De-Risking Risk Capital: A Lightweight Angel Fund

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This discussion springs from Boris Mann‘s post today, which touches on the need for “fail money” in Canada.  I agree with nearly everything he says, and it can’t be disputed that more active capital is required to continue the growth of the startup economy in Canada and build our web and digital media industries.

My reaction though is centred around (1) I hate the term “fail money”, but I know what he means is that we need more capital going to companies to TRY, and half will fail, which needs a high risk tolerance and (2) I’m a small-time angel investor myself, and at my level this concept makes me very nervous as an investor.

The issue is that I’m not investing enough to create a portfolio effect to counteract the high risk of any single investment.  I know others in the same boat, people with tens of thousands to spend, which only enables 1-3 investments, which gives you a really high risk.  We need a mutual fund of angel investing.  While startup accelerators and angel funds or super-angels come close to this, it’s not working well in Canada right now.

I talk about this quite a lot in my MBA thesis, which is a startup accelerator business plan (posted on this blog earlier today).

What I’d like to create is an investment vehicle that is very public about the status of its fundraising rounds, through an investor portal.  Any investor with at least $5,000 to spend can create an account, see the status of any rounds being raised by the fund or its portfolio companies, become accredited, and commit funds to any of the rounds.

The benefits of a very open, public, and broad approach include:

  • Creating a valuable contact database of interested potential investors
  • Remove barriers to participation for small investors
  • Significantly de-risk startup investing by allowing portfolio approach
  • Remove fundraising risk by casting a wide net
  • Open approach will generate significant attention and interest
  • Open and frequent communication keeps investors and prospects engaged with our companies and efforts
  • Open and requent communication also increases investor satisfaction, leading to high rates of initial and repeat investment
  • Ability to offer rounds being raised by portfolio companies and other unrelated startups to this investor portfolio, perhaps in return for fee or equity

This structure is a modification of the currently popular super-angel approach, and would obviously require one or two active investing partners to be doing the legwork.  The innovations here are around the broad community of investors and the unusual level of openness and transparency.

From my business plan, here’s a mockup of how I imagine the investor portal looking:

A Startup Accelerator Business Plan

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As part of my Queen’s MBA we don’t do a thesis, each student crafts a new venture business plan.  Because I’ve been excited by the potential of the startup accelerator model, I created a plan for an accelerator based in Vancouver and inspired by Bootup, Y-C, and TechStars.  I believe, and I know I’m not alone, that when dealing with very early stage teams it’s IMPERATIVE that the investment be paired with a strong mentorship presence and a lot of coaching and learning.

I’m proud to publish the full business plan here, I’ve redacted a few names that I included without their permission pending a response from them.

What I’m especially proud of are a few innovations that I think are necessary:

  • The investor portal (pp 6 and 16) – in Canada, the biggest issue is raising the funds for investment.  I want to create a lightweight and very public system that allows many small investors to participate, which does three things:
    • Fulfill the capital requirements with a MINIMUM of partner time spent, especially in subsequent rounds
    • Communicate clearly and frequently with investors, increasing their satisfaction at participating, and creating a lot of engagement with investors and potential investors, leading to higher repeat investment
    • Generates a lot of publicity and attention, creating a high level of investor awareness and participation
  • The creation of an endowment fund (pp 11, 12), which receives a portion of the exit funds on behalf of both the investors and the management, so on an ongoing basis the reliance on additional fundraising is reduced, and the management and investors who worked on one round will have a limited participation in all future rounds.
  • A focus on coaching startups as high-performance teams.  Mentorship on product development and pitching is valuable, but as I say on page 7:

Our initial education program will be significantly different from those of other accelerators in its inclusion of content for improving personal effectiveness and coaching high-performance team practices in the startups. The short length of the program means that one of the most effective things we can do to improve the success rate of our graduates is to improve their ability to perform both individually and within their team long after their graduation. We intend to outperform our peers in this market in part through helping to launch more productive, better performing, and emotionally healthier teams.

