Cash Management for Startups

By Mike Taormina, Wharton MBA alumnus and Co-founder of CommonBond

Editor’s note: This article came out of an exchange on the Venture Initiation Program listserv, where current and former members of the program go to ask the community for help in solving their entrepreneurial problems. We thought Mike’s advice to a fellow VIP alumnus was so terrific that we asked him to turn it into a blog post.

Commonbond logo

There is a wealth of advice out there for startups trying to raise money—and for good reason. Without that first round or seed funding, many great ideas would never become anything more than an idea.

We also live in a highly innovative fundraising environment today, and the attention paid to helping entrepreneurs navigate their options and access capital is critical. As a founder, it’s incredibly exciting to be starting a business at a time when doing so—while I wouldn’t say is “easy”—has never been more possible for so many people.

So, let’s assume for a moment that you’ve successfully raised capital for your business (congratulations, by the way). The question then becomes: “What is the best strategy for managing this newfound cash?

Given the diversity of products and the multitude of providers, this could quickly become a time-consuming, complex process. When CommonBond raised its first round of funding in November 2012, we confronted the same question on how to best manage our cash, and it was incumbent upon us to find the optimal answer.

Here’s how we approached it:

First, the considerations.

1.     Capital preservation is critical.

Angels and VCs invest in entrepreneurs to take risks in operating their businesses, not to take risks in making financial investments. Compounding the issue (no pun intended), any upside in today’s yield environment is so meager that it simply doesn’t compensate for any risk-taking, given the amount of cash early-stage companies have to manage. For example, let’s assume your $1mm account has an average balance throughout the year of $500,000. If we further assumed a yield of 0.10% (which would actually be quite high for a low-risk money market fund at today’s yields), we’re talking $500 for the year. That’s it.

If you instead decide to expose your cash to more risk in the hopes of a higher return, one of two outcomes are likely:

If the investment works out, yes, you’ll have more cash, but probably not a meaningful amount; or,

Your investment does not work out, and you lose principal—a cardinal sin that can quickly lose both your investor and your credibility with respect to subsequent fundraising rounds.

Given the relatively small capital base of a startup, there is simply too small an incentive and too great an investor confidence risk to take much investment risk with your cash management.

2.     Liquidity. Uncertainty abounds in startup land. You may need to liquidate an investment to free up cash, so make sure that doing so doesn’t lead to an uneconomical investment. Bank CDs, for example, typically provide a higher yield than T-Bills or money market funds, but only if you lock up the cash for a period of time. The penalty for exiting a CD early (and the negative yield it can create) may be reason enough for a startup to stay clear of CDs as instruments for short-term cash management.

3.     Cost management. Watch out for banks with minimum balance fees or those that charge a relatively high commission for a simple T-bill trade—a cost which can also lead to a negative yield on the transaction.

4.     Counterparty risk. If you invest in a money market account, make sure you’re comfortable with the counterparty risk—the likelihood that your financial institution of choice will run into bad times that results in either a lock-up or loss of your assets with the institution.

What to do next: 

  • Bank account. If you open a checking or savings account, you have the $250,000 FDIC protection, so this is a great place to start from a capital preservation standpoint.
  • Bank CDs. You could then invest in bank CDs. If you go this route, keep in mind consideration #2 above (“Liquidity”). You don’t want to end up locked up in a CD and having to pay a penalty to get out, negating any deposit income (again, for minimal yield upside).
  • Brokerage account. If you have a brokerage account, you could invest in T-bills, money market funds, or sweep accounts. With T-bill purchases, just make sure the fees being charged don’t lead to a negative yielding investment. So long as the yield covers the fees, this is a great way to preserve capital, since FDIC insurance only covers up to $250,000 for checking accounts. With money market funds, make sure the fund’s investment mandate and holdings align with your low-risk, capital preservation strategy.

In the case of CommonBond, we decided on a combined approach: we set up a checking account and a brokerage account, both at the same bank so that wire fees or transfer time were never part of the calculus. The brokerage account invests in short-dated T-Bills and/or in a bank deposit sweep account, and the checking account is funded to ensure the company has sufficient cash for one to two months of operations—an amount that will likely not exceed the FDIC insurance threshold for the typical early stage startup.

Doing some very basic but important cash management will allow you to focus on running your business. And pushing the business forward should, and will, generate infinitely more value than any cash management strategy could ever deliver.

