BloGiza

The third parts of the series on equity has been published in The Marker (and will be posted here in English soon)

it can be found at http://www.themarker.com/tmc/article.jhtml?ElementId=skira20080828_1015962

I don't write enough about Koolanoo Group, which has emerged as our flagship Internet company. But as they say around here, when there's the occasion for a celebration, go for it.

Our big congratulations go to Koolanoo Group and CEO Oded Kobo for closing the company's latest financing round. Koolanoo raised $25M and brought in a significant new international investor.

Koolanoo Group operates 360Quan which has emerged as one of the most significant players in the growing Chinese social networking space. It is fast becoming the most popular social network for Chinese teens offering them everything from blogs to music to dating. It has also recently launched IQ, a new Chinese Internet browser.

Koolanoo plans to use its latest financing to venture into a number of new media ventures such as mail, mobile, and television.

It's been an interesting ride so far. When we saw them first, nearly two years ago, Koolanoo was a couple of guys with an idea. Today it's an international company with headquarters in Herzliya and a large team in Beijing. We wish them the best of luck.

I don't write enough about Koolanoo Group, which has emerged as our flagship Internet company. But as they say around here, when there's the occasion for a celebration, go for it. Our big congratulations go to Koolanoo Group and CEO... Shai Tsur

As mentioned in the previous column, the valuation for an early stage tech company depends in large part on how much its entrepreneurs are looking to raise. The obvious next question, then, is how much capital should you raise?

When it comes to fundraising entrepreneurs need to focus on getting enough money to keep the company moving forward. Startups die because they run out of money before they are able to raise the next round.

But what exactly does it mean to “raise enough money to keep moving forward”?

There are two schools of thought here. One says, “Raise the amount you need”. The other says, “Raise however much you can get.” There are pros and cons to both approaches. Let’s have a look at them.

First, “Raise What you Need”. This is the approach that a lot of Israeli entrepreneurs and VCs (well, most Israeli VCs and some entrepreneurs) prefer. It says that you should raise enough money to allow you to reach a significant stage of product and business development.

The major advantage of this approach is that it allows you to raise your next round at a higher valuation. While valuation tends to be subjective in the early stages, the more developed a company is with regards to product development, market traction, and strategic partnerships the higher valuation it can command.

Therefore, if you raise a round at a lesser valuation that allows you to build up your company, during the next round you can command a higher valuation and give up less equity.

The cons to this approach, of course, is that you don’t know what the fundraising atmosphere will be like when you start raising your next round.

Which brings us to the “Raise What you Can” approach.

The big plus of raising a lot of money from the get-go is exactly the big minus from “Raise What you Need” approach. In other words, you don’t know what is going to happen in the future, so it is safer to take the money now when you can.

Given the situation with world financial markets at the moment, this approach certainly has its appeal. In the past couple of months, we’ve begun to hear the term “nuclear winter”. It describes a possible scenario where the economic situation will become so precarious that all fundraising activity will grind to a halt. There is a fear that it will become impossible for any company, no matter how promising, to raise fresh money.

So, what’s the problem with “Raise What you Can”? First, raising a lot of money means that you will be giving up a lot more equity.

Remember the examples from last time. When you are looking for $2M you can often do it with only one VC fund looking for a 25% share. When the fundraising jumps to $5M, then you will likely be looking at two funds and you will have to give up 50%. At later stages, with more progress and a higher valuation you will be giving up less equity and the equity that remains in your hands is worth more.

But that’s not the only problem with this approach. When you have more than you need, you tend to spend more than you need.

Many investors and entrepreneurs still remember the days of the Web 1.0 bubble. Many companies overstaffed, partly because they could and partly because there was a belief that you needed a large headcount before you could go for an IPO. An inflated headcount often means that development goes slower (due to the overhead involved in managing a large R&D team) while your burn rate goes up. Thus it becomes harder to control the situation if you run into problems.

