Startable - Healy Jones’ & Prasad Thammineni’s Blog

Following up my post from yesterday on exciting seed funding developments in Boston, The Founders Collective is officially launched. At least, their web site is now up. I know they have been attending various tech networking events recently and the word was already out that they had money to invest.

More seed funds for Boston = better

Boston needs more very early stage investors, and this fund looks like it will help fill a very critical fund raising gap. From their stated positioning on their web site, it looks like they will actually address the biggest hole facing the Boston technology investment scene:

Two guys and a dog. Unless one of the three is Bill Gates, it’s hard to get funded here in the North East.  Believe me - I know from both sides of the table now. New England VCs (and many of the local angel groups) love supporting previously successful CEOs and founders, but are slower to pull the trigger on unproven talent. If the Founders Collective is really willing to step up and fund new startup talent this could be a real boon to the local tech scene.

Is this the new early stage VC model? Most of these partners have real, full time jobs as founders/leaders of their own companies. Doing the math, there is no way a $40 million fund could support this many traditional VC partners salaries w/o the expectation that the next fund(s) would be much larger. Since the Founders Collective states that they want to keep the fund size small, the expectation must be that most of them keep their day job. Since I am now all too aware of what it’s like to work at a very early stage startup, I should probably say “day and night job.” How are they going to be able to do this? It’s going to be a ton of work, but I hope that they are successful.

How many new investments can they reasonably make in a short period of time? I wonder how much involvement the full-time CEO partners will be able to make. Will it be a consensus driven fund, where each partner needs to agree to a new investment, or can a single partner push the funding button? I’ve got so many questions on how this will actually work. It’s quite exciting.

They also state that most of their investors are successful entrepreneurs who are hoping to be involved in mentoring the fund’s startups. This would be awesome. Every entrepreneurial community needs this sort of knowledge and experience sharing.

I wish the team at the Founders Collective good luck and hope that they are able to get some great companies going!

There was some great news this past week for the New England startup scene - TechStars recommitted to another season in Cambridge and The Founder Collective officially announced that they’ve got a $40 million fund to make early stage/seed stage investments in New York and New England. I’ll talk about the Founders Collective tomorrow, today I’m going to focus on TechStars.

TechStars is coming back to Boston!

I was lucky enough to participate in TechStars Boston this past summer. It is a great way to launch an internet company, with solid mentors, great media exposure and a super-crappy office filled to the brim with passionate + smart technology entrepreneurs.

I can’t emphasize enough how great the mentors were for the TechStars program. The companies that had the best experiences at TechStars were the ones that took advantage of the one-on-one time that different mentors offered. These mentors were people who have successfully built real technology businesses. They opened doors for the entrepreneurs by introducing them to distribution partners, technology experts, journalists, etc. They provided strategic and operational advice. They beta alpha tested the heck out of the companies’ products. You can’t get this level of mentorship anywhere else that I’ve seen - not from a venture fund, not from a school - no where.

My advice is to apply to the program if you are a young, first time entrepreneur who has a grea idea and the ability to get it going fast, for not a lot of cash. TechStars is accepting applications now, so get on it. Remember that they are looking for you to show traction with your business during the application process, so set developmental (and if possible customer acquisition) deadlines over the next few months, mention this in your application and hit them.

One of the greatest things about TechStars being in Boston is that it brings talent in from other parts of the country. TechStars recruits from everywhere, and some of the great entrepreneurs from this past summer’s program has stuck around.

The change from the summer to the spring doesn’t really surprise me, but I do wonder if this will cut out some potential student founded companies from the program. Boston does have great entrepreneurial-driven cultures at places like MIT, Babson and other schools. It will be hard for some of these students to commit to full time company-founding during the spring if they are supposed to be in school. I guess they could potentially take a leave but this is cutting it pretty close to the spring for some registrars’ offices I bet.

Congrats to LaunchCapital, a local early stage seed fund, for being recently highlighted in the WSJ. I’ve know of LaunchCapital for the past couple of years, and they are truly doing something new - small seed round fundings plus a new tiny venture debt fund. I think this shows the nimbleness of the early stage investor base, and am both optimistic and hopeful that new fund models like Launch will succeed.

Sim Simeonov (a much higher profile Boston-area former VC than me) just published a good post on raising a Series A venture round. I agree with the majority of his points, although he does postulate that it may make sense to ask for/raise a bit more money upfront even if it means the founders end up with a lower ownership percentage. I agree with his thesis that more capital is better if it boosts your next rounds valuation/de-risks the business intelligently. However, I’m not 100% sure it actually has to decrease the founders’ percent ownership all that much. I continue to believe that early stage VCs main valuation tool is how much they want to own (which usually falls within a pretty narrow band). See my post on the way VCs calculate startup valuations.

