Friday, December 19, 2008

RIAA, you made my day.... sort of

The RIAA Logo.Image via WikipediaI've blogged several times about the disease in the music industry and criticized RIAA's going after digital pirates as a way to scare off potentially the biggest music fans in the new age of digital music.

If you haven't had a chance to read my thoughts on the music industry, here they are

Cure for RIAA Disease
Thoughts on Music Industry (Part 1)
Thoughts on Music Industry (Part 2)
Thoughts on Music Industry (Part 3)

Today, RIAA decided to abandon their latest strategy, so called massive lawsuits against internet users. As you can see from my vocal criticism against hesitance towards innovations and sticking to the good ol' days, this news really made my day ... sort of. While I wish internet users can be freed from ISPs as well, this is just huge. This really changes everything.

After all, the massive lawsuit strategy wasn't working. Music industry realizes that there should be other solutions to the problems. The major labels began to ramp up the digital business operations to feverishly figure out and capture the right opportunities. And, it's a greatest time to be a music-related startup these days.

One final thought about a strategy that music industry can learn from other mundane industry.... razor blades.

When Gillette introduced (I could be wrong here) Mach 3 Razor, the biggest competition it ran against was itself: another Gillette products dominating the market. Consumers had little incentive to make the switch. To make a long story short, Gillette made the consumers to make the switch by a)taking the old stuff out of the market, b) blanket the distribution channel with Mach 3, c) pumping lots of money (I mean A LOT) into marketing the greatest innovations of Mach 3.

So, what does this have to do with the music industry? I don't know if this would work or not, but just blanket the whole market with legitimate distribution channels. I was once a Napster user. I abandoned the habit of illegal downloads when the opportunity cost of searching and owning new music/movie became too high. It was just easier for me to spend the extra bucks. Yes, supply will increase and price will drop. Music companies will get hit, but this may just be a temporary phenomenon. The whole culture of purchasing behavior needs to be fundamentally changed, and that's why it's so painful to see the industry suffering. If it takes hours and hours to just find a song you like, wouldn't you rather shell out 99 cents? Write me a note if you can't absolutely find 99 cents to be a good citizen. I'll help you out.

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Thursday, December 18, 2008

2009 VC Fundraising Strategy

NVCA recently published a survey (here's a copy for you) predicting the venture capital investment climate for the upcoming year 2009. As already observed in the market, the survey result should really be no surprise but just another nail in the head. Overall, not the best news for startups. The good news is that there will still be venture investments for those who are best positioned and capture the right opportunities.

Situtations in both sides of the table.

  • shift focus on existing portfolio companies by allocating more follow-on reserve; thus, less money for new companies
  • reduce risks in early/seed stage capital allocation
  • set a higher bar in funneling investment opportunities
  • advertisement-based business model is no longer a viable option for most companies in internet/mobile
  • holds more negoting leverage on valuation. buy cheap and sell high is more attractive
  • many LPs deviate from allocating capital into VC/PE asset classes; thus, fundraising is more difficult
  • not betting on big exit opportunities in 2009
  • overvalued investments from the last two years need to be readjusted (or do something about it)
  • new deal pipeline will decrease
Entrepreneur (seeking early/seed funding)
  • we know the grim economic conditions and are working on pennies
  • ask for smaller capital to be conservative and prove that business is sustainable
  • will go out and raise the big round when the market improves towards end of 2009
  • friends and families seem to be better option than institutional investors
  • advertisement is still a viable option
  • cost of runnning a business is getting cheaper, and we'll survive
Where are the connects/disconnects here? Not much but there are some. Here are some tips for startups to become more attractive to VCs
  • PPT with ideas to change the world is for your blogs. You need product, user, customers. In a down economy, investors are more receptive to revenue generation than a grandiose vision
  • Hit every milestone. Exceed your own expectation. A company that got funded in 2007 ain't the same animal you are dealing with now.
  • Friends and families (and fools) are good options, and you should consider raising incremental investments from them. The real caveat... if you are dealing with the "wrong" type of friends and families, you end up having a full-time fundraising job.
  • Start building rapport with (highly likely) VC investor now. Wow them with the progress you are making. They might have more time "networking" with entrepreneurs now that the new deal is slowing down.
  • Innovate on business model.
  • Remember debt is another option.
This is, by no means, a complete list of to-do's. Seriously, it's no brainer.. but requries very hard work. Enjoy the holidays, and get back to work in full force for the great 2009.
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Thursday, December 11, 2008

Do capital efficient businesses exist anymore?

We keep hearing from both investors and entrepreneurs that building a capital efficient business is the key to survival in this economy. We heard that plenty of times, but do capital efficient businesses exist? I would submit that capital efficiency exists only in relative terms, if exists at all.

I put some number around what I call "capital efficiency index" that measures the value created by a firm divided by the total capital going into the business. As used in VC methods used in some academic literature, the time horizon is chopped at the time of venture exit.

So what exactly is a capital efficient business? There are many dimensions to measuring it, including,
  • low burn rate, better resource utilization
  • high revenue with small Capex
  • self-sustainable business model
  • repeatable source of revenue with same platform
  • etc.
In summary, high value is created with as little capital as possible. Simple enough.

There are reasons to believe that capital efficiency is easier now and should be done. Cost of hardware keeps going down the curve, some technologies get commoditized, SaaS makes it cheaper and easier to consume traditionally expensive technology products, etc.

After putting some numbers around, capital efficient businesses don't seem to exist at all. At least, macroeconomic factors and craze created by the market may be the only way to make a capital efficient business.

