Monday Morning Memo

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The Sun is shining, Bubba has a new jacket, and we got a lot on tap for the week.  All in all a great start to our Monday – read on for our MMM!

Recap of Last Week: We had our VC spotlight on Jeff Bussgang, ROTW on Crittercism (#Critters), and more Term Sheet Madness!

What Lies Ahead: Look for the Term Sheet Madness finals and more spotlights, rounds, and all things you have come to know and love about C:V.!

VC Spotlight of the Week – Jeff Bussgang

Entrepreneur, Author, Professor, and VC.  Not a bad background if you ask us. Jeff is our first “Quadruple-threat” we have featured and his book Mastering the VC Game is an ABSOLUTE must read for anyone in/looking to get into startupland/VC and required reading here at C:V.

Name: Jeff Bussgangbussgang

Company: Flybridge Capital Partners

Blog:  Seeing Both Sides (One of our liked blogs!)

Bio: Jeff is a “double-Crimson” with both a B.A. and M.B.A. from Harvard and is a former entrepreneur (Upromise, Open Market) turned VC. He is also a guest lecturer at Harvard as well (so maybe he is a “triple-Crimson”?).  Full background here!

Miscellaneous/Interesting Facts: We mentioned it above, but it is worth mentioning again, if you haven’t ordered his book already, stop everything and go get it!  This is right up there with Venture Deals in terms of C:V. favorites.

Seriously…

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Round of the Week – Crittercism

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MAU strikes again!  Mobile App Performance Management (mAPM) company Crittercism raised a $30M C round to assist in their expansion to the B2B app market.  We can only imagine how much larger their MAU will be once they do infiltrate the corporate world…

Name: Crittercism

Website: https://www.crittercism.com/

Funding to Date: $48M ($1.2M Seed, $5.5M A, $12M B, $30M C)

Deal Notables: Being tasked with fixing the “blue screen of death” for apps is quite an undertaking but Crittercism seems to have a solid direction of how to get there.  Interesting to note that two of their goals are to 1) Deliver more product capabilities/Expand their value-add and 2) Expand their distribution and partnership channels.  Hmmmm… where have we seen those tactics before...

P.S. if you were wondering, they already have plenty of “Lighthouse” customers

Term Sheet Madness – Boston Round 1

We wrap up 1st round play in Boston!  Term Sheet central here!

1. Liquidation Preference vs. 4. Employee Option Pool

Explanations: 

Liquidation Preference*: The determining term on how the proceeds of an exit will be shared.  The preference is given to preferred shareholders before common stock holders and can have vast implications for investors/entrepreneurs. Three types with very basic examples below:

  • Fully Participating: Receive shares on an “As-converted” basis i.e. if you have 2x Liquidation preference on 20% stake in a $100M post-money valuation (i.e.a $20M investment).  If the firm sells for $240M you will receive $40M (2x preference) and then 20% of remaining $200M or $40M for a total of $80M or 33% Ownership.  Founders receive remaining $160M.  C:V. Thought: Yikes.
  • Capped Participation:  Will only participate up until a limit (i.e. 2x cap).  In this case, the firm makes more than double their money so they will not participate and simply receive 20% of $240M or $48M.  Founders receive remaining $192M. C:V. Thought: Less Yikes.
  • Non-Participating:  Firm sells for $240M, investors receive 20% or $48M.  Founders receive remaining $192M. C:V. Thought: Normal.

*Editor’s Note: we combine participation and preference in this term

Employee Option Pool: The amount of equity to be held for future issuance to employees. This can be a sneaky way to lower a company’s pre-money valuation if one is not too careful (larger option pool than prior cap table).  This is also a key term as it will help determine the resources a founder will have when allocating and attempting to attract new talent to the company.

C:V.’s Chief Term-ologist’s Take: While Options are key retention measures for future employees, poorly structured liquidation preferences can have devastating ramifications for “less than spectacular” exits on founder/employee ownership.  You can work to redeploy your options at later rounds, but attempting to get rid of a fully participating 3x liquidation preference is an evil nobody EVER wants to deal with.

Outcome:  Liquidation preference fends off an inspired comeback in the 2nd half from Option Pool to advance.