Mike TaorminaBio: Michael Taormina is CFO & Co-Founder of CommonBond, a student lending platform that provides a better student loan experience through lower rates, exceptional customer service, and a commitment to community. CommonBond is also the first company to bring the One-for-One model to education and finance: for every degree fully funded on the company’s platform, CommonBond funds the education of a student in need abroad for a full year. Mike is a former VP at J.P. Morgan Asset Management and a CFA Charterholder.

Mentor/Investor Whiplash

By Fred Wilson Wharton MBA 1987;  Managing Partner of Union Square Ventures

Editor’s Note: This post originally appeared on AVC: musings of a VC in NYC

I’ve been doing a tour of the summer accelerator programs and a question I get a lot is about the feedback the teams get from the investors and mentors they meet with. They ask me how much they should react to the feedback they are getting advising them to do things differently, pivot, change the product, change the strategy, etc.

I call this constant advising/mentoring of early stage startups “mentor/investor whiplash” and I think it is a big problem. Not just with the accelerator programs but across the early stage/seed startup landscape.

You cannot meet with a potential investor (me included) or mentor/advisor without getting a lot of feedback about your business. If you take many of those meetings a week, then you are going to get pushed and pulled in lots of different directions and it will cause confusion, wasted time and energy, and even a loss of confidence in what you set out to do.

You cannot let that happen to you. You are the domain expert on your business. You have spent way more time and energy thinking about your business than someone who takes a 30 minute meeting with you, having never thought about it for one iota, and then gives you a ton of advice that you are doing everything wrong. You have to learn to hear that feedback but not react to it.

Here is what I recommend:

1) Create a spreadsheet and list each meeting and the feedback you got in it. List who gave it to you and what they said. If you can categorize the feedback easily, do that. A column for each category of feedback might be good. Over time you should look at the totality of the feedback and see if there are things that a large percentage of people are giving you. If that is the case, you may want to pay more attention to that.

2) Apply the “investor discount” to feedback you get from investors. Advisors/mentors who have no agenda are a purer form of advice. Investors have their own agenda. They want to invest in “bigger ideas” and “larger outcomes”. When they tell you that your idea is too small, they may be talking to themselves, not you. Do not make their problems your problems. This is your business, not theirs.

3) Listen to customers, users, and the market. Advisors, mentors, and investors are not the market for your product. Get your product out into the market and get feedback from real users and customers who you will serve as you grow your business. If they like what you are doing and investors do not, do more of what you are doing. The investors will come around when you are scaling into your market.

With those three rules in the frontal lobe of your brain, take as many meetings as you can get. Solicit feedback. Listen to it. Write it down. But do not act on it immediately. It is advice not direction. You are the boss of your company. Do what you think makes the most sense. And get your product in front of users and customers as early as possible and listen to them even more. Because the market will tell you what to do if you listen carefully enough. And Mr. Market is the best advisor you can have.


Fred WilsonBio: I am a VC. I have been since 1986. I help people start and build technology companies. I do it in NYC, which isn’t the easiest place to build technology companies, but it’s getting better. I love my work.  I am the Managing Partner of two venture capital firms, Flatiron Partners and Union Square Ventures. I also am a husband and a father of 3 kids. I do that in NYC too. And it isn’t the easiest place to raise a family either. But it’s getting better too. I love my family more than my work. I also love music, art, yoga, biking, skiing, and golf. That’s a lot of interests for a guy who works 70 hours a week and loves his family. But I manage to make it work.

SEC Game Changer:                                                        Entrepreneurs, You May Now Advertise for Investors

By Lisa Lovallo, WG’13/G’13, Head of Business Development at RockThePost

On Wednesday, July 10, the SEC made a decision that will change the way entrepreneurs and investors find each other: they lifted the 80-year-old ban on general solicitation for private companies seeking to raise funds.  This is exciting news for entrepreneurs who are all too familiar with the cumbersome process of generating interest in their private offerings via word of mouth and personal networking among investors, all while keeping hush-hush the fact that they are fundraising.  Now, entrepreneurs will be able to advertise openly that they are seeking funding.

As a main component of the JOBS Act – the Jumpstart Our Business Startups Act signed into action by President Obama last year – the provision lifting the ban on general solicitation will be truly transformative for the startup capital landscape.   Currently, there are 8.7 million individuals qualified as accredited investors, but only 756,000 of them have participated in startup investing as an angel.  Now that startups can advertise their offerings to their fans, customers, and the general public, the $20 billion angel market could potentially grow tenfold.  It’s a huge step towards democratizing access to startup capital.

