When raising capital for a new company, most novice entrepreneurs and investors focus on the idea. Is it a BIG idea? Does it have legs? How large is the addressable target market? The most common mistakes are talking about capturing 1% of a $500 billion market or showing conservative estimates that the company will go from zero to $100 million since the idea is so great.

Experienced entrepreneurs and investors know it’s all about the team. The reasons are quite simple actually:
• The idea and company you start with will morph with time.
• There will always be numerous mistakes and challenges of all sorts along the way.
• The markets shift quickly and unexpectedly.
• If the idea and the market are indeed good, there will always be competitors with more money, resources, and access.
• Access to capital varies with the mood of the investment community.

A smart, experienced team is one that has the ability to figure this out along the way, without falling in love with the idea itself, showing flexibility, agility, decisiveness, and maturity.

A good team thinks things through in an objective and thorough manner.
How do institutional investors know if you are someone they want to invest in? One of the most key elements is your ability to assemble a team that is credible, has relevant experience, is committed, articulate, and demonstrates integrity. A team that radiates the qualities discussed above.
How do you assemble such a team when resources are limited, and there is little or no cash in the bank?
A good leader has the ability to convince high bandwidth people to follow his/her vision and ambitions. The ability to assemble such a team demonstrates leadership capabilities which are key in the early, turbulent, and uncertain early stages of startups.
So rely less on the idea and more on putting the team together.

Alex is a proven tech entrepreneur, having started, led, and sold multiple successful companies. Most recently he was the CEO & Co-Founder of EdgeCast Networks. EdgeCast became one of the leading global content delivery networks, carrying 5% of the Internet traffic, operating in 20 countries, while accelerating and delivering the largest and most demanding websites such as Twitter, Tumblr, Dell, Sony, and Hulu. EdgeCast was acquired by Verizon, where Alex spent 2 years helping shape the strategy of Verizon Digital Media Services.

Prior to co-founding EdgeCast, he was a Co-Founder & CEO of KnowledgeBase, a SaaS-based enterprise knowledge management company with many Fortune 1000 customers, which was acquired by Talisma Corporation in 2005.

Before starting KnowledgeBase, Alex founded HostPro, an industry-leading web hosting and application services provider. In August 1999, Micron Electronics (MUEI) acquired HostPro. Alex was instrumental in helping HostPro grow organically and through acquisitions into one of the largest web hosting companies in the industry, with over 70,000 customers worldwide.

With more than twenty years of leadership experience in information technology and business operations, Alex has successfully led a number of business initiatives that include developing core technology solutions and bringing them to market, as well as managing day-to-day business, marketing, sales, and support operations. For his leadership, he has received numerous awards including E&Y’s entrepreneur of the year award in 2014. Additionally, he has extensive application development, security, and internet infrastructure experience, for which he has been awarded 23 patents.

Alex is an active investor in several venture capital funds and has served on boards of private and public companies such as Web.com (NASDAQ: WWWW). He graduated from Tufts University and lives in Santa Monica with his wife and children.

How did you become an entrepreneur?

“I worked for an Internet service provider, and my boss was the worst manager one could imagine. I learned everything not to do.” I was there for only 3 months before quitting and going on my own. My first company was Food Mood in 1996. “My partner and I were always hungry. We wanted to see the latest menus online and have the ability to order for delivery. We hated having a stack of menus in a drawer.’ We spent nights coding, went to restaurants, and tried to talk to managers. We all stayed at my mom’s apartment, and any money we made, we put into our business.” It was a good idea but too early for doing eCommerce for food delivery. Online ordering came about 15 years later, however, a connection led to some amazing deals to host websites such as Caesar’s Palace, Baskin Robins, Oral-B, and more….before we knew it we had transitioned to become a web hosting company.

What was the revenue model for this business?

We had a recurring revenue model. However, given the upfront cost of equipment, we had a negative cash flow. Since we couldn’t get any bank or VC financing, we figured out a different way to finance the business. I call it customer financing. We offered 5%-15% discounts for customers who paid long-term subscriptions upfront. “Instead of paying $50 per month, a customer would pay $500 for the year.” Kazerani highlights, “This model only works if you are constantly growing.” After cold calling and direct mailings were unsuccessful, we grew our customer base through magazine advertising. Though magazine ads were too expensive at first, we learned how to negotiate pricing with the publications, properly position ads, have a call to action, and effectively increase conversion. The company grew at a double-digit percentage month over month for 3 years.

How did you sell your first company?

