Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

VCWatch Archives

Uber Sleazy Tactics: Should Investors Teach Startups Ethics?

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Uber CEO Travis Kalanick Photo: JD Lasicka

Casey Newton in The Verge has a great story about how Uber, the San Francisco ride app startup, is trying to sabotage its rival Lyft by hiring people to call and cancel thousands of rides.

So much for the top innovator wins in Silicon Valley. These are very unethical and sleazy tactics:

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Changes At Iconic Silicon Valley VC Firm DFJ

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Peter Delevett at the San Jose Mercury News reports that Tim Draper (above at a 2012 Golden State Warriors basketball game) and John Fisher from Draper Fisher Jurvetson, won't be leaving the firm, contradicting a Fortune report. DFJ is one of the first Silicon Valley VC firms.

However, there are changes afoot:

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NYC VCs Pledge Millions To Turn Their Public Schools Into Code Academies - Who Will Fund Silicon Valley Schools?

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SF/Silicon Valley Public Schools should be showcases not basket cases.

Here’s a fabulous initiative led by New York city’s most successful VC, Fred Wilson of Union Square Ventures:

My colleagues at The NYC Foundation For Computer Science Education and I are raising a $5mm seed fund to invest in computer science education in the NYC public school system… and now we are now opening it up to others who want to participate alongside of us.

A VC: The Computer Science Education Fund

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Are East Coast VCs Feeling The Heat From A Revived AngelList?

AngelList's recent $50m funding and a new business model, is shaking up the money tree and even 3,000 miles away, New York city's top VC Fred Wilson is feeling a change in the air.

He quotes investor Hunter Walk to make his point, and his point is that:

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Meet Silicon Valley's Top VC Publicist...

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It's unusual for a publicist to be featured in a big spread in a large newspaper  since it's usually clients that are supposed to get all the attention, but Margit Wennmachers decided to get some ink for herself for a change, in the San Francisco Chronicle.

She is the co-founder of PR firm Outcast Communications and works as one of 24 partners at VC firm Andreessen Horowitz. She's been working there since June 2010, nevertheless, reporter Nellie Bowles describes it as "her new venture." 

I've known her for many years, especially when she worked at Outcast and she is indeed a tremendously capable person, deserving of a tremendously fawning article:

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AngelList Plans Expansion As It Raises $24m Ahead Of SEC Changes

AngelList, the company that brings angels and startups together, is planning an expansion taking advantage of a novel affiliate model, and changes in SEC rules on how private companies can raise money.

AngelList is a competitor to other early startup investors and some VC firms. Dan Primack at Fortune, reports that AngelList has raised money at a $150m valuation:

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The Majority Of VCs Harm Startups Says Leading Silicon Valley VC

Vinod Khosla is a veteran VC and a very successful one. He doesn't think much of other VCs reports  Kim-Mai Cutler: Vinod Khosla: 70-80% Of VCs Add Negative Value To Startups | TechCrunch.

Speaking on stage at Techcrunch Disrupt conference:

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Dave McClure's Guide To Disruption In VC Land

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Dave McClure, (above) the successful founder/investor of 500 Startups, posted a great response to a post by Sarah Lacy in which she defends the need for traditional VC firms of Sand Hill Road against claims of a broken and disrupted VC model:  A rare defense of venture capital classic | PandoDaily

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10-Year Study Erases VC 'Smart Money' Claims

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Marc Andreessen, Bill Maris, and John Doerr, are some of the smartest investors in tech, says Wired.

The National Venture Capital Association (NVCA) and Cambridge Associates recently released a study showing that VC funds returned an average of 7.4% annually over a ten year period. For early stage funding it was just 6.4%. This compares to 8.5% for the S&P 500.

Foremski's Take: The VCs of Sand Hill Road have an unshakeable belief in their investment skills, despite the study's Big Data showing they can't outperform a grandmother investing in an S&P Index fund.

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VCs Hire Lots Of Women - But Not As VCs

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Humor Tumblr blog Jesus Christ, Silicon Valley uses Sheryl Sandberg's "Lean In" manifesto as an excuse to paint incredibly realistic renditions of Sand Hill Road's venture capitalist innovation warriors, and their offices. It's funny because it's true. 

He points out that VC offices are full of women:

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NMV: Angel Investors Funding Progressive Change Startups

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San Francisco based New Media Ventures is a network of 60 angel investors that funds startups that allign with its mission to drive "political innovation."

So far it has invested about $4 million in ten startups such as Upworthy, which was featured by David Carr in the New York Times; NationalField, TurboVote and the Story of Stuff. NMV looks for startups that combine new media with technology, and are passionate about shaking up the political process through greater citizen engagement.

Fast Company's Ariel Schwartz recently profiled NMV:

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Consumer Web v Enterprise: Splitting Apart The VC Herd

The consumer web has a bright future, says Dave McClure (above).

Dave McClure, the highly successful Silicon Valley Angel/Micro VC investor, published a passionate post about the prosperous future for the consumer web, and criticized other investors for moving away from the sector.

Mr McClure writes:

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Women In Silicon Valley VC Firms: Equal Partners Or Just Publicists?

I used to know Margit Wennmachers, co-founder of Outcast Communications, a prominent San Francisco PR firm, fairly well and noted with interest when a press release in mid-2010 announced she had left Outcast and joined the VC firm Andreessen Horowitz as a partner.

I remember thinking that it was a good move for her, she had diligently stayed on for her earn-out years following the sale of Outcast to Next Fifteen Communications in 2005, and now she could sit back a bit and invest her hard earned wealth.

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When VCs Seek Ink - There's Flacks And Then There's Super Hero Costumes

It was interesting to see Margit Wennmachers, co-founder of Outcast PR, and now working at VC firm Andreesen Horowitz, so prominently quoted in the New York Times today:

Venture Capital Firms, Once Discreet, Learn the Promotional Game - NYTimes.com

She has done very well in getting a lot of ink for her employers, both the paper and electronic kind, in barrels and terabits. She's made them into the most visible VC firm in Silicon Valley.

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Silicon Valley Heavyweights Back Diabetes Startup Glooko

Glooko, a startup that lets people monitor their blood glucose levels using their iPhone, announced a who's who list of Silicon Valley backers, investing an undisclosed amount.

Glooko is founded by Yogen Dalal from veteran VC firm Mayfield. Its investors include:

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VC Bill Draper And Identified.com - Still Pitching Startups At 84

(Bill Draper, third from left.)

Wednesday I had dinner with Bill Draper and several startups around the theme of "Millennials" and how their online habits are determining the business models for a new generation of online services.

It was great to see Mr Draper, still pitching his investments, at 84 years old! He looked great and he's an excellent role model for how to age gracefully and energetically.

Mr Draper, born in 1927, is sometimes known as the "father" of Silicon Valley VCs. He started work at his father's investment firm, Draper, Gaither & Anderson in 1959. His is an illustrious career, take a look at this small excerpt:

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VCs Clamor For Virtual Databases As Delphix Raises $25m

There's lots of money in enterprise IT and virtual databases are emerging as a very hot sector for VCs, as Delphix raises $25 million in an oversubscribed C-round.

Virtual databases are able to increase the effieiciency of data centers and also help speed the development of web-based applications. Facebook is a Delphix customer. Tim Campos, Facebook's CIO, says that Delphiix is being used to help develop 11 projects simultaneously instead of just two.

Nick Sturiale, general partner at Jafco Ventures, and a board memebr of Splunk, said Delphix is "one of the most compelling value propositions" he's seen since Splunk.

New investors Summit Partners and Battery Ventures join lead investor Jafco, and Greylock Partners and Lightspeed Venture Partners.

Are VCs Abandoning Seed Funding? Report Shows Massive 48% Dive In One Year

The latest report on trends in US Venture investments shows a massive decline of 40% in seed investments in US startups in the final quarter of 2011, and a much larger drop of 48% for the entire year.

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'Big Data' Fuels Mohr Davidow Investments

A few weeks ago I was over at Sand Hill Road to meet with a group of startups funded by Mohr Davidow Ventures. The theme was "Big Data" and how these companies were using data to build their businesses.

It was a varied and interesting collection of startups. Here are some of my notes:

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MoneyTree Report: Forget The Bubble The Rise In VC Investments Is Unsustainable

The latest MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters:

-Q2 2011 VC investments jump 19% to $7.5 billion in 966 deals. Year ago: $6.3 billion in 814 deals

- Latest quarter is highest total since Q2 2008.

These high levels are not sustainable says Mark Heesen, president of the NVCA:

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Secondary Markets: Much Needed Liquidity For Silicon Valley Startups Or A Private Stock Market For The Rich?

Tuesday afternoon I was in the "Gulag," the warren of Venture Capital firms along Sand Hill Road, to attend SharePost's conference on "Market Issues & Opportunities for Private Companies."

The conference room was packed and for good reason. The lack of IPOs over the past ten years has created a liquidity crisis: how do investors and entrepreneurs get some of their money out of their companies, many of whom are profitable enterprises?

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NYC's Top VC Fred Wilson Fails To Avoid Media Spotlight

AdWeek reporter Dylan Byers published an interesting profile of Fred Wilson, the New York City based venture capitalist.

NYC Venture Capitalist Fred Wilson Is Rich and Grumpy | Adweek

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Kevin Covert: Preparing For A Silicon Valley M&A Boom In New Media

Investment banker Kevin Covert is increasing staff at his company, Covert & Co, up to prepare for an M&A bonanza in Silicon Valley. He says that the conditions are great for M&A especially in new media.

Mr Covert lives in southern California but he is no stranger to Silicon Valley, having been very active here, founding investment bank Montgomery & Co in 1999, in the middle of the dotcom boom.

Over the past ten years he's had a hand in many large deals such as selling MySpace to News Corp, plus also raising money for many companies, such as Meebo.

Here are some notes from our meeting:

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VCs Agree: "No Bubble" ... But Is Twitter A Sign?

"Double, double toil and trouble; Fire burn, and caldron bubble," chanted the witches of Shakespeare's Macbeth, cooking up trouble. Similarly, are the VCs of Silicon Valley cooking up trouble by helping to fuel a new bubble?

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Silicon Valley Veteran VC Bill Davidow Says "No Bubble"

I just finished an interview with Bill Davidow on the subject of his new book "Overconnected: The Promise and Threat of the Internet." I'll post the interview later.

I took the opportunity of asking Mr Davidow about the state of Silicon Valley and questions such as "are we in a bubble?"

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Top PayPal Alumni: "Silicon Valley Lacks Radical Innovation"



It was a sold out event: Peter Thiel and Max Levchin at the Inforum Club SF - the club for under 36 year old members of the Commonwealth Club.

Mr Thiel and Mr Levchin are two prominent members of what some call the "PayPal Mafia." This is a large number of unbelievably successful entrepreneurs; the Paypal alumni have gone on to help found an extraordinary number of successful startups.

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VCWatch: How VCs Kill Innovation

By Georges van Hoegaerden, Managing Director, The Venture Company

I believe no General Partner at any Venture Capital (VC) firm I know intentionally sets out to destroy innovation, yet the destruction of innovation is the outcome of the economic model under which Venture operates today. Let me elaborate.

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VC Interview: Bob Ackerman Warns On Secondary Market Excess

I spoke with Bob Ackerman, managing director of Allegis Capital and a veteran Silicon Valley venture capitalist about some of the trends and issues in VC. He spoke about his concerns about the secondary market, and that innovation in the US is being constrained by bad regulations, taxation and poor education.

Here are some notes from our conversation:

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Russian Billionaire Investment Firm Says Groupon Was Right To Reject Google

Paris: Alexander Tamas, partner at Digital Sky Technologies (DST), a major investor in Facebook, Twitter, Zynga, and Groupon, defended Groupon's rejection of Google's acquisition bid saying that it could become one of the most important companies on the Internet.

Mr Tamas was speaking at the Le Web conference in Paris. He said that there are very few Internet companies that have the potential to define their genre and become great companies. Groupon can achieve much more by staying independent.

DST is a Russian-based investment company largely funded by Russian oligarch Alisher Usmanov and run by Yuri Milner.

Earlier this year BusinessWeek reported: A Russian Star Rises in Silicon Valley

Since paying $200 million for 2% of Facebook last May, Milner has increased that stake to nearly 10%--worth perhaps $2 billion--by purchasing shares from early employees...

On Apr. 19, DST took the majority of a $135 million financing round for Groupon, a Chicago-based site offering coupons for restaurants and museums. In December, DST was the biggest investor in a group that plowed $180 million into Zynga.

...Milner has become a major backer of Web 2.0 startups and has another $1 billion to spend on new investments.

Mr Tamas said that DST looks for companies with a valuation of at least $1 billion and it only invests in Internet companies that have the potential to become the most important in their markets.

He declined to discuss the details of Groupon's rejection of Google's offer, reported to be as high as $6 billion but he said that the company's incredible growth in selling "groupons" discount coupons, justified its decision to stay independent.

He said it was rare to find Internet companies of the stature of Groupon. He used the analogy of planets, which shine by reflecting light; and stars, which generate their own light -- Groupon is in the star category.
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Please see: Analysis: Google Buying Groupon Doesn't Make Sense...

For more Le Web news please see this Pearltree: http://pear.ly/A3Iz


VCWatch: VCs Increasingly OK With Founders Taking Early Liquidity

Paris: There was a fascinating VC panel at Le Web moderated by Travis Kalanick, an angel investor; with Jeff Clavier of SoftTech VC, one of SIlicon Valley's most successful VCs; Philippe Botteri from Besssemer Venture Partners; Bernard Liautaud from Balderton Capital; and Barry Silbert, CEO and founder of SecondMarket.

Here are some of my notes from the panel:

- Mr Silbert's company runs a secondary market in shares in private companies. The shares are sourced from angel investors, founders, and employees. SecondShare plays an important role in creating liquidity in private companies in the absence of an IPO market.

- It can take up to ten years for a startup to have an exit and that's too long to expect founders and employees to wait.

- Traditionally, VCs have been against founders taking money off the table because they have less "skin in the game" and thus less motivated to create a successful company. But this attitude has changed significantly over the past two years and now it is considered OK for founders to reduce their stake by about 20 per cent.

- Mr Silbert said that public markets are broken and that the IPO has been dying for many years but not many realized it was dead. There used to be 400 to 500 IPOs per year but now there about 100.

- Liquidity for founders when raising successive rounds of capital used to be a rarity -- now it is much more common. It is often discussed and built into the structure of financing rounds.

- Some say the founder is less committed if they reduce their stake but it is exact opposite. Wives wants to see something from their husbands' 15 hour work days.

- - Jeff Clavier has invested in 90 companies over six years. He said that when entrepreneurs become investors there is a tendency to try to run the company rather than let the founders do it. It can take several years to adjust.

- Mr SIlbert sees himself in a war with Wall Street. He is a "recovering" investment banker and now wants to take on and disrupt the investment banks. The vast majority of startups aren't ever going to IPO. Wall Street cannot innovate, it moves too slowly and makes money of off opacity.

- Choosing a VC should be treated like hiring an employee because they sit on your board.

- SecondShare should do $400m this year, it did about $100m last year.


IPOs: Mary Meeker's Move To VC - And The Lack Of Wall Street Analysts

Mary Meeker, one of the top Wall Street analysts, has moved to Kleiner Perkins Caufield & Byers from Morgan Stanley.

Sarah Lacy reports:

Chegg's CEO Dan Rosensweig was one of many pinging Meeker with congratulatory notes this morning during my call with Meeker, Doerr and fellow KP partner Ted Schlein. He described it as "huge news" and a "big coup" for Kleiner.

"Mary's ability to spot the most important trends, evaluate-and-back the most effective entrepreneurs, predict the major pivots in the industry, and do it on a global basis has been unparalleled," he told TechCrunch via email.

