From the category archives:

Angel Investing

3 Things to Avoid When Fundraising in LA

by Ryan on January 18, 2011

DISCLAIMER: Everything that I write in this blog is my opinion and you may disagree with it / be offended by it. That’s ok. ūüôā

It’s been over 3 years since I moved to LA and started what I’ll call the Los Angeles Venture Capital “fundraising scene”. ¬†Over the past 3 years, I’ve raised a good deal of money (some disclosed, some undisclosed) and I’ve formed a few opinions along the way, which I’m going to share here in hopes that you can avoid wasting valuable time as you go about your own fundraising efforts in Los Angeles.

1. DON’T PITCH THE BITCH (i.e. Don’t pitch “Associates”)

In this instance, “the bitch” = “the associate at a VC firm” (gender agnostic). Don’t waste your time pitching associates at VC firms. ¬†In my opinion, VC associates have absolutely ZERO decision making ability /¬†influence¬†and will likely leave the firm within a 2 to 3 year period for one reason or another so any long term firm relationship you to wish establish through them will likely fade. ¬†Don’t bother pitching associates, it’s just a waste of your time. ¬†Would you try and sell something to someone if you knew that they ultimately didn’t have the power to approve the purchase? ¬†You’d go right to the decision maker and pitch them wouldn’t you? ¬†I’m not saying you should be rude to VC associates, but what I am saying is that when it’s time to pitch, go straight for the VC partners with real check writing ability. ¬†If they continually pass you off to an associate, be wary. ¬†It’s straight out of the movie¬†Boiler Room, except that in Boiler Room they chauvinistically advise not to sell stock to women. Seriously, don’t pitch the bitch.

2. PAY LITTLE TO NO ATTENTION TO THE FORMALIZED ANGEL GROUPS

Every young entrepreneur in LA has heard of the Tech Coast Angels and their¬†unaffiliated clones /¬†¬†red headed step children – The Pasadena Angels and The Maverick Angels (who actually charge you to pitch – run to the hills). In particular, if you have a “consumer internet” company, i.e. the kind of company you see regularly covered on TechCrunch, then my advice is to not bother with any of the LA based formalized angel groups. ¬†The reasons are too numerous to mention (HINT: ¬†They are Dinosaurs and although they’ll be bragging about Green Dot for the next decade or more, don’t be fooled, you’ll be wasting your valuable time and energy trying to get in front of them).

Rather than ranting aimlessly about these groups (NOTE: I’d be happy to debate them publicly about my issues with them), I’ll just simplify my reasoning behind this point with the following short story: ¬†Someone high up (i.e. a seasoned member) at one of the groups recently told me that he’s fundraising for a new company of his own. ¬†When I asked if he planned on pitching the same formalized angel group at which he holds office, said NO (I’ll refrain from detailing why in an effort not to sell him up the river). ¬†Amazing right? ¬†I could go on and on and ultimately into a tirade ripping into these groups but I’ll keep it professional and just tell you that if a member of the group thinks it’s a waste of time to pitch the group itself, then it’s likely a waste of time for you too. ¬†If you are absolutely set on pitching members of formalized LA based angel groups (TCA, Pasadena Angels, and Maverick Angels), then go directly to the individual angel members themselves for personal investments (rather than the group) or better yet, go and pitch¬†angels that don’t associate themselves with one of these formalized groups.

3. DON’T PITCH FIRMS WITH NO MONEY!

This may sound totally obvious but reality, it’s not always easy to tell, and there are at least a handful of “cashless VCs” in LA. ¬†Due to the awful economy of 2008, 2009 (RIP Good Times), and beyond, some VCs have died off or are in the process of slow downward spiral. ¬†Some have had a hard time raising new funds and are close to or already out of cash. ¬†Those that still have cash are slow playing their hands, or have reserved their remaining cash exclusively for follow on¬†investments¬†(i.e. topping off their existing portfolio companies when cash gets low). ¬†That being said, these VCs still hang around the “fundraising scene” and will often take a meeting with you, even though they have little to no cash to actively invest, just to ensure themselves that there are not passing on the next Twitter, Groupon, or Zynga. The problem here being that they wouldn’t have the check to write even if they thought you were the next $1B+ exit. ¬†So how do you know which firms are out of money? Here’s 3 easy ways…

1. Ask them point blank how much cash they have to put towards new investments, the last investment they made, and the amount of the check.

