Quick VC pitch tip #5

Yet another probably not particularly useful tip for entrepreneurs pitching their startup to a venture capitalist:

VC Pitch Tip #5 – The Venture Capitalist will want to hear a lot about your team

One of the most important, if not THE most important, component of a startup is the team. Venture capitalists will want to know a ton about the people starting the business. This is pretty intuitive, since most VCs invest in ideas before they are real businesses. Thus, the founders/management team ARE the business!

For whatever reason, CEOs sometimes forget to describe their background and accomplishments to me when they talk about their business. This happens much more often than you’d think. Don’t get caught off guard by the “tell me more about your team” question – have a great answer ready! Impress the VC! You can do this without seeming like a braggart. You’ll want to make sure you mention your role and key accomplishments. Metrics are great. Things that come across wonderfully are “I was the third employee and we sold the business for X million dollars two years after I joined” or “I managed 30 people” or “my last company developed critical IP in XYZ space.”

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National Venture Capital Association 2009 prediction survey

Assuming that you think that venture capitalists are decent forecasters of the future you might find the NVCA’s 2009 VC prediction study interesting. The study, linked here, is the National Venture Capital Associations annual study where the group asks Vcs a bunch of questions about what they think the next year will bring. Of course, since most VCs (hopefully) get about 4 out of 10 companies they invest in forecasted correctly, the study should be taken with a grain of salt. :)

There are some real take aways in the survey that should be noted by startup technology CEOs thinking about raising venture fund raising. In particular, the surveyed VCs predict that in 2009 fewer venture dollars will be invested. Also, fewer angel and early stage investments are projected. This is not a great sign. (see pages 3 and 9.) Additionally, some sectors that are traditionally heavy users of venture funding, such as semiconductors, appear to be out of favor. Not too surprising, venture capitalists continue to be into the cleantech space. I am a little surprised that the internet sector and the software sector got such a negative outlook. My gut would be that VCs are turning negative on the traditional internet advertising driven model. For software, not totally sure, but maybe VCs see a real slowdown in enterprise software purchases.

If early stage startup financing dollars do dramatically drop in the coming year then entrepreneurs need to be careful NOW in how they plan for growth.

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Venture B rounds in New England

Foley Hoag, a respected securities law firm, has posted a report on B round venture capital investments in the New England area. Unfortunately, the data is based off of June 2008 data, so it appears a bit dated at this point; it will be much more interesting to see what the results look like for Q3 and Q4 ’08… I’ll keep on top of this. 

However, their partners do provide some interesting commentary that fit with my current experiences, “we are seeing some bridge note rounds intended to stretch the company to the next round, where a year ago or earlier in 2008 we might have expected to go straight to a B round.”

One of the trends that I am currently noticing (keep in mind I probably don’t have long enough of a time horizon to really have an opinion on this) is that VCs are hesitant to have their companies go out for a B round in the current environment. This seems to be for 2 key reasons – 1) valuations are really down, and VCs do not wish to be diluted/realize the decrease in value or 2) fear that a deal just isn’t going to get done in a reasonable time frame given the current fear in the market. Nine months ago a solid venture backed company with a legitimate, named series A investor could have expected to raise a reasonable up round from a decent venture firm in a reasonable time frame. These days, that isn’t necessarily the case.

As a result of this, I’m seeing a lot of B or later rounds done internally as convertible notes. Sometimes these are called A+ or B+ deals, sometimes they are simply called bridge notes. Either the notes take on the same form as the previous preferred venture shares (i.e. a flat valuation) or they are convertible notes with no valuation attached. These notes will convert at the next, outside led round, into that next round’s preferred securities, usually with a bit of a valuation discount. Note that this pushes off the day of reckoning – the value doesn’t have to get reset until the point in the future when an outsider comes in and leads a new round. The hope would be that the market returns to normal as the company hits some metrics that make it more valuable (or just plain old justify the original valuation!)

This is a good reason to have synciated your Series A venture round!

If your startup suddenly needs you original investors to support it for more time with less outside money, you are going to be much better off if you’ve got multiple venture fundsn your first round. It will make it all that much easier to tap the well once again – two deep pockets are much better in these times than a single deep pocket. 

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Venture capital industry in crisis – I would hope so

I attended the MIT VC Conference this past weekend, and there has been a fair amount of PR/controversy from the opening discussion. Several well known (and quite successful) venture capitalists were answering a series of questions pertinent to the venture industry and relevant to technology entrepreneurs. The panelists addressed the issue of weather or not the venture industry is in a crisis and if so does the VC industry need to reinvent itself. 

The resounding answer was that, yes, the industry needs to reinvent itself. Then there was a long discussion on the issues and what caused the current situation, with some of the general consensus being that there was too much venture capital money in the system chasing too few good investment opportunities, thus destroying returns for the industry as a whole. 

I’d agree with that. In fact, I’d hope that people would want to emulate the venture capital industry. Why? Because it shows that the industry is getting has gotten good returns and thus, others want a piece of the action! If the VC industry was total crap no one would want to invest their money in the space. I’d rather be in an industry that everyone wants to be in…

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Webinnovators and an note on 2009 technology spending

Just a quick post today with a link to a depressing article in the WSJ on Forrester Research’s projection of 2009 technology spending. Also, I’ll be heading to Webinnovators this evening; hope to see some of you there.

2009 Technology Spend Projections

The WSJ is reporting that Forrester projects very light technology spending growth for 2009. This shouldn’t really come as a surprise, and to be completely honest I hope that we don’t see a decline. Our conversation with CIOs at large corporations, particularly financial services firms, have been pretty downbeat. Most of these executives are under pressure to be very careful with their technology spending next year. Forrester is projecting a 1.6% growth in software, hardware and services spend next year for a total of $573 billion.

The items that worries me the most is that, in a flat spending technology environment one line item tends to continue to grow and crowd out other spend – services. Technology management is becoming increasingly difficult, and the people costs of keeping systems running and patched/updated keeps getting more and more complex. If a CIO has the mandate to keep spending flat, and if additional employees, consultants and outside services are required to simply keep existing systems running then new tech spend like software and hardware could actually fall a bit next year. Let’s keep our fingers crossed! Unless you’re a CIO – then keep your fingers busy signing checks to acquire that new virtualization solution and to build out that awesome new data center!!!

Webinnovators

I’ll be at Webinnovators this evening. (I guess it is technically called the Web Innovators Group). Royal Sonesta Cambridge, 40 Edwin H Land Blvd, Cambridge, MA 02142 – 6:30 PM.

Bonus Link: CFO Basics Presentation

Mark MacLeod has a good post with a presentation he gave on what a good startup CFO needs to think about.

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