Venture Capitalists and Entrepreneurs: The Same – Only Different

Guest post by Paul A. Jones of Michael Best & Friedrich LLP

Venture Capitalists (VCs) and entrepreneurs are a poster child couple for the notion of the love-hate relationship. Any VCs who have been around the block more than a time or two is certain to have their stories of inept, dishonest, and/or overwrought entrepreneurs. Ditto any entrepreneurs who have spent any serious time courting or managing relationships with VCs. And yet, the VC/Entrepreneur nexus is the greatest innovation engine the world has ever seen. Go figure.

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Can I Raise Venture Capital as a Public Benefit Corporation?

Guest post by Benjamin D. Stone – Corporate Attorney, Mintz

As societies and markets increasingly insist that corporations generate positive social impact alongside profit, investors have taken notice. The global impact investing market alone, for instance, doubled from $114 billion in 2017 to $228 billion in 2018, and will almost certainly continue to accelerate. [1]

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Spotlight on Rising Stars in VC: Amy Gu

Post reprinted from NVCA BlogVentureForward

Name: Amy Gu

Location: I was born in Beijing, China, and I studied and worked in a number of countries before deciding to call the Bay Area my home.  The Bay Area is a hotbed for entrepreneurs: with innovations happening every day, it’s like a dream come true for me. Not only is this area great for my work, it’s also a beautiful place to relax and recharge –– when I’m not working, I enjoy being outside, hiking and breathing in the fresh air.

Hemi Ventures is based in Palo Alto and San Francisco. We also have satellite offices in New York and London.

Years of VC experience: My first investment was years before I started the Hemi fund in 2016. I was inspired by an entrepreneur, and by investing in his mission, I felt like I was contributing to this rebel and his dreams to improve the world.  I realized this was my passion, and in order to continue investing, I would need to leverage other people’s money, so I founded Hemi.

Position description: I am currently the Managing Partner of the fund, working with a team of four in our Silicon Valley office. I oversee all of the firm ’s portfolios, driving Hemi’s mission to identify various sectors to bring in the biggest possible returns for our investors. I also oversee investor relations since it’s the most important piece of the fund besides the actual investments.

Q. How did you get into the VC industry and what were some pivotal programs, events, and/or organizations that helped pave the way?

For the past 15 years, my career was focused on running startups as well as coaching startups. Prior to founding Hemi, I was the first General Manager of Evernote China and grew the user base to 20 million in four years. I also served as a growth advisor to Udacity and a handful of scaling tech companies. Then, somewhere in the middle, I started angel investing. I enjoyed working with young entrepreneurs as they started their first companies. That led me to start the fund Hemi Ventures, which is focused on investing in people who want to bring new technology to an industry or disrupt an industry with unique ideas. We are one of the earliest funds to identify the investment opportunity in autonomous vehicles, with four investment made in this sector in 2016. It’s amazing to see the amount of capital flowing in, and the knowledge we gleaned in the past two years has made us key opinion leaders in the industry.

Q. What career advice would you give to your younger self?

My advice to my younger self would be to have more patience. When I was young, I didn’t have much patience with people who didn’t excel at their work, or who didn’t strive for excellence. I’m also not patient with myself as a business leader – I’m driven to find success in a short amount of time. I push myself as hard as I can every day to make sure that I am doing everything I can to be the best at what I do. However, sometimes I need to accept that success and excellence take time and no amount of effort can take the place of that time.

Q. What’s on the top of your bucket list?

There’s an Indycar race this September, and I am planning to attend together with our investors. I know how much planning and precision goes into a race and I love the thrill of seeing it all come together.  I’m looking forward to being a part of that action in person.

Q. Which books, articles, podcasts, and/or reports would you recommend for someone interested in learning more about the work that you do?

