Market Insights

Just in case you think we master the Internet universe here in the US...

2011-06-16T12:12:00.001-07:00

A little graphic for you that tells the current story, lest we forget!

Effectiveness of Marketing Tactics Chart

2010-10-27T10:29:00.000-07:00

I saw this chart in the Executive Summary for a new Marketing Sherpa report called 2011B2B Marketing BenchMark Report. I've only read the summary but I thought this chart was interesting:

Here's some related data that I also found interesting:
The growing trend of utilizing inbound marketing tactics is demonstrated in the above chart on the effectiveness of marketing tactics, where the top four tactics are generally inbound in nature and two of the three least effective tactics are outbound.

Social media is undervalued in terms of effectiveness and this is a result of the infancy of this marketing tactic and the low level of experience organizations have in execution when compared to more seasoned marketing tactics. As B2B marketers become more mature with their social marketing practices, their perceptions on the effectiveness of this tactic will improve.

Art of The Lean Startup

2010-10-26T11:00:00.001-07:00

I haven't put anything up here in a while as I'm mostly using Twitter these days, but this one is definitely worth sharing. Om Malik has created a terrific visual represenatation (in the form of a cartoon!) of the lean startup world. Worth a read and pass it along - its 10 pages but well worth the time.

Art of The Lean Startup

View more documents from Om Malik.

Tech Startups Don’t Need the Valley Unless They Need VC

2010-03-16T11:09:00.000-07:00

This is a topic I'm spending a lot of time looking at these days: Do startups really need Silicon Valley? While the concepts of innovation continue to expand into new places every day, the startup infrastructure to support that innovation isn't really in place outside of Silicon Valley. Be sure to click through to the article for the interview with Mike Maples Sr.

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http://gigaom.com/2009/03/15/tech-startups-dont-need-the-valley-unless-they-need-vc/

Tech Startups Don’t Need the Valley Unless They Need VC
By Stacey Higginbotham Mar. 15, 2009, 7:00pm PDT

At South by Southwest Interactive today, panelists from the Bay Area; Madison, Wisc.; Beijing; and Austin, Texas, debated the value of building your startup in the Valley, and the corrupting influence of venture capital on technology startups. The panel came to the conclusion that, if you want to build big and build fast, then you need to go to the Valley. However, few companies need to build big and fast.

The panel didn’t break any new ground with its discussion on the Bay Area’s proximity to capital, abundant talent and reverence of startup culture. However, cracks are beginning to show, as startups need less venture capital, California’s economy worsens and as the reverence of a startup culture that celebrates the go-big-or-go-home way of creating a startup fades.

The Bay Area startup ethos that calls for millions in venture funding and a giant business built in three to five years may be on the wane as the venture world faces its own tectonic shifts (see video below). “The model of tech getting used to VCs throwing crazy amounts of money at them is just crazy,” says Mike Maples, Sr., an angel investor who formerly worked at Microsoft and has funded several businesses.

Panelist Penelope Trunk, founder of the Brazen Careerist, who started her company in Madison, Wisc., called the VC model shallow and limiting for an entrepreneur. She pointed out that the traditional startup culture embraced by Silicon Valley comes at a personal cost that makes it hard for women and those with families to become entrepreneurs, and she championed building a business that generates sales and grows organically.

Panelist Kaiser Kuo, a business consultant in China, echoed the call to bootstrap, saying, “VCs should be the funding source of last resort.”

I walked away thinking the big debate for entrepreneurs is less about where you start a company, than an effort to reclaim the word “startup” for entrepreneurs who bootstrap their technology business — in or outside of the Valley. Many of these companies get less PR (they can’t always afford it), but they will likely become increasingly relevant as the downturn forces a realignment of the venture industry and forces entrepreneurs to build a startup that can make it as a business from day one.

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Get advice from a VC on securing early stage financing

2010-02-19T16:49:00.000-08:00

This is a great article with sound, hands on advice for folks looking to secure early stage venture capital. It has lists of key quesitons you must be able to answer and has a very practical approach to what needs to be in place. This isn't the end all be all of information, but its a succinct, clear place to start!

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A VC’s tips on securing seed and series A financing
February 12, 2010 Carl Showalter 6 Comments

(Editor’s note: Carl Showalter is a general partner with Opus Capital. He submitted this story to VentureBeat.)

While the economy is finally showing signs of life, securing capital for early-stage ventures hasn’t gotten any easier- so it seems timely to let start-up owners in on the criteria by which they will be judged.

Each year our firm typically reviews more than 2,500 companies seeking seed or Series A funding and invests in between six and twelve. Here’s how we judge a young company’s viability.
First of all, we evaluate deals on three axes: The team, the market and the technology or product.

We want a team with domain expertise in the market space—individuals who can see the opportunities in that market before they are apparent to others and can use that vision to become early movers in the market.
We want the company to be targeting a market that is nascent or even nonexistent. It needs to be a market the entrepreneurs believe will, at some point, grow rapidly, creating an opportunity for the company to move faster than any incumbents.
The company needs to have a product with some level of defensibility – something that’s not easily replicable once the market becomes more obvious to others.

In addition to these primary criteria, there also has to be a scalable business model that can generate interesting valuation multiples over time. Having a good way to make money is not enough; a high-growth market to support it and a team and product that can take advantage of that market opportunity are essential.

The next step is to ask hard questions across these three axes. If you’re in the hunt for capital, here are some of the questions you’re likely to hear:

Team

Can the founding team succinctly and consistently articulate the company’s business opportunity?
Can they succeed in an unstructured environment? Are they comfortable with uncertainty? If the founders are from large companies, it’s helpful if they have some sort of track record in taking risks or starting something new.
Do they have a demonstrated ability to stay focused on the critical objectives?
Do they have the ability to challenge conventional wisdom and think differently? This is perhaps one of the most significant hallmarks of an outstanding entrepreneur.
Do they have a roadmap for the company culture? Surprisingly, many founders never consider this.
Do they understand the value of frugality and the need to ruthlessly prioritize spending?
Do they have realistic expectations of their positions in the organization and how that will evolve? In other words, are they comfortable with potentially not being a chief executive? This very issue can break up even the best of companies.
Is there a shared vision for the future of the company and its liquidity event? In this economic climate it’s more important than ever that company founders are focused on building a company for the long term.

Market

Is there a market that can grow exponentially to create an opportunity for a new entrant? “Exponentially” is key here. Solid growth may just not be fast enough to enable success.
Is there a scalable business model?
Is there a low-cost go-to-market plan relying on reasonable and realistic distribution channels? Lack of low-cost and scalable distribution is another small company killer. Are there large partners who could help reduce the cost of customer acquisition?
Are there three or less startup competitors vs. many?
Has there been some validation of the market opportunity, whether through a pilot or beta, or through research? Actual testing or feedback on a prototype by customers is always preferred, but for systems and semiconductor companies, research may have to suffice.
Do they have the ability to capture the imagination of investors as to why this could be a really large market opportunity? Are they convincing as to why they could be the market leader in the space? If they can’t capture the imagination of investors, it’s unlikely they can capture significant market share with customers.

Product

Is it simple to articulate and understand?
Is there a clear value proposition about the pain point or problem it’s solving and why this product or technology will uniquely address that need? There must be enough of a problem that customers are willing to risk buying from a startup.
Is there intellectual property or at least some “secret sauce” that makes it defensible? Patentable concepts are desired but not required.
Is the intellectual property free and clear from previous employers or others?
For a company selling a product, are the projected gross margins more than 50 percent?
Will the product be available within 12 to 18 months? Product should be in development, not just at research stage.

Despite what could still be considered a tough fundraising environment, early-stage venture capital investing is alive and well. If your start up meets the criteria outlined here, you should have no problem securing funding.

Interesting article from WSJ on Leadership styles

2010-02-04T10:57:00.000-08:00

Leadership is a topic I talk with startups about regularly. Most folks don't recognize it as a discipline and don't take the time to learn more about building their leadership skillsets. Here's a quick overview of leadership styles from the WSJ that hopefully will get you to think a bit more about the importance and value of leadership.
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http://online.wsj.com/article/SB10001424052748704041504575045163417674970.html?mod=e2tw

FEBRUARY 4, 2010, 12:32 P.M. ET
Which of These Six Leadership Styles Works Best?
By ALAN MURRAY

Leadership is a big, vague, amorphous topic. We can write about great leaders at great length. But practically speaking, how do you become one?

A good start is to focus on leadership styles. Daniel Goleman, who popularized the notion of "emotional intelligence," has described the following six different styles that leaders use to motivate others.

Our view is these are not mutually exclusive. You don't need to adopt one and ignore the others. Rather, the best leaders move among these styles, using the one that meets the needs of the moment. Think of them all as part of your management repertoire.

Adapted from the forthcoming book, THE WALL STREET JOURNAL ESSENTIAL GUIDE TO MANAGEMENT: Lasting Lessons for the Best Leadership Minds of Our Time, by Alan Murray. Copyright 2010 by Dow Jones & Co. To be published in August by HarperBusiness, an imprint of HarperCollins Publishers.

Visionary. This style is most appropriate when an organization needs a new direction. Its goal is to move people towards a new set of shared dreams. "Visionary leaders articulate where a group is going, but not how it will get there – setting people free to innovate, experiment, take calculated risks," writes Goleman.

Coaching. This one-on-one style focuses on developing individuals, showing them how to improve their performance, and helping to connect their goals to the goals of the organization. Coaching works best with employees who show initiative and want more professional development. But it can backfire if it's perceived as "micromanaging" an employee, and undermines his or her self-confidence.

Affiliative. This style emphasizes the importance of team work, and creates harmony in a group by connecting people to each other. It's particular valuable when you need to improve team harmony, increase morale, and repair communication or repair broken trust in an organization." But it has its drawbacks. An excessive emphasis on group praise can allow poor performance to go uncorrected, and lead employees to believe that mediocrity will be tolerated.

Democratic. This style draws on people's knowledge and skills, and creates a group commitment to the resulting goals. It works best when the direction the organization should take is unclear, and the leader needs to tap the collective wisdom of the group. The consensus building approach can be disastrous in times of crisis, however, when urgent events demand quick decisions.

Pacesetting. In this style, the leader sets high standards for performance. He or she is obsessive about doing things better and faster, and asks the same of everyone. But Goleman warns this style should be used sparingly, because it can undercut morale and make people feel as if they are failing. "Our data shows that, more often than not, pacesetting poisons the climate," he writes.

Commanding. This is the classic model of "military" style leadership – probably the most often used, but the least often effective. Because it rarely involves praise and frequently employs criticism, it can undercut morale and job satisfaction. Still, in crisis situations, when an urgent turnaround is needed, it can be an effective approach.

Note that what distinguishes each leadership style above is not the personal characteristics of the leader, but rather the nature and needs of those who are being led. As James MacGregor Burns argued in his path-breaking 1978 book, Leadership: "Leadership over human beings is exercised when persons with certain motives and purposes mobilize, in competition or conflict with others, institutional, political, psychological and other resources so as to arouse, engage and satisfy the motives of followers."

Unlike "naked power wielding," he writes, "leadership is thus inseparable from followers' needs and goals."

The good leader, in other words, must understand what motivates those he or she wishes to lead.

10 Things MBA Schools Won't Teach You as a Startup

2010-01-13T09:56:00.000-08:00

Some amusing words of wisdon from Dharmesh (who can teach you alot - check out his blog! As someone who's involved in teaching MBA Entrepreneurship at UC Berkeley, I can tell you this is only the beginning!

Startups: 10 Things MBA Schools Won't Teach You

1. No amount of strategic planning will ever substitute for managing your cash flow. Financial statements are great. The most important one is your bank account statement.

2. There are always more things to do than there is time to do them. Startups are a continuous exercise in deciding what not to do. You can sometimes win by just not doing things faster than your competition.

3. Sleep is that time you’re working on startup problems with your eyes closed.

4. It helps not to call people “human resources”. They’re people. And, as it turns out, people like to be treated like people. Go figure.

5. No amount of academic theories on efficient pricing will prepare you completely for what people will actually do. Finding the “optimal” price is really hard. In the meantime, remember that a sub-optimal price is a lot better than no price at all.

6. Price discrimination (in an economic sense) is a wonderful thing. Except that it often ignores the real costs in terms of organizational complexity. Every time you add a new product or product option a small part of your company dies.

7. There are an infinite number of ways to spend money on marketing. You have no idea what’s actually going to work. The idea is to experiment broadly and learn lessons cheaply. On a related note, no amount of MBA marketing classes will prepare you for the day that you have to produce leads in order to close sales. As it turns out, marketing is about more than product feature matrices and the right shade of blue for your logo.

8. To recruit the best people, fair compensation and equity are only a start. Company culture and a demonstrated passion for your vision is hugely important. (Oh, and your vision should be on the larger path to truth, justice and overall goodness). Your vision should not involve harming kittens. They’re adorable. [insert gratuitious kitten photo here]

9. There’s a lot of value to being likable. Good things happen when people like you. When people like you, bad things have less of a chance of being fatal. I advise being likable. That’s why I advise against being an investment banker after getting an MBA. (I also advise against being an investment banker before getting an MBA).

10. Advanced game theory is exceptionally useful. Basic game theory is dangerous — because it assumes that you’re dealing with a bunch of rational “players”. It’s like trying to design a real car that’s going to be driven on a theoretically frictionless surface, with no air resistance and no idiots on the road.

What are your top startup lessons learned that even the top MBA schools don't teach?

Why the Customer Development Process is So Important

2009-12-01T10:48:00.000-08:00

Iwanted to pass along this blog posting from the guys at Venture Hacks, who in general put up really useful, practical info. I thought this post was particularly important as it has three specific detailed case studies on customer development. Be sure to link through to the actual case studies (not just the summaries in the blog posting) - there's a lot to be learned here! Case Study number two is so simplistic but so important for startups to put on their list of things to do. Nothing speaks louder to an investor than a customer (or propsect).

http://venturehacks.com/articles/case-studies?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+venturehacks+%28Venture+Hacks%29

3 customer development case studies
3 customer development case studies
by Nivi on November 22nd, 2009
2 Comments

If you’re trying to implement customer development at your startup, you’ll learn more from these 3 case studies than anything else I’ve seen. I consider each of these a “must-read”. I’ve quoted some great bits from each case study, but make sure you click through and read each one in full.

1. Using an LOI to get customer feedback on a minimum viable product:
“We decided from the get-go that, while we clearly saw the benefits and necessity of our concept, we would remain fiercely skeptical of our own ideas and implement the customer development process to vet the idea, market, customers etc, before writing a single line of code.
“My partner was especially adamant about this as he had spent the last 6 months in a cave writing a monster, feature-rich web app for the financial sector that a potential client had promised to buy, but backed out at the last second. They then tried to shop the app around, and found no takers. Thousands of lines of code, all for naught — as is usually the case without a customer development process. (See Throwing away working code for more on this unfortunate phenomenon. – Eric Ries)

“We made a few pencil drawings of what the app would look like which we then gave to a graphic designer. With that, the graphic designer created a Photoshop image. We had him create what we called our “screenshots” (which suggests that an app actually existed at the time) and had him wrap them in one of these freely available PS Browser Templates. Now armed, with 4 “screenshots” and a story, we approached our target market, some of which was through warm introductions, and some, very literally, was through simple cold-calling.

“Once we secured a meeting, we told our potential customers that we were actively developing our web app (implying that code was being written) and wanted to get potential user input into the development process early on. Looking at paper print-outs of our “screenshots”, no one could tell that this was simply a printout of a PSD, and not a live app sitting on a server somewhere. We walked them through what we thought would be the major application of our product. Most people were quite receptive and encouraging…

“On the third visit, we pressed those who saw merit in the idea to sign a legally non-binding Letter of Intent. Namely, that they agree to use it free of charge if we deliver it to them and it is capable of X, Y and Z. And not only do they agree to use it, but that they intend to purchase if by Y date at X price if it meets their needs.”

The author of this case study is currently looking for a technical co-founder.

2. proof that we’re not (completely) crazy:
“The few customers we talked to had little in common except for the core problem we were solving. Two had very similar job titles, (let’s call them Ditch Diggers), so we ran a facebook ad with the job title at the top of thead, which was roughly, “Ditch Digger? Feeling spread thin? Click here to complete a survey and tell us about it.” Facebook ads were the easiest because we could pick types of people — we have yet to create an effective adwords campaign. We offered $10 Amazon gift cards to complete a 15 minutephone interview.

“What followed next was absolutely amazing. When we talk to a Ditch Digger it’s like every response has an exclamation point. “Yes, that’s me exactly!”, “I can’t believe you’re building a tool for this, thank you!”, “Here are 5 emails of other people that will want this!”, “It’s only (number that was so high we had to force each other to ask)/month? Great deal!”

3. How I built my Minimum Viable Product:
“I filled out a set of hypothesis worksheets in Steve Blank’s book on product, customer, channel pricing, demand creation, market type, and competition. I would recommend everyone formalize this process. My initial scan of the worksheets made me believe I already knew all the answers. I involved Sasha in the process, and discussions that I thought would be 30 minute conversations turned into 2 hour discussions as she questioned almost all my assumptions… Yes, I still love her after that… The biggest mind shift following a customer development process is from thinking you know something to testing everything you know.

“We built out our initial customer problem presentation and decided to target people just like us – busy parents with young kids.

“Our top 3 problems where:
Sharing lots of photos and videos is a hassle
A lot of services downsize the images so the quality is poor
Notifying family and friends of updates was manual and a chore

“We were able to find the initial batch through friends and daycare, and subsequent batches through follow-on referrals. I’ll add that it is very important to talk to complete strangers to keep objectivity in check. Family and friends can be too kind sometimes and really lead you down the wrong path. We debated paying for their time with gift cards or doing a DSLR camera raffle and in the end decided to just lay out our objectives and ask for 30 mins of their time. That was enough.…

“During the interview, we were particularly interested in learning what their sharing workflow was like. We set up the stage and let them tell us everything they did with their photos/videos taking them from camera to shared, what they wished they could change, and the magical pricing questions: Would they use a solution like the one we were envisioning if it were free? Would they use it if it were $X/yr? X changed from customer to customer but we kept it as real as we could.

“We talked to enough people until their answers started sounding the same…

“Our revised top 3 problems were:
Sharing lots of photos and videos is a hassle (stayed the same)
Requiring visitors to signup is annoying
Photo gallery design was too busy or complicated

If you’re crazy for case studies, I’ve found at least a billion at the Lean Startup Circle. Let me know if you find any good ones there.

How to Operate a Tradeshow Booth: real advice that you can actually use!

2009-11-20T11:42:00.000-08:00

I've been reviewing some old blog posts by Jason Calacanis lately, who I think gives out some of the most useful and practical advice to startups. Here's one from latelast summer that he posted about How to Operate a Tradeshow Booth. If you've seen it, its worth another look. If you haven't, there's something useful in there for everyone! I think putting your goals in place and running your budget against key metrics are two areas he talks about that are so very important.

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I thought I would take a moment to discuss the bestpractices for running a booth or table at a trade show or conference.These points are general and are intended to apply to everything froma 50-person SIG (special interest group), where you're given a genericfolding table, to a custom-built booth at a trade show like CES, heldin the Las Vegas Convention Center.This list is far from comprehensive, but I did query a number of eventexecutives with it to get their insights.

Tips on How to Operate a Trade Show Booth--------------------------------

1. Define your goal=============In order to maximize your investment in a trade-show booth orconference table top, you must clearly define your goals. A booth isbut one of many ways to obtain value from a conference. In fact, evenattending a conference can be a way to grow your company. It'simportant that your entire team, from marketing to product to the CEO,agree on the goals long before committing to an event.The most frequent reasons I've heard for hosting a booth are:a) to obtain leads/clientsb) to further develop relationships with existing clientsc) brandingd) educating people about your company and productse) to support your industry or the people throwing the eventf) for the fun and enjoyment of the team attending the event (i.e. "a junket")g) recruitingh) courting investorsSince your goals are going to determine your strategy, you need toreally think about which one or two of these are the most important toyou. Most companies will look at the list above--the same list that'sin the marketing materials that sold you on getting a booth--and say"yeah, we want to do a little of all of that."If you focus equally on each of the goals above, chances are you'renot going to succeed in any real way at any of them. Once you have alist of goals, you really need to prioritize them. I like to forcemyself to define one clear goal, like "we're here to find aninvestor," "we're here to get press for the latest version of ourwebsite," or "we're here to find a CTO."As an exercise, consider forcing your team to select your top threegoals and assign a percentage of importance to each. As a follow-upexercise, ask your team to now select, hands down, the most importantsingle goal. If you have too hard a time with this task, you probablyshouldn't be hosting a booth--unless of course it's 1999 or 2000 andyou feel like burning through venture capital money as quickly aspossible in order to take your company public.

2. Pick the right event=============The goals mentioned above are very specific and they target specificcategories of people: venture capitalists, clients, employees, or thepress, for example. Now that you know your goals, you need to find outwhich conference to sponsor. Most professional conferences will eitherprovide a list of companies represented at the event or a nice shinypie chart with demographics.Now you can take their word for it, or better yet, you can do your ownresearch. The best way to figure out what trade show to go to is toask the types of people you want to meet what trade shows they love.For example, if you wanted to meet developers, ask a developer for alist of their favorite events.You might hear about eTech (sorry tohear it's not returning), SXSW Interactive or Lockergnome.If you're looking to meet angel investors, you might hear back aboutTechCrunch50 or Web 2.0. For CEOs, you're gonna hear the Wall StreetJournal's D Conference or TED. You get the idea; ask the people whoactually put their money down for tickets about which events theylove.

