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

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

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

1. Can the founding team succinctly and consistently articulate the company’s business opportunity?
2. 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.
3. Do they have a demonstrated ability to stay focused on the critical objectives?
   
4. 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.
   
5. Do they have a roadmap for the company culture? Surprisingly, many founders never consider this.
   
6. Do they understand the value of frugality and the need to ruthlessly prioritize spending?
   
7. 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.
   
8. 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

1. 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.
   
2. Is there a scalable business model?
   
3. 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?
   
4. Are there three or less startup competitors vs. many?
   
5. 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.
   
6. 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

1. Is it simple to articulate and understand?
2. 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.
3. Is there intellectual property or at least some “secret sauce” that makes it defensible? Patentable concepts are desired but not required.
4. Is the intellectual property free and clear from previous employers or others?
5. For a company selling a product, are the projected gross margins more than 50 percent?
6. 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.

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

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.

The Basics of the Financial Food Chain

Here's the basics of the financial food chain for newbies. Good honest info on this from ReadWriteWeb (as usual) but there's a lot more info out there on each rung of the ladder. If you're interested in learning more about each step, do you homework!

http://www.readwriteweb.com/readwritestart/2009/06/the-capital-raising-ladder.php

The Capital-Raising Ladder
Written by Bernard Lunn / June 11, 2009 4:55 PM / 3 Comments

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

The amount of capital you will need depends on what kind of venture you plan to build. You may need to go no further than the first rung of the ladder. You might be able to build a very good business that meets all of your financial needs without raising a dime from anybody. You might also strike it lucky and get phenomenal growth without needing capital. But being under-capitalized is a big source of venture failure. So you need to assess how much capital you'll need. Your chances of realistically getting that capital should factor into your planning. If you can reach only the lower rungs of the ladder, don't plan a business that needs higher levels out of your reach. If your first venture is a success, the other steps on the ladder will be more easily accessible if you decide to pursue another venture.

10 Steps on the Ladder
You may need only a few of these steps. This is not meant to be a "do this, then do this, and then do this" progression. You can skip steps and stop at any point.

• No cash, moonlighting, sweat
• Credit card or savings (personal round)
• Friends and family round
• Incubators
• Serious angels and small VCs
• Classic VCs
• Corporate VCs
• Non-recourse working capital bank loans
• IPO
• Exit: Capital Realization

Our aim with this chapter is to help you understand what these investors want. Habit #5 in Steven Covey's "7 Habits of Highly Successful People" is:
Seek first to understand. Then to be understood.

1. No Cash, Moonlighting, Sweat
This is the earliest possible phase, when all you need is to build a website that can be uploaded to your server and that demonstrates your idea. If you are a non-technical entrepreneur, this step is not feasible. The non-techie equivalent would be a business concept: identifying a big gap in the market, doing enough research to be credible, and developing a unique approach to filling this gap.

2. Credit Card or Savings (Personal Round)
Now you need to load your site onto a production server (or create a fancy slideshow) and buy business cards. Maybe your phone bill just went up, or you need to travel somewhere to meet someone. No problem; no need to ask anyone for money. Just keep track of these little items. They are pre-operating expenses. If you get to profitability without external investors, these loans of yours to the company can be re-paid. If you raise external capital, this is almost always regarded as sweat equity (meaning you don't get it back until exit time, when you sell your equity).

Be careful. Loading up on credit card debt is risky. You almost always need more money than you think, and it takes longer than you think to raise real money. You can rack up a sizable debt fairly quickly. If your credit card company tightens up, you'll have no options. If your venture fails, you'll be left with a nasty bill, probably with crippling interest rates.

3. Friends and Family Round
You are now at the stage where this venture of yours might really take off. But now you need more than you can afford but less than is sensible to ask from an angel. This is the friends and family round, people who "invest" because they know you, like you, and trust you. Don't take this as validation of your venture. It is purely validation of how they feel about you.

Keep the deal simple. This has to be convertible debt. That means:
They loan the money to your business,
It converts into equity at the first equity round.

This lets you avoid having to ask your friends and family to valuate your venture. They are not experts, and it makes for difficult conversations with people who still like you.

Your friends and family will always be important to you... more important to you than this venture. Don't make promises you are not 100% sure about. Be totally open and transparent, and do your best. If you follow these simple rules and your venture fails, you at least won't lose your friends and family.

Document what has been agreed on, even if only with an email trail. Memories may prove faulty.

4. Incubators
The US alone has 600 technology incubators. One may be near you.
Some are little more than office space and offer no real value: don't waste your time with them. Look for ones with a track record of successfully incubating ventures. That track record means that angels and VCs look to these incubators for deal flow, meaning you will get access to capital when you need it.

