I hope you can join us Thursday night at a joint event of the Harvard Business School Angels of New York and the Harvard Business School Club of New York, on "How Top Venture Capitalists Create (and Sometimes Destroy) Portfolio Company Value".  I'll briefly discuss my research study on this topic, and then we'll have an all-star panel speaking.

Christopher Fralic is a Managing Partner at First Round Capital’s New York office, and has focused on a number of the firm’s investments in Advertising Technology, Social Media, Ecommerce, Gaming, Mobile and more.  Mr. Fralic has 25 years of technology industry experience, with significant Internet business development roles since 1996.  Prior to joining First Round in early 2006, Mr. Fralic was VP of Business Development at social bookmarking and tagging company del.icio.us through the Yahoo! acquisition.  Mr. Fralic was also one of the early employees and VP of Business Development at Half.com starting in 1999, and after the eBay acquisition, spent six years with eBay in a variety of entertainment, business development, and media roles.  Mr. Fralic earned his BS in Finance from Villanova University and his MBA from St. Joseph's University in Philadelphia.  You can reach Chris at www.nothingtosay.com and @ChrisFRC.

Dave Tisch is Founder and Managing Director of TechStars in NYC and is an angel investor through the BoxGroup.  BoxGroup is an investor in companies like Boxee, Flavors.me, Goodsie, fab.com, art.sy, Coursekit, Skillshare, GroupMe, DataMinr and many more.  You can reach Mr. Tisch at Tisch@techstars.com and @davetisch.

(This is the second of three blog posts on financial models for startups.  Yesterday I wrote about best practices in spreadsheet design.)

I couldn’t find a good template financial model online, so I decided to create one.

We started with a sanitized version of a financial model I had developed for startups I have run.  I gave it to Rodi Blokh, who dramatically improved and formalized my model to be suitable for publication.  Rodi (Haas MBA '13) is a former corporate banker at Bank of America Merrill Lynch, and interned at Track.com this summer, and has extensive financial modeling experience. He did a great job refining this and making it user-friendly.

Download the template financial model in Excel here.

This is designed to be a simple end-to-end financial model for an early-stage startup.  The model outputs standard financial statements and key operating metrics based on a wide range of user inputs, and is highly customizable and entirely transparent.

Unfortunately, most financial models are built for established businesses, and therefore force assumptions (like terminal growth) and calculations (EBITDA multiples come to mind) that a startup has no need for.  The model seeks to serve as a robust option for entrepreneurs that wish to analyze the operating side of their business, but does not constrict against pivots and technological disruptions.

The Income Statement sheet allows you to model expenses and revenues as they occur.  Unlike the Cash Flow Statement, which records movement of actual cash, the Income Statement records and projects items like depreciation, which see no physical cash flowing each year, but are accounted for over multiple years.

The Balance Sheet takes a snapshot of your company at an instant in time; the assets on hand when it is produced do not necessarily correlate to dates before or after.  Here you will see listed assets, liabilities, and equity.

The Cash Flow Statement, for a startup, will often prove particularly important, as it will tell you whether or not you can do the essential tasks like pay employees and bills.

We included a Discounted Cash Flow Valuation tab for the sake of completeness, but it’s irrelevant for most startups.  Projecting cash flows for a startup is a guessing game.  Startups really see their valuation determined by a negotiation between them and investors, not a DCF.

The final tab, Funding Rounds, will assist you assessing options for raising capital.  A key point here is that future capital raises will dilute current shareholders, so this model will allow you to see what a final equity share percentage will be after your desired funding stages.   More on this in a later blog post.

Thank you to Adam Kalamchi (Columbia MBA ’13) for some initial input on this model. 
Image credit: Genbug.

I’m kicking off a new series on this blog: detailed notes on events of interest to the investing and technology community.  Conrad Wadowski, Business Development at Xamtech, is initiating  with his detailed notes on the inaugural panel of the new Enterprise Tech Meetup.  Livestream video here.

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In startup land, consumer internet startups have gotten quite a bit of media attention. But if you're not interested in the idea of building the next great dating app, there's always the option to turn to the $230b B2B market for pain points to solve.

As companies like box.net, which just raised $50 million, stimulate the imagination of entrepreneurs, corporations are also making an effort to start conversations with early-stage companies.

Given the mutual need, a group of organizers in the greater New York area (myself included) have launched a meet up called Enterprise Technology Innovation that's designed to connect enterprise entrepreneurs with a panel of corporate executives.

Our inaugural event, "Corporations speak: How I think about buying your startup" was live streamed on September 28th from the Cooley office.

Panel:

Moderator: Safa Sadeghpour, McKinsey

Fionna Dodd Simmonds, VP M&A, American Express

Bill Taranto, Managing Director, Global Health Innovation Fund, Merck

Greg Merkle, VP Product Strategy, Corporate Markets, Dow Jones

Michael Monson, Senior VP of Performance & Innovation, Visiting Nurse Service of NY

Ben Boissevain, Managing Partner, Agile Equity

--

Safa Sadeghpour: Through my other life working at McKinsey, I realized there are some real challenges for corporations working on ideas internally. Someone once said there is no monopoly on great ideas. I noticed a lot of passionate and driven people that have had difficulties reaching out to corporations so I thought, let's create an interface to connect the two. While there are a million exciting events for consumer oriented companies, in New York there aren't any for the enterprise, so we started this.

For our first event we wanted to start from the backend. I want to ask about what you see as new trends in the M&A world. Secondly, what makes a startup attractive for acquisition? Is it sectors, stages, geographies, or is it a revenue or growth issue? Thirdly, from your experience what are the big deal breakers?

Fionna Dodd Simmonds, VP M&A, American Express

What are the current trends in start up M&A?