The other danger of having too much money is that you tend to lose focus. If you have the manpower to do five different things at the same time, you will be tempted to do those five different things instead of concentrating on doing the one thing you really need to do and execute on it properly.

So there you have it: two approaches, each with its own pluses and minuses.

The advice we like to give is to raise enough money to reach your major goal and then some. Make an honest assessment of the time and manpower that it will take to attain your desired milestone, and then assume that it will take at least another quarter to achieve it. Be sure to factor in the time you will have to spend raising the next round, always a process which takes more time than you might think.

The other piece of advice is to consider different financing options. For instance, many angel investors and some funds (including Giza when we invest as part of an Ofek project) are willing to provide seed-stage financing as a bridge loan. Instead of fixing a valuation and taking equity, the investors will loan you the money to reach a predefined milestone, assuming you will then be able to attract an additional investor during Round A. The new investor will then decide the valuation. In return, the seed investor will ask for a discount on the equity shares for the next round. The attraction of this setup is that it allows you to raise the money you need to get where you want to get without having to give up equity straight away.

Next time: Dilution and how to divvy up equity

As mentioned in the previous column, the valuation for an early stage tech company depends in large part on how much its entrepreneurs are looking to raise. The obvious next question, then, is how much capital should you raise? When... Shai Tsur

The Marker is publishing my latest series (in Hebrew) on the basics of equity:

The first column is now online, with the others coming once a week.

The Marker is publishing my latest series (in Hebrew) on the basics of equity: The first column is now online, with the others coming once a week. Shai Tsur

Thus far, we???ve looked at how the VC model works and what the investment process is. Now, we have to tackle the question that most entrepreneurs have of us, namely, ???Just what is it you people are actually looking for????... Shai Tsur

Alongside the challenges of actually getting a company up and running, the issue of equity often becomes a key concern in the life of entrepreneurs. After all, the startup is their baby and they are hoping to be rewarded for their hard work in the end. But many new entrepreneurs may not have a full handle on how a company should be valued and how equity should be distributed. So in the next couple of posts we will examine these questions.

Recently I’ve had a number of entrepreneurs pitch their company to me followed by the question, “Do you think I can ask for a pre-money valuation of $X million?” The short answer to that is, “Yes, you can ask but that won’t be much of a factor in the actual valuation.”

When you deal with traditional industries or later-stage technological companies, you can call on a set of established measurements – such as discounted cash flows and company assets – in order to establish a valuation. These help provide investors with a valuation that is relatively objective and takes into account the current state of a company and its future prospects.

Unfortunately, early stage tech companies usually have no revenues and few real assets, so the normal tools don’t really apply. This means that the valuation for early stage companies is strongly subjective. It is influenced partially by the quality of the team and the hype surrounding the space, but much more by the immediate financial needs of the company and the investor.

What does this mean for the entrepreneur? In short, it means that the valuation of the company is based mostly on what the investors are willing to give you, which in turn is based on how much you are looking to raise.

VCs (early stage ones at least) have a set investment model which is generally based on holding a 20-25% equity stake in a company. In the case where two VCs are investing, each one will want to hold 20-25%. This dictates the valuation we are willing to consider.

Let’s put it into numbers. You are looking to raise $1 million. Your friendly VC wants to hold 25% of the company post money (in other words, after the investment). So, if we divide $1 million by 25% we get $4 million dollars post money (i.e. the $1M put in is now worth 25% of the company). If we subtract the money investment from the post-money valuation we get $3 million.

This means that your company is worth more or less $3M.

Let’s take a second example, where two VCs are involved. You want to raise $5 million from two VCs. Each will want 25%. Therefore your post-money valuation is $10 million ($5M/50%) and your pre-money valuation will be around $5M.

These figures are not set in stone. But they are the basis for negotiations. Obviously, if you have a number of investors fighting over your company, you will be able to demand a higher valuation. But this will give you a ballpark figure about what you can expect your valuation to be.