While this is likely a lucrative move for Ms Meeker this is not good news for the return of the IPO market. The valuable role that Ms Meeker played in her "ability to spot the most important trends, evaluate-and-back the most effective entrepreneurs, predict the major pivots in the industry, and do it on a global basis" used to benefit the investors in public companies.

Now that benefit will go to a select group of elite investors in private companies.

However, if the IPO market is to return, and in turn, help fuel reinvestment in Silicon Valley startups by VCs such as Kleiner, Wall Street needs more Mary Meekers -- not fewer. One of the biggest problems public companies have is in having enough analysts following them and writing insightful investment reports.

Even large public companies such as Intel have problems in attracting enough analysts that understand their business. Newly public companies face an uphill battle in attracting analysts that know them and their markets. With the carnage among Wall Street analysts following the financial meltdown two years ago, the need for good analysts is even more acute today.

Kleiner could be shooting itself in the foot. The firm needs people like Ms Meeker on Wall Street talking about its public or soon-to-be-public companies, and helping to create the markets for that stock.

It's superstar analysts such as Ms Meeker that create the trading markets for public companies.


SF AngelPad's First Demo Day Draws A Crowd

AngelPad, the recently founded group of San Francisco angels, mostly from Google, held its first Demo Day with 8 companies presenting their businesses.

The goal is to provide investment and mentoring services to startups from angels that have a lot of experience in building successful web companies.

Thomas Korte, ex-Google, one of the founders of AngelPad introduced the companies, all of them run by engineers from some of Silicon Valley's top companies, such as Yahoo, LinkedIn, Facebook, etc.

There was a great turnout from potential investors with standing room only.

MoPub: A new ad network from former AdMob and Google engineers focused on optimizing mobile ads. All the right buzz words but it wasn't clear what it did. It just finished raising a round of funding.

RollCall: It lets groups of people decide where to go to the movies or anywhere else, using their smart phones. How long before Facebook or Twitter adds such a capability? It has finished raising its first round.

Curated.by: Organizing Twitter content by topic rather than hashtags, which "don't work." Sounds like a useful feature but is it a business?

AllTrails: A Yelp for hikers. Sounds like a useful service. Outdoor activities market is massive. The team is also working on an "AllSnow" site.

EggCartel: A type of Craigslist that lets you easily sell anything by taking a photo and posting it to your social networks. Looks useful and easy to use.

Adku: Analyzing large data sets to optimize e-commerce. Lots of the right buzz words in the right order.

HugEnergy: Track your energy usage in real time and learn how to save energy. Surely, you'll save 95% of the energy you can save, pretty quickly and then what? Warm and fuzzy.

Snip.ly: This was the most intriguing of the bunch. It analyses the most informative snippets of content on a page and then uses a recommendation engine to surface and share the "best snips." It is like PageRank for each page.


Paypal's Max Levchin: The Rise Of The Angels . . . And The Fall In Innovation

I'm a fan of Max Levchin and his fellow Paypal alumni because this group has spent the past five years creating many of the more interesting Silicon Valley startups.

Mr Levchin recently sold Slide to Google and he is an investor in Yelp and several other startups. And he is still young and has a lot more to add to his wikipedia page before he is done.

Mr Levchin writes on his blog, but only very occasionally. One such occasion was fairly recently, his first since mid-2008, a critique of Silicon Valley's angel community.

Angels have done very well for themselves over the past few years and this includes many of his former Paypal colleagues.

In his latest post: On ambition « You've gotta be kidding me he writes that the Angel method of investing in startups is considered a better method, "an antidote" to traditional VC investing.

Silicon Valley Angels have done well by choosing companies that can exit (sell themselves) fairly quickly, at fairly low values, $10 million to $20 million. While this approach makes money for the angels and their investments, it tends to discourage building breakthrough companies.

Angels advise startups to take smaller and earlier exits, which minimizes Angel risk but does little to develop startups with big dreams.

It's an astute observation and it is something that I've been thinking about over the past couple of years. I meet with a lot of startups and I remember meeting with Mr Levchin when I was at the Financial Times, and he was at Paypal; and hearing about Paypal's ambitions. Similarly with the founders of Yahoo, Salesforce, Google, Facebook and other groundbreaking companies.

Today, it is rare to find startups that think beyond being lucky to survive two years and be sold.

Yet even a few years ago we did have startups with grand designs. For example, I was an early admirer of Ribbit, a plucky startup that had the potential to disrupt the Telco industry.

Yet in mid-2008 it agreed to be bought by BT, the British Telecom giant. I was very disappointed: Are we seeing a disturbing trend in "blackmail" innovation...? | ZDNet

Since that acquisition Ribbit has launched a cool iPhone app but not much else. It has been dead quiet under the ownership of BT -- yet at one time this was an ambitious team taking on the world.

Mr Levchin sees the rise of the Angel and "Super Angel" investors as the key factor in the lack of "significant innovation" today.

At the moment, what amounts to lack of visible significant innovation seems to correlate with abundance of angel-funded startups shooting to get picked up for a fistful of dollars.

We should aim higher.

I agree.

It's easy to understand why Mr Levchin takes this position. He and his team built Paypal into a formidable company that eBay was happy to acquire for $1.5 billion. That's a hundred times more money than the $10 million to $20 million exit rounds of Angel investors.

Because Angel investors are investing smaller sums of money there is little incentive for them to take larger risks. However, traditional VC firms will invest at higher valuations and therefore will be less willing to sell for a "fistful of dollars."

The VC firms require a larger exit, and that's why they set a greater goal for their startups: to own markets of $1 billion and more -- this creates startups with far higher expectations. And that's what Silicon Valley needs if it is to produce the next Paypal, Google, Salesforce...

Mr Levchin makes an important point in correlating the rise of the Angel investors, with the fall in innovative startups.


Venture Capital: Hindsight Does Not Equal Foresight

Georges van Hoegaerden is an active critic of the venture capital system and is working hard to reform it. Here is an extract from his latest post:

What is wrong with Venture (not innovation) | The Venture Company.

The recently spawned statistical hindsight by reporting firms covering Venture returns post 9/11 has suddenly produced a new crop of followers to criticize Venture, with one problem. Hindsight does not produce foresight, and leaves many looking for short-term trailing micro-indicators rather than macro-economic compatibility and rudimentary principles of risk.

...Now, some suggest that the solution to Venture is to simply hang in, or use escapism in one of its many flavors to either constrict its workings further, lower risk even more, adjust management fees or exit out of Venture altogether.

The bottom feeders of the ecosystem fed by the attention from zealous media reporting (that still confuses stage with risk), popularize the oxymoron of Angel and micro-VC investing that yield even less scalable and smaller absolute returns than VC, and employs even more deflated risk profiles and a debilitating outcome to the production of Social Economic Value public markets care about.

The problem with Venture is that it is broken on many fronts, all of which are responsible for the improper deployment of risk. Let's list a few important ones:

- Endless diversification

Most Limited Partners I speak with are completely unaware of the deployment of no less than thirteen (13!) levels of bottom-heavy diversification of risk in Venture with the money they ultimately make available to entrepreneurs.

Think of it in simple terms: if I were to tell you that there are thirteen roads to drive to the beach, some or all intersecting with each other at one point, which one would you take at what point in time, and what town would you end up in?

Go ahead and read the private placement memorandums from Venture Capital firms like I have, and you will notice how Limited Partners in Venture have overwhelmingly invested in a thesis that does not list a critical path, but merely state a desire to end up on a beach.

Multi-level bottom-heavy diversification in any financial system serves as the ultimate detection that the original asset holder is being taken for a ride. And Limited Partners have been taken for ride, not just because they themselves deployed insufficient investment discipline.

- Endless Fragmentation

In order to make their entry in Venture worthwhile against the other asset classes Institutional Limited Partners invest in, no less than $1B needs to be put to work. Both Limited Partners and entrepreneurs (the asset holders) are taught to believe by Venture Capitalists (the derivative) that small is beautiful, blissfully ignoring the outcome of the false promise of their definition of capital efficiency and extreme fragmentation of dollars and risk. So much so that Venture Capital has turned into micro-private equity (or what we coin subprime VC).

So, in the end Limited Partners who thought they invested in Venture Capital have instead invested in (micro) private equity with the (micro) private equity returns as a result. Venture Capital the way it is deployed today yields incompatible risk/return ratios.

- Defunct innovation arbitrage

Technology does not create markets, it facilitates marketplaces. Technology is merely a distribution mechanism and a piece of the puzzle that enables the electronic facilitation of (in most cases already) existing macro-economic behavior. So, the reason why Venture Capitalists cannot generate significant returns is because their investment thesis centers around the development of technology, and fewer innovations rely solely on technology to become successful.

The investment thesis of Venture Capital from 40 years ago is simply no longer valid and yet the private placement memorandums (PPMs) have not fundamentally changed. Entrepreneurs with a more sustainable and economic approach to innovation are automatically rejected and Venture Capitalists have become stuck in their self-induced subprime maelstrom.

- Improper investment theses

Not just the lack of relevant operating experience lies at the bedrock of improper arbitrage of innovation but more importantly the improper assignment of risk to technology innovation. Unlike many Venture Capitalist may want you to believe, the risk of a technology Venture has nothing to do with the development of technology.

The risk of the Venture is associated with the propensity of the idea to attach to (ideally existing) macro-economic need. Hence the investment thesis in the private placement memorandums of VCs should state their ability and merit to recognize massive market pull, rather than technology push.

As a Venture Capitalist it means you now need to be a (macro) economist, with leadership operational startup experience and a technology background to assess the appropriately assess risk that will yield large Social Economic Value at the right price and time.

- Unnecessary new risk

Collusion and price-setting is not only prevalent with Angels (as Mike Arrington from TechCrunch alleged recently), it has been a daily practice of Venture Capitalists on Sand Hill Road for the last twenty years. While that is not only morally wrong, syndication of deals using those schemes not only violates free-market principles and hurts entrepreneurs, it also focuses rather than diversifies the risk Limited Partners meant to deploy by spreading investments across multiple VC firms.

Venture Capitalist have created new unnecessary risk by getting away with a soft and improper investment thesis in the PPM, and the deployment of an impromptu investment cartel (I can write a book about what I have witnessed here) for every deal they encounter, knowing full well that entrepreneurs have no other way than to obey to the cartel as their only path of securing a funding runway consisting of several rounds of spoon fed investments, or else be deemed and echoed in the Valley as "impossible to work with".

Because of the systemic dysfunction mentioned above Venture cannot and will not automatically recover. The improper deployment of risk can never make up for the passing of time, or the miraculous recovery of public markets, or the perpetuation of fear which increases protection of downside.

Venture can make an instantaneous recovery when it is reinvented (we have), from top-to-bottom, so its foundational principles are in line with the free-market principles we boast about so often but we implement so poorly.

The reason why we have not performed in Venture is because we lie to ourselves, and those lies only serve the derivative in Venture well. But unless we meet the needs of the real asset holders in Venture, Limited Partners with money and entrepreneurs with ideas, nothing will change for the better.

Are you with me?


VCWatch: Dumb Capital Please Exit Here

Georges van Hoegaerden[In this guest post Georges van Hoegaerden argues that Limited Partners should take an active role in reforming venture capital investing in the US.]

By Georges van Hoegaerden, Managing Director, The Venture Company

I was reminded again by how dumb capital has destroyed innovation by listening to Paul Kedrosky's interview with TechCrunch, in which he concludes that The Kauffman Foundation (which Paul represents as a Senior Fellow) may get out of Venture Capital altogether and deploy some of its monetary assets elsewhere.

Not an unexpected move, as I predicted a while ago many Limited Partners (LPs) as investors in Venture Capital (firms) would make, but a somewhat presumptuous conclusion from a respectable foundation that is supposed to be at the foreground and chartered to support the proliferation of innovation. Foolishly, I expected more intelligence from an entrepreneurial foundation than the intelligence displayed by a run of the mill pension fund stuck in a product of their own making.

Nevertheless I applaud the move based on how Paul described the foundation reached that impending conclusion. For we need to rid Venture Capital (VC) of Limited Partners who do not understand the foundational principles of innovation the sector depends on, and who do not understand the deployment of its unique risks. Probably for the same reasons why Michael Moritz of Sequoia Capital twenty years ago did not want to see pension funds enter the Venture Capital fray.

Take responsibility for you own actions (and in-actions)

First off, the reason why Venture has not and unchanged will not perform (at scale) is because of the financial system Limited Partners in Venture Capital have deployed, one that allows Venture Capital firms to take it for an all too comfortable ride.

With multi-tier bottom-level diversification (as described in 2010: The State of Venture Capital), a grab bag of other alternative investment options and ten additional levels of diversification once a VC firm is ready to invest, it should be no surprise that Venture Capital overloaded with derivatives and diversification has lost the merit it was once founded on.

We can now all easily blame 95% of the VC firms who do not produce any consistent returns for their Limited Partners, or Limited Partners can ask themselves the question why they created and participated in a financial system that enables such systemic underperformance.

We, as financiers of innovation need to take the responsibility of how we enabled a flawed governance of innovation.

Mired in "downstream thinking"

But our observations about Kauffman are based on the activities deployed by them over the recent years. The interview with Paul, the types of programs they support and a recent interview of Carl Schramm, Kauffman's current CEO with Charlie Rose all confirm who they have become. The beachhead for downstream thinking.

The entrepreneurial foundation, driven by the principles and money from a magnificent entrepreneur, seems to have made the mistake of confusing deep consensus driven hindsight with the proper definition of innovation; groundbreaking yet unrecognized foresight.

Perhaps not surprisingly since many of the key figures in Kauffman are economists who could not predict the demise of venture capital until it hit them in the face, and consequently have no idea as to how to fix it - as deep hindsight rarely translates into meaningful foresight. Hindsight and foresight are polar opposites.

Rather than to accept the outcome in Venture as a fait accompli, only a real entrepreneurial foundation would start to wonder what needs to be done to tap into the incredible entrepreneurial capacity in this country and model its financial constructs accordingly. Apparently not the Kauffman foundation.

Financial incompetence chokes our country

Now in the grand schema of things Kauffman is a drop in the Venture bucket, with a potentially side effect of dragging down other Limited Partners in Venture who are similarly clueless about how to reinvigorate the arbitrage of innovation. Such an atrophy of Limited Partners is actually a good thing (as it washes out those without proper investment discipline) as long as it is promptly replaced with new Limited Partners who have a more astute and disciplined interest in Venture aligned with the massive greenfield that lies ahead in technology innovation.

Problem is that beyond the danger that Venture as a scalable asset class could unjustly disappear, the malaise of the financial system in Venture may leave a large stain on the potential of the underlying asset, innovation. Already innovation in the U.S. has suffered from twenty years of subprime VC investing that by design can never scale innovative outlier capacity. The damage we already incur is a significant lack of faith, interest and distrust of technology companies by the public.

Because of the underperformance of the vast majority of Venture Capital firms many financiers now begin to think that the potential for innovation has decreased similarly. And that stain causes further mistrust in the sector, increases fear and catapults whatever is left in Venture even faster down the subprime spiral and our country into the lost leader of innovation.

Subsequently, the demise of VC creates some opportunities for alternative venture strategies, new Angel and micro-VC oxymorons that further perpetuate and fragment subprime investments and on average perform even worse than VC firms. Subprime at its best.

My recommendation to Limited Partners:

  • We are at the beginning of the technology evolution. Keep in mind that less than 20% of the world's population has access to meaningful technology innovation to enhance their daily life and improve productivity. A fantastic investment horizon lies ahead and as the youngest asset class in your portfolio, technology Venture has the most attractive economics and if deployed correctly, phenomenal potential for massive returns short term.

  • Venture Capital, the way deployed as a financial instrument today cannot support groundbreaking innovation at scale. Not because of a purported "Voodoo" of technology, but because of the systemic improper deployment of risk. Unchanged Venture Capital will continue to create self-induced risk, and therefor consistently produce deplorable returns for Limited Partners.

