Notes from the “Get Funded as a Technical Founder” talk that Charlie O’Donnell gave at the Django NYC Meetup

Hi, I’m Shaun Farrugia and I’m a system architect whose hands are practiced in code and status, but not so much at taking notes.   These are the VERY TERRIBLE NOTES that I took at the “Get Funded as a Technical Founder” talk that was given by Charlie O’Donnell (@ceonyc) at the (very good) Django NYC Meetup Group.

Since this was a Django Meetup , that means the audience was mostly engineers here.    Most of them knew what a VC was but they didn’t really know much about Venture Capital or how to ask about it or even what the effects of taking VC would be on the company they ran.

DISCLAIMER ON NOTES:   I took okay notes but I’m not really capturing the spirit of how Charlie talks here; he’s actually a very engaging speaker.  So hopefully you, the fun reader, is going to get something out of these.

With that said – here are the notes!

What’s a VC?

We trade on illiquid stuff which is equity in a company.  VC’s look at all markets not just tech.  However, there is not a lot of open access to these markets as it’s not like a public stock market or anything.  Yes, there are things like Angelist and Crunchable, but the best deals aren’t usually out there.  They are kept quiet usually and in the know. (SCF> I have “so it doesn’t get crickets” in my notes but I can’t tell if that’s just sloppy writing or if that was what was said!)

There is a difference between Angel Investors and Venture Capitalist as the term Angel Investor usually means someone using personal savings and a Venture Capitalist tends to be managing a fund for an institution.

Different VC’s do different size deals.  Charlie usually does deals around 250k and he has about 8 million to “play with”.  Other companies like USV (Union Square Ventures) are dealing with a pot of 500 million.  They do different types of deals.

A VC usually wants 20% in equity. So if you manage 500 million you need a lot of exits because higher investment.  Charlie manages around 8 million so doesn’t need a ton of exists on 20% to make a huge return and a big impact for his group.
Sometimes the funds that a VC will manage will grow (2mil -> 8mil -> 200mil).  So people who would have talked to you 3-4 years ago won’t talk to you if you aren’t large.

What is my job as a VC?

Basically my job is to meet a lot of people.  Some of these new people turn into new opportunities.  Sometimes the people he meets get placed at some of the investments that his fund has made.
Sometimes he would like people to run an idea by him first.  Shark Tank is bad because people feel like they have one shot and if they don’t get it then the idea is bad or they won’t get an investment.  One time he gave good feedback to a pitch that had a poor use case, they took the feedback and improved the use case but then didn’t come back.  Charlie wants people to come back.

If he doesn’t think people will pay for your service/product, then it’s your job to show that people will pay.  Example: Classpass pivoted from their initial service and then started to charge, based on some feedback, so they were able to adjust the initial approach and repair the use case so that it became something that people would pay for.

What does Charlie look for as a VC?

He’s keeping an eye for what will be a stumble.
(SCF: My notes here are terrible so I’m not really being accurate with the numbers of the pitches per week and the time period he sees 2k emails/demos in.  Blame my childhood and the lack of exposure to shorthand.) He will get 3-4 pitches some weeks and more other weeks but between emails and demos he sees about 2k a month(?)

If you pitch something that I like, then it’s yours to lose.

  1. Make sure you measure your ADDRESSABLE market.  Do not come to him saying “Tourism is a 9 trillion dollar market” and saying you’re going after that.  That’s not your addressable market.
  1. Consider Enterprise Software; but be aware that unless you have the VP, Enterprise Sales for Blackboard, you might not make that huge dent in the education market.  Why do you want the “VP”?  He can tell you A) what customers want and b) what Blackboard was not chasing and why they aren’t chasing them.

If you’re going after certain segments, you need a large sales force and keep in mind that in the “Blackboard” market, you really need to make sure the IT administrator who is stuck installing this software for 6000 users can be happy or else you’re not going to make headway.

  1. Consider the MATH PLEASE.   Sponsorships are not a huge thing.  You get one or two but those dry up when you’re not the hot thing anymore.   Consider if people are buying 1-2 things a year vs 1-2 things a month.

 

Why seek a VC or what is  VC looking for?

Well if you’re making 90k a year of your side project; then keep it; no need to open that up for a VC… Why not?
1. If you take a deal, then one day assume it won’t be yours.   This is because once your company grows, you might not be the best person to run the company or it might be too big for you.

2. If you take a deal you really need to imaginenot being a part of the company.

3. You have to go cash flow negative to grow.  VC will want you to grow not profit.  So you’ll need to hire a CEO and a bunch of engineers in order to sell into X market.   This is what your job starts to become.

How do I talk or reach out to a VC or Angel?