As Head of Business Development at RockThePost, one of the leading investment crowdfunding platforms, I regularly answer questions related to the JOBS Act and the general solicitation rules.  Here are a few of them that help to demystify the recent developments in the regulatory landscape:

What are the effects of these changes to the general solicitation rules?

Once the changes are enacted and entrepreneurs can advertise their fundraising, they will be able to promote it on social networks, their own websites and openly across the internet.  Given the tremendous expansion in reach, this will accelerate the fundraising process for entrepreneurs, so they can get back to doing what they do best – growing their business.

When do the new guidelines for general solicitation take effect?

In order for the change to take effect, the SEC first needs to publish the new language for the rule in the Federal Register, and then a period of 60 days begins where public commenting is accepted. The new guidelines should take effect in mid-September.

So, what’s the fine print?

Even with the general solicitation ban lifted, the antifraud provisions of the securities law still apply, preventing companies from making misleading statements, unsubstantiated claims, and omitting important documents or information.  Entrepreneurs will need to be very thoughtful and forthcoming with the information they share so as to comply with these provisions.  Disclosed written communication covers anything online and offline, including graphic material, TV, audio, and social media.

To publicly advertise, startups will be required to file an Advance Form D fifteen days ahead of when they anticipate advertising their fundraise.  They will be required to disclose ahead of time the language they intend to use for marketing purposes.

What is an accredited investor?

An accredited investor is a high-net-worth individual deemed to be financially sophisticated, as defined in Rule 501(a) under the Securities Act of 1933. More information about accredited investors is available here.

Currently, only accredited investors can participate in private offerings via crowdfunding websites until Title III of the JOBS Act is passed, likely in early 2014.  Title III will allow non-accredited investors to openly participate in startup investing as well, subject to certain guidelines capping individual investments based on annual income.

If you’re interested in the technical details of the SEC’s guidelines under review for general solicitation, you can find them here.


Lisa LovalloBio:  Lisa Lovallo is a 2013 graduate of the Wharton MBA/Lauder International Studies MA dual-degree program, majoring in Entrepreneurial Management and focusing on Brazil/Portuguese.  She is currently the Head of Business Development at RockThePost in New York City.  While at Wharton, she was in charge of communications for the Wharton eClub, launching the club’s new website in 2012, and was also a member of the Wharton Venture Initiation Program.  Prior to Wharton, Lisa worked at Bain & Company in Mexico City after completing a Fulbright Binational Business Fellowship there in 2007-2008.  She speaks fluent Spanish & Portuguese.

Four Tips to Succeeding With the Sharks

By Ryan Frankel, Wharton MBA 2012; CEO & Co-Founder, VerbalizeIt

Editor’s Note: Ryan Frankel, Wharton MBA 2012 and Kunal Sarda, Wharton MBA 2011, recently appeared on ABC’s reality television show Shark Tank with the venture the co-founded, VerbalizeIt, a real-time translation service. While students at Penn, Ryan and Sarda took advantage of the full range of entrepreneurial offerings by majoring in Entrepreneurship and actively participating in co-curricular offerings such as Founders’ Club, the Wharton Entrepreneurship Club, and the Wharton Venture Initiation Program (VIP). It was during their time in VIP that they received a Snider Seed Award for significant progress made on VerbalizeIt and first learned about the opportunity to pitch before the Shark Tank judges. Ryan recently wrote about his experience on the reality TV show for the Wharton Blog Network. The original post can be seen here, but the text has been reposted below. Their appearance was also covered by BloombergBusinessWeek

About a year ago, my co-founder Kunal Sarda, WG’11, and I received the once-in-a-lifetime opportunity to pitch our business to seasoned investors on the popular ABC reality TV show Shark Tank, thanks to an application notification from the Wharton Venture Initiation Program. We knew that if we wanted the Sharks to fund VerbalizeIt, a language translation community that offers users real-time access to human translators, we would have one chance to deliver a succinct pitch and negotiate for seed funding in front of 7 million viewers.

We spent weeks (or, more accurately, months) preparing for our negotiation, and we are pleased to report that our hard work paid off. We generated a bidding war among the Sharks and successfully negotiated a funding offer. The episode aired this past Friday, May 17, but you can watch a recording of Shark Tank Episode 26 on VerbalizeIt’s website.

