Finding Investors, Valuing Companies: Interview with Golden Seeds Founder

What do women business owners need to know about finding investors for their business and about business valuation? In Part 2 (below) of our interview, Stephanie Newby, former Managing Director of Golden Seeds® network of angel investors, answers these and other questions. (Part 1 discusses general funding issues for women-owned businesses.)

Janet: One of the things you mentioned is that you have to find good investors. I guess I have two questions. First of all, what are the mistakes women make in looking for funding, and how do they know that an investor is the right one for them?

Stephanie: Well, one mistake is not understanding the capital structure of the company before they go into it.. For example, I met an academic who was a scientist and she had done twenty years of research. She’d taken in about a hundred thousand dollars to commercialize her research and for that hundred thousand she ended up with only ten percent of the company which is absolutely outrageous. So I think women need to do a much better job insuring they really do understand how companies are structured and what impact taking capital in has on their company.

It’s not something to be afraid of. It’s something to understand and then be able to take responsibility for yourself, and take control of yourself. So, without being a control freak (meaning not willing to give up equity), you make sure you understand it really well. And then you can really manage who you bring in, how much you’re willing to give away, what that money is going to buy you.

And when you’re taking capital in, what you want to do is look for more than just dollars. So you’re really looking for people that can add value to your company as well as the capital.

Janet: If somebody’s looking for capital as a start-up, what percentage should they expect to have to give away? Does that vary from deal to deal?

Stephanie: It does vary from deal to deal, but the best way for me to describe this might be to describe a typical angel deal. The company’s looking to raise anywhere from five hundred thousand to a million dollars. The product might be in prototype, or it may be even in beta, which means ready to commercialize and already has one or two paying customers. The money that they’re looking to raise is going to help finish off the final development of the product, but more importantly to help them start to bring in some customers or at least scale those early customers.

So let’s say we have a company that’s going to bring in five hundred thousand dollars. They’re normally going to be giving up around 25-30% of the company and so if we put in five hundred thousand and we’re getting 33% of the company, then that means that after we put the money in, the company is worth $1.5 million. So it’s simple math, really, and it means that before we put the money in, the company was worth a million. The $1.5 million is what we call the post-money evaluation. So it means the pre-money evaluation was one million dollars, and with our five hundred thousand dollars the post money is 1.5 million and we, the investors, have bought 33% of the company.

Janet: How can a startup determine the value of their company? Valuation is one of those puzzling things for most business owners.

Stephanie: When you’re in that very early stage, what matters most is the percentage of ownership. That sort of matters more than what the value of the company is because, really, many of these companies don’t have much real value. In fact if an accountant put a book value on [one of these early stage companies], it would be zero. So really what you’re looking to get right is, the balance of who owns what at this early stage. What we really want to make sure is that the entrepreneur doesn’t start to feel like an employee. So we don’t want to take too much percentage of the company because then what we’ve got is an employee and what we want is an entrepreneur. This is why we’re typically taking minority stakes in the company, less than 50%.

Let’s take a company that hasn’t started at all yet. We’ve got three people around the table and we need all three of them. We’ve got an investor, we’ve got someone who created some really fantastic technology that has some patents and we have a business person, a CEO who is going to be able to commercialize this. So the easiest way to think of it is – let’s divide this company up 33% each. You’re going to give the technologist who has the patents 33%, and we’ll call that person the founder. You give the CEO businessperson 33%, because we need them to be building the company, and we are going to give the investor 33%. Then you’re going to say, “Well how much money do we need for the next twelve months?” And if that number is five hundred thousand, then you go back to the numbers that I used before, which means you’ve effectively created a 1.5 million dollar company out of those three pieces.

Janet: That’s a great explanation of valuation. Do one-person companies ever get funded? At what point should someone be seeking investors?

Stephanie: Yes. Usually a single person has some other people working for them, but they might not have much of a management team yet. They might come to us and we’ll ask, “Well, what does your management team look like?” And they might say, “Well, right now it’s just me but once I get funded, I’m going to be bringing in so-and-so, who’s going to be my chief technology officer, and by the way, this person’s already been working a bit for me for equity. I can’t afford to pay them yet until after the funding but here’s their resume and you can meet the person if you want.

