Tag Archives: startup

Of Mice and Mentors

There are a ton of positives that mentors provide startups, as no one person innately has the skill set and/or experience to run a successful company. But if there is an incubator bubble, does that beget a mentor bubble?

Mentors at incubators should be in it strictly to pay it forward and most certainly are. Mentors should not be participating at an incubator to get it immediately paid back. That is, a mentor probably shouldn’t be actively looking for his or her next startup co-founder gig or consulting contract when mentoring at an incubator. Incubator mentorship is neither co-founder dating nor a BNI event.

Incubators should be somewhat proactive about establishing protocols for when their mentors want to escalate involvement with a portfolio company. For example, what happens when a mentor asks for an advisor grant during your program? Some startups may feel as though they have already ‘paid’ for such mentorship by joining the incubator.

Mentors can and will provide value to a startup and I understand that mentorship can naturally lead to ‘advisor’ positions or other business arrangements. But many startups are having to walk this fine line before, during and immediately after demo day.

Non-Dilution Rights are Wrong

I hate non-dilution rights and if you are an entrepreneur you should, too.

I’m not talking about price-based anti-dilution protection that is typical in an angel or VC round. What I’m referring to is a right given to a particular stockholder so that such stockholder’s equity in the company is not diluted by any future issuance of stock — regardless of the price.

Investors will say this “protects” their investment from issuances of equity that do not benefit the startup. But the fact that the startup’s founders are being diluted by such an issuance should provide enough protection.

Unfortunately, for some investors having the founding team sit “side by side” with them is not enough protection. My advice to those investors requesting non-dilution is: if you don’t trust the founding team from issuing stock in the hopes of increasing the startup’s value — don’t invest in the startup.

My advice to entrepreneurs is, if you have an investor asking for non-dilution, it likely means that the investor doesn’t think you’re good enough to run the company. The investor is likely in love with your startup’s idea, but not in love with you.

How to Evaluate an Offer from a Startup Incubator

Great news — your startup just got accepted to an incubator! But before your startup signs up and cashes that $[XX,000] check, your startup’s co-founders should sit down and evaluate the incubator’s offer. The following are some issues to consider and actions to take before accepting an incubator’s offer:

(1) Calculate Valuation and Determine Value.

Pre-money valuations startups receive from incubators are typically low…really low. If an incubator offers your startup $25,000 in exchange for 6% equity, the pre-money valuation is a whopping $391,667.

As you can see, I don’t think any startup has joined an incubator based solely on the pre-money valuation. Thus your startup needs to determine the intangible value offered by the incubator (and yes, a $150,000 convertible note with no cap and no conversion discount qualifies as an intangible).

Rather than assign a monetary value to the intangibles, a startup should instead assign an equity percentage value to intangibles like mentorship. As equity in the company tends to be the currency of early stage startups, the startup should have a good foundation for assigning value in terms of equity.

This advice holds true for even if the incubator’s program provides tangible items free and such items have an assigned monetary value. For example, if your startup get $2,000 worth of massages during the program, don’t add the $2,000 in free services to the $25,000 investment amount. Determine how much of your startup’s equity you’d actually give up for those services if they weren’t provided free — it may be worth $2,000 retail but it can also be worth 0% of your startup.

Thus, if your startup is willing to give a couple points to a few advisory board members, determine how much the incubator’s mentorship (and introductions) equates to an advisory board and assign a percentage. Now subtract that amount (and any additional equity amounts you have assigned to other intangibles at the incubator) from the total equity the incubator is requesting.

Using the previous example, if your startup believes the mentorship is worth 2%, then re-calculate the incubator’s offer of $25,000 for 6% to $25,000 for 4%. The “revised for the cash investment only” pre-money valuation is $600,000.

(2) Scrutinize the Investment Structure.