• The point of sale is being revolutionized. 10 years from now you won't use a piece of plastic with a number on it. We're looking for anything having to do that that next step. Of course no one really knows the next step so we dabble in different types of companies to have a foot in the door when we find out the company actually is the next best thing.
• Another is understanding social or behavioral information. Understanding the reason customers transact the way they do through social data. When you use your card, the issuer can typically see where you spend, what time you spent and how much you spend. Having this data can help create value for merchants. The information can then be tied into loyalty programs in a point of sale coupon or deal.
• Any technology that helps us gather data or data analytics is important as we try to understand how customers spend and how we can get them to spend more.
• Emerging markets is hot. US consumer tend to be behind the curve in terms of using their cell phones to transact, whereas Asia is probably ahead of the curve.
• India and China are also significant focuses given the sheer number of people that are unbanked and use their cell phones for many other things such as paying utility bills, transferring money. Being able to tap into that network, and get to those countries logistically isn't easy because of regulatory concerns, and is also very much a hot area for us.

What makes a start up attractive for acquisition?

• This is really the difference between pre-revenue, pre-EBITDA versus EBITDA.
• A lot of times we're looking at companies that are profitable, that have PTI, but these companies are incredibly expensive and so I think that there is a general sense that there tends to be inflated valuations in the sectors we're currently looking at.
• Cost is a very big issue. We're willing to pay for something that's good, but I think there is a general sense that valuations keep going up and up, and we're wondering is that bubble going to burst?
• Companies that have open APIs where you encourage developer community use are interesting for us. One topic we weigh is investment versus acquisition. We can use an investment to get our foot in the door as opposed to doing an outright acquisition.
• IP is actually really important for us. Do you have any patents that are really interesting and that are defensible? We look at IP, which is one of the first questions I'll ask a startup. Are you in the patent process, is there something that differentiates you and that you'd be willing to get a patent for?
• I think a lot of times, even if we're looking at a company that's pre-revenue and the technology is good, but maybe something that we wouldn't want to acquire -- what kind of talent is behind that? And how would they do at American Express? We've looked at acquisitions purely for talent but we have to balance that because we're a large company. I've got into some start up meetings where you're in a tiny room and it's great -- you have people innovating and creating new products, and if you want to do something you hit enter and it happens. At American Express, 17 people have to sign off on hitting the enter button. We don't want to stifle that innovation, so there's a balance, and that's something we consider when acquiring talent.
• We also think about what type of product development pipeline you have for the next 6-18 months. Overall revenue, let's be honest, EBITDA and PTI are important. It's great to have it, it's great to make money, but it's not a deal breaker. A lot of companies that we look at are very small, but have great technology. If we were able to take that and feed it out to our network, we could provide a lot of value.

What are the deal breakers?

• Other than price, operating illegally is actually a big deal breaker. You laugh, but there are a lot of companies that are very small and you can fly under the radar. Maybe you need a license to do something and no one really knows you exist yet. In the financial services industry, you have anti-money laundering and government all over that. Another aspect is succession liability, if we bought it would we still be on the hook?
• Lax KYC or AML standards, know your customer or anti-money laundering for American Express, very important. When you're dealing with transferring money. For example mobile payments has money laundering written all over it, so you have to have good procedures in place to ensure that this doesn't happen. It does' t need to be American Express standards, we understand you're not Amex, but having some processes in place and making an effort is very helpful. Because if not, the cost of getting a company up to speed to where we need it to be is incredibly high.
• Also, an ability to integrate with a bank holding company regulations. This is an American Express specific issue. We are a banking holding company, and because of that, if we own greater than roughly 10% of a company, this may have changed to 5%, but roughly 10% then we have to push out all of our bank holding regulations on that sub regardless of we having a non-voting stake. It doesn't matter, we're still controlled for BHC purposes. Being able to understand how a company can adapt to that. And this is something we usually discuss in negotiations, but the ability to institute those practices is important.
• Finally, one key thing we think about is how do you balance the cost of acquiring a company versus building it ourselves internally. This is a big decision and argument I have to make internally. Why should we go out and spend X number of times EBITDA to buy this company, when we could spend Y dollars to do it internally, and yet it will take 8 months. Where is that trade-off, what's the time to market?

Ben Boissevain, Managing Partner, Agile Equity

What are the current trends in start up M&A?

• Seeing a lot of cross border activity. China's active, India is certainly active. They still see the US as a hotbed of innovation.
• For enterprise IT, cloud is certainly hot, Verizon just bought CloudSwitch. Verizon is a multi-billion dollar company, so everyone is looking at the cloud and figuring out what to do. Also, mobile.

What makes a start up attractive for acquisition?

• As a general statement corporate america has spent four years cutting their R&D budgets and are looking for growth and innovation.
• If you're a startup with revenue, growth and believable milestones, you can become very attractive.
• Another key in early-stage cloud and mobile is talent acquisition. It helps to study the company buying you and it helps to create competition with potential buyers.

What are the deal breakers?

• We've seen deal breakers where the CEO of the talent acquisition doesn't want to stay with the company afterwards. I've also seen it where the seller wants a 1-year term and the buyer wants a 3-year. As management it's better to be upfront about this.
• Financials are also important. You don't have to be audited by E&Y, but you should have your financial house in order. A regional accountant can be enough to look at your financials and make sure you're GAAP compliant.
• Groupon modified their S-1 for the third time and their revenue went down by half. This is because they were booking the money they had to pay to merchants later on as revenue.

Bill Taranto, Managing Director, Global Health Innovation Fund, Merck

• Runs a $250M fund. Doesn't invest in compounds, molecules or traditional products and isn't trying to sell more Merck products. Rather, I try to invest in companies that serve a broad set of clients, even competitors in the healthcare space.

What are the current trends in start up M&A?