“Multiple companies approached us, showing interest in acquiring HostPro.’ At the time we had no outside investors, no VCs, it was just us.” So we started a formal process by engaging Investment Bankers. Bids ranged from $12M to as much as $26M. The highest bid was half cash and half stock, and the second-highest bid, by Micron Electronics, was an all-cash offer at $23M. “We were conservative and took the ‘all cash’ offer. Interestingly, within 3 months, the stock of the highest bid went up to a value of about $50M, but eventually, with the tech crash of 2000, it dropped down to zero; we had made the right deal by selecting Micron. Post-merger we went and acquired many other hosting companies. I was 26 years old and I was managing about 600 employees.”How did you start your second company?

“In 2001 we started a Software as a Service company called KnowledgeBase. At the time, companies were outsourcing their call centers to Asia, however, there was a pain point in how you manage knowledge. We built an amazing software and landed some large customers such as Dell, AT&T, and United Airlines. But it was a niche, and too small of a market.” Kazerani points out, that there are only so many call centers in the world. To convince people why they needed the software and edge out the competition, they bought the first slot on Google’s AdWords, which sold the search engine’s first two results. “It took us about three months to close deals, whereas it took the competition nine months.” We were one of the first people to use Pay Per Click advertising to sell enterprise software.

Who is the core of the team?

“James Segil, Phil Goldsmith, Lior Elazary, Jay Sakata… with every company our core team grows as well. Phil is our head of sales—I met him on the first day of college. Some of the people you are meeting now while in college will become part of your core team in the future. James Segil is an amazing marketer and business development guru.” Lior and Jay are our tech partners who focus on various aspects of technology. Our core team is treated equally in terms of salary, bonus, and annual equity grants. We also try to get everyone to invest the same amount, but not always possible. This model allows all of us to be very aligned.

We give equity to all of our employees. At EdgeCast everyone had stock options, our receptionists, our salespeople, our engineers, and even people working in our network operation center.

What does it take to analyze the feasibility of a business idea?

“If we find an idea that we are passionate about (being passionate is key), we do a competitive analysis. How many people have tried, or offers are currently offering this product/service?” Tools like Crunchbase highlight competitors, their funding, and their leadership. Then we look at market size and decide if it is a big enough market to go after. We also look at the barrier to entry, how long would it take for us to bring a solution to market? and how hard it is for a new startup to catch up? and finally, determine the impact. After doing all of that, if the idea still has legs, we move to phase 2 which means we survey the market by talking directly to people and documenting their feedback, identifying partners, and thinking through possible outcomes.

“Anyone can veto an idea and that would stop the entire business idea. The team always comes before the idea. I would rather work with a great team and not do so well than to do well alone.” “Don’t worry if others think your idea is stupid, sometimes stupid works.…‘Everyone thought a couch sharing concept is a silly idea, and it turns out to be Airbnb.” Kazerani encourages sharing ideas: “You will learn if your idea truly solves a problem by talking to customers, and if you are afraid of sharing, it means the barrier to entry is low and anyone can catch up to you once you bring it to market.”

How did you start and manage EdgeCast?

“We started by wanting to be the creator of content, but download speed is so important that we pivoted to focus on a fast content delivery network for all content creators. Speed directly correlates with conversion.” Using $1M of our own money, 9 months later we had built a global network, a working product, cutting-edge self-service portals, and some beta customers. We raised $2.5M from friends and family and started signing up paying customers. Steamboat, a division of Disney, approached us wanting to invest and give their business to one CDN. We reached an agreement to raise $6M at a pre-money valuation of $26M, post $30M, and closed the financing in 2007. During the 2008 crash, many companies had massive layoffs, and Steamboat expected the same of our team. But with substantial growth, “We told them, ‘We are not going to fire anyone, but five founders will go to zero salaries.’ It’s like firing your most expensive and valuable staff without losing them. A year goes by and we told Steamboat, ‘everything is going well we have grown substantially, and the credit crisis hasn’t impacted tech. We are going to take salary again…and need some equity for past years’ deferred salary.’ We worked it out.”

In January 2010, we did a Series B financing and raised $10M. We had 250 employees at the time and our customers included all the major social media companies. We received an offer for $150M for the company and more if they reached other milestones. “But we thought we were doing a lot better than that—$150M was too low of an offer. We were on track to do $70M of revenue for that year. So we passed on the offer. At the end of 2012, we had to raise more money in order to increase our growth rate, and we were looking for $20M.” Kazerani says, “When valuing a company, it is about the growth curve, and growth rate, not the actual revenue. So when we are building a tech company, we would like to sell when the growth rate is increasing. When you get to the top of the growth curve, it’s flat, and it is too late to sell. Your valuation is actually far lower, even though your revenue might be higher”. For our financing, 5 VCs valued us at about $200M—one VC overvalued us at $350M. It was smart of them since they beat all the other offers and signed an exclusive time period to perform diligence. And they did do a ton of diligence. For example, they called 150 customers, both former and prospective. And eventually realized that $350M was too expensive. “They bowed out of the deal. We had to go back and redo our fundraising. Eventually, we were able to get a $200M valuation, and raised $20M.”

