David:

This Memorandum is confidential unless you decide to share it with others.

With your permission I am writing to cover several related topics; namely (i) what I consider to be the strengths and weaknesses of the company with an emphasis on how an investor candidate will likely look at the company, (ii) a recommended structure to use with investors, (iii) the importance of having a Plan B, and (iv) approaching Chinese companies you will meet on the trip who may be interested in investing for equity, as opposed to acquiring fractional interests,

1.    Strengths and Weaknesses of the Company as Perceived by Potential Investors.

First the Strengths:

(a)    Your commitment of funds and the significant amount thereof.
(b)    Your vision as to the importance of bringing some manufacturing back home.
(c)    Your insight into the fractional ownership concept.
(d)    The attractiveness of the franchise concept to be sold to engineering design firms.
(e)    The prospect of expanding the manufacturing options.
(f)    Branding the company’s name as a name that carries economic value.
(g)    The pending patent.
(h)    The possibility of a strategic relationship with industry players.
(i)    The prospect of doing business with Chinese manufacturers.
(j)    The collegiality of your employees.
(k)    Preliminary plans to acquire other companies from related fields.
(l)    Your success with your previous company, although it was in a different industry.
(m)     An anticipated ‘exit strategy’ based on the possibility of being acquired.
(n)     This list is not intended to be complete.

Second, the Weaknesses:

(a)    The lack of a significant number of customers to date for the business concept.
(b)    A shop floor that is underwhelming due to a scarcity of customers.
(c)    Financial forecasts that show the company to be in the low-margin manufacturing sector (net income after taxes of less than 10% of gross sales), as opposed to having found a way to break the mold, so to speak, and create a new economic model, one that shows that customers will pay more than industry prices.
(d)    Present uncertainty as to the correct direction for the company to pursue, whether China will be a ‘good partner’ or not, and what happens if the business plan and the revenue forecasts do not materialize.
(e)    The age of the team, and without someone from the industry who is the CEO and a ‘stud.’
(f)    Lack of a board of directors, or of advisory board members (as of the moment), that otherwise shows the strength of its outsiders.
(g)    Need for a ‘Plan B’ that can assuage investors’ need to feel safe with their investment.
(h)    Unlikelihood that a lead investor will emerge from conventional sources
such as aligned companies, venture capital funds or other categories.
(i)    The geographic location of the company, which is too far from the airport to make it convenient for out of the area investors to schedule  one day meetings at the company’s offices.
(j)    Some personal health issues that may affect you and in turn potential investors’ comfort.
(k)    This list is not intended to be complete.

2. Choices, Best Scenarios and the Alternatives Regarding Funding.

Using a balance scale, and trying to imagine all of the items listed under “Strengths” on one end and all of those listed under “Weaknesses” sitting on the other end, it is my conclusion that we should give unbiased attention to whether we can successfully raise the intended $4M before the middle of December.  To do so we may have to be creative in the areas of the structure of the investment, with an emphasis on enhancing the return to the investors.

If after we have worked through all these issues we are not prepared to bet the farm on the likelihood that investors will sign up, and quickly, we should begin the process now to identify possible acquirers of the company.  Between just us, this will be known as Plan B.

Due to the upcoming trip to China and the time constraints when the management team is out of the office, we have a challenge in fitting in presentations to potential investors when everyone is around.  This only makes it more critical to know what we are doing with respect to the terms of an offering, where there is flexibility and how do we get someone with credibility to be a lead investor.

It may be necessary to focus on potential investors who reside nearby, or those who have other connections to the company and/or its team, and leave out of the equation any potential investors who live elsewhere or who do not have any pre-existing connection to the company and/or its team. Furthermore, it is unlikely that we can attract venture capital funds, even if we were willing to live with their onerous conditions.  The economic model does not have the ‘big win’ kind of numbers, without gross speculation on our part, to convince them that this fits their portfolio requirements.

To that end, John, your financial analyst and manager of some of your personal investments, may be an important link to possible investors.  Can he recommend, or at least offer to show the Business Plan to some of his clients without violating any rules or disciplines? He will have to make a disclosure of his relationship with you. If he can help and is willing to do so, perhaps the company can compensate him when he brings investors in.  If so, we should start the process with him immediately.

All of the above is written with an eye on the calendar.  If it was six months ago, the trip to China was behind us, and the franchise plan was well accepted by engineers and design firms, then we would have a different story to present.  Time is of the essence.  And getting behind the ‘8 ball’ is not allowed to happen.

We have to capture the moment and not worry about negative ‘what if’ events could happen.  Time is of the essence, and I apologize if this is a repeat.

3.    Proposed Structure for the Investment.

Based on the foregoing, I suggest that you consider approving an investment package that has some incentives you may not otherwise be in favor of.  These are as follows:

a)    Create a strong preferential schedule for paying the investors back sooner than you will recoup your investment.  To do this, consider the following.  Give these investors a disproportionate return, not in alignment with their percentage of equity ownership.  To this end, how about a structure that says the investors will be paid 60% of the company’s net after tax income until they have recovered 100% of their investment?

