Session 3, Part 1: Financing Sources Panel


The following content is
provided under a Creative Commons license. Your support will help
MIT OpenCourseWare continue to offer high quality
educational resources for free. To make a donation or to
view additional materials from hundreds of MIT courses,
visit MIT OpenCourseWare at ocw.mit.edu. PROFESSOR: So tonight,
the first part of tonight is the financing sources panel. And we have two of our
three members here. So I’ll invite
them to take seats. Julianne, we’re putting
you in the middle because you have to keep the
guys on the end, and Axel. And what I’m going to
do is, to give them some context about where we are
in the course, just do a recap, so they know. And then I’ll have them
introduce themselves and we’ll go from there. It’ll be a Q&A after a brief
description of what they do. So where’s the class so far? We started off two nights
ago with an introduction to business plans and planning. We talked about the importance–
the basic tasks were to figure out how
to create value and how to capture value,
both for the entrepreneur and for investors. There are the three whys. Why this? Why is this an important
thing that you’re doing that you’re going
to spend your time on or you want people to
invest resources in. Why now? Why now is the
right time to do it. We’ve all been on the burning
leading edge of the wrong time. And then why this team? The investors are going to say,
well, is this the right team? And you need to be asking, do I
have the right team of people? And then if you get
those first three right, you should be asking
yourself the fourth why, which is why won’t this work? What am I missing here? That was the first
part of Tuesday night. And then Steve Purse
came in and talked about how to give
a pitch– taking all of that planning you’re
going to do and put it in a way to communicate. He focused pretty much
on pitching to investors, but he did point out
the same concepts apply to pitching to
partnerships and other things. Last night we had Bob
Jones come in and talked about finding your customer. It’s not sales. It’s not marketing. It’s finding your customer. What do they want? What will they pay for it? How do you find them? And he gave some really
personal examples of situations where he succeeded and
where he did not succeed. And it was very interesting. I got him to speak after
the break about something he’s actually working on. So that’s an important part
of what this class has been. It’s not about abstract
thinking about things. The people that are
talking are actually doing the things
they talk about. And he’s right in
the middle of that. And then we had
Rich Kibble come in and talk about business models. So I’ve got a customer. I think I have a
value, but what’s the model that I’m going
to use to generate revenue. The second part of
tonight, Charlie Tillett, who will come in
after the break, is going to do
financial projections. How do I take all
of that, figure out what it means economically? And we talked about it
being not a static process but a dynamic process– test,
redo, until you get it right. So once you’ve done
all that planning, you’re going to
need some resources. And one of the
resources is funding. So that’s what
the panel is about The people on the
panel represent sort of organized
forms of financing. But entrepreneurs get
financed in a variety of ways. So a lot of people talk
about just venture capital. But plenty of great
companies have been launched through angel,
friends and family type money. A traditional way
is using customers. You work for a customer. You see what they don’t want. You then try to move
from a services business into a product
business, productize it. There are grants. National Science Foundation,
small business innovation research funding, SBIR. This money is
available from each of 11 or so federal agencies and
can be up to a million dollars. I’m working with
a company I think is at a million dollars
of SBIR funding. And we have more recent types of
funding, which crowd sourcing, where the following at
Kickstarter and others have been to fund products. And we’re just beginning
under the JOBS Act that was passed a year or
so ago to have rules out that are going to get
finalized around crowd sourcing of investment. So in Kickstarter,
traditionally it’s I want to find this product. In the crowd funding
of investment, it’ll be I want to put money
into a company or a business. And they’re probably
some other ways people have funded,
like credit cards. Business plan competitions
have launched companies. I was involved in
the company who got launched because they got
sued for trademark infringement and settled and sold the
name to another company and got $25,000 for that. So that’s how they got launched. So lots of different
ways entrepreneurs got to be creative. But for the panel, we’ll
start with the basic organize and maybe we’ll
open it up to Q&A. So I’ve asked each
of the panel members to introduce
themselves– a little bit about their background, what
you should know about them. They’re entrepreneurs in the
sense that they raise money from people in
order to turn around and invest it in your project. So just as you’re an
entrepreneur to them, they’re an entrepreneur
to their investors. And asked them to talk two,
three, four minutes– whatever you feel comfortable–
to set the stage. So Axel, we’ll start with you. AXEL BICHARA: Sure. Happy to start. Good evening, everybody. I’ll go through my background
a little bit first. I am from Germany originally. Came to MIT in the late ’80s,
studied mechanical engineering, and sat in one of these
classes and ended up co-founding a software company,
mechanical design automation software company, out of–
at the time it was 15-375. And we raised venture money
relatively quickly $1.5 million to start with and then
some follow on rounds. I was VP engineering
in that company. We sold it after about
four or five years. I then became a
venture capitalist, was at Atlas Venture
for 19 years in total. Raised and invested about
$2 billion to $2.5 billion while I was there and
did mostly early stage, self slash early stage
technology startups. I left there about two years
ago to do deals on my own. And so I have helped start
a couple of companies and have made a number of
personal investments as well. And one of the
companies I helped start is actually an accelerator
for hardware startups. Called Bolt in downtown Boston. So that’s another financing
model I got exposed to and really got involved with
where you don’t provide just capital and some high level
expertise and strategy, but real hands-on
work on product, much more hands-on company
building, team building, than you do in a
venture capital. And we’re doing that with very
early stage companies there. So I can I think in
the evening here talk about it angel financing. I’m an angel. I’m involved in
this accelerator. I’ve been in the VC
business for a long time. And I’m also involved
in a company called Dragon Innovation,
which is a crowdfunding company for hardware startups. So I think that’s actually one
of the very interesting ways of getting companies off
the ground that may not show necessary the highest
potential from the beginning, but to launch an
initial product and then kind of see what happens. So in all this experience
I’ve accumulated, probably maybe the
most important lesson– the most important
lesson is probably always work with good people. Whoever your investors are,
you can’t fire your investors. You need to select carefully
who you end up working with. But also a match between
the financing source and where you are as
a company in terms of the potential of the market,
the potential of the team and everything. And often people think,
you’re only a great company if you raise VC eventually. That’s just so not true. That’s probably 1 in a
100 interesting startups is really suitable for
VC at the beginning. And it depends a
little on the stage, a little bit on the potential,
and also the potential may only discover over time. So I think that’s the
great and also– great other ways of getting
company off the ground. And one of the things every
good entrepreneur is focused on is dilutions. So you want to be
kept really– you want to be capital
efficient, but also dilution efficient from the beginning. And I think that often
means– mean crowdfunding is a great way to get pretty
much non-dilutive capital for a product. But whether it’s friends
and family money, incubators, accelerators,
angels– and then of course VCs have been going to
very early stage funding as well, where you
have a number of VCs writing $100,000 to let’s say a
$500,000 checks with very, very low barrier to getting a deal
done, which can be attractive. But it’s attractive
