Launch Magazine - Mar 2007

launch The Magazine for Utah Entrepreneurs

Grow Utah Ventures

march/april 2007

Calling on Angels The Ins and Outs of Getting Your Company Funded By Angel Investors

+

Seed Capital

e2e Interview and Podcast Gov. Huntsman & Ragula Bhaskar Entrepreneur Spotlight Rick Alden - Skullcandy

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launch

contents contents Grow Utah Ventures

The Magazine for Utah Entrepreneurs

startup

4 Editorâ&#x20AC;&#x2122;s Note

8 Dashboard

ascent 10 Mentor Column Kent L. Thomas

12 Funding Column Andrew Laver

14 Diary Column Ryan Coombs

16 Marketing Column Chris Knudsen

full throttle 22 Cover Story

Calling on Angels: The Ins and Outs of Getting Your Company Funded

By Angel Investors

18 Feature Seed Capital

26 e2e Interview

Gov. Huntsman - State of Utah

Ragula Bhaskar - FatPipe

30 Entrepreneur Spotlight

Rick Alden - Skullcandy launch

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>> editorâ&#x20AC;&#x2122;s note

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alan e.hall Despite the vital contribution to the economy and large amount of attention surrounding venture capital funds, only about 1 percent of all companies in the United States actually receive VC funding. The great majority of businesses simply do not fit the VC model. VCs invest other peoplesâ&#x20AC;&#x2122; money and are beholden to certain practices and obligations limiting the types of companies and stages of existence in which they can invest.

On the other hand, angel investors are typically wealthy individuals who invest their own money. They can operate under different conditions than VCs and have autonomy to invest in a wider variety of companies with business plans that do not necessarily fit a VC timeline of exit or rate of return.

Angel investors are the unsung heroes of U.S. business. Angels invest in 10 times as many companies as VCs do, making a huge difference in the landscape of our economy and are an indispensable resource to startups. In 2005, angel investors invested about $23 billion in U.S. companies.

Here in Utah, we are entering a golden age for angel investing.

Just a few short years ago, there was only one organized angel group and a handful of scattered individual investors. Today, there are five active angel groups from Logan to St. George and hundreds of individual investors. Thanks to FundingUniverse. com, many of these angels have a place to congregate and find promising companies worthy of investment.

In this issue of launch, we take a look at the current angel environment and give you some tips on how to attract angel investors in your company.

I invite you to visit www.growutahventures.com for more information on fund raising in general and a list of active angel groups in the state.

-Alan E. Hall Grow Utah Ventures Founder and Chairman

Click here for the HTML version of this article on www.launchutah.com.

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  

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launch Grow Utah Ventures

The Magazine for Utah Entrepreneurs march/april 2007 Editorial Chairman Alan E. Hall alanhall@marketstar.com Editor-in-Chief T. Craig Bott craig@growutahventures.com Director of Partners and Sponsors Justin Bott jbott@growutahventures.com Publisher Arkin Hill ahill@luminpublishing.com Executive Editor Colin Kelly Jr. ckelly@luminpublishing.com Creative Director Kevin Kiernan kkiernan@luminpublishing.com Production Artist Zane Pendleton zpendleton@luminpublishing.com Associate Publisher Jennifer Black jblack@luminpublishing.com

Editorial Board Christian Anderson, Brock Blake, Ryan Coombs, Brian Cummings, Jeremy Hanks, Tim Hunt, Chris Knudsen, Jeremy Neilson, Kent Thomas, Greg Warnock Contributing Writers Ryan Coombs, Chris Knudsen, Andrew Laver, Anmaree Osmond, Kent L. Thomas, Lisa Thomson Contributing Editors Kathryn Peterson, Jill Oâ&#x20AC;&#x2122;Farrell Photography Kevin Kiernan For advertising information e-mail: advertising@launchutah.com Send press releases or editorial requests to: press@launchutah.com Send comments and feedback to: feedback@launchutah.com Published for Grow Utah Ventures by: Lumin Publishing, Inc. 6183 S. Prairie View Drive Suite 103A Salt Lake City, UT 84118 801.417.3000

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UTAH FUND OF FUNDS SPOTLIGHT The Utah Fund of Funds (Utah FoF) was created by the Utah Legislature to increase the amount and diversity of capital funding available to help the state’s high growth companies. The $100 million first round of the Utah FoF was financed

by Deutsche Bank, and backed by tax credits approved by the Utah Legislature.

The Utah FoF invests in carefully-chosen, high-quality venture capital firms whose partners are willing to devote ample time visiting with Utah companies and entrepreneurs. Highway 12 Ventures, hails from nearby Boise, Idaho. Highway 12 focuses on earlyand expansion-stage companies in Idaho, Montana, Utah and Colorado. The firm has recently

FIRM:

Highway 12 Ventures HEADQUARTERS:

Boise, ID FOUNDED:

2000

begun investing its $75 million second fund. Highway 12 has a strong tradition of investing in Utah: the company has funded five Utah companies, more than one third of its portfolio.

Highway 12 Ventures partners describe their firm as “company builders, not company pickers.” They become proactively involved in the companies in which they invest, working to help them grow and be successful. Highway 12 Ventures is led by three capable professional partners: founder and managing partner Mark Solon; and general partners Mike Mers and Phil Reed.

Solon and Reed spend so much time in Utah that many people don’t realize they actually live in Idaho.

Solon began his private equity career in

Massachusetts, where he co-founded Atlantic Capital, Inc., a provider of seed and early-stage equity financing to companies worldwide. Prior to joining Highway 12, Reed spent more than 30 years helping build 10 different companies as founder or co-founder—including the multi-billion-dollar companies ComputerLand and BusinessLand— and raised capital from some of the industries most successful firms, including Kleiner-Perkins, Greylock, Mayfield, Oak, Bessemer and Venrock.

The Utah Fund of Funds is pleased to include the Highway 12 team in its portfolio. For additional information about Highway 12, please visit www.highway12ventures.com or www.utahfundoffunds.com.

INVESTMENT FOCUS:

Early stage in Utah, Idaho, Montana and Colorado PARTNERS:

Mike Mers; Phil Reed; Mark Solon

We don’t have a ‘Utah strategy.’ It has always been an integral part of our focus. What really drew us to the Utah Fund of Funds was the potential for connectivity and relationships with other high-quality firms, to help accelerate the growth of the Utah companies we invest in.

MARK SOLON, FOUNDER AND MANAGING PARTNER, HIGHWAY 12 VENTURES

ATTRACTING CAPITAL FOR OUR ENTREPRENEURS

UtahFundofFunds.com

THE UTAH FUND OF FUNDS program, supported with State of Utah tax credits, was created to drive economic development in Utah by providing Utah entrepreneurs and start-up companies with access to quality sources of venture capital funding. The Utah Fund of Funds is currently investing its first $100 million fund, financed by Deutsche Bank, in carefully chosen venture capital and private equity funds, whose partners are willing to spend significant time visiting Utah companies and entrepreneurs, and which have an open door policy for Utah companies at their headquarter offices. For more information, please visit www.UtahFundofFunds.com, or call us at 801.521.3072.

UTAH FUND OF FUNDS INVESTMENTS TO DATE:

TM

UTAH FUND OF FUNDS

>> dashboard

Send submissions to press@launchutah.com

News and Dealflow New Utah Venture Capital Fund, Mercato Partners, Opens Its Doors

Mercato Partners is an innovative growth equity investor committed to helping companies find their place in the market through rapid, well-planned growth.

