financing ideas to IPO
Jeff Osborn formed Osborn Capital after years as a
serial entrepreneur and successful executive at UUNET. With more than 40 seed investments in startup companies,
including his own manufacturer of racing boats, Osborn is a straight
talker who’s not afraid to give his personal take on the “real
deal” of getting funding. At
this Netpreneur.org Coffee & DoughNets meeting held September 20,
2000, He covered topics ranging from an explanation of pre- versus
post-money, to who makes the best (and worst) investors, to the future
of the economy.
made at Netpreneur events and recorded here reflect solely the views
of the speakers and have not been reviewed or researched for
accuracy or truthfulness. These statements in no way reflect the
opinions or beliefs of the Morino Institute, Netpreneur.org or any
of their affiliates, agents, officers or directors. The archive
pages are provided "as is" and your use is at your own
2000, Morino Institute. All rights reserved. Edited for length and
fran witzel: welcome
evening. I'm Fran Witzel, Vice President of Morino Institute's Netpreneur.org¾the
dot.org learning community for new economy startups.
On behalf of the Netpreneur.org team and tonight's sponsor, UUNET's
Head Start program, it's my pleasure to welcome you to the
first of our fall lineup of events.
Our featured speaker tonight is Jeff
Osborn of Osborn
Capital, an early stage angel investment fund.
Tonight we'll hear Jeff’s thoughts on “The Real Deal:
Financing Ideas to IPO.” Jeff
was an entrepreneur, a UUNET
executive and, most recently, he has been investing in and mentoring
startups. Jeff and his
team have invested in Aptis, which was sold to Nortel
Networks; Compatible Systems, which was told to Cisco
for $567 million; and ArrowPoint Communications, which was also sold
to Cisco for $5.7¾as
Carl Sagan would say¾BILLION
dollars. In addition to Osborn
Boats, Osborn Capital has invested in eHarbor,
and several other companies.
After Jeff shares his insights, we will follow up with a
Q&A session moderated by Shannon Henry, Staff Writer and Columnist
at The Washington Post, who has been recognized as one of the most
influential people in Greater Washington's tech community.
I believe that The Post and Shannon have done an incredible job of informing the
world about the incredible entrepreneurial stories in our region.
Many of those stories are being created by people in this room.
Be sure to log on to washingtonpost.com
for Shannon's Download
chat, a virtual continuation of tonight's event where she
will interview Jeff and takes even more of your questions.
The “real deal” for financing startups has changed since
this spring. Many of the
rules are the same, some have changed, but the odds of getting seed
funding have definitely changed.
recently reported that while the overall amount of VC money invested
for the second quarter of this year increased, the number of seed and
early stage investments dropped by 25%.
What does this mean for entrepreneurs and what do you need to
know to succeed? Judging
from Jeff's experience, one company that knows about success is UUNET,
and we are very pleased that UUNET's
Head Start program is sponsoring tonight's event.
Having quickly grown to be the largest ISP, UUNET has not
forgotten its entrepreneurial roots. Through its Head Start program, the company now offers full
service support and access to startups while they are still young and
have the potential of becoming the next generation of large UUNET
customers. Brad Wise is
one of the key people at UUNET who has rekindled the entrepreneurial
spirit with the Head Start program and other initiatives to address
the needs of ASPs and emerging high-growth companies.
He was one of UUNET’s original sales team of 10 under Jeff
Osborn, and now he is Vice President of Channel Sales &
Development responsible for leading channel sales, security product
sales and UUNET's small business marketplace strategy.
Please help me welcome Brad Wise, who will introduce tonight's
brad wise: introduction
you all for coming tonight. I
certainly do not want to spend a lot of time talking because we
definitely want to get Jeff Osborn up here.
I do want to say thanks to Fran and all the team at
Netpreneur.org for continuing to put on events like this so that we
can all benefit from them, and for allowing us to be a part of this
When I was asked to introduce Jeff, I immediately started
reminiscing about the several years we spent together at UUNET.