• Technology is the fundamental driver of the future of healthcare beyond the pill. What makes up the healthcare market is pay, provider, clinical, regulatory and employer -- the one asset that links each is data. Data is the currency that will be used to transact in the future. All healthcare is driven by outcomes and this is driven by data.
• One component is about access, aggregation, integration, analytics. We have to understand what the patient wants, what the physician wants and how that drives value.
• In terms of investments, we like to see our investments data enabled. Do they capture data, or can they do something with data? You often may hear about data such as electronic medical records, lab data, claims data -- that's a commodity, I can buy that from anyone, this is meaningless.
• What's happening is the creation of new longitudinal data in new service industries that tech is supporting. For example, a remote monitoring company. Who owns that data, how do you get access to that data? Then how do you turn that data into something valuable if you're monitoring a stroke or heart attack victim?
• Another theme is the power of the patient. We're seeing healthcare reach beyond the four walls of the hospital and/or physician office. The home health market is projected to be over $350B in 2020. This will all be enabled by technology. How do we move healthcare to the place where the patient wants it? And then how do you turn it into something of value? This is a tremendous market with high reimbursement.
• Another trend is you hear about personalized medicine. The problem is there isn't something that you'll be able to take that cures you immediately -- this type of technology is 10 to 15 to 20 years away. Just because they've done genome sequencing doesn't mean they know what to do with this.
• When we talk about personalized medicine we talk about how do you affect workflow? Right physician, right place, right medicine, right diagnosis, right treatment, right service around it -- you can do this through the right use of technology.
• Regarding emerging markets, we certainly want to be global. We want to invest globally and we want to be sure our investments can be used globally.

What makes a start up attractive for acquisition?

• Price has a large role, but we think in terms of platform. We want something to be broad based. Many entrepreneurs think very narrowly about a widget, but we want to go beyond this. An example might be diagnostics. Instead of just a one off, we think, can a company do multiple diagnoses?
• Another example is monitoring. We don't care about the device, we care about the platform. Multiple devices, being able to go anywhere and monitor anything.
• Transferrable, we want to go to the emerging markets. The US is the highest paying reimburser in the world. The problem is nothing is transferrable to outside the US. If I can do something at an attractive price point in India or China, that's easy to bring back to the US or anywhere in the world, and that's a big business.

What are the deal breakers?

• Healthcare is extremely complex. Most don't understand regulatory pathways and how to get approval for reimbursement and how to get clinical validation. What we find is that entrepreneurs get so focused on a particular widget that they forget how they will be reimbursed, whether it's out of pocket or through a provider or payer. There has to be some type of FDA approval to get yourself to market. You don't have to get approval yet, just a pathway how to get approval.
• Data enabled. We want all of our investments or acquisition to have a data component.
• Talent. If you don't understand healthcare then you're not going to make a good investment because we're going to have to come in and do it for you. We make pills and sell vaccines -- we don't create remote monitoring or technology companies -- so Merck's goal is not to take over the company. We actually want to set up the company as a separate LLC under the Merck umbrella and keep the talent that's there. We're very interested in not only your understanding of healthcare, but also the business of healthcare.
• The whole goal for Merck is to drive EPS and revenue. We want to use the power of Merck to help it grow to a point were it's actually meaningful. We're a $46B company, and $1M is revenue from a company isn't interesting in the grand scheme. We're looking to see how we drive additional revenue with portfolio companies that is helpful to Merck.

Greg Merkle, VP Product Strategy, Corporate Markets, Dow Jones

• Traditionally Dow Jones is a publisher, but I run corporate markets or the B2B side. While we are traditional publishers that create content such as WSJ, Dow Jones Newswire, Barrons, there is also another side called Factiva that has a heritage going back to 1977 with Dow Jones news retrieval.
• We were one of the first search engines around. Pre-internet so an interesting place to be. We now provide business intelligence tools to corporations by aggregating 38,000 sources.  Instead of crawling or scraping, we typically license content from publishers and pay out royalties.
• We take all those sources and reduce them to a single form of XML and we tag and code it. We categorize by industry, subject, region etc. and now we have a billion article archive. The idea is that you can mine this information. It is all updated by the minute and we have content in 22 languages.
• We serve consultancies, financial institutions, banks, insurance, hedge funds, small companies, healthcare, retail, etc.

What are the current trends in start up M&A?

• The five basic capabilities are searching, alerting, monitoring, analytics, sharing and dissemination, the last two being the hotbed.
• Getting close to the customer and understanding what they do is important to us and critical to our success.
• There is also influence of social tools that are now coming to the enterprise. Think of the enterprise as the next frontier of consumer-like behavior.
• Because as a larger company we can just as easily hurt innovation, what I try to focus on is building an internal innovation center like an agency. The areas I'm focusing on right now is customer intimacy -- we're working directly with consultancies as an example to find out how they work.
• These large enterprises can't seem to build their own tools and are looking for partnerships. In many cases there are gaps in terms of the workflow that they are trying to achieve such as sharing and collaboration. Something as simple as moving document around -- and while we have Microsoft SharePoint and LotusNotes, we've seen lightweight tools such as Dropbox or box.net that address mobility and workflow pain points.
• We're also looking at building rich intelligence tools. Going beyond the search box and into rich monitoring views. We hear about big data. Everything can be measured now. How can I correlate news and the events that are happening now with my hypotheses and analysis? How can I bring that in an actionable dashboard? We're actually dovetailing into a knowledge management strategy that is so far from where we were even a decade ago in terms of information retrieval.
• Big data is a trend, cloud based services is a trend. Also, globalization -- with many major corporations having operating centers around the world there is a need to mine data in different languages and normalize it.

What makes a start up attractive for acquisition?

• Talent for acquisitions is important in the mobile space such as HTML5 and iOS5 early adopters. It's easier to lease talent, partner or acquire it.
• Build versus buy are some of the challenging decisions we have to make. Many of the partners we work with are able to come to market much quicker.

What are the deal breakers?

• IP, copyright issues. Are you violating any? Valuation. You want to keep that founding talent on board -- after all, you're buying skills.

