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Wednesday, December 24, 2008

Some good news for 2009 if your are looking for funding

Investing In Thick and Thin

By Fred Wilson

A few weeks ago at Le Web, I participated on a panel made up of VC investors. There was a really good discussion about what next year holds for venture investing.
The moderator Ouriel asked if we would be cutting back our investing in 2009 and I replied that we did not plan on doing that
I went on to explain that the venture business is very cyclical and that I've seen at least three and possibly four cycles in the 22 years I've been in the venture business. But I don't feel that its possible, or wise, or prudent to attempt to time these cycles
Our approach is to manage a modest amount of capital (in our case less than $300 million across two active funds) and deploy it at roughly $40 million per year, year in and year out no matter what part of the cycle we are in
That way we'll be putting out money at the top of the market but also at the bottom of the market and also on the way up and the way down. The valuations we pay will average themselves out and this averaging allows us to invest in the underlying value creation process and not in the market per se

Eric Archambeau of Wellington Partners was on the panel and he described some research work he and some associates did a while back. They went back to the 1970s and charted for each year through the late 1990s the number of venture backed companies started that year and the number of $1bn revenue companies and $500mm to $1bn revenue companies that emerged in each 'vintage year'. The result of that work, he explained, was that the number in each category was relatively constant year after year with no discernable pattern and certainly not correlated with or against market or economic cycles. Interestingly, the data was not correlated with innovation and technology cycles either

This says to me that, like the lottery, "you got to be in it to win it" and staying on the sidelines is not a wise approach in any market environment
Mike Moritz was quoted in an SF Gate piece today making a similar point (which inspired this post and its title). He said:

"We've always invested through thick and thin. In fact, we prefer to invest in thin"
It is easier to invest in thin times. The difficult business climate starts to separate the wheat from the chaff and the strong companies are revealed. With many investors on the sidelines (particularly corporate buyers/investors and 'momentum' investors like hedge funds and the like), there is less competition to invest in these 'winners' and the prevailing valuation environment means you get more equity for your dollar invested. That's quite a recipe for success.
But its not a lot of fun to be operating in the 'thin times' even as an investor. Most good firms have a portfolio full of companies that will be struggling to stay afloat and the VCs will spend more time working with their companies in this environment. And when we get an opportunity to put more capital to work in a portfolio company we know and love in this kind of market, well that is often the best investment of all. Note that SF Gate piece mentions that Sequoia just led a big new round in AdMob which if I am not mistaken is an existing Sequoia portfolio company that is a top mobile ad company. Look for more of that sort of thing in this market.
As I've written here recently, I see no signs that the venture market is drying up. Its changing, for sure, and if you aren't running a company that's emerging as a clear winner, its going to be tough to raise money in 2009 from anyone other than your existing investors. And look for them to be more cautious, more diligent, and less generous than they may have been in the past few years.
There's money out there in venture land and its going to get invested in 2009 and its going to get invested wisely for the most part. At least that's our plan and I'm confident we can execute on it.


