Startable – Healy Jones’ & Prasad Thammineni’s Blog

I was interviewed for an article on Angel investing by the Christian Science Monitor recently. Check out the article here.

Looks like there is a significant possibility of Congress passing new legislation that will make it easier for startups to raise seed capital. This would supposedly let a company raise up to $2 million from a large number of investors – and by investors, I don’t just mean accredited investors (the high net worth people who are currently restricted into making large private investments.)

This is both cool and scary.

Of course the part of me that likes seeing new companies have the capital to give it a shot loves this bill!

The side of me that watches American Greed is totally freaked out at how scam artists will use the bill to defraud grandma.

But I think there is a solution that can help out at least a little bit.

If the funds have to be raised through a registered, regulated institution like SecondMarket then there is a chance that some of the most basic fraud can be avoided. For example, if a private secondary marketplace can confirm that the people raising the money are 1) who the say they are and 2) actually own the company in question, then two of the more common frauds (that I can imagine) might be avoided.

I’m not saying this will alleviate all of the potential fraudsters, but at least there won’t be people tricking grandma into believing that they are Zuck or that they are offering an exclusive chance to own pre-IPO shares in some company that’s already public.

I realize that the secondary markets will need to collect a fee to provide this service, but they also will add significant value beyond vetting the “legitimacy” of the startup – they will also provide buyers/liquidity. This is a pretty big deal.

Wait a second!

The MoneyTree/PWC Q2 venture capital dollars by region shows Boston still on top over NYC for dollars invested in Q2 2011!

NYC vs Boston VC investments

This does not mesh with the data from CBinsights that was released just a few days ago.

I’ve reached out to my contact at CBinsights to see if he has any info on this. I bet there are just some differences in how the data is collected. But in the PWC data above New England is quite a bit over NYC.

At the end of the day this doesn’t really matter too much as long as all the regions software investments are up. I don’t believe that this is a zero sum game, and there can be multiple regions outside of the valley that have thriving internet hubs. NYC and Boston should both be among these. I dream of a interconnected Northeast coast internet hub from NYC to Boston along the Acela route… it makes sense give how connected these two regions are that startup talent, dollars and ideas flow along the coast in a giant melting pot of new startups, people and exits.

MoneyTree/PWC just released Q2 venture capital numbers – and the high level amount of VC investment in Q2 isn’t looking good.

But Software VC dollars are up.  So is IT services.

Software VC Dollars

In fact, according to PEhub, “Countering the decline was 23% jump in funding to software startups. With $2 billion invested – 29% of the total – the sector generated the highest quarterly investment level in 10 years, or since the fourth quarter of 2001.” Dollars per software startup was also up a lot.

By stage of development there are some interesting numbers as well… one is that seed investing seems to have taken a dip. Not too surprised – we’ve read a lot about the seed crunch recently. The good thing is that the early stage dollars are hanging in there, so the best seed deals seems to continue to get funding… (I hope.)

Lots of reports of the end of Massachusetts as a startup hub due to the fact that NYC raised more venture funding in Q3 2011 than Boston.

First of all, I am not upset that New York is becoming a real startup hub. Let’s got those technologists out of the backrooms of hedge funds and out there making some awesome products that people can actually use!

Secondly, I don’t think that there is a zero sum game here; if more and more companies do well there should be enough capital to go around.

Third, Mass has been huge in healthcare investing and has been less than stellar in Technology investments for a while now. As healthcare venture capital investments have dropped pretty agressively it makes sense that Massachusetts would dip.

IMHO, the thing that Massachusetts needs now to get it’s tech/internet mojo back is to have a few major exits take place – followed by the employees of those companies starting the next generation of startups + the local VCs recycling money back into the area.

I see some great companies in Boston that are ripe for doing just this. I hope that we see success with a few of them and can get the startup juices flowing again. I feel that the NYC to Boston Acela line could be the next startup super cluster, and I’d like Boston to pull its weight. Check out the CBinsights report for all the details; it’s the source of these charts.

While we all knew that VCs are actively investing in startups, we now have some solid data from two of the most important law firms that help startups – Cooley and Fenwick. I think it’s great these two firms release reports on the aggregate level data the collect during their work. They have both just come out with info on the second quarter 2011, and it’s both positive and pretty interesting.

Cooley’s Q2 report is here, and Fenwick’s is here.

2011 Q2 VC Activity

Valuations are solid! According to Cooley, “Average valuations for Series A deals were $8 million, a level not seen since Q3 2010.”

Coley is also reporting that the average startup’s Series A valuation was $8 million, and Series B was almost $22 million.

Follow rounds are healthy! Here are the % of rounds that up, according to Fenwick (this means that the subsequent round of financing for any given company increased from the previous. For example, comparing Series B to a previous Series A for the same company.

Both reports are packed with info worth checking out. Again, thanks to these firms for helping keep the entrepreneurial community up to date on the VC economy.  You can also read peHUB’s reaction to the reports (and thanks to them for tipping me off to the reports.)

PEhub is reporting on some interesting early stage/seed stage fund raising date. Seed and early stage rounds are all the rage and the number of investments is up – 464 in Q2 2011 vs 374 in Q1. However, it was flat vs the previous Q2, so I think we are seeing some of the typical Q2 deal bump.

More interesting is the fact that deal size is increasing, per the chart below:

The first half of 2011 wasn’t great for venture capital funds looking to raise funding. While the total dollar amount for 1h 2011 is higher than 1h 2010 – $10,419 million from $6,132 million – the number of funds raising that capital continues to shrink. My source is a PEhub article.

Number of VC funds raising capital in first half of the year

• 97 : 1h09
• 93 : 1h10
• 79 : 1h11

PEhub also points out something else being hidden by the increase in dollars raised figure:

Adding insult to injury, half the amount of those funds raised — $2.7 billion -– went to Accel Partners. The Palo Alto, Calif.-based firm raised an $875 million growth fund and a $475 million early-stage fund in less than two month’s time, according to a release that Accel issued several weeks ago.

It’s not a great time to be a third tier VC…

The industry is shrinking. With fewer and fewer funds (even if the overall dollar amount invested with funds stays constant) it will be harder and harder for startups to find funding. Maybe angels will be able to fill the gap for some internet startups, but traditional VC industries like biotech and cleantech and computer/telecom equipment will be really hurt by this trend.

2 quick links

1) The definition of a venture capital fund – from the SEC

The only people who’s definition of a venture capitalist matter are the SEC and investors in private equity funds. And, well, the SEC just decided what a venture capital fund is. I’ve been following Dan Primack as he writes this one up. See the definition here.

2) Apps rule; the web is dead

Scroble has a solid piece on how it is clear that apps are beating the web, yet many tech industry experts are not willing to believe it. His basic point is – look at how normal people use their devices, and you’ll see that it is totally app centric. Ignore users preferences and workflow at your own peril. Check out my last post on app usage surpassing web browsing for more data…

Cool news today, and props to BostInno for breaking the story on Performable being bought by Hubspot.

This deal makes sense if Hubspot customers are looking for deeper analytics, like the ones offered by Performable. It also combines a large and well known engineering team with Performable’s kick butt dev team. It’s good to see that Hubspot is putting some of that monster Series D money to good use.

The only issue I have with the acquistion is that it puts two of the top Boston area seed investors under the same roof. Dharmesh Shah and David Cancel are two really aggressive angel investors… hopefully them being in the same company won’t cause their individual deal flow to decrease as they spend more and more time together…