PartyPoker Enters US Subscription Online Gaming Market Party On Or Party Over?

Recently World Poker Tour (WPT) was purchased by PartyGaming. The press associated with this purchase has focused on the sale as a brand purchase by PartyGaming for the purpose of growing Party's business in Europe. Very little press has focused on the fate of ClubWPT.com WPT's US subscription based online poker property. This part of the purchase may have more significant impact on the PartyGaming bottom line and the online gaming industry then WPT brand leveraging in Europe.

ClubWPT operates a US subscription online gaming site. They are allowed to do this legally under US state sweepstakes law. ClubWPT.com is one of a number of US online poker sites operating in this manner. Clubpogo.com, Pureplay.com, and Spadeclub.com are just a few of the other operates running legal US online gaming businesses using the alternative method of entry legal model sweepstakes model.

Although these sites are popular their subscriber base is small relative to the true size of the US online poker market. It is estimated that 10 million US players are still playing online poker either as free players or pay to play players. In point of fact, the real numbers are much higher because the UIGEA legislation enacted in 06 has discouraged US players from engaging in online poker. The numbers could easily be closer to 20 million.

PartyPoker.com, PartyGaming's online poker property has the email addresses for the majority of these players acquired prior to the implementation of the UIGEA and have continued to accumulated e-mail addresses post UIGEA through their free play site. So, what will happen if they decide to drive all of their US players to ClubWPT.com?

PARTY ON SCENARIO - If they decide to leverage ClubWPT.com, PartyPoker.com will become the largest and most profitable US based subscription site dwarfing any other subscription poker site in the US.

From a strategic perspective this could also set the stage for their dominance of the US online poker market if the US government does decide to consider poker as a game of skill and not chance. They will have already re-captured the majority of the US poker players in their subscription model business and will have re-established their brand in the US prior to the legislative change. I slight flick of a bit or byte will allow these players to upgrade to real gambling when the legislation changes.

PARTY OVER SCENARIO - PartyGaming draws attention wherever it does business. If it does decide to enter the US subscription online poker business under the ClubWPT brand it will raise the eyebrows of the Department of Justice and state attorney generals. These lawmakers could decide to tighten the definition of sweepstakes law that would result in online poker being excluded under sweepstakes law. This would spell doom for the existing US online subscription poker operators and would force Party to wait for a redefinition of poker as a skill game to enter the US market.

If Party successfully launches a subscription based online poker site in the US, and is unchallenged by US law makers, then the existing US based online subscription poker businesses would be buried by Party. It will be very hard for the other players to compete given Party's war chest. Party will out spend the other contenders and own the market.

Party's move into the US under the sweepstakes model could also jeopardize the UIGEA being overturned. If the US legal authorities are seriously considering redefining poker as a legal gaming model any attempt by Party to enter the US market prior to this decision could result in the authorities backing off.

PARTY ON OR PARTY OVER -Party is certainly contemplating these scenarios, counseling with attorneys and no doubt probing the US state and federal authorities to sort out what they will do. Their decision to entire the US subscription online gaming market may depend on the likelihood of the UIGEA being overturned and if it is to be overturned when it will happen. Either way all of the potential competitors have a stake in the Party decision and should also be considering what they will do based on the PartyGaming/PartyPoker move.

Zynga Under Investigation By Department Of Justice

Recently, I was discussing the online gambling business with a former online gaming colleague of mine and he brought to my attention that Zynga was under investigation by federal and state authorities suspecting that Zynga's Facebook poker room was engaged in online gambling. I thought this was a bit serendipitous considering the fact that I had recently published a blog, Virtual Currency And Gambling, about the danger of virtual goods purchases and sale being considered gambling. I specifically mentioned Zynga being at risk during a series of exchanges I had with individuals responding to my blog.

The Tech Crunch summary is exactly as I described the risk in my blog. The circular nature of virtual goods purchases, a game of chance and winning virtual goods could be considered gambling.

I have been writing a number of blogs about the online game virtual currency trade and how the Chinese governments gets the connection between this trade and gambling. Virtual currency trade is big business in China and it is obviously now becoming big business in the US.

What has surprised me is the lack of understanding of the relationship of virtual currency to gambling outside of China. A number of my blog viewers adamantly disagreed with me arguing that virtual goods purchases were not subject to gambling law. Clearly this is not the case.

To further complicate matters Zynga has been engaged in selling leads to European online gambling operators. This started well before Zynga began dabbling in virtual currency purchases. Much of their revenue growth prior to virtual currency purchases had been attributed to this exchange. This practice has been discouraged by the DOJ and state attorneys for years. Zynga may not be in violation of any US law if the leads sold to gambling operators do not result in US citizens gambling from the US. However, Zynga's affiliation with online gambling operators does not bode well for them. The authorities may come down hard on the company to set an example for other online game companies.

Re-Startup Formula For Success

A re-startup is a company that evolves from an unsuccessful startup. Many startup companies never achieve their initial objective to grow and become successful. The conventional wisdom is that these companies are failures. This assumption is not entirely true. Many startups fail and have the potential to succeed in a new form. In many ways a "re-startup" can have advantages over pure startups making them more likely to succeed then the original startup.

