A VC in Vacationland

Raising Money Legally: Check out the FINRA rules first!

April 16, 2011

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So you want to raise money for your startup and Uncle Bob recommends a friend of his who is "in the investment banking business". Be careful, be really, really careful when you choose a broker to solicit funds on behalf of your company.

First and foremost, they must be a registered broker in good standing with all regulatory bodies. You can determine whether an individual or firm is a broker/dealer registered with FINRA (Financial Industry Regulatory Authority) by going to their web site.

A broker cannot offer securities or solicit investments from an investor unless: 1) he or she is a registered broker with FINRA and 2) his or her securities license is at a brokerage firm that is registered with FINRA.

In addition, the securities regulations state that your registered broker cannot make cold calls to offer securities. A substantive, pre-existing relationship is required to exist prior to soliciting investors.Cold calls by the broker to prospective investors,in particular, may cause this offering to be considered a 'public offering', which would create numerous legal problems for both the broker and the company.

Perhaps Uncle Bob's friend is on the up and up. But don't take anyone's word for it. Check them out with FINRA.
Green Logistics: Reducing Consumption Waste

April 9, 2011

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The NY Times Magazine featured an interesting article, titled Wasted Data, on how information collected on our buying habits could help us reduce waste. Although the article was more than a bit disjointed–it was based on a graduate student's thesis–the concept is intriguing. Getting manufacturers to take more responsibility for the eventual recycling of the products and packaging they sell to us is a central tenet of operating a green supply chain. But few companies take it very seriously.

If we reduce the amount of excess packaging in our supply chains, lower shipping and packaging costs will result. And if we are not proactive in developing recycling options at the front end of supply chains, then we build in more waste. Ultimately, manufacturers are going to have to take more responsibility for recycling. Consumers now have the primary responsibility for getting rid of unwanted packaging and used up products. But as long as we have cheap oil, apparently no one will care much about dealing with the issue.
Viral Loop and Other Hot Start Up Marketing Strategies

April 2, 2011
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I admit to being a bit skeptical, even after a second reading, of the Viral Loop marketing strategy as some universal rule for start up marketing. Adam Penenberg's best seller on the subject certainly has a lot of compelling stories about the "to use it, you have to spread it" philosophy that has built some great American businesses, most notably Facebook and YouTube. After all, everyone needs an audience for their postings of the most intimate details of their lives, including real-time photos and videos.

But let's think about some variations of the viral loop theme and see how related marketing strategies might just work a lot better for your start up:
1. "Let others do the heavy lifting" strategy–here, you set up a platform to serve a relevant subgroup, like people wanting to stay fit, with all sorts of tools related to fitness. Then you offer personal trainers the right to upload a unique exercise video, which is basically an ad for their services as well as a a good way to build up those pecs, for example. Thousands of personal trainers take up the offer, then tell their existing students about the site and voila, you have over 500K users before you know it. DailyBurn and HealthGuru are excellent examples of how to execute such a marketing strategy.
2. "I want to emulate your lifestyle" strategy–Mommy Blogs, for example, have morphed into lifestyle websites where all the aspects of raising a baby in Manhattan or some other city are presented, including products bought, services utilized and kid-friendly locations, among numerous other bits of vital information. Developing a platform where people can explore different types of lifestyles is an obvious next play. The web sites are well developed, have a strong following (what does that say about individuality in the world…) and content updated daily. Just bring a bunch of them togther and provide the tools to search for stuff/lifestyles you like. A new start up in NYC, fav&co, is doing just that. Full disclosure: the entrepeneurs work at Control Group, of which I am Board Chairman.
3. "I write the reviews and you charge me to look at them" strategy–One of my all-time favorites. You review a restaurant on Zagat and then you have to pay to see reviews you or others have written. Oh, but you give me badges, such as jetsetter, if I complete certain tasks, like reviewing European restaurants. Big deal. The motivation is that you want to be known as a foodie, or for doing cute reviews (there is a monetary reward every so often for review creativity)
4. "Stealth" strategies–my portfolio companies are working on some interesting variations on the viral loop, including some tried and true "pay someone for bringing on new customers". More on those later as they prove themselves out.
Supply Chain Innovators: Chronodrive

March 26, 2011

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We all know that we basically have two ways to get groceries: schlep to the supermarket/c-store or order on-line and have it delivered (if you are lucky enough to live in such an area and can make it home for the delivery). What if we could order groceries on line, then pick them up at our convenience? Well, the French already have that option-Chronodrive.