Incidentally, if the company is reorganized as a limited liability company, as opposed to a C corporation, it would avoid double taxation.  As an LLC federal income taxes only apply on funds when distributed to the equity holders.  There is no tax on the income at the LLC level, unlike the liability for taxes on a C corporation on its net income, and then taxes are also levied on the distributions/dividends to its shareholders.

b)    Let’s consider using Convertible Promissory Notes rather that try to sell Preferred Shares at this time.  The Notes will carry say interest at 8% per annum, and be due and payable after 24 months.  Furthermore after two years the company can make a demand that the Notes be converted at a set price per share. The conversion will equate to 33% of the then outstanding equity of the company. The Notes would automatically convert into Class A Preferred Shares (with the preferences as shown below) if the company is acquired (or goes public).
c)    There will not be an escrow requirement for the proceeds received from investors if we can keep it out. Otherwise we can offer to escrow the first $2Million and then the escrow goes away.
d)    Following conversion of the Notes, the holders thereof will have anti-dilution rights as long as the Notes are outstanding. After that they will have a right of first refusal to invest whenever the company elects to sell additional shares so that they can protect their percentages of equity ownership.
e)    If the holders of a majority of the Notes elect to convert at the two-year date, then all holders shall be required to convert their Notes.
f)    In the event of a liquidation event after the Notes have been converted, the holders will have a preferential right, before any monies are paid to any other classes of shareholders, to be paid an amount, which when added to the monies previously paid from the annual net after tax income of the company, that together are equal to the amount of their original investment.
g)    The company will not hold any redemption rights.
h)    The board of the company will have at five directors. As an added inducement I recommend that the investors, as a group, be entitled to designate two members of the board, subject to approval of those nominees by the company.  You and two others, selected by you, will be the balance of the board members.
i)    If for any reason the investors have not recovered their entire investment within three years, they would be entitled to designate a third director and the board remains at five members.
j)    Agree to hold equity-holder meetings at least once a quarter and to provide annual financial statements and quarterly un-audited financial statements and reports.

4.  Rationality Behind Proposed Structure.

The purpose in suggesting these clauses and terms is to give investors a sense of safety without indicating that the company has concerns in these areas.  Also, I should add that in the presentations we need, at the outset, to establish that the company is just beginning to look for investors.  The purpose of this is to convey a dual sense of opportunity; namely that they are getting a first look and that you have not been turned down by other possible investors.

There is a thin line between selling an investment and showing an investment.  We must be showing, not selling.

5.  Capture the Audience.

Another point to make is to create in the meeting a quick sense of mutuality.  Body language from those in the room, or what and when they say something is also a harbinger of how they are looking at the opportunity to write a check.  It stands out like a sore thumb, hopefully one that is pointing up.  The surest way to make this connection from the outset of the meeting is to find something that is common to those hearing the presentation and those making it.  It could be backgrounds in manufacturing, schools attended, where they live in the area, who else they know, etc.  Hitting on one of these links, or others is very important.

Whoever is presenting, at any part of the presentation, should not get lost in what they have to say.  They need to be on the look out for what is being said by the attendees, how they are engaging, whether they are leaning forward or sitting apart from the others in the room.  It also helps to have as much GQ on each of the persons in the room beforehand so that we can address those interests and questions before they are asked.

Venture capitalists like to see “Mo” meaning momentum.   Rather than getting bogged down in too much detail early on we should begin the meeting with the latest momentum for the company.  Numbers can be boring but news suggests that the company is on to something.  Stories from recent trips, unanticipated calls from potentially significant customers, etc., are very good indicators of “Mo.”

6.    The China Investment Question.

The Ambassador clearly was pushing the proposition that companies in China may want to become investors in the company.  I am recommending that before you and the team gets on that plane that a plan is agreed on as to how this will be handled.  So much in China hinges on relationships and culture.  It may be important from both of those points to give this careful consideration.  If the company has no interest in selling any shares to a Chinese company they will, I believe, take it to mean that we do not see them as being worthy.  Based on my belief, I see an opportunity to create a genuine interest on their part the more you and the team engage with your hosts.  If it makes business sense to have Chinese companies using the company’s facilities for US customers who need rapid prototyping, then it should also make sense for the Chinese companies to acquire some ownership in the company.  The amount of ownership, of course, has to be attractive to them but not a threat to the company or its mission (unless they want to pay an Emperor’s ransom).

If this was my company and my chance to interact with Chinese manufacturers who have the capital to become good investors, I would entertain them and the possibility of working something out.  Excuse my openness but I know how well Jin can work with them and if you ask him to explain the idea he will do it.

7.    Conclusion.

If it was not for the time constraint and the time of the year, things could be easier with respect to the raising capital.  I am very mindful of your commitment to the company and will stay very pro-active with you so that you can rest any worries you have.  Call me anytime, day or night.  I will travel to the company, participate in presentations and keep providing my best advice, whenever asked.

I look forward to hearing your comments, questions and any criticism.  Following those we can advance the fund raising process.

Jacques Nichols (c) September 2007

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Allow me to write an important historical footnote, insofar as Oregon is concerned. The first venture capital backed investment in the history of Oregon was in 1971 when Floating Point Systems raised $1 Million for ten percent of the company (that would still be a good deal today for most start-up companies). The funds were provided by Greylock Management, Fidelity Ventures and Sutter Hill. Norm Winningstad, the President, (there were no CEO’s in the 1960’s and 70’s) called to introduce himself and said he would like to hire me as a special counsel for the company in connection with a venture capital investment. He had been to an AEA Conference in Monterey, CA and, as I soon learned, had excited these funds and they were about to come to town.

To conclude this historical note, the attorneys in New York made a typo in their confirming letter when the attorney wrote that the funds would invest $1.1 Million for ten percent. I brought this $100,000.00 error to Norm’s attention but was advised to say nothing and let them catch it. When Bob Newton, then the Treasurer and CFO for Floating Point, and I walked into the conference room for the closing and saw three checks on the table we saw that they had not caught the error. Score one for Oregon vs. The Big Apple. In any case, I think those venture funds made more than 10X on their investment in Floating Point.