There is plenty of documentation and literature on how to start, fund and manage a startup. However, there is very little advice on how best to manage a re-startup. There are similar challenges to running a startup and a re-startup. However, there are distinct challenges associated with a re-startup that require special management techniques to position them properly and put them on the road to success.

Re-Startup Building Blocks Self Assessment

There is a yin and yang to a re-startup. Certain aspects of a startup's history can work for or against a re-startup. Re-startups are best characterized as a natural evolution of a startup sharing common components that need to change over time. An assessment of these components should be conducted during the formation of the re-startup and a determination of how and if these components should be changed to properly position the new entity for a restart.

Staffing - If the staff has not been mistreated they most likely will continue to be associated with the company and the management team. This is a great asset especially if the company is highly dependent on scares human resources. In particular, technology based companies spend a lot of time and money acquiring technical resources. If a re-startup can retain these resources it helps to control cost and allows the re-startup to get to market quicker.

On the negative side the staff may be disgruntled and morale low. This is something that is difficult to change and may require a churn of most of the human resources in the company and rehiring to build the new company.

The staff should be fully evaluated to determine who is going to stay and who is going to go. Special attention should be given to key players that will form the nucleus of the new entity. These are people with special knowledge or skills that will be needed to get the re-startup off the ground. These are usually people that lead by example. The difficult part of the restaffing effort is removing people that have the talent and skills you need but do not have an enthusiastic attitude about the team or the new company. These people will have to be let go even if they represent a critical component to the business. The new business can not tolerate a naysayer spreading ill will in the company.

Morale - This is a big one impacting everyone in the company. If a startup has failed it leaves a residue of bad feelings, self assessment and doubt about the management team and their ability to lead the company to success. However, if the startup had recognized some success the management team and the employees may have confidence that the team can be successful with a new business plan.

The real challenge is to get the energy level back into the company. This may require the removal of some or all of the management team and an infusion of new blood and new ideas into the company. Bringing new personnel and ideas into a company can be reinvigorating especially if the old startup was not cutting it. The key is to establish a core group of people that believe in the new entity and the new personnel.

Learning From Mistakes - The initial startup failed for some reason. It could have been the business plan, the technology platform, a change in the market, the loss of funding. etc. The key is for the new decision makers is to acknowledge the deficiencies in the old model and learn from them. This alone will have a great impact on the morale of the company. This process should also make for a new and stronger company more likely to succeed.

Funding Sources - The original entrepreneurs spent time and energy making contacts in the financial world to raise working capital or to establish business relationships. These contacts will come in handy when the time comes to raise funds for the re-startup. The downside is that bridges most likely have been burned and the original funding sources are no longer an option. Also, a failed startup usually does not bode well for the managers involved in the original fund raising effort.

This is a difficult circumstance to navigate. However, savvy investors may look at a team that has failed with a startup as a learning experience for the team. Ironically, people learn more from failures then successes and really wise investor will know this. If the management team can convince an investor that they truly have learned from the prior startup and have a convincing argument for the re-startup they may very well get funded by the original investors. New investors will also be interested if the entity has an established platform, customer base and or product. Emphasis the positive aspects of the original startup's achievements and how the new team has learned from the past and is repositioning the company for success.

The Bottom-line - Many newly minted entrepreneurs and startup companies have a hard time managing to the bottom-line. They are usually run on enthusiasm and the perceived need for rapid development and time to market. This can be a formula for poor financial management that leads to overspending or a lack of appreciation for cash flow management. In many cases the original startup failed because of this problem and not because the business was not viable.

If this is the case the re-startup needs to put controls in place that obviate this problem and demonstrate to potential investors and customers that the business can be viable if the bottomline is managed properly.

Time Is Your Friend - Just because a business failed does not mean the same business will not succeed at a different time. Many new companies are ahead of the adoption curve yet spend as if they are at the cusp. A good management team will do a self evaluation of the failure. They might find that the time is now right for the model and should proceed with that hypothesis. The original team and model may require little change to relaunch the business and become successful.

Your Customers Are Your Allies - Even if a business has failed there will be customers out there that believed in the company, product or service. These same customers could become customers of the new business. Use these contacts to get endorsements for investors, to seed the new business and to potential be sources of capital as first customers or actual investors.

In conclusion, re-startups are common and in many cases will be successful because of lessons learned from the original startup. They present unique challenges that do need to be addressed. The best way to make them successful is to conduct an honest business and self evaluation to determine what worked and what did not. Launch with a new and improved leveraging the past. you might be surprised at how successful they can be.

The One Skill An Entreprenuer Has To Have

I have had the opportunity to work with many entrepreneurs and startup businesses and there is a consistent theme associated with the ones that have been successful. Startup companies face a myriad of challenges and attract extremely talented, motivated and intelligent people. These individuals have preconceptions about what is really going to make the business successful and they do have great skills that will help a business succeed. However, there is a skill and talent that stands above all that is absolutely essential for the success of the business.

