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Secondaries: how founders and early investors can sell shares before the liquidity event of the startup

ShareVCs and angels invest in companies early stage with the plan of getting to an IPO or M&A event exiting their investment at a much higher valuation than the one they invested at. You win some and lose some, but net net you make money. At least that’s the plan for venture capital and angel investing. In the past few years it has become possible for founders and early investors to sell some or all of their position prior to the definitive liquidity event of the company. Smart investors should take advantage of this or at a minimum understand this and possibly sell some of their position when there is a huge uptick in the valuation of the startup they invested in. If Peter Thiel sold some of his shares in Facebook prior to the IPO I think you can get in line and do the same. Experienced investors have invested into deals and watched their unrealized gain go up and up and up, but before the actual exit the valuation collapses. There are actually a million ways to lose everything. For some investors selling something prior to the big exit makes sense. This is simply experience talking to you. Understanding secondaries is a part of the puzzle every angel and VC should understand. I used to operate in this space and I have a vast amount of experience in the ever changing secondary market for tech venture capital. My experience in this area drives some of the strategy at Rubicon Venture Capital. With the permission of McGraw Hill, publisher of my first book, I can share with you...

Creating A Win-Win-Win Among Corporates, Startups & VCs

ShareI gave a keynote address on corporate venture capital interviewed by Duncan Logan at Rocketspace’s Innovation Collective Summit today and thought it appropriate to share this article I wrote for the NVCA CVC magazine a few weeks ago. I am nearing the final stages of finishing my second book on the topic of venture capital –MASTERS OF CORPORATE VENTURE CAPITAL: Collective Wisdom from 50 VCs on How to Get Funded & the Playbook for Corporate Venturing to Access Startup Innovation, Create Winning CVCs & Avoid the Classic Mistakes (May 2016). I was partly motivated to finish this book now, because I have also been advising a large Chinese corporate on the formation of their corporate venturing program. I first organized my own ideas for a comprehensive book on the topic into 10 chapters with detailed sub-headings. I then embarked on taking over 50 meetings and phone interviews with top corporate venture capital (CVC) practitioners including Intel Capital, IBM Ventures, Qualcomm Ventures, Teléfonica Ventures and many other usual suspects both old and new to the CVC scene. To be honest, before taking any of these interviews I foolishly felt as if I could just sit down and fill in each chapter based on my own experience of being a founder that raised over $27m in CVC funding for my own venture and then a decade of being an active angel and advisor helping 20+ startups raise VC funding and then running an angel group and finally my own VC fund – Rubicon Venture Capital. What I learned from these interviews was entirely humbling and enlightening. Many of the interviews began the...

Understanding VC Target Ownership Percentages

ShareVCs often have target ownership percentages that are driven by two things: 1) ability for each investment to return 100%, 50% or 25% of their entire VC fund and 2) a VC can only be effective on so many boards; so may as well join the board of the companies where they own a meaningful amount of equity. Many VCs have a minimum ownership percentage they target when making investments. Depending on the stage the VC invests at and their strategy it is often seeking to own at least 20% of the company when leading a Series A investment, buying 10% of the company in a Series B when the A investors want half of the B round and maybe 5% of the company when joining a syndicate of a few different investors in a Series C. Many VCs will want to take 20% regardless of stage and walk away from an A, B or C round if they can not buy at least 20% or 15% of the company at that time. In ancient times (80’s, 90’s and early 2000’s) these numbers were a bit bigger with VCs seeking to own 33% minimum and even lifting that up to 45%. With the power in recent years moving from the investor to the entrepreneur the amount a startup is willing to sell in a single round has gravitated downwards to 20% and goes up a bit to make room for many elbowing VCs trying to get in. With the macro economy cooling things off we may see startups moving back to selling a third in a single financing again...

Not Getting Pushed Around by a New VC & the Playbook for Treating Existing Investors with Allocations for Future Financings

ShareAlmost all good companies go through many rounds of funding to pursue innovation and growth as well as accommodate demand from investors that want in on a great deal. I recently spoke on a panel where the topic came up about getting “thrown under the bus” where new investors try to take the entire new round and prevent existing investors from investing additional capital. With many new investors active in the market that have never founded a startup, raised angel and VC funding for their own companies or worked their way up the VC ladder from Associate to General Partner, I wanted to share “old school” etiquette on this matter and give everyone a baseline of what I think is best for all parties. When a startup is hot there will be more demand from investors for the round than available inventory in the round. This either forces the valuation of the round up and up, which will push out sophisticated investors and the least value added investors will end up taking the entire round and the company will be worse off from not having selected the best investors to support the company at a valuation they agreed to be sensible. Often times, the new CEO is heavily influenced by the new VC coming in and the new VC has strong percentage targets of 20% or more and the founders may not want to be diluted by more than 10% and so the sharp elbows come out. Sometimes the CEO will tell existing investors that they are very sorry, but the new investor is taking the entire round and they...

