Don’t be a Yahoo! Make an Exit Strategy

In April 1995, Sequoia Capital made a Series A investment of $1M in a small company named Yahoo. Soon after, November of 1995, OpenText, Sequoia Capital, SoftBank Group and Thomson Reutors invested a combined $4.8M in a company whose valuation had raised to $40M. With this fast growth, it was not hugely surprising when the company went public in April 01996. At this point, the company was valued at $848M with stock costing $13. By December 1999 Yahoo’s stock doubled, with a share costing $108. Their valuation at that time was $113bn. For all involved, things seemed to be going well.

And then there was Google. Read more

Debt vs. Equity Financing


When seeking capital, it is important to think about what your objective with that money will be. Will it help you achieve a short-term or long-term milestone? Do you need a small amount or a huge sum? This will give you a better idea of what kind of financing is right for you.

Debt Financing

Debt financing involves paying back an entity money at a specified time or rate. For instance, a company could issue bonds that pay interest and a principle or it could take out a loan from the bank.

The big advantages of debt financing is that lenders have no right to the company’s future profits, which they would if they had shares (equity) in the company instead. This is a pretty big advantage. Imagine if a rapidly growing company such as Facebook issued shares to early investors in return for capital—the company would have missed out on billions in profits.

A major drawback of taking out debt is that a company will have to pay interest rates according to how risky it is viewed by investors. For instance, with low oil prices, smaller oil producers face the threat of going bankrupt and thus have to pay significantly higher interest rates with investors willing to take the risk of losing their money. Even more so, institutions such as banks will require assets to be put up as collateral in the case the company defaults on its obligations.

Equity Financing

Equity financing involves issuing ownership in a company. This gives owners rights to a company’s assets and profits.

The main advantage is that a company is receiving “free” money as there is no interest rate or obligation to pay. Yet this comes with the disadvantage that the owners are diluting their stake in their company.

Deciding What Kind of Financing is Best for You

This involves examining what stage your business is at. If your business is already earning revenue, and you believe you’d be able to pay off the amount you’re intending to raise with future cash flows, it is probably best to take out debt. If your company is pre-revenue or is suffering from turbulent economic events, like low oil prices, it may be best to issue equity in order to avoid paying painfully high interest rates on debt, especially if future cash flows are uncertain.

Impact Investing Night 2016

Impact Investing Night 2016: Keynote Speaker

Each Watson semester is an intensive fifteen week program in which scholars receive weekly mentorship and coaching sessions, free international legal support (through a partnership with Thomson Reuters), training in the hard skills and frameworks to take their ideas to the next level, and a community of peers that will last far beyond Watson. We aim to be the Olympic training ground for next generation change makers and you can expect the experience to be both challenging and fun. Below are four key elements of each semester. Speaker Eric Glustrom, Watson University’s founder, will be discussing how to measure the impact of an investment.

dBMEDx is a medical device company waging war against health-care acquired infections . We recently launched the BBS RevolutionTM, a next generation bladder scanner that battles both CAUTI and patient-to-patient transmission while delivering the quadruple aim of better outcomes, lower costs, more satisfied patients and more empowered providers. We are seeking growth capital to support our efforts to exit in 3 – 5 years. We have FDA clearance, CE mark, 5 patents and we’re generating revenue! Learn More Here

Intuitive Innovations delivers products and services for older adults that improve quality of life, independence and safety. Products combine technology and universal design that’s high tech on the inside, intuitive on the outside, and fashionable. Intuitive’s first product, the I Love You Band (I?U) comprises a watch, a PERS (personal emergency response system), and multimodal communication capabilities which collectively improve connectedness while providing peace of mind to loved ones. Learn More Here

Revolution Systems develops and sells the Revolution, a sorting line that is configurable, scale-able, self balancing and upgrade-able. Incumbent suppliers offer specially designed systems on a project basis that are elegant, but expensive and rigid. Revolution Systems’ focus on local communities and businesses, has resulted in an affordable system that can grow and adapt as the needs of the program change. Focus on smaller markets and creation of a flexible product allows us to achieve scale more easily than our competitors, reducing product cost to put recycling within reach of small communities and businesses. Learn More Here

Wave Solar is making an Impact with our Solar Steam Engine. A complete energy system for your home or small commercial building that provides electricity, heat, hot water and air conditioning, all from solar thermal panels plus natural gas. Given the back-up energy, the system will work in bad weather without storage, or work all night long as a back-up generator if the power grid is down. One percent of our systems will be installed for free in schools in third world countries. These systems will be reconfigured to purify dirty water into drinking water, provide a refridgation for a school, and run off garbage as a back-up energy source. Learn More Here

This event is available to be watched via livestream!