Incubators aren’t non-profits, therefore in addition to asking for a low pre-money valuation, they may structure their investment in a way that helps to ensure a higher return across their portfolio. Most incubators take common stock and sit “side-by-side” with the founders, but some may want some (weak) preferred stock and/or dilution protection.

Other incubators may want to set up an option pool. If so, the startup’s founders need to know this option pool lowers your pre-money valuation. Using the previous example, if an incubator wants your startup to set up a 15% option pool as part of the $25,000 for 6% of the company, the pre-money valuation gets effectively reduced to $329,167.

Like any issuance of stock or investment, one of the main things a startup should be concerned with is: Is this going to fuck up a future financing? (Technically, your startup should be asking this question for any contemplated transaction.)

If the terms won’t hinder a future financing, then your startup is good to go. If the terms will, then the question becomes: is the incubator going to waive these terms when a VC makes the request — without asking for anything in return for the waiver?

(3) Research the Mentors.

I wrote in a previous post, startups value mentorship over money when it comes to incubators. Research the mentors so you can accurately assign the amount of intangible value (in equity percentage terms as discussed in point 1 above) and justify the shitty pre-money valuation.

Analyze the mentors not just in what those mentors currently do or did when you were in middle school — but also how they fit with your team and your startup’s product. Do they know your space? Will you get to select your mentor or mentor group? How often will mentors drop in or otherwise be available?

(4) Inspect the Office Space.

Some incubators offer free office space. If so, check out the lay of the land to determine if your startup can be productive in the office space. Does your startup get a private office or will it share space coworking-style? How is the conference room and how hard is it to schedule time in the conference room? Can you break away for a confidential call from your girlfriend or potential VC investor? Do the chairs make your butt hurt after sitting in them for more than one hour? How is the technology?

(5) Figure Out Your Incubator’s Class End Date.

When does the mentorship and other benefits end? Can you continue to work out of the incubator’s office after your class ends? While most incubators’ class end dates fall around the respective incubator’s demo day, what type of support will you receive post-demo day from the incubator and/or the mentors? The best incubators are going to have no true “end date” and will be a forever-resource with respect to mentorship…although the incubator can likely only offer office space until the next class of companies move in.

(6) Search For the Incubator’s PR and Marketing Efforts.

If the incubator doesn’t take its class “stealth,” take a look at what the incubator does to market itself and its incubated startups. Take a look at pictures and videos from previous demo days, if any, and see if they’ll help get your startup’s name out there. It’s not really a demo day if only friends and family show up. Of course, joining some incubators give startups an instant “I’m Awesome, Fund Me Now” virtual-badge. Nonetheless, if an incubator can’t promote itself, how is it going to help promote your startup or the crucial demo day event?

(7) Reach Out To Prior Incubated Companies.

If you contact a startup that was part of an incubator’s past class know that you are accepted to and contemplating the same incubator, you should not have a difficult time getting a few minutes from one or more of that startup’s co-founders. Ask them about points 1-6 above but go further — ask them which mentors they perceived as being the most helpful or even which office to snag if you move in to the incubator’s office space. If a startup doesn’t get back to you, then that may tell you something, but don’t automatically assume that startup had a bad experience with the incubator.

(8) Determine the Opportunity Costs.

A startup that is accepted by an incubator may have an alternative funding offer from an angel investor. This can add complexity to a startup’s decision, because maybe the angel doesn’t want your startup to join the incubator. If the angel investor is offering an investment amount (greater than the incubator) that would “guarantee” your startup will reach a certain goal, it may difficult to accept the incubator’s offer. Regardless if your startup has an angel investor lined up, your startup will need to have a tangible goal in accepting the incubator’s offer that can be realized by completion of the program (or shortly thereafter). If not, the incubator is just a bridge financing to potentially nowhere for your startup.


Getting into an incubator is an exciting experience for any startup, but before signing up take a look at the incubator and how (much) it will help your startup. With the explosion of startup incubators, I hope the list above is helpful in determining whether your startup should accept such an offer. The more intangible value you can assign to the incubator, the more appealing the incubator’s offer will appear.