Sim puts forth some important math on how to calculate the real pre-money valuation of your Series A round, taking into account option pools, amount raised and percentage ownership taken by the VCs. As a startup founder looking to raise money, you should understand this. The algebra is simple, it’s nice to have a clean little formula to help you understand the implications of your term sheets. (I have worked at funds that did a more complicated pre/post money “effective” valuation taking into account the impact of some preferred stock features like participation - basically breaking the participation out and valuing it as a stand alone bond and then valuing the equity separately, but I wouldn’t bother/recommend that for most early stage investments.)

Sim also lays out the other real truth in getting a higher Series A valuation - you need multiple funds competing for deal. This is much, much harder said than done. And you also have to remember that VCs are pretty clubby - they like to syndicate/invest alongside each other, so if two firms realize they are both interested in the same company and they like investing with each other you probably DON’T actually have any real competition. This is because they are likely to team up and offer you a joint term sheet, or one is likely to wait until the other makes an offer and then try to join that investment as a co-investor.

He also has a link to a startup valuation calculator, that I haven’t stress tested yet. But it looks pretty straight-forward and very handy. If you are raising a Series A, you should read his post.

Nielsen has a great blog post on smartphones, Droid and mobile applications. Some of the most interesting points they make are:

• Over the next several months at least six new smartphone devices (like Droid) will be released - these devices are going to have large screens, keyboards and a wide array of applications.
• More smart phones are accessing web pages vs. “dumb” phones as of Q3 2009.
• 24% of cell phone sales in Q3 2009 were smartphones; Nielson expects this to jump to 40% in Q4.
• In 2011 50% of all phone sales will be smartphones
• In 2011 120 million mobile users will be on the internet, and 90 million will be watching video on their phone.

It is clear that we are finally reaching that critical tipping point in terms of mobile internet usage. (I guess we were already there, but now even a slow person like me can see it clearly.) But I believe that phones ARE the internet/computer for many people these days, and that there continues to be opportunity developing services, apps and sites specifically designed for these users. The evidence I’ve seen recently speaks to this point; in particular several of the Techstars mobile companies have really had amazing adoption.

Is Droid, for that matter any of these other new smartphones, going to really take on the iPhone and emerge as a real alternative smartphone platform? I understand that iPhone has a real lead in apps, but I don’t think the market is won yet (although I am a pretty happy iPhone user.) Blackberry shouldn’t be forgotten about either, since their market share is surprisingly large and I think grew to 19% of smartphones recently due to their new phones positive receptions. My gut is that at least BB and iPhone are going to continue to gain share real market share. I have no idea how Droid will do, but if it got 10+% market share over the next year or so I wouldn’t be shocked. And I think it might be good for the overall market if 3 competing smartphone platforms all had real volume.

I’m sure everyone now knows that Google bought Admob this Monday for $750 million. This highlights a pretty important topic - beyond the fact that buyers appear to be re-emerging in the technology world. It shows that companies with real traction in quickly growing markets are valuable. I’ve read rumors that Admob had revenues between $50 and $75 million; not too bad for a couple year old company. And real proof that the service and market are real. Large technology players are willing to pay up to establish early dominance in newly forming markets that are strategic to their core mission. It’s not about just the technology - it’s about getting traction. Congrats to Omar Hamoui, the company’s founder who was at Wharton during the first year of my MBA.

A couple of my venture buddies are really knocking it out of the park with their venture capital/startup blogs and I wanted to show them a little link love. You should check out there blogs and some of their recent posts.

Rob Go (of Spark Capital) has recently had some great posts. I really like his post on where to find angel funding in Boston.

Lee Hower (Point Judith Capital) just posted on how difficult it is to predict if any given startup will become really, really large.

There is a really cool piece by Ryan McBride on Xconomy listing New England startup competitions. It is a very useful resource for entrepreneurs thinking of getting their startup going in the area. It’s not just about the MIT 100k competition - there are a lot of cool events that hand out real cash to startups.

Photographic evidence that Windows 7 kills kittens!

Just kidding; the little guys are taking a nap. For some reason they love sleeping on my computer.

Windows 7 Kills Kittens!

