Tuesday, January 12, 2010

Dr. Jack Gill at MIT - Day 2: Start-up dynamics

I have the privilege of being a TA for Dr. Jack Gill's short course at MIT titled "High Tech start-ups". Today, the topic was "Start-up Dynamics" and the guest speaker was Luca Erceg, founder and CEO of Simbol Mining. They spoke to a packed house with standing room only about 30 minutes into the talk.

Simbol won the 2008 Cleantech Group's Most Promising Technology Award. They are commercializing zero waste, zero carbon footprint production processes for lithium, EMD, and zinc battery chemicals sourced from geothermal brines.

Dr. Gill first characterized the elements of high-tech start-ups as follows:

- 1 to 3 driven founders
- Proprietary product technology
- Sizeable market
- Satisfies an unmet need
- A R&D team to create the product
- A mission, vision and milestones for the company
- Sufficient capital to execute
- Tenacity and,
- Lots of luck.

He shared with the group a template that Vanguard Ventures uses to analyze and investment when they are pitched by entrepreneurs. It was a lot of what an entrepreneur expects to be assessed on, no surprises there. Since most of the audience was comprised of engineers and scientists, he went into the nuts and bolts of how to access venture capital and what to expect. He pointed to www.NVCA.org and the Western Association of Venture Capitalists as resources. I didn't know about WAVC, it was good to learn. He then went on to speak about common stock and preferred stock, the differences, pricing differential between the two and also touched upon convertibles and warrants. It was a terrific preview to the entrepreneurial finance class I am signed up for this coming semester!

One of the most useful pieces of advice I took away from his talk was the importance of being able to learn very quickly and adjust the game plan on the fly. When pitching an investor, if the pitch doesn't go so well, use that as a learning opportunity. Understand why the investor declined to invest, and when you leave the meeting, go to the closest coffee shop with your team and do a post-mortem analysis of what worked and what did not, and what needs to be refined for the next pitch. Sounds very similar to customer development for start-ups, perhaps this should be called "investor development for start-ups"!

He then went on talk about what a typical term sheet looks like and explained some of the jargon - what's pre-money valuation, option pools, vesting, and board size and composition.

Another topic I found very interesting that he touched upon is frequent start-up problems. He listed:

- Competence of CEO
- Inadequate capitalization
- IP issues
- Poor cash management
- Lack of focus
- Over optimistic forecasts
- Underestimating competition and,
- Mediocre drive and commitment

Having been a victim to IP issues with my first start-up, it was particularly interesting to me to hear about other traps I might fall into if I don't watch out.

I was intrigued to notice the similarities between what Dr. Gill and Dr. Bob Langer (who visited Founder's Journey last semester) said about creating a real company versus a product line. A real company is built on a technology platform, not on a single product.

Luca was a great speaker who responded to the questions addressed to him with very frank answers. As a first time CEO and founder, his observations were particularly relevant and timely. I enjoyed hearing about the importance of the CEO actively managing his relationship with his board of directors, and how an ideal relationship with will result in a two-way flow of information and will get the CEO the feedback and advice he needs to effectively run the company.

I also enjoyed his description of how he was approached by VCs after winning the Cleantech most promising technology award, and how he chose to raise an angel round first to have results before approaching VCs. He offered sage advice on the importance of selling oneself effectively to investors - the importance of having a really crisp elevator pitch, and revealing enough information to be intriguing and land a follow-up meeting with investors, but not too much information that will allow for snap judgements and no room for clarification or rebuttals.

In all, an excellent morning spent hearing start-up wisdom.

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