Look at the following chart. Listed are some of the most successful ventures in the "old" and "new" age. To be fair to the value associated with the companies, let's stick with consumer services companies.

What the chart is essentially saying is that much more capital is required to create the same "value multiple" in the new age of startups in the internet space. A single digit value multiple is everywhere in the new age group. The old age group took much less capital and created much more value. Yes, they are at different phase of life, but the absolute size of investments went up significantly even when the companies are much younger.

It seems that the potential size of successful startup is proportional to the $$ going into the company. Let me know if anyone has a business plan to match eBay's value multiple, I'd rather put my money into triple digit value multiple company than Facebook's meager 31.

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Wednesday, December 10, 2008

How to pitch angels?

While there is plenty of literature (including my buddies' blog Startable), how to pitch angel investor still remains as a mystery to many entrepreneurs seeking..... "angel round".

When an entrepreneur goes to conference and unknowingly runs into an angel investor (because angels don't really have a name badge), the conversation would go like this.

E: Entrepreneur
A: Angel

E: Hello.
A: Hello. What do you do?
E: Well, I'm working on a neat concept in the online video space to help companies monetize on contents.
A: That's a hard problem to solve. How do you do that?
E: Well, my partners and I developed this software to (blah blah)
A: Wow, that's amazing. By the way, I gotta meet someone in 2 minutes, but if we can meet some other time to discuss more in detail, here's my card. Call me.
E: Sure.

This is overly exaggerated conversation. I would assume that the next meeting will be about how the technology works, how many customers they have, etc.... but not much about team building, business model, exit strategy, capital plan, etc.

Why am I saying this? Pitching an angel is just that different. It's the art of pitching an idea vs. pitching a company. Enlighten with how brilliant and innovative the idea while knowing all the VC diligence stuff in back of your mind. The idea behind a small team of founders is what angels really want to understand and possibly add value by bringing some advice. An ideal angel investing should be like paying an expensive ticket to take a close look at the company and potentially work with the founders to materialize the company's mission. If entreprenerus follow the strategy of pitching a company.... say, "I have a company disrupting music industry, and our target market size is $500M, and we hope to dominate the market and return 5x of your investment in 5 years." Sounds like an attractive opportunity, but overly capitalistic and unrealistic.

Keep in mind that all that business stuff is required at some point, and all entrepreneurs should be able to talk about it later... just not at the angel investing phase.
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Who exactly are angel investors?

Let's get some nomenclature out of the way. As I mentioned in my other posts, there are different capital gaps that investors would like to fill. For example,

(this is a very rough estimate)
  • Later-stage VC: usually participates in Series B/C/D after having seen the market traction and significant customer ramp-up. They typically invest >$10M to support the growth.
  • Early-stage VC: usually particiapates in Series A (and sometimes seed round on rare cases) to prove out the business model and test out the customer traction. Many entrepreneurs approach them with several slides thinking that they will take the risk of productizing a concept and end up hearing, "you are too early for early-stage investors like us".
  • Angel groups: So who comes earlier than early-stage investors? Angel groups and seed investors. This group usually participates in $250k-$3M rounds. Because of the overlap between early-stage VCs, the criteria for investment would be similar to early-stage VCs. However, the investment size skews towards the lower end and the team is not complete at this point.
  • Angel/Seed investors: It's important to realize that different between angel groups and angel investors. Angel group consists of a group of certified angel investors who altogether take a look at companies while the decision gets made at the individual level. An angel investor, on the other hand, typically works alone and probably don't attend monthly screening meetings organized by the angel group. S/he may or may not ask for participation in management. The investment size would be smaller (<$100k/investor). Many of them are successful entrepreneurs (or climbed up the corporate ladder successfully). While their business card may not say that they are part of an angel group, they are genuinely interested in seeing innovations. Given the right idea and personality "click" with entrepreneurs, they want to invest in startups.
So, how do you pitch angels? Stay tuned.....

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Tuesday, December 9, 2008

Phases of Recession

With a sleuth of layoffs coming from all angles, why don't we take a step back and see where we are in the phases of recession. At macroscopic level, the cycle looks like a tidal wave, and the recession is a long process of declining economy.

phases of recession

I'm speaking strictly from the perspectives of startup economy, regardless of geography.

Phase I (tipping point): The implosion of subprime crisis crept into Wall Street during the summer of 2007. We thought the economy was booming as consumer spending increases, and even the no-job-no-money-joe next door was buying a luxurious condo. Good times. VCs were seeing a very good deal flow and internet entrepreneurs were just going upbeat about entering the online advertising market where billions of more dollars will be spent. Times are good, and we don't know if Fannie and Freddie will go belly up... yet.

Phase II (not my problem): Subprime crisis had already happened, and we can't buy our dream condo. So what? We know that we never deserved all that luxury by leveraging the balance sheet through the roof? Time to get realistic here, but everything is going to be okay. Unlike the dot com collapse earlier in this decade, it's not my problem. VCs are still out raising the historically largest fund, and entrepreneurs still go out raising enough capital to get through the next milestone.

Phase III (OMG, the financial sector is in deep trouble. I'm still okay though): Late summer of 2008, Merrill and Lehman went belly up, and the federal government intervenes with a huge pot of taxpayers' money. It just needed to be done to save us from the worst situation, because times are REALLY getting touch. We in the startup economy finally realize that the problem is big but still don't see the huge incentives to be hungry. People are having problems, but not in our office. We are still hitting all that milestones. Maybe we'll lose WaMu as a customer, but still not my problem.

