Some Take-Aways you will get Raising money for your business – it’s easy if you know how. Why I hope you don’t need to raise money from investors What is the biggest source of financing for startups? (Hint: its not Venture Capital funds or Angel investors) Why you don’t want to have employees in your business. Why you don’t want to be an employee either. How to accomplish those two goals and keep CRA happy. Why it’s critically important to structure your business right from the start. How you can do that on almost no money. Do you know what the most important “controllable success factor” is to be a successful entrepreneur? learn it on Oct 20. The economy has changed. The whole world has changed. Companies are now often being bought just two or three years from startup. I’ll describe exactly how you can maximize the chances of selling your business early. (And you get a copy of my book Early Exits to be sure you have all the steps.) As an entrepreneur – do you have “self doubt”? What that means and what to do about it.

1. Being an Entrepreneur
in the 21st Century
ByzHub Meetup
New Westminster, BC
October 20, 2011
Basil Peters

2. We are lucky to
live in Vancouver

3. We are Fortunate To Live in BC

4. BC Economy - Forestry

5. BC Economy - Mining

6. BC Economy - Fishing

7. Things have changed

8. The Economy
• Has changed
• The whole world has changed

9. Entire Countries are Bankrupt
Other countries will certainly follow

10. Market Lost Trillions in Days
Lately it‟s almost a regular occurrence

11. Lehman Brothers Is Gone

12. GM Bankrupt

13. Why is this
happening?

14. Global Trade

15. The World is Now a Small Place

16. The effect on
big companies

17. Canada‟s Most Valuable Corp
• Nortel was founded in 1882
• In 2000, Nortel‟s value was a third of the
entire TSX index – Canada‟s most valuable
• Market cap was $398 Billion
• Employed 94,500 people
• Bankrupt in 2009
• Assets sold to companies around the world

18. Other Big Tech Companies
• Was Nortel just a single example?
• Or a made in Canada failure?
• What about the other big, great tech
companies?

19. Intel – 15 years
 Bubble

20. Microsoft – 15 years
 Bubble

21. Cisco – 15 years
 Bubble

22. None Are Creating Wealth
• For their investors,
• And more importantly for their employees
• For decades, these greats were all built on the
increasing value of their stock options
• That‟s what used to bring, and retained, the
best and the brightest
• To these big companies

23. Big Companies are Risky
• When I graduated from university,
• Most of the new graduates wanted to get jobs
in the big companies
• To learn „how it was done‟
• To work somewhere that was safe and stable
• Today, working in a big company seems to be
a pretty risky proposition
• And certainly not a very lucrative one

24. Startups create all
the economic growth

25. Startups Create All the Growth
• In the old economy big was an advantage
• Today being big seems to be the opposite
• All of the economic growth is happening in
small companies
• In fact, startups have created ALL of the
new jobs for the past three decades

26. Startups Create ALL The Jobs

27. Lots Doesn‟t Work Anymore
• Many big parts of the financial ecosystem
• That worked for a hundred years
• Don‟t work at all anymore
• The economy has changed
• The world has changed
• But it‟s not all bad news – especially for
entrepreneurs and Angel investors

28. The Good News
for Entrepreneurs

29. Let‟s Focus on Our Economy
• Most of you are entrepreneurs
• Many are involved in the „new economy‟
• The knowledge based economy
• What‟s changed in our part of the global
economy?
• More importantly – how do we capitalize on it?
• What are the changes that we can make
money with?

30. Changes That Make Us Money
• I think the five most important changes in the
last decade that we can capitalize on are:
1. Innovation in startups
2. Internet acceleration
3. Capital efficiency
4. Availability of capital
5. Early exits

31. Innovation

32. Innovation is Our Opportunity
• The world has become a very small place
• Everything is interconnected
• We can‟t manufacture much in North America
• We almost can‟t write code here anymore
• The first big change is in our economy is that
• „Innovation‟ seems to be the last big
opportunity to make money in North America

