Terry Lipman Talks about Fostering the Film Industry in Austin, the challenge with Villa Muse-like projects, and other efforts to promote the Austin film industry
What is your background in the film industry?
I started in film in Australia in the 1980s when the Aussie Government introduced tax incentives to attract local investors to support locally made films. To obtain the incentives, however, certain “strings were attached.” Even though I was not a filmmaker, I was able to handle the strings. These included the provision of certain business services to protect the government and investors – accounting, legal, insurance bonding distribution etc. My initiative was very successful and went far to help develop an independent Australian film industry growing from a fledgling state to become a leading member of the world filmmaking community. I assisted in providing the business services in the making of over 200 movies including the legendary “Crocodile Dundee.” Gradually the US studios saw opportunities in making their films in Australia using the highly skilled local crews and facilities that were developed and moved in. They now have a number of major studio facilities there and in New Zealand.
When I came to Austin about ten years ago I immediately saw a similar situation as Australia. Austin had a great filmmaking community, perfect climate and other benefits and was only 1500 miles from Hollywood. More importantly it had a very active group of aggressive business entrepreneurs and investors enjoying enormous rewards from developing a successful technology industry. (There was so much technology needed in the making of films and music that Hollywood did not yet have.) The challenge I saw was how to bring the filmmaking and the business and investment community together so that, rather than Austin just relying on being a back lot for Hollywood, films could be made here with local ownership and control. I spent a year or so working with some local leaders – Pike Powers, Jerry Converse, The Texas Film Commission and film director Dwight Adair with support from local filmmakers to create a strategy with the State for funding help. As a result the State passed a loan guarantee program for Texas banks that financed films made in Texas using local crews, services and facilities. George Bush signed it. We celebrated. Everyone was happy. But unfortunately after 18 months work, the bank – Chase Bank – refused to accept the State’s guarantee as it had not put any money into a bank account! So the initiative died. It was a disaster.
What was that program called?
The Texas Film Industry Development Loan Guarantee Program. Though it was sunsetted a couple of years ago I have been invited to resubmit it if at any time it could show that it would create jobs for Texas. Now might be a good time with the enormous loss of filmmaking business to other States.
Is it completely dead?
No. Not completely dead. It just needs resuscitation in a new form. I started revisiting the situation about a year ago when so much Texas film business was being lost to other States and I read that if we built a film studio in Austin “they will return.” It’s a nice thought but it doesn’t work that way. It’s true that many Hollywood producers love making films here in Austin and would love to return but the way it works is that the major film studios go where it’s the cheapest. Louisiana and New Mexico states have provided such tremendous tax incentives that they have attracted the lion’s share of the interstate business from Hollywood. New York is doing something similar this year. Texas did pass a bill last year but, unfortunately its small 5% incentive didn’t help. It was just a token and many of Texas’ 6000 members of the filmmaking community are now moving to Louisiana. From my experience in Australia, I believe that building a successful industry is not about building sound stages and back lots first. That’s putting the cart before the horse. Sure it’s good to have a studio facility available – and we do have several right now - but only where there is a guarantee of ongoing usage to confidently cover its costs. And the costs of running a studio that operates 24/7 day and night can be very expensive. In my opinion building a local industry starts by owning and controlling the making of films. First we make a lot of good quality locally funded, reasonably budgeted films so there’s a return on investment. Then, as the confidence is built up by the investment community an industry is slowly and strategically developed. Then as the needs develop the call for the studios is created with a guarantee of business.
What will get it going?
By having local investors fund films made in Austin along the lines that Austin Ventures did guiding local investors to enter the software business. I am proposing a low cost “VC style” business corporation that would contract with Austin’s highly regarded filmmaking community and local service providers that is staffed by experts in all aspects of film business. It would seek out, acquire and raise funds for commercially viable films and serve in a risk management capacity to minimize the investors’ risk and maximize their opportunity for profits. In addition it would protect its investors with the highest levels of insurance, completion bonding, legal, accounting, marketing and other business services and serve as the Executive Producer on all projects funded. I see the corporation strategically positioned at the forefront of the economic development of a well-coordinated entertainment industry capitalizing on the growing digital capability based here in Austin, as Austin Ventures did for the software industry. And, with Austin being voted by Movie Maker Magazine this year as the number one place in the US to make movies, I believe now is the time to do that.
How far are you with packaging this up as a deal?
I am in the early stages but I do have the support of a highly regarded producer in Los Angeles with extensive experience to bring to Austin a package of five high quality and commercially viable very low budget films to be made here in which local investors will have the opportunity of substantial ownership for a relatively low investment. I have also secured support from an experienced film investor with substantial investments in Central Texas and who will put up some of the funds on a co-funding basis for this slate of films and others and who will take on a consulting role for any investors who might be interested in having a look at investing in film and who can see and support an economic development opportunity that we have right here in Austin via the “VC style” film industry catalyst organization.
A few years ago we had the Burnt Orange Productions unit? What ever happened to them?
It just didn’t work. I was involved in the early days. They were all great people with worthy motives but the experiment of creating a commercial film production company around a film school where young students could have practical experience working with leading directors was a great idea but it just didn’t work for a variety of reasons. Even with Carolyn Pfeiffer, a first class and most experienced person in the business, that wasn’t enough. I may be wrong but to me the organization did not appear to be operated on a commercial basis. It was more of a bureaucratic organization that concerned many in the local film community who saw their jobs at risk. Also unlike what I am proposing for Austin, the investors in the operation were not experienced in film and were more interested in supporting UT’s initiative rather than really investing in films.
What do you think about projects like Villa Muse that recently presented to the City Council for creating a studio in Austin?
