High-Impact Entrepreneurship

Join the global conversation

Entrepreneurs

42 High-Impact Entrepreneurs from 12 Countries Join the Endeavor Network at the 55th International Selection Panel in Istanbul

Istanbul, Turkey – October 24, 2014 – At the 55th Endeavor International Selection Panel (ISP), 42 high-impact entrepreneurs leading 23 companies from 12 countries were welcomed into the Endeavor network. Endeavor now supports 990 High-Impact Entrepreneurs from 629 companies across 21 countries. […]

October 24th, 2014 — by admin

Read more

In the news

The Wall Street Journal Features Endeavor’s Role in Miami’s Entrepreneurship Scene

The Wall Street Journal recently profiled Endeavor Miami‘s work with local entrepreneurs in an article exploring the city’s rapidly growing entrepreneurship ecosystem. Driven in part by companies hoping to gain a foothold in Latin America, the city is now […]

June 5th, 2014 — by admin

Read more
Get RSS Feed

Endeavor’s CEO and Insight Director published by Harvard Business Review

The Harvard Business Review published an article today by Endeavor’s CEO Linda Rottenberg and the director of Endeavor Insight, Rhett Morris, entitled “If You Want to Scale Impact, Put Financial Results First”. This piece is the inaugural article for the HBR-Bridgespan Insight Center on Scaling Social Impact — a partnership between the Harvard Business Review and The Bridgespan Group, supported by the Omidyar Network — that will share stories, insights, and lessons from the most innovative voices in the field.

The text of the article is reprinted below. The original article is available on HBR.org here.

If You Want to Scale Impact, Put Financial Results First

Entrepreneurs who lead for-profit, social enterprises face a unique challenge: they must simultaneously create financial value for their investors and social value for those they seek to serve. Having two missions, however, sometimes creates conflicts that can slow companies’ growth.

Endeavor Insight, the research arm of our organization Endeavor, has found that the way that entrepreneurs who lead social enterprises make tradeoffs between social and financial goals is a critical factor in determining the degree to which their companies will grow. Indeed, in our experience, and in a targeted study of close to 20 entrepreneurs, we found that those who prioritized financial goals over social ones were more likely to grow their social enterprises and achieve greater impact. We also discovered ways to build business models that reduced friction between commercial and social goals, thereby smoothing the path to growth.

What is our vantage point? Over the last 15 years, Endeavor has selected, mentored and accelerated more than 750 high-impact entrepreneurs across 14 countries. Their fast-growing companies work in almost every industry, from online retail to manufacturing to professional services, and together they have created more than 200,000 jobs and generated revenues of more than $5B in 2011. While Endeavor does not specifically target social entrepreneurs, more than 50 individuals in the Endeavor network lead companies with direct social impact – education and healthcare improvements, environmental preservation, financial inclusion, assistance to disadvantaged populations, and other areas.

A Tale of Two Entrepreneurs

Let’s look at two examples from our study (some of their names and details have been changed). Roberta leads a business that seeks to improve the healthcare system in her Latin American country by providing better IT infrastructure and processes in order to reduce medical costs and improve the quality of patient care. Most of the population in Roberta’s country has traditionally lacked access to quality healthcare, and government experts have forecasted that chronic diseases will bankrupt the healthcare sector in the next few decades. Roberta wants to make change at both a macro and micro level.

“It is really motivating to walk into a hospital and see that things are better. You hear patients telling you that last year they had to wait for three hours and now they only have to wait 20 minutes or you see hospitals providing access to people in rural areas who have not had it ever before,” she told interviewers.

Roberta’s company has aligned its social and financial goals. As the business reaches more hospitals, revenues grow and the impact on the healthcare system increases. This strategy has led to strong results. Over the last three years, the company has expanded to serve more than 1,000 hospitals and clinics that provide care to over 15 million patients each year. Revenues have also grown by more than 600% during the same period. The firm is looking to raise funding from venture capital firms so that it can further grow.

Thousands of miles away in Asia, another Endeavor Entrepreneur, Adam, also runs a social enterprise. His company seeks to transform the lives of people within a severely disadvantaged population by employing them at a manufacturing firm. The jobs at Adam’s company offer potential employees full-time employment and training that they cannot find elsewhere. Unemployment rates for the general population in Adam’s country consistently run in the double-digits and are even higher among his company’s target group. Adam decided to launch a for-profit enterprise because non-profit solutions took too long to create jobs.

“In a business you have an amazing ability to be flexible,” he said. “It’s far easier to create the change you want because in a day or two you can implement it.”

Adam’s business has not been as successful as Roberta’s. Revenues have stagnated over the last few years, in part because Adam has no ambition to expand into other countries despite the relatively small size of his current market. The social impact of the business has also suffered. The company has never employed more than 100 people and recently reduced its headcount. He is now pursuing grant funding, which he believes will address these issues and will enable his business to expand its product lines.

Why Has Roberta’s Company Scaled While Adam’s Hasn’t?

Roberta and Adam went through the same selection process to join Endeavor. Both of their companies were judged to be among the top 2% of applicants, yet one has significantly outperformed the other in achieving its social and financial goals. This example represents what’s happening across the sector: While some socially-focused firms have achieved rapid success and scale, many others have had promising starts, but never build on that success to expand their impact. Why?

We spoke to Michael Chu, a Senior Lecturer in the Initiative on Social Enterprise at Harvard Business School and the managing director of the investment fund IGNIA, who said that this trend may be due to the unique challenges faced by social enterprises. “In many cases when people are addressing a social issue through commercial platforms, they are looking to be even more disruptive than a purely commercial enterprise. You actually need even more rigor in your thinking. Just because you are trying to do something good doesn’t mean that the world will change the rules for you.”

In Chu’s experience, motivations are also critically important. “We tend to see lots of people who fall in love with the social impact and hide the weaknesses in the business model and the weaknesses in execution,” he said.

Our team set out to further explore this question by looking at the 50+ social enterprise companies in our network. We analyzed more than 100 different characteristics, none of which accounted for the discrepancies we saw in growth. So we conducted in-depth interviews with close to 20 entrepreneurs who lead these companies. We asked the entrepreneurs to rank how frequently they favored one type of goal over the other when making inevitable tradeoffs.