Tech Wildcatters Applications Due January 16th

Dallas-based Tech Wildcatters is set to launch their 2nd class and will stop accepting applications January 16th. Their inaugural class of 5 companies raised over $4,000,000 in funding through two venture and two angel rounds.

Tech Wildcatters is a startup accelerator that offers up to $25,000 and 12 weeks of hands on mentorship. Here’s what they look for in a startup:

-2 or more founders (there’s way too much work for just one person)

-Web, mobile, software, SaaS, tech enabled services, or any other kind of highly scalable tech

-B2B focus (i.e. the majority of your revenue needs to come from businesses)

-Ability for all founders to attend the 12 week program in Dallas

Semifinalists will be invited to Quick Pitch day in January where you will have the opportunity to learn more about the program and pitch to the entire mentor group. A community happy hour with Brad Feld will follow where he will be signing his book “Do More Faster”. Quick Pitch is a closed event.

Tech Wildcatters is looking to work with 7-10 companies in this class. And they plan to start having 2 classes per year.
Start here to apply.

Term Sheet Purgatory

There’s a lot of advice about (1) how to attract VCs, and (2) how to negotiate a venture capital term sheet. Both sets of advice tend to ignore the gap between an investor’s expression of investment interest and your startup’s receipt of the term sheet. I refer to this waiting period as “term sheet purgatory.”

Term sheet purgatory can seem like is an eternity for a startup, although it may last from one week to over one month. Usually, the investor is just prepping the field to make the investment. While progressive discussions with an investor about the investment are fine and most revolve around pre-diligence matters, sometimes these discussions shift towards the pre-money valuation and investment amount. And this has potential negative consequences for the startup.

It can be a mistake to arrive at a consensus with your investor on pre-money valuation & investment amount before receiving the full term sheet. Terms like the option pool, liquidation preference, and board composition are just a few other investment terms that have a meaningful impact on your startup. You’ll feel real solid about that $6,000,000 pre-money until you receive the term sheet and it specifies a 25% option pool, 1X participating liquidation preference, and an investor-favorable board.

Of course, you can re-negotiate the pre-money and/or investment amount, but it still makes for potentially awkward conversations and/or feelings of mistrust. Neither is a good way to kick off your relationship with your future investor. (Even worse, a startup may feel like they can’t re-negotiate because they’ve already “agreed” to those numbers.)

Thus, if your potential investor continues to verbally discuss investment terms with you, consider asking for the term sheet.

Even if you are comfortable negotiating verbally on one facet of your startup’s capital raise and blindly on the rest — what’s the point of talking about the color of your corsage if you haven’t received a (non-binding) invitation to the dance?

Request that all key terms of the investment are laid out in front of you in the form of a term sheet. This may be the quickest way to get you out of term sheet purgatory and avoid negative consequences along the way.

Interview with Mike Brown Jr. of AOL Ventures

I had the chance to chat with Mike Brown Jr., Founder and Partner at AOL Ventures, a few weeks ago. I’ve known Mike for a few years now and during the conversation I asked if we could turn the chat into a formal interview for this blog. He graciously obliged and the following Q&A about AOL Ventures and “Corporate VC” is an excerpt from that conversation/interview:

Give us the background on your fund and what you guys are up to?

Sure – AOL Ventures is the VC arm of AOL, focused on early stage investing in consumer internet businesses. We formally launched the fund in January of this year and are a small team of investment professionals supported by some great Senior Advisors and the entire AOL family.

Overall, we focus exclusively on investments where we can add the most value, blending our personal expertise with some element of parent company involvement. We’re broadly interested in a bunch of different opportunities within the consumer web, and tend to focus on Seed and Series A investments in content, advertising, mobile and local spaces in the US of A.

What stage of startups are you looking at and what do you look for initially?

