Startable

Julien Wallen had an interesting comment on my recent blog post on new year’s resolutions - in particular my resolution to attend more technology conferences in 2009. He quite astutely questioned if technology conferences had a positive ROI, “But I’m somewhat cautious about conferences. My experience is that either you need to prepare really really well to make best use of the time or the ROI is really questionable - that is with a startup budget not a VC one ;-)” So, I’d like to see if I can get a discussion going around this, and thought I’d offer up a venture capitalist’s opinion on technology conferences so that entrepreneurs could get a bit of a feel for if and how technology conferences might fit into their venture financing strategy. (read Julien’s blog post response on the ROI of tech conferences here)

Are technology conferences worth the cost?

Is there a positive ROI for a VC to attend a technology conference? 

Of course the answer is that It Depends!

Wow, what a cop-out answer!

As a venture capitalist, I attend conferences for one of three reasons (I reserve the right to increase the number of reasons if more become apparent.)

1. Meet new startups - conferences can be a very good place to meet new startups and find new potential investments.
2. Fill in an investment thesis - industry specific conferences can be great places for a venture capitalist to refine an investment thesis and learn more about the competitive landscape in an industry, get a feel for customer needs, the next generation of technology, best practices, etc.
3. Support an existing portfolio company - a good venture capitalist makes introductions that help portfolio companies succeed. Conferences can be great places for a VC to facilitate in person meeting between portfolio company executives and critical players in that company’s ecosystem. (In my short, not particularly illustrious career as a VC one of my shining moments was at a conference where I introduced a portfolio company CEO to several players, one of whom ended up becoming a large customer of the company and another of whom is now a serious channel partner for the business. The CEO compensated me with a cookie at a board meeting - a very tasty cookie.)

How does a venture capitalist make the conference worth the cost?

Preparation! In a prefect world, my conference schedule would be almost as scheduled as a day in the office, with back to back meetings with entrepreneurs and key players. Of course, one of the advantages of a conference is the ability to “wander” around and “bump into” people/companies that have been difficult for me to reach - and having a game plan in advance on who and which people/startups I want to “randomly” meet is pretty critical.

As an entrepreneur, how should technology conferences fit into my venture financing strategy? Read the rest of this entry »

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.”

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.

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. 

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…

Read the rest of this entry »

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.

The Wall Street Journal has a pretty negative article on Google’s innovation programs and cost cutting efforts. (Thanks to Prasad for finding this and highlighting it via his Twitter account.) Here is why Google’s innovation efforts matter to me as a venture capitalist - investors and technology entrepreneurs have a fear of Google. In meetings I often hear, “why can’t Google just do this with their engineers’ spare time?” or “why can’t Google come up with something like this and crush you with their distribution?”

From the article:

…with the U.S. economy in a recession, Google is ratcheting back spending and cutting new projects. “We have to behave as though we don’t know” what’s going to happen, says Google Chief Executive Eric Schmidt. The company will curtail the “dark matter,” he says, projects that “haven’t really caught on” and “aren’t really that exciting.” He says the company is “not going to give” an engineer 20 people to work with on certain experimental projects anymore. “When the cycle comes back,” he says, “we will be able to fund his brilliant vision.”

The thought among VCs was that, with millions and millions of people viewing the Google search page each day, Google could easily launch and test all sorts of crazy new services, like Google Checkout or Google Finance or Google Base or Gmail. Some of these have really taken off, and with the early(ish) success of Gmail VCs were quaking in our collective boots that Google could easily leverage its distribution power into huge market share for any new product its engineers dreamed of creating.

But maybe Google’s distribtion heft isn’t enough? 

Anyways, this was more of a long tweet than a real blog post. There is no real conclusion here, just a thought I wanted to throw out there.

Here is another almost meaningless pointer for an entrepreneur about to pitch a startup to a venture capitalist:

VC Pitch Tip #4 - You don’t need to wear a tie to meet with an early stage venture capitalist.

In Palo Alto or Boston you don’t need to wear a tie if you are presenting to an early stage technology venture capitalist.