Incubators should give you four things:

Cash. Not all incubators have cash to invest. Look for the ones that do. This could replace a friends and family round. They might do a convertible deal, letting the angels or VCs set the valuation. That is ideal. If they insist on a percentage for a small amount of cash, take a long hard look at their track record. Those deals of, say, 10% of the venture for $20,000 may work for some first-time entrepreneurs if the incubator can really deliver the credibility and network you need. But note that later investors make their decisions based on the merits of your venture. The incubator just gets you through the door and may coach you on what to say as you walk through. Is that worth 10%? Because $20,000 is probably not worth 10%.

Services on a deferred-payment basis. These would be from vendors (landlords, lawyers, accountants, designers, advisors, etc.) who get paid only after the venture is funded. So, these vendors are also betting on the incubator's track record.
Mentorship and championing. This should come from the person in the incubator who really believes in your venture but also challenges you at every step to make sure you are really ready to take it to the next level. Look for a mentor/champion who has been an entrepreneur. There has to be chemistry. See the chapter on Building An Advisory Board and follow those guidelines when choosing a mentor/champion in an incubator. Yes, you choose them. It is not just about them choosing you.

A network of entrepreneurs and investors they can tap into on your behalf.
Why do successful entrepreneurs put time and money into becoming incubators?:
To get in on the ground floor of a great venture and make some money.
The buzz of startup life is addictive.
To do some good, and repay the good fortune they have had.
To help the local region. Perhaps they came from here, went to Silicon Valley because it was their only option, but wished they had an incubator like them locally when they were starting out.

Good incubators are a great rung on the ladder. But choose carefully: some will only waste your time

5. Serious Angels and Small VCs
Serious angels do what they do for a living. That is their day job. Sure, they love it and are passionate about it, but they also want to make money from investing. These serious angels are very different from the person in a full-time job who enjoys the distraction of hearing pitches and occasionally writing small checks.

The serious angels operate just like small VC firms. Some work in association with other angels so that they can provide enough funding that the company doesn't have to rely on VCs too early on. Some have raised money from other angels and in effect become small VC funds themselves. Serious angels take all of these steps because of one overriding fear:

They fear getting squeezed by a VC that invests in a later round.

As an entrepreneur, you need to be sensitive to that fear. Almost all entrepreneurs are too optimistic about their plan. They assume they can reach whatever milestone they have with less time and money than they really need. Then, when the venture runs out of money, the angel has two options:

Invest more money. At this point, they are investing in an entrepreneur who has not hit their numbers and whose credibility is questionable. So this does not feel good. The smart ones will just assume at the outset that they will have to invest way more money than you are asking for. For example, if you say, "We can get to profitability (or some other milestone) with $500,000," they will assume that something more like $1 million is needed and plan accordingly (by reserving as much of their or their partner's capital as is needed).

Get squeezed by a VC. In this case, their stake will be massively diluted. Say they invested $500,000 and got a 20% stake. Now, the venture is running out of money and needs $3 million urgently. The venture has good prospects, so VCs are interested. Some VCs will extract harsh terms under these conditions. Angels obviously don't like being treated this way. The venture is a winner, and they spotted it early, so why should they be the loser in this game? Bear in mind that you, the entrepreneur, get squeezed in this situation as well, but you are in a better position than the angel because the VC needs you to continue working to build value. But basically, this is bad news all around.

You can avoid this situation in two ways:

Be more realistic in your business planning. Yes, this is hard. Planning with multiple levels of uncertainty is hard. That is why investors, who know this fact very well, usually want more time to evaluate your venture than you'd like to give them. Use the angel's experience to help you with business planning. Check your assumptions against their experience. The mechanics of a spreadsheet are simple; the mistakes always lurk in one or two main assumptions. This is why the real-world experience of your advisor, incubator champion, or angel is critical.
Work with angels who, with their partners, have enough cash to invest if you do end up needing more money than planned. Work with angels who have a strong track record and good connections with people on the next rung of the ladder: the classic VC funds. VC funds are less likely to squeeze (read, alienate) an angel who they know is a great source of ventures.

6. Classic VCs
If you are a serial entrepreneur who has already built and sold a VC-funded company, you can jump straight to this rung of the ladder. If not, don't even think about it. For Web technology ventures, classic VC funds have become a source of late-stage expansion capital. Some of those VCs are getting back in the early-stage game by one of three methods:

Establishing a separate early-stage fund. Unless the VC has different partners, this separate fund is probably little more than a name and hypothetical allocation of money.

Acting as Incubator. This works like a convertible loan and can be a great solution.

Cultivating a network of friendly angels. The idea here is that they send deals to these angels, who bring those deals back when the ventures need more money.

