Virtuous Capital; financing with a heart and a goal to make money.

Virtuous Capital

In the 1970’s I became a friend of Peter Crisp, the Managing Partner for Venrock & Associates. On two occassions he flew from New York to Portland to meet some start-up companies that were clients of my law firm. In 1982 Venrock invested in Mentor Graphics. About the same time I got to know Dick Kramlich, the Managing Partner with New Enterprise Associates, then located in San Francisco. When NEA was starting a new fund in 1982 I offered to introduce him to the State of Oregon’s Public Employees Pension Fund and to the Meyer Memorial Trust. Both of these entities invested in NEA. From these visits to Portland I gained respect for the venture capital process. In the case of Mentor Graphics it took less than an hour while Venrock, Greylock and Sutter Hill’s representatives heard the presentation, without a business plan yet prepared, to decide to invest. I later introduced Lattice Semiconductor to NEA and within one week Dick called and authorized me to present an offer from NEA to invest $8 Million (which they unfortuantely rejected, only to file for bankruptcy a short time later). These two men, Peter and Dick, legends in the venture capital industry, played very important roles in my decision to become a venture capitalist myself. One thing stood out. It never was about their money, or the terms of the transaction, it was always about what could those funds do to help the companies in which they invested gain significant advantages and strategic relationships.

In my personal opinion, venture capital as I experienced it, has dramatically changed over the intervening years, and not for the better. Without going into details based on the kind of terms and conditions that are commonplace in a today’s venture capital agreements, I do not subscribe to the position that when the company makes a profit, or is sold at a gain, that all the money belongs to the investors and the management of the comapny. A condition of every termsheet should contain a requirements that imposes an obligation on the investors and the management to share in profits, or the proceeds from the sale of the company, with non-profit organizations and charities that have a relationship with the company’s products or services. To that end I coined (no pun intended) a new term of ‘Virtuous Capital.’

Virtuous Capital, as created and defined by the founders of Impact Advisors, LLC (in which I am involved) requires the application of a heretofore unheard of formula for equity investments. This formula assures that included in the return on the investment (ROI) is a requirement for participation by one or more selected charitable organizations in (i) a percentage of the initial amount of monies invested, (ii) sharing in future net income of the portfolio company; and, (iii) a transfer by the source of the funds of a percentage of its acquired equity in the portfolio company to one or more charitable organizations.

This concept is an extension of the long-standing model used by the venture capital industry. However, rather than having all the return on investment go to the investors and hope that they, in turn, will make meaningful contributions to charities, under the Virtuous Capital formula not only will the fund have the potential to realize gains on its investments, but its portfolio company and the fund, working together, are committed to sharing their gains with selected charitable organizations. This way, everyone wins, including society as a whole.

The underlying goal of Virtuous Capital is to assure that there can be a Social Return on Investment (SROI) with every investment made under this banner.

When Impact Funds LLC invests in a portfolio company the following terms and conditions, in addition to some but not all of the commonly used terms and conditions used by venture capital funds, will be included:

1. Out of the amount being invested, up to five (5%) percent thereof will be immediately contributed to charitable organizations that are mutually selected by the Fund and the company. Those selected will, in some way, directly benefit from the products and/or services that the portfolio company will create;

2. Annually up to five (5%) percent of the company’s pre-tax net income, or more, will be
contributed to one or more charities that are selected by representatives of
the company and Fund; and

3. The Fund will contribute five (5%) percent or more of its equity position to one or
more charities that it selects prior to a liquidity event in the portfolio company.

EXAMPLE:

1. Impact Advisors LLC invests $10 M in ABC, a financial services company in exchange of an equity position that is equal to thirty (30%) percent of ABC:
(a) ABC receives $10M and net of the contribution to the selected charities, books a $9,500,000 equity stake for the Fund in ABC.
(b) ABC immediately donates $500,000 (5%) percent thereof to a non-profit organization in Africa that provides micro-finance loans to women.

2. ABC has a net income of $1 Million after the first year.
(a) ABC donates $50,000 to one or more charities (5%), and;
(b) ABC continues to donate 5% of its net income annually to charities.

