ArpexCapital

I came across the post below on PEHub, a great site for info on private equity and vc. Denise Pamieri of Pinnacle Group addresses the post to job seekers but I think applies to anyone, especially if they work in any type of business development/sales role.

” 1. Get Organized & Set Clear Goals

Every evening, before I end my day, I create a written detailed plan. The plan has blocks of time set aside for calls to people I know already, calls to prospective clients and candidates, responding to email & voicemail, addressing incoming inquiries, research, reading and planning. Creating this detailed plan takes about 30-45 minutes at the end of each day and I can’t imagine leaving work without setting my detailed plan for the next day.

By the way, I mean detailed – as in names, phone numbers, assembling any notes that will help me manage my calls. I prioritize my plan and, for phone calls, I sort the list by time zone and by subject. There is no sense calling someone on the West Coast at 7am – they’re not in and that means voice mail. I want to catch my prospects when they’re most receptive and when they’re available. I also want to talk to as many people as I can about a similar topic. That means, I might plan to call four healthcare VCs in a row and then four candidates with VC healthcare experience right afterward before I move on to calls on mezzanine players. I start with a list of at least 40 calls for each day I’m in the office so I can move quickly down my organized list if the person I’m looking for isn’t in, or can’t talk.

2. Work the Plan

Having a plan is important, working the plan is essential. I set time for each part of my plan (calls, in person meetings, emails, planning). When I’m on the road, those have only three parts – eg meetings and returning emails/calls and notes/planning. During each block of time, I work that part of my plan. For example, when I am scheduled to make calls – no matter what, I sit down at my desk and start making calls. I don’t spend time check my email, I don’t get sidetracked reading industry blogs or surfing the web or gabbing with my co-workers. Nothing is more important than making the calls. I use calls as the most important piece to start with each day because most of us are phone phobic and would rather email or noodle around on the internet. Jump in and get it done. Some days, I set my plan to start with a “warm” call – someone I know will take my call and get me jump started on positive vibes. Then, I just keep moving down my list from call to call or task to task, until I’ve completed my plan for the day.

3. Minimize Distractions and Plan Breaks

When I was in law school, I had the cleanest bathroom because I wanted to do anything but study and everything else interested me. Frequently I work from a hotel room when I’m on the road or from home, so I know how easy it is to get distracted and how much discipline it takes to stay focused. I learned that doing the hardest thing first each day was the best way to get traction. Now, no matter where I’m working, I start with a cup of tea on my desk and I do not leave my desk until I’ve made 10 calls. No refills, bathroom breaks, web surfing. I get to business and get my first 10 calls done. Then I have a break – check my email and voicemail messages, get some more tea, etc. And, I limit my break to 15 minutes – then back on the phone for 10 more calls. That way, by lunch time, I’m well along to getting all my calls done and have the afternoon for returning calls, sending emails, researching and planning for the next day.

4. Reward Yourself

I once ate an entire 1lb bag of Oreos in a single day. For those of you who know I’m a health food nut, that seems impossible. But, I was avoiding a brief I needed to write for an important case. So I rewarded myself with 2 Oreos every time I finished one section of the document. It was a small token, but I wouldn’t eat the cookies until I achieved that goal. By halfway through the bag, it might have been the sugar buzz that helped me finish the brief, who knows! Find what works for you, break your daily plan into manageable pieces and then when you’ve reached that goal (10 calls, 15 emails, whatever) go for a run, watch American Idol you taped last night, whatever works, then get back in the saddle and get through your plan.

5. Anticipate Rejection and Use it to Assess Your Skills

I make lots of calls each day where I learn that the firm isn’t yet ready to engage a recruiter, or they’ve decided to recruit on their own, or they’ve engaged another recruiter. It’s ok. While I’d rather that every call or meeting turned into a new search assignment, I’m realistic and I don’t take rejection personally. But, I do ask for candid feedback from each person I interact with about how I can improve what I’m doing. I’m also realistic that not everyone is comfortable giving candid feedback, so each day I compile a list of things I’ve learned, guessed are a problem or I may need to mull over to improve my success. At the end of the week, I review it to see any commonalities, places I can improve or ways to alter what I’m looking for. I ask myself a 3 part question at the end of each week and I write out the answers: What did I do well this week? (Hint: do more of that next week!) What could I have done better this week? What did I waste time on? Find a way to NOT do that next week when you’re making your plan.

Likewise, you should be undertaking a regular review of your skills (including your personality, interests and values), how they fit for each firm you are approaching and whether you should be broadening the type of opportunities (or industries) where your skills could apply. This process of refining your understanding of how you “fit” or if you don’t is critical to your success. There are lots of skills assessment tools on the web or in books, make sure you’re regularly setting aside time to think about how you can use what you know in a different industry or position.

6. Try Something Different

The saying goes “insanity is doing the same thing over and over and expecting different results.” Has your job search looked the same for the whole time you’ve been doing it? You send resumes by email. You check job boards & apply to jobs. You email recruiters to ask if there’s anything new. Are you going to new networking events? Are you doing volunteer work? Are you reading the trade rags and then making calls to people about the deals they’ve done? Are you teaching something or writing about it? Diversify your skills, your network and revive your passion about something so it can rub off on your job search. Don’t be like Sisyphus rolling the same stone up the same hill day after day, it robs you of your enthusiasm which is critical to your success.

