New Venture Capital Model Is Coming? Limited Partner Investors Seeking New Avenues January 7, 2009
Posted by John Furrier in Technology.Tags: entrepreneurship, silicon valley, startups, venture capital
5 comments
Is this financial market mess going to put the nail in the venture community? Today’s Venture capital has been struggling for sometime with ony a few small hits and very handful of big returns. The problem is that entrepreneurship is stuck because of venture capital. We need to modernize the venture capital business so entrepreneurs can get busy. I am seeing more early stage creative development then in years past. The entrepreneurial process will never die but it will evolve. These are the pains that we are seeing now with startups. The capital markets are a mess and with no liquidity market today’s venture capital firms are spinning their wheels. The good news is that capital markets are efficient and will work around the bottleneck we are seeing. This NYTimes story is an early indicator that big money will find new homes.
NYTimes has a very interesting story…
Investors in venture capital and private equity funds who want out are discovering that their stakes are worth less than they paid for them.
As returns on venture capital investments sour and investors’ wealth deteriorates, some of these investors — the universities, foundations and pension funds known as limited partners — have been unloading their stakes in the funds. When they decide they can no longer supply the money they had previously committed, they sell their stakes at a discount to what is known as a secondary firm.
In the second half of 2008, as more limited partners tried to sell their stakes, the price they could get for those stakes fell to 61 cents for every dollar of face value, according to a report from Cogent Partners, an investment bank for institutions looking to sell their holdings on the secondary market. That is down from 84.7 cents on the dollar in the first half of the year and a 4 percent premium in 2007.
A stake in an early stage venture capital fund that has already been fully invested, for example, would be worth 10 to 30 cents on the dollar, Mr. Gull said. “It would have relatively young portfolio companies, some number of them will need additional capital so the fund will get diluted and there are not going to be any exits for some number of years.
A 40 percent loss is no different than investments in the public markets, Mr. Gull noted, and investors would prefer to have the cash. They think, “It’s a sure thing that I can redeploy in some other activity I think has a larger chance for return,” he said.
Mr. Gull said he could not predict when pricing would improve, but his firm is betting that it will not see any meaningful returns from private equity and venture funds until late 2010.
Silicon Valley VCs Are Actively Investing December 2, 2008
Posted by John Furrier in Technology.Tags: Benchmark, silicon valley, venture capital
1 comment so far
All the talk about Silicon Valley being dead is bull. In fact many of the top VCs are actively investing like True Ventures, Norwest, Benchmark Capital, Foundation, among others. There are some top tier guys who are really hurting. I’ll post more on that later.
Here is a post from Benchmark partner Bill Gurley. I first met Bill when he was an analyst years ago before he joined Hummer Winblad then Benchmark. Bill not that technical but is very skilled at analyzing and reading the market. I think his views are right on the money (pun intended).
Bill says…
What is driving our enthusiasm to be optimistic while the general perception is that we should be “scared”? Here are four answers on a roll:
1) We make money investing, not sitting on our money. Innovation and disruption are constant and not subject to the whims of the overall economy.
2) We believe that environments like this tend to sort out the true entrepreneurs from the pretenders. When money is easy in Silicon Valley, it tends to attract short-term opportunists looking to make a fast-buck rather than build a lasting company. Only the best entrepreneurs set sail in rough seas like this.
3) We like the probability for startups (especially Series A deals) in this environment. Consider that people are easier to hire and rent is cheap. Incumbents are cutting their R&D budgets, and there will be fewer startups in each space, all of which means less competition. These are good things.
4) Graham and Dodd said it first and best, but one “… should try to be fearful when others are greedy and greedy when others are fearful.” Pretty clear what time it is.
Entrepreneurs Are Blind To Recessions – It’s All Signal – Series A Deals Are Happening October 17, 2008
Posted by John Furrier in Technology.Tags: venture capital, web 2.0
3 comments
Paul has another great post. I swear he must have the same five posts that continue to get recycled. He is always pounding that drum. He’s correct in his view. This is my third down cycle as an entrepreneur. It’s not fun but the reality is that the advantage goes to the entrepreneur. I’ve spoken to 3 other serial entrepreneurs this week and all fully agree that they are licking their chops to do a startup now. Not so 8 months ago.
I fully agree that it is the best time to start a company both for entrepreneur and the venture capitalist. In fact the angels are out there. I ran into one yesterday (granted I live in Palo Alto and you can swing a dead cat without hitting an angel or VC). There is big interest in seed, super seed, and full blown Series A deals.
