I recently spoke to Alex Goldberg, managing director of Canary Ventures. Canary Ventures focuses on seed stage B2B software startups in New York City and Boston. Its interests range from mobile infrastructure to big data as well crowdsourcing and gamification. Our discussion covered many of the basics entrepreneurs need to get started including how to gain funding and where the future is with wearable technology.
The full interview can be found below.
What key elements do you look for in a business plan?
AG: If we look at it in very conceptual terms, at the highest of levels, a VC thinks about two things. One is will a market emerge, does it exist, is it going to exist, what maturity is it at? And second, can a team execute in that market?
So the first half of it, really the test I look for in a business plan is, does this person have a real knowledge of the industry? Can they think about what's going on in it, have they seen some previous movies played and this is the second time around, and effectively, where do they see the market going?
The second part is do they have any particular unfair advantages? Have they recently come from the industry? Are they executors? Are they someone who really has pulled teams together before? I absolutely love second time entrepreneurs - they're really the cream of the crop and the thing that always gets our ears perking up.
When should entrepreneurs turn to the investment community for financing?
AG: It's a little bit of a complicated question because it really depends on the company. Some companies have as their goal in life, to grow to something like 80 to 100 million dollars in revenue within 4 years. Other companies essentially aspire to be sold within 2 or 3 years for 25 to 75 million dollars. Other firms are completely fine to never raise money. And still others can pre-identify 3 or 4 players - very large companies - like Google (News - Alert), which buys downstream, and requires an extraordinarily different playbook. So to answer the question more directly, it's really at the moment in time when you see the opportunity. There's a window that's essentially closing and while you could pursue it yourself, having that additional capital will enable you to accelerate your charge into the market and perhaps get a head start over others’ potential entrance, potential competitors, and give you opportunity to seize the opportunity immediately.
Where should entrepreneurs go to raise capital?
AG: There really are a couple different playbooks depending on the
objective. In the event that someone is starting from scratch, I like to be extremely practical, often they'll start with what we call The Three F's – the friends, family, and fools.
These are the people who you know in your own network. It could be your uncle, it could be your dentist, it could be your third cousin, and often people scrap together some amount of money to get some amount of evidence put together that their idea has some efficacy, to pull together a couple of team members often who are taking part salaries, volunteering some of their time, and really trying to scrounge together a couple of customer references, to show that what they have, has a future.
When you think about that, there's really a second phase, and that's the moment when you go to the community. For some reason or other, hopefully you’ve assessed and put together enough evidence that you believe, and you can prove to someone that you're not related to – who is not your dentist and not your uncle - that it's really an interesting company that ought to be looked at.
Often the people who invest first, at the highest risk, are so-called angel investors. And to a certain extent, early stage seed investors among the VC community. There's a national ACA - Angel Capital Association - with smaller chapters in a variety of cities all around the country. I'm personally extremely involved with the New York Angels, which is a group of 104 people who are either former entrepreneurs who are active investors who, come from VC firms, or are active executives of large companies. We see about a hundred companies each month and screen them. We do a lot of mentoring and coaching, and really try to help them even if the investment doesn't come from us. So there really are people out there, there are some pre-existing networks. Another source people go to is often their lawyers. Sometimes if you find the right one, in the right entrepreneurial practice, they often can help you get there as well.
There are quite a number of sources of financing. But it's very important to select the right type for the business strategy you’ve put forward.
How can entrepreneurs calculate the value of their enterprise?
AG: So valuation is a very sensitive topic. On one hand, you have an entrepreneur who believes this is my baby, this is worth millions of dollars, who are you to tell me it's worth nothing? On the other hand, there's sort of the market, which is, who else is out there who has raised money in a similar sector? So the fancy MBA way of saying that, is there's a peer analysis in effect. There's a number of announcements that have been out there, there are venture wires; there are other PR sort of sources that track recent investments. And you can kind of see a rough range of where investors have put capital, and roughly what the valuations have looked like.
There are more traditional methods, the later stage companies; part of what you learn in finance class at business school is discounted cash flow analysis and ratio analysis and all the rest. Among startups, generally speaking, we as sort of early stage or seed investors, more or less keep a checklist in our head, is there a team put together? How hot is the market that this person is in? Do they have some special intellectual property? Have they patented something? Do they have a customer and is there any revenue?
In effect, based on the strength of their poker hand, maybe mixed metaphors, you really begin to have a sense from the community and from peers around what the company is worth. With New York Angels, we see people asking, at least coming in, and that’s a little different from what the actual deal is, but really anywhere from one and a half to two million dollars all the way up to even 7 or 8 million. There's always going to be a negotiation, and sometimes if you’re not in range with one another, no deal will happen. Sometimes you're able to meet halfway. But in effect, there is no solid structural finance Excel spreadsheet model that you can easily go to. A lot of it is just sort of understanding the strength of your hand and putting together your positioning and your presentation to a number of investors and seeing what bites.
