Today I gave a presentation to Funding Universe subscribers describing the valuation of a startup across stages of development.

The theme comes from a metaphor I heard Ron Poelman use in a speech: valuations of early stage businesses come down to dividing the pie.

Founders: So, when the founders sit down to decide how many shares they each should get, the process is rarely a function of math and is more often a simple discussion of what feels equitable.  

Friends and Family:  With friends and family, the founders typically set a price arbitrarily that the friends and family accept.  This makes sense because there is typically so little basis on which to value a business this early.

Angels:  Typically, the value of a business at the angel investor stage is negotiated, focusing on creating a win-win scenario in which management remains sufficiently motivated to work while the investors are compensated for taking risk.

Venture Capital:  In the early rounds of venture capital, there remain relatively few bona fide metrics on which to base a traditional valuation analysis.  For instance, if there is little or no revenue and no profits or cash flow, most traditional metrics won't work.  The focus becomes subjectively assessing the company's prospects for growth and the future capital requirements that will dilute current owners.  While somewhat more analytical than prior rounds, early venture rounds still come down to making sure that the management retains enough equity to be highly motivated to work and for the investors to be compensated for their risk.

Let me share one story by way of example:

I’m going in for a little minor surgery tomorrow so please excuse me if I’m slow to respond to any form of communication over the next four or five days.

Wish me luck!

• There are 10.6 million women-owned businesses in the US today
• These firms employ 19.1 million people and generate nearly $2.5 trillion in sales.
• Between 1997 and 2004, the number of 50% or more women-owned firms increased at nearly twice the rate of all firms.
• Women-owned businesses spend an estimated $546 billion on salaries and benefits annually ($492 billion on salaries and $54 billion for employee benefits  health, retirement and insurance). Health benefits comprise the largest share of benefit expenditures, with 2004 spending estimated at $38 billion.
• Women emphasize relationship building as well as gathering facts; are more likely to consult with others, including experts, employees, and fellow business owners; and may take more time to make decisions.
• Women owners of businesses with revenues of $1 million or more are more likely to belong to formal business organizations, associations, or networks than other women business owners (81% vs. 61%).
• Women-owned businesses with $1 million or more in revenues are more likely than smaller businesses owned by women to have large corporations (34% vs. 12%) and the government (31% vs. 8%) as their primary clients.
• Fifteen percent of women-owned businesses with revenues of $1 million or more characterize their primary market as international. More than two-thirds of these women (69%) are involved in international contracts and almost half of them (49%) export directly.
• Women business owners are more willing than other women or men to take above average or substantial financial risks when saving or investing for their households (57% of women business owners, 14% of women in general and 26% of men in general).
• Women business owners are even more risk-tolerant when investing for their business than their households. Most women business owners (66%) are willing to take above average or substantial risks when investing for their businesses.
• Annual expenditures by women-owned enterprises for just four areas  information technology, telecommunications, human resources services, and shipping  are estimated to be $103 billion.
• Although a majority of both women and men owners of businesses with revenues of $1 million or more started their firms, women owners were more likely to have started their companies than men owners (73% vs. 60%), rather than have purchased, inherited, or acquired in some other way.
• The majority (72%) of women business owners surveyed in 2003 who were successful in obtaining expansion capital and had set specific expansion goals were found to have achieved or exceeded their goals.
• Eighty-six percent (86%) of women entrepreneurs say they use the same products and services at home as they do in their businesses.
• Women business owners are philanthropically active: 68% volunteer at least once a month; 31% contribute $5,000 or more annually to charities and 15% give $10,000 or more.
• Women-owned businesses are just as financially strong and creditworthy as the average U.S. firm, with similar performance on bill payment and similar levels of credit risk, and are just as likely to remain in business.

*From the Center for Women’s Business Research (www.centerforwomensbusinessresearch.org)

I’m willing to bet that every employee at Cisco gets a free iPhone (Apple’s iPhone that is) for the rest of their life. Although they both get to use the iPhone name, Apple is the clear winner here.

A few weeks ago, I blogged about the launch of TechStars and mentioned that David Cohen and I were trying to figure out a way to work together.  Over a few conversations, we decided to throw together a LivePitch and Networking event for EntrepreneurshipWeek USA in Boulder, Colorado.