We’re a small fund with $30M of committed capital, so we focus on Seed and Series A opportunities. Typical investment amounts at the Seed level range from $50k to $500k and from $500k-$3M at the Series A level.

Other than the standard things, we like to play around with a working prototype at the Seed level and like to see some key inflection points met if you are looking for Series A funding. We also tend to focus on repeat entrepreneurs but are not opposed to funding first time founders who have significant domain expertise.

Have you invested in any startups thus far?

We’re just through our first year and pleasantly surprised with where we’re at – Rather than single anyone out you can see a full list of our announced portfolio companies and other relevant investment information on CrunchBase. (CrunchBase Profile for AOL Ventures)

What are you not looking for and/or what is a bad way to pitch you?

People email me sometimes and say, “if we only had AOL’s traffic we would be huge!” I get it, but that’s not a logical investment thesis for us to deploy capital against. We’re not looking to be anyone’s 80% customer and we frankly pass on a lot of entrepreneurs who have unrealistic expectations about what they want out of the relationship with us (it is a marriage after all).

We are not really interested in anything other than consumer Internet, so it’s not good to send me your telecom idea or new consumer electronics device that you need to raise money for. Later stage opportunities are also out of the mandate of our fund.

I’ll make a point here – we are not opposed to getting emails from people seeking partnership opportunities and recognize that this is a product of where we sit. By virtue of our gig we are highly accessible to the external world and also know almost everyone or can get to anyone within our parent company. If you think there is a relationship that doesn’t make sense from a funding standpoint but might be interesting to AOL, Inc., we’re happy to make the intro and they are definitely open for business. Feel open to approach us and don’t be shy.

How active or passive is AOL Ventures in deals?

That really depends on how involved the entrepreneur wants us to be. We tend to be passive-active in nature and will help when asked, but most of our entrepreneurs honestly like us to get pretty involved.

During the investment process we really try and hone in on exactly what the entrepreneur wants out of the relationship and what are the specific tasks that we need to accomplish to help them take the company to the next level. If these align with our own abilities and we feel we can meet the expectations then we’re happy to get involved.

Do you look at portfolio companies as future acquisition targets?

Not really. While we definitely understand that AOL is a large media company and acquisitive, we’re not really involved in those discussions. Remember we’re a minority investor in early stage companies, so the best we can do for our companies is present options for them – at the end of the day those decisions are up to the entrepreneur and the company board.

What’s the difference between Corporate VCs and Independent VCs and how is AOL Ventures similar/different?

Assuming a Corporate VC is operating a traditional fund vehicle and not just investing off of the balance sheet (probably the first real difference), I would say the most recognizable difference is in the single vs. multiple LP structure. Corporate VCs tend to have their parent company investing in their fund whereas Independent VCs tend to have multiple LPs (like endowments, pension funds, etc) investing in their fund. In addition to the nuts and bolts of things like governance, investment committees, etc, also being different Corporate VCs have also tended to be more strategic in nature, making investments in companies that have significant strategic value (and potential BD or M&A synergies) back to their parent company.

Note that this is a broad generalization and I’ll caveat it by saying that with the emergence of models like Intel Capital, Steamboat Ventures, Comcast Interactive Capital, Genecast and new players such as us and Google Ventures, the model of non-strategic Corporate VC is also starting to play a meaningful role in the early stage ecosystem.

In terms of our day-to-day, I would say there isn’t much difference. We think and act like any fund from a sourcing, diligence, execution and management of investments standpoint.

Where do you see corporate venture as a meaningful piece of the ecosystem?

That’s an interesting question. Historically I’d say that corporate venture has been most meaningful at the later stages of a company’s life cycle but that has primarily been product of fund sizing and strategic mandate of the corporate funds. I’d say it’s a relatively new phenomenon that corporate venture funds play in the early stages of a company’s life. While I am a believer that corporate venture can also be meaningful at the early stages, the fact is that it is largely unproven and pretty new in the overall game.

