Convertible Note: An Entrepreneurs’ Perspective

If you are raising money for your startup, then most likely you would have heard of convertible notes. Your lawyer would say its cost-effective, other entrepreneurs would say it saves you the tricky valuation discussion and investors might like it for its simplicity. We heard all these good things and wrote a convertible note for our first financing. However, we realized that almost all the benefits can quickly vanish depending on your deal. So here are a few things to keep in mind.

 You will save money [really?] – Lawyers will tell you that a convertible note will cost half of the priced [equity] round. However, this difference can narrow significantly if you don’t have a standard deal. The lawyer fee can rack up quickly with back and forth on terms and documentation. If you know your investors aren’t atypical startup angel investors and are most likely to negotiate hard on cap, discount and interest, then you should seriously consider doing an equity round right out of the gate.

 Let’s not talk valuation, [but?] – I believe it’s a myth that a convertible note kicks the can down the road on valuation. Although standard convertible note terms include discount, most end up having a cap on conversion. Investors like to know [at least] how much they own for their investment in the company. A cap is nothing but valuation with a different name.  A $2M cap on a note is really $2M valuation of your company at the time of financing.

 Time to convert, [how?] – The idea of a convertible note is for it to convert into equity at some time [duh!]. The most likely scenario for conversion is at the time of priced [equity] round. Brace up for some ugly negotiations with your new investors on how a convertible note is converted. While your lawyer would suggest converting the note “into” the round, which means it is converted along with the new money [post- money], your new investors would want you to convert it pre-money to avoid dilution due to convert. This can significantly impact founders’ dilution depending upon the difference between the cap on the note and the valuation for the new round. The more notes you have, the worse the situation.

 Do worry about the interest, [seriously?]  – Most convertible notes accumulate interest in the range of 6-12%. Although it might look benign and lawyers might advise that it’s insignificant, you should pay attention to it incase you get lower cap on the note. Depending on the cap [or valuation] on the note, the interest itself can be significant at the time of conversion. For example, a $250K note at 8% interest compounded monthly at $2M cap and converted after 12 months will take away 1.35% of your company in interest only.  Most likely that interest comes out of founders’ pocket.

 

In a nutshell, if you aren’t getting a standard deal, then question really hard if you want to go for a convertible note. Entrepreneurs who are raising money for the first time can fall for a convertible note for its perceived simplicity and cost-effectiveness. Yours truly is one of them. Remember, devil is in the details!

Finding Our Feet at 500Startups

After a week of phone calls, parties, accolades and shopping, we arrived in Mountain View to start the 500Startups program. The office is right in the downtown at the top floor of a huge glass building. We walked in absorbing every little detail – the elevator, pictures on the walls, colors of the doors. After 18 months of working from home, it was like walking into freedom. We were so excited about the program that we showed up at 8:30 AM on a Friday. No wonder there was only one person in the office, probably on a call with his overseas team. We had no keys so we waited outside till he paid any attention to us.

500Startups Office

The moment we walked in, we were awed by the breathtaking view of the valley from the 12th floor of the building. Yes, this is where great companies are created! Slowly people started trickling in and we found ourselves in the company of teams from as far as Tokyo, China and Jordan. Everybody was jubilant and super excited for the program.

The weekend went quickly in apartment search, furniture and collecting general supplies. Soon it was Monday, the first day of the program. Everybody was anxious to learn how the superhuman 500Startup team will transform our ideas into successful businesses overnight! The opening day was full of conversations with partners, fellow entrepreneurs, companies from the previous batches, and the picture started to emerge. The magic wand is access to awesome information, multiple resources, and a solid support system that will help fuel our business. Over the next four days, we had sessions on fundraising tips and tricks, networking, fireside chat with Dave McClure to learn his amazing entrepreneurial story, and meetings with several mentors.

Today is Sunday and it is 80 degrees outside. My co-founder and I are working in the office on a new release. My head is still spinning from all the things we accomplished in the last five days, including seven mentor meetings, three networking sessions, and a negotiation for our investment round with a VC firm, plus acclimatizing in the new setting (we are from NJ). We were working 16 hours a day on our business before we started the program. Now we have to tap into all the awesome resources along with what we were doing earlier. It is overwhelming!

