Monday, December 31, 2007

Larry Upton’s Edioma Brings Language Education to the Mobile Phone

Larry Upton originally from Mississippi lived all over the world as his father was a serial entrepreneur and came to Austin about five years ago in which he started work at MessageOne to develop their Latin America infrastructure. He left and about a year ago he launched Edioma which provides language translation education over the mobile phone. Idioma in Spanish means “language”. They transposed the “I” to an “E” and had their company name. They currently offer Spanish but plan to expand into Mandarin and Hindi languages in the future.

A linguist by education he got involved in IT development. He noticed that students today learn by digital media not traditional means. A few years ago he contracted some help to do some stonework at his house. In the process, he noticed that some of the workers didn’t speak English well, and that everyone had a cell phone. Over seventy percent of the workers don’t have access to the internet. From that experience came the concept of providing education over the mobile phone. Follow on market research indicates that over 90% of the respondents in a survey were interested in learning better English, and nearly half were willing to pay (up to $21 per month) in order to do so. They have about 30,000 downloads (in about 5 weeks) from their first partner, called Movida which is a Sprint company selling prepaid phone cards through Walmart.

The language education focuses on practical phrases categorized by various situations: banking, traveling, shopping, etc. It’s a J2ME application which lets the user select a text phrase, and then by clicking on it, it gives the translation in words and also a voice speaking over the phone. If the user can’t pronounce it, they just show the phrase on the phone to who they are talking to.

Over the next six months Larry and his team are proving out the business model. There are 40 million people in America that rely on Spanish as their primary language and 400 million in Latin America so the market is large and growing. He plans to roll out games to provide education as well.

Best regards,
Hall T.

Wednesday, December 26, 2007

Tom Ortman – Solar Energy Entrepreneurs Network (SEEN)

I met with Tom Ortman of Concurrent Design who recently started the Solar Energy Entrepreneurs Network (SEEN) along with Paul Ballentine of Freescale to foster networking among those working in the solar energy space in Austin and Central Texas.

They recently held their first meeting and received a greater than expected turnout -- over 150 attendees. Tom’s initiative catalyzes the discussion by focusing on solar energy issues and connecting people together to form and progress their business in this area. Tom plans to run meetings regular next year and is currently surveying the group to identify the needs.

There’s ample room for innovation in the area of solar energy. I recently tried to have a solar panel array installed on my residence. A 3.2Kw system goes for $22K but a rebate from the city cuts that price in half. And there’s also a $2K federal income tax credit on top of that. Unfortunately, my house had too much tree shading to make it worthwhile. In the end, I went with two solar powered attic fans ($700 each) that cut my electric bill by almost $100/month in the summer. I’m quite happy about that. In the area of solar energy p anels, I can see a number of areas in packaging, installation, and maintenance that could benefit from innovation.

Best regards,
Hall T.

Thursday, December 20, 2007

Jared Slosberg –Experienced Entrepreneur Starting Angel Investing

I had the opportunity of talking with a new CTAN member today, Jared Slosberg, the President of ProfitFuel which sells online advertising primarily to small businesses. They’ve been doing this for over five years. They started by selling advertising on Yahoo! and later expanded to sell advertisements outside of Yahoo. They built a site called Clicksmart, which focuses on driving ROI for their small business advertisers.

Jared previously helped run HomeCity an online real estate company in which customer acquisition is done over the web. The company targets people moving to town and then provides all standard real-estate services. They have 50 realtors and recently expanded to Dallas. It was originally designed to serve corporate relocations but now includes private relocations.

Jared is not new to angel investing. He invested in Autowraptec a company that makes a machine that automatically wraps silverware for restaurants. A big restaurant in a casino will have full time staff for wrapping napkins, but even small restaurants will typically make their waiters and waitresses come in before their shift to wrap. The company is currently ramping up manufacturing to serve larger customers.

Angels bring startup experience to the investment process. An angel investor puts 5 to 10 hours a week into angel investing – finding deals, screening deals, presenting them, performing due diligence and so on. We look forward to Jared’s contribution to angel investing in Austin.

Best regards,
Hall T.

Thursday, December 13, 2007

Tom Ortman – Solar Energy Entrepreneurs Network (SEEN)

I met with Tom Ortman of Concurrent Design who recently started the Solar Energy Entrepreneurs Network (SEEN) along with Paul Ballentine of Freescale to foster networking among those working in the solar energy space in Austin and Central Texas.
They recently held their first meeting and received a greater than expected turnout -- over 150 attendees. Tom’s initiative catalyzes the discussion by focusing on solar energy issues and connecting people together to form and progress their business in this area. Tom plans to run meetings regular next year and is currently surveying the group to identify the needs.
There’s ample room for innovation in the area of solar energy. I recently tried to have a solar panel array installed on my residence. A 3.2Kw system goes for $22K but a rebate from the city cuts that price in half. And there’s also a $2K federal income tax credit on top of that. Unfortunately, my house had too much tree shading to make it worthwhile. In the end, I went with two solar powered attic fans ($700 each) that cut my electric bill by almost $100/month in the summer. I’m quite happy about that. In the area of solar energy p anels, I can see a number of areas in packaging, installation, and maintenance that could benefit from innovation.
Best regards,
Hall T.

Tuesday, December 11, 2007

Joshua Shipsey – An Entrepreneur Now on the Other Side of the Table

From time to time, CTAN receives a member with an entrepreneur background. Recently, Joshua Shipsey joined the group. Joshua has a background in industrial engineering and now has his own business. Over coffee the other day he commented how angels look at deals differently from entrepreneurs. Joshua came to our last presentation meeting and saw the four deals presented and then witnessed the questions the angels asked.