Founded by serial entrepreneurs and venture capitalists, Greg Warnock and Alan Hall, Mercato Partners carefully audits its partner companies to forecast what is real and achievable. By providing proven expertise in sales, marketing, communication and strategic vision, then matching that with the necessary financial and human resources, Mercato Partners helps companies see the end goal from the beginning.

Mercato Partners combines Utah entrepreneur Alan Hall’s knowledge of the channel, sales execution and rigorous duediligence methodology with Utah venture capitalist Greg Warnock’s investment acumen and experiences making Mercato Partners the capstone of their careers.

Visit www.mercatopartners.com for more information.

D.A.M. Truck Tools Wins $100,000 Funding Competition

Cedar City-based entrepreneur, Chris Culp beat our four other finalists on March 22nd to win $100,000 in equity angel investment during a business plan competition associated with the 2007 Governor’s Utah Economic Summit. FundingUniverse.com and Grow Utah Ventures organized the contest.

Culp will use the money to help form a company, D.A.M. Truck Tools, around his invention, the Dump-A-Matic truck bed insert that easily slides in and out of a pickup to quickly allow the dumping of contents. Before the competition, Culp sold 8 launch

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15 of the inserts and now plans to increase production and sales significantly. Other finalists included Caveon, Rahster.com, S2 and Xapio.

See www.dumpamatic.com for more information.

Meosphere.com Recently Launched

Meosphere, a new Web 2.0 site that infuses life experiences into a social networking platform, has launched www. meosphere.com after closing a second round of funding. Meosphere has raised its capital through Utah angel investors and is using the funds to expand content, finalize design and generate national awareness of the new site. Eric Eliason is the founder and CEO of Meosphere.

Meosphere differentiates itself from existing social networking sites by encouraging users to get offline and become immersed in the real world. This new take on social networking provides users with thousands of pre-built lists, letting them select everywhere they’ve been and everything they’ve done, building an impressive personal history that can either be shared online or kept private.

The more they do offline, the larger their personal Meosphere becomes. Additionally, users can connect with others who share similar interests, make recommendations on everything from beaches to restaurants to books, and create visual and detailed checklists of future goals and ambitions.

Sign up for free at www.meosphere.com.

Lingotek Receives $1.6 Million in Second Round of Funding

Provo-based meaning-based language translation providor, Lingotek, raised $1.6 million in Series A-2 financing this March.

The A-2 round was led by Lindon-based Canopy Ventures, contributing $1 million.

Previous investors, including Flywheel Ventures, also participated in the A-2 round.

This financing follows a $1 million Series A-1 round of funding in 2006. Lingotek will use the funding to expand its sales and marketing efforts and further increase its presence in the language translation market.

Lingotek has developed a Web 2.0 service called the Language Search Engine to dramatically improve the translation process. Lingotek provides online language information technology that cuts costs in half, doubles the output of human translators and improves the quality of the translations.

Lingotek’s customers are quickly recognizing that traditional methods for translation are outmoded and outdated to meet the increasing demands of global communication. Language professionals today need a fast, easy and inexpensive method to access relevant multilingual knowledge. Lingotek’s Language Search Engine satisfies language professionals’ demands for translation knowledge.

See www.lingotek.com for more information. $ Have something you’d like featured in the Dashboard section? Send your info to press@launchutah.com.

Click here for the HTML version of this article on launchutah.com.

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>> mentor

Kent L. Thomas

Opportunity Lost? >>The financial forecast is incomplete and has little or no basis in real life. The entrepreneur likely hired his neighbor, who is a student at the local university or is employed as an accountant, but who does not understand the complexities of preparing projections that are supported with well explained assumptions, contain a forecasted balance sheet and cash flows, and that allow the entrepreneur or a potential investor to conduct “pro-forma” analyses of the forecast. >>The entrepreneur does not understand his or her customer. Can you imagine spending the kind of time and money that I described at the beginning of this article and having never actually talked to a potential customer about your product or service?

Neither can I, but I’ve actually seen that happen.

Kent L. Thomas is a licensed CPA and the founder of CFO Solutions He has been the Controller, CFO or CEO of a variety of companies from startup to over $60 million in annual revenues. Kent and his team at CFO Solutions have helped their clients raise over $300 million in equity and debt financing since its founding in 1996 and they currently advise more than 50 clients in the Utah market.

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You spent months, perhaps years, working on your business idea and countless hours refining and perfecting your business plan. You talked to everyone about this opportunity. You may have mortgaged your home, borrowed against your retirement plan and maxed out your credit cards, and your spouse is reaching the end of his or her patience with your idea. You now have a working prototype that you can demonstrate to potential investors and you’re perfecting your PowerPoint presentation. You have the opportunity to spend 20 minutes with a group of investors (a VC firm, a group of angels or friends who have agreed to meet with you), now what?

I’ve seen this drama replayed many times during my years of mentoring and far too frequently, I see the same result — a lost opportunity because the entrepreneur or management team hasn’t done their homework. They just aren’t prepared.

Think about what you have invested and consider that your financial future may rely on the outcome of this presentation. Would you ever consider taking that kind of risk without proper research and preparation?

Far too many entrepreneurs do just that. Why, you ask?

Because they don’t know what they don’t know. My friend Chuck Coonradt, author of “The Game of Work” calls this “unconscious incompetence.” Please allow me to share some of the more common mistakes that I’ve seen:

>>The team has no practical experience in the distribution channel that they have identified to reach their customer. They may have identified the right channel, but if they do not know how to execute on that strategy, the likelihood is that much of the money invested in their venture will be wasted with false starts and errors. >>Arrogance. This is perhaps the saddest of all, but too many entrepreneurs believe they are the “final source” of all knowledge about their product or service and do not want to have anyone tell them what to do or that there may be a better way to market, sell or produce their product.

Before you risk it all, learn everything that you can about your industry — study existing business, accounting, marketing, distribution and production strategies and consider how you can incorporate or improve on them in your strategy. Build a team that has successful experience and knowledge in the areas that you are weakest and listen to them.

Ask for advice and above all, listen and learn. You can reduce risk if you are smart and wise and you will engender confidence from investors if you have a thoughtful and thorough plan, but are willing to listen to and learn from their pointed questions and criticism.

Good luck! $ Click here for the HTML version of this article on launchutah.com.

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>> funding

Andrew Laver

What Investors Want To Know your company will differentiate itself. Never tell an investor that you do not have any competition.

Will I Make Money If I Invest?

To an investor, this is the most important question.

Unfortunately, it is usually the question that entrepreneurs do not answer well. While investors sometimes fall in love with particular technologies or management teams, they are always concerned about the bottom line. An investor’s bottom line goals are most likely achieved with companies that have: 1) excellent management teams; 2) strong sales and marketing strategies; 3) reasonable valuation expectations; and 4) attainable exit strategies.

Andrew Laver is the founder of APL Capital Advisors (www.APLcapital.com), a boutique investment bank providing capital raising and merger & acquisition advisory services. He is also the co-founder and managing director of Salt Lake Life Science Angels (www.SLLSA.com).

When interacting with potential investors, it is important to understand their perspective. In my experience, most early-stage investors have three primary questions in mind when evaluating a new investment opportunity: What Is It?