I could be proved wrong but I don’t believe it will work - not at this early stage in Austin’s development in film. At least not the elaborate and expensive facility I have read about. It seems to be one of those ‘build it and they will come’ projects. In Australia the studios were not built until after there was a demand from the film industry for them not before. I don’t see any demand here at all. I see Villa Muse more as an interesting real estate deal proposed before its time rather than filling a local need. I heard they were seeking some $50M. Goodness knows how they could possibly generate a return on that sort of investment that would get anywhere near covering their costs let alone paying investors a dividend - not for years. Also I fail to see how it would attract the sort of business it is being built for. First Hollywood have numerous sound stages and back lots in their home town and will only go elsewhere where they can save money and they go to great lengths to save money. As an example almost no films have been made at Las Colinas Studio in Dallas over the 25 or so years since it was built for the same reason. It is currently promoted as a tourist attraction! They did a few lower budget television shows there initially like Texas Ranger but since then it has become a great big white elephant. I really believe to create a film industry with sophisticated studios to service it, you first need to create a demand by making commercially viable films and controlling where they are made. I really know that the way to change the paradigm from merely being at the mercy of Hollywood is by proactively seeking out and funding the best projects from around the world to be made here in Austin using some leverage to get the best deals from all the local crews, facilities and service providers plus international distributors. That, in my humble opinion, is the way we become a major industry force in the future.
Best regards,
Hall T.
Wednesday, June 25, 2008
Thursday, June 19, 2008
Board Planning Exercise—Finding Your Company’s Competency
At the recent Angel Capital Association Summit in San Diego, I had the opportunity to hear Dave Berkus of the Tech Coast Angels talk about the work of the Board of Directors in a startup. Aside from governance most startups need help in setting strategy. Dave Berkus outlined an exercise he uses with startups to help them find their core competency.
It goes something like this-- make a chart with the following column headings:
Candidate Company
What they want
What you want
Ranking 10-1
Now go through and for each candidate company that may one day want to purchase the startup, list out what they would want from your startup. Likewise, write down what the startup would want from the candidate company. After you list out five or ten of these, go back through and rank them based on the value a proposed buyout would bring.
This exercise brings into focus what the startups’ core competency is and helps the entrepreneur set a strategy to develop that competency. As a secondary benefit the exercise highlights who may want to buyout the startup and why. Along the way the startup can start building a relationship with the candidate company.
In the early days of a startup strategy is equally important as governance. The planning strategy outlined above can help set the agenda for the board in working with the startup.
Best regards,
Hall T.
Monday, June 16, 2008
Negotiating the Terms Sheet – Principles Unite, Numbers Divide
During the ACA Summit, Robert Robinson of the Hawaii Angels offered the following advice.
There are three elements to understand in any negotiation:
Commitment – what have the parties agreed to?
Verification – how will we know that everyone fulfill their commitment?
Enforcement – what happens if a party does not fulfill his commitment?
Areas to negotiate include:
--Expectations
--Process
--Terms Sheet
--Communications
--Portfolio governance
--Follow-on financing
--Exit
During the presentation he brought up a key point of negotiation when he stated,
“Principles unite, numbers divide.” As soon as someone starts using numbers conflicts start to arise. At some point in the negotiation numbers must be used, but building a common base first goes a long ways in helping navigating through the possible numbers later.
The negotiation process itself is important. In this blog post a first-time CEO gives his experience in negotiating with a VC but also applies to angels as well.
Knowing the terms and what they mean is critical to the negotiation process. I’ve sat across the negotiation table with entrepreneurs who from time to time lean over to their attorney and ask, “What does that term mean?”
To that end, we’ve taken steps to provide more training to entrepreneurs in the form of special events like the Central Texas Entrepreneur Funding Symposium and Mock Terms Sheet practices sponsored by Andrews Kurth. For a tutorial review of Terms Sheet terms, check out this site.
Best regards,
Hall T.
Wednesday, June 11, 2008
The CEO Roundtable of Web 2.0 Companies Talk about the Current State of Angel and VC Funding
A recent Roundtable of Web 2.0 companies including highlights the participating companies including ApartmentRatings.com, Babblesoft, Edioma, iTaggit, KeyIngredient, Mindbites, Moximity, MusicGorilla, NaturallyCurly, OtherInbox, VolunteerSpot, and Wowio posted this summary which captured best practices for CEOs. The group offered their views on the funding situation with what angels and VCs fund these days:
“Angels: A working product, a scalable model, revenue, and a willingness to exit. It also really helps to have a serial entrepreneur as a founder. Your raise should be between $250k and $1M.
Some smaller funds like G51 have been active B2C funders, as have a few out-of-town VC’s like True Ventures, Benchmark Capital, and DAG Ventures. Here’s my take on the profile of successful VC raises:
VC’s: A working product, a scalable model, a compelling, innovative, and defensible take on an emerging market, and the potential for a billion dollar exit in 5-7 years. Your raise should be $1M or more, although there was some talk that $1-$3M is no man’s land right now. If the founders are first time entrepreneurs, it also doesn’t hurt to have some ivy on their resumes.”
I think they are right about the angel investor’s view of the fundable startup especially the point about a working product. I would add that the management team needs someone with experience and a permanent CEO is a must.
A clear go-to-market strategy is also key. Sometimes I see entrepreneurs try to paint a picture of a market full of opportunities but instead leave the investor wondering which of the twenty segments highlighted will actually be pursued.
Best regards,
Hall T.
“Angels: A working product, a scalable model, revenue, and a willingness to exit. It also really helps to have a serial entrepreneur as a founder. Your raise should be between $250k and $1M.
Some smaller funds like G51 have been active B2C funders, as have a few out-of-town VC’s like True Ventures, Benchmark Capital, and DAG Ventures. Here’s my take on the profile of successful VC raises:
VC’s: A working product, a scalable model, a compelling, innovative, and defensible take on an emerging market, and the potential for a billion dollar exit in 5-7 years. Your raise should be $1M or more, although there was some talk that $1-$3M is no man’s land right now. If the founders are first time entrepreneurs, it also doesn’t hurt to have some ivy on their resumes.”
I think they are right about the angel investor’s view of the fundable startup especially the point about a working product. I would add that the management team needs someone with experience and a permanent CEO is a must.
A clear go-to-market strategy is also key. Sometimes I see entrepreneurs try to paint a picture of a market full of opportunities but instead leave the investor wondering which of the twenty segments highlighted will actually be pursued.
Best regards,
Hall T.
Tuesday, June 10, 2008
Mike Maples speaks at Acton Angel Network Event on the State of Angel Investing
Mike Maples speaks at Acton Angel Network Event on the State of Angel Investing, what he sees as warning flags in a startup, and what he looks for in deal.
