In the United States, ousting Founders from their own companies is often the norm. Starting with the Polaroid Corporation founded by Edwin H. Land in 1937 to Apple's Steve Jobs, to Cisco's Sandy Lerner, to Yahoo's Jerry Yang, to Twitter's Noah Glass, to Groupon's Andrew Mason, to Zynga's Mark Pincus, to Etsy's Rob Kalin, there is a long history of Founders being fired from their own companies. 

The number one reason: Founders who have a disagreement in vision and management with the Board of Directors and their investors are fired. There is a tenuous balance between diplomacy, integrity and standing up for what Founders believe in vs. making shareholders and investors happy. 

"Edwin H. Land often made technical and management decisions based on what he felt was right as both a scientist and a humanist, much to the chagrin of Wall Street and his investors. From the beginning of his professional career, he hired women and trained them to be research scientists. Following the assassination of Martin Luther King, Jr. in 1968, he led Polaroid to the forefront of the affirmative action movement." 

His "unusual" management style and several disagreements with the Board of Directors ultimately lead to his dismissal as he certainly wasn't the typical CEO of his era, although he is something of an icon now. 

In a similar vein, Etsy Founder Rob Kalin, the incredibly fascinating, outspoken and iconoclastic CEO was fired not once, but twice from his own company. He had a fundamental disagreement in preserving the original vision of Etsy, while his Board of Directors wanted to scale and open their business to big factories, he wanted to "rebalance capitalism and empower people and small businesses to have more sway on the global stage" something Kalin was very public about promoting. Unfortunately, he also made the mistake of publicly saying that "maximizing shareholder value was ridiculous" and that "shareholders weren't important at all". These comments, along with his public disagreement on preserving the vision of Etsy, not surprisingly, lead to his dismissal. On a related note, since Kalin's dismissal, Etsy has been floundering, and according to this recent businessinsider article, Etsy is in big trouble.

Here in the UK, Elizabeth Gooch, CEO of eg solutions, a company she founded in 1988 was ousted by a board she appointed in 2013, only to make a comeback as CEO and make the company profitable again by correcting the mistakes of her replacement who had made big promises to scale the business, but during his tenure, saw the value of the company drop. 

The lesson here is that Founder CEOs often have that "one thing" that drive of leading their own companies because they love what they do. Replacement CEOs might have all the right business and university credentials, but they most likely don't have that "emotional drive" and "emotional investment" into making a startup a success. Most startups fail simply because people give up. 

One of the Founders of the VC Group Passion Capital, Eileen Burbidge, an American who is soon to be a British citizen, writes that "there has to be something that is emotionally anchored, deep-rooted and which will drive that founder through their most difficult days."

Having that internal drive, but also being careful not to anger shareholders will probably help Founders in the long run. 

The second most popular reason why Founders are fired from their own companies is when there are too many Co-Founders, and the Co-Founders do not get along and are competitive with each other. 

When there is a founding team of 4-5, that can sometimes signal a red flag. Also Founders who don't know each other very well, and tend to have similar skill sets are often the ones who become competitive with each other (eg, Founders who are all MBAs or Founders who are all engineers or Founders who were all former analysts etc.) 

Take this (rather amusing) Quora query of Co-Founders wanting to get rid of the CEO Founder:

"I'm working in a 5 team tech startup. We have come up with a product for Android all coded up and designed nicely, back-end server running with a rather poor right now but functional database and get's the job done for a start...And the bigger problem is, somehow, all the co-founders reached on their OWN, the conclusion that the founder/CEO is absolute horseshit. He knows all the buzz words, practices none. and the product literally came from 3 cofounders. [sic] All that the founder did was put together the team, convince one of the founders to contribute a good amount of cash and join him, and convinced the rest of the team that he knows what he's doing. 
One idea is to kick him out, because most of us have invested too much in it to let it go like that. If we leave, he has no product, at all. 0. [sic] Because obviously we will take it with us. Thing is, how do we fix this hurricane in the nicest way possible while hopefully still keeping in touch as friends?"


The situation reads like a typical Twitter scenario, when several Co-Founders gang up on one Co-Founder and oust him/her out. This was also the case with Tesla, when Elon Musk decided the other Founder, Martin Eberhard needed to go. 

