Startable – Healy Jones’ & Prasad Thammineni’s Blog

This picture needs no captions. Although, do you remember when Apple looked like it was going out of business?

UNH just published a piece entitled “Where Have All the Seed Investors Gone?” that purports that seed investing has dramatically decreased in the first half of 2010.

I don’t believe it.

This study contradicts my non-scientific view into the seed funding scene (for example, I ate dinner with one of the most active seed investors in Boston who said he had done way more new deals this year vs. last, despite having told his wife he was going to back off this year!) It also seems to go against the data recently released by CB Insights (which I blogged about because it showed that VC investing was going down in Massachusetts.)

I emailed Anand Sanwal of CB Insights to ask if he had an opinion on seed funding trends this year. His response:

You’re absolutely 100% right.  These findings are totally inconsistent with our data.  In fact, we’re seeing seed rounds in sectors that traditionally haven’t been areas for seed investment (green, healthcare).  So overall, seed investments are increasing.  Within tech (esp internet/mobile) which is where the seed phenomena has sprouted (apologies for the pun), the momentum is continuing and may even be accelerating.

The report seems to talk a lot about formal angel groups having a higher percentage of “latent,” i.e. non-active members of the group. I wonder if the UNH report has too strong of an emphasis on angel groups? I believe that they are playing a less important role in seed investing today. Instead, it seems that angel investing is now being driven by things like VentureHacks AngelList, which is an informal… group is too strong of a word, more like collection, of angel investors.

So, I believe that angel investing is alive and strong in the US right now.

The UNH study does have some interesting stats; the one I find most interesting is around the analysis on “Yield Rates:”

The yield (acceptance) rate is defined as the percentage of investment opportunities that are brought to the attention of investors that result in an investment. In Q1,2 2010 the yield rate was 12%, continuing a stabilization in yield rates that began in 2008 (10%) and continued in 2009 (14.5%).

While that seems a little high, in my opinion, I think it does show how difficult it is to raise capital. Raising venture capital or seed investments is hard…

As I mentioned in a previous post, my company recently did a lot of cool testing during our site redesign. Anand Rajaram, OfficeDrop’s co-founder has a series of posts on Performable’s blog that talk about tips, tricks and tools that we used during the process:

Optimizing Conversion Rates Part One – Quantitative Tests

Optimizing Conversion Rates Part Two – Qualitative Tests

Optimizing Conversion Rates Part Three – Lessons Learned

Startups vs Bubbles

I just saw a cool Tweet by Ariel Diaz, a Boston-area startup executive.

The link leads to a post entitled “The End of the College Textbook as We Know It?” There is a pretty eye-catching chart that implies there is a bubble in the textbook market:

If a chart like that doesn’t make you want to start a company you aren’t an entrepreneur!

Someone should chart various assets/commodities/services/etc against the CPI. Anywhere there is a chart where inflation of the item is outpacing the CPI by 2x or more is potentially fertile grounds for innovation. I’d like to dub this the:

Inflation Innovation Ratio

Startups can create value by “disrupting” a market – providing a better service/good through the power of technology. If a startup can offer a superior service at a lower price, then both the end consumer and the startup can capture some of the “rent*” extracted by the current players in the industry. Growing a business by shrinking a market.

One caveat I would add is that there are industries where inflation is happening for reasons that a startup may not be able to attack – such as government regulation. I’d hope that other reasons, such as problems in the distribution chain, could be overcome by the power of the internet to disrupt.

*despite having studied way too much economics the term for the lost consumer utility in a monopolistic market escapes me…

Bostoninnovation did a nice job with their Shutup & Startup event this Friday. I didn’t attend the Saturday session, but was pumped to see a number of local students at the kickoff evening on Friday. It’s good for someone to take initiative here and try to get the Boston startup community connected with the Boston student community. I’m happy they did this.

I stole this image from the Saturday session from the Bostoninnovation tweet stream:

I would love to see more of these events, in particular ones that have a large number of students studying CS/development.

Also, hopefully I didn’t freak any students out. In my attempt to try to make people feel welcome I decided to randomly approach people and say hi. I realize this isn’t the New England way, but I’m not from here so…

Roy Rodenstein had a recent post on Mass High Tech called 5 Reasons Startups Move to Silicon Valley. He pretty succinctly sums up a number of the bigger issues facing the Boston startup scene and lists a number of smart things the area can do to better retain startups and the talent that creates them. It is a great piece.

