Spectrum Equity purchased a majority stake in Wasatch Venture Fund’s portfolio company The Generations Network (previously known as MyFamily.com) for an investment of $300m. The Utah-based Generations Network is comprised of Ancestry.com, Rootsweb, and MyFamily.com that, according to Hitwise, rank as the second, third and fourth largest U.S. “family lifestyle” sites. The Generation Network has more than 900,000 paying subscribers, receives 8.2m monthly visitors worldwide and counts approximately 2.5 million active site users.
It is best for an entrepreneur to try and finance her company through her own resources (bootstrapping, friends and family, etc) because it increases her commitment to the company and she then retains ownership. Yet, many companies will need additional capital and depending on the type of business private investors might be interested in participating via debt or for an equity piece. Utah has a good range of financing options available for looking entrepreneurs.
Angels: There are four organized angel groups and a couple of individuals within Salt Lake and Provo. I have listed the organizations only as I believe the individuals seek out their own deal flow. The angels will often invest at the earliest stage of the business, even as early as conception. Certain venture players will also invest at the seed stage (including Wasatch) but this stage is the angel’s main focus.
Local Venture Capital Firms: Venture capitalists provide early-stage and growth capital. Due to the venture capital model, VC’s usually only invest in high-technology deals able to generate high margins.
Local Private Equity Firms: I have lumped the later stage firms and buyout firms together in the Private Equity list since there are only a handful of these investors in Utah. The later stage firms finance companies that are already cash flow positive and need financing for expansion or in preparation for a liquidation. The buy-out firms actually buy a company and find a new management team (or personally manage the company) to turn the business towards profitability.
Venture Lending: Venture lenders are a financing option that extends the capital between equity rounds. It is debt plus warrant structure, preserving the equity of the company but providing potential upside for the lender. UTFC was the only venture lender until a couple months ago when Zions created a venture lending arm.
Wasatch Venture Fund portfolio company Berkeley Data Systems was acquired by EMC, the world leader in information infrastructure solutions. Berkeley Data Systems is the provider of Mozy, an online data backup subscription service. Wasatch invested in Mozy in 2005 alongside Novell co-founder Drew Major and venture capitalist Tim Draper.
Once again my little Macbook has succeeded in surprising me with its functionality. A couple months ago LifeHacker had posted about the downloadable Mac tool Combine PDF, a freeware that emulates Adobe Acrobat. I used the application and was happy with the product, but did feel the layout could have been a little more user friendly. I hadn’t used the application for about a month and went to use it yesterday evening. For some reason I was unable to upload the files I needed to combine. I tried downloading the latest version of Combing PDF and still no dice. After a quick Google search I learned that a PDF combining functionality is already built in on Macs and that freeware isn’t necessary at all.
The built-in tool is called the Automator and is esentially a list of macros that can be ran on a file without having to open the file. There are 212 actions available for all built-in application.
Since Microsoft Word was installed there are no actions available to turn a doc into a PDF, meaning that the doc will need to be opened in Microsoft word and saved as a PDF. Unlike Windows where a driver is necessary, the Mac version has the option already available in the print box as a button on the left corner.
Once all the files are saved as PDF’s, highlight them in the finder, ctrl+click, and choose Automator and Create Workflow. The Automator box pulls up and shows you all actions available. Find ‘Combine PDF Pages’ in the list of actions (easier to find by using the search box) and double click so that it is added to the workflow. Make sure that appending pages is marked. Then find the action ‘Open Finder Items’ and choose Default Application. This will open the combined file and allow you to save it.
From there, save the file with the name and in the directory of choice.
I love Apple!
The Lifehacker blog recently wrote a post concerning the stock photography website Free Range as the site provides free stock photography for commercial and noncommercial use.
Free Range has in-house photographers and access to photo archives, but also accepts photo submissions. The company operates through an ad revenue generated model that is split with 80% of the revenue going to the photographers (note that this is only the advertisements on the photographer’s page) and the other 20% being retained by the company.