In these downturn times the opportunities just fall out of the trees. In a downturn the noise level is reduced and it’s all signal. Thanks to the memo from Sequoia which was a strong signal from the Silicon Valley elite money machine on which behavior will be tolerated (translation they want less Seesmics and more real companies). The other them is that innovation is coming out strong. The real opportunities are presenting themselves. The real web 2.0 will emerge from this downturn.
If you look you will see the opportunities ..clarity is the best policy for startups.
The benefit of a downturn – there is no tolerance for “Noise” –
“Apples and Googles” More Like “Apples and Pears” – Bad News for Enterpreneurs? Where’s the Halfway House – July 20, 2008
Posted by John Furrier in Technology.Tags: Apple, entrepreneurship, google, startups, Steve Jobs, venture capital, wall street journal
2 comments
All the talk about companies being sold, founders getting ousted, and ventures failing or being killed by VCs. This seems to be the trend in Silicon Valley and around the world. The captial markets are a mess. The Wall Street Journal has a story on it today in a post called “Who’s going to fund the next Steve Jobs?”. James Freeman really nails this story and highlights very accurately the ugly trend being witnessed by many entrepreneurs out there right now. This is a big problem with serious economic implications.
This post hits home with me because I’m an entrepreneur living in this market with four kids and it ain’t pretty. The capital markets are in the tiolet and founders around the world are working hard to find no buyers of their ideas or products. It’s a bootstrapping market. The entreprenerial market isn’t broken or starved for good ideas and needed innovation. Instead the ecosystem is stuck in the sand. Incubators are clearly seeing the action and see the need for innovation. Some bright lights are shining out there like Y Combinator among others, but overall it’s pretty dark.
What does this mean?
Bad news for entrepreneurs short term and bad news for innovation long term. M&A doesn’t yield innovation. Passionate and skilled entrepreneurs need the runway to make their visions happen. Lack of exit stunts the available growth capital needed for those next big ‘Apples and Googles”. Big ventures take 3-5 years to develop. Problem today is that capital isn’t founder friendly. Founders getting ousted after one year doesn’t make innovation happen. I’m seeing more founders on the street then ever before. There needs to be a new financial model or new incubator model (or halfway house) for founders and entrepreneurs. Y Combinator calls it a startup for startups.
Big problem is that initial public offerings of young companies had become rare. Venture-backed IPOs in 2005 and 2006 were far below the levels of the early 1990s, never mind the boom years that followed. A recovery in the early months of 2007 still didn’t push IPO numbers anywhere close to the number of young companies being acquired by bigger, more established firms.
Love this passage from James Freeman of the WSJ. “This is bad news for the U.S. economy. Does anyone think that we would be better off if Bill Gates and Michael Dell had sold out to corporate behemoths early in their careers, instead of leading their firms for years as public companies? Would consumers enjoy the same vibrant market in Web services if Yahoo had gobbled up a nascent Google? How powerful would our computers be if Intel had become an IBM subsidiary, instead of going public in 1971?”
“Of course we can’t run these experiments. What we do know is that entrepreneurial drive, combined with venture investors’ money and experience, plus access to the public markets, equaled a tech revolution and an industry that is the envy of the world. That model may be collapsing.”
“True, investment in U.S. venture funds is holding up well despite the market downturn, with investors pouring $9 billion into this asset class in the second quarter. But over the long term, venture investments have to result in a healthy number of home-run IPOs to justify the risks and offset the inevitable failures. The industry cannot continue raising the money to fund American innovation if its returns trail the stock market indexes, as they did for the five-year period through 2007.”
“Some have ascribed the broken venture model to the “cheap revolution,” meaning that, thanks to earlier innovations, the tools to create new tech products are so cheap that entrepreneurs don’t even need funding from venture capitalists. That’s great, but we’re not seeing a flood of IPOs of young companies built without venture money, nor the creation of lots of privately held global powerhouses. By and large, founders of Internet startups are not creating companies with the dream of conquering the world, but rather with the intention of selling to Google, eBay, Yahoo or Microsoft.”
“Our society should be encouraging these entrepreneurs to dream big. Instead, they’re looking for the exit before they have to deal with the burdens of our public markets.”
“An acquisition generally means that the founders move on, see projects they championed get axed, and watch old colleagues get fired. How many company founders would aspire to conduct a sale of the business instead of a public offering, absent some bizarre and unnatural conditions in the market?”
Of course I’m biased but founders and entrepreneurs need to be in charge. Never fire the founder in a changing market.
Note: Steve Jobs was ousted by his investors (Venrock Associates) only to come back and change the world a second time. Can you imagine August Capital firing Bill Gates. Good venture capitalists understand the long term value of entrepreneurship not just the quick flip.