3. Develop a strategy and timeline=============After you've prioritized your goals, you're going to need a checklistand timeline. Your conference presence is going to have a lot ofmoving parts--far too many to just remember.For example, if you want to generate leads, then you should bring yourmost sociable team members and charge them with getting business cardsinto the raffle bowl. If your goal is to land actual clients at theshow, instead of just getting business cards, well then you're goingto want to bring your most knowledgeable sales people and focus onsocializing over drinks, lunch and dinner. If you want to landdevelopers, you'll probably want to bring your developers and set upan area for them to hang out with their laptops open. (That's whatdevelopers like to do).The main point is that different goals will lead to differentstrategies and a varied punch list.Signing up for a booth is easy but running one is not. Many marketingpeople are quick to sign up for a booth, but slow in preparing to runit. After you've defined your goals you need to develop a timelineleading up to the event, during the event and for post-event.

4. Budget properly=============The cost of the booth is typically 1/3rd to 2/3rds of your totalinvestment in attending an event. Someone just told me that the absurd$18,500 fee that people pay to demo on stage at the DEMO Conference istypically 1/3rd of the total spend once you add in travel, runningyour booth and preparing. $50k to launch at a conference--ouch!NOTE: That will be the last dig at DEMO, the conference that takesadvantage of startups desperate for attention, I promise! :-).Clearly, you need to budget for things like travel, hotels, signage,swag, raffle items, staffing, opportunity cost and food. If you canbarely afford the cost of the booth, you shouldn't be doing the event,because you're going to cut corners on things like staffing yourbooth, signage and giveaways--all of which are essential.Prepare a comprehensive budget for the event and make sure all yourstakeholders understand the true cost, so that they can measuresuccess post-event.

5. Run your budget against your key metrics=============Since you have your goals and costs defined, you might considerassigning a cost to each goal and metric. For example, if your goalsare equally to get prospective leads for the sales team and to recruitnew sales people, and you'd also like to brand yourself a bit, you canrun your costs against those categories:a) Land qualified leads: 40% ($4,000)b) Recruit potential sales executives: 40% ($4,000)c) Branding: 20% ($2,000)As you can see, I've modeled this conference as a local one-day eventwith a $10,000 cost: $5,000 for the booth, $1,000 for the raffle oftwo iPhones, $2,000 in swag, $1,000 for marketing materials and $1,000in staffing costs. Since you're spending $4,000 on generatingqualified leads, you can easily back into a cost-per-lead of $10 ifyou collect 400 of them or $20 if you collect 200 of them.If you normally pay a recruiter $10,000 to find a sales person, thenyou need to find a new sales person over 2-3 events to make thisworthwhile. If you land a new sales person or two at one event, you'reway in the black.These are the kinds of discussions you need to have before committingto an event. Again, unless you've got money to burn because yourcompany throws off huge profits like Google, Yahoo, Microsoft or NewsCorp. Those companies have departments that can burn money onconferences without giving it deep consideration because they'veearned that right. They have huge profits and your startup probablydoesn't. Startups and small- to mid-sized companies need to thinkabout these things deeply, because this money might be better spent onother bullets.

6. Who should work your booth=============As mentioned above, you want to pick the right category of person foryour goal. If you're recruiting sales people, you're going to want tobring not only your HR people (who do it for a living) but also othersales people to act as references for the HR people. If you're lookingfor developers, you need to bring your developers.After you've found the right category of person to manage yourpresence, you have to buy them a copy of the audiobook or print bookfor "How To Win Friends and Influence People." If you do this, pleasebuy it from the following URL at Audible since they sponsor my show,"This Week in Startups": http://www.audiblepodcast.com/twist :-)What they will learn in this famous book is, essentially, how to makeyourself a likable person, by smiling, showing interest in otherpeople and having a positive outlook. Sure it's corny, and maybe it'sobvious to many people, but it's well worth the investment of $10-30to get each of your folks both the book and the audiobook. (Make iteasy for them). In fact, insist on them listening to it and have abook club-style discussion about it before the show.

7. Getting people into your booth=============Be friendly, make eye contact and smile. Ask people one of the following things:a) "Hello, would you be interested in seeing our product?"b) "Hello, would you be interested in seeing our product and winning an iPhone?"c) "Hello NAMEonNAMETAG, how are you doing today?" -- response --"That's fantastic, glad you're having a good time. Let's win you aniPhone and show you want Mahalo does, shall we?"d) Hold out a candy bowl, and say with a big smile, "Candy?" -- waitfor thank you -- say one of the three lines above.If someone says "no, thank you," say something like:a) "OK, thanks, would you like to drop your card in to win an iPhone anyway?"b) "No worries, perhaps another time... enjoy the rest of the show!"c) "OK, enjoy the rest of the show. See you at the cocktail party!"The giving of the raffle or candy taps into the reciprocity effect inpsychology, which essentially states that if you do something nice forsomeone, they will feel compelled to return the favor. You give thecandy and they will see a demo. You give the chance at an iPhone andthey won't have a problem giving you their card.You can read more about reciprocity online, but basically it's whatthe Moonies do to you at the airport when they put a flower in yourhand and than ask for a donation. The book "The Power of Persuasion"has a good read/listen on this subject: http://bit.ly/eLhfr

8. How to demo your product=============Create a very short interactive overview of your product. For example,here is how I would demo Mahalo Answers:Me: "Have you ever used Yahoo Answers or seen a question from therecome up in a Google results?"Attendee: "Yes/No/Maybe."Me: "OK, great, well, Mahalo Answers is like that but way morepowerful. Here, you can see, I've asked people what their favoritecover to a Bob Dylan song is, and you can see I've received over 120answers in just three days, and many folks embedded a YouTube video ormp3 file!"Attendee: INSERT SOME OBSERVATION OR QUESTION HERE.ME: "Exactly! That's a great observation" (i.e. something to show youlistened to their response), "Let me have you try it... What questiondo you have today? Think of some problem in your life you're trying tosolve... maybe a vacation, car or product decision? Parenting orhealth?"As you can see I've set this up to be interactive and engage theperson and I'm showing--NOT TELLING--the core value of the product tothe user. I'm getting them right into the product and having them tryit. That is what you want to do: show the product and get thepotential user to TRY the product.

9. Do assume the Internet will be down=============I don't know if I've ever been to a conference of note that hadtotally stable Internet for the complete show, especially at techconferences. Have three different brands of EVDO cards as well as acanned demonstration or screencast of your product ready to go.1

0. Do offer swag=============Offer an easy to carry, memorable and hopefully useful piece of swag.If you're at Sundance and it's freezing, give out a scarf, gloves orwool cap--all with your logo. If you're at a beach resort in Hawaii,give suntan lotion with your logo on it, a sun visor or flip flops. Ifyou're in New York City, give folks a bike messenger bag, a customprinted Zagat guide or a journal with a pen.Don't give crummy t-shirts to people with a huge logo on it. Peoplemay take them but they won't wear them. If you are going to give folksa shirt, make it a beautiful shirt with a tiny, tiny logo on it. Makeit something someone very hip would be happy to wear to the club orgolf course. No one wants your huge logo across their chest unlessyou're a loved brand like Nike, Google or Apple.

11. Do have a raffle=============Collect business cards by having a raffle for whatever the mostrecently sold-out product in the world is. If there is a line forsomething to buy at the Apple Store or Best Buy, there will be an evenlonger line to get it for free at your booth. Have multiple handheldfishbowls ready so your booth agents can hold them out as people go byif need be.Email those people after the event and thank them for joining theraffle. Let them know they didn't win the XBOX 360, but that you areinviting them to a seminar about "how to save money with CRM" ifthey're interested. In other words, your follow-up pitch should offersomething else of value. Content is a great way to go, and the contentshouldn't be "all about Salesforce," but rather about what Salesforcecustomers care about.Try to go from the raffle to a conversation about amutually-interesting topic (i.e. a webinar) to the client. Going rightfrom raffle to client is too jarring and will feel like spam.Another idea is to send a lesser piece of swag in the mail with somecontent. So, something like: "Thank you for joining our raffle atTechCrunch50. I wanted to send you a complimentary copy of 'SiliconValley Bank's Guide to Doing Your Next Valuation' as a thank you. Ifyou have any follow-up questions, do let me know, and I look forwardto seeing you at next year's event or sooner!"

12. Have a fascinating business card=============File this under "purple cows," but having an interesting business cardcan go a long way. I'll never forget Charles Forman's business cardas long as I live. It's so innovative and cool that it got a story onGawker: http://bit.ly/2kuECT.TechCrunch50 demopit company Expensify featured their innovativebusiness card in their piece on the event: http://bit.ly/phCRWhen I launched Mahalo.com at the D Conference two years ago, I putthe names of each speaker on the back of my card in a Mahalo URL. Thatlet people see examples of our topic pages/search results forthemselves. Not as innovative as the two things above, but not tooshabby.Frankly, I'm thinking about knocking off Forman's card one of these days.Here's some more memorable business card examples: http://bit.ly/zqXUyWhat can you accomplish with your business card?

13. Wear a professional made name tag.=============A custom name tag looks better than the ones the conference gives out.Check out this one for Apple employees: http://bit.ly/2UgyW2

14. Have appropriate signage=============This is fairly obvious, but if you don't have your name around andabove the crowd height, your booth may get passed by. Big photos ofgood looking people are also good since that will catch the eye.People stop to look at photos of other people.

15. Don't hire booth babes or strippers=============Unless you work in the modeling, strip club or porn business, don'thire models, strippers or porn stars to work your booth--it'sinsulting to women. Now, that doesn't mean the folks in your boothcan't be attractive and well manicured. It just means, have sometaste. At last year's conference, someone had a bunch of strippertypes in hot pants and absurdly tight t-shirts. It was totally cheap,cheesy and lame. It's 2009, people, really.

Some assorted smaller tips that don't need much explanation:

16. Ask the conference producers for a discounted "introductory rate."

17. Have a big dish of candy next to your computers.

18. Have three times the number of staff for your booth as you need at one time.

19. Have your staff circulate through the show giving out swag, candyor party invites (if allowed).

20. Dress your staff in the company color scheme and with thecompany's logo on their front and back.

21. Consider having a game of chance (spin the wheel, blackjack, etc)at your booth.

21. Hold a post-conference recap with your team to evaluate how you did.

22. Hold a post-conference recap with the conference producers andtell them your pros and cons.

If you're interested in this you might be interested in my previous posts:

How to Demo your Startup (part one)http://calacanis.com/2009/09/08/how-to-demo-your-startup-part-one/

How to Demo your Startup (part two)http://calacanis.com/2009/09/08/how-to-demo-your-startup-part-two/

How to save money running a startup (17 really good tips)http://calacanis.com/2008/03/07/how-to-save-money-running-a-startup-17-really-good-tips/

What to do if your startup is about fail (or “Don’t Stop Believing”)http://calacanis.com/2009/02/27/what-to-do-if-your-startup-is-about-fail-or-dont-stop-believing/

PSSS - You can follow me on Twitter @jason (yes, I changed from@jasoncalacanis to just @jason).http://www.twitter.com/jasonPSSSS - You can follow me on Facebook at http://www.facebook.com/jasoncalacanisPSSSSS - You can subscribe to This Week in Startups at the followingURLs for iTunes: http://bit.ly/BSGLu or you can watch it athttp://www.thisweekinstartups.com

New Incubator in Berkeley, CA

2009-07-15T11:20:00.000-07:00

http://venturebeat.com/2009/07/15/berkeley-ventures-new-incubator-breaks-from-summer-program-model/

Berkeley Ventures’ new incubator breaks from summer program model
July 15, 2009 Camille Ricketts

Berkeley Ventures, a new Bay Area incubator for early-stage companies across tech sectors, has just launched with a unique offering: unlike Y Combinator or TechStars — incubators that run three-month programs — Berkeley will provide startups with ongoing support for up to two years.

In addition to providing $5,000 to $10,000 in seed money to some startups (in exchange for a 3 to 9 percent stake in each company), the Berkeley, Calif.-based firm will also house companies rent-free for three months, run mentorship programs, and offer discounted access to marketing, legal and technical advisers. Its members will also have the option of staying in the firm’s 8,400 square-foot space for discounted rent after the first three months until they are capable of relocating.

The incubator is emphasizing its 10-minute proximity from the UC Berkeley Campus and San Francisco as major advantages for prospective startups. It says it has connections at the university, as well as nearby Stanford to help its portfolio companies assemble strong, knowledgeable boards. It also hosts regular events where fledgling managers can meet each other and advisers, and of course investors. On specified Investor Days, startups have the chance to present to angels and venture capital groups.

Berkeley Ventures says it is looking for a diversity of startups for its flock, cutting across high tech, application development, cleantech, Web 2.0, finance, gaming, mobile and social networking.Companies from anywhere in the world can apply, but must be smaller that six employees to be eligible.

While it still reviewing applications for its first batch of startups, it has already recruited an impressive crop of advisers, including Jeff Braun, founder and CEO of Maxis before it was acquired by Electronic Arts, Anthony Patek, an attorney from Cooley Godward and Kronish, and Joel Serface of Kleiner Perkins Caufield and Byers, who works closely with the U.S. Department of Energy.

Cleantech IPO's on the horizon? Lets hope so!

2009-06-26T09:46:00.000-07:00

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.

Got your cocktail/elevator pitch ready?

2009-06-15T10:48:00.000-07:00

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.

The Basics of the Financial Food Chain

2009-06-12T06:21:00.000-07:00

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

2009-06-12T05:52:00.000-07:00

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.

Smaller is Better in VC, really?

2009-06-05T09:45:00.000-07:00

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.

VC's: a dying breed?

2009-06-05T09:37:00.000-07:00

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….

Note to Founders: READ THIS

2009-06-04T14:51:00.001-07:00

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.

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

2009-05-30T14:43:00.000-07:00

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

2009-05-26T10:21:00.000-07:00

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

2009-05-22T09:44:00.001-07:00

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?

2009-05-22T09:34:00.000-07:00

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

2009-05-20T13:46:00.000-07:00

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

2009-05-20T13:33:00.000-07:00

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

2009-05-20T13:28:00.000-07:00

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

2009-05-18T17:22:00.000-07:00

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

2009-05-13T16:54:00.000-07:00

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

2009-05-12T17:18:00.000-07:00

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?

2009-05-11T09:39:00.000-07:00

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...

2009-05-04T15:54:00.000-07:00

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!

----

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...

2009-05-04T10:51:00.001-07:00

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.

--
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!

2009-05-04T10:18:00.000-07:00

I'll be attending this months' SVASE Big Event focused on the current state of the Angel Market. Our friends from the Angels Forum and the Kieretsu Forum are on the panel - should be an interesting evening. If you'll be there as well, let me know - would be great to see you!

http://www.svase.org/?q=node/2022

Start: 05/06/2009 - 6:00pm
End: 05/06/2009 - 8:30pm

Contact Info: Laura Weigant Email: Info@svase.org
Location: Wilson Sonsini Goodrich & Rosati
950 Page Mill Road, Palo Alto, CA 94304

Finding Angels to look After You

Click Here to Register Now!
Angels are the optimistic financiers who give many startups their crucial early infusions of cash, and are often the logical next stop for investment capital, after your own savings and those of your friends and family.

Unlike VCs, angels invest small amounts of their own money - as little as $10,000 and usually less than $1 million - in very young companies. But like all investors, many angels have been drenched with losses during the recent stock market gyrations. That has left them skittish, investing in fewer technology start-ups and demanding more of those they do consider, leaving founders struggling to find money at the stage they need it most.

However, there are still active angels out there! As many angels are quite low profile, or even secretive, the problems for many aspiring entrepreneurs are: how do I find angels that might be interested in my startups, how do I find out if they are still actively investing, how do I approach them, and what do they want to see from me so they will invest?

To find the answers to these questions, and more, come join our panel of committed, enthusiastic angels, as they explore the best ways to get angels on your side and on you team.

The Panel:
· Jim Connor, President, Sand Hill Angels
· Ed Esber, Member, The Angel Forum
· Max Shapiro, Member, Keiretsu Forum
· Ronald Weissman, Member, Band of Angels

Moderator: Steve Bengston, Managing Director, Emerging Company Services (ECS), PricewaterhouseCoopers

WHEN: Wednesday, May 6
6:00 - 7:00 pm: Networking and hors d’oeuvres
7:00 - 8:15 pm: Panel discussion and Q/A
8:15 - 8:30 pm: Additional networking

LOCATION: Wilson Sonsini Goodrich & Rosati (WSGR Campus), 950 Page Mill Road, Palo Alto, CA 94304

PRE-REGISTERED RATES (All Rates Include Hors D’oeuvres):
Members - $20; Affiliates who advertise this event - $29; General Public - $49

Pre-registration closes at 9 PM the night before the event.

WALK-IN RATES: Add $10.00 to the listed price

To reserve an Exhibit Table:
Contact Info@svase.org, $350 Members, $850 Non-members (Includes exhibit table, 2 tickets to the event and 1 year corporate membership).

Seating is limited, so early registration is recommended to avoid disappointment on the day.

This event is co-sponsored by Wilson Sonsini Goodrich & Rosati, http://www.wsgr.com

If the event is sold out, we apologize that due to fire safety codes we cannot accept any walk-ins.

Speaker Bios

Jim Connor, President, Sand Hill Angels
Jim Connor serves as President of Sand Hill Angels. He has been active in financial software applications for the past twenty years and was most recently the President of JPMorgan SymPro, a subsidiary of JP Morgan Chase & Company from August 2003 to May 2007. JPMorgan SymPro is the leading provider of Treasury Management software to the public sector, specifically focusing on investment management, bond issuance/debt management and the integration of treasury and liquidity operations. Jim was the founder and CEO of SymPro, Inc., grew the company to become the unqualified leader in its market space and managed the acquisition with JP Morgan Chase & Company.

Prior to SymPro, Inc, Jim worked at Xerox Computer Services in Software Development Management, in the development and deployment of systems which supported the distribution of Xerox parts and supplies in North America. Prior to Xerox, Jim was employed in Europe within the computer technology sector and started his career with the NCR software and Operations Groups.

Jim is active in applying software technology to financial and business applications. He is currently the President of Discover Ventures, LLC which provides sales and marketing services to technology companies. He has published several White Papers on specific financial models and has a patent application accepted by USTPO. He serves on several advisory boards, is an active angel investor and serves as the Program Chair of the (SVASE) Silicon Valley Association of Startup Entrepreneurs, CXO Forum. He holds a Bachelors degree in Business from the University of Cincinnati and is a member of several professional finance associations.

Edward M. Esber, Member, The Angel Forum
Ed Esber is an experienced technology company CEO with expertise in marketing, sales and strategy. His early management positions were at two large technology companies, IBM and Texas Instruments. Business Week magazine has identified Ed as a visionary leader of the personal computer industry who is credited with pioneering the creation of the personal computer software industry. He has also founded or guided companies that have led the convergence of computers with multimedia, communications, toys, and child and adult learning.Ed has served as an active member of over twenty public, private and institutional boards. His board experience includes presiding over compensation and audit committees of diverse companies ranging from startups to public companies of over $5 billion in sales. His skills emphasize use of creative strategy, effective use of human capital, executive mentoring and survival of the company during difficult internal or industry transitions. Specifically, he served on the board of one technology company whose sales grew from $100 M to over $6B in less than 10 years. Ed has also presided over several acquisitions and mergers, and has raised over $50M in capital for public and private companies.
Ed has an M.B.A. from Harvard Business School. He also earned an M.S. in Electrical Engineering from Syracuse University and a B.S. in Computer Engineering from Case Western Reserve University.

The Angels’ Forum (TAF) employs a unique model for angel (private individual) equity investing in emerging companies. TAF is a private, closed group of 25 investors, including individuals and small corporate and family venture funds. The TAF group reviews new deals weekly and makes new A round investments throughout the year, as well as follow on B and C round investments in existing portfolio companies.

Max Shapiro, Member, Keiretsu Forum
Max Shapiro is an active angel investor. Shapiro has been a member of the Keiretsu Forum angel investor network since 2001 and is also a member of Silicom Ventures. He has invested in health care, wind power and Web 2.0 companies.

Shapiro is the founder and CEO of PeopleConnect. A serial entrepreneur, his unique blend of experience, creativity and persistence has made it possible for many startups and established companies to add key members to their teams. He was the youngest talent scout in the history of the NBA, serving as Chief Scout for the Phoenix Suns. Shapiro owned and operated SportsWorld back in the ‘70s the largest operator of sports camps for children in the US. In the 80’s he created and ran baseball and basketball fantasy camps for adults. Partnering with some of the greatest names in sports to direct his camps- Mickey Mantle, Willie Mays, Pat Riley, Magic Johnson, John Wooden and many other sports luminaries.

Shapiro brings a great deal of success in identifying talent, be it on a baseball field, basketball court or in the corporate environment. An industry leader, Shapiro is a well respected speaker on building startup teams. In July of 2008 he was a featured speaker in Tel Aviv Israel at the Silicom Ventures Technology Conference. The title of his talk was “How to Build A Great Startup Team.” PeopleConnect has helped many early stage high tech startups find employees willing to work for “Equity Only” until clients secure their next round of funding. Shapiro hold a B.S. from Washington University in St. Louis.

Ron Weissman, Member, Band of Angels
Ron Weissman was vice president of strategy and corporate marketing for Verity, a global leader in corporate information retrieval and knowledge management. During his tenure at Verity, the executive team earned the large company "turnaround of the year" award (1999) from the Turnaround Management Association; Verity gained dominant market share and saw its market capitalization grow from $50 million to more than $1.5 billion. Prior to Verity, Ron spent more than five years at NeXT Computer, where he managed European and corporate marketing. In addition to his work in Silicon Valley, he ran academic computing at Brown University and at the University of Maryland, where he was Associate Professor of History. He is the author of two books on the history of Florence during the Renaissance.