  • You can't teach an old dog new tricks, so don't expect better LP returns from the existing crop of VC General Partners. For twenty years Venture Capital has been given virtually unlimited freedom to deploy their optimal investment thesis, with massive market pull and the ability to control all the strings with regard to the governance of innovation. Tightening financial incentives does not magically turn subprime GPs prime and does nothing but dissuade new prime GPs who want to clear the air (the subprime ones will hang on for dear life as long as possible, even if you tinker with their management fees).

  • The deployment of the financial system that drives the deployment of risk in Venture Capital needs to be re-invented (we have). Investing in Venture unchanged is the definition of insanity. The solution is not a deeper understanding of Venture Capital's complexity, but a dramatic simplification and accountability of its foundational principles

  • Stick to your knitting. Get out of Venture if all of this is too much hassle for you. You may miss out on the incredible opportunity that lies ahead in technology Venture but your passive presence in the sector does nothing but perpetuate subprime and hurts the performance of our economy in the long run.

Linden Lab Seeks Second Life As Its Value Plunges

The value of Linden Lab, which operates the virtual world Second Life, has plunged by more than 21%, according to SharesPost, which tracks the private secondary market.

In late June, Linden Lab brought back founder Philip Rosedale as interim CEO, after CEO Mark Kingdon stepped down.

The current value of Linden Lab is estimated by SharesPost to be about $271 million or about $100 million less than a year ago.

The plunge in value appears related to today's news that the company is closing the five year old "Teen Second Life" virtual world at the end of this year.

The company said:

"...supporting and developing for two separate grids has been a challenge for us, and has slowed progress on improvements that benefit all Residents. To help us focus our resources and development on the Main Grid, we have made the difficult decision to close Teen Second Life."

Linden Lab has lowered the age for Second Life membership to 16 years and is evaluating lowering it further to 13 years -- but only if it can develop ways to provide safe access for younger teens.

"Linden Lab has received over $19 million from Mitch Kapor, Catamount Ventures, Benchmark Capital, Ray Ozzie, Omidyar Network, Globespan Capital Partners, and Bezos Expeditions."

SharesPost estimates the value of private firms based on shares bought and sold in private markets.

- Facebook has a value of about $25.5 billion;
- Zynga is valued at $4.9 billion;
- Twitter at $2.2 billion;
- LinkedIn at about $2 billion.


Saving Silicon Valley From The Coming VC Implosion

[This guest post is extracted from a longer article: Saving Silicon Valley.]

Georges van Hoegaerden was born in The Netherlands and came to Silicon Valley to work at Oracle. He soon jumped head first into the startup life and became a serial entrepreneur. But he quickly became disillusioned with VCs and a VC industry that lacks proper governance and consistent execution. He is passionate about reinventing the entire VC industry.

In this post he warns that Silicon Valley is on the brink of a serious "implosion" because 95% of VC firms are not making money for their investors. Many VCs are risk averse, they don't have the business experience needed for the job, and they are happy living off of generous management fees rather than working hard to build successful startups.

He points out that there are tremendous business opportunities ahead. We are still at the very early stages of a massive technology boom with just 20% of the world's population having access to any meaningful technologies. The VC industry should be expanding rather than contracting.


By Georges van Hoegaerden, Managing Director, The Venture Company

Georges van HoegaerdenSome people do not understand why I do what I do and why I bother, and underestimate my determination to fix Venture Capital. Certainly there are much easier ways to make money than to pursue the obliteration of an investment cartel, in which seemingly everyone belongs to the club.


...

I came to the U.S. on my own with some hard earned chunk of change in my pocket, invited by Marc Benioff (now Salesforce.com CEO, then Oracle VP) and Larry Ellison (Oracle's CEO) who wondered why I was able to sell their (then) emerging products while they couldn't.

I left Oracle with fond memories as soon as my green-card was approved and jumped in Silicon Valley hoping to find more intelligence there.

My first startup was a group of consultants with a horrible business plan, and I told them about my opinions in a way only I can. Instead of fleeing, they came back and asked for guidance (management incubation). We turned the company into a product company and raised a double digit series-A post 9/11. The company was sold in 2006 for triple digits.

Story continues...


The Lack Of Tech IPOs Is Holding Back Job Expansion Says Leading VC

Robert Ackerman, a leading Silicon Valley venture capitalist and founder of Allegis Capital, says that tech IPOs will remain scarce and that this will curtail job creation in the US.

A continued scarcity of tech IPOs means that the Obama Administration won't be able to count on Silicon Valley startups to help spark a job boom and help alleviate tough economic conditions for millions of unemployed.

Mr. Ackerman told SVW, "These days, tech startups have to rely on being acquired by a larger company once they reach a certain size because there isn't an IPO market to help them recapitalize and grow to the next stage. The largest expansion in jobs for a young company comes in the period after an IPO. If a company is acquired it doesn't lead to the same job growth."

But tech IPOs are unlikely to return to their former high levels because the infrastructure that supported and financed them has changed.

There used to be many boutique investment brokerages that had analysts following companies and sectors. After the dotcom bust many of those boutique brokerages disappeared or were acquired and now there is a massive shortage of analyst coverage. Without analyst coverage there is little liquidity in the trading of shares of small companies, and this discourages larger investors.

Mr. Ackerman said, "In 2007 we sold IronPort to Cisco for $830 million. This is a company that could have easily gone public but we chose to sell it. The lack of analyst coverage was a large factor in that decision."

Sarbanes-Oxely is another issue. Young companies have to bear the very large costs of compliance, reducing their earnings, which makes them look less appealing to investors.

And there are significant challenges in attracting investors in startups because of tax policies.

Mr. Ackerman has spent a lot of time in Washington, D.C. meeting with politicians and lobbying for the VC industry, seeking favorable tax benefits that would encourage investment in innovative companies. He says that venture capital is being regulated in the same way as hedge funds and private equity funds, which is wrong.

"Washington is trying to regulate the risk out of everything. We need policies that encourage risk taking, that encourage risks by entrepreneurs -- that's the way to create jobs."

He says that one staffer admitted to him that, "We don't really understand the issues around investing." His reply was, "That's fine but then don't pass legislation about issues you don't understand."

He is also highly critical of US immigration policies because they restrict US access to the world's most talented people. Attracting the best human capital is essential to maintaining US innovation yet many foreign-born top graduates of US universities are forced to return home.

"Every advanced degree issued by a US university should come with a green card attached," he says. "Otherwise we will lose our lead in innovation to China and India. Investment in startups is already pouring into those countries and it wont be long before it overtakes the US."



How To Look Good As A VC...

Georges van Hoegaerden from The Venture Company pokes some fun at venture capitalists trying to look good while as industry tackles some hard truths...

The following extracts are from: VC roast; how to take Venture for a ride:


- You give speeches to the world about free-markets from atop a comfortable perch of the most closed, dark, unregulated, in-transparent and proprietary market mechanism in the financial industry.

- You write on your blog that Venture is all about relative performance and then compare Venture indices with those of 100-year old asset classes (with nominal greenfield and growth), so Venture still looks like a “star”.

- You make the world believe that the best companies to invest in start with the discoveries from white males, under thirty, only a technology proposition, twenty miles from Sand Hill Road and built in a garage where you spoon-feed them $250K tranches, minimizing investor downside risk. Ignoring comfortably that the long-tail of viable ideas should just no longer be explored.

- You decline to discuss publicly any rounds of funding into portfolio companies and its valuations, because at some point that may actually lead to the discovery of your real knowledge, vision and merit of decision making in Venture, or what a fool you really are.

- You start raising new money, four years after your first, making it impossible for your LPs to establish the real merit of your initial investment thesis. You’ve just added another 12 years to your already comfortable existence and enjoy the stability of a more secure job than anyone else in government.

- You tell the world about how holistic your job really is, and how you as a member of the Venture sector are responsible for generating all these jobs, forgetting of course that you are mainly the matchmaker in the process (between the assets from LPs and Entrepreneurs) and it is not your money you put to work but the public’s money (dispersed through LPs to VCs).


PwC MoneyTree Reports "Modest" Start For VC Investors in Q1

About $4.7 billion was invested in Q1 2010 in 681 deals, reported PricewaterhouseCoopers and the National Venture Capital Association in its MoneyTree Report.

This represented a 9% decrease in dollars, and 18% fewer deals compared with Q4 of 2009. However, this was higher than the year ago quarter, with $3.4 billion and 635 deals.

Here is the sector breakdown:

- The Biotechnology industry received the highest level of funding for all industries in the quarter with $825 million going into 99 deals. This level of investment represents a 24 percent decrease in dollars and a 14 percent decrease in deals compared to the fourth quarter when $1.1 billion went into 115 deals.

- Medical Devices and Equipment saw a 29 percent decline in dollars and 30 percent decline in deal volume in the first quarter with $517 million going into 61 deals. This sector ranked fourth overall for the quarter in terms of dollars invested.

- The Software industry had the most deals completed in Q1 with 144 rounds, although this represented a drop of 25 percent from the 193 rounds completed in the fourth quarter. In terms of dollars invested, the Software sector was in second place, declining 29 percent from the prior quarter to $681 million in the first quarter of 2010. The drop in the number of deals in the first quarter puts Software at the fewest number of deals since the fourth quarter of 1995.

- The Clean Technology sector, which crosses traditional MoneyTree industries and comprises alternative energy, pollution and recycling, power supplies and conservation, saw a 87 percent increase in dollars over the fourth quarter to $773 million. The number of deals completed in the first quarter increased 44 percent to 69 deals compared with 48 deals in the fourth quarter. The increase in Clean Technology investments was driven by several large rounds, including five of the top 10 deals. Internet-specific companies received $807 million going into 158 deals in the first quarter, a 14 percent decrease in dollars and a 19 percent decrease in deals over the fourth quarter of 2009 when $941 million went into 196 deals. 'Internet-Specific' is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company's primary industry category.

- Eight of the 17 MoneyTree sectors experienced dollar declines in the first quarter, including Media and Entertainment (29 percent decrease) and Networking and Equipment (53 percent). Sectors which saw increases in dollars included Semiconductors (52 percent increase), Industrial/Energy (12 percent), Telecommunications (89 percent), Electronics/Instrumentation (73 percent), Financial Services (47 percent), and IT Services (14 percent).

- Seed and Early stage investments declined in the first quarter, dropping 30 percent to $1.4 billion. The number of Seed and Early stage deals dropped 24 percent to 299 from the prior quarter. Seed/Early stage deals accounted for 44 percent of total deal volume in the first quarter, compared to the fourth quarter when it accounted for 47 percent of all deals. The average Seed deal in the first quarter was $5.4 million, up from $4.0 million in the fourth quarter. The average Early stage deal was $4.6 million in Q1, down from $5.6 million in the prior quarter.

- Expansion stage dollars increased 9 percent in the first quarter, with $1.8 billion going into 224 deals. Overall, Expansion stage deals accounted for 33 percent of venture deals in the first quarter, up from 29 percent in the fourth quarter of 2009. The average Expansion stage deal was $7.8 million, up significantly from $6.6 million in the fourth quarter of 2009.

- Investments in Later stage deals remained flat in dollars and fell 20 percent in deals to $1.5 billion going into 158 rounds. Later stage deals accounted for 23 percent of total deal volume in Q1, compared to 24 percent in Q4 2009 when $1.5 billion went into 197 deals. The average Later stage deal in the first quarter was $9.8 million, which increased significantly from $7.8 million in the prior quarter.

- First-time financing (companies receiving venture capital for the first time) dollars and deals decreased 14 percent with $972 million going into 208 deals. First-time financings accounted for 21 percent of all dollars and 31 percent of all deals in the first quarter, compared to 22 percent of all dollars and 29 percent of all deals in the fourth quarter of 2009.

- Companies in the Software, Biotechnology, and Financial Services industries received the highest level of first-time dollars. The average first-time deal in the first quarter was $4.7 million, which is unchanged from the prior quarter. Seed/Early stage companies received the bulk of first-time investments, garnering 56 percent of the dollars and 73 percent of the deals, but fell short of fourth quarter percentages when they accounted for 65 percent of the dollars and 77 percent of the deals
MoneyTree Report results are available online at http://www.pwcmoneytree.com/ and http://www.nvca.org/.


VC Fundraising Lags Uptick In M&A And Potential IPOs

Despite an increase in M&A activity and several firms being prepared for a possible IPO later this year, VC fundraising efforts in Q1 2010 failed to rise above a level set in 1993, reports the National Venture Capital Association.

In the most recent quarter VC funds raised $3.6 billion, 31% less than a year ago.

Camille Ricketts, at VentureBeat, pointed out that those numbers are different from Dow Jones.

Dow Jones is clearly working off a different set of numbers. Its results, released on Tuesday, showed $4.1 billion raised across 34 funds last quarter -- which it said was a 41 percent jump from the first quarter of 2009. Dow Jones reported a little under $3 billion raised by fewer than 30 funds in Q1 2009, whereas the NVCA shows $5.3 billion raised by 57 funds during the same period.

David Gelles at the Financial Times, points to a consolidation in the VC industry.

With no sign of a turnaround in the near future, even insiders admit that venture capital firms have probably not seen the worst of it yet. "The next few years will see the industry consolidate with the strongest firms surviving," said Mr Heesen.

However, a change in the VC community likely take a long time because there are still a lot of VCs with large funds to administer. If the IPO market turns around later this year, there will be a rush to prep and fund late-stage tech firms, which could help the VC firms boost a lackluster performance.


The Next Big Thing According To John Doerr And Pals Is A Closed Thing

John Doerr and fellow Kleiner Perkins Caufield & Byers partners have published a post titled: The Next Big Thing and also announced they raised $200m for their second iFund.

According to the KPCB VCs, there is a "brave new world" emerging and it is best typified by the iPad and its fluid, dynamic user interface.

On Saturday (April 3) the iPad arrived. We believe it will rule the world.
I've touched it, held it, and caressed it. It feels gorgeous.
It feels like touching the future.It is not a big iPod. But it IS a very big dea
We're going from the Old World to a brave New World.
* From the Old World of the traditional, tired window interfaces... to the wonderful new world of TOUCH.

* From the Old World of Point and Click to the new SWOOSH of Fluidity.
* Instead of old, artificial, indirect interfaces, the iPad is direct and NATURAL.
* Instead of WYSIWyg - what you see is what you get - it is WYTIWis. What You Touch... IS what IS.
* Instead of holding a MOUSE, you're holding MAGIC.

The authors compare it to the beginning of the PC industry, and to the time when they saw the first web browser.

OK, we get it, you really like the iPad.

But the world of Apple is not an open world, it is not built on the same open platform that built the PC industry, or the world of the Internet with its open standards.

The world of Apple is proprietary, it requires the Apple online store, it requires Apple hardware and software; it requires permission from Apple; it requires proprietary hardware you can only get from Apple.

That's not a world that is comparable to the PC industry or the online world of the Internet.

And it's also a litigious world. Apple is suing to protect its user interfaces and its proprietary technologies.

In the PC world, everyone cross-licensed technologies with each other because they knew that legal battles were bad for business. The PC industry tried to create as little friction as possible so that an open platform could support many companies and support continued innovation and low prices.

KPCB's iFund is focused squarely on Apple and while that's a smart move it's not the "Next Big Thing."

- - -

Here is John Doerr on the new iFund.




Emergence Capital: Profitable Lessons From Freemium Business Models

It pays to specialize. VC firm Emergence Capital Partners is doing very well by focusing on investments in the enterprise IT market, and on startups that make use of the 'freemium' business model.

Freemium is not a new idea, companies have been giving away products and services for free for a long time but it is a new word -- popularized by Fred Wilson, a VC at New York City based Union Square Ventures. Chris Anderson, the editor-in-chief of Wired magazine, has also written about "free" business models.

A freemium model means that you offer a free version of your online service and try to convert some of those users to premium subscribers through offering additional features and value.

