Decent list of VC blogs - but not so sure about the methodology...

I think this is a good list but I'm not really a big belivever in their methodology. Click through to the article itself and read some of the comments - it seems like some of these measurements are off. No doubt the top 20 at least are all good ones. I like Guy and Brad's blogs alot.


The Top VC Blogs (According To Google Reader)
29 Comments
by Leena Rao on May 30, 2009
Venture capitalists can be valuable sources of information about the tech community. Not only do they have quality insider information but they also have a knack for figuring out how to evaluate startups. So it makes sense that their blogs can be compelling reads.

Larry Chang, a partner at Fidelity Ventures, has compiled a list of the 100 top VC blogs, according to the number of Google Reader subscribers for each one. Chang admits that the rankings don’t necessarily equate to the best quality of content and that there is fine content coming from VC blogs with less subscribers. But the list is a good starting point. Chang says he will be highlighting the best VC blog posts from this list on his blog every two weeks and will update the directory to add new VC blogs quarterly.

Here are the top 20 on the list, with their Google Reader subscriber numbers (you can see all 100 on Chang’s blog):

1. Guy Kawasaki, Garage Technology Ventures, How To Change The World (17,555)
2. Fred Wilson, Union Square Ventures, A VC (11,821)
3. David Hornik, August Capital, VentureBlog (7,060)
4. Brad Feld, Foundry Group, Feld Thoughts (6,434)
5. Marc Andreessen, TBD, Blog.pmarca.com (5,099)
6. Josh Kopelman, First Round Capital, Redeye VC (3,310)
7. Ed Sim, Dawntreader Ventures, Beyond VC (3,239)
8. Jeremy Liew, Lightspeed Ventures Partners, LSVP (2,973)
9. Bill Gurley, Benchmark Capital, Above The Crowd (2,257)
10. Jeff Nolan, SAP Ventures, Venture Chronicles (1,528)
11. David Cowan, Bessemer Venture Partners, Who Has Time For This? (1,261)
12. Christopher Allen, Alacrity Ventures, Life With Alacrity (1,194)
13. Seth Levine, Foundry Group, VC Adventure (1,154)
14. Rick Segal, JLA Ventures, The Post Money Value (795) – Canada
15. Jeff Bussgang, Flybridge Capital Partners, Seeing Both Sides (727)
16. Mike Hirshland, Polaris Venture Partners, VC Mike’s Blog (726)
17. Tim Oren, Pacifica Fund, Due Diligence (661)
18. Jeff Clavier, SoftTech VC, Software Only (656)
19. Mendelson/Feld, Foundry Group, Ask The VC (587)
20. Matt McCall, DFJ Portage Venture Partners, VC Confidential (432)

$500K is the new $5 Million: Good article on First Round Capital

Good article on the ins and outs of First Round Capital and some of the other well known angels/seed funds in the valley.

The most accurate insight in the article: "$500,000 is the new $5 Million"

The Future of Tech May 21, 2009, 5:00PM EST
'Super Angels' Shake Up Venture Capital

As large VC firms cut back, a hungry bunch of seed-stage investors are helping entrepreneurs get their ideas off the ground
By Spencer E. Ante

Earlier this year, as the stock market plunged, most bankers and other financiers hoarded capital and throttled back on new deals. But not Josh Kopelman. Even in the bleakest months, the co-founder of the venture capital firm First Round Capital hustled after startups to write them checks.

Take one sunny morning in February. Kopelman sits in the San Francisco loft of First Round's West Coast office across a table from Gary Briggs. A veteran entrepreneur, Briggs just took over as CEO at Plastic Jungle, a startup building an online marketplace where consumers can buy, sell, or trade gift cards. "There's about $40 billion of unused gift cards on retailers' balance sheets," says Briggs, so focused he doesn't touch the salad ordered in for his lunch.

Kopelman hops up to sketch on a whiteboard. He wants Briggs to describe in detail how Plastic Jungle makes money. "So you get a fee here?" Kopelman asks, drawing a thicket of lines and figures. The CEO explains that with each sale or transfer of a gift card, the company takes a commission. The VC ends the meeting by saying he wants to "kick the site's tires" and confirm retailers' willingness to sell cards on the site. A week later, First Round agrees to pay $1 million for an equity stake.

Even faced with a financial world aflame, Kopelman and a wave of new investors are running straight for the fire. It may be bravery or foolishness, but they're funding startups and entrepreneurs at a time when almost everyone else is holding back. In the latest sign of conflagration, venture capital investment plummeted 61% in the first quarter, to $3 billion, the lowest level since 1997. Only $169 million of that went to companies seeking their first round of venture money, what's known as seed-stage investments.

Kopelman thinks the problems in venture capital go beyond the recession. He says many old-line firms have gotten too big and unwieldy to build innovative companies the way they used to, and many angels, individuals who invest in startups, don't have enough money to back most high-tech ideas. Kopelman and a band of up-and-comers are championing a different tack. They want to reinvigorate venture capital by taking it back to its roots, when firms were smaller, more nimble, and more likely to help startups get off the ground. "I don't think a lot of people have been entrepreneurial about venture capital," says Kopelman.

Besides First Round, these "super angels," as they're called in the industry, include Baseline Ventures, Maples Investments, and Felicis Ventures. They're pushing ahead and financing startups even as big-name venture firms cut back and conserve capital until the economy improves. First Round Capital has quietly become the country's most active seed-stage investor, outpacing such marquee names as Sequoia Capital and Kleiner Perkins Caufield & Byers. In fact, First Round bet on the online personal finance site Mint.com after Sequoia took a pass on the deal—and watched the startup blossom into a rival to Intuit (INTU). "They took a risk on a 25-year-old kid," says Mint.com chief Aaron Patzer, who's now 28.