My first connection to Silicon Valley and Sand Hill Road in Menlo Park, CA (there’s a Sand Hill Road in Las Vegas too) was an undergraduate degree from Stanford University and a degree from Stanford Law School. But those were received in 1959 and 1961, respectively when there was no Silicon Valley at that time, let alone the Sand Hill Road that everyone knew about. I first had to go to Portland, Oregon and establish a law practice with start-ups and early stage companies before I had connections to the Valley.

On a couple of occasions during the late 1970’s Peter Crisp, the Managing Partner of Venrock, sat in the conference room at my law firm. In 1984 Dick Kramlich, a founding partner of New Enterprise Associates, sat in that same room. If you had only two draws to make in a game of venture capital poker, those two gentlemen stood a very good chance of seeing to it that you won every hand.

From those meetings and the offer of friendship from Peter and Dick I gained an immeasurable amount of respect for both of them and the way they represented the Venture Capital industry, (as it was practiced at that time). Although I was in Oregon, I knew I would be associated with them and this industry for a long time.

Other stalwarts from that august society also sat in that conference room. Charlie Waite from Greylock, Management, Grant Inman from Hambrecht & Quist, Vince Prothro on behalf of NEA, David Hathaway from Venrock and Paul Wythes from Sutter Hill were there too. On trips to the Valley I was introduced to Burt McMurtry of Technology Venture Investors (the only fund that invested in Microsoft) and other funds who had offices in the Valley.

I met a founding partner of US Venture Partners when he came to Portland to consider investing in a client, Avia, a footwear company. After we got acquainted he asked if I would be interested in managing a Portland office for their firm. NEA, on a couple of occasions brought up a similar possibility. At another time Jean Deleage from Burr, Egan and Deleage’s San Francisco office and his partners from Boston invited me to meet them in New York to discuss the same topic. While the possibility of joining a venture capital fund was enticing, I knew how distant, in many ways, Portland was from Silicon Valley and I did not pursue these discussions further. While I was fascinated with these possibilities, I kept seeing myself as a Maytag repairman, waiting for a return call from the home office.

As my law practice I was approached by numerous local companies asking for introductions to the funds I knew. In the fall of 1982 I quickly formed a company and called it Capital Bankers so that I, and two friends, could show up with business cards at the American Electronics Association show in Monterey, CA. I had heard about this gathering and I had an idea. It was confirmed as I sat through the various presentations. Oregon, and the Northwest, in fact had high tech companies that were equally interesting as the companies from California that presented at the AEA show. So, why not stage our own version of the AEA show?

I took up the reins to prove my convictions. In the period of December 1982 through November 1983 I organized and headed up the Northwest Financial Symposium. At the first event in Portland 66 venture funds attended and most had not been to Portland before. A hand-selected cast of 31 local companies presented and most of them attracted attention for one or more of the funds in attendance.

Within this ‘82-‘83 timeframe the event was held a second time in Portland and once each in Seattle, Phoenix and Calgary, Alberta, Canada. Although I was no longer involved with the Symposium after 1983 it had a continuous run of 11 years in Portland, and I believe in Seattle too.

More and more I found myself being drawn into the world of venture capital. In 1984 the VC bug bit me hard and I decided to leave the practice of law and jump in feet first. I become the Managing General Partner of what I named First Source Capital Fund. Later on I had a silkscreen company print up some T-shirts with a tag line that said: The Venture Fund With The Silent “D” The shirt was my retort to another VC’s comment that this work was not fun.

First Source was a general partnership with a Fortune 200 company that was in the timber products industry. They agreed to provide the capital and I was responsible for finding the companies in which to invest. At that time interest rates were north of 15% and home building was in a slump. The company thought that by emphasizing the new world of venture capital their shareholders would stay the course. Unfortunately for me they only provided money for three years, instead of the agreed-upon ten years. By then the period of high interest rates had passed.

The funding company lost its way and its character when they opted to break the partnership agreement and take the entire portfolio of investments in six companies and to cut me out of my 15% share of future gains. : -( And to know the rest of that story you will have to read my forthcoming book with the co-titles: WHO THE HELL SIGNED ME UP FOR THIS CLASS? and IF YOU WANT TO SEE GOD’S FOOTPRINT, CHECK YOUR BUTT!

One of the investments First Source made, in addition to two others that made money, was in FLIR Systems, Inc. for $8.1 Million. I will never forget signing that check. The fund acquired 40% of FLIR and in 1994 it went public. Ten years later FLIR had a market cap in excess of $3Billion. Besides the obvious math lesson as to what the value of my share of the gains would have been worth, the most painful lesson I learned was to know your partners. I had also failed to heed a warning from Dick who knew the CEO of the funding partner. He said the CEO could not be trusted and for me not to enter into the partnership.

That is also the No. 1 lesson to learn for any company that sets out to attract investors: Find where is the trust factor on the investor’s scale and your scale. Do they align? Can they be trusted? Can you be trusted? Does their word equal their bond, or are you going into bondage?

To tell more of the story about the start of First Source the same day that the funding company agreed to provide $100 Million over ten years they said it was subject to one requirement, namely that they would be the only investor. Just hours earlier the Secretary of State for Oregon had offered to invest $25 Million from state funds. Calling him back and declining his kind offer was a one of a kind experience for me. In the 1980’s even a venture fund in the Valley with $25 Million in committed capital was considered to be a player, let alone one with $100 Million.