Michael Monson, Senior VP of Performance & Innovation, Visiting Nurse Service of NY

• Nation's largest non-profit home based healthcare company. We do $1.3B in revenue and serve the New York metro area. We're both a payer and provider -- roughly equally split. We have a large payer business that's focused on keeping people in their homes. Also as a provider we do home care, hospice services  in people's homes, focused mostly on the frail and elderly.
• I run our corporate strategy group as well as our innovation office. This is a cross between a venture arm and a development arm. My job is to be on the market place looking for healthcare companies that can provide improved care and outcomes or decrease our cost structure

What are the current trends in start up M&A?

• There is a lot of money in health IT and home health. As a result of this, the valuations in the space have gone up and there are more strategics at play. In the last year Aetna bought Medicity. This type of deal is beyond what most vcs or private equity companies would have been able to pay.
• Behavioral science is also very interesting from a healthcare perspective. People make bad decisions. You would think a diabetic in bad condition would be more compliant about their diet, but shockingly they're often not. We're very interested in companies that allow people to overcome these humps. This is an emerging space and has a lot of promise.
• We are also very interested in informatics, big data, natural language processing which is exciting for the provider space. It would be easier to have a clinician adopt a system where they can take notes the same way they always have and information could simply be sucked out. We're also interested in companies that focus on medication compliance. Many patients simply don't comply and there are a number of new tools that help people with this. Also how do you create an environment that allows you to stay in your home safely and at a reasonable cost.
• Productivity enhancement is another area in healthcare that is a critical factor. If we don't use our scarcest resource, our clinician resource, healthcare costs are going to continue to skyrocket. Clinicians are doing tasks they shouldn't be doing or are not using the skills they have.

What are the deal breakers?

• If building something for mobile you need FDA approval and HIPPA compliance. Engineers build great technologies, but because they haven't spent time studying the customer or consumer, no one may want to use it.
• Many times entrepreneurs haven't tested their products. If you've built something for the home, it needs to be able to work in many different settings.

Q&A

Safa Sadeghpour: When you think about a company, how much value is placed on a product versus validating a market and revenue?

Ben Boissevain: It's more challenging to sell a company that's just a technology. Proving revenue is important, but look at who's buying whom. Smartest client I've ever had, kept a log of who's buying whom and was sold for 14X revenue with only one product.

Bill Taranto: It's good to talk about how broad you can go with your business, and creating a platform -- being able to map out where the business can go. For the most part you'll get a valuation on a single line of business as well as the comps around that.

Safa Sadeghpour: How do you think about equity participation versus acquisition?

Fionna Simmonds: There is no easy answer. Minority investments are hard for us, so the default would be -- is there some sort of partnership or operating agreement we can do, or otherwise acquire it. Sometimes however, start ups have a particular culture and if we feel that is best left alone, incorporating them under the AMEX umbrella is not the best bet. Typically we are not a financial investor, our goal is find out how can we add value and capitalize on that value. Also for an acquisition, is this a technology we want to own outright?

Safa Sadeghpour: Pharmacos have expanded, but there hasn't been that big play by health IT. When do you see this happening?

Bill Taranto: If you look where the industry is going, it's going to happen and fast. The traditional pharmaceutical company is really good at clinical informatics, what we lack is post-market informatics which is where reimbursement occurs.

We know how to get reimbursement for pills, vaccine and consumer products, but when you start to talk about remote monitoring or creating efficiencies in the market, it's all enabled by IT. For us to survive we have to invest in infrastructure and health IT. We're looking at Merck, but also the industry -- how do we help the industry better manage data. Every big pharma company has an informatics strategy right now.

Safa Sadeghpour: I hear about two trends in the market. One is a flight to safety and the other increased valuations of early-stage companies. These seem to be pointed in opposite directions.

Ben Boissevain: I think it goes back to global corporations, they've got large cash balances. What they're missing is innovation and revenue growth. Large corporations are looking for innovative companies because their revenue has been flat on a global basis. The VC and private equity communities are all relatively healthy.

Safa Sadeghpour: How do they find you and create conversations. When you’re looking for advice you get money, when you're looking for money you get advice. How do you approach this in a smart way?

Greg Merkle: The meetup is a great networking opportunity. I've found them to be incredibly fertile -- semantic web meet ups for example. There is someone like me at every major corporation and I'm actively looking for technologies and looking to invest or build. The meetup is on the leading edge and I try to be as open as possible, and will listen to anyone. You have to have an open mind. Email always works great

Michael Monson: I'm very active in health 2.0 and we've gotten a lot of opportunities through here. Every email that comes across my desk, we'll read. Even if it's something that's too early for us, we'll make introductions to venture firms to facilitate the conversation and stay in touch with the company.

( Photo courtesy of pagedooley .)

Preqin and LexisNexis Enterprise Solutions just released a report on “CRM Systems and Private Equity Deal Sourcing”, based on a survey of 63 private equity funds.

They report that 84% of respondents claim to source over 20% of their opportunities through proprietary deal flow. Based on our research, I think that these respondents are taking a very liberal view of what constitutes “proprietary deal flow”.

The study also found that, “80% of participants stated that they already use a CRM system for relationship management, or would use it for this purpose if they were to invest in one.” I suspect that this is a very liberal definition of “CRM system”. EquityTouch found in a 2009 survey of 61 PE funds that 37% were using no formal CRM application; instead, they were typically using only Microsoft Outlook and Excel. I don’t consider those CRM.  The most popular CRM tools were: Salesforce.com (17%); Act (15%); Saleslogix (7%); and Microsoft Access (7%). We should highlight another provider, Gust (formerly Angelsoft), which is by far the leading deal-tracking application for the angel network community, and also has over 100 VC clients. 

