Being an Entrepreneur in the 21 st Century ByzHub Meetup New Westminster, BC October 20, 2011 Basil Peters
We are lucky to live in Vancouver
We are Fortunate To Live in BC
BC Economy - Forestry
BC Economy - Mining
BC Economy - Fishing
Things have changed
The Economy Has changed The whole world has changed
Entire Countries are Bankrupt Other countries will certainly follow
Market Lost Trillions in Days Lately it s almost a regular occurrence
Lehman Brothers Is Gone
GM Bankrupt
Why is this happening?
Global Trade
The World is Now a Small Place
The effect on big companies
Canada s Most Valuable Corp Nortel was founded in 1882 In 2000, Nortel s value was a third of the entire TSX index Canada s most valuable Market cap was $398 Billion Employed 94,500 people Bankrupt in 2009 Assets sold to companies around the world
Other Big Tech Companies Was Nortel just a single example? Or a made in Canada failure? What about the other big, great tech companies?
Intel 15 years Bubble
Microsoft 15 years Bubble
Cisco 15 years Bubble
None Are Creating Wealth For their investors, And more importantly for their employees For decades, these greats were all built on the increasing value of their stock options That s what used to bring, and retained, the best and the brightest To these big companies
Big Companies are Risky When I graduated from university, Most of the new graduates wanted to get jobs in the big companies To learn how it was done To work somewhere that was safe and stable Today, working in a big company seems to be a pretty risky proposition And certainly not a very lucrative one
Startups create all the economic growth
Startups Create All the Growth In the old economy big was an advantage Today being big seems to be the opposite All of the economic growth is happening in small companies In fact, startups have created ALL of the new jobs for the past three decades
Startups Create ALL The Jobs
Lots Doesn t Work Anymore Many big parts of the financial ecosystem That worked for a hundred years Don t work at all anymore The economy has changed The world has changed But it s not all bad news especially for entrepreneurs and Angel investors
The Good News for Entrepreneurs
Let s Focus on Our Economy Most of you are entrepreneurs Many are involved in the new economy The knowledge based economy What s changed in our part of the global economy? More importantly how do we capitalize on it? What are the changes that we can make money with?
Changes That Make Us Money I think the five most important changes in the last decade that we can capitalize on are: 1. Innovation in startups 2. Internet acceleration 3. Capital efficiency 4. Availability of capital 5. Early exits
Innovation
Innovation is Our Opportunity The world has become a very small place Everything is interconnected We can t manufacture much in North America We almost can t write code here anymore The first big change is in our economy is that Innovation seems to be the last big opportunity to make money in North America
Innovation Happens in Startups The best and the brightest now work in startups Startups are where the opportunities are Where the excitement is Where the smart people create the innovations That s why all the economic and employment growth is created by startups And why nerds can earn more that football players, rock musicians and movie stars
Internet Acceleration
Internet Acceleration The internet has changed everything The biggest change in our lifetimes Larger impact than the printing press, automobile, air travel or atomic power The internet hasn t just connected everything It has also accelerated everything That s the second big change
The Internet is Changing Us I don t know if it is technology driven evolution or just training, but Young people s brains work differently now Watch your kids multi-task Ask a university professor how it looks to them Many students are too ADD to read a full book This is having a real impact on company formation, growth and exits
Our Species is Evolving People under 30 years old have much shorter attention spans It s not just in their multi-tasking conversations or reading material This shorter attention span also means that many of the team will start to think about moving to new jobs after 2 or 3 years
The Equity Effect Psychological vesting is about 2/3 of the time That means that the smart portfolio decision for the employees is to move to the next company at: Time = 0.67 Vesting Period The best and brightest go first These combine to mean that many modern companies at two or three years from startup Are middle aged and starting to decline http://www.angelblog.net/corporate_structure.html
Being Lean
New Startup Economics Third, it s amazing how little it costs to build a tech company today Back when I was an entrepreneur, hardware and software companies cost $10s millions That gave rise to the huge VC funds Also one of the reasons innovation used to happen primarily in big companies Today, entrepreneurs can build companies for $100,000s and, in some cases, $10,000s
Why It Costs So Little Today The Internet Fundamentally changing how we work And build companies Instant access to the entire global market Another example - open source software More importantly - virtual companies
Many Startups Raise No Capital As an investor for almost 20 years now, I m amazed by how many of the most successful companies I see Or have helped to sell Have raised no capital at all Or just a little from friends and family These bootstrapped companies are usually stronger and produce higher returns
There s No Shortage of Capital
Let me repeat that Yes, I just said there is no shortage of capital Worried that I have been living under a rock? Or haven t been reading the newspapers? Yes, the papers say there is a shortage Its not true My friends who are investors and fund managers, here and in the US, all complain they can t find enough companies to invest in
Financing in Previous Times When I was a young entrepreneur, Didn t matter if it was a hardware company or a software company Most companies cost $10s millions to build That created the enormous venture capital industry, parts of which are still around today And many common misperceptions Like that there is a shortage of capital
What are your financing options? Use your own resources even if you don t have any money Bootstrapping should always be your first choice (yes, I am an investor, but that s the truth) Some business models just can t be bootstrapped
If you really do need investors What are your options to raise private capital for your company? How many of you are planning to go to a venture capital fund to raise your startup capital? How many are planning on angel investors?
