Startable - Healy Jones’ & Prasad Thammineni’s Blog

Congratulations to Mike, Bruce, Sandro and Bill of DataXu for raising a Series B investment from Menlo Ventures, a well known Silicon Valley venture capital firm. Atlas Venture and Flybridge, the Series A investors, invested in this round as well. I got to know the DataXu team when I was with Atlas and worked on the Series A investment. Mike has a great team and some solid technology.

I think it is great that important West Coast VCs are making follow on investments in the  Boston area - another prominent investment like this is Scale Ventures investment in Hubspots most recent round. When Boston companies are doing well enough to attract capital from outside the region then you know something good is happening.

Also important - while Boston may the the number 2 venture capital pool in the world, it is nothing compared to the capital available in Silicon Valley. When venture firms from San Francisco supplement local New England funds this means that there is more early stage capital available in the region to support innovation - a really good thing! Let’s hope for some more great companies like DataXu and Hubspot. Actually - let’s try to make them ourselves!!!

Betaworks is another newer seed fund with a different model, as mentioned in PEHub. The group focuses on “new media” opportunities. They are really innovating with the structure of their fund - they are actually not a fund. Instead, they have organized as a company. It sounds like they want to be some sort of new media holding company, with some operations internal to the business (either by acquisition or by founding it internally) or by making seed investments in startups.

When making seed investments (as quoted in the PEHub interview) they “invest as little as $25,000, though our average is in the hundreds of thousands of dollars. We mostly join rounds that are a million dollars or less altogether, and we typically participate with early-stage investors that we work with again and again and again.” This is a great spot, as it is clearly underserved.

It’s clear that they focus on internet and online media companies, with investments/ownership of bit.ly, Stocktwits and Twitterfeed.

I think this is an interesting model. I kind of like it. Build it, buy it or invest in it. Pretty fun options.

I guess my one fear as an entrepreneur pitching to this group is, will they try to develop the idea on their own, since they have developer resources and ambitions of becoming a holding company? I’m assuming they will try to handle this sort of an issue like top tier VCs do, and try to avoid these types of conflicts - but it’s to say from their web site how they approach such competitive issues when evaluating investment ideas.

Their web site is not at all like the traditional VC or angel investment group. I appreciate all the cool stuff on the site, but it is a bit confusing to figure out what their thesis, check size and current areas of focus are.

MobileCrunch pointed me to a new seed fund, Right Side Capital Management. The interesting thing about this fund, as reported by MobileCrunch and as mentioned on the fund’s site, is that they want to make 100+ investments a year - with minimal due diligence. I’ve mentioned before that I think that there is space for innovation in the early stage financing world, and WOW it looks like this team is trying to do it!

Supposedly they will make investments based off of an online application with potentially no face to face interaction. This is kind of crazy, since trust in the team is the most important. This seems like a pretty serious experiment in early stage investing. If it works then has this investment team found the equivalent of an ETF to actively managed mutual funds?

I’m not really sure who the founders of the fund are (I actually wish they would have more detail on their bios; when I was a VC the bio with no company name or position really annoyed me.) But it’s also not clear how much operation or next fund raise help they will offer, so I don’t know how to think about them in terms of helping the company get to the next level. With 100 investments a year I’d think that they would be too busy to actually provide any real guidance to their portfolio companies.

I guess I’m pretty skeptical that this is going to work, but I appreciate the willingness to try something totally new and wish the team at RightSide luck! It’s a cool idea in a space that needs innovation (and capital…)

Dharmesh Shah (a longtime lurker on my blog - but he did comment once!) made a seed investment in Backupify, a provider of backup services back in June. Backupify has just received a larger angel investment of $900k from First Round Capital & General Catalyst (as well as some other really well known angel investors like Jason Calacanis).

Why am I mentioning this? Because it’s important to get the word out about Boston’s angel investment community. Dharmesh and the other initial angels invested $125k in the first round, and Dharmesh is a pillar of the Boston startup community.