Hopefully we will find our feet this week and strike a balance between making progress on the business and taking the best advantage of 500Startups’ resources. It’s all about moving fast and we have hit the deck running!

18 Months to Overnight Success

Just two weeks ago we had no money left in the bank and were thinking of shutting shop. One email changed everything! We got an offer from 500Startups for their accelerator program that expedited our investment round, converted naysayers into believers and made us celebrities among our friends. While we are enjoying the limelight and new boost to our young business, I am pondering over our journey to be an overnight success.

It all started 18 months ago with a simple idea. My co-founder and I worked nights to launch our first product and decided to quit our jobs when we crossed 200 (yes just 200!) subscribers of our app. In the next six months we raised angel investment, launched our service and got featured in online media. While we were getting popular in our friend circle we hit the wall on subscribers. We pivoted twice, tried new tactics and spent money on advertising but nothing worked. The suspicion crept in quickly with little money left in the bank and no brilliant sparks to recover. Suddenly the idea of going back to a regular paycheck and ending our pain seemed lucrative. That was the first real test of our resolve to be entrepreneurs.

To our surprise, a few days of frustration, depression and deep introspection reinvigorated our startup bug! We decided to give it one more shot for a simple logic – we are out of jobs anyway, have some money in the bank, and probably this is the last chance [we both are 35+] to try something this crazy. Two months and hurricane Sandy [we live in NJ] later we launched Sverve. This time, however, we had no fanfare but super results. Things change quickly in startup world – now we had traction but no money in the bank. Our investors [prudently] asked us to find new money and we had put in all our savings in the business already so there was no run way left. That was the second big test of our resolve.

Once again we decided to plough through and gave ourselves three more months on borrowed money. With more traction and early revenue, we could excite some new investors and found ourselves in the final round of the selection process of reputed accelerator programs. However, with time and money running out on us and with no firm decision from investors, we were at the brink of giving up. Then the life-changing email arrived! We got into 500Startups, got early money, and are now closing a seed round.

I am writing this on a flight to Silicon Valley as we gear up to start the program in Mountain View next week. My co-founder and I just killed last three hours discussing our hiring plan, product enhancements, and future funding rounds. It is an exciting time and we are thrilled to be back in business with 500Startups.

This was the story of our overnight success. Overnight, yeah right!

Startups are Overrated

Startups are exciting and are pathways to riches and glory. The news of a 17-year old selling his company for millions of dollars, articles on celebrity entrepreneurs and lifestyle of billionaire tech entrepreneurs inspire thousands of talented people to take the plunge. In all the glitter and glory often new entrepreneurs don’t realize what they are signing up for when they start a company. My love affair with startups has brought me to my third startup. I have been fortunate to work with some great co-founders, teammates and investors. A few years’ of an entrepreneur’s life gave me plenty opportunity to see it up, close, and personal. Here are a few things that I learned on the way and thought every new entrepreneur ought to know before jumping into the startup world.

1. Emotional roller coaster – You have already heard that a startup is an emotional rollercoaster ride. How bad is it? There are days when you go on the coaster a dozen times! A great email from a user can pump you up and then slow traffic on your service can quickly dampen the spirits. I must admit that downs are more frequent than ups. You will be tested everyday for mental and emotional resilience.

2. Long waiting game – The stories of successful exits are inspiring but often hide years of struggle, pivots, and sacrifices to be an overnight success. A startup on an average takes 5-7 years for exit and 10 years to go public. Of course this works only for less than 1% of successful startups. A serious entrepreneur is looking to plough through months, if not years of slow growth, failed experiments, and be ready to discard all the hard work and start again.

3. Stay motivated in the face of failure – It is probably the most well-guarded secret of startups. Since an entrepreneur is the biggest cheerleader of his startup, he will probably never admit to it openly. There are days when you are almost ready to shutting shop. However, the same night you would be working till 3 AM to release the next important feature that nobody might get a chance to use. Yes, it is the passion that got you started on this journey but is it deep enough to carry you through those times when skepticism runs deep and nothing seems to be working?

