Finallly some good news on the VC exit front! After the billions that have gone into Cleantech, it looks like we'll be seeing some IPO's in the not too distant future. Be sure to note that Steve Westly definitely has a more positive attitude than alot of other folks, but the growth in some of the companies noted here is real.
http://www.pehub.com/43201/westly-well-have-a-dozen-cleantech-ipos/
Westly: We’ll Have a Dozen Cleantech IPOs
Posted on: June 25th, 2009
Westly Group
There are cleantech bulls. And then there is Steve Westly.
The former eBay marketing director and onetime California state controller, who currently runs Silicon Valley venture firm The Westly Group, is predicting that the moribund market for new public offerings is about to wake up. In the next 12 months, Westly told participants today at VCJ’s Financing the Cleantech Vision conference, there will be a dozen clean technology IPOs. Some of them, he predicted, will be blockbusters.
It’s a remarkably optimistic outlook, given that so far this year there have been only been 13 U.S. IPOs priced in any industry – down from 35 during the same period last year, which was also a subdued period for new offerings. On the new filings front, the situation compares even more poorly – with just 12 IPOs filed this year, down 89% from last year, according to Renaissance Capital.
Still, there’s great desire amid VCs for a homerun cleantech IPO – something perhaps to rival the Netscape IPO, which ushered in the era of fast Internet riches.
Who’s on the short list? Westly mentioned Silver Spring Networks –the Silicon Valley-based developer of smart grid technology that has raised $168 million in venture funding – as a likely candidate. Silver Spring has certainly proven it can generate buzz, as it was a top pick of a few conference-goers asked to name a likely cleantech IPO hit.
Another favorite pick was Solyndra, the Fremont, Calif.-based developer of photovoltaic systems for commercial rooftops that has raised $226 million in venture funding to date. Another that’s expected to debut sooner is litiium ion battery maker A123 Systems, which is already in registration and recently filed an amended prospectus.
Magma Energy could also be a contender, though it’s making its debut in Canada. The Vancouver geothermal company, according to news sources, filed a preliminary prospectus today and is looking to raise C$50 million or more in an offering on the Toronto Stock Exchange.
Friday, June 26, 2009
Monday, June 15, 2009
Got your cocktail/elevator pitch ready?
Some good solid advice on how to be ready for the well known cocktail (or elevator) pitch opportunity. It always surprises me how hard it is for entrepreneurs to explain their companies in a minute or less. If you can't do it, you certainly can't expect your advisors or exisiting investors to do it. Even bigger companies have a hard time with the short speech too.
Work on it, and practice - it helps!
http://blogs.wsj.com/venturecapital/2009/06/11/winding-up-for-the-cocktail-pitch/
June 11, 2009, 9:44 AM ET
Winding Up For The “Cocktail Pitch”
By Scott Austin
Say you’re an entrepreneur at a cocktail party snacking on some trail mix when you strike up an innocent conversation with the guy next to you who turns out to be a venture capitalist. He’s interested in hearing more about your company - are you prepared to make the pitch?
Mark Suster, a general partner at Los Angeles-based venture capital firm GRP Partners, appeared on the Fox Business Network yesterday to help new entrepreneurs develop what he calls the “cocktail pitch.” As he stated in the Fox interview:
“You know that you’re going to be faced with this cocktail party pitch scenario a lot of times in your career. It’s not just pitching a VC - you bump into a potential customer, you bump into a business partner, you bump into a journalist who wants to cover your story…what are you going to say? You need to practice that so it rolls off your tongue with energy and excitement. If it’s the first time you’re saying it, or you haven’t practiced it, it’s not going to sound very good.”
I’ve embedded the Fox Business clip at the bottom of this posting for your viewing pleasure. Suster also recently blogged about this topic, and with his permission, I’ve reprinted some of his tips below. If you’re a new entrepreneur, Suster’s advice is very helpful. For more on this topic, please check out Suster’s blog or the original post in which he also advises what topics the pitch should cover.
1) Show energy & enthusiasm – Passion sells. Show energy and excitement. Get your game face on. Make an impression. This is your shot and you have my attention. Don’t waste it on low energy, mumbling, limp handshakes or lack of assuredness. I’m not saying go “over the top” in your excitement, but enthusiasm for your idea is contagious. If you’re shy or introverted I don’t expect you to be something you’re not – it will come across as insincere. But at least practice your pitch enough so that you can say it with gusto.
2) Be human (no jargon, give me examples) – Most people who pitch me use jargon. I have a simple philosophy. If you can’t explain to me what you do in simple terms I assume that you don’t know what you’re talking about and you’re hiding behind terminology to sound more intelligent. The most difficult of topics can be explained in human terms. I like people to use real world examples. When I talk about my recent investment in RingRevenue I like to talk about the problem that affiliate networks have selling high value products. I call it the “treadmill problem”. If I want to buy a treadmill I won’t click and order over the Internet when a treadmill costs $3,000 or more. I want to speak with a sales rep to understand the 8 different models and which I should buy. With RingRvenue affiliate networks can track calls like Internet sites track clicks. Explaining this in “treadmill” terms I believe puts a human face on the issue.