33. Innovation Happens in Startups
• The best and the brightest now work in startups
• Startups are where the opportunities are
• Where the excitement is
• Where the smart people create the innovations
• That‟s why all the economic and employment
growth is created by startups
• And why nerds can earn more that football
players, rock musicians and movie stars

34. Internet Acceleration

35. Internet Acceleration
• The internet has changed everything
• The biggest change in our lifetimes
• Larger impact than the printing press,
automobile, air travel or atomic power
• The internet hasn‟t just connected everything
• It has also accelerated everything
• That‟s the second big change

36. The Internet is Changing Us
• I don‟t know if it is technology driven evolution
or just training, but
• Young people‟s brains work differently now
• Watch your kids multi-task
• Ask a university professor how it looks to them
• Many students are too ADD to read a full book
• This is having a real impact on company
formation, growth and exits

37. Our Species is Evolving
• People under 30 years old have much shorter
attention spans
• It‟s not just in their multi-tasking conversations
or reading material
• This shorter attention span also means that
many of the team will start to think about
moving to new jobs after 2 or 3 years

38. The “Equity Effect”
• Psychological vesting is about 2/3 of the time
• That means that the smart portfolio decision
for the employees is to move to the next
company at: Time = 0.67 Vesting Period
• The best and brightest go first
• These combine to mean that many modern
companies at two or three years from startup
• Are „middle aged‟ and starting to decline
• http://www.angelblog.net/Corporate_Structure.html

39. Being Lean

40. New Startup Economics
• Third, it‟ s amazing how little it costs to build a
tech company today
• Back when I was an entrepreneur, hardware
and software companies cost $10s millions
• That gave rise to the huge VC funds
• Also one of the reasons innovation used to
happen primarily in big companies
• Today, entrepreneurs can build companies for
$100,000s and, in some cases, $10,000s

41. Why It Costs So Little Today
• The Internet
• Fundamentally changing how we work
• And build companies
• Instant access to the entire global market
• Another example - open source software
• More importantly - virtual companies

42. Many Startups Raise No Capital
• As an investor for almost 20 years now,
• I‟m amazed by how many of the most
successful companies I see
• Or have helped to sell
• Have raised no capital at all
• Or just a little from friends and family
• These bootstrapped companies are usually
stronger and produce higher returns

43. There‟s No
Shortage of Capital

44. Let me repeat that
• Yes, I just said there is no shortage of capital
• Worried that I have been living under a rock?
• Or haven‟t been reading the newspapers?
• Yes, the papers say there is a shortage
• Its not true
• My friends who are investors and fund
managers, here and in the US, all complain
they can‟t find enough companies to invest in

45. Financing in Previous Times
• When I was a young entrepreneur,
• Didn‟t matter if it was a hardware company or
a software company
• Most companies cost $10s millions to build
• That created the enormous venture capital
industry, parts of which are still around today
• And many common misperceptions
• Like that there is a shortage of capital

46. What are your financing options?
• Use your own resources – even if you don‟t
have any money
• Bootstrapping should always be your first
choice
• (yes, I am an investor, but that‟s the truth)
• Some business models just can‟t be
bootstrapped

47. If you really do need investors
• What are your options to raise private capital
for your company?
• How many of you are planning to go to a
venture capital fund to raise your startup
capital?
• How many are planning on angel investors?

48. Who Actually Finances Startups?
• Just a couple of years ago when asked how
many were planning to raise capital from VCs
• A surprising number of entrepreneurs still
thought VCs finance startups
• The actual data is that Angel Investors finance
27x more startups than VCs
• www.AngelBlog.net/Angels_Finance_27_Tim
es_More_Start-ups_Than_VCs.html

49. The Really Big Money
• In America, each year Venture Capital Funds
invest about $20 billion
• Angel investors also invest about $20 billion
each year
• Even more surprising, Friends and Family
investors invest about five times more than
either VCs or Angels
• From “Fools Gold” by Scott Shane 2009

50. The Problem Is
• Most of the people who invest in Friends and
Family rounds
• Really shouldn‟t.
• Professional investors agree that the earliest
rounds are actually the most difficult.
• Friends and Family investors almost never have
the knowledge and skills to objectively evaluate:
– Valuations
– Structures
– Market opportunities
– Technology

51. Uh, Oh!
• These are our friends and family!
• And we really need their money.
• But don‟t want to have awkward looks across
the dinner table.
• So what should we do?