Tuesday, December 16, 2008

How much !!! you got to be joking, my company is worth more

How many times have you been asked or you have asked "How much is my company worth ?", this is a hard question and there is no real answer, it is different for every company, and no VC will give you the same answer. This is a post I found by Jason Mendelson his a co-founder of foundry group he has a decade of experience in the venture capital and technology industries (www.foundrygroup.com ).
Whats the value of my Start up ?
I regularly get questions concerning how venture capitalists value companies. In fact, there seems to be an increase in the frequency of this question to me personally and through AskTheVC.
It's not an exact science. On top of that, there isn't a broad enough market to come anywhere near a public pricing mechanism. (Insert joke about current public market chaos here). VCs typically take into account many factors when deciding how to value a potential investment. You'll note that few of them are quantifiable into hard numbers and at the end of the day, the VC and company must agree on an exact number in order to get a deal done. So what are some of the factors? In no particular order, I present the following:
1. How mature the company is
What stage is the company? Early? Late? Pre or post product release? Customers? Pre or Post Revenue? Other major milestones? Hopefully it's clear that the later stage company (if all goes well), the higher the valuation.
2. How much competition there is with other potential funding sources
More is better. If I feel like I'm competing with other VC term sheets, then the valuation will likely be higher. I would offer caution to not overplay this card unless you truly have another interested party. I've seen this situation a number of times where the company overplays its hand and doesn't get their fundraising done and loses face in the process.
3. Quality of the management team
With a great management team, risk is taken out of the equation. In fact, many VCs believe (me included) that even the best idea fails without an excellent team. The more this quality team is built out before financing, the higher potential valuation you might get.
4. How the valuation plays into a particular VC's investment thesis
If a VC is an early-stage investor, they'll be used to lower valuations than someone who invests in later stage deals. This bias will have a large effect on the process. I've seen companies that have received term sheets from both types of investors at the same time with wildly different prices.
5. How much the VC thinks the company in particular wants that VC
VCs bring much more to the table than money (hopefully). If a company wants a particular VC to fund their company (either because of domain-specific knowledge, prestige, nice offices, etc.) the price for that particular VC may be lower than others.
6. Numbers, numbers, numbers
Yes, the numbers matter too. Whether it is past performance or predictions of the future, these all play in. Revenue, EBITDA, headcount, etc. all factor highly into the process. That being said (at least for early-stage companies) don't believe everything your MBA professor told you about DCF and other financial analysis. Especially at the early stage, the only thing that I know about your financials is that they are very wrong. So the financials have limited applicability to hard number crunching but are very telling of how the management is thinking about their business.
7. How big the market is
This one is pretty self explanatory. Bigger equals better for valuation.
8. Potential acquirers
Again, this should be easy to understand. If there are many natural acquirers for your company, this only helps in the valuation discussions.
9. Competition
Valuations received by your competitors can potentially make a case for you receiving a similar valuation or at least have a small "market" to compare your company performance to. This argument is of different importance depending on who your VC is. Some care a lot about competitive metrics and some don't value them at all.
10. Current economic climate
Bad climates normally lower valuations. It seems to effect later stage fundraising valuations more than early-stage transactions.
11. Previous deals
A particular VC's experiences and biases will have a large effect on valuations they will present you. Part of a VC's job is to be good at pattern recognition.
12. Other
There are other things as well, including the tried and true "I know it when I see it" analogy. Part of all of these exercises are truly black box.
Please note that I cannot give specific advice to folks on how much their company may or may not be worth. I only know one thing about attempting this exercise - I would be wrong. And you would not be happy with me.
It takes our group many meetings, much diligence and market analysis in order for us to arrive at the valuations we offer potential portfolio companies and even this is not an exact science. For me to attempt this exercise for a company that I am not deeply involved with would be futile.
At the end of the day, it's all about getting a transaction completed and whatever that number ends up being, is a rough approximation of what the company might actually be worth at that point in time.
Or maybe it's completely irrelevant. :) But at least you got funded. Good luck out there.

Thursday, December 11, 2008

How to pick your Dragon to plunder (Joke)

How to select your target VC / Investor
By Georges van Hoegaerden, the managing director of The Venture Company

For over 10 years I’ve built and managed growth for early stage innovation in Silicon Valley and more than ever do I believe that building real disruptive customer value is more important than trying to time an acquisition opportunity. You may too, unless of course you are a gambler and firmly believe that the $3 red-white-blue slot machines in Vegas consistently yield the greatest returns. I will not argue the outcome. Acquisitions remain nothing more than a welcome diversion on your way to building the largest technology empire. And even now when IPOs have dried up any focus away from building your empire is damaging. Real disruptive innovation is resistant to economic aberrations and a consistent focus on customer value remains your only rescue. I believe that IPOs for technology companies will return (and subsequently spur more pre-IPO acquisitions), albeit not with the same players. Real companies can only be built by real entrepreneurs, with real disruptive products supported by real investors. New participants (on both sides) with higher moral values will be the ones to restore trust in the technology industry and subsequently public stock markets that want a piece of it. Today, the VCs are stuck with a product of their own aristocratic making. Commoditization of investment philosophies since the 1990s has generated technologies that can best be described as sexy-cool rather than disruptive and meaningful (with a few exceptions). It paved the way for get-rich-quick entrepreneurs that are skilled in feeding the dogs the dog-food, rather than support the real entrepreneurs that have a dissenting view of the world. So, assuming you as an entrepreneur are for real, how would you recognize an investor that is not. Here are some of my anecdotal recommendations:

1/ Avoid an investor who blames his quick response on ADD Attention Deficit Disorder is an illness, not a skill. Recommend the investor to consult a doctor.