Given the congenital weakness of institutional investors in inputting and updating information, we think you should automate as much as possible the process. We have identified five ways in which investors can systematically add data to their CRM systems:

· Employee networks. One of the most powerful ways to get data within the CRM system is to use a relationship capital tracking tool, such as ContactNet’s Enterprise Relationship Management platform. These tools automatically spider through the emails, IMs, and other tools of a firm’s employees, in order to identify with which people the firm has relationships. Mike Ahearn, human resource partner at Boston-based VC firm Greylock Partners, reports that he finds these tools are a good way to find IT people who aren't actively searching for work and may not otherwise come up on his radar screen.

· Business cards. We recommend using a card scanning tool such as those sold by Cardscan, IRIS, Neat, or Presto to incorporate this data into your CRM system.

· Data from email and files. A number of vendors sell tools which automatically suck in data from email signature files, web pages, etc., into your CRM system. This speeds up data entry by obviating retyping. Vendors include eGrabber, Gwabbit, GrabText, and Broadlook.

· The cloud. We recommend setting up an automatic synchronization with some of the major public contact databases (LinkedIn, Spoke, Plaxo), which allows you to get current contact information.

· From the company directly, e.g., via a web-based application such as Angelsoft.

Most important is culture.  I know one PE fund where the manager has said that he evaluates the contributions of his team based on their activity in the CRM system.  If there’s no data in the CRM, that implies they’ve done no work, which implies no bonus.  Use of the CRM system at his firm is, understandably, very high. 

(Graphic courtesy of Gauravonomics)

If you are a student anywhere in the world seriously interested in venture capital, angel investing, and/or entrepreneurship, please consider working with us on your research papers.  We're obsessed with research and data, and have a number of research topics we'd love to dig into with the right student partners.

If you are highly qualified and your research is pertinent to our work, we can help provide you with research materials, guidance, introductions to interviewees and other experts, and access to unique data sets. If your research results are high quality, we'll also help you publicize and potentially publish your final research paper. We have relationships with many of the leading finance media which have published our own research.

To learn more, contact us with: your proposed research topics; the full resumes of your team members; the course for which you are writing the paper; your professor's name and website; timeline; and your targeted deliverable (length, format, etc.). We cannot respond to inquiries which do not provide all of this information. We prefer to work with graduate students (MBA/PhD/etc.), but are open to exceptional ambitious undergraduates also.  We have a strong preference for team projects as opposed to individual projects.

We've listed below some of the research questions about which we'd like to learn more. We're particularly interested in working with you if you choose one of these topics for a research paper or field study.

• Analyze advantages/disadvantages of investing personally in early-stage tech companies, vs. investing in an early-stage fund.  Create checklist of criteria which could help guide decision-making around when to invest personally and when to invest in a fund.
• Research best practices of VCs and angel networks in supporting portfolio operations. Among the issues to consider: identify the right technology stack to share documents, contacts, and best practices between different operating companies.  Research correlation of investing success with the nature of VC involvement in portfolio companies.
• Research diversification in early-stage investing vs. returns.  How much diversification is optimal?  What aspects are best to diversify in (sector, stage, geography?)
• Identify best practices in being an early-stage board member. Create case studies highlighting high- and low-performing board members, and companies who do and do not effectively leverage their boards.
• Novel, demonstrably-effective techniques to predict the success/failure of startups and revenue-stage companies based on pubicly visible data (e.g., YouNoodle). Similarly, techniques to assess forthcoming needs of particular startups (e.g., which ones are best off seeking more experienced management in the coming year).  
• Research and publicize best practices in managing a virtual file server for a diverse international team.

• Execute an analysis of the leading New York-area angels, superangels, and early-stage VCs.  Evaluate number of deals, size of deals, future activity, assets under management, industries of interest, and returns. Create formal ranking.
• Compare returns of NY vs. California vs. Boston VCs.
• Analyze contribution of the New York VC community to local job creation.

• Study characteristics of the most successful Entrepreneurs in Residence.
• Research characteristics of successful angel-backed companies run by older entrepreneurs (50+).
• A study of the value that acquiring access to someone else's patent can add to a startup in a range of sectors.

• Write a guide to market mapping a new industry sector. 
• Create a systematic approach for identifying industries ripe for disruption, and disruptive companies, using the ideas in Clayton Christenson's "Innovator's Dilemma" and its followup books.  E.g., look for hated companies (AT&T, cable companies); look for the largest private companies (which may be seeking to hide their profitability).
• Analyze the most rapidly-growing open-source tools/ecosystems in order to identify entrepreneurial opportunities in those spheres. Analyze opportunities that emerged from the growth of earlier ecosystems, e.g, Ruby -->Heroku.  Identify opportunities that emerge from growth of HTML5.
• Analyze the fastest-growing companies in every significant country, and then identify if we can create a comparable company in the US market.  This is the reverse of the strategy used by many emerging market entrepreneurs copying US models that are successful.
• Identify white space on market maps: Target sectors that are not yet transformed by the internet: finance, healthcare, energy, education, etc.  

• Identify how, when, and why senior executives/time-pressed professionals are using social media, and business opportunities that emerge from the use of social media by this most influential demographic.

Photo from BillWard

We recently hosted an idea dinner on "Disruptive Companies in the Asset Management Industry". 

The most attractive industries to disrupt are highly profitable ones, and asset management is traditionally a highly profitable industry.  IMHO, the most successful disrupters in this area to date have been Vanguard (who popularized index funds) and the ETF industry.  We thought it would be interesting to brainstorm about what are the next great ideas and companies that will/can disrupt this sector, based on the ideas on Clayton Christensen's "Innovator's Dilemma".  The dinner included a cross-section of senior finance executives and experienced tech entrepreneurs.  I've attached below the notes from the dinner in slideshow format. 

For this who don't flip through the slideshow, here are the highlights:

What Do Investors Value? (What Jobs Does the Investor Want Done?)