According to the Wall Street Journal, traditional online grocery shopping wasn't working in France—prices were about 15% higher than at traditional stores—a bigger premium than in the U.S. and Britain. Delivery times, usually limited to working hours, were inconvenient, and costs were high—home-delivery fees are about €12, or $17—not feasible in a country where it is more common for people to pick up groceries several times a week, rather than loading up once a week as is typical in the U.S.

French retail executives Martin Toulemonde and Ludovic Duprez knew consumers wanted a way to save time shopping without the high costs of delivery.

"The price for home delivery doesn't cover costs, so product prices are more expensive," said Mr. Toulemonde. And these days, shopping is seen as a chore. "There are many other things to do in life rather than fill a shopping basket," he said.

The pair founded Chronodrive in 2002, bringing in privately owned French supermarket chain Groupe Auchan as majority investor in order to get the bargaining power of a major grocery chain and keep prices competitive. Auchan doesn't disclose Chronodrive's sales or profit. Chronodrive says its operating margin is comparable to that of supermarkets, which was 3.3% at Auchan in 2008.

The group opened its first store on the outskirts of Lille, in northern France, in 2004. They chose a suburban neighborhood near main thoroughfares with a high number of middle-class families with cars—the ideal consumer who does a lot of grocery shopping but is short on time. The company aims to expand to 32 outlets by the end of 2010.

Many major French retailers are developing competing versions. E. Leclerc counts more than 30 pick-up sites for online orders, and Casino Guichard-Perrachon SA debuted its first four locations at the end of last year—though both have pickup sites at active retail stores instead of the dedicated warehouses Chronodrive uses. French retail giant Carrefour SA is testing a drive-through attached to its e-commerce warehouse north of Paris, as is Asda.

Auchan, meanwhile, has also opened drive-through supermarkets under its own name in Spain and Italy.

In the U.S., Sears Holding Corp. opened its first MyGofer drive-through store in Illinois in May.Wal-Mart Stores Inc. lets customers buy anything except groceries online and pick up their orders in the store for no fee. The company, which recently revamped its grocery site, is studying the drive-through model for food, and is putting smaller stores in inner city neighborhoods to capture new and under-served customers.

FreshDirect, of course, offers a direct delivery model in New York City, where density for delivery operations makes sense. For the other 95% of the non-city US, a Chronodrive-type model would make a lot of sense. I could order tomorrow's food tonight and pick up when I wanted. Oh well, no one has ever designated North American grocery retailers as world-class innovators.
March 23, 2011

want to see inflation in real time? Check out the MIT Billion Prices Project http://bpp.mit.edu/
Supply Chain Innovators: Global Traffic Network

March 19, 2011

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Mobile information service Global Traffic Network(NASDAQ: GNET) has announced the launch of real-time traffic information alerts.

Called the Mobile Traffic Network (MTN), the system is being launched in Kansas City and identifies accidents and delays and pushes audio traffic alerts automatically to drivers before they reach an accident.

The alerts are automatically pushed to the phone and do not require the driver to answer or interact with the phone in any way.

Using real time data to better manage supply chains will drive the next revolution in technology enabled planning and execution software. The more data "generators", the more pressure to develop the software to analyze the emerging emerging information and optimize solutions based on the new data. Supply chain software providers now need to step up and begin to offer solutions that allow companies to rapidly adapt supply chain to fast changing in-transit situations.
Disappearing Supply Chains: New College Textbooks

March 12, 2011

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We all fondly remember forking out hundreds, if not thousands for our college textbooks, including many we never really read (thank you, CliffsNotes). With basic tuition, plus room & board approaching $50K a year in many schools, it's no wonder that cost saving college options abound on the web. Renting your college texts is one.

Bookrenter recently raised $40 million in Series C funding. Comerica Bank, Focus Ventures and Lighthouse Capital Partners were joined by return backers Adams Capital Management, Norwest Venture Partners and Storm Ventures. The company previously raised $16 million.

In their own words: "Buying your textbooks is expensive, and who has time to find high-quality, cheap used textbooks? Be smarter — at BookRenter, you can rent textbooks for a fraction of the cost, and have them delivered right to your door as fast as the next day. BookRenter makes education more affordable one cheaptextbook rental at a time. We also have a huge collection of cheap textbooks that you can rent – saving you more money than before. BookRenter: The Best Way to Rent Textbooks for College!"

Here's the rub–BookRenter is creating an efficient marketplace for used books. Instead of being forced to buy high priced new or used texts from your college bookstore, or from that used textbook storefront in the strip mall next to the pizza parlour, BookRenter pools textbooks from various virtual and physical sites. The result is that the average textbook can be used a lot more times, reducing new book sales–sorry, publishers and professors. The whole concept is also part of the green logistics movement, whereby perfectly good products can be recycled many more times.