Steve Bengston, Managing Director, Emerging Company Services (ECS), PricewaterhouseCoopers
Steve is Managing Director of Emerging Company Services (ECS) at PricewaterhouseCoopers. ECS acts as “mentor capitalists” for young, high potential companies and assists them with a variety of services, including, Reviewing Executive Summaries/Investor Presentations, Referrals, Raising Money, Partnerships and Finding People. ECS works closely with the leading opinion leaders/influencers in the Bay Area, including venture capitalists, attorneys, bankers and other service providers that have made Silicon Valley the leading high tech center in the world.

Before joining PwC, Steve had 20 years of experience in a variety of marketing, business development and general management roles at several high tech companies in the Bay Area. Most recently, he was Pres/CEO of ynot.com, a leading international emarketing and greeting card company. Previously, he was VP Marketing & Business Development at Worldview Systems, an Internet travel pioneer. At Worldview, Steve helped launch and market Travelocity with Sabre Interactive.

Steve has a BA in Economics and MBA from Stanford University. He works closely or sits on the Advisory Board at Churchill Club, SVASE, SDForum, Financing Partners, Life Science Angels, and the Stanford/MIT Venture Lab, has taught classes on funding/running start ups at UC Berkeley, Santa Clara Law School, Hastings Law School, and Stanford, and is active in a variety of other organizations in the Bay Area targeting entrepreneurs and investors. He is a frequent moderator/panelist at both university and industry sponsored events.

Great input on how to close a term sheet quickly

2009-04-29T09:15:00.000-07:00

I always enjoy reading the Venture Hacks - they're full of real life experience and practical advice. this is good advice for anyone who actually has a term sheert on the table - tougher to do these days but not impossible!

How to close a term sheet quickly
April 28th, 2009

How do you quickly turn a signed term sheet into cash in the bank? I’ve seen entrepreneurs do it in one week and I’ve seen them do it in four weeks.

How do you do it as quickly as possible?
Complete all business diligence before you sign a term sheet.
Set a firm closing date for your lawyers and justify it with something like, “I’m leaving the country on that date.”

Have a strong BATNA that keeps the other side moving quickly.

Listen to our podcast below for the details.

Audio: How to close a term sheet quickly (mp3)

Transcript
Nivi: I was talking to a couple of entrepreneurs today about how to expedite the closing process. Closing is when you go from a signed term sheet to money in the bank.

You are taking the signed term sheet, which is really just a letter of intent; it is for the most part non-binding, except for some confidentiality and no shop clauses, and turning it into a set of closing documents and money in the bank.

Closing can take anywhere from one week, to four weeks, to six weeks, depending on the complexity of the closing. There are some things that you just can’t speed up. There may be legal diligence that needs to be done that just can’t be expedited. It takes time to get it done.
Other than those issues that you can’t really speed up any faster than they are going, it is really up to the entrepreneur to set the timetable for closing. You can set things up so it gets done in a week and you can set things so it gets done in four weeks.

My preference is to get it done quickly for a few reasons. One: It just reduces the risk of not closing. Two: The faster you get it done the quicker you can get back to building your business. Three: It is just good experience and practice to move things forward during negotiations with your lawyers, with the other side’s lawyers, and with the other side.

There are three parts to closing quickly. One: What you do before you sign the term sheet. Two: After you sign a term sheet, what you do on your end to make sure things are moving quickly. Three: After you sign a term sheet what you do to make sure the other side is moving quickly.

Lets cover each of those parts.

Before you sign the term sheet
First lets talk about what you do before you sign a term sheet. Number one, most term sheets have a clause or term in there that indicates what the expected closing date is so your lawyers, the other side’s lawyers, and the other side can all work together towards that date.
My next suggestion is to conduct all your business diligence before you sign the term sheet so there is no business diligence left to do once you have signed the term sheet, during the closing process.

A lot of startups, I think, make the mistake of signing a term sheet too quickly before the investors have made the decision to really invest in the company. And they are just locking the company up with the term sheet, taking the company off the market so they can do their real diligence.

I would prefer to get all the business diligence done before I sign the term sheet. And we have a blog post on this, look it up. It is called, Complete business diligence before you sign a term sheet. We have also got another blog post called, Discuss your plans before signing a term sheet.
You also want to complete as much legal diligence as makes sense and is possible before you sign a term sheet as well. Why leave some legal risks? Why take yourself off the market and expose yourself to the risks that there is some legal issue that is going to trip up the financing. You want to get as much of that done before you sign the term sheet as well. You can find more info on that in the blog post. For most seed stage investment there is not a lot of complexity in your legal documents, whether it is IP or existing contracts, or what have you.

And top tier investors aren’t going to try to push business diligence to after a signed term sheet, in general. And if they do they are pretty up front about it and there is usually a good reason why. If you are working with a good firm you will get the business diligence done before you sign a term sheet anyway. And if you are a seed stage startup without a lot of complexity the legal work is pretty turnkey, which means that you can get it done quickly. And it is really up to you to determine how long it is going to take. These financing closings take as long as you let them take.

How do you expedite the closing process?
There are two parts to this. The first part is making sure your lawyers move quickly. The second part is making sure the other side moves quickly. The other side consists of the fund and their lawyers.

Moving quickly on your end
First lets talk about making sure your side moves quickly. You should understand that you are in a very high leverage position with respect to your lawyers. Your lawyers have taken the risk of working with you while you were an unfunded, seed state startup with a lot of risk that you would go out of business.

They perhaps deferred fees, or gave you reduced rates. And they took on the risks of working with you with the hopes that you would be come a venture backed startup and grow on to great success and do a lot of business with them. Which is exactly what is starting to happen to you at this point in time, you are getting venture backed. You have a signed term sheet.

Your lawyers are in a pretty precarious position. They have taken a lot of risks and that risk is starting to bear fruit. But they are in a position where they are not locked-in in any way. You are not locked-in with them so you can terminate them at any point in time still. If you terminate them they have taken a bunch of risks, worked for reduced rates, deferred fees, and they weren’t interested in working with you while you were a seed stage company. They just did that to build the relationship so that you could work with them when you were a venture back startup spending lots of money on legal fees. If you terminate them, they won’t be able to reap what they sowed. So they’re in a precarious position. You have a lot of leverage over them.

The first thing to do to expedite the closing process is talk to my lawyers and tell them — if you haven’t already, which hopefully you’ve done — is tell them you’re going to measure them in four ways. High quality advice, one. Two, the speed at which they get things done for you. Three, the number of errors in the work product. Four, cost.

Next, you tell your lawyers that you want to have an extremely firm date for the closing process. You can take the Steve Blank approach there, if you like, and tell them that prior to that date, if they need help you are available to help them out, but when that date comes you don’t want any excuses. Right? If they come at you with excuses by that date, it’s really a fireable offense.
The best way to justify an extremely firm date is with a justification. People like to have reasons for why you want them to do things. So come up with a reason why the closing needs to happen by such and such date. For example, “I’m going on vacation on that date, I’m having a baby, I’m leaving to go to a business meeting in a foreign country, we need the money to make a payment, we need the money to hire somebody.” Just get with your team, brainstorm a solid reason why it absolutely has to be closed by that date.

That’s the end of the story of making your side move quickly. Ultimately, it’s really in the interests of your lawyers to actually get it done quickly. We’ve seen too many law firms get fired after a closing because the closing wasn’t done quickly enough, there were too many errors and the entrepreneurs were not happy with it. I think it’s important and good for the law firm for you to communicate what your metrics for success are. Finally, your lawyers are not computers, right? They’re humans. So don’t take the tone of the discussion here too literally. You want to treat them with grace and humility and make them excited to work with you.

Making the other side move quickly
The other piece of the puzzle is getting the other side to move quickly on the closing and getting the other side’s lawyers to move quickly on the closing. In general, if you’re closing with a good firm, a good fund, they also want to close quickly. They don’t have any interest in a slow closing process. It’s just a question of getting their lawyer’s bandwidth.

The best advice I have to get the venture fund, or investors and their lawyers to move quickly, is to have a great BATNA. That’s really the only advice I have for you there. Preferably you’re in a situation where your BATNA has said something like, “If the other side blinks during the closing process, call me.” You want to have a BATNA that’s still chomping at the bit to invest in your company.

I’m not suggesting that you break any no shop clauses or anything like that, or confidentiality agreements that you have in your term sheet. What I am suggesting is prior to signing a term sheet, you want to have a BATNA that is chomping at the bit and will be interested in investing in your company even if the term sheet blows up after it’s signed. They’re chomping at the bit, like I said, they’ve said something like, “If the other side blinks during closing, call me.”

If they haven’t said something like that, you can say something like that. When you call the investors that you’re not going to take money from and tell them that you’re going to sign a term sheet with someone else, you can tell them, “If there’s any problem during the closing process you are going to be my first call. I’m not expecting any problems during the closing process, but in the odd case that there is a problem during closing and we decide to pull the plug, you are going to be my first call.”

So you’re setting things up to have a great alternative if things blow up during closing, and you’re providing yourself with an excuse. You’re saying, if things do blow up it’s not going to be them pulling the plug, it’s going to be me pulling the plug.

Take it away Kazumi.
Learn more about: Closing

the new business accelerator - is this the new model for seed VC?

2009-04-24T10:43:00.000-07:00

A very interesting set of articles looking at the Y Combinator model and others in this rapidly emerging new sector. i thought the 3rd part was the most interesting - it's all definitely worth looking at if you're following this new emerging sector at all.

New Venture Capital Models – The Rise of Business Accelerator Seed Funds (Part 1)
New Venture Capital Models – The Rise of Business Accelerator Seed Funds (Part 2)
New Venture Capital Models – The Rise of Business Accelerator Seed Funds (Part 3)

Is VC dead or is it just changing?

2009-04-22T13:38:00.000-07:00

Interesting view on the VC industry courtsey of PEHub. At PE Hub they have been debating the merits of various new forms that VC may take - and have been doing it for some time. Worth a look.

http://www.pehub.com/37512/a-vc-revolution-in-the-making/

A VC Revolution In The Making
Posted on: April 19th, 2009

Last night I was invited to attend (thank you Brenda Chia, president AAAIM) the panel discussion “Market Changeup: Fund Management as a Business”, with Priya Mathur (Board director of CalPERS, California Public Employees’ Retirement System; one of the biggest investor in LPs and VC funds), David Fann (President & Chief Executive Officer, PCG Asset Management), Jan Le Chang (Vice President, Centinela Capital Partners), Phil Phleger (Morgan Lewis) and Bob Grady (Managing Director, Carlyle Ventures).

Compared to last year (written up here) the opinion of the people at the top of the innovation food chain was remarkably introspective:

Venture Capital is broken in some fundamental way.So much so that PCG predicts a revolution and a complete redesign of the Venture Capital model, with CalPERS nodding in agreement. CalPERS has gone from a yearly review of their asset allocation to quarterly and is currently debating new hybrid asset allocation models. That means less dependency on VC, and more on other vehicles. At the same time it is looking to reduce its relationships to only the top quartile VCs and getting out of the mid and bottom tier ones altogether. Annex funds, created to fill the void of fleeing late stage investors, are not found to be interesting as the majority of the funds currently in the pipeline will not produce positive returns anyway.

The sentiment from the fund managers was that they are literally “fed up with the rock star parties from VCs that don’t produce returns”. A conclusion clearly not received by all funds as we hear (from a trusted source) that general partners at a downtown Palo Alto walking-dead VC firm are still fetching $1M yearly salaries each, this year.

Everything is going to change.VC is not dead, but everything is under review. Fund managers are now for the first time talking to each other to fundamentally change the outcome of the game, regardless of the state of the economy. They all admitted that none of the widely used mathematical risk models prevented the precarious situation that now forces even CalPERS to pay close attention to its balance sheet and carefully manage available investment cash.

Limited Partners are looking for full transparency of the VC funds, going as far as wanting to see their balance sheets and who is holding their securities. Under the magnifying glass are VC management fees (no more 25%), splits, as well as exorbitant fees gained through stacked funds.

Co-investment with endowment funds are debated as they are too over-allocated in the equity vehicle to provide sustainability. We may see more monolithic investments in VC as a result.

All fund managers think cleantech and health-tech are interesting asset classes, but think the fleeing from technology is somewhat worrisome, they have become weary to over-allocate anywhere. Globally, no economy has proven to show any disparate advantage, the asian and china plays fell equally as hard as the US and elsewhere.

Moving forward, but not so fast.New VC funds will need to come up with a better story. The creators of the new VC funds will likely be experienced operators (just like at the start of technology evolution), removing the pure money managers who failed to add substantial value. They are expected to, as a team, have demonstrated an ability to warehouse deals before, deliver a unique value proposition to the investment climate and provide substantial value to the disruptive proposition of their portfolio companies.

CalPERS is eagerly looking to invest in emerging money managers who in due time (2-3 years expectancy to close a new fund) can expect their renewed support. So far, in the first quarter of 2009, 3 new funds have been invested in (compared to 47 all of last year) and no significant uptick is expected until this summer.

Clearly fund managers are licking their wounds, in a holding pattern for some positive news on the economy and perhaps some much needed regulation with regard to transparency. Rest assured, no fund manager seems to debate the value of venture capital as an investment vehicle, it is here to stay.

Help is on the way.The great outcome for entrepreneurs is that fund managers (as we predicted) from now on will pay close attention to the type, behavior and performance of VCs that allows entrepreneurs to build new companies more effectively.

Good times are coming.

Georges van Hoegaerden is the Managing Director at The Venture Company (www.venturecompany.com) in Palo Alto, focused on helping companies with technological and market insight, organizational development, team building, selling and managing growth. This post originally appeared on his blog.

Three Rules for Investing - Reid Hoffman

2009-04-21T09:44:00.000-07:00

Good advice from our fried Reed Hoffman. He's a smart guy and an active investor - his views are worth listening to.

Reid Hoffman: My Rule of Three for Investing

by Guest Author on April 19, 2009

The guest post below was written by Reid Hoffman, CEO and Founder of LinkedIn. Reid, who’s been a prolific writer lately, is a strong advocate of entrepreneurism and the startup mentality. See his recent Washington Post article Let Our Start-Ups Bail Us Out, and the guest post he wrote here on TechCrunch, Stimulus 2.0: It’s The Startups, Stupid. Reid has recently appeared on Charlie Rose, and we had a chance to sit down with him earlier this year for a video interview as well. Reid is an investor in over 60 web ventures including Digg, Facebook, Flickr, Friendster, FunnyOrDie, Ning, Last.fm, Six Apart and Technorati. He is also a member of the nominating committee of our upcoming TechFellow Awards with Founders Fund.

TechCrunch and Founders Fund announced the first annual TechFellow Awards last week. This is a great time to stimulate investment and recognize and encourage tech entrepreneurs –starting up is cheaper, talent is more fluid, and people are more inclined to take calculated risks. If we can find more ways to spur investment, it will be good for the entrepreneur now and good for society later.

As a serial investor, I’ve enjoyed backing some good Web 2.0 companies, and it’s helped me develop a shortlist of criteria to cut the wheat from the chaff. After five minutes of a pitch, I know if I’m not going to invest, and after 30 minutes to an hour, I generally know if I will. Many entrepreneurs are product-focused, which leads them to pitch the brilliance of the product.

Others are money-minded, so they can over think the business plan. But neither of these approaches answer the first few questions I want to know as an investor:

1. How will you reach a massive audience?
In real estate the wisdom says “location, location, location.” In consumer Internet, think “distribution, distribution, distribution.” Thousands of products launch every month on hundreds of thousands of new Web pages. How does a company rise above the noise to attract massive discovery and adoption? YouTube did it through existing channels like MySpace, which already reached millions. Yelp had strong SEO, which found them a mass audience searching for restaurants and nightlife. Facebook’s University-centric approach landed them 80% adoption across a campus within 60 days of launch. Every Net entrepreneur should answer these questions: How do we get to one million users? Then how do we get to 10 million users? Then how will you get deep engagement by your users.

2. What is your unique value proposition?
The Internet space is crowded. A product needs to be sufficiently innovative to distinguish itself from the pack, but not so forward thinking as to alienate the user. Many entrepreneurs create incremental improvements on existing products. This can be big – Google revolutionized search when AOL and Yahoo! were presumed to have it locked up – but more often, the pitch sounds like, “It’s a dating site, but for senior citizens…” I want to see innovation that is categorically distinct from existing propositions. Digg lets users decide which headlines are newsworthy. Last.fm tracks music listening with an iTunes plugin and buffer great music discovery. Flickr enables users to share and tag photos in new ways.

3. Will your business be capital efficient?
This may be the most important of the three. Even if you have a mass audience and unique value prop, a business fails without cash flow. An initial round of financing is important, but how reliable is later financing? Will investors see the right elements in the next stage? Your product must scale intelligently – this is why I like software. A well-coded site can adapt to mass demand without its capital expenditures scaling out of control. A product like TypePad can grow to 10 million users without half the growing pains of a service like WebVan, the Web 1.0 startup that attempted to deliver groceries to users’ doorsteps. Try reaching Facebook scale with a service like that.

With these three elements in place – mass audience, unique value, stable funding – a startup has time to discover where it can make money. Few business plans ever pan out like their owners intend. PayPal started as a plan to beam payments between Palm Pilots. Google raised funds with a vision to capitalize on enterprise search and ended up in advertising. The formula is to build an audience with a great product – then secure enough funding to figure out how to make it pay.

Since I’m focused on building LinkedIn, I’m not currently investing in new projects, but I firmly believe now is the time to take smart risks as entrepreneurs and investors. I hope these criteria help startups make better pitches as they fundraise, and maybe even encourage others to take the plunge. Good ideas need good strategy to realize their potential, and if these criteria help a few more companies find capital, it’s a win for everyone.

Reid Hoffman is currently the CEO of LinkedIn.

Reid was LinkedIn’s founding CEO for the first four years before moving to his role as Chairman and President, Products in February 2007. While CEO, Reid… Learn More
Information provided by CrunchBase

What's wrong with VC

2009-04-17T08:29:00.000-07:00

One of the better articles on what's wrong with Venture Capital that's out there lately - and there certainly are alot of them out there!

April 16, 2009, 06:42 PM EST
Guest Column: Venture Capital Under Attack --> -->

(The following is a guest column from Adam Grosser, a general partner with Menlo Park, Calif.-based venture capital firm Foundation Capital, where he has worked since 2000. Foundation Capital last year raised a $750 million fund dedicated to information technology, consumer products and services and clean technology.)

By Adam Grosser

As a venture capitalist, my job is to find great ideas and turn them into great companies.
The journey to find these ideas has taken me from inventors’ basements, to obscure research labs, to, in one case, a smoky Milwaukee bowling alley renowned for its fried Twinkies. With a lot of hard work and a little luck that journey ends on the floor of a stock exchange, witnessing a company you helped build go public. It’s a helluva ride.

What concerns me today is that for too many venture capitalists – and thus too many innovators and small businesses – that ride is coming to an end.

That’s not just bad for venture capitalists. It’s bad for America.

Although venture capital represents just 0.02% of U.S. GDP, it is responsible for an astounding 10% of all U.S. jobs and 18% of U.S. revenues.

Over the last 35 years, one job was created in the U.S. for every $25,000 of venture capital invested. That’s about 10 times cheaper than even the most generous estimates of job creation in the recent federal stimulus package.

Yet today, fear is so dominant, credit so tight, and regulation so onerous that many promising startup companies can’t get off the ground.

Financial markets have little understanding or tolerance for “small-cap” companies, and without a robust public market, potential acquirers are either sitting on the sidelines or bottom-fishing. Few are willing to invest the seven to 10 years and $50 million to $100 million it takes to build a new company.

This general climate of fear is being compounded by three deep structural problems: 1) a dysfunctional technology investment-banking ecosystem; 2) diminishing support from institutional investors for VC-backed enterprises; and 3) an increasingly onerous and counterproductive regulatory environment.

In the 1990s, a vibrant group of four small investment banks helped usher in a golden age of technology investment. Alex Brown Inc., Hambrecht & Quist Group, Robertson Stephens & Co., and Montgomery Securities – dubbed “the Four Horsemen” – underwrote a large share of venture-backed IPOs, which averaged about 130 a year before the dot-com bubble, compared with about 40 a year since. Those full-service boutiques employed a large group of research analysts that offered potential investors insight into the latest technologies being developed, and held conferences where technology companies could present to these investors.

Today, the Four Horsemen have vanished and so has the sell-side ecosystem that brought venture-backed IPOs to the market. America has now gone two straight quarters without a venture-backed company completing an IPO - the first time that’s happened since we started keeping records in the 1970s.

The second most pressing problem facing VC is pension funds, endowments and other buy-side investors running out of patience with small growing companies. Historically, buy-siders have understood and accepted that most economic value isn’t created until five years after a company’s IPO. But now, a focus on unfavorable current EBITDA multiples is displacing long term predictors of success such as market size, growth rate, technology and management experience.

Finally, we have counterproductive regulations such as Sarbanes-Oxley, and could see two more regulatory measures that will end up undermining the already tenuous value proposition for venture capitalists and their limited partners.