What do I look for in a Venture Capital Investment?

The answer to what venture capitalists look for in their investments is complex and there’s certainly no checklist that you can follow for investability. I’ll share an overview of my perspective on Venture Capital Investing.

If you were to ask me the ONE thing we look for in an investment, I will give you a simple answer that varies from some other fund managers –  I look for a clear path to an attractive exit.fire_exit-svg

I ask about the exit first because my job is to return capital and profits to Limited Partners.  If I am asking about anything else, I’m not doing my job. I look at many factors, but I look at them through the lens of the exit.

Many fund managers will tell you that the main thing they look for is a great team.  I have met many nice and passionate teams that I liked, but that didn’t have any idea about how to create value for shareholders by engineering a good exit.  They could build a company over time and overcome many obstacles, but at the end of the day, they didn’t know how to exit.

A clear path to exit includes several elements, including an experienced team who knows how to create value, pivot when necessary, and exit at the best time.  These teams have deep industry knowledge and they know where the industry is going and who the acquirers are who will be needing their company’s technology/customers/or other value proposition in a 3-5 year window. I call this the “Wayne Gretzky Factor” after Wayne Gretzky, the hockey player famous for saying that his hockey prowess was due to skating to where the puck is going, and not where it is.

Great team characteristics include an ability to work together, experience in working with fast paced venture-backed companies, willingness to share ownership with investors, coachability, complete team with finance, strategy, technical, sales and marketing skills, and people with industry experience and connections.  Finally, teams that have “grit” are going to work through all the tough spots are the ones that succeed. They are continually doing the hard work needed to achieve success.

A tight strategic plan is a differentiator between companies that are investment ready and those that are not.  I don’t want to invest fund dollars into a company that has “many possible customers”6699678_s  – I want a team who has analyzed all possible customers and determined those for whom the product creates the greatest value and for whom the cost of acquisition is lowest.  The company should not be figuring these questions out with investor money.  A tight strategic plan should include a clear mission, vision and values for the company as well as the major objectives and the strategies the company has to achieve them.  A clear plan will not eliminate bumps in the road, but it will help to navigate a path to exit that is as straight as possible.  It’s well known that companies with written strategic plans outperform those that don’t by 65% or more.  Demanding a tight strategy doesn’t ensure success, but it certainly helps.

Unfair competitive advantage is an important quality we look for.  A company should not be easily copied and it should be clearly different from its competition.  “First to market” is not a viable unfair competitive advantage, though it can sometimes provide advantages over late comers. The main reasons for desiring unfair competitive advantage is that it allows a company to grow with relatively smaller competitive threats, and it creates greater value for acquirers at time for exit.

Traction to Value Ratio is an important consideration in deals we look at.  Ideally companies have accomplished various types of traction, though there are no hard and fast rules about what that might be.  For some companies it might be having several patents.  For others it could be acquiring FDA or CEMark certifications.  Still others might get traction through technical development, customer and revenue development or other benchmarks.  Having significant traction shows us that the company can execute and it’s more than just a plan.  Achieving milestones adds value to the company.  Since our average valuation at time of investment is in the $3.5 – 4 million range, the company needs to be able to show it has accomplished enough to be worth that amount.  Some companies that have achieved higher levels of traction will warrant higher valuations.  We’re always looking for a good,but fair, deal. This means we’re wary of companies that are asking for high valuations without the traction to back it up.