After the initial infatuation of the startup launch, Founders might face the grim realities of being in a dysfunctional long-term relationship when the culture of the company they create leads to competitive behaviours. When Founders are fighting for positions, credit, projects and accounts, they are not working in conjunction with their strongest assets. 

The third reason why Founders are fired from their own companies is when the company hires too many people in an attempt to scale prematurely, and negative net income starts to bleed investors dry. (This is also the second primary reason why startups fail.) Groupon and Zynga exemplify this, although Zynga's Mark Pincus has recently been re-instated to his CEO position just last month; however when a company fails to scale successfully, and the burn rate catches on like a house on fire, take a guess who the Board of Directors will decide to fire or rather point the finger to blame for the mistake; certainly not a fault of the Board of Directors, whose collective presence was probably there for every expansion decision made, but The Founder CEO of course.

An anonymous Founder has the following to say after being fired: 

"Advice to other founders

This is every founder's nightmare. My advice: first, don't ever shortchange the time you spend with your board members. Build really good relationships with them.

And recruit for personality. My board would be perfect for a large foundation but it's the wrong board for a small entrepreneurial nonprofit. I admit that I had a big role in recruiting. Why did I recruit them? Because I didn't know what I was doing. They have no spine.

They chose to be unengaged and I let them do it. The finance committee did meet every month and we went over the finances in painful detail. This group of people didn't want to spend the time to be good board members. They were just interested in the once-a-month meeting.

I've changed my mind about being a voting member of the board. They couldn't have met without me if I had been a voting member. The dynamic was that they had all the power and I had none."

However, if you're a Founder who's been ousted from your own company, don't fret. Chances are, you will go on to do even better things and become Founders again of other companies as in the case of Cisco's Sandy Lerner who founded Urban Decay and Yahoo's Jerry Yang, who became an early angel investor in Alibaba; or, as in the case of Elizabeth Gooch and Steve Jobs et al, you might be asked to come back and take your rightful place as Founder CEO once again when the Board of Directors realise that the grass isn't greener after all. 

By Sierra Choi, Director of Marketing

[disclosure: Sierra Choi is also currently a Co-Founder of a start-up, Quantumemory, who is building her Board of Directors] 

Tools by Tech Start-ups Review - Roambi – Business Data Visualisation
There are host of new management tools for businesses of all sizes currently coming on-stream.  Tools linked to CRM, ERP, Project Management, Team communication which were once only used by large companies being offered to them by even larger companies such as SAP and Oracle are now available to SME via the cloud. One of the areas a lot of new tools are available is around Data Visualisation. We are fans of “Dashboards” for managing businesses and hence are now trialling several of these tools to see which is genuinely useful.

Roambi http://roambi.com/

What does it do?

Business data visualisation – especially used for sales over multiple products over multiple months  - budgets versus actuals, product categories, visualisation etc. At its core, it takes excel data you have collated and with guidance, creates charts. It is smart enough not to need to know what the columns ACTUALLY mean but guides you through a process so that you give it enough information to create comparisons between budgets and actual data, averages, best monthly sales etc. The beauty of this product is that it displays well on mobile and tablets having being designed from the bottom up for these smaller displays. In a rush for sales meeting and have nothing prepared? Perfect for these purposes.

Cost per user?
$10 per user per month for the basic plan. Cheaper plans for more users.

Ease of use? Plus across devices?
You have to dedicate some time to making sure you have the correct excel data in the first place – this is the real work. This tool will NOT DO DATA ORIGINATION or tell you what you need to look at. It is dumb until you instruct it. However the guidance as you step through the uploaded file is fairly good and leads to a good result. The charts are clean and well spaced and you have multiples choices from bar to line to pie to….

Bottom Line – whatever…:
This tool essentially replaces an analyst who can use pivot tables and do basic excel charting and link the charts to a nice document with headlines. For $10 per month – this is not expensive. The thing is – if you have your excel file set up properly in the first place with output charts– then it will more or less update itself as time goes on and you add more data and update the charts.
SO – if there is no one in your office who can use an excel charting tool or pivot tables – this is perfect. If you have some staff who have basic excel - then use them. Most of the trouble is in collecting the right data in the first place and knowing what you should be looking at.