Assuming you know your technology, product and company better than anyone, this is probably the question you will like the best. Start at a medium to high level and make sure to give the investor context by explaining the problem or need in the market that you plan to address. Avoid the minutia. Understanding your product or technology well is obviously very important, but do not spend so much time presenting the technology that you neglect other areas that are at least as important.

Why Is It Better Than Everything Else?

It is imperative for an entrepreneur to understand the competitive landscape. You must be an authority on existing and emerging competitors. If you think you do not have any competition, you are wrong. Even if you have the most revolutionary technology in the world, there is always competition. If nothing else, you compete with other, perhaps completely unrelated, products for business or consumer budget dollars.

Make sure you understand your competition and how 12 launch

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Management teams are crucial. It is not unusual to hear a venture capitalist say that he or she would much rather have an “A” management team with a “C” technology than the reverse. Investors know that management teams, not products, generate returns.

Sales and marketing is often the weakest area in a business plan or in other communications. You must have a solid plan to market and distribute your product.

You should be able to compare and contrast your plan with how companies in your industry, and other industries, have been able to market and sell similar products. Never assume that a great product will sell itself.

Early stage companies are extremely risky.

Consequently, an early stage investor will expect a higher return to compensate him/her for the elevated risk. Many investment firms target a five- to 10-times return on invested capital in only a few years. You need to understand this fact, and may need to temper your valuation expectations.

You should also be able to explain to an investor how he or she will get his or her money back. If an investor cannot achieve an exit within a reasonable time frame, all other factors are irrelevant.

If you are well prepared to answer these key questions, you will significantly increase the likelihood of successful financing. $ Click here for the HTML version of this article on launchutah.com.

Find Your Best Future Find Your Best Future Customers Today Customers Today an exclusive withUtah Grow Utah Ventures BecomeBecome an exclusive partner partner with Grow Ventures

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Utah's entrepreneurs. the ones leading businesses acquire any businessesanyacquire customers andcustomers clients byand clients Utah'sbyentrepreneurs.

They are the They ones are leading takingfrom themtheir away from their But competitors.Utah's But emerging Utah'shigh emerging growth companies. taking them away competitors. growth high companies. some ones of thegrow smarttheir onescustomer grow their some of the smart basecustomer by baseBybybecomingBya partner becoming us, you can strongly witha partner us, you with can strongly with young entrepreneursknow yourposition working with working young entrepreneursbecause they because know theyposition firm withyour thefirm bestwith the best they the willfuture become future andloyal will remainentrepreneurs loyal they will become starstheand willstars remain entrepreneurs in the state. in Callthe state. Call thosethem that helped themfirstwhen they first started. to those that tohelped when they started. us for a privateand discussion and a us for a private discussion a the lastwefewat years, we atVentures Grow Utah Ventures customized Over the lastOver few years, Grow Utah customized solution that solution is just that is just have been encouraging of yourright for your company. right for company. have been encouraging and assistingand the assisting brightest the of brightest

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>> diary

Ryan Coombs

Overcoming the Obstacle of Product Promotion on a Startup Budget

Ryan Coombs is a partner in PlasmaGlass, a Junto company. He’ll graduate in Business at UVSC, and is enjoying his first year with his new bride, Rebecca.

He may be reached at ryan@plasmaglass.com.

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Exhibiting your product at CES = $18,000 Promoting your product at CES = $150 Amid the countless challenges of growing our startup, we found ourselves writing off the opportunity to promote our product at the 2007 Computer Electronics Show (CES) because of the outrageous expense of exhibiting there. However, with a little creativity and community support, it’s amazing to see what your entrepreneurial mind can do.

Exhibiting at trade shows has been an essential part of our business model, primarily because our target market focuses on companies that give presentations and exhibit. Through our company, PlasmaGlass, we provide advertising that captures your audience’s attention as they walk down the aisle and view your presentation. This is accomplished through using a projector and our rear-projection acrylic screens, which are thin, lightweight and produce a brilliant picture that is more eye-catching than a plasma television.

Our goal this year was to exhibit at some of the largest trade shows to get maximum exposure for our new screens. We quickly realized how unrealistic this would be on our startup budget. How could we demo

our screens at places like CES and InfoComm? Our goal of exhibiting at large tradeshows was quickly diminishing from unlikely to impossible.

Recently, I was driving up to Park City to introduce our screen to the notorious Skullcandy team.

Skullcandy CEO, Rick Alden has been a mentor of ours for quite a while, so I thought he could benefit from our screen, and we could get some great exposure at his events. Skullcandy was pretty stoked about what we had, and mentioned that they were exhibiting at CES and that they wanted the biggest screen we could provide. Perfect! We loaned the screen to them and they picked up the expense of modifying and shipping it so that it could be suspended from the ceiling directly over their booth. As a result, we had our product at the show and I was able to walk around and make some connections, all for the cost of one night at the Oasis, gas, and a couple meals.

Similarly, we’ve been able to team up with iApplicants, Podski, and other companies to crosspromote our product at some of their venues. iApplicants CEO Ryan Kohler was looking for a new way to show off his Web-based hiring tools to trade show attendees at an HR conference. We loaned him one of our screens and projectors and he said the response was amazing, “the screen was so unique that every one who passed by the booth would pause and stare to see how it worked ... and that gave us the opportunity to speak with people who normally wouldn’t have stopped.”

Within our niche, it has been beneficial to use existing inventory instead of cash to help businesses accomplish their objective, while concurrently helping us promote our product. Surprisingly, it has lead to invaluable contacts with potential customers and new dealers for our screens. $ Click here for the HTML version of this article on launchutah.com.

MarketSpace Want to market your products or services to potential new customers, perhaps even mentors or potential investors? Wish you could place an ad in launch but don’t have the budget?

We can help!

We at launch fully understand the challenge of promoting and advertising your products and services when you only have a limited budget, or no budget at all. That’s why we designed MarketSpace — an exclusive section in each issue of launch.

We believe that many of your first and best customers will come from those

right around you, perhaps even other entrepreneurs. That’s why MarketSpace is exclusively set aside for entrepreneurs who are just starting their companies.

We’ve kept the cost low — even underwriting the expense of every ad that appears in this section. We simply want to make this affordable and available for you to use to get the word out about how great your company is.

If you are an entrepreneur and want more information about MarketSpace please contact us at advertising@launchutah.com.

Those who advertise here will get: >> Half page, full-color ad in the launch issue of your choice. >> Exclusive location in the MarketSpace section of launch. >> Metrics on readership activity. >> Extremely low cost.

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launch

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>> marketing Chris Knudsen

Kicking Butt at Sales 3. Listen

The most important skill a salesperson can develop is listening. Most salespeople lose business because they are too busy talking and not asking the customer the right questions. In sales you will naturally encounter walls put up by the prospect.

The way to overcome those walls is to close your mouth and listen to the customer’s problems.

The most important skill possessed by all successful salespeople is listening.

4. Ask Good, Open-Ended Questions

Chris Knudsen is an entrepreneur, consultant and adjunct business professor at Westminster College.

His blog is widely read at www.chrisknudsen.biz and he can be reached at ctknud@gmail.com.

As a college student, I remember the day my venture finance class was visited by a local venture capitalist. “What’s the most important activity your business can be engaged in?” he asked. The class looked stumped. Was it accounting? Was it software development? Was it operations? I raised my hand and sheepishly replied, “Sales?” My classmates gave me a strange look. The VC stood from his chair, looked over the class and replied, “He is absolutely right.”