Phase IV (TIME OF UNCERTAINTY): This is the time we are in. Sequoia Capital "leaked" the good ol' graveyard deck. Sequoia, probably the most respected VC firm in the entire history of venture capital, starts to have the ripple effect. Now, it looks like we are in some real deep trouble. It doesn't matter if our sales are still on target or have had raised $100M in the past month. Sequoia told us to tighten our budget, hit profitability, and survive at the end of the tunnel, and I'll do exactly that. But I don't know how. Maybe Obama will solve all our problems when he takes the office with a big economic stimulus plan. Until then, I'll sit and wait. I have enough cash to take us through another two months.

I also noticed a lot of uncertainties while attending conferences recently. Many VCs are saying that they are closing deals now, and there will be more. There will be very attractive investment opportunities because they will get lower valuation and better returns. Don't we all know that the uncertain outcome of their investments makes them worried as well? Do they really feel better about those lower valuations? What about entrepreneurs? Startups these days know that the power shifted to people with money. But, are they reallly willing to get squeezed in valuation? How many times we've heard that running a startup is cheaper than ever while successful startups took hundres of millions of dollars? Maybe, bootstrap is a way to go. I don't know. What I know is that this time of uncertainty causes the startup economy to hide in the cave until we see some sun light.

Phase V (hiatus of innovation): Times are getting worse. By the way, this is the most important phase that I want to double emphasize in this post. Customers stop buying and ask for more for less. I'm runnning out money. Nobody's telling me that I'm in trouble anymore, because I feel the pain in person. I need to survive.

Let's take a step back.... to the good ol' days when we were in school. When was the best time to be doing the homework with all your attention and capabilities concentrated on one darn deliverable? Perhaps... at the last minute? Yes, you are "hungry" and feel the urgency. Whether it was voluntrary or not, you were really doing something amazing with all those natural born skills. Then, you turn in your homework and take a deep breath. You don't remember how you did it... but you did it.

This is exactly what will happen to most startups. Economy, as we all know it, is cyclical. Times may get tough. But keep in mind that we need to be mentally and physically ready to take on these challenges. We'll get more innovative and creative when it comes to survival. If we can do this beforehand (say... now), it's even better.

Why don't we all "fake" to be in Phase V and innovate like there's no tomorrow?
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Monday, December 8, 2008

Thoughts on Music Industry (Part 3) - Stepping aside from spotlight

As I was listening to Eran Egozy at the MIT VC Conference last week, I was struck with a theme of music as a complementary services as opposed to the sole purpose of enjoyment.

I'm not trying to argue that listening to music by itself gives me a tremendous pleasure. This is exactly the reason that music has been around for centuries (perhaps since the beginning of human beings if you count "thumps" to be music). Music labes, artists, and songwriters are used to standing in the middle of spotlights. I've gotten to know several celebrities in my personal life, and all of them tell me that it just feels to good to be in the spotlight with all that attention.

With the proliferation of digital piracy and free music widely available, I'm going to try to argue why the traditional music industry should also consider stepping aside from the music industry. In summary, music is a mere means to improving other products and services in this innovation economy.

Let's look at the gaming industry in this context. Rock Band is undoubtedly one of the wildest success stories. People (not just gamers) just love holding that plastic thingy and rock 'n roll to the hundreds of titles available. Now, who's getting all the spotlight and who's making money? The creator of Rock Band (Harmonix Music Systems) is getting all the glory. People really don't really care whether a certain song is available or not as long as they can just bang their heads with the plastic guitar (and drum). But then.. who's making money? Some songwriters and labels that licensed those songs to Harmonix probably made some big bucks (though not huge money).

This is somewhat analogous the love and hate relationship between VC and entrepreneurs. Often, entrepreneurs are in the center stage getting all the spotlight while VCs take credits for putting their money into the right people's pocket. That's precisely the reason why VCs "back" companies, not "brings life" to them. At the end of day, both of them are successful.

Back to the music industry, the stakeholders need to understand that nobody has a panacea for all the problems. Instead, we need to understand how one product/service is complementary to other stuff like movies, devices, websites, etc. It's somewhat hard to digest the fact that you are all of a sudden bystander not central to the success of others while you are a "must have" complementary product/service.

As we know in today's world, a traditional business model of selling music doesn't work. However, music is a must-have service to numerous products. With this paradigm shift, a change of attitude needs to change.

Step aside from the spotlight.... and enjoy riding success with others.
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New Name, Same Focus

Having started out as a mere "public notepad" talking about startups, technology innovations, venture capital, and difficult problems we all face in our lives, I finally decided that it was the right time to give this blog a more appropriate name.

I felt that this is also the right timing to start thinking about the current economy a little bit differently. With the traditional industrial economy clearly in declining mode, something needs to be done to reinvent ourselves. It's the startup economy that's going to take us through the tough times and also continue to innovate during the good times.

With everyone's wallet getting tighter these days, I also decided to give myself an extremely fulfilling holiday present,

Again, new name, but same focus and rambling on the startup economy.
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Thursday, December 4, 2008

RIM should be worried


Worldwide: Preliminary
Smartphone Sales to End Users byVendor, 3Q08 (Thousands of Units)




3Q08 Market Share (%)



3Q07 Market Share (%)

3Q08- 3Q07 Growth (%)







Research In Motion




































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Death Spiral as Dictated by Microeconomics 101

If anybody has any doubts about the auto industry is in deep trouble, what planet are you from?

Holistically, we all know that the auto makers have been in trouble for a long, long time. I went to the school named after Alfred P. Sloan, a long-time chairman and president of General Motors, and I should have learned something about what went wrong.