At least I got one good memento from the partnership. Chuck Yeager, the first pilot to break the sound barrier, was on the board of the timber company and he gave me two framed pictures of him with his airplanes. I have since given them to my son. Feeling that reciprocity was a good idea, years later I gave a John Clymer print to the CEO of the timber company. It showed two hunters huddled near a fire while a venison meal was cooking. In the night background the yellow eyes of a pack of wolves starred at them. He owned a hunting lodge and I thought this would be appropriately hung on a wall. He sent me a thank-you note yet I wondered if he got the hidden meaning of my gift. I may have been dead meat after he terminated the partnership, but maybe there were wolves out there now he had to watch out for? A couple of years earlier he had been removed by his hand-picked board.

After First Source ceased operating I stayed connected to the world of start-ups and venture capital either as an attorney, an advisor or as a source of introductions to angel investors. Still I’ve wanted to return to that world, albeit in a different form, and certainly not as a wolf. I sought something that was similar in many ways but very different when it came to offering more than money to start-up and early stage companies. That something required to first looked to find if the entrepreneur had a heart or only a desire to be rich, and then I looked to see if the money men ever had a heart.

Thinking as often as I did about this subject, I concluded that destiny had its own clock and I couldn’t advance the hands any faster than they were programmed to move. Now, at last, those hands are in sync with a special source of funds that I have been working on for the past two years. However, it will remain in stealth mode, as I have learned that some things are best left unsaid.

I also had a great friend and executive recruiter who knew the Valley well. His name was Bill Tholke and he lived there since the late 60’s. Everyone knew Bill and his great Irish tenor voice as well as his love of telling good jokes. He ran all the search assignments for companies in which First Source invested. Bill passed away in 2005 and at the time he was a partner with Boardroom Consultants in New York with an office in Palo Alto. He often invited me to visit him in New York, or in Palo Alto, where I met John Atalla Ph.D., who previously worked at H-P Labs, and other founders of Valley companies. Some day I’ll tell the story of when Bill and John sat in that same conference room at my office in Portland and what Bill said to John who had a month earlier had missed the Christmas Party for the Atalla Corporation. Bill was on the board and with his wife attended the party. The punch line from Bill brought the three of us to hysterics.

One day while having lunch with Bill at the famous Sun Deck Restaurant on Sand Hill Road I went out to the rental car to pick up something and as I got to the front door I had the special privilege of holding it open for Bill Walsh, the revered coach of Stanford and the San Francisco 49ers. I said something about Stanford, he acknowledged it, and we passed like ships in the night. What was Bill doing there, was he being invited to hear one of those presentations where a deal is struck on the back of a napkin?

Portland Oregon has never been on the beaten track for VC’s, whether from CA or NY. So what goes? Why did Peter Crisp, Dick Kramlich and the others come to Portland? The answer is that I was fortunate to have clients for my law practice like Floating Point Systems, Mentor Graphics, Lattice Semiconductor, AVIA Group Int’l and others. They were the reasons these visits took place. Also I had been the attorney for the original investors in NIKE, Inc. and some of them invested in other companies I represented.

The visit by Dick to Portland in 1984 was at his invitation. I had previously attended NEA Annual Meetings with its limited partners in Dallas and San Francisco. Dick called to ask if I would make some introductions to potential investors for NEA. He was raising money for one of the early NEA funds. I was most pleased to do so. I soon arranged meetings with representatives of the Meyer Memorial Trust (the largest foundation in Oregon) and the State of Oregon’s Public Employees’ Retirement Fund.

Roger Meier, the single-handed chairman of the board of trustees of the State Fund, reluctantly agreed to attend the meeting. But that was Roger’s style, no matter who wanted some of his time.

Dick sat to my left and Roger sat across from me. Gerry Pratt, a good friend and a trustee for the Meyer Trust sat next to Roger. Dick started his presentation but Roger could not wait until he was finished. Instead he interrupted and said that he had just read that week’s Time Magazine article that was all about venture capital and he mentioned that Arthur Rock, who was on the cover, was someone he would prefer to be meeting today. Dick, without a hint of a smile on hearing Roger’s challenge, simply said: “I had lunch with Art yesterday; I used to be his partner.” I am temped to add an exclamation point at the end of the preceding sentence but Dick didn’t when he spoke, so I’ll let the urge pass.

Safe to say, Roger was impressed with what Dick said and invited him to make a presentation to the full board of PERS. Gerry then invited Dick to come to the Trust’s offices. NEA secured, as a result of that trip, at least $10 Million from the State of Oregon’s Fund and $5Million from the Trust. Hopefully both entities continued to participate in every succeeding NEA fund. If they did the ROI on their invested dollars is among the best in the country from VC firms. Gerry still goes to NEA’s Annual Meetings and I doubt he would ever pass that duty on to someone else. In the mid-1980’s Gerry said that he had designated me as his successor Trustee. I should ask him sometime if it is still written that way.

Peter Crisp came to my attention and me to his, when Brooks Ragen, who was two years ahead of me at Stanford Law School, dropped into my office when he was in Portland to visit his family. After law school he moved to Seattle where he was an investment banker. He later formed Ragen McKenzie. When Brooks asked how I was doing, I mentioned that I had a number of start-up companies as clients. He immediately reached for the phone on my desk and dialed Peter’s number. Peter and Brooks had been undergraduate classmates at Yale. When Peter answered, Brooks passed the phone over to me.

Peter had not been to Portland before but said the companies sounded interesting and that he’d fly out for a series of introductory meetings. I learned more from watching Peter in those initial meetings about venture capital and how it was practiced than I learned from anyone else. Two stories from Peter’s trips demonstrate how venture capital was pioneered years ago.