In 2 days, we planned the event, got a few sponsors, and we are now expecting to have around 100-200 entrepreneurs in attendance.  Here’s the idea:

• We’re accepting applications from entrepreneurs in the community to be able to pitch at the event.  We’ll probably select around 10 deals to make LivePitches to a panel of investors and the live audience.

• We’ve attracted a panel of angels to attend to judge the event and provide feedback.  The angels that have committed to attend are:

• David Cohen, Tech Stars
• David Brown, Tech Stars
• Jared Wandry, Norseman Capital
• Bob Smart
• Bill Treadwell
• And others…

• To get the audience involved, every member of the audience will receive $100 in “play money” that they can “invest” into their favorite company pitch. (by the way…this idea was the brainchild of Carolynn Duncan and Phil Burns — want to make sure that I give credit where credit is due.)

• At the end of the event, we’ll announce 2 winners — an audience favorite and an angel favorite.  The CTEK Angel Group and Holmes Roberts & Owen have joined the sponsorship club to provide prizes to the 2 winners.

Most of all, we just want to provide a fun event for the entrepreneurial community.  If you’re in CO, come check it out — it’s free.

Here are some things you don’t know about me:

1. I am tired of being passed over for that promotion.

2. I am interested in OEM software from Microsoft.

3. I think getting a PhD online in 4 weeks would really spruce up my resume.

4. I like investing in penny stocks that are going to move!!!

5. I buy a lot of Viagra and C|ali$ online.

6. I am interested in singles in my area.

7. I would like to fire my boss.

8. I deserve a $777 bonus.

9. Zahlen Sie 100EUR/$ ein und spielen Sie mit 400 EUR/$!!!

10. I am looking for a mortgage loan for $437,000.

At least, according to the email I get on a regular basis this is apparently what many marketers assume about me. Here are a few more things they assume about me:

11. I am willing to enter into financial transactions based on emails from people I don’t know.

12. I do not have a problem submitting my credit card information through a website that does not have a secure certificate, has no contact information whatsoever, has no privacy policy, return policy, or anything remotely resembling legal language.

13. I am an idiot.

Have you ever read a few spam subject lines and thought “They wouldn’t keep sending this out if nobody was buying it, so who in the world is buying this stuff?” You might be surprised. Although I searched and searched for it in vain, an article I recently read told of a website selling a male-enhancement product marketed via spam that accidentally published its customer database online long enough for it to be copied and passed around the Internet. The database listed customer names, credit card information, purchase history, etc. From the database a few facts could be pieced together:

1. The website was generating hundreds of thousands of dollars in revenue per month. A multi-milliion dollar business.

2. Some of the customers were people you wouldn’t expect to buy such things in response to a spam message (PhDs, politicians, and other publicly recognizable figures).

This was despite the website having no contact information, no secure certificate, and making no promises about whether the customers’ information would be protected. And yet people who should know better were making purchases on this site. That article also detailed how the people running the website only filled about half the orders and never sent out the other half. Why should they? They made it hard for anyone to figure out how to contact them and bug them about it, and who’s going to take the matter to court? You think a state senator is going to contact his local law enforcement officials about something like this?

But this isn’t a post about spam, it’s about marketing. The point is that while you and I would like to assume our customers have a certain level of intellectual ability, the fact of the matter is that some of them may be a few clowns short of a three-ring circus. You might assume that your messaging makes sense to anyone with a brain. You might think your website is easy to navigate. You might think your corporate brochure is designed in a way that does a good job of showing off your product. You might think your brand and your marketing is giving you the best ROI possible. But you might be wrong.

Granted, those who respond to spam are the exception, not the rule. Spam doesn’t work because it is carefully crafted by professionals, it works because of its volume. About 70% of all email is spam, and about 50 people per million respond to spam. Focusing on those 50 to the detriment of the million would be foolish at best. However, frequently companies create marketing pieces that make sense to them, but which not only fly over the head of the 50 but most of the million as well.

When crafting an idea for a billboard or a direct mail piece, designing the interface for your web-based software, or developing a TV spot, you don’t necessarily want to focus on the lowest-common denominator in society as a whole, but it does pay to at least consider focusing on the lowest-common denominator in your target audience. You might be surprised how simple you have to make something in order for it to be as successful as possible.