The populist movement to punish short-term profit seekers from the hedge fund and private equity industry by treating carried interest from long-term capital gains as ordinary income would end up applying to venture capitalists as well. There is a material difference between what venture capital firms do and what many hedge funds and private equity firms do. We make a long-term commitment to company-building. They don’t. Equally misguided are signals from Treasury Secretary Timothy Geithner that venture capital firms may be forced to submit to onerous Securities and Exchange Commission reporting requirements to ensure that we aren’t “a threat to financial stability.” This demonstrates a gross misreading of what venture capitalists actually do. Many VC-backed companies don’t utilize any debt at all – meaning that if a company fails, the price is paid only by the immediate investors and employees. Unlike a hugely leveraged hedge fund deal gone bad, a failed VC startup causes minimal collateral damage to financial intermediaries. If we start regulating VCs like hedge funds, it will stymie the risk-taking needed to grow promising but unproven startup companies.

These problems threaten the very foundations of venture capital, and therefore the American economy. So what can we do?

First, build great companies. I can’t speak for the entire industry, but I can attest that my firm, Foundation Capital, has five to 10 companies mature enough to meet all the historical criteria to be successful standalone public companies. We need to keep proving our worth through our work, and telling our story.

Second, we need to find some brave, charismatic bankers to reconstitute an ecosystem that recognizes the needs of rapidly growing innovative companies. The VC community needs to proactively give lead-managed business to the equity-oriented boutiques that care about small companies and are willing to do small IPOs. If there aren’t enough such firms, we should seed some with VC money.

Third, we need to re-educate the buy-side as to why growth companies are so central to building long-term value. The entire system needs to respect the IPO buyer. We can’t rush companies to market that aren’t ready just because an IPO window is open. Offerings must be priced conservatively because as noted before, most of the returns of the VC hall of fame have occurred long after the IPO.

But we also need to appeal to a larger universe of buyers. As Frank Quattrone recently suggested, we should “cultivate a broad array of smaller institutional investors for whom 1% to 10% allocations of smaller ($25 million to $50 million) IPOs would matter.” This would allow potentially game-changing young companies to get the funding they need to reach their full potential.

Lastly, and critically, if the data I began with is as compelling to you as it is to me, we need to make sure every legislator and policy maker knows: Venture capital is how America wins.
This is how America will engineer solutions to energy independence. This is where the breakthroughs in life sciences will come from. This is where tens of thousands of skilled new jobs will be created. Venture capital is the engine of the innovation economy, and we are in grave danger of shutting it down for good.

Scary VC news...

2009-04-13T18:21:00.000-07:00

Scary scary scary. Bad news for our industry. We'll see the fallout in a couple of years. I think its wrong for the NVCA to try to spin this on a positive note - honesty is the best policy. This is bad news...

VCs Find It Hard to Raise Money, Too
Stacey Higginbotham Monday, April 13, 2009 8:53 AM PT 1 comment

Some 40 venture funds raised $4.3 billion during the first quarter of 2009 — the fewest to raise money in a single quarter since the third quarter of 2003, according to data out today from the National Venture Capital Association. And while the dollar figure was 23 percent higher than the $3.5 billion raised in the fourth quarter of 2008, it was 40 percent less than the comparable three-month period a year ago, when 71 funds raised $7.12 billion.

The NVCA tried to put a positive spin on the news, stressing that established venture firms are still able to raise sizable chunks of cash. But the negatives are becoming harder to hide. One reason for the downturn in fundraising, as the industry group notes, is that many VCs are holding onto their cash while they wait for conditions to improve — a lemming-like mindset of cash conservation that won’t help pull us out of the downturn. The other reason is that the limited partners who fund venture capital firms are pinching their pennies as well.

Many of the large endowments that invest in the venture industry have seen their net worth plummet. As the stock market sinks in value, it means a greater proportion of their portfolios is now invested in riskier and less liquid investments such as venture capital funds. Since most endowments can only invest a certain percentage of their dollars in such risky assets, they need to pull back from their investments in the venture sector.

However, there’s another, more urgent reason we’ll be seeing fewer funds raise money over the next few years — the venture model is ailing. Exactly how is a matter of debate: Some argue there’s too much money in the space, and others argue that the days of huge IPOs are a thing of the past. One way or another, one result of this downturn could be the culling of venture firms that should have taken place after the dot-com bust. We may also see successful firms adapt their models to reflect both the smaller funding needs of many technology companies and the greater amount of time that lies between a startup and a blockbuster IPO. But like any culling or evolution, that’s going to hurt.

10 reasons why startups fail

2009-04-13T14:08:00.000-07:00

Great advice from our old friend Jolly. Its always important to take a few minutes to remind ourselves of this type of info. I happen to think #2 and #3 are super important.

VENTURE CAPITAL
Top Ten Reasons Why Startups Fail
--> Mohanjit Jolly, Executive Director, Draper Fisher Jurvetson India , March 17, 2009

Entrepreneurship is for those with thick skin, and sheer tenacity to be able to hear lots of “no’s” but not be deterred.

Jolly’s Volley
I think most people are aware of the fact that very few startups actually succeed. That’s precisely what makes entrepreneurs a rare breed. While knowing the risks, entrepreneurs follow their passion, try to change the world and hope for wealth creation for themselves and their shareholders.

It’s the potential for that proverbial home-run (or a Sixer in cricket talk, I suppose) that drives entrepreneurs, especially technology entrepreneurs (and VCs) to get into the game in the first place. But, for a combination of reasons both within and outside one’s control, startups fail. The list below is one compiled by my colleague, Tim Draper. I have tried to add my own little twist to give it some Indian spice and colour. So, here goes…

1. Startups run out of cash: One can argue whether that’s the cause or effect of failure. Often, startups are too optimistic about when their product is going to be accepted by the market (the hockey stick that entrepreneurs and investors alike often talk about). I used to have a professor in Business School who was a turnaround specialist hired by large corporates in the US to help float a sinking ship, and actually have them become viable businesses.

He used to say, “You can run out of wives and girlfriends, but make sure you never run out of cash”. I am guessing the latter will automatically lead to the former in most cases. But all kidding aside, there are often times when the entrepreneur is either too naive or highly arrogant when dealing with the situation of “cash crunch”.

On the former, he/she is busy fighting other fires that he/she simply underestimates how long the cash will last (sales cycles are longer than expected, for example, or customers are more price sensitive than expected). I have also seen the latter, where an entrepreneur will not heed advice from Board or advisors (in terms of cutting the burn) simply because he/she thinks that his/her company is too valuable for the investors and other stakeholders to let die, and they will bridge the company. More often than not, the entrepreneur is wrong. In tough times, investors become a lot more disciplined about letting go of the non-performers, and not putting good money after bad.

2. Founders don’t have complete faith in each other: They fight instead of delegate, trust and verify with each other. This is a tricky one. I often tell entrepreneurs that great companies are founded not by an individual but teams (2 or more founders). Gates and Allen, Brin and Page, Yang and Filo, Jobs and Wozniak and the list goes on and on…It’s important to have one founder who is outward facing (customer/business centric) while another who in inward facing (operations centric).

But there has to be a clear delineation in roles and responsibilities, so that one doesn’t step on the others’ toes. The other aspect is to be brutally honest with each other, and actually have a transition plan, as a company scales. More often than not, founders are great at the early stages of a company, but a new seasoned management team is necessary to scale the business to tens of millions of dollars and beyond in revenue.

Sometimes, I have found myself in situations where two buddies who founded the company are no longer capable of running the company (i.e. the company has grown to a size beyond what the founders can handle). The truly remarkable founders/CEOs are ones who realise when they are no longer right people to be at the helm of the company.

They often step aside, or take on a role of a chairman/evangelist and let a more seasoned CEO steer the company forward. But for a variety of reasons, ranging from “giving up control”, to “title creep (still needing to be CxO)”, to sheer ego, founders end up in a tiff with each other or with the Board. Let me give you a specific example. There is a company where two co-founders (Founders A and B, close friends for many years) started a company with operations and market in India, while they were still in the US. The plan was for them to move to India. But for a variety of personal reasons, Founder A simply could not make the move to India. Founder B, as a result, ended up doing most of the work.

Even though founder A was no longer contributing, founder B did want to let him go due to the long personal friendship. Founder B, as a Board member, has a fiduciary responsibility to do the right thing, and let his buddy go (since he was no longer actively contributing to the company). The unvested equity held by founder A was no longer working towards creating value for the company. Founders often have a hard time choosing between a fiduciarily responsible decision and an emotional personal relationship. By having a detailed conversation around roles and transitions at the onset, founders (who are also good friends) can avoid awkward situations downstream.

3. CEOs hire weak team members: This is partially related to the previous point. Strong CEOs sometimes try to carry everyone with them rather than hiring people who stand up on their own. Again, there may be team members who are dear friends, but may actually not be the best person for the position. CEOs need to do what’s optimum for the company and the shareholders, not their friends or their ego.

Most successful CEOs will utter the following words “always surround yourself with people smarter than you”. Again, if entrepreneurs are honest with themselves and actually adhere to that mantra, they will build a strong company, and an equally strong culture of hiring better and hiring smarter. Many CEOs or executives, due to either ignorance or arrogance, end up settling for weaker team members.

The reason for hiring strong team members is simply that they will question the status quo, and the traditional way of thinking. They will be a resource for the CEO and the Board to help determine the company’s overall strategy. For startups with constrained resources and continuous threat from incumbents, there needs to be a team with a combination of smart out –of-the-box thinking/questioning, scrappiness and uncompromising tenacity. Often founders, who are junior from an experience standpoint, do not want to let go of a lofty title. My recommendation is that one would often be much better off working at a director or manager level for a seasoned VP or CxO from the outside, than try to learn on the job as a CxO or SVP themselves.

4. They want to do too much: Usually, successful start-ups figure out a narrow niche that they can dominate and then expand from there. This is where the bowling pin analogy is helpful. Often entrepreneurs face a dilemma of “appearing big enough” to a VC especially during a fundraising discussion, but at the same time being able to focus on a particular segment of a market. There is also a balance between being flexible/nimble as a startup, but at the same time not looking completely lost or defocused.

Often, startups have to experiment and try a variety of approaches to products, channels, business models, but they also have to make sure that there is discipline and analysis behind the decision making. Bottom line: stay focused, become dominant is a very targeted segment or vertical, and with that success as foundation, expand into adjacent areas. Entrepreneurs should paint a long term big picture, in terms of a game changing vision, but be laser focused in their execution, especially when starting up. Admittedly, this is easier said than done (as with most of my articles).

5. They go after too small a market: Selling ice to Eskimos is a trivial but poignant example. You may have the best customised ice sculptures, but it doesn’t mean a whole lot if the market is either too small or non-existent. This is often the case when entrepreneurs develop a technology looking for a problem, rather than developing a product having researched a market and determining that the opportunity exists, it’s large and customers are willing to pay for the right product or service.

Another way of looking at this is to see how much “better, faster, cheaper” one can make a solution compared to something that already exists. Trying to improve existing solutions by 10 or 20% doesn’t usually have an impact. Order of magnitude impact in terms of price/performance is a lot more interesting. Having said that, companies often are created not to address an existing market, but one that is anticipated to emerge.

In India, for example, several companies were created and funded prematurely relying on broadband penetration that was supposed to happen in India. Examples around mobile video or location based services are other areas where current market is tiny, but they will emerge. A very tough question to answer is one of timing – Should a startup wait for a market to be ripe, or build a solution while guesstimating market maturation. I am more a proponent of the former, since there is quantifiable opportunity that often does not require behaviour change, and complete customer education. There is a reference in terms of incumbent products/technologies against which the startup can measure its own offering, in terms of being significantly better, faster and/or cheaper.

6. They don’t charge enough from their customers to survive: They often think their VCs are their customers and that a nice VC pitch is all they need to make to get more money. There is no better cash source than happy, marque price-insensitive customers. Just like many other challenges faced by a startup, determining a business model and more specifically pricing is one of them. Although it’s ok to provide a discount for the early alpha/beta customers, it’s usually not the right move to compete based simply on pricing.

Also, it’s crucial to have a very good idea of costs of creating and delivering one’s product or service, so that pricing and margins are enough to sustain a growing company. Tha aforementioned is an obvious statement, but one would be amazed at how often entrepreneurs don’t actually have a good handle on their margins. In India, which happens to be a more price sensitive economy than most, it’s extremely difficult to start with a low price and raise it over time. The reverse will likely be true. Bottom line: base the pricing on a quantifiable ROI to the customer, and have an incredibly capital efficient production and distribution base. Margins tend to shrink, not expand, as offerings get commoditised over time.

7. They hire too many people up front: Too many mouths to feed too early can sink a company. Keep a low burn until you have your business model in place. In some businesses it is crucial to have a team in place to be able to deliver the product or service. There is usually training involved, so people do need to be hired slightly ahead of revenue. But often, especially in good times, startups hire too many people prior to having clarity of the business model or revenue visibility.

Having a high burn without either having a product/service to sell, or a process to deliver that particular product or service, is the number one reason, in my mind, why startups fail. Startup investments happen in tranches or series of funding that are usually tied to a company hitting specific milestones. But if the burn is high, those early product milestones are not hit in time, and companies have an incredibly difficult time raising additional capital.

On the technology front, early hires are usually engineering centric to develop and refine the product. Once the product is getting close to market release (as alpha/beta), that’s when sales, business development and customer facing hires come into play. The aforementioned is a slight generalisation and seems fairly obvious, but one would be amazed at how frequently this particular mistake is made, often by seasoned entrepreneurs. I have had experience with several companies where, due to the economic/market environment, a RIF (reduction in force) had to take place.

What’s more amazing is that in most cases, after the RIF, the company’s performance did not suffer in terms of revenue, and bottom line improved drastically. Lesson learned: companies can be much more capital and team efficient than they realize. Often it’s only after a startup goes through the over-hiring and then laying-off cycle that entrepreneurs realise that they truly can do more with less.

8. Sheer luck (or lack thereof): Startups can and do get broadsided by competitors, new technologies, big companies changing direction, regulatory environment etc. This is one that squarely belongs in the category that’s completely “out of one’s control”. Startups’ success depends on a blend of luck and skill.

One can argue about the percentage splits between the two. In India, this point may be more true than most places, given the regulatory environment that exists in many sectors. And given the mood of large organisations like the RBI, SEBI, or the various ministries and their dynamic mandates, startups can either tremendously benefit or completely get clobbered by the decisions made. In India, there are grey areas around topics like Service tax, which can cause significant burden or relief depending whether a company is liable or not.

Given my aerospace background, I had a chance to see direct impact on technology companies catering to the defense sector getting tremendous benefit when the Republicans were in the White House vs the Democrats. Finally, often cash rich incumbents can simply play a loss-leading pricing game to crush a startup.

9. They don’t work hard enough or fast enough or smart enough: All those little decisions add up to an outcome. Awareness of the market dynamics subtleties are ignored or not analysed/understood as well as they should be. It’s important, for example, in India to realise that this is primarily a cash based economy, and on top of that a pre-paid economy. So, trying to enter the Indian market with a credit card based purely online subscription model, may not work, especially if the product or service is to be delivered to a broad consumer base.

DFJ has companies in our portfolios who have faced the very same challenges, so the nimble startups have to keep their finger on the market pulse and continuously adjust (without throwing darts in the dark) based on market feedback. Although not often the case, there are times when startups get a bit complacent. This could be due to over confidence in the technology, or on the other extreme, due to fatigue, especially if the company has been going on but been relatively flat for a number of quarters or years.

Sometimes technology entrepreneurs get a bit detached from their eventual customers, not realising that the needs of the market are changing, or the customer behaviour is morphing and as a result the product also needs to change. Lack of that adaptation, or not doing so fast enough, can also lead to a dire end. Let me give another hypothetical example. If a company relies on acquiring online merchants to be able to provide a service like search engine optimisation, or an advertising network to an online publisher, then it’s crucial to have a process in place to be able to add those merchants seamlessly and quickly if the business is to scale. Yet, if that company has an Oracle like culture, and the QA process for every merchant addition takes 8-10 weeks, the company is doomed.

10. They don’t take enough risks: Some start-up entrepreneurs think that they should operate as though they are big companies. This is wrong. They will never beat Microsoft or Google at their own game. They must get creative and do things differently, even at the risk of embarrassment. The incredibly successful entrepreneurs are those who thought monumental, not incremental.

11. Bonus point (buy 10, get 1 free, recession special): Entrepreneurs get greedy. This may be ironic coming from a VC. The sole focus of the entrepreneur should be to create a large profitable long term entity. The big pain point for the entrepreneurs, and understandably so, is around dilution that they suffer when raising capital. That concern often leads to sub-optimal decision making.

For example, especially in times of financial uncertainty like today when valuations tend to be lower, founders/promoters tend to take less money to minimise dilution. My advice to entrepreneurs is “when offered capital, take it”. It’s almost always better to take more capital than less because it usually takes longer and more capital to hit key milestones.
Bottom line: Entrepreneurship is for those with thick skin, and sheer tenacity to be able to hear lots of “no’s” but not be deterred. Having said that, passion alone cannot guarantee success and due in part to reasons given above, startups fail. What’s equally important to realise is that it’s “ok to fail”.

I am obviously not implying that one should stride for failure. Silicon Valley is filled with entrepreneurs who failed their first and even second time before they finally had a success under their belts.

The learning involved in going through a rough startup experience can be tremendous. In India, I feel a sense of risk aversion among entrepreneurs where a stigma still lingers (whether real or perceived) around failure. I think only when that viewpoint changes, will we start seeing truly monumental ideas coming out of India, rather than the incremental “low risk, low reward” variety.

good insight from our friends at the WSJ on pitching VC's

2009-04-13T12:22:00.000-07:00

We love this newly created WSJ blog on VC. This particulary posting is a very straight up look at how VC's view startups and their presenatations. Its basic info but a good reminder...

An inside look from VentureWire at high-tech start-ups and their investors.
Venture Capital Dispatch Feed
April 9, 2009, 02:55 PM EST

How To Avoid Making A Bad Pitch --> -->

By Ty McMahan
All venture capitalists have probably experienced a bad pitch from an entrepreneur. But a couple years ago, the team at Canaan Partners heard a real sleeper.

No, we mean, a real sleeper.

The chief executive and vice president of sales for a start-up company visited Canaan’s Menlo Park, Calif., office. Just as the CEO was hitting his stride, really driving home the reason Canaan should invest in his company, a deep, nasally sound vibrated across the conference table.
The VP of sales was taking a snooze.

“The CEO kept blazing through his pitch, acting like it wasn’t happening,” Canaan’s director of marketing, Gina Vakili, said. “If there’s an elephant in the room, we should all acknowledge it.”
It probably goes without saying, the company failed to attract funding from Canaan. Falling asleep in the middle of a pitch is a rare and extreme example of what not do when speaking to venture capitalists, but there are plenty of common mistakes that can be avoided.

To help entrepreneurs be prepared when they present to the firm, Canaan created the Entrepreneur Pitch Workbook, essentially a “Dummies” guide to pitching venture capitalists. (See below for a shorter, slideshow version of this guide.)

Assembled in a slick, colorful 27-page spiral-ring book, the guide outlines the perfect pitch. It covers everything from the typical time allowed for an introductory meeting, the ideal number of slides in a presentation and what the entrepreneur should wear to the meeting.

“The pitch book is written for entrepreneurs who don’t know our firm,” Vakili said. “We need to get to know each other and determine if we can work together because it’s a long-term relationship.”

Canaan’s advice for that first meeting:

1. Let us get acquainted with you and your team. We want to work with smart, honest people. This is a long-term relationship and it needs to be good fit.

2. Help us understand the opportunity. Unless you’re a niche, we probably already know the sector. Don’t spend too much time on that, spend time on the solution.

3. Don’t come in and negotiate. Entrepreneurs who come in and say “before we get started, I’d like you to know that we have multiple term sheets on the table” make us wonder, “then why are we meeting? Why are you here having a first meeting if you’re at the term sheet stage with other firms?”

After polling the firm’s investment professionals, Vakili compiled a list of the top pitch mistakes:

1. Lack of clarity – Executives should be able to express what the company does in 30 seconds. A presentation should be 30 minutes long without interruptions.

2. Arrogance and megalomania – Don’t bring a team to a presentation and not permit them to speak. “We invest in people and teams. If you brought your team, let them speak, show them off.”

3. Avoiding questions – Don’t dance around questions, especially if they’re asked multiple times in different ways. Be thoughtful and willing to explain your concerns with the business.

4. No competition – Don’t insist you have no competition. “We have a unique IP that gives us a multi-year lead” is never true. If someone wants to chase you, they can be right on your heels.

5. Not understanding the market - Market-sizing should be top-down and bottoms up. Saying, “We just need 0.1% of the population of China to be a success” ignores the importance of identifying and describing the target customer.

6. Not knowing the numbers – Be able to explain how your company plans to drive 500% revenue growth in its second year. But don’t suggest a valuation.

“I thought maybe [the pitch book] is just for new people,” Vakili said. “But, I’ve had successful entrepreneurs say how helpful it is. We’ve received great feedback.”

The book has been particularly helpful to entrepreneurs pitching partners in the firm’s offices in India and Israel. “That community is very new [to venture capital] and they’re looking for guidance and thought leadership,” Vakili said.

To better view the slideshow below, click the “full screen” icon on the bottom right of the box below or click the link which takes you to slideshare.net.
Canaan Entrepreneur Pitchbook

Great post on basic startup marketing tools

2009-04-07T11:12:00.001-07:00

basic but thorough info for any company. these days social media is a bigger and bigger part of our world - you can't ignore it or you will definitely get left behind.

Startup Marketing: Tactical Tips From The Trenches

I’m speaking at the Inbound Marketing Summit later this month in San Francisco. There are some really great speakers lined up (David Meerman Scott, Chris Brogan, Charlene Li, Paul Gillin and others). If you’re looking to learn more about inbound marketing and how to get found in Google, social media and blogs, this should be a great event. If you decide to attend, use the code HUB200 for a special $200 discount. Drop me a note if you’re going to be there, would love to meet-up.