in terms of you get capital relatively
easily and quickly. But the question then
is, is that actually the right VC to help you build
the company in the long term. Is VC the right sort
of financing to build that company long term? So I guess we can
zoom in to all of that as the evening progresses. And I guess I’ll stop here
with the introduction. PROFESSOR: Right. Well, before I ask
Julianne to speak, Axel has been here before
to talk about this. And as I was putting together
the panel thinking, who’s the right mix of
people, it struck me that your recent venture Bolt
fit well with nuts and bolts. [LAUGHTER] But I did ask you
to figure out who I could get for the nut part. So we haven’t figured
that one out yet. Welcome. Julianne, you’re not
the nut by any means. JULIANNE ZIMMERMAN: Well,
I guess we’ll leave that up to the audience to decide. So before launching into
my background and my focus and my reason for being
here on the panel tonight, let me just say that the
thing that I hope all of you recognize by the end of tonight,
if you don’t already know it, is that every form of
capital has a use and a cost. And different forms of
capital are appropriate not only at different
stages, as Axel said, but for different
kinds of businesses. So you’ve already
been challenged in your first session in And to a lesser extent
again, in second session, to think about why
you’re doing this and what you ultimately
aim to accomplish. The answer to that question
is really important for a variety of
reasons, not least of which is to guide
you in making decisions about the appropriate
resources to call upon to achieve that goal. And one of those being capital. And there are very, very
different kinds of capital that have different
uses, different benefits, and different costs. And by the way, I can’t
remember the number, Joe. You might know it. But it’s a minority
fraction of companies that they go to IPO that
were ever venture funded. It’s something less
than a quarter. It’s like 16% or 17% percent. Do you remember, Axel. AXEL BICHARA: I bet it’s
less than that, actually. And so many of the
great wealth creation stories I found who never
have raised money, or just raised tiny amounts of money
and kept it all for themselves. If you can pull it
off, it’s a great way– JULIANNE ZIMMERMAN: So there
are lots of preconceptions, as Axel mentioned about, it’s
only a really good company if it’s venture backed
or you only really have steep growth potential, if
you can attract venture money. I really hope that by
the end of this evening, we’ve really completely
dispelled those preconceptions from your mind. So about me, I’m also an alumna. I came here in the mid ’80s. I double majored in aerospace
engineering and literature, neither of which
would lead anybody to imagine that I’d be on
this panel here tonight. And my first career was in the
manned space flight business. It was a great first career. When I came to the end
of that first career, I was looking for
something that was equally challenging and very different. And I ended up co-founding
a company called Greenfuel Technologies
before there was such a thing as clean tech. As a matter of fact,
at that point in time, the greens and browns feared and
loathed each other, absolutely wanted nothing to
do with one another. And here we were
founding a company that was algae biofuels. And I’m very proud of the fact
that in the time that company was alive, we actually
managed to change the tenor of those exchanges. In fact, we ended up
being frequently featured in industry magazines like
Industrial Light and Power, which is about as far as
you can get from Mother Jones in the known universe. So I’ve been on the entrepreneur
side of the table, too. One of the things that
is important to notice about that is we raised about
$23 million in– good evening. We raised about $23 million, had
a very interesting proposition, made some mistakes, encountered
significant obstacles, had a good team. And when the market cratered
and project finance went away, we defaulted on all
their contracts. And that was the
end of the company. So there are many
things that can trip you up that have nothing to do with
the things that you thought of or the things that
you planned on. Interestingly enough in
the entrepreneurial realm, having a company crater
is not necessarily the death knell of your
career as an entrepreneur. I went on to be involved in
a handful of other companies. By then, there was such
thing as clean tech. And having been
involved before there was even a commonly understood
wave or trend or segment, I was– a venture mentoring
service, clean tech open, the 100K– mentoring and judging
a bunch of really interesting startups, some of which never
actually went on to launch. Many, in fact, didn’t. But the teams would join
and break part and reform. And that’s probably
something that you also talk about in terms of the way
that you form teams together. As Axel mentioned, really
above all, the most important decision you make
every day is who to work with– who to work
with on your team, who to work with as investors,
who to work with as partners, who to work with as vendors. Ultimately that is far and away
the most important decision you make. So having done all this
mentoring and judging and blah blah blah, of
course I found myself drifting perilously
close to pretending I knew something useful. And a friend and
colleague and I had been discussing
for about two years some trends we saw going
on– not exclusively here in the Boston area,
but especially here in the entrepreneurial
community. And it’s slowly
dawned on us that we had what sounded an awful lot
like an investment thesis. So in a very
entrepreneurial way, we wrote that down, started
showing it to people. Keeping things secret is
not a great way to start. We started showing it to people. We showed it to
everybody we thought would be able to
give us a candid response to the question,
is this completely wrong? What have we gotten wrong
and what have we missed? What have we imagined? What have we left out? Why will this not work? And we did that for
about five months. And we got some great
feedback and we ended up founding and new seed
stage venture firm here in Boston area
called Vodia Ventures. That firm is now a year
old and we are still raising our first
fund, so we are also, as Joe alluded, we also raise
capital for our investors. And we’ve done
four deals so far. So we’ve made four
investments in companies here in the Boston area. And we don’t focus on
clean tech, per se. We invest in segments
that people often associate with
clean tech– energy, air, water, food
security, public health, are the two that kind of
don’t fit the clean tech set. And I’d be happy to
talk with any of you afterwards about why
those sectors are– why are we doing that. But the thing that
I’d really like to finish up this sort of
background monologue on is, when you are
thinking that you might want to go to an outside
investor to fund your company, as Joe alluded and as
Axel did as well, it’s really important not only
to know what kind of money you want and how much and
how much dilution you’re willing to accept and what
an appropriate model is for your stage and all the
rest, but are your interests and investor’s interests
actually aligned? Do you share the same interests? You’re going to be working with
this person, an actual person, very intimately for an
extended period of time. And so you really do want
to be very, very careful. You don’t want to
send your elevator pitch or your
presentation to everybody you think might
possibly be interested. You really want to
be very selective, as selective as you are
about your team members, in picking the people
you think you probably are going to share a good
working relationship with. PROFESSOR: Amir, thank you. I know it’s hard getting in. But I just wanted
to fill you in. Same format as before. We’re introducing the class
to financing sources– where do you get your
money, what do you look for, and then we’re going to have a
discussion about the financing environment and all of
those sort of things. So Amir, go ahead. AMIR NASHAT: I’m extremely
sorry for being late. Getting lost on
campus, I suppose. So my background
is that I actually was lucky enough
to do my PhD here on campus in a lab in chemical
engineering, Bob Winger’s lab. I currently am a managing
partner at Polaris. We’ve had probably about 25
years of investing in Boston. As Polaris, we’re going
on about 18 years now. My partners had worked
in another firm. We invest in all kinds of stuff. We’re a pretty traditional
venture capital firm, I would say. And we kind of stick
to the old model from the ’80s and the
’90s of how to invest. Again, my background, I