3) Use numbers - Numbers speak. And they help convince people that you know what you’re talking about. In the RingRevenue example the pitch goes something like this: ”The highest that a product costs in an affiliate network is $200 because above that price people prefer to call a sales rep rather than buy online. Affiliate marketing is a large market already: $10 billion of goods sold through this channel of which the networks make fees of $2 billion. We think we can increase goods sold through this channel by 10x making it a $100 billion channel.”
4) Tell me what you want from me – In marketing or sales terminology we call this a “call to action” and I’m surprised at how few people incorporate this into their pitch. What is your goal in telling me about the virtual reality game you built that targets teens? Do you want me to meet you at some point in the near future? Do you want to approach me in 6 months but just want to be on my radar screen? Do you want to follow up with me via email to find out who invests in $250k deals in Southern California? Close by telling me what the next steps are or how I can help. Please don’t always make it a meeting for next week if you aren’t immediately fund raising. It can be as simple as, “I just want to say hello and tell you what we do so that I can speak with you next year when we’re raising money. Do you mind if I drop you a quick email with my contact details?”
5) Be prepared for the deep dive discussion if I engage – If you’re pitching me the Cocktail Party Pitch you had better be prepared for a deep dive. I might have just been thinking about investing in a self-service retail kiosk company so the fact that you have a product like this is great. I can cover the “Deep Dive” another time, but one bit of advice now … don’t do all the talking. I remember a friend from Australia had a saying that always stuck in my mind. He said, “that chap is a crocodile. All mouth an no ears.” Selling is about listening, asking questions and peppering in commentary. The Elevator Pitch is as much about selling as it is about pitching. So if you get beyond first base (the first 1-2 minutes) get ready for two-way dialog.
Work on it, and practice - it helps!
http://blogs.wsj.com/venturecapital/2009/06/11/winding-up-for-the-cocktail-pitch/
June 11, 2009, 9:44 AM ET
Winding Up For The “Cocktail Pitch”
By Scott Austin
Say you’re an entrepreneur at a cocktail party snacking on some trail mix when you strike up an innocent conversation with the guy next to you who turns out to be a venture capitalist. He’s interested in hearing more about your company - are you prepared to make the pitch?
Mark Suster, a general partner at Los Angeles-based venture capital firm GRP Partners, appeared on the Fox Business Network yesterday to help new entrepreneurs develop what he calls the “cocktail pitch.” As he stated in the Fox interview:
“You know that you’re going to be faced with this cocktail party pitch scenario a lot of times in your career. It’s not just pitching a VC - you bump into a potential customer, you bump into a business partner, you bump into a journalist who wants to cover your story…what are you going to say? You need to practice that so it rolls off your tongue with energy and excitement. If it’s the first time you’re saying it, or you haven’t practiced it, it’s not going to sound very good.”
I’ve embedded the Fox Business clip at the bottom of this posting for your viewing pleasure. Suster also recently blogged about this topic, and with his permission, I’ve reprinted some of his tips below. If you’re a new entrepreneur, Suster’s advice is very helpful. For more on this topic, please check out Suster’s blog or the original post in which he also advises what topics the pitch should cover.
1) Show energy & enthusiasm – Passion sells. Show energy and excitement. Get your game face on. Make an impression. This is your shot and you have my attention. Don’t waste it on low energy, mumbling, limp handshakes or lack of assuredness. I’m not saying go “over the top” in your excitement, but enthusiasm for your idea is contagious. If you’re shy or introverted I don’t expect you to be something you’re not – it will come across as insincere. But at least practice your pitch enough so that you can say it with gusto.
2) Be human (no jargon, give me examples) – Most people who pitch me use jargon. I have a simple philosophy. If you can’t explain to me what you do in simple terms I assume that you don’t know what you’re talking about and you’re hiding behind terminology to sound more intelligent. The most difficult of topics can be explained in human terms. I like people to use real world examples. When I talk about my recent investment in RingRevenue I like to talk about the problem that affiliate networks have selling high value products. I call it the “treadmill problem”. If I want to buy a treadmill I won’t click and order over the Internet when a treadmill costs $3,000 or more. I want to speak with a sales rep to understand the 8 different models and which I should buy. With RingRvenue affiliate networks can track calls like Internet sites track clicks. Explaining this in “treadmill” terms I believe puts a human face on the issue.
3) Use numbers - Numbers speak. And they help convince people that you know what you’re talking about. In the RingRevenue example the pitch goes something like this: ”The highest that a product costs in an affiliate network is $200 because above that price people prefer to call a sales rep rather than buy online. Affiliate marketing is a large market already: $10 billion of goods sold through this channel of which the networks make fees of $2 billion. We think we can increase goods sold through this channel by 10x making it a $100 billion channel.”
4) Tell me what you want from me – In marketing or sales terminology we call this a “call to action” and I’m surprised at how few people incorporate this into their pitch. What is your goal in telling me about the virtual reality game you built that targets teens? Do you want me to meet you at some point in the near future? Do you want to approach me in 6 months but just want to be on my radar screen? Do you want to follow up with me via email to find out who invests in $250k deals in Southern California? Close by telling me what the next steps are or how I can help. Please don’t always make it a meeting for next week if you aren’t immediately fund raising. It can be as simple as, “I just want to say hello and tell you what we do so that I can speak with you next year when we’re raising money. Do you mind if I drop you a quick email with my contact details?”