.Returns

.Investment Team Stability

.Relationships with other investors and investment teams

.Visibility

.Capital preservation

.Job security (of the investor)

.Tax minimization

.Social welfare

.Exposure to target sector (e.g. China, commodities)

.Networking

Examples of Disruptive Innovation in Asset Management

.Index funds

.ETFs

.Structured products which minimize downside

.Investing in new asset classes: domain names (Oversee.net), equity-like student loan instruments (MyRichUncle), litigation (Law Finance), patents (RPX), etc.

.Credit Default Swaps

.Crowdsourced financing: Indiegogo/Kiva/Kickstarter

.Discount Brokerages

.Expert Networks

Examples of Sustaining Innovation in Asset Management

.Quant hedge funds

.Private company markets

.Motif Investing

-Allows exposure to investment themes (eg, "I want to invest in African oil expansion"

New Asset Classes in Which Some Are Investing

.Domain Names

.Patents

.Human Equity

.Litigation

.CDs

.Virtual Currencies

-Facebook credits

-Frequent flyer miles

-Carbon Credits

I enjoyed participating in last week's Capital Roundtable Private Equity Masterclass on "Best Practices for Sourcing Quality Deal Flow & Developing New Business" (May 26^th, 2011). Our star intern Adam Kalamchi took detailed notes, below.

View more presentations

Chairman's Keynote: How to Win -The Five S's of Successful Deal Sourcing

Richard J. Fitzsimmons, High Road Capital Partners

(Presentation included above)

Notes:

Most funds have ~7 deals total, or about two deals per year. Finding the right deal can make or break that particular fund.

Sources: identify the right places out of innumerable sources

Companies
Of 5 million companies registered with the IRS, 4 million are S corp. pass throughs (individual owners); 1 million C corp (shareholders)

Owners
They prefer deals represented by intermediaries because it signals the owner is willing to sell. Otherwise, private owners tend to have unrealistic expectations or an arbitrary sale price expectation.

Intermediaries

Banks, brokers, Advisors
They have the confidence and trust of the business owner

Deal aggregation websites
Increasing in popularity, trying to increase market efficiency.
He thinks it's a tool, but will not displace traditional M&A
PE-Nexus, AxialMarket, CapitalSphere, DealMarket, MergerID, etc.

Fundless sponsors
Good at finding unusual opportunities at good prices

Estimated 100 - 200 total entities
Friends & family - basic networking

Strategies: how do you generate returns
He doesn't believe you can build sustainable proprietary deal flow; they believe in pro-active, outbound deal sourcing effort

After you've applied all of your filters, surprisingly hard to find under-priced assets, especially when intermediated

Signature: what makes you unique and how do you get people to recognize that?
Must build and promote your reputation / expertise

Flow is a function of reputation and share of mind in target market

Signature and messaging will vary by market and audience, but must be internally consistent

Spreading the word: gain awareness of your firm; define and spread your message
Email is quite effective at keeping top of mind. Build and maintain large email database.

Phone is slower and less scalable, but good quality and intimacy

Industry events have good value for face time in such a personal business

LinkedIn is increasingly effective for companies in addition to individuals

Statistics: must quantitatively measure your deal flow process in order to improve
Use statistics to test anecdotal hunches

Benchmark yourself to overall market activity

Panel 1: Creating The Right Deal Flow -- Creating & Managing Sustainable, Replicable Strategies

Moderator

Richard P. Prestegaard, High Road Capital Partners

Panelists

Robert P. Bennett, GroundSwell Capital LLC
David C. Glickman, Resilience Capital Partners LLC
Luke Johnson, Platinum Equity LLC
Robert B. Landis, The Riverside Company
Robert E. Michalik, Kinderhook Industries LLC

Notes:

Brokers tend to show deals to the people that are top of mind / they have seen recently, so staying visible and in touch is important
Being responsive to brokers respects their time, especially when you are not interested in a deal so they can move on to a higher potential buyer

Question: How are you organized? How do you align incentives?
Larger funds tend to have industry-specialized sourcing, but less so at the smaller funds due to lack of scale
Riverside shares deal-based compensation, so that the sourcing team works together and it's not zero sum in terms of hoarding contacts

Question: Where do the panelists want to improve their current sourcing?
Social media

Having flexible, searchable databases accessible on mobile devices
Move from partner- or people-oriented function to more institutionalized, systematic, and scalable

Question: How do you handle in-bound emails?
Platinum has a single individual who receives and sorts through inbounds, uses discretion if and how to react
Resilience responds every briefly to all credible emails to maintain their brand.

Question: What portion of your deal flow is proprietary?
Panelists do not believe there is sustainable truly proprietary flow (though I think they are defining this too narrowly as sales with only 1 buyer)
Platinum looks at as direct- (20%) and indirect-sourced (80%), not proprietary vs. non-proprietary. They are looking to improve self-creation of deals.
Riverside defines proprietary as any sale less than ~3 buyers involved
Kinderhook looks for the "broken" auctions that didn't get the right attention of the PE community

Question: What fee structure do you use for proprietary deals?
Truly proprietary deals have no fees - you are interacting directly with the seller
No negotiation on fees if there is an intermediary
Kinderhook pays 1% or a book and 2% for a phone number under the assumption that if there's a book created there are other buyers

Question: Thoughts on how to use social media to generate deal flow?
CareerAmp
Branch Out

The feeling is that they've started, but recognize there is value they are not tapping
Some are skeptical, especially how to drive quality vs. just more quantity

Question: If you are starting a business development group, what are the top three things you should do?
Focus, don't be all things to everyone, focus on key markets

Know what your company wants so you can speak as a decision-maker and not just a broker

Panel 2: Positioning Yourself to Win - Four I-Bankers Explain How to Compete for the Good Deals

Moderator

Richard J. Fitzsimmons, High Road Capital Partners

Panelists

David Deutsch, David N. Deutsch & Co. LLC
Thomas P. O'Connor, Berkery Noyes & Co. LLC
John L. Tye, Edgeview Partners LLC
Harold J. Williams III, Dickinson Williams & Co. Inc.