Score: 6/10 - docking marks because it essentially just automates chart making, which excel has pretty much automated already.

By John Rowland, Managing Partner

Over the past two weeks we participated at the Digital Shoreditch Festival. From very humble beginnings in 2011, this year over 15,000 people registered to attend. Nearly 500 speakers and countless other meetups, demonstrations, and parties. A whole app was developed just to keep track of it all. Amongst others, I saw an awesome talk from Martin Hollywood entitled "UX Hacking or 'Banana Pianos and Beyond'".  I saw Brian Cooper speaking about the "Future of Storytelling", and my business partner, John Rowland, spoke on Wednesday on “How to get through a VC transaction." All fascinating, but, it was certainly hard work to keep up with it all. How many other great talks did I miss?

This comes just a month before the second annual London Tech Week  (June 15-21) which is even larger - 40,000 participants are expected, hundreds more speakers, at events in over 125 venues spread out across London.

London has a thriving tech community and it is important for all of us involved to get a chance to meet, share ideas and innovations, and celebrate success.  However, I wonder if we are not getting overwhelmed with too much information? The effort and energy required to filter and distill these huge events and integrate them into your company is often quite substantial. Most entrepreneurs I know are already giving 200% into their companies and given our industry is all about innovation maybe we should be looking at new models where we can still collaborate, share ideas, and party, but be able to make more efficient use of that most precious commodity - time, by filtering content that is relevant to our needs.

By Ashok Parekh, Director of Investment Services

This week, my diary was filled with many events and had quite a talk with many different CEOs. I also had a great experience at  Colliders’ MadTech forum recently and thought this was a really fascinating area of London’s tech scene and a sector where London has a great competitive advantage. Last Friday, at the Digital Shoreditch Festival, I got to sit down with Jeroen Vanderhaeghen.   Jeroen is a former management consultant and he and his team set have been using their insight gained from the industry into producing the next generation mobile technology platform. They founded their company, Hyghlyne in Belgium but  have recently moved to London to take their business to the next level.

I wanted to learn more about the business problems that they are aiming to solve, and their new solutions.   In their view, customers now expect a holistic experience through the discovery, shopping and experience journey. For millennials, in particular, delivering a great product in a brick and mortar shop is no longer enough– they need a post-purchase experience.   Hyghlyne technology, via a mobile device, aims to allow brands to do this in a seamless way. They see a costly fracture for brands in using a plethora of platforms, devices and channels to achieve these goals.  The powerful insight for me, was that if you are spending money on a customers’ discovery, their shopping experience and finally their experience and you don’t tie it all together, you are giving part of the house away for free.

Bloggers and writers based in the U.S. often like to make a comparison between London with Silicon Valley and often comment that it is better to go to the U.S. if a company wants $30 million in funding, but is that really true? Chances are, if you are a startup in the U.S., getting $30 million for your Series A or B is going to be similar to winning the lottery. With a population of 350 million people with a high concentration of startups, typically the ones surrounding the golden arc of Stanford, MIT, Carnegie Mellon, and Harvard, are often the ones that get funded into the multi-millions. 

In fact, when speaking with a Partner at Kleiner Perkins, who shall go unnamed, he/she told me that the typical focus is on Stanford-based start-ups. The UK has its own golden triangle: Oxford, Cambridge and my alma mater, UCL; however, the overwhelming majority of startup founders who are funded in the UK did not attend those universities. I would even make a quick extrapolation that London is the better incubator for startups at the seed funding stage. In addition, London is a great place to live, with a lively arts sector, in addition to the proximity to countries in the E.U. In fact, in a survey of 200K people around the world, London was the most desirable city to live in the world. As Samuel Johnson has said, "Anyone who is tired of London is tired of life." Certainly Silicon Valley has pockets of rare beauty amongst its ubiquitous concrete, flat urban landscape of parking lots and shopping malls, in addition to the unchanging, monotonous sunshine that looms over the smog in all seasons; however, the bustling intersection of arts, technology and science in a smart-city infrastructure is what makes London the rising Tech Capital of the world. As Oscar Wilde said, "Variety is the spice of life."