Really – use email  – Charlie and some other VC’s don’t care if you cold intro!  They have the reparative plugin and know who you know so they can get a sense of you and the network.
Some VC’s are picky about having a warm intro but hey if you’re selling 100k a month then those same VC’s aren’t going to be picky.

Questions to Charlie from the Group

Q) What is your Due Diligence?

A) Not much!  I’ll keep an eye on your online footprints to get some insight on your ideas. If the idea is compelling and your online life is matching up then it’s OK.  Then he gets a sense if he can work with you.   An example he brought up is he was giving advice to a younger guy at one time and the guy was nodding and saying yes, but Charlie could tell he was not really listening; that’s a red flag.

Q) Do you prefer B2B or Consumer?

A) Too many VC’s are too worried about that! Charlie is interested in knowing about things but isn’t shutting himself out of huge swaths of the market.

Q) How does he feel about a company if it was crowd funded?

A) Charlie doesn’t really care until you have about 750k of Angel investment.  At that point it’s a little too funded for someone of his size to get involved.
He feels like hardware is a good place for crowdfunding because manufacturing can be expensive.  Sometimes he will send someone to get crowdfunded instead of investing because that will work better for them.

Q) What does a Developer go to you with? Should we always have an MVP?

A) That all depends.. (Charlie shared a few anecdotes at this point …)

-Sometimes sees a guy on Twitter and asks him questions

-Sometimes he gives homework to people based on a pitch (AKA why is this different than the 4 that failed)
Charlie says never to do stuff for VC’s that is extraneous if you think it’s fundable.

Q) Who are the people that invest in your fund?

A) People are committing 250k over 4 years.  That’s a minimum.   He has a handful of Angels, VC’s and 3 small institutions that are the makeup of his fund.

His portfolio needs to have more than 20 companies in it, otherwise it’s too much risk.
The only way (individual investors) get better at venturing is venturing.  Just have money and you can do it.
Charlie gives access to the deal if you’re in his fund.  So that way if you want, you can double down on it.
(There was a side conversation about accredited investors at this point but I did not take those notes – SORRY!)

Q) What news sources do you check?

A) Usually just by talking to people + Twitter .  Likes Jordan Crook.

Q) What homework can we do before a pitch?

A) Get your product management process down!  Understand features, do user testing, have clickable wireframes. Hire UX!

Questions – Email Charlie @ Brooklyn Bridge Ventures.

Working Capital and Your Small Business

Catherine Juon of Pure Visibility sat with MichiganInnovators.org to discuss her journey with a new business and some of the ways she financed her business while bootstrapping.  I was really drawn to this particular set of interviews because she is one of the local entrepreneurs I followed on Twitter and because I am very interested in the different ways a business is financed.

One thing that you should know is that I am pretty much dead set against all forms of debt financing.  I am more interested in bootstrapping with personal savings than with a debt instrument like a personal credit card.  This mostly has to do with my own poor behavior using credit cards and the fact that being out of debt is just so freeing.  There really was no underlying education on how to properly use a debt instrument for business financing.

I’m a little smarter after watching these interviews.  Pure Visibility helps with marketing website and is a pure serviced based business.  Catherine used her personal credit card as the needed working capital to help finance her ongoing daily operations.  Working capital was a new term for me:  this is capital (cash) you will need to finance your business while you wait for recievables to post.

Working capital, regardless of how it is financed, pays your employees and the electric company.  When you’re in bootstrapping mode, working capital is what you’re drawing on to keep the business going.  For many people that means financing with a debt instrument.

Her needs for working capital grew from a personal credit card to a corporate credit card and now Catherine is exploring a Line Of Credit as a stable and more appropriate source for working capital. Her experience has taught her a lot about how credit can best be found.   She began to pre-qualify the bank sources by explaining exactly what Pure Visibility was and making sure that the relationship was going to be the right fit.  Specifically she was wondering if the bank even “got it”.   She also began to look at her business in a component based viewpoint.  This leads her to ask what parts of her business are consulting, and which parts of her business become trade secrets.  Knowing the answer to these questions let her explain to prospective bankers in terms they understood.

Catherine was also very clear on her funding sources.  She acknowledges that venture capitalist funding is quite the cool thing to do but is seeking bank sources of credit to finance her business.   V.C. funding requires you to ask yourself what parts of the business will you give up to grow.  This is an question that I knew existed but had not really admitted to myself.

These were very educational videos for me.  While I am not convinced about debt financing, I did learn a couple things on the operational aspects of running an enterprise.  I’m curious about the application to a business plan.  Should working capital be laid out in the business plan as part of the operations?   I’m also wondering if you have to burn through all the cash or if some can be saved to self-fund growth opportunities in the future?  A trip to Entreleadership might answer that question for me.

