On Saturday, August 18, 2012, AlphaTech Counsel hosted its second annual event associated with the Forward Technology Festival 2012. The From Fumes to Funding event was offered as a track of BarCamp, held at the Engineering Centers on the UW-Madison campus. The topics were divided into three sections: Incubate, Accelerate, and Capital to Grow. Experienced entrepreneurs, attorneys, and founders of accelerators moderated the sessions and sought input from the attendees on a variety of common challenges faced by emerging technology company founders. Much like last year’s event on Capital Saving and Raising held at the Brink Lounge, the attendees engaged in lively discussion, asked questions, and shared their experiences. We put together a list of resources mentioned during the event: http://alphatechcounsel.com/Fumes-to-Funding-Resources.html
Casey Allen kicked off the Incubate section of the program, fostering a discussion about the people associated with technology startups. The group shared their experiences regarding whether to have co-founders, how to meet them, and how to split the equity pie. While it is tempting to give each founder an equal percentage, experienced members of the audience urged entrepreneurs to weigh the relative contributions of time, money, expertise, leadership, and other contributions of each founder and assign a value to each to arrive at an appropriate equity distribution. Casey stressed the importance of hiring an attorney experienced at working with emerging technology companies and granting founders shares subject to vesting.
In the Business Model and Customer Development session moderated by Greg Meier, he shared the current trend away from long business plans and toward more expedient business models, consisting of these steps: 1) capture the hypothesis, 2) validation / minimum viable product, 3) demand creation / scaling, and 4) company building. Using posters with Alexander Osterwalder’s business canvas model, four volunteers from the group described their businesses and Greg challenged them to narrow and define with specificity their proposed customers and value proposition. Some attendees pointed out that a business plan is still needed in certain contexts.
Chad Sorenson shared his experiences scaling a product-based business, particularly with regard to test markets, building a distribution network, and managing inventory. He learned that more reliable data can be derived from getting solid sell-through rates focused in one geographical area rather than by broad distribution. While it is common to use your local area as a test market, he suggested that you may also want to test the market in another location as you may have home court advantage locally. He and others learned through experience to maintain inventory on the low side when scaling up the business, because needing to produce more is a much better problem to have than unsold inventory. Chad also engaged the group on challenges faced by entrepreneurs scaling a service-based business.
Jonathan Fritz started his session on incubators and accelerators by describing the distinction between them. Incubators are typically sponsored by government, nonprofits, and universities and provide basic support services and camp sessions to help translate a rudimentary idea into a prototype (e.g., research parks). Accelerators are intensive multi-week programs in which the accelerator receives equity of startup companies in exchange for cash, mentoring, space, exposure to investors, and other services. All accelerators are not created equal; programs vary by stage of the company, industry focus, program length, the amount of cash, percentage of equity, and value-added services. Interested founders should research various accelerators to find the ones best suited for them and apply to more than one. The value of the mentoring and network far exceeds the value of the cash investment.
Capital to Grow
The final session on raising capital, led by Matt Storms, began with a discussion of friends and family rounds. The group discussed how to ask for money and ways to structure the investment (e.g., loan, bridge financing, or equity investment). Identifying milestones and the amount of cash needed to get to a liquidity event is a useful exercise. Some cautioned to keep friends and family rounds small to reduce the time and expense of chasing down dozens for signatures when raising future capital can be expensive and time-consuming. The additional disclosure requirements and risks of selling securities to those who are not an accredited investor were mentioned. Crowdfunding, raising up to $1 million in small increments from multiple investors through registered intermediaries online, presents opportunities and issues yet to be discovered, as the Securities and Exchange Commission has not yet published regulations regarding the crowdfunding provisions of the JOBS Act. Matt Storms then turned the discussion towards angel investments. Experienced investors suggested building relationships with investors (asking for tips and sharing general information about your company and plan) far in advance of pitching investors.
No “One Right Way” to Grow Early-Stage Technology Companies
As one moderator said, “There is no one right way.” However, if one startup is facing a particular challenge, chances are others have as well and can share what they learned. Through the exchange of information and experiences like this event and similar ones as part of the Forward Technology Festivial, the entrepreneurial community and its infrastructure can continue to grow.