Here are some recent funding deals of note that exceed $30 million USD:

Innovations leads £25m Series C funding round in PsiOxus

Everline and Ezbob raise £30m through Oaktree Capital Management

Aspin Group raises £25m through LDC investment

WorldStores raises £25m

Budget gym chain Xercise4less secures £31m in funding round

UK tech venture NewVoiceMedia secures £29 million of new funding

There are many more interesting big deals of note, and too many to list in one entry; but make no mistake that exciting things are happening in London across all sectors. 

By Sierra Choi, Director of Marketing 

Last Thursday, I attended the latest entrepreneur pitching event hosted by our friends at the London Business Angels. 

 It was another high quality LBA event with six great companies pitching - Secret Saviours, Fhoss, Bactest, Navetas, Fertility Focus, and Astrid & Miyu. Refreshingly, three of the CEOs pitching were women - Sophie Hooper, CEO of Secret Flavours, Professor Annie Brooking, our current client, who is CEO of Bactest, and Connie Nam, CEO of Astrid & Miyu. It was fantastic to see as my colleague Sierra has recently written a blog post about the amazing rise of female tech CEOs in the UK just 2 weeks ago. 

Interestingly, but not related, half the businesses on show were pitching products targeting the female consumer. Fertility Focus have developed MedTech device. Astrid & Miyu are offering personalised, affordable jewellery creations. Secret Saviour are in the wearable-tech/ luxury cosmetics business.

The pitches from all six businesses were great, but I have to single out Secret Saviours as something that really grabbed my attention. They produce female underwear, available now, that has been clinically proven to reduce/ prevent stretch marks in pregnant women.

Now, being a man, I must tread very carefully here. At £59.99, the product is not inexpensive, but to my mind, it addresses a large consumer market, that I would think, would be willing to pay for this. I did consult Sierra, our Director of Marketing, what she thinks of the product, and she gave me some interesting tidbits that stretch marks are actually derived from fat pulling away from skin and muscle from lack of exercise and recommended doing squats, and topical application with plain olive oil, which is what she says she have seen women do in the U.S. to reverse the condition. This seems like a bit of hard work though to some and the product might present an easy shortcut. 

I wait to hear if my readers agree...

By Ashok Parekh, Director of Investment Services

Lately in the Private Equity world, I’ve been working on some deals where a company has a choice between a (relatively) expensive debt type product (be it a convertible loan, venture debt type instrument) and equity at a price they are maybe not quite happy with; along with some terms they don’t quite like either, such as liquidation prefs. The obvious choice is to go with the debt – its less dilutive hence protecting equity on the upside. However, surprisingly, it is not always the case though - what it comes down to basic maths and crossover points in valuation. Also, control elements, covenants and vetoes associated with each financial product come into play and may be more important in the end.

Here we look just at some basic financial maths.

Let’s take a live example:

Company GrowFast needs £5m in equity. They have a business plan ready to be financed which they believe can boost their sales and bottom line to allow them to be valued at £30m in 2 years – and a ready buyer is in the wing if they prove themselves.  They believe current valuation to be anywhere between £7.5 and 15m depending on what view/ metrics you use.

1: They have an offer of Debt with (for the sake of simplicity) no current cashpay coupon and an all-encompassing 1.75X return in 2 years. 

2: Or they can take preferred equity - non–participating(no double dipping) however senior on a payout to common. Valuation as of yet unccertain.

Now some maths: 

To explain – Debt is giving a guaranteed return to the provider but is not sharing the upside, hence it is non-dilutive – apparently better. However, if you can raise equity (even preferred) at a high enough valuation – the dilution effect on a cash-basis is less than the cash loss effect of paying back the redemption on the debt. See the charts below – original equity holders are better taking equity, not debt as the payback on the debt is more on a cash basis than the equity dilution effect at THAT valuation (a higher exit valuation – debt would become more attractive):

Running a goal-seek on the above shows that in this very particular scenario:

• Need £5m
• Exit £30m

The cross over point on valuation on whether you should take equity of debt is as below – below this valuation take debt – above take equity (all else such as exit valuation being equal) :

This does not take into account the terms – control, rights, etc. associated with each product – especially on defaulting on the debt. Again, the devil is in the details but a good place to start is with a model to know where you stand. (I can share this basic excel with anyone who wishes--email hello@whitelake-group.com)

By John Rowland, Managing Director

Most of us in the start-up world have read ‘Crossing the Chasm’. In the absence of a Go To Market strategy developed by an expert - it can be used as a guide for an early stage company. 

