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.

http://www.avc.com/a_vc/2008/12/investing-in-th.html

Regards

Gordon

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.