From that day on I vowed to become a great salesperson. Over the last 10 years, my skills have evolved and even today I know I have much to learn about being an effective salesperson. It’s a continual learning process. I’d like to share several axioms I have learned about sales that may help you in your efforts.

To overcome customer objections, first listen to the objection. Then restate the objection to make sure you are clear on the concern. Then acknowledge the objection with empathy. Then overcome the objection.

Don’t get offended. If you are to this point of the process, the customer wants to buy.

6. The Close

To become good at sales, you need to understand relationships. You need to have real empathy. You need to be interested in truly helping your customer instead of earning a short-term commission. You need to build trust by being genuinely interested in helping the customer solve his or her problems. Being good at genuine relationship development is more important than developing “sales skills.”

To close the sale, simply ask the client for their business. It’s as uncomplicated as that. You don’t need the Zig Ziglar books. Just simply ask for their business.

If they object, go back into objection resolution mode (see No. 5) and then ask for their business again.

Repeat the process until you walk out with the sale.

I like to approach potential clients as though I were a consultant for the company. Consulting is always about the customer — sales is always about you. If the customer believes you are there to solve problems or educate them, they are more likely to open up and tell you exactly what you need to do to get their business. march/april

5. Overcome Objections

1. Build Real Relationships

2. Consulting is Different Than Sales

16 launch

What are your goals? What problems are you trying to solve? What are you looking to get out of your marketing dollars? What’s the one thing you’d like to change right now about the way your company does business? What’s working and not working for you in your marketing effort? What are your competitors doing that drives you crazy? What keeps you up at night?

What are your customers asking you for that you’re having a hard time giving them? If there was one thing that I could help you change, what would it be? What’s the one problem you need to solve right now? Ask open-ended questions, then listen and take notes so you don’t forget what you’ve learned.

Bottom line: Solve problems, sell benefits not features, sell value, show value, listen, educate, have empathy and build real relationships. By doing these things correctly, I promise you will see a dramatic increase in your sales. $ Click here for the HTML version of this article on launchutah.com.

And The Winners Are...?

Join us to honor Utah’s finest innovations and the companies that created them at the fifth annual

UTAH INNOVATION AWARDS LUNCHEON

THURSDAY, MAY 10, 2007 Noon to 1:30 p.m.

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By Lisa Ann Thomson

Seed Capital “

Where To Get the Cash To Germinate Your Business Let’s be honest. If you ask five smart financial types what “seed capital” is, you’ll get five smart answers.

They’ll agree it’s not traditional venture capital or a commercial bank loan. They’ll agree it’s money you get earlier rather than later in your business’ lifecycle.

They’ll also agree that the Utah financial landscape doesn’t have enough of it.

But exactly what it is and when entrepreneurs will need it can be a little hard to pin down.

To some, it is the very first money: your money, your parents’ money or your neighbor’s money. To others it is the first investment from someone you don’t already know: i.e., an angel investor. Still to others, it is the first institutional money from an official fund: i.e., an actual seed fund.

Then you have the question of timing.

If the seed capital came from your savings account or your dentist, you are likely in the earliest of early stages — probably just an idea you are trying to get from napkin to drawing board. If the seed money came from an angel investor or a seed fund, your company most likely already has something to show for itself — a prototype, a beta launch or a customer.

Next, you have the question of how much money you can expect at a seed stage.

Again, the answers vary. It could be the first $20,000 to test your concept or the first $500,000 to launch your product.

And finally, you have the big question: Where do entrepreneurs get this kind of cash? The truth is, in Utah, there aren’t many places. But there are a few, and there are people calling for more. Here’s a look at Utah’s seed capital landscape.

The Seed Gap

If you’re a budding entrepreneur, the starting point is almost unanimous: The first money has to come from your own pocket or a pocket close to you.

“If you are truly just looking to get started, I would look in your own bank account and

among your family and friends,” says Bryce T. Roberts, managing general partner of O’Reilly AlphaTech Ventures, a seed fund based in San Francisco. “I would be looking at what kind of sacrifices I am willing to make; I’d be polling my personal networks to see if there were a couple thousand dollars, a couple hundred thousand dollars to work as a catalyst for me to get things off the ground.”

But many companies are finding the next step is a little more tricky. T. Craig Bott, president and CEO of Grow Utah Ventures, calls it the “seed gap.” Young companies often find themselves in a tight spot when their own resources run out and they need more capital to move to the next level. But usually they don’t need millions, and therein lies the gap.

“It’s small amounts of funding to move a technology or a concept or an idea to the next stage of the value chain,” says Brian Cummings, director of the University of Utah’s Technology Commercialization Office.

The Ewing Marion Kauffman Foundation has identified a capital gap at $500,000 to $2 million on an aggregate national level.

But for Utah, Bott estimates the gap to be a little lower, ranging from about $50,000 to $500,000.

“That’s significant,” Bott says, “The trend is that a significant portion of businesses launch

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can be successful with a relatively small amount of money — meaning the $50,000 to $500,000 can be the last money that business needs to be successful.”

The reason for the gap is simple: risk.

Investing in a seed stage company is extremely high risk. You are talking about investing in a concept or idea, at the least, or in a beta product with a customer or two at most. “The profile is more risk, more potential return because you get in early,” says Jeremy Neilson of the Utah Fund of Funds.

Bridging the Gap

With the gap comes opportunities for investors, and that means hope for entrepreneurs. One major trend seen across the country is an uptake in angel investor groups. In Utah alone, where there was once just one major angel group in Utah County, there are now angel groups from Logan to St. George, with more in the works.

According to the Kauffman Foundation, these angel groups are key to bridging the capital gap. “Angel groups are starting to figure out how to put their capital together to fit into that gap,” says Marianne Hudson, executive director of Kauffman’s Angel Capital Education Foundation. Hudson points to Kauffman data that indicates in 2005 (the most recent numbers available) the average round investment from angel groups was $266,000 — square in the middle of the seed gap.

Another emerging resource in Utah is seed funds. A seed fund is much like a traditional venture capital fund except that it focuses solely on seed-stage investments. Utah currently has only one: a just-announced seed fund sponsored through the University of Utah’s Office of Technology Venture Development.

The fund is managed by the school’s Student Venture Fund, and specifically targets the earliest of early stage companies.

“We look at it as funding to develop either a concept or a technology. We look at it in its earliest sense,” says Cummings, who has championed the creation of the fund.

The fund will make investments of $50,000 to $200,000, with the purpose of helping a technology develop to the point of becoming interesting to a venture capitalist. As part of that, venture capitalists are invited to the table from the onset.

“We have venture capitalists who would do the follow-on funding involved right from 20 launch

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the get-go,” Cummings says. “They see the technologies and are there to do the next round of funding.”

The university’s seed fund is designed to capitalize on the research and technologies coming out of the major research universities in the state, but it is also open to the community at large. The hope is to model what’s happening at other schools around the country.

“You see it around Stanford and MIT. There are huge capital networks built around the universities. That’s what we’re trying to do here,” Cummings says.

