Category Archives: Startups

Upward Momentum

This week was likely the best for the venture/tech industry in 2009.   I believe this week  (and month) will be marked as a turnaround point as there have been a number of very positive events, which I hope will create some much needed momentum in the industry.

1) Amazon acquired venture backed company, Zappos, for ~$900M.  A great win for their investors, most noteably Sequoia Capital.  Large companies, such as Amazon, typically wait till the market is at the bottom, before acquiring companies, as they are targeting the lowest possible valuation; this signals an important inflection point in the market.

2) 3.5% increase in the stock market in a single week, DOW above 9,093 (high since Nov ’08) and NASDAQ at 1,664 (high since Nov’ 08).  Part of the increase in the stock market, was the positive earnings announcement from Apple; their iPhone product line is growing very rapidly, which is  also helping fuel the companies (some of which are VC backed) who sell their applications in the iTunes AppStore.

3) Several growth stage venture backed companies received follow on rounds of financings, which were led by new investors.  The point that these financings are being led by new investors is critical, as most follow on financings in 2009 have been done by existing investors (aka “inside rounds”).   I can’t recall a week this year with as many new follow on financings as this past week.  The fact that new investors are putting money in to venture backed companies is a sign that things are changing for the better.  Below is a partial list of existing venture backed companies that raised money this week from new investors:

  • eMeter – raised$32M, led by Sequoia Capital
  • Ning – raised $15M from Lightspeed Venture Partners, rumors are the valuation was $750M!!!
  • Kontera – raised $15.5M, led by Sequoia Capital
  • iControl, raised $23M, led by ADT Security Services, Cisco, Comcast Interactive Capital and GE Security
  • 5min – raised $5M, led by Globespan Capital Partners
  • SlideRocket, raised $5M, led by Azure Capital

4) Several reports, such as VentureSource and MoneyTree, have released data this week on the level of venture investments in Q2.  All the data points are indicating that Q1 investments have been surpassed by Q2 investments.  Based on conversations I’m having with the VCs and the volume/pace of VC financings I’m observing, I project that Q3 venture investments will be larger that Q2

5) Lastly, several VC firms have raised new funds this week.  This is significant, as there have been many articles and conversations indicating that the VC business is at risk.  The fact that these firms, specifically, Matrix and Khosla, is a sign the Limited Partners (LPs, those that invested VC funds) continue to believe in the VC business model.

  • Matrix Partners, $600M for two funds, $450M main fund and $150M special opportunity fund
  • Kholsa Ventures, $1B for two funds, $250M early stage and $750M late stage
  • DFJ, closed on $196M of a targeted $400M fund

Note: the data in this post in all publicly available and was mainly sourced via:  Silicontap.com, Techcrunch.com, Venturebeat.com, Yahoo.com

A Presentation Template for Pitching Investors

I recently presented at a SDForum event called “Crafting a Fundable Roadmap“, which included 40+ entrepreneurs and was held in San Francisco.  My presentation was about creating a presentation that is suited for meetings with potential investors.  While there a lot of resources available for creating the “right” pitch presentation, I have my own thoughts as to what should and shouldn’t be included in an initial meeting with an investor.   Given that I meet with hundreds of entrepreneurs a year, I have a sense of what works within a presentation.  The content that I provided is descriptive, so need to summarize that, but wanted to provide a few key takeaways.

  1. More slides does not mean you have a better business, 12 slides in more than enough for an initial presentation
  2. Do not have more than four bullet points (not sentences) in each slide and don’t read the bullet points to the investor (they can read) elaborate/expand on each bullet point
  3. Use visuals when appropriate (customer logos, demo/screen shots,  competitive landscape graphs/charts, financial charts) – no need to flying visuals or complex “builds’
  4. Have passion when presenting, this is your company/idea, you should be excited to present

Investor Presentation Template

The Gold Rush

It is 1849 again, only this time the movement of caravans are not traveling West, but are headed East to Washington D.C.   I’m referring to the passing of the $787B stimulus package aka American Recovery and Reinvestment
Act of 2009 that was recently signed by President Obama.