Kopelman's aggressiveness stands in sharp contrast to the accepted wisdom on Sand Hill Road, the heart of the venture business in Silicon Valley. Last fall Sequoia gave a presentation to its portfolio companies, entitled "R.I.P. Good Times," urging them to slash spending quickly. It was a defining moment in the downturn: Many venture firms took it as a wake-up call to shut struggling startups and halt most new investments.

Kopelman could pay a steep price for moving in the opposite direction. While he has a track record of strong returns and is considered a rising star in the venture field, he has never faced the risks he does today. Not only does he confront the usual challenges of startups but he also could get tripped up by a litany of economic problems. "Investing in young companies is always risky," says Josh Lerner, a professor at Harvard Business School. "Investing in young companies during a time of enormous economic uncertainty is particularly risky."

Getting the venture model right may be crucial for the U.S. economy, whether it's done by Kopelman or someone else. Over the past 60 years the money and expertise provided by venture firms has led to the creation of thousands of companies, including Intel (INTL), Genentech (DNA), FedEx (FDX), and Google (GOOG). A study by the National Venture Capital Assn. found that U.S. venture-backed companies generated 10 million jobs and 18% of the nation's gross domestic product from 1970 to 2005.

FLY ON THE WALL
Kopelman got an early start in the business. His grandfather, Herman Fialkov, founded chip pioneer General Transistor and later started the venture firm Geiger & Fialkov. Kopelman interned at the firm the summer after he finished high school, tagging along with his grandfather to board meetings and to hunt for deals on Long Island. "I was the fly-on-the-wall note taker," says Kopelman.

Now 38, Kopelman crisscrosses the U.S. twice a month from his Philadelphia home to look over 2,300 potential deals a year and stay on top of companies he's backing. We first met over lunch in a Manhattan eatery. As he sat down, Kopelman argued the traditional venture approach is fundamentally flawed: "When you look at the math of venture, I think it is broken."

Kopelman grabbed a napkin and began scribbling. Venture firms raise money from institutional investors and wealthy individuals in discrete funds (usually known by such names as First Capital I, First Capital II, etc.). To give a fund's investors a 20% annual return, the firm needs to triple the money raised within a six-year period, Kopelman said. For a $400 million fund, that means returning $1.2 billion to investors. Since VCs typically don't want the risk of holding more than 20% of the companies they invest in, they have to help build a few companies with a total of $6 billion in market value. But in the past few years only a handful of companies have sold or gone public for more than $1 billion. "You sit there and say, 'Holy crap, that model doesn't work,' " said Kopelman.

What's a venture capitalist to do? For Kopelman and other super angels, the answer is to get small. Over the past five years they have launched funds with $100 million or less and financed hundreds of companies, including Facebook, Digg, and Twitter. Ten years ago, when it cost $5 million to launch a startup, firms such as First Round couldn't exist. But thanks to plummeting technology costs, Kopelman & Co. can help companies launch products today for less than $1 million. "Five hundred thousand is the new $5 million," says Mike Maples Jr., who founded Maples Investments three years ago.

Super angels still aim for billion-dollar exits, but their model doesn't hinge on home runs. Instead, they can profit by hitting singles and doubles and reducing their strikeouts. First Round's second fund, raised in 2007, was $50 million. So Kopelman needs to return $150 million to the investors to hit a 20% annual return. His firm has done better than that: Its first two funds have generated a 35% annual rate of return after fees, says one investor in the funds. Among its successes: StumbleUpon, a Web recommendation tool bought by eBay, and search engine Powerset, acquired by Microsoft.

Established venture firms argue that the super-angel model has limits. Michael Moritz, whose Sequoia Capital backed Google, Cisco Systems (CSCO), and Electronic Arts (ERTS), says big venture firms can do certain kinds of deals that smaller ones can't. With $1 billion, for example, you can back capital-intensive startups in green energy or explore deals in China and elsewhere abroad. Still, super angels play an important and growing role, Moritz says. "My guess is more of it happens over the next few years because of the dearth of financing [for early-stage deals]," he says.

NOT FOR THE FAINTHEARTED
Kopelman's strategy—and strong returns—have won him deep-pocketed supporters. The endowments at Yale, Princeton, and Northwestern universities signed up for First Round's third fund, a $125 million vehicle raised last year. Another backer is Christopher A. Douvos, co-head of private equity investing for the Investment Fund for Foundations, an investment adviser for nonprofits. He agreed to put tens of millions into the third fund. Still, he says there are clear risks to investing in such early-stage deals. "You have to have courage to invest in this strategy," Douvos says.

One day this spring, Kopelman lines up back-to-back-to-back meetings in his San Francisco outpost. The loft has tall ceilings and a foosball table. After interrogating a young entrepreneur in the first meeting, Kopelman quickly lets him know his idea needs refinement. "There's one thing I've learned about entrepreneurs' business plans," he says, bringing the meeting to a close. "Every one is wrong."

Kopelman would know. His early experience in venture capital gave him the confidence to hatch a startup while still an undergraduate at the Wharton School of the University of Pennsylvania. He took the company public in 1996 when he was just 25. In 1999 he left to start an online marketplace, Half.com, for used books and videos. A year later, eBay (EBAY) bought Half.com for $312 million.

Today, Kopelman sees a wealth of opportunities in building businesses on information freely available on the Web (what he calls "data exhaust") or ones that are disrupting markets with cheaper Web technology. After the first meeting, Kopelman settles in to brainstorm with one of those disruptors. Kevin Reeth is CEO of Outright.com, a provider of online bookkeeping software that just launched its first product.

In this exchange, Kopelman switches roles, becoming more parent than prosecutor. After Reeth explains his main challenge is customer acquisition, Kopelman suggests hiring a marketing exec and launching a guerrilla marketing campaign. The idea: Set up a Web site,
canyougetconfirmed.com, that would play off of the troubles former Senator Tom Daschle ran into when Obama nominated him for a Cabinet post. The site would lure customers with free tax tips. Reeth likes it.

