Great ideas are everywhere. Great tech is everywhere too. The problem: getting great ideas to make money.
For the technology-inclined-but-market-impaired, hope for starting a viable business often comes in the form of accelerator programs, where inventors meet investors to discuss building new companies. David Anderson, a valuation expert at EisnerAmper in Iselin, says accelerator programs can be a great blessing to very early stage companies in transition between the idea and the development of a working tech operation.
Anderson will present his ideas and experiences in the world of startups and M&A at the tTAp (techTEAMs Acceleration Platform) workshop on Tuesday, February 18, at 8:30 a.m. at the New Jersey Hospital Association Conference Center, 760 Alexander Road. Cost: $225. Visit http://techacceleration.us/events.
Anderson and EisnerAmper deal with a lot of very early stage companies trying to navigate their way from idea to enterprise. Most, he says, are not even flush enough to hire the accounting firm on a paying basis. But this is where tech startups with good ideas need help most, which is why he participates in programs like tTap. The program looks to educate tech entrepreneurs in the fine art of winning investors and navigating the occasionally hazardous waters of launching a business.
Anderson’s specialty is helping tech entrepreneurs understand preferred shares as a method of payment and investment. At its simplest, tech investment starts with venture capitalists putting money into a company so that it can develop its technology in the market. The company, in turn, agrees to pay back the investment within a set period of time.
But venture capital is not a loan, and investors typically want a stake in the company even after the seed money is returned. This is where preferred stock comes into play — shares of the company for which the dividends get paid to preferred shareholders before they get paid to other shareholders. New companies get into trouble, Anderson says, because it can be hard to track how much stock (and, ultimately, how much money) the company might be giving away.
How about a worst-case example? What could happen if you don’t know how to balance your wealth distribution? Consider the case of Trados, a Delaware-based translation software company built by its founders into a $60 million enterprise. Only to get nothing. The founders had given everything away in shares of the company to investors. The founders appealed, “and the court said sorry, zero is fair, considering what you did,” Anderson says. “It’s a shame. You usually only get one shot at wealth like that. Clearly the techies needed an advisor or two.”
Anderson uses the tale of Trados — a case settled just this past August by the Delaware Supreme Court — as a cautionary tale at programs such as tTap.
It’s a business, not just tech. The core of the problem many techies run into when starting a company is not realizing or understanding the difference between what their inventions can do and what their investors want to hear. Investors, Anderson says, want to know how the product/technology/company will make them money.
Inventors, on the other hand, are often naive about the commercialization aspect of their products. They fall in love with the technology and the science and, consequently, often fail to win investors’ hearts and wallets because their pitches are all about how wondrous the technology is.
“You need to convince investors that the company will work,” Anderson says. “You need to know how to put a proposal together that appeals to investors; how to present it and present its commercial opportunities.”
Something to keep in mind, Anderson says, are opportunity costs. “When you invest in someone’s company, you’re incurring the cost of not investing in someone else,” he says. For startups, in other words, it’s imperative to draw the risk/reward picture clearly; to convince investors that it’s riskier to put their money elsewhere than it is to put it into your company.
Set up right. “The legal entity needs to be set up the right way,” Anderson says. New companies, particularly corporations, can be a veritable circuit board of relationships, obligations, contracts, and payouts.
On top of convincing investors that your company can work, you have to know how you will pay them — and your employees. New companies, he says, often do not have actual cash to pay anyone for a while, so they offer employees shares of the company. In the tech/internet boom of the 1990s, stories of T-shirt-wearing startup employees cashing in on millions in stocks from a company just gone public made the rounds weekly. And that’s great if you’re the one sitting on the valuable stock.
But how do you dole that stock out? To whom do you give it? How much? Who gets preferred shares and who gets common shares? Who gets voting rights in a corporation and who doesn’t? “Small techs are usually founded by a couple of Ph.D.s who hold a couple of patents and maybe one other person who sets up the business,” Anderson says. That person is the one saddled with the day-to-day management of the business itself. And that person often is overwhelmed. “You need me,” he says. “Or people like me.”
Anderson grew up in Florida, where both his parents were teachers and his father also was an officer in the U.S. Army. He became a go-to valuation expert through the unconventional route of academe. He earned his bachelor’s and master’s in English from the University of Florida and a Ph.D. in the subject from Princeton. In the 1980s Anderson taught at Penn.
In the early 1990s Anderson and his family went to Germany to teach while he did research for a book. The trouble was, he didn’t want to raise his kids in Germany, he wanted to raise them in the Northeast. But teaching opportunities in the stretch between Philadelphia and Boston had dried up. “I could teach, but not where I wanted,” he says. His job at Tubingen University “was good, but I didn’t want it forever,” he says. So he decided on a new course that would provide him the chance to live where he wanted to — he would get an MBA and study accounting and finance.
Part of the trigger had to do with the time and place. Germany had reunified just a few years earlier, after 40 years. The reunification, he says, coincided with his existing interest in how economies and finance worked, and the melding of western economic philosophies with Marxist economic philosophies played out in the microcosm of the German city where he taught.
With the idea cemented, Anderson returned to the states to earn his MBA from the University of Rochester. He stayed in the area for about a decade before returning to the Princeton/New York City area. He joined EisnerAmper in 2007.
These days Anderson’s expertise serves him and many tech startups well. His admittedly hard-earned MBA and real-world experience have taught him the value of knowing the value of hiring the right help to keep you from getting in over your head. “It’s not that it’s hard to do it right,” he says of launching an investor-funded tech startup. “But you need to know how to do it.”