Why aren’t I starting this?  This plan has one significant weakness, which I included intentionally for the purposes of this as an academic project: even with the innovations around investor attraction and retention, it’s probably not possible to operate an accelerator as a going concern in Canada that requires annual fundraising.  The successful American accelerators and angel funds are backed by $30+million endowments that remove the uncertainty of funding next year’s cohorts and the partner time required to go fundraising.

Here it is, in all it’s glory.  I must give significant credit to Boris and Danny of Bootup Labs for their knowledge and assistance, to Jed Christiansen for his thesis analyzing the accelerator model, and to Ben and Mack from Compass Engine who helped with the founder perspective.

Startup Accelerator – Business Plan

The Daddy-preneur Fitness Program

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There are lots of dads in the startup scene, and perhaps more than anyone else, we need to keep fit while pushing ourselves hard – building a business and raising a family require not just time, but more importantly energy and attention.  More on this coming in a later post, but springing from a discussion over beer at the Main Street Daddypreneur Meetup a few months ago, here’s some resources on cramming fitness into a schedule with no slack.

The most important criteria here is that none of the activities require a lot of context switching cost – to spend 30 minutes at a gym I need to drive or bike there, park,  shower after, get back home, and maybe pack a bag beforehand.  This is over an hour lost for a half hour of fitness contribution, and that’s a waste we can’t afford.  I’m seeking activities that can be done at home or work an don’t require scheduling, as nap and meeting times can be unpredictable.

And a disclaimer – I only succeed at about half of what’s below in a given week.  But I try to get it done every day, and I try to be flexible and relaxed about what I actually accomplish.  If you can add one or two things below to your current week you’ll be better than last week.

High-Intensity Inverval Training

Don’t train longer, train smarter.  Using high-intensity intervals, you can jack up your metabolism for 24 hours, and gain the fitness benefits of a traditional cardio workout 4X LONGER.  It’s discussed in the AskMen article below how this approach is appropriate for not just cardio but for fat loss and muscle gain.  Never spend an hour on a stationary bike again.  This is an intense activity, and they say you should only do it 2-3 times per week.

How it works:

Hardcore
Greatest improvement, longer recovery time
Less Hardcore
More endurance, shorter recovery time
5 min warm-up
Maximum effort for 0:15 to 0:30 80% intensity for 0:45 to 1:30
2 min. recovery 1-2 min. recovery
Repeat 6-10X Repeat 5-8X
Cooldown

Further reading: AskMen.com – HIIT | Wikipedia – High Intensity Interval Training

A HIIT timer app: http://gummisoft.weebly.com/hiit-timer.html

Bike Everywhere

I love biking much more than running.  It gets my heart pumping, gets my lungs gasping, and works my legs until they’re wobbly.  And it does it with resistance instead of impact, so I’m becoming more muscular instead of skinny and sinewy (sorry, distance runners).  I’m lucky (?) enough to live in a very hilly area of Vancouver so I can jump on my bike and effectively do HIIT by spending 20 minutes pumping up and down the hills near my house, and I return tapped out but feeling amazing.   The other great lead biking has over running is that it’s a transportation method!  You don’t want to run to your next meeting, but bike there and you’re getting in shape, reducing your carbon footprint, and saving money.  I never feel like a part of my city so much as when I’m cycling through it.  Bikes can be inexpensive (I have a $500 Norco urban bike of some kind) so there’s little barrier to getting started.  Oh yeah, and since this is a Daddypreneur program, don’t forget what a great family activity cycling is, get your kids in love with it early and you’re giving them some good lifestyle habits 🙂

In Vancouver I get great service at The Bike Doctor (Broadway).  I also have several kid carriers.  Hit me up if you want to talk about them.

Also, this is very cool, a friend in a graduate program at UBC helped produce this “Google Maps for cycling”, it generates bike routes and includes info on hills and bike lanes: http://www.cyclevancouver.ubc.ca/cv.aspx

Effective Bodyweight Excercise

Save money and time – cancel the gym membership.  I love spending time in the gym, trying equipment and excercises that I can’t do at home, but realistically I make it about once a month.  Just as I can get better cardio workouts from the HIIT sprints above compared to an hour on an elliptical, so can I boost my metabolism and build strength with a small set of excercises done at home.  Put together a program of pushups, bycicle crunch, pullups, and lunghes, for example, and you can tax your whole body in a half hour or less.