The ability to raise investment capital and to do it over and over again is the magic bullet skill all successful entrepreneurs have. You may argue that the business has to have great potential, that the product needs to be innovative, the market for the product or service large and growing, the business owners need to be hardworking and bright, you have to have a great marketeer, etc. Sure these are great to haves. However, many companies led by accomplished entrepreneurs with great products or services have failed because the company was missing the key ingredient.


So what are the qualities, skills etc. that make for a good fund raiser?

Pitching/Selling: Raising money is all about how you present the business, yourself and the team. Pitching an early stage company is different from pitching an existing product or service because the product or service either does not exist or is in some form of development. For this reason potential investors will be focused on the entrepreneur trying to determine if that individual is capable of creating and operating a business.

In the initial few minutes of the elevator pitch the investors will concentrate on the presenter. Who are you? What is your background? What successes have you had? How are you qualified to run this business and manage the initial investment. The presenter should lead by answering these questions before he or she gets into the details of the business. Establish creditability early in the exchange.

Dealing With Objections and Rejection: Investors are more likely to object or challenge the fund raiser then to agree with their suppositions. This should not be taken as a negative. It is a way for the investors to dig deeper into the business. Respond in a positive way and answer the challenges with facts and figures. If you do not have an answer be honest and indicate you can not answer the question now and will get back to the investor. Never take a challenge personally. Rejection is always a big part of the process. A good fund raiser will always learn from each rejection or challenge and build responses to them in future presentations. Politely, acknowledge the challenge at the time of the challenge and commend the potential investor for pointing out any potential deficiency in the business.


Determination: A fund raiser has to be tenacious because the fund raising effort will require endless hours and repeated calls, pitches, etc. The investment community will be looking to see how the fund raiser handles the long and difficult funding process, requests for additional information, etc. Fund raising is a sprinting marathon requiring the fund raiser to be prepared for long and challenging effort.

Success History: The fund raiser has to have a history of success in some capacity. It could be academic accomplishment, business success, startup experience, etc. The fund raiser also has to emphasis accomplishments in a way that is not perceived as self aggrandizement. The accomplishments should be noted in the interest of explaining their relevance to the business. The success background expose should be interspersed with other information about the business indicating that the information is important but not the sole reason to invest in the company.

Investor Networking: The concept of networking yourself to success is a bit of a cliche in this day and age. Networking for the purpose of fund raising is different then hanging out in social networks and letting people know you are out there. Fund raising networking requires some serious face to face time with potential investment sources. In a perfect world this form of networking should begin well before a entrepreneur decides to raise funds. This method will result in a more fundamental bond between the fund raiser and the funding source. When the time comes for actual money raising the request for funding will be coming from a person that the investor already knows and has some confidence in his or her ability to deliver on expectations.

Multiple Fund Raising Source: The law of averages requires a fund raiser to have a multiplicity of funding sources. Before heading out on the official funding road you should have a portfolio of between 10 and 20 pre-qualified investors ready to pitch to. You may find that that you have to pitch and work with an even larger amount of investors before you successfully land a round.

Research: Dig into the backgrounds and portfolios of the potential investors. What are they investing in? What was their most recent investment? Talk to an entrepreneur that has worked with the investor before? What are the most likely question the investor will ask?

Flexibility: You certainly have to be agile when it comes to raising funds. Do not get hung-up on the amount and structure of a deal. You should have an amount your are looking for and a specific purpose for the funds. However, be prepared to take a greater or lesser amount of capital. During the process you will have to be willing to change your business model, change your schedule at a moments notice and be anywhere the funding source wants you to be.

Personal Investment: It is very unlikely that anyone will invest in your business unless you have invested your own money first. Certainly time invested in the business counts for something but good old hard cash ranks much higher.

Commitment: Raising funds is a full time job. . Do not kid yourself into believing that you can effectively tend to other business needs during this period. Everything else will be secondary during the process until the deal is closed.

You Are Always Fund Raising: One common thread amongst all good fund raisers is that they are always raising funds even when the business does not need the funds. During every business meeting, customer visit, conference, family and friends gathering think about how this might be an opportunity in the fund raising process.

Trustworthiness: This is where salesmanship differs from raising money. You can be a really good sales person even if your character is somewhat in question. This is not the case for a fund raiser. You have to legitimately be above board and have a trustworthy reputation. This means you actually have to believe that you can deliver on what you are promising and you make it perfectly clear to the potential investors what the risks are. Most investors will understand that there is risk to any investment. What they do not want to deal with is risk generated by a questionable business partnership.

Sources Of Capital: Many entrepreneurs waste their time seeking investment in the wrong places. This is a difficult one to sort out if you have never been on the funding road. The right funding sources are dependent on many factors; what is the business, what is the state of the business, what is the state of the economy, geography and how much you need all dictate what sources are best for the operation.