3. ABC has a $100,000,000 liquidity event in year five, of which Impact
Advisors receives $30,000,000.
(a) Impact donates $1,500,000 (5%) to the micro-finance non-profit or other selected charities.
(b) ABC donates $3,500,000 (5%) to specified charities, before any distributions are made from the liquidity event to its other equity holders.

Copyright by Jacques B. Nichols, February 2007

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Angel Investing

“Angel fund launches to help startups”

Business Journal – March 23, 2007

http://portland.bizjournals.com/portland/stories/2007/03/26/story4.html
The lead paragraph to this article said: “An angel investment fund launching this month aims to help startup companies get the capital they need to grow.”

Any time I see the words ‘start-up companies” and ‘’angel investors’’ I immediately stop whatever else I am doing and read with interest. In this case I knew the reporter and some of the names mentioned in the article. But what a disappointment it was. When I asked myself if anyone in Oregon could take seriously a story to start a new fund with 20 investors putting in $25,000.00 each for a total of $500,000.00, I paused. To make it worse they will choose two to four companies to invest in over a year to 15 months.

What self-respecting company would approach this fund, knowing that (i) they have so little money; (ii) they leave the due diligence to the investors (to save on fees to the managers of the fund), and (iii) stretch out the process beyond a year? Come on Portland, get real!

If potential investors need this much effort and caution, they will not find a single worthwhile company in which to invest. The good candidate companies will go elsewhere rather than serve as laboratory mice so some investors can learn the process of investing in start-ups.

A number of years ago a study was done by the HarvardBusinessSchool and they evaluated the results of a number of venture backed companies. One of the findings was that there was no greater likelihood of success when the due diligence amounted to ‘analysis by paralysis’ than when it was a quick ‘Yes’ by an inexperienced investor.

I am all in favor of bringing start-up companies in front of investors, but the investors too have to be worthy. Using startups in the way described in the article will amount to a waste of lots of time and probably most of the money that is eventually invested. Furthermore, hiring a couple of MBA students to help with the market and industry research should be done separately from the process of investing. And, while a law firm has offered to do the legal work pro bono to organize the fund, that is probably because they can do the math. If they charged fees of $50,000.00 to $100,000.00 as mentioned in the article are typical, there would be even less to invest.

I feel sorry for the individual who is mentioned in the article as having invested $5,000.00 in order to learn how he could earn larger investor returns by investing in very early-stage companies. Besides if he doesn’t know already that there is no difference between a start-up and an early-stage company, how much more is he going to pay for his education? In my opinion, there is only one way to learn what this type of investing is all about. Get to know the people. That’s it. Everything else is so much hype, and in some cases, bullshit.

An undercapitalized company is a surefire recipe of a failure, waiting to happen. An under-funded fund is similarly a surefire recipe of a failure that will never get off the ground. And, if they make any investments how can the companies that receives their nickels and dimes count on more of their limited dollars, or its investors, for the always-needed succeeding rounds of capital?

This is an effort that, in my opinion, should never have been started. (Started-up?)

All of this is being said without touching on the subject of the fairness of the terms and conditions that will accompany a term sheet. Spare me from even speculating on what it will contain.

I have participated in this process for over 40 years. My heart goes out to start-ups in Oregon who believe this is a new fund, and to those investors who put their money into the fund expecting they will have a great experience and make more money.

Copyright, April 8, 2007, Jacques B. Nichols, If you wish to reprint, pass around, or copy for any reason, please contact me for permission. I am happy to share my written materials as long as I am given credit for the writing and you have included my blog address.

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Venture Money Cliches

TOP CLICHES ABOUT RAISING MONEY

Quotes by Jacques Nichols (unless by others, as noted)