Corporate VC generally has gotten a bad rap – what are some of the things that you think you need to do to be successful?

Haha, who said it has a bad rap?! In all seriousness though, I think there are a few key issues that we looked at from the outset and felt needed to be in place to make this model work effectively.

First and foremost, we have carry in our fund and share in the upside if we earn a financial return for our LP. I don’t think many Corporate VCs operate this way and we feel it creates a lot of mis-alignment with entrepreneurs.

Second, we operate autonomously with a small investment committee (3 ppl) and separate governance structure. We’ve written a check as quickly as 72 hours (obviously not ideal but we have done it). We believe in the ‘quick yes / quick no’ philosophy and we’re not out to waste an entrepreneurs’ time. We co-invest with people we know and don’t ask for any egregious terms above and beyond the lead investors terms.

Third, we tend to only invest in situations where we can add measurable value and really give entrepreneurs that unfair advantage they need. The perfect deals for us are those where we can blend our personal expertise and value-add with a flavor of parent company involvement and value-add.

Thanks Mike!

Key Ring is Hiring

Key Ring is a mobile app by Mobestream Media on both iPhone and Android that brings all your loyalty cards together. You use Key Ring to scan & store your existing loyalty cards, enroll in new loyalty programs, and access exclusive coupons and discounts.

This Dallas-based startup is looking for people to fill the following positions:

· Ruby on Rails Developer
· Mobile Developers (iPhone, Android, Windows Phone 7, Blackberry)
· B2B Sales; Background in DB marketing, Loyalty marketing, Retail
· UI Designer / Graphic Designer

Benefits are likely to include (i.e., talk to them about this):

· Health Insurance
· Stock options
· Ability to work with a very casual but professional team in a non corporate environment
· Comfy chairs, ok desks and unlimited keurig coffee

If you are interested, contact the guys at Key Ring directly via email at info@keyringapp.com

November Rain

Axl Rose began working on November Rain in 1983 — a full 8 years before it was released by Guns N’ Roses. Axl came up with a piano-only version of the song early, but by the time 1991 rolled around November Rain was a full-blown hair metal power ballad.

Axl realized that what might have worked in 1983 would need to be refined for the state of music in 1991. And he was successful doing so.

Occassionally, I’ll hear from an entrepreneur that he has been working on a startup idea for 5+ years on his own and is now almost ready to launch. The longer you keep your startup in stealth mode before your public launch, the tougher it is to keep your startup relevant.

November Rain is an anomaly.

Why Finders Are Losers

Whenever a startup considers paying a “finder” for successful investor introductions, I have the same type of conversation with the founders that goes something like this:

Startup: “Finder” knows a lot of investors and he’ll introduce us if we pay him [6]% of all capital raised through the introductions.

Me: Is “finder” a registered broker-dealer?

Startup: No.

Me: Well, it’s an issue because the finder offering to raise capital for your startup should likely be registered with FINRA (Financial Industry Regulatory Authority) and your state’s securities board. And the SEC is closing the window on these unregistered broker-dealers. Most importantly, using an unregistered broker-dealer can, at a minimum, jeopardize your startup’s private placement exemptions.

Startup: But how does everyone else do it?

Me: Just because they’re doing it doesn’t make it “legal.” Just because a law is not enforced does not mean the transaction is ok under the law. If I drive without my seatbelt but don’t get a ticket, does it mean it’s legal? The reality is, a tremendous amount of unregistered “brokers” (as defined by the SEC) are out there raising capital for companies.

Finders are one of the startup world’s dirty little secrets. And there’s a ton of these dirty little secrets trying to latch on to startups from coast to coast. If someone wants you to help your startup get seed capital only if they get a cut, you need to run far away.

You may think raising capital will take up an obscene amount of time at your startup (it does) and/or you don’t know any investors (you probably don’t), but your startup can not outsource or delegate this task. From my experience, these finders who want a cut rarely, if ever, deliver.