For pushups, I strongly recommend the 100 pushup website & the iPhone app that helps me do it on the go.  This program does an initial test and then pushes you through eight weeks of increasing workouts to get you to 100 pushups a day.  I just noticed that at long last they have programs out for crunches, and squats, so if you want a full-body workout and don’t have time to figure one out, just put  those three in a spreadsheet and get started.  I think I might do that this afternoon.

The bicycle crunch is considered the best ab workout (study by American Council on Excercise).  When short on time, I just do pushups and bicycle crunches.

While I get mocked by my wife for it’s “Cosmo for men” attitude, Men’s Health is actually pretty good at presenting a variety of body-weight or at-home workouts every issue when you’re looking to mix it up and try something new.

Update 2010-10-26: This report on realbuzz.com lists the most effective excercises for each muscle group, based on research.  This is a great starting point for creating a time-compressed full body routine: http://www.realbuzz.com/articles/the-top-10-best-exercises/

Meditate

Life is crazy.  Kids are amazing/stressful.  You can improve your focus and mood by meditating for a few minutes a day.  I’m trying to make this part of my routine, but it’s hard with fluctuating kid wakeups.  When I can fit it in, 5-10 minutes of focusing my mind and quieting the noise does wonders for my mood and energy.

Great post by Alex Payne on his advise for surviving the startup lifestyle with energy and health, including a nice bit on meditation and some resources: Staying Health & Sane at a Startup.

Fit It In

Hardest part!  I think there are three principles, that you can use individually or combine:

1) Schedule it.

If you can, set up appointments with a personal trainer.  I was never in better shape than when I was seeing a trainer 2-3X per week, not just because she kicked my ass for a solid hour, but because I had an appointment that I was paying for.  If you can block this into your schedule and afford the trainer (40-50/hr) it is by far the best option.

If not, scheduling it is still one of the best ways to ensure you have time.  Whether it’s 5:30 AM three days a week, or 8:30PM after the kids are in bed, pick a time, schedule it, and think throughout the day about that as inviolable time.  Recognize the importance, commit, and you’ll be happy you did.

2) Pick slack times.

No slack times, right?  I’m in the middle of an MBA, multiple contracts, with a 1- and 3-year old.  And.. And… So I get up at 5:30 to be able to get work done and exercise in before the kids wake up somewhere around 6:30.  I started taking swimming lessons this fall, and fit it in after dinner once a week.  Get creative with your schedule 🙂

3) Relax.

As in the disclaimer at the top, you can’t do it all.  If you can, I’m very jealous.  Pick one or two things from this list and commit to them for a few weeks.  Let me know how it went, and if you have other things that work for you, let’s add them here.

Agile Budgeting For Startups – Cash is King

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Budgets are a waste of time.

In startups and small companies, the business or strategy can change every few months and the revenue and expenses can swing wildly monthly. In an environment of constant change, it’s a complete waste of time to put the effort into an annual, quarterly or even rolling budget. What you can do instead is implement a few monitoring and control systems, so that you always know exactly what the financial picture is but you spend the minimal time on the processes. I’d like to put together a few standard tools that startups can use to manage their finances in an agile way – continuous improvement, low process overhead and immediate feedback. Let’s work on Agile Budgeting.

UPDATE: I should note here that, as we discuss in the comments, this post and this process really apply mostly to bootstrapped operations with small amounts of capital.  Doesn’t have to be early-stage, I used this process in years 8-10 of my company.  Use it when you don’t have huge amounts of padding.

The most critical piece is your cash flow management. You need a system that will give you an accurate picture of your bank account balance right now, as well as at various points in the future. Will you make payroll on the 15th? Will you make rent on the first? When in the next two months should you buy those Aerons? I’m going to describe a process that should give you this transparency without spending more than a few minutes a day on it.

