How to Choose the Best VC or Accelerator for Your Startup…
Raising funds seems like the Holy Grail of the startup community. Spend time around an accelerator or co-working space in ATX, and you will overhear someone talking about raising money. For many first-time founders, this will be one of the biggest frustrations since most VCs typically don’t invest in first-time founders. In this month’s blog, we share some tips to increase your probability of finding the right accelerator program and VC partners.
First Ask: Do You need to Raise Funds?
You rarely read about companies who have bootstrapped in TechCrunch. It’s certainly not the sexy route these days regardless of how much equity a founder retains in the end. Your mentors and advisors will challenge you on this to make sure it is the right path for your situation. If Bootstrapping is possible, check out the - Bootstrap Austin blog. The next questions to ask: Why do you need to raise funds? Often times founders will head to accelerators to help answer this question and continue the fundraising journey.
Accelerators and Beware of the Term Sheet
Joining an accelerator has been a new trend in the tech startup community since the first seed accelerator, Y Combinator, started in 2005. Between Capital Factory, TechStars, Mass Challenge, Sputnik ATX, Oracle Startup Cloud Accelerator, Founder Institute, and many others, there is no shortage of options for entrepreneurs in Austin. Accelerators are a great way to find product market fit, prove the business model and execute on your strategy (…or pivot). They are also great for finding a network of mentors who can offer sage advice. Often times you can get some serious press and street cred by going through a well know accelerator such as Y Combinator or Techstars. They might even help you raise funds via their angel or VC network. Some accelerators like Mass Challenge can hand out a $100K check without taking equity but most do not. Before committing to an accelerator, be sure the benefit will outweigh what you give up in equity. Giving up 3-6% of your company for a few co-working seats may not be worth it long term. My main caution for entrepreneurs evaluating accelerators is to watch out for the fine print in the term sheets. I have had heard of a few potential D&O claims regarding non-dilutive equity provisions holding up the next round of funding.
Do Your Homework on VCs
Once ready to go on the fundraising trail…many entrepreneurs approach finding institutional investment dollars as a numbers game. While sending a drip campaign to every VC in America seems like a great strategy, it is also a great way to waste a lot of time. With the amount of data available, you can easily hone in on a richer list of potential VCs that might be a good fit as potential partners. A great resource for this approach is in the book Venture Deals by Brad Feld and Jason Mendelson. Some aspects to consider when narrowing down the VC prospects along with Austin specific examples:
Check Size – Knowing Silverton Partners typically invests between $500,000 to $5 million, with the average being between $1.5 million to $2 million might help you decide if they would be a good target for your firm.
Industry/Area – knowing Brand Foundry focuses on B2C will be helpful to know if you are a B2B SAAS company.
Stage of Investment – Guess what stage, ATX Seed Ventures prefers for the first check?
Geography – Some firms have geography as part of their investment appetite. Live Oak Venture partners also supports companies based in Texas.
There are many other factors, but that should help get a jump on narrowing down the list for richer results.
Call Other Founders
Assuming you have been successful at narrowing down the VC list…how do you choose the right one? One pro tip from Brett Hurt’s, Lucky 7 Blog as well as numerous panel discussions around Austin is to call references. He shares this pro tip not only for hiring employees and for evaluating potential VC partners. Calling the funders of other portfolio companies to get insight into how a particular VC operates is such a great idea. You might want to find out how a VC is as a board member, what value they bring to the relationship (aside from money) and how they have helped the company succeed over time. Having these conversations might even help you narrow down which VC within a particular firm you may want to have on your board. One of the biggest compliments a Founder can give is to call a VC ‘founder friendly.’ Another would be to ask the founder which fund he/she would invest in upon exit. You might get some interesting answers on that one. The bottom line: reputation is everything here and go with your gut.
Summary: Choose Wisely
If you decide to go through an accelerator or raise funds, make sure you do what is best for your situation long term. Lean on your network and do some research. When in doubt, rely on the reputation of the program or VC and go with your gut.
Like the knight says in Indiana Jones – The Last Crusade …‘you must choose but choose wisely. For as the true grail will bring you life, the false grail will take it from you.’
Other Helpful Resources: (Add links as able to)
ABJ – Tech Mike Cronin
Silicon Hills News
Lumen Insurance Technologies is a boutique commercial insurance agency based in Austin, Texas. Lumen is hyper-focused on providing the technology startup ecosystem with quality commercial insurance coverage (e.g. D&O, E&O, Cyber, etc.) following a funding event and beyond.
Check us out on the web at www.lumeninsure.com to find more blog topics, general info, or to get help with finding coverage. Email us at firstname.lastname@example.org if you would like to suggest a topic for future blogs.
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Here at SnapShot, we create all sorts of videos for our clients. Each video created has its own individual purpose and whatever that purpose may be, we help select whether an animation or a live video will work best. Both are great options, of course, however, sometimes it’s best to use one over the other.
Animated videos can take a bit longer to create as everything is made from scratch. Live videos, on the other hand, can take a couple hours to a couple days to get the footage needed. You can also edit or re-shoot live videos much more quickly; whereas with animation, you’d have to re-create the imagery, script, and cinematography each time depending on the edits.
We recommend using animation videos to explain a specific process, how-to instruction, or even to explain a complex idea. We’ve come to find that it is easier to illustrate specific points rather than have someone describe it as that can occasionally draw up confusion. If you are a very visual person, then animation can help catch the viewer’s eye and keep their attention.