I'm just going to scratch the surface and let you all dig deeper into what thousands of things went wrong.

So, what went wrong with the whole industry? PRICE COMPETITION. To throw some b-school lingos here, firms compete by leveraging a variety of weapons like marketing, supply and demand, sales strategy, cost advantage, innovation, etc. If anyone has sat through Lecture 3-4 of your microeconomics class, you've probably learned that price competition is the evil of all competitive strategy. This is because price competition drives the profit down to zero until one company is left with a huge market share with no money left in the pocket.

Back to the auto industry turmoil....

There are empirical evidence that the auto industry used to be profitable until some brilliant strategists came up with innovative pricing strategy called "Everyone gets an employee discount". The death spiral goes like this. First, GM has this promotion nationwide to steal would-be other companies' customers. In this segment, the customers are pretty price-sensitive and would select the lowest price available. Then, another brilliant pricing strategists at Ford and Chrysler have no option other than matching GM's pricing. The prices across the models keep going down the curve until nobody makes money by selling cars. Yes. This is what happened.

Fastforward to today, CNN's headline talks about car dealers getting creative. Man, these people just don't learn anything from experience. The death spiral is soon to turn into death bobsled ride. I wonder if the Congress realizes this.
So what else could be done here? Everything, except price competition. Coke and Pepsi are profitable because they compete in promotion/marketing/brand. Dell made money because of the low cost structure. Google made money (among many other reasons) because of its willingness to take risks to innovate. Apple made money because..umm.... well... Steve Jobs. Kleiner Perkins and Sequoia Capital have the market power because of the network externalities to be able to take a first look at quality deals. I mean anything but price competition is okay.

(By the way, I'm listening to the auto hearing right now and just heard that the auto makers want to make more efficient and longer-lasting cars. Wrong. Make efficient, yet short-lasting cars. There ain't no recurring revenue until the customer comes back to drop big bucks for another cool car.)

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Wednesday, December 3, 2008

Thoughts on Music Industry (Part 2)

This over 100-year-old industry is running into major challenges and bogged down by the good ol' days of profitability. Here are the fundamental shifts that already occurred.

  1. Physics has changed: physical media --> digital media (no, I mean binary things like mp3, streaming, etc.)
  2. Contol/Power has shifted: recorded studios --> artists and fans
  3. Price came down the curve quickly.

The fat profits to recording companies are at best marginalized by the adoption of digital formats and piracy. When all things seem gloom and doomed, there are still positive things about the whole paradigm shifts.
  • 53M iPods sold in 2007
  • 36% y/y growth in P2P file sharing
  • 25% y/y growth in audio streaming
  • 40% y/y increase in worldwide digital music sales
  • 8% y/y increase in concert sales
So... what's the big deal with the bunch of numbers? People LOVE music and they are willing to pay for consumption.

I don't know what the answer is for this industry. Just like in any other industries, innovations must be experimented and questioned. What I can tell from my small world is that something dramatic needs to happen (for better or worse) and the whole innovations will cost numerous deaths and a few trophies for those who have the "golden" key. And most importantly, the industry as a whole needs to change the mindset of looking at the opportunities, because the good ol' days are indeed over.
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Thoughts on Music Industry (Part 1)

Have you ever thought what a brilliant idea it is to be a patent holding company? You claim to be sitting on a pile of innovations by acquiring a bunch of dormant patents until you encounter an "a ha" moment by suing major innvators/companies, hoping for an awesome ROI? Just to revisit some old stories, lawsuits against Apple, Nokia, Palm, and RIM ring a bell?

Do you see stunning similarities with the recorded music industry, as I do? That's right. Both of them sit on a pile of innovations (and greatest creative thinkers) and decide to monetize by exploiting the power of obscure legal languages.

Music is still by far the most popular entertainment avenue. People just love listening to music and are amazed by the creativity coming out of the artists' minds. Yet, the music industry needs to deal with piracy, and the creatives are entitled to getting (monetary) credits.

Hear me out: When a monetization strategy is by suing loyal consumer of your product, something's gone terribly wrong.

RIAA sues MIT student and students dropping out of school to pay legal fees. Though somewhat outdated story, it still gives me depression. The music industry needs to get along with consumers and focus on solving the very difficult monetization problem. It needs to accept the whole paradigm shifts towards the new frontier.

Next part is about the whole paradigm shifts in the music industry.
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Google Crunch Course

All about Google
View SlideShare presentation or Upload your own. (tags: google technology)
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Monday, November 24, 2008

Bailout Trauma

All of a sudden, America turned into a bailout nation. It's good to hear that the government is taking the steps to save the whole economic turmoil stemming from the financial sectors. I just can't stop thinking that the whole bailout situation is scary.

Consider these two familiar situations.

Situation A: You are a college student and parents gave you $200 and said, "kid, be frugal. Spend the money where you need to. If you run into financial crisis, let us know. You need to be studying and get good grades, not thinking about the financial situation".

Situation B: You are a college student and parents don't give you $200 and said, "kid, be frugal. Spend the money where you need to. If you run into financial crisis, it's your fault. Earn the money right away while studying and getting good grades in school".

Maybe these cases ring a bell. The government is treating the troubled companies with attitude similar to Situation A, not exactly, but quite similar. For the interest of constructive feedback to startups of the world, let's focus on Situation B.

Why do startups go through tremendous growth with limited resources at hand? It's probably because most of the decisions at hand have to do with survival without very few backdrop plans. It's a question of life or death.