Before starting: Get a bookkeeper as early as possible. They’re inexpensive compared to software engineers or biz dev folks, and they should keep your finances up to date with few mistakes. Both are critical to your company’s success. No amount of light process will save you from doing hours of data entry without a bookeeper.  This model is something that you should (we did, at least) update every day, so when there’s a decision to be made you can pull up the spreadsheet and know that the numbers were accurate this morning.

Before working on your cash flow, you need a clear view of your situation today.  A worksheet like this can be quickly updated from your online banking by your bookeeper every morning, and as cheques are written and payments received.  The available balance calculated at the end here is the starting balance for your cash flow, so it must be accurate.  That’s why we include outstanding cheques and undeposited payments.  We made a policy of keeping a minimum balance in our main account, shown here as $5,000 to guard against bounced cheques or variances in timing.

Once you have an available balance, you can start forecasting your cash flow.  As with anything else, start with the big blocks and work your way to the little bits and pieces.  Here’s the basic framework, starting with today’s balance and a few of the big monthly items.  We always start with that accurate balance so that as it gets updated you see where your planning went wrong and you’re going to run out of cash 🙂

We always preferred to use a separate account for tax liabilities, so here you see the payroll witholdings going on when payroll is made, and coming back out before the payment is due the next month.  Things are pretty red here!  But that’s ok, we haven’t entered any income yet.

Next step is to get a clear picture of your expense patterns. Summarize ALL of your expenses for the past few months and identify the things that happen regularly. This spreadsheet lists the expenses, recent monthly sums (doesn’t have to happen in every month, but often enough to be a normal part of your operation), and what dates you usually pay it on. Things without set payment dates I’ve split evenly between the first and second halfs of the month (eg. Lawyer).  The only things being left out of this list are the ones we’ve already entered on the cash flow.

I split the expenses into month-halfs because generally it’s not important what date it happens on, but whether it happens before or after your big fixed-date expenses: rent and payroll. Also you’ll see in a minute that we can fine-tune this much more.

In this list you have captured all of your outflows in the past three months.  This spreadsheet goes into your cashflow Excel file and gets updated probably twice a year.

Now, depending on the level of detail you want, you pull out the regularly recurring and fairly fixed stuff and enter it as new row items on the cashflow sheet.  I would enter items such as Dell Lease, Health Insurance, Hosting, etc… because they happen monthly, I know what date they happen on, and I have a good idea of the amount.

The rest of them get bundled into “Misc Expenses”, which you enter twice a month.  Once before the 15th payroll and once before the month-end payroll.  Now our cashflow worksheet looks like this (new rows highlighted):

These numbers are based on the averages from the previous three months, but when the expense rows are being entered for a new month, use the expected value.  For instance, LocalHost should be entered at the recent rate of $1,800 not the average of $1,467.

Do the same process for your revenue.  Make a list of your regular customers, the normal payment amounts, and when in the month they usually arrive (customers tend to have a pattern of how long they take to pay, and of course it depends on the payment method).  Fill in the expected payment dates and amounts and you have a complete cash flow prediction for a typical upcoming month:

Now comes the process part.  You’ve constructed a great starting point, now you make it repeatable, and you ingrain it as part of your routines.

Update balances – Usually performed every morning, the bookkeeper will check the online banking and update the balances sheet of this workbook.  The updated Total Available carries through to the Cash Flow sheet, perhaps significantly departing from what was expected for this point in the month.  Preferably he would also scan the Balance column of the Cash Flow sheet for any red numbers and bring them up for discussion.  In our case he also updated the current exchange rate.

Pre-fill months – Done monthly by the bookkeeper, the template rows (the set of standard expenses and revenues) are filled in to keep the timeline extending about two months out.  The owners should review after this to see how realistic the numbers are – the goal here is that the template set should be a pretty good picture of reality, and there will frequently be tweaks needed.

Enter specific numbers when known – The bookkeeper will update the template rows when they learn of the real amount for any of the transactions.  For example, you may receive the invoice for your hosting and update the amount for the payment row that occurs a few weeks later.  The bookkeeper should also enter any additional transactions that they learn about, and flag them for discussion or review (surprise payments are no fun).