Who Actually Finances Startups? Just a couple of years ago when asked how many were planning to raise capital from VCs A surprising number of entrepreneurs still thought VCs finance startups The actual data is that Angel Investors finance 27x more startups than VCs www.angelblog.net/angels_finance_27_tim es_more_start-ups_than_vcs.html
The Really Big Money In America, each year Venture Capital Funds invest about $20 billion Angel investors also invest about $20 billion each year Even more surprising, Friends and Family investors invest about five times more than either VCs or Angels From Fools Gold by Scott Shane 2009
The Problem Is Most of the people who invest in Friends and Family rounds Really shouldn t. Professional investors agree that the earliest rounds are actually the most difficult. Friends and Family investors almost never have the knowledge and skills to objectively evaluate: Valuations Structures Market opportunities Technology
Uh, Oh! These are our friends and family! And we really need their money. But don t want to have awkward looks across the dinner table. So what should we do?
The Solution: Fairness Alignment Governance All built into the structure of the company, through the first investment agreement.
Finding an Angel in Vancouver More good news is that there are lots of angel investors in BC And many more angels just a short drive south A third of the Bellingham Angel Group s investments are in BC Angels are easy to find: www.angelblog.net/how_to_find_an_ angel_investor_in_vancouver.html
Angel Co-Investment Just a couple of years ago, the conventional wisdom was that angel investment topped out at around $2 million per company Kauffman and ACA started talking about co-investment just a couple of years ago Now I regularly see groups of angels investing $5 million to $10 million Probably enough for 99+% companies
The Biggest Investor in Canada An angel investor friend of mine, Mike Volker Is famous for saying that the biggest angel investor in Canada is The SRED program Don t forget IRAP Your research, and much of your development, might only cost you 35 cents on the dollar
Many Other Sources We often think about banks But they usually finance mature companies Today, there are many new types of investors and lenders New funds and entirely new investment structures for entrepreneurial companies Search the web and ask your mentors
Tip: Why are they investing? What is the most significant reason investors decide to invest? Hint: This answer applies not just to the Friends and Family round but to all rounds. Expectation of a financial return? Because they like the business plan? The real answer Because they like you.