I had the opportunity to hear Mike Maples Sr. speak on the state of angel investing at the Acton Angel Network event last Thursday. The event highlighted Matt Lyons of Andrews Kurth who led a Mock Terms Sheet practice. For those who have not heard about it, the program involved a case study and a terms sheet. Participants are divided into angel investors and entrepreneurs and invited to “negotiate” through the terms sheet.
The event was great fun and educational too. In fact, at the end of the day, I gave a few closing remarks and invited everyone to move to the room next door for drinks and food. Typically, this generates a rush of people but instead the participants continued their negotiations for another 15 minutes before closing it off.
Mike Maples keynote started off with a review of the bubble days in which hype ruled. Mike pointed out that in many cases the hype turned into reality such as:
1. B-B e-commerce reaching $1.3 trillion by 2003 – actual $2.4 Trillion
2. Consumer e-commerce reaching $108 billion by 2003 - $95 billion
3. Productivity gains from e-commerce would pump $250 billion into economy by 2005 - $450 billion
4. Industry’s would change – Music, Travel, Movies, Yellow Pages, Retail
But the bad news is that business cycles do exist and that the bubble days created a lot of bad habits among entrepreneurs and investors. The VCs are currently in disarray. The bottom half of the VC community went out with the bubble burst and aren’t coming back. Twenty of the top VC funds in the 1990s went away and aren’t coming back either. Entrepreneurs receiving large investments tended to overspend on unnecessary things.
The old investment cycle of the 1990s of Angel investment leading to VC funding leading to Mezzanine funding is giving way to a new model of angel investment first and VC funding only for expansion after success.
The three warning flags Mike looks for in a deal are
1. The entrepreneur claiming there’s no competition,
2. The entrepreneur asking the investor to sign a confidentiality agreement up front.
3. High management salaries
Mike advised the entrepreneurs in the room to bootstrap as long as you can. He encouraged the audience to pick a focus and execute well including:
1. Build the right product
2. Build the product
3. Manage spending
4. Hire the best
Mike closed out with what he looks for in a deal
1. ‘Entrepreneurs that want to Learn
2. Idea, product, service you can explain to your spouse
3. Invest with people you like to work with
4. 3-5 yr –
a. 15 X return
b. 25% year annuity
5. Sharp, narrow focus
a. In big area or
b. Protected Niche
6. Hard technical problem, not a feature
Best regards,
Hall T.
I had the opportunity to hear Mike Maples Sr. speak on the state of angel investing at the Acton Angel Network event last Thursday. The event highlighted Matt Lyons of Andrews Kurth who led a Mock Terms Sheet practice. For those who have not heard about it, the program involved a case study and a terms sheet. Participants are divided into angel investors and entrepreneurs and invited to “negotiate” through the terms sheet.
The event was great fun and educational too. In fact, at the end of the day, I gave a few closing remarks and invited everyone to move to the room next door for drinks and food. Typically, this generates a rush of people but instead the participants continued their negotiations for another 15 minutes before closing it off.
Mike Maples keynote started off with a review of the bubble days in which hype ruled. Mike pointed out that in many cases the hype turned into reality such as:
1. B-B e-commerce reaching $1.3 trillion by 2003 – actual $2.4 Trillion
2. Consumer e-commerce reaching $108 billion by 2003 - $95 billion
3. Productivity gains from e-commerce would pump $250 billion into economy by 2005 - $450 billion
4. Industry’s would change – Music, Travel, Movies, Yellow Pages, Retail
But the bad news is that business cycles do exist and that the bubble days created a lot of bad habits among entrepreneurs and investors. The VCs are currently in disarray. The bottom half of the VC community went out with the bubble burst and aren’t coming back. Twenty of the top VC funds in the 1990s went away and aren’t coming back either. Entrepreneurs receiving large investments tended to overspend on unnecessary things.
The old investment cycle of the 1990s of Angel investment leading to VC funding leading to Mezzanine funding is giving way to a new model of angel investment first and VC funding only for expansion after success.
The three warning flags Mike looks for in a deal are
1. The entrepreneur claiming there’s no competition,
2. The entrepreneur asking the investor to sign a confidentiality agreement up front.
3. High management salaries
Mike advised the entrepreneurs in the room to bootstrap as long as you can. He encouraged the audience to pick a focus and execute well including:
1. Build the right product
2. Build the product
3. Manage spending
4. Hire the best
Mike closed out with what he looks for in a deal
1. ‘Entrepreneurs that want to Learn
2. Idea, product, service you can explain to your spouse
3. Invest with people you like to work with
4. 3-5 yr –
a. 15 X return
b. 25% year annuity
5. Sharp, narrow focus
a. In big area or
b. Protected Niche
6. Hard technical problem, not a feature
Best regards,
Hall T.
Thursday, June 5, 2008
Newt Hamlin of LGE Execs talks about LGE Execs and its practice of technology transfer
Newt Hamlin of LGE Execs talks about LGE Execs and its practice of technology transfer and commercialization coming from Texas university systems.
How did you get involved with LGE Execs?
I was running a software company called Optimal Electronics and we were an LGE client. Managing Partners Rocky Bullock and Terry Sadowski asked me to join to help them build and diversify and add organization and management structure behind LGE. I began meeting with them last year as an interested bystander and in 2008 we have started significant growth. To date we’ve built up to over 80 partners in the Americas, Europe and Asia.
What’s the focus of the group now?
We’re now focusing supporting both pre-seed and early stage tech transfer and commercialization spinning out of US and European universities; and on providing everything from virtual management teams to project management and silo management for small to mid cap to Fortune 100 companies.
How did you get over 80 people so quickly?
We actually are being targeted by several potential partners a week who are intrigued by our model and interested in joining us. We’re becoming very selective about whom we bring on, and we have established pretty good momentum.
Who are some of your clients?
For tech transfer we are working with public and private universities in Texas and are launching a relationship with Enterprise Ireland and several Irish universities. In all cases we’re in the initial stages of reviewing their IP to see which ones have the best prospects for commercialization—either to license or build companies.
What about UT – where are they on tech transfer these days?
