Startable – Healy Jones’ & Prasad Thammineni’s Blog

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:

Ok, so the Groupon acquisition by Google has fallen through.

Now it’s time to analyze the pieces. Props to the Wall Street Journal for taking on the proposed deal from a different angle. The WSJ compares the proposed Groupon acquisition, at $6 billion, to other large venture backed M&A exits and finds that “If Google had acquired Groupon for up to $6 billion, the deal would have been the largest for a venture-backed company since 1999 and the third largest acquisition on record.” Wow, that’s pretty interesting.

The WSJ goes on to state that this is a sign of the current internet company bubble and negatively compares the price to past bubbles, mainly the telco equipment maker bubble back in the late 90′s.

I find this to be a bit of a stretch, mainly because Groupon is at a run rate of $2 billion in revenue, up from no one having heard of it just a couple of years ago. And it’s cashflow positive. Vs. the telco equipment companies that may have had real IP, but were not generally producing that level of revenue so quickly.

I’m not saying there isn’t a bubble. In fact, I think there is one. But buying a cashflow positive company growing at hundreds of a percent year over year at a 3x revenue run rate doesn’t seem as insane as buying an equipment company growing more slowly with all the logistical headaches of building and distributing a product to a limited number of end customers.

Very unrelated links, but both I found to be very interesting.

Web Design – Google and an Example

An amazing piece by Justin O’Beirne on why Google Maps is so much more readable than the competition. He must have put a massive amount of work in to this post. I love the modifications he makes to Bing’s maps to make them better based on what he sees Google doing. Awesome stuff.

Taking Money off the Table to Boost Growth

One of the venture firms I worked for, Summit Partners, used to say that letting a founder take a little money off the table often boosted the company’s growth rate. I know this may sound counter-intuitive – if the founder just got $, won’t they become a lazy fat cat? Roger Ehrenberg has a great post on letting your winners run – even if that means letting the founders take a little money off the table prior to the real exit. I think he explains how a little liquidity can give the founders the confidence to go for the big time with their company.

The debate on the bubble rages on, but there is a small but interesting data point from Fenwick – a Silicon Valley startup law firm.

90% of all series B and beyond rounds tracked by Fenwick for INTERNET companies were up rounds – way more than the software category. Small data point, but that’s a big % above.

Dan Primack at Fortune has a new piece on Union Square Ventures – the fund is out on the prowl for a new fund, and has a great IRR from their first fund. He links to data from a bit limited partner (investor in VC funds) and points out that the other great returns fund in the report is The Foundry Group.

What do these two funds have in common? Well, one key piece is that they both have great bloggers as investors.

So, my question is this a coincidence? Or is there a correlation between venture capitalists who have thoughtful and proflific blogs and good returns?

On the one hand, there is some data here to suggest that these good bloggers are also great investors. I”m sure they boost their visibility with their blogs, and thus their deal flow and overall sexiness as an investor.

On the other hand, a) they also both invest in early stage internet deals, and blogging really appeals to these types of businesses. b) And if the hype on a little bubble in the early stage internet investing world is true then their funds may be enjoying returns from focusing on this space, and thus the blogs may contribute nada. c) And as some of the earliest spotters of the “capital gap” they may be benefiting from the first mover advantage of supplying just the right amount of capital needed by internet companies these days d) And it is possible that people who are good bloggers may be somehow just smarter than average investors (i.e. the two skill sets are just correlated and not causal really).

I’d guess if blogging really helped investors then we’d see more life science VCs and more growth/PE funds blogging. So my thesis would be more that the two funds I just mentioned are doing well not because of blogging, but that blogging was a symptom of all the good things that enabled them to do well recently.

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…

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.

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.

Two recent posts on how web entrepreneurs are looking for quick, small amounts of capital instead of large dollops from the traditional venture capital sources. Both of these posts are based on a report by Dorsey & Whitney, a startup law firm. These reporters do a good job analyzing the data, so I’m not going to offer any additional opinions.

peHUB says:

It’s not astonishing that consumer Web CEOs are in the driver’s seat when it comes to funding options right now. It also seems the case that an investor’s brand, proximity, and global presence matter less to startups that are eyeing an exit from the get-go….

Amid the criteria cited for taking money from a particular investor were valuation, dilution and liquidation preferences. Interestingly, brisk deal-making, and investors who don’t pressure startups to take more capital than is necessary, were among the mostly ranked criteria. In fact, the latter two criteria ranked as “somewhat important” to “very important” by 91 percent and 92 percent of respondents, respectfully. Meanwhile, fully one-third of the CEOs called valuation “somewhat important” or “not important.”

Wade Roush of Xcomomy says:

The 363 startup founders who responded to the survey said they were mainly looking for investors who will offer attractive deal terms and valuations, who can move quickly on deals, and who won’t push startups to take more money than they need. On all three counts, angels happen to have the perceived advantage. But the entrepreneurs indicated that they cared more about getting deals done than about whether there are big names on the other side of the table. Which means traditional venture firms who don’t want to be locked out of today’s smaller companies probably shouldn’t waste time worrying about super angels (who are arguably evolving into mini-VCs in any case).

My favorite chart from the report (click on the image to go to the report as a PDF.)