5) Be prepared for the deep dive discussion if I engage – If you’re pitching me the Cocktail Party Pitch you had better be prepared for a deep dive. I might have just been thinking about investing in a self-service retail kiosk company so the fact that you have a product like this is great. I can cover the “Deep Dive” another time, but one bit of advice now … don’t do all the talking. I remember a friend from Australia had a saying that always stuck in my mind. He said, “that chap is a crocodile. All mouth an no ears.” Selling is about listening, asking questions and peppering in commentary. The Elevator Pitch is as much about selling as it is about pitching. So if you get beyond first base (the first 1-2 minutes) get ready for two-way dialog.
Friday, June 12, 2009
The Basics of the Financial Food Chain
Here's the basics of the financial food chain for newbies. Good honest info on this from ReadWriteWeb (as usual) but there's a lot more info out there on each rung of the ladder. If you're interested in learning more about each step, do you homework!
http://www.readwriteweb.com/readwritestart/2009/06/the-capital-raising-ladder.php
The Capital-Raising Ladder
Written by Bernard Lunn / June 11, 2009 4:55 PM / 3 Comments
This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.
The amount of capital you will need depends on what kind of venture you plan to build. You may need to go no further than the first rung of the ladder. You might be able to build a very good business that meets all of your financial needs without raising a dime from anybody. You might also strike it lucky and get phenomenal growth without needing capital. But being under-capitalized is a big source of venture failure. So you need to assess how much capital you'll need. Your chances of realistically getting that capital should factor into your planning. If you can reach only the lower rungs of the ladder, don't plan a business that needs higher levels out of your reach. If your first venture is a success, the other steps on the ladder will be more easily accessible if you decide to pursue another venture.
10 Steps on the Ladder
You may need only a few of these steps. This is not meant to be a "do this, then do this, and then do this" progression. You can skip steps and stop at any point.
- No cash, moonlighting, sweat
- Credit card or savings (personal round)
- Friends and family round
- Incubators
- Serious angels and small VCs
- Classic VCs
- Corporate VCs
- Non-recourse working capital bank loans
- IPO
- Exit: Capital Realization
Our aim with this chapter is to help you understand what these investors want. Habit #5 in Steven Covey's "7 Habits of Highly Successful People" is:
Seek first to understand. Then to be understood.
1. No Cash, Moonlighting, Sweat
This is the earliest possible phase, when all you need is to build a website that can be uploaded to your server and that demonstrates your idea. If you are a non-technical entrepreneur, this step is not feasible. The non-techie equivalent would be a business concept: identifying a big gap in the market, doing enough research to be credible, and developing a unique approach to filling this gap.
2. Credit Card or Savings (Personal Round)
Now you need to load your site onto a production server (or create a fancy slideshow) and buy business cards. Maybe your phone bill just went up, or you need to travel somewhere to meet someone. No problem; no need to ask anyone for money. Just keep track of these little items. They are pre-operating expenses. If you get to profitability without external investors, these loans of yours to the company can be re-paid. If you raise external capital, this is almost always regarded as sweat equity (meaning you don't get it back until exit time, when you sell your equity).
Be careful. Loading up on credit card debt is risky. You almost always need more money than you think, and it takes longer than you think to raise real money. You can rack up a sizable debt fairly quickly. If your credit card company tightens up, you'll have no options. If your venture fails, you'll be left with a nasty bill, probably with crippling interest rates.
3. Friends and Family Round
You are now at the stage where this venture of yours might really take off. But now you need more than you can afford but less than is sensible to ask from an angel. This is the friends and family round, people who "invest" because they know you, like you, and trust you. Don't take this as validation of your venture. It is purely validation of how they feel about you.
Keep the deal simple. This has to be convertible debt. That means:
They loan the money to your business,
It converts into equity at the first equity round.
This lets you avoid having to ask your friends and family to valuate your venture. They are not experts, and it makes for difficult conversations with people who still like you.
Your friends and family will always be important to you... more important to you than this venture. Don't make promises you are not 100% sure about. Be totally open and transparent, and do your best. If you follow these simple rules and your venture fails, you at least won't lose your friends and family.
Document what has been agreed on, even if only with an email trail. Memories may prove faulty.
4. Incubators
The US alone has 600 technology incubators. One may be near you.
Some are little more than office space and offer no real value: don't waste your time with them. Look for ones with a track record of successfully incubating ventures. That track record means that angels and VCs look to these incubators for deal flow, meaning you will get access to capital when you need it.
Incubators should give you four things:
Cash. Not all incubators have cash to invest. Look for the ones that do. This could replace a friends and family round. They might do a convertible deal, letting the angels or VCs set the valuation. That is ideal. If they insist on a percentage for a small amount of cash, take a long hard look at their track record. Those deals of, say, 10% of the venture for $20,000 may work for some first-time entrepreneurs if the incubator can really deliver the credibility and network you need. But note that later investors make their decisions based on the merits of your venture. The incubator just gets you through the door and may coach you on what to say as you walk through. Is that worth 10%? Because $20,000 is probably not worth 10%.
