hedging the pump

Feeling the pain of rising fuel costs? Oil is around $70 a barrel and with instability in the vast majority of large oil producing regions (Iraq, Iran, Saudi, Nigeria, Venezuala, Russia) causing supply shortfalls I think we're all painfully aware that oil is very unlikely to decline to the $15 - $20 per barrel with equivalently low gas prices we've seen over the last few years.

So what can you do? How about locking in the price of gas at something reasonable? This is essentially what energy companies do today. They will buy gasoline in the futures market as a hedge to lock in a particular price point. I'm not familiar with the details of how the big guys do it but have at least the beginnings of an idea about how you and I can do it.

Let's say oil producing regions stabilize and production goes back up, enough to make gas fall to $2.00/gallon. Also, in our sample scenario assume our hedger (H) has a car that gets 20mpg and drives 15,000 miles per year. With a little 3rd grade math that comes to 750 gallons of fuel and at the current price would be a spend of $1500/year. Let's also assume our protaganist can find a stock in the equities market that moves in a highly correlated fashion to either oil or gasoline (company A). H purchases $1500 in company A's stock. Now if gas prices rise by 10 or 20 or 50 percent, H's stock will also rise in lockstep. The critical point now lies in profit taking and averaging down. I haven't got all of this worked out yet, but am thinking that if H were to take profits around 5% intervals over the initial purchase price and average down by buying more stock when the stock falls on 5% increments from the purchase price, discounting transaction fees and taxes, H's total fuel costs - stock profits + stock losses would end up with an average cost per gallon near the locked in price.

Anyone out there have more ideas on this?

No Quarter

It's Saturday afternoon. My son is sleeping upstairs, my daughter is at a birthday party, my wife's working out. What do I do? I work. I feel compelled, almost relieved to work. There is a huge tension that comes with the exhiliration of the startup. That is a certain implied willingness to get the job done, at any cost. Long hours, travel, your friends become your friends at work. Your family lives with your obsession of pursuit of a dream.

We just had our second child a few weeks ago. I feel guilty for not putting in the requisite 80-100 hours per week. Not from my co-workers however. They've been more than supportive and I've been proud of the way the entire team has stepped up over these last several weeks to deliver an initial version of our html product to market.

In a startup, there is no quarter, no place to hide. You are always on and the company depends upon every individual contributor to deliver their best every day, night, and weekend. I wouldn't have it any other way most of the time. My wife knows that I go absolutely nuts if I'm not running 100mph (kinda like I drive). But it would be nice to pause and recharge once in a while.

Maybe in the fall, after we've got the next product pushed out, sales starting to ramp, strategic relationships firmly in place, and next round of funding nearly secure. LOL. Maybe in the fall. ;)


"Walking side by side with death
The devil mocks their every step
The snow drives back the foot that’s slow
The dogs of doom are howling more
They carry news that must get through
To build a dream for me and you
They choose the path where no-one goes.
They hold no quarter, they ask no quarter."
-- Led Zeppelin

Landing Venture Capital

There was a recent article posted on TheStreet.com entitled Landing Venture Capital. This is a fairly good article outlining the state of Venture Capital funding. 2005 was the first year in three years that venture capital funding has increased, yet the odds of getting funding remain bleak for early stage companies. It goes on to describe how the VC's essentially moved into triage mode after the dot com crash in 2000 and even though the money has started flowing it is still primarily focused on either later stage companies or early revenue companies, i.e. you won't get funding for a couple guys in a garage with a business idea. It does outline the re-emergence of angel investing. Because VC's are not focused on as many early stage deals, there are more of these deals available to angels. A great example of a new sort of VC firm taking advantage of this trend is Paul Graham's Y-Combinator.

While I agree with the state of VC funding, the article contains an underlying assumption that your primary goal is to achieve funding. Your primary goal is to deliver a product to an identified market that will find value and pay you more for it than it costs to produce. There are a number of companies today, especially in the Software as a Service space (Web 2.0) that are growing their business organically and bypassing VC funding altogether. One of the poster children in this area is 37 Signals, the creators of Ruby on Rails and authors of several popular web hosted products such as Basecamp, Backpack, etc.

So while the article isn't exactly bullish on venture funding prospects, don't lose heart. Focus on the primary goals of driving value and getting paid for it, network heavily in the funding communities (both angel and VC) and the rest will take care of itself.