For example, Roberta has to decide whether to discount services to hospitals too poor to buy them at a profitable price. Should she influence the quality of care of more patients? Or keep margins healthy? And what about Adam? Should he plow cash into increasing the pay of the disadvantaged people he employs, or build his working capital?

What We Learned

Our research showed that the entrepreneurs’ approach to tradeoffs plays a critical role in their ability to scale. Those who prioritized financial goals over social goals were much more likely to experience high rates of growth and have greater social impact. Though the sample was relatively small, the trend was quite strong. The more likely entrepreneurs were to favor financial goals, the faster their companies grew.

Here is what one entrepreneur said about this balance: “The first thing I have to do is make sure that I stay in business because social businesses are more challenging than other types of companies. For long-term sustainability, you need to value business first and make sure that all of your actions have business case to support them.”

Unfortunately, this is not always easy. Entrepreneurs with dual missions regularly face tradeoffs. We’ve found with the social entrepreneurs in our network that one of the best ways to avoid sacrificing financial sustainability for social impact is to reduce the total number of tradeoffs that entrepreneurs must make. The design of a company’s business model is among the most important factors that influence its ability to scale.

“Social entrepreneurs need to understand if their social mission is complementary to their financial goals or if there are going to be lots of friction points due to conflict between them,” said Cathy Clark from the Center for the Advancement of Social Entrepreneurship at Duke University. “The ventures that grow fastest are likely to be the ones that have the most frictionless business models. Just because you have a misalignment, it doesn’t mean you won’t scale. It just means you have to be even smarter. You have to manage around more of these sorts of issues.”

Below is a matrix that shows how we believe an entrepreneur’s approach to tradeoffs and business model design affect a social enterprise’s ability to scale. Entrepreneurs can use this tool to evaluate their current position, and can use this information to adjust their business model or approach to tradeoffs. The hope is that by shifting their strategy, it will be easier for their enterprise to increase its social and financial impacts.

Anecdotally, we have seen that entrepreneurs and businesses tend to gravitate to the top right and bottom left sections of this chart. Entrepreneurs who deal with tradeoffs by prioritizing social goals over financial ones tend to design business models that require more tradeoffs to be made. Entrepreneurs who fall in the upper right hand corner tend to report that they did not obsess over the conflicts between the social and financial objectives of their companies. Instead, they focused their attention on growth, believing that any step they took to help their companies scale allowed them to accomplish more.

So What Does This Mean?

Of course, there are limits to this research. For example, the entrepreneurs included were drawn from a single organization with a distinct selection process. And their enterprises ranged from those in which the consumer and beneficiary were one and the same, like Roberta’s, to ones in which one set of customers created benefits for another, as in Adam’s case. However, these findings can inform any entrepreneur leading a social enterprise or investors funding it.

Entrepreneurs leading social enterprises should consider the following:

– Design business models that align financial and social goals as closely as possible to minimize tradeoffs and reduce friction.

– When tradeoffs must be made, prioritize financial goals over social ones to maximize the long-term sustainability of the business.

The organizations that support them also need to:

– Work to identify founders who can develop business models that prioritize financial sustainability and ability to scale. In our experience, entrepreneurs with strong business backgrounds who develop passion for social issues tend to do this very effectively.

– Encourage entrepreneurs at social enterprises to prioritize long-term sustainability when dealing with trade-offs.

Additional background on Endeavor’s methodology

In order to understand the factors that lead to success and failure for social enterprises, Endeavor’s Insight team analyzed more than 100 different characteristics of the social enterprises within Endeavor’s network. Over the last 15 years, Endeavor has supported more than 750 high-impact entrepreneurs leading fast-growing companies in almost every industry. Though Endeavor does not specifically target social enterprises, more than 50 of the entrepreneurs supported by Endeavor lead social enterprises.

These companies have experienced a wide variety of growth rates during the last three years. Approximately one-fifth of these firms have grown their revenues at 40% or more on average each year. Unfortunately, the majority of these firms have experienced negative, low or moderate growth revenue rates, which makes it quite difficult to achieve their financial and social goals.

After using existing data to analyze characteristics that influence the likelihood an enterprise will scale for each of these firms, the Insight team conducted one-hour, in-depth interviews with close to 20 entrepreneurs who lead these companies. These analyses and interviews informed the results published in the article.

 

WPP acquires stake in Endeavor Entrepreneur company Globant

For the original press release, click here.

WPP (NASDAQ:WPPGY), the world’s leading communications services group, has agreed to acquire a 20% stake in Globant S.A. (“Globant”). Globant is an emerging worldwide leader in providing both technical expertise and design and creative capabilities in the development of software products that can be applied to digital marketing campaigns on a global scale.

Headquartered in Buenos Aires, Globant is a rapidly growing business employing 2,700 engineers, marketing specialists and designers in 21 offices across 14 cities in Argentina, Brazil, Uruguay, Colombia, the United States and the United Kingdom. The company’s approach is unique in that it provides clients with both the infrastructure and technical support that drive digital marketing campaigns, combined with the creative and design skills usually found alone in digital agencies.

Globant’s net revenues for the year ended 31 December 2011 were US$90 million and net revenues for the six months to 30 June 2012 were US$56.9 million with total assets of US$69 million as of 30 June 2012. WPP will invest approximately $70 million in acquiring the Globant stake.

“Increasingly, clients want better coordination between their IT departments and their marketing departments, between their Chief Information Officers (CIOs) and their Chief Marketing Officers (CMOs),” said WPP Chief Executive Sir Martin Sorrell. “There are many consulting companies or digital agencies that are expert in one function or the other. Few, if any, do both and even fewer can integrate deep technical and creative capabilities on a global scale as Globant does. Partnering with Globant will allow our companies to increasingly provide our clients with insights and skills that will make their digital marketing efforts even more effective and simpler to manage at both the front and back ends.”