Animated videos also help trigger certain emotions from the audience. It’s easy to make people laugh with animation, because, well, they can be funny. You are in control of the script, what the animation looks like, the music, and so on and so forth. We created an animation video for Direct General around pleasant surprises, so we came up with a few videos that were unexpected to their audience in 15 seconds or less. In short, animations are a great option when you need to explain something in a short amount of time or to explain an otherwise “boring” concept.
If you want to emphasize who you are as a company or share a real story, live videos might be the way to go. Live videos are a great way to show off a location or an event, such as this kickboxing video we created. If you want to highlight a company’s culture or office space, this might be the better option. These type of videos can seem more authentic to an audience and gather a personal feel.
If you are on a time crunch, a live video might be the answer here as well, as they can typically have a shorter turn-around time.
When in doubt, remember to always think about your audience, the message you want to convey, and the time you have available. This could also help you to determine which avenue to pursue when it comes to an animation or live video. Animation videos are great if you have an idea you want to explain in a short amount of time, while live videos are great if the goal is to communicate something personal or present a relatable idea.
Not sure if you should use an animation or live video for your next project? Just ask us! We would love to discuss what your next idea is.
Advice for Startups That Fail to IPO and Have Insurance Concerns…
Though many tech entrepreneurs dream of taking a company public, the reality is very few companies (particularly in Austin) go public. Recently, in Austin we had Sailpoint go public and Phunware do a merger into a publicly traded company (count it) but that’s about it. Anand Sanwal, co-founder and CEO of CB Insights, puts it bluntly in a CNN Tech article , “less than 1% — will go public.”
For years it has been said, “90% of startups fail.” However, I read a Fortune article recently highlighting research from Cambridge Associates. They determined the failure (defined as 1X return or less to investors) rate is more like 60% for Venture-Backed Startups.
If this is true, roughly 39% of venture backed startups will likely have a successful (more than 1x return to investors) exit. Even the ones who ‘fail’ can still result in an acquisition, so what do you need to know from an insurance perspective during and after an acquisition?
This blog is not designed to answer all your questions about insurance and ERPs during an acquisition. However, it will give you some context so you can ask the right questions and make a good business decision during an acquisition scenario.
Occurrence vs Claims Made Policies
Know which of your policies are occurrence based and which ones are claims made. Policies such as general liability or commercial auto are occurrence based. This means the policy in force the day the claim occurred is the one that would respond in a loss scenario. Professional policies, such as your Errors and Omissions or Directors & Officers policies, are claims made policies. This means the policy in force when the claim was made is the one that responds to the loss as long as there was coverage in place (often referred to as a retro date) prior to the loss. The intent here is not to do a deep dive into this but to know there is a difference because the next section only applies to claims made policies.
ERP (tail coverage) and Runoff?
Since claims made policies respond when a claim is made and not when the loss occurred, ERPs, Extended Reporting Period, (often referred to as ‘tail coverage’ or discovery period) and runoff are designed to help. In general, these are opportunities for a company to purchase time to report claims that may have already occurred (but have not been discovered yet) on a claims made policy.
In an acquisition situation, the policy is typically cancelled on the acquisition date. If your company has the option to purchase an ERP, this period is designed to allow claims that have occurred between the retroactive date on your policy and the policy being cancelled (assuming contiguous coverage) to be reported. Since this period is at the end of the policy, it is called “tail” coverage. It is important to note: any claims that occur after the policy is cancelled (even if an ERP has been purchased) would not be covered.
Is very similar but takes place when the claims made policy stays in force after the acquisition date. In this scenario the policy is not cancelled but stays in place as ‘Runoff.’ This acts like ERP giving you till the end of the policy period to report a claim that occurred prior to the acquisition date. At that point, an ERP can also be purchased.
A common theme in both situations (ERP and Runoff) is any claim taking place after the acquisition will not be covered.
Will Your Carrier Offer ERP?
Not all carriers are created equal. Some carriers have clearly defined options (terms and pricing) for tail coverage and some only offer a free… ‘mini-tail’ [pinky finger in the corner of my mouth] of 90 days. The caution here is to be aware that not all policies will offer tail coverage. There are situations such as a hostile takeover where the carrier will want to steer clear. To protect themselves from a certain loss, they may not offer an ERP. This does not mean you will be left high and dry because there is a secondary market for this. It will just cost you…
Timelines and Cost
If a carrier does offer ERP, it will usually be defined by years and percentages of current premium. For example, a 1-year D&O Extended reporting period could be 100% of the annual policy premium while a 1-year E&O ERP could be 75%. Sometimes, these can be reduced if multiple years are purchased. This can also be negotiated with the carrier if it is a super clean account.
Here is an example from a standard lines E&O carrier for ERP on a clean account:
1 year 75%
2 years 125%
3 years 150%
4 years 175%
5 years 200%
Who Pays and Why?
Like all insurance answers: it depends. Typically, the company being acquired would have more of a vested interest in making sure the appropriate tail coverage is purchased after the acquisition and would pay. A good example is with a D&O policy. Since the execs of the company being acquired can be personally named on a lawsuit, they would certainly want to make sure a D&O ERP is purchased if not required by the deal. For E&O the acquiring company may want to make sure a policy such as E&O is purchased to make sure any claims that happened prior to the acquisition are covered in the ERP.
This can be paid for as part of the provisions in the sale, by reducing the amount of stock purchased, or can simply be on your own dime. Either way, it is all negotiable and should be part of the conversation before the deal is done.
Good Business Decisions
As an entrepreneur you are familiar with making business decisions on risk reward. Regardless of the outcome for your company, good or bad, there will be insurance implications. Be sure to get with your agent, broker and legal counsel to help you work through what you need to properly insure your company during and after the transition. Now let’s toast to the 39% and the folks who are still grinding to get there.