Startable – Healy Jones’ & Prasad Thammineni’s Blog

Yup, I”m sure they are going to happen once companies go public. Some of those purchasers of shares in the secondary markets are going to lose money. Not sure which companies this will happen, but it’s gonna. Dan Primack sums it up nicely from today’s Fortune Term Sheet email.

At some point, the secondary markets are going to produce a large number of lawsuits, possibly class-action ones. Imagine one of the heavily-traded companies goes public at 30% lower than where it traded on the secondary market. And imagine the secondary market sellers were insiders. The buyers may well sue, arguing that the sellers should have known the shares were overvalued (remember, buyers almost never know the actual company financials). I don’t think these suits will – or should be – successful (anyone buying without the data should know they’re flying blind), but lawyers will line up to bring them. Very rich target, plus some wealthy plaintiffs (by definition)…

This is pretty refreshing – a successful internet entrepreneur turned angel investor who is able to clearly articulate his biggest weakness as an investor. Marc Randolph, co-founder/first CEO of Netflix, writes in a post on Fortune: “An entrepreneur’s greatest attribute is an angel investor’s greatest liability. I came to the sad realization today that I was never going to be a great angel investor. And for a simple reason: I like every idea I hear.”

So true! Saying no is the biggest part of being a VC or an angel investor. And I hated doing it when I was a VC.

Checkout Marc’s post on Fortune.

What is going on with the Massachusetts technology VC scene? While the rest of the US seems to be recovering nicely from the VC nuclear winter of death, Boston is lagging. Check out this chart of quarterly VC technology deals from Q4 2009 to Q1 2011 by CBInsights:

Is it just me, or is it odd that the dollar total for MA dropped by over $100 million while New York City increased by well over $150 million? Those are big swings, and I’d hope that the two would move in tandem – but obviously they are not!

The deal total for MA has held pretty steady for the past few quarters, ranging from 39 to 43… but NYC is doing a great job crossing the 50 deals per quarter barrier for the past two quarters.

I like to think of the two ecosysems as pretty highly correlated, with people moving back and forth or traveling back and forth on Acela pretty regularly. For example, OfficeDrop’s investor is from NYC but he’s up in Boston one a month and is open to making investments anywhere along the Acela train line. I know for a fact that Boston VCs are actively looking in NYC for investments – but are they still looking in Boston?

Something doesn’t quite jive here for me. I’m seeing a ton of interesting seed stage internet companies in Boston getting traction and funding. But are we missing out on the current internet bubble?

Checkout the CBInsights post here.

It looks like there is an interesting discussion starting around the dearth of venture backed IPOs. This is something that the NVCA tried to get rolling a few years ago, just before the financial markets totally blew up. Read “Recommendations to Restore Liquidity” on the NVCA’s site.

The current discussion was sparked by a WSJ opinion piece.

Here is a good piece by Dan Primack of Fortune – he basically doesn’t think Sarbanes Oxley is the cause of the malaise.

Jeff Bussgang was brought into the fray and is pretty sure that regulation is killing the IPO market.

I’m a little more nuanced. I think SOX is just one piece of the problem. I’m not sure fixing it will suddenly unleash a ton of IPOs. I think it will help, but not a ton. I see a lot of problems that the NVCA identified, mainly around the fact that small companies don’t have enough ibanking options – because ibanks can’t make money taking companies public any more. I’ve heard rumors that this is because there is no $ trading for your clients – supposedly the electronic exchanges kicked the butt of the banks, plus some sort of regulation drove down the commissions that they can charge. IDK, just what I’ve heard. So it seems like it’s hard to get shares in the hands of institutional investors. Plus we are missing all those wonderful retail day traders who drive up the price of everything. And, since many large VC backed, private, companies can use places like SecondMarket to sell shares and get liquidity, why even bother to go public anymore??

Anyways, let’s hope this discussion goes somewhere and doesn’t get interrupted by a major financial crisis like it did last time.

NextView Ventures

NextView Ventures, a Boston are micro-VC/seed fund, has just launched their website. Rob Go, Lee Hower and David Beisel have a solid group of entrepreneur advisors, which I think is probably the most impressive aspect to this new fund. (And I’d highly recommend any of these three to any startup that would be lucky enough to get a term sheet from them.)

Scott Kirsner of the Boston Globe has a great article that highlights NextView and some of the other new local seed funds. One of the most important attribute of these new funds is the fact that they are willing to help unproven, young entrepreneurs get their first startup off of the ground. This is one of the Boston area’s biggest holes – I hope the new funds are able to fill it and are able to encourage other VCs to fund young founders and end up helping keep startups in Boston.

And local seed funds – don’t forget to report your local investments to the databases that keep track of venture investments! We want to make sure everyone knows that the Boston startup community is healthy!

CB Insights has a new post on NYC vs. Boston venture investing, and in particular how New York and Boston compare in internet investing. Since the internet is the sector I really personally care about their data is pretty interesting.

