Onwards and upwards with more finance learnings! Part 3… yes, that means I’ve effectively kept this learning thing going for three months already. I’ve learned a ton about finance itself, and some of its roles in startups.
At the end of Part 2, I noted a few points I wanted to dive into with more detail. So today, I’ll cover a handful of them including:
  • Pre-money and post-money valuation
  • Earnings-per-Share
  • Equity Financing
  • Debt Financing

Pre-money and post-money valuation.

In Part 2, I touched on a lot of stocks and investments by VCs. Simplistically, the equity a VC receives in exchange for funding is:
Except, valuation can also be parsed into pre vs. post-money valuation. You can probably guess what these terms mean, but they can have a big difference in equity. Pre-money refers to the valuation of the company BEFORE the injection of capital; whereas, post-money refers to the valuation of the company INCLUSIVE of the investment round. For example…
Pre-Money Valuation
Post-Money Valuation
Hugh Invests
$10M
$10M
Valuation of Company at Investment
$50M
$50M
Valuation After Investment
$60M
$50M
Hugh’s Equity %
16.7%
25.0%

What’s happening? As you can see, if Hugh invests $10M at a pre-money valuation, the company is then valued at $60M after the investment. Hugh’s equity stake is 16.7% because the company is valued at $60M ($10M + $50M) à$10M/$60M = 16.7%.
With a post-money valuation, Hugh is investing his $10M into a company valued at $50M which is already including his investment. Thus, Hugh has a 25.0% equity stake in the company.
8.3% can mean a lot of money on the table for either side – the investor or the company when going public or some other liquidation event.

Earnings-per-Share.

Ah, another pretty “straight-forward” financing metric. Straight-forward in that its name is exactly what it is… “earnings” per share; where share is the number outstanding shares. Note: outstanding shares is the number of shares issued to company officials, stock holders, etc.
Earnings is the net earnings less taxes and dividends paid out to preferred stock owners (recall from Part 1 that preferred stockholders receive dividends before any other common stockholders).
EPS is a metric used as a gauge for how well a company is performing, and evaluate the performance of a company to its shareholders.

Equity Financing.

Mostly up to now, I’ve shed more light on equity financing. In the startup world, equity financing makes the headlines like Yik Yak raising $61M or BitPay raising $30M back in May 2014.
As a recap, with equity financing, companies are exchanging ownership in the company for capital (and partnership). As equity investors are investing on the potential upside of future success, they may be more lenient on recent financials with an eye on the future. Further, there usually isn’t a fixed return to investors which frees up working capital for the company. However, investors, as owners of the company, do usually get a share in the profits and have a say in the direction of the company.

Debt Financing.

Debt financing is very common place in everyday life ranging from homes, cars, and of course, businesses. In debt financing, loaner and loanee (the company) agree on a principal amount + interest to be returned on a period basis for some time (or when the note (another word for loan) is paid up).
The principal and interest can be marked as a fixed cost which raises the break-even point of a company (costs + revenues = 0; costs = revenues). As you can imagine, this can be a significant burden on a company’s cash flow, and thus, loaners typically require strong financials in addition to credit.
On the upside of debt, the company does not give up ownership in the company, and thus, the company maintains all profits (present and future) as well as the direction of the company. Also, interest on the loan can be tax-deductible for the company.
There’s obvious upsides and downsides to both equity and debt financing. Making that decision is hugely dependent on a myriad of factors for the company.

Onwards to Next Month

Here’s the open list of topics for me to research and share starting next month. Happy I knocked a few off the list from last month.
  • Convertible
  • Dividend
  • Pro-rata
  • Leveraged
  • Term Sheet
  • Etc.