The NVCA had a conference call last week, on Tuesday 2/17/09, to describe what the effect of the stimulus package is for the VC industry and the call was certainly a positive one.  The good news for startups and VCs is that roughly 8% of the $787B is going to support initiates in the cleantech and life science sectors.  According to the NVCA, the breakdown of the allocated funding is as follows; $37B for cleantech related programs/projects, $19B for healthcare IT, and $5B for science related programs/projects.  To put these figures into perspective, according to the recent PWC/NVCA MoneyTree report, VCs invested $28B in 2008 and of that $4.6B went to energy related companies.   Another figure that put things into perspective, since 2002, VCs have invested a total of $13B in energy related companies, so the stimulus package provides the industry roughly 3X this total amount.

The stimulus package is a huge boost to both startups and VCs in the cleantech sector.  Lets focus on the $37B available for cleantech companies; those that will fair the best are ones that are currently generating revenue and/or are close to production.  In addition, the folks at the NVCA indicated that the companies that have the strongest ties to D.C/DOE will likely move to the front of the line.  Lastly, those that have the most postive impact on job creation will do well, so I suspect that companies in the solar, wind, biofuel, battery/auto, and smartgrid sectors will get most of the allocated funding.  With that in mind, a partial list of privately held venture backed companies that are heading East for some cash and will likely strike gold are (in no particular order):

Solar: BrightSource Energy, Solyndra, Solar City, NanoSolar, SolFocus, Miasole, Fat Spaniel, AVA Solar, CaliSolar, eSolar, Konarka

Battery/Auto: Better Place, A123 Systems, Tesla, Boston Power, Fisker, Deeya

Biofuels: Range Fuels, Mascoma, Amyris, Altra Biofuels, Qteros

Smartgrid: Silver Spring Networks,  Gridpoint

Wind: Northern Power, Southwest Windpower, Wasatch Wind,

Discolsure – I put together this list based on information that has already been made public and is readily available online.

The Best VCs?

I meet with a lot of entrepreneurs and the topic we tend to discuss most is fundraising.  Naturally, the entrepreneurs ask me who the best VCs are?  Well, that is very tough question to answer as there are many variables to consider when thinking about who the “best” VC is.  It could be their track record, meaning how many exits have they had and/or how much money have they made for their firms.   Other considerations are how much value they bring to their portfolio companies, how active are they at board meetings, how do they help the company succeed, how active are they in helping you raise the next round of financing, etc.  Another variable is their personality and how that matches the CEOs they work with.

Well rather than tell my personal/professional opinion of who the best VCs are, lets review a few groups that rank VCs based on their own methodologies, specifically Forbes and TheFunded.com.    Forbes provides an annual review of who the best 100 deal makers are, which includes mostly VCs; they call it the Midas List.  The 2009 Midas List was unveiled on 1/29/2009.  The other group that ranks VCs is called TheFunded.com; which ranks VCs on a weekly basis, based on what entrepreneurs think of the VCs; their most recent ranking is dated 2/9/2009 and included 99 VCs.  I’m sure there are other services/sites that rank VCs, but the two I mentioned are the most well known to me, so lets see what they say.

Both groups have different methodology of identifying who the “best” VCs are.  Essentially, Forbes, takes a look how successful these VCs have been, so they review which VCs have the largest IPOs or acquisitions of their portfolio companies, see their methodolgy here.   Given that most start ups take seven years to exit, my perspective is that these VCs are being measured on how successful they were in identifying/sourcing good investments opportunities ~7 years ago (avg time for start ups to get to an exit) and how much value they added throughout the process.  Although Fores does provide an explanation as to how they rank the VCs, I would argue that they also consider the “brand” of these particular VCs and also their popularity.  Given that most professionals in the VC/start up ecosystem expect very few large exits in 2009, it is going to be difficult to apply the Forbes methadology in ranking the best deal makers in 2009.

TheFunded essentially is looking at which VCs have the most positive reviews by entrepreneurs.  For those of you who are familiar with this site, you know that there has been a lot of questions about the validity of the postings, as they are anonymous.  In addition, they have received some negative attention from VCs, see this Techcrunch article.  However, I believe there is some validity to this site as they are beginning to get more and more entrepreneurs to rank these specific VCs.  As the sample size of entreprenuer ratings increase, they will get more positive attention on the data they present.  My opinion is that the perspective of  TheFunded provides an indication as to who is currently the best VC, which could mean that these VCs might not realize their exits (IPOs / acquisitions) in ~7 years; see the point I made earlier.  The argument could be that the highly ranked VCs on this site might get access to great investment opportunities simply because they have good feedback from entrepreneurs; founders with great ideas would gravitate to these highly ranked VCs.