Globant has deep experience in working in state of the art digital marketing spaces including, but not limited to, mobile, gamification, social networks, cloud computing, big data and e-commerce. Globant’s clients include American Express, JP Morgan Chase & Co., LinkedIn, Electronic Arts, Google, Coca-Cola, National Geographic, Zynga and Sabre Holdings, as well as a number of WPP companies, such as JWT, Young & Rubicam, Grey, GroupM and Kantar.

“Our core competencies in gamification, cloud computing, big data, social networks and mobile enable us to deliver innovation to our customers and add value to their efforts to reach end users through software products. We are focused on staying ahead of the technology curve, which makes us the right partner for companies looking to build and engage consumers in a global way,” said Globant´s CEO and co-founder Martin Migoya. “We are extremely proud to welcome WPP into our family; their support will help us to achieve our goal of becoming one of the most innovative software development companies in the world.”

This investment continues WPP’s strategy of targeting fast-growing markets and sectors and the application of technology to the communications services industry. In 2012 WPP completed 25 transactions with companies that are in either faster growing markets (e.g. BRICs, Next 11, CIVETS, MIST) or faster growing sectors such as digital, data or application of technology, or both. WPP’s digital revenues (including associates) are budgeted to total well over US$6 billion in 2013, representing over 33% of the Group’s total revenues, which in 2011 totalled US $16 billion. WPP has set a target of 35%-40% of revenues to be derived from digital over the next five years.

In addition, this transaction also continues WPP’s strategy of investing in fast growing geographic markets, which also currently represent one-third of revenues, with a similar objective to reach 35-40% over the next five years and reflects its commitment to developing its strategic networks throughout Latin America. WPP regards this decade as very much the decade of Latin America, particularly with the FIFA World Cup taking place in Brazil in 2014 and the Olympics in Rio in 2016. The Group collectively, including associates, will have revenues of over US $1.6 billion and will employ over 18,000 people in the LATAM region alone.

Endeavor January 2013 newsletter

To view Endeavor’s January newsletter, a recap of all the top news stories from the previous month, please CLICK HERE.

Reminder: To receive our monthly newsletters by email, please enter your email address in the sign-up box at the bottom of our homepage.

Endeavor Entrepreneur company Enox On>life Media and Google offer free Wi-Fi internet connection in 150 Brazilian bars for 90 days

Reprinted from The Next Web. Original article here.

By Anna Heim

Google has partnered with Brazilian advertising firm Enox On>life Media to bring free wi-fi to 150 Brazilian bars, the company announced today. Enox specializes in connecting brands with consumers in real-life locations, from fitness centers to beauty salons and restaurants.

The operation is timed for Brazilian summer, and will last 90 days. Locations are distributed in seven cities of the Southern and Southeastern regions of Brazil: São Paulo (SP), Rio de Janeiro (RJ), Curitiba (PR), Porto Alegre (RS), Florianópolis (SC), Belo Horizonte (MG) and Campinas (SP). The list of venues is available at brasilfreewifi.withgoogle.com.

The operation is also a way for Google to acknowledge the growth of Brazil’s mobile market and its recent changes, Google Brazil’s marketing manager Maia Mau explains:

“We know that Brazilians are using their phones and tablets each time more. Just to have an idea, the number of people with smartphones in Brazil is greater than in Germany, France and Australia, and most of them use their devices every day, to read news, watch video clips and connect with their friends. By means of this project, we’re sure that the Brazilians will be able to enjoy better their friends when they are at the pub, besides creating and registering memories of their moments.”

It will now be interesting to see whether Google will expand this campaign to other venues, such as airports, and possibly make it more perennial.

Economist spotlights Endeavor Entrepreneurs in Turkey

Reprinted from The Economist. Original article here.

Muslim farmers do not keep pigs. This is as true of those who play at virtual agriculture as of those who fill physical food-troughs. So there are no pigs in the Arabic version of “Happy Farm”, published by Peak Games, a young firm based in Istanbul. For the same reason “Happy Farm” has no vineyards, and female farmhands wear the hijab. Local tastes matter.

Peak Games has found rich soil. It already employs 200 people and has developers in Jordan and Saudi Arabia as well as Istanbul and Ankara. More than 35m people play its games at least once a month, many of them on Facebook. Half of the players are in Turkey; the rest are in the Middle East and north Africa. Rina Onur, one of its founders, says that she and her colleagues saw a gap in the online-games market that companies catering to Western tastes could not fill. So Peak Games offers people in Turkey and nearby countries games with a regional twist, like “Happy Farm”, as well as online versions of traditional amusements. Okey, a Turkish game played with tiles, is most popular.

Turkey is bursting with internet companies, many of them selling things to the young. It is not hard to see why. The country is big, youthful and embracing the internet eagerly. Half of its 75m people are under 30. Around 44% of Turks use the internet, up from just 14% in 2006 and 3% in 2000. They comprise Facebook’s seventh-largest national audience. Turks are also happy to use credit cards, which are handy for buying things online: the country has three of them for every five people, says GP Bullhound, an investment bank, more than the European average. And the market still has a lot of room to grow. Penetration rates are well below those in western Europe (see chart).

Several companies have attracted foreign money. Peak Games has raised $20m. In September General Atlantic, an American investment firm, and others put $44m into Yemeksepeti, through which Turks order meals for delivery from local restaurants. In 2011 Naspers, a South African media company, paid $86m for 68% of Markafoni, an online fashion club; eBay raised its stake in GittiGidiyor, an auction site, to 93%, and Kleiner Perkins Caufield & Byers and Tiger Global Management, both based in America, invested $26m in Trendyol, another fashion site.

Typically, Turkish internet companies have borrowed business models from abroad and given them Turkish tweaks. Mustafa Say, whose iLab Ventures owns the other 7% of GittiGidiyor, says that buyers pay into an escrow account, from which money is sent to sellers only when goods turn up. That, he says, has helped to build trust. Yemeksepeti’s customers pay nothing extra for delivery and can pay in cash on the doorstep. This still accounts for 37% of sales, says Nevzat Aydin, a founder and its chief executive. Not only money and ideas have come from abroad. So have people: returning Turks, most of them equipped (like Mr Say and Mr Aydin) with American education and experience.