As a blogger I find the site to be extremely useful as a photo or image definitely livens up a post, but I personally have a limited supply of photos that are usually based within a handful of subject realms. I find it particularly useful on the Wasatch Girl blog and for business postings as I usually don’t have any relevant photos of my own.
Due to the high volume of business plans a VC reviews, only approximately 10% will actually move into the due diligence process and be considered for an investment.
The due diligence process entails a thorough look at all aspects of the business including primary and secondary research and monitoring over a period of time, usually taking 3 - 6 months to complete. Everything from market size to customer calls to a number of meetings with management will take place. It is important for all business pieces to be thoroughly investigated, but three of which stand out at the time of investment:
- Management
- Market
- Deal Structure
1) Management - It is a belief in the VC world that it is better to invest in a mediocre technology with a phenomenal management team, rather than a phenomenal technology with a mediocre team. The reasoning being that it is the team that lines up the deals, structures the business model, rolls the product out to market with accurate timing and keeps the passion alive in the business.
It is also common for venture capitalist to back the same entrepreneur in a number of different ventures if the entrepreneur has previously proven his/her talent.
2) Market - The market size and growth is obviously a needed variable due to the point that without a market there isn’t a need for the product/service, nor the possibility of creating a profitable business that can create a return to the investors.
3) Deal structure - Deal structure contains many different variables many of which will be addressed in later posts. Mainly, the structure needs to make sense through its pre-money valuation by being in line with the market comparables and structured to allow the venture capitalist the opportunity for a return at the time of an exit. Complementary to the valuation is ownership. The venture capitalist expects a certain amount of ownership with an investment but wants to keep the majority for the founder and team to keep success as a motivating factor. If previous investors have taken too much equity it is real hard for a venture capitalist to come in without diluting the owner.
As an analyst for a venture capital firm, I read hundreds of business plans a year and assist our portfolio companies in keeping their business plans updated for further rounds of financing. I often am asked advice on how to compile a business plan and though there are numerous formats that can be used, below are the items I generally want to see included.
- Executive Summary - this should be succinct summary, telling the reader everything she needs to know within a three - five page span. Mainly this subject should address why the company has been created and what problem it will be solving. If there isn’t a problem needing an answer, consider going back to the drawing boards to think of another idea.
- Overview - In this section the reader should discover the origins of the idea and a further explanation of the purpose of the innovation.
- Technology - The entrepreneur will describe how the problem will be solved by explaining the implemented technology.
- Thoroughly describe the technology including diagrams.
- Answer why this technology is superior to the offerings on the market.
- Include patents (provisional and issued) and explain with brevity the coverage of the scope. Referencing filing numbers is useful.
- Product / Business Model
- Explain the initial product, price points and how it will be rolled out to the market
- Explain the pipeline of products and the timeframe of when each one will be commercialized.
- Discuss the business model that will be used and the target audience, explaining why the model and audience chosen are the best solution.
- If the company already has customers, these should be included.
- Market
- Explain the size of the market, backing up your numbers with research reports from top tier research firms (Aberdeen, IDC, Gartner, etc.). With early-stage innovative companies there is the possibility that your market is yet to be tapped and therefore not covered by the analyst firms. The entrepreneur might have to back into numbers by combining markets or creating their own calculations of the market size.
- Discuss the annual growth of the market and the drivers that will continue to propel it forward.
- Explain the market validation for the product(s).
- Competition
- Thoroughly discuss the direct and indirect competitors. The most useful comparisons are usually in the form of the Gartner Quadrant and / or a table that breaks down the characteristics in comparison to all other companies. It is useful to note which companies are venture backed and by which firms.
- Address the company’s competitive advantages with current competition
- Describe the barriers for new competitors trying to enter the market
- Management Team - list all management team members including thorough biographies. Include any position that will be filled upon financing.