Entrepreneurs look at the possibilities of the business while angels tend to focus on the risks remaining to be solved. The presentation format gives the entrepreneur just 10 to 15 minutes to cover all the major points of the business – management team, product, target market, competition, financials, funds sought, exit strategy just to name a few. Some entrepreneurs would like to spend more time on the product/service they offer, but the angel is seeking to identify the risks remaining in the deal and how to solve them.

I thought this was a particularly useful insight.

Best regards,
Hall T.

Monday, December 10, 2007

Chuck Besondy – The Mad Scientist of Marketing

I had coffee today with Chuck Besondy who is a fellow blogger who writes the One Riot—One Ranger blog. He is currently co-writing a book called “Leadership On-Demand” which is about utilizing interim staff for sales and marketing management functions. This also helps for high workload seasons, filling gaps in the skills set, or when key people leave. The work is based on 20 interviews with CEOs.

One of the more interesting projects Chuck has done is director of marketing for the Austin Wranglers. He put together the marketing plan for ticket sales and sponsors. He’s also worked with David Altounian’s iTaggit and performed the initial market validation and market sizing.
As for market sizing, Chuck described his work at Boxx Technologies which serves the film and video industry. Chuck took the total available market and calculated the serviceable market by looking at the number of studios, number of projects per studio, and brand loyalty among other factors to get down to a much tighter number.

Chuck is called by some the “Mad Scientist” of marketing as he brings unusual rigor to the process of setting up sales/marketing funnels. This is a favorite topic of mine since I’ve seen how powerful it can be in galvanizing the resources of a company. A sales funnel essentially divides up the suspects (no interest but potential customers), prospects (interested potential customers) and customers (those who actually bought the product) and maps the steps one goes through from one stage to the next and even models how many go through the process.

Best regards,
Hall T.

Thursday, December 6, 2007

Lisa Williamson – Upspring CEO

I had the opportunity to have coffee with Lisa Williamson, the CEO of Upspring. She comes from Pepsico and is now a serial entrepreneur with two startups behind her now. She’s almost finished with their equity raise of $2M and has a number of new products in the pipeline.

So how is Upspring going these days?
We are a consumer healthcare play targeting toddler care. It’s a heavily fragmented industry. There’s no innovation coming from the large players. We have only one product coming from outside the company. The rest of the IP comes from internally. We have a line of functional and diagnostics products which gives us some choices for how to grow the company. We have “Walking Wings” which is in national distribution and has strong revenue. The money we raised will be to develop new product innovations and grow existing products. We’re expanding our diagnostics product line beyond Milkscreen along with a new product called the Night Knight.

So how is Milkscreen going?
We’re in Central Market, select Whole Foods and independent retailers but with national distribution we’ll get more exposure.

It seems like your expanding into the diagnostics market first?
It’s more margin and a better multiplier and there is so much more growth because consumers are taking healthcare into their own hands and the Over the Counter (OTC) market is growing rapidly.

Where do you get ideas for new products?
The Night Knight is the only product that comes from outside our company, currently. We have so many internal products on our roadmap but we also have a steady flow of product ideas that people are bringing to us. We also have a partnership with a company in Sweden that has a great innovation and industrial design for their products that we may be launching in the U.S.

How do you protect all these ideas?
For the Night Knight we have a utility patent on the intended use of the technology. We are in patent pending with Milkscreen. We’re trying to broaden the patent to get more coverage. For all of these we filed PCT’s.

Your marketing is head and shoulders above others. Is that part of your IP?
Our goal is to be first to market and gain broad distribution quickly. My background is in marketing at Pepsico.

I was impressed with your PR on Milkscreen.
Our strategy is to generate PR throughout the first year, much less expensive than traditional advertising and more effective.

Do you sell on the web?
We sell Milkscreen directly, but not Walking Wings so we don’t compete with our retailers.

What about the price of Milkscreen?
We recently fixed the cost of goods for Milkscreen by reducing it significantly. That helped us set the right price point for it. We sourced a different chemistry which let us manufacture it ourselves at a lower price point.

How about your exit strategy?
We want to build a strong consumer brand and continue to bring true innovations to the market. As mom’s we are very passionate about our products, as business women we understand the need for a liquidity event to provide a great return for our investors.

You just raised $2M. What was the biggest challenge in raising the money?
We knocked on a lot of doors. The challenge was finding the right group. The majority of our company value is in the product roadmap, IP and the distribution. Because we had some revenue, it was a challenge to set the valuation. We offered equity with 1x liquidation.

Best regards,
Hall T.

Monday, December 3, 2007

WiredReach—Easy to Use File Sharing

I had coffee recently with Ash Maurya of WiredReach which makes dead simple file sharing software using a peer to peer technology. Ash has a background in the Telecoms industry in Richardson and found a need in the market for file sharing of large sizes. While most companies offering such services focus on the big three – music, videos, and photos, Ash’s company focuses on the “long-tail” of applications including Photoshop and AutoCAD users. Adobe Photoshop users and Autodesk CAD users are underserved segments which his company focuses on. They offer their software for a fairly low-price per month. They’ve been working on custom application projects for several years and are now moving over to a standard products offering – a key for scalability.

In reviewing deals, CTAN has its three basic criteria:

1. Are they based in Texas?
2. Do they have a complete/near-complete product?
3. Are they seeking $2M or less?

After that CTAN looks at the next three questions:

1. Do they have an experienced management team?
2. Can the product generate revenue yet?
3. Have they validated the market? Will anyone buy it?

It appears Wired Reach meets both sets of requirements. Of course there’s more work to do, but this is a great way to open the conversation with CTAN.

Best regards,
Hall T.

Wednesday, November 28, 2007

Recent ACA Survey – The Returns and Success Factors of Angel Investing

The Angel Capital Associated recently released a survey on angel investor returns. They contacted 276 angel groups of which 86 responded to the survey. In short, the average return to an angel investor in the survey was 2.6x the investment in about 3.5 years yielding an IRR of 27%. These returns align well with other forms of private equity investing.