The size of the Turkish market is a “double-edged sword”, says Numan Numan, a former Goldman Sachs banker now at 212, a venture-capital firm which takes its name from the telephone code for the European side of Istanbul. Scale at home is a boon, but start-ups in smaller countries, such as Israel or Estonia, have more incentive to look beyond their borders from the outset. Of the six Turkish firms in which 212 has invested, Mr Numan expects “a minimum of four to go regional at least”.

Turkish internet firms think they have a good base from which to expand, especially into the Middle East and north Africa. Peak Games is perhaps the best example, but others also have ambitions. Because Turkish television and culture are popular in the region, endorsements by Turkish celebrities can help to sell clothes and shoes. General Atlantic’s money will partly finance Yemeksepeti’s move abroad.

Lots of others are hoping to follow the successes. In November, in a hall at Bilgi University in Istanbul, 20 young Turkish companies coached by Bootcamp Ventures, the event’s organiser, presented their plans to prospective investors.

Events like this, Bootcamp’s fifth in Turkey, have become common. “When we started here six years ago,” says Didem Altop of Endeavor, a non-profit organisation which seeks to encourage entrepreneurs in countries from Brazil to Jordan, “there used to be three events a year. Now there are three a day.”

Turkey has so far been short of “angel” investors who will sprinkle money on a seedling company without demanding most of its equity. That is changing, as the first generation of founders become investors and mentors for the next. In Galata Business Angels, Istanbul has a network of such people including Mr Numan and Sina Afra, co-founder of Markafoni. Incubators are being set up: at Enkuba, in Istanbul, Piraye Antika, a former local head of HSBC, a big bank, and her colleagues have taken on Bu Kac Para Eder, which values antiques online, and torpilli, which helps students preparing for university-entrance exams.

The government’s policies have been a bit disjointed, says Ms Altop, but are becoming more concerted. Young companies can already get grants for research and marketing; those in “technoparks” are excused some taxes. More encouraging is the prospect of tax breaks to accredited angels, which are due to come into effect soon. Most start-ups will fail, as they do everywhere: fashion and daily deals, in particular, look horribly crowded. But more of them may get the chance to emulate those already on the road to success.

Linda Rottenberg: Entrepreneur “Women to Watch” 2013

Linda Rottenberg
Photo © Anna Wolf

Reprinted from Entrepreneur.com. Original article here.

By Jenna Schnuer

Entrepreneur magazine: 2013’s Entrepreneurial Women to Watch

When Linda Rottenberg graduated from Yale Law School in 1993, she knew one thing: She didn’t want to practice law. So off to Argentina she went–to work for Ashoka, an organization that supports social entrepreneurs. Tech entrepreneurship was booming in the U.S. But in Argentina? Rottenberg learned that there wasn’t even a word for entrepreneur there. “Everybody I was meeting who had big talent aspired to a government job,” she says.

There was no venture capital. No role models. No support. That sparked the idea for Endeavor, the New York-based organization Rottenberg launched in 1997 with Peter Kellner, an investor who had witnessed the same lack of advocacy for entrepreneurs during a Harvard Business School trip to China. Endeavor finds what Rottenberg calls “high-impact” entrepreneurs around the world and supports them through intense mentoring–each participant gets his or her own board of advisors–and access to a network of local investors. Rottenberg, who serves as CEO, defines high-impact entrepreneurs as those with “the greatest ability to create jobs, generate revenues and become role models for the next generation.”

The basic idea hasn’t strayed much from Rottenberg’s initial plan. “We had sketched out search, select, support, give back–that the entrepreneurs would start giving back to Endeavor,” she says. “On the big-picture level, it is almost exactly what we had envisioned.”

But the program’s influence is even greater than Rottenberg could have imagined. Since its founding, Endeavor–which has 17 offices around the world and is aiming for 25 by 2015–has worked with 726 entrepreneurs. In 2011 program participants earned $5 billion in revenue and created 200,000 jobs. And they are starting to step up to the give-back portion of the program as well: In 2012 two Endeavor entrepreneurs each gave $1 million to their local offices. “They’re now mentors and angel investors themselves,” Rottenberg says.

That reciprocation is at the heart of Rottenberg’s mission. “The No. 1 factor for catalyzing the [entrepreneurial] ecosystem is successful entrepreneurs investing and mentoring the next generation,” she says. “[It's] even more important than institutional venture capitalists.”

Brad Feld on Term Sheets

Entrepreneurs entering their first round of venture capital financing face many unknowns and hurdles. In fact, the Chief Counsel of one of Endeavor’s first entrepreneurs said, “not understanding this stuff – liquidation preferences, participation, etc – cost our team about $100M when we sold the company.”

To help entrepreneurs entering their first round of venture capital negations, Endeavor Insight has developed a Term Sheet Calculator. The interactive tool shows entrepreneurs how changes to critical parts of contracts can dramatically alter how entrepreneurs, investors and employees split shares of the company.

To further help entrepreneurs, Endeavor has featured a blog post by Brad Feld, a Venture Capitalist and Managing Director of Foundry Group, about liquidation preference.

 

Reprinted from “Term Sheet Series. Original article  available here.

 

I’ve written about liquidation preferences (and participating preferred) before, as have most of the other VC bloggers (and several entrepreneur bloggers.) However, for completeness, and since liquidation preferences are the second most important “economic term” (after price), Jason and I decided to write a post on it. Plus – if you read carefully – you might find some new and exciting super-secret VC tricks.

The liquidation preference determines how the pie is shared on a liquidity event. There are two components that make up what most people call the liquidation preference: the actual preference and participation. To be accurate, the term liquidation preference should only pertain to money returned to a particular series of the company’s stock ahead of other series of stock. Consider for instance the following language:

Liquidation Preference: In the event of any liquidation or winding up of the Company, the holders of the Series A Preferred shall be entitled to receive in preference to the holders of the Common Stock a per share amount equal to [x] the Original Purchase Price plus any declared but unpaid dividends (the Liquidation Preference).

This is the actual preference. In the language above, a certain multiple of the original investment per share is returned to the investor before the common stock receives any consideration. For many years, a “1x” liquidation preference was the standard. Starting in 2001, investors often increased this multiple, sometimes as high as 10x! (Note, that it is mostly back to 1x today.)