Kopelman and partner Rob Hayes adjourn the meeting and scramble to make a flight to Southern California. An assistant hands them their bags, tickets, and travel info, and they whirl out the door. "Welcome to Josh's world," says the assistant.

STRESS-TESTING BUSINESS PLANS
In March, Kopelman meets with Jose Ferreira, chief executive of an online education startup called Knewton, at its spartan headquarters in New York's Greenwich Village. Knewton sells LSAT and GMAT prep courses online, in competition with giants Kaplan and Princeton Review (REVU), but its aim is to use the Web to offer better teaching for less money. Whereas textbooks provide the same material to everyone, Knewton has developed an adaptive technology tailored to the strengths and weaknesses of each student. Knewton is betting its software may be adopted by publishers and other education companies.

Knewton's board has already approved two partnerships, including one deal to license its technology to a rival company. Ferreira wants to cut more deals. But Kopelman says he is concerned that if Knewton does more deals it will spread itself too thin. Tension fills the air. "The most powerful word a CEO can say is no," Kopelman tells Ferreira.

"What happens if Princeton Review comes to us and wants to make a deal?" asks Ferreira.
Kopelman does not budge. "It's worth going to Boston to see them," he says. "But promise me you won't sign anything. I want to see deal points." Ferreira agrees.

Kopelman knows First Round needs to keep taking risks. That's why his firm just launched an event called Office Hours, a sort of American Idol for aspiring entrepreneurs. Several times a year, First Round will offer anyone the opportunity to get 10 minutes with Kopelman and his partners to stress-test their business plan. "We think it's important when a lot of VCs are cutting back that we get out there and see as many people as we can," he says.

One recent gathering took place at Live Bait, a watering hole in New York's Flatiron district. An intern at the firm asks everyone to sign a log-in sheet. It's first come, first served. At 2 p.m. Kopelman orders a sandwich at the bar, sits down at a table, and starts talking. First Round partner Howard Morgan grabs another table. The atmosphere recalls the informality of the early venture days, when firms such as Sequoia and the Mayfield Fund would meet at the Mark Hopkins Hotel in San Francisco for lunch and bat around ideas.

Entrepreneurs arrive, then mill around the bar. By 2:45, 35 people have showed up, including two who drove 90 minutes from Philadelphia. "My hands are cold," says Yasmine Mustafa to her partner, Aaron Hoffer-Perkins. "That means I am nervous." The duo are quitting their jobs to launch a company that helps bloggers make money from their sites.

When the intern says it's their turn, Yasmine springs up and the two walk over to meet Kopelman. Ten minutes later they head back to the bar for a drink on First Round's tab. "It was awesome," says Yasmine. "It actually spawned new ideas, which is what we want before we develop the product."

"Always fast, always to the point, no B.S.," adds Aaron.

I check in with Kopelman around 3:15. With the deep troubles on Wall Street, Kopelman says he's surprised at the level of entrepreneurial action in New York. "It's going great," he says.

Peering down at his notebook, Kopelman says he has already met with eight entrepreneurs and heard two original ideas. "Several ideas we are going to follow up with," he says. Then he quickly heads back in to meet more entrepreneurs.

Great deck for startups on how to present at investor events

This is a great deck on how to present in a very time condensed format and win. The idea is not to focus on your technology or how great it is (we know its great!) but to focus on who will pay for it, why they will pay for it, and why they won't spend money with another company to solve this problem.

I've seen so many startups over the years try to cram everything into a short 5-10 minute presenation at every event imaginable. You don't need to say everything at this first shout out to investors. This is a sales pitch for you - just get them interested enough to ask for a meeting. That's really all you can ask for!

http://www.webyantra.net/2009/05/22/excellent-resource-how-to-make-pitches-at-startup-showcase-events/

What are we all striving for - shareholder value?

Some interesting thoughts for the long weekend on how to not get caught up in the eternal pursuit for more money. I have to agree with Jack Welch - "Shareholder value is a result, not a strategy".

Questions I Wish VCs Would Ask Entrepreneurs (Hint: They’re Not About ‘Shareholder Value’)

By Upendra Shardanand - Fri 22 May 2009 08:38 AM PST

Upendra Shardanand is the Chief Executive Officer and Founder of Daylife, which helps publishers add content and inventory without additional staff or engineering. He also co-founded Firefly Network, a spinoff from his work at the MIT Media Lab, and sold the company to Microsoft (NSDQ: MSFT) in 1998. Upendra was the founding partner at the venture firm The Accelerator Group, and was the Director of Technology at Time Warner (NYSE: TWX).

Several years ago, when I was with the Accelerator Group, we were in discussions with a music-industry executive about a music-related venture. At some point he e-mailed a request: He wanted my colleagues and me to send him a list of our favorite bands. A slightly puzzling request, but we complied – who doesn’t like doing a top-10 list? Afterwards, he shared that he was very pleased with our answers – not one gun-toting, life-of-crime musician on the list! Apparently, he had no desire to work with dangerous acts. Life is too short to get shot.

As odd as that question may have been, it was honest and a nice change of pace from the normal litany of questions one gets from partners or VCs. By now I heard hundreds of investor pitches, and every investor seems to be reading off the same crib sheet. They’re all very focused on how best to maximize shareholder value (as opposed to avoiding getting shot, or some other criterion).

It’s long been accepted that the singular objective for any company is to make everyone money. The more the better. And I’ve been in many a discussion where it seems the wisest way to cut to the chase on a strategic business decision is to ask, “OK, but what will most maximize shareholder value?”

So it was interesting to see Jack Welch recently say: “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy … Your main constituencies are your employees, your customers, and your products.” (I’d personally add suppliers, partners, the environment, and society at large.)

Some buy a trickle-down logic and argue that if it’s good for the shareholders and makes good business sense, then you will end up taking care of all other stakeholders.