The three factors that influenced positive outcomes included:

1. Due diligence – more hours invested yielded higher returns.
2. Experience – more experience in the angel yielded better returns.
3. Participation – those angels who interacted with the entrepreneur several times a month yielded better returns.

The exits ranged from 52% of the deals losing money, 48% making money and 7% making 10x return or greater. The average amount of time spent on due diligence was 20 hours per deal, but some spent up to 60 hours of due diligence and saw substantially higher returns. Where investors spent more than 40 hours of due diligence experienced exits of 7.1X.

Angels who spent time with the entrepreneur 3 to 4x per month experienced a return of 3.7x in four years, while those who spent time with the entrepreneur only a couple of times a year experienced a 1.3x return in 3.6 years.

This information certainly backs up my own personal experience. Where I invest in deals in which I know the industry and actively work with the entrepreneur on the business, I receive greater returns compared to those deals in which I’m a passive investor and don’t know the industry at all.

If you would like to read the full report you can download it from the Kauffman site here.

Best regards,
Hall T.

Monday, November 26, 2007

Austin Inventors and Entrepreneurs Association—Valuations Anyone?

I had the opportunity to speak to the Austin Inventors and Entrepreneur Association. About thirty people turned out to hear my speech on “How to Raise Funding.” There were several entrepreneurs with cleantech inventions and even a few medical device developments. Led by Chris Ritchie the group meets to share ideas and information about how to successfully invent and launch new product ideas. The question of valuations came up as it does in many conversations. The more risk the entrepreneur takes off the table (product, market, IP, etc) then the better the valuation will be. There are some classical models for calculating valuation. If you have a cash-flow stream coming into the company, that can be used to value the company. Likewise, asset-heavy businesses can make a valuation based on the value of the assets. Also, revenue-streams could be used. If there are no cash, revenue, or assets, then comparables can be used. By looking at companies recently purchased one can determine the value of a business by comparing to a recently purchased company. This information is often quoted in the press and with a little digging through a trade or market research organization one can find the particulars about the purchased business and then extrapolate onto your own business.

Often times a valuation is placed on the business by the entrepreneur that is calculated based on the money sought to be raised and how much equity the entrepreneur wants to see at the end of the funding event. Based on these two numbers, the “valuation” is derived. If the entrepreneur is not incentivized then there’s not much of a future for that startup business.

I’m a regular listener of the Frank Peter’s Show podcast which highlights the angel and venture capital world of southern California. Recently, Frank had Luis Villalobos on the show who made the comment, that he has invested in over 60 companies in his angel investing career and every investment required substantial negotiations on the valuation. It’s not an easy question.

Best regards,
Hall T.

Wednesday, November 21, 2007

The Role of Patents in a Startup

I had the opportunity to speak to the Texas Evening Entrepreneurs. Founded in 2005, the group was created and run by students in the Texas Evening MBA program. One of the members raised the question about patents and how important are they. In some cases patents along with copyrights, trademarks, and trade secrets are crucial to securing funding. This is true in the area of medical devices and healthcare in particular. In the area of software it is less so.

One begins by filing a provisional patent. The cost is fairly low (around $300 the last time I checked). Later a full patent can be filed when some funding is secured. A competent patent attorney plays a key role in helping perform a patent search on prior art. Many patent attorneys will defer payment until funding can be secured.

Since software tends to be more of an execution play, patents may not be as important. The time it takes to litigate a patent can run from 2 to 3 years if not longer and among startups there’s often little money or assets to be seized and it’s often easy for competitors to work around patents to achieve the same goal.

Best regards,
Hall T.

Monday, November 19, 2007

NDAs (Non-Disclosure Agreements)—Not on the First Conversation

Everyone once in awhile I’ll come across an entrepreneur who wants to tell me about his deal but before giving me any details wants me to sign an NDA which is a Non-Disclosure Agreement that requires the signer not divulge the details of the subject matter to anyone for a certain period of time (usually 2 to 5 years). To an angel investor this is a red flag.

When an entrepreneur won’t even show me his one-pager without my first signing his Non-Disclosure Agreement that tells me his deal is not protected and most likely is not protectable. I advise entrepreneurs to have a one-pager ready to share with investors who show interest after a brief discussion. The one-pager should state what the business does but doesn’t necessarily go into details about how the IP actually works. If the discussion goes far enough that it enters the due diligence phase and the investor wants to see the “secret sauce” then it’s reasonable for the entrepreneur to ask the investor to sign an NDA, but not at the beginning of the first conversation.

While I understand the entrepreneur’s concern about protecting his idea and subsequently his business, it’s difficult to generate interest among the investors when you can’t even tell them the basic concept. The entrepreneur should be able to inform the investor about what the product or service does at a high level and what performance advantages it has over other methods.

My rule for signing NDAs is that I should know exactly what is being protected – the technology, the business model, the concept, etc. Signing an NDA without knowing this could mean the investor is signing away his ability to invest in any deal that is related to the entrepreneur’s target market or application.

To carry out the conversation, I invite the entrepreneur to tell me about the non-confidential matters. “Just tell me what you can without an NDA.” This potentially keeps the conversation going. Of course, the first subject to discuss after receiving the one-pager is how can one protect the idea – patents, copyrights, trademarks, trade secrets, etc.

Best regards,
Hall T.

Wednesday, November 14, 2007

SmarteSoft—Automating Software Testing

I met with Gordon MacGregor from SmarteSoft which makes test automation software for web-based and client-server applications. The company’s software improves software validation times by up to 5x with substantially lower costs. They are targeting a horizontal audience but with some emphasis on key verticals such as medical device companies trying to meet FDA requirements. The market for automated testing of software of course is huge. The IDC puts the market size well over a $1B a year. The company is out raising funding to scale up the business. They are shifting from a standard software license agreement to a Software As A Service (SAAS) model. This will help generate higher revenue for the company.