The next thing to consider is whether or not the investor shares are participating. Again, note that many people consider the term “liquidation preference” to refer to both the preference and the participation, if any. There are three varieties of participation: full participation, capped participation and non-participating.

Fully participating stock will share in the liquidation proceeds on a pro rata basis with common after payment of the liquidation preference. The provision normally looks like this:

Participation: After the payment of the Liquidation Preference to the holders of the Series A Preferred, the remaining assets shall be distributed ratably to the holders of the Common Stock and the Series A Preferred on a common equivalent basis.

Capped participation indicates that the stock will share in the liquidation proceeds on a pro rata basis until a certain multiple return is reached. Sample language is below.

Participation: After the payment of the Liquidation Preference to the holders of the Series A Preferred, the remaining assets shall be distributed ratably to the holders of the Common Stock and the Series A Preferred on a common equivalent basis; provided that the holders of Series A Preferred will stop participating once they have received a total liquidation amount per share equal to [X] times the Original Purchase Price, plus any declared but unpaid dividends. Thereafter, the remaining assets shall be distributed ratably to the holders of the Common Stock.

One interesting thing to note in the section is the actually meaning of the multiple of the Original Purchase Price (the [X]). If the participation multiple is 3 (three times the Original Purchase Price), it would mean that the preferred would stop participation (on a per share basis) once 300% of its original purchase price was returned including any amounts paid out on the liquidation preference. This is not an additional 3x return, rather an addition 2x, assuming the liquidation preference were a 1 times money back return. Perhaps because of this correlation with the actual preference, the term liquidation preference has come to include both the preference and participation terms. If the series is not participating, it will not have a paragraph that looks like the ones above.

Liquidation preferences are usually easy to understand and assess when dealing with a series A term sheet. It gets much more complicated to understand what is going on as a company matures and sells additional series of equity as understanding how liquidation preferences work between the series is often mathematically (and structurally) challenging. As with many VC-related issues, the approach to liquidation preferences among multiple series of stock varies (and is often overly complex for no apparent reason.) There are two primary approaches: (1) The follow-on investors will stack their preferences on top of each other: series B gets its preference first, then series A or (2) The series are equivalent in status (called pari passu – one of the few latin terms lawyers understand) so that series A and B share pro-ratably until the preferences are returned. Determining which approach to use is a black art which is influenced by the relative negotiating power of the investors involved, ability of the company to go elsewhere for additional financing, economic dynamics of the existing capital structure, and the phase of the moon.

Most professional, reasonable investors will not want to gouge a company with excessive liquidation preferences. The greater the liquidation preference ahead of management and employees, the lower the potential value of the management / employee equity. There’s a fine balance here and each case is situation specific, but a rational investor will want a combination of “the best price” while insuring “maximum motivation” of management and employees. Obviously what happens in the end is a negotiation and depends on the stage of the company, bargaining strength, and existing capital structure, but in general most companies and their investors will reach a reasonable compromise regarding these provisions. Note that investors get either the liquidation preference and participation amounts (if any) or what they would get on a fully converted common holding, at their election; they do not get both (although in the fully participating case, the participation amount is equal to the fully converted common holding amount.)

Since we’ve been talking about liquidation preferences, it’s important to define what a “liquidation” event is. Often, entrepreneurs think of a liquidation as simply a “bad” event – such as a bankruptcy or a wind down. In VC-speak, a liquidation is actually tied to a “liquidity event” where the shareholders receive proceeds for their equity in a company, including mergers, acquisitions, or a change of control of the company. As a result, the liquidation preference section determines allocation of proceeds in both good times and bad. Standard language looks like this:

A merger, acquisition, sale of voting control or sale of substantially all of the assets of the Company in which the shareholders of the Company do not own a majority of the outstanding shares of the surviving corporation shall be deemed to be a liquidation.

Ironically, lawyers don’t necessary agree on a standard definition of the phrase “liquidity event.” Jason once had an entertaining (and unenjoyable) debate during a guest lecture he gave at his alma mater law school with a partner from a major Chicago law firm (who was teaching a venture class that semester) that claimed an initial public offering should be considered a liquidation event. His theory was that an IPO was the same as a merger, that the company was going away, and thus the investors should get their proceeds. Even if such a theory would be accepted by an investment banker who would be willing to take the company public (no chance in our opinion), it makes no sense as an IPO is simply another funding event for the company, not a liquidation of the company. However, in most IPO scenarios, the VCs “preferred stock” is converted to common stock as part of the IPO, eliminating the issue around a liquidity event in the first place.

Fred Wilson on cash flow

Reprinted form A VC. Original article here.

By Fred Wilson

This week we are going to talk about cash flow. A few weeks ago, in my post on Accounting, I said there were three major accounting statements. We’ve talked about the Income Statement and the Balance Sheet. The third is the Cash Flow Statement.

I’ve never been that interested in the Cash Flow Statement per se. The standard form of a cash flow statement is a bit hard to comprehend in my opinion and I don’t think it does a very good job of describing the various aspects of cash flow in a business.

That said, let’s start with the concept of cash flow and we’ll come back to the accounting treatment.
Cash flow is the amount of cash your business either produces or consumes in a given period, typically a month, quarter, or year. You might think that is the same as the profit of the business, but that is not correct for a bunch of reasons.

The profit of a business is the difference between revenues and expenses. If revenues are greater than expenses, your business is producing a profit. If expenses are greater than revenues, your business is producing a loss.

But there are many examples of profitable businesses that consume cash. And there are also examples of unprofitable businesses that produce cash, at least for a period of time.

Here’s why.

As I explained in the Income Statement post, revenues are recognized as they are earned, not necessarily when they are collected. And expenses are recognized as they are incurred, not necessarily when they are paid for. Also, some things you might think of as expenses of a business, like buying servers, are actually posted to the Balance Sheet as property of the business and then depreciated (ie expensed) over time.
So if you have a business with significant hardware requirements, like a hosting business for example, you might be generating a profit on paper but the cash outlays you are making to buy servers may mean your business is cash flow negative.

