Startable - Healy Jones’ & Prasad Thammineni’s Blog

Yesterday MSFT announced their new cloud computing service, “Windows Azure.” I’m not going to get into detail here on it because it has clearly been beaten to death by much more talented writers, and I’m also a day 

late to the party. However, given the recurring theme on this blog about cloud computing I feel the need to comment. I believe that the Microsoft cloud computing heralds the enterprise’s acceptance of the cloud - and that is big.

My prediction is that enterprises will dip their toes into the cloud by taking advantage of the cloud’s compute power, putting computationally intensive crunching into the cloud first. Likely this will be non-core or lower sensitive data in a non-mission critical process. As SLAs are better understood and security is, well more secure, other things like backup and redundancy will likely scoot towards the cloud. Eventually we’ll get full blown enterprise applications in the cloud. 

Here is a good post on the MSFT cloud effort if you want to learn more.

One of the more important venture fund raising decisions a startup entrepreneur has to make is around their Series A VC deal syndication strategy. Specifically, an entrepreneur needs to decide if he or she wants to raise capital from a single venture capital firm or “syndicate” the investment with two or more funds at once. VC deal syndication is a pretty funny dance, with the entrepreneur trying to get VCs to converge, and venture capitalists trying to feel out each other and the company to see how/where/when an investment might come together. Given the added complexity of getting two VCs at once, many entrepreneurs consider raising capital from a single fund and screwing the whole “syndication” thing.

Venture funds of the size of Atlas (my employer), about $400 million in the current fund (Atlas Venture VII), can easily cut the check for most reasonable Series A rounds. However, most Series A rounds are syndicated. I would postulate that startups with two strong Series A VCs are in a much better position than firms that raised capital with only one VC, and have outlined some of the reasons for and against syndication at the Series A. Some of these reasons are magnified given the difficulty in the current capital markets.

(While I think most people coming to this blog are familiar with basic VC terminology, as a reminder the first institutional investment in a startup is usually called a “Series A” investment, the second is called the “Series B,” etc. Also, when I say first institutional fund raise I am specifically talking about the first investment in the startup where a formally organized venture capital firm provides some of the cash invested.)

Reasons to Syndicate:

1. More potential capital for your business. There is a limit to the amount of capital that a venture fund can commit to any given startup. If your company has two VCs invested in the Series A, the theoretical amount of capital available to your startup is greater.
2. Protection. Read the rest of this entry »
   

Little overwhelmed right now, but thought I would share two links I’ve recently come across that I’ve found quite interesting. One is on the freemium business model for startups and the other is data on recent Series A venture capital financings in New England.

Freemium is Not a Business Model, by Mark Evans. Mark is a Canadian writer/entrepreneur. The comments section here is really interesting; worth scrolling through. I agree that many startups underestimate the difficulties of making a real business via a freemium. However, enough startups have succeeded with this model that it has to be taken seriously. To prove that you’ve got a startup capable of really creating huge revenues via a freemium model you’ve got to have a serious marketing and conversion engine (that’s my two cents…)

Quarterly Review of Series A Financings in New England, by Foley Hoag. (download the pdf for the report) Foley Hoag is a respected corporate law firm. Their attorney’s provide the following commentary: “Series A rounds are getting done despite the general economic climate; and yes, they are getting done at a more modest level because of it.” “The first two quarters in 2008 saw a general decline nationally in Series A transactions (down 8% from the same period in 2007), with a more marked downturn felt in New England (down almost 30% from 2007).” Keep in mind they are using a small sample set for their analysis, but it’s still an interesting read.

It’s becoming increasingly clear that the generic advertising based web 2.0 business models are struggling, and I am wondering if lead gen business models are a much more effective model for the current downturn. Some of my partners are saying that 100 million in the new 10 million, as in a startup now needs 100 million monthly views to generate venture style revenue returns based off of a pure advertising based business model. While this is a bit of a cynical joke, there does seem to be statistically valid slipping in online CPMs, particularly around untargeted display advertisements. Targeting definitely helps, and some startups that I interact with are earning $25 to $60 CPMs… however, these are for highly desirable user groups. If you really think your startup has better targeting but doesn’t have huge users maybe you should consider using lead generation to do the monetization yourself.*

My general thought process is as follows:

1. Targeting requires work and advertisers can be lazy. Read the rest of this entry »
   

Your startup can survive this recession. The stock market might be crap and financiers may be pissing themselves with fear, but other entrepreneurs before you have fought through these tough times and had tremendous success. In the light of depressing powerpoint presentations on the state of the market created by some venture firms, I thought I’d highlight companies that you may have heard of that got going when the economy was hurting.*

The Late 1930’s - Europe is at war and the US economy is limping through the Great Depression. Dave Packard and Bill Hewlett conduct some experiments in a garage in Palo Alto… and in January 1, 1939 formally launch the Hewlett-Packard Company. Yes, that’s right. The cornerstone corporation of Silicon Valley was founded during the Great Depression.

