Startable - Healy Jones’ & Prasad Thammineni’s Blog

With the explosion of different staged venture capital sources it is becoming difficult to know where to turn for your first round of financing. How is an ordinary entrepreneur supposed to understand which funding group is the right one for her business? Rather than explaining the difference between micro-VCs, angel groups, big-time venture capitalists, growth funds in text, I thought I would draw a helpful diagram (I haven’t done one of these in a long, long time!)

The X axis is the stage of the company seeking funding - from just an idea on the left to a profitable company with a big revenue base on the right.

The Y axis is the amount of capital required - from a tiny amount at the bottom to many millions at the top.

Finding right 1st round investor

peHUB exposes the truth in getting venture financing - skinnier people living in more svelte states are more likely to raise venture capital! http://www.pehub.com/79078/high-obesity-correlates-with-low-venture-activity/

Now we know the truth about why fried-twinkies-direct.com has never been able to get venture capital!!!

Some great stats on GigaOM on the growth of the Android…

I love my iPhone’s OS… but my battery life sucks and the network is, well, it’s not that great. I wish Apple would open up here a little!

My friend from business school, Matt Soldo, has a well written post on MBAs in the tech startup world, “In Defense of the MBA.”

Matt has held positions with a few different internet companies, and is currently with Box.net. I also know he seriously batted around a few legit startup ideas while getting his MBA as Wharton. So I respect his opinions.

Since I was sort of famously quoted in TC on my MBA experience (and my MBAs and Startups post continues to get good traffic) this is a good opportunity for me to revisit my MBA post from last year.

As OfficeDrop has grown I’ve found my MBA more and more useful. Basic stuff like statistics, pricing strategies, etc are particularly useful. I sure that I could have learned this in a book, but there is something about the classroom learning environment that is good for the way I acquire knowledge.

The connections I made during the MBA are very useful. For example, I wanted to test out an idea for a new verticalized product offering at OfficeDrop. I glanced through LinkedIn, saw several classmates who were in the targeted field and had some quick conversations. I could have done this without the MBA, but it was nice to know that there were people who would pick up the phone. And of course the connections were helpful during our fund raise.

I’ve said it before, but my Managing People at Work class was really good. People, outside of the greedy finance world, are pretty fun to manage because it’s not just about the money. My MBA has provided a structure for me to think about this.

I still wish there had been more emphasis on leading sales teams at Wharton. How is this not the most important skill for almost anyone running a company?

The environment of business school is a real problem for people thinking about starting their own company. So many MBAs run for the safety of things like consulting, banking and big corporate positions (and have their post-graduation jobs sewn up with high salaries by the early part of their second year) that you feel strange trying to do anything different. I know for a fact that this atmosphere pulled some potentially great startup people into the boring safe jobs. My friends at Stanford and Harvard who started their own companies said they felt this pressure there too, so I think it’s safe to say this is a pretty standard MBA program problem.

And, finally, business school loans are the bane of anyone looking to start a company because they destroy so much free cash flow.*

Those are my current, unfiltered, thoughts on my MBA. Just as my position has changed over the past year I’m sure it will change again. Would love your comments, and don’t forget to read Matt’s post!

*On a somewhat unrelated note, does anyone else think that student loan situation in the US is the major cause of the educational cost inflation that we have here? In other words, because the federal government makes loans so easily available it is driving up the cost of higher education? I’m starting to think that government policies may be part of the reason that education is becoming so expensive - flood a market with cheap financing and the asset prices will go up??

CB Insights has a report on a topic I mentioned last week, the decreasing deal sized in New England. The report shows that the “In Q2 2010, the median seed VC deal size in both NY and Massachusetts were $425k and $480k, respectively, meaning entrepreneurs were raising smaller rounds.”

Interesting stuff - visit CB Insights here to see their take.

What is happening with venture/angel deal sizes in New England? Why are things getting smaller? It may be the sudden angel/seed renaissance… while the CB data does not include later stage investments, I think that New England did not have any huge ($50 million +) investments last quarter, which would impact the data I mentioned last week by driving down the average deal size… but I think something strange is going on.

These guys are the number 1 sports one app in iTunes, if I understand their tweet correctly! Wahoo! A great TechStars Boston company.

Chris, an investor with Common Angels, has a great post from the 16th (I came across it via PEhub.) Chris interviews Andy Payne, a Boston area startup guru exec. Check it out!

PWC/NVCA venture capital data is out for the first half of 2010. Happily, New England venture investing is moving along with the rest of the US, and nicely increased from the first half of 2009 - when looked at from a first half of the year perspective.

VC $ Invested First Half of the Years

Deal Volume:

First Half VC Deal Volume

But the Q1 to Q2 data shows a different story.

The thing that is interesting to me about the New England data is that NE deal volume stayed flat from Q1 2010 to Q2 from 96 to 95, while the entire of the US was up 740 to 906. Also, the dollar volume in NE was DOWN from $796 million to $581 million, while the US was up $4.87 billion to $6.52 billion.