This business model can work very well for some companies -- especially the portfolio companies managed by Emergence Capital.

I spent most of Wednesday evening with Brian Jacobs and Gordon Ritter, general partners of Emergent Capital, and the CEOs of their most successful 'freemium' startups:

David Sacks, CEO, Yammer

Ivan Koon, CEO, YouSendIt

Brent Chudoba, VP Business Strategy, Survey Monkey

Umberto Milletti, InsideView

Jason Lemkin, CEO, Echosign

It was an excellent discussion and I came away with a notebook full of great content and it also sparked some new angles and ideas. It was also interesting to see how polarized the discussion became at times, and how the CEOs would band together on a series of points.

Emergence has the benefit of working with many companies in the enterprise space, so they can highlight best practices. Although the CEOs have a much narrower view, they know what it's like inside the trenches, and what is workable.

Here are some of my notes from the discussion:

- You can have a conversion rate of 2 to 4 per cent and still be successful with the freemium business model, says Ivan Koon.

- What should you do with your "deadbeat" users, the ones that won't convert to premium? Ivan Koon was in favor of cutting them off, once you have a 60 percent market share, and to stop accepting free users. Others said it was worth keeping them. I pointed out that with a 4 percent conversion rate you have a potential 96 per cent upside to play with.

Umberto Milletti said you should keep trying to entice your free users and that you mustn't use free trial periods because that's a power play, it means the company can take away a service and that users won't put up with that.

- Freemium means much lower, or virtually no marketing costs, said Brent Chudoba, and viral marketing helps bring new users. Survey Monkey users send surveys to thousands of people, which exposes the brand very widely.

- Where do you set your premium crossover? That depends on your service, your sector. Holding data hostage is not a good idea or doing a bait and switch -- switching off free users if they don't pay.

- Gordon Ritter focused on user data. He said that the companies were collecting lots of user data all the time and they needed to mine that data.

- Gordon Ritter also spoke about the need to do A, B, C, D, E testing. There was no sense in waiting around to see what features or what pricing would work when you could set up multiple tests to measure various aspects of your business.

The CEOs gave a bit of pushback on this point. Ivan Koon talked about using their intuition to know what will work and what won't. Umberto Milletti made a good point saying that his intuition has been wrong in the past, sometimes "shockingly wrong," and that testing was the best way to prove your intuition.

The CEOs said they didn't have the resources to carry out multiple tests and Jason Lemkin said it would mean certain planned features would be delayed.

I understand the pressures of startup CEOs, there are tons of things they could/should be doing, but it would require a week in every day to keep up.

- The human touch is important. When premium pricing reaches a certain level, it is important to have a sales representative talk with customers. This also gives an opportunity to up-sell or cross sell. The East coast digital camera stores are a good example, you have to call them to get their low prices but they generally manage to sell you extra memory, a camera kit, and some lenses too.

- Why don't free trials work? Umberto Milletti says it's because you can't create advocates for your service in 30 days, it takes longer.

- Gordon Ritter said that the companies have to think in terms of a machine, how to create a business process that acts like a machine. A machine means a service can be scaled -- if it is too dependent on humans, it can't be scaled.

- Is an ad supported model the same as a freemium model? I said no, partly because you don't want to have to start relying on online ads because the rates are low and moving lower. Online ads can bring a little extra revenues but, why give up that real-estate? Why not use that real estate on your web page to entice users to premium plans, or other services?

- David Sacks asked how do we fight commoditization of our business? That's an excellent question because the dirty little secret of freemium business models is that a competitor could offer a similar service for very little cost -- you have to find a way of differentiating your business, whether it is through community, great user experience, or something else.

- Should you get rid of your free users over time and just start charging?And can you charge a high price for your service if you have a large market share? Are you leaving money on the table by not pricing higher? The danger is that a competitor could come along and offer a freemium model priced under you. If you offer a free service, it creates an obstacle for a competitor, there is no price umbrella to shelter under. Thus, freemium can be part of a defensible business strategy.

- Brent Chudoba pointed out that if your service isn't something that is producing value, you don't have a business -- no business model, freemium or otherwise, will help you.

- Gordon Ritter continued to hammer home the point about testing, and mining user data. He pointed out that Marc Benioff (Emergence was an investor in Salesforce) is sitting on a huge mountain of user data. He can see what new features or applications it is worth launching, and what their monetization potential is.

- One of the CEOs pointed out that there hadn't yet been a large acquisition of a freemium company.

- Brian Jacobs wrapped things up, saying that there were still many questions around the freemium business model, and that it is still evolving.

It was an excellent discussion and for me, it sparked a lot of ideas that I'll be returning to in future posts.

Also, it struck me that there is a good roll-up opportunity here. I proposed that Emergence should combine its freemium portfolio companies, maybe add one or two more, and launch an IPO with the NASDAQ ticker FREE.

Salesforce is likely to do a roll-up, with the half-a-billion dollars it raised earlier this year.

---

Here is a PearlTree showing related web content to this story.

 Freemium + Emergence Capital Partners 

Please see: Emergence Raises New Fund and Maintains Focus - SVW


Farmville valued $1B More Than Twitter By The Smart Money

Facebook, Twitter, Zynga are hot companies and one day they will make hot IPOs. But what's their value?

It's often difficult to put a value on private companies because their financial data is private. But you can get some sense of their value by tracking the buying and selling of private company shares, and that's what SharesPost does.

The company announced its first value index today comprised of seven leading venture backed private companies.

The private market is where VC and other rich individuals can trade shares in venture-backed companies. You could call it the "smart money."

But you might be in for a surprise as to what the smart money values.

- Zynga, the maker of the Facebook game Farmville, has a $2.61 billion valuation. Twitter has a $1.44 billion valuation. The smart money sees $1.17 billion more value in Facebook games than it does in Twitter.

- According to the SharesPost Index, Facebook has a valuation of $11.52 billion. That's a lot less than the $15 billion valuation it had in October, 2007 when Microsoft purchased a 1.6% share for $240 million.

It's a 23 percent devaluation despite the massive growth at Facebook since Microsoft's investment. And it hosts Zynga's games, that has to add to its valuation.

Here is the complete list of the companies in the SharesPost Index and their current valuation:

Facebook $11.52 billion.

Zynga - $2.61 billion.

Twitter - $1.44 billion.

Linden Lab (Second Life) - $383 million.

LinkedIn - $1.3 billion.

Tesla Motors - $1.28 billion.

Serious Materials (Cleantech) - $227 million.


The Need To Teach Bootstrapping In Business Schools

Sramana Mitra discusses a very important topic in her column on Forbes.com: Why B-Schools Set Up Entrepreneurs To Fail

Academia generally looks down upon entrepreneurs even as they teach entrepreneurship in business schools and other university programs around the world.

Meanwhile, I have come to observe that most business school programs have an extensive emphasis on fundraising, especially fromventure capitalists, and very little pragmatic understanding of what it really takes to get a venture off the ground.

As a result, business schools launch students into the real world with completely unrealistic expectations, set up to fail.

She writes that she solicited input about the need to teach bootstrapping skills but some responses were negative. And there is an assumption that only mom-and-pops businesses can be built with bootstrapping.

How very wrong! Ask Frank Levinson and Jerry Rawls of Finisar whose bootstrapped venture went public at a $5 billion valuation. Or ask Christian Chabot of Tableau Software, who raised his Series A from NEA at a $20 million pre-money valuation by bootstrapping the early stages, when typical valuations for that round are in the $2 to $5 million range.

I know that Greg Gianforte, CEO of RightNow Technologies would agree with Sramana Mitra. He is a very strong advocate of bootstrapping. Here is a column he wrote for SVW that lists the perils of VC money:

Seven Reasons Not To Raise VC capital

Raising venture capital for early stage start-ups seems to be the prevailing path for most entrepreneurs; however, most would-be founders should reconsider.

Here are some reasons why:

- If you start by selling your concept to potential prospects (rather than stock to VCs), you will either end up with initial customers or a conviction that your idea won't work. Why raise money and then find out which one it will be?

- Raising money takes time away from understanding your market and potential customers. Often more time than it would take to just go sell something to a customer. Let your customers fund your business through product orders.

- Adding VCs to the mix early gives you an additional set of masters you must serve in addition to your customers. It is always hard to serve two masters, especially in a startup.

- With no money you can't make a fatal mistake. This is a blessing. Without VC money, you are forced to figure out how to extract funds from your customers for value you deliver. Ultimately that is the only thing that really matters.

- Money removes spending discipline. If you have the money you will spend it - whether you have figured out your business model and market or not.

-Raising VC money determines your exit strategy. You will either sell the business or take it public. What if you end up with a very profitable, modest sized business that you want to just run? That is no longer an option once you raise VC money.

- You sell your precious equity very dearly before you have a proven business model. This is the worst time to raise money from a valuation perspective. I know this is a contrarian view. And some of you are saying that might be fine for a small company.

Don't forget Dell, HP, Microsoft all originally started without VC funding; you can build a big business with bootstrapping and without VC money. At RightNow, we doubled our revenue and employees every 90 days for two years before we took any outside money, and even then the employees retained more than 75% ownership after raising $32m.

Greg Gianforte is the author of:

"Bootstrapping Your Business: Start and Grow a Successful Company With Almost No Money."


These Are The Signs That Show When A VC Is A Bad Date...

[This guest post is a slightly shortened version of the original: Why VC is such a bad date | Entrepreneur | The Venture Company]

By Georges van Hoegaerden, Managing Director, The Venture Company

http://venturecompany.com

Finding the perfect date

Georges van Hoegaerden As a VC, finding the right type of innovation to monetize is like finding the perfect date, they are few and far between. And to a founder of a startup finding the right General Partner (at a VC firm) is similarly daunting.

A unique match between two people (the General Partner and the CEO) is something that takes more than glowing at the prospect of having a baby together (i.e. build a new prosperous company) and discussing the financial projections and terms of the deal.


Higher standards

The reason why many people are such bad daters is because they do not hold on to their own standards, those that make them happy and those that make them strong.

Story continues...


Open Angel Forum Opens In San Francisco March 4

Open Angel Forum San Francisco is looking for applications from startups seeking investments from angels. It was co-founded by Jason Calacanis, the CEO of Mahalo, in response to angel networks that were charging high fees to startups.

Open Angel Forum does not charge startups to pitch. And it promises "A-list" investors.

The San Francisco chapter is headed by Kevin Rose, co-founder of Digg, and Chris Sacca, a top angel investor.

Tickets to attend the event are $1500. There are five startup spots - applications are here. Deadline is February 26.

Open Angel Forum is an event bringing together entrepreneurs, venture capitalists and industry professionals. We are not a venture capital or investment firm, but rather an event company. Our mission is to host events that are free to startups and investors.


Wow. No Charisma, No Funding - Says Study In Harvard Business Review

Startups should put away their business plans and find a charismatic CEO if they want to raise funding. That seems to be the finding of a study reported in the Harvard Business Review:

Executives at a party, were fitted with devices that recorded 'social signals' such as their tone of voice, gesticuation, and proximity to others.

Five days later the same executives presented business plans to a panel of judges in a contest. Without reading or hearing the pitches, Pentland correctly forecast the winners, using only data collected at the party.

This study is one of several that found that it is possible to predict who will succeed in salary negotiatins, and in other busness activities. The researchers say they are monitoring 'honest signals." Professor Sandy Pentland says that 'honest signals' is a biological term.

They're the nonverbal cues that social species use to coordinate themselves--gestures, expressions, tone. Humans use many types of signals, but honest signals are unusual in that they cause changes in the receiver of the signal. . . If I'm happy, it almost literally rubs off on you.

He added:

The more successful people are more energetic. They talk more, but they also listen more. They spend more face-to-face time with others. . . It's not just what they project that makes them charismatic; it's what they elicit. The more of these energetic, positive people you put on a team, the better the team's performance.

Read the rest of this article here on Harvard Business Review:

Defend Your Research: We Can Measure the Power of Charisma - Harvard Business Review


Why Haven't Silicon Valley VCs Done Better? Historic Opportunities Abound

Returns for VC funds have been bad for several years. But why?

Georges Van Hoegaerden has put together a very compelling list of reasons why VCs should be generating much better returns.

In his post Why do we keep listening to VC as the barometer of innovation? he writes:

- Technology has moved from hardware, to software, to software services with immediate market recognition and impact, allowing for simple business models and reduced risk with regard to customer adoption.

-The Internet with its ever increasing penetration provides a boundless addressable market for technology that a successful proposition can tap into at almost no additional expense.

- Until this year (thankfully LPs are now waking up) there have been truckloads of support from Limited Partners to the Venture sector, allowing VCs to pick their preferred fund size and implement their ideal diversification strategy.

- We produce more highly skilled local students and have access to a much larger petri-dish of (global) entrepreneurs than every before, that should account for a much larger supply of disruptive ideas and development resources.

- The penetration of applications to vertical markets (healthcare, oil and gas, real estate, etc.) remains pretty much untapped, leaving low hanging fruit investment opportunities unserved.

- The deployment of macro-economic principles with the application of technology to drive more efficient marketplaces remains untapped, leaving winner-takes-all investment opportunities unserved.

Excellent points. So why have many VC funds floundered?

Mr Van Hoegaerden believes it's because many VCs do not have the operating experience to manage investments, and that many VCs have been practicing a "micro" private equity approach to investments.

I keep hearing about a shakeup in the VC industry. I'm waiting to see what it looks like.


Best And Worst Times Of The Year To Raise VC Money

Timing your startups' capital raising periods can be very important because a lot of VCs conform to a fairly predictable schedule.

Mark Suster offers a handy guide:

I encourage entrepreneurs who are raising money to focus on the following time periods to START your process:

- January 6 - May 15th (green zone)
- May 16th - June 30th (yellow zone)
- July 1st - September 7th (red zone)
- September 8th - October 15th (green zone)
- October 16th - October 31st (yellow zone)
- November 1st - January 7th (red zone)

He points out that this is a US guide, in Europe the VC season stretches well into November (no Thanksgiving.)

Another useful fact: Full partner meetings are on a Monday.

Last chance this season to get your money is for a full partner meeting scheduled for Monday November 23. If you don't have one you'll have to wait until next year.

Mark Suster offers a 6-step relationship guide to VC.



Zynga Credibility Evaporating - What's The Effect On Its Super Star VC Investors?

Zynga, one of the largest virtual goods and gaming companies, promised it would stop running scam ads after Mike Arrington at Techcrunch called it out, amongst others, last Sunday. Then Zynga did it again.

On Saturday Mike Arrington noticed the ads were back, but he had to use someone else's computer because the ads weren't showing on his connection.

Deliberate blocking?

Mark Pincus, CEO of Zynga says no, it was "offer provider, doubleding, told us this was the result of their failure to remove an optimization queue which was still showing these ads to 10% of pageviews. i want to be clear that zynga had no control over the pages being shown and never filtered them from michael or anyone's view. "

You would think that this week of all weeks Mr Pincus would use a belt and braces to make sure no scam ads filtered through unnoticed.

It didn't take Mike Arrington long to find the ads so how come Zynga didn't see them?

Dean Takahashi at VentureBeat noted:

Shukla, who was replaced as CEO last week at Offerpal, told us in an interview that her tools allow publishers to review every single offer in the system and remove those that the publisher doesn’t think are proper. Super Rewards also has the same kind of offer removal feature. But those systems evidently haven’t been implemented...

Zynga's credibility is fast evaporating. It's quickly accumulating an unpleasant reputation; especially since Techcrunch posted a video of CEO Mark Pincus admitting "I Did Every Horrible Thing In The Book Just To Get Revenues".

There are 230,000 Google references to Zynga plus "scam" out of 1.44m just for Zynga. That's 1 in 6 references .

How will this effect Zynga's A-list investors? There must be considerable concern about being in the public eye.