Last time we were in great recessionary period, so called The Great Depression, the FDR administration treated the free market economy similar to what the new U.S. government is trying to do. Whether FDR's lifeline injection was effective or not, I'll leave it up to the historians to mull over. What's clear is that it wasn't the governmental actions that eventually saved the U.S. economy, it was WW II.

Fastforward to today... I'm not saying we should enter wars. I'm pointing to the whole attitudes of business managers to treat the whole situation as life or death situation. Focuse on cash reserves, reprioritize strategic decisions on a daily basis, win customers, depend on lean operation, consider there's no government to save you butt when things go sour, etc. The most notable example that makes me scratch my head till my head gets bald is Tesla Motors. Hey, it's a so-called venture-backed startup asking for a piece of auto bailout. C'mon. It reallly should've been hungrier than the hungriest startup if they ever remotely realized that bailout was never an option for them.

Companies (big and small), please be hungry. Operate like you would do in a free market. Please!
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Thursday, November 13, 2008

Broken VC Model?

TheFunded - Canarie
View SlideShare presentation or Upload your own. (tags: investing vc)

Adeo Ressi, founder of The Funded, presenting in front of a bunch of would-be venture capitalists about the broken VC model....

The real scary part is that the value created by VC falls below the money raised. (TechCrunch link below) We know this country is used to running budget deficit all the time, but c'mon... this is insane. The net negative economic value created by the venture capital industry just doesn't make sense. Do LPs even realize they'd be better off re-allocating their assets to ... umm.... charity?

From entrepreneur's point of view, what does this mean then? If venture capital industry shakeout indeed happens, and Kleiner Perkins, Sequoia, Accel, and Benchmark command "quadpoly" power over startups, then what? Do we turn to commercial banks for loans and operate highly leveraged startups? Then, another credit crunch. Then, another bank goes belly up. Then, then, then........ we'll have those VCs invest and run all startups. Aren't they supposed to be ex-serial entrepreneurs with successful track record of running numerous startups anyways?

Seriously, this is problematic. We need to find a solution to make this work out. More than 40% of the U.S. output is generated by the small businesses. Startups fuel the economy and big companies keep the fire going. I agree with many of Adeo's points in his slides. What he doesn't realize is that the VC model MUST work in this economy. Stop complaining. We have to fix the model ... like.... right now.

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Monday, November 10, 2008

(REPRINT) VCs quickly turn off tap


10 November, 2008

VCs quickly turn off tap

The number of deals slows dramatically in October

Whoa, Nelly! The Wall Street financial crisis has caused venture capitalists to pull back sharply on their investment reins.

In October, U.S.-based venture firms did fewer investments than in any other month in nearly five years, according to preliminary data gathered by Thomson Reuters (publisher of PE Week).

Official data for the month of October won’t be released until after the end of the fourth quarter, when Thomson Reuters has collected quarterly surveys from venture firms.

The preliminary numbers indicate that VCs are hunkering down more quickly than they did after the dot-com crash. The data show that U.S.-based venture firms invested in just 250 companies last month, down from 565 companies in September and 518 companies in October 2007. You have to go all the way back to January 2004 (when they invested in 232 companies) to find a lower number. The only other October with fewer deals was in 1993.

“I’d venture to guess that the Q4 slowdown is going to be acute,” says Venky Ganesan, a managing director at Globespan Capital Partners, an early stage tech investor based in Palo Alto, Calif. “You can’t have the destruction of 40% of investor capital, or $10 trillion, and not have an effect on the economy.”

The amount of capital that VCs are investing also plummeted in October, when U.S.-based firms put $2.5 billion to work, down from $3.8 billion in September and $3.2 billion in October 2007.

The October 2008 total is the smallest amount that U.S. VCs have invested since February 2006, when they invested about $2.4 billion. Looking only at October, the last time the monthly total was lower was in October 2004, when about $2.4 billion was invested.

Maybe more telling is how few firms are actually doing deals. Just 240 U.S.-based venture firms made investments in October. That’s the lowest number since November 1997, when 239 firms made investments.

The anemic numbers are similar to those of 2002, when VCs pulled back following the dot-com crash. For example, U.S. firms invested $1.6 billion in 278 startups in October 2002.

Two of three VCs contacted by PE Week said they would be surprised if the venture business had pulled back as quickly as the data indicate.

“I wouldn’t have expected [the Wall Street financial crisis] to have had such a quick effect [on the VC business],” says Sanjay Subhedar, a general partner at Storm Ventures, an early stage investor based in Menlo Park, Calif. “I expected things to contract significantly in terms of investments in Q4 and certainly in Q1 and Q2 of next year.”

It would be unusual for deal numbers to drop so quickly because it takes time for VCs to put deals together, Subhedar notes. If the numbers did drop that quickly, it would suggest that a number of deals that were supposed to get done in October were put on hold.

Similarly, Bart Schachter, a managing director at Blueprint Ventures, a San Francisco-based firm that focuses on IP spinouts, says he wouldn’t expect total deal volume to decline so quickly. Still, he says: “I wouldn’t be surprised if outside-led financings have completely dried up.”

In other words, if a startup is trying to raise a Series B round, it is very unlikely in the current market for a new investor to come in and lead the round, Schachter says. Instead, the previous investors are doing the round without any outside help.

“Everyone has their arms tightly wrapped around their existing portfolio,” he says.

For his part, Ganesan says the venture market has already slowed down. “Globespan will continue to look at a lot of stuff, but the bar has gone really high and there’s no urgency of doing investments,” he says. “If we end up doing any deals, it will be one or two in Q4.”