What questions, thoughts do you have about the above? Any other topics from a startup’s finance point-of-view you’d be interested in learning more about, and having me research for you?
Resources: http://www.investopedia.com/ask/answers/114.asp,  http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/earnings-share-eps-1003, http://www.investinganswers.com/financial-dictionary/stock-market/shares-outstanding-3594
I know — my PowerPoint skills are amazing…
Right after making the decision to zombify Body Boss, I met with a local entrepreneur about my Next Act. Except, I didn’t have one, yet. Instead, I talked to him about what was learned, what I may do next, and I asked him what he thought the best role for me would be in a startup.
Not sure if I was so big-headed (figuratively, in addition “physical” – I know I have one… takes a while to find a helmet or hat that fits well), but I was envisioning the scene in my head going, “Daryl, you should continue building. Your best role would be CEO of a startup… your own, preferably.” (I’m now shaking my head muttering, “stupid titles… who cares?!”) Well, those weren’t the words he used. Instead, he said, “I think you’d be a great Product Manager.”
Admittedly, I didn’t know anything about Product Management, at least, not from a formal sense, so I was a bit… (naively) disappointed. I had to think about it this.
I was in this mode of “there were two roles in startups – Builders or Sellers,” and “Product Manager” seemed a bit “back-office” to where the action was. Except in an early-stage startup, especially, Product Management is deep in the action as the company strives to reach product-market fit.
For Body Boss, I played a role largely on the Sell side leading the sales, marketing, biz dev efforts, but I was also heavy in Product Management along with our developers and designer.
As I look back at my Body Boss experience, other startups like Beachscape and 1Q, and even my prior life as a consultant, Product Management perhaps is, indeed, my bread and butter. I never really had the corporate sales role which many startups seem to like, but I’ve had a lot of experience in the other initialism of “PM”, Project Management. In many ways, effective Product Managers and Project Managers share many qualities.
TheNextWeb.com (TNW) featured an article “Product Managers: Who are these ‘mini-CEOs’ and what do they do?” by Ken Yeung back in October of 2013, and more recently, David Cummings (DC) wrote a piece “The Product Manager”. I found both articles to be insightful, and wanted to share some great sound bites and commonalities.
  • In a way, it’s almost like they’re the mini-CEO, complete with the influence, but no authority — they aren’t the direct supervisors of the engineer or designer and can’t fire anyone for not following through, and focused on the success of the product’s mission. [TNW] This couldn’t ring more true for Body Boss where the four of us co-founders had no “hierarchy” and equal equity. We formed a four-headed Product Manager. This can be incredibly challenging when everyone has a different vision, though, as wheels spin and development halts.
  • [Josh] Elman wrote a post entitled A Product Manager’s Job and in it, he says that a core part of it involves having a good feel “for what seems right or wrong, and are also good at listening to early feedback from testers and others who try it.” [TNW] It’s rare there’s a dedicated Product Manager in a startup. In reality the CEO and the lead engineer (and designer) take on the role together. However, the take-away here is the importance of involving feedback from testers and partners early and often in the development of the product. This mitigates risk of building an unwanted product or non-essential/ useful features.
  • True empathy for the customer is a must-have (we’ve all used products that didn’t feel like they had the customer in mind). [DC] Going hand-in-hand with the preceding point, building a product with the customer in mind is critical. Like at Body Boss, none of us were professional strength coaches, and yet, we were selling to them. We didn’t have true empathy, though, and thus, we missed some of the big pain-points early. This was hard moving forward from the start. Note the little nugget in what I just said, too: none of us were professional strength coaches. Having experience in your market/ industry can go a long way in developing empathy and leveraging your network for traction growth.
  •  […] PMs need to have an appreciation for leading while also understanding that it’s about solving the holistic problem. Being a PM can teach you a lot about leadership and also about yourself […] it’s not about using your power to accomplish something — he sees this action as a sign of weakness. It’s all about inspiration, vision, and analysis while keeping in mind that it’s a team sport so you’re not going at things alone. [TNW] and Attention to detail and planning skills are crucial due to all the moving parts. [DC] Product Managers are connectors. They have great communication skills and enough know-how of the business, sales and marketing, design, and technical know-how to empathize with the right touch points of the product. Just as you move higher up the ladder in a corporate setting, a leader’s duties shift to more strategic initiatives and people influences… much of what a Product Manager does.
  • [Joanna] Wright says that managers need to be aware of three things: knowing the product and its users, having tenacity by picking up ideas and following through even though no one may believe in it, and being able to collaborate and working with others to have a strong vibe together. [TNW] Joanna’s points here highlight every critical aspect of an effective Product Manager… they are multi-faceted and view the product holistically… they are leaders – inspiring, team-oriented, collaborative… they persevere with the vision believing in the long-run benefits than short-term challenges… they are internally and externally people-focused as people are what drive the product either consumption or creation… they don’t just drive execution, but they motivate execution.
Hmm, it’s a no wonder TNW’s Yeung and Cummings view effective Product Managers as difficult roles to fill.

I can’t say whether or not being a Product Manager explicitly is “my thing”, though. Product management is definitely a part of what I do and what I want to continue to do. In fact, it perhaps fits me best as an explicit role as it embraces my interest in breadth rather than depth. However, I love early-stage startups because of its necessity for product management in addition to the external-facing role of business development.

So if my Next Act is to join an existing team, perhaps Product Manager is a great role for me. If I’m going to start another startup, then playing Product Manager will likely just be part of my greater role anyways.

How does a Product Manager role sound for you? What are your thoughts about being a Product Manager or Product Management vs. a role in one of the other “specialties” where perhaps you’d be the responsible party a PM would work with?
Image Source: http://media-cdn.tripadvisor.com/media/photo-s/03/10/f8/52/after-the-sun-was-over.jpg
Over the last couple weeks to close out 2014, I wrote:

Now, we’re onto the final chapter of the 3-part series. This is tricky one only because, well, it’s like making public declarations of my intentions. If I fail, again, it’s public. There’s that accountability factor. Okay, so focusing on the short (for 2015) and long-term goals (beyond)…

Within Distance – the Year of 2015

Continue Hacking.