Mason and big sister

polyphasic sleep

My son was born just 10 days ago now and I've been experimenting a bit with sleep deprivation, or rather the prevention of. We're getting about 3 blocks of 2 hours worth of sleep each night, which when taken together is really not that bad. But the fact that it is interrupted seems to make a big difference. I do get up and do a bit of work while Mason is satisfying the most primal of infant urges, which probably keeps me up longer than if I were to be very efficient with helping and then lapse immediately back to sleep but what fun would that be :)

I have noticed in this short time that if I can take two power naps (20-30min) during the day, one in late morning and one late afternoon, I am none the worse for wear. 1 nap and I'm fairly sluggish, 0 naps and I'm about as productive as dubya in times of crisis.

financing

To finance or not to finance, that is a constant question in the startup world. Many would advise to take the money if it is there, but it's a multi-faceted decision that will have you creating spreadsheet after spreadsheet in order to run what-if scenarios.

Some of the things to be considered are:

• Capitalization Risk - how long will current capital last with projected sales? Can you get to cash flow neutral before the current cash runs out? How close will you have to cut it? What if you do a lower revenue number than projected? When do you run out of cash in the worst case scenario? Will you need to lay people off? How will that affect morale?
  
• Dillution - What will your likely pre-money be (you'll need to do some comparisons by talking to other local entrepeneurs as well as banks and attorneys to get some idea of what the market will bear). Does the dillution to the current shareholders seem to be a reasonable trade-off for reducing capitalization risk?
• Opportunity Cost - Are forces mounting that require you to accelerate some portion of your business: product development, business development, sales? Perhaps you don't have time to grow organically. Is competition increasing or the market heating up to the point you need to hire up personnel to capture more market share and support the onslaught of new customers? If so, you might want to take in more cash. New investors will also bring new networks with them that should be able to accelerate some aspect of the business.
  
• Terms of Financing - You may find that current financing terms are too oppressive. In addition to the dillution, this might include: liquidation preferences, loss of control of the board, management changes required, or reverse vesting of founder shares.

Think carefully b4 you jump, but once you do, go aggressively down your chosen path. It always takes longer than you think to raise money.

sorry for the long delay

I've been quite busy lately growing the business, raising money, and growing the family (new child on the way). For those interested in the technology side, we have started a new company blog that will describe our journey with Ruby and Ruby on Rails. Check it out here.

We have finished raising our series A financing with a mix of Angels and VC money. It was a fairly easy and straight forward financing, as financings go :) I'll write a bit about some of the issues in the near future.

Threat Assessment

I was watching the most recent hair raising hour of 24 this monday and it provided a lesson that is very translatable to business. Terrorists have obtained canisters of military grade chemical weapons and plan to use them very soon. The only lead is a phone call that was picked up between the terrorists and an expert in these sort of weapons. Jack rushes to the residence of this man and captures him, only to find a 15 year old girl being held as a sort of sex slave by the increasingly despicable terrorist helper. Jack talks to the girl and tells her everything will be fine now, but the man requires a full pardon, transportation to another country, and given the girl back to comply. Now I've seen Jack break other prisoners in shorter order than he has available in this situation, even ignoring orders to do so, but that's another blog entry. Anyway, the girl, left free to roam around the apartment, and very lucidly grasping her dire probability of being handed back over to this man, finds a gun and shoots him.

Jack did not assess the threat in this situation properly endangering the mission. The girl acted fairly predictably and while she wasn't a direct threat, she became one by pursuing her best interests which were put at cross purposes with Jack and his mission.

The lesson here is to not ignore indirect threats even from sources that would almost never pose a threat. Always recognize the interests of every party you will encounter on the journey to your goal and act accordingly.

Term Sheet Terms: repurchase rights == reverse vesting

When a company is incorporated the founders set up the ownership structure. This structure may include a vesting schedule for founder's shares. The reason for the vesting schedule is to assure future investors in the company that the founders are in it for the long haul. A typical vesting schedule that isn't too aggressive and the one I used in the case of my current company is to vest 25% up front and the remainder in 1/60 increments per month over the next four years.

When taking in institutional money, the new nvestors will assess the percentage of vested shares the founders have and may ask for a reset on some percentage of these shares. One way this happens is that they will add a "repurchase right" term to the term sheet which enables the company to repurchase a certain amount of the founders shares at a nominal price for a period. This number of shares will diminish over time, essentially creating a new vesting schedule for founders.

My advice is that if you know you will be taking in money, find a happy middle ground between something aggressive that will undoubtedly be reversed and a vanilla four year vesting schedule. Starting the company is certainly worth a chunk of up front vesting.

walk the line

I just saw Walk the Line, last night. Joaquim Phoenix and Reese Witherspoon both post stellar performances in this well written drama about the life of Johnny Cash. The story describes a complex emotional tragedy that builds steam as layer by layer of events compound leading to Cash's eventual addiction to pain killers and then salvation by June Carter who is fighting her own demons of relationship/commitment.

It is well put together, has good cinematography, great acting, and absolutely dead-on soundtrack by T Bone Burnett.

Go see it! (I wish I could make the song play as you're reading this ... I keep my eyes wide open all the time, because your mine, I walk the line...)