Since the show, we’ve negotiated with several more investors. Below are the strategies that helped us raise $1.5 million in investment capital with the right mix of investors.

We asked questions to understand what was important to each investor. Before the negotiations, we researched their past investments and interests. We looked at past comments made by the Sharks and talked to people who have worked with them so we could understand what factors made a deal attractive. Our goal was to discern how we could be flexible on the terms that the Sharks cared about, while avoiding giving up too much of the things we strongly valued.

We determined the least we would accept and were prepared to walk away. Kunal and I are both confident that travelers and small business owners would be excited about our business, but it was tough to ascribe a value to a market that has never been served before. In the end, we tried to make conservative estimates of our growth potential and agreed on a baseline valuation for our company.

We tried not to focus solely on the money. In case we received competing offers, we evaluated the non-monetary assets each investor could add, such as areas of expertise, business contacts and specific skills. This was a crucial step because we ultimately had to choose between offers from two different Sharks within a matter of minutes. Even when time is less crunched, we have found it easier to rationally evaluate non-monetary factors before getting into the heat of the negotiation.

We learned to control our emotions. We knew it would be difficult to contain our emotions when the cameras started rolling, but we understood that failing to maintain our composure would cost us. The only effective approach for improving our emotional control was practice, practice and more practice. We called on many of our Wharton friends for mock negotiations, and while we’re still working on this aspect, we felt that the practice significantly improved our mental readiness for negotiation.


FrankelBio: Ryan Frankel is the CEO and Co-Founder of VerbalizeIt, the company that delivers instant access to a global community of translators. He is a 2012 Wharton MBA graduate, a Haverford College alumnus and a recent TechStars participant. Prior to enrolling at Wharton, Ryan was a financial analyst at Goldman Sachs in the firm’s Special Situations Group, where he focused on middle-market private-equity transactions and the operational management of the portfolio companies. A former collegiate baseball player, he is now an endurance athletics enthusiast who has enjoyed competing in an Ironman triathlon and a marathon.

Can You Leverage A Social Enterprise In The Era of Crowdfunding?

By Ron Ben-Zeev, Wharton Undergraduate 1986; Founder, World Housing Solution

That is the question I asked myself a few month ago, while listening to Brian Meece, Founder and CEO of RocketHub, the third largest such platform in the US, who was speaking at a Startup Weekend event I co-organized in Orlando, Florida. Crowd funding or crowdfunding (alternately crowd financing, equity crowdfunding, or hyper funding) describes the collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organizations. As Brian was speaking, my mind was spinning in many directions. Can this help my startup? How? Can the funds raised make a real difference or is the potential exposure enough?

I had heard and read about the outliers, the companies who had set out to raise a certain sum only to exceed that sum by a huge factor, millions in some instances. The majority of those seeking to raise funds, even if they raise their target amount, raised only a modest sum. However in 2012, these small sums reached an excess of $2.7 BILLION and have funded more than 1 million campaigns worldwide. A study by Massolution forecasts an 81 percent increase in global crowdfunding in 2013 to $5.1 billion, the hockey stick growth rate everyone seeks. With that knowledge in hand, I approached Brian and discussed my current venture (yes once an entrepreneur, always an entrepreneur) called World Housing Solution (WHS).

The earthquake in Haiti catalyzed the founding of WHS. My partners and I had just developed the concept of our structural insulated composite panels and the tragedy that was unfolding just a few miles off our coast was the perfect place for us to launch our concept. Using Space Age composite-sandwich-construction methods we developed rapidly deployable and reusable shelters and structures that are a solution to today and tomorrow’s emergency, temporary and affordable housing needs.

After reading report after report about the lack of safety and deplorable living conditions in tent villages, we knew we could come up with a better way to help the displaced, both here and abroad, by natural and man made disasters. The reusable shelters can also be used to respond to military deployment and temporary labor housing needs. Movable factories that create the structures can be quickly built anywhere. Although we made some headway in getting noticed by the government and won a few contracts, we were starving for exposure and capital. With that in mind, we dove headlong into a crowdfunding campaign.

So how did we do?

The campaign is still on going. However, on the exposure side, we hit the jackpot. RocketHub was quietly working with the cable TV network A&E TV to establish a strategic partnership affording both an interesting storyline for the network as well as exposure for nascent organizations on RocketHub. Together they launched a multi-platform initiative called PROJECT STARTUP and selected WHS, as one of the first projects to be featured. We are still trying to figure out exactly what it means, both in the short and long term.