Services on a deferred-payment basis. These would be from vendors (landlords, lawyers, accountants, designers, advisors, etc.) who get paid only after the venture is funded. So, these vendors are also betting on the incubator's track record.
Mentorship and championing. This should come from the person in the incubator who really believes in your venture but also challenges you at every step to make sure you are really ready to take it to the next level. Look for a mentor/champion who has been an entrepreneur. There has to be chemistry. See the chapter on Building An Advisory Board and follow those guidelines when choosing a mentor/champion in an incubator. Yes, you choose them. It is not just about them choosing you.
A network of entrepreneurs and investors they can tap into on your behalf.
Why do successful entrepreneurs put time and money into becoming incubators?:
To get in on the ground floor of a great venture and make some money.
The buzz of startup life is addictive.
To do some good, and repay the good fortune they have had.
To help the local region. Perhaps they came from here, went to Silicon Valley because it was their only option, but wished they had an incubator like them locally when they were starting out.
Good incubators are a great rung on the ladder. But choose carefully: some will only waste your time
5. Serious Angels and Small VCs
Serious angels do what they do for a living. That is their day job. Sure, they love it and are passionate about it, but they also want to make money from investing. These serious angels are very different from the person in a full-time job who enjoys the distraction of hearing pitches and occasionally writing small checks.
The serious angels operate just like small VC firms. Some work in association with other angels so that they can provide enough funding that the company doesn't have to rely on VCs too early on. Some have raised money from other angels and in effect become small VC funds themselves. Serious angels take all of these steps because of one overriding fear:
They fear getting squeezed by a VC that invests in a later round.
As an entrepreneur, you need to be sensitive to that fear. Almost all entrepreneurs are too optimistic about their plan. They assume they can reach whatever milestone they have with less time and money than they really need. Then, when the venture runs out of money, the angel has two options:
Invest more money. At this point, they are investing in an entrepreneur who has not hit their numbers and whose credibility is questionable. So this does not feel good. The smart ones will just assume at the outset that they will have to invest way more money than you are asking for. For example, if you say, "We can get to profitability (or some other milestone) with $500,000," they will assume that something more like $1 million is needed and plan accordingly (by reserving as much of their or their partner's capital as is needed).
Get squeezed by a VC. In this case, their stake will be massively diluted. Say they invested $500,000 and got a 20% stake. Now, the venture is running out of money and needs $3 million urgently. The venture has good prospects, so VCs are interested. Some VCs will extract harsh terms under these conditions. Angels obviously don't like being treated this way. The venture is a winner, and they spotted it early, so why should they be the loser in this game? Bear in mind that you, the entrepreneur, get squeezed in this situation as well, but you are in a better position than the angel because the VC needs you to continue working to build value. But basically, this is bad news all around.
You can avoid this situation in two ways:
Be more realistic in your business planning. Yes, this is hard. Planning with multiple levels of uncertainty is hard. That is why investors, who know this fact very well, usually want more time to evaluate your venture than you'd like to give them. Use the angel's experience to help you with business planning. Check your assumptions against their experience. The mechanics of a spreadsheet are simple; the mistakes always lurk in one or two main assumptions. This is why the real-world experience of your advisor, incubator champion, or angel is critical.
Work with angels who, with their partners, have enough cash to invest if you do end up needing more money than planned. Work with angels who have a strong track record and good connections with people on the next rung of the ladder: the classic VC funds. VC funds are less likely to squeeze (read, alienate) an angel who they know is a great source of ventures.
6. Classic VCs
If you are a serial entrepreneur who has already built and sold a VC-funded company, you can jump straight to this rung of the ladder. If not, don't even think about it. For Web technology ventures, classic VC funds have become a source of late-stage expansion capital. Some of those VCs are getting back in the early-stage game by one of three methods:
Establishing a separate early-stage fund. Unless the VC has different partners, this separate fund is probably little more than a name and hypothetical allocation of money.
Acting as Incubator. This works like a convertible loan and can be a great solution.
Cultivating a network of friendly angels. The idea here is that they send deals to these angels, who bring those deals back when the ventures need more money.
Be careful. Many classic VCs like to work with a few "entrepreneurs in residence" to create ventures in-house. Their interest in any of these projects may be no more than due diligence.
In short, if you don't have a good relationship with a classic VC, don't start here.
7. Corporate VCs
Higher up on the ladder are corporate VCs. They get their deal flow from classic VC funds and invest with strategic objectives. They typically look to grow the market for their core product. They may want a minority stake in a venture that they see value in acquiring later on. Corporate VCs can be great, but make sure the deal does not come with strings attached that would scare off other potential acquirers.
8. Non-Recourse Working Capital Bank Loans
This is the high-five moment for bootstrapped ventures. It means you have been profitable for a while but need working capital because of fast growth. Most banks like to fund these. The big deal about non-recourse loans is that you are not personally liable. The bank uses your company's cash flow as collateral. For entrepreneurs who have gone into personal debt to build their venture, this is a big, big milestone.
9. IPO
This is the golden ticket for a VC-backed business. Well, at least it used to be. And it may be so again. It is another rung on the capital-raising ladder. You do an IPO to raise money, at least in theory. In reality, the larger motivation is to get your stock tradable (i.e. "liquid") so that you and your investors can sell some of it.