Also, it should be noted that this rule does not necessarily apply to angel investors. Angels have their own goals with regards to the revenue they will see from your company and will offer you a valuation accordingly. One well-known angel investor I know has a standard model of taking 20% of the company in return for $100K seed money. Some are less generous, others more so.

To reiterate, your valuation is directly affected by the amount you want to raise. Next time, we will tackle the issue of how much do you need to raise.

Alongside the challenges of actually getting a company up and running, the issue of equity often becomes a key concern in the life of entrepreneurs. After all, the startup is their baby and they are hoping to be rewarded for their hard work in the end. But many new entrepreneurs may not have a full handle on how a company should be valued and how equity should be distributed. So in the next couple of posts we will examine these questions.

Recently I’ve had a number of entrepreneurs pitch their company to me followed by the question, “Do you think I can ask for a pre-money valuation of $X million?” The short answer to that is, “Yes, you can ask but that won’t be much of a factor in the actual valuation.”

When you deal with traditional industries or later-stage technological companies, you can call on a set of established measurements – such as discounted cash flows and company assets – in order to establish a valuation. These help provide investors with a valuation that is relatively objective and takes into account the current state of a company and its future prospects.

Unfortunately, early stage tech companies usually have no revenues and few real assets, so the normal tools don’t really apply. This means that the valuation for early stage companies is strongly subjective. It is influenced partially by the quality of the team and the hype surrounding the space, but much more by the immediate financial needs of the company and the investor.

What does this mean for the entrepreneur? In short, it means that the valuation of the company is based mostly on what the investors are willing to give you, which in turn is based on how much you are looking to raise.

VCs (early stage ones at least) have a set investment model which is generally based on holding a 20-25% equity stake in a company. In the case where two VCs are investing, each one will want to hold 20-25%. This dictates the valuation we are willing to consider.

Let’s put it into numbers. You are looking to raise $1 million. Your friendly VC wants to hold 25% of the company post money (in other words, after the investment). So, if we divide $1 million by 25% we get $4 million dollars post money (i.e. the $1M put in is now worth 25% of the company). If we subtract the money investment from the post-money valuation we get $3 million.

This means that your company is worth more or less $3M.

Let’s take a second example, where two VCs are involved. You want to raise $5 million from two VCs. Each will want 25%. Therefore your post-money valuation is $10 million ($5M/50%) and your pre-money valuation will be around $5M.

These figures are not set in stone. But they are the basis for negotiations. Obviously, if you have a number of investors fighting over your company, you will be able to demand a higher valuation. But this will give you a ballpark figure about what you can expect your valuation to be.

Also, it should be noted that this rule does not necessarily apply to angel investors. Angels have their own goals with regards to the revenue they will see from your company and will offer you a valuation accordingly. One well-known angel investor I know has a standard model of taking 20% of the company in return for $100K seed money. Some are less generous, others more so.

To reiterate, your valuation is directly affected by the amount you want to raise. Next time, we will tackle the issue of how much do you need to raise.

Alongside the challenges of actually getting a company up and running, the issue of equity often becomes a key concern in the life of entrepreneurs. After all, the startup is their baby and they are hoping to be rewarded for... Shai Tsur

Over the last couple of months, I have developed a growing addiction to social media. Where a year ago my main channel for interaction with friends was email, followed by email and Facebook, nowadays it increasingly includes Twitter and shared links via RSS readers. Not to mention FriendFeed, which is a mélange of everything else.

However, no real framework governs all these tools. Some people you contact via email, some people you send messages to in Facebook, some people you tweet. Some people you talk to across multiple channels oftentime continuing a conversation across multiple platforms.

Which is all great in theory – more ways to communicate between people should lead to more and better communications. Except that I’m beginning to think this isn’t actually the case.

I’ve had a couple of examples in recent weeks where I’ve contacted someone on Facebook regarding some issue fully expecting the person to respond via Facebook. Except that the person doesn’t respond until days later and I realize I should have actually emailed (or, heaven’s forbid, phoned) them. 

