Buy This Book - Univetica: Compelling Change

In sharing my thoughts about Mehdi Ghafourifar’s seminal work, “Univetica: Compelling Change”, I opted to provide a non-traditional book review. The traditional approach delineates a condensed version of the author’s key concepts, which the reviewer either advocates or criticizes. (See Amazon reviews.) The review approach I elected to personalize the book and discuss their impact on my constantly evolving world view.

I grew up in an age when people were voracious readers, and read books for knowledge and enjoyment. There was no Facebook; people conversed directly with each other. No YouTube, Internet, personal computers, DVDS or VHS tapes. Not even cable TV. Thus reading was a primary channel of acquiring information. Newspapers thrived.

In high school and college, I read hundreds of books, and built a library of several thousand books, on a variety of topics. I received a Bachelor of Arts Degree in American Studies at the University of California, Davis. The major program emphasized the development and perfecting of three essential cognitive skills; analytical thinking, critical writing, and the analysis of the intangibles (concepts, beliefs, theories, models). The goal was to intellectually prepare people to answer the “so what” question.

In all the reading I have done in my life, I have found only a handful that really address (or even recognize) the so what question. Not only does Univetica: Compelling Change recognize the vital importance of asking the so what question, but does so in a manner that has significantly impacted my worldview, and many of the ideas that comprise my world view (such as financial ROI and social ROI does not have to be mutually exclusive).

I predict that Mehdi Ghafourifar’s “Univetica: Compelling Change”, will become an even more influential book than Thomas Kuhn’s “The Structure of Scientific Revolutions” (1996). Kuhn argued that scientific advancement is not evolutionary, but rather is a "series of peaceful interludes punctuated by intellectually violent revolutions", and in those revolutions "one conceptual world view (paradigm) is replaced by another". One could easily argue that Univetica represents the framework for a paradigm shift in the way we approach the future to create a meaningful existence.

Buy, read, study, and embrace this masterpiece created by Medhi that possesses the power to positively change the lives of tens of millions of people around the globe. This book is truly a gift to humanity.

Not Getting Funded? Disclose Your Risks!

The majority of business plans my firm receives only superficially address the management of risk. Entrepreneurs tend to either downplay the significance of risk as it relates to valuation, or even worse, fail to identify and define all risks related to their venture. This creates two questions in the investor’s mind (1) is the exec team totally clueless or (2) does the exec team lack the basic intellect to operate an early stage technology startup company?

Instead of ignoring risk, embrace it. All VCs recognize there are a number of inherent external and internal related to investing in early stage ventures. In assessing your specific venture, you will be judged heavily upon your ability to recognize and define risk, and especially the strategy you developed to mitigate and manage those risks identified.

You may want to review my free PDF file: “What To GetFunded? Think Risk Management”

In Planning to Succeed, Plan When to Get D&O Insurance

Though privately held companies are becoming much more sophisticated in managing executive risk, some misconceptions still persist with regard to the true nature of their liability exposures and the insurance products designed to guard against such risk.

More than one out of every four private or nonprofit firms doesn't have directors and officers insurance for their executive employees and board members, according to a 2012 Business Insurance survey.

The reality is that presently executive liability claims can (and do) originate from a variety of sources, and they can harm a private company of any size in practically any industry. The majority of those claims are filed in defense of an employee practices lawsuit, but other sources of litigation can include customers and clients, competitors, minority shareholders, lenders and donors, government agencies, foreign entities, and fellow executives or board members.

Customers, clients and competitors also pose a significant risk to private companies. Industry observers have noted a recent increase in lawsuits among competing firms that accuse executives and board members of slander, defamation of character and comments disparaging their products or services. Litigation over the theft or infringement of intellectual property, trademarks and patents is also frequent.

Want to obtain information from an expert, contact:

Brian Dixon

408-688-6853

bdixon@fifthstreetfinancialgroup.com

www.fifthstreetfinancialgroup.com

Three Investor Secrets

1.      Term Sheet are Negotiable

Many investors will tell you that term sheets are not negotiable.  BULL, everything is negotiable. Two very important points to remember if you receive a term sheet from an investor:

• The investor has expended a significant amount of very constrained time and money vetting your venture.

• You have validated that your venture is investment worthy.

Despite investor claims to the contrary, term sheets are always negotiable.

2.      Valuation is a Science, not an Art

Because of the nature and complexity of the many intangibles associated with early stage ventures, valuation methods are intricate. There are two schools of thought on the valuation of early stage ventures: it is an art or it is a science. The characteristics of the art model include:

Experience and intrinsic knowledge to the “intangibles”

•        Skills, Relationships, experience and knowledge base of the exec team

•        Pre-existing strategic alliances and partnerships

•        Customer relationships

•        Innovative business models.