My session’s going to be called “Startup Marketing: Tips From The Trenches”. As I get my thoughts together for this, I started making a list of all of the things I’d advise a new startup to do to get things kicked off with a limited budget. As it turns out, there are a lot of tactical steps that individually don’t do much, but in aggregate start laying the foundation for much bigger things. So, I thought I’d share some of these things with you. This list is not intended to be a comprehensive “here are all the things you should do”, but more of a “if I were starting a company today, here’s what I would do in the first 10 days…” It’s written in a short, punchy style. I’ll likely revise it in the future as I add more things, but I wanted to get “Version 1.0” out there for you and see what you think.

Tactical Tips for Startup Marketing

1. Pick a name that works. Needs to be simple, memorable and unambiguous. The “.com” domain should be available without playing tricks with the name (like dropping vowels or adding dashes). Also, just because there’s no website on a domain doesn’t mean it’s “available”. Available means something you can register immediately, or that has a price that you’re willing to pay attached to it. Don’t wander down the rabbit hole of finding the perfect name if you have no indication that it’s for sale. This will waste a bunch of your time.

2. Put a simple website up. Doesn’t have to be fancy. The goal is to put enough content on the site to start the Google sandbox clock. Don’t worry about the site not saying much (nobody’s going to be looking at it anyways). Make sure to use a decent content management system (CMS) and not Dreamweaver or (shudder) FrontPage. Just because you can hand-craft HTML doesn’t mean you should for your startup website. The structure and features of a CMS are going to be important someday. Trust me.

3. Get some links into the new startup website. If you have a personal website, link to it from there. If you have friends/associates/family with websites, cash in some favor chips and get them to link to it. The goal is to get the Google crawler to start indexing your site. You only need one decent link to get things going. To check whether your site is being indexed by Google, do a search like site:yoursite.com (not perfect, but good enough).

4. Setup a twitter account. Name of the account should match your company/domain name. Link to your twitter account from your main site and to your main site from your twitter account. (Note: If you have a natural skepticism of the value of twitter, you are welcome to this skepticism. But, go ahead and grab your twitter account anyways. You can resume your skepticism after you do that).

5. Add e-mail subscription. Let people sign-up to get an email when you’re ready to show them the product. A simple email signup form is sufficient.

6. Get a nice logo. Run a quick contest on CrowdSpring or 99Designs and you’ll wind up with something decent enough. Make sure you get the vector file (Illustrator or EPS file) as part of the final deliverable. If you've got design skills yourself, or know somebody really good that can do it, even better.

7. Setup a Facebook business page (known as a “fan” page) for your startup. You’re not going to get many fans in the early days. That’s OK. Just get something out there. Add a simple description of your startup, link back to your main website. The usual stuff.

8. Create a clean Facebook URL. Facebook doesn’t allow simple/vanity URLs (unless you're big and established). So, to make things easier on yourself (and your users), setup a sub-domain and redirect it to your Facebook page. For example, here’s what I did: facebook.hubspot.com (notice that when you visit this link, it takes you automatically to the ugly Facebook URL). Setting up this sub-domain is free and usually pretty easy (it’s done through whoever your registrar is for your domain).

9. Kick off a blog. You can use one of the free hosting tools (like WordPress.com), but don’t use their domain name. Put your blog on blog.yourcompany.com — or if you’re proficient and can install WP locally, make it yourcompany.com/blog. Do NOT make it yourcompany.wordpress.com. The reason is that you want to control all the SEO authority for your blog and channel it towards your main website. And, chances are, WordPress.com doesn’t need your help on the SEO front.

10. Write a blog article that describes how you got to this point. What problem you’re hoping to solve. Why you picked this problem. It should feel a little uncomfortable revealing what you’re revealing. If you have tendencies towards being in “Stealth Mode”, read “Stealth Mode, Schmealth Mode”. With inbound marketing, you’re going to need to get used to revealing things that might be uncomfortable. Get over it.

11. Setup Google Alerts for at least the following: Your company name, link:yourdomain.com and “industry term”. Try to find a good balance for your industry term so you don’t get flooded with alerts that you simply will start ignoring. This may take some iteration and refining. (Oh, and use the “As It Happens” option in Google Alerts so you’re not waiting around for new alerts to show up).

12. Find three closest competitors. Pretend like someone is paying you $10,000 for locating each competitor. Really try hard. Barely managed to find three? Take a lot of effort? Great. Now find 3 more. Of these 6, pick the two that you think are the most marketing savvy. They should have a Website Grade > 90, a blog with some readers, a website that you can envision people using, a twitter account that they actually post to, etc. These are the competitors that you’re going to start “tracking”. Add their names and websites to your Google Alerts.

13. Update your LinkedIn profile (you do have a LinkedIn profile, right)? Mention your new startup, and add a link to your startup website to one of the three slots for this purpose. Make sure you specify the anchor text. Don’t go with the default of “My Website”. The anchor text should be your startup name and maybe a couple of words of what it does. You can look at my profile to get a sense: http://www.linkedin.com/in/dharmesh (note: I don't accept LinkedIn invites from people I don't know. If you're looking to get to know me, follow me on twitter @dharmesh).

14. Get business cards printed. Don’t go overboard, but don’t use a “free” option (because it’s not really free, it’s just subsidized). I don’t believe much in business cards, but you need them to simply avoid the 30 seconds of discussion as to why you don’t have a card when people ask you for one at conferences and meetings and such. They’re worth the price to avoid that uncomfortableness.

15. Use the Twitter Grader search feature to find high-impact twitter users in your industry. Start following them. You want to start forging relationships. Start building your twitter network. Resist the temptation to mass-follow a bunch of random people or play other games just to get your follower count up. That’s not going to matter. Get some high quality relationships going. If you’re really serious, start using an app like TweetDeck so you can more easily monitor the needed conversations.

16. Create a StumbleUpon account. Specify your areas of interest (part of registration). Spend 10 minutes a day (no more!) stumbling and voting things up/down. Start befriending those that are submitting sites that are relevant and interesting for your startup. Don’t submit your own stuff — just start contributing.

17. Subscribe to the LinkedIn Answers category that best fits your area of interest. Answer one question a day that you feel like you’ve got some expertise in. Don’t self-promote. You’re seeking to build credibility and trust — not sell anything.

18. Find the bloggers that are writing about your topic area. Subscribe to their feed, and read their stuff regularly. Leave valuable comments and participate in the conversation. (Do not spam them or write “fluff” comments. If you don’t have something useful to add to the conversation, don’t comment).

19. Start building some contacts on Facebook. Organize your users into groups (one for your business and another for friends/family). This will come in handy later. Don’t spam people and ask them to visit your website. At this point, your website is still probably not worth visiting.

20. Grade your website on Website Grader. Fix the basic things. You should be able to get a 50+ just by doing the simple things it suggests. [Disclaimer: I wrote Website Grader].

21. Get Some Analytics: Install some web analytics software and start watching your traffic. Where is it coming from? How is it growing? What keywors are people using to find you? What content are they looking at? It's ok to get a bit maniacal and obssessed about it at first. Many of us do that (and some of us never get over it).

Stay tuned for a revised edition in a few weeks as I think about this more (and watch my actual behavior). Also, if you’re interested in startups, you can follow me on twitter @dharmesh.
What have I missed? What ideas do you have on tactical things for startup marketing? What do you do?

Posted by Dharmesh Shah on Tue, Apr 07, 2009

another great posting from Yokum on where you should incorporate

2009-03-19T13:18:00.000-07:00

What state should I incorporate in?
I think there are three primary choices for the state of incorporation for most technology startup companies: (i) Delaware, (ii) the state where the company has its headquarters (i.e. California), and (iii) the Cayman Islands.

Almost all of the companies that I represent that intend to receive venture financing are incorporated in Delaware. I represent a few pre-VC financed California companies were already incorporated by the time that I met them. I also represent a few Cayman companies that have headquarters outside the U.S.

Reasons to incorporate in Delaware
Regardless of where the operations of a business entity are located, Delaware is frequently chosen as the state of incorporation for the following reasons:

Investors insist on Delaware
Almost all investors, regardless of where they are located, are familiar with Delaware corporate law. They may also be familiar with the corporate law of state where they are located. Because of the various advantages that Delaware law provides, most venture capital investors insist on investing in a Delaware entity.

If a company is incorporated in another state, such as California, and needs to reincorporate in Delaware in connection with a venture financing, the company will incur additional legal expenses in connection with the reincorporation. If a company ultimately undertakes an initial public offering of its stock, the underwriters will usually require that the entity be incorporated in Delaware. In order to complete a reincorporation, a California company typically creates a subsidiary in Delaware and merges into it, with the Delaware company surviving.

Compliance with securities laws may be problematic if there are lots of shareholders. All contracts of the company must be reviewed in order to ensure that the reincorporation doesn’t accidentally terminate an agreement.

One example of a material difference in corporate law between states is the stockholder vote necessary to sell a company. California corporate law provides that a merger requires the approval of a majority of the outstanding shares of each class of the corporation. This means preferred stock as a class and common stock as a separate class. In contrast, Delaware corporate law provides that a merger requires the approval of a majority of the outstanding stock entitled to vote. The fact that holders of common need to approve a merger of a California corporation is one reason why venture funds prefer Delaware. Venture funds don’t want common holders to have the ability to block a merger.

Delaware has a predictable, fair and well-developed body of corporate law
Delaware has a specialized court (the Court of Chancery) that has original jurisdiction over corporate law matters. Because of its unique expertise on corporate and business law matters, the Court of Chancery has produced a large body of decisions that has clarified and interpreted the Delaware corporate statutes. In addition, the Court of Chancery (and the Delaware Supreme Court which hears appeals from the Court of Chancery) is focused on the timely resolution of corporate law disputes. An appeal from the Court of Chancery may often be heard and ruled upon by the Delaware Supreme Court in a matter of days.

Directors of Delaware corporations are afforded a high degree of protection
While the directors of Delaware corporations have a fiduciary duty to act in the best interest of the stockholders, Delaware courts will, as a general matter and absent fraud or self-dealing, defer to the good faith business judgments made by the directors. In addition, Delaware corporate law allows for a corporation to indemnify its directors for losses that they may incur from being sued. Attorneys are generally more comfortable advising directors on their fiduciary duties under Delaware law as opposed to the law of any other state.

Complying with procedural formalities is efficient in Delaware
Observing proper corporate formalities under Delaware law is efficient, which is critical to preserving the limited liability feature of corporations. Delaware was one of the first states to allow voting by electronic proxy and attendance at stockholder meetings through the Internet. Additional areas of flexibility include the ability of less than all stockholders to act by written consent and the allowance of electronic signatures. Filings, such as an amendment to a company’s certificate of incorporation in connection with a venture financing, can be made electronically and are generally accepted upon submission within a day.

In addition, Delaware law is more flexible with respect to the number of directors. When a California corporation has two shareholders, it must have two directors, and when it has three or more shareholders, it must have three directors. Delaware corporations are only required to have one director.

Reasons not to incorporate in Delaware
There are some reasons why a company may not want to incorporate in Delaware, including the following:

Delaware franchise taxes
An entity that operates in a state other than Delaware will need to comply with tax and regulatory requirements in both Delaware and the state in which it operates (including qualifying to do business as a “foreign” corporation in that state and paying the relevant fees).

In particular, Delaware has an annual franchise tax that it levies on its corporations, although this amount is generally negligible for a start-up company with few assets and stockholders. If a company is not going to raise venture financing and will not otherwise be forced to reincorporate to Delaware, then incorporating in the state where it conducts business will save the company from paying Delaware franchise taxes. However, the cost and hassle of reincorporating to Delaware in the future may be greater than any tax savings in the early stages of the company.

Non-U.S. businesses
Some companies may be initially incorporated in the U.S., but may determine that establishing an off-shore parent entity is beneficial for investment or tax reasons. For example, some non-U.S. venture funds are prohibited from investing in U.S. companies.

Companies incorporated in tax-favorable jurisdictions like the Cayman Islands, the British Virgin Islands and Bermuda are not subject to taxation in their jurisdiction of incorporation, although depending on the nature of their operations, they may be taxed on their earnings in higher tax jurisdictions. Thus, a Cayman company may avoid paying U.S. corporate taxes on a portion of its worldwide income.

However, there are serious tax issues associated with establishing an off-shore parent company when there is an existing U.S. entity or if intellectual property originates in the U.S. Thus, if there is some reason that a company may need to establish an off-shore parent company in the future, then legal and tax advisors should be consulted prior to incorporation.

The Cayman Islands has become the preferred jurisdiction for many Chinese companies. Only companies established in the Cayman Islands, Bermuda, China and Hong Kong are pre-approved for listing on the Hong Kong Stock Exchange. In addition, Cayman corporate law has enough flexibility to permit U.S. style preferred stock financing arrangements and most venture capital investors that regularly invest in companies with headquarters in China are familiar with Cayman law and the documents used in these financings.

a terriifc post on what type of entity should entrepreneurs form

2009-03-19T13:14:00.000-07:00

Written by our friend from Wilson Sonsini, Yokum Taku. Great information for every person thinking of starting a new company.

http://www.startupcompanylawyer.com/2009/03/12/what-type-of-entity-should-i-form/

What type of entity should I form?
March 12, 2009

C corps, LLCs, and S corps differ significantly in the areas of taxation, ownership, fundraising, governance and structure, and employee compensation. Almost all technology startup companies that I work with are C corps. Any company that raises venture financing will need to be a C corp in order to issue preferred stock.

If founders want the benefit of flow through tax treatment with respect to losses prior to an outside financing, an S corp election may make sense as long as there are no entity or non-U.S. citizen/resident stockholders. However, S corp losses can only be used to offset personal income up to the founders’ basis in the S corp stock, which may decrease the utility of the S corp election. In any event, the S corp election can be easily revoked at the time of a financing. The legal documentation for an S corp is basically identical to an C corp.

I generally avoid LLCs as most technology startup companies need to grant options to employees and consultants, and there is no easy “off the rack” method to do this. In addition, the conversion of an LLC to a C corp results in additional legal and accounting expense. However, LLCs may make sense for businesses like consulting companies.

The primary differences between C corps, LLCs and S corps are outlined below.

Taxation
C Corps. A C corp is a separate taxable entity independent from its stockholders. Thus, the earnings of a C corporation are generally taxed twice: once at the corporate level on the corporation’s taxable income and a second time at the stockholder level on dividends or distributions. In addition, C corps often must pay higher state franchise taxes than LLCs or S corps.

Although the double-taxation feature of C corps may be undesirable, its impact may be diminished where a company does not pay dividends or generates taxable income at a lower marginal tax rate than the rate applicable to the individual stockholders. If a C corp generates net operating losses rather than net income, these are carried forward to offset future corporate taxable income. However, such operating losses may not be used to offset taxable income of the individual shareholders.

LLCs. LLCs are flow through entities for tax purposes, meaning that taxable income earned by the entity is passed through to individual members. Thus, earnings are taxed only once, at the member level. An LLC may elect to be taxed as a C corp, an S corp, or a partnership. It may specially allocate items of income or loss among its various members. It may use taxable losses generated at the entity level to offset taxable income of the individual LLC members. However, such flexibility is countered by increased compliance costs due to the application of complex partnership tax rules that also apply to LLCs.

S Corps. Similar to LLCs, S corps receive flow through tax treatment. However, an S corp must allocate its taxable income to the individual stockholders according to their ownership stakes in the company. Taxable losses at the entity level may be used to offset personal taxable income of the individual stockholders, but only to the extent of the tax basis of their interests in the entity.

Ownership (Stockholders)
C Corps. C corps may have an unlimited number of stockholders (subject to SEC reporting requirements if the number exceeds 500). The owners do not need to have a relationship with one another nor have a role in running the day-to-day affairs of the company. Additionally, they may transfer their ownership freely and readily (by selling their stock) without affecting the continuing existence of the business or the title to its assets. Thus, the perpetual existence of the entity is unaffected by the death or withdrawal of any one shareholder.

LLCs. Similar to a corporation, an LLC may have an unlimited number of members. However, ownership transferability for an LLC is not as flexible as that for a C corp. Generally, a member needs the approval of other members before selling an interest in the LLC. Also, a death, withdrawal, expulsion, or other departure of a member may constitute a termination of the LLC and a deemed liquidation for federal tax purposes.

S Corps. Unlike C corps. and LLCs, S corps are limited to 100 domestic stockholders. Stockholders must be individuals, with limited exceptions for certain trusts, estates, and exempt organizations. Stockholders must also be U.S. citizens or residents. Ownership transferability is flexible and similar to that of C corps. Finally, the perpetual existence of the S corp is unaffected by the death or withdrawal of any stockholder.

Fundraising
C Corps. Most venture and institutional investors favor C corps because they may have separate classes of stock, allowing for the creation of various levels of preferences, protections, and share valuations. A C corp is also the easiest type of entity to take public in an initial public offering.

LLCs. Although LLCs may be attractive to businesses financed by a small number of corporate investors and/or individuals, they are often not suitable for companies planning to attract venture capital or pursue multiple rounds of funding. LLCs require complicated operating agreements that may render the operation of the LLC undesirably difficult with a high number of members. They may be unattractive to tax-exempt venture fund investors because their investment in a flow through entity may produce unrelated business taxable income. Finally, investors simply may be less familiar with LLCs and therefore less willing to invest in them.

S Corps. S corps are not a popular entity choice because, in addition to presenting the same challenges to tax-exempt venture fund partners as those presented by LLCs, S corps are limited to one class of stock (meaning no preferred stock financings) and 100 stockholders. Such inflexible features are typically unattractive to venture investors.

Governance/Structure
C Corps. C corps have well-defined structural accountability, with governance responsibilities held separate and apart from the owners. Management is accountable to the board of directors and therefore has the ability to transact business without stockholder participation in each decision. However, corporations are required to pay attention to formalities that legislatures and courts have determined to be significant (e.g., meetings of boards of directors and maintenance of corporate bylaws, corporate minute books, stock ledger books, separate bank accounts, etc.).

LLCs. LLCs operate more informally then C corps and are either managed directly by the owners or managed by one or more owners (or an outside party) designated to fulfill such responsibility. Unlike corporations, they are not bound by corporate formalities such as holding regular ownership and management meetings. However, in contrast to corporations, they do not operate under a well-defined regime of uniformity and legal precedent.

S Corps. S corps operate in a manner similar to C corps. and must therefore adhere to statutory formalities for decision making.

Employee Compensation
C Corps. Businesses that plan to use equity incentives (e.g. stock options) to attract and retain talent often prefer to operate as C corps. C corps can offer incentive stock option plans that allow employees to defer tax on the equity compensation until they sell the underlying stock. Additionally, C corps. may offer certain fringe benefits to employees that are tax-deductible to the company and also tax-free to the employee.

LLCs. While an LLC may reward employees by offering them membership interests in the LLC, the equity compensation process is awkward and may be unattractive to employees. Furthermore, LLCs are not able to offer certain forms of equity compensation available to C corps., such as incentive stock options.

S Corps. Although S corps can grant stock options, they should not be granted to non-U.S. residents. S corps are less flexible than C corps with regard to fringe benefits and must either report the benefits as taxable compensation to the employees or forfeit the fringe benefit deduction available to the company.

Starting up with a friend: What could possibly go wrong?

2009-03-12T10:23:00.000-07:00

a bit of a long article but the concept is important and the points made are very true. i'd add a few things to the list but its a good start for folks who are in this position.

http://danieltenner.com/posts/0005-starting-up-with-a-friend.html

Posted on March 11, 2009
by Daniel Tenner

It seems like a fool-proof plan: start up with a close friend. You’ll get along (obviously), and you’ll get to share the exciting, fantastic, scary experience of starting up with someone you care about. It’s not a bad idea, but there are a few caveats that you should be aware of before you proceed.

When I started my first company with one of my closest friends, I expected things would go very well between us. We understood each other in ways that would take years to build up (and did take 10 years). We knew each other, and we knew we could rely on each other. We were prepared to have many surprises along the way — starting a business is always going to be a scary adventure.

What we weren’t prepared for was that the main problem would come from us and the dynamic between us.

What happened, in brief
I’m not going to go into all the details of what exactly went wrong, for a number of reasons (among them, it would be a one-sided account and inherently unfair on my friend and first cofounder). The long and short of it is, we had different expectations about the business. I left my safe, comfortable corporate job to work on it, so I needed it to succeed, or else I would find myself back in the corporate world. By contrast, my friend had already started several companies and was comfortably well off, so he didn’t have the same expectations and requirements.

It turned out we have a different definition of “the business isn’t working out”. For me, it was working out if it was making enough money to cover my expenses. For my friend, it wasn’t working out unless it was making enough money to also add to his existing wealth and thus justify the time and effort which he poured into it. Both those views were correct, but because we knew that we understood each other, we didn’t realise that our views were different until that difference had grown into a huge misunderstanding.

This core divergence of views could have been resolved easily if we’d known about it and discussed it ahead of time, but we didn’t know about it, so it festered and turned into dozens of other misunderstandings, so that by the time it finally became clear what our main divergence was, much of the damage was already done and it was entangled in a huge mass of emotional misunderstandings.

This almost cost us our friendship. We got through this thanks to the help and mediation of another very good friend, who helped us to communicate to each other how we felt, so that we could move forward together rather than against each other.

I’m glad to say the mediation worked, and we’re still friends (perhaps even stronger than before). Nevertheless, I learned some important lessons from this.

1. Make your agreements explicit
The first lesson is to keep agreements explicit. It’s not enough to think that your friend understands what you think: make sure he does by discussing it openly with him. As my mediating friend phrased it, “unspoken promises” have a tendency to turn into broken promises (which are always hard to swallow). Avoid unspoken promises.