Really? In an age where investors and management can get out quick, leaving all the other stakeholders holding the bag, what we end up with is Enron, AIG and Tyco. Those companies may be the extreme examples, but for a long time in the tech industry we’ve had a setup where every dot-com investor and entrepreneur could exit fast and buy that Ferrari, without necessarily having built anything of lasting value. Perhaps more innocuous then Enron, but no less a wasted opportunity to do something truly great.

And companies are like snowballs being rolled down a hill: Once they’ve been pointed in a direction, it’s really hard to change course. A company’s mission only gets watered down with time, its resolve weaker with age.

Perhaps in this era of Obamanomics and global cataclysm, where the maxim of endless growth fueled by endless consumption is being questioned, we’re starting to reset a bit, and the dog is starting to wag the tail. Perhaps we’re starting to see job hunters pursue purpose over money.

Perhaps publications will find new ways to keep score besides who raised how much and who exited for how much. Surely there are metrics other than the dollar by which to judge companies? (Read these words of wisdom on the value of the right metrics from RFK Jr.).

As exit opportunities become scarcer, perhaps entrepreneurs will start attacking hard, long-term projects with real benefits as opposed to get-rich-quick schemes. I once congratulated one of my investors, Scott Heiferman, on the success of his young company Meetup. I was deeply impressed whenever I spotted a Meetup group at a café or Whole Foods cafeteria, and I kept seeing them more and more often. But Scott was visibly irritated.

“Brands or anything that really lasts or matters often take decades to build. We haven’t done anything yet,” he said.

And perhaps boards and VCs will take Jack Welch’s advice and depart from their scripts and start viewing shareholder value as a result, not an objective. I’ll give a discount on the deal if any VC ever asks me questions along the lines of, “what do you do to make your office a fantastic place to work?” or “would you disclose the identity of one of your users to the Chinese government” or “who are you fighting for?”

The things we read, the colleagues we keep, the investors we have. Picking them carefully will determine the measures by which we’re held accountable. Life is too short to get shot.

More bad news (sorry!) from the Angel Capital Association

Some more bad news (sorry) from the angel investing side this time. THe whole article is below but this is the key info:

But in November, 15.1% of angel groups expected to “invest in a greater portion of existing portfolio companies.” That percentage grew to 32.3% in the latest survey, which seems to mirror the thinking of venture capital firms, which are concentrating more money on their own portfolio companies than in new deals.

Also, in November 23.7% of angel groups checked off “raise a new fund” in 2009. That percentage was cut in half to 12.3% in the latest survey.

http://blogs.wsj.com/venturecapital/2009/05/20/angel-investors-opinions-change-on-economy-investing/?mod=rss_WSJBlog

Angel Investors’ Opinions Change On Economy, Investing

By Scott Austin
The Angel Capital Association, a trade organization for North American angel investment groups, released a survey today that updates the opinions of its members from when they were last polled in November.

The differences between the two surveys - the latest canvassed members in March and April - is minimal in most places, with many of the results fluctuating by just a few percentage points. But there are a few major changes of opinion to highlight.

With the question, “Do you plan any major changes to your group structure or investment process in 2009?” respondents were able to check off up to 11 answers that apply to them. Most of the answers came back relatively the same percentage-wise. For instance, 28% of respondents in the November survey expected to “significantly grow the number of member investors” in their groups, while 29.2% in the latest survey expected to do so.

But in November, 15.1% of angel groups expected to “invest in a greater portion of existing portfolio companies.” That percentage grew to 32.3% in the latest survey, which seems to mirror the thinking of venture capital firms, which are concentrating more money on their own portfolio companies than in new deals.

Also, in November 23.7% of angel groups checked off “raise a new fund” in 2009. That percentage was cut in half to 12.3% in the latest survey.

Further in the survey, respondents show they are more pessimistic about the economy than they were a few months ago but more optimistic they’ll find better deals as a result. With the question, “How long do you estimate the credit crunch/ current market conditions will last?”

35.9% of respondents in November expected the fourth quarter of 2009 while 40.3% said 2010. Now, 26.6% said the fourth quarter and 56.2% believe 2010. However, 23.7% in the newest poll said they “might more aggressively seek new deals on an opportunity basis,” higher than 14.8% from November.

To view the two surveys, click here for the newly released one and here for the one issued on Dec. 1. Besides expectations, the survey also breaks down the investment data for 2008. A few highlights: the average total investment per group in 2008 was $1.77 million, down 9% from 2007; the average number of deals made fell 16% to 6.3; and the average investment per deal rose 4% to $276,918.

One note: the ACA does not represent individual angels, but only angel groups which pool a number of “accredited investors” together under one umbrella and invest their money together. The ACA represents 162 of these groups.

Very interesting deck on Customer Development

I don't usually write anything but the most brief comments here but this time, I'm going to put out some thoughts on a recent deck by Steve Blank on Customer Development. This terrific deck starts with a basic premise: More starups fail from a lack of customers than from a failure of product development. Those of us who've spent time with seed and early stage startups know for a fact that this is true.

But as Steve mentions, we have no processes to manage customer development. There are tons of resources available to manage the product development process, but the key driver of success, customers, is left out to dry.

He goes on to talk about the First Customer Ship (FCS) date as the goal for startups, which as we know from experience, is generally the case. but I totally agree with him when he says, "You don't know if you're wrong until you're out of business/money".

Download the deck and read his ideas on how to fix this serious problem. He's wise and its great advice.

http://www.stanford.edu/class/msande273/resources/Stanford%20steve%20101805.pdf

More bad news from TechCrunch on the state of startups and VC

http://www.techcrunch.com/2009/05/18/crunchbase-data-rocks-too-bad-the-q1-numbers-suck-our-report/

CrunchBase Data Rocks. Too Bad The Q1 Numbers Suck. Our Report

by Michael Arrington on May 18, 2009

We’re all glad Q1 is behind us.

Silicon Valley and the start-up ecosystem certainly was not immune to the general economic malaise. The TechCrunch sweet spot, early-stage start-ups, was particularly hurt.

