How You Get Slaughtered in a Down Round

Here is my latest post on Tech Cocktail about what happens to the founders in a down round. 

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Neil Kane


Strike While the Iron is Hot

Photo from US govt. Congressional bio website.

Photo from US govt. Congressional bio website. (Photo credit: Wikipedia)

In today’s guest post on Tech Cocktail I talk about the importance of taking advantage of unexpected situations and opportunities when they arise…usually without warning or a chance to be prepared. My story is about the time I met Senator Paul Simon in a coat check line…


Neil Kane

Nanotech Takes It On The Chin

English: Nanoparticle and nanotechnology - CILAS

English: Nanoparticle and nanotechnology – CILAS (Photo credit: Wikipedia)

Here is a link to an Op-Ed piece that Crain’s Chicago Business ran today about the unfortunate state of funding for emerging nanotechnology companies. I’d welcome your thoughts and comments…either here or on the Crain’s site.


Neil Kane

The Best Advice I Ever Got

In today’s guest post on Tech Cocktail I talk about how to manage your time and maintain high levels of productivity. It’s a time-tested technique that is independent of technology.



Neil Kane

Convertible Equity–An Idea Whose Time Has Come

1932 Nash Advanced Eight Convertible Sedan

1932 Nash Advanced Eight Convertible Sedan (Photo credit: aldenjewell)

In my last company, Advanced Diamond Technologies, there was a time between equity financing rounds when we needed bridge financing. This is very common among young companies. I don’t recall now the circumstances under which we needed to raise money quickly, but it has always been the accepted wisdom that if you need to raise money quickly, use a Convertible Note.

A Convertible Note is a loan to the company made by investors. In our case we tapped existing investors. To avoid the transaction costs of an equity financing, and to avoid the need to negotiate a valuation on the company with the equity investors, a Convertible Note essentially says the following:

  • We (the investors) will loan you the money
  • You will pay us back when you do your next equity financing
  • At that time, when the valuation of the company is determined by new investors, we will convert what you owe us (plus interest) into shares of the company at the negotiated price less a discount (to account for the fact that we’re investing now, not then).
  • And if you don’t raise new money during a specific time frame [this is highly situational and could be anywhere from 90 days to two years], we get our money back plus interest. In other words, we can demand repayment and foreclose on your or take over your company if you aren’t able to repay. At the very least, we will extract a huge pound of flesh when converting the debt you owe us into shares of your company.

Continue reading

Why A Startup is Like Chutes and Ladders

You know Chutes and Ladders–the board game (Snakes and Ladders to those of you from the British Commonwealth). It’s popular among the younger set since the game is simple and requires no skill. In fact luck is a major component of success with the game. The goal is to be the first to move through the 100 spaces of the board. If you land on a ladder, you get to go up the ladder and advance a number of spaces equal to the length of the ladder. If you land on a chute, you slide down a number of spaces. Careful observers will note that landing on a ladder and advancing is the result of performing some virtuous task like baking cookies. And going backward down a chute is the punishment for a vice like breaking a window.

It seems to me that the parable of this game is a metaphor for what it’s like creating a startup. And in particular the “two steps forward, one step backward” sensation is very much like raising venture capital. Continue reading

Get the RED Out

Anyone who has ever been around entrepreneurs and early-stage companies knows that early-stage business projections (revenue, cash flow, profit) are overly optimistic. Experienced investors always cut them down before analyzing the company. And experienced investors also know that a top-down set of projections (such as, “We’ll get .5% of a $10 billion market and that’s how we’ll become a $50 million company.”) are virtually worthless.

But I’ve just identified another type of problem–I need to come up with a clever name for it– that for now I’ll call RED (Revenue-Expense Disagreement). RED is when the expense line doesn’t match up to the (usually overblown) revenue projections.

Let’s say you had an idea for a new type of body scrub made from the broken pieces of cookies that are at the bottom of the bag. Nobody eats those anyway, right? Its a free raw material, so your margins will be huge, right? My point here isn’t to evaluate the merits of this particular innovation, but rather to use this as a hypothetical example of a RED error.

I chose this example because, according to Hoover’s, the beauty products industry is a $10 billion industry. You’d only need a minuscule, should-be-easy-to-achieve .5% market share to make the numbers work.

Suppose you come up with a revenue model that gets you to $50 million. You just need to sell 10 million bottles per year at $5 each. Simple. But is your pro-forma P&L statement internally consistent? Do you have enough employees built into the model to give an accurate portrayal of the headcount you’ll need at $50 million? Do you understand how much you need to spend on marketing to support that level of sales? How will you get your product into the 13,000 beauty stores? How much working capital will you need to finance the inventory that’s required to support that level of sales? Do you understand the credit terms in this industry because they will have a profound effect on your cash flow. Answering these questions will make the difference between getting your business financed or always wondering why “they don’t get it.”

New business ideas sometimes get shot down because the ideas seem outlandish. I actually think that most great ideas initially merited a reaction of “You’ve got to be crazy.” I’m talking to a lot of young entrepreneurs these days who are very eloquent and spirited about why their vision makes sense and why the world needs their idea. I’m not trying to convince anyone that their idea won’t work. Who am I to make that judgement?

But I see a lot of RED errors in their presentations. I worry that when they go out for funding, they’ll get shot down not because their vision isn’t meritorious, but rather because they haven’t described a financial model of the business that will make sense in the long run. Good investors will spot this.If you’re susceptible to making this kind of mistake, be sure you get some assistance from a good financial modeler and someone who knows the industry.

A crazy idea rationally presented with a solid financial model has a chance of getting funded. A sensible idea with inconsistent financials most certainly will not. Are you seeing RED?