Why was New England down while the US was up?

It could be partly because all the deals have yet to be reported in New England, but I don’t know if that would explain such a big drop in dollars invested vs. the rest of the US. This also means that the average deal size in NE is also down quite a bit. I know there is a ton of angel investment activity in Boston, which is a great thing, but does this mean the later stage VCs are gone? Anyone have any ideas??

My post yesterday on the Northeast venture capital outlook got some good traction, and was reposted on Venturefizz. Today PEhub pointed me to a new NVCA/Deloitte survey of 500 VCs on their outlook projections. US VCs think that the number of venture firms in the US is going to shrink, in “the United States [...] 92 percent of U.S. venture capitalists expect the number of venture capital firms to decline.”

I guess that’s not too surprising. The venture market in the US is undergoing some pretty significant changes, with some very established firms not able to raise new funds, some newish funds not being able to raise 2nd or 3rd funds and some other established firms raising new funds, but shrinking in size.

However, there do seem to be a larger number of seed/micro-VCs coming into the mix (I am thinking of Rob Go & company’s new fund, and the seed fund announced by Gabriel Weinberg and friends, all the TechStars like incubators that provide funding, etc…) I have no idea what these funds will do to influence the overall number of funds in the US. I doubt that they can make the aggregate number of funds “break even” as in not shrink - but the can help offset the total number of fund decline somewhat.

What these funds can’t do is dramatically increase the total DOLLAR amount of VC available in the US. I doubt that the entire super-angel/micro-VC funds raised in this and last year will total $500 million - the amount of VC $ lost as a result of a single big traditional venture fund going out of business. (I have no data to prove this, it is a gut reaction. I do like numbers if anyone has them.)

I don’t think this is going to hurt the sector that I really love, the internet space. I won’t get into the whole capital efficiency thing that is now possible for internet companies - it’s well covered. But I do wonder how clean tech and bio tech - two capital intensive spaces - will deal with the capital shortage. I think it will be ugly for them.

Finally the survey asks VCs why they think the world is shrinking. The results are:

Factors cited most often for an unfavorable investment climate in the U.S. were difficulty in achieving successful exits (88 percent); unfavorable tax policies (59 percent) and unstable regulatory environment (53 percent). The prevalence of these challenges represents a stark contrast to responses five years ago when the survey posed a similar line of questions.

I continue to believe that the first reason, the poor exit environment, is the major driver of problems for the US venture industry. In particular, the lack of IPOs is a major issue. When a company goes public it not only raises a lot of capital to expand, it also generates wealth that flows back into the entrepreneurial/VC ecosystem (via limited partners and employees options). Additionally, public companies get a lot of press - press that inspires other executives to think about the glories of founding their own companies. This is press that continues as the company grows (unlike press that happens after a company is aquired, which tends to trail off after the initial announcement.) Finally, public companies have cash and stock that they can use to acquire other tech companies and keep the good times rolling.

However, I have no solution to this lack of IPO problem. It’s more than just regulation (although becoming a public company is expensive with accounting/compliance/legal etc.) I think there may be a problem with the investment banking environment. There doesn’t seem to be the level of trading support for companies once they have gone public. But I think the $ are gone from the trading market, so I don’t know how this could ever return. OK, now I’m getting out of my league and will stop this post, because we have gone from pure conjecture to me totally making stuff up out of thin air…

I attended the AlwaysOn Venture Summit East last month, and was just sent a survey of venture capitalists in the Northeast that came out of that conference. Happily, our local VC friends are pretty optimistic about the rest of the year. You can get the survey here.

In particular, they think that the number of new financings will increase pretty significantly in the second half of 2010 and into 2011:

The survey also suggests that the dollar amount invested will grow in line with the number of new deals. (I’m not going to bother to paste in that chart since it looks pretty similar to the one above.)

VCs are also excited about early-stage investing in the coming years. I guess that’s not too surprising, since that is where they traditionally invest money. The large percentage interested in seed financing is pretty interesting, but without a feel for what this chart has looked like over the past few years I can’t really draw any conclusions on how the environment is changing. But still, an interesting chart.

More VCs seem weighted toward slightly higher valuations than lower - although most, 43%, claim to think that valuations will be flat in 2010 and 2011. Hmm… I tend to think valuations are going up! Let’s start that rumor.

Finally, the charts on exits. When I first looked at it I felt that it seemed pretty optimistic; over 40% of VCs think that at least 20% of their portfolio is ready for exit. But it’s hard to argue that this really means anything. From my time at VCs, 20% of portfolio companies being at a stage when they could be sold is pretty standard. The real question isn’t
“are companies ready for exit.” The real question is, “are the capital markets open.” Open, as in, are there IPOs/M&A opportunities for tech companies.