Good news for startups, Index Ventures launches new fund and Johnson acquires stake in Beer & Partners

There is good news for start-ups this Monday. Index Ventures, a EU based firm has launched a new fund focusing on early stage deals, and plans to invest in twenty companies over the coming 24 months. Aside from the positive indicator that money is being raised in order to invest in new companies and that we’re seeing signs of life from the VC sector, what really differentiates this move by Index Ventures is its strong focus on the startup, and it’s approach to investment in them.

What this means is that the partners of the firm will take an active stake in the start-ups by joining their boards, this is a shift away from the status-quo of larger firms whose partners typically don’t engage the startup team due to time constraints or otherwise.

Index Ventures new seed fund is exactly what needs to happen in the VC industry. VC’s need to take a more hands on approach in their invested firms to ensure a greater success to failure ratio, and at the same time, they need to fill the gap in early stage capital that is lacking in many European markets. Some of Index Ventures prior investments are MySQL, Skype, Playfish and RightScale.

In more financing news, the Guaridan has reported that Luke Johnson, the man who brought Pizza Express to market in the 1990’s has acquired a 27{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686} stake in the Beer & Partners angel investment network.

As a whole, good indicators, and again it seems that those who will lead the world out of its current slump will once again be entrepreneurs.

Is my time worth it? Pre-Money Valuation and the Burger King Opportunity Cost


You have to be thinking to yourself, what on earth does Burger King have to do with startups. Well, a few months back I was talking with a colleague regarding startups, projects, and someone wanting to buy a portal we had developed for a small sum, and the concept of the burger king opportunity cost came about.

In a nutshell it’s a way to quantify if the time spent working on your project is paying off, or if it’s an utter and complete waste of time, i.e. is my startup worth more than the money I could earn flipping burgers at Burger King.

Now, valuing a startup is no easy task, and most current tools are used to assess whether or not to invest in a company, not whether the entrepreneur’s time is worth the commitment to the idea and startup. However we need to understand and employ these methods in order to find out if you’re time is worth it. Depending on the stage of the startup, methods utilized by investors are

Anticipated Return on Investment (ROI) – which basically states that an Angel Investor should look to invest in companies that can yield 30x Return on Investment, i.e. 100k invested -> 3million return.

Why so high? Startups are RISKY investments and on average at least 50% will fail, as an investor, the portfolio of companies invested in should ideally bring in between 10x-50x ROI. Anything less, doesn’t justify the investment. Can your startup compete with this?

Venture Capital Method – which in its simplest form is

Post-Money Valuation = Discounted Terminal Value / Cash-on-Cash ROI

Post Money Valuation – is the valuation of a company immediately after a round of investment is closed.

Post-Money Valuation = Investment + Pre-Money Valuation

Terminal Value – the valuation of a company at exit, meaning the proceeds from the sale of the company via M&A, IPO where investor ownership is liquidated

Cash-on-Cash ROI – the cash-on-cash return on investment expected for said investment in the year of harvest (exit).

To calculate your BK Opportunity Cost, you have to get the value of your startup today. But how do you do that?

Fundamentally, we have to look at two things.
1. Is your startup able to bring in a ROI of 30x for an angel, and if it is
2. What is its Pre-Money Valuation in the Angel Round, meaning now.

Burger King Opportunity Cost

So for the sake of the exercise, let’s assume the following.

You and your partners own 100 shares of Startup Ltd, which is 100% of equity. And say you’re looking for investment into Startup, Ltd. of 100k in return for 20 newly issued shares, the implied post-money valuation is:

(€100k) * 120 / 20 = €600k

To calculate the pre-money valuation, the amount of the investment is subtracted from the post-money valuation. In this case, it is:

€600k – €100k = €500k

So you and your partner dilute your ownership to 100/120 = 83.33%.

To get the Burger King Opportunity Cost of your business you follow the formula

Pre-Money Valuation – Investment in Project ≥ Possible Salary Received from Working at Burger King * Partners * Time

Using the above example, Startup Ltd. has three partners, you’ve been working on the project for a year each, your Pre-Money Valuation is at €500k and say you invested in the company €100k. And, assuming the annual salary of a burger king employee on a monthly basis is €1000, Your BK Opportunity Cost would then be.