The purpose of the post was not to be over analytical as to which group reviews most accurately, but to set the stage and see if there was any overlap of highly ranked VCs on both lists.  So after cross referencing both lists, there were only three VCs (suprisingly) that were on both….drum roll please…”The Best VCs” are, in no particular order, John Doerr from KPCB, Gregory Gretsch from Sigma Partners, and Pete Barris from NEA.  Congrats to these three for making both lists.

P.S. I don’t know if these investors are really the “best”, but hopefully you enjoyed the post

2009 StartUp Outlook

So 2008 was a terrible year in a lot of ways, but it was a good year for startups to raise capital, except for the Q4 following the market downturn.  So how will 2009 look like for those looking to raise VC money.

The good news, VCs have raised a lot of money (new funds) the last two years, which means that many of them have sufficient capital to invest in new companies.   The VCs can’t simply stop investing all together, so checks will be written to the “right” companies.  During the last recession in ’01-’03, there was still a significant amount of VC activity; in 2002 over $4B was invested in early stage companies, 2009 should see as much, but I predict it will be more than 2002 .  Other good news, there a lot of qualified unemployed professionals who are seeking work; this is a great time to “cherry pick” some engineers, sales, marketing, finance experts.   Not only is there a breadth of talent available, but they are also willing to work for less than they did in 2008.   Lastly, the costs of starting a business continues to go down, as everyone who is providing a service is a lot more willing to reduce their cost of services.  For those startups that are utilizing hosting services such as Amazon, Rackspace, etc, this area is becoming a lot more competitive and therefore prices should go down for these services as well.

Well that is most of the good news, the bad news; IT, Marketing, Ad budgets are going to continue to get cut.  Consumer spending will be reduced as well.  Companies who need significant revenue to maintain their business, will be in a life or death situation.   For those startups who raised VCs funds in 2007 or 2008, many of them will be out of business in the next 6 months as they will not be able to bring in the revenue needed to keep the lights on and will not get additional funding for their VC investors.  Companies that have excess money to acquire startups, will be in a great situation as there will be plenty of dying companies available, it going to be a buyers market!  This is good news for startups, as there will likely be less competition and there could be an opportunity to buy IP/client base at a heavily reduced prices.   If you are raising VC money, you could factor a portion of amount raised for acquisition purposes (this is not usually in business plans, but now could be a good time to do so).

In regards to specific positive sectors areas that VCs will be looking to invest in will include, mobile, gaming, energy efficiency, life science, and SaaS related companies.

If you look at the mobile sector, the proliferation of smart phones continues as both professionals and consumers are adopting these devices at a rapid pace.   I  just read a blog post this morning about a Blackberry device selling for $20, that is so cheap!!!  The Blackberry Curve is selling for $99, which is a good deal as well for a great phone.  Even the iPhone is going down in price, you can now buy a refurbished iPhone for $99! So kids, teenagers, college students will easily be able to adopt these inexpensive devices.   The adoption of these type of devices, allows startups an additional way to reach their clients and provide an avenue for more revenue.

In regards to gaming, this is an area that continues to increase in adoption and money spent.  The pre-teen and teen generation has always adopted gaming and this will continue.  There are GenX/Y and baby boomers who are gamers, but there is still a substantial percentage the historically have not been interested in gaming, but are not starting to become interested with the help of the Wii, iPhone and internet based casual games.  Although the broader gaming sector is saturated with competitors, there are still areas for companies to make  money.

Cleantech investing reached the peak in 2008 (in terms of dollars invested) and most expect that dollars invested in this sector will continue at a healthy pace.  A lot of the VCs invested in solar and biofuel companies, which accounted for the largest percentage of the invested dollars.   These two sub sectors have been very capital intensive and there have been few companies which have performed as expected;  there will be some consolidation in this sector.  In 2009 a  lot more funds will invested in cleantech companies that are more capital efficient than solar and biofuel. For example, software based cleantech companies will get more interest as well as mobile/PC components that reducing heat and energy consumption, such as battery, antenna, CPU, screen related companies (which ties to the points made regarding the mobile sector).

