Early Exits

Back in January, I wrote about the oncoming era of the “small exit“. I felt then (and still do) that the combination of capital efficiency, the bad fit between traditional VC and today’s young startups, the sheer number of startups vs. amount of available capital (especially here in Canada) all pointed towards small exits. Vancouver-based Basil Peters has written a book on this topic which I recently had the pleasure of reading.

His book Early Exits covers his considerable personal experience as a founder, VC and now angel investor. His thesis for the book is as follows:

“Today, the optimum financial strategy for most technology entrepreneurs is to raise money from angels and plan for an early exit to a large company in just a few years for under $30M.”

There are many reasons why this message likely resonates with today’s tech entrepreneurs:

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Angels rock! Canadian Co-Investment Summit report

I attended the National Angel Organization‘s Co-Investment Summit on Friday in Toronto. This was my 1st time attending an Angel event and I was very impressed!

The Co-Investment Summit is an interesting concept. Startups that already have angel backing apply to present to other angels for follow on or co-investment. Before presenting, each startup gets introduced by their existing angel who endorses the company or investment opportunity to the other angels in the room.

Unlike investor events I have attended in the venture space, the attention and focus was on hearing from the entrepreneurs at this event. I had to so some work in the hallway for a period. It was a ghost town – as everyone was inside the auditorium hearing companies pitch.

The quality of the pitches and companies was also very high – especially given that most have raised relatively small amounts of capital to date. For the companies presenting, this event was a great opportunity as over 100 angels were in the audience.

Akoha was one of those companies – and I’m pleased to report it was chosen as one of the “top 5” companies by the angels.

As someone who’s spent most of his career on the venture side, I am positively impressed by what I am seeing as I learn more about the angel space. I’ll be following up with more posts on the angel scene soon.

The early stage funding gap

Silicon Alley Insider has a great post this week on the funding gap for early stage deals. Funds are waiting until an idea is fully baked (and market-validated) before investing. Here’s an excerpt from it:

Paul Graham from the YCombinator incubator put forth:

I’ve tried to explain this to VC firms. Instead of making one $2 million investment, make five $400k investments. Would that mean sitting on too many boards? Don’t sit on their boards. Would that mean too much due diligence? Do less. If you’re investing at a tenth the valuation, you only have to be a tenth as sure.

This illustrates a few themes that I’ve been posting about recently:

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The Term Sheet

It’s funny. When I talk to other startup types about term sheets, they are so casual about them, it seems like they receive one every other day. I’ve been fundraising for and growing startups for over 8 years now. Four companies and many more rounds later, term sheets are still a BIG deal to me.

There are different types of term sheets and a term sheet can mean many different things depending on who you talk to. For some VCs, it is little more than an initial expression of interest. These term sheets, which come too early in the process are not worth much.

For most VCs, term sheets are a serious sign of commitment. However, you still need to look at the closing conditions to see what, other than standard financial and legal stuff, is on their minds. Do they still have big questions about the team or the business? If so, this term sheet may be less of a commitment than you think.

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