In fact, it's kind of ironic that we are doing this event in
late September because it was in late September six years ago that I
got the opportunity to interview with Jeff¾the shortest interview I’ve ever had.
It was over the telephone, and he said one thing to me,
“Impress me.” I got
60 seconds to impress him, and, fortunately enough, I guess I said the
right things because I'm here today.
It has been an absolutely wild ride at UUNET, and Jeff was a
real visionary leader, both on the sales side and overall leadership
of the company. I sat
down with some folks, yesterday, who were part of that original
10-person team to get some stories.
I have about 50 stories here, but I won't tell them.
I know that Jeff, in his entertaining way, will share a number
of stories with you tonight, so, without further ado, it is my honor
to welcome Jeff Osborn.
jeff osborn: straight talk on
a grinding proposition
was really gracious of Brad, but I hate getting an intro like that
because there is pretty much nowhere to go but downhill, so I'd like
to thank you all for coming out tonight . . .
Where should I start? Oh! I wrote some notes.
My name is Jeff Osborn. I'm
currently with Osborn Capital. I
had to go to work, and that company had the same name as me.
Actually, I started it.
For four years, we have been investing in small companies,
primarily in Northern Virginia and New England.
In 1996, the idea was that it seemed like Northern Virginia was
becoming a real technology center, but nobody really knew it yet.
The number of VCs here was one¾was there anybody other than FBR?¾and
the number of lawyers who understood how to spell “IPO,” even if
you spotted them the vowels, was zero.
It seemed like there was a lot of potential and, from the UUNET
experience, we were fortunate enough to be able to fund some
companies. The total
number of deals we have done is 43, and we have sold or taken public a
number of them, although a lot of IPOs have been on hold since April. I mention that just in case you have been asleep or in an ice
cave, because it's gotten a little ugly lately. I was also with UUNET from 1993 until early 1997 as the first
VP of Sales & Marketing, and one of my first employees is here,
Sara, who now works for me.
once upon a time on the Internet
People sometimes forget how fast this whole Internet thing has
moved along. I think it's
going to catch on; what do you think?
A lot of people don't believe me when I remind them that in
April of 1994 there was a rule change making it legal to do commercial
business over the Internet. Before
that, in order to get somebody online you had to sign a paper pledging
that you would do nothing related to business over the Internet.
Think about it. There
I was trying to get a thousand bucks a month out of somebody for this
thing that they are not allowed to use for what they want to use it
for; now it's just about ubiquitous.
I spent the last two weeks with some people on a raft in the
bottom of the Grand Canyon. We
decided that we wanted to share each other's pictures, so somebody
started writing down email addresses.
I remember asking, “What are you doing that for?
There's 16 of us. Everybody's
not going to have an email address.”
What are the odds? Everybody
had an email address. In
1993, however, I would speak to large groups of technology business
people and ask, “Who has an email address with an @ in the
middle?” I’d get
10-15% positive responses, so this thing has been pretty amazing.
I have been chasing this high-tech thing since the early 1980s.
I was a programmer first, then I realized that with a haircut
and a suit you made four times as much money.
It was a revelation. I
wasted a year and a half in which I would go into a roomful of
programmers and realize I was in about the middle percentile of
intelligence of people in the room. The first time I walked into a room full of salespeople and
did that same check, I was the smartest guy there . . . even asleep.
It was an interesting and, eventually, really wise move.
In 1983, I was with a company in California that was doing
something called “TCP/IP routing” which turned out really big.
We actually canceled our first IP product because nobody was
going to use it except researchers and universities.
Who knew? Well, it
caught on. I did a series
of startups, mostly in telephony, in the 1980s.
Then, in 1991, full of youthful vim and vigor at age 32¾which was a young age to start a company, then,
believe it or not¾I
went off and started a thing called Wilder Systems.
We developed the software, went out to try to raise money and
didn't. I went through bankruptcy, and it was very ugly.
The remaining guy sold the company for a few million bucks.
That's what used to be a successful startup.
We ran up $5,000 or $10,000 bucks on credit cards, did some
tricks and stuff, got some money together, sold things for cash, paid
for things on 90-day terms and we put a company together.