was a chemical engineer. I actually wanted to go
work at a startup that was being spun out
of Bob’s lab, and I had a very simple logical train
of thought which was my adviser and another guy on
my thesis committee were both starting a company. And I figured that if I took
a job at their new startup since they were desperate
to find employee number one, the chances they would let
me stand well for my thesis and not ask tough
questions was very high. So I said sure, I’ll go
work at your startup. And then what ended up
happening was just randomly I ended up interviewing
with– so it was being seed funded by a series of
venture capitalists at a company called Polaris
I’ve never heard of before. I had actually briefly worked
at Goldman Sachs– can people hear me OK or– I briefly
worked at Goldman Sachs in fixed income
trading stuff briefly. And I had never heard
of venture capital. And venture capital
is the freckle of the freckle in the
financial markets. It’s such a small
industry financially. So I no idea what to expect. I had no idea who
these guys were. But kind of interview after
interview, I was smart enough to realize they were probably
actually interviewing me for Polaris, because
I don’t think I need to meet the guy that
founded 3Com and created ethernet to get a lab job. And so little by little
I started to ask around and they seemed like people that
would be really good teachers. And that’s kind of what
I’ve done most of my life, including as a
venture capitalist. I just kind of associate
myself with people that have something to teach me
and some really good mentors– whether that’s
people I work with or whether that’s the
entrepreneurs in our companies and people we surround
ourselves on boards with. And so that’s kind of what I do. Within that context, we’ve
started several companies that I’ve been CEO of that
we’ve spun out of MIT. Sun Catalytics is one
in the energy space. A consumer product
company called Living Proof is another one
that’s more kind of materials and consumer products. Provasis Therapeutics was
a cell therapy company that we spun out of
the lab here at MIT. So there’s been a
series of companies. Again, I’m not an entrepreneur. I’m not very entrepreneurial. I did those projects
just because it seemed like it was really
logical technology that was going to help change
the world and nobody wanted to be CEO but me. But as venture capitalists, we
follow other people’s leads. We’re actually quite
conservative in some sense. And that’s kind of
maybe what we try to do. With that said,
obviously we take much, much greater risk than any
other investors tend to take. But we view ourselves as
kind of chicken shits, for lack of a better term. And say anyway,
that’s kind of us. That’s me, and I don’t
know what else I can say. PROFESSOR: So I think this
would be a good point just to maybe start some Q&A if
people have some questions. Otherwise I have some
things I can T up. But is there any pressing issues
that anybody in the audience has? There we go. AUDIENCE: [INAUDIBLE]. AXEL BICHARA: So it’s
like any deal you do. You give up a bunch of equity. You get some capital. And kind of what
you get in return. And there are many incubators,
which are typically sort of– if you desk a
little bit of mentoring and an internet connection. In accelerators,
you often have sort of a multi-focused program,
just more value added and one dimensional another. So I think the short answer
is, do your homework. Who are the people? What have they done before? What kind of real work
are they going to do? And how committed are the
people you’re working with? Is it sort of a loosely
connected network of people helping out? Are there people involved
who have full time dedicated to making
the companies they work with successful? And obviously there needs to
be a fit with your objective. Is your objective too–
I got some introductions. I’m networking,
financing sources, or are you looking for some
help to really build a product, help you build the team? Step back and figure out,
what financing sources should I go after and
who are these guys? How can they help me figure
out what the best path is. So when we started
Bolt, we saw the need for entrepreneurs who
have a piece of hardware as part of their offering
basically totally grinding to a halt in traditional sort
of software accelerator settings where the expertise
simply isn’t there. And it’s much harder
to build hardware than it is to build
an iPhone app. And so we built– we have
a big machine shop where you can build anything. We have a full time
staff, engineering staff, that helps you products done. And then people like me on the
financing, company building, team building, strategy side. But there’s a full
spectrum, from things that are really
lightweight to things that are fairly involved. We’re probably more
on the involved side. But there’s no good or bad. It’s really what’s a fit
with what you’re looking for. PROFESSOR: Axel, Y
Combinator kind of program where you get accepted,
there’s sort of a set formula about we’ll give you x dollars
for y percent of your company– is that how you work
or is it a set formula? AXEL BICHARA: We have, I
would say, a default formula, and then there are exceptions
to the rule depending on specific circumstances. For instance, if a company has
raised a bunch of venture money already. So we’re not just
working with companies that are– three guys out
of MIT and the slide deck. Some offers are long. Some have been
software entrepreneurs before, are looking for
the expertise to getting a piece of hardware to market. So if the company has,
for instance, raised a bunch of venture capital,
sort of the totally formulaic approach of a Y
Combinator wouldn’t work. So we have the formula
and then the rule, and then the exception
to the rule, basically. And my philosophy
and our philosophy is, if there’s a good company
and a good entrepreneur that we want to
work with, there’s a way to get a deal done that
makes sense for everybody. PROFESSOR: Are you willing to
tell us the default formula? AXEL BICHARA: Yeah. The default formula is, we
take 10% of common stock. We put in 50K. But the main thing you get
is you work with us for six to nine months basically
around the clock helping build product,
helping build team, get the company set
up for financing. And there’s often
the discussion, well, it’s only 50K. What’s evaluation? You kind of do the math. And the answer I normally
give is, let’s take the 50K. Give it to a charity. The reason for coming here is
everything else we’re doing. It’s not the 50K. So it’s very much
a company building is a value we provide in
this particular case, which is really diametrically
opposed from what I did in the past, which was
big VC firm where it’s really all about the capital. But that goes back to
what stage are you at and what do you need help with? And maybe one more comment
on the hardware thing– in the amount of money
and time companies I invested at Atlas that was
wasted because we made kind of beginner’s mistakes
in getting hardware products to market
would have been significant value added if
something like Bolt had exited, even for a VC
company at the time. AMIR NASHAT: Can I make one
comment about incubators? And as Axel put, now come in
different shapes and sizes. One thing I noticed as a
voyeur at Dogpatch Labs. We had set up Dogpatch
Labs some years ago. It’s now exists within
Cambridge Innovation Center. It’s more the value of being
around other people when you’re trying to
evaluate these places. One is the services
they provide. The other is actually
the value of being around sitting next to someone
who’s doing better than you, and how that motivates
you, and there’s this competitive
dynamic that kicks in. And you could watch it actually. Whenever I would
over there, someone would get off the
phone with Pepsi and they were talking to
some VD person over there. And you could see the other
teams around them really kind of– what have I done today? Maybe I’m a biotech or maybe I’m
a software company or something and I’ve got nothing
to do with Pepsi. But it just gets you
thinking, what did I do today? And you could feel
the energy that grew. So I think surrounding yourself
in an environment where it feels like people
are quite intense is actually
surprisingly valuable. And I think for a lot
of people that benefit from going into
these environments, whether it’s an incubator
or accelerator or anything else– sitting at home alone
and having to motivate yourself is actually quite
difficult a lot. It’s like going to the gym. Some days you’re great
and some days you’re not. It just kind of helps
if you’re at the gym with a bunch of
other people that are kind of running
around acting like they’re lifting a lot of weight. So I just think