Why Startups Fail? Entrepreneurs Perspective – Keep the Founder Around May 23, 2008
Posted by John Furrier in Technology.Tags: entrepreneurship, silicon valley, startups, venture capital, why startups fail
16 comments
Why do startups fail? There are many reasons. Here is a post from a VC in Silicon Valley called VCDave – David Feinleib is a partner at MDV – Mohr Davidow Ventures – He invests in Internet-enabled companies.
This is a great post from VCDave, but I would add that the faster the market moves the more the founder needs to be in charge. Finding a founder with vision, product skill, and deal making ability is ideal. Venture capitalists need to let the founder run the ship. If VCs run interference with the founder then the entire venture slows down. Building a startup from nothing is difficult and navigating the market landscape with imperfect information is key. Entrepreneurs are good at dealing with ambiguities.
Once a venture enters the market the venture plan has to be in a constant state of reinvention to ‘hit’ the tipping point for the preferred business model for the proverbial ‘big opportunity’. One thing often over looked is the important objective of getting the new venture in a position in the market to seize the growth opportunity contemplated by the entrepreneur and the investor.
Entrepreneurs and VCs need to deal with change as a positive not a negative. If the ventures position in a growing market is good then the change is a normal characteristic. To me it’s about letting the founder stay in control until the venture hits calmer waters. Founders know best in the early stages. Creative, product, sales, and deal making skills matters the most. VCs shouldn’t just replace founders because a few waves crash on the ship.
If investors want a return remember that the founders know best. Don’t replace the founder to early.
http://www.usatoday.com/money/companies/management/2007-08-21-founder-ceos_N.htm
Update: Donna who tracks the NYC startup scene at StartupAlpha has a post on this. Here is 37Signals Jason Fried’s take at Signal vs Noise on this topic.
Two important points Donna and Jason make: 1) build a good sustainable venture and 2) if the market is slowly developing then there is no market.
Here is a good section from end of Jason’s post “If the entrepreneur finds themselves in a situation they can’t control it’s almost certainly because they put themselves in that position — either by borrowing too much, spending too much, rushing too fast, creating a false sense of urgency, hiring the wrong people, attacking a market that doesn’t exist, or not focusing on generating revenue early enough. Natural disasters are out of our control, bad business decisions are in your control.”
My advice to entrepreneurs: try to maintain control for as long as you can (control > 50%) at all costs. Only go over 50% dilution if you need to scale and never run out of money.
VC Credibility and Founder Credibility – It’s a Marriage March 29, 2008
Posted by John Furrier in Technology.Tags: entrepreneur, entrepreneurship, first round capital, startups, venture capital
2 comments
Getting financed by a VC is a marriage. When it doesn’t work out it’s a divorce.
Josh Kopelman writes a great post on entrepreneurs pitching him. He talks about Founder Credibility. It works the other way as well – VC Credibility. Both parties (the founder and VC) are looking for partnership – founder: money/business partner and VC: investment partner so chemistry is key.
If the VC doesn’t understand or believe in the founders vision then it will never work out. For VCs they do this all the time- they take hundreds of meeting until they find that chemistry.
Here is Josh’s post.
This past week I had two distinctly different meetings with entrepreneurs. They both were successful serial entrepreneurs. Both were exceptionally smart. Both had good ideas.
The first entrepreneur, however, thought that they were expected to know the answer to every question. There wasn’t a question I asked that he didn’t have a definitive answer to. He knew what their pricing model would be. He knew why Google would never compete with them. He knew what their consumer churn would be three years out (despite the fact that they hadn’t launched yet). Whenever I tried to discuss the different risks in the business, he told me why they didn’t exist.
The second entrepreneur, had a different approach. He definitively stated answers when he had them, but when he didn’t know he said so. When asked about his pricing model, he said “well, we’re considering a few different options depending on the outcome of some tests we’re running…” When asked about cost of customer acquisition, he said “well we don’t know what our numbers will be…but here’s our model based on other comparable companies.” When asked about risks, he identified several — and then we discussed how to reduce/eliminate them.
I’ve come to believe that a key investment criteria is founder credibility. And, I think the second entrepreneur was far more credible. No one expects a pre-launch company to have all the answers. (In fact, we get scared if you think you have them). As I’ve previously discussed, rather than have an entrepreneur sell me on why they are 100% correct, I’d much rather understand how they are attacking the different risks facing the business.
And, by the way, the same applies for venture capitalists. I often feel that during company pitches — and board of directors meetings — we’re expected to have an immediate opinion. Should we double our marketing budget? Should I hire this person? Will this strategy work? While it’s OK to offer opinions and thoughts, I think it is also appropriate to acknowledge uncertainty.