The number of start-ups getting started was down 65% vs Q1 2008. We saw just 184 new start-ups formed, down from 546 in 1Q 2008.

Start-Ups Founded: January 2008 - March 2009Source: CrunchBase
Early-stage start-ups are working hard to do more with less. The average number of staff at new start-ups founded 1Q 2009 was 6, down from 8 a year ago. How do we know? It turns out that there’s a wealth of interesting facts that we can glean from CrunchBase, our structured-wiki startup directory and primary data source for TechCrunch Research. What else did we learn from CrunchBase?

The $3.1 billion in venture capital financing was down 50% from Q1 2008, though up nearly 25% from Q4.

Venture Capital Financings: January 2008 - March 2009Source: CrunchBase
Here’s the thing, transaction volume was weighted heavily to Series B and later stages of investment, suggesting that VCs were focused on providing additional resources for their top portfolio companies as opposed to new deal flow. By example, only four of the startups founded last quarter also reported the closing of outside funding.

Venture Capital Financings by Stage: 1Q 2008 vs. 2009Source: CrunchBase
(Excluding the New York Times’ $250 million bailout raise by Carlos Slim), the biggest consumer web and mobile financings were: obopay ($70M), Zag ($70M), Twitter ($35 million), Omniture ($25M) and Pocket Communications Northeast ($25M.) Monetization businesses received attention: Tremor Media ($18M), Offerpal Media ($15M) and AdMob ($12.5M.)

Perhaps most telling of all, no acquisitions were announced by Google, Microsoft, Yahoo!, AOL, or Amazon. We can’t remember a fiscal quarter where none of these companies announced even a small transaction. In total, $1.6 billion in M&A was reported for the quarter, down from $11.9 billion in Q1 2008.

M&A Transaction Values: 1Q 2008 vs. 2009Source: CrunchBase
There were a total of 82 exits announced for the quarter, and the number of exits was actually higher than the 73 reported Q1 a year ago. In 2009, dealflow was tactical and modest in size. The two big deals of the quarter were Autonomy’s acquisition of Interwoven for $775 million and Cisco’s acquisition of Pure Digital Technologies (aka the Flip) for $590 million.
M&A lTransactions: January 2008 - March 2009Source: CrunchBase

Despite a number of executive departures and hirings, we’re still waiting to hear new news from big internet media. After budget cuts are complete, what will be the sources of future growth? There is a vast sea of start-ups available at newly rationalized prices.

See the report table of contents and table of exhibits here.

The Harsh Reality on Today's Term Sheets

The harsh reality is that entrepreneurs are getting a rough ride out there these days. Is it really worth raising the small amounts of money that investors are willing to dole out with such negitive terms? You'll have to answer that for yourself...

http://blogs.wsj.com/venturecapital/2009/05/18/what-is-an-acceptable-term-sheet-these-days/?mod=rss_WSJBlog

May 18, 2009, 1:31 PM ET
What Is An Acceptable Start-Up Term Sheet These Days?

By Ty McMahan
Even at a time when venture capital dollars are scarce, some first-time entrepreneurs remain reluctant to lower valuations and find a way to work with investors on terms.

Valuations skyrocketed in recent years – a $15 billion valuation for Facebook Inc. in 2007, for example – but in the past several months, as the public markets crashed, private-company values have fallen hard, by as much as 40% some investors say. If you’re the head of a hot, young start-up seeking capital, you may not agree and hold steadfast to your terms. But is now the time to lower expectations?

As an example, longtime angel investor Michael Cann brings up a story about a first-time entrepreneur who early last year shopped around a term sheet for an online media company. Over the years Cann has studied more than a few term sheets, making investments in secondary ticket operations StubHub Inc. and Viagogo Ltd., as well as Second Rotation Inc., an online marketplace for second-hand electronics.

The terms of this particular deal didn’t interest him. Cann felt the term sheet offered by the entrepreneur was too aggressive and they couldn’t find a middle ground. “Compared to term sheets I’ve seen in the last five, six, seven years, some of the things he was asking for would be outrageous in any economic environment,” Cann said.

In February of this year, Cann spoke to the same entrepreneur. He had yet to close the round and his terms hadn’t budged. The company did manage to raise “a significant amount of money from some very successful executives” last year, Cann said, adding that he presumes they know little about angel investing.

“If he can get someone to invest on those terms, good for him,” Cann said.

Here is a summary of the terms:
- Seeking $4 million on a $12 million pre-money valuation;
- Multiple closes but no warrant coverage for early investors;
- 1x liquidation preference (not participating);
- Series A gets one board seat and the common stock elects the other two;
- No covenants to restrict how money is spent;
- No vesting;
- Founder and CEO immediately starts paying himself a $225,000 annual cash salary;
- Founder and CEO will reimburse himself for $37,500 for legal expenses; and
- Option pool is 8.3% of the common stock

Cann says he would have agreed to the following terms:
- Seeking 2 million on a $4 million pre-money valuation ($4 million in capital gives them too much runway, Cann says);
- Multiple closes but no warrant coverage for early investors;
- 1x liquidation preference (not participating);
- Five board members: Two company employees, two representatives of Series A investors and one outside director selected by both company and investors (not typical for angel rounds, but $2M is a big angel round, Cann says);
- No Typical covenants to restrict which govern how money is spent;
- No vesting CEO and CTO get 25% of their shares up front to reflect value already created, the rest vests monthly over three years
- Founder and CEO immediately starts paying himself a $ $125,000 annual cash salary;
- Founder and CEO will not reimburse himself for $37,500 for any legal expenses; and
- Option pool is 25% of the common stock

Other background to consider: Cann said this is the founder’s first start-up, though he was a successful executive in the online media field at big companies. The founder and CEO own something like 80% of the common stock, and the management team will need to be built out. The company’s service, which is dependent on online advertising, launched in the summer, and the site attracted an estimated 50,000 unique visitors in April 2009.