While the University of Utah’s seed fund is the first of its kind in Utah, seed funds are not uncommon in other areas. O’Reilly AlphaTech Ventures is based in San Francisco, but managing partner Roberts says he is open to doing deals in Utah. O’Reilly AlphaTech Ventures’ typical initial investments range from $100,000 to $1 million, but it also keeps another $3 to $4 million in reserve capital for that investment.

Roberts acknowledges that the competition is fierce for attracting seed money from outside Utah. “There’s a huge curve that you’ve got to overcome before you’ll be interesting to someone in Silicon Valley. You’ve got to have a real story about ‘why Utah.’ The idea, the state of the company, and the entrepreneurs have to be pretty compelling,” he says.

Locally, traditional venture capitalists are also dipping their toes into seed capital. The Utah Fund of Funds has worked with several VCs who have set aside capital for seed investments. Neilson points to vSpring Capital as an example. vSpring will invest as little as $250,000 of seed capital, although its typical investments range from $2 to $3 million.

Grow Utah Ventures is another example of a local fund committed to bridging the gap.

Grow Utah Ventures is a fund established by a small group of investors in Northern Utah with the goal to invest in 100 young Utah companies. They’ve invested in about 50 so far, averaging about $250,000 per investment.

“When we put Grow Utah Ventures together about three and a half years ago, we analyzed where our money would be best used,” says Bott. “We didn’t have much in Utah for the seed stage, so we said, ‘Count us in on that level,’ and that’s exactly where we play.”

Another local player is InnoVentures.

InnoVentures specializes in the earliest of

early stage companies, but it is not a pure equity player. Rather, InnoVentures specializes in a type of venture debt. It lends money with traditional interest and repayment terms, and it also takes warrants in the company.

InnoVentures typically lends between $100,000 and $500,000.

“Most venture funds don’t reach down into that area, and if we were doing only equity investments, we probably wouldn’t be able to either,” points out Damon Kirchmeier, managing director of InnoVentures. “But this hybrid model we’ve come up with — debt to early stage companies with warrants — allows us to do a lot of deals in small amounts.”

Moving Forward

Even with these sources of funding, Utah needs much more, says Bott.

“There are two weaknesses in the Utah story,” Bott says. “One, there’s not enough money. Even though we’ve made progress, we pale in comparison to other regions — even the Western states. And two, in Utah, we are not really focusing on pre-revenue companies. If you look at seed capital in the rest of the country, they are willing to come in at the proof-of-concept stage, before any sales.”

And the reason for that? “Our conservative nature,” says Bott. “We want that young entrepreneur to prove he’s got a product that sells before we give him seed capital. That puts a huge burden on the individual, his family and friends, to get his business all the way to the stage where he’s developed something and it’s selling before he gets capital. That’s too big a gap for an individual or family and friends to carry.”

So we’re back to the seed gap — the difference between founders, family, friends and big institutions like VCs and banks.

We’ve got to get more seed money, and we’ve got to get Utah’s seed investors more willing to invest at the seed stage.

“The difference for Utah companies would be huge,” says Neilson. “It would allow more companies to get started, grow and reach venture stage; it would allow companies to test their concepts quicker; and it would add needed expertise and advice to the companies.” $ Click here for the HTML version of this article on launchutah.com.

By Lisa Ann Thomson

Martin Frey, a customer relations consultant and member of Olympus Angels and Utah Angels, sums it up in a nutshell: “We haven’t run out of money to invest.”

With more angels in Utah than ever before, there is more capital available to young companies than ever before. And angel investors want to put it to work. But for entrepreneurs to tap into this funding, they need to know what angels are looking for, how best to work with them, and where to find them. And they need a business that merits investment.

So we got inside the heads of angel investors around Utah, as well as some experts on angel investing, to figure out what makes angels tick and learn what you can do to be the right investment for the right angel.

From their responses comes a primer for every entrepreneur who might be looking for help from above.

That was part of the motivation for Alan Hall and his associates in rallying the troops in Utah. Hall sees an ongoing need for capital for early stage companies, and he firmly believes that entrepreneurism is an important aspect of economic development. “But I’m just one guy,” says Hall, who himself is a long-time angel investor based in Ogden. “We need hundreds of people like myself who are in a position to invest. So my philosophy has been to also act as a facilitator and encourage others to become investors.”

A few groups, like Utah Angels, have been successful stalwarts in the Utah investment community for years. But in the past few years, angel groups have been surfacing all over the state — from the Cache Valley Angels to the Dixie Angels — mostly at the behest of Hall. Today, he estimates there are about 70 active angel investors in Utah’s organized groups, and Brock Blake, CEO of

The Angel Opportunity

FundingUniverse.com, estimates there are a few hundred more who invest individually or could be considered semi-active.

Calling Angel capital is a rapidly growing segment of the equity capital markets. According to numbers compiled by the Ewing Marion Kauffman Foundation, about 500,000 new businesses are started every year in the United States. Of those half million companies, between 30,000 and 50,000 receive some type of angel capital. In 2005 (the most recent numbers available), angel investors in the United States invested about $23 billion compared to the $22 billion invested by venture capitalists. Those numbers translate into a huge percentage. Kauffman estimates that as much as 90 percent of companies who get outside equity capital, get it from angels.

“There is a growing importance of angel investors in funding start up and early stage companies,” says Marianne Hudson, executive director of Kauffman’s Angel Capital Education Foundation.

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What Types of Companies Do They Invest In?

In reality, the type of company an angel will invest in depends on the angel. But there are truisms that can help you research potential investors so you target those most likely to take interest in your venture.

First, research shows that angels tend to look for deals within a geographical area.

For instance, Lon E. Henderson, president and CEO of Soltis Investment Advisors and founding member of Dixie Angels, says his group will entertain deals throughout the region, but they will look hard at companies in the St. George area.

“We’re open to the state and the region, but we do have a priority of trying to be an

on Angels

The Ins and Outs of Getting Your Company Funded By Angel Investors

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Average Source of Funds for Businesses 40% receive money from family and friends 10% receive angel investor funding 2% to 4% receive seed fund money 1% receive venture capital funding

Estimated Angel Investors in the U.S. 4.2 million millionaires in the United States 1 million of those are informal investors 225,000 are estimated to be active angel investors 10,000 are in angel investment groups

Top Angel Investment Preference by Industry (Nationwide)

1) Medical Devices & Equipment 2) Software 3) Biotechnology 4) Business Products & Services 5) Health Care Services 6) IT Services Source: Ewing Marion Kauffman Foundation

economic stimulus for Southern Utah,” he says.

Next, angels tend to focus on companies that match their expertise. Hall prefers companies with a technology focus or a sales and marketing emphasis because his background as the founder and chairman of MarketStar allows him to bring deep industry knowledge and a strong network to the table.

Ronald W. White, a long-time investor and member of Olympus Angels, does strictly information technology deals because of his experience and background in that industry sector. Local investor Greg Warnock, who has a degree in computer science and history with technology companies, also tends to prefer technology-oriented businesses.

“It’s because of a comfort level they have,” Hall says. “They understand the market, they understand the industry, they understand the products and competitors.”

But Hudson points out that organized angel groups — which are an increasing trend across the country, not just in Utah — are helping individual investors expand their industry knowledge and investment opportunities.

“Over time, these groups are going to become more sophisticated and better investors because the investors themselves are learning from each other, certainly learning more about technologies and industries that one angel may not know about but their colleague in that group does,” she says.

When Should You Look for Angel Investment?