Timing: Like many things in life timing has a big impact on the success of a venture. Raising money to fund a company is no different. The current economic environment is a classic example of a time that is sub-optimal for raising funds. Even the most accomplishment fund raisers have been challenged by the events that have occurred over the past year. Sometimes it is better to hold back and get on the funding road at a different time. A good indicator of the right time is increased deal flow represented by a growth in investor's portfolios, IPO activity, M&A activity and public attention being focused on a specific economic sector that is associated with your business. Windows of opportunity open and close quickly so continuous research is required to hit it just right.

In conclusion, closing a round of funding is a skill and talent. When you are fortunate to have an investor interested in your business it is important to close as soon as possible even of you have to modify the deal terms.

Good Luck!!

Virtual Currency Blog "Censored" By Chinese Government

A colleague of mine residing in China recently informed me that he could not access the Kevin's Corner blog. Further investigation revealed that no one in China could access it and the blog had been censored. Apparently, my last blog item suggesting that there could be a link between the purchase and sale of virtual currency and gambling raised some eyebrows in China.

It is no secret that I have posted a number of items on Kevin's Corner relating to the phenomenal growth of the use of virtual currency, the purchase of virtual goods, the sale of virtual goods and the trading of these items in China. A host of Chinese companies have gone public on the back of revenue generated from virtual currency and goods sale. The purchase, sale and auctioning of virtual currency and virtual goods is big business in China despite the efforts of PayPal to stop the trade on their property.

The recent Chinese government legislation banning the B to B trade of virtual currency certainly got my attention which in turn lead to a couple of blog items and a lively debate amongst my blog readers about the true purpose of the legislation. The debate still leaves me a bit uncertain on the legislation's true purpose. Was it designed to stop virtual currency trade from undermining the yuan as the base commercial and trading currency in China or was it designed to stop gambling related to gaming virtual currency's ability to be traded for yuan?

Either way open discussions about virtual currency trade in China are obviously not welcome by the Chinese government. In a centrally controlled economy the government wants to set currency valuation and to control commerce in a way that can be tracked by the government. Somehow virtual currency trade is threatening their control.

Clearly, virtual currency has proven to be a bit of a challenge for China. On one hand their stock market is filled with companies making million on game play, virtual currency trading and virtual goods purchase and sale. I image it is hard for them to sort out how to keep their new age economy growing and at the same time control the very engine that is driving the growth. I am flattered that someone or some bot decided to block my blog. However, I doubt that blocking my blog is going to stop the proliferation of virtual currency trading in China or the desire for Chinese residents to use virtual currency as a proxy for real gambling.

Virtual Currency And Gambling

Several of my blogs have addressed the emergence of virtual currency as rival currencies to traditional denominations such as the dollar, yen, euro, etc. The recent reaction by the Chinese government to restrict the inter trade of gaming virtual currency because of its ability to usurp the value of their currency created a stir in the online payment and gaming arena.

I received several responses to my comments on the Chinese government move implying the Chinese government was attempting to stop the proliferation of "gambling" by restricting virtual currency trade. Further investigation of the government's announcement did not reveal any relationship between online gambling and the legislation.

However, the debate made me think more deeply about the way online gaming companies are using virtual currency in their businesses.

Casual gaming, MMOGRPG and online video gaming businesses have evolved from granting virtual currency for game play to allowing players to purchase virtual currency. Virtual currency purchases are used to gain access to different levels of games and to purchase virtual items.

So how does this evolution of virtual currency exchange relate to gambling? There are many definitions of gambling and each jurisdiction has its own notion of gambling. However, a good rule of thumb used by the US government defines gambling as a combination of consideration, chance and prize.

If a gaming activity requires consideration/payment to engage in the gaming activity and there is an element of chance associated with a particular outcome and the outcome has monetary value then the activity is considered gambling.

So let's dissect this in the context of the recent evolution of gaming virtual currency. If I can purchase virtual currency using traditional currency (consideration) to play a game of chance that can lead to a prize of more virtual currency then is this not gambling???

To make thing even more interesting if the prize won is a virtual item which in turn can be sold for traditional currency inside the game or outside the game on e-Bay does this make it even more obvious that we have now entered the realm of true online gambling. If the virtual currency won can be traded outside the game universe for other currencies or traditional currencies is this not considered a prize in the traditional sense?

Subscription models such as World of War Craft also fall into this category. The subscription fee is paid in a traditional currency. The fee provides access to a game where play leads to the granting of prizes in the form of virtual goods which in turn can be sold on e-Bay for real cash.

My point here is that it appears the casual online gaming companies are implicitly or explicitly crossing over into the traditional world of gambling. This is creating an interesting challenge for gaming companies, regulators and consumers.

I suspect we will hear a lot more about this in the near future. Many of the online game companies are now generating "significant" revenue form the sale of virtual currency. In many cases this is becoming their primary source of revenue. When one of these companies attempts to go public or is engaged in a purchase by a public company will this bring this issue to the forefront and be challenged???

Optimizing The Entrepreneur/Broker Fund Raising Relationship

Entrepreneurs engaged in a fund raising effort have a number of options at their disposal when seeking funding. Entrepreneurs are usually familiar with friends and family, angel investors and venture capitalists as sources of funding. Another way to obtain funding is to engage a broker. Broker/entrepreneur relationships are commonly used to bridge the gap between investors and entrepreneurs. Broker relationships come in many forms creating a need to fully understand the relationship to maximize the potential for fund raising and to decrease the possibility of misunderstanding between the entrepreneur and the broker.

