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.

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.

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.

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.

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.

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.

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.

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.

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.

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.