I recommended to Gordon to look at DOORS by Telelogic. It’s a requirements management software package that is complementary to his testing application. Anyone using DOORS is a prime candidate for using SmarteSoft.

Gordon comes from Glasgow, Scotland. I used to spend my summers in Scotland so we had a nice chat about the bed and breakfast scene there as well as the new bridge (it’s not so new any more) that connects the Isle of Skye to the mainland. It’s a debate whether the bridge is a step forward or backward. In any event, this company is moving fast and should be interesting to watch.

Best regards,
Hall T.

Monday, November 12, 2007

Idea 2 Product Competition—Technology and Innovation on Display

Today I had the opportunity to judge the Idea2Product competition held each year at the University of Texas Austin. Universities from around the world apply to show off their ability to take a technology and turn it into a commercially-viable product.

The University Illinois-Urbana showed off a device that when implanted reads neurological signals and wirelessly transmits it to a computer which further processes the data which could move a wheelchair movement or generate speech. The Audeo is the name of their product. I recommend you check out the wheelchair demo on their web site. It’s quite remarkable. Originally targeted at the disabilities market, the developers envision applying the device to gaming applications.

The University of Texas team proposed BioPristine – an antibacterial coating sprayed onto a surface for eliminating MRSA – a highly contagious form of Staph infection which when coupled with other conditions can cause death. The proposed formula provides improvements over Lysol, chlorine, and ammonia-based products as it’s not water soluble and therefore does not wear off with repeated washing or usage. An application will last up to 45 days. The developers plan to target the school system.

The San Jose State team proposed a utility vehicle powered by a combination of renewable energies including wind, solar, and electric motor technologies. It wasn’t clear how much protection their business methods patent would help them since their target market is India and China.

The Purdue team proposed a flow cytometry-based device for detecting CD4 levels in AIDS patients. The device is low cost and super simple to use as it is targeted for use in Africa. The competition focuses on the technology and innovation elements. The challenge with ‘social entrepreneurship’ is how to make money from it.

Finally, KTH from Sweden proposed a diabetes testing device that comes in a single unit so it is lower in cost and easier to use. It was difficult to understand how their device works as they declined to give any details on it for fear of protection.

The winner of the competition was the University of Illinois with their Audeo technology. The second place winner was RWTH Aachen University which had a cancer screening kit with a special screening marker that could detect several types of cancers, and third place went to the University of Michigan which had a microfabricated battery-replacement component that generated power by scavenging environmental energy.

The quality of the plans is quite high. If you ever have the chance to see the competition, I recommend it, as it keeps one up to date with new technologies.

Best regards,
Hall T.

Wednesday, November 7, 2007

DLA Piper Breakfast—State of Venture Capital & Angel Investing

Paul Hurdlow of DLA Piper held a breakfast forum this morning at the Four Seasons hotel. I sat on the panel with Rudy Garza of G51, Wes Cole of Gefinor Ventures, and Steve Fredrick of Grotech Capital based on the East Coast.

One of the topics of discussion is how do angels protect themselves from dilution that comes with subsequent rounds of investment. The short answer is to seek deals that don’t need so much capital and entrepreneurs that don’t have “IPO” as stars in their eyes. Back in the roaring ‘90s entrepreneurs would come with their “funding plan”. Seed stage money today, Series A in six months, Series B in another six months, etc. For angels that kind of thinking is a non-starter. I remember some of the companies in the ‘90s spent more time with the investors rather than their customers. I always thought there was something wrong with that picture.

Another topic was the general slow down in venture capital. John Hurley showed the latest stats from VentureOne which highlighted a slow down in funds invested. I highlighted the increase in angel investing and attributed a portion of this shift to the reduced cost of starting up businesses. What took $5M to start a business in 1997, now takes only $500K in 2007, in some cases. Of course, semiconductor and life science deals still need large amounts of capital to pay for basic research, software and consumer product companies are much cheaper to launch today due to outsourcing, offshoring, and better productivity tools (email, web, etc).

The Angel Capital Association released a survey run in the first half of this year. Over 50% of the angel groups saw Dealflow rise significantly. The average membership number grew 22% (from 42 to 51). Anecdotally, I’ve seen angel activity increase substantially from 2006 to 2007. I attended the ACA summit in 2006 in which there were150 attendees. The summit this year doubled to over 300 attendees. Across the board, Dealflow was up as well as membership.

The DLA Piper events are great fun. Paul paid me one of the greatest compliments. He said he reads my blog.

Best regards,
Hall T.

Monday, November 5, 2007

Wireless Seed Stage Forum—Using Wireless technology to Enable Startups

The ATI and CTAN held a Wireless Seed Stage Forum today at the UT Club. It was the first time I’ve been to the UT club, and I must say it was a nice venue. We had 16 wireless entrepreneurs from across the country including California, Chicago, Huntsville, Pennsylvania in addition to Texas-based companies.

The most inventive presentation goes to Agilemesh which makes mesh-based surveillance equipment targeted at military and law enforcement units. Instead of the standard 15 slide presentation, the entrepreneur built a wireless system for us demonstrating the ease of setup and use. I could have used a little more information about their business plan as I now know how to setup their system, but I have no idea how they make money, what their business model is, or who is their competition.

A common theme throughout the day was traditional businesses seeking an outlet on the mobile phone but not quite knowing how to make money out of it. Entrepreneurs showed off solutions. One example of this is Advanced Mobile Solutions which pushes newspaper content to the mobile phone.

Zibadoo won the greatest interest from CTAN members. Zibadoo generated point of sale coupons for mobile phone users who request information about a particular service/product. During the presentation the entrepreneur gave the audience a code to text message and in return the user received a coupon for a free pizza.