What happened between Verizon and EdgeCast?

“Verizon reached out to us in the summer of 2013. We started having some meetings. In the meantime, we started consulting with our Investment Bankers. The Bankers gave us some great advice, they told us not to rush Verizon, and to let them build their business case internally. Eventually, it received higher visibility levels of visibility within Verizon. They wanted more information, and we wanted them to commit.” Their first offer was $260M, which was so low I didn’t count. Agreeing on 2 more weeks of information sharing they offered $350M. We ended up negotiating and getting close to $390M.

“In our agreement with our last VC, they had a blocking right for any exit below 2x. They had come in at a $200M valuation, so they could block any deal below $400M. We needed it to reach over $400M. If it didn’t, it would come out of our pocket and dilute our investment Clearly the VCs were looking for reasons to block the deal.” One of the VCs slipped: “since the company was selling in the same year as their 2013 investment, he wouldn’t have to distribute back the proceeds to his shareholder, and could continue investing with his 2x return. Using that argument against him, he finally agreed not to block the deal as long as the deal closed in the same year. So we worked hard to make that happen. We closed on December 23rd, 2013.”

Lessons Learned:

• Appreciate the team. Trust is key.
• Go after a pain you identify with passionate about the problem you are solving.
• Understand the size of the market
• Figure out how you are going to sell your product/service early
• Manage conflicts carefully
• Make a deal that works out for everybody

“Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its inherent virtue is the equal sharing of misery.”
Winston Churchill

“The problem with socialism is that you eventually run out of other people’s money.”
Margaret Thatcher

“Socialism is the same as Communism, only with better English.”
George Bernard Shaw

“Socialism values equality more than liberty.”
Dennis Prager

At a recent dinner party in Paris, I was part of a most interesting conversation. The dinner guests included a few high-ranking government officials, VCs, heads of a few well-known tech internationals, and CEOs. The discussion was around the growth of the tech ecosystem in Paris and the rest of France.

France has a long tradition of pro-union, pro-socialist governments. But the current administration has taken it a step further, coming to power with their tax the rich platform. One of the other steps they took, however, was the main topic of the discussion. The interior minister, who is a lifelong politician, has decided ” to make firing so difficult for companies, they will not think about doing it.”

Clearly this makes theoretical sense to someone who has never held a job in the private sector or has experienced accountability.

There are several important unintended consequences that are impacting the tech ecosystem:

The best companies look with hesitation at any high-caliber candidate who would like to work or remain in France!

Many private schools are losing a large number of families, including their best, brightest, and most accomplished, as they are moving out of France
The foreign VC investment in France is diminishing rapidly.

“To fly as fast as thought, you must begin by knowing that you have already arrived.”
Richard Bach

Source: http://siliconbeachfest.com

 

Last week I had the pleasure of spending time at the various Silicon Beach Fest activities in Santa Monica. My conclusion: Los Angeles is a serious tech hub.

Make no mistake; we still have a long ways to go. There is a serious lack of growth capital. There are still very few large, brand-name successes, and more often than not, there is more hype than substance.

As William Gibson said, “The future has already arrived. It’s just not evenly distributed yet.”

But overall, the quality of the new companies being funded has improved dramatically. There is a drastic improvement in the quality of teams, as well as deeper understanding of business models, monetization mechanisms, and scalable models. Much of this improvement is due to the incredible work being done by the likes of Paul Bricault, Jason Nazar, and Jeff Stibel to name a few, who are helping create a thriving environment for young entrepreneurs and CEOs.

The ecosystem in Los Angeles finally has the necessary infrastructure, seed, and early-stage capital, support, and advisory services, business development opportunities, and an excellent talent pool to be sustainable. Many CEOs are now on their 2nd and 3rd companies. They are now more mature, experienced, and in most cases, more in touch with reality. Many Silicon Valley firms are setting up shop in LA to get access to the deal flow here.

There are few VCs in Los Angeles, but they are committed, great advisors, generous with their time, and sincere in their desire to see our startup scene succeed and grow.

The quality and frequency of tech-related events are fantastic, which allows for frequent networking events at all levels. We are seeing an increase in the number of exits and growth rounds.

As other cities are actively building their tech ecosystems, it is wonderful to see how far we have come in LA.

As Napoleon Bonaparte said, “Take time to deliberate, but when the time for action has arrived, stop thinking and go in.”

This is a great time to be a tech entrepreneur in Los Angeles.

