Elana Fine, Managing Director of the Dingman Center recently participated in a live chat on Tuesday April 23 with the Washington Post’s Capital Business magazine for their Business Rx column answering questions from regional entrepreneurs on improving or starting a business. This post features some of the questions from the live chat. Follow the Dingman Center’s Facebook Page and Twitter Page for information on the next live chat and other Dingman Center news and events.
Q. What kind of return do investors like to see within 1 year – 18 months of Series A funding? For example, if a start-up raises $3 million in Series A, at the end of 18 months, what’s the minimum profit margin the company should aim to achieve?
Elana Fine: Investors (meaning VC/angel in this case) actually don’t expect a return at all in 12-18 months. They are investing for the longer term – and understand that you will likely need additional investment before you exit (usually via acquisition or IPO). They invest in companies in big markets that might generate a 3x-10x return. The investments are illiquid compared to the stock market and therefore riskier. In exchange for this risk and longer holding period — the cost of venture capital is high. Most venture investors don’t expect there to be profit margins right away because they understand the money it takes to scale a company.
Q. I have my own consulting business focused on data analysis, research, writing, and project management. I had started consulting when I lost my job a few months ago and found great success right away leading to a full-time offer that was too good to refuse. I want to continue consulting through my own business and have the time to pursue them, but I am wondering about the ethics of doing so.
Elana Fine: We work with a lot of companies who “moonstrap” their startups – working on them after normal work hours. I think the big question is whether you are competing with your employer — that would certainly cross the ethical lines. I’d always go with the tenet of “honesty is the best policy.” If you are concerned, have an honest conversation with your employer. If you are running the business on your own time and it doesn’t conflict, shouldn’t be a problem. They might be excited and impressed by your entrepreneurship!
Q. I have been following the Boston marathon bombings and think I have some good ideas for facial recognition software. I have a few friends that are coders and could help. Would a VC invest in this kind of business?
Elana Fine: I think VCs would (and have) invested in facial recognition and other security/identification/verification software. However, they won’t invest until you have something up and running and have some initial customer traction. I’d start by doing a competitive analysis. There were a lot of companies started in this space after 9/11. Would be interesting to see where they are now and how far the technology has come.
Q. I have been a nonprofit management generalist for 5-6 years and I recently started a consulting firm working for myself. I have been lucky and have gotten several contracts in the first few months. So far I’ve been marketing pretty broadly and while that has been successful, would it be wise to hone in on a certain expertise, or is it better to remain a generalist? Also, at what point is it recommended to work with sub-contractors? Is it ethical not to tell clients when I choose to work with a sub-contractor? Thank you!
Elana Fine: Hmmm… two questions on ethics in a row. Happy to be a moral compass I’m actually not sure on the ethics relating to sub-contractors. I will take part one though. As a consultant I think you do benefit by becoming a specialist, as long as it is in a large enough market where you can build a strong business. You need to start with a market-sizing analysis around your expertise and broaden or narrow based on your skill set and potential demand. This area has A LOT of consultants, so you’ll really need to focus on refining your marketing message. I think your expertise also drives the price you can charge. Think of a handyman as an example — most often a generalist that can do a lot of different things in your house will have a lower price point. However, when you really want to redo your bathroom, you call in specialists who will be more expensive but will know how to do the job.
Q. What trends are you seeing in angel financing? Do you think we’ll see more funding this year?
Elana Fine: Honestly, I think angels are having an identity crisis. Angel activity across the country increased significantly in the past two years. Now they are facing a Series A crunch – not enough early stage VC capital to fund all the companies that have raised money. This wave of investments also differs greatly from 5-10 years ago because the companies looking for Series A are at later stages now that software development costs have come down. Angels acted like Series A investors — so are they now looking for Series B investments? And if that is the case, what does that mean for valuation and their equity positions? Will their holding period be shorter? I’m hopeful, but I don’t think we’ll see as much funding this year until we start seeing the companies that were funded in last 24 months receive follow-on capital.
Q. I’m a student startup and am in the finals of a business competition. Obviously, I’m in it to win it. When I do, what are the first steps I should take in evaluating where to allocate the prize package?
Elana Fine: Great attitude – you have to always compete to win! Be very thoughtful about where to allocate your winnings and don’t necessarily assume you need to spend the money all at once. Make sure to include your use of funds in your application/presentation — usually judges focus not just on the company, but the ability of the team to use the prize package to take business to next level. If you think you’ll need additional investment, use the money to get customer or user traction that will prove demand for your product and validate your business model. If this is a business plan competition and you haven’t already built something — use the funding to get a minimally viable product out to market to start getting feedback. As a student you need to be careful – winning a large prize package can also create a lot of temptation. Be smart, responsible and resourceful.
Q. As a successful woman in the finance and entrepreneurial worlds, what advice do you have for other women looking to start businesses or work in investment banking? Have you read “Lean In?” Is Sheryl Sandberg the Gloria Steinem of our time?
Elana Fine: My advice — DO IT!! I haven’t read “Lean In” yet, but it is next on my list. I’ll report back next month. Women have so many of the necessary skills to start and grow businesses (drive, persistence, charisma, multi-tasking, delegation, etc.), but we just don’t see enough women entrepreneurs. I think the one ingredient we might be missing is appetite for risk and potentially over analysis. We have great intuition and we need to apply it to starting more companies. I don’t have the solutions, but it is really an issue I’d like to personally spend more time on.
Elana Fine was appointed Managing Director of the Dingman Center in July 2012, after joining the team in 2010 as Director of Venture Investments. As Managing Director, Elana’s primary focus is leading the Dingman Center in support of its mission and strategic plan. Key responsibilities include oversight of our student venture incubator, Dingman Center Angels investor network, business competitions, and technology commercialization efforts.