Notes:

Question: When you start a process, how many buyers do you reach out to on average? Most? Least?
Start with a hit list of several hundred strategic and financial buyers. Articulate thesis for each counterparty, then run ideas and work with clients to narrow the list. End up approaching 20-30 strategic and 50 financials.
To maximize value and sale price, wider net is better
There is a lot of un-invested capital sitting in funds and outside-in it is hard to tell the internal dynamics, so casting a wide net increases chances of a good outcome

Question: How many PE firms are in your databases?
Several thousand---- then narrow down based on objectives and focus etc.
Don't be "Just Another Middle Market Buy-out Fund (JAMMBOF)"
Opportunistic, no focus

Question: How do generalist PE funds differentiate and get in the advisers list?
Good funds pro-actively stay in touch with bankers
Understand what each bank's coverage model is. How do they prioritize and assign responsibilities? Then develop personal relationship with whoever is covering you.
Staying on the buyers' lists is based on how well you conduct yourself in the diligence processes, "beauty contest"
Banks are aware of your funding situation and your portfolio / investment thesis. More likely to attract deals if you have a good specialty / strategic thesis vs. being just opportunistic.
"Strength and length of relationship"
Show enthusiasm, ask questions, express interest directly that this is one of the deals in your sweet spot
PE funds can reach out to companies directly, but you need to manage and related personalities this carefully. Certainly has upside if the business owner through these communications develops a preference for a specific PE fund. Once the process starts officially, need to follow protocol through the bankers; it really ticks off the bankers if you interact directly with the CEO.

Question: How do PE funds differentiate in the LOI phase?
Bring substantive content and 'meat on the bone'
Everything you have done until that point builds your credibility
Show that you have fully leveraged the data room
Having unanimous buy-in from your own investment committee is important. Do not want surprises, as deal gets closer to closing, and then suddenly the investment committee reads the documents more closely and asks questions that should have been asked earlier.

Question: What is the discount you get for being the preferred buyer?
Don't really give discounts, but call the preferred buyer and tell them the terms they need to match to close the deal.

Question: Which corporate deal sources have the most effective pipelines?
Many, many approaches
Apple's lead is overly friendly and kind
Some have interns periodically call to check in
"I believe there is proprietary flow, since he's seen buyers who consistently are single-bidders."
If you are known as someone who is truly helpful, you will always get calls with an opportunity or just for advice

Teten question: What will the impact be of deal aggregating websites (Axialmarket, MergerID, PE-Nexus, PEGBASE, CapitalSphere, DealMarket, BizBuySell,) on the investment banking industry?
Tye: they are still evaluating and thinking about how to make it value-creating
Some of the others haven't seen them impact their markets
They will get calls from banks if they develop trust not to front-run processes

Panel 3: Finding Hidden Gems - Four Proprietary Deal Flow Experts Discuss How They Advise Their Clients

Moderator

Richard P. Prestegaard, High Road Capital Parnters

Panelists

Zubin Avari, Charter Oak Equity LP
Christopher A. Gebelein, Private Equity Growth Advisors LLC
Sven A. Kins, Cook M&A Advisory Services
Matthew S. Wells, PE-Nexus LLC

Notes:

Question: When clients reach out for help, what are they asking?
PE clients don't know whom to call within corporations to discuss something like a divestiture

PE funds get busy and sometimes periodically reach out and then fail to follow up. Advisers can help by rounding out their contact list and then having a consistent cadence of following up and messaging with business owners. Many middle market firms don't have enough business development capacity.

Question: In divestitures, which comes first, the buyer or the seller?

Private Equity Growth Advisors:
Focuses on the corporate client who has the need to sell. It's very hard to just call corporations and just ask what they have for sale. These communications are largely ignored. The better approach is to try to solve the problems of corporate development people who want to grow their businesses.

It takes corporate executives a long time to decide to divest. Even once the decision is made, the business have been neglected and getting a healthy auction going are quite low. There are lots of risks that the business deteriorates during the sale process. So, there is a sense of urgency.

They try to have a 60-90 day process. Much of this is done for quarterly earnings management reasons. This can be proprietary since there is just no time to run a process.

Accounting and incentives systems drive behavior within the corporation and you must be aware of this as a buyer (e.g., the manager won't realize the loss which will affect their business unit's reporting and therefore their personal bonuses).

Question: In the above, how do you convince potential corporate seller not to engage in a full process with bankers and advisers?
Many times there is not enough time due to quarter end or the business itself will not last throughout a protracted sales process

Of course, the larger the deal, the high the chances the corporate seller does hire a banker to be able to justify price to their board

They stay close to corporate development officer to understand all of the non-price items that are important to them. This is important for getting their clients into the final bidding round.

Question: What are some issues with divestitures?
Financials (e.g., balance sheet) are not held at the business unit or asset level

Sellers may not be as sophisticated in terms of understanding how PE funds think and operate

Question: How does PE-Nexus work?
This is a technology-enabled solution to compliment the existing, traditional process

Casts a wider, more efficient net than existing channels with a more robust database and a more detailed search function

Question: Is the PE-Nexus platform for all market segments?
The platform is really for the middle market, not KKR / Goldman Sachs

Question: How does Charter Oak Equity source their deals?
They are a sponsor and they act as if they were investing their own capital

Certainty to close is critical before they take deals to the PE groups

They are also so aligned with the PE group in terms of reputation and returns that they like repeat business with the same groups

Question: How do each of the panelists get paid?
Charter Oak Equity LP
Fee at close
Part of management fee
Part of carry

Private Equity Growth Advisors LLC
Some clients pay a monthly retainer which gives PE fund credibility with corporate contacts
Success fee

Cook M&A Advisory Services
Nominal retainer
Success fee upon closing
Hope to be part of the add-on process if part of growth plan

PE-Nexus LLC
Straight subscription fee from buy-side clients
No success fee
No charge to the sell side, their currency is the data

Keynote Presentation 2: Virtual Handshake

You can download the slides at teten.com/deals .