That’s a good question. We have been in ongoing discussions with people at the UT system and a number of its universities and they collectively are an amazing collection of good engineering, life science, agriscience, energy, nanotechnology and other patents. Commercialization is a different animal however. In fact, a leader at a major university just recently told me that there are three notable successes in university tech transfer—MIT, Stanford, and Gatorade. Most universities believe they are doing a good job but for many it’s just a hobby. Our review across the country and in Europe indicates that there is simply not enough money committed, and that a large percent of researchers and professors don’t consider commercialization their best route to tenure. On a positive note we are talking with a larger and larger number of schools that really “get it” and understand the huge value of building a knowledge based economy.
What about Texas A&M?
It’s the same there as UT, filled with great IP and struggling to find a way to make commercialization a more rewarding effort. Making capital available for pre-seed development is vital, and universities in general push back against allowing the tech transfer/commercialization people to solicit funds from their development contributors or to redirect resources or investment away from other projects.
What is the UT system currently doing?
In addition to laying out aggressive objectives and coordinating with system universities, they have an innovative program called the Texas Ignition Fund which gives grants to startups. They are currently reviewing business plans from universities across the state. The plans promote exciting, often revolutionary science but understandably they rarely demonstrate an understanding of market analysis. Then again, while nice $50,ooo is not enough to move a technology far toward commercialization.
So what does LGE Execs do?
We can work with universities to evaluate IP, then either license the technologies we believe have commercial potential, help the university license them, or bring a management team to the table to build companies, develop business plans and strategies and manage growth going forward.
Do you provide the funding?
Currently, we generally rely on funding from states (or nations) along with some funding from the universities, and we help emerging companies raise subsequent rounds of growth capital. We have been encouraged by many to raise a large global fund, a large portion of which we would invest side by side with others in tech transfer companies. That would be valuable and we believe our window into the best technologies would add value to other investors as well.
Are LGE Execs consultants?
Actually, no. Meaning no disrespect to all the great consultants we call ourselves “anti-consultants” because we’re operators and executors. We want to partner with analysts and strategists from Bain and McKinsey and execute the operations plans they recommend to their clients. Because of our depth of total experience we can certainly participate in the planning process but our forte is its execution. Our large company clients typically have a hole in their management team or their supply-chain process and we can come in and start executing from day one.
What types of work does LGE perform?
The diversity of our collective experience allows us to deliver across a broad set of functions. We have created four practice areas thus far:
1. Supply, which is everything to do with the creation, manufacture, delivery and service of goods and services, including supply chain, operations, development, customer service, IT, etc.
2. Demand, which is everything to do with the marketing and sale of goods and services, including strategic positioning, product management, product marketing, sales, channels, marketing communications, etc.
3. Management/Finance, which covers general management, governance and fundraising, including interim CEOs, board of directors placement, advice on capital raises, corporate structure, and M&A.
4. Talent, which covers recruitment and development, including executive recruiting, training, CEO and executive coaching, outsourced HR, and staffing.
On which industries does LGE focus?
Our strengths are technology, IT, IT services, energy, media, telecommunications, health care, life sciences, biotech, medical devices, nanotech, consumer goods, retail, food processing, insurance, aviation, and hospitality.
How often are you building a new strategy versus executing on an existing strategy?
Because our client mix is going to skew toward earlier stage companies, by the end of this year it’ll probably be close to 50% building new strategies and 50% executing existing ones. We’re getting referrals and calls from potential clients just about every day.
What kind of companies are they?
For the most part they are companies that have just raised capital and know they need management help, or companies that have to rethink their strategy. With tech transfer we’ll choose four or five technologies we believe can succeed, license them, put them into companies to develop proofs of concept, then either license the successful ones or build businesses around them.
Where do you find the money coming from?
As I mentioned we are thinking about raising a large global fund. Aside from that there is private equity, venture capital, university alumni, and strategic partners—Pfizer, Merck, Cisco, and the like.
Are you working with UT Austin?
We’re moving slowly and cautiously, working with the System management and a few of the universities; as yet not with UT/Austin. As people from almost every university have told us, universities have two divergent viewpoints on tech transfer. On the one hand they want to attract and keep great professors, they want to license technology or build companies and make money and provide tenure for professors; and they want to generate good publicity. On the other hand they don’t want to lose money, assume liabilities, lose good professors, generate bad publicity or have outsiders soliciting their capital campaign donors. The greatest problem I see is that if they’re not organized then their technology gets sold off for a nickel on the dollar. I want our university clients to put $5M into a deal and make it worthwhile for the university, its alums and a state’s citizens. That’s our objective.
Best regards,
Hall T.
How did you get involved with LGE Execs?
I was running a software company called Optimal Electronics and we were an LGE client. Managing Partners Rocky Bullock and Terry Sadowski asked me to join to help them build and diversify and add organization and management structure behind LGE. I began meeting with them last year as an interested bystander and in 2008 we have started significant growth. To date we’ve built up to over 80 partners in the Americas, Europe and Asia.
What’s the focus of the group now?
We’re now focusing supporting both pre-seed and early stage tech transfer and commercialization spinning out of US and European universities; and on providing everything from virtual management teams to project management and silo management for small to mid cap to Fortune 100 companies.
How did you get over 80 people so quickly?
We actually are being targeted by several potential partners a week who are intrigued by our model and interested in joining us. We’re becoming very selective about whom we bring on, and we have established pretty good momentum.
Who are some of your clients?
For tech transfer we are working with public and private universities in Texas and are launching a relationship with Enterprise Ireland and several Irish universities. In all cases we’re in the initial stages of reviewing their IP to see which ones have the best prospects for commercialization—either to license or build companies.
What about UT – where are they on tech transfer these days?
That’s a good question. We have been in ongoing discussions with people at the UT system and a number of its universities and they collectively are an amazing collection of good engineering, life science, agriscience, energy, nanotechnology and other patents. Commercialization is a different animal however. In fact, a leader at a major university just recently told me that there are three notable successes in university tech transfer—MIT, Stanford, and Gatorade. Most universities believe they are doing a good job but for many it’s just a hobby. Our review across the country and in Europe indicates that there is simply not enough money committed, and that a large percent of researchers and professors don’t consider commercialization their best route to tenure. On a positive note we are talking with a larger and larger number of schools that really “get it” and understand the huge value of building a knowledge based economy.