It's a top tier A-list take a look:

Bing Gordon
Kleiner Perkins Caufield & Byers

Fred Wilson
Union Square Ventures

Reid Hoffman
Chairman, LinkedIn

Peter Thiel

Managing Partner Clarium Capital

Bob Pittman and Andy Russell

The Pilot Group

Brad Feld
Foundry Group

Sandy Miller
Institutional Venture Partners

Rich Levandov
Avalon Ventures

Maybe we can hear from some of them this week.

For example, New York city's top VC, Fred Wilson has a very popular blog A VC - Musings of a VC in NYC.

But like the New York Times' recent failure to notice the scandal in the world of virtual goods, Mr Wilson's blog hasn't noticed it yet either.

It's a great story. You'd think the East Coast media would be all over this story of a Silicon Valley bubble fueled by scams...

- - -

Please see: NYTimes Article On Virtual Goods Misses Huge Controversy


Venture Capital Avoids Government Regulation - But Challenges Remain

Silicon Valley venture capital firms will be pleased that "Financial Services Chairman Barney Frank has rejected a Treasury plan to subject venture capital firms to "systemic risk" regulation."

The Wall Street Journal reports that VCs haven't gotten away scot-free.

While Mr. Frank and colleague Paul Kanjorski (D., Pa.) plan to exempt VCs from the most onerous regulation, their draft directs the Securities and Exchange Commission to define appropriate reporting requirements for such firms.

Venture Capital Firms Allowed to Live - WSJ.com

This was one of the complaints in my recent interview with Bob Ackerman, founder of Allegis Capital. (VCWatch: Code Red In Silicon Valley Says Bob Ackerman - Government Killing Innovation)

However, Silicon Valley's VC industry still faces several considerable challenges. The amount of seed funding has greatly diminished and several large firms haven't been able to raise new funds.

The lack of seed funding could hurt the region in a few years time because it will limit the number of viable startups.


Pedal To The Metal: Is It Time For A New Sequoia Presentation?

Rarely has a Powerpoint presentation deck had as much destructive power as the one prepared by Eric Upin, partner at Sequoia Capital.

"R.I.P. Good Times" was presented about a year ago in a mandatory meeting of all the CEOs backed by Sequoia. Mike Moritz and Doug Leone laid down the line: slash jobs and expenses now - the fallout from the financial crisis could last for years. [GigaOm:Sequoia Rings the Alarm Bell: Silicon Valley Is in Trouble]

The presentation was leaked and circulated wildly with nearly half-a-million views.

Silicon Valley VCs might like to think of themselves as svelte wolf packs sniffing out the best investment opportunities, but they more often act like herd animals all running in the same direction -- especially when spooked.

The RIP presentation had a huge multiplier effect. Thousands of startups cut jobs and slashed spending. Outside services, especially PR firms, were hurt badly as companies cancelled or cut their retainers to the bone.

Now we are beginning to see some green shoots of a recovery. There has been some very welcome M&A activity and at very generous valuations.

Recent acquisitions in the hi-tech field include the purchase of Mint.com by Intuit for $170m (£102m), Adobe buying Omniture for $1.8bn (£1.08bn), the sale of Skype to a private equity syndicate for $2bn (£1.2bn) and the purchase of SpringSource by VMware for $420m (£254m).
BBC NEWS | Technology | Silicon Valley 'seeing revival'

All we need now is the IPO market to spark up and Silicon Valley will roar back to life.

But why wait? Surely it is better to have all your ducks in a row now. This is a great time to invest in people and services to make sure your startups are well positioned and well known.

Surely now is the time for another Sequoia presentation: "Pedal to the Metal." You can bet they won't be leaking that one.

- - -

Please see:

RIP: Sequoia Capital's hedge fund? | VentureBeat

Sequoia Capital partner Eric Upin has left the storied Silicon Valley venture capital firm to work at investment management firm Makena Capital Management, according to Forbes.

You're Fired, Er, No You're Not - Layoffs - Gawker

Sequoia Capital, the backer of Apple, Yahoo, and Google, ordered its startups to slash their payrolls this fall. We hear one CEO fired people so enthusiastically he had to retract some of his pink slips.


GOOG's Kai-Fu Lee Becomes China's Archangel Investor

Last week I got a chance to speak with the former head of Google China, Kai-Fu Lee about why he left the search giant and what he will be doing. Mr Lee joined Google in 2005 from Microsoft, to become president of Google China. His mission was to increase Google's reach in China against the domestic competitor Baidu.

Microsoft tried to stop Google from hiring Mr Lee but Google won the legal tug of war. At the time, Mr Lee wrote: "I need to follow my heart." [Kai Fu Lee: I need to follow my heart ZDNet.com]

Similarly, leaving Google, Mr Lee told me that he needed to follow his heart and take on a role where he can create a tremendous amount of value.

He is setting up an investment fund, Innovation Works that will make very early investments in Chinese startups. The fund will also provide the young companies with back-office support and other services so that the entrepreneurs can concentrate on developing technologies and services. The size of the fund is initially set at $115 million.

Here are some notes from our conversation:

- There is a large amount of capital in China waiting in the wings ready to invest in later stage financing for startups. But there is very little seed or angel investments.

- My goal is to provide those angel investments, and to quickly get companies up and running. Within 9 to 12 months those companies can attract later stage investments.

- The angel community in China is very different. It is very inexperienced and it often has ridiculous expectations. For instance, angels will sometimes insist on being repaid their money if a startup fails, trying to say it was a loan when the investment documents show otherwise.

- Angel investors are a very rare breed, they are self-selected, they have to learn how to do what they do and to network. I hope to be able to train others and to create a community of angel investors.

- There is a tremendous amount of enthusiasm and talent among Chinese entrepreneurs.

- Silicon Valley has managed to create a culture of openness to ideas and also to capital. In that way, ideas and capital can often find each other. China does not yet have this type of culture.

- There is some advantages to companies that are Chinese. This is especially true in the area of media such as search and social networks. These can be ideological areas and often require a license. We will be making investments in these areas as well as other sectors.

- Chinese startups are generally a lot more humble and understated and that can help.

- I will also be investing my own money.

- I'm not sure if Chinese entrepreneurs or developers from Silicon Valley will be drawn back to China because of this venture. If they are, there will be less need for my help.

- The timing is right for my move.

- Because of my roles at Microsoft and Google people trust me. I hope to become a matchmaker for talented entrepreneurs and capital.


Funding Innovation: Silicon Valley Still Tops As New York City VCs Will Tell You

Silicon Alley Insider has an interesting post: New York VCs Spend 90% Of Their Money Out Of Town.

The article quotes ChubbyBrain, a site that tracks VC investments, which found "Only 10% of NYC Area Venture Capitalist Investment Has Gone to NYC Startups."

That's about $1.8 billion in the second quarter of 2009 going into investments outside of NYC, the majority to Silicon Valley based companies.

It's no wonder that Silicon Valley continues to attract companies because this is where investments are made. This is despite an often repeated mantra that: "innovation can be carried out anywhere."

It is true that innovation can be carried out anywhere, but innovation in Silicon Valley gets funded. As New York City VCs might say it: mantra shmantra.


Finally - Standard Legal Docs For Startups . . . But Where's The Funding?

Mike Arrington at Techcrunch has a great post on standard legal docs for startups that can save them as much as $50k in legal fees when taking investment monies. The Funded Publishes Ideal First Round Term Sheet.

The legal docs were prepared on the behalf of Andeo Ressi, founder of The Funded, a site that ranks VCs. They are designed to protect founders from some of the predatory terms used by VCs.

Story continues...


The Naked Silicon Valley Emperor And The Blameless VCs

Georges van HoegaerdenGeorges van Hoegaerden, a serial entrepreneur, writes that "The Silicon Valley emperor has no clothes."

...Silicon Valley has become the emperor who wears no clothes. Many Venture Capitalists (VCs) like the emperor will hold their head high and continue their procession for the sake of protecting their management fees.

...the simple fact remains that very little disruptive innovation is born. And without disruptive innovation (and the risks that such innovation incurs) it is just a matter of time before the Limited Partners (LPs) recognize that the emperor's procession is coming to an end.

Mr Hoegaerden says that the fault is with the VCs -- many don't have the entrepreneurial experience to do their job. And they will always look to blame others and never themselves.

He writes that "innovation is not the problem," the problem is ineffective VCs

Story continues...


VCWatch: Code Red In Silicon Valley Says Bob Ackerman - Government Killing Innovation

BobAckerman.jpgI just spoke with Bob Ackerman, founder of Allegis Capital, and he is very concerned about innovation in Silicon Valley, primarily because of the cumulative impact of US government actions and regulations.

Here are some notes from our conversation:

- I'm very worried about the seed corn, that we won't have that next crop of innovative companies five, ten years in the future.

- Innovation is in trouble because of restrictions on H1B visas; unfavorable tax policies regarding stock options; the failure to change Sarbanes-Oxley in regards to startups which increases costs; and the government investing billions of dollars picking winners and losers, such as the bailout of the automakers. It's all building into a crescendo that harms innovation.

- I'm afraid that Washington doesn't understand venture capital and what we do. The Treasury department wants to regulate VC firms in the same way as hedge funds and private equity. This is wrong. VC firms use no leverage, while hedge funds and private equity leverage funds at huge ratios and look for short term gains. VC firms should not be regulated in the same way, it will hurt the smaller VC firms which are the most productive. This is a cottage industry.

Story continues...


Silver Lake Says It's a Risk Taker And Looking For "Misunderstood" Companies

Forbes reports on "What private equity investors want."

DavidRoux.jpg
Beth Kowitt writes that David Roux, co-founder and co-chief executive at Silver Lake said that the firm has more than $9 billion to invest. He's looking for companies that have:

- predictable business model.

- scalable business model.

- a misunderstood business model "therefore undervalued by the marketplace."

Basically, he's looking for a company with a solid business model with recurring revenue and a low valuation. That sounds like a low risk set of features, yet he sees Silver Lake as a risk taker.

"We're at a point in the cycle where we feel like we're being paid to take risks."

But he wants to moderate the risk by making sure valuations are low.

While companies would like to keep their valuations from July 2007, Roux said that a term of art in the industry now applies: "the valuations have begun to season."

He doesn't sound like a risk taker to me. And with $9 billion to invest, he won't be investing in startups.

Conjoin Plans To Invest As Much As $200m In Restoring Lustre To Lacklustre Ventures

RichardGarnickCEOCojoin.jpg

Richard Garnick is from Boston but he likes to pepper his language with Hindi phrases that describe his aggressive mantra for transforming poor performing businesses.

He's Chairman and and CEO of Conjoin Group, a newly formed company that plans to invest as much as $200 million over the coming year in transforming five to ten mid-sized companies.

And the Hindi phrases are because of his background as the top North American executive for the giant Indian IT outsourcing firm Wipro Technologies, and from time spent establishing offshore operations in India.

Despite the poor economy he sees lots of opportunities.

"There are a lot of solid businesses that were funded in the 2001 to 2006 period but never managed to reach 'escape velocity' and scale up. Now, their owners are tired of their stagnant performance but have been unable to change the business. That's where we come in."

Mr Garnick will take an ownership interest and spend as much as $20 million restructuring the company.

He's looking for businesses with solid recurring annual revenues in the $50 million plus range. His team will come in and analyze every aspect of the business and implement changes to reflect best business practices. Anything that can be digitized, and that is part of a repeatable business process, is outsourced to India.

Why can't businesses do this themselves?

"Many have leadership that doesn't know or understand what can be done in terms of outsourcing. And there are many political obstacles towards change within companies. We bring in our own leadership, we align ourselves with the goals of the owners, and we implement best practices that can reduce operational costs by at least 50 per cent, and as much as 75 per cent."

Also, mid-sized businesses don't have the capital to bring in a McKinsey team to do the analysis, which can run to $10m or more. Conjoin has its own practice, staffed with ex-McKinsey people, to perform this work at less than half the cost.

Here are some further notes from our conversation:

Story continues...


Vinod Khosla: How To Succeed In Silicon Valley By Bumbling And Failing...

Vinod Khosla is one of Silicon Valley's most successful VCs. I was at the recent SDForum Visionary Awards where Mr Khosla was one of four winners of the 2009 awards.

His acceptance speech was short and very good. Excellent advice for entrepreneurs.

Also, he talks about failure, which I have long advocated is Silicon Valley's strength.

A couple of years ago I met with a delegation of Russian diplomats, VCs, and government officials. They were visiting Silicon Valley and wanted to meet with me as part of their tour. They were looking for ways to create several Silicon Valley-like regions in Russia.

During our meeting, I told them I would tell them the secret of Silicon Valley. I paused. They all leaned in a little closer...

Story continues...


A Message To VC's LPs: We're Just At The Beginning Of The Tech Build-Out . . .

[Guest post from Georges van Hoegaerden, an accomplished entrepreneur, CEO and venture catalyst "turned conservationist of the technology asset class." His articles also appear at http://venturecompany.com. Here are extracts from a longer essay: How LPs should deal with VC. ]

By Georges van Hoegaerden

Georges van HoegaerdenThe technology sector which is my passion for the last 30-years is at the beginning, not the end of its emergence. Perhaps the top-level indicator of the innovative runway we have ahead of us is the following: more than 5/6 of the world's population does not yet use a computer connected to high-speed/broadband internet today. And all should and will, given the right technology.

That's where technology innovation comes in; not just in connecting people to the internet but in deploying innovation that uses the internet as a distribution mechanism. The way we use the internet today is rudimentary, and many new technology stacks will emerge to improve its impact on everyday citizens.

Story continues...


Do Be Do - Slave Girl's Mid- Year Performance Review . . .

On Sand Hill Slave, Slave Girl gets her mid-year performance review . . .

In my case, partners always catch me for the review when I’m in the middle of something that has my complete and undivided attention.

Partner: I have time for that review now.

SlaveGirl: Okay, can you give me a few minutes? I’m wrapping something up...

Partner: Well, I’ve only got a few minutes-

Sensing his tone, I immediately close out my YouTube window and scamper into his office.

Continues . . .

Sand Hill Slave: Even Though I Walk Through the Valley in the Shadow of Tech, I will fear no VC...

Investing In Innovation? All The VCs Are Looking For New Fees Rather Than New Startups

juergen-popp.jpg I recently caught up with Jurgen Popp, one of the top European angel investors. He was in town attending a VC conference and also tending to some of his US investments, including the rapidly growing Smart Health Buyer -- a US version of a very successful German startup.

From his perch in Zurich, Switzerland, Mr Popp gets to mix in European and US VC circles. And because he is an angel investor, he is often able to say things that others can't. Here are some notes from our meeting:

- I recently attended a large VC conference in San Francisco. The VCs all seemed interested in what types of new fees they could charge their investors rather than looking for new startup ideas.

- There were about five angel investors at the VC conference and it was easy to spot each other because we were the only ones asking questions about business rather than about fees. We all ended up sitting at the same table.

- The US VCs love to portray themselves as risk takers but they are not. It's the entrepreneurs that take the risks.

- There is very little VC activity in Europe right now, it seems to have virtually disappeared.

- There's a lot of activity among VC firms selling and buying portfolios, but a lot are being sold at 15% to 25% on the dollar.

- The way some of the US VCs behave they are killing innovation. They will join together to drive down valuations and take as much equity as they can from the founders.

- There are a lot of companies waiting in the wings to IPO. But I wonder if it is worth it for some of them. If they raise $50m on a $200m valuation much of that money will go in fees to bankers and lawyers.

- I believe there will be a rebound in VC investing in 2010 because by that time there will have been a rebound in stock markets -- maybe a doubling of where we stand today. That will free up money to be invested in startups.

- I'm already seeing a bit more activity. More people are calling, and there is a lot more interest in investing in small companies. That will grow over the next few months.

More Bad News For VCs: Sand Hill Slave Is Back!!!

I'm so happy. My favorite bitch goddess, Sand Hill Slave is back!!!