One point in his post that is worth highlighting is how the second enterpreneur views the market. He looks at the market as a fluid dynamic – “running tests” with “base assumptions”. Many entrepreneurs have been scorned for this view (myself included) in being “not focused”. I hate that word. All early stage entrepreneurs are ‘very focused’ on the fluid market how to enter and plans based upon certain market conditions or scenarios. Key is the focus on the possible scenarios – for that there is no one answer.
Josh’s last point is important: VC Credibility – When VCs sit on 9 boards and shows up once a qtr for board meetings with ‘the answers’ then their credibility is on the line.
Early stage is about entering the market with a narrow value proposition that has the opportunity to take advantage of a massive growth trend when in market. For this the entry strategy should be very clear and the answers to the so called ‘billion dollar’ revenue plan should be scenario based.
Are Web 2.0 Entrepreneur’s Love Affair with Venture Capital Over March 18, 2008
Posted by John Furrier in Technology.Tags: entrepreneurs, silicon valley, startups, venture capital
add a comment
Cnet has a story headline “Is venture capital’s love affair with Web 2.0 over?”- Ironic??
According to this massive trend 2007 deals are down an amazing amount – total deal numbers down an amazing 5. “Web 2.0 deals in the Bay Area actually dropped from 74 deals in 2006 to 69 last year” -Wow.
Entrepreneurs are starting companies that require less capital and no venture capital at all. Maybe entrepreneur’s love affair with venture capital is over. It’s clear to me that entrepreneurs that I talk to are bootstrapping longer and financing ventures themselves.
I hardly think that a reduction of 5 deals validates a venture capitalist trend. Most VCs are not that savvy on Web 2.0 and are generally skeptical on web deals. The ones that do get it are doing many deals. Jeff Clavier has already pounded out 16+ deals in his new fund.
Entrepreneurs Beware. Yahoo Buyout Could Kill Technology Startups? Advice: Be an Arms Dealer. February 2, 2008
Posted by John Furrier in Technology.Tags: entrepreneurs, entrepreneurship, fred wilson, microsoft, silicon valley, startups, venture capital, yahoo
2 comments
Entrepreneurs beware Microsoft buying Yahoo could shut down the tech startup scene. It could send the startup climate back to 2001 levels – nuclear winter shut down. I lived through 2001-2004. It was ugly.
Brad Burnham has hit on a narrow topic about the downside of the Yahoo buyout for Silicon Valley. Brad’s story is very relevant with ‘macro’ implications to the tech world not just Silicon Valley. This deal could cripple startup activity.
Efficiency for Microsoft means leverage with suppliers. Translation: Startups are suppliers and Microsoft just became Walmart. This could have a chilling effect on the VC and tech investment community. This new industry structure puts even more of an emphasis on ‘hits’ or category specific deals. If the Venture Capitalists are confused today can you imaging what they will do going forward. This could get ugly.
Advice for Technology Startups and VCs: Understand where your company is in the pecking order in this war. If you’re not an arms dealer then you might want to rethink your strategy.
Update: others are thinking the same…. A VC -Fred Wilson; Opportunity for another big player to bid: News Corp.
Venture Capital Resource AsktheVC – Entrepreneurship Lessons December 14, 2007
Posted by John Furrier in Technology.Tags: entrepreneurship, venture capital
1 comment so far
Brad Feld who was a Mobius has formed a new VC firm called Foundry. Brad’s a good investor and I’ve learned from Facebook that he has the same birthday as me (Dec 1). He and his team have a great site called AsktheVC. It’s a great resource for entrepreneurs who want to prepare to build a great venture. They don’t post everyday (like sites chasing news) but their post are very strong in value. Very credible.
Brad Feld and Jason Mendelson are the co-authors of AsktheVC. Brad and Jason have been working together since 2000 when Jason joined Mobius Venture Capital, a venture capital firm that Brad co-founded. They started writing together on Brad’s Feld Thoughts blog in 2005 with their Term Sheet series. After several other series about issues facing venture capital backed companies, Jason and Brad decided to start AsktheVC. Brad and Jason, along with three other partners have recently founded a new venture firm, the Foundry Group located in Boulder, Colorado.
Some topics that were post this past month.
Sales is a Science, not an Art, What Happens If Convertible Notes Are Called By Angel Investors?, Should Venture-backed Companies Require Non-Competes?, Ad Revenue Models, The Wizard on Early Stage Board of Directors, Should Startups Invest In Patents?, What Are Typical Employment Contract Terms and Severance Benefits for a Startup?, more at the site.