•        Intellectual Capital

Investors tend to focus of the science model, and discount the art characteristics. However, there are methods of quantifying intangibles. The key is proposing a range of value and providing the basis of the assumptions used in creating the range of values. In quantifying intangibles, an effective strategy is to explain patiently to the investor “you actually agree with me, you just haven’t realized it yet.”

3.      Investors are not Geniuses

Many investors, particularly VCs, think they are truly geniuses. After all, they have the money and decides who gets funded. However, many of the successful deals they funded are an example of the maxim, sometimes it is better to be lucky than good. 

Don't believe me, look at the average VC fund returns over the last 10 years. A limited partner would have received a greater annual return by buying the S&P index, and it doe not cost a 2-3% annual management fee.

Many investors are examples of book smart and street stupid. They have the pedigree (Harvard, Wharton, and Stanford MBA) but lack real work experience. These MBA students went straight from grad school to an investment firm, and never worked a day in a start-up or other early stage venture.

I leave you with one of my favor Warren Buffet quotes which is certainly applicable to investors

“Even a broken watch is correct two times a day.”

Any Investors on LinkedIn?

There have been a number of discussions within various LinkedIn (“LI”) groups inquiring if there are any real investors on LinkedIn. Here are my thoughts on the subject:

1. Real investors do not troll for deals on LI. Real investors already have trusted sources from which they obtain high quality deal flow.

2. People who request investment documents from entrepreneurs and then do not respond back are not investors; they are either collecting business plans or trying to act as intermediaries to real investors. There is no excuse for not responding. I receive about 100 unsolicited exec summaries, BPs, and slide decks per month. It only takes a few seconds to reply and advise that a particular venture is outside my investment parameters.

3. I know many legitimate angel investors and VCs that are on LI, as this forum provides a good means of keep your finger on the pulse of the early stage venture world. If I have an interest in a deal I see on LI, I will contact you. I personally know of dozens of companies that have secured funding via connections made on LI. So do not give up.

4. Most important, LI should be only a small part of your capitalization strategy, not the sole source for seeking investors. Remember, the deal that is most likely to get the attention is one that is referred to an investor from a trusted source, not a cold call from someone totally unknown to the investor. Build real relationships on LI through the exchange of ideas or requests for advice, and get connected to people who are "centers of influence" within the investment community, and could provide an introduction or referral to an investor.

5. Always remember the old Silicon Valley adage followed by most investors; bet the jockey, not the horse. Give me a great exec team and an average business model / technology, rather than a mediocre exec team and a really cool technology.

Upfront Fees

There are "legitimate business expenses" associated with a private placement (such as legal fees). However, I do not agree with, nor support, those individual posing as investors that try and secure any type of upfront fee for intros to investors. Securing capital should ALWAYS be success fee based.

There is one category of upfront fees I do fully support - consulting fees to assist an exec team in making a venture attractive to investors. Such consultants provide tangible deliverables (such as a PPM).

As I previously stated, I receive an average of 100 unsolicited requests for funding per month. 99% of the documents sent have a "red flags" (fatal flaws) that would lead most investors to discard the documents upon first reading.

 It ceases to amaze me how many entrepreneurs solicit VC firms without even the rudimentary understanding of how such firms operate. To increase your probability of obtaining capital, you must completely understand the worldview of investors, and the various methods they use in assessing potential deals.

Sente Capital Management Investment Parameters

In an effort to decrease the file size of my inbox, and the amount to time I waste reading emails seeking funding, I have instituted the following policy.

Please do not send me a business plan, executive summary, slide deck, or email requesting funding without first downloading and reading the PDF document, “Sente Capital Management Investment Parameters.” Submissions not meeting these parameters will be deleted.

If you want to get funded, make sure you spend the time researching a potential investor's investment parameters and criteria. For example, sending me a real estate deal is a total waster of both my time and your time. I have no interest in investing in a depreciating asset that is ill-liquid.

Thanks.

Thoughts on Setting Valuation – Part 1 of ?

The division of equity between founders and investors is purely a function of the venture's valuation. If people are telling you there is a calculus or formulas for precisely determining the valuation of early stage companies, they are academicians, not professional investors. There is a number of essential inter-related factors analyzed in setting a valuation, and it is important to recognize that some of these factors are easily quantifiable, while other factors (such as value of the exec team) are more qualitative and thus not easily measured.

For example, I have seen a Series A investment of $5 million buy 40% equity and a Series A investment of $2 million buy only 10% equity.

The bottom line; valuation truly depends on the nature of the specific venture. The one thing I have never encountered is an entrepreneur that actually proposes a realistic valuation. Get help from an expert, that knows how to quantify your valuation and can support the valuation determined.