Raising $56 million is not easy. Congratulations to a green start up who lives the first rule of successful entrepreneurship–find a simple problem that costs people too much money and solve it.
ProFounder Launches To Help Small Businesses Crowdsource Fundraising

March 5, 2011

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According to TechCrunch, raising funds for a small business can be a daunting task for any fledgeling entrepreneur. Whether it be from friends and family or from the general public, finding investors, setting terms of the funding, assigning equity and filing compliance documents is a challenge. Enter ProFounder, a stealth startup that launches today to ensure that all entrepreneurs and small businesses have access to an easy and simple fundraising platform.

ProFounder, which has been in private beta for the past year, offers entrepreneurs two ways to raise money on the site: through a private fundraising round, and/or a public fundraising round. The private fundraising rounds allow entrepreneurs to share a percentage of their revenues with investors (their friends, family, and community) over time. Essentially, this type of fundraising round is an offering of securities, and ProFounder helps facilitate compliance with state and federal laws related to this offering.

Public fundraising rounds allow entrepreneurs to share a percentage of revenues with both investors (anyone can participate – friends, family, community, and general public too) as well as a nonprofit organization. For both public and private fundraising rounds, ProFounder has a limit of $1 million raised.

Entrepreneurs can apply to Profounder, upload a pitch to offer to potential investors and then create a term sheet with Profounder’s templated forms and compliance sheets. As stated above, the term sheets are based on a revenue-share model. ProFounder then gives businesses a page where they can invite friends, family, and investors to a destination page that allows users to make contributions and investments directly on the site.

The bonus of using ProFounder is that the platform allows unaccredited investors (i.e. friends and family as opposed to a venture firm) to participate, so anyone can be an investor. And entrepreneurs can set their own investment terms and ProFounder facilitates all of the compliance, including tracking the number of investor seats in each state where each of their investors live, making sure entrepreneurs know which compliance documents they need to file, making sure entrepreneurs know which filing fees to pay, etc.

ProFounder, which was is the brainchild of Kiva co-founder Jessica Jackley and fellow Stanford Business School alum Dana Mauriello, also manages payouts and will pull funds from the entrepreneur’s bank account every quarter to pay investors their share of the business’ revenues.

ProFounder makes money by charging a 5 percent fee (of a public raise) and/or a flat $1,000 fee for any private raises.

If a company pays out investors before the terms of the deal end, then founders can choose to donate the rest of the revenues to a non profit organization. For example, if you offer two percent of your revenues to investors over the next five years and within two years, everyone has been fully paid, then the next three years of two percent of your revenues will go to the nonprofit.

To date, ProFounder has facilitated 5 successful private fundraising rounds, raising a total of $155,000 and engaging a total of 108 investors. For example, Bronson Chang, a recent USC alumni moved back to his native Hawaii to help out with the family business—a candy shop in Honolulu. Bronson wanted to open another shop in the area and raised $54,000 from 19 community members including friends, family, and USC classmates. Bronson is also currently raising an additional $60,000 through a public investing round.

Another private beta tester, BucketFeet, is a start-up from two recent college grads that makes hand-painted sneakers. The fledgling entrepreneurs managed to raise $60,000 from 37 investors including friends, family, and classmates across the country.

ProFounder’s model is similar in some ways to Kiva’s microlending, which recently opened up its platform to American entrepreneurs. Other companies playing in the space include Kickstarter, European fund ProFounders Capital, and Prosper.

But Jackley and Mauriello say that with the 27 million new and existing small businesses in the U.S., there are plenty of opportunities to offer fundraising and investment platforms to this demographic. Eventually, ProFounder will include social networking integration and possibly a convertible debt option for term sheets, say Jackley and Mauriello. In the end, Mauriello says, it’s about making sure that small business entrepreneurs have access to much-needed resources in terms of raising money.
Supply Chain Innovators: Retailigence Is A Localeze For In-Store Product Inventory

February 26, 2011

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According to Xconomy, using web applications to drive traffic to brick and mortar shopping stores is a strategy that seems to be paying off for retailers. In March, Forrester reported that the “online research, offline buying” consumer market represents $917 billion in consumer spending, which was 30 percent of all U.S. retail sales at that time. As more and more developers build applications for this market, there is a demand for product inventory and store location data. Enter Retailigence, a stealth startup incubated in the Founders Institute that applies the Localeze-model to in-store product inventory and listings.