52. The Solution:
• Fairness
• Alignment
• Governance
• All built into the structure of the company,
• through the first investment agreement.

53. Finding an Angel in Vancouver
• More good news is that there are lots of angel
investors in BC
• And many more angels just a short drive south
• A third of the Bellingham Angel Group‟s
investments are in BC
• Angels are easy to find:
• www.angelblog.net/How_to_find_an_
angel_investor_in_Vancouver.html

54. Angel Co-Investment
• Just a couple of years ago, the conventional
wisdom was that angel investment topped out
at around $2 million per company
• Kauffman and ACA started talking about
co-investment just a couple of years ago
• Now I regularly see groups of angels investing
$5 million to $10 million
• Probably enough for 99+% companies

55. The Biggest Investor in Canada
• An angel investor friend of mine, Mike Volker
• Is famous for saying that the biggest angel
investor in Canada is
• The SRED program
• Don‟t forget IRAP
• Your research, and much of your development,
might only cost you 35 cents on the dollar

56. Many Other Sources
• We often think about banks
• But they usually finance mature companies
• Today, there are many new types of investors
and lenders
• New funds and entirely new investment
structures for entrepreneurial companies
• Search the web and ask your mentors

57. Tip: Why are they investing?
• What is the most significant reason investors
decide to invest?
• Hint: This answer applies not just to the
Friends and Family round but to all rounds.
• Expectation of a financial return?
• Because they like the business plan?
• The real answer –
• Because they like you.

58. Early Exits

59. Exits are the Best Part
• I believe exits are the best part of being an
entrepreneur or investor
• It‟s when we get paid for all of our hard work
and risk capital
• But it‟s also the least well understood part of
being an entrepreneur or private investor
• Simply because it doesn‟t happen very often
• One of my life goals is to provide information to
help entrepreneurs execute better exits

60. We Always Hear About The Big Exits
• The media always reports the really big exits
• From BC, it‟s exits like
Club Penguin‟s $350 million sale to Disney
• Or Google‟s purchase of YouTube for $1.6 billion
• Those exits are very rare occurrences
• The „new‟ big story is the large number of smaller
exits

61. Most Exits Are Under $20 Million
• Mergerstat database shows the median price
of private company acquisitions is under $25
million, when price is disclosed
• But the price is not disclosed in most smaller
transactions
• I estimate the median price to be well
under $20 million
• And probably below $15 million

62. Google Wants Even Earlier Exits
• I was surprised recently to learn just how early
Google wants to do acquisitions
• Charles Rim one of the top Google M&A guys:
• “90% plus of our transactions are small
transactions. … less than 20 people, less than
$20 million and that is truly the sweet spot”
• “we do prefer companies that are pre-revenue”
• http://www.angelblog.net/Google_Wants_Even
_Earlier_Exits_Than_in_Early_Exits.html

63. Examples of These Exits
• Google bought Adscape for $23 million (now Adsense)
• Google bought Blogger for $20 million (rumored)
• Yahoo bought Oddpost for $20 million (rumored)
• Ask Jeeves bought LiveJournal for $25 million
• Yahoo bought Flickr for $30 million (rumored)
• AOL bought Weblogs Inc for $25 million (rumored)
• Yahoo bought del.icio.us for $30 – 35 million (rumored)
• Google bought Writely for $10 million
• Google bought MeasureMap for less than $5 million
• Yahoo bought WebJay for around $1 million (rumored)
• Yahoo bought Jumpcut for $15 million (rumored)

64. Why This Is Happening Now
• One of my friends from a Fortune 500
company explained it this way:
– We (big companies) know we aren‟t good at
new ideas or start-ups
– We basically suck at building businesses
from zero to $20 million in value
– But we think of ourselves as really good at
growing values from $20 million to $200
million or more