One misstep entrepreneurs make when seeking angel investment is looking for it too soon. The first money in your company should come from your own checkbook, says FundingUniverse’s Blake.

“I call it the capital food chain. The first place you are going to go to is yourself — whether that be through savings, personal credit cards, second mortgage, etc.,” Blake says. After bootstrapping with your own funds, you can move on to friends, family and fools — anyone in your personal circle who believes in you and is willing to invest.

If you are going to seek outside investment after that, angels may be a good next step. As with industry sectors, individual angels have their own comfort levels at which stage to invest, but most angels tend to look for early stage companies who have moved beyond an 24 launch

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idea on paper and are positioned for growth.

“I look for firms with validation in the form of revenue and customers,” says Tony Howells, a member of Olympus Angels.

“Volumes of analysis can’t authenticate a business plan like paying customers who are representative of a larger market.”

“If you have somebody who’s out on the market with a product and a few sales, the proximity to a meaningful business is a little bit closer,” echoes Warnock.

“I think that’s where we can best apply our money,” Hall says. “It’s going into a stage of the business which is probably the most critical, and that is to generate and accelerate the revenue growth.”

So if you have a great idea and a slick presentation, your company may not be ready for angel investment. But if you have a great product and a few clients, you may be primed.

How Much Do They Invest and What Kind of Equity Stake Do They Expect?

The Kauffman Foundation studies indicate that from individual angels you can anticipate as little as $20,000 and an average of about $100,000 to $500,000. Its research has also found that in 2005, the average round of investment from angel groups was $266,000 with the range tending between $100,000 and $1 million. But Hudson also points to several examples of angel groups coinvesting up to $2 million or more.

Some angels do provide loans, but for the most part, angel investors expect equity.

That’s what they trade you for — a chunk of your company for a chunk of their money.

The typical stake can range from 5 to 40 percent, according to Kauffman numbers, but the average range is 15 to 30 percent.

That may seem like a lot to an entrepreneur who hasn’t done this before, but to the angel investor, it’s a way to secure a reasonable return on his or her investment, and perhaps more important, a way to secure involvement in the company.

“If they are not going to own 15, 20, 25 percent of a company, at some point they feel like, ‘I’m not really a partner in this business,’” Warnock points out. And since angel investors are often motivated by more than just financial return, a small equity stake that means small participation isn’t as attractive.

Giving up ownership may also be the best

way to take your own remaining equity stake to a much higher level, says Frey. “When there is a real opportunity in the market that additional capital would allow you to capture and would increase the overall value of your venture by more than the equity you would have to give up, it’s advantageous for you to raise capital,” he says.

What Do They Look for In a Potential Deal?

“The bedrock considerations are favorable valuation and deal terms, a scalable business with high margins and accessible market, a defensible position with respect to intellectual property and competition, a well-balanced management team with a track record in the designated space, a clear exit path, and of course projected return on investment,” Howells says.

But he adds that angels look for intangibles too, like philosophy, chemistry and intuition.

“Too often during the pitching process entrepreneurs are focused on a product or concept demonstration and overlook the fact that they are selling an investment with many elements that extend beyond the scope of the business activity,” says Howells.

A big one is the management team. For White, “The key is the management team.

Everything else is secondary.”

Investors are keenly interested in the management team for one reason: risk.

“When you put together a business plan and a forecast for your project, the only thing you know for sure is what’s on the business plan and forecast, will not happen,” Warnock says.

“You don’t know if it will under-perform or over-perform, or in what ways it will change.

But the business world is so dynamic that there’s just no chance you’ll execute exactly to strategy. Knowing that, we’re looking for a team that can be adaptive and reactive and make good decisions in responding to changing circumstances.”

Other factors that attract an angel to a deal include return on investment, involvement, legacy and community building, and mentorship, Howells adds.

How Do You Keep Your Foot Out of Your Mouth?

Knowing what angel investors look for in a potential deal will help you target specific angels who are compatible with what you

Because angel investors are often motivated by more than a return on investment, they usually want to engage in the growth of the business, mentor the entrepreneur and utilize their networks. have to offer and then help you prepare for the meeting.

“The entrepreneur will only get one chance to make a first impression,” White notes, “so he or she should learn everything possible about the prospective target before contact is made. Most entrepreneurs are surprised at how much can be learned, first from public information such as the Web and printed sources, and then from person contacts.”

When given the chance to pitch to angels, send no more than two people to the presentation and deliver a well-rounded overview in 15 minutes or less, says Howells.

“The objective is to create interest and generate further discussions,” he says.

“By definition, angel investors do not expect a fully actualized and executed business plan.”

But they do expect candor and an accurate analysis. “Shortcomings, inaccuracies and exaggerations are usually exposed during due diligence anyway, so why risk your credibility?” Howells points out.

“Entrepreneurs need to be forthright,” Hall adds. “People want to hear the good and the bad.”

Something else to consider as you approach angels: be realistic. Blake points out that statistics show a mere 1 to 2 percent of everyone who is looking for equity money actually gets it. “You have to be a very, very, very good deal to raise money,” he says.

But you’ll help your chances if you are prepared — something angel investors see entrepreneurs consistently fail to do.

From practicing your presentation before you get in front of investors to having your company correctly positioned for investment, entrepreneurs need to have their ducks in a row.

“They haven’t created a good legal team or engaged a good tax player. They have a good product but don’t understand yet who their real client is. They probably have underestimated their time to market,” says Henderson as he lists common mistakes he sees.

Finally, have a long-range plan for your company. Angels get the return on their

investment at the end of the life cycle, so you have to be prepared to explain what the exit strategy is. And be realistic about that too, says Hudson. “Angels who are sophisticated very rarely expect you to say IPO as your exit option. Mergers and acquisitions are really the exit option they are anticipating,” she says.

So know how you are going to grow to the point of merging or being acquired.

“Entrepreneurs have to be able to describe how they would end up selling their business,” says Hall.

A Few Reasons To Consider Calling On Angels.

Finally, it’s important to realize that angels bring more to the table than just cash. They bring experience, objectivity and a network.

And those intangibles may be worth more than their money.

“The right angels, the sophisticated ones, really help an entrepreneur build their company,” Hudson points out. “I’ve seen amazing stories about how their background and credibility have ultimately been more important than their money.”

Because angel investors are often motivated by more than a return on investment, they usually want to engage in the growth of the business, mentor the entrepreneur and utilize their networks. “A lot of them are former entrepreneurs themselves and just love to stay involved and use their skills and experiences,” Hudson says. “And many of them are all about helping to build great companies in their communities as a way of economic development and a way of giving back.”

So if you are at the right stage, in the right location, and willing to trade ownership for funding, then angel investment may be the perfect way to grow your company and tap into Utah’s brightest minds and deepest experience. $ Click here for the HTML version of this article on launchutah.com.

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The Entrepreneur to Entrepreneur Peer Interview Series

>> e2e

The following is a condensed transcript of a peer-to-peer conversation between two of Utah’s entrepreneurs. Click the “play” button to the right for an audio stream of the entire interview including expanded discussions and other topics not discussed in this condensed transcript. Or, click here to download the audio file as a podcast to your computer.

Ragula Bhaskar

Co-founder, President and CEO of FatPipe Networks

Jon M. Huntsman Jr. Utah Governor

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Gov. Huntsman: I am delighted to be here with Bhaskar, whom I have had great respect and admiration for since I first met him. He is a great entrepreneur.