“Success is not final, failure is not fatal: it is the courage to continue that counts.”
Winston Churchill

Most startups fail. That is a fact. Even the most experienced operators fail 50% of the time. Experienced Super Angels see exits nearly 20% of the time. Scaling is very hard. Building a successful company is about understanding the changing needs and challenges of a company throughout its lifecycle. It is about team building, execution, managing expectations, establishing relationships, and understanding the ever-changing markets, needs, trends, and product-market fit.

There are common mistakes that are made, that if avoided, dramatically increase the chances of success. Most entrepreneurs are too excited about their idea to take the time to examine the foundations of what they are building. Over the decades, I have come to learn to ask a number of questions, that help me determine if the team has thought through the idea, their plan, and how to execute it.

My first focus is always on the CEO/Founder. Is he/she backable? I define that by determining if he/she can build rapport. That tells me that he/she will be able to build great teams, raise capital, sell, and provide clarity and focus.

Next, I look at the company’s setup; the legal structure, operating agreement, roles and responsibilities, vesting schedule, conflict resolution, etc. Then I begin asking what I consider to be pivotal questions:

1. What is the problem you are solving?
2. Do you have a personal connection to the problem?
3. What is the story? How did you come up with this concept?
4. Have you validated the problem?
5. Who are you solving this problem for?
6. Is this a big problem that will continue to exist?

Then I want to know:

7. Why you?
8. Why now?

I then look at how they will solve the problem:

9. Do you have the right solution?
10. Does the solution match the problem?
11. Do you have Product-Market Fit?

The market:

12. How big is the market? Is it a growing market?
13. What does the competitive landscape look like?
14. What is your differentiation?
15. What is the business model and monetization mechanism?
16. Is your model defensible?
17. What is the go-to-market strategy?
18. What are the key sector trends? Headwinds or tailwinds?

Operating questions:

19. What are your assumptions around unit economics?
20. Do you have the ability to grow and scale the company and get it to the next stage?
21. Is the timing right for this company?
22. How much do you need to raise for an 18-month runway?
23. What are the use of funds?
24. Do you have a budget laying out the expenses over the next 18 months?
25. What are your pre-money valuation expectations?
26. What does success look like in 12 months?
27. Who is on the team?
28. Who is in charge?
29. What if you have to pivot?
30. How are you going to recruit talent?

The goal is to make sure the founders have thought through the basics of the company, the market, and how to get to the next round. Additionally, it is key to understand if they are looking at the same key factors and unit economics in determining the company’s success. And if they can use best practices and focus on key factors in building a company from the ground up, developing and validating a business model, validating the problem, building a team, working with VCs, and avoiding the most common mistakes.

“Price is what you pay. Value is what you get.”
Warren Buffett

One question I am most often asked is, “What is my company’s valuation?”

In addition to the customary, “It depends,” my answer is usually followed by, “It depends on who the buyer is, market factors and trends, and cost of capital.”

As Warren Buffett said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Tech buyers and financial sponsors are always looking for good, scalable companies. A good investment banker does many things for a client. He finds the right buyers, creates a sense of competition and urgency, positions the company for the highest valuation with each potential buyer, negotiates terms, conditions, and employment agreements, and most importantly, acts like a therapist when, inevitably, the deal looks like it is going south twenty times before it actually closes as parties are fatigued, frictions rise, and common sense is replaced by ego.

Strategic buyers can act as large, efficient distribution channels for the right IP. As tech companies are cash-rich, and the pace of internal developments can’t possibly keep up with the necessary growth expected by Wall Street, the corporate development departments are actively seeking growth opportunities through M&A.

One of the early tasks is finding the right buyers. Any good investment banker knows that there is one buyer out there that is willing and able to pay the extra premium for that asset because it is accretive for him to do so. Finding that special buyer, positioning the asset accordingly, and justifying the premium valuation requires domain expertise, deep industry relationships, and a disciplined process.

When a strategic buyer is at the table, the following are the important points that will frame the conversation:

• The ability of the buyer to monetize that IP
• The scalability of the IP
• The quality of the existing clients
• Company’s Leadership Position in Its Segment
• The scarcity of the asset
• Timing & the macro Environment
• The competitive nature of the process

Knowing the dynamics of a particular industry is imperative as the goal is to change the nature of the negotiations from a multiple-type discussion to the ability of the buyer to monetize that IP. That can only be done if the quality of your clients validates the viability and scalability of your product. These buyers also are likely to acquire companies they already know in one way or another, as a competitor or partners.

So when the time is right for you to check the market for an exit, take the time to fully understand the landscape, hire a banker specialized in your segment, and make sure your potential buyers understand and focus on the strategic and accretive nature of the transaction.