Or, they might have a chief operating officer as well, in the wings, or, you know, more typically we see co-founders because it’s just easy to get something started when you’ve got a couple of people. But yes, a single person can get funded. Usually the first round of financing is going to come from their own friends and family. We call that the friends and family round. And you know, that’s a good thing, because those people are really betting on this individual. Whereas, once we come in, we’re betting on both the individual and the idea.

I think it’s really imperative to never take capital from somebody that you don’t like, or that you don’t want to be working with because your investors really are helping you build the company. You’ve got to care as much about them as you do about an employee.

Janet: At the New York Venture Capital Association meeting this Spring [2011], there was talk about a lot of money chasing too few deals. Do you see that as being useful for women looking for funding today and is it any easier for a woman to get funding now than it was, say, ten years ago?

Stephanie: It’s definitely a good thing to have more capital in the market, because this whole sector is very starved of capital. So that benefits both men and women. If you think about whether it easier for a woman to get funding now than it was ten years ago, I don’t think we’ve got very much data to compare. But there’s been a lot more in the press in the last couple of years about the importance of ensuring that women entrepreneurs can get funded, and there have been many efforts to try to raise awareness of this in the minds of both venture capitalists and angel investors. So, I think it would be very much easier.

CBI Insights published a Venture Capital Human Capital Report in 2010. One interesting thing that came out of that is that women entrepreneurs in New England get funded at a much higher rate than anyone else in the country. I think it was 31%. It’s a really entrepreneurial community up there, there are a lot of angel groups – at least thirty angel groups just in Boston –and you know, there are obviously a lot of woman entrepreneurs up there, too. But we don’t have enough data to compare one year to the next, really, to know whether that’s going up.

Janet: Do women have any many chances to meet mentors early on, as men do?

Stephanie: Well, I do think it’s a problem, but what you have to do is go to places that are really focused on supporting women. There are a couple of non-profits that we work with. One is called Springboard Enterprises and the other is called Astia. Both of them provide very good support to women entrepreneurs by introducing them to the venture community and by actually providing them with a coach and a mentor if they are going through their program. And then there’s the Women Presidents’ Organization (WPO). They are more established businesses, but they are a very good peer-to-peer kind of networking group that does a lot more than mentor networking. You get put into a small group, in your region, of other CEOs. Each month someone brings along a business problem that they’ve come across that they want help with and then all of the women in their little group will help them work it out.

So I think you need to look specifically in the places where you will find women. There are other groups like us that focus on women entrepreneurs. One is called Phenomenelle Angels Fund. They’re in Wisconsin. And then there’s a group called Women Angels, started by Barbara Boxer. They’re based in Florida. They’re the two that I’m aware of. There is an increasing number of women angel investors. If you can find an investor group with women angels in it, you know, you could always ask them. The best place to find angel groups is

Janet: Are there specific steps people should take before they start looking for funding? What can they do to learn about the whole venture process? Should they look for venture and angel events or meetings in their area?

Stephanie: Definitely going to those venture capital events is very good because you see other entrepreneurs pitch, whether they’re male or female, so you’ve got to get a sense of what you need to put into your pitch. Also, getting funding is really about building relationships so I think it’s best to start building relationships with people who you might think could become an investor in your company. If you have a relationship, then it’s much easier to say “Okay, I’m ready to take your money now, and so would you be interested?” and you’re not just asking total strangers. If you’re asking total strangers, then they have to go through a process of getting to know you, and it’s going to take longer.

Janet: Can you think of any big mistakes entrepreneurs make in pitches, and business plans? Is there any one or two things that jump out that are like fingernails grating on a chalkboard?

Stephanie: Well, one of the things that neither venture capitalists nor angels want to do at all is sign an NDA, which is a non-disclosure agreement, because we have to keep everything confidential, and we see so many businesses. I mean we view thousands of business plans so we can’. -It would be a physical and mental impossibility to be able to segment out which ones we had signed a non-disclosure agreement for or not.

