Is the money you are getting a Smart one?


This this the key question that any entrepreneur should ask himself when he gets a VC/Angel term-sheet.  And doing it ahead of time might actually land him a term-sheet earlier.

Fact is, any VC financing you get will be an expensive one. A VC has to have an IRR of 30%+, therefore its money is more expensive. That said, don’t miss-understand me and think that entrepreneurs should not seek venture financing.  What I want to say is that the entrepreneur needs to have perfectly clear to himself how the investor will add value in order to make the expensive cash well worth it.

At the Warehouse, we have perfectly clear what is our value proposition.  I’ll go over our value prop to help entrepreneurs understand how an investor can add value and to do a little bit of advertising 😉

1 – We can absorb your company’s back office – This has 2 key benefits to the entrepreneur.

Gives you more time to actually run your business rather than manage the bureaucracy.  If you are a salesman, go sell, if you a programer, go program and let us to the boring admin work for you.

And gives you confidence that you are receiving top quality support.  Did you ever check your accountants books? Are you absolutely confident that when your company makes it big you wont have labor or fiscal liabilities holding it back?

This might be less of an issue in US where the burocreacy is much simpler and the suport services better quality but having been entrepenuers in Brazil, we at Warehouse are completely convinced that this adds a lot to the entrepreneurs.

2- We help create a governance – This helps you to keep an objective perspective on the business and stick to the plan. When an entrepreneur is in a startup, passions, frustrations and emotions often blur his/her vision and make him/her detour unnecessarily.

We will help you set a structure that is appropriate to help you think through the issues and problem-solve with you what is the best course of action. To do that, we will set up a board with smart, knowledgeable people that can accelerate your growth. We will also create committies do discuss specific themes such as:

Compensation and People: Who are the key people in the company? What are the positions that need to be filled? Who is the ideal candidate? How do we motivate them? What should your stock option pool be? Who gets what? These are all questions that we can help you decide. We can also help you find the right people to bring onto the team.

Budget: Lets think ahead and plan the revenues and expenses that will get us to our goals. What are the specific targets we have to hit and when in order to secure our progress?

Funding: How much money will you need? how will we raise that money? who are the investors we want to bring on board?

We are not know-it-alls, but having multiple investments allows us to gather a lot of experience quickly and put it to use to accelerate the growth of our portfolio companies.

3-We Leverage our Network

We network with our investors, we network with possible entrepreneurs, we network with specialists during the due diligence’s, we network with other investors, we network with possible buyers of our portfolio companies, we network with our portfolio clients and more.  This immense amount of networking multiplied by the number of companies we invest in makes our contact list grow exponentially.

Knowing how to tap into this extensive network to support the portfolio companies is a key value add for any VC.  We can help you get clients, partners and specialists.  However, don’t expect your VC to immediately open up ALL his/her network. VCs are zealous of their networks and don’t want to over use it and risk wear out.

So, at the same time we use the network, we try to give back to it. When you need to use the network, don’t be surprised if you are asked to give something back to it.

4- We have Domain Knowledge – Having a VC that understands your market will add an enormous value to your company and prevent lots of pain.

An investor that knows your market will have the network to make the appropriate introductions but he will also be able to support you in structuring your offer and also think how to format your company for a possible buyer.

Lets say you are a mobile TV platform company. You can go many ways.  You can provide the service yourself, you can provide the platform for others to provide the service, you can focus on providing one to one advertising over the platform.

You can, therefore, charge for service, for installation, for add, for click through, include in the monthly subscription of the cell phone, or in the monthly subscription of the cable TV company.

These choices will also make your likely buyer to be : a VAS provider, a network company like Nokia or Google, a network operator or a Cable company.

Having someone that knows the industry to discuss such key points with you and help you decide is priceless.

At the Warehouse, we are specially knowledgeable in the media, consumer internet and green tech.

5-We Bring an Strategic View – Having someone that is not as immersed in the business as you and helps you think it through is incredibly powerful. At the Warehouse, we have 3 former consultants guys… I know I know I know.. Despite of all downsides of McKinsey guys, we can help you step back from the day to day of your company and take a higher level view.  This is not an everyday thing but done every so often, helps you ensure that you are moving in the right direction and that you take market changes into consideration in order to adapt.

For all those reasons, VCs are much happier to discuss with entrepreneurs how they will help take the business from $7M valuation to $50M than to discuss whether it is a 30%,40% or 50% ownership.

If the company doesn’t make it big, the ownership difference won’t save us.

VCs do their valuation on a base case. Therefore, it is unlikely that valuations will change significantly among the different VCs. On the other hand, the future value of the company might change significantly depending on who you partner with.

The other day, a very interesting entrepreneur visited us. He came with a pitch of $1.2M for 30% of the company and it made perfect sense to any other VC.   But when he came to us, he create a second business plan showing that we could help him make to company worth at least 200% more, based on our industry connections.

I clearly wouldn’t take the same approach as he was telling me how much I was worth to him, but I think it is important for the entrepreneurs to do this calculation.

Obviously if  I were an entrepreneur, would much rather have 20% of a Billion dollar company than 100% of a $10M outfit. Not necessarily the VC that takes a bigger share of you company is the worst deal, if the value-add is there.

 


 

 

 

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To NDA or not to NDA?