The finder may have a ‘rolodex’ of rich people but it’s usually chocked full of people who don’t typically invest in early-stage startups. Even if these finders deliver an investor, the investor isn’t hip to investing in startups and ends up asking for crazy investor-favorable terms that could will screw up a future financing.

Now the founders have either a really crappy financing deal (with a potentially blown private placement exemption) or have lost about 3-4 months not getting out there and networking with potential investors. You can develop your startup in a cave — but you’re going to have to leave it if you want to raise capital. No one can pitch your startup better than you.

And to any finders reading this, if your only contribution to the startup ecosystem is that you will introduce startups to investors, for compensation, then you aren’t contributing. Either genuinely help a startup, or don’t help at all.

Dealing with a Startup Creeper

Advisors are great for startups. They can provide your startup with guidance on a wide range of topics and typically take a seat on your startup’s advisory board.

But sometimes a person who gives your startup infrequent, casual advice will broadcast to the world that he or she is an advisor to your startup in an “official” capacity — which is (shocking) news to you and your co-founders. Awkward.

How did this “advisor” turn into a creeper?

The Genesis of the Startup Creeper

Most startup founders do a tremendous amount of networking. Through this networking, a founder may become acquainted with someone willing to provide some expertise, advice and/or connections. Most of the time, startups and the “advisor” have no problem with this unofficial, undocumented relationship. The startup isn’t looking for routine advice or time from the advisor, and the advisor isn’t looking for anything from the startup (e.g., cash, equity, geek cred).

But occasionally this “advisor” makes his or her role unilaterally public creating the awkward situation.

A founder will typically find out when someone he or she knows in the startup ecosystem tells the founder, “Hey, [Startup Creeper Name] told me he was an advisor to your startup.” Or maybe news of the official relationship is on their Twitter or LinkedIn page. Regardless, this “official relationship” is news to you and your co-founders. The casual advisor relationship has now turned creepy.

I got married before the Myspace/Facebook era, but I imagine this is something like going on a first date and coming home to find your date’s Facebook profile lists them as “in a relationship with” you. Creepy.

Don’t Lead Them On

You lead on a startup creeper by continuing to either solicit or accept their advice and connections. You may think they’ve been giving some decent advice, but you don’t really know why they are hanging around — or you are trying to figure out their angle. At this point, you have both failed to bring up the status of your startup-advisor relationship.

The Decision

No matter how you arrived at this point with your Startup Creeper, you have 2 choices:

(1) Make it official and offer them a position on your advisory board.

If the initial shock wears off and you are OK with it, immediately sign up the advisor to an advisory board agreement. Anyone providing more than casual advice should be signed up to an advisory board agreement — especially someone receiving confidential information regarding your startup and/or identifying themselves as an advisor.

This is an important task because the advisory board agreement will most likely contain provisions such as a nondisclosure of confidential information, inventions assignment, and a no conflicts rep & warranty. Your advisor will likely be privy to various inside info regarding your startup and it is to document that he or she cannot use it for someone else’s benefit, or more importantly, to the disadvantage of your startup.

(2) Kick the Startup Creeper to the curb, in the most tactful way possible.

If you are still feeling slimy after the initial shock wears off, then you need to wrap up the relationship in an expeditious manner. Difficult conversations are a part of business and this type of situation presents a great time to tackle your (likely) first one.

But do so without burning a bridge — no matter how creepy the advisory relationship is. Communicate in private, and opt for in-person over telephone conversations. If you cannot meet in person, choose telephone over email. Don’t forget to thank them, because they did share their expertise, time, and/or connections with your startup. And the situation would likely not have reached this level of awkwardness without leading them on in some capacity. Now, maybe they can shift their focus on another project or startup.


There are tons of great startup advisors out there (although they are hard to find). People want to help your startup and that’s a good thing. But you have to manage these relationships, before they turn into awkward situations like the Startup Creeper scenario.