Day: December 27, 2009

Modumetal and other category creating companies

I’m often asked about what I look for in startup companies. There really are two answers to this question.

On one hand, for most of my investments I seek a good solid company, with a great management team that can build a good revenue stream in an uncrowded market, which can be acquired at a good premium.

But the ones that get me really excited are those few, rare opportunities to define a completely new category with a world-changing technology. At any point in time, I like to have at least one such company in my portfolio and the current leading candidate is Modumetal (www.modumetal.com). Modumetal owns a category called nanolaminate composite alloys. In essence, they have found a way to make laminated metals that can take advantage of properties that occur at a nano scale. As you can read on their web site:

Modumetal is a new class of nanolaminated materials that will change design and manufacturing forever. Modumetal is going to change the way that engineers make parts, not just by affording the ultra-high performance of its nano-materials, but also by a process that we call Modumetal by Design™. This process allows engineers to bridge design and manufacturing to realize large-scale finished parts from nanoscale building blocks. Modumetal is a revolutionary nanolaminated alloy system that is stronger and lighter than steel AND can run longer and hotter than nickel-alloys AND is more corrosion resistant and costs less than stainless. Modumetal will replace today’s metals, ceramics and composites in applications, starting with military armor – proceeding to cars, planes, buildings and consumer goods. It is the next generation material that represents a sea change in the age-old tradeoffs between cost, weight and performance.

It is still early in the life of the company, so there is still a great deal of risk. The excitement of being part of company that can change the way things work may not be the most disciplined way to do angel investing, but it sure is what I enjoy. Stay tuned.

Startup Company Boards

Startup companies need good boards. But they often don’t have them.

There are many reasons. First, there really aren’t that many experienced people willing to serve on a startup company boards. And those that are experienced, skilled, and bring a lot of value, generally want to be compensated, which startups can’t really afford.

VCs will serve on boards, but generally when their fund owns 15% or more of the company, so their compensation comes from the fund and the upside from a huge amount of stock.

In contrast, individual angel investors usually only own a very small (<2%) of a company and there is no ready mechanism for their co-investors to compensation.

So.. what makes a good board member? Many startup CEOs believe that the most important factor in choosing a board member is industry experience. I disagree. Industry experience is valuable on an advisory board, but needs to be resident in the company. Some degree of industry experience is, of course, beneficial. But, the following experience is more important on a board:

  • Experience on other boards for high-growth companies;
  • Having been through financings of various sorts;
  • Experience in acquisitions and IPOs to understand the inflection points and needed metrics;
  • A good rolodex relevant to the company;
  • Good chemistry with the CEO and other board members; and
  • A willingness to be direct and outspoken about the company, even if that position is unpopular with management and the board.

To get good board members, a startup company must be willing to compensate board members (as they do management). I’ve spoken with a number of angels and angel groups around the US and found that board stock compensation seems to vary widely. On the West Coast (primarily the Bay Area) and Boston, compensation seems to follow the VC model – no additional compensation is required. However, in much of the rest of the country, options are generally routinely given.

I’d recommend the following package for a pre-A round company: 1% of fully diluted stock, vesting over no more than 2 years. Shorter vesting is generally a very good idea for board members in order to make sure that board members don’t try to act to save their board position rather than do what is right for the company. Of course, if the company is already financed and has suffered the dilution to do so, then the percentage would be less.

I believe that the Angel Capital Association, the Kauffman Foundation, and/or a university business school should conduct a survey on this.

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