Early 1980’s - Read the rest of this entry »

In an earlier post Prasad Thammineni makes a thesis for why startups should blog. He also asks the question, “Do VCs care if startups have a blog?” As a venture capitalist, I would say, “yes, a startup blog is not a bad idea.”

I will ignore the obvious reasons to blog, such as search engine goodness, brand building, etc. Instead, I’ll focus on why your startup blog matters to a VC.

If you are trying to raise venture capital, a blog isn’t a bad idea because:

1. A VC might find YOU via your blog. This is true - VCs just don’t sit on their butts and wait for new investments to walk in the door. In fact, some VCs actually know how to use Google… and during our research into your space might we just might stumble across your thoughts and then contact you.  
2. Thought leadership/PR. If you are a really well known blogger in your space then you will potentially get quoted in press articles and/or asked to speak at events. Since most VCs can read (and a few can even listen) there is a chance that they will be so intrigued by what you’ve said that they reach out to you. Read the rest of this entry »
   

Recent conversations with startup founders and their questions on VC’s ability to invest given the current market conditions have reminded me that many technologists do not realize how venture capitalists manage their funds. Unlike mutual funds, VCs should be able to invest regardless of the market’s state. 

Many people tend to think of VCs as mutual funds that invest in private companies, but this analogy is wrong on several levels. Many mutual funds take money from investors on a rolling basis and begin investing in the market as they get these funds. Unless the fund gets additional investors’ money (or sells current holdings) it does not have capital to place in new investments (that is a generalization, but let’s go with it). Also, if current investors wish to withdraw capital from the fund they usually can do so on a daily basis. This results in the fund either using existing cash or selling assets to raise cash for these redemptions. Again, this is done on a rolling basis.

Venture capital funds are raised and redeemed differently. First, they are not raised on a rolling basis. Rather, a group of Limited Partners (LPs). These LPs sign an agreement with the venture capital firm agreeing to provide a specific amount of capital to the venture firm as needed. The summation of these LPs commitments is the size of the fund. If a VC has 50 investors who each commit, on average, $10 million then the VC has a $500 million fund. 

It is important to realize that the VC has not actually taken possession of this $500 million. Read the rest of this entry »

Last night I attended a dinner where Mark Heesen, President of the National Venture Capital Association, spoke for a little bit about the state of the venture capital industry. One of his major topics was around the poor exit market for venture capital backed portfolio companies. The number of IPOs this year for venture backed companies has been ridiculously low (I think he said only 6). The time from first funding to IPO for the companies that have been able to go public has lengthened to 8.5 years, the longest time period since this metric was tracked. This means that the “hold time,” i.e. the amount of time that VC’s are actively supporting a business with their fund, has gotten longer.

The increase in hold time could mean that the number of new startups receiving venture backing over the next few years could decrease. This would be caused by two primary factors:

1. Read the rest of this entry »
   

You need a financial model when you pitch VCs, now more than ever. Like it or not, venture capitalists’ risk tolerances have at least been slightly negatively affected by the horrific market conditions. While solid venture firms continue to make investments in startups (as proof, here is one of my European partner’s blog posts about Atlas’ recent investment in Inspiration Stores), everyone is subconsciously affected by the capital markets turbulence. In other words, venture capitalists want and need to make investments in promising technology companies… but when the market keeps falling by 300+ points day after day even the most risk loving investors can have dangerous conservative thoughts. You, as an entrepreneur seeking venture capital funding, can combat this by signaling to the VC that you will be a respectful steward of their investment. One of the best signaling factors you can create is through a realistic financial plan.

I am specifically addressing R&D/development stage companies - companies who will not have meaningful revenue for the near near term. I should also define financial plan - I mean a detailed spending plan for the next 2ish years, the period during which the funding will be used. Of course, if you will have revenue during this period of time you should also have a realistic plan for how and when you will earn this revenue.

Read the rest of this entry »

Ah, angel investors. With a name like that, you’d think angel investors would be everything venture capitalists are not - warm, forgiving, easy going, free flowing with their cash… I’m sure there are some angel investors who have those qualities. However, most of the angels I’ve interacted with have been smart business people looking to generate significant returns - not so different from venture capitalists. As your startup searches for funding you will likely be introduced to angel investors. Here are a few things you ought to think about while you interact with angels:

• Friends and family can be angels… but you’d better treat them right. Make sure your f&f realize that the investment is risky; clearly tell them they could easily lose their entire investment. It’s probably a bad idea to let them invest their entire life savings. Make it clear that the investment will not be liquid, so they will not be able to ask for the return of their money at a specific time. Make sure they know that their investment could be diluted to no value by future financing rounds. Don’t make the mistake of relying on a handshake or legal investment documents downloaded off the internet. Hire an experienced lawyer and make sure everything is clearly explained to your f&f.
• Don’t confuse smart business person with experienced investor. Read the rest of this entry »