I was out with a well known startup’s development group the other night, and one of their VCs from the West Coast was out with them. He and another investor (acting individually, not as part of a VC fund) invested over $500k in a young developer’s startup after just a couple of breakfast meetings. Obviously this was in Silicon Valley. There is just not a lot of this fast decision making angel investing in New England. The West Coast VC made it pretty clear that he thought that investors in Boston would never be able to make these sorts of fast, company forming investments.

He’s correct, in that we don’t have a lot of the “have breakfast, get a check to start a company” investors in NE. So I think it’s important to celebrate the investors who do make company forming investments. I don’t know how much research/effort went into Dharmesh making the initial investment in Backupfiy, but regardless, he helped get something going and we should all be proud that there are investors in Boston who do this sort of a thing.

Finally, TC mentions that Backupify is looking to move HQ…  Let’s make them feel welcome in Boston and see if they will move up here!

TechCrunch is reporting on thefunded.com’s most liked VCs from 2009. While I’m happy to see some of my coworkers from Atlas on the list, it was another point that jumped out at me:

…there was a lot of turnover in VC firms in 2009.  When TheFunded sent emails to all the investment pros in its directory, 38 percent either bounced back or replied with an automated message saying they’ve left their firms.  None of those people are on this list.  And about one or two firms a week became inactive, or 9 percent of the 4,005 firms listed in its directory.

As a means of comparison, I recently sent out a large scale email (several thousand addresses) that had a 19.3% bounce rate. So, I believe that the bounce rate experienced by thefunded is statistically significant, which means that this is yet another clear indication that the venture capital industry is shrinking pretty aggressively.

What does this mean for entrepreneurs? Well, once again, it is important to find a fund where you will have a stable funding base + a partner who doesn’t leave. (Per an earlier post, here is what to do if the partner who is on your board leaves the VC - a summary: freak out.)

Some quick tips to make sure you are “picking” a funding group and partner that are stable.

• Look for funds that have raised capital in the past one to two years. If the new fund is a ton smaller than the previous, you may want to wait a few months to see if the partnership adjusts its roster as a result. If the fund is getting bigger this is a sign of a more stable partnership.
• Figure out if you partner is a decision maker or a junior partner who is wearing training wheels. Decision makers are harder to jettison from a fund.
• If the partner has had a recent success, they are more likely to have real authority within their partnership, so are less likely to leave (i.e. get forced out) in the near term. Awesome IPOs or M&A from his/her individual investments at the fund are great indications of a partner who is important to the fund.
• Ask. If you are getting really serious (i.e. the fund is giving you a term sheet or has just done so) you are within your rights to ask how stable the partnership is and how likely the partner is to stick around. Just ask politely, perhaps something like “I see this as a long term partnership with you and the fund; it is important to know that you are going to be here for the long haul over the next few years…”

Fred Wilson has a thought provoking piece today regarding late-stage venture investments competing with M&A (i.e. selling a portfolio company). In other words, a large, still-not-IPO’ed, VC-backed company raising a ton of capital from a “venture” investor(s) instead of going public or selling the portfolio company to a big strategic player. Thus, the company gets $ to grow but more importantly the investment serves the function of a liquidity event. The managers/employees/early-investors get to take some of the $ raised off the table by selling stock.

My advice to a junior or mid-level employee at a company raising a late stage VC round where the original VCs or senior executives are selling stock?:

Sell some of your stock. You worked really hard to vest/earn your options. The smartest most in the know people (in terms of the company’s capital structure) at your company are selling some stock. You should think about doing this too. You give up potential upside, but your company is taking on a lot of additional risk, risk that flows to the common stockholders.