€500k – €100k ≥ €1k * 3 * 12 = €400k ≥ 36k @ BK

Woohoo, it was better off for the guys Startup Ltd. to start the project than to flip burgers.

Why? Because the opportunity cost of starting Startup, Ltd. is greater than the minimum sustainable wage that you can have in order to survive, and for that specific reason we’ve used Burger King, and not the salary of an iBanker, Engineer, etc… however those salaries can be easily applied to the opportunity cost formula.

On the other hand. If Startiup, Ltd. is not able to get Business Angel Investment of a 100k, and instead are only  are able to sell their work for €20k, then the BK opportunity cost is €20k ≤ 36k @ BK, and it’s reversed, meaning their time would have been better spent flipping burgers.


5 Tips on Presenting and Pitching to Business Angels


When it’s time to approach business angels there’s a few things to consider and a few other things to keep in mind, and a few even other things that for the most part are common sense yet entrepreneurs tend to forget about all the time.

But before you’re ready to look for someone that will assist you not only in the next round of financing for your company, but also extend a hand in helping to get the company off the ground, you should consider a few things.

For those who read this regularly, we may be repeating ourselves, but bear with us until we get to the meaty stuff.

Am I a functioning company, and do I have a product or service that I can offer for sale, or am I already selling? If the answer is yes, you can consider starting to contact business angels. If you are prior to this stage in your business development, then we highly recommend you save yourself and the business angels the time and not send anything out.

Now, since you’re ready to seek funding, you’re selling a product, and need a financial boost, here’s some very good, yet very simple best practices on….

Raising Angel Capital….

One: This may seem obvious, but apparently it’s not. Do not send your proposals to angels / angel networks that are not in your industry. If you’re a high tech company, a business angel network that deals with energy is not a good idea to send your summary to. Please stick to soliciting people to the industry that you’re in.

Two: Don’t bother sending proposals to “managed” angel funds. These fund managers are often that, just managers, they invest in companies but offer no outside help, and neither do the business angels. These types of funds tend to result in the following. 1. Companies going bust 2. Funds going bust due to poor investment decisions. 3. Angry investors.

Three: Two goes into three nicely, you want an Angel that can lend a helping hand, an industry expert on who you can count on and someone who will want to actively help in getting the company to the next level. That someone should mesh well with the current management, and aside from playing financier, should also want to mentor. This is VERY important.

Four: When sending out your proposal, executive summary, business plan – wait … actually don’t do the third one, never ever do the third one. “But why F3FundIt?” Because no one who is busy wants to read through 25-40 pages of your analysis, and I mean no one.

Send out proposals/exec summaries that are 2 pages maximum. Any more and it will probably wind up in the bin. It’s not that your sweat isn’t worth anything, your b-plan is in fact a guideline for you and your company, not for your investors. They’ll know if they like your concept in the first 3 minutes, and if something catches their eye, they’ll get in touch with you. At the same time, when you contact them, they can’t honestly say “No I haven’t had a chance to read your two page summary”, can they now?

Five: Something that we constantly hear form Angels are complaints about how poorly the company presents itself, how, after 15 minutes of speaking on the phone with an entrepreneur the Business Angels are lost as to what the hell the entrepreneur is doing. Know business terms, get accustomed to knowing your value proposition and pitching your company – practice in front of the mirror if public speaking isn’t your thing. Be clear, and be concise. Your startup will thank you for it, after all your selling it, and yourself.

Live by it, learn it, and do it. Chances are if you follow these tips and you have a good idea – you’ll wind up getting meetings, or at least phone calls.

And if any BA’s are out there, any other pet peeves you’d like to tell us about?

Seeking Investment, Seed, Angel and Venture Capital

Seeking Investment, Seed, Angel and Venture Capital

You’ve been working for days on end, the business plan is more or less finished, you’ve started developing your product, and still putting some polish onto the conceptual side of things. You figure you can get the basics up and running, or simply put you’re at a wall, and the best way and only way to get over it is cash. You’re now officially seeking or looking for investment. 


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