Having an outside perspective can often help, especially if your company is run by engineers. This might mean hiring a firm, a consultant, a focus group, or talking to a spouse. Although I say this with some reservation because getting an outside opinion can also hurt. Companies have sometimes engaged firms, consultants, and focus groups and spent millions or even billions to market a new product, only to have it fail miserably, despite professional recommendations and positive data. New Coke and some products from Levi’s come to mind. But generally speaking thinking about the issue is better than ignoring it entirely.

Often there’s no way to find out what your customer wants other than throwing a product/service out there and seeing if they buy. After all, that’s the ultimate test. Having a back-up plan in case of an initial failure might be helpful, but the ability to recover from a marketing mistake, learn from it, and then regroup, is what has turned many failures into successes. This capacity will enable you to not only protect yourself from overestimating the customer, but underestimating them as well.

My wife Lindsey is learning the piano taking formal weekly lessons. She used play when she was younger, but has since forgotten some of her chops. So for the last 6-7 months, she has been practicing often after she puts the baby down to sleep. The sweet sound fills our house. Though she doesn't yet sound like Mozart, Liszt, or Beethoven, the aural harmony of progress, practice, effort, hard work, and dedication is music to my ears.

It's very motivating for me to hear this change in action. My line of work is either visual, experiential, or cognitive so my ears don't get to participate in gauging my development (if any). So outside of practicing musical instruments, I can't think of many skills where you can hear actual progress aloud. Keep up the good work, Lindz!

Listen up Mac freaks! Scott Bourne has moved the iLifeZone off the TWiT Network to Podango. Unless you’ve been under a rock for the last year you know that The iLifeZone is the largest Apple/Mac podcast on the WWW.

Check it out!

Podango is kicking butt lately! Shieldzone just jumped on as a sponsor and Overstock.com will be sponsoring us starting March 1. We also just added David Lawrence and TheLatest.AT Channel.

More big announcements to come.

Westminster College is currently engaged in a very cool top secret project. They are looking for a college professor to help create a unique curriculum for this project. Here’s more:

“The Bill and Vieve Gore School of Business invites applications for an Assistant/Associate Professor faculty position to play a lead role in the development and delivery of a new competency-based adult degree completion program in business. A strong interest in innovative learning methodologies, skill in the uses of information technology in learning and assessment, and a commitment to adult learning is required; a Ph.D. in a business field and successful college teaching experience is also required. A slight preference is given for applicants with fields or experience in one or more of the following areas: strategy, corporate finance, quantitative analysis, and/or operations.”

I’ve been told that the Ph.D is more preferred than required. So if you have an MBA, have done some teaching and have a good operational background this position may be right for you. I can tell you that the project you would be working is very cool and it’s one heck of resume builder.

Contact Sarah West at swest “at” westminstercollege dotedu for more information.

For many years it has been the understanding of most that a person or company which has taken a license under a patent cannot sue to seek invalidity of the patent as long as they are in compliance with the terms of the license. This has created a dilemma for many companies that have a license under a patent which they believe to be invalid. Do I keep paying the royalties on a patent which cannot be successfully enforced against my competitors? Do I stop paying royalties and can challenge the patent, only to get sued by the patent owner for willful infringement and an injunction?

The Supreme Court recently resolved the dilemma in a manner that will cheer many licensees and give heartburn to patent owners. In Medimmune v. Genentech, the Supreme Court ruled 8-1 that a licensee does have standing to sue to seek a declaratory judgment that the patent is invalid or not infringed without breaching the license agreement. The Court found that the threat that the patent owner would seek to enforce the patent if the licensee failed to pay licensing fees under the patent was sufficient to establish a case or controversy as required by Article III of the Constitution. For many years the courts have found that a person can challenge the validity of a law without first breaking it. The Supreme Court found that an entity should likewise be able to challenge the validity of a patent without first having to breach the license agreement and expose itself to damages and an injunction.

The Supreme Court’s decision has already spawned a host of commentary about how to prevent one’s licensees from challenging a patent while simultaneously enjoying the benefits of the license. It has also caused considerable discussion of whether this signifies a growing hostility of the Supreme Court to patents, or simply the logical extension of prior Supreme Court precedent. Either way, it is important for both patent owners and licensors to more carefully consider patent license agreements.