When I was a boy, that's how you started it. Unfortunately,
over the last two years, the method has become: first somebody gives
you $20 million, then you hire 1,000 people, then you lease a building
and in some decade you think about becoming profitable.
I'll get into it in a little more detail tonight, but I think
the good old days are back. Anyone
who has not yet figured that out is going to have a very, very
difficult time of it. In
April, our team started making phone calls and telling people in the
portfolio companies, “You better have a plan somewhere that shows
how this thing succeeds without raising another nickel.”
We got a lot of push back, but just kept repeating it until
they said, “Yes, sir.” If you don't have a plan to end up making money without
raising another nickel, you really, really
need to think about just what it is you are doing, the livelihood of
the people working for you, the security of your marriage and all
those other pieces.
no guts, no glory . . . and no entitlements
Here is the Horatio Alger portion of my little story. When I started Wilder Systems, we sold networking software,
and I did a lot of tricks¾I
maxed out all my credit cards, stopped paying the mortgage (it came
back to bite me in the butt) and we used a clever trick that I haven't
seen anybody use in years. It’s
an interesting one, one based on the fact that you shouldn't be doing
this if you don't know your industry pretty well.
If you have been a librarian for 20 years and you now want to
do optical networking switches with forward-looking routing, that's
probably a bad idea, but, if you know your business, then you can use
that to some advantage. I had been doing international distribution software for a
few years, so I sent out offer letters to all the international
distributors I knew. I
offered them the one-year exclusive on the software we hadn't written
yet for an early cash order of different amounts based on the country
they were in. It was,
maybe, $10,000 for the U.K., Western Europe or Japan; $5,000 for some
of the smaller countries; and a grand for New Zealand, Ghana and
countries of that size. Literally,
before we started the company, we had $26,000 in actual firm orders in
the bank. That was the last money we ever raised by trickier means than
stiffing suppliers and demanding cash.
I believe that these techniques will be coming back in vogue,
so you might want to be the first entrepreneur on your block to try
it. It's easier when everybody isn't doing it.
Just a thought.
There’s something that's happened that I'm worried about. Ten years ago, networking was a bunch of folks with soldering
irons in our pockets. We
were ham radio geeks boosting the power of our Cobra cordless phones.
It was people who were really into it.
If it never became anything more than a good job, we still
would have done it. In
the last five years, a lot of those people have had their companies
hit it big, made a bunch of money and all the rest of it . . . by the
way, I'm not saying that making a bunch of money and hanging out is a
bad thing. It's been a
real blast and I highly recommend wealth at a young age.
You might want to write that down, it's one of the more
important things to take away from this evening.
But a lot of people are getting into it now just because some
guy they read about in Newsweek
made millions of dollars. They
say, “I can do that, too.” If you are doing it right, starting a
company is a really grinding proposition.
It's hard, so I thought I would turn you on to the “Four Easy
Secrets To Internet Startup Success.”
They are: one, be smart; two, work hard; three, know your stuff
really, really well; and
four, get lucky. Then
there is the part that people forget, which is: Repeat
On my . . . fifth? . . . I don't know which . . . my fifth
startup, I'll walk you through a scene.
I stiffed the mortgage because that was my clever funding
method. We were selling
things in cash, but it wasn't coming in fast enough, so when they
seized the car I kind of figured that I needed to get serious.
We tried to do a big licensing deal that would get us a single
check for $40,000. I
would get to keep the house and the marriage and all those other
things. The day that deal
definitely fell through I was pretty crushed.
I went home early because I had really built it up to my wife
that it was going to happen.
I walked into the yard and there was the sheriff. They were taping a foreclosure notice on the front door of
the house. My car had
been seized by two big thugs in black tee-shirts a couple of weeks
before. We had pretty
much come home and taken the phone off the hook because you knew that
anyone on the other end was going to yell at you.
Anyway, I walked into the house that day and my wife was
standing there with a perfect thousand-yard stare, utterly devoid of
hope. She asked me one of
those questions that a guy just never wants to hear: “Is this what
It was one of those defining moments, and I would have given my
left leg to be anywhere else but there at that moment.
