Monday, August 27, 2012

flexReceipts Receives Investment from venVelo

Winter Park, FL, August 27, 2012 --(

flexReceipts, a leading provider of digital receipt technology, announced today that it has received a substantial investment from venVelo, a business accelerator in Winter Park, Florida. flexReceipts’ target customers are retailers that print paper receipts and want a better way to engage their consumers.

flexReceipts already enjoys established relationships with many of the largest point-of-sale (POS) providers and is in use at the Orange County Convention Center in Orlando, the second largest such facility in the United States with over 1.4 million annual attendees.

Allen H. Kupetz, COO of venVelo and the author of “The Future of Less: What the Wireless, Paperless, and Cashless Revolutions Mean to You” sees the flexReceipts solution as the logical next step in the cashless revolution. “flexReceipts offers consumers an easy way to manage their receipts digitally rather than saving little odd-shaped pieces of paper. It offers businesses superior data analytics and customer engagement tools, both of which offer marketers a unique insight into the buying habits of consumers.”

flexReceipts recently won both the Rollins College Venture Plan Competition and the Florida Venture Forum.

The flexReceipts team is led by Tomas Diaz, a 2002 MBA graduate of the Crummer Graduate School of Business at Rollins College. According to Diaz, “Eliminating the expense retailers are currently incurring for paper receipts, coupled with their total spend on online advertising, creates a multi-billion dollar total addressable market. This investment will allow us to ramp our sales and marketing effort and add more features to our core offering.”

Richard Licursi, CEO of venVelo, added, “flexReceipts aligns perfectly with our strategy of finding and investing in Florida companies that hold great promise as local job creators, can benefit from our experience and involvement, and provide the opportunity for a significant return to our investors.”

Tuesday, August 14, 2012

Three Reasons to Look to the Angels for Start-up Funding

VCs can pack a powerful punch. But here's why you should hold that thought.
By Langley Steinert | Aug 7, 2012
You're starting a business. You need capital. All the headlines say that venture capital firms (VCs) are looking for the next great thing, and you've got it.

But at the initial seed financing stage of your start-up, VCs are not always the better option In fact, angel investors often have more to offer. VCs serve a great purpose, but are often better suited for later stage growth funding.

Here are three benefits you'll enjoy from angel investors as you build a foundation for your start-up:

1. Operational Experience

Having investors and board members with operational experience (especially within your industry) can provide invaluable contacts and advice, and angel investors are almost always current or former industry executives themselves. My current company, CarGurus, is an online automotive shopping site, and we benefit from having investors like the former founder of eBay motors, the current CEO of TripAdvisor and one of the first 10 employees from Yahoo! To date these folks have provided connections and guidance that comes from their own operational backgrounds.
While there certainly are venture capitalists with operations experience, the majority of VCs come from finance backgrounds, with experience in areas like investment banking. Let's be clear: VCs play a vital role in helping with growth equity (your second or third round of financing). They can help you build your board, hire great executives and strategize on your business model. However, for your very first seed stage funding, a few angel investors from your specific industry will most likely provide greater input on how to master those first months of operations.

2. Patience, Patience, Patience

Angels invest less money individually than a VC firm, so the amount of capital you can raise from a group of angels will certainly be far less than that of a VC financing. The flip side of that coin is that angels are by definition not professional money managers. Angels don't expect to get their money out within three to five years at some pre-determined rate of return. As long as your company is doing well, most angels are happy to let their investment "ride" for the long haul. For the most part, angels are patient, long-term investors.
At CarGurus, we reached profitability with no VC funding. Our investors are friends and family, and they have never once voiced the topic of "exit strategy" or asked me when they will get their money back. All of them are happy to keep their money invested, growing pre-tax at a nice rate of return. If they were to get the money back, they would have to go find another investment that does as well, and that takes tremendous time and energy. Remember, angels usually have other day jobs and are not professional investors.
Venture capitalists have limited partners (the VC's own investors) and by definition have to return capital to their investors within a fund's lifecycle, usually five years. For venture firms to raise their next fund, they have to show not only that they can invest money but that they can get liquid and exit their investments in a timely manner. During your first year of operation, that's not an ideal mindset, but in your later stages of financing, having such a VC focus on growth and liquidity may be just the boost you need.

