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Crisis Doesn't Build Character, It Reveals It.

A few minutes into the World Solar Challenge (see previous post), my Michigan team found themselves in the middle of a near worst case scenario.  The car was caught in a chain reaction accident that resulted in severe damage to the front of the vehicle (see picture below).  It may not look like much, but these cars are temperamental beasts and can't race like NASCAR with fenders flapping in the wind. 

Michigan was able to repair the damage within 24 hours and began racing again but they were now a day behind the leaders and effectively out of the race. 

Knowing this, the team raced full-tilt and put up a top 3 finish time (sans the time to repair the crash damage).

I'm sure many of the race crew will ask themselves "what if" questions, but in my view, they demonstrated more strength of character and team work than they could have in a 1st place finish.  Sure the scoreboard counts, but in the long run it counts as much how you play the game.  So my hat if off to the Michigan team...may you have better luck in the North American race next summer.

Risk

Those who know me already know that I am a huge fan of solar car racing, in particular the University of Michigan Solar Car Team (my alma mater).  While I think the technology is pretty cool, what this project is really about is educating and training talented students in a hands-on, goal-driven environment that is very akin to corporate startups.

So a little bit of background on solar car racing is in order after which you'll get my somewhat odd title to this blog post.  The first "real" solar car race was held back in 1987, 20 years ago this month.  The race was won by General Motors whose car, Sunraycer, pretty much defined the design of all the solar cars that would come over the next couple of decades.  Held every two or three years, some 50 to 80 teams compete for the title of world champions.  I estimate that over this period something like $250MM has been invested in designing, building and racing these cars.  The races are quite challenging; for one thing they are held on a 3,000 km course through the Australian Outback.  Student teams compete alongside cars fielded by corporations. 

Anyway, I'd like to highlight one point I made previously and that is that essentially every team that made a credible challenge for the world championship essentially followed the design of Sunraycer.  Namely, their car has an aerodynamic shape with solar cells that power batteries that drive an electric motor.  There were numerous "tweaks" over the years testing 3 or 4 wheels, different types of batteries, different types of solar cells, but all essentially the same paradigm.

But this week, Michigan unveiled their latest car, Continuum, which has shattered the status quo.  In a nut shell, what they have done is incorporated lenses on the car which serve to concentrate the solar radiation on ultra high efficiency cells.  These modules are then able to track the sun over the course of the day.  If you look closely at the picture below, you'll see the concentrators in the middle of the car.

  So now about the title, "risk."  Over the years, I have been an adviser to the Michigan team.  When the latest group started two years ago, I greeted them like all of the new teams over the years by telling them about "Michigan tradition."  Michigan, with 4 national championships in solar car racing, is the winningest US team in the brainsport.  After six months or so, the team floated the idea of using concentrators.  I told them it was  a terrible idea and expected that to be the last of it.  But no, they came back with detailed designs.  Becoming a bit worried, I began reaching out to friends to "talk some sense into these kids."  I spoke with a close friend who is an engineer for NASA and quite possibly the smartest guy I know.  I reached out to a friend who was captain of the 1993 Stanford team and had tried something similar (unsuccessfully).  I begged them all to tell the new kids they were crazy.

Anyway, to the team's credit, they pressed on despite otherwise knowledgeable people telling them this was a bad idea.  A long story short, I am thoroughly impressed with the team's perseverance in the face of such opposition.  If it weren't for young people who ignore older folks who tell them "it's not possible" no one would take risks, progress would be slower and life would be boring. 

However the team finishes, I'm proud of their accomplishments.  Go Blue!

Due Diligence - What to Expect

You just signed a term sheet for your first round of venture capital.  Congratulations!  Now what?

While every fund has their own process and each deal works a bit differently, what you can expect between signing a term sheet and closing the round (to which I refer in aggregate as "diligence") basically falls into four buckets:

1. Confirmatory due diligence.  What this means is the investor is switching gears from "why should I do this deal?" mode to "why shouldn't I do this deal?" mode.  There is a pretty standard set of items the investor will request.  Click here for the generic diligence request list that Softbank uses.  Depending upon the stage of the company, there are usually a 100+ documents that need to be collected and delivered.  I'm a big fan of using Microsoft Sharepoint to manage document delivery.  In fact, I recommend using it to deliver documents from the beginning of the fund raising process.  For example, when a VC asks for your "financial model" you should point them to Sharepoint instead of emailing the file.  One benefit is you can check who's accessed the file and you can turn off access if they pass.  For $40 per month you can buy a hosted version of Sharepoint.  I've used this company before with good results.
2. Syndication.  For many deals, particularly the first institutional round, the full amount of the raise won't be spoken for.  For example, if the raise is $8MM, the lead investor might be committed to $4-5MM.  Syndication is the process of finding one or more additional investors to complete the round.  If you had the good fortune of receiving multiple term sheets to begin with (and assuming you like one of the others) the easiest way to complete the syndicate is to invite those folks to participate on your newly signed term sheet.  Failing that, you should reach out to the firms with whom you got close, but not all the way.  The expectation is that the entrepreneur leads and directs the syndication process.  The good news is that having a signed term sheet (hopefully from a reputable firm) makes it a lot easier than getting the term sheet to begin with.
3. Documentation.  Generating about 2-inches of legal agreements codifying the investment.  Usually company counsel will take the lead on drafting documents; although it's not unheard of for the lead investor to do the first draft.  You should ask that the syndicate use one law firm, but if they insist on each using there own, plan on the process taking a week or two longer than it would otherwise.
4. Closing.  Signing the paperwork and wiring the money.  Yeah!  It used to be that closings were held in person at some attorney's office (at least that was my experience early in my career) but today that almost never happens.  The closing is usually held over a couple of days after everything has been agreed and then they sign and fax their signature pages to company counsel.  Depending upon how many signatures, it can take a few days to complete.

It is rare (although not unheard of) for a deal to fall apart after signing of a term sheet.  I did an informal poll of some VCs and found that less than 10% of early stage VC deals fall apart and fail to close.  The best thing you can do as an entrepreneur to avoid this is to ask the VC (ideally right before signing the term sheet) what remaining concerns they have and what diligence they expect to perform.  The more explicit you are in asking these questions, the more likely you are to avoid surprises on either side of the table.

Diligence typically takes anywhere from 30 to 60 days, although it's not unheard of to go longer, particularly if the company and lead investor still need to finalize the syndication of the round. 

Lightning Doesn't Strike Twice

Over the past few months, I have received a bunch of calls and emails along the lines of, "I see that you invested in XYZ Corporation and we're a very similar but noncompetitive company and thought that since you know the space you might be interested in investing in us." 

From an investors point of view, there are two schools of thought on this.  One school says diversify the portfolio (don't make the same bet twice) while another says the only way to get alpha is to *not* diversify. 

In my experience, the vast majority of investors are in the "diversify" camp which means as an entrepreneur you shouldn't waste your time talking to investors who are already invested in your market.