Dave Neal

Dave is currently Managing Director of The Startup Factory, the leading technology accelerator in the Southeast. Dave has performed Chairman, CEO, CFO and General Counsel roles since 1994 in information technology companies, several of which have returned money to investors and several of which provided really interesting entrepreneurial lessons.

Dave spent eleven years as an Adjunct Professor of Entrepreneurship at the Kenan-Flagler Business School at UNC-Chapel Hill and five years as an Adjunct Professor of Law at the UNC School of Law. He co-developed the FastTrac Tech program later acquired for use by the Kauffman Foundation. David holds a B.S. and a J.D. from the University of North Carolina at Chapel Hill, and an M.B.A. from Stanford University.

In 2011 Dave partnered with Chris Heivly, a serial software entrepreneur and a co-founder of MapQuest, to raise the capital for The Startup Factory and create TSF’s Research Triangle operation. TSF has made 22 investments to date, focusing on lean startup methodologies for helping portfolio companies advance.

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Dave NealFebruary 26, 2015Leave a comment

Vanilla Is The Flavor You Want

We recently selected our seventh class here at The Startup Factory (“TSF”). Assessing and selecting from 100 or more companies is always a challenge. It gets even tougher when we work with entrepreneurs who want to maintain something unusual about their company’s structure.

Part of the game in seeking and closing an investment is to make your company as “vanilla” as possible. Quality investors see a lot of deals. At both a conscious and sub-conscious level they are looking for reasons to say no. Thus our emphasis at TSF on your company having a legal structure that raises no questions and looks like the deals an investor has done before.

We do this in two ways at TSF. First, we work to create a “down the middle” set of investment documents. “Down the middle” means a number of things:

  • The documents are fair to both TSF and the entrepreneur
  • The documents protect TSF from key risks that we may encounter as an investor
  • The documents set up the right incentive structure for both parties, and
  • The documents will be viewed as professional and readily acceptable by future investors

Second, we work to make sure our deals include several elements that investors expect to see in a term sheet and the associated documents:

  • Re-vesting of founder shares
  • Preferred stock as opposed to common for investors
  • Dividend rights
  • Anti-dilution or price protection
  • An option pool for attracting and providing incentives to future employees

At TSF, we’ve worked with several companies that objected to one or more of these features in their company. Sometimes the company has an alternative idea that it feels strongly about. In other cases, the founders object to a specific term like re-vesting their shares. Whatever the objection, it puts us in a difficult place as an investor.

If we accede to the request to modify the key terms of an investment we will make the entrepreneur we are negotiating with happy. But we will also likely make his or her route to later funding more difficult. This is because the value of having a “vanilla” structure is hard to overestimate.

Don’t standard venture capital documents change over time? Yes, they do but it’s better to try to adopt such innovations later in your company’s life cycle. Once you have traction, revenue and profitability your leverage to try such innovations will be stronger. Until then, vanilla is the flavor you want.

 

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Dave NealFebruary 6, 2015Leave a comment

The Siren Song Of That One Big Customer…

In Greek mythology, the Sirens were three mermaids who lured sailors to their deaths by singing a song they couldn’t resist. As their reward, the sailors ended up crashing their vessels on the rocks. The vessel and their lives were lost.

I’ve seen a similar phenomenon more than once recently among the start up companies that I am familiar with. An opportunity to test your product offering goes  very well and conversations begin. Naturally, this is a nice boost to the ego of the start up. A lot of focus is placed on doing what ever is necessary to close “the deal” with the big company.

That’s understandable. Getting a deal done with a big company provides validation, revenue and perhaps an easier path to raising capital. It’s also very risky. Think about the psychology and implications of the start up and big company deal:

  • It means everything to the start up. If you’re the early stage company in this position you’ll do a lot of things to get a deal done. Will it be a deal that moves you along the most effective path for your company?
  • You’ll often be asked not to deal with key competitors of the large company. This removes the most critical element of “skin in the game” for the larger company. It also puts the start up in a “no win” position, removing key negotiating leverage that can keep the counter-party honest.
  • Even completing a deal and working with a behemoth can reduce your leverage with later customers. If you are perceived as a captive provider or too closely aligned with your larger partner it can affect the willingness of others to work with you. It can even affect your acquisition options if you are unduly dependent on one large customer.

The solution? Always have a secondary option active and on the path to close. This will provide you with leverage and intelligence on what other options could work for you. Otherwise you might find your ship against the rocks with holes in the bottom of your boat…..