that’s one part I would look at when I evaluate. It is a soft factors. It’s obviously
not a hard factor. PROFESSOR: We have
some other questions? AUDIENCE: [INAUDIBLE]. PROFESSOR: Yeah, we haven’t
covered that in the class, so if you want to
just take a moment and explain it to the
people that don’t know. AXEL BICHARA: Oh, explain? JULIANNE ZIMMERMAN: Sure. Go ahead. AXEL BICHARA: So explain
convertible note? So an equity deal is
not a convertible note. I’ll start with that. Equity deal is you basically
sell shares in your company. You give away a percentage for
the capital that gets invested. Convertible note is basically
you basically borrow money and you owe that money
back to the investors unless there’s an event
under which the note converts into equity. So may or may not
convert into equity depending on what the
terms of the note are. Often somebody
does, as an example, let’s say, $500,000
convertible note that has a term that says it
converts into the next equity round of financing off a
million dollars or more. And so if there’s such
an equity financing, it converts and there’s
some other terms like a discount interest rate. Or it may not convert
if the company, for instance– well, if it goes
bankrupt, the money’s gone. If the company is
acquired, there’s typically a term where you get
1 and 1/2 to 3 times your money back of the note. So that’s kind of the basics. So why did convertible
notes become so popular? It’s very easy and
quick to get done. It’s a one to two page document. And as an entrepreneur,
you get the money quickly and there’s no more
complicated legal documents to do an actual equity deal. On the flip side is,
you owe the money. It’s debt until it converts. And normally the rule with
debt is that if things go well, it’s a good thing to have taken. If things don’t go so well,
you may end up regretting it. Now in many startups,
things don’t go so well. So you just need to kind of
think the different scenarios through. We actually had a discussion
earlier today with a VC in one of the Bolt companies. So do we do a convertible
note deal or an equity deal? I could argue either side. But maybe as a rule, if you’re
talking about raising $250,000, $500,000 and you’re likely
to raise more money, like whatever, another
million plus a year later, it’s not a
bad thing to do. It’s a quick way to get started,
low legal fees and everything. By the time you reach $2 million
or more in convertible note, it’s just odd. There’s this amount of money you
have spent that’s converting, that’s going to be dilutive. It’s starting to be
a biggish amount. What if the pre money is
$4 million, let’s say. Well, already $2 million
converting at $4 million pre, a third of the company
is already gone. So I would say up to $500,000,
a million, $1.5 million maximum. If I see a convertible
note at more than that, it’s probably starting to
get pretty uncomfortable. AUDIENCE: [INAUDIBLE]. AXEL BICHARA: Right. Where they would not do it. One way to think about
it is, it really depends upon the terms of the note. If you go in and
there’s something called a cap or no cap. Basically a valuation
cap or note. So let’s say I give you
a note for like 500K and it has no cap on
it, so it converts in some future financing. So you’re actually
using my money to increase the value of
the company, which I then buy shares at. So some VCs actually do
that and it’s all about competing with the next
guy, get a foot in the door with some interesting
entrepreneur. But from a purely
financial standpoint, it’s actually kind of
crazy to loan somebody the money– it’s
typically 2% interest rate to increase evaluation,
in which you then invest. The other effects– if
you are a note holder, you’re actually
not a shareholder. So you won’t get a board seat. So that’s one. But for many investors–
understanding thee objective of the investors is
actually important. Like for many venture
firms especially, it’s a foot in the door. You care about the option
value of doing a deal later. So if that’s the valuation,
the main objective, that’s kind of one thing. Now if all the money
the company will need is let’s say $1 million–
it’s a bunch of angels and they really help you to
work on the deal– understanding the objective is actually
very, very important. Do you have alignment of
interests or actually conflict of interests? Is the objective
of the investors to increase your
evaluation or not? So there’s actually
no simple answer. There’s something beautiful
about an equity deal. You have aligned interests. You own more or less–
preferred versus common– but it’s more or less the
same shares in the company. So on the margin, I actually
tend to prefer equity deals. JULIANNE ZIMMERMAN:
So if I could just expand on Axel’s comments. Remember I said at the beginning
that every form of equity has its intended use, it’s
benefits and it’s costs, right? So as Axel said, a note tends
to be a really good instrument when you are expecting
there to be fairly rapid succession of events. So you’re going to
hit some milestones. You expect to
raise more capital. It’s an opportunity for
you and the investors, when your interests
are aligned, to do a relatively lightweight deal. It’s relatively
inexpensive to do. It’s relatively quick. You don’t have to
agree on evaluation when things are in
flux, which is also easier for both parties. And the advantage for
you as the founder is you haven’t already committed a
portion of the company away. You have the opportunity
to hit those milestones and justify evaluation. The advantage for
the investor, again, might be the optionality. So the option itself
have value to them. It might be that they like
the idea that their note will convert at advantageous
terms in the next round, and that’s when the cap and
the other terms come in. But again, the purpose
of a note is really kind of a temporary instrument. It’s not designed to
be long term instrument and it’s not intended
to be a kind of one off or permanent instrument. It comes due. It has a termination date. So on the date when it matures,
you either have to go back and say we need an extension or
you have to pay back that money or you have to have a subsequent
funding round in order for the note to convert. So what you want
to keep in mind is that’s what it’s designed to be. It’s designed to be
an interim instrument. Does that make sense? AMIR NASHAT: If I can make
one cautionary statement with notes– in
general, I think if I was an entrepreneur
I’d tried to take notes if I could, because
I’m paying you Tuesday which is in stock for
a hamburger today, which is the cash you give me. The one thing you
have to watch out for is if I gave you
$100,000 in equity and I own 5% of your company,
things go sideways whatnot, I own 5% of your company. So you may not like me. We may be in an argument,
but I’m a minor shareholder. And most of the controls
is in your hands. If the company goes belly
up with it’s $100,000 note, I’m a creditor
actually, which means your intellectual property and
a whole host of other things show up in court and I’m first
in line probably, unless you’ve taken other loans. So my power becomes extremely
strong for the same $100,000. So you really don’t
want to screw up a note you never
want to borrow money when you’re close to the edge. If you feel really good
about how things are, or you do what are called auto
converts, where at your option, the note converts to equity, if
investors will give you that. A lot of them wont. But if they allow you to auto
convert at some evaluation, then you never really
owe them the money. It will get converted to equity. But be careful about
owing people money, because they become
the controllers and it’s a court process,
which nobody controls. AUDIENCE: [INAUDIBLE]. AMIR NASHAT: How do you
define structural fit versus strategic? AUDIENCE: [INAUDIBLE]. AMIR NASHAT: Let me
start with the first part of your question, which
was the presumption that kind of alignment
might be different. I think you should be
really careful taking money from people where you don’t feel
like there’s 100% alignment. Every one of my
entrepreneurs and I, I hope, have the same exact goal. If you don’t, it can
get quite tricky. And then in later rounds,
strategics come in, people come in. Maybe objectives
shift a little bit. My price point maybe
lower for my stock than somebody that led a
very later stage round, so our sensitivities to certain
events may be different. But in general I
think everybody better be rooting for the same
thing, which is the company to be successful. And that’s one of the
reasons I would always worry about people with too
much of a strategic interest. Because a lot of
our bio-techs bring money from corporate partners,