3. Valuation and Ownership

Again, angels are not professional money managers and as such will usually give you a better valuation and financing terms, allowing you to retain more of the equity and board control of your company. Angels certainly want to make money, but they are not "in the market" every month and therefore are not as experienced--nor do they care to be--when it comes to valuations or governance issues.
After you have established traction on your product and business model (i.e., shipped a product and generated some revenue), you can and most likely should raise venture capital. But at that point you can do so at much more favorable terms.
I've been involved as a co-founder in two profitable, successful start-ups. One was done with venture capital and one was done without venture capital. Truth be told, I was once a venture partner at a venture capital firm ( myself. Flagship Ventures provided the seed money when I co-founded TripAdvisor. Flagship did a great job and was a valuable partner in growing TripAdvisor into what it is today.
When I started CarGurus, I decided to forego venture financing and go the angel financing route. I do concede that raising money from angels is not necessarily the easier path. Chasing down ten angel investors to get them to agree on a financing document and actually give you money is a bit like herding cats. However, for CarGurus, the benefits have far outweighed those challenges.
There is no right or wrong answer about taking VC money in your seed round or taking VC money at all. As I mention above it can be done successfully both ways. However, if you can raise money from angel investors in your first seed round, it will allow you to conserve more equity, retain more board control and get more operational input in those first few months. When you do raise venture money it will also allow you to raise that second or third round at more favorable terms.
In those early days of your start-up, look up to the angels and you may receive the blessings that set you on the right path...

Wednesday, August 1, 2012

The Paradox Of VC Seed Investing

This is the first in a series of articles I am writing to bring more transparency and honesty to the field of venture capital. While many of the themes may be contrarian or controversial, I have two primary goals: First, I want to help entrepreneurs and startup enthusiasts understand what motivates investors.

Second, I hope to draw attention to some of the fallacies venture capitalists use in their negotiations with entrepreneurs. Aligning the incentives of entrepreneurs and VCs will lead to much stronger relationships and innovation.

Entrepreneurs regularly come to Founders Fund asking us to lead or participate in their seed/angel round. They are often confused or shocked when I try to convince them that with very few exceptions, it is not in entrepreneurs’ best interest to raise seed capital from large venture firms and neither is it beneficial for large firms to invest in seed stage companies. Among the reasons: the structure of VC economics and unavoidable perception issues. Since this conversation happens frequently, I’d like to share my honest thoughts on why large funds should avoid angel investing -­‐ and also why Founders Fund nevertheless does so through its wholly owned FF Angel funds.

The economics of VC explain a lot about why large funds should not do seed investing, so let’s start with a quick review of those dynamics. VCs raise money from a pool of capital known as limited partners (the fund is the general partner), which include accredited individuals and large financial institutions . The VCs usually charge 2% of this capital annually for operating expenses (the management fee) and 20% of the profits (the carry). This is known in the industry as a 2-­‐and-­‐20 structure but varies from fund to fund. While the management fees from a large fund can be an important source of revenue, the real incentive is (or anyway, should be) the carry. For of every dollar committed to a fund, the firm will take home approximately $.15-­20 of management fees (which ratchet down over the life of a fund), but $.40 in carry if the fund triples. And good VC managers aim to get a return of at least 3-­5x committed capital. Established firms have been raising more capital lately and this has important consequences for the kinds of investments they make. For the remainder of this article, when I refer to “VCs,” I am referring top tier funds in the range of $400 million to $1 billion+. As I am a partner at Founders Fund, I will use our latest $625 million fund as
the example.