65. Under $20 Million Is Easy
– A company priced at $100 million is already out
of our sweet spot to buy
– $100 million also requires board approval
– But at $20 million, it‟s really easy for me to get it
approved just inside my division
• Many big companies are spending more on M&A
than internal R&D
• Today, it‟s the best way for them to grow

66. Big Corps Have So Much Cash
• Many big companies have so much cash that
it‟s a problem – shareholders complain
• Google has $20 billion
• eBay has $5 billion
• Amazon has $3 billion
• Yahoo has $3 billion
• Microsoft has $35 billion
• Apple has $75 billion  cash and investments

67. Who Else Is Buying?
• The most familiar buyers are Fortune 500
companies
• But medium sized companies are also
aggressive buyers – especially public ones
• Private Equity funds are also coming back into
the market now that debt is available
• Also many individuals not ready to retire

68. Weekender Sold in 10 Days
• In 2009 when I wrote “Early Exits”
• I speculated that one day: “They‟ll probably
define an early exit as selling the company
before the end of the weekender”
• That almost happened in November 2009
• A team of entrepreneurs in London built a
business in one day and sold it online in ten
days: www.24hour-startup.com <– great video
• Not an isolated example, see www.Flippa.com

69. A New Really Early Exit
• Anyone heard of the company PumkinHead?
• How about About.me?
• About.me was acquired by AOL
• Just four days after its public launch
• That may be a new record
• But a better way to measure is from startup

70. A Local Really Early Exit
• This is a Vancouver company but they asked
me to keep their details confidential – for now
• This company wanted to test the idea for their
product, so they called on a US customer
• The customer asked to buy the company
• The CEO called me for help
• Three months later the money was in the bank
• Company was less than 12 months from startup
and hadn‟t launched the product yet

71. Big Exits In Just 2 – 3 Years
• Flickr sold for $30 million at 1.5 years old
• Delicious sold for $30+million 2 years from startup
• Club Penguin for $350 million at 2 years old
• YouTube sold for $1.6 billion at 2 years old
• Playfish sold for $275 million at 2 years old
• Mint sold for $170 million at 3 years old
• AdMob sold for $750 million at 3.5 years old

72. How Early Can You Sell?
• A common misunderstanding about M&A exits
is that you have to grow the company to be
profitable
• Or grow it to be larger than $X millions of
revenue
• The real threshold is to „prove the business
model‟
• For example, prove what a customer is worth
and what they cost to acquire

73. It‟s Often The Optimum Time
• As soon as you prove the model is often the
best time to sell
• Always better to sell on an upward trend
• Sell on the promise not the reality
• Often when you can get the best price
• Very often „stuff happens‟
• Most entrepreneurs wait too long to start

74. The Most Heartbreaking Error
• The most heartbreaking error I see entrepreneurs
and boards make is to exit too late
• It‟s caused by our fundamental human nature
• And happens primarily due to a lack of education
• In my opinion, more at the director level, than
company management
• This is probably the single factor that could most
improve the returns of angel and fund portfolios

75. Don‟t “Ride It Over the Top”
Optimum
Optimum time exit time
6 to start the exit IRR = 124%
More typical time
Investment Return (times)
5 to start the exit
4 More typical
exit time
3 IRR = 15%
2
Fastest
1 Growth
Phase
0
0 1 2 3 4 5 6 7
Years from Investment

76. What works today

77. Our 21st Century Economy
• What works today:
1. Startups innovate and create jobs
2. Angels, Friends and Family finance them
3. Big companies, and others, buy them early
4. The buyers continue to grow the business
5. Entrepreneurs and Angels do it again

78. A Golden Era For Entrepreneurs
• There has never been a time before when
• It was so easy for entrepreneurs to create
• Such valuable companies
• On so little capital, and
• Sell them so early
• For so much money

79. Resources
• www.Early-Exits.com – book on exit strategies
for entrepreneurs
• www.AngelBlog.net – blog for entrepreneurs
and angel investors
• www.Exits-Blog.com – blog on exits
• www.BasilPeters.com – for this PowerPoint
and videos of previous talks