One of these lessons took place at a software company’s offices in Beaverton, OR. The founder was so excited to have some one connected to the Rockefellers in his office that he could hardly contain himself. When he asked Peter for his card he was told: “I don’t have any with me. Peter practiced venture capital without fanfare. He did not give his business card away to just anyone. First they had to show him who they were. Later in that meeting he reached across to a grab a sheet from the yellow pad that the founder had been writing on and filled out his phone number in New York.

During the same meeting Peter made a point that was another lesson. As the founder became more and more convinced that his company had to be perfect for Venrock Peter listened and then said: “My job is like working at a railroad station. As I look out onto the tracks I see a string of cars that seems to go on for miles. Yours happens to be the one that for now is right outside the window. I may pass on your company and miss a terrific investment, but there are so many more cars that have yet to go past this window that it will be OK with me if we miss this one.”

Another story, with an obvious lesson, came during a dinner Peter and I had one evening with the founder of a medical products company. He was the only one of the six companies on our schedule that heard the magic words from Peter: “I’d like you to come to New York to meet my partners.” That’s all it took, one dinner and the door was wide open. Unfortunately my client, Richard Flora, made the mistake of being a wise-guy and said (after too much to drink): “Why the hell do I need the Rockefellers?” I kicked him on his chinbone but Peter let the humor pass and repeated the invitation. Instead of accepting the invitation Richard sold the company to Pfizer only to later wish he hadn’t.

To continue with my brand of insight into how this industry operated, another venture capital story with a lesson, comes to mind. In 1985 a group of NEA partners visited companies in different localities across the country. Portland was on their list. Neal Bond and Frank Bonsal were the lead partners on the trip. Trusting in my judgment, they had not asked beforehand which companies we would visit. When I pulled up my van at the first company’s parking lot someone sitting in the back asked if Fred Adler was an investor in this company. I said I believed he was, although the company was not a client of my office. The next words I heard were: “Drive on to the next appointment; we are not going in.” That was lesson number three: Don’t try to force a marriage between various funds.

Unfortunately I did not learn that lesson well. In 1987, and after the termination of First Source Capital Fund, I arranged for a meeting at Burr Egan & Deleage in San Francisco. Jean Deleage had offered to introduce me to some of their limited partners who may be interested in investing in a new fund in Portland. A third person who I had invited to the meeting immediately brought up the name of Patricof & Co. from New York. As soon as Jean heard that piece of information he said he could make a couple of recommendations as to where we might want to go for dinner, but he would not be joining us. There went about $40 Million and the possible successor fund to First Source died.

Portland is also not without connections, some of which are remarkably similar to those that have worked in the Valley. When you read the history of Kleiner Perkins, the ultra successful venture fund in Menlo Park, you learn that Henry Hillman, Sr. was their first investor. Henry Hillman, Jr. and I met here in Portland after I had guaranteed a $250,000 bank line of credit for AVIA. I did this because I could not allow an investment banker to do so and in consideration thereof he demand 40% of the company. For my good deed the founder sent me a collector’s duck call from Eddie Bauer and a few shares of common stock. Actually I did very well when I sold the shares in a gray market before Reebok bought the company. Henry once told me that his family made more money from the first four investments made by Kleiner Perkins than they did from the next 200. Genetech was one of those investments, along with Apple.

Henry also said that with venture investing the big unknown is whether ‘Luck’ will make an appearance. When he invested the bank cancelled the guarantee I had signed for the company’s line of credit.

Sorry if I can’t stop telling these venture capital-related stories. And speaking of Apple, or in this case the Big Apple, the meeting with Jean Deleage and his partners as mentioned above took place in the Helmsley Hotel in Manhattan. On entering a spectacular French provincial restaurant on the mezzanine level one of Jean’s partners said, as he pointed to the ornate ceiling overhead: “Jean, this reminds me of your home in California.” Jean took a moment to look upward and then, being a true Frenchman, and with a delightful accent said: “No, my ceilings . . . zey are a bit higher.” Touché.

And, one more bit of wisdom. When I first heard the word ‘nanosecond’ in 1981 from Raul Sud, the founder of Lattice Semiconductor, I immediately decided it also defined the length of time it took an investor to go from being an optimist to being a pessimist, or maybe it is the other way around if the investor is a cheerleader at heart.

A final story . . . for now. In its original cardboard tube alongside my desk is a full-size movie poster in color with a caricature of me, ala Marlon Brando from the Godfather movie. Years ago I was dubbed the ‘Godfather of Start-Ups’ (it only applied in Oregon). Ray Nelson, the founder of Flying Rhinoceros, a local animation studio, presented the poster as a surprise. I love it but for various reasons have left it in the tube. A tag line at the bottom says: “It ain’t no picnic getting you’se guys de bucks.” One of these days I’ll take it to a framing store and find an appropriate wall to hang it on.

LEARNING ABOUT VULTURE CAPITAL

In 2005 I learned first-hand what vulture capital was all about. Peter and Dick would have never treated a company that way, or its original investors, let alone care only about making money. Once I had the experience of seeing how vulture capital operates I began casting about for a new and different term to signify the type of capital that would serve the mutual interests of investors and portfolio companies. I believe that an investment is an inter-dependent partnership between the investors, the entrepreneur and early seed investors. My first attempt was to coin the term: “Harmonic Capital.” Again loving to write, I wrote a tag line. It said: “Finding the Perfect Balance between the Pitch and the Note.”

The more I thought about what I had heard in that 2005 meeting I decided that ‘vulture’ was not an appropriate enough word, so I gave that kind of capital another ‘V’ word. Hint; it comes in a jar. What made that meeting so heinous was not just a requirement that the fund’s moneys hold a 4X preferential right for return on its money before any returns would be paid to the earlier investors (including myself), but it was how they practiced the art of deceit. The investors that I brought in when the company was formed purchased their Class A Preferred Shares at a price of $0.50 per share. When the funds that invested as a second round came in the transaction was structured as Convertible Debt and their monies were to be converted at $0.67 per share.