10. Exit: Capital Realization
The final step is to realize value by selling some or all of your stock either in a trade sale or to public market investors if you have done an IPO.
If you are starting out, then yes, all of the steps above the fifth rung on the ladder may as well be on the moon. But as with anything, take it one step at a time.
The Incredible Shrinking VC Industry
If you don't know Paul Kedrosky and his great blog, Infectious Greed, take a look - you'll become a follower too. This is an interesting article from the NY Times on a speech Paul gave this week at the Kauffman Foundation. The topic: Right Sizing the US VC Industry. And yes, its more of the same: VC must shrink by half to generate the kind of returns that are expected of players in this asset class. Its not news anymore, but its today's reality and we all need to get used to the incredible shrinking VC world.
http://bits.blogs.nytimes.com/2009/06/10/does-the-venture-industry-need-to-shrink-by-half/
June 10, 2009, 8:00 am — Updated: 5:22 pm -->
Does the Venture Industry Need to Shrink by Half?
By Claire Cain Miller
Will the venture capital industry survive? Yes, says Paul Kedrosky, but it needs to shrink to half its current size if it wants to start generating competitive returns again.
Mr. Kedrosky made his case in “Right-Sizing the U.S. Venture Capital Industry,” a report published Wednesday by the Ewing Marion Kauffman Foundation, where he is a senior fellow studying entrepreneurship, innovation and the future of risk capital. He is also an investor and the author of the blog Infectious Greed.
Venture capital’s “poor returns make the asset class uncompetitive and at risk of very large declines in capital commitments as investors flee this underperforming asset,” he wrote in the report. “The sector must shrink its way back to health if venture capital is to provide competitive returns and secure its own future as a credible asset class and economic force.”
Mr. Kedrosky is the latest to pipe up in the debate over the fate of the venture capital industry, as the exit markets remain virtually shut for most start-ups and limited partners reconsider whether they want their money tied up in illiquid venture funds. Many other V.C.’s are also concluding that venture funds must shrink, including the elder statesmen of the industry and limited partners.
Venture capital was healthiest in the early to mid-1990s, Mr. Kedrosky argued, when firms invested $5 billion to $10 billion a year in start-ups. Today, they invest about $30 billion a year. He argued that limited partners — the investors in venture funds — should shrink their investments to help resuscitate the sector.
Though the industry often cites the 8 percent returns for venture capital over the last 10 years, compared with −27 percent for the S&P 500 and −28 percent for the Nasdaq, Mr. Kedrosky said it was more accurate to compare venture to the Russell 2000, an index of small-cap stocks that returned 18 percent over the same period.
To once again generate competitive returns, the industry should slash investment by half, to approach the investment rates of the mid-1990s, when returns were last healthy, he said.
Venture investment swelled during the late 1990s and the dot-com bubble, which “led to a collapse in performance from which the sector has never recovered,” Mr. Kedrosky wrote. Since then, it has been slow to shrink for several reasons, he said. The life of a venture fund is typically a decade and investments are generally illiquid during that time. Venture capitalists collect management fees of a percentage of capital under management, so they are paid more for bigger funds.
He also pointed to “a widespread and incorrect belief that venture capital is a necessary and sufficient condition in driving growth entrepreneurship.” In fact, only about 0.2 percent of the estimated 600,000 new businesses created in the United States each year are financed by venture capital and about 16 percent of the fastest-growing companies are, he found.
Though those arguments will surely make venture capitalists defensive, Mr. Kedrosky is ultimately a fan of the industry and argues that it does societal good by helping many entrepreneurs start companies. To continue to do so, though, “the venture industry must be viable — it must offer its investors competitive returns,” he said. “At present, it is increasingly uncertain whether the U.S. venture industry can and will do that.”
The size of the venture industry is a problem, Mr. Kedrosky wrote, because too much capital causes higher valuations and lower exit multiples.
Another problem he cited was that information technology has matured to the point that new innovations will not be hugely profitable and it costs a fraction of what it used to to start an I.T. company. Still, venture capitalists invest more than half their money in these companies, “because they always have, not because they credibly anticipate improved returns,” he said.
Finally, even if the initial public offering market recovers, venture capitalists will very likely only be able to bring companies with significant revenues and profits to market, but never again young, money-losing companies as they did in the late 1990s when returns shot up, he said.
http://bits.blogs.nytimes.com/2009/06/10/does-the-venture-industry-need-to-shrink-by-half/
June 10, 2009, 8:00 am — Updated: 5:22 pm -->
Does the Venture Industry Need to Shrink by Half?
By Claire Cain Miller
Will the venture capital industry survive? Yes, says Paul Kedrosky, but it needs to shrink to half its current size if it wants to start generating competitive returns again.
Mr. Kedrosky made his case in “Right-Sizing the U.S. Venture Capital Industry,” a report published Wednesday by the Ewing Marion Kauffman Foundation, where he is a senior fellow studying entrepreneurship, innovation and the future of risk capital. He is also an investor and the author of the blog Infectious Greed.
Venture capital’s “poor returns make the asset class uncompetitive and at risk of very large declines in capital commitments as investors flee this underperforming asset,” he wrote in the report. “The sector must shrink its way back to health if venture capital is to provide competitive returns and secure its own future as a credible asset class and economic force.”