Here’s an example of a really bad thing to keep implicit: “We’ll only call it quits if the business is bankrupt and can’t raise any more money.” The promise here is that we’ll keep going until the very end. This may seem obvious to one party in the business, but it may not be so to the other. One partner could, for instance, feel that the time to call it quits is when the business has 3 months of cash flow left. Another may feel that it’s worth going deep into credit card debt territory before giving up.

Don’t make this mistake: keep those agreements explicit.

2. Detail your agreements
Once you make some agreements explicit, it should become clear that you need further discussion to figure out exactly what your explicit agreement is. Don’t be afraid to do this. It’s not “too early to discuss this”.

Here’s an explicit agreement that’s not detailed enough: “We want the business to make a lot of money”. Really? How much are you happy with? 10’000 pounds a month? A million? What is the definition of success? It’s almost certain that you and your business partner have different views as to what “a lot of money” is. Being on the same page about what you expect out of your business will ensure that you don’t pull in different directions when things are going well. Think of how mortifying it would be to find out that your partner wants to pull the plug when you think that the business is successful.

3. Don’t be afraid of discussing the bad stuff
There are a number of subjects which seem almost embarrassing to discuss when things are going well. For example, “What if one of us decides to pull out?” Your first reaction to this topic might be “What? We’re barely getting started, and already we’re talking about what happens if one of us pulls out?”

The reality is that people’s life circumstances change through time. They get married, or decide to leave the country, or get engrossed in a different pursuit, etc. Many things can get in between a founder and his start-up. Similarly, many things can go very wrong with a start-up. When those things do go wrong, or when one of the founders decides to pull out, is not the time to discuss these things. You need to discuss them with a clear head when no one is thinking of pulling out and the business looks healthy and hopeful.

When you discuss your start-up’s future, do not be afraid to talk about the disaster scenarios. Also, when you negotiate what will happen if a partner quits, don’t be so sure that it won’t be you.

4. Write things down
There are two reasons to write things down: first, people’s memories of conversations are faulty. Writing things down also ensures that there is no disagreement, later, about what was decided. You don’t need a long document for this — even just one or two pages describing your agreement is enough to avoid later misunderstandings.

The second reason is that people may think they have reached an agreement when in reality they never agreed about the details. Once you put something in writing, you give it a certain air of finality that teases out those last remaining disagreement. Basically, putting an agreement in writing is like putting a new piece of functionality in code. Until it exists in that form, it’s just vapour.

Halfway through my misunderstanding with my friend, we thought we’d figured out a way forward. I wasn’t sure that we were both thinking the same thing, so I made the effort to put it in writing, in the form of a business plan. When my friend read it, and understood more clearly what I meant, he recanted, and the agreement fell through. It’s a good thing that it fell through, because it would likely have resulted in even more problems later on if we’d gone through with it based on our flawed understanding of each other.

5. Don’t make it work at all costs
Yes, I know this is your friend that you’re starting up with, and this is your great opportunity to start your own business. However, if, in those discussions, you find that there’s an intractable disagreement, don’t fall into the trap of thinking that the most important thing is to smooth things over and start the business.

Starting up with someone is almost like marrying them (temporarily), in a way. You’ll be talking to them almost everyday, and possibly even more than with your significant other. You’ll be working on a “baby” (your business) for many months. It’s a big commitment, basically, and much like any other kind of significant commitment, you shouldn’t go into it if you think there are major problems, because those problems will only get worse.

6. Don’t assume things will get better with time
It’s easy to rationalise away big problems by assuming that things will get better with time. In some cases, they will, but in a majority of cases, they won’t. What this means, for example, is that you shouldn’t assume that your inexplicably small share of the business will magically grow to 50% later on. This is even less likely to happen if the business is working well (if the business isn’t working out, chances are it doesn’t matter anyway).

Sample questions
This article wouldn’t be complete without a list of questions that you might go through and discuss with your cofounder. Use them as a guideline or as a checklist, as you please.
What do we both mean by “the business is successful”?
What do we both mean by “the business is not successful”?
What happens if one of us needs to voluntarily pull out, for any reason?
What happens if one of us cannot work on the business anymore, for involuntary reasons?
What are the conditions under which we’d call the business a failure and pull the plug?
What is plan B for each of us if we do pull the plug? Are we both prepared for that plan B?
What do we expect of each other, both in terms of responsibilities and in terms of attitude and effort?
What is and is not an expense? What is the maximum amount someone can spend on an expense without checking with the other? (from Sebastian Marshall)
When and how will profits be distributed? How much will be reinvested? What will the reserves be? (from Sebastian Marshall)
What happens if one partner needs cash and the other wants to reinvest it into growth/expansion? (from Sebastian Marshall)
How will you handle it when (not if) the hours each partner is working are unbalanced? (from Sebastian Marshall)
This is not a final list by any means, but it should at least provide some starting points to make the implicit explicit. If you have other suggestions, please do add them in the comments below.

Conclusion
I don’t regret starting that business with my friend, but I do regret not clarifying those kinds of questions upfront. It would have saved me a lot of worry. If your business is struggling, you don’t need the additional pain of seeing your friendship unraveling under the stress of accumulated misunderstandings.

So, do yourself a favour, and set out to:
Make your agreements explicit so that you don’t break implicit promises
Detail your agreements so that your promises are clear
Don’t be afraid of discussing negative scenarios, so that you don’t add the stress of misunderstanding to already bad situations
Write things down so you’ll remember
Don’t make things work at all costs, so that you don’t spend the next years living with a deal that’s not acceptable to you
Don’t assume things will get better with time, so you’re not surprised when they don’t

Will The Four Horsemen Ride Again?

2009-03-04T10:56:00.000-08:00

Venture Capital is getting dissed right and left these days...

From WSJ Venture Capital Dispatch
http://blogs.wsj.com/venturecapital/2009/03/03/will-the-four-horsemen-ride-again/

March 3, 2009, 06:57 PM EST
Will The Four Horsemen Ride Again? --> -->

By Scott Denne
The slow pace of initial public offerings has forced venture capitalists to find a solution to their late-stage liquidity woes, funding private exchanges such as InsideVenture Inc. (see our story here) and Web portals that let wealthy individuals in on the action. The drought, which started in early 2008, even spurred the National Venture Capital Association to launch a committee to investigate the issue, with the group’s chairman, Dixon Doll, urging the committee to “move beyond clichés, such as Sarbanes-Oxley bashing.”

Moving beyond clichés is one thing, says Paul Deninger, a vice chairman of middle-market investment bank Jefferies & Co. But, he asks, will venture capitalists own up to the part they have played in the withering of IPOs? As investment banking has become more consolidated over the last decade, Deninger said venture firms have largely stopped listening to the advice from smaller banks like his and tied their interests to those of the brand-name investment banks to their own detriment.

“Venture capital needs to take stock of itself and realize the error of its ways,” Deninger said. “The strategy of a Goldman Sachs is to serve [large companies like International Business Machines], not the VC ecosystem. When things were great, who was leading the charge?”

In the 1990s, four smaller investment banks, dubbed “the four horsemen” - Alex.Brown Inc., Hambrecht & Quist Group, Robertson Stephens & Co., and Montgomery Securities - underwrote a large number of the venture-backed IPOs, which averaged about 130 a year before the dot-com bubble, compared with about 40 a year since, he said. Those full-service boutiques employed a large group of research analysts that offered potential investors insight into the latest technologies being developed, and held conferences where technology companies could present to these investors.

The problem with the large banks, he believes, is they tend to serve only the largest institutions, which must put a more substantial portion of money into an IPO offering to make it worth their while. Smaller banks, meanwhile, cater to the “next tier” of institutional investors for whom $1 million is a meaningful position. By catering to smaller investors, but more of them, banks like Jefferies can get smaller offerings out the door and create demand for the stock after the initial offering, Deninger said.

The silver lining to the current economic climate, Deninger said, is that smaller banks are getting more attention from venture capitalists and institutional investors. “The firms that have gotten in the way of [the IPO] market are the firms that have gotten us into this mess.”

Hitting For Average Vs. Swinging For Fences

2009-03-03T13:07:00.000-08:00

another good article from the WSJ - ya gotta love the honesty of our friends at AlphaTech.

March 2, 2009, 11:32 PM EST
Hitting For Average Vs. Swinging For Fences --> -->

By Scott Austin
Baseball enthusiasts often disagree about who’s the more valuable hitter: the slugger who often strikes out but occasionally connects with the big home run or the light-hitting speedster who racks up singles and doubles.

An onstage chat about investment returns at Monday’s Demo 09 conference sparked an analogous disagreement among venture capitalists.

Deep into the talk, which was titled “Venture Capital in the Post Recession” and streamed live on Demo.com, David Hornik, a partner at August Capital, explained that it’s the “wild success stories” that have always driven the venture capital business. Those investors that manage to make the home-run investments “will always drive great returns for their investors,” said Hornik, whose early-stage firm manages more than $1.3 billion in capital.

Christine Herron, a principal at seed-stage investor First Round Capital, which typically invests just a few hundred thousand dollars per investment, politely bit back. “That’s taking a very big-fund mentality,” she said. “For seed stage investors or angel funds that manage $100 million, you can keep hitting a double, double, double, and still have a great fund.” Herron said that a fund she worked at in the early 1990s, Geocapital Partners, was able to yield a respectable 4x to 5x return by stringing together several smaller hits. “We didn’t have the expectations of putting down a check worth $20 million to $30 million.”

Another seed-stage investor, Bryce T. Roberts of O’Reilly AlphaTech Ventures, believes the venture industry needs to scale back expectations. “I think that’s one of the things that’s come out of this downturn is recasting what success looked like,” he said. “When I first got into venture capital in 2001, it was all about trying to build the billion-dollar business….I’m all about swinging for the fences, but that’s the spotlight being cast on the venture industry.

“How many multibillion dollar business have been created in the last seven to 10 years? How sustainable is that as a model versus taking smaller amounts of capital and preserving optionality, and taking a slower path to growth rather taking a ton of dilution and multiple rounds of financings? That’s going to be a really attractive and viable model for entrepreneurs going forward.”

Earlier in the discussion, Roberts said the size of seed rounds are growing because in this environment it may take longer, up to 24 months, before venture capital investors swoop in. “We used to be able to invest $100,000 to kick a ball out for 9 to 12 months, now we’re looking at $1 million to $2 million for a seed round.”

Gov't Bailout for VC's?

2009-03-03T11:02:00.000-08:00

Not something I'd imagine we'll be seeing...

http://online.wsj.com/article/SB123595208950605121.html

OPINION: INFORMATION AGE
MARCH 2, 2009
Too Risky for Venture Capitalists
Why proposals for a government bailout were roundly rejected.
By L. GORDON CROVITZ

With industries from autos to banking begging for taxpayer handouts, what would you call an industry that says thanks, but no thanks? Crazy, but like a fox. Even for venture capitalists, some ideas are just too risky.

Hundreds of the country's venture capitalists this past month blogged against or otherwise rejected proposals that the U.S. government fund early-stage investing. They dismissed a recent column by Tom Friedman in the New York Times that urged bailout funds for venture capitalists. "You want to spend $20 billion of taxpayer money creating jobs?" Mr. Friedman wrote. "Fine. Call up the top 20 venture capital firms in America" and invest the money with them.

Venture capitalists certainly agree that innovators and start-up companies, not bailed-out GMs or Chryslers, will create the new jobs. They rightly brag that almost 20% of U.S. gross domestic product is generated by companies built by venture capital, such as Intel, Apple and Google. Still, they almost universally panned the notion of taxpayer support. Their real-time rejection is an excellent example of how social media -- here, the venture community dissecting a proposal online -- can now quickly take down bad ideas.

"The top venture firms don't want, don't need and are never going to take government money. The same is true of the top entrepreneurs," Fred Wilson of New York's Union Square Ventures wrote on his blog. "The worst firms, on the other hand, will gladly accept government money," which would go to investors who can't raise funds privately and to entrepreneurs whose ideas shouldn't be funded. "It's a problem of adverse selection."

Venture firms have had a hard time profitably investing $30 billion each year for the past several years. Even in the paralyzed markets of the last quarter of 2008, more than $5 billion was invested in more than 800 deals. Returns, however, have been low. Some areas, such as clean tech, look especially troubled now that oil no longer costs $145 a barrel. Another $20 billion would be impossible to digest efficiently. Instead of subsidizing the biggest venture firms, Geoff Entress of Rolling Bay Ventures in Seattle posted that tax breaks are needed for seed-stage angel investors, who "are quickly becoming an endangered species."

The idea of direct government funding is also anathema because it would undermine market discipline. Pension funds, endowments and other institutional investors keep a close eye on how their invested money is doing. Venture firms can raise new funds only if their previous performance was good.

Several venture capitalists pointed out the irony that government-funded venture capital could mean trading a credit bubble for another technology bubble. Artificially inflating the venture coffers through a government fund could risk repeating the debacle of 1999-2000, when too much money chased too few good ideas, resulting in the sharp deflation of the Internet bubble. Taxpayer funds would reduce hard-won investment discipline as cheap money backed riskier, less-promising ventures. Valuations assigned to companies would artificially rise, poorly selected start-ups would fail, and taxpayers would be on the hook.

Taxpayer money would bring other unwanted side effects. As Bill Gurley of Benchmark Capital in Silicon Valley put it on his blog, "If American citizens were truly appalled with John Thain's bathroom and the GM executive's private plane, then they should find plenty to abhor in the well-compensated VC community." Congress would no doubt hold hearings on the "obscene profits" earned by the founders of the next Google.

If policy makers want to help entrepreneurs and their investors, there's no mystery about what's needed. Immigration needs to be reopened. Venture capital is still available, but the U.S. is now a laggard in the other half of the equation, which is making sure the entrepreneur's sweat, energy and risk-taking can ultimately pay off. Sarbanes-Oxley helped kill the market for public offerings, which had been a lucrative step for successful start-ups. Income taxes are going up, not down.

And the U.S. capital gains tax rate of 15% contrasts with the 0% rate in Hong Kong, Singapore and even Germany, where there's an understanding that these investments are made with income that's already been taxed once.

This no-bailout-please episode is a wider reminder about the downside of Washington picking winners and losers. Government spending almost always distorts markets. John Maynard Keynes included among his prescriptions a do-no-harm fiscal stimulus of simply paying people to dig and then fill in ditches. Venture capitalists have now reminded us that throwing taxpayer money at an industry is more likely to be a kiss of death than to transform frogs into princes.

Innovations supported by venture capital in technology, health care, education and other promising but risky industries are at the heart of our economy, too important to be dictated by nonmarket forces. Other industries now lobbying for their own bailouts should weigh more carefully the risks that come with taxpayer involvement. The lesson of accepting government involvement often is something ventured, nothing gained.

Write to mailto:%20informationage@wsj.com

Venture Capital and Startups Feel More Pain, Study Says

2009-02-27T11:38:00.000-08:00

I hate posting on all the bad news we've been seeing in the Venture Capital world these days, but I thought this article provided the kind of detail that startups are interested in seeing. Not only are the down rounds bad news, but the re-emergence of multiple liquidation preferences doesn't build internal support for startup management and employees. Bad signs here...

http://www.businessweek.com/technology/content/feb2009/tc20090225_653458.htm

Venture Capital and Startups Feel More Pain, Study Says
Startup valuations are falling and venture capitalists are driving harder bargains, according to a survey by California law firm Fenwick & West
By Spencer E. Ante

Like the rest of the economy, the world of venture capital and startups is starting to feel more pain from the deepening global financial crisis.

That's the main takeaway from a new survey detailing trends in venture capital investments during the fourth quarter of 2008 by the California law firm Fenwick & West.

The survey, which analyzed the terms of venture deals for 128 companies headquartered in the San Francisco Bay Area, found that valuations are falling for startups and that venture capitalists are driving harder bargains. The silver lining: The fallout so far is not nearly as bad as it was during the dot-com bust, when hundreds of companies went under and stratospheric valuations came crashing down to earth.

Down Rounds on the Rise
Sure, there were some startups last quarter that secured a higher value on their latest investment round, such as online vacation rental site HomeAway. But, of the 128 companies that received financing, 33% of them experienced so-called down rounds, or an investment that placed a lower valuation on the company than it received in the previous round of investment. More ominous, the percentage of down rounds rose every month at year's end, hitting 45% in December. "Each month things got worse in the fourth quarter," says Barry Kramer, the Fenwick & West partner who runs the survey. The highest percentage of down rounds occurred in the first quarter of 2003, when 73% of the companies surveyed by Fenwick & West suffered down rounds.

With the recession worsening, most financiers and lawyers do not expect the situation to get better anytime soon. They predict valuations will continue to decline until the overall economy begins to improve. "Private values really do lag," says Kate Mitchell, managing director with Scale Venture Partners. "More down rounds will come in 2009."

Overall, the prices venture firms are paying for equity are not rising as much as they have in the recent past. Companies that received venture financing in the fourth quarter saw an average price increase of 25% compared to the previous financing round, a significant decline from the 55% average price increase reported in the third quarter of 2008. One factor that is depressing prices is the continuing lack of an initial public offering market. The prospect of a public offering often helps entrepreneurs to extract higher prices from a venture capitalist. Last year, there were only six public offerings of venture-backed startups, including RackSpace Hosting (RAX), ArcSight (ARST), and IPC The Hospitalist Co. (IPCM).

"Multiple Liquidation" Preferences Gain Favor
As venture capital firms retreat and finance fewer deals, the financiers that do move forward are continuing to extract tough terms from the entrepreneurs they go into business with. Of the companies that received financing, 41% of the deals contained "liquidation preferences," or provisions obligating that the most recent investors get their money back first if the company is sold or acquired. That's about the same rate as the previous two quarters.

However, many more firms that do receive liquidation preference are getting "multiple liquidation" preferences, which state that a venture firm will get back as much as two or three times the amount of capital it invested. In the fourth quarter, 23% of the companies that secured preferences negotiated a multiple preference, up from 16% in the third quarter.

Another painful and little-known practice on the rise is the use of what VCs call "pay-to-play" provisions. When companies can't find new investors to bring into a company, they sometimes will try to corral a new round of financing from existing investors. Some may balk. To force all of the current investors to pony up the money, venture capitalists who are willing to play will create a provision stipulating that if others don't participate, their existing equity, which is usually in preferred stock, will convert into common stock.

Remembering Lessons Learned
Common stock typically has fewer advantages than preferred stock, such as the right to be paid first in the event of a sale. In the fourth quarter, 15% of all financing had pay-to-play provisions, up from 12% in the third quarter and 7% in the second quarter. "Insiders are putting tough terms on each other in order to get them to put money into the company," says Kramer.

About the only good news in the survey is that the venture ecosystem seems to be benefiting from the painful memories of the last bust. Entrepreneurs and financiers say that more firms are likely to survive this crisis since some of them, remembering how hard it was to raise money during the last crisis, brought in money before this downturn. Plus, many startups are getting much more aggressive about cutting costs, which should lower the failure rate. "VCs went through this eight years ago," says Kramer. "The last few years have seen more reasonable valuations. We're not going to fall as much."

The number of startups that are shut down is likely to climb in 2009, and some venture firms may also disappear. But many venture capitalists say that is not such a bad thing. A pruned tree will be healthier, so goes the thinking. "The most healthy thing for this industry would be a clearing out of people who don't have the stomach for it," says Paul Holland, a general partner with Foundation Capital. "It's a very healthy sign for our business."

Ante is an associate editor for BusinessWeek.

Venture Academics - A New Model Emerges

2009-02-27T11:32:00.000-08:00

I thought that given the upheaval in today's venture environment, that it was important to note the emergence of some new models for Venture Capital. This is one of them - and I believe there's a lot of potential here.

http://www.forbes.com/forbes/2009/0316/100_venture_academics.html

Venture Academics
Jonathan Fahey, 02.25.09, 06:00 PM EST Forbes Magazine dated March 16, 2009

A new firm thinks it has found a way to turn inventions from the nation's biggest research institutions into cash.

After ten years of research, David Martin, a materials scientist at the University of Michigan, came up with a polymer that could help deaf people hear and blind people see. His poly (3,4-ethylenedioxythiophene), or Pedot, could coat the electrodes used for stimulating and recording from the brain, making them smaller, more sensitive and more effective at treating deafness, blindness and Parkinson's disease, among other conditions. How was Martin to turn Pedot into a commercial product? "I don't have an M.B.A., and I never wanted one," he says. A venture capital firm told him to come back when his invention was further advanced.

Martin had entered what technology transfer officers refer to as the valley of death, the barren gulf between the basic science and a prototype good enough to pique the interest of an established company or a venture capital firm.

But stepping into this void came a new company--half VC, half private equity firm--called Allied Minds, of Quincy, Mass. Allied created a company called Biotectix around Martin's discovery. It put up $750,000 to hire Martin's lab colleagues and run the first animal trials. With promising results Biotectix moved into its own labs and landed its first commercial contract (with the Australian medical device maker Cochlear) to incorporate its invention in cochlear implants. The polymer dramatically increases the sensitivity of the implant, while reducing its size.

In funding the commercialization of academic research, Allied Minds has an ample assortment of targets, given the paucity of bank credit and the preference of VC firms for big, quick investments. But it's a territory littered with failures. Two and a half decades ago University Patents was a glamorous pioneer in this business, with a share price of $24.50. All that's left is a moneylosing firm called Competitive Technologies (amex: CTT - news - people ), which sells for 95 cents a share and is at distinct risk of being delisted from the New York Stock Exchange.