A recent survey of 33 Bay Area venture capitalists showed that their “confidence” had hit its lowest point since the survey began in the first quarter of 2004. The Silicon Valley Venture Capitalist Confidence Index fell to 2.89 points on a 5-point scale, marking its sixth consecutive quarterly decline.

Alexander Haislip contributed to this story.

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Saturday, November 8, 2008

Honda unveils wearable robotic walker

As a former biomedical engineer by training, I just don't see how anyone will buy into causing detrimental damages to cr%$#h in exchange for the ability to walk around. Who's in?


TOKYO, Japan (AP) -- Imagine a bicycle seat connected by mechanical frames to a pair of shoes for an idea of how the new wearable assisted-walking gadget from Honda works.

This wearable assisted-walking gadget from Honda is designed to reduce stress on the knees.

This wearable assisted-walking gadget from Honda is designed to reduce stress on the knees.

The experimental device, unveiled Friday, is designed to support bodyweight, reduce stress on the knees and help people get up steps and stay in crouching positions.

Honda envisions the device being used by workers at auto or other factories. It showed a video of Honda employees wearing the device and bending to peer underneath vehicles on an assembly line.

Engineer Jun Ashihara also said the machine is useful for people standing in long lines and for people who run around to make deliveries.

"This should be as easy to use as a bicycle," Ashihara said at Honda's Tokyo headquarters. "It reduces stress, and you should feel less tired."

To wear it, you put the seat between your legs, put on the shoes and push the on button. Then just start walking around.

In a test-run for media, this reporter found it does take some getting used to. But I could sense how it supported my moves, pushing up on my bottom when I squatted and pushing at my soles to help lift my legs when I walked.

The system has a computer, motor, gears, battery and sensors embedded in it so it responds to a person's movements, according to Honda Motor Co.

Pricing and commercial product plans are still undecided. Japan's No. 2 automaker will begin testing a prototype with its assembly line workers later this month for feedback.

The need for such mechanical help is expected to grow in Japan, which has one of the most rapidly aging societies in the world.

Other companies are also eyeing the potentially lucrative market of helping the weak and old get around. Japan is among the world's leading nations in robotics technology, not only for industrial use but also for entertainment and companionship.

Earlier this year, Japanese rival Toyota Motor Corp. showed a Segway-like ride it said was meant for old people.

Japanese robot company Cyberdyne has begun renting out in Japan a belted device called HAL, for "hybrid assistive limb," that reads brain signals to help people move about with mechanical leg braces that strap to the legs.

Honda has shown a similar but simpler belted device. It has motors on the left and right, which hook up to frames that strap at the thighs, helping the walker maintain a proper stride.

That device, being tested at one Japanese facility, helps rehabilitation programs for the disabled, encouraging them to take steps, said Honda official Kiyoshi Aikawa.

Honda has been carrying out research into mobility for more than a decade, introducing the Asimo humanoid in 2000.

Tuesday, November 4, 2008

Thursday, October 23, 2008

VC Research - Choosing the Right Venture Investor (Part 2)

As promised, I'm publishing the strategies of VC firms today.  Please note that I'm not endorsing or even remotely trying to explain the full strategies these companies are going after.  I'm simply doing a quick exercise that you (entrepreneurs) can do at your desk.  I also live in a small world of Boston community.  For now, I am going to limit my examples to Boston-based VCs, and you can do the same with the Bay Area folks, or any other parts of the world.  Moving on......

with my past companies,

  1. Ascent Venture Partners:
    Investment Criteria:
    IndustryTargeted high-growth IT
    GeographyEastern United States
    Capital needs$2M to $8M initial round

  2. CommonAngelsWe invest in high-potential early-stage companies in new ares of information technology such as software, telephony, semiconductors, RFID, and medical devices not requiring clinical trials. We typically invest $500K to $1M as part of rounds up to $5M. Companies should also fit with our members' professional skills and interests.
  3. Matrix Partners...... Our investment strategy is to invest in companies that we perceive to be on the cutting edge of creating major new markets in software, communications equipment, semiconductors, storage, Internet and wireless.... Our bi-coastal presence also gives us the ability to extend our network to capture talent throughout the country.....We approach each investment with a long-term commitment, since our goal is to build successful, independent companies - not acquisition targets. Matrix invests $10+ million over multiple rounds, with an initial investment ranging from seed amounts of $100,000-$300,000 to early-stage rounds of up to $10 million.
  4. Highland Capital Partners.... many of Highland's limited partners are in a position to provide important business relationships to our portfolio companies. They are seasoned, long-term investors and this experience allows them to play a constructive role in building and maintaining value in your company - even after an initial public offering.... current fund: Highland Capital Partners VII(2006): $808 million and a separate Consumer Fund.
  5. Commonwealth Capital Ventures ..... generally invests $2-$6 million initially, with up to $15 million or more per company over multiple rounds. We have made small seed investments of less than $1 million as well as later stage investments of more than $12 million. We work closely with our entrepreneurs to determine the optimal business and financial strategy, selecting what is best for sustainable growth. Our investment activity is focused on the innovation centers of the Northeast United States. We are strong believers in the value of sitting on the same side of the table with our management teams when problems or opportunities require action.
  6. Spark Capital.... Our investment focus is on the conflux of the media, entertainment and technology industries. Over the last decade, telecom, wireless, and cable operators have spent enormous amounts of capital building up their broadband infrastructure. The next decade will be spent monetizing this infrastructure. We will exploit this opportunity by investing in companies that we believe will benefit from the rapid transformation of media and content driven by innovative technologies and evolving business models.... We are former executives of major entertainment, media, and technology companies such as Sony, Time Warner, Blockbuster, Lion's Gate, Apple, and Microsoft. While we consider ourselves stage-agnostic, no idea is too green for us. 
  7. DACE Ventures....Dace Ventures’ team seeks to invest with entrepreneurs who share our focus on digital media, consumer marketing and mobile services.  We have aligned our fund strategy and team strengths to enable Dace to become the ideal investor for early-stage companies with capital-efficient business models. We have no minimum funding size, though we generally invest from $250,000 to $3 million in an initial financing, with substantial reserves for follow-on’s. We seek to work with passionate entrepreneurs who can build great teams to take best advantage of transformational forces in the Next Wave.
  8. Battery Ventures....
These are just some of the more obvious VC strategies from their websites.  In many instances, this is how they pitched their own investors to go after particular strategies, thus spending their money accordingly.  Others may not be so obvious, but you can always "ask around".