4. Ability to take a No – You are talented, smart and at the top of your game. You aced your school and then your job. Nothing seemed impossible and you were always applauded and supported for your new initiatives by your friends, colleagues and family. Start a business and things turn upside down quickly. Your admirers turn skeptics and question the idea, your ability to pull it through and the decision to quit that well-paying job. Most successful professionals are not good at taking a “No” and that makes startups even harder.

5. Fight your own self – Most tech entrepreneurs leave their cushioned jobs to start fascinating companies. However, when things don’t click or while going through that long waiting period, you will question yourself a million times if quitting the job was the right decision. What if I do it on the side or what’s wrong with getting a hefty paycheck every second week? At times those thoughts overpower you and that is the time when you have to fight back and decide to stay in the game.

My goal is not to demoralize entrepreneurs but to give them a real glimpse into what they are signing up for by starting their companies. I strongly believe in following your passion and taking chances in life. Nobody becomes great by playing safe and not working hard. However, it is always prudent to know upfront what you are getting into.

Hey Entrepreneur, take a plunge, but with your eyes open!

9 Tips For a New Entrepreneur

Recently a few entrepreneurs asked me for some good resources to start with. I was in the same stage a few months ago and was grateful to other entrepreneurs to help me get started. The best thing about the entrepreneur community is its willingness to help and give back. In the same spirit I wrote a few emails about resources and general tips to new entrepreneurs. That’s when I thought of writing this blog. Hope it will be helpful to entrepreneurs in and beyond my network.

Here is what I would recommend:

1. Integrate in the Entrepreneurial Community – The first step is to network with fellow entrepreneurs and startup folks. I can’t stress more the importance of speaking with other entrepreneurs and experienced startup folks. I took every opportunity to talk to such people and learned a ton. It is natural for an entrepreneur to be fully consumed in building product and get isolated from the larger community. Product is important and so is meeting people otherwise no one will know who you are, what you are building, and why they should be interested in you. You are building a product to build a business and business is a highly networked entity. Go out and meet people.

2. Lean Startup Machine (LSM) – If you have an idea and thinking of prototyping it or in the midst of it, you must go to LSM in your local area. They have terrific workshops to help you validate your idea and provide you ways/framework to evaluate, pivot, and scale it. LSM is driven by lean startup methodology, an effective way for entrepreneurs to get to scalable business model. Moreover, LSM is an excellent way to get into local entrepreneur community in case you are looking for a door to get in.

3. MeetUp – I learned a ton about startup resources, how to get to investors, marketplace and best practices by mingling with fellow entrepreneurs and startup community at large. MeetUp is a great source to get information on local area events. I believe 80% of the events I attended were from MeetUp.

4. Mentor – We were lucky to have great mentors who guided us on finance, legal and fundraising. I will strongly encourage finding mentors who can help you in areas you need help. Look into your existing network or else reach out to people you respect and admire in areas you lack expertise. You will be surprised how willing people are to help you when you start a business. Just go talk to them!

5. Startup Incubators – There are hundreds of startup incubators all over the country. YCombinator and Techstars are some great incubator programs. You can search on Internet for incubators in your local area. These programs are excellent places to get your startup off the ground, find great mentors and raise capital. I would suggest going after the better ones and starting networking with them early. The more they know you the better your chances are to get in.

6. Social Media – It is important to plug into digerati to get noticed and get advice on building a tech startup. Twitter is defacto home of digerati so create a twitter account if you don’t have one and start following prominent VCs, entrepreneurs, and tech bloggers. You would find great information in their tweets and at times will get an opportunity to engage with them. Twitter is such a level playing field to connect with people you admire.

7. Blogs – If you don’t write a blog then start one today! In addition to writing your own blog, I will suggest reading blogs of startup folks – VCs, entrepreneurs and tech writers, and leave insightful comments. I would highly recommend reading blogs of VCs like Paul Graham [YCombinator], Fred Wilson [Union Square Venture] and more. I also read tons of blogs from entrepreneurs with Vinicus Vacanti [Yipit co-founder] blog being my favorite. GigaOM, Ash Maurya, BusinessInsider are some of my favorite tech blogs.