2/ Avoid an investor who does not carry (or seriously considers) an iPhone The iPhone is the biggest innovation in consumer electronics in my lifetime (so far) and if your potential investor does not understand its ramification to the technology ecosystem as a whole, it is unlikely he will get yours.

3/ Avoid an investor who cannot price your company ahead of you. Any technology investor should be able to price the value of your disruption. Ask the investor for the valuation and if he is close to your target, you can share with him your cost model and where you are today on the trajectory. Cost model and stage (the risk) are a discount to the disruptive value, the ability to build the technology is merely a commodity. In Silicon Valley technology is not the risk, but market entry with sufficient disruption is. Walk away from investors that incorrectly evaluate the risk model.

4/ Avoid an investor whose partners you can’t stand Investors in a fund make decisions collectively, they need partner consensus before they can invest - just like in politics (more on that later). A firm with a partner you don’t like should be taken off your VC prospect list, as you cannot risk the influence of the bad apple to your company’s future. Develop your personal blacklist (as we did) based on fundamental people principles.

5/ Avoid an investor who wears his education on his sleeve Wearing a Super Bowl ring means you made it in the real world, wearing an Ivy League ring does not. I wholeheartedly agree with Craig Venter that later stage education (without operating experience) in general is a deterrent to creativity and innovation or the ability to spot and spawn it. The majority of Silicon Valley investors are remnants from a bull market, echoing beliefs that are founded on skewed business principles.

6/ Avoid an investor who asks really dumb questions and is proud of it. I never thought dumb questions existed until I ran into one investor who proudly blogged about how other entrepreneurs simply walked away from him, making his life easier. We walked away from him too.

7/ Avoid an investor who thinks he knows your industry better. Even in the unlikely scenario he does, you should still walk away. Investors that know industries better than the entrepreneur should have become one. So either the investor is better informed (which should send you back to the drawing board) or he thinks he does (which becomes a pain in board meetings). Investors see a lot of things that don’t work, rather than discover the opportunities that do.

The bottom line is that we recommend entrepreneurs not to squander their great ideas with the first investor that waves money in their face. Real disruption does not become extinct quickly and so you literally have years to find a great investor out of the 790 firms that exist in the United States. Thankfully the get-rich-quick money schemes in technology are drying up, so make sure you, as the entrepreneur, also have the integrity to build real disruption that spawns real and lasting customer value for years to come.

Maybe we should compile a Good Vs Bad database on the VC community ?

Beannachd Dia dhuit


Wednesday, December 10, 2008

A cheat sheet to help you with your friendly Dragon (Investor)

What you need to know before you go on the funding trail(or entering the dragons den):

Well you have your business plan written, you have a one pager prepared, the elevator pitch is polished and sharp, your friends think it is great great and your competitors are nervous, it is time to go and dual with the Dragons. There are two keys to a Dragons check book, fear and greed, you need to raise there appetite to open the door to there treasure trove, once you have entered there den, you need to be:



and be prepared to walk away

You need to have a good team, not high flyer's, but definitely street cred ability, a few scars.

You need to have prospective customers.

You need to have a solid financial plan for 3 years.

You need believe in what you are doing, and know that you can do this for the rest of your life.

You need to be committed and demonstrate it.

These are some other thoughts I picked up from Guy Kawasaki (http://blog.guykawasaki.com/)

These are the characteristics of an attractive and fundable date for a venture capitalist or angel investor.

Realness. This seems like a duh-ism, but few entrepreneurs do it. Most entrepreneurs focus on quick flips to an IPO or acquisition. don’t get me wrong: Venture capitalists and other investors aren’t necessarily good guys who want to make meaning and change the world. A simpler explanation is that entrepreneurs who make meaning and change the world usually also make money. Nothing is more seductive to venture capitalists than a company that may have a big impact on the world.