A good deal is important for investment. I’ve read some ridiculous blogs by investors who claim that valuation doesn’t matter.  They point out that the difference between a valuation of $4 and $5 million dollars today with a $1 million investment is the difference between 20 and 25%.  After multiple rounds of dilution, the total ownership may drop down to a difference of 8 and 10%.  So, if there’s a $100 million exit, the difference in return is only $2 million out of $100 million.  That’s one way to look at it, but another way to look at it is that the $5 million initial valuation yielded an 8X return and the $4 million valuation yielded a 10X return.  This is a 20% difference in return to investors – it is not insignificant.  The fund manager’s job is to return maximum return to investors and this is done in a variety of ways including determining a fair valuation.  Note that a fair valuation is not necessarily the lowest valuation, but one that will return the highest returns to investors.  Too low valuations often result in unmotivated founders, or insufficient equity to raise additional rounds needed to grow the company to its greatest value.  

The benchmark we’re looking for is to return 10X to investors within five years.  

This is about a 60% IRR.  This is the same as getting 25X in seven years or 4X in three years in terms of IRR (internal rate of return).  We invest with a portfolio strategy, so we look for companies that have the ability to return 10X or more and invest as if it was our only investment, but understand that some will be winners and others will return less than 1X.  If a company can’t demonstrate a clear path to a 60% or greater IRR for investors, then it’s not something that we would pursue.

Negotiating the deal goes beyond valuation.

Investment Process Concept on the Mechanism of Metal Gears.

We also look for deal terms that provide industry norms such as 1X liquidation preference (non-participating), control provisions, board seats, right of first refusal for follow-on investment to maintain pro-rata shares, and more.  The terms of the deal can be as important or more important than just the valuation and we look for terms that are reasonable and fair for everyone while protecting the investors interests.

Strong marketing and go to market strategy are important.  By the time a company comes to us they should have solved all or most of their technical challenges and the funds we’re providing are to validate the market and let the company build to a run rate of $1 million or more.  These are rules of thumb, but apply in many cases.  So, this means that the primary risk facing the company at this point is a failure to execute a go to market strategy with sufficient channel penetration to grow quickly and utilize leverage through use of multiple channels and or partnerships.  We see a number of companies whose strategy is to market through “word of mouth”.  This is an example of a good starting point, but a strategy that is probably not scalable. It’s typically much harder for companies to achieve sales objectives than they think, and we like to see a well thought out plan vs.a 1.0 strategy which will not achieve the objectives.

A believable proforma is a key factor, but not for the reasons some would believe.  We don’t expect companies to hit the numbers that they project, but we do expect that they will have done the work to research industry norms for key ratios and that they are able to model out their strategies in sufficient detail to understand their capital needs and develop a solid capital strategy from there.  The proforma should show not only the current raise, but should also show all planned subsequent raises. The valuation, proforma, exit strategy, marketing strategy and capital strategy should all be aligned and in agreement with each other.  The proforma should show growth at believable rates which nonetheless result in a target revenue number by year five that is in the norm for acquisitions in their industry. If the number is significantly lower, then they may not represent an attractive M&A target.  If the number is significantly higher, then they may be too expensive for M&A, leaving IPO as the only exit option.  IPO is not a bad thing, providing that it is a realistic goal.

It’s important for the CEO to be comfortable with uncertainty.  

This isn’t a quality you hear about often from fund managers, but here’s why I think it’s important.  I’ve met a lot of CEOs who tell me that it’s ridiculous to ask for a proforma because we all know it will be wrong.  Others tell me that asking for an exit strategy is an exercise in futility because you can’t know who is going to acquire you or when it will happen.  Both of these statements are true with regard to the fact that there is extraordinary uncertainty facing the company. Some CEOs are afraid of uncertainty and resort to inaction.  These CEOs don’t pave their own way into the future, but wait for it to come to them. The likelihood of success for these CEOs is far less than those who recognize uncertainty and strive to understand its limits and build a plan to achieve success.  They make the future rather than just waiting for it to happen.  In the case of exit strategies, this shows itself in how the CEO plans for exits.  While it’s true that you can’t know who will acquire you or when, you definitely can understand how your company would provide value and for whom it would be valuable.  You can then design your company to meet the needs of possible acquirers and, having identified them, create relationships with the CEOs, strategists and business development teams within those target companies.  That way, when eighteen months from now, their board decides that it needs to acquire a company just like yours, they know exactly who to call.  These calls result in “strategic” acquisitions vs. “financial” acquisitions.  Because strategic acquisitions result in multiples that are 4-20X more than financial acquisitions, having spent the time to identify these acquirers and create relationships can more than double the return to Limited Partners in a fund.