As Fred says on his blog, “But companies like Facebook, Zynga, Twitter, Yelp, etc, etc will need to go on to become large profitable public companies in order to justify these financings.” Here is why:

• Selling to a strategic investor is not going to create the huge value that is required to generate a huge return for these later stage investors. While I do not know what their return profile is, in order to get a 2x return the company needs to almost double in value (depending on the type of preferred stock they bought.) So, for someone like a Facebook then that is a really, really huge valuation. The higher the valuation the harder it is to complete a sale.
• The number of potential buyers at these huge valuations is limited. I mean, how many companies can pay $20 billion for Facebook? (I think that’s 2x the DST investment; correct me if I’m wrong.) Globally I think there are less than 500 companies over $20 billion in size. And many of these are oil companies, and I doubt they want a social networking site. If you are trying to sell a technology company for $250 million there are a lot of potential buyers. If you are trying to sell it for $20 billion then there are a limited number of doors that you can knock on.

Realize that by selling some of your options you will be giving up potential upside if the company should go public and become one of the 500 most valuable public companies in the world. (That’s why you probably don’t want to sell all your stock.) But the new investment probably has some features that make your common stock riskier:

• Liquidation preferences, so that the new investor gets paid out well before the common stockholders. So if the company is sold, the preferred investors basically get their money back before anyone else gets paid. Of course, it is possible that some of these later stage investors are not getting liquidation preferences - after all they are investing in hot companies with smart investors already in the mix. But I’d be pretty darn surprised if the new investors weren’t sophisticated enough to get a liquidation preference. And this will be on top of the liquidation preferences already held by the previous investors in the company.
• Anti-dilution provisions. I’ve blogged about the anti-dilution provision before. Basically, if the company raises capital at a lower valuation than the last round the common stockholders end up getting “diluted” to help the new investor keep their investment near its original value.

Fred asks if this new mega-big-not-an-IPO-but-a-VC investment phenomenon is a passing fancy or here to stay, and says we won’t know for three to five years. But I am willing to bet that this is a passing fancy. Just as the LBO shop selling portfolio companies to yet another slightly larger LBO shop phenomenon was a product of too much liquidity in the buyout market, this phenomenon is probably driven by … well, I don’t want to be impolite, but you don’t see the really smart, institutionalized growth investors doing these types of deals. For example, while a Summit Partners would make a liquidity investment prior to a company going public they haven’t hit any of these super-sexy deals. And I think there is a reason for that (note that I worked at Summit a long time ago). On the other hand, I do hope that these Facebook type deals make money because I want the tech world to produce a ton of homeruns in the near term, so best of luck to all these investors and the companies that took the $.

There is a (sort-of) new fund in Boston - Volition Capital has just formed by spinning out of Fidelity as an independent growth capital fund. The old Fidelity Ventures group has a new name, but similar focus. The move was announced yesterday, January 11 2010 and is now being reported in the press.

Volition Capital’s Investment Focus

Volition’s investment focus may be changing a bit from what it was when the group was part of Fidelity Ventures.  The fund will invest in growing, founder-owned tech businesses based in the U.S. and Canada. I’m not quite sure how this compares to the old Fidelity Ventures, because I know that they invest in VC funded businesses (like SeatWave). Volition is defining “growth companies” as ones that have between $5 million and $50 million in revenue. I do not believe they require the companies to be cash flow positive, but this may have changed as well since leaving the Fidelity umbrella. Volition Capital specializes in software, Internet, information services and tech-enabled services companies.

Volition’s portfolio

Since the group will be managing the old Fidelity Ventures portfolio they will be starting out with legacy investments. The firm’s portfolio comprises 26 companies in the United States and Europe. Having this existing portfolio is probably a good thing for them, since they’ve got some solid companies in their portfolio and this will help the group establish the “track record” they’ll need to raise their first stand-alone fund. Some of these companies include Intralinks, BlackDuck Software, Flock and Seatwave. It is interesting because on their portfolio page they indicate if an investment is an early stage investment or a growth investment - and they seem to be pretty evenly split early stage and growth.

Good luck to the Volition Capital team, including Larry Cheng and Geraldine Alias!

I hope that the team is able to successfully manage out their existing portfolio, make a few new good investments out of their remaining fund and raise a new fund!