I summarised here how to do so – to save you reading the book (!) I’ve turned it into a Strategy Roadmap.

“If you leave your customer’s success to chance – you are giving up control over your own destiny.”

First revenue will be with “early adopters” – technology enthusiasts (Visionaries) – who need a lot of consulting and extra design on the product. They will require pilot projects – extra development work etc.,  - however they prove the value proposition of the product. 

Even for visionaries, the company needs to spell out clearly the order of magnitude jump in benefits – (I.E., prove beyond doubt it is a break-through product) - >10X improvement. Make the value proposition real and attractive.

Following visionary sales - the “early majority” – “the Pragmatists” – need to see a “Whole Product” (the core product plus any additional services/ support/ add-ons) from a provider they perceive as the market leader in the specific niche. This is why a company focuses ALL its resources on one niche – to be seen as the leader and attract the early majority.

Whole Product Concept – not just the core generic product but all the services/ support/ add-ons/ credibility needed for a pragmatist buyer to believe it is a market leading product. Pragmatists don’t want a test product or a new product – they want to have confidence in a Whole Product that they believe has longevity. Solve your target customer’s problem end to end.

Things such as:

• Additional software
• System integration
• Installation and debugging
• Change management
• Training and support
• Standards and procedures
• Additional hardware & software

Crossing the Chasm Approach:

1. Segment the market into Target niches – as small as possible but large enough to be a credible niche to prove oneself (Be a big fish in a small pond) – Company needs to be able to win 50% of the business in the targeted niche. Sub segment as many times as you need to get the right size niche.
2. Focus on one niche at a time – concentrate an overwhelming force on a highly focussed target. Overabundance of support in a confined market niche. Word of mouth spreads within this niche to allow you to own it.
3. Dominate target niche – become market leader.
4. Move to the next market niche 
5. Go to the mainstream market

Pragmatists need to be able to reference each other (calls/ trade magazines etc) – (I.E., a self-referencing market set)

Hence pragmatists like to buy from a salesperson from a previous relationship. Develop an alliance with an already accepted vendor. Pragmatists like to see price competition. They will pay a modest premium for top quality or service. Need patience to market to them…..Need to make yourself into the obvious supplier of choice. One of the keys is strong word of mouth reputation amongst buyers. Need 4-5 customers in one segment. Need to become the market leader in the niche.

How to pick the niche? Don’t focus on Target Customers – focus on Use Cases or characterise a market by what problems/benefits you are solving/giving.

1: Use case   -  characterisation:

• Economic buyer – payer
• End user
• Technical buyer (installer)

2: Examine different use cases BEFORE the application of the new product:

1. Situation – what is the moment of frustration for a buyer currently?
2. What is the user trying to accomplish (desired outcome)
3. Attempted approach (without the new product)
4. What goes wrong? How and why? (interfering factors)
5. Economic consequences (what is the impact of failing?)

3: Then with the new product:

1. With the new product how does the end user go about the task? (New approach)
2. What is it about the new approach that enables the end user to become unstuck?(enabling factors)
3. What are the costs avoided or the benefits gained?(economic factors)

Factors to measure each potential niche market (Scoring to make a decision):

1. Target customer/niche readily accessible to the sales channel we intend to use? Well enough funded to pay the price of the whole product?
2. Compelling reason to buy – is there a COMPELLING economic reason to buy in this niche?
3. Whole Product? (what is it that this niche needs and can we supply it with our Partners and Allies?)
4. Partners and Allies – Do we have the relationships to fulfil the “whole product”? Whole product alliances…
5. Distribution – do we have a sales channel in place that can call on the target customer?
6. Pricing – is the pricing consistent with the target customer’s budget?
7. Positioning  - Is the company credible as a provider of the product to the chosen niche?
8. Does this target facilitate entry into adjacent niches? (bowling pin effect)

