Opening up the 2011 PIE spring quarter speaker series was Mike Gardner, a seasoned software development entrepreneur. Mike inspired us with the story of starting his first business, and he helped us think about various avenues for funding a start-up.
Mike started his first company as an innovator in the field of desktop publishing, before it was the large industry that it is today. By discovering a missing market for useful tips and instructions on how to program printers, Mike started Peachpit Press, which is still in business today. In classic form, they put to use the information in their product and desktop published the first edition using personal capital. Peachpit Press continued to grow, and was eventually bought by Addison Wesley. Today, it is owned by Pearson, an international media company operating successful brands such as The Financial Times and the Penguin Group.
The PIE students got a crash-course in the progression that a start-up takes to meet its financial needs and growth goals. Here is brief outline of some of the major points:
1. Get your idea, create a prototype, and form a working team. This can often be done using personal capital and “mini-seed” investments from friends, family, etc.
2. Seed capital. The first formal round of investment is considered the seed round, and has a broad monetary range from a few thousand up to a million dollars. It’s crucial to show an initial customer base from which the company intends to leverage its sales. The amount of this leverage, referred to as the multiplier, often determines the amount of seed investment given. For example, a start-up that has $30,000 in initial sales will often be able to claim that it is worth 3x’s its sales, for a valuation of $90,000. The start-up can then negotiate funding based on a valuation at this level.
3. Venture Capital funding, series A. If a start-up company continues to show growth and solid earning potential, it can start searching for venture capital funding, or VC funding. This is a very pivotal point for a start-up and requires a strong understanding of negotiating skills. In exchange for funding, a typical VC firm will receive three things:
a. A percentage equity (ownership) of the business
b. Preferred shares – meaning the VC’s are the first to get paid
c. Two seats on the board of the start-up
4. Venture Capital funding, series B. As it sounds, this is an additional round of financing that comes from the same, different, or various VC funds. It is common to be approved for one VC firm’s funding contingent on the start-up getting another VC firm to invest.
Mike shared with us various success stories and horror stories of seed/VC negotiations, but one lesson emerged: negotiate at a time when the company doesn’t need the money to continue operating. The more the company needs the investment, the worse terms it will receive. Conversely, if the company is doing well and close to break-even, investors will be more willing to provide accommodating terms. Some start-ups will even put the VC investment in the bank and save it for a rainy day, IF they can negotiate the deal at a time when they appear to have strong growth.
Thanks to Mike Gardner for coming to speak with us, and to the PIE students for being engaged as always.
*picture from vc-group.com