Presenter:
David Teten, CEO, Navon Partners LLC

Notes:

People are increasingly online and connected, but we are still at the very early stage of social media having a material impact on how we do businesses
Our kids are the future business leaders and they carry the habits they are developing today into their future business habits
There is an incredible amount of data leaked online
Need to stay top of mind
Diverse networks have much larger value than more focused networks
Social media is a low cost way (time and money) to extend the reach of your network
Leverage multiple media formats - this increases trust. More likely you hit their preferred channel. Also allows people to do diligence ahead of time rather than a cold meet.
Online communities are great sources of free consulting services

Five next steps
Google yourself and see what people are saying about you
Be a data hound
Reduce email use: move communications to thinks like wikis that are better stores of information and less re-emailing (social text is a good corporate wiki)
Find people to meet online - zoominfo aggregates all publically available information.
Join the right clubs

Question about companies that help manage email / contacts :
rapportive - pulls in all publically available data when you email someone from gmail
xobni - gives you insight into frequency of interaction

Panel 4: Alternative Deal Resources - Four Other Advisors Discuss the Value They Add to the Process

Moderator

Robert J. Fitzsimmons, High Road Capital Partners

Panelists

Howard M. Berkower, McCarter & English LLP
Jake E. Lilie, Dynamic Data Inc.
Nadim Malik, Sutton Place Strategies LLC
Roland W. Tomforde, Broadgate Consultants LLC

Notes:

Question: How can firms use their technology to improve deal flow?
Excel is a way of the past, everyone is using CRM now, generate reports for Monday morning meetings
Deal Dynamo
Salesforce - lower priced option
TheNextRound
Equity Works

Social media is a great way to personalize your firm
LinkedIn, Twitter, Facebook

Question: How can firms use data to improve deal flow?
Know your market penetration, share of target market

Know the details about what is falling through the cracks - which deals did you miss and why?

90% of their effort is to understand how the buy and seller get / got connected

Question: What are other ways firms drive good deal flow, especially since some are publicity shy? Should they be shy?
Roland agrees that PE firms are shy

There are ways to create localized branding e.g., in your industry

Each opportunity must been a seen as an opportunity to underscore your key messages

Question: What is an ideal level of email traffic?
Don't wear out your welcome, but hard to pinpoint a specific number. Need to avoid people instinctively reaching for the delete key.

It's been very exciting to see such a strong response to our recent research study on "Best Practices in Private Equity and Venture Capital Deal Origination", published in the Winter 2010 Journal of Private Equity. 

To our knowledge, this is the first systematic study on this topic; we have not found any other in-depth research on origination by either academics or practitioners. In leading this research, we are leveraging our experience working with a wide range of top-tier investors and our proprietary dataset of the origination practices of over 150 institutional investors globally with whom we have conducted in-depth interviews. We also have presented on our research to dozens of conferences, funds, and investment banks globally, gaining additional insight from audience feedback.  My coauthor Chris Farmer of General Catalyst provided critical insight, particularly on the venture capital industry.  Our research associates, Yujin Chung (Andreessen Horowitz) and Neha Kumar (Anklesaria Group), provided invaluable quantitative and analytical support.  I also want to thank my former colleagues at global research firm Evalueserve for their help in conducting approximately 1/3 of our surveys, and for additional background research.

A wide range of publications has now featured our research:

- 3/29/11: Business Insider, Five Best Practices In Sourcing Investments

- 3/29/11: Axial Market Blog, Where the Deals Are - Best Practices in Sourcing Investments

- 3/14/11: Bloomberg Radio, Teten Discusses Private Equity Deal Origination (Audio file)

- 1/13/11: Pensions & Investments, Study: PE firms spend hours on investments they'll avoid

- 1/3/11: Global Corporate Venturing, Chasing the rabbit: deal origination best practice

- 12/6/10: Financial News/Private Equity News, Four Ways Buyout Funds Can Increase Dealflow

- 12/10: Mergers & Acquisitions, Where are the Deals? Private Equity Funds' Best Practices in Sourcing Investments

- 10/5/10: Institutional Investor, Where Are the Deals?

- 9/6/10: Buyouts News, Need to Meet: David Teten

- 6/10: Harvard Business Review, Time for Investors to Get Social

I've embedded below the sanitized slides from a presentation we've made on our research to some investor conferences and privately to various private equity funds and investment banks.

The Capital Roundtable is holding a  MasterClass May 26 on "Best Practices for Sourcing Quality Deal Flow & Developing New Business for Private Equity Funds", and I'm honored to be one of the speakers.  The conference is being chaired by Bob Fitzsimmons, of High Road Capital Partners. It's in Midtown Manhattan.  

Among the other speakers:

- Robert P. Bennett, Ground Swell Equity Partners LP

- Christopher A. Gebelein, Private Equity Growth Advisors LLC

- David C. Glickman, Resilience Capital Partners LLC

- Luke Johnson, Platinum Equity LLC

- Sven A. Kins, Cook M&A Advisory Services

- Robert B. Landis, The Riverside Company

- Jake E. Lilie, Dynamic Data Inc.

- Nadim Malik, Sutton Place Strategies LLC

- Robert E. Michalik, Kinderhook Industries LLC

- Richard P. Prestegaard, High Road Capital Partners

- Roland W. Tomforde, Broadgate Consultants LLC

- John L. Tye, Edgeview Partners LLC

- Harold J. Williams, Cobblestone / Harris Williams

You can register at a $400 discount off The Capital Roundtable's standard rate by mentioning Navon Partners.  For registration or inquiries, just call Lonnie Angle at 212-832-7333 ext. 0, or email her at ag@capitalroundtable.com.

For more details click here.  I hope to see you on May 26th!

P.S. Since we expect this conference to attract a strong attendance, please register as soon as possible to reserve your seat.