That price was all right, however, they did not convert the Notes when they became due. Instead since they controlled the board and removed the original CEO and appointed their own CEO. They waited two years before calling an Annual Shareholders Meeting. When a Notice of a Shareholders’ Meeting was sent out it called for a meeting in just ten days. Tucked away in the accompanying material was a proposal to convert $8.8 Million in Notes, plus $4 Million in additional loans, not at the specified $0.67 per share, but at, can you believe this, $0.04 per share!

I challenged their attempt to reorganize the capital structure of the company in this way but just before the meeting I learned they had strong-armed the founder/employees who held the majority of the common shares to vote for this plan or be fired. With control over the number of shares required to vote for their proposal, all I could do was leave my thoughts in the room. To do so I told the VC’s and the other shareholders in the room a story from FLIR early history and how I helped raise $2,500,000.

A close friend of mine, Chuck Wiper, who had been a B-17 pilot in World War II and who said he wished that FLIR’s infra-red camera had been on his plane before it crashed, invested $1.25 Million on the spot when I asked him to invest. He called me a couple of days later to ask why a Seattle venture capital fund needed an extra month to do due diligence before they would write a matching check. He added: By he way, I just went to the Post Office and mailed you another check for $1.25 Million. Then he added: “Please do me a favor and call that fund and tell them you just got some ‘Screw-you’ money!”

Chuck was also an investor in NIKE, Oregon’s all-time most successful investment. If you had invested $20,000 today you’re your NIKE shares are worth over $400 Million and your annual dividend exceeds $4 Million. No, I did not take any of my fees and buy some of those shares after I was offered the chance to do so.

Spoken as it was in full living color, that display of such a vitriolic form of venture capital led me to continue to seek an alternative funding classification. It had to be one that for ever more separates itself from all the other ‘v’ words I’ve heard or used. Thus I created the term ‘Virtuous Capital.’

The present terms and conditions in a VC-written term sheet are as much fun as catching your tie or shoelaces in an elevator door. They focus on cram-downs, perpetual anti-dilution, 4X or greater preferential rights, and not to mention a VC dominated and one-sided board, their hand-picked management, and the upcoming nightmare of trying to find satisfactory dates and times for future board meetings that meet the VC’s schedules, never management’s.

PREMISE AND VISION FOR VIRTUOUS CAPITAL

The most interesting part of Virtuous Capital is in knowing that it will not, absolutely will not, be attractive to most funds and their limited partners. Why? Because on the surface it looks like it will limit the amount of possible gains from their investment.

This concept works perfectly with Virtuous Capital. Here is the underlying model: Funds that are certified to be ‘virtuous’ are required, at the inception of an investment, to set a cap on their expected return from the investment. Future returns, if they exceed this ceiling, are required to be contributed to charities.

The more (i) equity in a company that is earmarked for, or outright granted, to selected charities, when the investment is first made, and (ii) the more of the future gains that the investing fund receives upon a liquidity event, the ultimate economic value of the company will be greater than with a typical venture/vulture capital deal.

I acknowledge that future results from investments made by funds that hold themselves out to be virtuous will confirm or disprove the preceding statement.

Speaking of this dual charitable component of Virtuous Capital is like how the word ‘dilution’ draws focus away from the primary reason a company seeks investors, namely to grow the company. Instead all they think about when they hear ‘dilution’ is how large a percentage of their company they will have to ‘give away’ to get funded. I have hit this ‘percentage reduction’ notion on the head many times in an effort to educate the audience that you cannot buy anything with a ‘percentage,’ that you need money, right? It is the anticipated growth in value of the company, thanks to the money and the wisdom from the investors that should come with it that makes the percentage retained at the time of closing rather unimportant.

I believe that funds that are certified to be ‘Virtuous’ will not only do well by doing good: They will be the funds of choice for the most promising companies with world class products and services Once companies learn about virtuous capital, such companies will seek out funds that practice the tenants of virtuous capital.

Virtuous Capital will not be its own (only) reward.

The first person to whom I mentioned the phrase ‘Virtuous Capital’ was Bill Hogan of San Jose, CA. Bill’s resume points out that he has raised over $100 Million as a CEO but the reason he got my call was that he has more recently been the CEO and a board member of Global Giving, based in Washington, DC. I knew that if anyone would ‘get’ what Virtuous Capital stood for it would be Bill. Since then he and I have talked about it numerous times and we are going to apply its principles whenever we are involved with funding companies.

I also realized that this concept of Virtuous Capital needed a special audience to test its impact and veracity. In the spring of 2007 I flew to Phoenix, AZ to attend a meeting of a company that had asked for my assistance to attract an investor. Before going to the meeting I reviewed a collection of bios about the principals of the company. One stood out. It was from John Paul Warren. If space permitted his bio should be reproduced here. Suffice to say, John Paul has an international reach as a man who has reached millions of people, yet he is an entrepreneur.

As the meeting began each of those in the room knew they would be asked to talk about themselves. John Paul sat to my right and the direction the introductions were going around the table meant that I would speak before he did. I wanted it to be the other way around. Sure enough, the founder of the company, just before I was to speak, suggested that John Paul speak next. I doubt that anyone, except for me, would have chosen to follow John Paul. He was a tough act to follow, that’s for sure, but it made sense once I began to speak.