How can entrepreneurs then capture the attention of potential investors?
AG: That's a funny one. I was trying to think to myself, if I was trying to get an investor's attention, what would I do? One thing that is key here is when you make a promise, when you make a prediction, when you say you’re going to do something, going back later and actually saying hey look what I did...it shocks people. Think of the number of people out there who actually do what they say they're going do. When I meet people like that, I save them, I keep them in my contacts folder and I make sure to stay in touch with them on LinkedIn (News - Alert). I love people like that. So I think people who keep small promises, people who predict accurately, or in effect keep you up to date with what they're doing and how their progress has evolved, are terrific. They are the sort of people who get my attention.
The second thing that traditionally VCs really pay attention to when they see it, it's almost catnip for VCs, is when an entrepreneur says, “I don't need capital.” I’m not raising anything. We're doing great ourselves. That really gets our ears perked up. And then finally when you think about revenue, if you are showing a constant increase in revenue and the reason you want to raise more money is because you want to increase the scope of it, that's the sort of thing that really gets a VC's attention.
Are there any current events in the technology sector that you feel are particularly notable at this point?
AG: Sure. At any moment in time, there's some sort of wave going on. There's fashion tech wave happening in New York that is very hot right now. Financial tech – financial services innovation, crowdsourcing for businesses, etc. There's always some sort of wave going on, and I always encourage an entrepreneur to think about where we are in each of the waves. To use a silly analogy, we all know when some new hot restaurant opens up. Only celebrities can get in, and then within a few weeks people can make reservations a month or two in advance, and then months later anyone can get in. And so by the same token, each of the waves in these sub-segments in technology goes through different lifecycles. So when you think about current events at any moment in time, I would just encourage people to tune into that maturity model of the market they're in.
For me personally, what I'm particularly intrigued by right now, and there's been a lot of press around this in terms of current events, is how in effect the first wave of startups that we think about were often hitting very green field spaces, and there's been a lot of people writing articles and talking about this. When you create a brand new thing like Facebook (News - Alert), there's no real competitor, it's almost creating something out of nothing. The current wave of startups - if you think of Uber or Airbnb, are disrupting existing industries. So in terms of current events, there's kind of a funny dynamic that's happened where some of the Silicon Valley, New York, and Cambridge, Massachusetts startups are starting to hedge in on territory that's occupied by incumbents. And it's creating a little bit of a funny dynamic right now. It can be good, it can be bad, but there's some special interest. There's also some regulatory work that's going on. Bitcoin went through the ringer with regulatory people, because again they were entering someone else's market that's been there for a long, long time. So when I think about current events with Uber, Airbnb and Bitcoin, these are people entering sort of entrenched special interests and there's some interesting collisions going on right now.
Looking ahead - and this is about wearable technology specifically, how do you imagine wearable technologies enhancing our lives?
AG: Well I'm seeing several examples being pitched to us, and again that would be an example of a segment that's really at its birth right now, and it's the source of a lot of excitement and I think there's a lot of innovation still to come.
I've seen a number of companies really coming from the fashion tech angle. It could be a pin you put on your jacket, it could be, as we all know a watch or eyeglasses or what not, that augments you somehow. There are some interesting social examples of how you might be walking down the street and some jewelry you're wearing blinks because someone like you is nearby. And it's kind of funny how sociologically it may change the way in which we interact with one another. So that's one area.
A second area which interests me because I'm really deeply involved in enterprise and B2B, is when you think about extremely vertical business-focused applications, and I saw a pitch not too long ago, it was a company that's raised quite a bit of money already, and they're basically using Google Glass, and creating enterprise applications on top of it. So if someone works in a factory, who's responsible for the pick, pack and ship function, where you're looking around the warehouse, you find the things that you want to put in the box, you put the right stuff in the box, it can help augment what the worker is capable of doing. So, in other words, it's assisting someone in their job that they're already doing anyway and hopefully it's increasing the accuracy or decreasing the cost and helping the effectiveness of the worker.
And then thirdly, just to be kind of fun, I always like almost human factors engineering, people who truly observe human beings as they go throughout their days. I would love to have a fork or spoon that said hey you really shouldn't be having that extra cake because you're going over your calorie budget this week. So to the extent that you can integrate into an existing object that you're already using anyway, those are the ones I find kind of fun and probably the ones that will be adopted more quickly. It's very different of a human factor experience to pick up a fork which you do everyday, than to learn how to use some new jewelry or pull your phone out of pocket, so that kind of interaction is going to be a little different.
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Edited by Stefania Viscusi
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