Shaun Farrugia

Angel Investors Pocket Knife – Terry Cross

I recently watched both of the Terry Cross interviews on MichiganInnovators.org and am better for taking the time to do this.  Terry Cross has been angel-investing for 46 years and has “learned a few things” in his time.   I learned more about how angel investing works from watching these interviews than I knew before.  It’s true that I was pretty limited in what I knew about this topic.  The interview questions and answers were precise and informative as well as clear and understandable.  I felt so educated by these interviews that I wanted even more detail on how Terry thought.   

Terry talked about how an entrepreneur needs to perform risk mitigation before he really begins to take them seriously.  I have never written any sort of business plan yet but I am glad I listened to this interview before doing this.  Terry made clear exactly how he expects the funded entrepreneur to think through his plan.  I plan on taking my plan through the same rigor that Terry laid out in the interview.  The litany of “things that can go wrong” was not supposed to be taken as a fear-inducer.  The point was to give your business plan more direction.  It can also allow the business plan to remind you of those pitfalls as they occur.  Clear thinking early in the process might be better than panic thinking when the problem arises.  Maybe..

 I found it to be a very cogent and clear way to think through risk in a way that will benefit your plan and the investor.  Then I got the feeling that risk becomes the guide at this point.  Is this a true statement?  I’m wondering if risk should be the right guidance factor for any business?  I am naturally risk-averse, but born and raised a Roman Catholic, so there is a natural avoidance of any sort of “control”.  It’s more palatable to me to see risk as a strong guidance mechanism, but I cannot accept that risk is the “point” of the whole enterprise.  

Overall, the interviews gave me a number of great ideas and was HIGHLY educational for me.  Glad to have the opportunity to have viewed them.

Thanks,

Shaun Farrugia

 

Michigan Pre-Seed Capital Fund

The Michigan pre-seed capital fund allows technology companies that are just beginning to receive funds to help assist their growth and development.  The fund allows entrepreneurs come to the table with funds and have those funds matched by the Pre-Seed Capital Fund. Skip Simms, fund manager, tells us that this is a very unique capital fund.   Many areas of the country do not have such a fund and have approached the Michigan Pre-Seed Capital Fund for guidance on setting up their own funds.

Many companies got out of investing in early-stage companies after the tech bubble burst in 2001.  Early-stage companies are those companies that have not had a round of funding and are seeking funding to help bring a product to market.  These rounds of funding are typically small.   These investors who started to avoid early stage rounds of funding wanted to concentrate their funds on companies that came out of the embryonic stage and had a solid foundation.   Skip refers to these types of investments as up-stream investments.

This was my first time reviewing anything of this nature.  I’ve always wondered how funding was sought after and awarded.  I have become more aware of the different types of funding that are out there.   This is the first glimpse I’ve seen of a fund being a collaborative effort between government, industry and academics.  Then again, I haven’t seen many funds.  

I am excited to see this type of opportunity given to entrepreneurs in the State of Michigan.   I was a resident of the State of Michigan for 29 years I relocated to New York City.  I know that I will champion the State of Michigan in my new home, both in spirit and in deed.  I can let people know about these types of opportunities in a city that is known for opportunities.

 

One thing that concerns me is the low amount of business clusters this can be available to.  I am concerned about the lack of pure information technology categories that are qualified for funds.  Many creative and young people that are leaving the State are pure programmers or visual and creative designers.  These types of people do not want to be in an unsexy automotive or homeland security type operation.  

 

The over designation of “Advanced automotive” is unsettling.  Most of the news in the state is focused on the automotive industry crumbling before our eyes.  Many young people believe that these companies are reaping the product of a corporate culture that protects “position” over “innovation” and talent.  There is no creative or fiduciary incentive for these individuals to contribute to this industry as a supplier or an employee.  Doing so would be almost un-tasteful.

 

Furthermore, nanotechnology makes a brief bullet point appearance under “Advanced Automotive”.  This is the over-designation that is hiding some of the more interesting aspects of this pre-seed fund.  Nanotechnology is a much more sexier technology for creatives to follow.  Why is it hidden under automotive and manufacturing?  Nanotechnology should stand out on it’s own.  

 

Lastly, why do we not hear about this?  It’s possible that commercials for this fund have been on WWJ but much of the energy that SPARK and SmartZONE is seeking is possibly listening to other forms of media.  Not to be trite but advertising these types of things on modern rock stations might enlist a younger more creative energy to help out in Michigan.  

 

Overall I’m glad to see something like this happen in Michigan.  I’ll be exploring the other structures of support for new business in the coming future!

 

Shaun Farrugia

9-22-2008

New Class and Final Class

Hi All,

I am pretty excited to be learning about entrepreneurship at Eastern Michigan University.  The class is 388 – Introduction to Entrepreneurship.  I will be using this blog to post comments and responses to blog posts as I read them.

Thanks!

Shaun Farrugia