“Hacking” here is admittedly broad as I’m referring to hacking in the programming sense and in general business. Till I find that startup that keeps me going, I’m aiming to push a new idea out every 30-60 days (with half that time devoted to customer discovery, build out, launch, and the other half towards marketing and growth).
If an idea doesn’t see much traction, I learn and move on. After I spoke to one of the cofounders of Hired.comthis idea really resonated with me, and was recently suggested to me by another entrepreneur I’ve come to know well.

Reduce the “No.”

For whatever reason, I was life hacking (yes, hacking my life) trying to become more direct, and I surprisingly introduced just “No.” as a response to others. That is, just saying, “No.” instead of saying, “Well this is why this might be a better way…” or “I don’t see it this way.” This is more apparent in verbal conversations.
I remember the Allison Gilmore, Director of the PhD program at Emory’s Goizueta Business School (also performs Improv), giving my MBA class a session about responses. She taught us how “No” and “No, but” really shut down people. For whatever reason, this flew over my head, and I was doing the opposite. Even “no, but…” would be a better response than the curt “No.”
So I’m tracking when I give the short “no” in hopes of responding in a more positive way. Of course, I’ll throw in a “no” if/ when appropriate.

Stop taking on so much.

I love to help people, but sometimes, that means I say “yes” too much. In light to the above about saying “no”, I need to be able also say, “Sorry, but I can’t do XYZ…”
This past year, I volunteered a lot of time helping other startups, sometimes with little to no compensation. I took these chances as good learning opportunities, but now that I’ve got some other opportunities going, my time is that much more valuable. As such, this year will be the year of smarter multi-tasking.

Become a better communicator.

When I say communicator here, I’m also really focusing on the listening part. Late last year, I got some good constructive criticism that I have been… very energetic to different opinions. I’ve done a pretty bad job at keeping my emotions out of specific subjects, and I’m aiming to parse out the emotions in favor of patience and understanding.
Roger Fisher and William Ury’s Getting To Yes: Negotiating Agreement Without Giving In suggests that I take more of an interest-view rather than positional. In future disagreements (or just differing opinions), I’ll be more cognizant of others’ viewpoints (diversity is good). Especially where others may be affected by emotional attachments, it’s best for me to realize that it’s not oftentimes a personal attack. So I’ll need to take a step back, get a better understanding as to why, and make a mature approach from there.

Attend two startup events a month.

I used to be good at this – taking the time to attend Atlanta Startup Villagemeet-ups or other gatherings. However, I made excuses the second half of last year, and just stopped. This year, going to start attending startup events around Atlanta more often.
Goal is twice a month and make genuine connections.

Volunteer at least twice every quarter.

I’ll probably get back into Habitat for Humanity as the charity/ volunteer organization. I like what they do, their approach, and I like the skills and lessons I get out of each build.

Be a better Son, Brother, Uncle, Friend, Mentor.

Probably the most important one, but this is everlasting… This past Christmas and New Year’s, I got to spend with my immediate family and grandparents down in Florida. I couldn’t help but take a pause every so often to see my family laughing and walking together, and it was an amazing feeling to be a part of that. 
Add to that, every minute I spend with my little niece my love for her grows exponentially. It’s amazing just watching her develop. I’m looking forward to strengthening my relationship to everyone in my family, and my good friends.

Stopping biting my finger nails!

This needs no explanation other than it’s a bad habit. There. That was easy. Next!

Friggin’ lift 315 lbs on the barbell bench press.

Just because three plates is bad ass territory.
Also, yesterday, I just stunted a lot of good growth by straining my hamstring at a soccer game. Why? Because of poor warm-ups. Why? Because I was late to the game? Why? Because traffic was terrible. Why? Because I, Daryl Lu, failed to leave for the game on time from work. There. It’s my fault. So, I also need to stick to my schedule to prevent lateness which can prevent warming up which can cause hamstring strains.

Beyond the Horizon (2016 and Beyond)

Be featured in TechCrunch, or other national publication.

I’d like to have a startup be featured in TechCrunch… just to have that daily newsletter come into my Gmail with my startup’s name on it. Or maybe have an article republished on Entrepreneur.com or Inc.com… that’d be cool.

Build a lasting startup with at least $1MM in recurring monthly revenue.

$1MM’s a “wow” number, and I think that’d be sufficient to have a decent-sized startup team to lead to even greater.

Give a TED Talk, or other industry conference.

I’m sure as part of my journey, there’s going to be something enlightening that no one else has talked about yet, or maybe I’ll expound or counter on another.

Stepping Forward Now…

Obviously that even though this is part 3 of the Reflections 3-part series, like any good book or movie, it’s really just a glimpse of things to come. Hopefully, this post whets your appetite for your own goals both short and long-term.

Also, if you actually want to learn how to throw Ninja Stars, check out this YouTube video: https://www.youtube.com/watch?v=D_w6T4nO-KA

Happy New Year! Cheers! Entrepreneurial Ninja. Out.