One thing is certain; crowdfunding has come through on its promise of exposure. Like anything that comes up along the entrepreneurial journey, it is what you do with opportunities that truly matter. We were given a spark and we are trying to turn it into a raging inferno.


Ron Ben-ZeevBio: A 1986 alum of the Wharton School, Ron is recognized for successfully applying his unique blend of diplomacy skills, expertise in entrepreneurship, negotiation, strategic forecasting and planning, and sales and marketing. He currently resides in Central Florida with his wife and three children.

The Dorm Room Fund: Helping Student Entrepreneurs Thrive

By Ryan Marschang, Wharton Undergraduate 2014

What is The Dorm Room Fund?

Over the past several years, more and more students have been turning towards entrepreneurship. As a student founder, you usually have a few options for raising seed stage financing. If you’re looking at taking financing from an angel or VC, chances are you’ll need to take a leave of absence from school or drop out entirely. Similarly, if you are aiming to join an incubator or accelerator like YC or TechStars, you’ll also need to get out of school. While those may be excellent ways to seriously pursue entrepreneurship, they shouldn’t be the only way.

The Dorm Room Fund (DRF) is a great resource on campus that supports students building their companies while staying in school. At its core, the DRF is a VC fund run by students, for students.

I first joined the fund as a member of the founding investment team when the first fund was launched in September 2012 in Philadelphia. Since then things have been moving quickly – DRF PHL has made nine funding commitments to date, we recently expanded to NYC and are currently launching a third fund in San Francisco. With $500,000 from First Round Capital, each fund aims to invest in student-run companies in their respective geographies. This means that DRF PHL aims to support student entrepreneurs not just at Penn, but at all college campuses in the Greater Philadelphia Area.

The Investment Team

As a member of the investment team, I have been actively involved in sourcing student-run companies, making investment decisions alongside the team, supporting our growing portfolio and helping support the Philly entrepreneurship community. The investment team at DRF PHL is comprised of 11 students from both Penn and Drexel with varying backgrounds. Many of us are leaders of different entrepreneurial organizations on campus ranging from the Founders Club to the Entrepreneurship Club to PennApps. Many of us are also fellow entrepreneurs and builders. Members on the committee range in age from 19 to 30 and everyone brings something unique to the table. Members have worked in industries ranging from ecommerce to edtech to cleantech, and some students have worked in VC. This diversity of backgrounds, I believe, allows us to make highly informed investment decisions on a wide range of companies.

When it comes to making investment decisions, one of the toughest challenges has been taking a definitive stance, either in favor or against funding a company, with the imperfect information typical of such an early stage. While we factor many things into our decisions, it isn’t uncommon for one or two really strong data points to end up swaying a vote. Each member of the team contributes different data points to our discussion. For example, a team member might have worked with one of the entrepreneurs before and knows the founders really well, or might know a particular market from previously building a company in that space. When it comes to taking a stance, we rely on one another. I think we’re able to do that because of the high level of trust and regard we have for our team members.

Working with Entrepreneurs

Besides the opportunity to work alongside an awesome team, I joined Dorm Room Fund because I fell in the love with the idea of students helping students build their companies. Since joining the fund, I’ve had the opportunity to work with amazing entrepreneurs, both undergrads and grad students, building companies in markets ranging from health IT to ecommerce to biotech. Students in Philly are working on some disruptive ideas and each week I look forward to hearing pitches and working with these entrepreneurs.


A lot of our sourcing at DRF PHL comes naturally. Members of the investment team have strong relationships with entrepreneurs in the area. Mainly because:

(1) We too are entrepreneurs in the same ecosystem.

(2) We work alongside them in different classes/organizations/clubs on campus and in the city.

(3) We hang out with them outside of class and attend the same events throughout the year.

Our first two investments, Firefly and Dagne Dover, are great examples of how members of the investment team knew the founders well before any investment was made.

While we have seen most of our applications to date come from Penn and Drexel students, we are actively reaching out to Temple, Villanova, Swarthmore and several other campuses in the area.

Moving Forward

As we continue to expand and make investments, we are working hard to build a network in which student entrepreneurs can really thrive. With the launch of DRF, students now have access to capital that will allow them to remain in school while they build their businesses. With funds already launched in Philadelphia, NYC and San Francisco, and the possibility of further expansion, we hope to connect and support the top student founders across the nation.