Allied claims it has a new approach, imported from the U.K. The company has agreements with 31 U.S. universities and national labs, including powerhouses Harvard, Yale, the University of Michigan, most of the University of California schools and the national laboratories Lawrence Berkeley and Los Alamos, to periodically survey discoveries and pick a few to develop. The company will initially invest $1 million or so in a project and aims to create six to eight new companies a year.

Instead of operating as a fund, with a specific end date by which it must pay back its investors, Allied Minds is structured like a holding company. It creates subsidiary companies that it owns along with the university and the researcher. Allied Minds, as parent, provides interim management and back-office functions such as legal and payroll to the subsidiary as it "de-risks" the technology on the cheap. As the companies mature, Allied Minds will profit if the companies sell or license products to bigger players, or if the companies go public.

Allied was founded by the British venture capitalist Mark Pritchard and funded largely by Neil Woodford, an investment chief at Invesco, the U.K. asset management firm. Allied Minds won't say how much it has raised, but the number appears to be $50 million. Since its founding in 2005 the company has created 15 subsidiary companies based on technology like magnetoresistive random access memory from New York University and a salt-intake monitoring system from Cornell University. None has made money, but these projects are still in their early years.

"We are in uncharted territory with all of our technologies," Pritchard acknowledges. "But it should not be that hard. There is phenomenal innovation going on in these schools, and the world and companies need innovations."

Pritchard decided to start the company after a 2003 visit to Purdue University on behalf of a British company he was funding. The mechanism for getting technology out of the university was sclerotic. Except for the Massachusetts Institute of Technology and Stanford University, which have developed strong networks of fundraisers, most research institutions, he found, were grasping for help getting technology off their shelves.

"If you look at what comes out of U.S. universities in terms of creation of products and companies, it's a pretty poor return on taxpayer money," says Pritchard.

It's hard to judge that, but according to the Association of University Technology Managers, the biggest research universities in the U.S. received $28.5 billion in federal funding in 2007, along with $3 billion from industry. They received $2 billion in licensing revenue, and 502 companies were started that year to capitalize on academic science. The U.K. has at least two public companies (ip Group and Imperial Innovations) built around university technology development; the only public U.S. company that focuses on very-early-stage university discoveries appears to be the ailing Competitive Technologies.

The little money now being invested in professorial startups comes from state and university grants, angel investors, seed venture capital funds and, occasionally, big traditional venture capital funds. Some schools, like Boston University, have started in-house venture funds.

E. Jonathan Soderstrom, who runs Yale University's technology-transfer office and is the president of the Association of University Technology Managers, says that the problem of raising money has never been as acute as now. "The gap is widening as the market continues to punish risk-taking," he says. "This is a concern of every single tech-transfer office in the world right now. The system is broken, and none of us know how to fix it." Perhaps Allied does.

Finding the Jewels

Recent Graduates
A few of Allied Minds' 15 subsidiary companies, tapped from the nation's universities.

SaltCheck
Based on research from Cornell University, the company is developing a way to monitor salt intake that can be performed at home or in a doctor's office instead of by sending samples to labs.

RF Biocidics
These University of California, Davis researchers have a way to disinfect nuts, grains and other foods, using quick, targeted blasts of heat that kill pathogens but leave food alone.

AXI
An entry in the race for biofuels, AXI is using University of Washington expertise to create algae strains with certain characteristics, like the ability to produce fats or oils.

Illumasonix
A University of Colorado engineering professor is working on a noninvasive system to map blood flow of cardiovascular patients, using ultrasound and microbubbles injected into the bloodstream.

Cephalogics
From a radiology professor at Washington University in St. Louis, a neuroimaging device in the form of a wearable cap. Could be especially useful in monitoring newborns.

ProGDerm
Cancer researchers at Lawrence Berkeley National Laboratory are using a discovery that a certain protein induces fat-cell generation, to develop an antiwrinkle treatment.

Looks like 2009 isn't the year for a return to the tech IPO

2009-01-21T12:04:00.000-08:00

Interesing article on a recent Jefferies report. Click through to see the article - there's a good chart on precursors to the return of the IPO market.

http://gigaom.com/2009/01/20/ipo-drought-hides-bigger-tech-woes/

IPO Drought Hides Bigger Tech Woes
Om Malik Tuesday, January 20, 2009 10:30 PM PT 7 comments

A lot has been written about the venture capital industry and how its problems affect Silicon Valley’s (proverbial) innovation machine. And that certainly is true, but the bigger problem for the technology industry has been the IPO market, which mirrors the pitching average of New York Yankees’ closer Mariano Rivera. This lack of public market liquidity is a much more systemic and longer-term problem, one that was brought home by a research report issued by Jeffries & Co, a small investment bank.

Look at some of the numbers: in 2008 there were nine IPOs in the technology, telecom and media (TMT) sector vs. 77 in 2007. In 2008, there were only six VC-backed IPOS and only one from Silicon Valley. (Check out this excellent discussion among the editors of our partner, BusinessWeek.)

What really is most shocking is the sharp increase in the number of IPOs that were withdrawn in 2008, especially in the TMT offerings. And those who did tap the IPO market could get a forward price-to-earnings multiple of 13.2x, down from a multiple of 33.5 in 2007. Only four IPOs were priced in their range and almost all are under water. According to Deutsche Bank, of 98 tech IPOs still public since January 1, 2006, only nine are above issue and the median stock is down 57 percent from offer.

Much like the objects that appear in the rearview mirror of your car, the paucity of public market exits is a much bigger problem. For starters, it really stymies some of the larger startups with sizable revenues and some profits, and limits their options for creating an exit event that brings in much-needed capital but also rewards the employees.

Back in the day — and I mean long before the dot-com bubble totally destroyed technology’s moral and fiscal compass — it was possible for reasonably sized software, network and chip companies to tap the public markets after spending between four and seven years in the trenches. Those type of deals have vanished, just like the smaller investment banks, such as Robertson Stephens.

I think that’s one of the reasons why we’ve seen a sharp decline in pure tech-type investments in companies building next-generation infrastructure or semiconductors, even though we continue to pivot our lives around the network, thereby requiring a more sophisticated underlying infrastructure.

The IPO landscape is going to resemble a dry river bed through much of 2009. Ted Tobiason, a managing director at Deutsche Bank, recently predicted that “There probably won’t be a great deal of volume in 2009 in any circumstance as it takes time to convert a disbelieving market to a believing market (and believing issuers). But 2010 could be a terrific year.” Let’s just hope he is right, for otherwise Silicon Valley’s problems will keep getting compounded.

Interesting article from Biz Week on the future of technology innovation

2009-01-05T10:38:00.000-08:00

this recent cover story has some interesting details - most we know about but its a good summary of the broken system that's out there these days.

http://www.businessweek.com/magazine/content/09_02/b4115028730216.htm?campaign_id=rss_tech

Cover Story December 31, 2008, 5:00PM EST text size: T T
Whatever Happened to Silicon Valley Innovation?
Short-term thinking and increasing risk aversion have stifled the tech center's spirit. But innovators still lurk there, if you look for them
By Steve Hamm

Transmeta Corp. (TMTA) once embodied the Silicon Valley dream. Starting in 1995, the company raised more than $300 million in a nervy bid to reinvent the market for chips powering portable computers. Yet Transmeta struggled in recent years, and the grand hopes officially ended on Nov. 17, when the Santa Clara (Calif.) company agreed to be acquired by a little-known rival. In the empty lobby of the company's headquarters shortly before the sale was announced, a note on the reception desk told visitors to call an extension and "ask for Mary Anne." Incoming and outgoing mail bins on the wall were both empty.

Meteoric rises and catastrophic collapses are the norm in Silicon Valley, of course. It's all part of the process of creative destruction that's one of the Valley's strengths. But for some tech industry veterans Transmeta's fall is a lesson in how dramatically things have changed in the information technology capital. Venture firms are shying away from the kind of large and risky bets they made in the 1990s, and some experts say a company like Transmeta could never get off the ground today. "If it takes more than $100 million to get a company started, you probably can't get the returns VCs want," says Navin Chaddha, managing director of Mayfield Fund, which has backed standouts such as Compaq Computer and Genentech. The venture model for capital-intensive companies is "broken," he says.

Venture capitalists' taste for risk has changed for a number of reasons, including the difficulty of taking tech companies public or selling them for lucrative paydays. The result is that venture firms are putting much less money into tech startups than in the past, and the money they do invest goes into less expensive, less risky deals, including social networking startups such as Facebook, Twitter, Yelp, and Digg. These so-called Web 2.0 companies are creating exciting new forms of socialization, information sharing, and entertainment. But some of the Valley's old guard are skeptical they'll grow big and important enough to deliver sizable productivity gains for business and the nation or to produce an upswell in new core technologies. Today's startups "give us refinements, not breakthroughs," says Andy Grove, former chief executive of Intel (INTC).

RESEARCH CUTBACKS
Startups and venture capital are just part of the issue. Federal funding of advanced computer science and electrical engineering research has dropped off sharply since the late 1990s, as has the number of Americans pursuing computer science degrees. And large technology companies are putting less emphasis on basic research in favor of development work with quicker payoffs. "We're off-balance. Everybody is thinking short-term," warns Judy Estrin, former chief technology officer at networking giant Cisco Systems (CSCO). She just came out with a book, Closing the Innovation Gap, that's a call to arms for the U.S. technology sector.

For more than 40 years, Silicon Valley has been the world's most prolific laboratory for information technology innovation. But Estrin, Grove, and others are growing concerned that the vitality of the Valley, and, indeed, that of the entire U.S. tech industry, is at risk. That could have huge consequences for the future of American productivity, job growth, and national competitiveness. These problems have been brewing for years, but they've been amplified by the economic downturn.

Many people in Silicon Valley disagree with the doom-and-gloom assessment. After all, Apple (AAPL) is reinventing the cell phone with its computer-like iPhone, while Google (GOOG) pioneers cloud computing and Intel pushes the envelope in microprocessor design.

But while those concerned about the direction of the nation's tech economy acknowledge those bright spots, they believe an overhaul is needed. They're calling for new tax incentives from government to encourage long-term investments in breakthrough technologies, a renewed commitment by large tech companies to basic science, a shift by venture capitalists to bolder bets, and grander ambitions on the part of entrepreneurs.

So is Silicon Valley losing its magic? Or is there another generation of breakthrough technologies that outsiders just don't know about? To find answers to those questions, I recently motored through the Bay Area. I talked to some of the industry's most prolific inventors and most successful company builders. I got an earful from advocates on all sides.

Andy Grove's modest title of senior adviser to Intel belies the monumental role he has played in the success of the company and Silicon Valley. He rose through the ranks at Intel to become chief executive and chairman. He's widely credited with saving the U.S. chip industry and Intel from the onslaught of the Japanese industrial machine in the 1980s. Grove adopted a motto: "Only the paranoid survive." Now 72 and retired, he thinks the Valley's techies don't worry enough.

Dressed in a gray sweater with a BlackBerry (RIMM) clipped to his belt, Grove greets me at the door of his small office above a travel agency in Los Altos. He launches directly into a diatribe against what he sees as the shortsightedness and shortage of ambition on the part of today's Valley-ites. He regrets that the U.S. ceded the market for computer batteries to Japan in the 1970s. Now it's way behind in the race to invent improved batteries for electric vehicles—something he thinks Silicon Valley companies should be working harder on.

What really infuriates him is the concept of the "exit strategy." That's when leaders of startup companies make plans to sell out to the highest bidder rather than trying to build important companies over a long period. "Intel never had an exit strategy," he tells me. "These days, people cobble something together. No capital. No technology. They measure eyeballs and sell advertising. Then they get rid of it. You can't build an empire out of this kind of concoction. You don't even try."

Grove doesn't name names. But his criticisms raise the question: Can any of today's startups measure up to the giants of the Valley? Can any become the next Intel, Cisco, Hewlett-Packard, Oracle (ORCL), Apple, or Google? It's hard for some to imagine. "These Web 2.0 companies are surfing on the old wave. They're not creating the next one," says analyst Navi Radjou of Forrester Research (FORR), which studies the tech market.

To get a different perspective on the latest crop of startups, I drove up Route 101 to the San Francisco headquarters of Digg, one of the most celebrated Web 2.0 outfits. Started four years ago by Kevin Rose, a University of Nevada at Las Vegas dropout who drifted to San Francisco at the tail end of the dot-com boom, Digg is at the forefront of the concept of crowdsourcing. People who come to its Web site rate the quality of news stories, pictures, and videos collected there. And when "Diggers" find stories they like on other Web sites, they click on a button to add those stories to Digg's lists. The site has more than 22 million users, and it's among the few startups that can still get venture capital funding, raising $27.8 million in October. Rose says the key to Digg's success is staying nimble. "Things change in the shower in the morning," he says.

When I met Rose at Digg's converted industrial building, I didn't recognize him at first. I pictured the kid BusinessWeek put on its cover two years ago—with a baseball hat turned backwards and a goofy grin. Rose still looks young, but he's matured. His hair is clipped, and that day he wore designer glasses. The mood at Digg is a bit more serious these days, too. Growth in the number of monthly visitors to the Digg site has flattened, and Rose and his colleagues are hustling to add new features. While he concedes the company didn't do much technology innovating in its early years, he says that's changing. Digg hired Anton P. Kast, a former assistant professor of mathematics at the University of California at Berkeley, to assemble a small research team. Kast et al have produced software that links people with similar interests and soon will make recommendations to people based on their preferences. "This is not something you can build over a weekend," says Rose.

Companies such as Digg and Facebook are clearly just getting started. They have the potential to let people organize themselves and share information in powerful new ways. But it's hard to imagine Digg coming up with the kind of fundamental technology that changes the way business gets done or the way the economy operates.

There is some serious technology innovation going on in the Valley—just not a lot of it coming from startups. And that fact may prove an obstacle to truly transformative changes. One fountain of innovation, for example, is IBM's Almaden Research Center, perched high in the grassy hills of San Jose. Back in 1954 when the Santa Clara Valley was producing more prunes than microchips, IBM scientists invented a machine that would change the world of computing: the disk drive, a device for storing information electronically. The prototype in one of the hallways at the lab is about the size of a MINI Cooper automobile. It could hold just two digital songs, if there had been such a thing at the time; its modern-day successor, Apple's iPod, can hold 30,000. The march of the miniaturization of electronics is the foundation of Silicon Valley innovation.

And the march goes on. A short walk from the car-size disk drive is the office of Don Eigler, one of IBM's top physicists. Eigler, 55, has white hair, but he wears it in a ponytail and is as energetic as a 25-year-old. Since Eigler joined the lab in 1986, he has produced one advance after another at the intersection of physics and electronics. For example, he was the first person to move a single atom.

THE BLEEDING EDGE
These days, Eigler is working on harnessing the natural spin of electrons to overcome the limitations of the chip technology that has been in use since the 1960s. "My work is on the boundary between fundamental science and applied science. It won't hit the marketplace in a direct way for many years to come," Eigler explains. If and when it does, his work could place IBM at the forefront of the next big advance in microchips.

Exciting, yes. But the fact that much of the most promising tech work is being done at large companies like IBM may actually be a problem. Established companies are usually not the most capable of creating truly disruptive technologies. As management guru Clayton M. Christensen explained in his hallmark Innovator's Dilemma, established companies have a vested interest in selling what they already produce, and they're often reluctant to launch technologies that upset existing businesses. Scrappy upstarts are the ones who usually come up with breakthroughs, and they push established companies to new achievements.

That's certainly been true in the case of Microsoft. For much of the company's three decades in business, it primarily copied, packaged, and improved technologies invented by others. But prodded by Netscape in the mid-1990s and Google in the past few years, Microsoft has been forced to reinvent itself and its software. The company now invests heavily in basic computer science research and employs 1,000 PhDs in labs around the world—including one in Silicon Valley.

Microsoft's glass and stucco Silicon Valley lab is tucked away in Mountain View, just a stone's throw from Highway 101. I stopped in to visit Charles P. Thacker, one of the pioneers of PC computing. As a youngster at Xerox's famed Palo Alto Research Center in the 1970s, Thacker led the team that designed the first true personal computer, the Alto. This machine so impressed Apple's Steve Jobs that he modeled the Macintosh computer on it.

INNOVATION LAG
At 65, Thacker is still a tinkerer at heart. These days he's developing a research computer, called BEE3, to experiment with the newest microprocessor technologies. Microsoft has to rethink its software so it can take full advantage of the way the new chips work. In an annex next to his office, Thacker shows me a BEE3 with the lid off, exposing complex circuits and wiring. He has a small fan mounted on the frame that blows air on the chips. A soldering gun sits nearby.

While Thacker's project could make computers much more productive, it's not a revolutionary concept. Still he says Microsoft researchers are working on a wide array of potential breakthrough technologies. "Don't think about what your computer does for you now," he says. "Think about what it doesn't do. It doesn't drive your car. It doesn't know anything about you. It can't adapt to you. You can't talk to your computer even in the simplest way." These are the capabilities he believes will come with the next advances in computing.

The threat to the U.S. is that these advances may come from overseas. Fundamental innovation is happening in more places than ever before. In 2007, only seven American firms ranked among the top 25 U.S. patent recipients. Europe and Asia continue to lead the way in mobile communications. Japan is surging ahead in display and nanotechnology. And China and India are coming on strong in fundamental computer science research and software, respectively. "India and China are improving exponentially. We're flat. So we're falling behind," says Curtis R. Carlson, chief executive of SRI International, the Silicon Valley research lab-for-hire.

Executives at companies whose investments in basic research appear to be slipping insist they're as committed as ever. Hewlett-Packard's research budget has flattened in recent years, and its rank for patents received fell from No. 5 in 2006 to No. 10 in 2007. But Shane V. Robison, HP's chief technology and strategy officer, says the company is getting more bang for its buck now because it's concentrating on software innovations—which are less expensive to produce than chip advances. "A lot of people think if you're not doing microprocessor design, you're not doing information technology innovation," he says. "That's a goofy way to think about it."

The Valley faithful point out that the region has always gone through cycles of innovation, with lulls before the next big breakthrough. Google looked like just another search engine in its early days; perhaps another startup just getting going has the same potential to change the world. "I'm a Silicon Valley optimist," says John Hagel III, co-chairman of the Deloitte Center for Edge Innovation. "I think there's an incredible amount of opportunity to be created out of the technologies that are already in play."

New technologies may also end up eclipsing the old. Semiconductors, for example, laid the foundation for technology improvements in the past, but there may be more important advancements elsewhere in the future. Ken Lawler, a Valley partner with the venture capital firm Battery Ventures, points to new developments in biotech, solar power, and other green technologies. "Innovation is still alive and well," he says. "It's in new areas."

One day during my journey, I stop into the offices of Numenta, above a bookstore in Menlo Park. The startup has one of the most ambitious goals imaginable: building computers that work like the brain. Numenta represents classic Silicon Valley game-changing ambition—no surprise, perhaps, considering that one of the founders is Jeff Hawkins. He's a serial inventor who produced the first tablet computer, GridPad; the first successful handheld computer, PalmPilot; and the first successful smartphone, Treo.

Hawkins and his Numenta programmers study the inner workings of the brain and then replicate them with some of the most complex mathematical algorithms ever devised. Yet it's not venture capitalists who are funding this effort: Hawkins, a sandy-haired 51-year-old, is financing Numenta largely with his own savings. "The work we're doing is technically very hard. It would be very difficult to get it funded in the typical Silicon Valley way," he tells me.

There's a minitrend emerging in the Valley: Some of yesterday's inventors are resurfacing with bold ideas, which, like Hawkins, they're funding themselves. But there's a limit to how much self-funded entrepreneurs can do.

So, after my journey through the Bay Area and dozens of interviews, I drew several conclusions: Breakthrough innovation is going on at a handful of large companies and a few small ones. But there are also legitimate concerns about the Valley's long-term prospects. IBM and Intel will keep producing important chip advances. Microsoft and Google will race each other to come out with cutting-edge Net technologies. And Apple seems likely to produce more hit products. But unless entrepreneurs and venture capitalists refocus on more ambitious tech projects—even though they take more time and money to incubate—the Valley's and the tech industry's contribution to the national economy is likely to wane.

The world economic meltdown might actually have some positive effects. In times of crisis people sometimes set off in bold new directions. This shock might prompt action on the tech front from the federal government. The America Competes Act, which was passed by Congress in 2007 but was never funded, called for increased money for university research, improvements in math and science education, and corporate R&D tax incentives. Tech leaders say now is the time to act. "We have chosen not to compete," says Intel Chairman Craig R. Barrett. "You cut off your future if you don't invest."

Diana Quoted in Today's Examiner

2008-12-30T10:26:00.000-08:00

some interesting info on the VC world for young people. features a couple of quotes from me!

http://www.examiner.com/x-828-Entry-Level-Careers-Examiner~y2008m12d30-Getting-attention-and-cash-from-VCs-and-angel-investors

Getting attention (and cash) from VCs and angel investors
Add a Comment

December 30, 12:42 PM
by Heather Huhman, Entry Level Careers Examiner

Many college students and recent graduates are starting their own businesses these days, whether the reason is their Generation Y entrepreneurial spirit or the sluggish job market. But, these individuals don’t have a lot of capital and are often the victims of “reverse ageism.” So, how can you break through to get attention – and cash – from venture capitalists (VCs) and angel investors to launch your new business?

1. Make waves on campus. “Students and recent graduates starting a business need to first demonstrate that they can capture attention of – and lead – their peers, school administrators and alumni in unique, groundbreaking ways before anyone in the investment field is going to put money behind them to go out and drive a business,” said Charlie O’Donnell, co-founder and CEO of Path 101. “So, this means it's not just enough to run the school’s finance club, but the backable entrepreneurs are the ones that, while in school, thought bigger, like helping to conceive of and implement a real student managed investment fund, and then worked with the alumni office to solicit funds for it.”