I serve as governor of this great state, I have been in business and public service, and lived overseas three times. I’ve ran an embassy, I have been involved in what was a small family business at one time and helped to build it into a large family business that my brother is now CEO of.

I bring a perspective that is very much private sectorbased to my job here. It guides everything I do from a policy standpoint. If we are going to be able to pay the bills for education and transportation we need to have a viable economy. That means you have to understand the needs of the private sector and understand what our growth opportunities and industries will be over the next 20 to 40 years.

I am always amazed at how competitive the region we are living in is. It is the most competitive and dynamic geographic and economic region in the United States, which is the most competitive nation on the face of the earth. So, we are competing not just against the likes of Denver, Phoenix, Las Vegas and Boise, but we are competing against Deli, Beijing and London. We have to make sure that the right public policy decisions are made to get us ahead in the game and that has been the challenge and the joy of serving as governor the last two and a half years.

Bhaskar: FatPipe makes mission-critical networking products. We are based in Salt Lake City and the company’s primary focus is to ensure that corporations and institutions stay connected all the time to their data networks. We do that by bonding multiple data lines from multiple data carriers into one single fat pipe.

If I may ask you Governor, the Kauffman Foundation recently voted Utah as the most dynamic economy in the country. How much of a role did government play in being recognized by the Kauffman Foundation?

Gov. Huntsman: I don’t think a whole lot. I have to be honest, as a politician, I think maybe you can identify a common direction for the state and you can point the way and you can rally public policy decision making to support that overall direction. But the free market is either there to respond or it isn’t. Gladly in our case the free market has responded well.

Dynamism is exactly the most complimentary term that you could throw at us at this point.

I would much prefer to be No. 1 in dynamism than almost any other category because I think that it suggests that our future is a very bright one ahead.

Entrepreneurs are awake, active and staying here in our state as opposed to fleeing some place else. That excites me to no end. We are going to continue to work very hard on our public policy initiatives to support that sense of dynamism.

I would like to ask Bhaskar a question, as he is sitting here as one of the great entrepreneurs of our state.

How did you make the transition from the academic life to being an entrepreneur and what stimulated you to go from the classroom to the marketplace of ideas and risk taking which isn’t always associated with being an academic?

Bhaskar: I think that the hardest part of making the transition from academia to business was leaving the comfortable life. When I got my tenure, I realized that I had another 35 years of my life and I was reminded of Mark Twain saying that 25 years from now you will remember all of the things you didn’t get to do and won’t regret the things that you did. I thought, “Why don’t I step out and see what else I can do beyond academia.”

Academia is a very predictable path. You become tenured and you become a professor and I think somewhere there was a certain craziness in me willing to step out and do something different without a safety net.

Governor, in your 20s, you actually rolled up your sleeves and helped your dad start and grow the Huntsman Corporation. What are the things you would like to tell a young entrepreneur about your experiences?

You have always got to sharpen your edge and sharpen your approach to the marketplace and continue to reinvent who you are so you never become stale.

Entrepreneurs are never satisfied they always want to remake what they have done, they want to build and improve upon it they are never satisfied in the sense that they have ever arrived at their destination.

They are creators.

Gov. Huntsman: In business, entrepreneurship and the free market there are no guarantees. Our company built up then practically hit the wall a couple of times — as recently as five years ago.

You have always got to sharpen your edge and sharpen your approach to the marketplace and continue to reinvent who you are so you never become stale.

Entrepreneurs are never satisfied they always want to remake what they have done, they want to build and improve upon it they are never satisfied in the sense that they have ever arrived at their destination. They are creators.

I have also found that it is important to believe in the old adage, “You never take no for an answer.” I remember so much in the early days whether it was bankers or customers or anybody else. They would routinely tell us, “No, no we can’t finance that, no we are not going to buy your product, no we are not going to do business.”

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As an entrepreneur, raising money is a tough thing.

It is probably one of the hardest parts of the job and you have to totally believe in yourself because pretty much 99 percent of the people will say, “no” to you.

That is when salesmanship begins and you start telling people why they should invest in you.

An important lesson I learned from my dad was that he would just say, “You know, ‘no’ always means ‘yes’ in my lexicon.”

It is kind of a never-say-die attitude and the minute you throw in the towel, the minute you start hearing “no” as being literally “no” is when you begin to fail as an entrepreneur. Maintaining that entrepreneurial gung-ho-never-say-die attitude in the marketplace is absolutely critical to success.

Also, it was ingrained in us during the earliest days of our family business that the customer is king. You never lose that philosophy in the market place.

I’ve got a question for you Bhaskar. Speaking of family businesses, your partner is your wife, Sanch. Is that a good thing for your marriage or not? I suspect there are a lot of emerging entrepreneurs out there who want to do it as a team or as a couple and they are probably wondering, “Is this a good thing or a bad thing in the long term for my marriage?”

Bhaskar: The most important thing I’ve found is that you need someone that you totally trust as your business partner. You know you can count on that person all the time to do a job because it has to get done. For me, I run the administration and finance side and Sanch runs engineering and support. She really holds it all together.

We have learned how to disagree about an issue at work and still go home without being upset with each other personally — that has helped us a lot and made a big difference.

Gov. Huntsman: How did you get your early stage financing and long-term funding for FatPipe?

Bhaskar: The hardest part of getting out of academia and going into business was that venture capitalists all just say, “OK, you are from academia so what do you know about business?”

So the first thing we did was put in our own money.

When the product was ready to sell, we went to our friends and got them to put in some money. Then we got the VCs involved after we actually started selling the product and started showing that it could sell.

They came in at the stage where the product test was done and then they could take the risk of producing more products and growing the company.

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As an entrepreneur, raising money is a tough thing. It is probably one of the hardest parts of the job and you have to totally believe in yourself because pretty much 99 percent of the people will say, “no” to you. That is when salesmanship begins and you start telling people why they should invest in you. I was very fortunate that I had Wasatch Venture Fund, Tim Draper and Tim’s dad working on the deal. They were willing to take a chance on me.

Governor, you have taken strong measures to raise the marketing budget for tourism and seen a good return. How do you feel about that and what are the other ideas that will have similar outcomes?

Gov. Huntsman: I think Utah is an undiscovered destination in the world with some of the most beautiful, extraordinary, breath-taking vistas and venues anywhere on the face of the earth. There is a fascination about the West. I have always thought that we can market Utah as the quintessential western destination.

We had about 17 million tourists when I was elected and now we are knocking on the door of 20 million. If you see it as an engine of growth as I do, then you have to give it the attention that any engine of growth deserves.

We have a new marketing and ad campaign that really does bring into focus what Utah is — “life elevated” if you will. I think it is working and the numbers would suggest that it is working. We are hitting the mark in terms of the number of travelers and tourists that are coming here. Longer term, I think that it will have profound implications for many industries — the hotel industry, the resort industry, the restaurant industry and many others. Our work on travel and tourism isn’t just being done for the sake of travel and tourism, it is being done because I think there are a lot of industries that are going to be helped that are very important to our longer-term economic viability.

I think we are right on the edge of an explosion in destination travel that will really put Utah on the map.

You are beginning to open up The New York Times or the Times of London and you are finding articles about Utah and the great things to do in Utah.