There is no set algorithm for calculating valuation. It is highly dependent upon a nexus of both internal and external factors that impact the venture seeking funding. These factors include:

• The quality of the exec team and the quality of BOD / Advisory board they have attracted.
• The market space
• Quantity and state of IP
• Differentiation points
• Transformative value
• Ability to scale
• Degree of economic viability
• Revenue model
• Business model and strategy
• Competition
• Number of similar deals funded
• Capitalization strategy
• Exit strategy

And the list goes on…

BTW, this is the valuation viewpoint that most Silicon Valley VCs maintain.

Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist?

Foundry Group co-founders Brad Feld and Jason Mendelson are the authors of Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, published by John Wiley & Sons.

I have read this book, and believe much of the information presented is very valuable. However I think the authors selected a title that panders to entrepreneurs. I have been in and out of the VC business for 30 years, and have never encountered an entrepreneur (including myself) that is smarter than a professional VC or smarter than my attorney, Peter N. Townshend of Perkins Coie (Check out his LI profile). To be successful, you do not need to be smarter than a VC; you need a transactional attorney that is smarter.

Entrepreneurs should focus on their specific expertise, build their company, and create value. Outsource the complex areas where your domain knowledge is minimal. Unless you have attended law school, passed the bar, and have extensive private equity transactional experience you will never be smarter than your attorney.

Hal's Thankful List

Often we are way too caught up in business to spend time reflecting the many people or entities for which we should be thankful. Thanksgiving always provides a good opportunity for such reflection. However I believe it would be highly beneficial that we openly recognize our blessing more than once per year. Below is my list of thanks.

The United States of America

1. All members of the United States Armed Forces, who are the honorable, bravest, and unselfish people in the world.
2. Being an American, despite all the challenges facing the U.S., I live in a democratic society that enables me to pursue my dreams, and provides me the opportunity to change the world.
3.  Free access to safe drinking water, unlike the 3.3 billion people worldwide that have no such access and must suffer and endure the pain and heartbreak of unsafe water.

 Business

1. The passion and enthusiasm demonstrated by many of the entrepreneurs that I encounter and interact with daily.
2. The wisdom and sharing of ideas and knowledge by many of my peers in the VC industry.
3. All the business relationships and friends I have met and collaborated with via LinkedIn.

Companies

1. My team of General Partners and Venture Associates at Sente Capital Management.
2. The opportunity to serve as Chairman of the Board of Directors of Barrow Capital Management, a New York hedge fund.
3. AquaO₃ Corporation, the company I founded to address the global safe drinking water crisis.

People

1. Astrid F. Kowlessar, my Co-Managing Partner at Sente Capital Management.  The best partner one could have.
2. Peter Townshend, my corporate counsel and “Consigliere”; partner at Perkins Coie, who is the BEST attorney I have worked with in my 30 years career.
3. Bob Higgins, my partner at AquaO3, who is an engineering genius.
4. BK – (AKA “Bob Kane”), my personal attorney and friend, who I have known since high school.
5. William Smith, a “true” friend. A best friend is who you call after a night of partying for bail. A “true” friend is the person sitting next to you on the bunk in jail, who says “man we sure tore up the town last night”.

 Family

1. Elena Trujillo Spice, My beautiful wife and soul mate of 31 years. Much like Charles Dickens, by being married to me Elena has experienced “the best or times, and the worst of times”.
2. Lindsey Spice-Zich, my incredible daughter whose intellect exceeds my own. Working full-time as a Program Manager for an Environmental Law firm, Lindsey is also pursuing her MBA at UC Davis.
3. Jake Spice, my first born son. A tremendous athlete in all sports, especially golf (single-digit handicap). A very cool character; at the age of 15 played golf with former President Ramos of the Philippines. Also traveled to Manila with me, and golfed with a number of high government officials.
4. Matt Spice, my 2^nd son. Intelligent, empathic to the plight of others, and highly talented as an actor.
5. Ivan Zich, Lindsey's husband; the "Croatian Sensation". A highly talented musician who has made my daughter very happy. I love Ivan like one of my own sons.

Food

1. Katz Deli (NY) – The best pastrami in the world. Don’t argue with me. I know. I have tried pastrami everywhere.
2. Yank Sing (SF) – The absolute best dim sum outside of Hong Kong. Have dined at Yank Sing wince 1960
3. S&B Soul Food – Betty cooks and her daughter Tracy serves the best soul food and southern dishes outside of the Deep South. I will kill for Betty’s sweet potato pie.
4. Millers East/ Coast Deli (SF) – This is where I get pastrami fixes until I can get to NY. The best pastrami I have partaken west of the Hudson River.
5. Dreamland Ribs (Alabama) – The best BBQ bar none. I have been known to purposely route domestic travel through Birmingham and have Dreamland deliver a takeout order to one of the airlines premier members airport lounges.

This list probably should be longer, but I have touched upon the most important in my life. Thanksgiving is over, but you still can create your Thankful List.