Meta Due Diligence is as Important as the Due Diligence Itself.

We look at all of these factors ranging from markets, to finances, team dynamics, product, IP, legal, valuation and the deal while we’re going through the due diligence process. The other thing I Peter Adamslook at is what I call “meta-due diligence.”  Meta-due diligence refers to how the team responds to the difficult process of investigation that investors go through.  Great companies welcome the process, and are organized with their information.  They respond well and with candor even when tough questions are asked.  Ultimately they know that one reason that investors who do thorough due diligence on companies isn’t just because they’re weeding out the losers, but that by pushing for validation of strategy, investors are actually making companies stronger and more likely to succeed.  Investors who do 40 or more hours of diligence on a company report returns of up to five times greater than those who do casual diligence.  Rockies Venture Fund  does over 100 hours and often much more than that on the deals we invest in. Some companies are technically “cleared” in the diligence process, but the relationship becomes so strained and confrontational by their refusal to participate and their belief that diligence takes away from their time to “build their company”, that they end up revealing that they don’t understand the value of diligence in building their company’s value and they would rather pursue a “ready-fire-aim” approach to business without validated strategy.  Rockies Venture Fund avoids these companies.

I hope these points help to clarify what we look for in the companies that become part of our portfolio.  There are many more factors, many of which are balances between subtle polar opposites.  We ask our CEOs to be confident and humble at the same time.  Proformas should show a hockey stick path, but should be researched and realistic as well. Startup CEOs should be coachable, but should show the leadership to know when to decline well meaning advice. Companies need to show fast growth, but they need to operate within their resources or risk crashing and burning. And the list goes on.

I believe that it’s easy to teach someone about venture capital and how it works.  The mechanics and best practices are well known and can be taught.  The art of choosing, nurturing and exciting great companies continues to improve after a fund manager has spent their 10,000 hours that Malcolm Gladwell talks about in Outliers.  It takes so much time because the cues are subtle and it takes experience to watch which companies succeed and which companies fail. A good fund manager knows they won’t be right all of the time, but they will be right enough of the time to provide great returns to investors and to help foster economic development and job creation in their communities.



Venture Capital for DummiesPeter Adams is Executive Director of the Rockies Venture Club, Managing Director of the Rockies Venture Fund and teaches in the Colorado State University MBA Program.  Peter is co-author of Venture Capital for Dummies, (John Wiley & Sons 2013) Available at Amazon, Barnes and Noble and your local book store.

Scaling Down – How corporate innovation programs can learn from startups.

Startups around the world are being told to develop strategies to scale up.25125832_m

They begin in largely unstructured teams that respond quickly to rapidly changing conditions and they are lean and focused. To scale up, they need to understand how to gain more income per employee by developing systems, specialization of roles, clear plans and KPIs for success. Startups need to make these changes as they grow because the ad hoc management methods many startups use will collapse under their own weight as the company scales from ten to twenty five to one hundred, to five hundred and to one thousand or more employees.

Large corporations are rewarded by relying on the systems that allow them to operate effectively at scale.

The culture is designed to support systems and process – but this is the very culture that kills startups.

What makes large companies successful is what kills innovation and ideas in startups.

Scaling Down is about re-defining how corporate innovation programs work. It’s about learning from lean and fast-moving startups and building innovation programs that look like startups but that serve a bigger corporate strategic need.

Corporate innovation programs are broken. What used to work with internal R&D programs no longer fits the fast paced innovation that global competitors are bringing to the marketplace. Internal innovation programs operate slowly, consume huge resources and can’t keep up with startups that can operate without all the corporate management baggage and anti-innovation cultures that kill ideas.

Scaling down is a process driven program that begins by identifying global trends to determine the direction that an industry is headed in. It then assesses the corporation’s strengths that it can bring to innovation and designs an innovation program that takes advantage of these strengths while eliminating the startup-killers that have made them successful. Finally, the Scaling Down program leads into the HyperAccelerator model that creates a pathway to de-risking and accelerating the innovation process.

When does the clock start at a VC Pitch Event?

Too many startups stress about how to get their whole story into a five minute pitch and they don’t think enough about how to cheat time a bit to get the most out of the five minutes (or two, sevenPitch Timer, ten, twelve, fifteen or whatever you’re given). This is the first to two blogs on the topic of how to cheat time — the first has to do do with the first slide and the second has to do with the last slide.