That is going to have a multiplier effect as people in the crowded city centers are able to see the great life that we have here. I think this will prove to have been a very wise investment. $ Click the “play” button below for an audio stream of the entire interview including expanded discussions and other topics. Or, click here to download the audio file as a podcast to your computer.

Click here for the HTML version of this article on launchutah.com.

“Where People and Ideas Come Together”

Located in scenic Cache Valley, Innovation Campus is northern Utah’s premier high-tech research park. Growing from 40 to 150 acres, Innovation Campus offers top-notch environment, facilities, and business assistance.

As part of Utah State University, Innovation Campus offers unparalleled research and technology resources, along with a responsive and vibrant business community.

Start-up assistance, access to USU faculty and staff, and a talented student workforce are all available to Innovation Campus members. Companies here can also utilize the campus library, recreational facilities, and staff discounts at USU. Innovation Campus is made for companies focused on technology, innovation, and commercialization. Come find out why it’s the right place for you.

1770 North Research Park Way Suite 120 North Logan, UT 84341 435-797-9610 www.usu.edu/innovationcampus

>> spotlight

Skullcandy Rick Alden

By Anmaree Osmond

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It’s amazing what a little bit of

people watching can do for the

entrepreneurial minded.

Serial entrepreneur Rick Alden

launched his most recent company,

Skullcandy (www.skullcandy.com), in January 2003,

but the idea behind it was born years earlier.

Alden was sitting on a train in Osaka in 1998 and observed that nearly everyone was wearing a pair of headphones, listening to music. When cell phones would ring, headphones would come off, only to be put back on again later. It was a constant battle between the two technologies. He noticed the same behavior in London, and found it interesting that people on opposite sides of the world were doing the same thing.

When Alden experienced that scenario himself, he got the idea for what would become Skullcandy’s first product — Link.

He was sitting on a chairlift listening to music when he heard his phone ring. As he was pulling off his gloves and reaching into his pocket for his cell phone, feeling somewhat annoyed at the inconvenience, he realized there had to be an easier way. Reflecting on the people watching he had done, he added to his list of “potential future products.”

He decided that someday, when he had nothing better to do, he would invent a device that would allow people to hear both their phone and their music player through one pair of headphones.

Someday came, and in January 2003 Alden launched Skullcandy, a company that produces “hard core audio and wireless solutions.” launch had the opportunity to meet with Alden to learn more about his business experiences and the journey that led up to the creation of Skullcandy. launch: Skullcandy offers several products, but tell us about the product that started it all.

Rick Alden: I love the Skullcandy Link. It’s a pair of stereo headphones with two plugs, one for your music device and one for your phone. While you’re listening to your music, if the phone rings, it rings directly into the same pair of headphones you are listening to your music on. When a call is received you can turn down the music. We recently received a patent on Link. launch: You have been called a serial entrepreneur. When did that interest in entrepreneurship begin?

RA: In 1986, a friend and I were both going to business school at the University of launch

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When people come from the world they are going to innovate, and they have great passion for their innovation, they will find a way to make it work. It is amazing what human tenacity can produce.

Colorado and racing on the snowboard circuit on the weekends. Being busy with school, it was tough to stay competitive. We realized we weren’t going to excel at that so we started thinking of some fun things to do within our fledgling sport of snowboarding. At that time, everyone wanted to try snowboarding, but mountains didn’t have instructors, or in many cases, even rentals available. We rolled out the first ever learn-to-snowboard demo tour called the Snowboard Jam Series. For $10, people could get boards, boots and a snowboard lesson. That grew into a large nationwide tour. We ran the tour for seven years and had a ton of fun.

In 1989, we expanded our event properties to include pro, amateur and trade events, and also began a snowboard membership program. For $30, snowboarders could buy what we called the Shred AmeriCard, which gave them discounts on lift passes, hot waxes and all sorts of things. We got tens of thousands of kids to send us $30 for the membership card.

Then, in 1993, I got an idea for a newstyle snowboard boot and binding system that would make it so snowboarders wouldn’t have to deal with all the straps. We’d had a reasonable exit on the events and the membership programs, and that money helped finance that next project — the first ever step-in boot and binding system for snowboarding called the Device System. We launched it in 1995 then sold it in 1997 to a publicly traded snowboard company called Ride Snowboards. We had a very good exit on that project. In 1999 I reacquired Device and sold it a second time — this time to the Atomic Ski Company in Austria. launch: Skullcandy seems to target the snowboarding industry. Was that a conscious choice right from the start?

RA: I have always been in the snowboard 32 launch

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industry. It is still my heart and the core of this company. We are not a snowboard company, but we launch our products as if we were. The products fit a youth oriented market, so the marketing must as well.

Skullcandy is an edgy name and product line, but we have found that conservative will buy edgy, but edgy will not buy conservative.

We are intentionally more aggressive than standard audio brands, but we try not to alienate anybody. We sell to a whole lot more than just surf, skate and snow shops.

Our products can be found at major retailers such as F.Y.E., Best Buy, Staples, Zumiez and almost every college campus, guitar shop and CD outlet in the nation. And the list grows daily. Music is universal; people put headphones on. And fortunately, Steve Jobs has created a huge wake for us to surf behind and sell headphones to all of his customers. launch: How have you funded Skullcandy?

RA: I personally financed it in the beginning. I had some capital from the sale of Device and later pulled out a large home equity loan. I believe the first $1 million is always the most difficult stretch for any company. After you hit a million bucks, investors will look at you, but zero to a million is a tough window. I was very fortunate to be able to finance things through the $1 million plus mark.

Eventually, we needed investors to grow the company further. We have some really amazing investors, and we could not have realized our fantastic growth without them.

We actually had a unique experience recently. I am the kind of guy with the kind of businesses where I am lucky if the banks allow me to use the drive-up tellers. We don’t get a lot of conversation with the banks, but one of the key players in Utah banking came into the office recently with some documents, ready to sign us up for a lot of money. It was a real turning point having a bank come to us.

launch: What has been your biggest challenge in trying to grow the company?

RA: Being able to pay for the manufacturing of the product to be able to sell it. When you are an unknown company, you get very poor terms with your factories. We missed out on numerous opportunities because of a lack of manufacturing capital. Vendors don’t pay in advance, and factories don’t build without cash upfront, so it’s a real catch-22 when you are just getting off the ground. launch: What do you think has contributed most to your success?

RA: We have an amazing team at Skullcandy, and we love what we do. But most importantly, our product line seems to be relevant in the marketplace, and sell-through has been fantastic.

On a more personal side, I married great, and my wife, Holly, is very tolerant of the entrepreneurial lifestyle. She has endured the highs and lows, insane hours and crazy traveling. It is a different life being married to someone who is always taking out another loan against their house to get the next business off the ground. launch: What advice would you give to people who want to start a business?

RA: Make sure your idea is not dumb.

A lot of people have ideas for products that should never even be discussed again.

The worst ideas I see are the ones people have when looking in on other peoples’ worlds. Guys who have never snowboarded before should not create a product for snowboarders. If you are not your own customer, you don’t know your product well enough to bring it to market.

It is also important to have passion for whatever the product is. When people come from the world they are going to innovate, and they have great passion for their innovation, they will find a way to make it work. It is amazing what human tenacity can produce. Make sure you are your own customer, that you know your product innovation intimately, and then just put it out there — with passion and a good idea it’s amazing what can happen. $ Click here for the HTML version of this article on launchutah.com.