- Financials
- Financials can be a quick deal killer. Entrepreneurs are enthusiastic about their companies, but this enthusiasm can often translate into aggressive financial projections. Remember that the market might not think your product is as great as you do and that there are a handful of risks that can occur. It is far better to bring very conservative numbers to a VC firm rather than a graph of the hockey stick growth. VC’s can imagine wild growth, but don’t fare well with extremely hopeful thinking.
- Round of Financing Details
- Describe how much the company needs and the use of the proceeds.
- Some entrepreneurs like to “suggest” a pre-money valuation. This is acceptable, but if doing so make sure to base the value on recent industry pre-money comparables. It is usually best just to leave this information out of the business plan because it is the VC who will be setting the initial terms if they are interested.
- If previous investors have been involved, include a capitalization table.
- Exit Strategy
- A VC operates through the returns produced by their portfolio companies. The company should list out when they plan to exit and through which medium.
One of the best ways to propel your business plan through the rankings of the venture capital firm is through an introduction, especially from an entrepreneur or other professional who has worked with the firm. A simple introduction will highly increase the probability that your plan will get off the analyst desk and into a partner’s hand.
One of my favorite aspects about blogging is the positive nature that can be generated through posts and comments. A local Utah blogger has started weekly postings titled “Giving Props to My Peeps” where the writer, Thom Allen, writes about a person he has been impressed with during the last seven days. What a great idea! His posts can be seen here, here and here.
I have blogged quite a bit about Ten Thousand Villages on my personal blog as I volunteer with the organization on a regular (usually weekly) basis. Today I thought I would post an entry on the WasatchGirl blog instead as not only do I enjoy the volunteer experience, I find the business model to be intriguing.
First, I post about Ten Thousand Villages as the Salt Lake location has recently moved. Due to the unfortunate Sugarhouse development, Ten Thousand Villages had to re-locate and as of today is open in its new location at 1941 South 1100 East (two store fronts north of the Sugarhouse post office). I would urge all readers to go and check out the new store as there is lots of new merchandise.
Second, the business model of this non-profit is interesting. Ten Thousand Villages was formed in 1946 and has grown from a grassroots organization (in the back of Edna Ruth Byler’s car trunk) to a very well established company with 160 branches dispersed throughout the United States. The company’s mission is fair trade and partners with more than 100 artisans overseas, providing them a fair wage in advance for the merchandise they supply. The materials are shipped to the United States and are sold at branch locations that are managed by (at least in the case of the Salt Lake store) two full time paid employees and one part time paid employee. The rest of the work (running the cash register, checking in merchandise, assisting customers, stocking the store, etc.) is done strictly by volunteers. Not only has this organization succeeded in running a retail store based around volunteer employees, but it has grown in the process.
I find the model to be interesting because:
- The payment of artisans in advance provides the necessary capital for the artisans to work without needing to take out a loan or boot strap their operations
- The default rate of artisans not providing merchandise (though unknown to me) must be low for the organization to continue payment upfront in environments with very little legal protection
- Prices of merchandise are still reasonable even with the higher cost of goods, most likely being offset by not needing to pay volunteer wages
- People will volunteer their time, enough to operate a retail operation, if they believe there is a good cause backing the organization.
- The company has found a way to combat a social ill on a on-going basis.
To circle this back around to the venture capital perspective, there are a handful of successful for-profit organizations that are focusing on social issues (i.e. Tom’s Shoes which has been bootstrapped to date). Financing such start-ups are a number of foundations and social venture capital firms, a handful of which are listed below:
- Social Venture Capitalist: Acumen Fund, Benentech, NESsT Venture Fund, New Profit, Calvert Social Venture Capital Funds, VentureSome
- Foundations: Echoing Green, Philanthropic Ventures Foundation, Ashoka, Google.org, Equity for Africa, Charitable Venture Foundation, Social Venture Capital Foundation, Entrepreneurs Foundation , Village Enterprise Fund
- Microfinance shops: Unitus, DrishTree, SKS Microfinance
- Other: Enterprise Works Business Development, SocialVC Business Plan Competition, Yale Business Plan Competition