Traction. The easiest way to prove that you have a real business is to already generate revenue. It’s one thing to believe your bull-shiitake pitch; it’s another to have customers and cash flow. You show traction, and investors will suspend disbelief. Fundamentally, you’re asking them to take a leap of faith, and it’s easier to get people to jump off a diving board than the Golden Gate Bridge. If you can’t show traction, then at least line up customer references who will really say, “If they build this, we’ll buy it.”

Cleanliness. Investors are busy, so you need to present a clean deal to them. Clean means that there isn’t a lawsuit by your former employer contesting the ownership of the intellectual property, or a disgruntled founder who owns 25 percent of the company but doesn’t do anything but sit around and complain. The more crap that an investor has to clean up, the less likely he’ll be interested in your deal.

Forthrightness. If you have crap that you simply cannot clean up, then disclose it right away—not necessarily in the first meeting, but soon thereafter. Also, have a plan ready to fix the problems. The worst thing you can do to an investor is surprise her with bad news, like a messy deal with lawsuits and conflicts, beneath the surface of the company.

Enemies. Woe unto you who claims that there is no competition. It means youre clueless or pursuing a market that doesnt exist. Investors like to see some competition because it validates that a market exists. Th en its your problem to explain why you have an unfair advantage. If you truly have no competition (and I doubt it), then either say that Microsoft or Google might go after you because these companies want it all or provide potential competitive threats.

Generally, in everything that you say, ensure that your results exceed expectations. Deliver a prototype early. Deliver your list of references early. Sign up your first customers early. Close a partnership deal early. Launch early. The only thing you shouldn’t do early is run out of money while trying to raise money. Investors seldom fund ships that are already sinking.

Well if you are going for funding, starting your own adventure, be prepared to be changed, and remember to enjoy, when you have lost the enjoyment, you will loose the motivation to succeed, remember money does not bring happiness, it helps, but it will leave you hollow.



Friday, December 05, 2008

Food to help you prepare for next year

Time to get serious about strengthening your systems

By Pam Slim

Bio Pam is a coach and writer who helps frustrated employees in corporate jobs break out and start their own business. She has been self-employed for 12 years and has enjoyed every bit of it.
Her first book "Escape from Cubicle Nation, will be due from Penguin/Portfolio in Spring, 2009" and Pam writes for Martha Beck's blog on a bi-monthly basis.

When I was about ten years old, our roof got in some serious disrepair. We lived in a house built in 1906, and the creaky beams and bones of wood were showing their age. The wooden shingles had been damaged by years of rain and wind, and water started to leak through the ceiling.

My hard-working single Mom did her very best to cover all of our needs, but a $3,000 roof was not going to happen. So we made due, placing pans under the various dripping spots of the ceiling.

I was lying in bed one night, listening to the rain pound outside. Then, without warning, a big chunk of plasterboard fell on my chest. It didn't cause any major damage, it just scared the heck out of me. Our system of staying dry had reached a breaking point.

The same may be true in your business, your health or your home.

I have been reading an interesting book by Sam Carpenter which is called Work the System: The Simple Mechanics of Working Less and Making More. He is a telecommunications business owner in Bend, Oregon, who spent the first fifteen years of his business operating in crisis mode.

His "plaster on the chest" moment came when he was one week away from closing his doors. His health was terrible from working 100-hour weeks, his finances were depleted, his staff was unhappy and customers were angry. He couldn't hold on any longer, and faced certain failure.

Then he had an out-of-body experience (surely fueled by lack of sleep!) when he rose up from his situation, looked down on it, and for the first time realized that his entire life and business was built on sloppy systems. Nothing was documented or planned. Stuff just "happened," which was why crisis after crisis continued.

At that moment, he got clear on what he had to do: take each underlying system in his business one at a time and clean it up. With flawless systems, clearly defined roles and excellent communication, the business would survive, improve and eventually thrive.

So that is what he did, with the help from his staff. The process took a long time, but by rigorously examining and documenting every step of every key process in their business, they were able to make leaps and bounds in efficiency. Providing better service, they raised their rates. Retention improved, and training new employees was much easier.

On the personal side, Sam did the same thing. He made health and sleep a priority. He respected the system of his body, and only ate healthy foods. He started to exercise.

