Week 3!

My takeaways from the simulation

The simulation was a unique opportunity to blend theory and practice. The activity was absolutely worth the time and preparation, since it allowed us to apply some of the concepts from Entrepreneurial Finance, but also from negotiations, entrepreneurship, management, and leadership courses to real-life situations.

I’ll start with the sour spots, because they are few and improvable in years to come. For future editions of the simulation, it would be helpful to have a few more minutes to debrief. At the same time, the system for uploading deals was a bit confusing. 

On the positive side, the organization and logistics were excellent. The guidance that was provided to students before the simulation was key to the exercise’s success. There is always a sense in this class that someone is looking after the students. 

I was assigned the role of founder of secondopinion.com, a company that provides medical advise and health counseling through an online platform. My task was to scale an ongoing pilot program. One of the things that was really interesting is that the students could seat wherever they wanted in the room —as opposed to having pre-arranged seating by roles—. As a result, when the simulation started, looking for funders and employers was particularly challenging *just like in real life). Another interesting feature of the simulation was that investors had specific preferences and interests to allocate their money, and employees had different priorities and needs. This added complexity to the process of building teams and finding the right source of financial support for your venture. 

During the simulation, I was talking with more than one VC simultaneously. I soon realized that they wanted exclusivity and to “feel special”, so at different points they left the negotiations abruptly. Once I learned they had specific interest to allocate their money I let all the VCs leave the table and re-focused on strengthening the team. I hired an IT Director and a Marketing director that would help us raise money. Eventually the VC came back, with less expectations, seeing a stronger team and willing to join. 

As I looked for funding and building a professional team, I realized that the trade-off between retaining control and scaling up was real. I was lucky to find a Marketing Director that would work for free, but when the time came to look for funding, the venture capitalists were anchoring high in terms of requested equity. There was a moment in which I thought I would have to give away more than a third of the company. I eventually raised the upper-bound goal assigned to the role, but I had to build a board of directors and gave away 27 percent of the venture. 

A very helpful thing was to hire employees early on and communicating the vision of the venture to them, so they could join me in the task of raising money. While I closed a deal they were looking for the missing funding, so the team worked in a highly coordinated manner. 

One of the things I would add to the exercise to make it more realistic is a limit on the amount of equity founders can give away. Not having a limit allowed founders to give away a large part of the company for money, even a higher share of what would perhaps be reasonable for a startup. 

If I did the simulation again, I don’t think I could add much more value. Things turned out really well for secondopinion.com, in terms of the team that we built and the amount of money that we raised. Perhaps, on a second round, I would be able to handle things in a less chaotic way, and add more planning to the negotiations, following some of the suggestions by Feld and Mendelson.

Scaling my venture

The process of looking for money has already started for i4 Group. We currently have three main sources of funding. With my partner, we requested a loan of 200,000 pesos (the equivalent of USD 15,000). The loan we requested has already been approved by the lending bank, and will be disbursed in two stages over the next 6 months. The repayment period is 10 years with an annual interest rate of 5%. 

Another source of funding are 2 VCs in Argentina, that will provide us with the money to have our campaign management platform designed and hosted in a server. They know the project, know the team, and are willing to invest. Although one of them is not well versed on the activities of a consulting firm such as ours, his successful career in the private sector could potentially put us in the path of getting to know several new clients in a brief period of time, including from Latin America and the Caribebean. Discussions about equity still haven’t taken place, but we expect to raise approximately 200,000 additional pesos, 100,000 from each VC. 

Because we want to know exactly what to expect when entering negotiations with the VCs, my partner and me have scheduled separate meetings from the regular weekly Skype meetings we have been holding since January 2015. Given the lack of time we face (Presidential elections, as well as most subnational elections will take place October 31st), we have prepared a plan to be able to handle to combine the potential advise of the investors with our pre-existing scheme to use the money. This involves explaining and providing information to the VCs. 

The plan to allocate the money to the development of products is key, as the two VC will most likely want to have a saying on the purpose of the money. The money we received should be earmarked for specific processes and goals, regardless of unexpected needs that may come up. In the words of Feld and Mendelson, “the single biggest mistake people make during negotiation is a lack of preparation. It's incredible to us that people will walk blindly into a negotiation when so much is on the line. And this isn't just about venture deals, as we've seen this behavior in all types of negotiations” (p.130).

Human capital

Several times throughout the startup creation process, my partner and I have discussed the retention strategy for the two programmers and two IT coordinators that have joined i4 Group . They joined us trusting that the company would grow and would be able to integrate everyone. Handling this issue from the United States is challenging though. 

Broadly speaking, there were three alternatives: salaries, equity, and a combination of salary and equity. So far, we have issued payments to the two programmers but only for the completion of the projects (as opposed to monthly and regular payments). 

With the money we raise, we expect to consolidate the team and face the upcoming elections. We plan to have a small working place or office. The following milestones will be followed this year:

I am currently writing the responsibilities of each one of the team members, including my partner’s and my own. Up to date, we have been working and advancing at a fast speed, under a chaotic approach to assigning responsibilities. My prediction is that this style of work won’t allow us to scale and face the upcoming elections in a organized and coordinated way. For such purpose, I also intend to write the compensation scheme and tasks for a part-time selling force that could potentially join us.