The following are important pieces of information that should be known before a broker is contracted.

1. The broker's operational mode.
2. The range of services provided by the broker.
3. The compensation model of the broker.
4. The tasks expected of the entrepreneur in the broker/entrepreneur relationship.
5. The term of the contract.
6. How the entrepreneur funds will be used (if funds are being transferred).
7. References for the broker.
8. Funding sources to be contacted by the broker.

What Does A Broker Do? Brokers can provide a number of services including document preparation, consultation, deal negotiations and raising capital. The range of services provided by the broker influences the compensation that the broker receives. It also influences what is expected of the entrepreneur during the funding process. A funding broker acts in a similar manner to a mortgage broker. The funding broker usually (not always) is not the funding source. They make a connection between the entrepreneur and the funding source. There are exceptions to this rule. Brokers may decide to invest their own funds in a venture. However, this usually occurs after the broker has negotiated a relationship with the funding source. It is rare for a broker to take a primary or first mover position in a funding effort.

When Should An Entrepreneur Use A Broker? - There are a number of reasons why a business owner may use a broker.

1. Identify Funding Sources - Newly minted entrepreneurs frequently do not have contacts in the investment community. It certainly is possible to contact funding sources directly and is advisable even if you do use a broker. However, a broker will usually have long standing relationships with investors. Using a broker can give you a quick introduction to a range of investors that you would normally not encounter as a free lance entrepreneur.
2. Document Preparation - Investors frequently want to see a number of documents explaining the business in a way that allows them to evaluate the business from their vantage point. These documents can range from a reasonably brief overview summary (PowerPoint elevator pitch) to a complex business plan providing multiyear sales projections and operating budgets. If an entrepreneur is uncomfortable preparing these documents they may call upon the broker to create these documents.
3. Negotiations and Deal Closing - Raising capital is not much different from negotiating any large commitment financial transaction. Something is being exchanged for a significant amount of money. If you are unfamiliar with negotiating investment deals a broker can be a handy resource to help sort out what is best for both parties.

Sources of Capital - Brokers tap angel investors, private investors, VC's and institutional investors as sources of funding for their entrepreneur clients. Each broker will have their own collection of investors. The investors they work with will be influences by the "stage" of the company they are seeking investment for. For instance, if a company is a startup with no real revenue and still in the idea or development phase the broker is most likely to seek funding from individual or angel investors. If a company already has a customer base and a revenue history the broker may seek funding from traditional venture capitalists.

From the entrepreneur's perspective it is important to understand what funding sources are going to be tapped and why. The funding sources will have an influence on how long it will take to close a round and the viability of the funding source. The funding sources will also influence the likelihood of the business getting funding. For instance, if a broker is contacting traditional venture capital sources for a very early stage company then it is unlikely that the funding effort will be successful. The broker may not be willing to reveal the details of the funding source out of concern of revealing the funding source to another broker. However, they should be able to tell you that they are seeking funding from an individual, angel, VC or institutional investors.

Can An Entrepreneur Go Directly To Investors During The Broker Relationship? Unless the broker relationship specifically states otherwise yes you can. It is advised that you do not engage in a broker relationship that prohibits this activity. Brokers have a stable of investors that they contact. The stable has a finite amount of investors in it. An entrepreneur needs to cast a wide net out into the investor pool do not limit you investor options to just one section of the pool.
If you do decide to seek funding outside of the broker relationship inform the broker of what you are doing and who you are contacting to make sure there is not overlap of effort. An independent effort to raise funding will also have an ancillary benefit of increasing the fund raising experience level for the entrepreneur. It will also give them an appreciation for what the broker is doing for them.

How Are Brokers Compensated? - Brokers can be compensated in a number of different ways. They may receive cash, stock, stock options or a combination of stock and cash for their services. When negotiating a contract with a broker make sure you understand the compensation structure, when payment is required and specifically what the broker is being compensated for. If the broker is performing a number of functions including preparation of the executive pitch, creation of a business plan, formulation or financial projections, introduction to investors, closing funding, etc. make sure you associate compensation with each of these tasks. This makes it easier to establish the relationship of accountability and compensation.

What Is The Entrepreneur Responsible For? In many ways the entrepreneur is responsible for making the broker successful in closing funding for the entrepreneur. The fact that an entrepreneur is using a broker to raise funds does not exonerate the entrepreneur from assisting in the fund raising process. The entrepreneur has to make their business viable and marketable.

1. Business Plan - Even if the broker is creating the documentation for the business plan the business owner has to create the content for the plan. This plan may be massaged and reformatted for an investor by the broker. The broker may provide input to the plan. However, the business owner needs to understand the business plan and drive the business plan development process.
2. Team - A team should be assembled that demonstrates that the company cam execute on the plan when funds are raised.
3. Executive Summary - Perhaps the most important document in the fund raising process is the executive summary or elevator pitch. It is the first impression that a potential investor will get of a company. The details for this pitch will be provided by the business owner. The broker my change the format and ask for additional information.
   