Another example in the opposite direction would be a software as a service business where your company gets paid a year in advance for your software subscription revenues. You collect the revenue upfront but recognize it over the course of the year. So in the month you collect the revenue from a big customer, you might be cash flow positive, but your Income Statement would show the business operating at a loss.

Cash flow is really easy to calculate. It’s the difference between your cash balance at the start of whatever period you are measuring and the end of that period. Let’s say you start the year with $1mm in cash and end the year with $2mm in cash. Your cash flow for the year is positive by $1mm. If you start the year with $1mm in cash and end the year with no cash, your cash flow for the year is negative by $1mm.

But as you might imagine the accounting version of the cash flow statement is not that simple. Instead of getting into the standard form, which as I said I don’t really like, let’s talk about a simpler form that gets you to mostly the same place.

Let’s say you want to do a cash flow statement for the past year. You start with your Net Income number from your Income Statement for the year. Let’s say that number is $1mm of positive net income.

Then you look at your Balance Sheet from the prior year and the current year. Look at the Current Assets (less cash) at the start of the year and the Current Assets (less cash) at the end of the year. If they have gone up, let’s say by $500,000, then you subtract that number from your Net Income. The reason you subtract the number is your business used some of your cash to increase its current assets. One typical reason for that is your Accounts Receivable went up because your customers are taking longer to pay you.

Then look at your Non-Current Assets at the start of the year and the end of the year. If they have gone up, let’s say by $500k, then you also subtract that number from your Net Income. The reason is your business used some of your cash to increase its Non-Current Assets, most likely Property, Plant, and Equipment (like servers).

At this point, halfway through this simplified cash flow statement, your business that had a Net Income of $1mm produced no cash because $500k of it went to current assets and $500k of it went to non-current assets.

Liabilities work the other way. If they go up, you add the number to Net Income. Let’s start with Current Liabilities such as Accounts Payable (money you owe your suppliers, etc). If that number goes up by $250k over the course of the year, you are effectively using your suppliers to finance your business. Another reason current liabilities could go up is Deferred Revenue went up. That would mean you are effectively using your customers to finance your business (like that software as a service example earlier on in this post).

Then look at Long Term Liabilities. Let’s say they went up by $500k because you borrowed $500k from the bank to purchase the servers that caused your Non-Current Assets to go up by $500k. So add that $500k to Net Income as well.

Now, the simplified cash flow statement is showing $750k of positive cash flow. But we have one more section of the Balance Sheet to deal with, Stockholders Equity. For Stockholders Equity, you need to back out the current year’s net income because we started with that. Once you do that, the main reason Stockholders Equity would go up would be an equity raise. Let’s say you raised $1mm of venture capital during the year and so Stockholder’s Equity went up by $1mm. You’d add that $1mm to Net Income as well.

So, that’s basically it. You start with $1mm of Net Income, subtract $500k of increased current assets, subtract $500k of increased non-current assets, add $250k of increased current liabilities, add $500k of increased long-term liabilities, and add $1mm of increased stockholders equity, and you get positive cash flow of $1.75mm.

Of course, you’ll want to check this against the cash balance at the start of the year and the end of the year to make sure that in fact cash did go up by $1.75mm. If it didn’t, then you have to go back and check your math.

So why would anyone want to do the cash flow statement the long way if you can simply compare cash at the start of the year and the end of the year? The answer is that doing a full-blown cash flow statement tells you a lot about where you are consuming or producing cash. And you can use that information to do something about it.

Let’s say that your cash flow is weak because your accounts receivable are way too high. You can hire a dedicated collections person. You can start cutting off customers who are paying you too late. Or you can do a combination of both. Bringing down accounts receivable is a great way to improve a business’ cash flow.

Let’s say you are spending a boatload on hardware to ramp up your web service’s capacity. And it is bringing your cash flow down. If you are profitable or have good financial backers, you can go to a bank and borrow against those servers. You can match non-current assets to long-term liabilities so that together they don’t impact the cash flow of your business.

Let’s say your current liabilities went down over the past year by $500k. That’s a $500k reduction in your cash flow. Maybe you are paying your bills much more quickly than you did when you started the business and had no cash. You might instruct your accounting team to slow down bill payment a bit and bring it back in line with prior practices. That could help produce better cash flow.

These are but a few examples of the kinds of things you can learn by doing a cash flow statement. It’s simply not enough to look at the Income Statement and the Balance Sheet. You need to understand the third piece of the puzzle to see the business in its entirety.

One last point and I am done with this week’s post. When you are doing projections for future years, I encourage management teams to project the income statement first, then the cash flow statement, and then end up with the balance sheet. You can make assumptions about how the line items in the Income Statement will cause the various Balance Sheet items to change (like Accounts Receivable should be equal to the past three months of revenue) and then lay all that out as a cash flow statement and then take the changes in the various items in the cash flow statement to build the Balance Sheet. I like to do that in monthly form. We’ll talk more about projections next week because I think this is a very important subject for startups and entrepreneurial management teams to wrap their heads around.

HR tips from Dr. Dana Ardi

Reprinted from Fred Wilson’s AVC.  See original article here.

Dr. Dana Ardi is a friend, former colleague, and an expert in the fields of talent management, organizational design, assessment, leadership, coaching, and recruiting. Dana has taught me a ton about these areas and was a partner at Flatiron Partners where we made a big investment in the talent side of the business. I asked Dana to “bat cleanup” on this series on People and she’s done that in fine form with snippets from her coming book on Betas, the new archetype of organizational leader.

————————————

“When someone asks you, A penny for your thoughts, and you put your two cents in, what happens to the other penny?” It’s a really great question, as well as being one of my favorite among many George Carlin quotes. And it came to mind when Fred asked me to contribute a guest blog post.

Having just put the finishing touches on a book about organizations that’ll be out next year, I’m happy to toss that second penny into the ring.

I consider myself a corporate anthropologist. I’ve spent most of my life studying the cultures of organizations, how they evolve and intersect with what’s happening right this second, and how the people in them influence and shape their communities. My consulting mission isn’t to transform established, successful companies – they’re doing fantastically well the way they are. It’s to assist them and other entrepreneurial ventures with the positioning to succeed with today’s workers, in today’s new business environment, and to help them evolve.

