VCs chat with Microsoft

I help organize events for the New England Venture Network, and we recently met with Dan’l Lewin of Microsoft. Dan’l is a Corporate Vice President for Strategic and Emerging Business Development and is responsible for Microsoft Corp.’s global relationships with startups and venture capitalists. He had some interesting things to say…

Microsoft intends to keep a healthy startup acquisition pace

Over the past several years MSFT has acquired approximately 20 companies per year, and this strategy willMicrosoft's Lewinlikely continue in the current environment. Dan’l reminded us, as venture capitalists, that our startups were worth something to Microsoft based on their IP and the employees who created that IP. Microsoft does not really need any help with distribution, sales people or customer lists, so he seemed to imply that his ideal time to make a purchase is when the startup has proved its validity with some customers but before it has built out its large own, internal sales team and distribution partners. It sounded like acquisitions in the sub $200 million range were much easier for MSFT division heads to complete than larger purchases, in particular if these fit neatly into that division’s stated strategic goals. Again, no change to Microsoft’s current strategy. But good to hear that they will keep buying companies in this bad economic situation.

Microsoft is trying to keep its software relevant to startups

I got the pretty clear feeling that MSFT feels serious pressure from open source. To combat this they have a cool new program called BizSpark. Basically, they are willing to give away a lot of very valuable Microsoft software to startups that are less than 3 years old and that have less than $1 million in revenue. It’s not a bad idea, as I do know that a number of developers enjoy .NET. Curious to hear people’s impressions of this program.

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Atlas raises new fund

Atlas Venture, the fund that I work for, has announced the raise of our 8th fund. This is a real accomplishment, given the horrid state of the financial markets. And, it means that we are still making investments. Wahoo! 

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Strategies for solid Web 2.0 products

Here is a great link to “50 Essential Strategies For Creating A Successful Web 2.0 Product” by Dion Hinchcliffe. I’m about half way through the list, but some of the points are pretty thought provoking. Dion is trying to be quite comprehensive, so he has the standard “release early and often” advice, but also has more nuanced suggestions such as “Search is the new navigation, make it easy to use in your application” and “The link is the fundamental unit of thought on the Web, therefore richly link-enable your applications.”

This is a solid read on Web 2.0 strategy/design execution. I’d recommend that even experienced web executives take a look at the list. Even if you already know everything he mentions it is still a well written refresher on what makes the online environment so special.

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State of the venture capital industry

Interesting link today in PE Hub on the drop off in venture capital funding in Q4 2008. The post attempting to prove that well known funds like KP and Sequoia have slowed done their investment pace in Q4. I would think it’s pretty obvious all VCs backed down in Q4 – just like everyone else, VCs were reeling from the tempest in the financial markets and trying to understand how that would affect their portfolio companies and favorite industry spaces. I think more interesting are the spreadsheets linked at the bottom of the page. If I’m parsing the data correctly, then Q4 venture capital investments were off pretty substantially, both in terms of number of companies backed and total dollars invested.

  • Q4 2007: $8.085 billion invested in 1,051 companies.
  • Q4 2008: $5.403 billion invested in 818 companies. 

Drop from Q4 2007 to Q4 2008 was approximately 40% for both metrics. That’s a big drop, although not as big as the 60%+ drop from 2000 to 2001. (full year and Q4 drop were both just over 60%)

Here is the breakdown by stage (I’ve considered startup/seed + early as “Early stage” and expansion + later stage as “Later stage.”)

  • Q4 2007: Early stage: $2.012 billion invested in 387 companies.
  • Q4 2008: Early stage: $1.564 billion invested in 326 companies.
  • Q4 2007: Late stage: $6.073 billion invested in 664 companies.
  • Q4 2008: Late stage: $3.839 billion invested in 492 companies.

Drop from Q4 2007 to Q4 2008 for early stage was -22% in $ and – 16% in # of companies invested in.

Drop over the same time period for late stage was -37% and -26%, respectively.


It’s getting hard to raise new capital, and even harder to raise follow on capital? I think that makes sense if you consider my previous post on VC funds cutting off lower ranking portfolio companies from the follow on financing teat more quickly. 

*Note: I got all of this data from the “National data spreadsheets, including sector-by-sector investing” spreadsheet at the bottom of the PE Hub post – I hope I’m using the best data.

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Tough times for VCs means tough times for venture backed startups

Dow Jones’ Venturewire, a news service for VCs, today published an article titled “Darwinism Sets In At Claremont Creek.” This article described a venture capital firm dealing with the recent economic downturn, and how they are allocating their reserves to existing portfolio companies out of their older fund. The key take away from the article is that the fund will continue to fund their best investments but will stop backing their less-promising startups. In other words, some of their companies are not going to get additional funding from them.

That’s pretty bad news for some of their portfolio companies. The article talks a bit about how this is happening across the venture universe, and I believe that the journalist used the Claremont Creek fund as an example because they were very forthright on explaining their efforts/methods/thought process. Hats off to the investors at Claremont for being so honest about this. Startup CEOs can learn a lot from this example.

So that you understand a bit better what is going on here, we can go with the math presented in this article. Claremont Creek’s older fund was raised in 2005 and was $130 million in size. It has made $44 million in investments into 16 portfolio companies. (They are not making investments into new companies out of this fund; instead, new investments are made out of a new fund, a $175 million fund, that was recently raised.)

The older fund should have reserved the remaining $86 million ($130 million – $44 million already invested) for these 16 companies. That’s about $5.4 million for each company. I’m willing to bet they did a robust job projecting the cash needs for these 16 portfolio companies, so let’s pretend that each portfolio company “needed” that $5.4 million to get to an exit/become profitable or whatever.

But now we have the evil economic downturn.

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