 

 2. Antidilution vs. 3. Conversion Rights

Explanations:

Antidilution: A protective measure in the unfortunate case of a down round, it offers investment protection for investors by redefining the ownership of their initial investment.  Two types below:

  • Full Ratchet:  The harshest of the provisions, this translates the equity ownership from the prior round to the new price at the lower round.  i.e. If the original round was 20% on $100M Post (i.e. $20M investment) and the new round only valued the company at $50M the investors would then be awarded shares to keep their ownership the same at $20M or 40% of the new company. (See, we weren’t kidding that this was basically draconian…)
  • Weighted Average: A more forgiving provision that puts the incentive on both sides of the table.   The weighted average model only considers the new shares being issued and not the entire pool.

Conversion Rights: The ability to convert preferred equity into common stock. Automatic conversion gets infuriating interesting when investors “must” convert at different prices upon an IPO.  If one investor has a $20M auto-conversion and a later round investor has a $60M conversion and the company wants to price an IPO at $50M then the later round investor can stall until the company can float an offering that will reach their $60M auto-conversion price.

C:V.’s Chief Term-ologist’s Take: While Conversion can get interesting upon an IPO, antidilution provisions can effectively cram-down any remaining founder ownership.  You tell us an original founder that is truly motivated to succeed after having half of his/her share taken at the B round and we will tell you about our cousin from Nigeria….

Outcome: In a less than eventful 2 v 3 matchup, Antidilution blows out Conversion to advance.

Answering the Million Dollar Question: How Do You Scale?

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You’ve raised some money (or if you’re really lean, you’ve bootstrapped) and you’ve found Product/Market Fit in a growing and disruptive market. Now the big question is how do you attack that market and take share? In other words, how do you scale?

Scaling the business is a pivotal undertaking in a startup’s life and while we do not have direct experience scaling an enterprise here at C:V., we do have experience supporting some of enterprise technology’s most successful sales teams and have offered our input on how large company sales tactics can apply to a startup looking to scale.

*Editor’s Note: This post will feature examples tailored for larger deals and longer sales cycles as that is our background. While the specifics may not necessarily relate, we hope the concepts will.

Demonstrate your Value:  Most posts about scale would simply say “Sell, Sell, Sell!” and while we are not discounting that method at all here at C:V., we believe that the Enterprise Technology sales model is shifting from a need-based, “point and purchase” model and moving towards a more consultative, “solution selling” approach.  Therefore, we believe that in order to scale effectively, a salesforce must not only know what problems they currently solve but also how they can add value across a range of outcomes to successfully partner with their client and not just provide a resource.

Partner:  The decision to become a multi-channel salesforce is one that can be challenging to startups looking to scale because concerns over quality of service may arise (i.e. fear the Partner may not know the product as well, or will not offer the “White Glove” support we do) when dealing with an indirect sales model as opposed to a direct only salesforce that most startups employ at the outset of their life.  While this is a valid concern and a company must address this issue before deciding to Partner, we do believe that properly structured strategic partnerships (i.e. teaming up with larger players in your industry) can be an extremely effective way for smaller companies to scale their offerings quickly and efficiently.  In addition to getting your product into the minds and hands of more customers, partnerships can also offer an additional level of credibility to your company vision that can help you get those “Lighthouse” customers that all companies crave.

Get a “Lighthouse” Customer: Much like an Anchor store is to a mall, getting a few big name customers is a huge benefit for a company trying to scale.  Having these “beacons” (hence the lighthouse name…) of support for your product and company can be a huge asset and will draw other ships to your company’s shore (still staying nautical…).  You can use these customers as testaments to your product and vision as well as a reference to future prospective customers.  Just think of how much more serious a prospective client will take you if you can say your offering is currently in use in 5 of the Fortune 50…

P.O.C.:  The Proof Of Concept or “P.O.C.” is a time-tested model that initially does not provide revenue, but gets your offering into the hands of customers with the idea that if they like it they will buy it later.  This “trial period” model, can be very effective when trying to land that “Lighthouse” customer when they are still hesitant to buy even after you have “Demonstrated your Value”.  Also, the P.O.C. method can be a very effective way to reach a huge subset of your customer base relatively cheaply, and as long as you convert a large percentage of these opportunities, it can become a very viable model to grow the enterprise.