4. Pitching The Company - The broker will introduce the business owner to investors and describe the business to investors. However, the investors will want to meet the business owner and the team and they will want the business owner to pitch the company. The business owner will sell the investors on the company the broker's responsibility is to establish the contact.
5. Self Assessment - The entrepreneur should conduct a self assessment as to their preparedness for the funding road. Many entrepreneurs under estimate the commitment associated with starting a business and raising funding. The funding road can long, frustrating and expensive. Only a very small percentage of companies seeking funding receive it. In many cases the initial funding is lower then expected. Ideas are seldom funded. A demonstration of the viability of the business is required before an investor will engage. The entrepreneur will most likely have to fund the first stage of funding. Make sure you are ready for the show before you jump into the pool!!

Managing The Broker Relationship - Managing the relationship with a broker is key to the success of the funding effort. In many ways managing the broker relationship is no different than managing direct funding sources. However, there are some important difference.

1. Legal Advice -It is suggested that an entrepreneur engage legal counsel to review a broker contract. Carve out what each party is responsible for and when control actually passes over to the investor.
2. References - The broker should be willing to provide the client with references. This should include entrepreneurs that have used the broker service and possibly a funding source that has worked with the broker.
3. Time Lines - Establish a start and finish time for the relationship. The funding road can be long with no guarantees that the broker can claose funding. Give the broker a period of time to close. If it does not work out move on to another source or extend the contract with a new set of objectives.
4. Exclusivity - Is is advised that a relationship with a broker be non-exclusive. An entrepreneur should be continuously looking for funding from a number of different sources.
5. Clarity of Tasks - the broker my perform many tasks for the entrepreneur. Make sure you are both clear what these tasks are and what the entrepreneur and broker are responsible for.
6. Compensation - Put a price tag on each task the broker is going to perform and what constitutes a completed task and acknowledged payment.
7. Ending The Relationship - There should be a term to the contract and a clarification of what rights the entrepreneur has to the materials created and relationships established during the funding process after the contract is terminated.
   

In conclusion, the broker relationship can be a useful option for an entrepreneur during the fund raising process. Broker relationships come in many forms requiring a clear understanding of the responsibilities and compensation associated with broker executed tasks. Clarity of responsibility and compensation reduces the likelihood of misunderstandings.

The entrepreneur is in control of their destiny and is the party responsible for getting the business funded. A broker is a "facilitator" and will only be as successful as the entrepreneur and business warrants.

Gameinlane Virtual Currency Exchange

For all of the followers of my blog you know I have been interested in the rapid evolution of virtual currency. This weeks announcement that the Chinese government will begin the full regulation of virtual monetary exchange underscores the importance of virtual currency for the world economy. They have instituted this move because virtual currency trade is disrupting the trade and value of traditional currencies. This further confirms my prediction that the intersection of virtual currency and traditional currency is on the horizon. In fact, it is already here. I am of the opinion that this is the single most important development we may see in our life times. It will create all kinds of opportunities and challenges. It will rock Wall Street and redefine Main Street. The line between virtual goods and physical goods went from blurred to non existent.

So how do you get on board and not buried in the onslaught of virtual goods merchants and virtual currency issuers. You leverage virtual currency to get big fast!!!

We have marveled at Blizzards early success and Zynga's recent success in this space. Their big problem is that they act as insulated silos not encouraging the open exchange of their currency. Guess what! This is a big mistake and a great opportunity for other virtual currency issuers to create larger and more sophisticated trading environments. How about inter trade of virtual currency between issuers? Yes, this is the next step and a way to grow a much larger community of virtual currency users and virtual currency.

At the risk of self promotion I have started a business, www.gaminlane.com to do just that. I have begun to engage game companies and virtual currency issuers to join the virtual currency marketplace.

If you are issuing currency now leverage it by allowing it to be exchanged with other currency issuers. Start establishing a real value for your currency by allowing people to use it outside of your environment!!

Let's create the next big wave in virtual currency. For more information on how to sign-up please contact me at kflood@gaminlane.com.

Is my prediction of a Universal Virtual Currency on the Horizon??

What Is Your Start Up Worth?

Establishing a valuation for an early stage company is challenging. There is little financial history to predict future earnings and the real character of the company is still forming making it difficult to find comparable references with similar financial history.

Entrepreneurs are frequently unfamiliar with traditional ways to value companies and may approach valuation as an ownership issue rather than the market's assessment of their company's worth. Conversely, savvy investors attempting to acquire an ownership stake in a company may attempt to take advantage of an entrepreneur's desperate need for working capital by artificially deflating the valuation using the current company valuation and not the future growth and earning potential of the business.

Despite these challenges investors and entrepreneurs do need to agree on valuation based on a reasonable scientific method of establishing valuation.

This will keep fund raising negotiations on track, less emotional and instill confidence in current and future owners that the valuation is real and a legitimate reference point for future rounds of funding.