RFMicron another Austin-based company, makes RFID tags that work in any geography and on in surface. By using a signal processing algorithm they are able to tune the RF frequency to the range mandated by each region of the world and also correct for the surface on which the tag is placed – whether it be metal, insulation or liquid. This is useful since RFID tags operate differently based on the material to which they are attached.

Syner Ip combined VOIP and WiMAX to provide telephone service to Hispanics living in the US.

Benesec is a 4 month old startup from California that performs mutual authentication for credit card purchases to prevent fraud.

HEMS technology makes wireless network devices for homeowners who want to monitor and control their electricity consumption in the home.
Q-track used an interesting technology called Near Field Electromagnetic Range to perform real-time tracking of a subject or device.

Yuvee showed off an advanced user interface on the PC that could download to the mobile device a new definition of the keys. One could turn a key into a speed dial for a particular website such as CNN, to get that content on the mobile phone. The interface was quite slick as it look like a virtual phone keypad that hovered over the tablet PC screen. By pressing on the touch-sensitive screen, the entrepreneur was able to adjust what the keys on the phone would do. It was like having a virtual mobile phone that you could reprogram by just touching the keys (and in some cases entering web-link information).

The event generated buzz among the investors in the room. Now let’s see if it generates some checks.

Best regards,
Hall T.

Wednesday, October 31, 2007

SBDC – Small Business Development Corporations

In our Entrepreneur Training sessions, I’m often asked about where an entrepreneur can get training and startup assistance. The Small Business Development Corporation is one resource. I had a coffee this morning with Joe Lam of the Texas State SBDC to learn more about the services they offer to entrepreneurs seeking to startup a business.

The Small Business Development Corporation is an affiliate to the Small Business Administration. They provide services to startup companies including basic business plan development, financial analysis and secondary market research. They coach entrepreneurs in how to get funding as well as how to run their business. I asked if there was a limitation on the amount of time spent with entrepreneurs, but Joe replied that as long as the entrepreneur is making progress then the SBDC will continue working with them.

There are three offices in the Central Texas area – San Marcos, Austin, and Round Rock. I asked why I hadn’t heard more about their services to the startup community. Joe replied that the federal government which funds the SBDC didn’t earmark any funds for advertising so they’re limited in their ability to promote their services. I invited Joe to come out to our next entrepreneur training which will be December 4, 2007, to tell us more about their offering. If you’re looking for help in your startup, please join us. You can see more at this site.

Best regards,
Hall T.

Monday, October 29, 2007

Mock Terms Sheet Exercise with Andrews Kurth

CTAN joined in a “Mock Terms Sheet” exercise last evening. In the exercise, angels are paired with entrepreneurs, given a case study, and a sample terms sheet. The two then negotiate the closing of the deal. It’s a great exercise in understanding deal structuring as well as honing negotiation skills. The event was sponsored by Andrews Kurth and led by Matt Lyons. To make things interesting Matt placed a few “gems” into the terms sheet to see if people would catch them.

The case study had a convertible note and a preferred equity terms sheet that were negotiated at the same time. The entrepreneurs at first felt that was unrealistic, but I raised the point that angel investors want to see a valuation set and so convertible notes are not entirely satisfactory to the investor. We all agreed to negotiate both at the same time.

The entrepreneurs were quick to figure out that their stock was taken back to zero and they had to work another year for 20% to vest. For an entrepreneur to start a company and work for several years and then see his equity position taken away is quite an emotional thing. We agreed not to press the point. Matt indicated that was the first thing most entrepreneurs look for.

The entrepreneurs were also quick to figure out that the investors had most of the board seats from the get go. This also is anomalous among deals as control needs to be divided among investors, founders, and independents.

Each point in the terms sheet is there for a reason. As an investor you want to identify the risks in the deal and then apply the terms that mitigate the risk. In the end, it’s important to negotiate a deal that incentivizes both investors and entrepreneurs to the same goal and exit. If the goals are misaligned then things get difficult.

Best regards,
Hall T.

Wednesday, October 24, 2007

Open4Business—What Angels Look for In Deals

CTAN held a panel recently at the Open4Business Conference to talk about what angels look for in a deal. We opened with a recent survey from the Angel Capital Association showing the number of deals is up by 50%, and the average number of members in an angel group has grown from 41 to 52 in first six months of this year. Finally, syndication of deals between angel groups is up dramatically as well. Last year, I attended the ACA conference in New York. There were 150 of attendees. This year, the same conference had over 300 attendees. Across the board, membership was up and deal flow was up.

Joining me on the panel were Bril Flint and Monty Myers of Eureka Software which has been in Austin for 25 years. Each gave their view of what makes for a good angel deal. Bril looks for a competitive advantage or a unique angle that can be protected. Monty talked about helping companies who had made the sale but needed to help to deliver the product.

We talked about the different types of angel investors. There’s the Marriage Partner – the one who will be there through thick and thin. There’s the Networker – the one who knows everyone and can help connect people into jobs or partnerships. Then there’s the Therapist who focuses on coaching the CEO. The key question he asks is, “so what keeps you up at night?”

Questions ranged from how to value a company to how many women are in the group. We gave some rough rules for the valuation question – if you have a cash flow you can calculate based on that. If you have an asset-based business you can use that as well. I like the 4-point rule. You get $1M for a complete and seasoned management team, $1M for a complete product that’s shipping, $1M for a raft of happy customers, and $1M for a filed patents providing sufficient protection to the business. It’s rough but makes for productive conversations.

It was clear that the number of women involved in angel investing is quite low and there should be more.

Best regards,
Hall T.

Monday, October 22, 2007

Social Networking Sites – Discussion with Matt Cohen of Large Small

I had a coffee with Matt Cohen this morning at Primo360 which has become my office away from the office. Actually, I enjoy their flavor of espresso. Matt and I discussed the Social Networking space and the phenomenal buyouts going on. There are many social networking startups in Austin so of course we see a growing number of deals from this space.