Early Exits
Exits are the Best Part I believe exits are the best part of being an entrepreneur or investor It s when we get paid for all of our hard work and risk capital But it s also the least well understood part of being an entrepreneur or private investor Simply because it doesn t happen very often One of my life goals is to provide information to help entrepreneurs execute better exits
We Always Hear About The Big Exits The media always reports the really big exits From BC, it s exits like Club Penguin s $350 million sale to Disney Or Google s purchase of YouTube for $1.6 billion Those exits are very rare occurrences The new big story is the large number of smaller exits
Most Exits Are Under $20 Million Mergerstat database shows the median price of private company acquisitions is under $25 million, when price is disclosed But the price is not disclosed in most smaller transactions I estimate the median price to be well under $20 million And probably below $15 million
Google Wants Even Earlier Exits I was surprised recently to learn just how early Google wants to do acquisitions Charles Rim one of the top Google M&A guys: 90% plus of our transactions are small transactions. less than 20 people, less than $20 million and that is truly the sweet spot we do prefer companies that are pre-revenue http://www.angelblog.net/google_wants_even _Earlier_Exits_Than_in_Early_Exits.html
Examples of These Exits Google bought Adscape for $23 million (now Adsense) Google bought Blogger for $20 million (rumored) Yahoo bought Oddpost for $20 million (rumored) Ask Jeeves bought LiveJournal for $25 million Yahoo bought Flickr for $30 million (rumored) AOL bought Weblogs Inc for $25 million (rumored) Yahoo bought del.icio.us for $30 35 million (rumored) Google bought Writely for $10 million Google bought MeasureMap for less than $5 million Yahoo bought WebJay for around $1 million (rumored) Yahoo bought Jumpcut for $15 million (rumored)
Why This Is Happening Now One of my friends from a Fortune 500 company explained it this way: We (big companies) know we aren t good at new ideas or start-ups We basically suck at building businesses from zero to $20 million in value But we think of ourselves as really good at growing values from $20 million to $200 million or more
Under $20 Million Is Easy A company priced at $100 million is already out of our sweet spot to buy $100 million also requires board approval But at $20 million, it s really easy for me to get it approved just inside my division Many big companies are spending more on M&A than internal R&D Today, it s the best way for them to grow
Big Corps Have So Much Cash Many big companies have so much cash that it s a problem shareholders complain Google has $20 billion ebay has $5 billion Amazon has $3 billion Yahoo has $3 billion Microsoft has $35 billion Apple has $75 billion cash and investments
Who Else Is Buying? The most familiar buyers are Fortune 500 companies But medium sized companies are also aggressive buyers especially public ones Private Equity funds are also coming back into the market now that debt is available Also many individuals not ready to retire
Weekender Sold in 10 Days In 2009 when I wrote Early Exits I speculated that one day: They ll probably define an early exit as selling the company before the end of the weekender That almost happened in November 2009 A team of entrepreneurs in London built a business in one day and sold it online in ten days: www.24hour-startup.com < great video Not an isolated example, see www.flippa.com
A New Really Early Exit Anyone heard of the company PumkinHead? How about About.me? About.me was acquired by AOL Just four days after its public launch That may be a new record But a better way to measure is from startup
A Local Really Early Exit This is a Vancouver company but they asked me to keep their details confidential for now This company wanted to test the idea for their product, so they called on a US customer The customer asked to buy the company The CEO called me for help Three months later the money was in the bank Company was less than 12 months from startup and hadn t launched the product yet
Big Exits In Just 2 3 Years Flickr sold for $30 million at 1.5 years old Delicious sold for $30+million 2 years from startup Club Penguin for $350 million at 2 years old YouTube sold for $1.6 billion at 2 years old Playfish sold for $275 million at 2 years old Mint sold for $170 million at 3 years old AdMob sold for $750 million at 3.5 years old
How Early Can You Sell? A common misunderstanding about M&A exits is that you have to grow the company to be profitable Or grow it to be larger than $X millions of revenue The real threshold is to prove the business model For example, prove what a customer is worth and what they cost to acquire
It s Often The Optimum Time As soon as you prove the model is often the best time to sell Always better to sell on an upward trend Sell on the promise not the reality Often when you can get the best price Very often stuff happens Most entrepreneurs wait too long to start
The Most Heartbreaking Error The most heartbreaking error I see entrepreneurs and boards make is to exit too late It s caused by our fundamental human nature And happens primarily due to a lack of education In my opinion, more at the director level, than company management This is probably the single factor that could most improve the returns of angel and fund portfolios
Don t Ride It Over the Top Investment Return (times) 6 5 4 3 2 1 Optimum time to start the exit Fastest Growth Phase Optimum exit time IRR = 124% More typical time to start the exit More typical exit time IRR = 15% 0 0 1 2 3 4 5 6 7 Years from Investment
What works today
Our 21 st Century Economy What works today: 1. Startups innovate and create jobs 2. Angels, Friends and Family finance them 3. Big companies, and others, buy them early 4. The buyers continue to grow the business 5. Entrepreneurs and Angels do it again
A Golden Era For Entrepreneurs There has never been a time before when It was so easy for entrepreneurs to create Such valuable companies On so little capital, and Sell them so early For so much money
Resources www.early-exits.com book on exit strategies for entrepreneurs www.angelblog.net blog for entrepreneurs and angel investors www.exits-blog.com blog on exits www.basilpeters.com for this PowerPoint and videos of previous talks