His former 100-hour workweeks are now 2 hours. His company is successful and his life is flourishing.

How can you translate this systems thinking into your own life?

If you are in business for yourself, you can see that every part of your operation is based on processes and systems. They may be a home-grown jury-rigged, inefficient systems, but they are systems nonetheless. To start:
Define the strategic objective of your business. Carpenter gives very specific examples of this in the book. You can also use a much higher-level description like Guy Kawasaki's example of "mantras" in his book The Art of the Start. His personal mantra is "empower entrepreneurs." I am not totally decided on mine yet, but a key objective is definitely "promote liberation."
Define the general operating principles of your businesss. Operating principles guide your decisions, and allow you to choose which systems and processes are truly necessary to run your business. Some examples from Carpenter's business are:-We focus on just a few manageable services. Although we watch for new opportunities, in the end we provide "just a few services implemented in superb fashion, rather than a complex array of average-quality offerings.-The money we save or waste is not Monopoly money. We are careful not to devalue the worth of a dollar just because it has to do with the business.-We study to increase our skills. A steady diet of reading and contemplation is vital to personal development. It is a matter of self-discipline.
List the key processes and systems that underlie your business. For my coaching practice, there are processes like client acquisition, blogging, bill paying, teleclass delivery and forum moderation.
Work on cleaning up and documenting one process at a time. You may want to choose the most high-impact system to document first. Write down all the steps involved in clear, simple, step-by-step language.
Automate as much as you can of the mechanical processes. Outsource things you don't need to do yourself. Tools like autoresponder email systems can work great for this. (Aweber.com is what I use for this newsletter and signups for all my classes)If you haven't started a business, it would be great to keep this framework in mind as you design your business model.

What jumped out at me so clearly as I read Carpenter's book is that by rigorously cleaning up the systems that underpin my business, automating as much as I can and outsourcing any tasks that I don't need to do personally, I will have much more time to focus on providing more services, contributing more free content (blog posts!) and serving more people.

And if you are not a business owner, not to worry -- you can apply this systems thinking to your everyday life.

Some process improvement areas that spring to mind:
Email management (set up filters and rules for taming the email beast!)
Grocery shopping (I hand write my list every week, trying to remember the basics -- how about if I created a pre-printed list that I could hang on the refrigerator?)
Laundry (I used to have four different laundry baskets in everyone's rooms, then I switched to a central basket in the laundry room and it is much easier. Talk about a task I would love to outsource!)
Remembering birthdays (this is one area I have been terrible at in the last few years since I relied on my memory instead of calendaring everyone's birthdays. Maybe next year I will remember to call my best friend on her birthday (January 14) for the first time in three years)
Rotating food in the refrigerator. (We have gotten in the habit of cleaning out the refrigerator every Tuesday night, since the trash goes out on Wednesdays. It really helps cut down on "mystery scientific experiments" growing in the back of the shelf.)You can see your systems don't have to be glamorous. They just have to work well, and allow you to spend your time doing what you really want to do.
Other good resource books:

Beyond Booked Solid, Michael Port
The 4-Hour Workweek, Timothy Ferriss
Getting Things Done, David Allen
Upgrade Your Life, Gina Trapani
Connect: A Guide to a New Way of Working, Anne Zelenka

Good blogs:

Matthew Cornell

Pam's Web page : http://www.ganas.com

Thursday, December 04, 2008

Some thoughts on the "Credit Crunch"

Recession and the credit Crunch

I have been trying to spin out technology from a govt. incubator in the N.E. of England, this has been a long and convoluted track, one which is precariously coming to a major nexus. The track has seen the business model morph from a major project , with debt finance in the teens of millions and matched equity financing , to the bare bones of a model which was built on a deck of cards that are crumbling away quickly. I am sure many of my readers have been there before, where a solid plan on the exterior is actually a convoluted network of supporting items and actions, if you miss or loose a couple of them the whole becomes very unstable( or role is to makes sure we have spare aces up our sleeves). This is normal for a start up but adding on top off that the financial institutions issues with the credit collapse, it makes it nearly impossible to raise debt financing , and the terms from your VC in general is like day light robbery, but what is a guy to do, if you have a project you need to have the resource. I look at it like "Oceans 13" You have a major deal to make loads of cash and have the time of your life executing the deal (For some sad folks it's the execution and not the pot of gold that we crave), you take your money to bank roll you, from where you can get it.