(Readers, what do you think - given the information above, which terms do you think are fair?)
Kyle Harris, managing director of New York-based early-stage firm LiquidityWorks, said he continues to receive pitches seeking lofty valuations and conditions.

“First-time entrepreneurs are so unrealistic to begin with they don’t know where to move to,” Harris said. “When they can’t counter when we make an offer, we know they have no perception.”

However, Harris sometimes appreciates an aggressive term sheet.

“To be an entrepreneur you kind of have to have an inflated valuation,” Harris said. “You have to believe you have a trillion-dollar opportunity. But, these guys pushing crazy terms are unrealistic and lack experience. They assume funds will write checks on how great they think their idea is. I don’t mind someone being unrealistic as long as they can defend the opportunity.”
Both Cann and Harris cited executive compensation as one of the more tricky terms.

Similar to the founder who approached Cann, Harris said a first-time founder recently presented a term sheet asking to immediately be paid $180,000 in salary.

“The thing that frustrates me is the guy working in a basement with no money, then expects to go to big money,” Harris said. “He basically wanted a huge piece of equity, a huge salary and a guaranteed exit no matter the success of the business. Executive compensation is a flaw.”

This is a GREAT article on differentiation

Great article from David Shen on MeToo startups. Differentiation is a huge key to success in startups - there are some terrific ideas in here.

http://www.dshen.com/blogs/business/

May 12, 2009
The Problem with Early Stage Me-Too Product Startups

I believe the universe of internet businesses has become extremely crowded in the last few years. In the early days, you could come out easily with something new because there weren't that many competitors out there. Now, it's hard to find somebody who isn't working on something similar to what you're thinking about. So competition is fierce and many times you'll find entrenched competitors with a lot of product inertia and a great head start.

The other huge problem is on the consumer side. Consumers are deluged by new products and services all the time. They have overload and just keep to the products they know best, and need to have a really good reason to change and move from another service to a new entrant. We saw this first in the past with email addresses; Yahoo Mail users were hesitant to move because the cost of changing your email address was super high and thus user retention was very high. Now add what makes up our digital lives on services like flickr (all our pictures that we've uploaded for half a decade now), or facebook (our friends are all here, plus their interconnections), or linkedin (our business connections are all here, plus all their historical connections). The cost of moving has become so high because we've invested so much time and effort into those services and we don't want to redo that, let alone adding the cost of learning a new service.

As an early stage investor, I've found that this makes picking companies exponentially harder and it's a shame. I meet a lot of smart entrepreneurs with some really great ideas, but then I do some research online and find that there are others who are working on something similar or in a close enough space to be competitive. Then I start to get worried about their prospects.

You can find tons of books on the subject of competition and winning despite having entrenched competitors. In general, I have found that entrepreneurs are doing what they should be doing to attack a crowded market. These are things like (my thanks to Andrew Chen for helping me with this list):

1. Innovate on the product experience (ie. Posterous vs. Wordpress).
2. Business model changes, where you are going free (or freemium) for a product that's usually subscription (or fixed charge).
3. Changing the market where you're going long tail instead of hitting the larger market (ie. casual games versus hardcore games).
4. Change in distribution model, where you are delivering something as a service rather than a download, or bundled into an existing thing (ie. Facebook app) instead of a standalone thing.
5. Change in branding. An example is where you cater to an upscale prestige market or niche market instead of a mass brand, or vice versa like taking a niche product and making it available to the masses.
6. Create a business that is better, out of a larger part of another business (ie. Lefora created a message board hosting product for those who don't want all the bells and whistles of a full social networking product).
7. Innovate on design, which appeals to those who want a similar product but one that looks/feels better.
8. Offering more features on a product, or customization on product.
And the big, traditional way of taking a new entrant into a crowded market:
9. Mass advertising to gain broad awareness and induce trial and adoption of new product in face of existing competitors.

So I am not saying it's not possible to win against a crowded marketplace. My issue is with early stage startups: in order to win in a crowded marketplace, early stage startups often don't have enough resources to last long enough to compete effectively and win. While a lot of the above can be implemented, growth time is limited by whether or not you have enough capital and revenue to survive until you run out.

To me, if you're developing a me-too product, it's ultimately going to boil down to a marketing game more than in any other situation. You can develop the best product or service, but if nobody knows about it because they're busy using something else, then you're still dead.
So distribution for a me-too product is critical. In the past and present, large corporations could do this because they had lots of money to launch large advertising campaigns. They knew distribution channels and could insert their new product there. They had contacts in their market and it was straightforward to get word out that they had a new product even if it was similar to existing products.

As a new startup, you may not have those channels and contacts established, and certainly you don't have money to spend on advertising plastered on the Superbowl, magazines, online, and elsewhere.

However, once you finish your product using one or more of the strategies above, you need to jump to strategy number 9 as soon as possible and get it out to consumers. You don't have time to wait until people notice you; you need to get noticed.

Some possible ways of doing this:

1. Buy advertising. As an early stage startup, this is the least viable unless you somehow have enough money to do this. Lead gen advertising can be better than CPM based advertising as you'll be able to pay only on a referral, but still this costs money. Let's move onto cheaper alternatives.

2. Marketing that involves barter space. You trade something of value for advertising space on their side. Something of value can be advertising space on your site, or donation to their cause for charities.

3. Word of Mouth Marketing. Contact bloggers, magazines, users and get them to try and talk about your product. Getting in the NYTimes is a big traffic driver, as well as many other national circulation magazines. Online publications like CNet and The Huffington Post can also be great. Twitter is also a great up and coming means for getting your word out.

4. Get distribution partners. Existing companies can add your product on their sites and can help you promote it. This is usually in deeper partnership such that it goes beyond just buying ad space. You look for exclusivity in contracts and features that your product has that enhance an existing company's product and prestige.

