Showing posts with label entrepreneurship events. Show all posts

An MBA opens doors. This week I stumbled upon a door that few take, yet is typically difficult to break open without an MBA from a top business school. Described as a high-probability way of making good returns on investment and entrepreneurial effort, search funds are funds that are typically only raised by alums of top business schools. Essentially, search funds are a way for entrepreneurs to raise money to acquire a company. Once a company is acquired, the entrepreneur works to improve the profitability of the company over a period of 5 years or so, before selling it on for a profit - taking a 30% share of that profit. Usually that 30% share will be worth several million US dollars.

I stumbled upon the idea at an MIT Enterprise forum event earlier this week; I had been to their events before. On this occasion, Jim Southern explained the mechanics of search funds and went through a case study of how search funds work. One of the ideas that struck me about Jim's talk was his point that in the normal entrepreneurial path of building a company, only 1 in 10,000 or 1 in 100,000 people are successful in generating a multi-million dollar earn out. Yet, through the search fund process, the probability is more than 25%.

As Jim Southern's talk progressed, I got more and more excited about the search fund vehicle. The disheartening part for me was that the search fund process prefers acquisitions of companies with simple operational processes, e.g. a freight forwarding company or events company. This is because it makes it simpler for the entrepreneur to understand the process of the company and improve the profitability. Under this restriction, I would have to give up my preference for new media, which I have built my career on. Software development, which is at the heart of new media, can be complex - at times it can seem like a process that does not have a process. This makes it less than ideal for a search fund. However, I find new media exciting and engaging.

Consequently, at this stage - while I am enticed by the idea of search funds - I am reluctant to give up on my new media entrepreneurial plans. Setting up search fund might be a good "Plan B" for me though, if by my second year at Kellogg all else has failed.

The New York Times has a recent article on search funds. Stanford GSB has the most research and information on these funds.

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I was fortunate enough to attend the Kellogg 2009 Private Equity and Venture Capital Conference. The conference's keynote was given by Tim Draper, a founder member of the prestigious venture capital firm Draper Fisher Jurvetson.

What I found most interesting in Tim's presentation was the three things that he looked for in companies that he invests in:

1. Zeros a typical cost in the business model. e.g. Hotmail removed cost of delivering post, Amazon removed cost of inventory.
   
2. Revolutionises some existing business. e.g. Hotmail revolutionised postal mail, Amazon revolutionised bookshops.
3. Solves a problem.

While the second and third points are not extraordinary, I did think the first point to be fascinating. The reason that the Internet has become the powerful force that it has is because it is zeroing costs found elsewhere. You no longer need to have physical copies of music in the form of CDs etc. The same is true for newspapers, the contents of which can easily be read online. In the meanwhile, Facebook zeros the cost of keeping in touch with people - you no longer need to email or phone someone to see what they have been up to; they update their profile and you can respond as and when you want. eBay zeros the cost of the finding someone to buy your goods. Wikipedia zeros the cost of assimilating vast amounts of information on any topic.

It makes you wonder: how can you take any traditional business and zero its cost in the new media world?

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The TechCrunchUK's Christmas Party on 16th Dec was an interesting night out. I attended the last speaking session, which consisted of entrepreneurs giving pitches to investors and the audience, as well as the networking event that followed. Riaz Kanani has a good summary of the companies that took part in this session.

Most of my evening was spent in the networking party. I was surprised by the number of startup type people at the event. It felt like we were back in the age of the bedroom startups of the 80s, when people were creating games that distributors would pick up and sell to millions. Perhaps this is the power of the internet. Some of the ideas that people were working with seemed so wacky (just check Riaz's writeup of the pitching session to get an idea), that it made me think my own business startup idea is the most solid idea in the world. It was insightful learning about how people were approaching their startup problems. One person, for example was reselling open source software while adding a bit of consulting. Another was rehashing and aggregating feeds to produce their own dot com site. There were also investors there. Some of them made interesting points: Hollywood always makes the most money during a recession, so there is interest in investing in entertainment. There is also an appetite for investing in startups that create cost savings for other companies. Among others at the event, I even managed to catch up with the BBC's technology correspondant, Rory Cellan-Jones. The networking venue worked well, with plentiful of free drinks and food.

TechCrunchUK have posted their own debrief.

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The UK MIT Enterprise Forum held an event last week, Wed 26th November, titled  'What does the current economic crisis mean for European entrepreneurs and investors?'. At the event, Abdul Guefor, Managing Director of Intel Capital EMEA, gave a talk on Intel Captial's business and current financial situation.



Below are the highlights of Abdul Guefor's talk.

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About Intel Capital
Intel Capital think they are the largest investor in tech startups in the world. They also have offices across the world and have been investing in companies for 20 years. Whereas some VCs have only recently been realising that VC is becoming global, Intel has been there for 20 years. Intel does not use VCs as a way of doing R&D. Instead, there are things that are important to be done to help Intel’s business, but which Intel does not want to do. E.g. Wimax: Intel does not want to be a telco, but adoption of Wimax is important for growth of Intel based mobile devices, so it made sense for Intel to invest. Intel is also interested in spend companies that will be financially successful.

