neumannsol.com

Here’s my favorite books on the above topics:

1. Competition Demystified

by Bruce Greenwald

2. The Origin and Evolution of New Businesses

by Amar V. Bhide

3. Co-Opetition

by Adam M. Brandenburger, Barry J. Nalebuff

It nicely complements the approach in the competition demystified book above.

4. The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World

by Amar Bhide

Excellent articles on the topic:

Angels: Don’t Use Convertible Debt to Fund Startup Ventures

5 Reasons Convertible Debt Sucks

David Rose’s Angelsoft Blog lays out the reasons, along with some exceptions.

Here are some of the key points:

• The primary reason, of course, is economic: the angel is investing at an earlier, riskier stage and therefore should expect a higher return than the VC, who is coming in when some of the risk has been removed, and after the entrepreneur has made the company more valuable using the angel’s money. For the angel to wait until the next round to value the company results in exactly the opposite: he or she takes the early stage risk and ends up with later stage valuation: a lose/lose proposition!
• From the side of the entrepreneur, doing a convertible debt round correctly is complicated, creates a perverse incentive for the angel investor to work against the company, and ultimately doesn’t make a big difference for the entrepreneur.
  
• Most of the time, the founder is in a much better situation to negotiate favorable (or reasonable) terms with friendly angel investors with professional VCs My recommendation is to use the opportunity to negotiate favorable terms with angel investors and these will likely become precedent for future rounds.
  
• The biggest problem with convertible debt is that it aligns the interest of your angel investors with future VC investors and against you! Because the debt converts into equity at a price equal to or slightly discounted from what the VCs pay, the lower the price the more the angel investors will own. And often times, the angel investors will have the relationships and connections to VCs (and hence know them better than you do) so it is in your interest to get your angels on your side of the table.
  
  • One final comment against using convertible debt for angel rounds: Convertible debt creates misalignment between entrepreneurs and their angel bridge investors. Angels would prefer to see VCs invest at a lower valuation as the angels convert their bridge debt to equity (increasing the angels’ ownership fraction) while entrepreneurs seek VC investment at a higher valuation (maintaining more ownership for the entrepreneurs). Under these circumstances, angels may be less motivated to undertake activities that could increase valuation prior to the subsequent funding. Misalignment of entrepreneurs and investors is simply a bad practice.

Check out Secrets of Angel Investing

Also, I attended a few talks/presentations (including one by David Rose of Rose Tech Ventures, NYC) on how to pitch to VCs, what VCs look for, and so on. The following is a collection of some of my notes from these talks:

Qualities/Things Angels/VCs look for (most of this is from David Rose’s talk at CBS):

• Integrity (Most important of all)
• Passion
• Experience & Knowledge (Deep domain knowledge)
  • As David Rose said “I would rather invest in an entrepreneur who has failed, rather than one, who has never tried before”
• Sales, Finance and Product Management Skills
• Leadership
• Commitment (”Bad things happen to all businesses!”)
• Vision (Rarely do VCs/Angels invest in “me-too” businesses)
• Realism/Pragmatism (Don’t try to solve problems, you possibly can’t!)
• Coachability

Presentation Guidelines (Influenced by David Rose’s talk at CBS and emails on NextNY):

• Start with a story/something dramatic, an anecdote
• Always lay the groundwork first (don’t assume that the audience know everything — don’t assume anything!)
• Specifically mention the things you know and understand and things you do not
• Do not lie. Don’t be dogmatic!
• Absolutely no typos, errors, and internal inconsistencies
• Keep it short.
  • Good Presentation: Short, Short bullet points
  • Better Presentation: Just the headlines on the slides
  • Best Presentation: Just images on the slides (and you tell a story through it)
• Tell a story
• Rehearse, Rehearse
• Anticipate the questions (Be allocentric — think about the questions you would ask if you had to invest your 401K money in the startup!)

What do VCs look for:

Great article on Gigaom by Anand Rajaraman on how to finance your startups: Venture Capital, Angels or Bootstrap?

While I agree with most of the ideas in the article, IMHO, the technology matters even less (Perhaps, this discussion below is limited to Internet/Wireless tech startups).

If the startup is targeting a new market, then there are clearly no barriers to entry:

• There aren’t any economies of scale yet (no supply side barriers to entry)
• Maybe some proprietary technology — but not likely
• Definitely no customer captivity yet (no demand side barriers to entry)
• Government regulations — don’t bank on it!

Thus, what matters is:

• How quickly some barriers to entry are created
• How efficiently (cost) the operations are run: execution baby!

Therefore, I believe VCs care about the potential market size ($100m+) and the management team (has to be “backable”).

The article also touches on the notion of the inside view (founders tendency to ignore the base rate — misconception of the base rate and place too much emphasis on “uniqueness”) v/s outside view (VCs or angels viewpoint which is more likely to be based on base rates and information based on their previous experiences and less biased by the “uniqueness” of the current venture).