pharmaceutical companies. A lot of times they’re kind
of interested in the company, but they’re really interested
in a particular asset. And we have to excuse
them from the room when we have
strategic discussions, because we’re trying to play
them against other pharma. It makes it somewhat of
an awkward situation. It’s very workable. But it’s not the same
as having someone you really trust that you can
just be totally open with. So every VC obviously has a
Rolodex, a series of people, a network, that they
bring to the table. But if you’ve got a group
that’s very, very specifically interested in a particular
piece of intellectual property or a strategic fit or
something like that, you have to be careful that
your company doesn’t drift away from that or that there aren’t
moments where you really can’t be as frank with
them as you’d like to be. JULIANNE ZIMMERMAN: I think
that’s a really lucid answer. What I would say is that
people throw around the word strategic, and as
you heard just now, strategic meant two different
things in the same sentence. So the way that I like
to think about it is, do we all agree what success is? Does success mean the
same thing to all of us? How will we know
that we’ve succeeded? And if the answer is
we’ve gotten $100 million or whatever figure it is,
that’s not a useful answer, because there’s a semi-infinite
number of trajectories that pass through that point. So what are the things that we
all care about accomplishing, and do we share compatible
ideas about what it will take to accomplish that success? So in the course of starting
and growing any company, you’re putting yourself
in, by definition, a high conflict environment. You always have more things
to do than you can do. You always have
decisions to make in an absence of
complete knowledge, so you never have complete
intelligence ever, even when you really good
situational awareness, you never have
complete intelligence. So even when everybody
is really tightly aligned and everybody shares the same
objectives, the same goals, the same motivations,
you’re going to have honest
differences of opinion. If you have divergent
notions of what success is or what we care about,
you have a problem. You don’t just have legitimate
differences of opinion about how to solve an
agreed upon problem, you have different
definitions of the problem. That can get very
ugly very quickly, and it can just be disaster. So ultimately what
you really want to be sure of is that everybody
on your team, everybody internally, your
investors, everybody, agrees on what success means. What do we aim to accomplish? How do we win collectively,
all of us together. How do we win? And then you have
the recipe to be able to deal with all
of those uncertainties and all those decision
points in a productive way. AUDIENCE: [INAUDIBLE]. some sense of what
scale of money is involved in your experience
in making investments in [INAUDIBLE] could be as big
as [INAUDIBLE] or as much money as [INAUDIBLE] a
sense of perspective. [LAUGHTER] AXEL BICHARA: I can try that. I mean, a typical seed
financing, angel financings, 250K would be really small. $500 million, I would say up to
$2 million, $3 million of angel is pretty doable these days. Valuations, again,
talking about a vacuum is always, always tricky. But there are a few deals
that get done at less than $3 million pre, I would say. And $5 million or $6 million pre
is a lot for a million dollar angel round. No VCs start at 100K with a foot
in the door kind of strategy and typically A
rounds are these days whatever– three, two,
$6 million, $7 million in the tech world. Bio tech obviously is
much bigger numbers. There are definitely VCs and
also, depending a little bit on the backgrounds of
founders, plays where you raise a lot of money quickly. One company that I
helped get off the ground called On Shape we raised
an A round of $9 million in November of 2012 and we
raised a B round of $25 million in April of this year. It was the all-star team
going after big opportunity and some VCs was very like
multi-billion fund saying, this is a big play. I want to be in there,
and kind of paying up to do a deal early. And that happens up
two $100 million rounds to if a VC firm is convinced
that there’s an emerging market segment or some really
interesting disruption going on, by piling a lot
of money you obviously acquire a meaningful
ownership as a VC, but you also help establish–
if you’re executing well– help establish the
success of the company. It would be very
hard for competitors to raise money if you have
$100 million into bank already. So there’s all kinds of–
especially sort of in emerging winners, you look at, oh,
these are crazy evaluations, They’re crazy deals. If you really look
at it, they may not be the crazy if
it is an emerging winner in a multi-billion
market disruption, for instance. JULIANNE ZIMMERMAN: So
again, I would say– sorry. Again I would say, there
are so many different kinds of companies. And remember that
we’ve all commented that venture money,
professional money, is a very small segment
of company finance. So I would say the way I would
answer that is starting from 0, the lower end is zero. You take no outside money. And there have
been companies that have famously gone bust after
taking in more than $100 million. So there’s an
extremely wide range. The appeal that I think
tends to get overblown in a lot of the press
coverage of big deals is it sounds very sexy. It’s very exciting. It sounds like a
lot of momentum. And that’s the intention
of a big round certainly. But there’s also, again, there
are always costs and always downsides. The downside is, if you take
a huge amount of capital– whether that’s hundreds of
millions for $10 million depending on your
stage of development– if you take a huge
amount of capital, it also puts a tremendous
amount of pressure on you to use that capital
very aggressively. And so companies have
also been blown up by taking too much capital. So really what you
want to be doing is focusing, again,
on Joe’s questions. Whys? What are all of the whys? Why are you doing this? Why now? Why this team? Why this amount of money? Why this timing? Why this instrument? Why this firm? Whatever. Because you really
want to be focused on is this the right amount
of money for my company to do what it is intended
to do at this point in time? It’s really easy to get
wildly out of balance there. AMIR NASHAT: Yeah. I mean, again, we write checks
as small as $50,000, $100,000 to get started. Our goal is probably $5
million to say $20 million in an investment. It’s a wide range. If the company only
ever needs $1 million and we all know
that going into it, it’s probably not a
fit for us, because we have a reasonably
large fund so we’d have to make so many small bets. It’s perfectly fine if a
company only takes $1 million and is either successful
or unsuccessful. Because we all learned
in a very quick way that it was really great. You’re never going to complain
if you took $1 million and turn it into a big win. I have had a lot of co-investors
who complain about that. But my view is, come on. You’ve got to be kidding me. And then of course
we kind of sometimes have to plan to put 20,
30 million hours through to support our company. I think the fundamental
question is exactly the why. And for us, we are so focused
on backing entrepreneurs, every single deal we’ve
been in pretty much, the intellectual
property shifted. Almost everything
about the deal changed. Very rarely does it work
exactly the way you want. The people are what
make it happen. And if a person doesn’t
own a lot of it, then why are they coming
to work every day? So I think whenever we own a
venture entrepreneurial type deal, whenever we
own a lot of company, something went horribly wrong. And when we don’t own a lot of
it and it’s a great company, something’s going great
because they’re raising money at great valuations. They don’t need the money
to bring capital in. They give a shit about stock. They don’t want
to give it to me. They don’t want to
give it to anybody. They’re going to charge a lot of
money for that share of stock. That’s the best kinds
of deals we’re in. Whenever we own
75% of a startup, of a venture backed
company, it’s because we had to
bridge them three times, they had terrible financings. So I love it when entrepreneurs
say, I don’t need your money. I’ll do it some other way. I’ll just take a little bit. Again, it puts you in
a precarious position. But it’s exactly
what Julianne said, which is once you raise
$100 million dollars, you need to generate $200
million, $300 million, $400 million dollars
worth of exit to keep your investors happy. They’re all on your board. They’re not going to let you