The trends that Intel think will be important are

• Mobile broadband
  
• emerging countries will go straight to wireless broadband
  
• new types and varieties of devices that are neither the laptop nor mobile phone, but variations in between
  
• Power efficiency
  
• Electronic goods that regulate their power to ensure energy is not wasted.
  
• Example, in the middle east, there are hotels that are interested in air conditioning that turns itself off when people are not in the room
  
• Immersive Graphics:
  
• In the past, graphics where computed by the microprocessor. In recent times, there have been dedicated graphics processors – built by companies such as Nvidia. Will there be separate processors in the future?
  
• 3D immersive graphics are expected in the future.
  
• Healthcare sector starts using IT
  
• For example, remote monitoring of patients.

In the current financial crisis, we are seeing:

• VCs shutting down
  
• Startup companies revenues reducing
  
• IPOs almost non-existant
  

The impact is of this plummeting valuations and fewer finances.

The crisis is different to the 2001 dot com bust in that this time the whole economy is affected and there is a lack of liquidity in the financial system. Stock markets are also not over-valuing stocks as much as previously.

So is there hope for entrepreneurs?

• In a downturn, people / resources cost less, the quality of management shines through (i.e. the company is not on the up because everything is on the up), the less able competitors retrench and the long term investors prosper.
  
• Great sustainable companies are built in this time, for example Google was built in during the dot com bust. Sterling Moss said that in racing, when there is an accident everyone slows down… but he speeds up to get past everyone else.
  
• Entrepreneurs should create a ‘save the company plan’ (detailing cost cuts), rally their investors and ask if the board is functioning – the board is meant to bring outside perspective.
  
• VCs sometimes complain that the entrepreneurship pool in Europe is not strong enough: the entrepreneurs are few in number, they are not pushy enough and they are not good at marketing.
  
• According to a study, VC returns in Europe in the last 5 years have been -5%, whereas in the US they have been +2%. Is the VC model broken? It is probably just the case that VCs are pumping too much money into their companies; at large sums the returns will not be large. Instead, companies need to burn money slowly – for life, not just during a financial crisis.
  
• Innovation, not cost cutting, will lead us out of the recession.
  
• When choosing an investor, pick one with a strong track record and one that can provide capabilities that will make you successful. For example, for Intel the sweet spot is ventures that have a product and now just need a way to distribute it. Intel are able to bring in potential client companies. For some of their startups, they have run open days for potential client companies to come in.
  

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Chicago Booth held an event earlier this week, After the Pitch: Entrepreneurial Financing Insights.

The event featured an entrepreneur making a pitch to a panel of investors for money. Following the 10 minute presentation from the entrepreneur, the entrepreneur was quizzed by the panel. The parts that followed were interesting. We were 'let in on' the kind of discussion such an investment panel would have after the entrepreneur had left. Chicago Professor Waverly Deutsch, who chaired the panel discussions, closed the  the evening with her summary.

Below are the highlighted insights that I noted...

The Entrepreneur: Riaz Agha, Founder, Greatswitch.com
GreatSwitch is a new price comparison site. The key differentiator between GreatSwitch and its competitors is that the site stores the details of the person using the site and then proactively later offers them opportunities to switch their mortgage / other financial product as better offers arise. This is in contrast to current sites, where you have to search for better deals periodically.

Investor Panel:

Ashish Patel, Managing Director for Europe, Israel, and the Middle East, Intel Capital

• We always start assessing the venture by looking at the route to market. How will the venture get there? How will it achieve critical mass? What is the unique proposition?
• Very few people make money using patents to prevent copycats.
  

Giuseppe Zocco, Co-founder and Partner, Index Ventures

• Riaz needs more awareness of what he does not know. This is important for building the rest of the management team. There seems to be CTO experience missing. Should seek a former CTO from a competitor.
• The venture needs to address how it will continue to innovate after the initial launch.
• There needs to be an understanding of the financial needs of the firm for the next 7+ years.
• A lot of ventures have approached the firm with the 15th iteration of their business plan, so keep iterating and refining to address concerns of the VC firm. Sometimes the venture does decide some of VC's concerns are not valid.
  

Sherry Coutu, Angel Investor

• Everyone liked Riaz's energy in presenting his idea.
• The business plan needs more work. e.g. I would expect to see more detailed cash flows.
• Angels will typically come in and hone the financials, as well as put in a team to deliver the final product/service, and enter discussions with other angels to understand what other similar ventures are launching.
• Angels will also look to identify who the venture can be passed on to for larger levels of funding in later rounds.
• Usually there would be further sessions with the entrepenuer for the angel to determine how the entrepenuer thinks. The angel would also want to get view from other angels with other expertise.
• A lot of investing is networking.