The trend is the really important part of CB Insights’ data, as Massachusetts still has larger volume both in terms of dollars invested and number of companies funded.

NYC vs Boston Internet Investments

The number of companies funded in New York seems to be rising year over year, as does the dollar volume (I’m looking at Q4’10 vs Q1 and Q4 from 2009), as does the dollar volume. Massachusetts’ dollar volume is flat to down and the number of companies is clearly down.

This seems like a potentially bad sign for the New England area… is the internet startup momentum stagnating right now here? I’m not really concerned that NYC is having a good year – in fact I’m happy that the funding environment there seems to be healthy. I’m more worried about Boston’s health.

The difference is even more pronounced at the seed level. While over 50% of the investments (as in companies, not dollar volume) in NYC are seed or series A deals, Boston is 40% of below. So, is there a less healthy seed and early stage environment in Boston right now? And will this result in fewer successful later stage companies?

IMHO what Boston needs is a big, successful late stage exit that spawns a lot of money in potential internet seed investors handing + a large number of new potential company founders. A single home run could really invigorate the local ecosystem.

WSJ’s Venture Capital Dispatch has a very interesting article with Michael Kim of Cendana Capital. Michael invests as a limited partner is micro-VCs, and the interview by Tomio Geron really focuses on the health of the seed/micro/very early stage market. Pretty good stuff. My favorite question and answer is on what Cendana looks for in a venture fund; I really like the second part because Michael talks about the reserve issue (something I’ve really been thinking about in the angel financing world.)

The initial percentage ownership and the assumptions of percentage ownership after several rounds of financing are important. For example, would a single company return a substantial portion of the fund if the company sold for $100 million? So, the approach the VC is taking with reserves and follow-on investments is important.

Will you lean into winners? Do you have sufficient capital to protect ownership positions? How far can you go to follow on? Percent ownership is most important—having a thoughtful approach to how many portfolio companies in the fund with how much percent ownership in each of them. There’s some who want to incubate companies and own substantially more for helping develop ideas.

2010 was a good year for venture backed IPOs; $7 billion raised via 72 offerings. This is 4.3x more money raised than in 2009, and is 6 times the number of actual offerings.

Venture Backed Liquidity Events

(the image above came from the report on the NVCA’s website: http://www.nvca.org/ Venture Backed Exits Q4 and Full Year 2010).

This is good for two reasons

1) First of all the amount of money going into startups via IPOs (and also to the venture capital investors) was better last year vs the past two years combined.

2) Secondly, hopefully this will get some $ into the founders/early employees hands eventually, which may lead to continued strength in the angel funding market, keeping the startup ecosystem going.

I’m not really sure how I came across this piece of academic research, but Rebecca Zarutskie of Duke University published a research piece in May 2008 called “The role of top management team human capital in venture capital markets: evidence from first-time funds.” Basically, she looks at various qualities of the partners at first time venture capital funds and runs regressions to see if any of those experiences impact fund performance.*

She concludes that VCs with previous venture capital experience, previous experience as startup execs and experience as management consultants make for better funds. Ok, so other than the last piece, this isn’t too surprising. She also looks to see if other things like having a PhDs or law degrees  help as a partner, and she doesn’t find a statistical improvement in exit percentages.

But there is one finding that is statistically significant that I find a little funny:

Funds with MBAs perform WORSE

That’s right, if the partners of a fresh fund have MBAs their fund is likely to do worse than a fund without! The finding is statistically significant.

Is it possible that MBAs make you a worse investor? That would seem like a real problem, since something like 59% of the investors in her sample had them.

Rebecca isn’t really sure how to interpret this finding:

However, I do find, perhaps counter-intuitively, that management teams with more general human capital in business obtained through MBAs perform on average worse than other fund management teams. A possible explanation for this result is that there is an oversupply of individuals of possessing MBAs relative to those with other educational backgrounds who are typically candidates to enter the venture capital industry.

My gut would be that, no, being an MBA does not make you a worse potential investor, but that it might make it easier for you to raise that first fund. And, since the bar may be a little lower for first time funds if the partners have MBAs then the group as a whole may under perform. The reason I’d think it would be easier to raise a fund if you had an MBA is 1) better connections, 2) LPs may like the brand associated with people who have HBS type degrees and well, that’s the two reasons.

Forgive me if someone already wrote about this research a while ago, I just discovered it over the weekend.

*(Her definition of fund performance is the % of deals in the fund that were exited, which is a crude but decent enough metric to make her research interesting.)

I wonder how long it will take for all the VCs relocating to Cambridge to drive up the rent here to the point where all the startups have to start moving back to Route 128.

Inspired by Dan Primack’s BVP’s Cambridge office bathroom photo – I’d post a picture of OfficeDrop’s bathroom but I don’t want OSHA to shut us down

Just kidding, our office space is really cool (and we still have a spare office available for month to month rental if a local startup is interested.)

Check out the photo from the NY Times today of Prasad in our main office area: