April 28, 2010

Investors vs. Entrepreneurs – Interview with John Richards

John Richards

John is an entrepreneurial Indiana Jones.  He’s as comfortable pioneering angel investments as he is lecturing his students at Brigham Young University. John is equal parts technology entrepreneur, college professor, and angel investor.  He’s passionate & principled, generous & tough.

Quick anecdotal story:
When John was a kid he ran his own library out of his basement. but unlike the public library, he charged for rentals to the other kids. I don’t know how John got them to use him over the public library, but he did.

Just who is John Richards?

John the Entrepreneur:
John honed his entrepreneurial skills growing and managing a print yellow pages publishing company for many years. Then, in 1994, John co-developed and launched the first-ever online Yellow Pages derived from an offline print product – Yellow Pages on the Internet, LLC (YPI). He sold that company to InfoSpace, Inc and, from 1998-2001, John served as its vice president of. He was at “Ground Zero” of the Internet Revolution, seeing InfoSpace rise from less than 10 people to an Internet juggernaut valued at a peak market capitalization of over $35 billion.

John the Professor:
Appointed to an associate professorship at Brigham Young University in Provo, Utah, John teaches courses in entrepreneurship in the Marriott School of Management and the School of Technology. He is an associate director of the Rollins Center for Entrepreneurship & Technology.

John the Angel Investor:
As a partner of the Utah Angels, John is one of Utah’s most active investors (*He’s had several nominations for our ‘Angel Investor of the Year Award’).

Have you seen an investor take advantage of an entrepreneur’s trust?

John: I’m not sure what you mean by ‘take advantage.’ At some point an investor and an entrepreneur are on opposite sides of the negotiation table. If the investor has superior knowledge of how venture investments are done and the entrepreneur doesn’t have any knowledge of it, then in one way you could say the investor is ‘taking advantage’ of his superior knowledge by negotiating a favorable deal for himself. Whether that’s wrong or not, I’m not making any judgment on that. But taking advantage of a situation because you have superior knowledge or skill is an element of business.

What’s the best way for an entrepreneur to protect himself?

John: Educate himself.  Be a sponge & learn anything & everything. An entrepreneur’s number-one defense is education. FundingUniverse is a great source of knowledge & education for entrepreneurs. *thanks John!*

Would it be appropriate to have a trusted mentor read over your contract?

John: Of course. A lawyer should read over it. You’ll also want an experienced business mentor look it over and help you understand things.

What contractual clauses should raise a red-flag in an entrepreneur’s mind?

John: Fist you’ve got to ask, ‘what kind of investment is this? Is this common-stock, preferred stock, debt deal, convertible debt deal, etc… ?’ But I’ll give you some examples. You’ve got to be careful not to give too high a percentage of the company away in early rounds because there are probably going to be multiple rounds of investment. And you might find yourself, more quickly than you thought, with less than 50%.

I could talk for hours on this, but you need to be mindful of the preferred stock agreement. You don’t want to have the liquidation preference or the conversion multiple too high.  As an entrepreneur you’ll always want a 1x liquidation preference, not a 2x or 3x. The same with the conversion multiple. You want one share of prefered stock to convert to one share of common stock, not to three, five, or ten shares. those are the types of things that, as an entrepreneur, you should really fight for. Of course at the end of the day it’s a market-driven issue. If you only have one investor offering you money and you don’t have any other competitive offers, then there isn’t much you can do.

Have you ever seen an investor attempt a take-over of an entrepreneur’s business?

John: Most bona fide investors wouldn’t do that. They don’t want to. Investors are investors, they don’t want to be operators. Their goal is to optimize the situation and it’s not optimal when an investor has to come in & take over. Taking over & running your small business isn’t worth an investor’s time.  Is it possible that an investor could have that motive? Yes. But, I’ve never seen it.

How about replacing the CEO?

John: Oh yes. On that point there is no doubt. Especially for a venture capital firm (angel investors do it less frequently). A venture capital firm may invest and then give a year for the founders to perform. If a founder doesn’t perform a VC will put a lot of pressure on the board to oust that founder as CEO. I see that many times every year.

April 7, 2010

Become Fundable? Interview with a Bank VP

Damon Kirchmeier

I had the pleasure of interviewing Christopher Liechty – VP of Communications for The Bank Of American Fork. So naturally I outlined an agglomeration (word of the day) of fundraising questions for the interview. However, I soon discovered that he’s not only a lending expert, but a respected marketer. He co-founded the marketing firm Meyer & Liechty and the International division of the U.S. graphic design Association AIGA. As a marketer myself, I couldn’t help but bag some marketing advice as well.

So this interview is equal parts marketing & funding advice.

What is Brand Experience Marketing?