Key takeaways : understand your investor before talking to them.  Some of them might sound interested in something outside their comfort zone though.

In summary, here are some parameters to differentiate venture investors.
  • fund size
  • stage focus
  • sector focus
  • geography
  • board participation
  • LP relationship
  • active vs. passive deal sourcing (i.e. cold calling vs. referral dependent)
  • etc.
Just because nothing's really about voracious capitalism without making a joke.... if you are trying to raise anywhere between ~$250 to $1.5M, welcome to the world of capital gap.  Remember the chasm theory?  Yes, you fall right into that gap. 

Wednesday, October 22, 2008

VC Research - Choosing the Right Venture Investor (Part 1)

When entrepreneurs bootstrap the business to significant milestone, they start to think about raising external capital, often from VC firms.  I've recently spoken to a number of entrepreneurs seeking anywhere from 200k to millions of dollars.  I often start out the meeting by asking, "What can I do for you?".  Almost always, the very first thing they spit out of their mouth is, "I need $xxx to support my crazy growth.  I need capital and advice from the VCs to turn this company into a big time success."  Sounds familiar?

Without going too deep into re-re-re-talking about the venture money management business, let's get this straight.  When VCs raise a new fund, the partners spend a good chunk of time talking about the investment strategy.  Yes, VCs have their own strategy of investing their own money.  One of the reasons that a majority of the business plans coming thorugh the pipeline shoot directly to trash via a "delete button" is that they just don't have the right fit with their fund's strategy.  

So, what's the problem here?  I just can't say how many times entrepreneurs approach any VCs without having done extensive research and figuring out the "fit".  It just sounds too mundane to even bother talking about it, but it's just so crucial.  Here are the REAL-LIFE discussions with entrepreneurs.  For the sake of protecting their silliness, I'm not going to use any real names.

  1. An entrepreneur with a great idea and significant early-stage traction in the consumer internet sector wants to raise a VC round.  He talked to xxxx (growth equity investor) and one angel investor.  He thinks both of them are very interested in his business and was asked to meet more people.  What is the pitfall here?  S/he just wasted time and emotional excitement.  Since when growth equity and one angel investor are positioned to fund and advise an early-stage company?
  2. A consumer mobile application company approached a very well-respected early-stage IT company.  He thought the investor's prestige and knowledge will take his business to the next level.  Yeah... enterprise software sales isn't really same as advertising-based business.
  3. An entrepreneur's goal is to "flip" the business for $10-20m within the next 4-5 years.  He approached one of the top-tier VC firm.  The VC's partner is not interested, because the market size is too small.  The entrepreneur is pissed to get this typical rejection.  What he didn't realize is that the VC firm's strategy is to "invest in self-sustainable businesses requiring a long-term commitment".  In other words, the VC's not interested from the beginning.
Seriously, I can go on and on about approaching the wrong guys.  Would you ever pitch a mobile social networking idea to a biotech venture investor?  If this sounds too easy, spend more time really understanding what the investors do.  Same thing applies to the venture investors, but they much less often make these mistakes.

For the sake of my readers, I will aggregate some of the VC's strategies, and you will see the stunning differences in what type of capital gap the VCs are trying to fill in.

Tuesday, October 21, 2008

Announcing a new "me"

I've always wanted to have my own unique avatar but was never satisfied with the ones available. My wife has some amazing artistic skills, so I just asked her to make me an avatar. She knows me the best, and I knew that she was going to make me as good-looking as possible... so here it goes.


Anybody wants an avatar, let me know. I'll hook you up with the best in town. :)

Monday, October 20, 2008

Adjusting to the new economy - Hiring and Firing

The whole financial turmoil stemming from Wall Street is starting to trickle all the way to Silicon Valley, and it's no secret that startups react to the "new" economy. I might as well say a few things about some of the overreactions of several companies - layoffs.

For large companies like eBay, MySpace, XM Sirius, etc., hiring process became just so complicated to the point where handpicking the "A" team is a real challenge, if not possible. I get that, and a bad economy is a legitimate and good excuse to lay off underperformers. Even in a good economy, the "bottom 10% rule" should always apply. It's just that the market views the layoffs in bad economy as a bad sign, although it may not be necessarily true.

Now... the startup economy's behavior. How many times have we heard in venture community picking the very brightest and dedicated people should always be the top priority? Have we not learned the disastrous consequence of "growing too fast" during the dot com days? The rise of venture financing after the market correction period of 2000-2003 created the invisible (and imperceivable) bubble in the tech industry. The rising availability of capital at hand and appetite for growing too fast without having a fundamental business model slowly crept into the venture community. The consequence - layoffs.