Matt believes that Facebook is the new AOL for the twentysomething generation. For those who don’t remember, AOL was started as a community site to connect with friends and family and there was plenty to do on the site. AOL later in life changed to an advertisement model and became just another “channel” on the web. Matt indicated that the twenty something generation and younger communicates either through Facebook or through text messaging. The email system that the older generation uses is too open. Anyone can send you an email message. This is validated by the spam filter on my email inbox which captures over 500 messages a day now. Facebook lets you control who sends you messages and who you communicate with. It’s a closed world in which the user has more control.
LinkedIn is a business networking site that let’s users select who they want to connect with. I have over 400 connections now, and over one million contacts only three degrees of separation away. The problem with LinkedIn is that aside from connecting, there’s not much else to do on the web site. How long do people really hang out at the LinkedIn site? It’s log in, take care of business, and log off.

A small eco-system will continue to spring up around these social networking sites. Investing in them is a zero or a one. You either hit it big or you lose it all. It’s those huge payoffs you read about in the news that keeps entrepreneurs pursing what I call the “high tech lottery.”

Best regards,
Hall T.

Wednesday, October 17, 2007

UT Venture Fellows program – A Great Learning Experience

I met with Jim Nolen the other day and he updated me on the UT Venture Fellows Program. Venture Fellows are recruited from the UT MBA program for a two semester course. Twenty candidates are nominated and elected to the program by the alumni of the previous Venture Fellows class. Members get the opportunity to work in various capacities at VC firms such as performing due diligence, market validation, developing an M&A package for a company’s acquisition and more.

I was then invited to give a talk on angel investing to the group and found the audience intrigued with the prospect of working with angels in addition to venture capitalists. In my talk I highlighted the fact that angel investors in aggregate invest more than VCs. The VCs are just better at PR than angels since angel groups are more fragmented. There is a shrinking number of VCs but a growing number of angels and angels groups in the state of Texas. Startups need less money today and than previously due to increased efficiencies in business due to outsourcing and other factors.

I was impressed with the program as it provides real, hands-on experience to students before they graduate. As we know from working with startups, that is sometimes the difference between success and failure.

Best regards,
Hall T.

Monday, October 15, 2007

Attracting Angels Seminar – It’s All About Networking

I had the pleasure of speaking on a panel this morning hosted by the Austin Business Journal and Fish & Richardson on the topic of “Attracting Angels”. On the panel with me was Fred Stowe of Order Corner -- a company in which CTAN made an investment, and Steve Vandegrift, a long-time member of the entrepreneur/investor community. Kin Gill moderated the discussion.

Steve vocalized what many in the investment community already know – VC funding in Austin is almost gone. The funds in the 1990’s have invested their dollars and are now trying to make their portfolio companies work. Rudy Garza has G51, Brian Smith has S3 Ventures, and there is Austin Ventures, but that’s about it. Most of the deals are now angel deals anyway. What used to take $5M to startup a company can in many cases be done with $500K due to the cost of business going down thanks to the web, email tools, outsourcing, and the like.

Angel investing is back in a big way. They run in five to seven year cycles, and a new cycle was kicked off in 2006. I attended the Angel Capital Association meeting in 2006 in which there were 150 of us attending. This year, the same ACA conference had twice as many people. Across the board, angel groups are seeing a resurgence in membership and dealflow. Certainly, the Central Texas Angel Network is seeing a surge in membership and deals. We get about 30 deals a quarter submitted to our site.

Fred Stow echoed the comments of Steve and highlighted the need to network to find funding. He also mentioned that in his experience the angel groups in Austin, Dallas, and Houston, each had unique characteristics. Dallas is focused on retail, Houston on energy and biotech with a leaning toward “old money” and Austin towards more eclectic deals with risk. Each angel group has its personality and should be taken into account when looking for funding. An angel should bring more than just dollars to the table. An Angel should bring contacts and expertise as well.

In submitting deals to the Central Texas Angel Network, we look for investment by the founder – just to ensure “skin in the game.” On software deals we also look for market validation. It’s hard to talk about business models when you don’t have any customers. There has to be some vetting of the business model in order to get traction with investors. The costs of acquiring/supporting a customer as well as the revenue from that customer are important to know before seeking an angel.

Most angel groups seek deals that are raising at least $200K. We rarely see deals like this. Most are seeking at least $500K. The audience asked about “baby angels” in so far as are there people who will invest in deals that are lifestyle businesses? While there are not official groups for this type of investor, there are individuals who like these deals. It’s all about networking.

Best regards,
Hall T.

Wednesday, October 10, 2007

Eureka Instruments – Water Quality Instrumentation

Austin is an environmentally conscious city which gives substantial attention to water quality in the area due to assets such as the Edwards Aquifer and Barton Springs.

I met Stuart Garner earlier this week at an Entrepreneur training CTAN holds at the MCC building. (The training gives entrepreneurs some insight into how angels fund deals and the session also covers the Emerging Technology Fund program.) Stuart runs a successful startup making water quality testing instruments, called Eureka Instruments. Eureka designs and markets water-quality instruments called multiprobes. Multiprobes measure such parameters as temperature, pH, salinity, dissolved oxygen, and water level. Biologists use the devices to measure the quality of water impacted by the effects of urbanization or a contaminant spill.

The water quality market has been growing steadily for 30 years at about a 15% per annum rate and is about a $60M market place. It’s great to see innovation applied to protecting the environment.

Best regards,
Hall T.

Monday, October 8, 2007

Minggl—Social Networking of Social Networking Sites

If you’re an avid social networking user you know the drill. Login to Facebook and review your profile. Login to MySpace and check your favorites. And so on and so forth. Each social networking site has its own login and password requirements. But what if you could login just once and all your sites are now accessible? That’s what Minggl does for you.