To this end I have elicited the expert advice of Lucia Wallace, Senior VP at Houlihan Lokey, to help craft this blog. Lucia is familiar with negotiating valuations for companies of all sizes in various stages of maturity. She has taken an interest in early stage companies and has provided good advice on what valuation approaches are best for early stage companies.

We will start out with an overview of traditional methods used to value companies and how they do or do not fit early stage companies.

Discounted Cash Flow (DCF) - This valuation method uses an estimate of future cash flows generated by a company. A discount co-efficient (discount rate) is applied to the estimate. This discount rate is based on the level of risk associated with the estimates.

In many cases a start up has no historical reference for cash flow making the DCF method of valuation suspect. A business owner may inflate the cash flow to demonstrate the great potential of the business to please investor expectations. An investor may deflate the predicted revenue to obtain a greater percentage of the company (or would assess the business owner's expected cash flows as having a high degree of risk). With no real history of cash flow the debate over cash flow valuation can result in an uncomfortable negotiation scenario were each party is arguing for a valuation without any real basis for the argument. At the end of the day, the discount rate is supposed to reflect the appropriate level of risk - which is extremely difficult to pin-point (if you do not want an excessively wide range of values).

Book/Asset Value - There are a number of valuations based on the value of the assets of a company. For technology based start ups this may be the value of the product/technology developed to date, patents, cash on hand, etc. However, the primary asset of a start up or early stage company is the collection of intangible assets (patents, technology, workforce, management team, advisors, access to cash, etc.), which is very difficult to value. Hard assets (furniture, plant, real estate, equipment value, etc.) have an easier determinable value, however, generally make up a small portion of total value of a company. Future value is the important piece of the puzzle because early stage companies are usually growth companies with the real investment value of the company in the future not the present.

Visits/Traffic/Eyeballs - A web oriented company can predict its future value based on expected web traffic. There are good comps for this. However, not all visit/traffic business models are the same. For instance, if there is a product platform developed to support content delivery or a unique business process has been crafted to differentiate the company the visit/traffic approach does not give you the full valuation picture. In the end the traffic has to be tied to some demonstrable and supportable revenue number. Just indicating that the company is going to generate traffic is going to be challenged.

So how do you get a substantiated value for a company that makes sense to investors and to start up business owners?

The best approach is to compare your company to another similar company. Back in the day an investor made an investment in an entity with no financial history. From that point on a "comp" has existed for all future investors and entrepreneurs.

The world has become more complex, in a good way, providing all kinds companies to choose from to establish a valuation for your early stage company. A start up can establish a valuation based on Market Multiples for comparable companies.

Market Multiples - Market multiples can be derived from either publicly traded companies, financing of private companies, and/or M&A transactions. Using this approach, you calculate the multiple on a financial metric (e.g., enterprise value /current value, enterprise value / future value (one or two years out) or enterprise value / current or future EBITDA) for the comparable company, and apply that multiple to your financial metric.

• The easiest way is to find publicly traded companies, as both valuation and financial information is easily available. Let's call these Public Comps. Note that the valuation in the public domain is generally for a "minority" ownership (i.e., a few shares), and not for a significant or even "controlling" ownership position. If you are selling some aspects of control, you need to account for that.
• You could also use a private company that has recently received funding, and pre-money valuation has been publicly disclosed, and you are familiar with some financial metrics (e.g. approximate revenue). You can calculate revenue multiples (or multiples on unique visitors, or EBITDA multiples) based on these Private Financing Comps. More likely than not, however, you won't have detailed financial information, so its difficult to draw detailed conclusions from this approach. If you are creative, though, you might be able to gather some information from the investor About the private companies in their portfolio - many are proud of these investments and publicly display them on their web sites, talk about them and market them to other investors and consumers.
• You can also use an M&A transaction (M&A Comps), for which both the transaction value and the target's financial information are available. Similarly, you can calculate revenue, cash flow or earnings multiples implied by the M&A transaction. Please note that an M&A transaction also reflects a premium for gaining control.

Trade of Shares For Investment - Valuation, investment and equity distribution are all tied together. I discussed equity distribution in a previous valuation Blog.

Keep in mind that the investor is investing in a very early stage company. This = risk for the investor. To mitigate the risk of the business plan not playing out exactly as planned the investor may ask for a greater percentage of the company then may be might expect. This should not be confused with conceding "control" of the company to the investor. In most cases, the last thing the investor wants is to control/manage your company. This is why they are so interested in the team running your company. You should be focused on getting the investor interested in your company, establishing measurable valuation and obtaining an amount of working capital that will conservatively allow you to focus on running the business and not remaining in perpetual fund raising mode.

In conclusion, start up valuations are hard to evaluate with traditional valuation approaches. The best way to obtain a satisfactory valuation for the business owner and the investor is to compare your company to similar companies that have public valuations. Yes, the valuation of the company may impact percentage ownership. Valuation and equity discussions will be intertwined in negotiations so make sure the basis the valuation and equity distribution are clear.