The only area where I take issue with his reasons that startups leave is that he is very focused on funding. Basically, four of his five reasons are about the lack of depth of seed/early stage funding in Boston. I left a comment saying that if I was to list five reasons startups leave Boston I wouldn’t have funding be four of them. In other words, I see other issues as more important – onces he touches on in his fifth point, the point on the ecosystem.

I’ll try to elaborate on a few of the problems I see in Boston – problems that make it less desirable for startup founders to want to found/keep their companies here. My point of view is colored by the years I spent living in San Francisco and by the fact that I am not originally from New England. Also, please keep in mind that as a guy helping run a startup in Cambridge I actually do think this is a great place to found a technology company.

1) Willingness to take a risk on less experienced founders. Or lack thereof. I think there are investors here who are willing to back new, cool companies. However, I don’t see that many investors who are willing to back young, unproven entrepreneurs. I can think of a number of successful companies on the West Coast who have very young founders who received funding. Everyone always points to Facebook, but the one that I really think of is Box.net. Very young founder focusing on an enterprise space gets funding from well known West Coast VCs. Are there any Boston area b2b companies where an early 20 something got funded and remains the CEO? Or even got funded?

2) Little willingness to roll up the sleeves and mentor/help other companies. This is a follow up to the first point – is Boston willing to help young company founders grow? I kind of feel that very few people in Boston will back young founders because few people really want to take the time to actually mentor them. I’m hopeful that things like TechStars and the Mass Challenge will provide a bit of the framework – and more importantly create lasting relationships between younger entrepreneurs and experienced mentor-types who can help them grow into executives like Zukerberg or Gates.

Ok, maybe those first two points could be considered somewhat related to “funding” so I’ll go in the opposite direction with the next.

3) Very few here-is-how-you-grow-your-company events. There are so many Boston events on getting funding – boring. What I want to know is how do I grow my company. I want events where people from successful local companies like Monster and Smart Bargains and Constant Contact tell war stories. Where the hell are these people? I have no desire to see a group of VCs talk about how they back management teams and pick big end markets. I want to hear what works and what doesn’t from people who have just created big, awesome tech companies. Some of the recent customer development and unconferences are big steps in the right direction.

4) Very little national, customer driving press. I can only think of one blogger/reporter in Boston who can actually get me customers – Scott Kirsner of the Boston Globe. The other journalists here try hard, but appearing in their publications doesn’t drive traffic to my site that converts into paying customers. TechCrunch, Mashable, Lifehacker, GigaOm, Gizmodo… I don’t think they have anyone in Boston. Connecting with reporters directly is very important to starting a dialog that gets your startup featured. I can’t do that here very easily. I am hopeful that both Xcomony and BostInnovation will grow into publications that DO drive customer growth – the reason why I think this will happen is because they both do in depth style writeups on products, not just articles around which companies are getting funded by whom. (Please note, I still love getting any and all press for OfficeDrop!)

5) It is hard to feel welcome as a “non-native” in Boston. When I first moved to San Francisco I felt like it was my city in just a few months. It took over a year to even begin to feel welcome in Boston. It’s hard to meet new people here. Mobility, which is a big part of getting to know and feel at home, is very challenging due to the fact that the drivers here are worse than those in third world countries that I’ve visited. It’s not just that there are no street signs, it is also that I really think there is a basic lack of understanding of the rules of the road,  civility in the car and enforcement of driving rules. There is also something strange about the culture that makes it harder for people to strike up conversations and relationships with people they’ve never met before. I believe that small steps are being taken by things like the Shutup Startup weekend coming up this weekend (I think I’ll go to the Friday night event). Hopefully this be a move in the right direction in helping students feel like part of the Boston community. (Also, since this particular point is becoming a little bit of an all over the place rant – Boston needs real happy hours. I think part of the reason I quickly made so many friends in SF was how easy it is to bond with people over cheap, after-work drinks. Ok, so that particular point is a stretch, but I really really miss happy hours.)

Boston is a great place to start a company. We have funding, world class universities, blah blah. But more importantly to young founders, Cambridge and Boston are great places to live. Unlike Silicon Valley, which is a really boring place to live when you are 24, Cambridge provides both a fun atmosphere and somewhat affordable startup real estate (trust me, I tried to live in Menlo Park when I was in my early twenties and only lasted 9 months. It is the most boring place in the world to live when you are young; other than the great Indian food it is way worse than Cambridge.)