What about Texas A&M?
It’s the same there as UT, filled with great IP and struggling to find a way to make commercialization a more rewarding effort. Making capital available for pre-seed development is vital, and universities in general push back against allowing the tech transfer/commercialization people to solicit funds from their development contributors or to redirect resources or investment away from other projects.
What is the UT system currently doing?
In addition to laying out aggressive objectives and coordinating with system universities, they have an innovative program called the Texas Ignition Fund which gives grants to startups. They are currently reviewing business plans from universities across the state. The plans promote exciting, often revolutionary science but understandably they rarely demonstrate an understanding of market analysis. Then again, while nice $50,ooo is not enough to move a technology far toward commercialization.
So what does LGE Execs do?
We can work with universities to evaluate IP, then either license the technologies we believe have commercial potential, help the university license them, or bring a management team to the table to build companies, develop business plans and strategies and manage growth going forward.
Do you provide the funding?
Currently, we generally rely on funding from states (or nations) along with some funding from the universities, and we help emerging companies raise subsequent rounds of growth capital. We have been encouraged by many to raise a large global fund, a large portion of which we would invest side by side with others in tech transfer companies. That would be valuable and we believe our window into the best technologies would add value to other investors as well.
Are LGE Execs consultants?
Actually, no. Meaning no disrespect to all the great consultants we call ourselves “anti-consultants” because we’re operators and executors. We want to partner with analysts and strategists from Bain and McKinsey and execute the operations plans they recommend to their clients. Because of our depth of total experience we can certainly participate in the planning process but our forte is its execution. Our large company clients typically have a hole in their management team or their supply-chain process and we can come in and start executing from day one.
What types of work does LGE perform?
The diversity of our collective experience allows us to deliver across a broad set of functions. We have created four practice areas thus far:
1. Supply, which is everything to do with the creation, manufacture, delivery and service of goods and services, including supply chain, operations, development, customer service, IT, etc.
2. Demand, which is everything to do with the marketing and sale of goods and services, including strategic positioning, product management, product marketing, sales, channels, marketing communications, etc.
3. Management/Finance, which covers general management, governance and fundraising, including interim CEOs, board of directors placement, advice on capital raises, corporate structure, and M&A.
4. Talent, which covers recruitment and development, including executive recruiting, training, CEO and executive coaching, outsourced HR, and staffing.
On which industries does LGE focus?
Our strengths are technology, IT, IT services, energy, media, telecommunications, health care, life sciences, biotech, medical devices, nanotech, consumer goods, retail, food processing, insurance, aviation, and hospitality.
How often are you building a new strategy versus executing on an existing strategy?
Because our client mix is going to skew toward earlier stage companies, by the end of this year it’ll probably be close to 50% building new strategies and 50% executing existing ones. We’re getting referrals and calls from potential clients just about every day.
What kind of companies are they?
For the most part they are companies that have just raised capital and know they need management help, or companies that have to rethink their strategy. With tech transfer we’ll choose four or five technologies we believe can succeed, license them, put them into companies to develop proofs of concept, then either license the successful ones or build businesses around them.
Where do you find the money coming from?
As I mentioned we are thinking about raising a large global fund. Aside from that there is private equity, venture capital, university alumni, and strategic partners—Pfizer, Merck, Cisco, and the like.
Are you working with UT Austin?
We’re moving slowly and cautiously, working with the System management and a few of the universities; as yet not with UT/Austin. As people from almost every university have told us, universities have two divergent viewpoints on tech transfer. On the one hand they want to attract and keep great professors, they want to license technology or build companies and make money and provide tenure for professors; and they want to generate good publicity. On the other hand they don’t want to lose money, assume liabilities, lose good professors, generate bad publicity or have outsiders soliciting their capital campaign donors. The greatest problem I see is that if they’re not organized then their technology gets sold off for a nickel on the dollar. I want our university clients to put $5M into a deal and make it worthwhile for the university, its alums and a state’s citizens. That’s our objective.
Best regards,
Hall T.
Monday, June 2, 2008
Jonathan Davis of American Workforce talks about the new model for recruiting
Jonathan Davis of American Workforce talks about the new model for recruiting, the cost of mishiring, and the new Entrepreneur Organization Accelerator program.
What does American Workforce do?
We are the next evolution of what recruiting has evolved into. We partner with companies in which the CEO is frustrated by the process of trying to hire the best people and concerned about the sacrifice he and his managers have to spend out of their day talking to unqualified candidates. Companies hire us to build pipelines for the type of people they are going to hire. We become their recruiting department or a supplement to it. The biggest benefit: our clients get a chance to see the best talent in the marketplace, not just the best candidates who happen to be interested in a role at the exact time that companies have that specific need. Instead of billing by the cost of their first hire, we bill more like a law firm: by the increments of each hour - increasing both transparency and allowing a client to dial up or down their recruiting efforts in any given week. We’ll actually do the work in their name instead of trying to cloak the idea—you know what that typical call sounds “I can’t tell you the name of the company or the job but here’s what it may look like.” We think that model is broken. Freakonomics analyzed the realtor model which is we’ll charge you 3% of whatever we sell your house for or the old recruiting model which is we’ll charge you 25% of whatever the first year salary is including bonuses. If a recruiter is only compensated for the placement, their incentive is not to help the client hire the best person; rather, they just want to get someone hired.
How’s it going?
You know if keeps growing. Clients keep coming back. They keep telling other companies about the service. We have some that are now long-standing clients of over 3 years. We really do help companies find “A” players.
How do you define an “A” player?
In the book Topgrading by Brad Smart, he analyzed what is the definition of an “A” player. In a particular job, at that salary, you may be an “A” player, but if we took you out of that job and placed you in another entirely different position (think a Marketing Associate being asked to be a CFO)at a different salary, you likely will no longer be an “A” player. It helps you define that top 10% of the talent available for that role at that salary level. It helps you calculate the cost of mis-hiring which is about 20X of what you would have paid someone. If you hire someone and pay them $10K for two months and then discover it was a mistake, it’ll probably have cost you $200K due to lost time and opportunity cost to correct the situation. Companies that get that are hiring American Workforce to find and hold key candidates until they are needed. We find the “A” players proactively.