Move the horizon – As you go through the month, the bookkeeper should be removing (or hiding – sometimes you need to look back) rows that have actually happened, leaving any that haven’t, and updating the “Misc Expenses” rows with new amounts as some of those component transactions occur.

Use it – If these are happening, you will be able to pull up the spreadsheet at any time, see where cash crunhes occur in the next month, and shuffle things around.  Most cash flow issues are related to timing, so opening up the sheet and seeing a red balance in a few weeks allows you to get on the phone with a client and speed up their payment.  You’re reacting in real time to accurate information about the future. When we used this at my company, my partners and I would pull it up a few times a week, adjust the entries with what we knew, and check for cash crunches as far out as two months away.  This is invaluable.

Some of the expenses are more for padding than anyting, such as the Lawyer row.  It doesn’t happen every month, but if you’ve budgeted a normal amount you’ll never get caught without the money to pay.  You’ll never be annoyed by having some extra money in the bank.  In fact, we would usually enter specific padding transactions in our monthly template for expenses that only happened annually, such as an amount for the annual tax preparation.  These can be entered as a monthly transaction for a portion of the amount, which is then put into a different account, or added as a running “earmark” item on the Bank Accounts spreadsheet (like the “Minimum $5,000 balance” item in my example at top).

If you can make this group of worksheets a part of your (well, your bookkeeper’s) daily routine, the ongoing effort is very small and the accuracy is very high.  Depending on your needs, I’m sure it would also work fine being updated weekly, but I find it’s best to have it accurate continuously as the situation changes.

PLEASE let me know if you apply this, I’d love to hear what modifications you make to the framework in your situation.  Let’s keep improving on this model and passing it around.

Here’s the sample workbook I’ve been using for this post:

Agile Budgeting – Sample Workbook

UPDATE: This process and this workbook are both released under CC – Attribution Share Alike.

UPDATE: I’ve posted some followup comments and resources here: Agile Budgeting Followup

The Startup Library

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I love books.  I’ve done almost all of my learning from books and web pages.  So following up on a post by Boris about finding startup books in Vancouver, I wondered what would be the required reading list for a startup (or a Bootup cohort company).

Here’s my tentative list, from personal experience.  What else needs included?  Is there a great Drupal book?

Business

  • Four Steps to the Epiphany – Steve Blank – on my TO READ list, the bible of customer development.
  • Startup Lessons Learned – 2008-2009 – Eric Ries – I’m not listing blogs on this post, because there’s plenty of resources for that.  But I get to cheat and include this book form compendium of Eric’s posts.  This material is invaluable, for the detailed discussion of continuous deployment practices and the lean startup business model.

Engineering

  • Test Driven Development by Example – Kent Beck: the how-to book for applying test-driven development (a great Extreme Programming technique for rapid reliable code, and very applicable to continuous deployment) and unit tests.
  • Refactoring to Patterns – Joshua Kerievsky: if you’re writing a lot of code hopefully you’ve read both Refactoring and Design Patterns, but this book puts the two together and gives you strategies for migrating spaghetti legacy code to nice patterned code.
  • Facebook Cookbook – Jay Goldman: this is a great book that covers all aspects of Facebook platform and Connect programming, from ideation and planning to viral marketing and API code samples.  The only downside is that the API is constantly changing and portions of this were already out of date when I bought the book last year.

Personal

  • Getting Things Done – David Allen: on my TO READ list – sounds like the least gimmicky, most lean and effective way to stay focused on what’s important and cut out your wasted cycles.
  • Getting To Yes – Fisher,Ury: how to negotiate effectively in all areas of your life (with employers, investors, spouses, fishmongers) by avoiding positions and addressing underlying interests.
  • The Seven Principles for Making a Marriage Work – John Gottman: <preach>Some things are more important than your next round or release.  Without strong support at home you can’t succeed, and whether your startup succeeds wildly or flames out, you will have failed if you lose what’s important to you.</preach>

Please, let’s fill this in with more.  And then get Chapters or Amazon to sponsor a set for new cohort companies 🙂