It can update photos and videos from anywhere across the web and consolidate friends lists and organize them better.

The entrepreneur behind the scenes is Dewey Gaedcke who according to his LinkedIn profile holds the survival record (5 days without water) in Kilauea Volcano national park in Hawaii. Dewey talks about how Minggl gives the user the ability to bring all of one’s content, whether if by YouTube, Flickr, MySpace or any other site, and consolidate it into a package that can be placed by the user in a position on the web and even change the access priority on the content so the user controls what others can see.

Best regards,
Hall T.

Wednesday, October 3, 2007

Springwise – Source of Innovative Ideas

Are you looking for that innovative idea that will inspire your next startup? I found a source called Springwise that captures new ideas from around the world. In the current edition, I found “Mobile Marketing at Music Festivals” an interesting idea. Instead of holding up a lighter during a concert to register your affirmation of a song, how about holding up a mobile phone with a lighter glowing on the display? How about applets you can download to help you find others in the crowd?

How about parties for foodies? In these events, you need only get a group of people together. Consultants bring the food to the meeting for you to sample. It’s a direct sales technique but for a free meal of new and interesting cuisine it sounds like a lot of fun.

Then there’s “Ridesharing with a Twist” which utilizes social networking sites to help people find carpool rides that are more interesting. Finally, there’s the “Scoring for Simpler Shopping Comparison” in which a web site gives a single number score (1-100) for a product. Most sites provide data covering several screens making comparisons difficult.

In each of the examples above, Springwise highlights a startup in that space so you can dig into the idea and see how they are executing it. I recommend you check it out as it may spur some ideas for your own startup.

Best regards,
Hall T.

Monday, October 1, 2007

David Altounian’s iTaggit—Keeping Track of Your Personal Stuff

I had my morning coffee at Uno’s today with David Altounian who now runs iTaggit which is an internet site that lets users organize and inventory their personal assets such as jewelry, artwork, etc. They generate revenue from advertisements, and referrals to service providers.

David has an interesting history going back to Dell where he ran Dell Labs for several years before moving on to startup Motion Computing the maker of tablet PCs. Along the way he picked up an MBA at Chicago’s Kellogg school of Management. According to David, his post-career goal is teaching Marketing Strategy in a university. I asked how he came up with the idea for iTaggit. While in university he saw numerous services that managed people’s financial assets but nothing that managed their physical assets. From that observation he concluded that people needed better tools to keep track of their stuff for insurance purposes, and other reasons.

David went on to talk about iTaggit’s growth. They just released an eBay Auction function on iTaggit’s site. It lets the user tag one of his items to sell on eBay and an eBay pop-up let’s the user customize the HTML for presentation of the item and brings all the relevant information from iTaggit’s database into the eBay posting. He recently upgraded the user interface and found a nice increase in business. In one case, the simple change of a background color made a big difference.

David talked about the benefit of taking less money in a startup rather than more. It teaches you how to spend more carefully. Motion only raised $6M but could have reached for $30M or more. He also spoke about finding the right fit between the entrepreneur and the investor. Sometimes the money is available but the funding source needs to fit well with the startup.

Best regards,
Hall T.

Wednesday, September 26, 2007

Phurnace Software – Made Java Applications Easier to Manage

Most people in town know Phurnace Software because they’ve made quite a splash in the past year. For those who don’t know, Phurnace makes software that accelerates the deployment of Java applications. Founded by Daniel Nelson while at UT, Phurnace now resides in the Austin Technology Incubator.

Larry Warnock recently took over as CEO of the startup. Larry has quite a history with startups. He developed a startup in the Bay area which was acquired by Siebel. He came to Austin to join AV Labs and then moved on to Zilliant and Vignette before landing at Phurnace.

I met with Larry recently and learned more about Phurnace’ offering. Java applications require a great deal of customization on the enterprise software environment. There are literally hundreds of parameters that must be set and adjusted for the web services layer in the network – of which there are three main standards. Phurnace builds scripts into its Java application development environment and manages these parameters for the user.

Although Larry wouldn’t divulge revenue or sales stats, he did say they are seeing traction in the marketplace. Phurnace is a great example of startups coming out of UT. In the case of Phurnace they won the UT Moot Corp competition last year.

Best regards,
Hall T.

Monday, September 24, 2007

Armida Technologies – Wireless Video Surveillance

Having worked in the wireless space for some time now, I can tell you that wireline replacement is a real motivator for customers to switch to wireless systems as soon as they are “good enough.” The cost to wire an industrial location ranges from $2/ft up to $2000/ft, which makes wireless a no-brainer if a solution is available.

Armida Technologies brings wireless to the video surveillance market. Their value-add is their software which encrypts the signal before sending it. In case of interference, they can still recover enough of the transmission to give the user a clean image.

You can see Armida and other wireless companies in the upcoming Wireless Seed Stage Forum held by the Austin Technology Incubator on October 17, 2007.

Best regards,
Hall T.

Wednesday, September 19, 2007

Stormchaser Technologies – Automated Trading Systems

Stormchaser Technologies offers an automated trading system that uses algorithms to make day trades. The user loads in a select basket of stocks, and the software determines what trades to make. If the user wishes, there’s an automation features that takes complete control of the trading process. Robin Abraham, the CEO, calls it the “black box” technique in which the software does everything. There’s also the “grey box” mode in which the software offers trading advice, but the user determines what trades to make and enters them manually.

Robin spent several years consulting for IBM and even dabbled in real estate for awhile. He found dissatisfaction with trading systems because they couldn’t be automated nor could you use different platforms. He started in 2000 and came out with the first version that was a simple trading system. Over time he grew the tool into an automated trading system.

His philosophy on trading is that everyone has their own philosophy and that’s what makes a market – everyone has their own view. He wants to cater to those with unique ideas about trading. His trading system pulls from several different philosophies on money management, trading schemes, and portfolio management.