If you have any questions about DRF I’d love to hear from you. If you’re on campus come drop by our office hours every Monday from 5:30 to 6:30 p.m. @ 4040 Locust!

Ryan MarschangBio: Ryan is studying Chemical Engineering and Finance in the Management and Technology Program at Penn. He is a fellow entrepreneur and is passionate about energy and education. In addition to DRF, he is the Chair of the Weiss Tech House Innovation Fund and has interned previously @KhanAcademy. You can reach Ryan at or follow @RyanMarschang.

Crowdfunding: Promise or Peril?

The numbers seem astonishing: Last year, Kickstarter, the largest crowdfunding site, raised over $312M from over 2 million backers, funding 18,000 projects.  Though raising money from large crowds to fund new artistic and cultural endeavors is not new, the speed at which internet crowdfunding has taken off – from almost nothing to hundreds of millions of dollars in just a couple of years – has caught the notice of policy makers, entrepreneurs, and investors.

On this wave of optimism, in April of 2012, President Obama signed the JOBS act, legalizing equity crowdfunding (previously, crowdfunding investment was strictly a donation, perhaps in return for a product or reward).  As of today, the SEC is still writing the rules that will allow equity crowdfunding to occur in practice, and over 1,000 companies appear to be ready to enter the equity crowdfunding space as soon as those regulations are finalized.  But not everyone is excited about crowdfunding, a number of pundits and analysts have expressed concern that crowdfunding, especially equity crowdfunding, is likely to lead to a lot of fraudulent projects, failed businesses, and naïve investments.

Though many people have been weighing in on crowdfunding , there have been relatively little hard data about what makes crowdfunding projects succeed (or fail), and how many projects actually deliver on their promised goals.  In two draft research papers, “The Dynamics of Crowdfunding” and “Swept Away by the Crowd,”  I have used data from Kickstarter to understand the underlying patterns of crowdfunding in the first case, and the ways in which crowdfunding compares to Venture Capital, in the second. Among a number of findings in the papers, I want to highlight two of them:

Project founders try to deliver on their promise.

Fraud in crowdfunding should be easy. People post projects online, without having to prove any deep credentials, and, if they raise the money, have little legal obligation to actually deliver on their promises.  With such a perfect environment for people to take the money and run, some observers suspect that fraud might be common.  To find out if this is true, I looked at the 381 successful Kickstarter projects in the categories of Design and Technology (these are the projects that most resemble traditional startups) that had promised delivery dates for rewards to funders before July, 2012.  I found that fraud was relatively rare.  Only 14 out of 381 products, or  3.6%, had stopped responding to backers and could potentially have given up on delivering entirely.  To see how small this category is, compared to the amount of money spent on the space, look at the chart below.  Dark green projects were those that were delivered, light green were promised projects on schedule, and yellow is projects that were delayed, but were making efforts to deliver. Only the thin red line are those cases that are possibly fraudulent.


But they are often late in doing so.

The large, and growing, yellow section in the graph below illustrates an issue with crowdfunding, however.  The majority of projects I studied were late in delivering their promised products.  This shouldn’t be a big surprise, as entrepreneurs are over-optimistic, and this is just as true among crowdfunding entrepreneurs.  The statistics are fairly stark: only 24.9% of projects delivered on time, and 33% had yet to deliver when I conducted my study.  The bigger a project was, and the more successful it was, the longer the delay.  After 8 months of delay, only 75% of projects had delivered, though, as CNN pointed out in their examination of the 50 biggest Kickstarter projects, project creators were still working to deliver on their promise.  The graph below shows the number of projects delivering over time.

Project Delivery Delays

Promise or Peril?

To date, the data seems to show that the worries about fraud in crowdfunding are perhaps more overblown than might be expected (my letter to the SEC on crowdfunding explains some of the reasons why fraud is rare). But, even with the best of intentions, crowdfunded entrepreneurs are like other sorts of entrepreneurs – likely to learn a lot of tough lessons about the reality of their plans in the process of executing them.  The challenge for equity crowdfunding will be to ensure that investors in crowdfunding are patient enough to see new ventures through their inevitable evolution, and helpful enough that they can actually provide useful advice and guidance to help their portfolio companies succeed.