Mr. Kedrosky is the latest to pipe up in the debate over the fate of the venture capital industry, as the exit markets remain virtually shut for most start-ups and limited partners reconsider whether they want their money tied up in illiquid venture funds. Many other V.C.’s are also concluding that venture funds must shrink, including the elder statesmen of the industry and limited partners.
Venture capital was healthiest in the early to mid-1990s, Mr. Kedrosky argued, when firms invested $5 billion to $10 billion a year in start-ups. Today, they invest about $30 billion a year. He argued that limited partners — the investors in venture funds — should shrink their investments to help resuscitate the sector.
Though the industry often cites the 8 percent returns for venture capital over the last 10 years, compared with −27 percent for the S&P 500 and −28 percent for the Nasdaq, Mr. Kedrosky said it was more accurate to compare venture to the Russell 2000, an index of small-cap stocks that returned 18 percent over the same period.
To once again generate competitive returns, the industry should slash investment by half, to approach the investment rates of the mid-1990s, when returns were last healthy, he said.
Venture investment swelled during the late 1990s and the dot-com bubble, which “led to a collapse in performance from which the sector has never recovered,” Mr. Kedrosky wrote. Since then, it has been slow to shrink for several reasons, he said. The life of a venture fund is typically a decade and investments are generally illiquid during that time. Venture capitalists collect management fees of a percentage of capital under management, so they are paid more for bigger funds.
He also pointed to “a widespread and incorrect belief that venture capital is a necessary and sufficient condition in driving growth entrepreneurship.” In fact, only about 0.2 percent of the estimated 600,000 new businesses created in the United States each year are financed by venture capital and about 16 percent of the fastest-growing companies are, he found.
Though those arguments will surely make venture capitalists defensive, Mr. Kedrosky is ultimately a fan of the industry and argues that it does societal good by helping many entrepreneurs start companies. To continue to do so, though, “the venture industry must be viable — it must offer its investors competitive returns,” he said. “At present, it is increasingly uncertain whether the U.S. venture industry can and will do that.”
The size of the venture industry is a problem, Mr. Kedrosky wrote, because too much capital causes higher valuations and lower exit multiples.
Another problem he cited was that information technology has matured to the point that new innovations will not be hugely profitable and it costs a fraction of what it used to to start an I.T. company. Still, venture capitalists invest more than half their money in these companies, “because they always have, not because they credibly anticipate improved returns,” he said.
Finally, even if the initial public offering market recovers, venture capitalists will very likely only be able to bring companies with significant revenues and profits to market, but never again young, money-losing companies as they did in the late 1990s when returns shot up, he said.
Friday, June 5, 2009
Smaller is Better in VC, really?
Another interesting article on the changes in the VC industry from the NY Times BITS blog. The people that are quoted here are all truly the elders in our industry - in my nmind, they speak the truth. How does that shake out for startups and related service providers? I think we all better get used to smaller...
http://bits.blogs.nytimes.com/2009/06/05/venture-capitals-elders-say-think-small/?scp=1&sq=venture%20capital%20think%20small&st=cse
June 5, 2009, 7:45 am —
Venture Capital’s Elders Say Think Small
By Claire Cain Miller
Venture capitalists who began investing in the 1960s have seen the industry transform any number of times. Their advice to today’s venture capital firms: think small.
In the good old days, venture funds were $100 million at most, recalled Alan Patricof, founder and general partner of Greycroft Partners, who backed America Online and Apple Computer.
“I personally believe and I think the evidence proves that the venture industry has gotten too big, the funds have gotten too big,” he said. In order to invest their enormous amounts of capital, venture capitalists end up choosing companies that are not sufficiently disciplined or capital-efficient, he said. And because firms have invested so much money, they depend on taking their portfolio companies public to get great enough returns, at a time when I.P.O.s are few and far between.
“Our biggest challenge today for venture capital is to think smaller,” said Mr. Patricof, who recently wrote an essay on NYTimes.com on how venture capital has changed.
In the 1960s, when venture capital was virtually unheard of, most investors were family offices and only tens of millions of dollars were invested in start-ups each year, recalled Franklin “Pitch” Johnson, who backed Amgen and Applied Biosystems. That grew to hundreds of millions of dollars in the 1970s, a few billion in the 1980s and $100 billion in the 1990s, when “we knew it wouldn’t go on,” he said.
Much of the huge influx of money in the 1990s came from pension funds, which saw the returns that endowments and foundations were getting from venture capital firms’ Internet deals and wanted in on the game.
Paul Denning, chief executive of Denning & Co., a private equity consulting and fundraising firm, remembers a time in the 1990s when he encouraged a venture capitalist to visit the big pension funds but the investor refused, saying he did not want their money. At the time, Mr. Denning thought he was misguided. “Maybe he was right,” he says now.
Investors in venture funds cut back after the Internet bubble burst and today venture capitalists invest about $30 billion a year, though that is still too much, Mr. Patricof said.
Not all of the venture capitalists who invested alongside him since the 1960s agree that smaller is better. Richard Kramlich, who invested with Arthur Rock before co-founding New Enterprise Associates in 1978, has one of the biggest funds in the industry, with $8.5 billion in committed capital.