Find the RIGHT Champion:  We hear about a lot of deals being lost because the account manager has not lined up the proper Champion in the business and as a result cannot get the sign off on funding or approval from the CIO.  The Champion is a huge asset to your sales process as they are the person at the prospective client’s company who will be spearheading the initiative internally. The key is to find the RIGHT champion for your product in the prospective client’s organization. Find the person who can be what their nickname describes, the CHAMPION of your product who not only buys into your value proposition, but also has the ability to maneuver the deal to the appropriate levels of management within the organization.  This is obviously easier said than done, but through the correct “Demonstration of Value”, you should be able to find the right match. The reason the RIGHT Champion is so important is that it will allow you to establish a network within the client organization as well as provide a platform for future opportunity (upgrades, other solutions, etc.).

 

Round of the Week – SoFi

Student Loans from Select Colleges and Universities + Lower Rates than Sallie Mae + Social Community with Alumni support = SoFi

SoFi or Social Finance has followed the above equation and found great success in the Student Loan refinancing market. As a result, they have raised yet another $80M in a C round to expand their footprint and dive into other loan markets.

Name: SoFi

Website: https://www.sofi.com/

Funding to Date: $161M Equity, ~$400M Debt (Full Details here)

Deal Notables: Part of this funding will be for SoFi’s first foray out of the student loan business and into other lending verticals (mortgages, etc.).  This could be a daunting task for most startups for fear of growing too big too quick, but given SoFi’s track record of successful loan refinancing with a committed investor and applicant base, we see them having a strong case for exploring expansion.

This round was for preferred equity (we presume) but SoFi is the first company we have featured here on C:V. that has debt (And a large chunk of it!).  There does not appear to be any additional debt raised in this funding, but we do admire the fact that SoFi can play in both markets simultaneously so effectively.  Check out the piece in Time on them too!  Great read about how they are transforming the lending industry.

VC Spotlight of the Week – David Cowan

When 3 of the top tabs on a VC’s blog are Startups, Security, and Ted Talks, C:V. is bound to take notice. That is exactly what happened in this week’s VC Spotlight on David Cowan (well, that and he is one of the most well-respected internet/security investors of the past two decades…).

Name: David Cowandavid cowan

Company: Bessemer Venture Partners

Blog: Who Has Time For This? (One of our liked blogs!)

Bio: David has both a BA and an MBA from Harvard and has been investing since 1992. He has quite an impressive track record of investments and IPO’ s which you can read about here.

Miscellaneous/Interesting Facts: We are avid TED talk fans here at C:V. and if you haven’t watched any of them, we highly recommend it! David skyrocketed in our book as he has attended 8 TED events and has also rated his top talks of the past few years.  Totally C:V. approved!

Term Sheet Madness – Denver Round 1

The Madness continues! Look here for Original Posthere for Full Field, and here for Palo Alto Regional!

1. Board of Directors vs. 4. No-Shop Agreement

Explanations:

Board of Directors: One of the biggest control mechanisms and defining aspects of the company.  The Board of Directors is the management team that sets direction and helps the company achieve their vision.

No-Shop Agreement: The term sheet equivalent of monogamy, the No-Shop Agreement essentially makes it very difficult to field other offers when you are in the final stages of a financing.

C:V.’s Chief Term-ologist’s Take:  Term sheet monogamy is important and all and while we hope No Shops would only be broken for a can’t miss deal, Board of Directors is a powerhouse in the control field.  They advise, direct, mentor, and shape the direction of the company.

Outcome: The Board advances (unanimously)

 

2. Vesting vs. 3. Protective Provisions

Explanations:

Vesting: The time period and speed at which you earn your equity in the company.  Simple in theory, huge implications in practice.

  • Example: If you have a 4 year vesting schedule at 25% a year on 100 shares, you will get 25 shares a year for 4 years.  If you leave after 2 years, you get 50 shares and 50 shares is “left on the table” unvested.

Protective Provisions: Essentially veto power, Protective Provisions are a list of company events (issuing shares, raising debt, selling the company, etc.) that the investors can vote to stop from happening. Depending on severity, this list of events can cause some serious control issues in a company.

C:V.’s Chief Term-ologist’s Take:  A battle of two of the stronger Economics and Control provisions in the field, we see this going down to the wire.  Vesting can have such profound impacts on employee performance (re: Worst Case = feeling of indentured servitude for life of vesting schedule)  yet Protective Provisions, if severe enough, can effectively stop the company from doing anything.  Now obviously we here at C:V. always hope for the best and would hope that vesting would be reasonable given the company stage and protective provisions would include materiality thresholds to allow for certain business measures to be enacted, but even still there is no clear-cut winner in this round.

Outcome: In a double-OT thriller, Vesting survives to advance to the finals to play the Board.