In the Information Age, workers in today’s organizations are accustomed to being sold, not told. Robert Louis Stevenson once wrote, “Marriage is a long conversation,” but so today is business – which is why companies have to change or else risk going under.

It’s pretty clear to me that the Information Age requires a new approach to organizing groups of people, as well as to successfully function within those same organizations. This approach I call Beta, to distinguish it from the old Alpha paradigm, and it trickles down to corporate culture, recruitment, and most of all, leadership.

What do all the most successful leaders, companies and workers have in common? In a nugget, it’s the trait we call self-awareness. In Heart, Smarts, Guts and Luck, a recent business title published by Harvard Business Review Press, co-author Anthony Tjan argues that all successful business leaders are skilled at just that. Of the four core qualities that he has observed make up most successful entrepreneurs and business-building, they know when to dial up…or dial town. They know when to emphasize passion, lower the pitch on assertion and bypass analytical smarts in favor of creative thinking or relational skills. In short, they’re as fluid and adaptable as the businesses they run.

What if you want to be there, but you’re not there yet? Here are a few things to to bear in mind about today’s and tomorrow’s winning-est organizations.

The Most Successful workplaces of the Future…

• Do away with archaic command-and-control models. Winning workplaces are horizontal, not hierarchical.Everyone who works there feels they’re part of something, and moreover, that it’s the next big thing. They want to be on the cutting-edge of all the people, places and things that technology is going to propel next.

• Instead of knives-out competition, these workplaces put a premium on collaboration and teamwork, and on building a successful community with shared values.

• Oh, and I’m not saying workplaces should become democracies – that would never work – simply thatpeople are empowered and encouraged to express themselves.

• Winning contemporary workplaces stress innovation. They believe that employees need to be given an opportunity to make a difference – to give input into key decisions and to communicate their findings and learnings to one another.

Corporate Culture matters more than you think

• The best teams are hired with collaboration in mind. People who remain in the culture are those who are dedicated to the ideal that that the whole is more than the sum of the parts.

• In the most winning corporate cultures, everyone has something to contribute. Leadership is fluid and bend-able. Integrity and character matter a lot. Everyone knows about the culture. Everyone feels the culture. Everyone subscribes to the culture. Everyone recognizes both its passion and its nuance.

• In winning corporate cultures, roles, identities and responsibilities mutate weekly, daily, sometimes even hourly. There’s a focus on social, global and environmental responsibility. No, these initiatives aren’t just good ideas, they really matter.

Today’s Most Successful Organizations…

• …look less like an advancing army and more like a symphony orchestra. They are divided up into sections rather than functions. Each section has a leader and every player is a member of a team that works in synchrony. The orchestra conductor may direct what the orchestra does, but he knows he’s not completely in charge. His sole mission: To impel the other orchestra members to play to the very best of their ability, while integrating those efforts into a concerted group effort.

• In life as in business, most people are not generals, they’re lieutenants. Nor do they necessarily want to be generals – they want to be impact players. Frankly, most of us are happy to have the opportunity to accomplish what we’re good at, and what we enjoy, so long as we receive adequate recognition and reward.

• The most successful contemporary cultures convey the message that it’s okay to be yourself, and to do your best. You don’t always have to move up; you can also move across. More important is that you are happy, fulfilled, contributing to the community and feeling productive and rewarded.

The Leaders of Today have to be self-aware – and top-down mandates no longer work

• There will always be the need for decisive leadership, particularly in crisis times (and there’s a touch of the autocrat and control freak inside every successful entrepreneur). But today’s world is all about collaboration –and launching and maintaining that “long conversation” that Stevenson talked about.

• The leaders of tomorrow need to practice ego management. They should be aware of their own biases, and focus as much on the present as on the future. They need to manage the egos of employees by rewarding collaborative behavior and teamwork.

• Leaders should strive to become what Michael Maccoby dubbed “Productive Narcissists,” tempering high self-esteem and confidence with empathy and compassion. Mindfulness, of self and others, by boards,executives and employees, may very well be the single most important trait of a successful company. Companies have to define the culture; the culture can’t define them. So pre-define it!

• Finally, companies need to understand that every individual in the organization is a contributor; and the closer everyone in the organization comes to achieving his or her singular potential, the more successful the business will be. Successful cultures encourage their employees to keep refreshing their toolkits, keep flexible, keep their stakes in the stream.

Rethink Recruiting

• Diversity is key – and by diversity I mean of thought, style, approach and background. You’re building a team, not filling a position. Cherry-picking candidates from name-brand universities will do nothing to further an organization and may even work against it.

• Don’t buy resume or credentials. Buy competence, track record, character and culture fit.

• Avoid hiring only superstars. It’s about company teams, not just the individual. Sure, it’s totally tempting to create an All-Star team, but in case you hadn’t noticed, those people don’t pass the ball, they just shoot it.

• Hire competencies but remember: hire with your heart. Make sure new workers fit into the preexisting culture, while also importing their expertise. Become their sponsor – onboarding is essential. Spend time listening. Give them what they need to succeed.

• Sometimes you need to hire aliens – folks outside of the culture who bring new ideas and best practices from other places. These people become culture-influencer and agents of change.

• New hires are more than just the college or university they attended. In short, don’t hire credentials, hire people.

• Character matters. Most people don’t succeed in teams not because they are unqualified or incompetent, but simply because they are not a good cultural fit.

• Act now. One of the big mistakes entrepreneurs make is they don’t act quickly enough. Put aside perfectionism, don’t wait for the perfect person – he or she may not exist. Hire track record and potential.

• If, looking back, you realize someone is not a good cultural fit, or is not getting it done, don’t wait to make the change. Sometimes it is just as simple as readjusting their position or redefining their role. If they really don’t get it done, then it’s time to make the tough call.

Be on the lookout for signs of a lack of emotional commitment from employees:

• People complain about the hours they’re putting in;
• Turnover is high, particularly among young top achievers;
• Recruitment is difficult; there’s little innovation or creative thinking; and
• There’s more politicking that there is actual dialogue.