Startups go after different HR strategies. Different school of thoughts....
(1) Let's find the smartest people, and we'll figure out what to do with them! The philosophy is to vacuum smart folks with the belief that they can perform any jobs within the company.
(2) Let's hoard cash and put anyone through a grueling hiring process to ensure that the person can perform the job effectively. Basically, carefully assess the resource needs and be very very picky in choosing the right person to do the job. This is usually very difficult for startups since the resource needs cannot accurately be forecasted and the time to fill the position is not as easy as big, successful firms. This strategy also leads to hoarding cash until that cash MUST be spent for MUST-HAVE reasons. Nice.. but very difficult strategy.
(3) Let's grow as fast as possible. Yes, most of the venture-backed startups should follow this strategy.. with caveat. Growing too fast often leads to overstaffing, and the firm becomes a "B" team magnet. When the bad time hits, the company overreacts to the slightest changes to the plan.

It just seems that some startups didn't learn the lesson from the 90s and followed the (3) strategy. They should've realized that prudent HR strategy should ALWAYS have been in place to expect all unexpected. Some companies even came up with lame reason that the economy was an excuse to lay off underperformers. What they really should've done during the good times was to realize that the economy is cyclical (as always) and layoff should be the very very last resort to cut costs. What they are saying is essentially that they hired unnecessary people during the good times and wasted cash.

After all, nobody knew how the economy was going to turn out. What the startup economy should realize.. again ... is that HR strategy deserves more attention. If we haven't learned anything from dot com era of 1990s and credit crisis of 2008, we really should be doing something else.

Wednesday, October 15, 2008

VC's Voracious Capitalism

My last post was about the voraraciously capitalistic entrepreneur.  Just to be agnostic to both sides of the table, I might as well talk about our dear voracious capitalists at Sequoia Capital.  I'm not trying to mock them or anything.  Trust me.  I have such tremendous respect for the folks at Sequoia for finding and growing some of the best companies in the world.  Moving on....

Q3 this year was just an ominous time for the VCs in the fundraising cycle.  Subprime, banking system meltdown, LP backing out of capital calls, Harvard trying to sell PE asset to secondary buyers, etc.  All these hit the VC fundraising really really hard..... except for Sequoia.  Valleywag (yes, yes, I waste some time here) reports that Sequoia raised almost 11% of the total $8.1b raised by VCs in Q3.  That's north of $1b... probably too excessive for a traditional early-stage venture firms.  The new fund will be used to make new investments in their new focus area.  This is problematic.

Imagine the situation here.  You used to be very handsome and hang out with another very good-looking friend.  One day, a very very formidable car accident hit you.  You are crippled and psychologically devasted.  You also fear what will happen in the future.  Then, your friend says... "you are ugly.  I'm moving on with new friends".  Man, this will piss the heck out of me.

Back to our buddies on Sand Hill Road.... The flashy "R.I.P. Good Times" scared off the startup community.  CEOs are told to cut costs, downsize workforce, survive, etc.  If I may summarize the whole situation, what they are saying is... "you are ugly, I don't want to sink more money, and I need sexy friends who can generate returns to my portfolio".  Yes, they are just doing their job.....

But... whatever happened to "The Entrepreneurs Behind The Entrepreneurs"?  That's right.  They are still behind the entrepreneurs.  Time to change the tag line?  :)

Maybe I'm just being overly emotional here.  Seriously, if they act like they knew the whole economic downturn was imminent, they really should've figured out Plan B with their LPs.  At macro-scale, the new fund will hopefully make contributions to economic recovery and continuing innovations (not just tech but financial also since they also do hedge fund now).  

No need to blame anyone here.... I agree .... cut cost and survive!  The world is not over until 2029.

Thursday, October 9, 2008

Entrepreneur's Voracious Capitalism

Usually, VCs are the ones that entrepreneurs call "voracious capitalists". I run into soap operas where VCs throw money, get on the board, screw everything up, and take everything away from the entrepreneurs. So how can entrepreneurs do just the opposite, like lying about financials and taking money from VCs?

During the VC diligence process, the management's background is thoroughly assessed to ensure that the money being thrown in will be managed by good people. Entellium, a Seattle-based CRM company, was sly enough to pass all those background checks and dupe some of the highly respected VC firms, namely Ignition Partners and Sigma Partners. (Story here).

I'm not trying to analyze this case here but rather talk about how entrepreneurs must execute on stewardship and prudence in using someone else's capital. Yes, that's right. Even though they legally "sold" shares to outside investors, they are legally and morally accountable for adding shareholder value. It's really easy to get tricked into thinking that the capital infusion is the cure-all to startups. Yes, cash is the king... only until you realize that 1 + 1 needs to be 11 in the startup environment.

Let's think about the Entellium case here. The founders lied about the revenue and keep taking venture capital. What were they thinking they would end up? First of all, they are going to miss home for a very long time. Secondly, they should've realized that building a capital efficient company is the cornerstone of venture-backed company business model. With all that money pumped in (even if the imaginary revenue is real), the exit just will not be as successful. The venture investors should've also realized that economics of this investment as well. In the venture business, it's all about the multiple here: cash in, cash out. Lastly, and probably the most detrimental one, both founders will never ever have a chance in the startup world. While some rogue investment bankers (wink, wink, UBS dude) do come back to the scene, the venture business really depend on the trust more so than anything else. I just can't say how many times I've seen "A" team with "B" idea gets venture funding. You would think that VC was a dark side. Think again, there aren't any return of Darth Vader in the venture community.

Case in point, there's no point of being voracious for capital. Let it play out and try hard to make stuff happen. Failure is much more valuable than greed for other people's money.
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