Keith Breslauer, Chicago MBA '88, Partner, Patron Capital

• There needs to be more thought on the revenue model - how will this make money?
• For internet models, think about this: is it a vitamin or a pain-killer? For the online world, the venture needs to be very disruptive.
• Would expect the person making the pitch to
• Find market data on all the competitors
• Find out all their negatives
• Give a presenation on how you would address these market issues.
  

Panel Chair: Waverly Deutsch, Clinical Professor of Entrepreneurship, Chicago GSB

• Most entrepreneurs need to be more realistic with their expenses.
• Entrepreneurs always underestimate the difficulty of creating behavioral change to make their product/service successful.
• The most important thing is to get the investor excited, because you won't be able to answer all their questions.
• Emphasise what is different about your business. What will get out the sizzle?
• As an entrepreneur, you need to have knowledge available of the industry you are entering. This could be through advisors or others. This is particuarly important if you do not have knowledge of the industry.
• People invest in people.
• The investors talked about why they would invest - they want to invest more than money to ensure the business is successful; they want to bring in the expertise of their colleagues.
• When you are pitching for money, you must have the correct investor profile. e.g. angels invest from £0 to £1M; VCs from £1M+.
• For multiple rounds of dilution, the venture must have strong multiple returns.
• Investors these days are thinking about the longer duration.
• The angel investor is thinking about where the money will come from next (for further rounds); who can they bring in? Investing is a team sport - angels need to ensure their investments have enough money.
• The newest money coming into a venture has the power. They will want to change the terms. This is why angels think about who can come in to fund the venture in later rounds.
• In the current financial situation, VCs are withdrawing from earlier stage funding and angels are being looked at to fill the gap. It is therefore important that your venture can make money.

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I watched the video Wharton posted on entrepreneurship today. I highly recommend watching it if you are interested in entrepreneurship. Before looking at this, I was a little anxious about how committed Wharton was to entrepreneurship, but I can see they can definitely produce enough interest and offerings in the area.

I took a few notes while watching it. For the lazy, I've included them below...

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I was very impressed with the talk given by Seth Berger ('93 grad). He told a great story covering the temptation to going into investment banking and what swayed him to start a company. He said something surprising - he said he got rich very quickly after selling his company to a VC; in the end, he earned at least as much as those traveling the slow upward career path.

Irene Susantio ('08 grad) talked about how she won the Wharton Business Plan competition. She talks about how having their small team (her and Brian) meant they made decisions quickly, and the advantages of her non-biotech She mentions a few things that she learned: In the reality of starting a company, you are not going to be dealing with millions of dollars. Being humble about amounts of money is important. Secondly, you learn a lot from creating a company while at Wharton - it is not the same as learning in class. However, you need an obsession to do it; don't do it half-heartedly.

Greg Neichin ('08 grad) says he lives and breathes tech start ups. He gave three messages (also blogged here):
1. Starting a company is normal (and sexy). This is important to remember, because you can be discouraged by the perceptions of other students. Wharton grads have started some of the hottest startups around at the moment, e.g. PlaceVine, admob, Bazaarvoice (and more).
2. The most important thing you can do is commit to starting a company. If you hedge your bets with the corporates, you will fail. You have to commit to researching and knowing your idea. You have to commit to yourself. Committing with someone else (i.e. a partner) that this is what you want to do will encourage you more. If you are not committed, everyone you ask for help will know that you are not committed. e.g. professors are used to having hundreds of students contacting them about their business plan, but then seeing these same students going for interviews with corporates.
3. Execution is what is most important in making the company successful. You won't learn that in a class room. Entrepreneurship programs are obsessed with business plans. In reality, you have to get down to executing. If you commit, you don't even have to worry about executing - it will happen by itself. Smart people with backs against the wall will commit to making it happen.

Uri and Mike, two 2nd year students then speak about the Entrepreneurship Club. Uri started a luxury handbag company through the VIP program. Mike says he is planning to something similar with an energy efficient light bulb company. They said the Entrepreneurship club help create a community for like minded entrepreneurial individuals. Secondly, the club organises events, like alum talks. They also organise career treks to VCs and the like. Their key event is the Entrepreneurial Conference. A lot of VC and entrepreneurial alum will be at the conference, so it is a great opportunity to network.

A few responses from the alum to questions at the end:
- People are obsessed with raising money. At least in the Internet industry, you should be able to scrape together a prototype with very little money. To get ideas, read around. Proably the real reason you want to raise money before doing anything is because you are not willing to work for less than $100k.
- The notion of protecting your idea is a fallacy; the truth is unless you are a real rocket scientist, your idea has been thought of before. It is all about execution. Who can move fast enough and really moves on that plan?
- If you are having fun, you will work and keep pushing. Figure out how much money you are aiming to make before you start - make sure you remember that number. When you get to that number or when you figure that you will not be able to grow the business, sell out.
- There was a great final question: If you are committed, and you are smart enough - what is the value of coming to Wharton? What is Wharton going to give you? This produced an even better answer from Seth: When you go to raise money, when you go meet with partners, when you go talk with customers, they ain't going to remember your name. They are going to remember the guy from Wharton.

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