I decided, cleverly, to go with the truth. I thought about it, and said, “Yes,” and kind of cringed.
She gave me a big hug and a kiss and said, “I guess this is
what I wanted, too.” Needless
to stay, I'm still married to this woman, the saint.
The good news is, that was in May of 1992. Three years later,
to the day, I made about $10 million in one day.
Yes, because this is America.
What I'm trying to say is, if you really want to do the “hey
I want to make $10 million” thing, make sure you have the guts and
the resolve to also do the “lose the house, lose the car, threaten
the marriage” thing. If
you are doing it right, that's a more likely outcome on the first try
than the other. Okay?
There really is, however, this “entitlement/birthright”
thing going on that just really creeps me out.
Twenty-two-year old kids are saying, “I went to college for
four semesters and I'm not rich yet!
Whose fault is it? I'm looking for somebody to blame.” It's weird. This
audience tonight is actually older than a lot of the entrepreneur
groups, which I'm thrilled to see.
If you haven't done anything, how are you going to be the best
at doing it unless you are really
lucky or something. Marc
Andreessen, I think, turned out to be a bad role model for a lot of
people because not every 22-year-old is Marc Andreessen.
shares don’t mean squat
Anybody want to see my picture of how to raise money and how it
all works? Is that
This process has changed, as Fran alluded.
It's a lot harder now than it was back in the spring.
It was a little crazy for a while there.
Things have quieted down, so I'm going to go through this as if
the last six months hadn't happened because I'm not sure what the heck
is happening right now.
By the way, this is the coolest toy in the world.
[Osborn is writing on a standard whiteboard
that is configured with a device that digitizes whatever he writes or
draws and projects it on a large monitor.]
You are going to love this.
You write on the board here, and it shows up there.
Is that the coolest thing you ever saw?
I want one of these. This is just way hip.
What's the best way to do this?
How many of you have raised millions of dollars from a
traditional venture capitalist? [A
smattering of hands are raised.]
How many have only gotten “family and friends” money or
your own credit card advances? [Most
of the audience members raise their hands.]
A bigger number. How many are in-between; say angel money but not big VC
money? [Again, a
smattering of hands.]
Okay, so most of you are in the category of “Oh gosh! I have
a car payment and I don't have any money.”
Let me map something out here.
[He begins creating the chart shown in Figure 1 below, starting with
the first column of numbers labeled “Startup.”]
Since you are a Washington, DC, crowd, note that the word
“capital” here ends in “t - a - l,” not “t - o
- l.” Nowhere else
in the country do they make that mistake.
It's really funny. It's
not the Washington Capitals,
as in money.
1: An Example For Calculating Valuation
for an expanded version in PDF format)
|Amount To Raise
|# Shares Allocated
|Start Price Per Share
|Founders’ Cumulative Share
OK. You start out
with some number of shares in your company.
It's worth some amount of money that you pull out of your shoe
box, for lack of a better orifice.
Over time, people will pay you larger amounts per share and
your holdings are diluted. Did I lose anybody on that?
Is it worth stepping through how that process actually works?
I find this is like talking to a 13-year-old boy about sex.
If you ask people whether they understand shares and dilution,
they nod their heads and say yes, but they get a “deer in the
headlights” look on their face.
You ask, “How big is your option pool?” and they say, “Um
. . . uh . . . Olympic.” So,
sometimes I have a hard time figuring out whether people really know
or not. I’ll go through
it, but if it becomes really boring just throw stuff at me and I'll
Generally speaking, first is the startup phase¾watch this; this
thing even catches spelling mistakes and it has an eraser. That's so cool.¾At the inception round, you have a pre-money
valuation. Can anybody
tell me the difference between pre-money and post-money? . . . Did you
not raise your hands because you are shy or because you didn't know?
Nobody is admitting it. It’s
there is a pre-money valuation at what we'll call inception or
startup. Nobody admits
it, but this is really a number you just pull out of your ear.
It really is. Does
anybody have a better way to value three guys with a good idea?
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