Story continues...


7 Great Reasons Not To Take VC Money

[Guest column by Greg Gianforte, CEO of RightNow Technologies and a serial entrepreneur.]

By Greg Gianforte

Raising venture capital for early stage start-ups seems to be the prevailing path for most entrepreneurs; however, most would-be founders should reconsider.

Here are some reasons why:

- If you start by selling your concept to potential prospects (rather than stock to VCs), you will either end up with initial customers or a conviction that your idea won't work. Why raise money and then find out which one it will be?

- Raising money takes time away from understanding your market and potential customers. Often more time than it would take to just go sell something to a customer. Let your customers fund your business through product orders.

- Adding VCs to the mix early gives you an additional set of masters you must serve in addition to your customers. It is always hard to serve two masters, especially in a startup.

- With no money you can't make a fatal mistake. This is a blessing. Without VC money, you are forced to figure out how to extract funds from your customers for value you deliver. Ultimately that is the only thing that really matters.

- Money removes spending discipline. If you have the money you will spend it - whether you have figured out your business model and market or not.

-Raising VC money determines your exit strategy. You will either sell the business or take it public. What if you end up with a very profitable, modest sized business that you want to just run? That is no longer an option once you raise VC money.

- You sell your precious equity very dearly before you have a proven business model. This is the worst time to raise money from a valuation perspective. I know this is a contrarian view. And some of you are saying that might be fine for a small company.

Don't forget Dell, HP, Microsoft all originally started without VC funding; you can build a big business with bootstrapping and without VC money. At RightNow, we doubled our revenue and employees every 90 days for two years before we took any outside money, and even then the employees retained more than 75% ownership after raising $32m.

- - -

[I see a lot of companies that are seeking VC money, or have VC money but need more, as if that would make their business viable. VC money isn't always smart money and it isn't always the smartest thing to do. I republish Greg's column at least once a year because it contains lots of common sense.]

Greg Gianforte is the author of: Eight to Great: Eight Steps to Delivering an Exceptional Customer Experience

His previous book is: "Bootstrapping Your Business: Start and Grow a Successful Company With Almost No Money."

If you would like to contribute a quest column please let me know: Tom(at)Foremski.com.

Plan To Fix VC Industry Promotes Role Of VC Over Entrepreneur

[Guest post from Georges van Hoegaerden, an accomplished entrepreneur, CEO and venture catalyst "turned conservationist of the technology asset class." His articles appear at http://venturecompany.com.]

The auto company's plan to fixing VC

By Georges van Hoegaerden

georgesvanhoegaerden.jpgThe National Venture Capital Association (NVCA) has released its recovery plan (4-pillar plan) to fix Venture Capital that is eerily similar to that of the auto companies. It focuses on the prolongation of (their) life rather than on the quality of its product; the ability to spawn meaningful innovation.

Now I am sure Dixon Doll, from his perch atop a $1.6B Venture firm, means well but his purview is severely limited by his role as chairman as one of the most closely held investment clubs in the nation. Its members, ninety-something percent of the U.S. VCs are simply not incented to present all options for improvement, and certainly not one that would include self-cannibalization.

Nothing in this plan covers the stimulus and meritocracy required to spawn and monetize disruptive innovation. The plan mentions entrepreneurs, as the real value creator in this equation - in passing - only once (slide 11) amongst its thirty slides. The plan seems to forget that the entrepreneur is the real value creator, not the VC.

Story continues...


Only Idiot CEOs Pursue VC Investments

[Guest post from Georges van Hoegaerden, an accomplished entrepreneur, CEO and venture catalyst "turned conservationist of the technology asset class." His articles appear at http://venturecompany.com.]

Idiot CEOs

By Georges van Hoegaerden

georgesvanhoegaerden.jpgThat's how one of the many CEOs that contact me recently described his colleagues who submit to Venture Capital (VC).

This alternatively funded CEO describes other CEO's that seek VC funding as idiots -- with a 1 in a 1000 shot at a lousy valuation (52% Round A, 25% Round B and 15% Round C). He continues that many of the serial entrepreneurs trumpeted by VC's have no money themselves despite "successful" previous exits.

He is not alone about the ineffectiveness of Venture Capital, I frequently hear from other successful entrepreneurs about it. And the situation may get worse before it gets better. The economy is offering VCs even more excuses to turn the screws, and control of companies is gained in more ways than a simple equity stake.

I believe technology investing today is largely a sub-prime asset class as described in a plethora of sub-prime articles in this blog, and find many entrepreneurs discouraged by both the process as well as the outcome of fundraising, even when that yielded a round.

Because of the ineffectiveness of VC and the rampant false positives and false negatives I refuse to believe VCs (and the NVCA collectively), who suggest that the sum of Venture Capital equals the sum of technology innovation. We see great entrepreneurs actively pursuing more creative investment vehicles (high-net-worth individuals, private equity firms, investment bankers, sovereign funds...anyone with money), and rightfully so.

In the meantime, oblivious to recognizing their own flaws, VCs are further descending down the sub-prime spiral by restricting investments to compliant entrepreneurs, evidence that they remain clueless about the fundamental risk management of high yield returns.

Smart CEOs should simply refuse to work with many technology investors for the following reasons:

Story continues...


VCs Need To Get Back To Roots Says Allegis' Ackerman

VC firms are keeping their powder dry these days and that means very few new ideas are being funded. Bob Ackerman from Allegis Capital was recently on CBS 5 speaking with KPIX reporter Sue Kwon.

A few key points from the interview (thanks to Steve Kaufman):

- Stiff U.S. regulations and tax policy is slamming Silicon Valley VCs. “It’s killing the goose that laid the golden egg,” he said. The evidence is not merely the decline in U.S. fund-raising but the concurrent increase in VC funding offshore – a record $8 billion was invested in Indian and Chinese startups last year. Many of startups that corralled the money were started by entrepreneurs who were educated in America and then worked for U.S. technology companies before returning home. “They are returning to their roots, and the capital is following them,” Ackerman said, adding that this trend is delivering body blows to the traditional wellspring of U.S. technological innovation.

- Even though some of the greatest technology companies, such as Cisco, were created during economic downturns, local VCs have become exceedingly risk-adverse. Ackerman says 75-80 percent of VCs have stopped investing in new startups. Instead, they’re focused on mitigating failures among startups they have already backed and are investing fresh capital only in those they deem most promising. They’re missing the boat because it’s almost impossible to determine which startups will ultimately succeed. One Ackerman-backed startup, IronPort Systems, founded in the middle of the dot.com bust in 2001, was acquired by Cisco in 2001 for $830 million.

- VCs have been spoiled by evolutionary industry trends. This decade, as VC funds grew bigger and bigger, VCs became more hands-off and less hands-on, paying insufficient attention to most of the entrepreneurs they backed. VCs need to return to their roots and work much more closely with entrepreneurs, sharing their successes, failures and experiences to improve the overall possibility of success.

- If these trends are not soon reversed, Silicon Valley will completely lose its waning reputation as the world’s greatest technology innovation center, initially created by the convergence of great universities, a disproportionately large number of local VCs, a strong entrepreneurial culture and the lack of stigma in failure. All this explains why the Valley, at least until recently, consistently attracted so many bright Indian, Chinese, Russian, British and French engineers as the technology haven for the best and brightest. As noted above, this long-standing trend is now in serious jeopardy.

Here's the interview:

http://cbs5.com/video/?id=48599@kpix.dayport.com

IT VC Investments Plunge In Q4 To Lowest Level Since 1998

Investments in the IT industry fell to their lowest level since 1998, a 39 per cent drop compared with the year ago period. Overall, US venture capital investments fell 30 per cent, compared with the year ago period, to their lowest level since 2005 reports Dow Jones Venture Source.

"The data confirms what we've being hearing anecdotally for some time that many venture capital firms are circling the wagons to weather the downturn and are focusing more on the health and vitality of current portfolio companies rather than new investments," said Jessica Canning, director of Global Research for Dow Jones VentureSource.

Healthcare also fared badly, dropping 42 per cent from a year ago.

The bright spot was energy investments which more than doubled from the 2007 Q4.

Here are the 2008 Q4 details:

Deals: 554

Investment: $5.5 billion down 30 per cent from 2007 Q4

Total 2008

Deals: 2,550

Total 2008 investment: $28.8 billion down 8 per cent from 2007

Here are the sector details:

Story continues...


Advice On Raising Capital

Scott "Dig" Scheper is an analyst at a venture capital firm in Orange County. He recently put together this short presentation on lessons in venture capital. He has some excellent advice for startups such as don't wait in the car park to pitch again!

Lessons in Venture Capital 2008
Publish at Scribd or explore others: Business How-To Guides & DIY financial entrepreneur

The State Of VC Funding In Southern California

I wasn't able to attend the recent Under the Radar Dealmaker LA Roundtable on the VC Outlook 2009 but TechZulu was there. Here are some video segments from the conference:

Jason Nazaar, Founder, DocStoc (Moderator)

David Travers, Associate Rustic Canyon Ventures
Brian Garrett, Managing Director, Cross Cut Ventures
Jim Armstrong, Managing Director, Clearstone Venture Partners
Mark Suster, Partner, GRP Partners

7 Reasons Startups Should Not Take VC Funding - Advice from a Serial Entrepreneur

This is a guest column written for Silicon Valley Watcher by Greg Gianforte, CEO of RightNow Technologies and a serial entrepreneur:

Raising venture capital for early stage start-ups seems to be the prevailing path for most entrepreneurs; however, most would-be founders should reconsider.

Here are some reasons why:

-If you start by selling your concept to potential prospects (rather than stock to VCs), you will either end up with initial customers or a conviction that your idea won't work. Why raise money and then find out which one it will be?

-Raising money takes time away from understanding your market and potential customers. Often more time than it would take to just go sell something to a customer. Let your customers fund your business through product orders.

-Adding VCs to the mix early gives you an additional set of masters you must serve in addition to your customers. It is always hard to serve two masters, especially in a startup.

-With no money you can't make a fatal mistake. This is a blessing. Without VC money, you are forced to figure out how to extract funds from your customers for value you deliver. Ultimately that is the only thing that really matters.

-Money removes spending discipline. If you have the money you will spend it - whether you have figured out your business model and market or not. -Raising VC money determines your exit strategy. You will either sell the business or take it public. What if you end up with a very profitable, modest sized business that you want to just run? That is no longer an option once you raise VC money.

-You sell your precious equity very dearly before you have a proven business model. This is the worst time to raise money from a valuation perspective. I know this is a contrarian view. And some of you are saying that might be fine for a small company.

Don't forget Dell, HP, Microsoft all originally started without VC funding; you can build a big business with bootstrapping and without VC money. At RightNow, we doubled our revenue and employees every 90 days for two years before we took any outside money, and even then the employees retained more than 75% ownership after raising $32m.

- - -

Foremski's Take:

I see a lot of companies that are seeking VC money, or have VC money but need more, as if that would make their business viable. VC money isn't always smart money and it isn't always the smartest thing to do. Greg's column needs to be republished from time to time because it remains relevant.

Greg Gianforte is the author of a new book:Eight to Great: Eight Steps to Delivering an Exceptional Customer Experience

His previous book is: "Bootstrapping Your Business: Start and Grow a Successful Company With Almost No Money."

If you would like to contribute a quest column please let me know: tom(at)SiliconValleyWatcher.com.

The Joke Of An $800m "StartUp" VC Fund

Sramana Mitra rightly takes to task Lightspeed Venture's new $800m fund supposedly focused on early stage investments in IT and cleantech.

With that much money you'd have to make a couple of hundred early stage investments which is clearly not possible. The VCs wouldn't have enough time to find, make, and nurture such investments.

Sramana Mitra:

There is only one reason for raising these humongous funds: Raw greed for larger and larger Management Fees.

It's not the first time Sramana Mitra has taken on VC firms in boasts that they finance early stage startups.

Here’s an excerpt from one of NEA’s press releases: “Practicing classic venture capital for over 25 years, NEA focuses on early stage investments, playing an active role in assisting management to build companies of lasting value. With $6 billion under management, NEA’s experienced management team has invested in over 500 companies, of which more than 150 have gone public and more than 200 have been acquired."

NEA is a great firm, indeed one of the classical institutions of the industry. Precisely why they should be slightly embarrassed to utter “early stage” and “$6 Billion under management” in the same breath!

I agree. It's the angel investors who take the risks and invest and nurture Silicon Valley startups. It is angel investor networks such as TiE and Silicom Ventures that do the real heavy lifting around here.

BTW TiE's excellent annual conference is coming up May 16 -17 in Santa Clara. Don't miss it!

Incremental Is Not Innovative: Where Is The Next Big Thing?

Excellent article by Jeff Nolan, an ex-VC, writing in SandHill.com on venture capital investments and locating the next big thing.

Incrementalism and "The New New Thing" - With all the venture capital moving around in the Silicon Valley, where is the real innovation?

He makes many good points especially that there is a lot of money flowing into companies that only offer incremental improvements over what is already available.

The situation may leave the technology industry in another downward spiral if none of the "incremental" ventures hit it big and no other genuine innovation appears soon.

Incremental innovation just won't cut it. In my opinion innovation has to be disruptive otherwise it won't succeed, because there is little incentive to change.

I certainly agree with the Web 2-point yawn factor:

In my opinion, the worst thing that happened in these last couple of years is that damn versioning of what is a simply the broader continuum of the evolving Web. Define Web 2.0… just try it and you will see the futility.

I totally agree with Mr Nolan on this point:

I am waiting for venture investors to once again discover that there is money to be made in enterprise software.

But what is next?

As I survey the landscape of consumer- and business- focused software and service providers I am struck by how much incrementalism there is at the moment. Something like Twitter is ground breaking in terms of breakout adoption, but what about the other 10,000 startups? There are few bold "aha" ideas, lot's of social "-this or -that", and mostly a bunch of companies hoping to draft on the perceived success of a few gorillas. . .

. . .The venture capital will no doubt continue to flow to these companies in the hopes that a few will rise to the top and get acquired. With the melt down in non-VC private equity I am sure that institutional investors will surge back into VC with abandon and this will prop up the Valley for the foreseeable future.

But I'm still left with the uncomfortable question of "What’s next?" When Facebook doesn’t deliver world peace, and FriendFeed fails to be better than sliced bread, what will we do?

SandHill.com | Opinion : Incrementalism and "The New New Thing"

I know when the next new thing will emerge...

It will emerge from this coming recession. The next new/big thing has always emerged from the bust cycles in Silicon Valley.

This last one produced a two-way communications technology platform based on RSS (a blogging platform) that led to the flood of collaboration apps known as Web 2.0. The next big thing will emerge from the same roots. Because it is during a recession that we have time to think about and invest in the next generation of innovation. Intel (an SVW sponsor) makes its investments in chip fabs during the bust cycle in the chip industry, then when the boom cycle comes it is ready to crank out tens of millions of chips.

If we are going to go into a recession the silver lining is that there will be gold at the end of the rainbow (mashup metaphor #34 :-)

Angels Are The Real VCs...

Sramana Mitra makes a great point about venture capitalists and angel investors. She notes that huge VC funds continue to be raised. This means VCs can't do as much mentoring and guiding to help startups, they have to make large investments to justify their funds (and more importantly, their management fees.)

She cites figures for 2007 that show:

Angels invested $26 billion in 57,120 companies.

VCs invested $29 billion in 3,813 companies.

What I find disconcerting is that some of the best early stage venture firms are basically putting themselves in a situation whereby they cannot do early stage anymore!

From: Sramana Mitra on Strategy.

What happens to Silicon Valley startups if the angel investors can't do the job as well as they used to because of their exposure to numerous financial crises that abound?

This is what seems to be happening, as I found out last week: Out & About: Entrepreneurs Talking About Recession- Are Angel Investors In Trouble?