go down a path that’s small. So your flexibility just
went out the window. They’re going to push
you down a path that’s big return, big win, and that
may not be what you want to do. PROFESSOR: Let me–
in the materials, there’s a PowerPoint
on beginner’s guide to venture capital. And if you haven’t read it, you
should have before the class. But these guys
compete for capital to invest in their funds. And they have to show a return
history to the people that are going to invest in them. And one of the issues is that
when these guys put money in your company, that’s
when the stopwatch starts on how fast are they
generating return. So you’ve got to
be prepared to have everything running
as fast as you can once that money comes in. And they’re going to push
you to it, because they’ve got to turn around and say, to
their investors, you gave us X and we returned so
much time X. So even if you can convince them
to invest in your company, if you’re not ready
to run like crazy, if you don’t have a model
that you think could work, pedal to the floor,
it’s going to be a tension filled environment. Would you disagree? AXEL BICHARA: I
would probably agree. PROFESSOR: Was there a question? Then I’ll ask one. AXEL BICHARA:
There’s one up there. All the way in the top. PROFESSOR: All the
way in the back. All right. AUDIENCE: [INAUDIBLE]. JULIANNE ZIMMERMAN:
Well, so first of all– PROFESSOR: Maybe generalize
it so you could work it in. I was going to ask a
variation of that, which is what are the biggest problems
you see for people trying to raise money, because that’s
sort of what you’re saying. I don’t really
understand how they’re– AUDIENCE: [INAUDIBLE]. JULIANNE ZIMMERMAN: So
here’s the first thing. Or actually here’s
the zero thing. The zero thing is you really
need to have not just exchanges like this, but you need to
have meaningful exchanges with someone who’s
a mentor to you who can give you ongoing
sanity checks and guidance. This is my plug for the MIT
venture mentoring service. It is the most amazing thing. It is free to you. Go sign up right now. I mean, seriously. Do not wait. Immediately. Go immediately. The premise of the venture
mentoring service is that these amazing people, Joe included,
will spend time with you to advise you and, under
the terms of the program, cannot take any interest
in your business. And so it’s purely
objective advice. It’s in your interest, not even
in the business’s interests, it’s advising you
personally as founder. So go get that. The first thing then
after that is, forgive me if I’m reading too much
into your question, but it sounds like you’ve
already have some tensions that have already started. That’s a warning sign. Klaxon’s are going off. If you already have significant
frictions with someone and you haven’t even made a
financial transaction yet, I think you want to
step back and think about where those
frictions are coming from. Are they coming from legitimate
discussion points, things that you’re being challenged
to think about that are in the interest of the
company you’re founding, or are they personal frictions? Are they differences,
again, in objectives? What’s behind those frictions? And are those
productive frictions? So both of my fellow
panelists have spoken about the
beneficial frictions that you can
encounter, whether its from peers or from advisers and
investors and incubator staff pushing, pulling, tugging. Those can be
productive frictions. But if you’re
actually experiencing a lot of discomfort, I think
you should listen to that. AUDIENCE: [INAUDIBLE]. AXEL BICHARA: I have–
it really depends on who you’re working with. But I’ll answer your question
in a slightly different way. When an investor funds
you, they probably make a whole bunch of calls. Who are you? What have you done before? What’s it like to work with you? I’m often amazed how few
entrepreneurs actually check out the investors. So if you take somebody on
your board as a lead investor, call up three, four CEOs
they worked with before. I mean, I would say it’s almost
irresponsible not to do it. And it’s not just,
oh, they’re nice guys. Do they have a Rolodex? It’s what happens when things
get difficult. Because they will get difficult. How
have they behaved in follow on financings, in work
with strategic investors, at exit, management
team building. If there’s a problem
with a founder/CEO, how do they behave under
those circumstances. So just do the reference checks. Because as I said earlier,
they can fire you, but you can’t fire them. JULIANNE ZIMMERMAN: Did
that answer your question? AUDIENCE: [INAUDIBLE]. JULIANNE ZIMMERMAN:
Mechanically, there are only three ways
that anybody gets deals. You go out and get them,
you get referred to them by peers and folks
in your network, or you get cold submissions. That’s it. There are three mechanisms. Different firms
have different ways of going out and getting them. And by and large,
the return on effort for an entrepreneur for a
cold submission is pretty low. So if you’re
someone thinking you want to raise venture
funds at any scale, it’s in your interest to go see
who looks like the most likely best fit for you and go
find a way to meet them. But really ultimately it’s
important recognize that those are the only three channels. There aren’t any other channels. Does that make sense? PROFESSOR: What role
do introductions have? Referrals? Entrepreneurs should be
building a full team of people. Is that an important part
of who surrounds them in your experience? AXEL BICHARA: Wait, this
seems to be to questions. Is a referral or the– PROFESSOR: In other words,
having a deal referred to you, is that elevated higher in the
stack if you know the person and how does an entrepreneur
who doesn’t– get into that network? Any advice on that? AXEL BICHARA: Well, I would say
certainly anybody in this room should be able to get an
introduction to any of us with– I mean, it
should be trivial. It’s really not that hard at
all to get good introductions and they absolutely do matter. And there’s some that are
good, some that are great, some that are not so good. But a lot of it is through
networking, who do you know, and you absolutely want
to pursue investors through strong introductions. It’s a no-brainer. AUDIENCE: [INAUDIBLE]. AMIR NASHAT: I’ll
take that, I guess. It just really depends
on– in the Langor Lab, we used to have a formula
which was science– you publish the paper in
science, you file the IP, and you have animal data. You’re ready to roll. That works in general. But I think I think that there’s
a point at which the technology and innovation stops being
a series of questions and it starts being
a series of answers. And I think what you
find is that that’s a good transition wherever
people who in academia like to ask questions are no longer
really interested in pursuing that. And what companies
like to do is create answers– a technical
translation of concept into a product. And the rigorous-ness
of the precision of the answers and
all those things becomes really important. And it just becomes boring. It’s very hard to get a
grad student to do it, for a postdoc to do it. So I think that tends to be the
point at which it kind of hits a stalling point
in whether it then finds a home on the other
side where a group of people say, yeah, this could
easily be a product. Let’s go for it. It’s worth being a product. It’ll either sink or swim. But I think I’ve always–
at least in the lab, you could see a
trajectory of a project just stop being
interesting to people because the next steps
were kind of doing it 100 times to get the
quality control levels right or what not. To do a lot of animal
work just wasn’t that interesting anymore. So that’s when we typically
tried to kick it out. Yeah. When the questions become–
I think that curious people love unpredictability. And I think that scientists love
unpredictability in the data. Every experiment
you do, you find something you thought
was going to do X and it’s not going to do that. I think that’s a very hard
way to make a product. I think that’s kind of a
good scientific discovery. I think at some point
then it becomes a series of business unpredictabilities. Can we raise the money? And so I think
when it transitions from being a science
experiment to being technology is kind of when you
go from questions to answers in my mind. I don’t know how others– AXEL BICHARA: I would answer
it slightly differently in that there’s so many
potential investors out there. And I guess my view is more
from a software, hardware tech company, not so
much life sciences. By networking with potential
investors from early on, you’re likely to create
value in what you’re doing and that could be helping
validate technology or not, finding competition. It’s just interesting. What’s a body language? Do you have really