5. Viral marketing. This is a very hard avenue to execute, which is to start with a few users and then it blossoms outward to many. Determining how your product can be viral can be an elusive game and if you don't hit on it early, you could waste a lot of time tweaking and hoping that something you create will be virally popular and spread.

In working with a few startups, I am disheartened by the fact that the importance of distribution is still not well understood. The leading thought is that "if I build something great, then everyone will come find me." Unfortunately, that is rarely the case in this crowded marketplace, and most early stage companies don't have enough time to let people just wander around until they find out about the product.

They did not do enough work to go out and contact bloggers. They didn't go out and try to woo corporate partners to see if they would help them get their message out. They just waited for users to come and they didn't come in great enough quantity to support their business by the time their money ran out.

So don't let your product fail simply because you can't induce trial. Remember, you have developed a me-too product, one that users already have a solution for and switching costs and barriers may be too high for them to take action to look for a better solution. You need to get them to know that your solution exists, and attract them to try it out - and since you're an early stage startup, you need to do this ASAP to give yourself enough time to let consumer adoption grab hold and ultimately take off, all before your money runs out.

Interesting tidbits on Angel Investing

The GrowThink guys are at it again - they've dug up some interesting insights on today's Angel Investing market. i liked these two tidbits", but the rest are good to know as well.

• Return expectation per deal for investments by successful angels: 30x
• Proportion of business angels that expect a 10 times or better return: 45.4% (what they actually get is another matter...)

These Truths About Angel Investing Will Surprise YouWritten by Jay Turo on Tuesday, May 12, 2009 Categories:


Scott Shane, one of the world's most respected statisticians regarding entrepreneurship and angel investing, has a new book out - "Fools Gold? The Truth Behind Angel Investing in America." It is without question the finest compilation of statistics and cold, hard facts regarding the REALITIES - as opposed to the myths - of the keys to successful angel and emerging company investing. Some amazing statistical nuggets from Scott's book:

• The book's 12 chapters have a combined 692 source references! Compare this to the average "this is what I think with absolutely no basis in numbers" opinions that pass for wisdom on CNBC, on the world of Internet financial blogs, and from your friendly neighborhood financial advisor
• Average portfolio return for angel investors participating in organized angel groups: 27% annual return (quoting this study)
• Return expectation per deal for investments by successful angels: 30x
• Proportion of business angels that expect a 10 times or better return: 45.4% (what they actually get is another matter...)
• Number of companies founded each year that achieve $10 million or more in sales in 6 years: 3,608
• Number of companies founded each year that achieve $100 million or more in sales in 6 years: 175
• Share of drug start-ups that go public: 20.3%
• Portion of venture capital dollars invested in the top five industries for venture capital: computer hardware, software/Internet, semiconductors and other electronics, communication (including mobile) and biotechnology - 81%
• Top reasons why people invest in private companies: To make money (obviously), to learn new things, to pay it forward
• Number of companies financed by business angels in a typical year: 50,700-57,300
• Amount invested by business angels in a typical year: $23 billion
• % of Angel Investors with net worths of LESS than $1 million: 66.7% (really an amazing statistic as the SEC definition of an accredited investor is a person with a net worth of greater than $1 million)
• 45 to 54 - Age range with the highest odds of making angel investments - disputes the myth that most angel investor are retired
• Proportion of angel investments that involve co-investment with VCs - less than 1.1 percent
• Proportion of angel investments made in retail and personal service businesses - 37.5 percent. (Note: If you just make a rule to NOT invest in these 2 areas, your probability of emerging company investing success goes up dramatically)

As working with and investing in entrepreneurial companies is my life's work, I read this book extremely closely and found it both invigorating and challenging. Invigorating in that it confirmed, with statistics, the superiority of private company investment returns vis a vis all other investment classes. And frustrating in that it starkly outlines the very basic mistakes that most private company investors make over and over again that prevent them from being a successful investor in this asset class.

My overall takeaway: If you want to invest in private company deals, only do so via one of two avenues: 1) Via a GOOD angel investment group like The Band of Angels or the Tech Coast Angels (if you can get in) or via a managed portfolio approach such as a private equity or venture capital fund targeted toward the space or via a hybrid, operational approach like Growthink.

Alternative Energy Investments, down the drain?

Natural progression hits the clean tech world...its definitely time for VC's to rethink their investment strategies across the board. Looks like its already happening in clean tech.

http://www.google.com/hostednews/ap/article/ALeqM5hj2JCiyhJBYTBfMLayBEDBi1jRbAD9842QU00

VC spending for alternative energy tumbles 63 pct
By ERNEST SCHEYDER – 2 hours ago

NEW YORK (AP) — Venture capitalists reined in spending on renewable energy to begin the year, with funding for research and startup projects falling 63 percent through March, according to an industry report released Monday.

It is the latest indicator of just how badly the global economic downturn has dampened the rush toward alternatives to fossil fuels. Oil and gas companies have also been hurt as overall demand for energy has fallen in the recession.

From January to March, venture capitalists spent $277 million on clean-energy projects, compared with $715.3 million in the same period last year, according to an Ernst & Young analysis based on data from Dow Jones Venture Source.

"Investors took a deep breath and paused," said Ernst & Young's Joseph Muscat. "The weak economy has caused demand for energy in general to go down."

There were already signs that traditional stock market investors had pulled back on clean energy spending. The report Monday showed how wealthy and institutional investors, some of the most ardent backers of alternative energy, have been forced to tamp down spending as well.
There were a few surprises, however, with some comparatively big money going toward the critical technology of storing energy. New investments more than doubled to $114 million, making energy storage the biggest lure among venture capitalists in early 2009.

The fuel cell sector attracted $45 million in the first quarter, compared with none a year earlier, according to the analysis released Monday.

BASF, the world's largest chemical company, recently spent more than $10 million to build and open a fuel cell plant in Somerset, N.J. The Germany-based company has spent more than $100 million on fuel cell research in recent years.

"Fuel cell technology is one of the most important on the quest toward sustainability," said Horst-Tore Land, head of BASF's fuel cell division.