If you do wear a suit and a tie, I’m pretty sure that the VC’s first thought is that you are… well, hmm. How do I say this nicely. A bit of a dinosaur? We usually groan when we go into a meeting and the management team is wearing suits and ties.

I’m not suggesting you dress like an idiot or anything, but I’m just saying that you are better off in khakis and a shirt than an average suit and tie if you are pitching early stage investors. (Per Prasad’s comment below, there is nothing wrong with a sports jacket!)

Although, as an aside, there was one entrepreneur who wore such a crazy suit it was actually a positive. The guy was clearly a propeller-head, but quite backable. His suit only added to the charm. I’m trying to think of how to describe it, sort of retro with a funny skinny tie. Not like an expensive Prada suit or anything, but something quirky like you’d expect a guy who had made a nice chunk of money selling an algorithm in his early 20’s would have - which is exactly who the guy was. And I guess European management teams sometimes pull off the suit, and sometimes the flashy media-types from NYC or LA can get away with their giant pink ties. But for the rest of us… a suit and tie is just not a great idea.

This tip may not hold for startups meeting with VCs in other parts of the country - I just don’t have any experience away from Sand Hill or Winter Street, so I don’t know.

I guess the real tip here is: if you are not certain what to wear, you can ask. Since most VCs probably have an executive assistant who helps arrange the meetings, you can easily ask this person without embarrassing yourself as you are setting up the meeting. Or, you can call the general number and anomalously ask what most teams wear when the present to the venture fund.

And, ok, I’m not a real fashion buff myself. (Below is the picture to prove it… my wife hates this shirt.) But since you are selling yourself when you meet with Vcs you ought to try to look the part.

Venture capitalists valuing startup companies have a particularly difficult challenge these days, as public company comparable values have plummeted. This makes it even harder for the startup entrepreneur seeking venture capital know what their startup is worth. I’d like to highlight a particular phenomena that may come into play when VCs are valuing startups. This phenomena usually happens sometime after the Series A round, most likely at a Series B or Series C round. I call this the “venture capital valuation valley of death.” (I tried to come up with word for death that started with the letter “v,” but I’m a financier not a poet and alliteration is not my strong point.) 

There is a point when a startup ceases to be valued only as a technology/idea and becomes valued a real business. Or, maybe this is more of a hope - after all, venture capital investors often recite the mantra, “we invest to build real businesses, not to do quick flips.” Quick flips are valued off of hype, technology IP and momentum. Real businesses are supposed to be valued off of silly metrics like cash flow multiples. OK, ok, revenue multiples. (Please don’t mention DCF’s. I just don’t care.)

Anyways, sometimes a really interesting technology/idea attracts interest from larger players - “strategics.” If this company is truly game changing or strategic to several potential acquirers then one or more of these larger companies may reach the conclusion that they need to own that technology and will pay a large price for it before the startup has begun creating revenues. Usually the strategics are thinking that they could easily finish the technology development and push the solution through their existing channels to their existing customers and reap significant value. 

At this point, the startup may be more valuable to the strategic acquirers than typical financial valuation metrics would suggest. The technology/hype has run ahead of the traditional financial valuation. Now the entrepreneurs and venture capitalists have to make a decision - a) do they sell the startup now based on the promise or b) do they soldier on and try to create a real business. If b), the startup enters the valuation valley of death. 

The startup’s value may flat-line or even decrease at this point. Read the rest of this entry »

As I continue to have my thinking cap on regarding cloud computing for the enterprise, I’m trying to come up with the different “pins” that will need to get knocked down for real enterprise adoption. I was turned on to a post on ElasticVapor on a cloud computing interoperability effort via a CNET post. The basic tenant of the article is that in order for enterprise to get really excited about moving applications/data into the cloud that they will have to be able to easily port data between different cloud computing providers’ systems.

Since my relatively dense previous post on cloud computing adoption and the enterprise wasn’t all that well loved by this blog’s readership base, I thought I’d post another… Read the rest of this entry »