2. Learn how to build lasting relationships with professionals. “Students are also notoriously bad at creating long-term relationships with professionals,” said O’Donnell. “One of the angel investors in my current company is someone who I worked for at an internship that I started when I was 17! Eleven years later, he put a significant amount of money into my business. Students have to get out and get to know people – and get people to get to know them. That's why a digital presence like a blog or Twitter can be so valuable.”

3. Be upfront about your age. “I started my first company while still in school, at 14, back in Karachi, Pakistan,” said Zaki Mahomed, CEO of TimeSvr. “That was a long way away from the young prodigy culture of Silicon Valley. I learned early on that your age is always going to be hanging in the air, and it’s best to be the first to address it, in order to get it out of the way.”

4. Create something newsworthy. “Any press – either from blogs or the mainstream – is a good indication that you're doing something right. VCs pay attention to what others are paying attention to,” said Nate Westheimer, entrepreneur in residence at Rose Tech Ventures.

5. Involve great people. “Find relevant mentors and advisors and get them truly engaged in the business. This isn't building an ‘advisory board’ in name only. Rather, it means finding ways to really get some experienced people with strong reputations involved in your business in a meaningful way. Then, leverage those folks to get introductions to investors,” said David Cohen, executive director of TechStars.

Bruce Bachenheimer, program director of entrepreneurial studies at The Lubin School at Pace University, adds, “Build a real board of advisors, not just people who agree to let you use their name as ‘window dressing’ for a business plan or investor pitch – rather, experienced entrepreneurs and seasoned professionals who will dedicate the necessary time to understand your business and formulate meaningful advice. The young entrepreneur should not only assemble such a board, but must understand what is required to keep the advisors engaged and committed.”

6. Show that your business has traction with the market. “The best evidence is customer acceptance. Facebook was being used by hundreds, if not thousands, of students before they sought outside financing,” said Robbie Kellman Baxter, president and founder of Peninsula Strategies.

7. Focus your investor targets. “Make sure that your business is appropriate for the type of investing that your target investor does,” said Diana Benedikt, founder and principal of Venture Insight Advisors. “Some deals will just never get big enough for VCs who are looking for ‘home run’ type wins, where the payouts are huge (i.e., Google). It’s a waste of everyone’s time to try to sell a small deal to an investor who only does big deals. Also, angel investors want to see their deals passed down the ‘financial food chain’ – meaning the good ones will want to see your deal financed later by a VC who, if they’re only looking for the next Google, won’t put money in a small opportunity.”

Cohen adds, “Don’t spray and pray. Do your research, and approach the right investors for your business with the right approach for them. You just need one interested investor who can introduce you to others. So, look for those investors that you respect and that have strong experience in the market you're entering.”

8. Initially, ask for advice, not funding. “Be open to feedback from potential investors and think of the first meeting as relationship building, not an investment meeting. Your goal in the first meeting is to get a second meeting, and the sure way to get a second meeting is to make progress based on feedback from the first meeting,” said Cohen.

9. Network, network, network. “There are countless examples of companies raising capital from networking events,” said Dave Lavinsky, president and co-founder of Growthink, Inc. “I recently interviewed a CEO of a venture backed company who met his investor at a MIT alumni event. Even if the fellow alumni won’t invest, they can refer you to someone who can.”

10. Don't quit your day job. “No matter how long they tell you it will take to get your money, it will take longer. Be ready to wait, and wait some more. Some funds hold out on you to see if you still have a viable business and plan months later, for fear they would be throwing money down the drain at the minute they meet you,” said Anthony Migyanka, managing partner at Mobile Money Minute, LLC.

11. Build a great team. “At the end of the day, VCs invest in people, so the stronger your team, the better. Balance your team with known successful people and young, eager and capable individuals,” said YuChiang Cheng, CEO of World Golf Tour, a recently launched start-up. “Determine your strengths and build your team from what you are missing. If you can’t hire or find co-founders, identify three to five great advisors who can mentor you, make introductions and vouch for you to investors.”

12. Be prepared. “This means do your homework and prepare investor materials that tell a compelling business case and at the same time, answer the questions that all investors will have. Who? What? How?” said Benedikt. “Imagine that the investor is managing your money. You want him to have the key pieces of information to make a proper investment decision on your behalf, right?”

Caspar A. Szulc, executive vice president and co-founder of Innovative Medicine, LLC, adds, “Whether you’re 19 or 60, what matters most is a well prepared and concise business plan. Investors will want to see something on paper before they have a face meeting, and having a well constructed business plan is essential to spur interest. Take the extra time to make sure your business plan is solid and forecasts a realistic yet attractive picture. If your plan is solid, when it comes time to present, investors will already be interested regardless of age.”

Recommended reading:
The Successful Business Plan: Secrets & Strategies
Finding an Angel Investor in a Day

13. Don’t be disappointed by disappointment. “I was turned down for investment more than 30 times, and I didn’t speak with that many people! Patrick Byrne from Overstock.com was trying to raise a lot more money than I did and was rejected by more than 50 firms,” said Mark Newman, CEO of HireVue. “If you can’t accept rejection, don’t try to raise money from investors. As you go out in the market, don’t take anything personally – refine the pitch and improve the approach.”

Topics: Entrepreneurship

For Innovators, There Is Brainpower in Numbers

2008-12-09T11:34:00.001-08:00

Unboxed
For Innovators, There Is Brainpower in Numbers

By JANET RAE-DUPREE
Published: December 5, 2008
“None of us is as smart as all of us.”
— Japanese proverb

DESPITE the enduring myth of the lone genius, innovation does not take place in isolation. Truly productive invention requires the meeting of minds from myriad perspectives, even if the innovators themselves don’t always realize it.

Keith Sawyer, a researcher at Washington University in St. Louis, calls this “group genius,” and in his book of the same name he introduces a scientific method called interaction analysis to the study of creativity. Through studying verbal cues, body language and incremental adjustments during team innovation efforts, Mr. Sawyer shows that what we experience as a flash of insight has actually percolated in social interaction for quite some time.

“Innovation today isn’t a sudden break with the past, a brilliant insight that one lone outsider pushes through to save the company,” he says. “Just the opposite: innovation today is a continuous process of small and constant change, and it’s built into the culture of successful companies.”

It’s a perspective shared broadly in corporate America. Ed Catmull, president of Pixar Animation Studios and Disney Animation Studios, describes what he calls “collective creativity” in a cover article in the September issue of Harvard Business Review. “Creativity involves a large number of people from different disciplines working together to solve a great many problems,” he writes. “Creativity must be present at every level of every artistic and technical part of the organization.”

So, we all should brainstorm our way through the day, right? Wrong. That classic tool introduced by Alex Osborn in 1948 has been proved in a number of studies over the last 20 years to be far less effective than generally believed. “He had it right in terms of group process,” says Drew Boyd, a businessman based in Cincinnati who blogs and speaks often about innovation. “But he had it wrong in terms of the method.”

Brainstorming, Mr. Boyd says, is the most overused and underperforming tool in business today. Traditionally, brainstorming revolves around the false premise that to get good ideas, a group must generate a large list from which to cherry-pick. But researchers have shown repeatedly that individuals working alone generate more ideas than groups acting in concert. Among the problems are these: Throwing in an idea for public consideration generates fear of failure, and workers looking to advance their own interests often keep their best ideas to themselves until a more opportune time.

Instead of identifying a problem and then seeking solutions, Mr. Boyd suggests turning the process around: break down successful products and processes into separate components, then study those parts to find other potential uses. This process of “systematic inventive thinking,” which evolved from the work of the Russian engineer and scientist Genrich Altschuller, creates “pre-inventive” ideas that then can be expanded into innovations.

Kapro Tools, working with an Israeli company called Systematic Inventive Thinking, used the method to create a new type of bubble level calibrated to help build gentle slopes to improve drainage. Previously, construction workers approximated the slope they wanted by placing a nail or other object under the edge of a standard level.

“Innovation is a team sport,” Mr. Boyd says. “There’s a dynamic that happens between people that produces results I just don’t see with an individual.”

Even Albert Einstein, society’s most common mental picture of genius, needed group input to hone his insights. According to “Einstein’s Mistakes” by Hans Ohanian, the great physicist’s derivation of the famous equation E=mc2 contained several errors; it wasn’t until 1911 that another scientist, Max von Laue, developed a full and correct proof.

“The best innovations occur when you have networks of people with diverse backgrounds gathering around a problem,” says Robert Fishkin, president and chief executive of Reframeit Inc., a Web 2.0 company that creates virtual space in a Web browser where users can share comments and highlights on any site. “We need to get better at collaborating in noncompetitive ways across company and organizational lines.”

THAT’S exactly what innovators at a dozen health care systems throughout the country had in mind nearly four years ago when they formed the Innovation Learning Network, says its director, Chris McCarthy. The problem, he says, is that there are so few health care innovators within each organization that introducing technologies and processes can be painstakingly slow. “We thought if we could get all these experienced folks together to push each other’s thinking continually, we’d all be better off,” he says.

What started as a grant-financed, one-year trial is now a member-financed permanent network, he says. The members bring in new technologies and experiment with them in a faux clinical setting in San Leandro, Calif.,. One of the first large-scale initiatives to arise from the network is KP MedRite, an effort at Kaiser Permanente’s 32 hospitals to ensure that nurses are not interrupted while dispensing medications. Other member health care systems have already begun to introduce the program at their sites.

By using the group’s knowledge and experience, Kaiser Permanente accomplished in less than a year what would have required roughly two years to do without the network, Mr. McCarthy says. “It was a huge jump-start for us,” he says. “The group effort allows us to move much more quickly and become successful much faster.”

Janet Rae-Dupree writes about science and emerging technology in Silicon Valley.
More Articles in Business » A version of this article appeared in print on December 7, 2008, on page BU3 of the New York edition.

Report: Enterprise 2.0 Apps Will Dramatically Fall in Price

2008-10-13T11:42:00.000-07:00

not such great news for the Enterprise 2.0 world...some of the comments are quite interesting as well.

http://www.readwriteweb.com/archives/enterprise_20_apps_fall_price.php

Report: Enterprise 2.0 Apps Will Dramatically Fall in Price
Written by Richard MacManus / October 12, 2008 7:41 PM / 12 Comments

A new report by Forrester Research states that the market for collaboration and productivity web apps in the enterprise (a.k.a. enterprise 2.0) is set for a shake-up, with prices to fall in some cases by over half. Price drops will be especially sharp in blog, wikis, social networking and widgets. The only exception is mashups, which will increase in price over the next 5 years.
Forrester says the price drops will be due to "cutthroat competition, commoditization, bundling, and subsumption", with many startups and established big companies competing for the enterprise dollar.

There is still expected to be strong adoption by enterprises of web 2.0 apps, which will result in increased license revenue. However that will be offset by the large price drops.

Which Apps Will Suffer The Most?
The outlook is particularly bleak for blogging software, which Forrester says will "fall to the lowest average cost per enterprise among Web 2.0 tools" - that's bad news for Six Apart and Automattic, both of whom have been aggressively targeting the enterprise in recent years.
Wikis are also expected to fall in price, however Forrester notes that wikis have had a strong impact on enterprises so far. So there will be more competition, but best-of-breed solutions will continue to do well. Forrester says that "well-designed, intuitive, and cheap wiki technology" will do best.

We've noted over the years that it's very tough to create an easy-to-use and intuitive wiki app, therefore we expect existing best of breed providers such as Atlassian and SocialText to continue to do well. [disclosure: SocialText is a RWW sponsor]

Widgets are expected to drop in price a bit over the next 5 years, mostly because they will become far more common place than they are now. Forrester notes that traditional enterprise applications providers like SAP and Oracle will begin to offer widget solutions for their existing customers.

Social networking is expected to see a big drop, largely due to SharePoint. Forrester states that "much like blogs and wikis, social networking is likely to be commoditized quickly over the next five years." They do hold out some hope thought for "specialized tools that focus on alumni networks, new employee orientation, and cross-department collaboration", which they think may continue to get price premiums.

The one thing we'd caution here is that SharePoint so far has proven to be a complex and difficult to use beast, so we're not so sure that easy-to-use alternatives will be commoditized by SharePoint. In theory it sounds sensible, but in practice how many people actually use SharePoint to network?

Forrester sees mashups as being very early in their market sycle, so it is optimistic pricing will increase. It states that "IT departments will prioritize mashup technology as part of portal, business intelligence, and business process management software investments as well as a major component of SOA implementations."

Update: Jeffrey McManus (no relation) asked in the comments: "Who pays anything for mash-ups or widgets?" The report notes that both aren't common - just 1.8% of North American enterprises had a widget deployment in 2008, while mashups so far have been "small isolated tests, typically limited to the IT department". There are no figures given for how much widgets and mashups will grow, although Forrester says that it "never expects widgets to find a home in more that one-third of enterprises". However there seems to be decent money in it for vendors, with an average of $26,500 per implementation for widgets in 2007 and $76,500 per deployment for mashups in the same period. Examples of current mashup platforms include JackBe, IBM, and Serena Software. Forrester expects the price for mashups to "nearly double to $143,400 per engagement by 2013."

Also in the report, podcasts are predicted to remain largely unchanged over the next five years and enterprise RSS will play "a critical role as the Web 2.0 middleware, staving off major price declines."

The graph below from Forrester summarizes all of the data:

Why Will Prices Drop?
One of the reasons is that old fear of web 2.0 companies: commoditization. As innovation gets copied and 'digested', so it becomes less of a differentiator for the innovators. As Forrester puts it in the report, "for the most part, a blog from one vendor is no better than a blog from another, eroding differentiation and price premiums."

Bundling is another threat to startups, creating "a homogenous set of competitors." Forrester seems to be suggesting that most enterprise 2.0 vendors are attempting to sell a Web Office suite: "Everyone, from blogging vendors like Six Apart to social bookmarking vendors like Connectbeam, is converging on one offering: the enterprise Web 2.0 suite." This, says Forrester, will result in an "industrywide brawl, with buyers the only guaranteed winner".

The third main factor is subsumption, which Forrester says "brings Web 2.0 technology to millions of users at little to no cost." Subsumption in this case has a similar meaning to integration. It's a tactic that the big vendors - like Microsoft, IBM, SAP and Oracle - have more easily at their disposal over startups. Forrester points out that these bigcos can easily roll Web 2.0 features into their existing software packages - in many cases at no extra cost to the user. Microsoft has been doing this with SharePoint, which has lightweight blogging and wiki tools bundled into the main product.

What's more, Microsoft has managed to partner with a number of high profile but small enterprise 2.0 vendors - such as Atlassian and Newsgator. In June we profiled 9 small companies that had launched Enterprise 2.0 offerings that integrate with SharePoint technology. So this could be viewed as another form of 'subsumption', whereby startups have to partner with big companies like Microsoft in order to compete in this highly competitive market.

Even an apparently independent startup like Zoho, which seems to be competing well with bigger companies, has to a degree partnered with bigcos - their use of Google Gears has them relying on a technology produced by Google (ok, Gears is open source, but still it is a form of reliance).

Conclusion
Overall, the trend according to Forrester is that prices for enterprise 2.0 apps will fall but that demand will continue to ramp up. We at ReadWriteWeb can't argue with the overall trend, however we think that startups still have a few tricks up their sleeves when competing against bulky and often hard to use products like SharePoint. However we've always said that partnerships - with bigcos and other startups alike - will be key to startups as they engage their bigger competitors in a crowded market.

What Startups Can Learn from Sequoia Capital’s Doomsday Plans.

2008-10-09T11:40:00.000-07:00

some scary words from the Sequoia Capital folks...but important lessons to learn are in here as well:

http://gigaom.com/2008/10/09/what-startups-can-learn-from-sequoias-doomsday-warning/

What Startups Can Learn from Sequoia Capital’s Doomsday Plans.
Om Malik, Thursday, October 9, 2008 at 11:27 AM PT Comments (0)

Last evening I had reported about a special meeting held by Sequoia Capital for its portfolio companies, warning them about a fiscal hurricane that was going to hit them, and they better figure out ways to survive what could be a big downturn.
There were some gaps in the details about that meeting, but I have been able to piece together the minutes of that meeting and what they had essentially said. Since these are second sourced details, I cannot say they are a hundred percent accurate, and as a result please use a degree of skepticism. Nevertheless, I still feel confident enough to share these details.

These were the four speakers:
Mike Moritz, General Partner, Sequoia Capital who moderated the speakers. The speakers were Eric Upin, Partner, Sequoia Capital who till recently ran the ran the $26-Billion Stanford Endowment Fund; Michael Partner, Sequoia Capital, who Sequoia’s very first hedge fund and worked at Maverick Capital and Robertson Stephens. The last speaker was as I mentioned, Doug Leone, General Partner, Sequoia Capital.

Details of what they had to say are below the fold.

Moritz Musings
Mike Mortiz kicked off the proceedings by saying that there are drastic times and that means drastic measures must be taken to survive. His message to companies was don’t worry about getting ahead instead … “we’re talking survive. Get this point into your heads.” He warned that companies need to be cash flow positive, and if they are not, then they need to get there now, because raising capital without being cash flow positive is going to be tough. He was warning that there will be a price to pay for those who hesitate to act.

Upin Says
Upin, who know a thing or two about money and markets told the room thatWe are in the beginning of a long cycle, what we call a “Secular Bear Market.” This could be a 15 year problem.” This comment was accompanied by many slides that showed historical charts of previous recessions, averaging 17 year cycles. He pointed out that issue here is not equity markets but the credit market and that will take a long time to recover. He was ominous in warning the startups that this is a global issue, not a normal time and this is a significant risk not just to growth but to personal wealth.
He advised startups make drastic changes, cut expenses and cut deep but still keep marching. “Make changes, slash expenses, cut deep and keep marching. “You can’t be a general if you turn back,” he is supposed to have said. The point he hammered in was that since you can’t manage the economy, manage everything else including your business.

He had some interesting advise for starts.
* Cut spending. Cut fat. Preserve Capital.
* Throw out the models, spreadsheets, because all assumptions will be wrong.
* Focus on quality.
* Reduce risk.
Michael Beckwith
Michael Beckwith’s presentation had lots of charts and data and he pointed out that the V-shaped recovery is unlikely. He also said that the cuts in spending will accelerate in Q4 and Q1 2009, and pointed to eBay as an example.

Leone’s lessons
Doug Leone, told the group that this (downturn) was a different animal and would take “years to recover.” He was clear in pointing out that:
* unprofitable companies would have tough time raising cash, so get cash flow positive as soon as possible.
* Go on the offensive and pound on your competitors’ shortcomings.
* Be aggressive with your messaging and be out there. In a downturn, aggressive PR and Communications strategy is key.
* Decline in M&A will mean that only lean companies with sales models that work will get bought.
* On a scale between Capital Preservation and grabbing market share, he advised that everyone should be only preserving capital.

Leone other tips for companies, especially the Sequoia portfolio companies were something like this:
* Start with zero-based budgeting.
* Cutting deeper is the formule to surive, and this is an era of survival of the quickest.
* Make sure you have one year of cash.
* If you have a product, it should reduce expenses and boost sales. If the product is ready, cut the number of enginggers.
* Focus on building the absoliutely essential features in your product.
* Be brutal wahen it comes to marketing — anything that isn’t working, cut it.
* Kill cash burn for cash is king,
* Cut base salaries on sales people and leverage them with upside.
* Most importantly, be true to yourself.

Wind leading the pack of winning Clean Tech technologies

2008-10-02T13:46:00.000-07:00

a very interesting article based on research from right here at Stanford.

http://www.cleantechblog.com/2008/10/wind-leading-pack-of-winning-clean-tech.html

Wind leading the pack of winning Clean Tech technologies
by Marguerite Manteau-Rao

Mark Jakobson, professor of Civil and Environmental Engineering, at Stanford University, performed a thorough evaluation of energy solutions to global warming, as applied to alternative vehicle technologies. His answers may surprise you.Pr. Jakobson looked at the following energy sources:

wind turbines
battery electric vehicles
solar photovoltaics
hydrogen fuel cell vehicles
geothermal power plants
tidal turbines
wave devices
concentrated solar power
hydroelectric power plants
nuclear power plants
coal with carbon capture and sequestration
corn ethanol
flex-fuel vehicles
cellulosic ethanol

and evaluated them according to the following criteria:

resource abundance
carbon-dioxide equivalent emissions
opportunity cost emissions from planning-to-operation delays
leakage from carbon sequestration
nuclear war/terrorism emission riks from nuclear-energy
air pollution mortality
water consumption
footprint on the ground
spacing required
effects on wildlife
thermal pollution
water chemical pollution/radioactive waste
energy supply disruption
normal operating reliability

Here's the outcome:

Wind comes out the clear winner. Concentrated solar power, geothermal, solar photovoltaics, tidal, wave, are good additions to the mix. Hydroelectric is added for its load balancing ability. Nuclear and coal are less beneficial. Corn and cellulosic ethanol should not be included in policy options. Hopefully, the next administration will be wise enough to follow Pr. Jakobson's recommendation . . . and align its subsidies with the right kind of technologies.

Marguerite Manteau-Rao is a green blogger and marketing consultant on sustainability and social media. Her green blog, La Marguerite, focuses on behavioral solutions to climate change and other global sustainability issues. Marguerite is a regular contributor to The Huffington Post. Since Sarah Palin's VP nomination, she has also been impersonating Ms. Palin at What's Sarah Thinking? blog

Labels: air pollution, alternative energy, energy security bill, global warming, Mark Jacobson, solutions, vehicle technologies