Irony of What’s Suitable for an Angel: Early vs Late Stage Investing

ShareIt’s been over 20 years that I have been talking to angel investors in the Valley and around the world about their individual investment preferences when it comes to direct individual investments and wanted to share some of the results of these conversations. The way the real world works is that until recently most VCs do not invest in pre-seed or seed stage startups. Especially as most Sand Hill Road funds increased in fund size from $50m and $250m to $700m and $1.2bn per fund as a result of 2001 and 2008 downturns. These super-sized VCs need to write bigger checks and invest in later stage financing rounds than they did in the 80’s, 90’s and early 2000’s. So angel investors filled this need for early stage seed investing. Then we saw the birth of micro-VCs like Ron Conway’s SV Angel raising institutional funds and investing at the angel / seed stage like a machine out of their funds with fulltime investment professionals focused on angel investing. We now seem to have an accelerator for every type of startup and the best ones have their own funds and invest seed capital in an institutional manner and nearly all of these financings with the micro-VCs and accelerator funds also include angel investors. This is where we expect to see the angels active. The result of all of this is that angel investors today and in recent years do have access and are welcome to invest in seed stage financings for tech startups in the Valley and around the world. However, once these startups make more progress and progress to a...

We are in a new venture economic cycle in 2016

ShareAt Rubicon Venture Capital we believe 2016 is already a new and different economic cycle from 2015 and 2014 for startups and VCs trying to agree on appropriate valuations and size of financings. The venture economy ebbs and flows much like the public markets, but not as tightly in tune as logic might suggest. Startup CEOs have their own idea of what their valuations should be and how much capital they should raise and how often. Venture capitalists have their own ideas on the same topics and deals get done when both sides agree. Our take is that the venture world has been in an upward boom in recent years and peaked in August of 2015. There was a “Chinese chill” in August followed by a controlled “hitting of the breaks” without skid marks in September, October, November and December. What has happened with venture is a mild market correction; however, not all entrepreneurs or VCs have gotten the news yet. As we all know 2016 began with a hammering of the global public equity markets. Some of our companies already restructured in 2015 cooling burn rates and recapping their companies at more humble valuations raising funding when they didn’t need it. Funding has become more of a continuous process than big forklift monumental “series” financings. Now many mid to late stage companies are lowering expenses, lowering growth expectations, raising more capital ahead of schedule and adopting new operating plans to sail through potential rough waters that may be ahead. What does this mean for Rubicon? Lower valuations for us to invest in. Ability to drag startups through more...

Videos from VC / Angel Investor Workshop @ Silicon Valley Innovation Center

ShareVideos from VC / Angel Investor Workshop @ Silicon Valley Innovation Center Click here to go to Andrew Romans’ YouTube Channel and view the videos. (Read the notes of each video to fast forward through the first 10.5 minutes of Part I. I need more time to break these into shorter videos; so feel free to skip around.) Topics covered Overview & analysis of the market from Pre-Seed, to Seed, Later Stage Seed / Seed Extension, Series, A, B, C, D to the private IPO phenomenon – understanding trends – which are crowded, overpriced, underpriced and key risk points Why investing now is more attractive than ever before What industries, sectors, company stage and geographies are best for you Convertible notes – key points and the meaning beyond the moving parts Priced equity rounds – key points and the meaning beyond the moving parts Valuation concepts on pricing valuations when investing, exiting and risk tied to perceived exit multiples Portfolio construction strategies for angels and VCs – how to allocate your capital Best practices for sourcing deal flow and conducting due diligence Tactics to get into oversubscribed deals Strategies for continuing to invest in portfolio companies a 2nd, 3rd, 4th, 5th time, etc Best practices for post investment information rights, governance, adding value and Different options to invest ranging from Angel List, to other investor platforms, angel groups, demo days, accelerators, VC funds, SPVs, tax breaks for UK, EU and Israeli taxy payers Different options to get liquidity on the secondary market before definitive liquidity event for startup / how to sell some stock before the final exit Questions & Answers from an audience of...

The “carve out” is another tool in the toolbox of both the founder / hired CEO and VC

ShareI had a meeting last night with an entrepreneur and old friend of mine visiting Silicon Valley from Tel Aviv in my San Francisco office and then we went 1:1 afterwards (without my Rubicon team) for a drink. I was keen to learn about the opportunity to invest in his new startup, but I also wanted to hear how my previous investment I made 7 years earlier into his last startup would work out for both him and me. His last startup (I will not name names in this post) is an Israeli company backed by Pitango, Carmel and other leading VCs from Israel. The two co-founders left the company about 18 months ago after nearly 10 years of building up this first startup. Both now have new tech companies we’re looking at potentially investing in. The previous company continues to grow revs with solid profit margins, but has failed to scale to the level we had all initially hoped for, but is still a valuable asset. They have a meaningful liquidation stack of over $40m total that needs to be paid off to the VCs and bond holders before the founders’ common shares (founder stock) would receive any consideration from the exit. This means that it is possible that their previous company where they raised over $40m of VC funding might be sold for less than the $40m invested. They have a 1x liquidation preference they need to pay the VCs back and a few million dollars venture debt that gets paid out before the VCs. So the waterfall of liquidation preferences looks like this: 1) venture debt, 2) VCs,...