Reprinted From January, 2000 Valley Business Journal
© Alan M. Insul, all rights reserved

FINANCING THE START-UP

So you say you’ve got the next “.com” that’s bigger than Amazon, Yahoo, and E-Toys combined. You think between time invested, lost earnings, and cash spent (borrowed at 18% credit card rates!) you’ve sunk a million dollars into the enterprise. You have even tied up the domain name and all its variations twelve ways to Sunday – “giagantic_huge.com”. So with all the capital chasing college kids and their internet start-ups, you should be swimming in millions – right? So how come you’re the only start-up in the world still not funded?

Finding the right investor, whether angel or venture capitalist, requires an understanding of the investor mind set. First, they are not risk takers in the sense of gambling or even entrepreneurs taking the same evangelical leap of faith you have shown for gigantic_huge.com. Second, investors look at hundreds or even thousands of deals. It is difficult to stand out from the crowd unless your business plan or executive summary identifies that this is the kind of investment they like. Third, entrepreneurs make the fatal mistake of assuming the venture capitalist wants to run the company, and that they always ask too much for their capital. Investors run, not walk, when they see such an inflexible attitude.

When all is said and done, internet funding has truncated the time associated with money raising, but it has not eliminated the basics. Your plan must show that gigantic_huge.com is selling a unique product or service, or uniquely delivering it. The market potential must be large enough to generate the kinds of returns sought by early stage risk capital. There is a management team that can deliver it. Finally, show the exist strategy for the investor.

Most entrepreneurs fail to recognize that investors in start-up or early stage companies are really risk adverse and seek to hedge or minimize those risks. They look for a product or service likely to capture a large enough share of an identifiable market so as to demonstrate a pay day with sufficient return. Early stage investors, such as angels (i.e. wealthy individuals), loose about a third of the time. Therefore, they look for returns sufficient to make up for their loses.

Some of the things they look for include shorter than their normal investment periods (5 to 7 years). Show some established revenue numbers whether directly from operations or extrapolated from an industry standard. This helps assess the potential market value of gigantic_huge.com. How quickly do you use capital (the “burn rate”). The higher the burn rate, the more you will have to demonstrate where gigantic_huge.com will get the next stage of funding – other than the investor. Can management pull this thing off. This is where the entrepreneurial leap of faith comes in. Muster that enthusiasm so it rubs off on the investor. Do not hide the holes in the management. Gigantic_huge.com is a start-up or early stage
company. Investors understand you are not top heavy in operational management such as financial or fulfillment. Venture capitalists are often your best source of added support to either hire the talent or supplement existing personnel.

Above all else, remember this is not a transaction where the investor deposits the money and you never hear from them again. It is truly a partnership in the sense that you should look to the investor for support. In turn, they look to you to provide honest insight as to your progress in achieving the business plan. For example, if the investor perceives that you consider them a nuisance, or that you do not understand why reasonable financial controls are legitimate, they will invest elsewhere – no matter how gigantic or huge gigantic_huge.com could become … at least that’s what this lawyer thinks.

Reprinted From December, 1999 Valley Business Journal
© Alan M. Insul, all rights reserved

LAW IN THE THIRD MILLENIUM … A BRAVE NEW WORLD?

My last column of the year also just happens to be the end of the second millenium. I can’t pass up the chance to look at what my future grandchild (plus 40 or 50 generations) might say in their December’ 2999 VBJ column. Of course, with the retirement of the last lawyer sometime around 2355, the new breed of professional will focus on dispute resolution not the art of advocacy. Therefore, my distant heir to this column will proudly bear an ADR (alternative dispute resolver) instead of ESQ at the end of the Insul name…

“I happened to be looking at an old family memory disk from the beginning of this millenium. My very distant great grandfather who first wrote this column over 1,000 years ago started a tradition of
occasionally looking at the big legal picture. So I have culled through the entire third millenium’s archives and have summarized what I think were the most significant legal decisions:

* 2120 AD. In a landmark ruling with far reaching international and national implications, the Supreme Court has abolished all notions of privacy as a fundamental right under our constitution. The Court ruled that the framers of the Constitution did not contemplate a global economy much less the available arsenal of technologies which range from the passively ubiquitous record keeping of the WEB to the recent deployment by foreign corporations of SECOTO (Satellite Enabled Camera Observation Through Objects). In an obvious concession to territorial limits, the Court signaled that henceforth it would limit judicial review to alleged misuses of information gathered by the non-stop monitoring of every person from cradle to grave. In a footnote, the Court further reasoned that since technology renders proof of wrongdoing 100% certain, people no longer need the protections of the now arcane 4th amendment concepts of search and seizure.

* 2275 AD. Today the Supreme Court determined that all ‘Clark’s People’ (named after Barney Clark the first mechanical heart transplantee 300 years ago) are indeed entitled to protection as a ‘person’ within the meaning of the constitution. This ruling even extends to those having replaced their organic brain with ANIC (Artificial Neuro Intelligent Computing) which is programmed to mimic the former organic brain.

* 2532 AD. Bowing to long established scientific fact, the Supreme Court belatedly abolished all notions of causality in law. The Court felt compelled to reach this conclusion after the defendant’s ADR dispassionately pointed out that over 500 years ago Superstring or M theory Physicists disproved that time or space really exist. Chief Justice Juanita Gonzales wrote for the majority that ‘… the law can no longer abide holding a person accountable for their actions merely because a dozen witnesses subject to time and space illusions testified to seeing the defendant gang member hit the senior citizen with the baseball bat.’

* 2776 AD. On the eve of the millennial celebration of the old US Constitution (now the ruling document of all the world’s people), social and political disaster has been averted when the World Court in a 151 to 149 vote upheld the constitutionality of the Revised Social Security System. The Court affirmed the current system’s requirement that 10% of the non-voting equity of the world’s businesses be held in government trust to fund all worker’s retirement. In turn, workers are paid out of the equity hedge fund at 100 years of age or retirement which ever happens last. Wildly popular when first introduced, it has come under increasing attack from multi-nationals as an unfair tax upon their right to conduct business and the individual’s right to freely invest their earnings.

* 2993 AD. In a unanimous vote with far reaching implications for the rights of all living creatures, it has been agreed by all the people of the world that visitors to a past time must pledge not to disturb or interrupt the natural flow of events. It has come to our collective attention that for added recreation some persons visiting the last millenium caused our less enlightened ancestors great individual trauma and social ridicule by falsely leading them to believe that they have been visited by vastly superior ascension beings from that time.”

…We are indeed privileged members of our species. In a few days we will simultaneously stand on the peak of one millennial mountain and glimpse up from the nearly incomprehensible base of the next. Speaking for myself, I am not sure if I really would like or understand the world of mankind at the peak of the third millenium. But than again, perhaps King John had similar thoughts at Runnymede that day in 1215 AD while signing the Magna Carta. Thankfully, he still signed, and, metaphorically speaking, so should we…At least that’s what this lawyer thinks