Be careful. Many classic VCs like to work with a few "entrepreneurs in residence" to create ventures in-house. Their interest in any of these projects may be no more than due diligence.

In short, if you don't have a good relationship with a classic VC, don't start here.

7. Corporate VCs
Higher up on the ladder are corporate VCs. They get their deal flow from classic VC funds and invest with strategic objectives. They typically look to grow the market for their core product. They may want a minority stake in a venture that they see value in acquiring later on. Corporate VCs can be great, but make sure the deal does not come with strings attached that would scare off other potential acquirers.

8. Non-Recourse Working Capital Bank Loans
This is the high-five moment for bootstrapped ventures. It means you have been profitable for a while but need working capital because of fast growth. Most banks like to fund these. The big deal about non-recourse loans is that you are not personally liable. The bank uses your company's cash flow as collateral. For entrepreneurs who have gone into personal debt to build their venture, this is a big, big milestone.

9. IPO
This is the golden ticket for a VC-backed business. Well, at least it used to be. And it may be so again. It is another rung on the capital-raising ladder. You do an IPO to raise money, at least in theory. In reality, the larger motivation is to get your stock tradable (i.e. "liquid") so that you and your investors can sell some of it.

10. Exit: Capital Realization
The final step is to realize value by selling some or all of your stock either in a trade sale or to public market investors if you have done an IPO.
If you are starting out, then yes, all of the steps above the fifth rung on the ladder may as well be on the moon. But as with anything, take it one step at a time.

The Incredible Shrinking VC Industry

If you don't know Paul Kedrosky and his great blog, Infectious Greed, take a look - you'll become a follower too. This is an interesting article from the NY Times on a speech Paul gave this week at the Kauffman Foundation. The topic: Right Sizing the US VC Industry. And yes, its more of the same: VC must shrink by half to generate the kind of returns that are expected of players in this asset class. Its not news anymore, but its today's reality and we all need to get used to the incredible shrinking VC world.

http://bits.blogs.nytimes.com/2009/06/10/does-the-venture-industry-need-to-shrink-by-half/

June 10, 2009, 8:00 am — Updated: 5:22 pm -->
Does the Venture Industry Need to Shrink by Half?
By Claire Cain Miller

Will the venture capital industry survive? Yes, says Paul Kedrosky, but it needs to shrink to half its current size if it wants to start generating competitive returns again.

Mr. Kedrosky made his case in “Right-Sizing the U.S. Venture Capital Industry,” a report published Wednesday by the Ewing Marion Kauffman Foundation, where he is a senior fellow studying entrepreneurship, innovation and the future of risk capital. He is also an investor and the author of the blog Infectious Greed.

Venture capital’s “poor returns make the asset class uncompetitive and at risk of very large declines in capital commitments as investors flee this underperforming asset,” he wrote in the report. “The sector must shrink its way back to health if venture capital is to provide competitive returns and secure its own future as a credible asset class and economic force.”
Mr. Kedrosky is the latest to pipe up in the debate over the fate of the venture capital industry, as the exit markets remain virtually shut for most start-ups and limited partners reconsider whether they want their money tied up in illiquid venture funds. Many other V.C.’s are also concluding that venture funds must shrink, including the elder statesmen of the industry and limited partners.

Venture capital was healthiest in the early to mid-1990s, Mr. Kedrosky argued, when firms invested $5 billion to $10 billion a year in start-ups. Today, they invest about $30 billion a year. He argued that limited partners — the investors in venture funds — should shrink their investments to help resuscitate the sector.

Though the industry often cites the 8 percent returns for venture capital over the last 10 years, compared with −27 percent for the S&P 500 and −28 percent for the Nasdaq, Mr. Kedrosky said it was more accurate to compare venture to the Russell 2000, an index of small-cap stocks that returned 18 percent over the same period.

To once again generate competitive returns, the industry should slash investment by half, to approach the investment rates of the mid-1990s, when returns were last healthy, he said.
Venture investment swelled during the late 1990s and the dot-com bubble, which “led to a collapse in performance from which the sector has never recovered,” Mr. Kedrosky wrote. Since then, it has been slow to shrink for several reasons, he said. The life of a venture fund is typically a decade and investments are generally illiquid during that time. Venture capitalists collect management fees of a percentage of capital under management, so they are paid more for bigger funds.

He also pointed to “a widespread and incorrect belief that venture capital is a necessary and sufficient condition in driving growth entrepreneurship.” In fact, only about 0.2 percent of the estimated 600,000 new businesses created in the United States each year are financed by venture capital and about 16 percent of the fastest-growing companies are, he found.
Though those arguments will surely make venture capitalists defensive, Mr. Kedrosky is ultimately a fan of the industry and argues that it does societal good by helping many entrepreneurs start companies. To continue to do so, though, “the venture industry must be viable — it must offer its investors competitive returns,” he said. “At present, it is increasingly uncertain whether the U.S. venture industry can and will do that.”