7. Take Care of Yourself

Get dressed (don’t do your job search in your pajamas!), exercise every day, make time to be with friends who make you laugh, breathe some sense of meaning into this process for yourself. Revamp your finances so you don’t have to be breathless with your back up against the wall. When you’re really burned out, take a break. Give yourself a vacation from your job search. Regroup and rethink what else you could be doing as your career. For nearly 20 years I have asked almost everyone I meet what they would do with themselves if money was no object. It gives tremendous insight into what you should be doing. Ponder that question and really discover whether there’s a way to be doing that (or at least a little of it) while you’re looking for your next job. It will help you to feel some sense of purpose and meaning and you might discover that money is not what’s keeping you from doing what you really want to do.

8. See the Big Picture to Stay Positive

I’ve learned to take the pressure off myself by not viewing any call or meeting as critical to my success. That doesn’t mean I don’t think they’re each important. It means that I keep them each in perspective. I look at every call, every meeting as an opportunity to build a relationship. I know that, in the long run, my success will come from being my best self with every person I talk to or meet. I think of every person I meet as being either a candidate, or a client, or one becoming the other, or someone who knows one or the other and as (and this is the most important piece) 15 interesting minutes of my day. In most every call or meeting I have each day, I find a way to connect with the other person on a meaningful level other than “what they can do for me”. I try to find a way to laugh, to empathize, to feel as though I am being of service to that person in that moment. I know that, in the end, it will all work out. My meaningful goal and its reward are those feelings of connection. Let this job search help you connect with your authentic self and with the people you’re meeting. Most jobs are filled with people who connect with each other and that can’t be bought at any price.

Denise Palmieri is the Director of Client Relations for Pinnacle Group International, an executive recruiting firm specializing in recruiting investment professionals for the private equity and alternative investment community. ”

Recently we discussed the use of a convertible note in a seed stage investment . The convertible note is a common and important tool in angel/seed stage investing in the US; I haven’t seen it used yet in Brazil but it could be a useful adaption for use in Brazilian angel groups and seed investing.

Some early-stage VCs dislike convertible notes. Others, like many angel investing groups in the US, use them for every deal that they do.

On the good side, a convertible note avoids the problem of valuation: the newer the company, the less data available to do a meaningful valuation, i.e, the more subjective a valuation becomes and the more room for disagreement between investors and entrepreneurs. A convertible note solves the problem by acting as debt until the next round of institutional capital, whereby it “converts” into equity at a preset discount to the valuation of that round. (The assumption is that, by the time of that institutional round, the company has enough of a track record to enable a relatively accurate valuation.)

The primary case against the convertible note is that it limits the upside of the seed investor. Theoretically, since the seed investor is providing capital at the highest risk, his upside should also have unlimited potential. Yet, when the seed investor uses a convertible note, he necessarily caps his upside by agreeing to convert at a pre-determined discount to the next round.

Let’s do some math. (I worry about posts that have a lot of math but, let’s face it, the investment business is about return on investment, and calculating return on investment is about math.)

Scenario 1:

The seed investors put in $1MM into Startup X using a convertible note, which will convert to equity at a 20% discount to the valuation at the next round of investment.

A year later, a large VC firm makes a Series A investment in Startup X; they give X a $10MM pre-money valuation and prepare to invest $5MM.

Prior to completion of the Series A investment (as part of the Series A process, really), the seed investors convert their $1MM in debt into equity at an $8MM valuation (20% discount to $10MM). Thus, they own 12.5% of the company before the $5MM Series A investment.

12.5% of $10MM = $1.25MM, so, on paper, the $1MM seed investment has appreciated 25% in one year. Not bad.

After the $5MM Series A comes in, the seed investors still have an investment worth $1.25MM but they have been diluted down to 8.3% of the company.

As I said, not bad.

Scenario 2:

In this case, assume the seed investors decide to negotiate a valuation with the startup and get 33% of the company in exchange for their $1MM investment (i.e., the negotiated a $2MM pre-money valuation for Startup X, $3MM post-money).

A year later, the exact same Series A as in Scenario 1 takes place.

Since the Series A investors value the company at $10MM pre-money and the seed investors own 33% of the company, the seedf investors’ stake is worth $3.33MM.

After the $5MM Series A investment, the seed investors own 22% of the company, (almost 3x what they own in the convertible note example).

In sum, by negotiating a valuation for their investment, rather than deferring it to the next round, the seed investors increased the value of their investment (on paper) and their ownership percentage by 300%.

Scenario 3:

Let’s take another example, which is more interesting because it shows that, the more successful the startup up is, the more crushed the convertible note investors can be.

Assume the same scenario as example #1 – the seed investors use a convertible note – but this time startup does extremely well after the investment.

Instead of a $10MM pre-money valuation, the Series A investors give the company a $50MM pre-money valuation and decide to invest $15MM. Great! The seed investors scored a grand slam!!