Ask yourself this – “When does the clock start at a pitch event?”

The answer is that it usually starts the moment you begin speaking. So you’re in control of when the clock starts. Now – what happens before you speak? The answer is that usually you are introduced by the MC or moderator and the first slide of your deck is queued up on the screen as you’re approaching the stage.

Here’s where many companies have a lost opportunity. Their first slide has mostly useless information that is already known to the audience. Why have a slide that has your company name, the date, the name of the event, the city, etc? Why not make sure, since your slide will be up on the screen for up to sixty seconds before you start talking, that the slide is doing a lot of work for you.

Your opening slide can:

Tell the audience about what market you’re in.
What is your product/service.
What is your primary value proposition?
And more!

At the very least, you should compose a tag line below your company name that is a tweet or less (140 characters) that describes your company, industry, and key differentiators.

If you do this, you’ll have the audience queued up and ready to hear a pitch for what you do.

I call this process “building a box”. When you do this, you’re developing a conceptual framework into which everything you say can be placed in context. People who don’t build a box early on in their pitch leave us guessing and ultimately uninterested in the pitch.  This is the way the human brain works – we have a hard time processing information that is out of context – yet inexplicably, over half of VC pitches leave out the context until we’re half way through the pitch or more!

Don’t keep the audience guessing until half of the way through your pitch about what you do.

If the audience doesn’t get what you do within the first thirty seconds of your pitch – you’re dead.

Why not use that first slide to make sure that the audience knows what you do BEFORE YOU EVEN START SPEAKING?

How to Cheat Time on Your VC Pitch – Part 1: The Last Slide

Too many startups stress about how to get their whole story into a five minute pitchVC Pitch Last Slide and they don’t think enough about how to cheat time to get more out of their pitch.

You can cheat just a bit to get the most out of the five minutes (or two, seven, ten, twelve, fifteen or whatever you’re given). This is the first to two blogs on the topic of how to cheat time — the first has to do do with the first slide and the second has to do with the last slide.

Ask yourself this – how long is the last slide up on the screen?

The answer is that in a five minute pitch event, the last slide is usually up for five minutes of Q&A. If this slide is up for five minutes, why do so many people waste this opportunity by having the slide say “Thank You” and their email. Most pitch events provide your email to all attendees, and it’s great that you’re polite with the “thank you”, but it would be much better if you could effectively use that time and that slide to reinforce the key points of your pitch.

A good last slide will reiterate the highlights of your pitch.

You can have the team, product, market, traction, the deal, or whatever you like. I have seen slides broken up into as many as six sections with key elements reinforced in each. Since this slide is up for so long, the twenty five word limit for slides in a pitch event is waived! Go ahead and toot your horn.

The kiss of death for a pitch is when nobody has any questions for the presenter. This means that either people didn’t understand your pitch, or that they understood it well and had absolutely no interest. The last slide will help clarify key points, but most importantly, it will provide key points that people can ask questions about. Sometimes people are shy to ask a question and sound dumb if they didn’t understand something. Sometimes in a big pitch event, people may even get confused and ask a question that doesn’t even pertain to your company, but might have been from one or two pitches prior. Having your key points up on the screen gib vets them the confidence to ask questions.

Of course – the other great solution to silence during Q&A is to have Back Pocket Slides that you can draw on to effectively extend your pitch if nobody asks any questions!

VC Pitch Trick – Back Pocket Slides

Giving a VC pitch to angel investors or VCs can be nerve wracking for many startups, but one technique that can Venture Capital Back Pocket Slideshelp startups regain control and confidence is to have a full suite of Back Pocket Slides.

Back pocket slides are slides after your final slide in your deck that contain details about items you might not have had time to cover in your vc pitch, or that you anticipate might come up during Q&A. Examples of these things might include a competitive matrix, an outline of your IP strategy, or some detail on your go to market strategy and key metrics. These are all optional items in the typical pitch, but could be of interest to investors and are things that often come up during Q&A.

Imagine that you’ve just given your VC pitch, and you’ve got a great final slide that summarizes all your high points, but you still don’t have any questions. The audience is totally dead – what do you do?