That sounds like an interesting book?
It’s definitely interesting but it’s also a textbook. It’s quite thick and dry. He’s got an updated e-book that’s a lot like Cliff Notes and it is a lot easier to read.
You’re now taking over the EO Accelerator Program . What successes have you had so far?
Well it’s cool because we’re on the next level of its evolution. The program continues to grow and could be larger than EO in short order (EO has 6,800+ global members). As you know, EO takes Founders & CEOs whose companies have revenues of $1M or greater. There are only so many companies in the city that meet those criteria. With the EO Accelerator program we reach so many companies. If someone had given me this program five years ago, my company would be quite different today and for the better.
How does the EO Accelerator Program work?
It’s a facilitated learning session held once a quarter. We fly in a facilitator that was involved in creating the content of the program. It’s got four particular areas of study: strategy, money, people, and sales/marketing.
We have sixteen companies in the program now. In the upcoming session we’ll focus on strategy and answer questions such as how do you find and utilize mentors, how do you build a company vision and values, what are some creative strategies for outsourcing and how do you establish a culture inside your company? Our target participant probably only has 3 or 4 employees. That’s a general rule of thumb that when you start adding those employees it’s time to start thinking about culture. The program also involves our existing EO members which is exciting. Austin is unique in that we trend towards some more established businesses that are taking part in the Accelerator Program. These include Chris Justice of SparkSite which is an event planning/logistics company and Dean Dzurilla of Xolved which resells and implements Netsuite packages.
What have they changed from a year ago?
The program focuses more on case study and bringing more mentor input into each of the lessons as we get a wide range of people in the program so one size doesn’t fit all. They kept the core areas the same but stayed true to the EO mantra which is: everyone gets offered advice all day. What Entrepreneurs really need is not advice, rather they need to hear tips and experiences from others who have already been there so that they can avoid the same pitfalls and mistakes.
Best regards,
Hall T.
What does American Workforce do?
We are the next evolution of what recruiting has evolved into. We partner with companies in which the CEO is frustrated by the process of trying to hire the best people and concerned about the sacrifice he and his managers have to spend out of their day talking to unqualified candidates. Companies hire us to build pipelines for the type of people they are going to hire. We become their recruiting department or a supplement to it. The biggest benefit: our clients get a chance to see the best talent in the marketplace, not just the best candidates who happen to be interested in a role at the exact time that companies have that specific need. Instead of billing by the cost of their first hire, we bill more like a law firm: by the increments of each hour - increasing both transparency and allowing a client to dial up or down their recruiting efforts in any given week. We’ll actually do the work in their name instead of trying to cloak the idea—you know what that typical call sounds “I can’t tell you the name of the company or the job but here’s what it may look like.” We think that model is broken. Freakonomics analyzed the realtor model which is we’ll charge you 3% of whatever we sell your house for or the old recruiting model which is we’ll charge you 25% of whatever the first year salary is including bonuses. If a recruiter is only compensated for the placement, their incentive is not to help the client hire the best person; rather, they just want to get someone hired.
How’s it going?
You know if keeps growing. Clients keep coming back. They keep telling other companies about the service. We have some that are now long-standing clients of over 3 years. We really do help companies find “A” players.
How do you define an “A” player?
In the book Topgrading by Brad Smart, he analyzed what is the definition of an “A” player. In a particular job, at that salary, you may be an “A” player, but if we took you out of that job and placed you in another entirely different position (think a Marketing Associate being asked to be a CFO)at a different salary, you likely will no longer be an “A” player. It helps you define that top 10% of the talent available for that role at that salary level. It helps you calculate the cost of mis-hiring which is about 20X of what you would have paid someone. If you hire someone and pay them $10K for two months and then discover it was a mistake, it’ll probably have cost you $200K due to lost time and opportunity cost to correct the situation. Companies that get that are hiring American Workforce to find and hold key candidates until they are needed. We find the “A” players proactively.
That sounds like an interesting book?
It’s definitely interesting but it’s also a textbook. It’s quite thick and dry. He’s got an updated e-book that’s a lot like Cliff Notes and it is a lot easier to read.
You’re now taking over the EO Accelerator Program . What successes have you had so far?
Well it’s cool because we’re on the next level of its evolution. The program continues to grow and could be larger than EO in short order (EO has 6,800+ global members). As you know, EO takes Founders & CEOs whose companies have revenues of $1M or greater. There are only so many companies in the city that meet those criteria. With the EO Accelerator program we reach so many companies. If someone had given me this program five years ago, my company would be quite different today and for the better.
How does the EO Accelerator Program work?
It’s a facilitated learning session held once a quarter. We fly in a facilitator that was involved in creating the content of the program. It’s got four particular areas of study: strategy, money, people, and sales/marketing.
We have sixteen companies in the program now. In the upcoming session we’ll focus on strategy and answer questions such as how do you find and utilize mentors, how do you build a company vision and values, what are some creative strategies for outsourcing and how do you establish a culture inside your company? Our target participant probably only has 3 or 4 employees. That’s a general rule of thumb that when you start adding those employees it’s time to start thinking about culture. The program also involves our existing EO members which is exciting. Austin is unique in that we trend towards some more established businesses that are taking part in the Accelerator Program. These include Chris Justice of SparkSite which is an event planning/logistics company and Dean Dzurilla of Xolved which resells and implements Netsuite packages.
What have they changed from a year ago?
The program focuses more on case study and bringing more mentor input into each of the lessons as we get a wide range of people in the program so one size doesn’t fit all. They kept the core areas the same but stayed true to the EO mantra which is: everyone gets offered advice all day. What Entrepreneurs really need is not advice, rather they need to hear tips and experiences from others who have already been there so that they can avoid the same pitfalls and mistakes.
Best regards,
Hall T.
Wednesday, May 28, 2008
Building a Board for your Startup – Noses In, Fingers Out
There’s an old saying, “If you want to live long, choose your parents well.” This came from Dave Berkus of the Tech Coast Angels during the Angel Capital Association Summit in San Diego held earlier this month. Dave sits on ten for-profit boards. He went on to describe how entrepreneurs can prolong the life of their startup by choosing their board members well. As an angel investor you may be invited to sit on the board of a company. Dave provided sage advice on the subject.