Running a company is not about excelling at just one thing but being excellent at all things. A great principle needs to be in everyone’s mind to build the company into a great success. This message rang true when I read Principles, by Ray Dalio, which is the book I would recommend. Building a great VC and a great startup both take a strong commitment to principles. At Hemi, our primary job is to invest, but that doesn’t mean the rest of our work can be mediocre. We have high standards in all of our business practices, including areas like marketing, hiring, culture, and internal data management.  We expect the startups we invest in to share these high standards throughout their business. It takes extra effort considering our limited resources but having high standards in everything we do is what sets our company apart from others.

Q. What qualities do you appreciate in the people you’ve worked with?

Venture Capital is as much about human capital as it is about financial capital; humans are the most important asset we have. A great VC team will attract great founders and great investors, thus a strong base of human capital is irreplaceable. The Hemi team is built on three critical values:

  • Integrity: It’s our bottom line at Hemi that everyone will maintain the highest level of integrity including respect for the entrepreneurs that take risks and a level of honesty and transparency in how we manage the fund.
  • Independent Thinking: Those who do not think independently are under the influence of others. The upside of investing usually comes from a freethinker with contrarian opinions at the right time.
  • Hunger for Excellence: Our brains can be lazy and it’s easy to become comfortable with achieving only the bare minimum. Small mistakes can have high costs, so we need to always be disciplined to hold ourselves to the highest of standards.

Q. What impact do you hope to make on the venture capital industry?

I am one of the few female founding partners in the industry, and this is by far the most challenging work I’ve ever had. I hope by seeing my success, people will realize that there are great female investors that can bring tremendous value to the table, not because of their gender, but because of their strength. I love working alongside our founders, sharing their adrenaline ride.  It’s a rush to close an investment in a new startup on a Friday, and then quickly bring the CEO to an important customer meeting the following Tuesday, just a few days later. The impact I want to make is to help our tech rebels trailblaze new markets as they push their industries forward to defy the limitations of today.

Keep up with Amy on LinkedIn!

Silicon Valley Venture Capital Survey – Fourth Quarter 2017


By Cynthia Clarfield Hess, Mark A. Leahy and Khang Tran

View the full report.

This report analyzes the terms of 190 venture financings closed in the fourth quarter of 2017 by companies headquartered in Silicon Valley.

Overview of Results
Valuation Results Remain Strong
Valuation results continued to be strong in Q4 2017, but the percentage price increases declined moderately compared to the prior quarter, following three consecutive quarters of increases.

Internet/Digital Media Scores Highest Valuation Results
The internet/digital media industry recorded the strongest valuation results in Q4 2017 compared to the other industries, with an average price increase of 179% and a median price increase of 51%, both up from the prior quarter.

Valuation Results Down for Series D Financings
Series D financings recorded the weakest valuation results in Q4 2017 compared to the other financing rounds, with the highest percentage of down rounds and the lowest average and median price increases of all the financing rounds.




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Venture Capital Fundamentals: Three Basic Rules-Dilution, Dilution, Dilution

Written by: Joseph W. Bartlett, VC Experts Founder

Take a sample of 100 venture-backed companies successful enough to undertake an initial public offering. In a high percentage of the transactions, the prospectus discloses that the earliest stage investors (founders and angels) wind up with close to trivial equity percentages and thus, puny returns on their investment in the company. One would think that these investors are entitled to the lushest rewards because of the high degree of risk accompanying their early stage investments, cash and/or sweat. The problem, however, is dilution. Most early stage companies go through multiple rounds of private financing, and one or more of those rounds is often a “down round,” which entails a disappointing price per share and, therefore, significant dilution to those shareholders who are not in a position to play in the later rounds.

The problem of dilution is serious because it has a dampening impact on angels and others who are thinking of financing, joining or otherwise contributing to a start up. Estimates put the relationship of angel capital to early stageinvestments by professional VCs at five dollars of angel capital going into promising start ups for every one dollar of VC investment. But if angels are increasingly discouraged by the threat of dilution, particularly since the meltdown, we don’t have much of an industry; there is no one to start the engines. [1]

There are a variety of fixes for the dilution issue open to founders and angels.