The loss of the angel investors is potentially a big problem because Silicon Valley VC firms have outsourced much of the seed investing to the angels. The angel investors are a more important generator of the next wave of startups now than ever before, this could hurt Silicon Valley.

Top European VC Firm Raises More Than Half Billion Dollars To Prop Up Late Stage Euro Startups

As US acquisitions of European startups grow more costly due to falling US dollar, Swiss-based Index Ventures Tuesday announced it has created the first European fund to invest in mature, late stage, European startups. The fund raised 400m euros, or about $576m at today's exchange rate.

The goal of the fund is to invest between 20m euros and 50m euros, in mostly European companies, which are at a stage where they are considering being acquired.

"In many of these cases, investing additional capital and time in the business will result in a much greater long-term payoff and allow the entrepreneur to continue growing his or her company into a market leader," said Dominique Vidal.

MySQL, which Sun Microsystems last week agreed to acquire for $1bn, is one of the firms' portfolio companies. It was also an investor in Skype, which was sold to Ebay for $2.6bn. Index has invested in 100 European and US startups.

Betfair, and FON are among other hot investments in its portfolio.

But a falling US dollar and a devaluation of Ebay's Skype investment has created a poor acquisition market for European tech and life sciences companies, which are often sold to US corporations.

Index was founded in Geneva in 1996.The latest fund will be managed by "Index co-founder Giuseppe Zocco; Dominique Vidal, previously CEO of Yahoo! Europe; and Guido Magni, formerly the Global Head of Medical Science at F. Hoffman-La Roche."

Index Ventures - News

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Turning Oil Into Innovation: Russian Delegation Seeks Silicon Valley's Lessons

Monday I met with a Russian delegation that is part of an ambitious Russian government program investing billions of dollars in creating several Silicon Valley type innovation regions across Russia. This includes passing new laws, deregulation of controls over some types of investments, and possibly even creating a stock market for its high tech sector.

The group is here to build connections with Silicon Valley and to learn from some of its best and worst practices. There is a two-day conference on Thursday and Friday: Silicon Valley Open Doors 2007.

Silicon Valley's secret is . . .

The delegation was eager to hear about my views on SIlicon Valley. They leaned forward when I said I would tell them Silicon Valley's most important secret--and then I stopped. They laughed, and then I told them the secret, knowing that it can't be torn away from this region: Failure.

Silicon Valley tolerates, and funds, massive amounts of failure. Only about one out of twenty startups succeed.

Probably no other culture allows people to fail as many times as Silicon Valley. Inside every succesful Silicon Valley entrepreneur is a failed entrepreneur.

I know plenty of successful people but they failed many times. Other countries and regions don't tolerate failure on such a scale, you rarely get a second or third chance let alone 23 chances, as one entrepreneur I met recently claimed.

Cloning

"We don't want to build a clone of Silicon Valley, we know that wouldn't work. But we believe we can learn how to avoid some of Silicon Valley's problems and eliminate its bottlenecks," said Yuri Ammosov, a senior policy officer in the Russian Ministry of Economic Development and Trade.

Mr Ammosov is also a serial entrepreneur, he was very successful with a Russian version of Hotmail. Because of that experience he was chosen to advise the Russian government on technology policy, and he also teaches business studies and entrepreneurism to Russian graduates.

Creating Russian Venture Capital Funds

A key part of his job is in helping to channel more than $1.25bn of government money into establishing several large venture capital funds along with capital from wealthy individuals and Russian financial institutions. This initiative was created earlier this year as the Russian Venture Company (RVC).

RVC invests in each VC fund up to 49 per cent, with the rest of the capital raised from private and non-public sources. Each RVC affiliated venture fund agrees to invest 80 per cent of its capital in early stage startups.

Along with Mr Ammosov, I met Yan Ryazantsev, a senior investment director in RVC, Nikolay Dmitriev, consultant with RVC (also introduced as Mr Ammosov's brightest student), and Anna Dvornikova, who is based in San Francisco and is a director of the American Business Association of Russian Professionals.

Culture of innovation and change

Mr Ammosov acknowledges that there are many cultural, infrastructure, and legal changes that need to be made in Russia, and it will take time. For example, he tries to teach his students to take risks in establishing a startup, risk taking is essential for an entrepreneur.

The Russian government is also willing to pass laws that will help stimulate investment, an equivalent Regulation D - Rules Governing the Limited Offer and Sale of Securities Without Registration, which was very important in stimulating US investments in high tech companies.

SOX - no thanks

Sarbanes-Oxley, however is not something that the Russians want to copy, they see it as one of the problems to avoid. Yes, transparency is important for Russian companies but not the way SOX has been implemented, and the burden it imposes on young companies.

The Russian government is also creating stronger IP laws and training its courts on how to implement them. "Stronger IP laws are important to help protect Russian companies," said Mr Ammosov.

There are also plans to establish tax-free economic zones, and a willingness to pump further billions of roubles into making sure Russia's innovation centers rival those of China, India, Israel, and the US.

To achieve those goals, RVC has a very impressive board of directors, which includes Yigal Erlich, who helped establish Israel's "Silicon Wadi" second in size only to Silicon Valley; and also Esko Aho, former prime minister of Finland, who brings with him some of the "Nokia" pixie dust.

Exit here

Venture capital is important but so is an exit event, so that the cycle of investment and development can regenerate investment capital. And that is why the Russian government is studying markets such as NASDAQ and AIM with an interest in possibly establishing a market to trade Russian high-tech companies.

- - -

Find out more about Russian innovators this week:

Come to the Computer History Museum this Thursday and Friday for a two-day conference "Silicon Valley Open Doors 2007." (SVOD.org)

Here is the agenda.

And here is an impressive list of speakers.

And here is SVOD's anthem:

"Another Riskmaster"

Lyrics by Silicon Valley's own Tim Draper(!) [I have no idea what the tune is, obviously something stirring, I can imagine something between Red Army chior and Welsh chior.]

Hey! You want to start a business?

Russia seems to show some promise

While weighing all your choices

“Go to Moscow!” you hear voices


Google founder came from Russia

Parametric? - Not from Prussia!

Genesis and PayPal too

SVOD and what is new?


With luck you’ll become a

Master!

From Soviet biology

Comes really cool technology

Software immunology

From Nukes we get ecology


Ukraine’s Orange Revolution

Good for all-freedom solution

And then political pollution

Now it’s all in execution


Chorus:

With luck you’ll become a

riskMaster!

All you need is a faster chip

A million rubles

A couple of engineers


riskMaster!

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Web 2.0 on the Ropes. . . Kleiner Perkins Halts Investments

Whenever I meet with VCs lately I've noticed they have a growing distaste for Web 2.0 startups. The "Web 2.0" term, in connection with a startup, and as a collection of concepts, is very tired in this community.

For example, Kleiner Perkins Caufield & Byers, Silicon Valley's leading VC firm, has stopped investing in Web 2.0 startups.

"We have absolutely no interest in funding Web 2.0 companies," says Randy Komisar, a partner at Kleiner Perkins. He mentioned this during an after dinner conversation last week. He said he had recently told John Battelle, one of the organizers of the rapidly growing Web 2.0 Summit conference, that the term no longer had the same positive cachet it once had. In the VC community it clearly has a negative one.

For the organizers of the Web 2.0 conference, that must be a tough thing to hear, since it comes from one of the country's top VC investment firms. Mr Battelle, CMP, and O'Reilly Media, have created a highly popular and lucrative conference. They have even taken legal action to prevent others from profiting from the term "Web 2.0" and they have plans to expand their franchise to larger audiences.

I didn't get a chance to ask Mr Komisar when his firm stopped funding Web 2.0 companies. But we did talk earlier in the evening about some of the fundamental changes he is seeing in Internet trends. [I wrote about part of it here: "Aggregate Knowledge . . ."

It won't be just Kleiner Perkins that has lost interest in Web 2.0 companies. The firm is one of the trend setters in Silicon Valley, with a long string of massively successful investments over several decades. And Silicon Valley VC firms always invest in trends, rather than companies. They certainly won't be attending "Web 2.0" conferences, and without VCs attending, there is no point in startups showing up and preening for their next capital raising event.

Reinvent, redefine, and reprint

Web 2.0 companies will now have to reinvent and redefine themselves. And reprint their business plans. They should also remove any mention of "long tail economics."

I have a bad feeling about the longevity of that term in the investment community. It sounds a touch too W2.

Nixing anything "long tail" is an easy way to future-proof a business plan for a few months longer.

"Social graph" is doing great right now, so make sure you pepper your business plan with that term. "Social platform" still has legs. And "attention economy" is a ricochet term with a bullet.

. . . too 1.5?

Steve Rubel won't be crying for Web 2.0 companies. [The Web 2.0 World is Skunk Drunk on Its Own Kool-Aid] And other people are certain to find pleasure in the very possible demise of Web 2.0.

My line has always been that "The thing about Web 2.0 is that it is so 1.5..." Because Web 2.0 as a concept grew out of an intermediate time in the evolution of the Internet.

We are witnessing an emerging Internet better described as an "Internet 2.0" world, where technologies such as RSS have nothing to do with the "Web" yet are unique to this phase of the Internet. It clearly looks to me that we are building an Internet 2.0 world and anything "Web 2.0" would be a subset.

UPDATE: Tim O'Reilly replies:

Posted in comments at 3.51am.

Either KP is getting sucked in by the hype end of Web 2.0, and failing to understand what it's really about, or else, more likely, they are using another term for the same thing.

At the end of the day, there is a deep, long term trend towards the network as platform, and to applications that leverage the true strength of that platform. That's what *I* call Web 2.0, and I know that KP is still investing in that trend.

(They are, however, also taken with many other important areas, such as energy and the environment, that are increasingly distant from the web.)

But I think the real way to interpret this comment is to say that if a company needs to identify itself as a "Web 2.0" company rather than describing the problem they are solving, or the opportunity they are creating, then they are just playing the buzzword game, and aren't worth investing in, regardless of the buzzword!

UPDATE2: From Randy Komisar: - - -

Tom certainly has stirred up a tempest in this tea pot, but that is good for the blogging business isn't it. As much as the controversy is interesting, it must have been difficult to hear me clearly across the table.

Tim's comments are more to the point. What is the definition of Web 2.0? Nobody would know better than Tim, but for me the moniker is getting threadbare and seems to focus backwards, not forward. I am looking for the next set of innovations - and I will let Tim name them since he seems to have a knack for it.

I am afraid that the noisy room may have garbled Tom's hearing. KPCB certainly has invested in some of the greatest "Web 2.0" companies like Amazon and Google. And we have selectively continued to fund terrific consumer internet entrepreneurs, like Paul Martino of Aggregate Knowledge who was the host of our dinner that evening. I am sure there will be plenty more, whatever you ultimately choose to call them :)

Reply from Tom: Randy, my hearing was fine. You made the comment as we were getting ready to leave. We were all standing and you were just a yard or so away from me. We were all talking about Web 2.0 and how the term was over used and too many companies using it, and you said that Kleiner Perkins had no interest in investing in these companies.

My apologies if my article may have put you in a delicate position but I think that many of the reactions have been confusing the agenda of investors with that of publishers and marketers.

As for past investments, I'm sure that Web 2.0 had some meaning and Kleiner did invest in companies that would describe themselves in that way. And today, as you rightly point out, VCs such as yourself are interested in new emerging trends and technologies that the term "Web 2.0" doesn't capture, and that is perfectly understandable. VCs have a forward time horizon of five to seven years so it is perfectly OK not to be interested in terms used to describe unique qualities of older companies.

However, there are a lot of publishers and companies that have invested a lot in the term and have a strong self-interest to defend that term and make sure that it is seen to be current and leading edge. That has nothing to do with Kleiner Perkins' investment strategy and nor should it. They are two different agendas.

Please see Silicon Valley Watcher:

August 2006 - A plethora of Web 2.0 = Way too many Swiss-army-knife-collaborative-platform-technologies

November 2006 - Web 2.Uh Oh Week in SF - Where are the Users?!

November 2006 - Tired of all the 2.0 hype? Here comes Web 3.0

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Silicon Valley's Rising Star VC: Jeff Clavier

jeffclavier.jpgIs there any investor in Silicon Valley startups that can match the current track record of Jeff Clavier? His self-funded Softech VC fund has had an extraordinary run of success, selling five companies out of 20 investments in less than 4 years.

Truveo (acquired by AOL for a rumored $50 million), Userplane (acquired by AOL for a rumored $35 million), MyBlogLog (acquired by Yahoo for $10 million), Kaboodle (acquired by Hearst for a rumored $30-40 million), Mayas Mom (acquired by BabyCenter for $7 million), Dogster, Kongregate, Edgeio and many others.

From: TechCrunch - Jeff Clavier launches $12m venture fund

And Mr Clavier just turned 40 this month. Can he do it again with other people's money? Past performance is not a guarantee of future success but clearly Mr Clavier is doing something right.

If he succeeded in selling one of two of his portfolio companies that might be considered lucky but his list of successes shows that luck has little to do with his performance as an investor. It is Mr Clavier's approach to investing that makes the difference.

He was one of the first investors to write a blog about investing and Web 2.0 topics. This provided 2 key advantages as an investor:

1- By being an active participant in blogging and online discussion groups he could see early trends and know the people that shape them.

2- He became highly visible within the Web 2.0 community which helped his deal flow tremendously.

Here is Mr Clavier talking about his successes and his investment criteria on a recent VC panel. He is joined by Gordon Ritter, from Emergence Capital Partners, a successful investor in the software as a service space; and M.R. Rangaswami of the Sand Hill Group - successfully sold to CMP; Jai Das from SAP Ventures; Sam Argus from law firm Fenwick & West - moderated by Sean Wise. From TechOne.

Part 1

Part 2

- - -
MORE INFO:

Here is Mr Clavier from his blog "Jeff Clavier's Software Only" :

Story continues...


An Arbitrage Opportunity In Early Stage VC Funding

VC funding is up but has shifted over to later stage financing:

VCs Invest Record Amounts but Rush Towards The Exits

Charles Beeler, a general partner with El Dorado Ventures writes a long piece on PEHUB, that there are "3 myths and 1 reality about early stage investing."

The 3 myths:

Myth #1
There’s too much money chasing too few deals

I’ve been hearing this one since entering the business in 1996, and know that it was being said long before I came along...

Myth #2
Valuations for venture-backed companies are going through the roof.

Truth is, overall valuations for VC deals are going up. From a trough in the first half of 2003 of $10 million pre-money, the average VC-backed company is now worth $20 million pre-money, a 100% increase...

Myth #3
The “flavor-of-the-month” market is overheated

Pick your favorite market – networking, storage, software, nanotech, cleantech, Internet – and at some point, someone will say it is overheated. Part of our job as VCs is to chase opportunities in what we perceive to be hot markets, so you’re going to see certain markets get flooded with investment when VCs decide it’s the place to be...

 3 Myths and 1 Reality about Early-Stage Investing

The reality is that early stage investing is "not even back to the level of early-stage Internet investing of the first half of 2002." And that was a very bleak time.

Yet Mr Beeler writes that "reports of early-stage VC’s death have, in fact, been exaggerated."

I get where Mr Beeler is heading, but I think it would have been better to write the piece this way:

Strong rebound predicted for early stage VC funding because of the high valuations in later stage funding.

 

 ----

Additional Info:

Charles Beeler is a General Partner with El Dorado Ventures, a Menlo Park-based venture firm that specializes in early-stage technology investing. For more information on visit www.eldorado.com.

 

VCs Invest Record Amounts but Rush Towards The Exits

Foremski's Take: Here's my topline analysis on the VC investment figures just released for Q1 2007. VC funding is up but most of it is crowding into later stage financing. The early stage financing has fallen, which shows that the... [Edit]

Posted by Tom Foremski on April 24, 2007 12:19 AM

VCs Invest Record Amounts but Rush Towards The Exits

Foremski's Take: Here's my topline analysis on the VC investment figures just released for Q1 2007.