In conjunction with the startup’s public launch, Retailigence is also announced that it has raised $1.5 million in seed funding from Draper Fisher Jurvetson, Quest Venture Partners, Dave McClure, ZIG Capital, Global Brain Corporation and other angel investors.

Essentially, Retailigence is an open API for developers that want to use brick and mortar store locations and product listings and availability. The startup has connectors to retailers backend systems, point of sale platforms and inventory, and pulls this data into a database in the cloud. Currently, Retailigence is able to pull in data from Target, BestBuy, RadioShack, ToysRUs, The Home Depot and a number of other retailers. It total, its data base includes more than 3 million products from over 50,000 stores,

Currently, 30 to 40 developers are using Retailigence’s API. The startup says the one of the world’s largest newspaper publishers (they declined to name the publisher) is using the API to tag images of products and provide users with the ability to click on the images to find the product’s availability in the store’s nearest location. Another use case for the API could be in a GPS device that can call up product listings and availability at nearby stores.

There’s no doubt that Retailigence’s database could be incredibly useful or both retailers (to attract foot traffic into their stores) and for developers. Milo has been operating a consumer-facing site for some time, and Google recently followed with their Blue Dot product.
Calculating Founder Ownership Shares

February 19, 2011
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Calculating founder ownership shares as new funding is taken into a start up can be a tricky proposition. Here is a useful treatise by Jon Fisher in the subject:

"In the beginning, the startup’s founders own 100 percent of the company. If the founders can raise their own funding and grow the company from its initial profits, the founders can retain complete control over the company. Most likely, the founders will need seed capital to help them get started.

Outside funding usually works by either charging you interest (and expecting you to pay the debt off within a fixed period of time), or by taking a financial stake in your company. Banks typically loan money to companies while venture capital firms take an equity stake in your company.

The key is to accept only the funding that you need to retain as much control over your company as possible. A simple formula for calculating the percentage of ownership the founders retain is as follows:

F = F0 * (1 – L)
Where F = Founders’ latest % ownership
F0 = Founders’ previous % ownership
L = Outside investor’s % ownership

In a new startup, the value of F0 = 1.0 and L = 0, so the formula is as follows:

F = 1.0 * (1 – 0)
= 1.0 * 1
= 1.0 (or 100%)

In exchange for providing seed capital, outside investors want a percentage of the company. Suppose that outside investors provide seed capital in exchange for 25% (0.25) of the company. The remainder of the company’s ownership is now calculated as follows:

F = 1.0 * (1 – 0.25)
= 1.0 * 0.75
= 0.75 (or 75%)

When outside investors take 25% ownership of the company, the remaining 75% is left in the hands of the founders. Now each round of additional funding requires exchanging capital for a percentage of the company. So if a company goes through a second round of funding where these additional investors accept a 10% stake in the company, the formula calculates the diluted ownership for the founders using these values:

F = Founders’ latest % ownership
F0 = 0.75 (Founders’ previous % ownership)
L = 0.10 (Outside investor’s % ownership) Inserting these new values into the formula calculates the following result:
F = 0.75 * (1 – 0.10)
= 0.75 * 0.90
= 0.675 (or 67.5%)

With each additional round of funding, the ownership percentage of the founders gets less and less, which is called dilution. The more funding your company requires, the less ownership of the company is left for you.

If a company goes through too many rounds of financing, their percentage of company ownership can sink below the ownership percentage of any outside investors. When this happens, it’s possible for the outside investors to take over the company, fire the founding team, and put their own people in charge of the company instead. This creates zero value for the founders and rewards them with a trivial payoff for all their hard work.

To retain control over your company, you have several options:
- Start up your company as inexpensively as possible, relying on high-technology to leverage your company’s reach and strength
- Only accept as much outside funding as necessary
- Grow organically; let your company’s profits fund your growth
Exchanging partial ownership of your company for funding is inevitable. How much funding you accept and how much ownership you’re willing to give away is negotiable, so choose wisely."

Jon B. Fisher served as Bharosa, Inc.'s CEO until its successful acquisition by Oracle Corporation in July 2007. Jon became Oracle's Vice President Product Management assisting with the release of Oracle Adaptive Access Manager 10g. Jon now serves as an adjunct faculty member at the University of San Francisco's school of business. Jon's unconventional 15-year software career, described in detail in Strategic Entrepreneurism. The book, which centers on the idea of designing a company specifically to be acquired by a larger one (rather than to become the next big IPO), offers a guide for ambitious entrepreneurs to help them complete their own successful acquisitions. Contact Jon at fisherjonb@yahoo.com

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