And I have to say, I like Windows 7. I’ve been using the beta version since the middle of the summer and it hasn’t crashed at all. I also dig the little universal search box; I still use Google Desktop, but MSFT’s search box has become part of my workflow. I have gotten used to the windows-button-tab-button way of circulating through open windows, and graphically it is very appealing. The help documentation is pretty good too, so I’ve been able to modify the preferences I want to pretty easily.

You want to get a job as a junior venture capitalist?

Really? Have you seen the state of the venture market? 10 returns are falling and there is not end in sight and the venture industry is shrinking… But, OK, you want to get a junior investor role at a venture capital firm. Having collected job offers at over a half a dozen venture and private equity groups (and having been rejected by countless more!) I’ve got a pretty strong opinion on how to prepare for an interview with a venture firm. This is what has worked for me. If it fits your style then go with it. (Note that I have never worked with biotech investments so this may not be a helpful if you are looking for a position as a life science investor.) I’ll going to need to do a couple of posts on this topic, so I’ll start with 4 questions that you need to have good answers for before you do the 1st interview.

The 1st questions to have answers to when interviewing for a venture capital position

This is not an inclusive list of topics to prepare for, but these are probably the top few questions that you need to have solid answers - and you should have practiced them so they are concise and impactful. It should not take more than 90 seconds to answer each of these questions; probably less. Let the VC ask follow up questions on the issues they care about - do NOT ramble on.

• Why now? I mean, why do you want to join this firm at this moment? You’d better have an answer. Start by knowing what companies they’ve invested in recently and what exits they’ve had. When I interviewed, I created little packets on each firm. Recent deals, “mission statement” or focus, partner bios. How did my previous experience overlap with the people I’m going to connect with?
• You need to seem like you’ve got a process for approaching a new investment. Check out my venture capital investment memo template for details on what a VC uses to discuss investments. But you need to be brief. I would concentrate on three of the following five topics:

A. Management. Make sure you mention this as an important criteria, but it doesn’t have to be point # 1 on your list. Look for people who have run/managed and grown businesses before and who you trust to grow a startup, or if you are on the West Coast people who seem very coachable, who listen well, who seem like they can grow into being an effective leader and who are humble enough to be willing to bring in a “professional” CEO if the company eventually needs it.
B. Market. You want a big, growing market that has space to have a strong niche player or room for a new big player. For early stage investing the market doesn’t yet have to exist, but you need to be able to feel comfortable that you’ve got at least half a billion, probably more like a several billion dollar market in the foreseeable future. There need to be customers who want/need some sort of a solution and have a willingness to pay. You also need to be able to find and sell to these customers efficiently once you reach scale.
C. Technology. Hopefully the tech is unique, can be defended or can’t be recreated easily. If not, hope that it is at least cool. If it is some sort of a hardware solution it needs to be at least 10x, hopefully more, better than the existing solutions on the market. How much longer will it take and how much will it cost to develop the product and can this team do it?
D. Deal. Can you invest on reasonable terms? Don’t pretend to be an expert here if you’re not. There are lots of good technologists who have become VCs and who did not have any deal experience prior to joining a VC. This is stuff you can learn on the job usually. However, it is important that the capital needs of the company match up with the venture firm’s ability to fund it. How much will the fund need to reserve to support the investment, and does this match up with the capital at the fund’s disposal.
E. Exit. What does this company look like at scale? Is a way to exit the company? Can grow to be a big company and thus do an initial public offering, or are there numerous buyers who might find it strategic/good technology fit? Who are these buyers, and have they been buying?

• Be knowledgeable on several industries/spaces that you think would be interesting investment areas for the fund. This is pretty critical. The firm is going to be looking for your to be able to source new investment opportunities, and this starts with figuring out industries that are potentially interesting. Use the criteria laid out for what makes a market interesting, and cite facts and figures around the space you’ve picked as proof that you know what you are talking about. Finally, know of and have the ability to make intros to companies in that space that may be good investment candidates.
• Prove that you can learn to execute deals. Show that you are not an idiot mathematically - did you get good grades? Talk about analyses you’ve run at your last job. Mention negotiations that you’ve been part of.

This isn’t intended to be an exhaustive list of questions that you will be asked in a venture interview. Most of my interviews (at least the ones where I’ve gotten the job) have been multi-day affairs, so obviously you are going to get asked a lot of different questions. But you would be amazed - venture partners tend to ask pretty similar things. Stick to a solid framework, because the partners at the fund are going to be comparing notes with each other and you are going to need to be consistent.