Startable - Healy Jones’ & Prasad Thammineni’s Blog

Vivek Wadhwa has started yet another interesting conversation on startups - this time on the dearth of female leaders in the IT space. I left a comment on Brad Feld’s blog in response to his response… and here is my response to Brad’s response and the original article. I guess it’s my response².

The original point is summed up by Vivek as: women make great entrepreneurs but represent a tiny % of leaders at technology startup companies. (That’s not a direct quote, that is me summarizing in a 7th grade book report style.) As usual, Vivek has done a real study and has numbers to back up his conclusion.

Brad nicely hits the point: This is “about innovation, competitiveness, and entrepreneurship.” (That is a direct quote.)

This whole point is something that my wife and I talk about a lot. She is at a tech startup; as am I. (We have some fascinating dinner conversations around HTML and the SalesForce Force.com API.) My comment on Brad’s blog pretty much explains where we are coming out on this issue:

Brad, I think a large part of the problem is pretty easy to understand. My wife and I both work at different startups; last night we were both at work pretty late. She didn’t finish up until around 10:30; I got done an hour or so before her but kept working for a while. We don’t have kids, but this lifestyle is not going to be possible when we do. Our highest performing women tend to marry high performing men (in my case I got lucky with my wife…). Since the burden of taking care of kids tends to fall on the woman, and since our best and brightest women are marrying men who have similar hard working lifestyles, something has to give. And it is usually the women’s careers.

There has got to be a business model taking top tier women with kids and getting them back into the workforce part time. That may be my next startup, but I’d be happy if someone else beat me to it.

This is a real issue. A couple of points that I see as “proof” that our best and brightest women are leaving the workforce: 1) A very high percent of female MBAs drop out of the workforce and become full time moms, much more than other professional female grad schoolers and 2) At the venture firms where I’ve worked, not a single one of the male partners’ wives worked. This is dozens of women, many with advanced degrees and who had very solid careers prior to doing the whole mommy thing.

I know that a lot of these women love being moms, but would also like to participate in the workforce. They are people who added a ton to the places they worked, but who don’t have the 70+ hours a week to commit now. There has to be a way to get them to find fulfilment both as a mom and as a startup exec.

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…”

Funny. Last night I was watching the president speak at the state of the union address and fired off a tweet about something that caught my attention - elimination of the capital gains tax for small business investment. From @HealyHoops: Don’t understand how it will work, but sounds interestingRT @jsteig: eliminate cap gains on all small businesses . . . that’s good! #SOTU

Then I stop paying attention to Twitter… but lo and behold, CNN is using some pretty interesting social media measuring tools and somehow decides to mention my tweet on the air. You can see it here - my tweet is about one minute and forty seconds into the clip.

First of all, the social media monitoring and display technology they are using is pretty cool. It’s a pretty interesting segment.

Secondly, I do think that the elimination of small business taxes could be really powerful for sparking investment in local and startup businesses. I really don’t understand how it will work, as in what will stop it from becoming a vehicle for tax avoidance and how will it impact venture investing? Will GPs count as small business investors? How about LPs? Will funds be counted the same as grandma helping her daughter getting her hair salon off the ground? Pretty interesting questions…

Third, thanks to Joseph Steig for the tweet I retweeted/commented on.

Finally - Can I now say that I’ve been featured on CNN? Or As Seen On TV?

Update - HealyHoops on the Daily Show too!

This is getting a little out of hand, but my little (re)tweet was also on the Daily Show. The twitter/CNN bit starts around 9:55 into the show (I found the video navigation a bit difficult with Chrome.) I don’t think the particular sketch is all that funny, but it is amusing to have my tweet mentioned by Jon Stewart. And I don’t agree with Jon that Twitter is totally useless!

Xconomy has a great piece on Carbonite, a Boston based SaaS provider of online PC backup services. The company is known as a great local software company, and it’s good to hear that growth continues to be strong. Let’s hope David Friend, founder and CEO, is able to keep the company on track and doing well despite the tough economic climate.

Very cool basic dilution/ownership model for venture capital rounds. Founders - keep in mind there are likely some terms that will trick up the VC’s preferred stock ownership, but this is a cool tool. I haven’t spent enough time with it to “break” it but I think it will suit the vast majority of typical venture investments at an illustrative level.

And this is before the Nexus One!

Brent Frei has a post on VentureBeat on increasingly interesting SaaS “app store” battle. I really care about this battle because Pixily has integrated with Intuit’s AppCenter, and it is an important part of our distribution strategy.

While Brent argues that Microsoft is losing out and will not become the powerhouse platform for the next generation of internet applications for business, I’m not yet so sure. In my mind the platform that best drives new customer growth for the largest number of third party applications will be the winner.

I think that the winner will be determined by applying the most marketing muscle plus the best user experience (both for the app developers but also very importantly from the end customer’s perspective.)

That’s my two cents; read his article.

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 $.

Today I use a ton of applications on my iPhone to get the full experience of online services/sites like Facebook, Amazon, LinkedIn, Wikipedia and others. But the beauty of the web (at least on the PC) is that you don’t need to download software in most cases to get a full, awesome experience. I can just log into eBay and start trading stuff; I don’t have to wait for a download to get going.

But on the mobile phone it’s different. To get the best experience I need to hit the app store and download something. It’s a like a weird step backwards from the point where anyone could easily use any site with a browser (from your PC) without downloading software to a place where each site has its own special software that requires a download and install.

According to MediaPost:

Gartner estimates the combined installed base of smartphones and browser-equipped enhanced phones will surpass 1.82 billion units by 2013, eclipsing the total of 1.78 billion PCs by then.

But the firm warns that many sites still are not optimized for the mobile Web, even though cell users expect to make fewer clicks on their phones than on a PC. To successfully expand into mobile, publishers will have to reformat sites from the small form-factor of handheld devices.

I totally buy this argument. While one can quibble around the exact number of mobile devices vs. PCs, there is a clear and obvious trend that mobile devices are becoming an important secondary, and to a lot of people, the primary web access device.

So I wonder - will web sites just automatically be optimized for mobile viewing, or will the “app” become even more important? Is this whole app thing for using online services a real of “de-evolution” of the web - or a mere blip before mobile browsers and bandwidth become powerful enough to support the real web experience? What do people think, are mobile web apps here to say or just a strange passing fancy?

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!