The first question to the entrepreneur sitting up a board is why are you building the board?
1. Advice or governance?
2. Do you have outside investors?
3. Do you need legal expertise or expertise otherwise?
4. Source of appeals for management?
5. Do you know what you don’t know?
The entrepreneur faces risk on several fronts with the board because the board can
1. Hire/fire the CEO
2. Influence/control the strategy
3. Withhold approvals for funding, acquisitions, and more
4. Become misaligned with the management
Dave advises the entrepreneur to
1. Not stack the board with family and friends
2. Balance the board with financial, operational, and industry experience
3. Determine the frequency of the meetings. For a startup, a weekly meeting is not uncommon.
The board has a legal responsibility. The first is the duty of loyalty to the corporation and the second is the duty of care to the shareholders. Dave recommends setting up two committees—the audit, and compensation committee.
Dave summarized the board’s posture as “noses in, fingers out.” The board should know what’s going on but they should let the management team operate the company.
Compensation for the board is typically in the form of stock options usually amounting to 1% over 2 to 4 years. Cash is rarely used and stock grants create tax events. The stock options are usually non-qualifying and are priced at the last transaction price. Dave also noted that common stock is worth about 1/5 of preferred shares so that factor must be taken into account as well.
As a board member Dave looks for the “bottleneck.” “Who or where is holding us back?” He then focuses the group on that problem. Dave noted the “every $3M” crisis. The first $3M crisis comes when the company reaches about 20 employees. The first crisis is the financial crisis, thus the company seeks funding. Those who grow the business then reach the organizational crisis – how to organize the people into an effective team. Finally, the company reaches the product crisis usually related to quality issues.
For those who will sit on a board, D&O insurance is a must. A $2M policy will cost $6K to $7K. The value of the policy is in the legal representation it brings and not just the dollar value of coverage. Dave noted that he has been sued four times.
You can find out more about Dave Berkus and his philosophy in Extending the Runway. The book is priced rather high because the proceeds go to the Boy Scouts of America.
Best regards,
Hall T.
Wednesday, May 21, 2008
ACA Conference Summit 2008 – Angel Investment is Becoming an Asset Class
I attended the Angel Capital Association Summit held in San Diego this year. The number of attendees grew from 325 attendees to 370 this year. While it’s a nice growth it’s not quite as dramatic as last year’s which went from 150 to 325 in one year.
The ACA now has 163 member groups representing 6,760 investors. Over 50% of the groups forecast increased deals and dollars for 2008. Trends this year for angel investors include:
--University-connected angel groups rising
--CleanTech groups forming
--More women involvement in angel investing
--More co-investment by region
--More communication with angels on a worldwide basis
--Growing relationship with VCs
The ACA continues to develop as an organization. Their goals for this year include:
--Public policy committee development
--Regional collaboration committee
--Offering D&O insurance to member groups
--Partnership with the National Venture Capital Association
--More research into angel group investment returns through a partnership with Dow Jones VentureOne
From the conference it was surprising how many attendees came from outside the US. The other major trend was the growth in the number of sidecar funds. Over half the angel groups have one. A sidecar fund is one in which the members invest a set amount and the funds are applied as an add-on to the deals the members fund. This provides both diversification as well as a means for investors to join the investment without having to commit time and effort to the process.
Also, angel investments were referred to several times as an “asset class.” I haven’t heard that before but given the traction around startup investments which most VCs have left behind for later stage deals we may be seeing the rise of a new asset class for investment. During the conference one speaker noted the slowing growth of the Venture Capital community. VCs had $300B invested in 1995 and in 2008 only $380B. The speaker defined VCs as a “compensation scheme in search of a business model.”
If you are interested in angel investing from an historical point of view you may want to check out Georges Doriot who was one of the first angel investors. You can read more about him in his book called Creative Capital.
Best regards,
Hall T.
The ACA now has 163 member groups representing 6,760 investors. Over 50% of the groups forecast increased deals and dollars for 2008. Trends this year for angel investors include:
--University-connected angel groups rising
--CleanTech groups forming
--More women involvement in angel investing
--More co-investment by region
--More communication with angels on a worldwide basis
--Growing relationship with VCs
The ACA continues to develop as an organization. Their goals for this year include:
--Public policy committee development
--Regional collaboration committee
--Offering D&O insurance to member groups
--Partnership with the National Venture Capital Association
--More research into angel group investment returns through a partnership with Dow Jones VentureOne
From the conference it was surprising how many attendees came from outside the US. The other major trend was the growth in the number of sidecar funds. Over half the angel groups have one. A sidecar fund is one in which the members invest a set amount and the funds are applied as an add-on to the deals the members fund. This provides both diversification as well as a means for investors to join the investment without having to commit time and effort to the process.
Also, angel investments were referred to several times as an “asset class.” I haven’t heard that before but given the traction around startup investments which most VCs have left behind for later stage deals we may be seeing the rise of a new asset class for investment. During the conference one speaker noted the slowing growth of the Venture Capital community. VCs had $300B invested in 1995 and in 2008 only $380B. The speaker defined VCs as a “compensation scheme in search of a business model.”
If you are interested in angel investing from an historical point of view you may want to check out Georges Doriot who was one of the first angel investors. You can read more about him in his book called Creative Capital.
Best regards,
Hall T.
Monday, May 19, 2008
Alexia Erlichman of Music Gorilla talks about starting Music Gorilla
Alexia Erlichman of Music Gorilla talks about starting Music Gorilla to highlight unsigned musicians, how she leverages South by Southwest, and how she came to Austin.
What is Music Gorilla?
Music Gorilla is an online service company which provides unsigned musicians access to film, TV, video games and songwriting opportunities and to play at major label showcase events among other things.
How did you come up with the idea for Music Gorilla?
Lawrence Erlichman came up with the idea from interaction with musicians in Austin. He’s an entrepreneur in general. He saw musicians needed access for their music to get out there. You don’t necessarily need to make a record with a major label to become known and, right now, even if you tried, you’re not likely to get one since they’re not signing a lot of new artists. Musicians are using MySpace and Facebook to get their music to fans and sites like ours to find success.