There are many reasons to work in venture capital. Founders Fund, for instance, has remained steadfast in its mission to transform our world for the better, as presented in our manifesto. At the same time, venture capitalists are capitalists, with a duty to provide returns. With a 2-­‐and-­‐20 structure, we and every other VC in the world are incentivized to make money for LPs and ourselves. In order to achieve meaningful carry, we need to return several multiples of the fund, or multiples of $625 million in our case. Consider the basic implications here: we make a traditional seed investment in a company of $250k, and that investment returns. 20x, which by anyone’s standards is a home run. The problem is that it only returns $5 million and we need to make another 124 “home-­‐run” seed investments to return our fund. In a more extreme example, take Andreessen Horowitz’s $250K seed investment in Instagram. This was one of the most successful seed investments of all time and netted its fund $78 million. In our case, we would need eight Instagrams to get to $625 million—a feat that no single fund has ever achieved in the history of venture capital. The case would be very different if we were a smaller early-­‐stage firm where the Instagram investment may have returned its fund multiple times over.

This begs the question: why do VCs do seed investing at all? The standard reason is “option value”, or the ability to put in more money later as the company scales and gains traction. That’s a terrible answer.. Example: You are the founder of Acme Computing Technologies (ACT), and raise $250K in your seed round from a moderately successful venture firm. That firm has not been bad to you in any way, and may have even been helpful. Six months later, ACT is doing well so you are thinking about a $5 million Series A to scale the business. Your original VC would love to do this deal, but you get a call one day from a legendary Silicon Valley firm. Are you really not going to take that call? Of course you will! And if she offers you competitive terms, are you not going to strongly consider taking the money? Of course you will! Top tier firms almost ALWAYS have an option on a company, even if they did not participate in the seed round. Firms with great reputations bring many benefits, from branding and signaling to good advice and great connections. For good companies, this scenario happens frequently.

On the flip side, entrepreneurs should be cautious of taking seed money from top tier VCs because of this “option value.” Let’s change the story and say that a top tier made a seed investment in ACT from the start. We will ignore the subset of companies that die or “crush it” and focus on the large majority of companies in the grey area. If the top tier fund skips the next round for whatever reason, ACT would have a serious problem on its hand. The most common question other firms will ask is “Why didn’t the fund take this round”? Passing sends a negative signal to the market, and in some cases, may actually kill the company. The perceived option value comes at a potential huge cost to company, and is the main reason entrepreneurs need to strongly consider this downside.

Those are the structural problems with VCs doing seed investing – it’s challenging for a seed investment to have an impact on the fund’s total returns and there can be all sorts of signaling problems. So why would an entrepreneur take money from a top VC, and why would the VC itself ever make seed investments?

A potential reason to take money from large VCs is because of their size and ability to move quickly on a small seed investment. In general, if any $400mm+ fund VC takes more than 24 hours to decide on a $250k seed investment, the entrepreneur should run away, fast. Rapid access to capital allows entrepreneurs to waste less time fundraising and spend more time on product or business development. Furthermore, since the fund is so large, and the investment a small fraction of committed capital, the VC will likely leave the entrepreneur alone to run her company with no interference. VC meddling is potentially very detrimental to a company’s early success. Convenience and autonomy seem like great reasons to take money from a large fund, but the negative signaling potential to kill the company in the future outweighs these.

Despite these reasons, there are some cases where it does make sense for us (and indeed, any VC firm) to invest in seed stage companies. First, we invest in very high risk tech companies that otherwise would have a difficult time raising funds. We do this because we believe that IF these companies achieve their technical milestones, they open up huge new markets. This is usually a big IF, and also mitigates any signaling risk since other firms might not be willing to invest in the first place. Second, we invest in our network, who are typically amazing entrepreneurs or visionaries (e.g., the PayPal mafia, Facebook mafia, etc.). Investing in our network means we do not need to exert much incremental effort sourcing and helping out on deals because we already know the entrepreneurs and what they are working on. That kind of investing is a process that is almost infinitely scalable and thus incredibly efficient. These companies often do not fall under our manifesto criteria which we apply to our large main fund investments, so there is very little signaling risk if we do not participate in the Series A round. At Founders Fund, we do these seed investments through FF Angel to signal one of these cases, both to other VC firms as well as our own investors.

At the end of the day, we are venture capitalists. We strongly believe in stimulating innovation through capitalism. We are in this profession not simply to make money, but to help fund some of the most important technology the world has ever seen. Making our industry more transparent is an important part of what we do, as it can help cut through all the myths of venture capital, and empower founders to focus on the most important thing: progress.