Monthly Archives: September 2010

Is downside risk mitigation important to investors?

Over the years I have learned that my assumption that all investors seek to minimize downside risk is just plain wrong. For example, venture investors want to ensure their capital has a chance at generating out-sized returns. They have limited resources (time and money) to make the best investments as possible. Mitigating downside risk doesn’t pay very well because more often than not the investment opportunities with the greatest upside potential have horrible downside risk protection. Partners at venture capital firms have very little time and can only sit on a limited number of boards. They have to be VERY picky about the startups that get their attention. So don’t bother spending much time trying to explain why would be hard for a venture investor to lose his money in your deal. Angel investors, on the other hand, love to hear about how their money is safe. Of course they want the same sort of out-sized returns and they have limited resources (time and money), but there is one major difference: the money they are investing is theirs. Making money is REALLY hard and angel investors don’t like to lose their hard earned money in your out-sized investment opportunity. They really want to know how they can get their money out of your deal if it turns south.

For the past 30 days or so I have been working on putting together a $5MM round for ShopSavvy (our mobile app company) at a $19MM pre-money valuation. We have spent almost a million dollars building ShopSavvy into one of the leading shopping platforms for mobile phones. Today the app has more than 6.5 million users who are actively saving money by comparing online and local prices of the items they buy. Three months ago our biggest competitor with just 2 million users sold their assets to Ebay for $5/user. Using this as a comparable we should be worth at least $32.5MM. I would argue (and I have previously) that if you include our team and our backend systems (Pricenark) we are worth even more. Several potential acquirers have approached us about selling, but we have decided that ShopSavvy could be a billion dollar company in as little as three years. As a search/advertising business we think that each barcode scan our users conduct could be worth between $.05 and $.20 each (each Google search is worth between $.05 and .06 each) making ShopSavvy an important player in the mobile shopping game. Add platform opportunities like our payment wallet, couponing, rebates, deals and warranties and ShopSavvy could become the dominate player. If we wanted to sell ShopSavvy today I have no doubt we could get $50MM or more for the company, but we have convinced ourselves that it makes too much sense not to go for the grand slam. For a mere $5MM and 24 months we will know if we are going to be that billion dollar company – pretty cheap in the scheme of things. Again to reiterate: for a venture investor the problem isn’t mitigating the downside risk, but ensuring the upside opportunity. On the other hand, angel investors love to protect the downside. If ShopSavvy continues to grow at rates even half as fast as our current growth trends it will be worth significantly more than invested capital. This is just the sort of bet angel investors love – lots of upside and very little downside. Turns out it is a lot easier for us to raise capital from angels and super-angels than venture capital firms.

So what does this mean to you? If you have a great way to mitigate downside risk spend more of your time talking to angels and super-angels. If your downside risk story is horrible, keep talking to venture capital firms and the issue won’t even come up.

You aren’t the only who can or are doing whatever you are doing. . .

Lots of entrepreneurs spend a lot of time telling investors they are the only ones who can do this or that particular thing. While other entrepreneurs explain how their method or model is better than all of the other methods or models. Polite investors just sit back and hold their tongues as they recount how many entrepreneurs they personally know doing the same exact thing. Even if you think you are the only company who can do whatever you are doing, don’t tell anyone. Humility is a virtue that can help instill confidence. Of course startups aren’t the only ones guilty of hubris or condescension. Yesterday Mike Elgan asked “Why is Google so condescending?” explaining that Google spent the last week telling us just how backward we are. Some of the quotes were simply unbelievable:

Google’s Gabriel Stricker, director of Global Communications and Public Affairs, said that the reason Google holds events like this one was that “we hear from a lot of you that with the kind of breakneck pace of innovation that we go through at Google, it’s nice for us to kind of let you catch your breath.” He went on to tell the audience that they would “hear from our Search rocket scientists in a second who will hold your hand through the latest and greatest of what we’re up to.”

I share Mike’s sentiments when he notes, “So Google is so awesome that the company has to pause so the rest of the world can catch its breath? And we’re all so stupid that Google geniuses have to “hold our hands” as they explain things?”

Mike noted that the hubris isn’t confined to Google’s PR team, “Come to think of it, Google’s CEO Eric Schmidt often comes across as arrogant and condescending. He recently asserted that Google users actually “want Google to tell them what they should be doing next.” Responding to a question about Google’s ever-increasing invasion of privacy for profit, Schmidt said: “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”

Google should be very concerned. Unlike an investor, users tend not to sit back on hold their tongues. Companies that talk down to their users for very long tend to lose them fairly quickly. Don’t make the same mistake.

Capital Factory Demo Day!

Today is Demo Day at Austin’s Capital Factory. The event runs through 3PM and features five startups including:

  • Hurricane Party – a location-based social networking application that helps users create, manage and discover events that are relevant to them.
  • RecycleMatch – an online market for waste and recyclables that helps companies make waste a resource.
  • Smackages – a makeup counter in your web browser.
  • Ripplefunction – a social media tool to track, manage and promote events online.
  • Keepstream  – a social media curation tool for saving and repurposing the best content from Twitter, Facebook, and sites across the web.

Entrerpeneurship Survey Request

Take a moment to fill out this LONG survey about entrepreneurship in Texas: http://www.zoomerang.com/Survey/WEB22B3CUQDYM8

Together with our co-sponsors, the Texas Emerging Technology Fund, the Institute for Innovation and Entrepreneurship at UT Dallas, the Dallas Regional Chamber of Commerce, the Metroplex Technology Business Council, the Houston Technology Center, the Rice Alliance, and IC2 at UT Austin, and many other partners statewide, Monitor Group invites your participation in a survey to assess the state of entrepreneurship in Texas.

Our focus is on capturing the perceptions of entrepreneurs, business service providers, investors, and government officials regarding Texas’ entrepreneurial environment and whether it enables or inhibits success in their enterprises. Your responses will inform a published report on Texas’ economic competitiveness and key microeconomic determinants—innovation, skilled human resources, and entrepreneurship. Survey participants find that in completing the questionnaire and reviewing the published findings, they gain insights that help them improve their enterprises.

Since 2003, Monitor has conducted entrepreneurship surveys in 30 countries, including the United States. Our partners in Dallas and elsewhere in Texas have helped us identify a strong base of respondents that include you and your organization. Through the survey instrument, we’ll assess and benchmark the standing of entrepreneurs in comparative country settings and conditions; identify comparative strengths, weaknesses, challenges, and opportunities; and distill useful findings that stimulate and support entrepreneurial activity.

Accordingly, we ask that you follow the Web link below and complete the online survey questionnaire, which should take no more than 20 minutes. We would also ask that, as appropriate, you help us identify and pass along this survey to other entrepreneurs, entrepreneurial financial and business service providers, and economic development policymakers. All respondent names and organizational affiliations will be kept confidential. Please submit your responses no later than September 24, 2010. Should you have any questions, please contact Pedro Arboleda at Monitor Group at +1-617-252-2000 or Pedro_Arboleda@monitor.com or Dr. Joseph C. Picken at 972-883-4986 or jpicken@utdallas.edu.