The Hands On Engineering Manager Paradox

The current economy appears to be breeding a crop of job descriptions looking for people that will program, create systems architecture, speak the business language of upper management, hire the engineering staff, manage the staff, put together an engineering budget, setup the servers, etc. To put this politely, not going to happen. Or at least not for very long.

I certainly have been in situations were I was doing all of these things. However, realistically not all of them very well. Sure, in a very early stage start up you might need to ask someone to initiate multidisciplinary tasks. However, no one is going to be good at all of these tasks. Setting an expectation that someone should be able to handle them all could have negative long term implications for the individual being asked to perform these tasks and for the organization as a whole.

There are fundamental differences between the skill sets to manage an organization and to build systems. There are a few people on the planet that are versatile enough to flip back and forth between these modes of operation. However, even for these people, the work load gets to a point where there needs to be focus to establish any real progress on any of the tasks.

I understand why a business owner would want to have all of these tasks encapsulated in a single individual. Budgetary constraints, investor pressure to control staffing, the institution of a lean and mean startup culture to name a few.

In some cases the business owners that are looking for these interdisciplinary individuals do not come from a technical background and do not fully understand the focused concentration level required to create a system that scales, is reliable and can be understood by the rank and file technical staff. The last thing you want this person to do is to be spending time managing the day to day operations of your engineering group when they are deeply involved in getting your system designed, built and up and running. Conversely, if an individual is beavering away programming, configuring servers, installing hardware, etc. and not paying attention to day to day engineering organization management the entire development process could come to a screeching stop.

The practical consequences of proceeding along with this model are as follows:

Someone Else Is Managing The Engineering Group - If you are asking a programmer or systems architect to manage your engineering group you will wind up having another person in your organization stepping in and managing the day to day operations. This could be one of the co-founders, product or project manager or an executive staff member.

Your Early Design And Systems Have Issues - We all remember the Friendster debacle. This system could never adjust to the popularity of the service. It fundamentally lacked an architecture or any real supported systems structure. Was the engineering managers asked to do everything resulting in a lack of focus on a reliable sustainable systems architecture?

Staff Churn and Organizational Dysfunction - What a bad way to start a company. You will be facing enough challenges trying to get your business up and running the last thing you need is a bunch of frustrated engineers wanting to quit because nothing is working right and they are being mismanaged.

The stress of a struggling system and a disorganized engineering group stresses out other parts of the organization. This can lead to some serious confrontations between various individuals and groups.

So how do you avoid the downside of a single engineering manager simultaneously executing managerial and technical tasks and still stay within the budget?

Engineering Team Management Oversight - In the early stage of the business or organization establish someone with management skills to oversee the engineering group. This could be someone on the executive team or it could be an outside consultant. Have this individual work with the engineers to staff and organize the group, deal with personnel issues and act as a liaison for the engineering team to make sure their concerns and issues are voiced. Conversely, this individual will communicate management directives to the engineers in way that they can translate into concrete action.

Engineering Process - Establish a development process that is well undertood by all members of the organization. Make sure that process matches up with the business goals of the company. In a start up or small company realize that just about everyone in the organization is part of the development process

Architecture and Platform - Clearly state the business objective of the company and obtain a satisfactory systems architecture plan to achieve the objectives. Get outside advice if necessary and entertain a number of options. Once you establish your platform and architecture they are very hard to change.

Short and Long Term Objectives - You may be in a mad rush to get something up a running. This is understandable just make sure you do not fool yourself into believing that a rushed system is extensible and sustainable. It will most likely have to be replaced or significantly modified to run your business. Do not blame your engineers for getting something up and running quickly and then castigate them later when they tell you the system will have to be changed to accommodate your growth.

Engineering Organization Staff Planning - Be prepared monetarily and organizational for what it takes to run a real company. In the early stage of your company you may have a few programmers and consultants getting you going. This will be short lived if you are moderately successful. Have a good understanding of what it will take to effectively run an engineering group. Anticipate the need for an engineering manager, architect, DBA, programmers, QA, product management and IT support.

Crisis Management - Watch for signs that the engineering group is in a perpetual state of crisis management. If nothing appears to be going right or you appear to be exerting a tremendous amount of time and energy to get tasks completed you are in crisis management. Take the time to determine what organizational or technical issues are causing the problem. Address this issue immediately before you develop a perpetual crisis management culture.

Focus and Prioritization - Of all the tasks and items you want the hands-on engineering manager to perform determine the most important priority for that individual and clear the deck for them. Get the high priority items complete. Do not let the manager become distracted. This is especially important for technical and architectural tasks. Ping ponging back and forth between tasks is exhilarating but very dangerous if you are building a team and a system.

In conclusion, the current investment market places pressure on engineering organizations to consolidate functions and tasks into single individuals. This is understandable and a reality. However, do not fool yourself into believing that managing an engineering organization is not a full time responsibility requiring multidisciplinary skills not often found in a single individual. Understand the implications and compensate for the challenges an organization will face if the engineering managers is expected to be multidimensional. Prepare for the future realizing that eventually the organization has to build an engineering organization to be successful.