Christopher: It’s the next evolution of marketing. The last evolution was ‘if I can get you to remember my name then I’m successful.’ Marketers made promises and then left the fulfilment to someone else. But that kind of thinking ended in remorse. Experiential marketing lines up promises with the experience. People enjoy their exprience, they tell their friends, and then they do your marketing for you. You just can’t get away with treating the customers poorly after the sale.

What advice do you have for marketing a small business?

Christopher: Define you audience narrowly; succeed in a smaller circle. That may be a particular psychographic or interest group (moms, business people, gamers, etc…). Try to define your audience as narrowly as possible and then go about taking care of them.
Our Bank [The Bank of American Fork] is looking for community builders, as opposed to people who don’t really care where they live.

What is your role as VP of Communications for the Bank of American Fork?

Christopher: I plan the full range of the Bank’s communications, from branding, marketing, advertising, and brand experience to product development, public relations, customer service, and internal communications; the total customer experience. We promise “Big city banking, small town service.” My job is to deliver on that.

What can a small business do to improve it’s fundability?

Christopher: Mostly it’s the numbers and the relationship. Having a good feeling for the person’s character has a big influence on approving a loan. Develop a good relationship with the loan officer. Help the loan officer get to know you.

What role does credit play in a small business loan?

Christopher: As a small business person it’s unlikely that your business is going to have enough collateral to support a loan. It’s really your personal finances that are going to back up the business loan. Your personal guarantee is a sure deal. Loan officers are going to ask for a personal guarantee no matter what.

So your personal credit score becomes very important?

Christopher: Actually, credit score is not a major factor. We do look at it, but it’s all about overhead and your ability to repay. So if your personal & business expenses are low and you have some equity in your house, those will be the main things that we look at. Even if your business is brand-new, if your overhead is low and you’ve got some equity then the bank can say, “Okay, I’m covered up to [blank] amount.” If the person seems like they’ve been careful with their expenses, are not living high on the hog, and has reasonable overhead, then they’ve got a good shot at funding. But if they’ve got a huge house payment, maxed out on a lot of credit cards, and got lots of overhead then it’s not likely they’ll get a loan.

March 5, 2010

An Investor’s outlook on Social Media

Damon Kirchmeier

I had the pleasure of interviewing Damon Kirchmeier—Managing Director of InnoVentures Capital Partnersabout social media. Why him? He’s affable, amiable, amicable, approachable… (and every other synonym for ‘friendly’ contained in the thesaurus). Interviewing nice people makes my job a lot easier!

He’s a truly genuine fellow: he’s out on the road every day carefully investigating the state’s newest ventures. He’s ‘all business’ and works harder than anyone else to identify and fund great startups.

Quick anecdote: He identified Fezzari bikes way back when. He not only offered them funding (they didn’t end up needing it) but also offered to help design bikes!

Here is our interview

FundingUniverse: You’ve got the most eclectic resume I’ve ever seen. You used to work as a nuclear plant engineer, managed Navy & civilian personnel at a dual reactor plant, medaled in World-Championship Downhill bike racing, designed bicycles for Fezzari… and now you’re Managing Director at InnoVentures Capital Partners. Does your wife need to start lacing your breakfast cereal with Ritalin?

Damon Kirchmeier: yes

FundingUniverse: Why Venture Funding?

Damon Kirchmeier: Because it’s cheaper than other sources, you want to preserve equity, or you don’t fit any other source. Banks want 3 years of profitable operating history and collateral and equity investors want 10x their money in 5 years – lots of good companies don’t fit these criteria.

FundingUniverse: Has anyone ever contacted you about funding via social media?

Damon Kirchmeier: No

FundingUniverse: Is Social Media a good way for entrepreneurs to seek funding?

Damon Kirchmeier: I think it’s a good way to narrow a search or find potential funding sources. For a fund like mine, I am already flooded via traditional sources like phone and email.

FundingUniverse: What advice do you have for entrepreneurs in using social media to find investors?

Damon Kirchmeier: I wouldn’t necessarily assume an investor is going to review your info until they are way down the line.

FundingUniverse: what advice do you have for entrepreneurs in using social media to impress investors?

Damon Kirchmeier Your online image is a reflection of you as a person so make sure it says what you want it to.

FundingUniverse: Have you seen social media waste entrepreneur’s time & money?

Damon Kirchmeier: Mostly time.

FundingUniverse: What did they do wrong?

Damon Kirchmeier: Blogging on topics they do not fully understand or blogging on controversial subjects which may offend a potential investor.

FundingUniverse: Have you seen social media used effectively by small businesses?

Damon Kirchmeier: Yes, I love the “Will it Blend?” series from Blendtec on YouTube. They found a very fun way to show the product capabilities.

FundingUniverse: Which social media networks do you find most effective?

Damon Kirchmeier: LinkedIn, Facebook, YouTube

FundingUniverse: Which social media networks do you find to be a waste of time?

Damon Kirchmeier: MySpace, Twitter