His firm sometimes incubates tiny companies with small amounts of money, as it did with Data Domain, which went public last year. It also invests large amounts of money in later-stage companies that need to grow, as it recently did when it invested $45 million in Workday.
“On one hand, it’s great to experiment, and on the other hand, we have to have the capacity sometimes to do” big investments in companies with a lot of potential, he said.
http://bits.blogs.nytimes.com/2009/06/05/venture-capitals-elders-say-think-small/?scp=1&sq=venture%20capital%20think%20small&st=cse
June 5, 2009, 7:45 am —
Venture Capital’s Elders Say Think Small
By Claire Cain Miller
Venture capitalists who began investing in the 1960s have seen the industry transform any number of times. Their advice to today’s venture capital firms: think small.
In the good old days, venture funds were $100 million at most, recalled Alan Patricof, founder and general partner of Greycroft Partners, who backed America Online and Apple Computer.
“I personally believe and I think the evidence proves that the venture industry has gotten too big, the funds have gotten too big,” he said. In order to invest their enormous amounts of capital, venture capitalists end up choosing companies that are not sufficiently disciplined or capital-efficient, he said. And because firms have invested so much money, they depend on taking their portfolio companies public to get great enough returns, at a time when I.P.O.s are few and far between.
“Our biggest challenge today for venture capital is to think smaller,” said Mr. Patricof, who recently wrote an essay on NYTimes.com on how venture capital has changed.
In the 1960s, when venture capital was virtually unheard of, most investors were family offices and only tens of millions of dollars were invested in start-ups each year, recalled Franklin “Pitch” Johnson, who backed Amgen and Applied Biosystems. That grew to hundreds of millions of dollars in the 1970s, a few billion in the 1980s and $100 billion in the 1990s, when “we knew it wouldn’t go on,” he said.
Much of the huge influx of money in the 1990s came from pension funds, which saw the returns that endowments and foundations were getting from venture capital firms’ Internet deals and wanted in on the game.
Paul Denning, chief executive of Denning & Co., a private equity consulting and fundraising firm, remembers a time in the 1990s when he encouraged a venture capitalist to visit the big pension funds but the investor refused, saying he did not want their money. At the time, Mr. Denning thought he was misguided. “Maybe he was right,” he says now.
Investors in venture funds cut back after the Internet bubble burst and today venture capitalists invest about $30 billion a year, though that is still too much, Mr. Patricof said.
Not all of the venture capitalists who invested alongside him since the 1960s agree that smaller is better. Richard Kramlich, who invested with Arthur Rock before co-founding New Enterprise Associates in 1978, has one of the biggest funds in the industry, with $8.5 billion in committed capital.
His firm sometimes incubates tiny companies with small amounts of money, as it did with Data Domain, which went public last year. It also invests large amounts of money in later-stage companies that need to grow, as it recently did when it invested $45 million in Workday.
“On one hand, it’s great to experiment, and on the other hand, we have to have the capacity sometimes to do” big investments in companies with a lot of potential, he said.
VC's: a dying breed?
Another scary tidbit from our friends at the WSJ. We're losing not only partners at firms but firms themselves. And in what I consdier pretty large numbers: "The number of venture capital principals dropped more than 15% since 2007, while the number of active venture firms fell 13%."
This doesn't bode well for the startup world. We all hope that a new model will emerge for VC and angel financing, but we have yet to see what that really is.
--
http://blogs.wsj.com/venturecapital/2009/06/05/the-daily-start-up-the-revolving-vc-door/?mod=rss_WSJBlog
June 5, 2009, 10:22 AM ET
The Daily Start-Up: The Revolving VC Door
By Scott Austin
Timothy Draper, a founder and managing director of Draper Fisher Jurvetson, is one of the most optimistic venture capitalists you’ll ever meet. He proved that on Thursday at the International Business Forum venture capital conference in San Francisco where, according to The New York Times, he said: “Very few of us actually know it, but the next eight to ten years are going to be the greatest venture capital years in the history of the world.” Pouring more Sunny-D into his half-full glass, Draper said he believes that in five years there will actually be more venture capitalists than there are today….
Perhaps Draper should read the story today in The Wall Street Journal, which chronicles just how bad the turnover is in the venture capital industry. The number of venture capital principals dropped more than 15% since 2007, while the number of active venture firms fell 13%, according to the National Venture Capital Association. The shakeout should only get worse over the coming years as firms fail to deliver the returns asked by their investors. We’ll have more details on the industry shrinkage later on this blog….
This doesn't bode well for the startup world. We all hope that a new model will emerge for VC and angel financing, but we have yet to see what that really is.
--
http://blogs.wsj.com/venturecapital/2009/06/05/the-daily-start-up-the-revolving-vc-door/?mod=rss_WSJBlog
June 5, 2009, 10:22 AM ET
The Daily Start-Up: The Revolving VC Door
By Scott Austin
Timothy Draper, a founder and managing director of Draper Fisher Jurvetson, is one of the most optimistic venture capitalists you’ll ever meet. He proved that on Thursday at the International Business Forum venture capital conference in San Francisco where, according to The New York Times, he said: “Very few of us actually know it, but the next eight to ten years are going to be the greatest venture capital years in the history of the world.” Pouring more Sunny-D into his half-full glass, Draper said he believes that in five years there will actually be more venture capitalists than there are today….