Life Science and health related companies are not as susceptible to the ups and downs of the economy, as people need to stay healthy.   In addition, the baby boomer generation continues to get older and need more health related services.  I don’t expect to see a big change in VCs dollars in the Life Science sector in 2009.

Lastly, SaaS (Software as a Service) companies will continue to receive VC dollars.  SaaS continues to displace traditional software which was sold based on 3 year contracts, was installed behind the firewall, which caused a lengthy sales cycle.  The adoption of SaaS by large and medium sized companies will continue as traditional software contracts are expiring and are likely to be replaced with companies providing a similar solution but delivered via SaaS.

One area that is going to see a lot less VC money is consumer internet companies.  This sector has seen a lot of investments over the last several years, but has very little meanigful exits (this has been the case for most sectors).  More importantly companies in this sector have failed to monetize their userbase and unless a company has a real revenue model (beside advertising), raising VC money is going to be real tough!!!

The key to raising some money in this economic enviornment is to establish a great team and even more critical now is to have some recurring revenue (assuming you are a software/service company).   The VC money is out there, so go get it!

SDForum Event Recap

Yesterday I organized and moderated an event on SaaS/Cloud Computing.  The event was through SDForum Venture Finance SIG, which I’m a co-chair of.

Jim Lussier of Norwest Venture Partners and Ken Gullicksen of Morgenthaler Ventures we part of the event.  In addition, there were four pre-VC backed companies who provided a 5 minute product/company pitch, followed by 5 minutes Q&A from the VCs.  The presenting companies were Qlubb (consumer application), Trevaly (enterprise application), Continuent (infrastructure open source application), and TapInSystems (infrastructure application).

Some of the feedback provided by the VCs:

Jim Lussier: when looking to invest in a enterprise application SaaS company that is seeking a Series A financing, he typically looks for a company that has a complete product with 5 to 10 beta/paying clients.

Ken Gullicksen: when looking to invest in an open source SaaS company that is seeking a Series A financing, the company needs to be further along than a typical SaaS company as the company doesn’t have IP defensibility that a start up company typically has.

Jim and Ken: when pitching an idea to VCs there a few key areas you need to focus on; you need to indicate and quantify how big the market it, indicate what the pain of your customers are, and indicate why your company solves the pain and also how you are differentiated from any competitors you might have.

Jim and Ken: when indicating the market size, you should not only rely on specific figures provided by reports such as Gartner.  What they would like to see is a bottom up approach and the ability for the entrepreneur to quantify the market on his/her own.

Why should I move?

I recently met with a company based in Southeast US and we started discussing that challenges the company might have in raising capital from Venture Capital firms.  Part of the dialogue revolved around the fact that the company is not in a “convenient” location for the VCs.

If you look at which geographic areas that most Bay Area VCs invest in, it is primarily in the Bay Area, followed by Southern California and Northwest US (Seattle and Portland).  The company indicated that they would like to stay in the Southeast as the cost of labor is much more cheaper than the Bay Area and it would not be financial wise to relocate to the Bay Area.  The team indicated a willingness to fly to the Bay Area for board meetings, but my feedback to them was this would not solve their geographic “challenge”.  The fact that a VC needs to get on a plane and fly out of the area make it very inconvenient, which is understandable.  However, the broader issue I believe is primarily a mental barrier, meaning most VCs would like to have the ability to meet with the team at any given moment and not having this option is a challenge.  The fact is, many VCs don’t spend a lot of time physically (besides board meetings) in front of their portfolio companies, majority of the communication is done via email, phone, skype, etc.   That being said, companies that are seeking funding, need to be close to the money.

The are certainly a lof of VCs around the country, but the majority of VC funding is made to Bay Area companies, so if you have the ability to move the management team to the Bay Area, it is a wise move.

Monitor110: A Post Mortem

Silicon Alley Insider posted a great post mortem on well funded start up called Monitor110. A few of the key insights for me was that the company received too much money initially and management team was not focused. It is very difficult to find candid stories about failed start ups, so learn as much as you can from other peoples’ failures.

http://www.alleyinsider.com/2008/7/monitor110-a-post-mortem#slide_4