Or, I find myself having running conversations with people via tweets and private messages on Twitter. Except that Twitter was never built to be an effective tool for two-way conversations and eventually the whole exercise gets so frustrating that I go back to email.

The explosion of social media choices does provide us with a lot more options for communications. But lacking a good framework for organizing and keeping track of these conversations, it mainly seems to increase the noise.

Over the last couple of months, I have developed a growing addiction to social media. Where a year ago my main channel for interaction with friends was email, followed by email and Facebook, nowadays it increasingly includes Twitter and shared... Shai Tsur

We had the honor of co-sponsoring last Thursday's Garage Geeks event in which Sergey Brin came down to Holon to pay a visit to the Garage. Several hundred people showed up (apologies to everyone who asked me for an invite last week - space was really limited) to bask in the man's Google-y glow.

Sergey actually stayed for quite a while, close to two hours. At first, he seemed a little surprised at the rock-star reception he got. Either that or the poor guy was just trying to eat something while everyone mobbed him. But later in the evening, after some presentations by the Garage crew, he got up on stage to give a little talk and answer questions.

The Q&A session was also surprisingly lengthy. (Ayelet Noff has posted a video of most of it which you can find here). I'd be lying if I said that we heard some earth-shattering revelations from Sergey, but here are a few of the more interesting tidbits:

• When asked where Google is focusing its attention these days, Sergey mentioned both Android and RE>C (Renewable Energy Cheaper than Coal), Google's cleantech initiative. I'm actually kind of thrilled to hear this. Along with the proliferation of the iPhone and similar devices, the rise of Android may finally help launch mobile Internet as a mainstream application. Google is one of the few companies that can leverage its size and prominence to introduce new standards and paradigms for the mobile world, so all the power to them. And although Sergey claimed rather politically that Google and Apple are not competitors here, it will be interesting to see how the dynamic plays out.

• Someone asked Sergey if Google was planning on buying Yahoo, which led him to tell the story of the first time the two companies met. In his telling, it was in late '96 or early '97. He and Larry had put together a small company already and approached David Filo with an offer: Give us a couple of million dollars and we'll develop a good search engine for you. Yahoo passed on the offer. In retrospect, Sergey says he understands what Yahoo was thinking -- a couple of crazy kids with an idea come to you asking for a lot of money and it seems a bit ridiculous. But from such events is history created.

• Charmingly, Sergey brought along his parents. Which led Yossi Vardi, who helped bring Sergey to Israel, to point out that in the eyes of Sergey's mother, despite the fact the guy has gazillions of dollars he still hasn't finished his PhD. Sergey says that he plans to finish the doctorate one day.
  
  Now, being that we are all a bunch of provincials, someone had to ask when Sergey is planning on making aliyah. To which, a number of people in the audience shouted "after he finishes the PhD."

• Google's "70/20/10 rule" -- 70 percent of focus on the core business, 20 percent on ancillary businesses, and 10 percent anything-goes projects -- seems to actually track in real life.

• Sergey's favorite application -- Panoramio, an application over Google Earth which shows you pictures from any given place. Which is kind of like Flickr's geotagging feature that no one seems to use.

In short, an interesting evening and a chance to catch a bit of the magic. More on the event can be found here.

We had the honor of co-sponsoring last Thursday's Garage Geeks event in which Sergey Brin came down to Holon to pay a visit to the Garage. Several hundred people showed up (apologies to everyone who asked me for an invite... Shai Tsur

During his recent visit to Israel, Robert Scoble interviewed Tal Keinan, CEO of SemantiNet. SemantiNet is one of Giza's very promising Internet companies. In the video, Tal provides a demonstration of what they do:

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SemantiNet will be launching its first product into beta soon.

During his recent visit to Israel, Robert Scoble interviewed Tal Keinan, CEO of SemantiNet. SemantiNet is one of Giza's very promising Internet companies. In the video, Tal provides a demonstration of what they do: SemantiNet will be launching its first... Shai Tsur