Perhaps Draper should read the story today in The Wall Street Journal, which chronicles just how bad the turnover is in the venture capital industry. The number of venture capital principals dropped more than 15% since 2007, while the number of active venture firms fell 13%, according to the National Venture Capital Association. The shakeout should only get worse over the coming years as firms fail to deliver the returns asked by their investors. We’ll have more details on the industry shrinkage later on this blog….
Thursday, June 4, 2009
Note to Founders: READ THIS
Wow - I really hate being the continual bearer of bad news, and in general we pretty much know the info in this article from the WSJ, but seeing the numbers in front of me continues to make me wonder when the VC/Startup equation will begin to turn around.
The scary part below is: "Founding CEOs kept a median of under 3% of their companies’ shares in 2008, down sharply from a high of over 10% in 2002. At the same time, nonfounder CEOs’ ownerships have remained at just more than 1%."
Its a lot of work for only less than 3% of the company...but hopefully this smaller piece is of a bigger pie (that's a whole other story!).
http://blogs.wsj.com/venturecapital/2009/06/03/founding-ceos-keeping-smaller-stakes-as-companies-go-public/
June 3, 2009, 7:11 PM ET
Founding CEOs Keeping Smaller Stakes As Companies Go Public
By Venture Capital Dispatch
Jay Miller of Dow Jones Newswires filed this dispatch:
Founding chief executives are keeping much smaller stakes as they take their companies public than they did seven years ago, according to Presidio Pay Advisors.
The firm’s analysis found that investors are returning to a more rational financial expectation of companies looking to raise public capital. Companies are now taking an additional two to three years to file for an IPO. As a result, founder CEOs’ stakes are suffering greater dilution, likely because of less favorable term sheets or additional rounds of financing needed to get to the IPO.
In 2008, median company revenue, market capitalization and net income at IPO were at the highest levels since Presidio began collecting the data in 2002.
“Today, very few companies go public with limited revenue and nonexistent net income,” says Brandon Cherry, a principal at Presidio. “The prevailing IPO profile has shifted to a company with healthy revenue and positive net income, which is significantly affecting how compensation is delivered.”
That is a marked shift from earlier in the decade, when an Internet and technology start-up’s IPO highlighted the prospect of profits and even revenue in lieu of actual results. That approach worked in the early days of the commercial Internet, when just about any Web site could be semiplausibly touted as the next Wal-Mart Stores Inc. or AT&T Corp.
According to the compensation consultant’s study, founding CEOs kept a median of under 3% of their companies’ shares in 2008, down sharply from a high of over 10% in 2002. At the same time, nonfounder CEOs’ ownerships have remained at just more than 1%.
Presidio also discovered that the mix of options and common stock has shifted toward options, which have no downside risk for executives. That change could create a potential disconnect between the interests of executives and investors, the firm warned.
The scary part below is: "Founding CEOs kept a median of under 3% of their companies’ shares in 2008, down sharply from a high of over 10% in 2002. At the same time, nonfounder CEOs’ ownerships have remained at just more than 1%."
Its a lot of work for only less than 3% of the company...but hopefully this smaller piece is of a bigger pie (that's a whole other story!).
http://blogs.wsj.com/venturecapital/2009/06/03/founding-ceos-keeping-smaller-stakes-as-companies-go-public/
June 3, 2009, 7:11 PM ET
Founding CEOs Keeping Smaller Stakes As Companies Go Public
By Venture Capital Dispatch
Jay Miller of Dow Jones Newswires filed this dispatch:
Founding chief executives are keeping much smaller stakes as they take their companies public than they did seven years ago, according to Presidio Pay Advisors.
The firm’s analysis found that investors are returning to a more rational financial expectation of companies looking to raise public capital. Companies are now taking an additional two to three years to file for an IPO. As a result, founder CEOs’ stakes are suffering greater dilution, likely because of less favorable term sheets or additional rounds of financing needed to get to the IPO.
In 2008, median company revenue, market capitalization and net income at IPO were at the highest levels since Presidio began collecting the data in 2002.
“Today, very few companies go public with limited revenue and nonexistent net income,” says Brandon Cherry, a principal at Presidio. “The prevailing IPO profile has shifted to a company with healthy revenue and positive net income, which is significantly affecting how compensation is delivered.”
That is a marked shift from earlier in the decade, when an Internet and technology start-up’s IPO highlighted the prospect of profits and even revenue in lieu of actual results. That approach worked in the early days of the commercial Internet, when just about any Web site could be semiplausibly touted as the next Wal-Mart Stores Inc. or AT&T Corp.
According to the compensation consultant’s study, founding CEOs kept a median of under 3% of their companies’ shares in 2008, down sharply from a high of over 10% in 2002. At the same time, nonfounder CEOs’ ownerships have remained at just more than 1%.
Presidio also discovered that the mix of options and common stock has shifted toward options, which have no downside risk for executives. That change could create a potential disconnect between the interests of executives and investors, the firm warned.
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