I said that I had recently coined the term Virtuous Capital. John Paul immediately showed that he was paying attention. I continued and said that Virtuous Capital not only was about making money but it aligning itself and its portfolio companies with charitable organizations that had connections to the company’s products or services. I said that it was designed to have our cake while planning for others to eat it too.

When I finished speaking John asked me to stick around during the break. When we had the room to ourselves he said he had been praying for such a new term. He immediately offered to join me in taking the message about Virtuous Capital to the world. He has spoken to audience in 110 countries.

Virtuous Capital is a variation on Socially Responsible Capital, which focuses on public companies, while Virtuous capital focuses on start-ups and early-stage companies. More work is needed to further develop the concept and the distinctions to be found in the term, Virtuous Capital. I’ll look to Bill and John to help here.

Maybe we will call it Vir/Cap. It is also the antithesis of the term ‘Super Capitalism,’ used by Robert B. Reich in his new book by that title. The cover of his book says it all, with a string tied on the dollar sign.

Virtuous Capital can stand on its own and succeed the way venture capital was designed by the first venture capitalists over 50 years ago.

Bill Hogan John Paul and I will co-author this book. Together we plan to introduce and champion its message and mission on an international scale.

All of this will be spelled out in greater detail in the book.

Let’s begin . . .

Jacques B. Nichols © Oct.2007

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On August 21, 2007 the Ambassador from China to the US was invited to join in a breakfast at The Benson Hotel. I was also invited and knew that I would be asked to say the concluding remarks. Sitting across from Ambassador Zhou Wenshong I listened intently to his message and what the speakers who spoke on behalf of their company, US Reliant, Inc. had to say. When it was my turn to speak I addressed the entire room by saying that although we had only been in this room for an hour, we are now a family.

The Ambassador’s wife, Xie Shumin returned my statement with an approving acknowledgement that was shown in her nod. I continued to say that the company was going to China and that they would, thanks to the efforts of the Ambassador and my friend, Jin Lan, who organized this breakfast, make acquaintances with a number of large manufacturing companies in China. I had been thinking that US Reliant had only 25 employees, not enough to fill even one small bus. Yet because of the relationships started today they would be able to have these high-level meetings. In turn, I suggested that small Chinese companies should be afforded similar opportunities to meet large US companies.

I finished by making a prediction. I said that one year from this date, if we meet again we will see how far the ripples on the ponds that we are creating today have expanded. Apparently my message struck a cord. When I closed by stating my appreciation for being invited to speak today, I heard a round of applause.

Question: Is there a common ground or a symbol that can bring Chinese and the US companies closer together? I have an idea which is another one of my postings. Have you found it? What are your views on the current business relationship between the US and China?

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While I was the Managing Partner of First Source Capital Fund I mentioned at a meeting of other fund managers that I had fun doing my work. One of them took umbrage at my comment. He asked if I was often still at the office after 7 p.m. I said ‘Yes.’ He then asked if I liked to be on airplanes every week. I said: ‘Yes.’ He then said that there was no room for fun in our profession. I disagreed. I said: If I was not doing what I love to do, I would not do it.” He registered no acknowledgement with what I had said.

Immediately on returning to my office I called Oregon Screen Impressions and ordered T-shirts with the First Source logo and a tagline that read: “The Venture Fund WithThe Silent D.”

I had no difficulty finding persons willing to wear the shirts, and not only from companies that we had funded.

Last week I exchanged email messages with a former reporter for the Wall Street Journal. We had met at a breakfast in Portland for the Ambassador from China. I gave him one of my Savvy, Sage and Wise business cards. It carried the address for this blog site. In his email to me he said he was “. . . looking forward to lots and lots of fun working together.”

Seeing his message brought to mind this story about the tagline. Obviously my new best friend would have no problem appreciating the importance of having fun and working hard.

Question: Do you agree; does keeping ‘fun’ in the business equation, make for greater success?

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The Oregonian, on Thursday morning’s edition for July, had a headline in the Sports Section that said: Seattle’s bullpen fails in ninth.  Above the headline was a box score that said: Seattle 7, Los Angeles 7 (through 11 innings).  Below the headline was a picture of a celebration by the Los Angeles Angels after a two-run, two-out homer in the ninth inning tied the game.

Below the picture a caption said: “. . . the Wednesday night game did not end in time for this edition of The Oregonian.”

We also get the local paper, The Columbian, which was on the porch and I read it first.  Apparently the folks who work there stayed up to see the finish of the game.  Its headline, also on the front page said: “Mariners salvage win in the 12th”

The article that followed the picture had this for its lead-in sentence: “Yuriensky Betancourt grounded a single through the left side of a five-man infield to score Adrian Beltre with one out in the bottom of the 12th inning and send the Seattle Mariners to a wild 8-7 victory over the Los Angeles Angels on Wednesday night.”

I love sports, especially for the metaphors they provide.  In business many times there are those who give up, whether the score is tied or the game has gone deep into extra innings.  Then there are those who stay to the end, but they never give up, and then they are the ones who are rewarded for their commitment and perseverance.

The next time you find yourself believing that a particular company or person is going to fail, remember the way The Oregonian handled the story where they highlighted that Seattle’s bullpen failed in the 9th, and then recall what The Columbian had to say because they stayed to the finish.  The other day I saw a bumper sticker on a car that was being towed.  It said: FAILURE IS NOT AN OPTION.

Yesterday I parked in a lot and the car in front of me said: “Something good is going to happen soon.”  And the week before when in Salt Lake my fortune cookie said: “Soon you’ll be sitting on top of the world.”  That’s the way it works in baseball (sometimes.)