  • Make sure you enjoy pre-emptive rights, the ability to participate in any and all future rounds of financing and to protect your percentage interest. Pre-emptive rights can be, of course, lost if you don’t have the money as founders and angels often do not to play in subsequent rounds.
  • Try to get a negative covenant; this gives you a veto over the subsequent round and particularly the pricing of the terms.

You don’t want to kill the goose of course, meaning veto a dilutive round and then once the Company fails for lack of cash; however, a veto right at least will you the opportunity to make sure the round is fairly prices; that the board casts a wide enough net so that the round is not an inside trade; meaning that the investors in control of the Company, go over in the corner and do a deal with themselves. Those rounds can be highly toxic to the existing shareholders (cram downs, as they are called). Finally, if you don’t have cash try to upgrade your percentage interest with derivative securitiesoptions and warrants (a warrant is another word for option, they are the same security, a call on the Company’s stock at a fixed price but options are if the call was labeled if an employee is the beneficiary is the holder and the warrants are for everyone else). If you are the founding entrepreneur therefore, make sure you are a participant in the employee option program. Often the founder will start off with a sufficient significant percentage of the Company’s equity that she doesn’t feel necessary to declare herself eligible for employee options. This is a major mistake. In fact, I am likely to suggest founder client consider a piece of financial engineering I claim to have invented; the issuance of warrants in favor of the founders and angels at significant step-ups from the current valuation, which I call ‘up-the-ladder warrants.’ To see how the structure works, consider the following example:

Let’s say the angels are investing $1,000,000 in 100,000 shares ($10 per share) at a pre-money valuation of $3 million, resulting in a post money valuation of $4 million ($1 million going into the Company). We suggest angels also obtain 100 percent warrant coverage, meaning they can acquire three warrants, totaling calls on another 100,000 shares of the Company’s stock; however not to scare off subsequent venture capitalists or, more importantly, cause the VCs to require the warrants be eliminated as a price for future investments. The exercise prices of the warrants will be based on pre-money valuations which are relatively heroic win/win valuations, if you like. For the sake of argument, the exercise prices could be set at $30, $40 and $50 a share (33,333 shares in each case).

Let’s use a hypothetical example to see how this regime could work. Since the angels have invested $1 million at a post-money valuation of $4 million, they therefore own 25 percent of the Company–100,000 shares out of a total of 400,000 outstanding. The three warrants, as stated, are each a call on 33,333 shares. Subsequent down rounds raise $2,000,000 and dilute the angels’ share of the Company’s equity from 25 percent to, say, 5 percent–their 100,000 shares now represent 5 percent of 2,000,000 shares (cost basis still $10 per share) and the down round investors own 1,900,000 shares at a cost of $1.05 per share. Assume only one down round. Finally, assume the Company climbs out of the cellar and is sold for $100 million in cash, or $50 per share.

Absent ‘up-the-ladder warrants,’ the proceeds to the angels would be $5 million–not a bad return (5x) on their investment but, nonetheless, arguably inconsistent with the fact that the angels took the earliest risk. The ‘up-the-ladder warrants‘ add to the angels’ ultimate outcome (and we assume cashless exercise or an SAR technique, and ignore the effect of taxes) as follows: 33,333 warrants at $20/share are in the money by $666,660 and 33,333 warrants at $10 a share are in the money by $333,330. While the number of shares to be sold rises to 2,066,666, let’s say, for sake of simplicity, the buy-out price per share remains at $50, meaning the angels get another $999,999–call it $1 million. The angels’ total gross returns have increased 20 percent while the VCs’ returns have stayed at $95,000,000. Even if the $1,000,000 to the angels comes out of the VC’s share, that’s trivial slippage … a gross payback of 47.5 times their investment, vs. 47 times. If the company sells for just $30 a share, the angels get nothing and the VCs still make out.