short meetings or are there people
leaning forward and wanting to spend more time with you? Every entrepreneur
needs to build a team from the beginning. I think value added
investors have great networks and may give you feedback
on where there at the holes in your team and maybe
make introductions. Some of the best
deals I’ve done is I ended up introducing the
founders to each other. That doesn’t happen
to you if you don’t go out and talk to people. So I would say, if in doubt, I
would start turning financing sources earlier. That doesn’t mean
you do a big pitch and set up a meeting
at a VC firm. That’s let’s grab a
coffee at a Starbucks with somebody who has
some domain knowledge and get some feedback. AUDIENCE: [INAUDIBLE]. AMIR NASHAT: What’s
the triple one? What’s the double? AUDIENCE: [INAUDIBLE]. JULIANNE ZIMMERMAN:
So this is again one of those it depends
kind of answers. The first thing that I
think you have to recognize is that by declaring that
you have multiple objectives, you’ve set yourself
a much harder task. That doesn’t mean
it’s not worth doing. But the point is, from the
get go, you’ve set yourself a very challenging proposition. And there is a much
smaller segment of investors who are interested
in that kind of proposition. Most of them are not
here on the east coast. It’s not that there aren’t
any, but most of them are not. You will find
congregations of them at places like SoCap, the
Social Capital Conference. You’ll find them at
places similar to that. There are foundations
that are beginning to do some investment because
they may want to see a return, but they don’t have to. So Omidyar for example is one. Domini is one. There are several like that. The Kahn foundation does some. But again, you’re
talking about seeking out investors who are a very
tiny sliver of an already small pool. So it just makes
it incumbent on you to be that much more focused
about really seeking out investors who are interested
in your specific proposition. Not double bottom line or
triple bottom line investors, but people who have
declared publicly that they are interested in
whatever it is you’re doing. Because it really is a
very, very narrow segment. The good news I would
say is that there is a lot more happening
in that segment of late. It’s very disorganized. Extremely disorganized. And you’ll find that there are
even more, on a relative scale, there are even more people
looking for that capital than there are looking for
conventional venture money, whatever that means. So it’s challenging. It’s not impossible, but
it’s really incumbent on you. You need to be very,
very focused in targeting exactly the right folks. That’s the last thing
I’ll say about that is that there are some
really good groups to join if you haven’t already–
again, to share peer knowledge. So the social entrepreneurship
groups, for example, are really, really
worth being involved in to share intelligence
with peer companies so that you can
help each other out. AMIR NASHAT: If I can
make a comment on it. Again, I’m going
to color my comment by saying that I invest in
biotech and health care stuff primarily. I find this whole concept of
double, triple, and quadruple, and I’m sure people make
up more bottom lines to be kind of
intellectually– like it lacks intellectual rigor. Without question, every
single person I’ve backed, especially in the
health care area, is not doing what they’re
doing to make money. They’re doing what they’re
doing to make a huge impact. If you want to make an
apology for not making a huge impact by
saying, well, I’m going to do some other stuff. I’ve got these
multiple objectives. They’ve got one objective,
which is to cure that disease. The faster they can cure it
with the least amount of money, with the fastest amount of time,
the most efficient way to do it is in the benefit
of the patient. And so what you find
is that if you then want to treat the most
number of patients with that medicine
or that approach, the most efficient
business model which creates the greatest
profitability, which allows the maximum
amount of sharing of value between the
person that gains the benefit and the person
who provided the benefit is the best way to do it. And when you look
at even in places where social entrepreneurship
is a big deal, I think when you’ll find
ideas that really take off, it’s because there’s a
sustainability to them. The person that
receives the benefit is willing to share that
benefit with the person that provides it. And I think this idea that we’re
going to skimp on all of that and not come up with a
business model that’s the best alignment of
everyone’s interests is to me where I kind of
get lost in the whole thing. I feel like usually when you
have these situations where you’re kind of compromising,
I suppose– because every time someone said double or triple
bottom line, which I’m not implying is your
case, it feels to me like a compromise versus
saying, let’s align the interests of the farmer in
the village who doesn’t have enough money for
the weather data, but they’ve got interest
in other things– let’s find a way to
make it a win-win-win and really line up
everybody’s interest. And then it becomes
actually only one objective, which is maximum impact for
everybody in the equation. So I don’t like the idea
that it’s compromise. And so maybe it’s
colored by health care and maybe my tech partners
wouldn’t necessarily view the world that way. But in every one of our
health care companies, everyone’s only got one
objective– cure that kid or make that impact. And the money is just
part of the whole equation to make it as efficient,
the Carnot efficiency of the idea basically. Just get it as perfect
as you can to line it up. So that’s kind of
the way I do it. JULIANNE ZIMMERMAN: I think
you should get extra points for saying Carnot efficiency
in a discussion about finance. This is how we
know we’re at MIT. We’re geeks. AMIR NASHAT: Everybody
understood it. No one was not understanding it. PROFESSOR: It’s on a
cheat sheet beforehand. [LAUGHTER] What about with
all the different– AMIR NASHAT: They
don’t use that word at Harvard, that’s for sure. [LAUGHTER] PROFESSOR: With all
the different financing sources that are out now
with crowdfunding coming on and the traditional friends
and family and everything, can you talk a little bit about
mismatch of investor groups? Have you seen deals
that were really good deals but they got
the wrong initial investors and you can’t work
with them and you pass? What kind of watch
words would you have for people about
how they approach that? Is that a common mistake? Or anyway, just can
you comment on that? Anybody? AXEL BICHARA: I can
start with a few. The most classic
is– well, I guess the two classic ones that
jump to mind right away are amount of capital
relative to the opportunity, where you’re going after some
marketable opportunity which turns out to be kind of narrow,
but you’ve raised so much money that you kind of need to
assume a level of success that the market
will just not yield. These are the worst deals. And the conflict may
not happen immediately, but it happens over time. So being realistic about the
potential of the market you’re going after and
raising the capital to really pursue the upset
over time, but not all upfront because you think the
stars will line up in terms of what you pursue. Some of the worst deals I’ve
done had exactly that problem. The other one–
strategic investors. Strategic investors,
by definition, have a strategic
interests and not primarily a financial interest. And just think about how long
it takes to build a company. I would say most
overnight successes took 10 years to get there. So let’s say there’s
a 10 year time frame to build a great company. During those 10 years,
whoever did the deal from the strategic
investor, which is often a biz deaf, culp
deaf person, whatever. You’ve gone through two
or three board members. They totally forgot why they
invested in the first time. They’re not professional
investors like VCs. And you inevitably end
with– not inevitably. You very, very often
end with situations where there’s a lawyer for
some strategic investor sitting there reading the fine print of
the legal agreement done eight years ago looking at
all the rights they have and really becoming a
nightmare to work with. I’ve been in situations where
the strategic investors, you’re trying to go
public, strategic investor has a board seat. I’m not signing off on DS1. We don’t want this
company to go public. People actually do that. Professional investors like
VCs would never ever do that. So I think having professional
investors on board first before you take on strategics
is a very good idea, because professional investors