Create the competition – for a pragmatist buyer to buy – they need to be able to compare the product to other products they know about – hard buy in a vacuum without comparison ability. Hence in the niche you choose there must be as:

1. Market alternative:  The vendor(product) the target customer has been buying from for years. 
2. Product alternative: Another product/vendor being disruptive as a competing technology leader but whom we can win against in our chosen target segment due to our focus.

Product positioning – how to make the product easy to buy (as opposed to trying to sell):

• Vendor with seen staying power - longevity
• Easy to compare
• Easy to see the value proposition
• Technically accurate description of the disruptive innovation – 
• the claim  - value proposition THE MAIN ONE (Isotera may have too many itsy bitsy value props – not one major one…)
• the evidence of this claim

Typically you sell to one of these 5 groups:

1. Enterprise execs making big ticket purchasing decisions
2. End users (low cost decisions)
3. Department heads – medium cost purchase decisions
4. Engineers making design decisions
5. Small business owner operators.

So there you have it – follow the above and you are in business and will have VCs all over you …..simple right?! :)

By John Rowland, Managing Partner

Despite the UK's long history of "imperalism," or rather, globalisation, as we like to say in modern times, the UK has not yet scaled into other nations with the tenacity of its former historical precedents. According to Sherry Coutu's 2014 Scale-Up Report: 

"The key metric for successful economies over the next 20 years won't be how many new companies they can create, but how many of those companies they can get to scale."

"Essentially, Sherry Coutu is calling for a significant pivot in the UK's industrial policy. Whilst promoting entrepreneurship and start-ups is clearly important it won't be enough in itself to ensure economic growth."

One of the challenges for UK companies to scale into other nations is something that it shares with South Korea in order to expand outside its own nation. South Korea is a fertile hub of startup activity, however most of their innovative startups, once they receive traction, becomes readily cloned by the US, and while the US clones move onto multi-million dollar or billion dollar valuations, the South Korean innovators are trapped within the ecosystem of their own nation. One of many examples is CyWorld, the social network founded by students at KAIST University in 1999, was cloned via Friendster in 2002 and then via MySpace in 2003 and later by Facebook in 2004. 

Generally, being "first" in the market is not necessarily a sign of being able to scale successfully into other nations. As friends in Germany tell me, the largest obstacle in German startups' ability to scale into other nations is the language barrier, and the most successful German startups speak English at their home offices.

If we take the recent example of Uber vs. Hailo- Uber has created a revenue model out of "hitchhiking" whereas one of the criticisms of Hailo was that it focused on the needs of the London cabbie, rather than on its customers, but then was unable to adapt to New York City's infrastructure in which most NY cabbies were not as high tech as London cabbies, and did not even possess smart phones.  Also Hailo was said to be halted by Uber's investors who were given a condition not to simultaneously invest in competitor companies and then finally quickly exited the entire North American market by saying it could not compete with Uber's monthly burn.

Interestingly, as a side note: Uber, although they operate in 230 cities around the world, they make the majority of their income from just 5 cities: San Francisco, New York, Los Angeles, Chicago, and Washington D.C. 

In contrast, China has a population of 1.4 billion people- it's a huge market to conquer, closely followed by India with a population of 1.3 billion. In comparison, the UK has a population of 64.1 million, the US: 318 million, Japan: 127 million and South Korea: 50 million. 

One of the obstacles into scaling into South Korea and China is that one cannot do business there or open shop without government approval and partnership with one of their top corporations. 
When Walmart tried to scale into South Korea without corporate partnership from one of South Korea's chaebols: Samsung, LG, the Shinsagae group et al, they were immediately ousted and the chaebols banded together to form E-Mart. 

Similarly, navigating through the many laws present in China is like diving into an endless swamp, and a company cannot scale into China without help from a partner company. 