Our dueling newspapers showed that it’s the final score that counts; not an inning by inning box score.  “Fail” did not happen during the game.  “Win” comes at the end of the game.

The moral to this story is:

Who cares how many innings it takes to win? A win is a win, salvaged or not!

Jacques B. Nichols
August 3, 2007

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Was it always there, in plain view?
Of course it was, but I hadn’t seen it before.
But when I did, it struck me

Like a red flag excites a bull,
Like a dropping cross-arm signals a coming train,
Like a sounding car alarm; they get attention

Now it won’t go away
Every time I see it tucked inside the word
‘Business’, it’s in there, in plain view.

The word: Sin

Surely it has been noticed by others,
Comments must have been written
But still the question remains

Why is ‘business’ spelled this way?
Could it be because ‘sin’ always tries to hide,
The way it hides in every deal?

Well, some can say: ‘That’s business.’
But I want to change our way of spelling it,
Just like I want to change the world and have peace.

But how do we take ‘sin’ out of business?

Try transparency
Try full disclosure
Try integrity

Try to avoid what’s an acceptable sin
And spell the word: ‘Busyness’ like in ‘Happyness’
Maybe they’ll make a movie of it too.

Like that red flag in front of a charging bull
Drop the flag!  Drop the ‘i’ and use a ‘y.’
Besides, asking ‘Why’ is always a good idea.

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David McInnis has lived the American Dream. He sold his company, PRWeb, recently and with pockets filled with cash started to buy a few toys, like a three wheel motorcycle. Only the single wheel is on the backend. David is not about speed, only performance and the front wheels shift camber much like a marching team. And it was a marching team that stepped into a Barnes and Noble Bookstore on June 5, 2007 in pursuit of Lee Iacocca’s latest book: Where Have All The Leaders Gone?

Customers who saw this entourage had only a few minutes to catch the action. Within ten feet of the front door the book was prominently on display and five hands reached out like octopus arms for a tender morsel. Before even one page could be read they turned the scene into a photo op. And now this story begins.

Earlier in the day five men were sitting around a conference table at Tangible Express in Springville, Utah. David had invited the attendees to discuss how to take his latest ‘American Dream’ to the World, and not just to the next level. And what was David’s 2nd American Dream?

Before answering that question, let me describe these five compatriots in more detail and tell you more about how David has been spending his new money. Tangible Express, which is only a place card until a new more descriptive name for the business at hand is agreed upon, looks like an in-door cattle yard. At least that is one description of the manufacturing floor and the 13 red and white rapid prototyping machines that David has purchased at the tune of $5 Million Dollars, with another $3 Million worth waiting in the corral. Now, why would a guy who just sold a public relations funnel buy so much hardware? Boat anchors are a lot cheaper.

David’s newest dream is draped in red, white and blue. He wants to bring back on-shore what has left America’s shores. He believes that if companies with special manufacturing requirements buy fractional ownership in the type of machines they need, such as these rapid prototyping machines, they’d have significant advantages over sending such work to China and other countries. First of all, they’d own their part of the machines; get to amortize their purchase and count of faster delivery of the finished parts. David’s dream goes beyond these prototyping machines and includes CNC machines, injection molding machines and other machines that are otherwise too expensive for many companies to afford to buy outright. Furthermore, they can swap time on the machines they own for time on other machines in David’s corral.

Now who were in the conference room? Besides David, in attendance was Alex Linde, the President and COO of Tangible, who was formerly with PRWeb, Ken Packer, Controller who was hired after the company moved to Utah, and two guys from Vancouver, the other Washington. One, Mark Effinger, who makes you think of Tony Robbins on steroids, had consulted with David on PR Web. He had recently introduced Jacques Nichols to David. Jacques has been called the God-Father of Start-Ups in Oregon and is an attorney, virtuous capitalist and a writer.

It was Jacques’ question to the group that led to the trip to the book store. At one point in the discussions he asked the group: “Who is the perfect spokesperson for this the company?” When Mark said “Jack Walsh,” Jacques replied: “Close, but not correct.” After no more names were advanced, Jacques said, with a smile: “It’s Lee Iacocca!”

Jacques had a great friend, who passed away in 2005 named Bill Tholke. Bill used to be with Korn-Ferry, the head-hunting firm. Years ago he told Jacques a story about Lee. The punch line to the story was how Lee walked into a room at Ford Motor Co. that was filled with engineers who were grappling with how to create more electronics in their car when Lee entered the room. On finding out that the room, except for Bill, was filled with engineers, he smashed his ever-present cigar into a ready ash tray as he said: “Damn it, that’s the problem with you engineers, you don’t understand marketing.” Jacques also surmised that Lee probably had an American flag on his coat lapel at that time.

When this gang spotted the book on display, Jacques burst out in laughter. There they were: The ever-present cigar and a little flag on Lee’s lapel. Bill’s story had come back to life, just as it had been told.

On getting back into the car four sets of eyes (David was driving his new Chrysler) started to skim the book for more morsels that supported the proposition that Lee, as a spokesman, could stand for David’s 2nd American Dream and its Mission Statement. The first evidence was found on page 12 and the second evidence was found on page 26. Both emphasized how much of America’s manufacturing had been shipped overseas. The words ‘Off Shore’ are constantly in the press. Now ‘On-Shore Manufacturing Co.’ should become Tangible’s new name.

Jacques offered to write up this Don Quixote journey and share it with the group. He promised the group that we’d find a way to send it, along with the picture of the five of them in the book store, to Lee.

And then maybe what follows will become a chapter for his next book, called” ‘What Lee is Doing for AMERICA!’

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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 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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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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