2006 ©

1. “There are three types of Venture Capitalist’s: venture, vulture and now the V——- gang. It is time for a new, better, class. It is time for ‘Virtuous’ Capital.”
2. “You cannot make dough out of bread crumbs.”
3. “You’re the reason I should invest, and you’re the reason I should not invest. I’ll pass.” Bill Tholke, Boardroom Consultants.
4. “This is a great idea . . . I wish someone else had thought of it.”
5. “Dilution is not a four-letter word, get used to it!”
6. “It takes the first 90 seconds to connect with potential investors, everything you say and do after that can only lose them. And that takes less then ten seconds.”
7. “Before making your presentation, take a look in the mirror. What do you see? Look and listen very carefully. You may get the gong.”
8. “The sooner a potential investor uses the ‘we’ word, the surer you can be he’ll invest. The longer it takes, or he doesn’t use this word, bag the presentation. It ain’t going anywhere.
9. “No company ever went broke due to dilution.” Les Fahey, Fahey Ventures.
10. “Show me your team and I’ll show you your company’s chances of attracting great investors.” Mark Reed, Common Ground Partners.
11. “No” is a very good word. Now you can focus on who may invest. “
12. “No one ever calls you back on Monday as they promised.”
13. “Be sure to give the good car to the guy who has to go to the airport to pick up the investors, just be sure it is not a Lexus.”
14. “And so what’s not to love about getting funded; well there can be lots of good reasons. They should easily come to mind if in your gut you didn’t connect with those guys in the room.”
15. “Time is your most important asset. Wasting copious amounts of time on meetings without getting a check is a corporate mortal sin.”
16. “Investors write checks somewhere, everyday to someone else’s company. Why not to yours?”
17. “Trying to raise money is like fishing. What are you using for bait?”
18. “Money follows success. Success follows money. It’s axiomatic.”
19. Only one word gets an investor’s undivided attention. It’s the ‘E’ word. Without it no check will ever be written. What is the ‘E” word?” (It’s EMOTION!)
20. “Investors fear a future cash call like you fear running out of money.”
21. “Get you cheerleader/first investor on board and then let him/her bring in the other investors. Works like a charm.”
22. “Always go for potential investors who have a ‘pre-existing’ connection to the company, its products, markets or some other tangible relationship. Avoid educating the uninitiated!”
23. “A cheerleader is not as dependable as a bell cow.”
24. “Cowboy entrepreneurs need not apply.”
25. “God loves the cowboy investors. And so will you.”
26. “In the 70’s and early 80’s potential investors considered it rude not to come to the meeting with a checkbook in their pocket. Nowadays, no one has a checkbook handy. Why?”
27. “A community with stories and scores of successful investments made in local companies is what makes the Silicon Valley, and Seattle what they are, and what separates them from other cities.”
28. “No company I know of ever raised too much money. Take your timidity and naïveté and double up your request.”
29. “So what it the investor stands a good chance of making lots of money. How much more will you make if no one invests?”
30. Raising money is like going to a new restaurant. It’s all in the presentation.’
31. Break away from the mold; throw out 80% of the Power Point slides.”
32. “Tell them, who, not what, you are”
33. “Make them want to introduce you to their wives. Without the wife’s OK, a lot a promises to invest will die.”
34. “Investors need another investment to attend to, like another hole in the head. Make them see you in a different light.”
35. “Only you believe that what you are selling really matters. Those in the room will possibly think that you have them confused with someone who gives a shit.”
36. “Know your limits, be prepared to counter, and if it means more to you to protect your company’s mission, vision and values, draw your line in the sand.”
37. “Use gray matter, when negotiating, and not necessarily your own.
38. Make sure you remember all the stories that will be associated with your company and its funding efforts. The moral to the story will be the best part of the story.”
39. “Investors are not walking dollar signs. Don’t look at them that way. We want to be seen as real people, with all the common failings.” Donald Moody
40. “Go after ‘Harmonic Capital,’ the kind that seeks to balance the Note with the Pitch.”
41. “Don’t invest in a company run by a fat guy.” From a 70s’ VC.
42. “Women entrepreneurs should tap into the untapped pool of money controlled by women.”
43. “The wife may not be in the meeting, but when he gets home, can he sell her on the deal?”
44. “Get creative and pop up a new formula that shows the investors that they’ll get their money back sooner, not later.”
45. “Meeting milestones should work in your favor too, not just in the investor’s favor. Insist on having some that work for you.”
46. “They ought to hold a ‘Morning After’ contest and give the top prize to the company whose Business Plan’s projections actually, over time, came the closest to what really happened.”
47. “It’s the intangibles that’ll get a check written. You really can’t know in advance what will really make the difference.”
48. “Investors are a funny bunch, but don’t tell them.”

2006 © Jacques B. Nichols: If you wish to reprint, pass around, or copy for any reason, please contact me for permission. I am happy to share my written materials as long as I am given credit for the writing and you have included my blog address.

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