(I do need to take a minute here to say that there are some good guys out there, the guys I have worked with on this deal have been some of the best I have worked with (SIGMA VENTURES), there are a few others that I have come to respect both sides of the pond. )

So today's little gem comes from a favorite blog off mines "Pure VC" www.purevc.com it talks about "the depths and extent of the financial crisis we face today", you can stop here and now turn to your favorite fiction site, BBC, The Sun, The mirror, or let these guys educate you.

Deleveraging, Recapitalizations, & Margin Calls
People still don't seem to believe or comprehend the depths and extent of the financial crisis. Here is my brief explanation. We have been in an economy built on leverage and that leverage is coming down like a house of cards. Banks and financial companies were levered 40:1 loaning monies out that far exceeded the capacity for defaults. It started with residential mortgages and sent the financial world reeling as banks packaged these loans and sold them to others. Due to recent changes in accounting rules, banks were forced to value these assets "marked to market". Thus when the market froze and there was no liquidity to trade debt, valuations declined. We saw the collapse of some venerable investment banks such as Bear Stearns and Lehman Brothers as well as thrifts such as Washington Mutual and Indy Mac and mortgage titans Freddie Mac & Fannie Mae and Countrywide - the list goes on and on. We also saw the swallowing of Merrill Lynch and Wachovia, and the near crumbling of Citigroup. Even Goldman Sachs and Morgan Stanley have not been spared.
For those of you who believe that the financial companies will be coming back anytime soon, please think again. The market no longer values any business model that relies on leverage. In order to deleverage, companies must sell assets both good and bad. This compounds the problem as these assets are worth less and less. To make matters worse, the entire industry is in trouble and there are no buyers to take on leverage (the only buyer is the Federal Government). Anybody that acquires or merges with another insitution is simply asking for trouble. How can an overleveraged bank imagine that it can purchase another weaker overleveraged bank without weakening its position? It can't. Thus, it must go back and raise funds such as Bank of America did after its Merrill acquisition. Dividends will be cut completely. Massive amounts of equity will need to be raised. And when the federal money runs out we will be in trouble.
Thus the economy is in a massive recession and is shrinking because of deleveraging. If we were levered 40:1 and we are going back to 10:1 leverage then you can imagine our economy will shrink that same amount. If you don't understand what I am talking about, think about the size of the economy as measured by credit card transactions. Imagine if your bank suddenly froze your credit cards and you could not buy anything on credit and you had to use cash. Transactional volume would come to a halt because most people use credit to pay for just about everything. Unfortunately, a freezing and cutting of credit extended to consumers may actually happen. You can imagine what this will do to retailers. It looks like we are going back to the age where cold cash is king.
Essentially, we have had a recapitalization of the entire economy. The stock market has lost trillions of dollars as reflected by the haircuts of stock prices. Open up your 401k statement and you will see what I am talking about. 99% of the population does not understand what "recapitalization" means. In the private equity world, recapitalizations are the re-valuing and re-valuation of a company's worth. When you hear "recap" it typically refers to loss of valuation to the downside - think "massive shrinkage of company's value". Sometimes a recap is to the upside but that is what we would call a "dividend recap" meaning that we are taking out money from the company at the time of recapitalization. Anyways, the key theme in a recap is this - previous investors typically get washed out unless they "pay to play."
One final thought - the entire world has been put on a "margin call". How? Well, the market has told us that any business model using leverage is no longer desirable. Thus anybody with leverage is forced to close out its leverage down to either zero or something more reasonable. This is why it is a treacherous downward spiral - the only assets to sell are those that are devalued and those companies that are publicly traded are thus in a bad position. They have margin calls on them and must sell devalued assets that are losing more value everyday.
Do you still think that the next shoe to drop is not the commercial real estate industry? Or the consumer credit industry? The market thinks leverage is evil - any business models with leverage must adapt or become the next victim of market evoluion.

Have a great weekend