Archive for August, 2007

LendingClub secures $10M in Series A

LendingClub just announced that it secured a Series A round of $10M from Canaan Partners and Norwest Venture Partners. Seems like things are really accelerating and VCs are pouring more and more money in new financial startups.

 We spotted LendingClub at BarCampBank a while back and put them on our Bank & Finance Watch site. Seems like we are going to live a rapid increase in the number of startups we’ll follow on our site and witness more and more funding for a selection of these.

FriendsClear is launching

FriendsClear is a new personal finance startup founded by Jean-Christophe Capelli, Nicolas Guillaume and Anthony de Anfrasio. In the new tradition of Web 2.0 startups (think Wesabe’s “Wheaties for your Wallet” for one glorious example, but many others as well), FriendsClear starts its public life under the form of a blog. Jean-Christophe is a good friend and one of the co-founders of BarCampBank. So what makes FriendsClear unique – beyond the tons of experience accumulated in its founding team – is that FriendsClear can be considered as the first startup incubated within BarCampBank borne to life. I wish all the success it deserves to FriendsClear and hope that this single child status will soon disappear with the arrival of many other siblings.

Should I give an arm and a leg to the VCs?

Bringing VCs on board can be an emotional (and sometimes traumatic) experience. It always seems that you’re giving a lot for what seems little in return: cash. Using simple maths may prove a powerful tool to set some context before taking the dreadful decision of accepting foreigners’ money. In this case, we can rely on the notion of discount rate to shed some light to the debate.

 Let’s first take the theoritical case of a startup doing a seed round of €500k on Year 1, a first round of €2M on Year 2, a second round of €6M on Year 3, a mezzanine round of €2M on Year 4 and a brilliant exit of €30M on Year 5. If VCs use a discount rate of 50% to define the shares they want with a target exit of €30M, they’ll dilute you from 100% ownership to 91.5% after seed-round, 71% after first round, 39% after second round (ouch!) and leaving you 35.1% ownership of the company after mezzanine round (where we keeped a 50% rate for the sake of simplicity). So you’ll end up with €10.5M in Year 5.

Not bad! But wouldn’t have you been better not taking VCs’ money and maybe take 10 years to exit with 100% of the final €30M? This is where using discount rate can bring some rationale to the decision. Let’s forget all the details of the different rounds that were there just to set the stage for: am I better owning 35% of the exit value in Year 5 or owning the entire exit value in Year 10? This is where it all depends on your own discount rate. If your own way to assume the discount you apply on years between 5 and 10 is below 23.3%, then you should go all on your own and shoot for the big prize; just be prepared for a long, long trip. If it is above 23.3%, then settle for the “quick” route and pocket the %35.1 percent faster (still 5 years).

 When we compare this 23.3% with the 50% of the VCs, it could seem obvious that the decision should be: pocket the money on Year 5 and then,..become a VC. In fact, the 50% holds only for specific projects: The successful ones. VCs invest in a portfolio of projects and as the old saying goes: Out of 10 invesment, 5 go down the drain, 2 become zombies (projects with no exits), 2 give back less than what was disbursed and only 1 is a superstar offering the famous 50% or above. All in all, a fund is very happy if it can provide an Internal Rate of Return (IRR) above 12%. So you could assume that you’re finally better off keeping your investment in your own startup and make it blossom at a rate superior to 23.3%. But remember that your investment is tied to one “single” project, and that the risk is exactly what is making the transition from a discount rate to an IRR.

In fact, from an option point of view, it is always very positive to get cash out sooner than latter. What the little example illustrated was just that faster exits are actually made possible by the cash that the VCs bring in: this provides the acceleration needed to reach more rapidly the way out.

So when taking the decision, remember the paradox: Giving an arm and a leg can help me run faster.