So, if you want startups to thrive in Boston, do your part. I’m trying to get a group of experienced marketing folks together to mentor startups (calling it Boston Internet Guild, BIG). I’m making an effort to attend events where young startup folks gather. I’m talking up how great of a place Boston is to be. I’m sure I haven’t thought of everything – help me think of other things we should be doing to keep startups in Boston.

OfficeDrop co-founder Anand Rajaram has posted his second piece on Performable’s blog about how OfficeDrop used user testing during our site redesign to increase our site’s conversion numbers.

We’ve been having a lot of luck with our online videos. At OfficeDrop, we use them both as teasers/commercials to get people interested in using our services and as how-to videos that explain features and integrations. People seem to like them, and we see a real correlation between people who watch the videos (even a portion of them) and who sign up as customers. Here is an example of our main “teaser” intro video – I’m going to have to update it soon based on several new features that we’ve recently introduced.

I also try to use them as “link bait” i.e. putting some educational content out there and hope that other link to it based on the good info we basically give away; see our digital office page as an example. Online video is a pretty important part of our site and building and marketing strategy.

Prasad has a new post on Small Business Trends that lays out some simple tips for creating better online video. If you have a site, I’d recommend using simple online videos to promote and sell your service. Or at least make it more personal and give potential customers the chance to see what you look like and “bond” with you!

One of OfficeDrop’s cofounders, Anand Rajaram, and I (and the rest of the team too!) recently learned a lot about our customers during a site redesign. Anand really used some cool, cutting edge online tools to help us with this redesign – and as a consequence we were able to nicely increase our site’s conversion rate.

He is writing a series of posts on this redesign on Performable’s blog. The first is up, Optimizing Conversion Rates with Simple Tests. I’m not going to lie, it’s a pretty good post! Online testing tools are pretty powerful, and I’d encourage you to try some of the ones we used, like UserTesting, Feedback Army, and FiveSecondTest.

CB Insights’ data is showing that Massachusetts early stage fund raising, as a $ volume, really dropped in the past quarter.

Massachusetts Funding Plummets – The state sees a five quarter low dropping below half a billion dollars of funding while dealflow stays consistent. Healthcare remains dominant but loses some share of dollars and deals to internet and software. Portion of state’s deals going to seed deals significantly less than New York and California.

While the number of deals in the state remains the same, the dollar volume is way, way off. A chart from CB Insights’ report:

Basically, it looks like the size of dollars invested by deal has dropped in half since Q1 (~$10mm per deal vs ~$5mm per deal.)

It also seems like NYC has surpassed Boston for early stage internet deals. This is actually a pretty big thing. I’m not against NYC doing well, and also postulate that there is some positive spill over to Boston for a good funding environment in NYC – in fact, OfficeDrop‘s funding source in NYC based.

But what is prompting the drop in Boston, while both CA and NYC have gone up? What is going on?

Some potential ideas on the funding situation in Massachusetts

Healthcare seems to have been hit hard this quarter. Healthcare has been a very important part of the Boston venture scene, and also tends to have higher average deal size. Over the past three quarters, for example, the average healthcare deal size has been about $10mm per deal, vs about $6mm for internet investments. See page 41 of the report to see some charts on this in Mass.

Lack of big deals. Other regions have some serious Series C deals – that have lots of capital invested, thus dramatically popping the average + total deal size. Did Mass have any really big later stage deals?

Lack of clean tech. “energy and utilities” are 7% of deal volume in California – but only 3% in Mass. These tend to be bigger deals than internet. Did Massachusetts miss the cleantech boom?

Are Mass companies too quiet? For example, when my company raised funding last year we didn’t really let any of the data providers know, do a press release, or even a blog post. I know of several other MA companies that have raised $500k+ that haven’t announced it. Maybe fund raising isn’t enough of a status thing in MA?

Is seed funding too popular in Mass? This chart is from page 42.

Actually, now that I compare the above chart to California, I think the answer is no. CA not only has more seed deals, but also has more Series D+ deals. Maybe the real idea is that MA companies get sold before needing huge capital raises? IDK.

This is a very good report. Download it.