Jack Ma, Chairperson and Founder of Alibaba, has infamously said, "You can fall in love with the government, but don't marry them." Governments, according to Ma, have a level of bureaucracy and inefficiency that makes them cumbersome for emerging startups to scale into a nation, but you still need to play by their rules. 

Instead of focusing on the US market to initially scale into, perhaps the UK should begin with its entry into the ripe Asian markets: particularly, South Korea, Japan, Singapore, Hong Kong and China. These markets alone have a demographic of more than 1.7 billion people. 

Although China is an indomitable tiger to be tamed, scaling could merely be a simple problem of a mere language difference, as is the problem for many South Korean and Japanese startups. As the monthly burn rate to scale into these nations would be significantly lower than entry into the US market with a potential upside of multi-billion dollar valuations once those markets are captured, it is something UK startups should consider. 

By Sierra Choi, Director of Marketing

This week I spoke at the Digital Shoreditch Festival in London. I made a presentation on “How to get through a VC transaction?” which was aimed at companies which have had angel funding and now wish to proceed to a larger VC institutional funding - a natural progression for many. My presentation (which I am happy to email to anyone who wishes) focussed on the differences an Angel backed company will encounter when they go to VCs for funding as opposed to angel investors.  

I was happy to chat with several interesting CEOs of start-ups afterwards including David Kosky of WorkLife and Alexei Poliakov of Locomizer.

First of all timing: you don’t want to go to VCs for funding until you have enough commercial traction to command a valuation that limits dilution. More importantly in the first instance, you need to be at a stage to command any interest from the VC at all. So an angel backed company needs to  ascertain their Valuation Inflection Points (VIPs) and monitor progress on them over time to then know when they are ready for VCs. Typical VIPs are commercial product readiness, first commercial revenue, users over a certain number, cash flow positive and (best of all) bottom line positive.

A company needs to know the differences in the process you went through with Angels and the one you now face with VCs. Major differences will be seen around:

• Valuation  - different approach by VCs as opposed to angels
• VCs will take a keen focus on valuation unlike Angels who are more “price takers” in the market. Angels often price deal along the lines of ...”Well if I put in £100k  - for this stage of a company  - I want 10-15%” and will often take or leave a term sheet set by the company with minor alterations. This is a valid way to view valuation from an angel doing many small deals for the portfolio effect with no time to negotiate each in detail. VCs will write their own term sheet.
• VCs will work backwards from an exit price calculated for some time in the future, include any more rounds at a potential uplift (for dilution effect) and then work back to a price for the current round – a more involved pricing process.
• They will square this off with valuation on current metrics – Price to revenue, price to EBITDA, (even price to users if you are Whatsapp! and make not yet a penny)
• Deal structuring – also different – more complex
• VCs will introduce terms such as Liquidation prefs linked to preferred shares  - which means they have the right to have X times their initial investment returned before common shareholders (the management and original angels). They will also look to “double dip“ and have a participating preferred share which then subsequently shares “as if” converted to common. See this article on Liquidation prefs even in unicorns!
• Other terms VCs like - anti-dilution protection, drag and tag rights, veto control rights, ratchets on valuation (for explanation on any of these terms in plain English – please contact us)

The old adage remains truer in VC than in any other deal negotiation: 

“You set the price - I’ll set the terms”

With the advent of many smaller VC funds – there is now more capital for series A so you may be able to get VC attention earlier than a couple of years back; however, just because a VC is small (actually most likely because) they will still hammer on these terms, unless you have something compelling that is being chased by the investment market.

I'll will write more about the following in my next blog: 

• Preparation for a VC round
• Strategy of a VC round – play hard to get or not…. 
• Closing the round – perseverance and deal fatigue

White Lake through our Virtual CFO London service offer growth companies a subscription service to cover strategic and control financial issues plus capital raising all in one from a team of ex-VCs.

In my years of experience as an ex-VC, a founding team can become distracted by the often time-consuming fundraising process and not spend enough time developing their core product and gaining traction with potential clients. 

Our goal with this service is to cover the range of emerging startups that need more than a simple accountant, but have not scaled to the degree to be able to integrate a full-time CFO and pay monthly brokerage fees for fundraising.


By John Rowland, Managing Partner