The Current State of VC in Brazil

By Thomas Baldwin (WG’13/G’13)

It’s midnight as I write this on my buddy Wolf’s couch here in São Paulo. Despite a long and exhausting day full of meetings, I’m restless, antsy, agitated… not even close to tired. This city has that effect on me. I’ve talked about this before, but the energy here is electric, the city is raw and real, humanity unleashed. I love that amidst the chaos of this city, more and more entrepreneurs are creatively addressing serious problems to create meaningful social (and economic) value. Oh, and lest I forget, I should also mention that people here are consuming. A lot. Walking through the mall these days makes you feel like a sardine. They’re packed.

Brazilians love to shop. Both offline and online.

But I digress. In this post, I want to discuss a topic that is of relevance to anyone looking to raise capital down here. Over the past few days I’ve met with a number of startup founders in Sao Paulo. Many of them are singing a common refrain about how the ecosystem – particularly with respect to VC funding – has changed over the course of the past year and a half. I thought I’d write a quick post to share what I’ve learned, and offer a few thoughts of my own.

Allow me to provide some context. I traveled to São Paulo in the summer of 2011 as part of the Lauder Program’s summer immersion session.  I was a bright-eyed MBA looking to absorb as much information as possible about the exciting world of Brazilian startups. I had a blast and learned a lot.

Boy, those were heady times. In the summer of 2011 – a year and a half ago – lots of people were raising capital. A lot of freshly minted MBAs came down, and many of them raised sizable rounds relatively easily, on very generous terms, with great valuations, without having to demonstrate much in the way of traction or revenues, without having a minimum viable product. In some cases, the ease with which these entrepreneurs raised was warranted by truly phenomenal ideas and / or excellent entrepreneurial track records. Davis (WG’11/G’11) and Kimball are an example of this with And they continue to crush it.

In other instances, however, the money may have come too easily. Some entrepreneurs probably shouldn’t have gotten as much money they did. Peixe Urbano, for example, is struggling mightily right now, and their investors are worried.  Like I said, these were heady times, and I think a lot of VCs got caught up in the hype, felt like they were going to get left out of supposedly hot deals, may have shirked a bit on diligence, and as a result may have made some hasty decisions. It’s obviously easy to say this in retrospect, so I’m not criticizing anyone. All I’m saying is that TIMES HAVE CHANGED.

Fast forward to the present. Today we exist in a venture environment much different from the one I described above. Pre-product capital raises are few and far between. Investors want to see traction, they want to see an MVP. They are pushing back on valuations. In general, it’s harder to raise capital right now.

Why has this happened? A couple reasons:

(1)    As I alluded to above, not all the investments that VCs made in 2011 are performing well. Home-grown Brazilian VC is relatively new, and when things heated up, I believe certain VCs made some mistakes (yes, VC is a hit-driven business, we expect lots of companies to fail even in a successful portfolio, but I’m saying that some avoidable mistakes were likely made). So the Brazilian VCs are learning, they are becoming more sophisticated, they are no longer as impressed by a flashy deck and great salesmanship as they were before. They are becoming more astute in their assessment of business models, of what is likely to work and what will likely fail.

(2)    The Brazilian “sexiness” factor, and a few high-profile capital raises by MBA-types, resulted in a huge influx of ambitious aspiring entrepreneurs from abroad. On the home front, more home-grown talent began to view entrepreneurship as a viable career path. You also have successful Brazilians returning home from abroad to launch businesses here. Bottom line: the space has gotten MUCH more crowded. VCs here used to have to search pretty hard to find entrepreneurs, now the entrepreneurs come to them in droves. It’s tougher to get their attention, and quality expectations are higher.

(3)    Diversification. Brazilian VCs are over-indexed to certain segments, particularly eCommerce. They put a lot of cash into eCommerce startups in 2011, and as a result they are shifting focus to other areas, like healthcare, financial tech, and education. A lot of the entrepreneurs on the ground are still pushing eCommerce ideas, which has resulted in lots of folks getting turned away. The eCommerce spigot seems to have closed (unless of course you’re doing B2B eCommerce, which I think is an entirely different story, and which I’ll cover in a separate post).

(4)    Some (but not all) of the US venture firms that are investing in Brazil have “placed their bets” on Brazil and are holding tight for a while until they see how things play out with existing investments. They are excited about Brazil, but they don’t want to over-expose themselves, so having put money into a few companies here, they may be pulling back for the time being. Unless they find something incredibly compelling, of course.