9,99 of  every 10 entrepreneurs that pitch me ask me for an NDA…. the other day even my brother asked me for one… that made me think, specially since I’m super careful about it.  Entrepreneurs that have met me have probably been asked if a part of their information, or even their names,  could be shared with either a partner or a co-investor.

I clearly understand their desire to keep they ideas safe but cant really bring myself to agree with the request. As per my previous post, Brazilian entrepreneurs have to learn to share their ideas. Part of it will demand that they develop a trusting relationship with their advisors.

But more than that, they have to understand that it is not my business to do a startup… my business is to invest in one and help it grow. Therefore, I will never take their idea and try to set a company up myself.   If they are concerned that I will share their ideas with portifolio companies, that is slightly more reasonable, but i wouldnt risk my reputation and career over it.  If their idea is so AWESOME, I will probably want them to develop it and invest in them.

Also surprising to me is that the thing that they are most secretive about is not their business model, product or delivery method. They are more concerned about their financials. Don’t they realize that this is likely to be the least valuable part? First, it is probably way out of whack. Second, even if it is right, I will know that you will make a lot of money but that is no good to me if I  don’t know how .

Entrepreneurs, please understand our side:

1 We do look at many companies in the same space and virtually anything that you present to us, we will probably also see from someone else in the same space.

2 we are very concerned that non invested, disgruntled entrepreneurs will claim breach of agreement at anything an invested company does.

3 you can always destroy our reputation with or without an NDA if a VC breaches your confidentiality

4 if you don’t trust us, you probably shouldn’t pitch us

Proximity is King


Yesterday I went to BR New Tech meet up. Great event hosted by Microsoft for 200 entrepreneurs and investors.   TKS MSFT!

Aside from the quality of the entrepreneurs, what stroke me was how little the industry really knows about itself. Very few people in that room could claim that they knew what the others were working on and that is a major setback for the community.

3 aspects drive this behaviour

1. Personalization of the company. Brazilians grew up thinking of companies that belong to someone. For that reason, the ideas that generate those companies also belong. There is very limited willingness to bring on partners for new ventures, be they a VC/Angel or another entrepreneur.

This clearly slows down the company’s development as one person will have to master all aspects of the business, whereas you could just bring someone with that specific expertise and get moving much sooner and at a much aster rate. As they are not looking for partners/investors/ideas, entrepreneurs do not share their ideas and, therefore, cannot be helped.

One of the most interesting companies I’m looking at right now, did exactly the opposite. The entrepreneur walked in with an idea and we didn’t like the business plan based on a few monetization problems.  He went home and 30 days latter came back with completely different twist that made much more sense and we are moving forward. 2 things I like about it. 1 an entrepreneur that listens and will let me help develop the company; 2 an entrepreneur that is resilient and will pivot the company if needed.

Entrepreneurs need to understand that they will hardly get it right the first time. So get your idea in front of as many people as possible so you gather feedback and improve it.  This leads me to my next point

2. No industry references. As we are in the industry’s infancy, we do not have the brokers and the success cases mapped out. That makes it really difficult to know who you  should put your idea in front off.

This problem is much harder to solve as it will take a cycle of successes for the real brokers to become known. We did see a good start in the room yesterday with the angel investors but more will be needed. We will know that Brazil matured as a VC market when we have specialized though leaders rather than broad ones.

3. Geographic dispersion. There is no real meeting place for the community to meet and share Ideas. We do not have a  Sand hill road or an RTP where we congregate the community and can walk down the street and meet people who will help.

People underestimate how much value can be created over a simple lunch or coffee. Entrepreneurs can meet partners and investors, investors can exchange ideas and find do-investors and employees can can have the next bog idea.

When Warehouse had to choose its office we made an explicit choice to move away from Faria Lima, PE/IB dominated area of the city,  into Vila Leopoldina.

Vila Leoppoldina feels a lot like the Meat Packing district as it is an industrial area that is quickly converting to residential/office space. Furthermore, it is side by  side with Sao Paulo’s leading university. We took a long gamble that  Vila Leopoldina might actually become Brazil’s version of sand hill road but it is still too early to tell. Lets work for it.

If we can increase the proximity of the entrepreneurs, VCs, Industry References and Ideas, we will succeed in creating a robust industry.

Preference Based / Individualization


It’s been 2 years since Hunch.com A round and a full year since its B round.  Now roundpegg has raised its A round. Both of them are trying something interesting. They are trying to eHarmonize the world.

In a world where the proliferation of options overwhelm individuals, helping them make choices according to their preferences becomes invaluable.

To narrow down the options, both sites apply matching engines to rank options and guide you through them.

The concept is not new and Amazon has been doing something similar for ages. However, there is a settle difference, while amazon takes into account what you know (through what you bought),  Hunch and roundpegg take into account who you are and what you like/dislike, therefore suggesting things that are not always obviously related.  This, therefore, might lead to experimentation.

This, in itself is a space that I really like. Moreover, I like the infinite possibilities around it. There is value in this tool in virtually every complex decision one has to make.

Imagine a site that could suggest restaurants based on what you like/bought and how you behave. Go further, imagine suggestion of specific dishes. Or take it to another space, and use preferences to narrow down the options when house hunting or shopping for a new car.  imagine what this could do to job hunting, roundpegg is already working on that.

As the engine increases significantly the chances of positive outcomes, users will be more willing to experiment.

On the back-end, having all this preferences mapped out create a priceless database from where to extract amazing consumer information.

In the future, we will all marry to eharmony, either for dating or for anything else.