8. Technical Resources: There are some great resources both free and cheap to get you started on technical side. I like “Unbounce” to quickly create and host landing pages, “getstatisfaction” for user feedback, and Skype for communication etc. I also look up Quora and ask friends for tips on other technical resources.

9. List your Startup – There are some good places to list your startup to bring it in front of investors and mentors. My favorite is AngelList and recently I listed our startup on Gust. I would suggest being active on these networks to engage with the community.

This list is never ending but I will stop here. The product is core to your startup but it takes a lot more to build a business. Entrepreneurship is an exciting journey and an enriching one too. Go meet great people and learn from their experience.

All the best!

The Hardest Part of Being a New Entrepreneur

Entrepreneurship is tough but so is everything else in life. It is never easy to ace exams or ascend the career ladder or raise kids so why so much fuss about entrepreneurship being so difficult? It is my third attempt at startup business but it is different from prior stints as this time I transitioned from a corporate executive to an entrepreneur. The startup vagaries aside, I found one thing that makes this transition really challenging – an ability to take “No”.

Most of us have done well in school, career and life. We always got a pat on the back for acing an exam, delivering on a tight deadline or doing great things in life. Hardly ever our friends, peers or bosses questioned our judgment. In fact most of the time they were encouraging when we took up a challenging assignment. The more successful you are the more chances that people haven’t doubted your ambitions and abilities.

Turn an entrepreneur and everything changes around you! While most friends and peers will applaud you for your “courage” there will be a nagging suspicion if it is the right move. Does your idea have legs? Can you execute on it? The veil of positivity and trust is torn and suddenly a go-getter for the first time starts hearing doubts and “No” consistently. It can be demoralizing and emotionally draining for new entrepreneurs.

New entrepreneurs can get deterred in this environment of volatility and suspicion. The challenge is to overcome this phase and keep faith. It is easier said than done but certainly doable. Unfortunately schools don’t teach it and no one talks about it so it catches new entrepreneurs off guard.

It takes time to build a successful business. The road to scalable business is full of hits and misses – more misses than hits. The key is to enjoy small successes and build on them, and shrug off loses by learning from them. It tremendously helps to talk to other entrepreneurs, share openly and frequently with friends and friends, and find a mentor. Entrepreneurship is an immensely enriching experience. Immerse yourself in it to become a better businessperson and an individual!

Social 2.0: The Next Wave of Social Applications

The year 2011 belonged to social applications. Several iPhone apps that enabled some kind of social activity were launched last year. There is still no abating of this trend but it is obvious that majority of such applications will die in the next 18 months. After all, how many social networks will you update after you had a good meal or watched a great movie? Many technology pundits are decreeing the death of social networking applications. I have an entirely different take on it. Just like Web 2.0 companies brought real business models and value to dotcoms, it is time for “Social 2.0”, a set of applications that will bring value out of gigantic social databases such as Facebook, Twitter and the likes to solve real problems.

Humans are social by nature and love to brag to their friends and society at large. The Social 1.0 services gave us ways to share our updates with our connections online. The clear winners are Facebook with a friends graph of 800M users and Twitter with loose ties of 150M+ people and between them they accumulate billions of updates everyday. In addition, some specialized networks such as Foursquare capture our other activities. However, the whitespace in this industry has shrunk considerably. There will certainly be a few innovative companies that will provide new ways to connect and share information but it is increasingly becoming difficult and expensive to capture mindshare away from Facebook and Twitter. However, it doesn’t mean that social is a done deal.

While the first wave of social companies was successful in gathering what’s on our mind, our pictures, likes, short updates and check-ins, the next wave of social companies will build value-added applications on these gigantic social databases. Under billions of Facebook and Twitter updates is buried a wealth of information that can help us make buying decisions, quickly find great deals, and help reduce inventory by aggregating demand in real time.  It is time to stop inundating people with multitudes of social networks to get their specific status and move on to mine information gathered by friends and followers graphs. The best of social is yet to come.

Welcome 2012: the year of Social 2.0!

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