Michael Greeley, Chairman of the New England Venture Capital Association (NEVCA) and Partner at Boston-based Flybridge Capital Partners predicts that New England companies will raise $2 billion in venture capital in 2010. That’s down from $3 billion in 2009. He points to the fact that NEVCA currently has 108 members, down from 138 members in 2009.

Yikes.

Hey startups… time to get really friendly with those angel investors who still have cash money!

Using the power of Google Analytics, it’s easy for me to see which Startable blog posts were the most read in 2009. Keep in mind that I’m merely looking at the number of views, so stuff posted earlier in the year has a distinct advantage of making it to the top.

10. The hidden cost of down rounds - the antidilution provision. When venture backed companies’ values drop, the pain is not felt evenly amongst the shareholders. With venture backed companies’ valuations falling like rocks due to the financial turmoil and bad-economy-induced-missed projections, I’m not surprised that this post got a lot of traction.

9. 4 Ways to generate business ideas. Prasad’s post on idea generation and ways to come up with innovative businesses and solutions still attracts good traffic to Startable.

8. The Entrepreneur in Residence. The first in a three part series explaining what an entrepreneur in residence does at a venture capital firm. The follow up posts talk about how to deal with an EIR and how to meet with one. I think this post will continue to get good traffic; it is actually the number one search term driving traffic to Startable.

7. MBAs and Startups.  Right when I was fresh from leaving venture capital and starting actually doing the entrepreneurial thing, I responded to a Dharmesh Shah post on 10 things MBA school won’t teach you. Now that I’ve been a “real” entrepreneur for the past 6 months, I agree with what I wrote. This post also had a bit of a TechCrunch boost.

6. Early stage venture capital valuations. Right after I left venture capital I felt that I could reveal the truth (as I saw it) on how VCs value startups. VCs have a target ownership, and the more you raise the higher valuation you startup will get. I continue to stand by this.

5. So you want to be a junior VC. My advice to someone who emailed me asking for tips on interviewing for a non-partner position at a venture capital fund.

4. Angel groups are professionalizing and I’m not sure VCs realize it. I was pretty impressed after attending a meeting of the Northeast ACA (Angel Capital Association.) This isn’t a meeting most venture capitalists get to attend, and I was pretty shocked at the level of sophistication. Angel groups are really getting good. Somehow this post got a lot of stumbleupon love.

3. The venture capital investment memo. Since I worked at a few funds, I thought it would be fun to compile the “average” investment memo put together during the investment process at a venture firm. I get good monthly search traffic to this post.

2. Leaving venture capital. Well, this is when I officially announced I was leaving Atlas Venture. I guess people wanted to read about it!

1. It’s not me it’s you, the real reason many startups can’t raise venture capital. Many, many startups are rejected by venture capitalists for the simple reason that the VC doesn’t have confidence in the founder. However, this is rarely communicated. I list some tips that the founder can use to tell if they are the problem.

Wow, so I’ve written a lot this year. Hopefully I’ll continue to have some good content going forward. I am always available over email or twitter, so don’t feel bad reaching out.

Happy New Years!!

It’s great news that Laura Fitton’s oneForty has received venture funding, in Boston, by Flybridge Capital. I’ve blogged about oneForty being one of the most exciting companies coming out of TechStars Boston this past summer, and it is great news for the local New England internet scene that oneForty has been funded by a local firm.

I had a bad feeling that oneForty would move West, as Laura had good angel funding backers from the SF area. She also was working closely with a web design firm base in SF. Of course, the major thing that had me scared she’s leave Boston was the recent ZenDesk move - cool company leaves Boston after it gets funding from a West Coast VC. But Boston was in luck! Jeff Bussgang of Flybridge had the cojones to step up and keep this cool company in New England. Good luck with the investment Jeff and good luck to Laura as you grow the business! (Also, congrats on recruiting Sachin Agarwal to the team and bringing a talented internet entrepreneur to the area from Chicago.)