Take note of those employees who have an emotional commitment to the organization:

• People give extra effort voluntarily;
• They become your best ambassadors
• Employees make personal and professional sacrifices to stay rather than leave;
• People feel free to think outside the box; and
• Meetings often result in lively debates and team action.

The employees of tomorrow plays to their strengths

• Rather than aspiring to omnipotence, and acting as though they’re the masters of all they survey, Betas focus on what I call “motivated skills,” e.g., the things they know they do exceptionally well. And instead of exploiting their peers’ weaknesses in order to attain and hold onto power, they encourage their fellow team-members to play to their own strengths so that the entire team and organization can succeed.

Self-Awareness is all (but don’t think for a moment it means you’re soft)

• What is self-awareness but bringing an intellectual and emotional understanding of your strengths and their weaknesses, your goals and their motivations to a given situation?

• Ensure that you hire self-aware people. Give them the proper tools, techniques and feedback, as well as the proper levers of success and sponsorship. Onboard people with the belief that they’ll be successful. Then make sure it happens.

• That said, organizations cannot be whole-heartedly responsible for their employees’ development; employees have to play their roles, too. Beta leaders are skilled at assembling employees, encouraging them to think new thoughts in different ways and challenging them to do new things.

If there’s a single takeaway from years of consulting, recruiting and observing both old and new organizations it’s this: People really truly matter. They are your strategy. They need to be encouraged and coached to pursue what they do best; to keep doing what they enjoy, and to participate in the success of your company.

To survive and thrive today and into the future, business leaders need to grow and develop their own self-awareness. Self-awareness means that you are willing and able to collaborate with employees, directors, customers and yes, even your competitors. It means that you understand that every individual in your organization is a contributor with varying degrees of potential – and that the closer everyone comes to attaining a high level of self-awareness, the closer the organization comes to achieving its potential. It means that your self-awareness feeds into your employees’ own self-awareness, which in turn ignites the overall success of the venture.

Now that Fred has made me the cleanup hitter, I’ll leave with this parting shot: Hire smart and hire the very best people you can. Don’t just onboard someone to fill a slot. Instead, build a community. Keep asking yourself not just what you want and need, but what’s best for the organization to grow and evolve. And remember what George Carlin said: “If you haven’t gotten where you’re going, you’re probably not there yet.”

Stanford Social Innovation Review features Endeavor Entrepreneur Jalil Allabadi

Reprinted from Stanford Social Innovation Review. Original article here.

By Jamil Wyne

During the past two years, Internet penetration in the Arab world has increased dramatically. It has proven to be a powerful civic participation tool and is developing into a facilitator for commercial opportunities. As access continues to grow, it is important that the government, private sector, and general public leverage it to enhance the region’s social development space, in particular health care, which is evolving in the region.

As of June 2012, 3.7 percent of the world’s Internet users were in the Middle East and North Africa region, with Internet penetration reaching 40 percent of the population (compared to the world average of 30 percent). Between 2000 and 2012, Internet penetration grew by more than 2,600 percent. Further, between January and November 2011, the number of Facebook users in the region increased by 68 percent, and as of June 2012, Arabic was the fastest-growing language on Twitter.
Much of the recent fascination with online penetration is due to the Arab Spring. Twitter and Facebook became part and parcel of the discussion surrounding Tahrir Square and events in most countries that saw uprisings. Facebook usage at least doubled during times of protests across the region.

This conversation now also includes e-commerce—in fact, business-to-customer online sales in the region could reach USD$15 billion by 2015 (MRG International—October 2011). In a recent report of 8 countries by the Dubai School of Government, 84 percent of 4,000 Internet users said that social media tools can assist in developing entrepreneurial skills, and 86 percent thought that social media was an important tool for startups. This suggests that Internet users are looking to the online space to shape civic and commercial participation, helping them to learn and enhance productivity.

But an issue often overlooked in this conversation is the role that online space can play in Arab health care systems—a cornerstone of the region’s social development agenda. Parallel to rising online activity, health care in the region is changing. Increasing incomes have led to new demand for health services, calling for more institutions and facilities to answer. As more players demand information on where and how to obtain services, enhancing basic health care knowledge is increasingly important.

As new suppliers and consumers enter the field, online information hubs can play a huge role in educating patients and enhancing awareness of different health care providers. One company in particular offers a model for how this framework could operate.

The Jordanian company Al-Tibbi began in 2009 with a simple agenda: to build the first online Arabic medical dictionary. From there, founders Jalil Allabadi and his physician father created a one-stop shop for online health care information, which now receives 50,000 unique visitors a day, or roughly 1,500,000 unique visitors a month—and those numbers are growing at a rate of 17 to 20 percent every month.

Al-Tibbi’s mission is to expand health awareness and application. The online resource makes information on hospitals, clinics, physicians, and other medical facilities publically available for Arabic consumers. It also helps visitors learn about different health risks, ailments, and treatments—information that can directly inform their decisions and lifestyle. Perhaps most important is the fact that the information is provided only in Arabic. Though Arab physicians and health care professionals study the same materials as their English-speaking peers, relaying the same concepts to Arab patients can be done only through accurate translations.

Al-Tibbi has also created a portfolio of “firsts” in the Arab world. Its Symptom Checker is an online tool that helps patients better understand ailments and maladies. The company has also built the largest Arabic health channel on YouTube, with 2.9 million views to date. Additionally, 750 physicians contribute expertise to site visitors, and 100 more join in each month. The incorporation of physicians is part of Al-Tibbi’s larger strategy to change the way experts, patients, and other stakeholders communicate about health care. Supporting this goal, Al-Tibbi recently became an Endeavor-supported company that has grown from 5 employees in 2010 to 23 in 2012, plus 10 freelancers.

The region needs many online players to contribute to its health care space, which must go beyond information sharing and education. The same is true for the rest of the region’s social development agenda. Online tools are critical to advancing knowledge and to increasing well-being and opportunities. Companies such as Al-Tibbi demonstrate how online and social development objectives can intersect, and provide a blueprint for other players to follow and for millions to leverage.

Contact us

Press center

Community

Newsletter Sign Up