The size of the venture industry is a problem, Mr. Kedrosky wrote, because too much capital causes higher valuations and lower exit multiples.

Another problem he cited was that information technology has matured to the point that new innovations will not be hugely profitable and it costs a fraction of what it used to to start an I.T. company. Still, venture capitalists invest more than half their money in these companies, “because they always have, not because they credibly anticipate improved returns,” he said.

Finally, even if the initial public offering market recovers, venture capitalists will very likely only be able to bring companies with significant revenues and profits to market, but never again young, money-losing companies as they did in the late 1990s when returns shot up, he said.

Smaller is Better in VC, really?

Another interesting article on the changes in the VC industry from the NY Times BITS blog. The people that are quoted here are all truly the elders in our industry - in my nmind, they speak the truth. How does that shake out for startups and related service providers? I think we all better get used to smaller...


http://bits.blogs.nytimes.com/2009/06/05/venture-capitals-elders-say-think-small/?scp=1&sq=venture%20capital%20think%20small&st=cse

June 5, 2009, 7:45 am —
Venture Capital’s Elders Say Think Small
By Claire Cain Miller

Venture capitalists who began investing in the 1960s have seen the industry transform any number of times. Their advice to today’s venture capital firms: think small.

In the good old days, venture funds were $100 million at most, recalled Alan Patricof, founder and general partner of Greycroft Partners, who backed America Online and Apple Computer.

“I personally believe and I think the evidence proves that the venture industry has gotten too big, the funds have gotten too big,” he said. In order to invest their enormous amounts of capital, venture capitalists end up choosing companies that are not sufficiently disciplined or capital-efficient, he said. And because firms have invested so much money, they depend on taking their portfolio companies public to get great enough returns, at a time when I.P.O.s are few and far between.

“Our biggest challenge today for venture capital is to think smaller,” said Mr. Patricof, who recently wrote an essay on NYTimes.com on how venture capital has changed.
In the 1960s, when venture capital was virtually unheard of, most investors were family offices and only tens of millions of dollars were invested in start-ups each year, recalled Franklin “Pitch” Johnson, who backed Amgen and Applied Biosystems. That grew to hundreds of millions of dollars in the 1970s, a few billion in the 1980s and $100 billion in the 1990s, when “we knew it wouldn’t go on,” he said.

Much of the huge influx of money in the 1990s came from pension funds, which saw the returns that endowments and foundations were getting from venture capital firms’ Internet deals and wanted in on the game.

Paul Denning, chief executive of Denning & Co., a private equity consulting and fundraising firm, remembers a time in the 1990s when he encouraged a venture capitalist to visit the big pension funds but the investor refused, saying he did not want their money. At the time, Mr. Denning thought he was misguided. “Maybe he was right,” he says now.

Investors in venture funds cut back after the Internet bubble burst and today venture capitalists invest about $30 billion a year, though that is still too much, Mr. Patricof said.
Not all of the venture capitalists who invested alongside him since the 1960s agree that smaller is better. Richard Kramlich, who invested with Arthur Rock before co-founding New Enterprise Associates in 1978, has one of the biggest funds in the industry, with $8.5 billion in committed capital.

His firm sometimes incubates tiny companies with small amounts of money, as it did with Data Domain, which went public last year. It also invests large amounts of money in later-stage companies that need to grow, as it recently did when it invested $45 million in Workday.
“On one hand, it’s great to experiment, and on the other hand, we have to have the capacity sometimes to do” big investments in companies with a lot of potential, he said.

VC's: a dying breed?

Another scary tidbit from our friends at the WSJ. We're losing not only partners at firms but firms themselves. And in what I consdier pretty large numbers: "The number of venture capital principals dropped more than 15% since 2007, while the number of active venture firms fell 13%."

This doesn't bode well for the startup world. We all hope that a new model will emerge for VC and angel financing, but we have yet to see what that really is.

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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

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...

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Angel Investors’ Opinions Change On Economy, Investing

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

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

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

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

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

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

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

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

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

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

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

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

by Michael Arrington on May 18, 2009

We’re all glad Q1 is behind us.

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

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

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

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

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

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

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

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

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

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

The Harsh Reality on Today's Term Sheets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

However, Harris sometimes appreciates an aggressive term sheet.

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

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

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

Alternative Energy Investments, down the drain?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Copyright © 2009 The Associated Press. All rights reserved.

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

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

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

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

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

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)

Three Rules for Investing - Reid Hoffman

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
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