help you get the terms and also relative ownership and all of
that right with strategics. And I’ve just seen
it so many times, that it may even be
great for a few years. But over the life of
a typical company, you very frequently run
into significant issues. JULIANNE ZIMMERMAN:
The other thing that I’ve seen happen
again and again is where there have been large
numbers of early investors, whether they’re friends and
family or loosely affiliated angels or what have
you, and someone has made the oversight of
making decisions unanimous. This is a nightmare. Because what ends up happening
is you might have, who knows, 17 or 20 or God knows how many
individual parties who have to sign off on every
subsequent thing that happens. And I’ve seen this
happen many times. It it’s a terrible mistake. It costs an incredible amount
of time to fix that and go back. And I’ve seen
individual investors who have put $10,000
into a company just tie up deals for days or
weeks or even scotch deals. So not just strategic,
not signing an S1, but individual very, very tiny
investors preventing a deal from happening. So if you do the friends
and family route– I would not advise you not to do
that– just make sure that you have good counsel. You don’t have the benefit
of a professional investor to advise you. Make sure you have good counsel
to structure that round so that you’re not bound to
having every single person participating agree with
every future decision you have to make AMIR NASHAT: I’m going
to give a squishy– like an early
biomarker or squishy answer for how I kind
of have viewed people I have found difficult work with. Again, we’re kind of in the
same boat most of entrepreneurs are in. We invest early. We bring other VCs on the
board and we get frustrated by our colleagues. So we’re like, pulling out
our hair, too, sometimes. And so I’ve always found
that investors that actually ask a lot of
questions– and it’s very specific to
a particular deal. Someone who’s a good listener
asks questions and is just listening and
questioning is usually probably a better investor. Whenever I’ve been in these
kind of nightmare situations, you later kind of
remember that, you know, they didn’t really ask
a lot of questions. They just told me a lot stuff. They kept lecturing me
about my idea, my company. I think usually that’s
like my first alarm bell whenever we’re
involved in stuff. And it can go wrong
1,000 different ways. But if they’re not asking
you interesting questions and listening, you’re probably
in for a bruising relationship, in my opinion. And the sooner
you get– and then reference checks, whoever
said that earlier– Axel had say reference the
hell out of investors. We do. PROFESSOR: We’re coming
up close to break time. Maybe one last
question and then I’ll ask the panel if you
have any last comments. Don’t feel you have
to, but if there’s something that’s pressing. Was there a question over there? AUDIENCE: [INAUDIBLE]. Do you know they
are going to have to be part of the
gang that’s employed, would you go talk
to them straightaway if they were very [INAUDIBLE]. AMIR NASHAT: I’ll give
you a general answer. I think you should get
rid of your biggest risk with the least amount
of money as fast as possible. And the way you described the
situation maybe your friend has– it’s like, my friend
has a rash, at the doctor– [LAUGHTER] I guess is basically
like, if there’s a point at which you are stuck,
then you should get unstuck. I’ll give you an example. Sun Catalytics is a
really good example. If I’d gone to my
partners– we were developing this energy stuff. And one of the big
markets was India initially for the company. If I’d gone to my
partners and said, hey, we need to put
in a bunch of money. It’s going to be great. We’re going to go commercialize
in India and all this. Or any other VC people. They’d say, India? What are you going to do there? So very, very early in
the life of the company, I realized we needed to have
that fixed, because it’s a major risk that one
of our largest markets was one nobody new. So we went and we did a deal. We got an investment
and partnership dollars from the Totten Group. I’ve never heard that
question in four or five years about the company. We can say anything about India. Yeah, we’re going to go
sell spaceships in India. They’re like, oh yeah,
you’re with Totten? No problem. And we just basically got
rid of the biggest risk which was this
perception that there was no market by solving it. Now could we have gotten
better terms later or whatever? Maybe, but I got rid
of it at the earliest point in the context of deal. And so if you’re really going
to be stuck with these guys, I think you’re going
to worry about that, that you don’t get rid of your
big– whatever your risks are. I always kind of list them and
I say the biggest one first. JULIANNE ZIMMERMAN:
I absolutely agree. The other thing that I think you
want to be really careful about is if there’s honest to God
only one major player you need to cooperate with
you and whatever that means– first
of all, you want to make sure you’re not
going down a cul-de-sac. Not only do you want
to retire the risk, but you want to make
sure that you’re not aiming for something
that’s not going to exist when you’re ready to get there. So you really want to understand
what’s in it for them, not just now, but when
you’re ready in whatever, a year or five years. Are you aiming for a place
where they will no longer be? Because what you
don’t want to do is spend that next chunk of your
life going into a blind alley. And I wasn’t here last night. I miss Bob’s talk. But I’ve seen it before. And if I remember
correctly, one of the things that he likes to say
is, go talk to people and don’t try to sell them. Just have a hypothetical
conversation. If I had this, would
that interest you? I understand your interests
like this, do I have that right? Do I understand what
you really want? You can have those
conversations without having to make big disclosures,
without having to formalize any kind of relationship. And just like you want your
investors to ask questions, you want to be asking
a lot of questions along the way of
any party you’re going to be working with. And if it’s really
true that you are going to be dependent
on this one entity, then you really
need to understand how vital it is to
them that they’re going to get to have access
to whatever you’re developing. And you need to stay very
close to that vital interest because even if you sign a deal
with them today, as Axel said, people change roles. They go on and work
for another company. You lose a champion,
and if you don’t already have a deeper connection
with that organization, you could be talking
to a lawyer, which is not a really great feeling. So yeah, you definitely want
to prioritize your risks. You want to retire them. You also really want to
understand if you’re really pinning your prospects
on this one company, you better make sure
that they’re going to be there when you get there. AXEL BICHARA: So I would
get the deal done early, at least get started early,
but get people experienced with deal making on
board, whether it’s an investor, advisory,
friend of the company. Some of these big
strategic deals, they may take more than
a year to get done. And the way to think about them
is really like a chess game. You need to think
a bunch of moves ahead to really
achieve your objective. And I’m a big believer
in skilled negotiation actually creating
value fundamentally because you find win-wins,
alignment of interests, and you may only
discover that after five or six moves in the chess game. And people who have done that
many times in their lives, just from experience, turns out
they can add a lot of value. So that maybe
another perspective. PROFESSOR: Are there
any final words of wisdom you’d like to impart? Well, we’d like to– AXEL BICHARA: Not met. PROFESSOR: I think have some
very valuable MIT– [LAUGHTER] no, wait, wait, wait. These are MIT paper weights. You can have them
if you promise not to throw them at entrepreneurs. I leave it to your discretion
of whether you use them with your investors,
your fellow investors. And we’d all like to
thank you very much and hopefully you’ll stay around
for a few minutes for a chat. So thank you. [APPLAUSE]

3 comments on “Session 3, Part 1: Financing Sources Panel”

  1. SunnyFly100 says:

    Real life examples (stories) would be very helpful (just like in previous video). Abstract talking is not very useful for people with no experience.

  2. Rob Saunders says:

    Annoying audio. Who has time for three introductions?

  3. Zen Michele says:

    Terrible sound

Leave a Reply

Your email address will not be published. Required fields are marked *