Not really – let’s do the math:

The convertible notes converts at $40MM, a 20% discount to $50mm. Their investment is still worth $1.25MM – a good paper return – but they only own 2.5% of the company. After the $15MM investment, they only own 1.9% of the company.

Is it really fair that the seed investors provided $1MM of high-risk capital to get the company to a $65mm valuation and yet they only have stock worth $1.25MM?

If they had negotiated for a third of the company upon investment, Scenario 2, they would now own 25% of the company after the Series A investment and their stake would be worth $16.5MM!!!

There are some other critical things to consider in the debate over convertible notes – whether the seed investors receive preferred or common shares upon conversion, what happens if the Series A is a “down round”, what happens if there is no Series A, etc. — but this is already a long post so we’ll get to it in a later post.

I was in Sao Paulo this week for one of six “Learning Labs” organized by the US Council on Competitiveness and Brazilian agencies (MBC, ABDI) focused on technology and innovation.

The point of the labs is to share best practices and help foster entrepreneurship and innovation.

The effort by these organizations reflects the fact that, I believe, the futures of the US and Brazil are intertwined and the success of both rests largely on how well the countries foster innovation and support entrepreneurship.

I hosted the panel on the entrepreneurial environment in Brazil and the US and stressed the following points:

Policy-wise, innovation/entrepreneurialism cannot be mandated but we can create an innovation-friendly environment by removing tax, legal and regulatory obstacles. For example, in Brazil, forming a business sometimes takes a year or more. As importantly, shutting down a business is just as difficult. Taxes can be as high as 100% of an employees salary; if you fire an employee without ‘just cause’ you can be penalized another 40%. Other barriers include a legal system that can take years to resolve a business dispute. Address these problems and I believe you will see a flourishing of entrepreneurialism in Brazil.

On the plus side, I said that Brazilian entrepreneurs are as good as any I have seen in the States. They are amazingly resourceful: imagine trying to start and maintain a business when the cost of capital is 30%, inflation is rampant and the regulatory structure is stifling. Yet tens of thousands of Brazilians did it successfully over recent years. Now, the economy in Brazil is much more healthy, in many ways healthier than the US, so Brazilian entrepreneurs should flourish. First we need to get the regulatory obstacles out of their way.

A more difficult issue is culture. A culture that encourages risk and experimentation will have more innovation than one that doesn’t, regardless of government policy. I gave an example: California has one of the least business-friendly environments in the US, yet Silicon Valley continues to lead the country’s technological innovation. I submit that the culture of Northern California, specifically the Bay Area, explains much of the Valley’s success; it encourages experimentation in every aspect of life: personal, political and business. It is no coincidence that ground zero of the 1960’s counter-culture movement is also the ground zero of technological innovation.

Many US and foreign cities have tried to become “the next Silicon Valley”. If it were simply a matter of business-friendly policies and entrepreneurial incentives, they would have succeeded by now. Culture, however, is difficult to replicate.

In the US, we often quote something called Murphy’s Law, which states, “That which can go wrong, will go wrong.” I believe that the more VC investing someone has done, the more they come to believe in the universal applicability of Mr. Murphy’s code. Just because things will go wrong, however, doesn’t mean a startup won’t succeed, it just means its going to be a lot harder than anyone can anticipate.

That’s why entrepreneurs that have track records of success are so valuable to investors. They have proven that they can overcome the dozens of unexpected challenges that inevitably arise when starting a business.

It also points out why it’s so important to invest in an industry in which the tide is rising. Often times, just being in an industry at a time of high growth can itself overcome many of the setbacks startups face.

Entrepreneurs, on the other hand, tend to flip Murphy’s law on its head. That which can go right, will go right. It’s not a bad outlook and, in fact, unrelenting (but not delusional) optimism is required to be a successful entrepreneur.

These two different outlooks, however, lead to one of the most common and difficult issues investors and entrepreneurs face: what is the valuation of an early-stage company?

Entrepreneurs focus on the potential upside to their business (otherwise they wouldn’t bother starting it). They tend to approach the question of valuation from the point of view of, “We could be the next Google/eBay/Facebook/Twitter (etc.). Given that possibility, we should AT LEAST be valued at $10mm/$20mm/$30mm (etc.).”

Investors, on the other hand, tend to approach the valuation issue with Murphy’s Law.

One of the ways to avoid the valuation issue is to use a convertible note for the seed investment. A convertible note is essentially a debt instrument that converts to equity at a discount to the valuation of the NEXT investment round. The theory is that, by the next round of investment, the company will have more of a track record and thus the valuation can be more easily and fairly determined.

For example, assume a seed investor provides $1,000,000 in convertible debt to a startup, with the agreement that the $1mm in debt will convert to equity at a 20% discount to the valuation of the next round.

One year later, the company completes a Series A round at a $10,000,000 pre-money valuation. Concurrent with the transaction, the seed investors convert their $1,000,000 into equity at an $8,000,000 valuation (a 20% discount to the $10,000,000 valuation). So, the seed investors own 12.5% of the company “pre-money”, i.e., before the Series A investors put their in their investment.

There are a lot of good things and some bad things about using convertible notes. We’ll discuss both in the next post.