Robin indicated that one advantage of automated trading is that it forces discipline on taking exits and stops. The emotion factor in manual trading sometimes overtakes one’s better judgment. Automated trading helps with that. His other philosophy is the user should be able to develop once and implement many times. So the user could develop a trading strategy and then implement it on numerous platforms without the cost of redevelopment.

Stormchaser is targeted at the active trader with special tools for the swing trader. You can go to the Stormchaser web site to download a seven day free trial.

For next steps, Robin is developing new trading systems that leverage 3rd party developers into the process such as the Aurora and STXtreme systems.

Best regards,
Hall T.

Monday, September 17, 2007

Video Leverage – Professional Video Generation

I work at a large company in Austin and for many years our sales team would video tape sales conference presentations so others could check out the tapes and review the materials. Essentially, one of the salesmen would setup a camcorder on a tripod in the back of the room (about 100 feet from the presenter) and hit “record.” He later transferred it to a VHS tape. The image of the speaker was almost imperceptible, the voice inaudible, and in general the quality low.

An administrator kept track of the tapes for checkout and had a bookshelf full of them, all carefully labeled and archived for several years. One day, in passing, I asked, “So how many tapes have been checked out?” She replied, “Oh, no one’s ever checked out a tape. “ From that experience it became clear that viewing a video tape of a presenting person is a different experience from viewing a live presentation. The video viewer can check out of the session by simply hitting a button. Five minutes of viewing a video is equivalent to an hour of viewing a live presentation, which is why just taping a presentation and then transferring the raw footage onto a tape does not translate well.

I met with Andy Choquette from Video Leverage in Austin to plan a video shoot to be shown at the upcoming Open4Business conference event. Andy brought up several of the production quality issues one needs to keep in mind for shooting, producing, and displaying video footage. With video coming to the internet, the need for quality video grows dramatically. As Director for the Central Texas Angel Network I’m seeing more and more emails with links to a video pitch from the entrepreneur. I also find some entrepreneurs communicate their business proposition better in a pitch than in writing. Since it’s much easier for an investor to watch a ten minute video pitch than to read a lengthy business plan, it won’t be long before this is the standard in the industry.

Best regards,
Hall T.

Thursday, September 13, 2007

PlanHeaven – Entrepreneur Pitches coming to the Web

Dylan Peterson is an Austinite now working out of Seattle. When I first met Dylan four years ago he was pitching a Charter Bus reservation company called Coppertop which is now called Charter Bus America. The venue was Opal Divine’s on 6th street which I thought was an odd location for pitching to a group of angels. Even odder was the fact that we were all gathered on the balcony overlooking 6th street. Just as he stood up to pitch, the musicians on the deck below started up a new set and Dylan had give his pitch over the SxSW concert going on downstairs. He kept his cool and gave the pitch without a hitch.

Dylan is now back in Austin with a new startup called PlanHeaven. The company runs a website which streams videos of entrepreneurs pitching their business plan to potential investors. As the director of an angel network, I can look up deals that meet my groups requirements which for the Central Texas Angels are

1) Based in Texas
2) Seeking $2M or less in funding
3) Have a complete or near-complete product/service

As video comes to the web in ever greater volume, it’s a natural tool for the entrepreneur to use to communicate the value of his/her business. Many investors would rather watch a ten-minute video to get the basic idea rather than read a business plan or even an executive summary. Check out the website.

Best regards,
Hall T.

Friday, September 7, 2007

Displaypoints – Digital Advertising comes to the Restaurant Table

Last spring, the Central Texas Angel Network sponsored a funding event in conjunction with the Acton Angel Network. Five entrepreneurs from Acton’s faculty/alumni/student body presented their business plans. One of the top presenters was Greg Fitzgerald of Displaypoints which is a digital advertising company that uses a 7-inch digital display (similar to a tablet) to bring advertisements to the customer. Compared to billboard advertising, the table top display can be customized to the target audience with greater frequency and relevancy.

Greg and his team are targeting the fast-casual and casual dining restaurant chains first, throughout the state of Texas. You can see their displays at Iron Cactus, Bennigan's, Austin's Pizza, Cane & Abel's, and Mangia Pizza.

Interest in advertising on the Displaypoints system appears to be strong. The US Army is going to start advertising through Displaypoints’ system for recruiting. The Displaypoint system allows them to target their demographic with laser-like precision. Now that the Army signs up then the other US military forces will soon follow. MADD (Mother’s Against Drunk Driving) will run a ad campaign showing the effects of excessive drinking. In tests at Bennigan’s, Greg talked about how their point of sale advertising can measurably change the buying habits of the customers.

The biggest surprise is how restaurants are challenged with high turnover and how much time and cost they invest into training their staff. The Displaypoints system can help offload the wait staff by handling the specials the restaurant offers each day.

Best regards,
Hall T.

Monday, September 3, 2007

Demand Fitness - Fitness through the web

I had the opportunity to meet Mike Salas who previously worked at PMC-Sierra and Britestream. He started an online fitness site called Demand Fitness. The site provides over 200 online training videos streamed through the web to subscribers who want to improve their workout routine but without a trainer. Often times the user is someone working out at home. I asked about the need for equipment, but it appears that most of the courses do not require machines or weights. The courses tend to emphasize yoga, pilates, and aerobics. Most gyms offer training courses targeted at the mainstream, but the use of the web allows Mike to reach the “long tail” of the market and provide training to expectant mothers, those with limited mobility, and other niche areas. There’s also an online “tracker” that tracks the subscribers goals and progress status.

Demand Fitness went live last year and now has a growing subscription base with fees around $15/month. Mike is seeking to expand into the corporate fitness center market and to provide “branded” training courses with a company’s logo and backdrop. With only two people he’s able to create a growing business with a sustainable model.

Best regards,
Hall T.