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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Monday, October 6, 2008

Crash course on GS, MS into Holding Company

Anyone interested in what the big fuss is about Goldman Sachs and Morgan Stanley turning into holding company from investment banking, check this out.

Bottomline - they need your deposit to clean up balance sheet. Look for GS Bank around the block.
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Boston - Recession-proof city?

It's official! Boston isn't in recession, at least according to The New York Times article "For Most Cities, Recession Has Arrived". This makes sense, given that the major industries of Massachusetts are textiles, electronics, publishing, education, tourism, and fishing. They are rather unrelated to the current economic downturns caused by the credit market crash.

But wouldn't the financial market have a profound effect on supply and demand, buying power, pricing, etc. in all these industries? How about the tech startups, venture capital, and investment management firms in Boston? They are some of the major industries leading the output generated by the state. Why's Nation Bureau of Economic Research claiming that Boston's economy is not only contracting, but also growing significantly.

The article "noted that the cities with economies still expanding as of August were often those more reliant on education, health care and energy for jobs. But even in those places the indicators point down." Boston has the highest school density, so it makes sense. Health care... I don't have a good answer, but maybe the state-mandated health insurance policy contributed to this? Since the program is funded by the federal government allowance to make this happen, the money actually comes out of Uncle Sam's pocket. And, of course, we the entrepreneur community in Boston have seen plenty of capital infusion and labor transfer into the energy sector.

If anybody has a good explanation for this, let me know. Meanwhile, go Boston!
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Wednesday, October 1, 2008

Tech Bubble 1.0 Stars: Where Are They Now?

Tech Bubble 1.0 Stars: Where Are They Now?

Posted using ShareThis

  1. Amazing how many of these Web 1.0 generation entrepreneurs move on to start other companies.
  2. Almost all of them did not get the same high visibility in the new Web 2.0 era. If successful (in this case fame does not necessarily equate to successful outcome of the company/founder) entrepreneurs can better run companies afterwards, why haven't I heard of almost all of the companies founded by these guys? Is it even a good indicator?
  3. SAI missed out on some of the biggest names like Marc Andreessen, Mark Cuban, etc. They are obviously around, still doing some great stuff.
  4. Some of these guys completely failed to create any shareholder value but ended up with pretty good retirement plan. Hey, Spitzer, interested in investigating these dudes? Oh yeah, you're not having a good time these days.

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