2. ¬†Ask around – i.e. other VCs and entrepreneurs to get a 2nd opinion of the firm and it’s financial position, and

3.  Do a little research and find out when they closed their last fund and the amount of the fund.

If everything passes the smell test, then by all means go ahead and court the heck out of them. ¬†If things don’t add up, be sure to ask for intros to other investors that are more active.

UPDATE:

Legendary LA VC Jim Armstrong of Clearstone Ventures wrote a great reubuttal post on his blog here. ¬†Check it out. Jim’s the man!

Back of the Envelope: How to Estimate the Annual Revenues of Any Private Company

by Ryan on September 15, 2010

estimate revenue

Have you ever wondered how much money a particular company makes? Perhaps you just wanted to know their annual sales? ¬† The only problem was, the company was small (i.e. not¬†publicly¬†traded) so there’s no public financial information available on them. ¬† So how do you calculate their revenues?

I created a simple, back of the envelope (i.e. quick and dirty), mathematical calculation that accurately estimates the revenue of pretty much any public / private company, large or small. It’s certainly possible that I’m not the first to come up with this calc, but for now, I’ll take the credit for it. Here’s how it works:

ANNUAL REVENUE = NUMBER OF EMPLOYEES X $100,000

That’s it! ¬†It’s that simple. ¬†Now let me briefly explain the logic behind this one. ¬†The average American makes a little over $40,000 per year. ¬†The costs of an employee to an employer is about 1.25x¬†their¬†base salary. ¬†The additional 25% comes from payroll taxes, health insurance, worker’s comp insurance, office space for them to sit in, etc. ¬†Therefore, the employer must bring in $50,000 ($40,000 x 1.25) for every employee in the company. ¬†Because most companies have a gross profit of 50% or so, this means that in order to stay in business, the average company must have $100,000 in revenue for every employee in their company (($100k x 50%) – $50k) = $0 or Break Even). ¬†The companies with more than $100k in sales per employee are more profitable (e.g. GOOG) than those that don’t (e.g. pretty much every startup company on the planet that takes VC / Angel money).

We so often hear about how well a company is doing based on their press releases, speaking engagements by their founders, etc.; however, no one ever wants to tell you exactly how much money their company makes. The next time you want to know how much revenue someone’s company is doing, don’t just ask them point blank. Instead, simply ask them how many employees they have. Every CEO will tell you how many¬†employees they have. If they won’t tell you, just ask one of their employees how many people work in the company. ¬†Once you have that number, simply multiply it by $100k, and you now have a quick and dirty (and in my experience, highly accurate) estimate of their annual sales.

A word of caution on startups…If the company is a startup, you can pretty much rest assured that they are doing way less than $100k per employee. ¬†For now, assuming the company has a business model where they actually sell something), take their number of employees and multiply by $50k instead of $100k to arrive at the annual revenue estimate. ¬†In a later post, I’ll explain how you can more accurately nail down the exact revenues of a cash burning startup. In addition, I plan to explain how to accurately estimate a startup’s market cap (i.e. how much the company is worth) in a calculation just as simple as the one you’ve read about here today.

UPDATE: I’ve been reading in the comments about how the calc needs to be adjusted upwards / downwards depending on the¬†industry¬†(Duh! ¬†It’s a “back of the envelope” ESTIMATE, hence the title of this post!). ¬†Therefore, I’ve come up with a simple adjustment such that it works for nearly any industry. ¬†The revised formula is ¬†as follows:

ANNUAL REVENUE = NUMBER OF EMPLOYEES X AVERAGE SALARY OF AN EMPLOYEE IN YOUR INDUSTRY X 2.5