Battery storage companies raised $69 million in the first quarter, up 37 percent from a year earlier, according to the investment report.

A123 Systems, which makes lithium ion batteries for electric cars, signed a deal with General Electric this year.

While oil and gas companies have cut back spending as well, alternative energy startups can be more vulnerable because many rely heavily on venture capital.

It is not known if the first quarter represented the bottom for new investments in clean technology, though industry observers say conditions appear to have improved marginally.

The recently approved government stimulus package contains billions for research into renewable resources, funds that should help boost investment, said Muscat.

Large chunks of funding have been set aside for such measures as upgrading the nation's electrical-distribution system, tax cuts to promote alternatives to oil, and to make federal buildings and private homes more efficient.

"The long-term trends are still there for clean energy," said Ethan Zindler, head of North American research at New Energy Finance. "This is a period of doldrums, where we're stuck between the last massive wave of investment and waiting for some of the major support from stimulus packages around the world to kick in."


Copyright © 2009 The Associated Press. All rights reserved.

Great pointers on positioning your startup for acquisition - today's only real exit option...

This is a short but VERY good and practical article on positioning your startup for acquisition. The pointers at the end are right on the money!

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May 4, 2009, 6:32 PM ET
Want To Position Your Start-Up To Be Acquired? Follow These Tips
Venture Capital Dispatch HOME PAGE »

By Scott Austin
Last August, Hewlett-Packard Co. signed a letter of intent to pay $360 million cash for LeftHand Networks Inc., a venture-backed provider of storage systems. A few weeks later, Wall Street’s collapse sent the economy in a tailspin and threatened to knock the screws out of the deal.
But after a two-week pause the two sides got back together and in November closed the acquisition on the same terms. Asked how LeftHand was able to command the same price despite the uncertainty created from the financial markets, an investor in the company said, “Maybe it’s because every Sunday I went to church and lit candles. Faith and religion are very important in the sale process.”

Jokes aside, LeftHand was able to hold its ground because it had proven itself valuable well before Hewlett-Packard offered to buy it. H-P had been reselling LeftHand’s software on some of its servers for nearly three years, and realized it couldn’t do without it.

The deal signifies the importance of setting up strategic relationships with possible acquirers, especially in this environment, said the aforementioned investor, Matthew McCall, a managing director with Draper Fisher Jurvetson Portage Venture Partners.

“When you’re hair’s on fire as a corporation, you’ll try anything to make the pain go away,” he said. “Now’s a great opportunity [for start-ups] to enter partnerships, distribution agreements, and dialogues with larger corporations.”

McCall was on hand at the National Venture Capital Association’s annual meeting in Boston last week to provide some pointers on how start-ups can position themselves effectively for a possible exit. McCall, who says his firm has scored 10 exits in the past 18 months, offered a few “key elements” that have helped his portfolio companies exit the past couple of years:

-Form a strategic relationship with a potential buyer. “Companies that have been successful in this enviroment are great at identifying who the strategic players are out there that would rather see you alive versus dead. Some of our portfolio companies are aggressively approaching them as a sugar daddy, as a protector in the market place. They’re going to them and saying, ‘We’re going to get a production line out for you, but getting lease financing is very difficult, would you do that for us?’ And we’re seeing some of these guys come up with corporate lease lines for them or helping guaranteeing those lease lines.”

-Look at it from the acquirer’s perspective. “Too many people try and sell from the position of fear. Especially in this marketplace, instead of saying, ‘How can we sell this?’ you need to get into their shoes and say, ‘Why do they need to buy it?’ One of our most successful sales in the last year happened because this was a critical piece of the buyer’s portfolio. You could see this was a hot part of the market, that they didn’t have a strong position in it and there are two or three competitors. If you can identify that and position it accordingly, you’re in a great position.”

-Identify the alternatives. “If you’re the clear superior company in the market and there are no alternatives, you’ve got leverage. If you’re the No. 2 or 3 technology out there, you can push as hard as you want, but they’re going to push back on you. And then at the end of the day they could buy one of your competitors and could really put you in a bind.”

-Make sure at least two mortal enemies are bidding on your start-up. “We had a company that was looking to sell, and went to a potential acquirer and said, ‘If you don’t move now, so and so will.’ They said, ‘Go ahead sell to them, we’d love to kick their ass in the market.’ About three weeks later we engaged their mortal enemy - the two had a Coke/Pepsi type of relationship. Two weeks later, we signed a letter of intent and closed it in six [weeks], at twice the original bid.”

Is CleanTech really this bad? I don't think so...

From today's WSJ VC Dispatch and referencing the NY Times article. Obama has injected so much interest into CleanTech adoption, plus here in California we have our own set of government initiatives. I don't see the future dimming at all, despite the increased levels of competition in the space.

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http://blogs.wsj.com/venturecapital/2009/05/04/the-daily-start-up-silicon-valley-down-for-the-count/?mod=rss_WSJBlog

The New York Times has painted a dire landscape of the clean technology space in the past few days. On Thursday, in a story titled, ” Clean Tech’s Future Dims as Financing Drops Off,” the Times cites a large drop-off in first-quarter funding and wonders if “the green bubble” has burst. Then on Sunday, another story cited the first-quarter numbers and suggests that “the falloff in the early-stage technologies could affect countries’ abilities to introduce new technologies at the large scales that matter.” Quick take: Put down the fire torches (and pick up the energy-efficient LED lights). Three months represents a very small slice of data in the long-term investing world of venture capital. The cleantech sector’s funding woes are mirroring the overall decline in investments, and venture firms tell us they’ve taken a pause from investing in capital-intensive projects for the time being, especially as they wait to see what Washington does with its stimulus funds. So don’t think this sector is dying out - the Obama administration is determined to make oil independence a signature policy, and will make sure they throw a ton of money at the sector to the delight of VCs….

We'll be at this months's SVASE event - come check it out!

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