80 entrepreneurs and 80 degrees

How do you get 80 entrepreneurs to spend two hours together in an 80 degree conference room? Free advice and free beer.
Despite the weather and a pesky motorcade, we had a great turnout for an end-of-summer kick-off of our Entrepreneur Roundtable series. With over 2000 companies applying to the AoA process over the last decade, we felt there was tremendous knowledge in this group that could and should be shared within it. No service providers, no vendors, no solicitors-- just early-stage entrepreneurs the AoA had interviewed. We basically stepped out of the way, let the entrepreneurs get to know each other over beer and pretzels, and put together a panel moderated by Madrona Venture Group's Geoff Entress, featuring DRY Soda's Sharelle Klaus and Buddy TV's Andy Liu. And though more DRY Soda was consumed than beer, we had a lively bunch that wasn't shy about asking questions, just a few of which are noted below:

• How did you support the business before getting angel funding?
• Andy: founder investment from prior exit. Sharelle: claiming to be "cheap" (read: capital efficient), she obtained a home equity loan, used credit cards, and received a small SBA loan (didn't require collateral, just lots of paperwork)
• Takeaway: founders with "skin in the game" inspire investor confidence, and "cheap," in a word, is good (apologies to Gordon Gekko).
  
• What metrics or milestones were critical in getting you funding? (asked Lynn Brewer, Integrity Institute)
• Andy: waited until the company was cash flow positive to approach angels, and also obtained a critical mass of unique visitors to the site
• Sharelle: needed to show sell-through in at least one key distribution channel
  
• Thoughts on convertible notes? (Steve McCracken, Green Couch Conspiracy)
• Geoff: generally tries to avoid--not because of the downside risk, it's the lack of upside (see our previous post on the topic)
  
• Pros/Cons of funding from angels, strategic partners, VCs
• Andy: with angels the funding tends to be completed more quickly, VC's tend to be focused on ROI, and strategic partners bring additional value to the business, so at the end of the day, if given the opportunity, choose whichever route will grow your business the most quickly and effectively.
• Note: Sharelle was asked about valuation in her angel round, and if she would have increased it if she could do it over again. She noted that while some may have perceived the deals as investor-friendly, she was able to close both her A and B rounds quickly (the first in 3 weeks), so it's hard to argue with that outcome.
  
• How often do your portfolio companies really communicate with you? (Joel Gendelman, NTuitive)
• Geoff: official quarterly reports are sufficient, a monthly touchpoint is even better, and the assumption (right or wrong) is that no news is bad news...so stay in touch!

If you've previously interviewed with AoA and the above was enough to whet your appetite, email us to be added to the invite list and join the conversation. We've planned quarterly meetings and welcome suggestions on both topics and panelists.

Canadian investing, eh?

Think you might want to foray into Canadian investment? You’re not alone.

According to the CVCA (Canada’s Venture Capital & Private Equity Association ) cross-border investment is increasingly trendy. Non-Canadian investors represent 33% of venture investment in Canadian firms, and foreign investment in Canada is up 67% (Q32006 over Q32005).

At our last AoA Membership Luncheon, Devin Stockfish of K&L Gates gave our group some quick tips on investing in Canadian companies (timely, as one of our presenters was in fact Vancouver, BC-based). While this serial entrepreneur CEO had good traction and a compelling technology (and, as he pointed out, Canadians are just so darn nice), Devin provided some additional reasons we might want to consider cross-border investment.

• The “shred” program (SR&ED, Scientific Research and Experimental Development), providing investment tax credits to provide incentives for conducting research in Canada

• IRAP (Industrial Research Assistance Program),provides business and technical services to growth-stage Canadian companies

However, he suggested investors consider the following nuances:

Canadian tax issues

• Differing treatment of dividends, interest and capital gains
• 116 clearance certificates , which become important with sale of shares
  
• US LLC treatment: treated as a corporation vs. a partnership

US tax issues

• Passive foreign investment company (PFIC) and Controlled Foreign Corporations (CFC):note special instructions from the IRS on taxation of profits

The take away was not to shy away cross-border investing, but to deal with these issues at the time of investment vs. at the liquidity event. The proper deal structure (and legal help) can prevent headaches. Other than that, when you visit the management team in Canada, remember your passport, and that it’s only an urban legend that Canadian beer is stronger.