A good presenter will wait about 10-12 seconds and if there are no questions, then they’ll say “one thing a lot of people ask me about is … Our competitive matrix. You’ll then shift to your competitive matrix slide and continue presenting with the same cadence and timing you used during your pitch. I.e. If your average slide time is 20-30 seconds, then you should maintain that same cadence with the back pocket slides. After you’re done with the slide, then pause to ask if there are any questions. Wait for up to five or six seconds and then start in with “another thing a lot of people ask about is…..” And start on another slide. I’ve never seen anyone need to use more than two slides in this way before the questions start rolling in.

Of course if there are questions, then you can also use the back pocket slides to reinforce your answers. It will make you appear much more in control if you have anticipated many of the questions and have pre-prepared detailed answers for them.

A good number of back pocket slides is five. Two or three can work, but you’re not as likely to get a hit during Q&A as if you have five. Some people have ten or more slides, but I find that they often have difficulty fumbling through them on stage in order to find them quickly, that this can sometimes backfire.

Finally, one more benefit of the back pocket slides is that if you’re invited to another venue that offers a ten minute pitch format, then you’ve already got your extra slides all put together and they become your primary slides instead of your back pocket slides!

Why Venture Capital may not be a Silver Bullet for Startup Funding.

alternatives to venture captialVenture capital is a great solution to many startups’ finance problems, but it’s often not the best solution and, even when it is the best solution, it often works best as a part of a suite of financial solutions rather than a silver bullet that solves everything in one move.

Venture capital, including angel investment, is the most expensive type of capital out there. So why would so many people be intent on going for the most expensive option when others exist?  A typical VC is looking for a return of 60% or greater on their investment – compounded annually.  That means that at three years they want 4X. At five years it’s 10X. At seven years it’s 25X and at 10 years it’s a whopping 100X return on investment.  All of these are 60% compounding returns.

Venture capitalists need big returns to help offset their big risks.  About half of their investments might result in a complete loss of invested capital, so they need to have investments capable of being home runs in order to pay for all the losers.

There are different ways to create a capital strategy for startups who want to both grow fast, but minimize dilution and reduce the cost of capital.  Rather than using just one very expensive type of capital for their startup, they may use a suite of different sources that are appropriate to the phase of development.

Early Stage – Before VC

Early stage companies have many sources of capital available to them, even if they don’t know it.

SBIR (Small Business Innovation Research), Advanced Industries Proof of Concept and many other federal and state grants are available for early research and proof of concept.  Often these are expensive research projects whose risk is much greater than can be justified even for venture capital.  Startups that use these sources of funds can increase their value and decrease their technical risk without any dilution to the founders.

Another source of early stage funding comes from specialty service providers.  Attorneys and CPAs will often defer compensation or work out an equity deal in exchange for early work.  You might be able to get your patent filed for zero out of pocket costs using this kind of deal.

In Revenue

Companies that are in revenue have lots of new non-VC sources of funding available.  Consider accounts receivable finance to cover your rapidly growing need of cash to carry AR through thirty to ninety days before it gets paid.  Some lenders will even lend on purchase orders so you can get the capital you need to buy the components you need to build your product.

If your product is a SaaS (Software as a Service) platform, then your cost of goods is going to be people, not product.  Consider using Equity Compensation for all or part of your payment to your developers.  There are both individuals and development companies who will swap a portion of their compensation for equity.  You’ll need to have a good handle on your valuation, but why not give equity directly to your developers rather than give it to VCs who give you cash which you then turn around and give to developers?

So, there are many more types of finance options available to you than can be described here.  The main point to remember is that you are not required to use just one mode of funding.  Look at all of the available sources and design a suite of solutions that provides the best solution to your situation.

To learn more about how to use creative funding along with venture capital, or instead of it, consider attending the RVC’s Colorado Capital Conference November 15-16, 2016.  If you’re not in Denver on those days, you can register to participate in the conference via live-feed.

More information and registration at

Colorado Capital Conference




Peter Adams


Peter is Executive Director of the Rockies Venture Club, Managing Director of the Rockies Venture Fund and teaches in the Colorado StaVenture Capital for Dummieste University MBA Program.  Peter is co-author of Venture Capital for Dummies, (John Wiley & Sons 2013) Available at Amazon, Barnes and Noble and your local book store.