How do you make money?
Mostly Membership fees with a few other revenue streams. Placements happen but can be infrequent at times so it’s hard to live off a percentage of placements.
How about advertising?
No. The site is industry focused and is not highly trafficked by the general public.
How did it start?
We built it up from nothing. We self-financed it ourselves. It’s built up a reputation in our industry. We even have a partnership with Starbucks. They had those Hear Music kiosks in some of their stores a few years ago. They missed the technology because the kiosks burned CDs but you couldn’t plug your MP3 player or iPod into it to download music. They selected artists from Music Gorilla to highlight in their kiosks.
Are they going back after it?
No. They developed a partnership with iTunes to place their music there.
How many users do you have right now?
We have about 1000 Artist Members and 300 industry members use the site and 10,000 fans. S0me artists register as fans first to check it out so some of those fans are prospective artists.
There are quite a few music sites out there. I just read about one in Scotland where the registered members decide which artists get to play in the festival. How are you different?
There are a ton of music sites out there. On most of them, you can just put a profile on their site with your music. They are not at all geared toward the industry. We are one of the few that markets to the industry. We also showcase the artists in showcases such as those that take place during South by Southwest. We also do a lot of film, tv and songwriting submissions where we put together a cd and send it to the music supervisor or producer for the project. They don’t necessarily want to download it from the internet.
When did you launch the site?
In February, 2003.
Have you ever done any cross promotion with music festivals like the ACL Music festival?
ACL is less our target market because they showcase established artists. South by Southwest is a more interesting festival for us. We used to have a booth at South by Southwest but the longer it goes on the better venue it becomes for artists who are already signed. Record labels are breaking their bands to the public and other industry at South by Southwest. We now do our own showcases during South by Southwest by getting our own venue. They wanted to select some of our artists and place them in venues all over Austin. We decided to do our own showcase because they charge a significant amount for an afternoon party. We couldn’t afford that so we do our own events and have done so for the past four years. We bring in an A&R rep to give feedback to the artists we showcase so it’s quite helpful to the musicians.
How much are you trying to raise?
$150K to $200K.
Are you trying to expand?
There’s no need to expand geographically because everything is done online and we have members all over the world.
So what would you use funding for?
Marketing and advertising to get the word out on the service. We want to get articles into the magazines such as Billboard. We have found that when people find out about our services they sign up because the membership fees are reasonable especially for the amount of opportunity that we provide.
How did you get to Austin?
Randomly. I used to work for Robert De Niro as a production assistant. I was driving across the country after college when there was a film/TV strike in New York. Austin was one of the places we visited. We returned to New York three days after September 11th, 2001, and the city was shut down. I later decided to return to Austin because it’s such a laid back city and they have a great film community which is what I was doing at the time.
Best regards,
Hall T.
***
What is Music Gorilla?
Music Gorilla is an online service company which provides unsigned musicians access to film, TV, video games and songwriting opportunities and to play at major label showcase events among other things.
How did you come up with the idea for Music Gorilla?
Lawrence Erlichman came up with the idea from interaction with musicians in Austin. He’s an entrepreneur in general. He saw musicians needed access for their music to get out there. You don’t necessarily need to make a record with a major label to become known and, right now, even if you tried, you’re not likely to get one since they’re not signing a lot of new artists. Musicians are using MySpace and Facebook to get their music to fans and sites like ours to find success.
How do you make money?
Mostly Membership fees with a few other revenue streams. Placements happen but can be infrequent at times so it’s hard to live off a percentage of placements.
How about advertising?
No. The site is industry focused and is not highly trafficked by the general public.
How did it start?
We built it up from nothing. We self-financed it ourselves. It’s built up a reputation in our industry. We even have a partnership with Starbucks. They had those Hear Music kiosks in some of their stores a few years ago. They missed the technology because the kiosks burned CDs but you couldn’t plug your MP3 player or iPod into it to download music. They selected artists from Music Gorilla to highlight in their kiosks.
Are they going back after it?
No. They developed a partnership with iTunes to place their music there.
How many users do you have right now?
We have about 1000 Artist Members and 300 industry members use the site and 10,000 fans. S0me artists register as fans first to check it out so some of those fans are prospective artists.
There are quite a few music sites out there. I just read about one in Scotland where the registered members decide which artists get to play in the festival. How are you different?
There are a ton of music sites out there. On most of them, you can just put a profile on their site with your music. They are not at all geared toward the industry. We are one of the few that markets to the industry. We also showcase the artists in showcases such as those that take place during South by Southwest. We also do a lot of film, tv and songwriting submissions where we put together a cd and send it to the music supervisor or producer for the project. They don’t necessarily want to download it from the internet.
When did you launch the site?
In February, 2003.
Have you ever done any cross promotion with music festivals like the ACL Music festival?
ACL is less our target market because they showcase established artists. South by Southwest is a more interesting festival for us. We used to have a booth at South by Southwest but the longer it goes on the better venue it becomes for artists who are already signed. Record labels are breaking their bands to the public and other industry at South by Southwest. We now do our own showcases during South by Southwest by getting our own venue. They wanted to select some of our artists and place them in venues all over Austin. We decided to do our own showcase because they charge a significant amount for an afternoon party. We couldn’t afford that so we do our own events and have done so for the past four years. We bring in an A&R rep to give feedback to the artists we showcase so it’s quite helpful to the musicians.
How much are you trying to raise?
$150K to $200K.
Are you trying to expand?
There’s no need to expand geographically because everything is done online and we have members all over the world.
So what would you use funding for?
Marketing and advertising to get the word out on the service. We want to get articles into the magazines such as Billboard. We have found that when people find out about our services they sign up because the membership fees are reasonable especially for the amount of opportunity that we provide.
How did you get to Austin?
Randomly. I used to work for Robert De Niro as a production assistant. I was driving across the country after college when there was a film/TV strike in New York. Austin was one of the places we visited. We returned to New York three days after September 11th, 2001, and the city was shut down. I later decided to return to Austin because it’s such a laid back city and they have a great film community which is what I was doing at the time.
Best regards,
Hall T.
***
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