Guy Kawasaki has blogged about NDAs in a way that’s very good. He gives the entrepreneur a good idea about why none of us sign NDAs. He also has a blog about ten slides that you need to put into your PowerPoint when you’re looking for investment capital.

One thing that’s very important is there are two questions that are always going to be asked by investors. One question is: “What’s your exit strategy?”And an investor would cringe if the entrepreneur says “Oh I don’t want to sell my business- I’m going to pass it on to my kids.” And if that’s the case, you can’t really ask for investors to put money into your company because it’s not clear how they will get it out. There has to be an exit strategy.

And then another question that’s always going to be asked is “If things don’t work out with you as the CEO, we may need to make a change and how would you feel about that?” As an entrepreneur, you have to sort of bite your lip if you don’t like the answer but you still have to give the right answer. And the right answer is something like, “Of course when the time comes that I am not the right person anymore to be leading this business, all I care about is growing it and I’ll be willing to step aside. There might be some other role for me in the company, and if not, I’ll move on to do my next start-up. I’ll still have my equity and I’ll be very interested in seeing how that equity grows and hopefully I’ll be a board member or an advisor or something else.”

So that’s the correct answer. It’s probably very tough for the entrepreneur to give it but any other answer could potentially be a deal killer.

Janet: How many companies has Golden Seeds invested in and do you have goals for investing in a specific number of companies per year?

Stephanie: We’ve invested in thirty-six companies and we’ve invested over twenty-three million into those companies since 2005. Is there a target? Not really, because you don’t want to target doing “x” number of deals per year in case you just don’t see any good deals. You know, you’ve got to always make sure they’re good. We’ll probably do somewhere between six and eight new investments this year.

Janet: And how many plans do you look at a year?

Stephanie: About three hundred and fifty.

Janet: I understand you’re starting a new fund?

Stephanie: Yes, we’re targeting a minimum of twenty-five million. We’re about halfway there.

Janet: Are you focusing on women investors or any investors?

Stephanie: Any investors. Actually, interestingly, we’ve got a lot of guys writing the bigger checks for our fund. So, there are a lot of very good guys around and we love them. We need them. We just really want people who are aligned with our mission to be our investors, so, people who really care about investing with a gender lens, and not only are they investing in a fund that is majority women-owned, but our money is going to women entrepreneurs. There’s a social purpose to this that resonates with a lot of people and they’re the people we’re looking for. They do have to be accredited investors. We’re looking for family offices as well and foundations that are interested in supporting women and insuring that women have equal access to capital.

Janet: Did you have anything else that you’d like to add ?

Stephanie: I will say that we care a lot about returns, so although we have this social purpose to what we do, the charity stops there and first and foremost, we are totally fixated on providing above market returns. We’re not backing [just] all-women teams, we’re backing a team that has at least one woman in the management team who has equity. So really what we’re banking on is diversity. And we genuinely believe that diversity produces higher returns. There’s an increasing body of research that demonstrates that’s the case, and the returns that we’re already seeing are confirming that this is indeed possible in this early stage investing as well.

We’re really focused on producing above market returns, and the data that we’ve got – we’re returning right now – my personal return, and I can only quote that, is twenty-eight percent per year.

Janet: So if somebody who’s looking for funding wants to get in touch with you, what’s the best way?

Stephanie: An entrepreneur looking for funding should go to our website,, and click the Entrepreneurs tab. It explains what we’re looking for, when we’re looking to invest and there’s an online application. We review every application very carefully because we don’t want it to be based on who you know or that you’ve got to know somebody there to be able to apply. We know that women don’t always have the networks to do that, so the application will be looked at on its merits.

And then for people who are interested in investing, if you click on the Investor tab, there is actually a way to connect with us for investing as well.

Janet: For entrepreneurs who want to get to know you, to start building those relationships, is there any particular place that they’re more likely to find you or somebody from your team and do that?

Stephanie: Astia and Springboard, probably.

Janet: Thank you so much for taking the time to talk with me.

Note: Please see Part 1 of this interview for Stephanie’s insights on general funding issues affecting women-owned businesses.

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