What does all of this mean for entrepreneurs looking to build big, capital-intensive businesses in Brazil? Think carefully about the factors I’ve written about above, and act accordingly. In the current environment, you need more than a beautiful deck, a magnetic personality, and a compelling vision. You need to show traction, you need to demonstrate some results (ideally revenues), you need to show you’ve got a sustainable competitive advantage. If you’re bent on B2C eCommerce, recognize you might have a tough road ahead of you (I’m not saying it’s impossible, just that you’re swimming upstream). If you’re looking to raise from Brazilian VCs, don’t pitch them on an idea that taps a theme they’re already invested in (don’t go to Monashees with anything Baby related, for example).

Most important (and most basic of all), do your homework! Unfortunately (or fortunately?) there are a lot of people down here who are pitching crappy ideas, who haven’t done a solid market-sizing, who don’t understand how local dynamics impact imported models, etc. Use this to your favor and differentiate yourself by getting genius-level smart on your chosen idea & market before you step inside the shark tank!

Até a próxima gente!

This article was originally posted on 12/20/2012 on Tom’s blog Tropical Considerations: Insights on the Brazilian VC/Startup Ecosystem.


My name is Tom Baldwin. I’m a veteran Brazilianist with a passion for startups and entrepreneurship. I’ve spent a little over a year living and working in Brazil at different points in time. I’m a dual citizen of Mexico and the US. I’m a student at Wharton / Lauder.  My blog, Tropical Considerations, chronicles a 5 week adventure in São Paulo that began in December of 2012. I’m here to build relationships, explore opportunities, and work on a few ideas of my own. Find me on linkedin and twitter.



Working to Keep Entrepreneurs in Philadelphia

By Emily Cieri, Managing Director, Wharton Entrepreneurship

Last Wednesday, September 19, I was fortunate to attend the opening of First Round Capital’s Philadelphia office.  As many of you may know, FRC has had offices in Conshohocken, PA for about 10 years.  They subsequently opened up offices in San Francisco and New York, since their investments began focusing in those regions.  Josh Kopelman (W’93), Managing Director of FRC, has made a bold statement in moving into West Philadelphia; he is now is going to take a leading role in the Philly entrepreneurial eco-system – as explained in his video previewed on Wednesday.

I was in attendance at the FRC opening — which was a Who’s Who of the Philadelphia entrepreneurial community.   There were remarks by Mayor Nutter (W’79) and Penn President Amy Gutmann, who both praised Josh for making this bold move.

Philadelphia Mayor Michael Nutter (W’79) and University of Pennsylvania President Amy Gutmann speak at the First Round Capital Event on September 19.

It’s no accident that his office is one block off of Penn’s campus at 4040 Locust Street.  It also happens to be around the corner from Josh’s fraternity house when he was a student, which he mentioned during his comments on Wednesday.

Josh mentioned four startups: AdMob, Warby Parker, Invite Media, and Milo, and asked what they all had in common.  My initial thought was: That’s simple they were all founded by Wharton alumni! But no, that’s not the commonality Josh sees.  What he mentioned is that all of these companies were started in Philadelphia, but quickly moved out – AdMob and Milo to Silicon Valley, Warby Parker and Invite Media to New York City. Josh wants to reverse this tide and work to keep these and other entrepreneurs in Philadelphia.

The new FRC space is fabulous! Lots of community space, dedicated space for start-ups, and dedicated space for student entrepreneurs.  It’s obvious that the students are what’s really exciting him – and why not, he knows the same thing we do –  that entrepreneurial-minded students are smart, hardworking, fun and interesting to be around.

As is customary with Josh his actions speak louder than his words and he’s starting now.  Here’s what is lined up for students:

  • The Dorm Room Fund – a $500K venture capital fund that will be run by students to invest in student-run startups – initially those located in Philly (at Penn and Drexel).  Read Josh’s post here that shares his story and motivation behind the Dorm Room Fund.  He’s looking for a total of eight students to run the fund and application information is available on the Dorm Room Fund website.
  • Interns – FRC is looking to hire 2-4 undergraduate student interns to work in their Philadelphia office.  More information is available here.
  • A plan for the student space mentioned above is scheduled to launch in October or November.  We’ll be sure to share more information once it is available.

I am thrilled to have Josh and FRC in Penn’s backyard – Josh has always been very active at Wharton Entrepreneurship and across campus.  But now the game has changed and our students and programs will benefit immensely from this – as well as Philadelphia.  Welcome back Josh!