VC funding is up but most of it is crowding into later stage financing. The early stage financing has fallen, which shows that the VC funds have become much more conservative and risk averse--exactly what Paul Kedrosky has been saying for some time.

The spin from the VC community is that VC funding has "broken out" to its highest level since the dark quarters of the dotbomb years, in 2001. But early stage funding has dropped significantly and if that continues that is very bad for the next crop of startups.

Have the VC funds been scared off by the lack of decent investment opportunities? Maybe. I wouldn't blame them for looking at many Web 2.0 companies and walking past the window decorations. 

Money is shifting from IT and into life sciences and clean tech. Biotech is not doing well, medical devices are doing very well, clean tech has dropped a bit but the 12 month rolling average looks good for many sectors.

[Whenever the statisticians resolve to 12-month or five year, or in the case of the chip industry 40-year rolling averages (because the chip industry can...) you have to nod and wonder if there might be some other factors in play.]

Take a look tell me what you see in these tea leaves :-)

(This is some of the raw material that is provided to journalists...)

Here is the webcast, highlights, and the media release:

 

Story continues...


An East Coast Fueled Bubble 2.0?

I popped into the Web 2.0 Expo and conference Monday afternoon at the cavernous Moscone West in downtown San Francisco.

I needed to get to the top floor to get my press credentials. Joining me in the elevator was Matthew, from an East Coast music startup.

We started chatting and we got onto a fascinating subject. He said hedge funds and private equity funds on the East Coast were moving into early stage funding for startups.

"The hedge funds have so much money. They're doing deals such as giving $5m for 10 per cent of the company," he said. "And they couldn't care less about board seats."

Wow. That is going to hurt the VC industry out here, I said. VCs will take as much as 60 per cent of a company in exchange for funding. Or in some cases, they take a big piece of a startup and let it use their computers, it's called "incubating."

OK, the hedge funds won't be hanging around and giving sage advice on building a company, or plotting how to evict the founders. But so what?

With that type of financing a startup can hire an experienced management team, and consultants that know how to build a business. It's a lot cheaper, the startup team gets to keep control, and they can raise more money in subsequent rounds. Sounds great.

If hedge/private equity funds get into the VC business in a big way, that will very easily generate the next bubble in Silicon Valley.

Here is a snapshot of VC investments over the dotcom-dotbomb period:

VCchart.png


Source: PricewaterhouseCoopers Global Insights & Solutions MoneyTree™ Survey Report


In Q1 2000, the investment peak reached $28.421bn and the dotcom bubble reached its zenith. 


Some VC funds have as much as $1bn to invest. Private equity funds are larger and getting larger. A $5bn fund was considered huge a couple of years ago. Last month Goldman Sachs Groups announced plans to raise a $20bn fund.


With so much capital around, and fewer places to put it to work to get big returns, investing in Silicon Valley startups will become very attractive. We could easily see another bubble forming in the next couple of years. [I've got a killer business plan for the East coast funds...]

Sequoia sees profits in micro-finance in India

Sramana Mitra has an informative post about Sequoia Capital, one of the leading Silicon Valley VC firms investing $11.5m in microfinance company SKS.

SKS currently provides loans to its 600K members in 7,200 villages in rural India. The company says that the new capital will go towards providing financial services to over 5 Million poor families by 2010. SKS estimates that its loans have a return on equity of 23%. That’s a high interest rate, but, it also makes it viable for a venture fund to invest in the company.

She adds that:

This is not philanthropy but pureplay capitalism.

SKS will be required to exit within 3-5 years, or else Sequoia will get out of the deal. Naoko Felder furnishes some examples of prior IPOs in the sector: “I just wanted to add 2 cases regarding IPOs related to MFIs 1) BRI of Indonesia,(Nov 2003) then a state-owned bank, released 39% of its shares to the public by listing in the Jakarta Stock Exchange. 2)In 2006, Equity Bank Limited listed in the Nairobi Stock Exchange (2006).”

There is, ofcourse, a fortune at the bottom of the pyramid. It just takes work to get to it.

Link to Sramana Mitra on Strategy » Blog Archive » Sequoia Enters Micro Finance

Is it a good idea to have VC firms invest in such companies? After all, their motivation is to make a lot of money and get out after about five years--that is not what SKS wants to do. How will SKS provide the VCs with an exit?

If VC firms want to portray themselves as doing something good, then they should do it some other way, such as providing pro bono services to help such organizations grow, imho.

Emergence Raises New Fund and Maintains Focus

I've been waiting for a few minutes inside VC firm Emergence Capital Partners' swank offices in San Mateo as general partners and co-founders Gordon Ritter and Jason Green walk in. "I see that you've managed to escape the Sand Hill Road gulag," I tell them.

They laugh and we sit down to talk about their VC investments and philosophy. They tell  me that getting out from the Sand Hill Road VC community in Palo Alto was important.

"We got fed up with the same scene, and seeing startups go from one firm to the next, all day long," said Gordon Ritter.

"We also wanted fresh and independent thinking and so getting out was important in that regard," said Jason Green.

The four year old Emergence recently announced a second fund, $175m, an increase of $50m over its first fund. And its focus is on what they like to call technology enabled software and services startups.

The first fund had an early success with an investment in Salesforce about a year before it went public. And the other investments have been in similar types of companies in the software as a service sector.

"We decided from the beginning that we would specialize in one type of investment rather than have many different investment sectors," said Mr Ritter. Most other VC firms invest in startups in different sectors. But Emergence decided that focus and specialization would enable it to establish through leadership and expertise--and that would produce more successful investments.

Mr Green says that this has paid off in that they are now known for their expertise and that their portfolio companies have succeeded in raising additional funds.

"Startups in our space know about us and they come to us." He said that Emergence gets to see about 68 per cent of all dealflow in their areas of expertise. That's about 600 business plans per year.

Technology enabled service startups are attractive because they offer a regular services revenue model. Mr Ritter does not believe in hybrid models where companies offer a license for the software, or a software as a service.

 RightNow Technologies, for example, offers its software to customers to run in their data centers or they can purchase it as a service.

"Hybrid models won't work because not everybody will upgrade to the new software and so that limits development of new features and services," said Mr Ritter.

The small and medium business market is a natural target market for the type of companies Emergence funds--a huge opportunity and one that IBM, Hewlett-Packard, Oracle, Microsoft, SAP, etc are also targeting.

How about exit strategies? "It's too early to think about IPOs and selling companies," Mr Green said.

But when the time comes, the two men are confident there will be plenty of opportunities for exits. The large IT vendors are obvious potential buyers for their portfolio companies.

Emergence is emerging as new rules VC firm. I define a new rules venture as: take a few specialists in a specific area; focus on the most efficient and productive business processes; and wrap open source and web services IT around them (Mr Green says their in-house IT capabilities are far more sophisticated than at the $1bn VC firms where he used to work).

In many ways, Emergence is a technology enabled services company itself.

Additional Info:

Story continues...


Mind the Gap: Venture Capital's Exit Problems

 Don Dodge points to some interesting VC figures on his blog that can be summarized as:

Exits have averaged $18B over the past 6 years while investments have averaged about $40B over the same time period.

Link to Don Dodge on The Next Big Thing

For every $1 invested only 45 cents is returned through the sale of a startup or through an IPO. (Maybe all those Web 2.0 investments will pull the funds out of the ditch?)

So I guess VCs should be happy to get what they can from selling their portfolio companies to the big players such as Microsoft, IBM, SAP, Oracle, etc.

 

Don says:

Microsoft acquired as many companies as Google and Yahoo combined. Microsoft acquired 19 companies last year. Google acquired 10 and Yahoo acquired 9. IBM also acquired 9 companies. Of course Google spent more on acquisitions, spending $1.65 Billion on YouTube alone.

Link to Don Dodge on The Next Big Thing

If you don't know Don:

Don is currently Director of Business Development for Microsoft's Emerging Business Team. The goal is to help VC's and start-ups be successful with Microsoft, and together, provide great products for our customers.       Don Dodge

3.8.07 Only truly big sites deserve VC investment

(Via Tim O'Reilly) Venture capitalist Jeremy Liew says any investment needs to have potential to reach $50 million. If your brilliant idea is for an ad-supported Web 2.0 site, here's how big you'd have to get to make Liew's investment pay off. With today's CPMs, really big.

1. Be a site with a broad reach (say general social networking, communications, news). At large scale, without a great deal of targeting possible, a startup’s “run of site” or “run of network” advertising might be able to get to the $1 RPM range (Revenue per thousand impressions). To get to $50m in revenue you would need 50 billion pageviews in a year, or just over 4 billion per month.

2. Be a site with demographic targeting (say a Latino portal, or a sports site (targeted at men) or a social network targeted at baby boomers). Although in TV and in magazines, demographic targeting can generate double digit CPMs, online at scale, RPMs tend to be in the low single digit range. Lets assume a $5 RPM. To get to $50m in revenue you would need 10 billion pageviews in a year, or just over 800 million per month. (More than Microsoft.com.)

3. Be a site with endemic advertising opportunities (say a site about movies that movie studios will want to advertise on, or a site about cars that auto manufacturers will want to advertise on, or a site about travel that hotels and airlines and online travel agencies will want to advertise on). If you have a highly targeted audience that is interested in buying a specific product, you can command RPM’s well into the double digits. Lets assume a $20 RPM. To get to $50m in revenue you would need 2.5 billion pageviews in a year, or just over 200 million per month.

Pretty nasty stuff. So you don't want an exit strategy, just make enough to pay the bills and have a good time, as Tim suggests. He also thinks there's an aggregation option:

The other option, implicit in Chris Anderson's long tail hypothesis, but not mentioned by Jeremy, is that you aggregate a lot of other sites. There are different models for this: Gawker and Weblogsinc launched multiple sites, publishing blogs like they were books, with some expected to succeed and others to fail; FM Publishing (in which I am an investor) doesn't aggregate ownership, but provides marketing services to an aggregate of clients.

3.6.07 VC3: Ready Set Pitch

So, it's a humbling experience, making the rounds on Sand Hill, making your well-honed elevator pitch. Why not compress the whole sordid affair into a rapid-fire afternoon? That was the idea behind VC3 - part of EntrepreneurshipUSA - give budding startups three minutes to pitch and VCs three minutes to respond. Then move on.

It was a humbling experience for some of the hopeful, the Mercury News reports.

Eric Frenkiel, a purposeful, bespectacled 21-year-old Stanford junior, recently launched what he coyly described as a site ``in the fashion-media space.''

In a session with young venture capitalists John Vrionis and Chris Sun -- themselves Stanford alums now working at Lightspeed Venture Partners and Storm Ventures, respectively -- Frenkiel talked at a fevered clip ... At the end, Vrionis handed Frenkiel his business card, but Frenkiel took it glumly. ``Are you giving your card to everyone?'' he asked plaintively. His demeanor brightened when Vrionis said no.

But it's hard to hold a VC's attention even for three minutes. In reality you probably have 15 seconds to get someone's attention. After that, it's just politeness.

Brian Ong, a 24-year-old Stanford graduate student who launched an online services marketplace in December with four friends, said some VCs were:

``actually checking their BlackBerrys while I was talking. We're talking about a three-minute pitch,'' he said, incredulous. ``Maybe some of them need to see who's e-mailing them at every single minute of the afternoon, but I kind of doubt it.''

Doesn't seem like the financiers were seriously giving each pitch serious attention. Steve Kompolt, who started a digital signage company two years ago, concluded:

``A lot of this is these guys being cordial and giving feedback. What they're really looking for is that needle in the haystack.''

VC investments highest in 5 years - Life Sciences leads, no sign of mania

Latest data from PricewaterhouseCoopers/National Venture Capital Association MoneyTree report, shows decent sized increase in VC deals and money invested. This means steady investment rises and no sign of over funding mania:

 

Venture capitalists invested $25.5 billion in 3,416 deals in 2006, realizing a 10 percent increase in deal volume and a 12 percent increase in dollar value, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Financial.  The year, which marked the highest level of investment since 2001, saw quarterly investment levels remain steady in the $5- to 6-billion dollar range, as the venture industry invested in the traditional technology and life sciences sectors and began a deliberate foray into the energy sector.  


The year was characterized by significant growth in the life sciences sector, with biotech and medical device investing both reaching record high levels.  Other areas of growth included Media/Entertainment, Energy and Internet-Specific companies.  Seed and Early-Stage companies received more financing and dollars in 2006 but the largest gains were in the Expansion Stage deals during the year.  First-time financings reached the highest level since 2001.  


Investments in the fourth quarter of 2006 totaled $5.7 billion in 802 deals, down from $6.6 billion in the third quarter of 2006, but were well within the range of $4.3 to $6.9 billion investments seen over past five years.

 

Here is the breakout (I added the bold in this section):

 

The Life Sciences sector (Biotechnology and Medical Devices industries, together) set the pace for investing in 2006 with $7.2 billion in 731 deals compared to $6.0 billion going into 647 deals in 2005. The increase was driven equally by significant increases in the Biotechnology and Medical Device sectors, both of which had record high levels in 2006.   For the year, Life Sciences accounted for 28 percent of all venture capital invested, consistent with historical percentages .   Life Sciences was also the number one investment sector for 2006.


Software investing remained relatively flat in 2006, with $5.0 billion going into 865 deals compared to $4.8 billion going into 869 deals in 2005, but still remained the largest single industry sector for the year and the fourth quarter in terms of both deals and dollars.  


The Industrial/Energy sector experienced a sharp gain of more than 107 percent in dollars invested in 2006 with 183 companies receiving $1.8 billion, compared to 136 companies in 2005 receiving $851 million.  The alternative energy subsector accounted for 40 percent of the dollars invested in this category.  


The Media and Entertainment sector saw more venture capital dollars in 2006, with $1.6 billion going into 299 deals compared to 2005 when $1 billion went into180 deals.  Telecom companies also saw an increase, although less substantial, with 294 deals getting $2.6 billion dollars in 2006 compared to 263 deals receiving $2.5 billion in 2005.  The wireless subsector accounted for 44 percent of the Telecom sector in terms of dollars, with 128 deals garnering $1.2 billion during 2006.


Internet-specific companies received $4.0 billion in 645 deals in 2006, a notable increase over 2005, when these companies received $3.2 billion in 494 deals. "Internet-specific" is a discrete classification assigned to a company whose business model is fundamentally dependent on the Internet, regardless of the company's primary industry category.  These deals accounted for 16 percent of all venture capital dollars in 2006.

 

Early stage up, later stage down, showing exit strategies have changed:

 

Funding for Seed and Early Stage companies increased by 16 percent in deals and 11 percent in dollars, with $5.0 billion going into 1,176 deals in 2006 compared to $4.4 billion going into1,018 deals in 2005. The percentage of total deals in the Seed and Early-Stage was 34 percent in 2006.  Average post-money valuations of Early Stage companies fell to $12.14 million for the 12 months ending Q3 2006 compared to $14.59 million for the period ending Q3 2005.  (Valuation data lags one quarter.)


Expansion Stage companies saw a significant increase in both deals and dollars in 2006, with $11.2 billion going into 1,283 deals, compared to 2005 when $8.6 billion went into 1,092 deals. The increase reflects a higher confidence level in companies that reached the expansion stage.  Expansion deals accounted for 38 percent of the total deals done in 2006.  Average post-money valuations were $67.56 million for 12 months ended Q3 2006 versus $61.88 million for the year-ago period.


Later Stage Investing decreased in deals and dollars on both an absolute and relative basis in 2006.   Venture capitalists invested $9.3 billion in 957 companies this past year, compared to $9.7 billion in 990 companies in 2005.  Later Stage deals accounted for 28 percent of all deals in 2006.  Average post-money valuations were $108.32 million for Q3 2006 versus $77.61 million for the year-ago period.


First Time Financings
First-time financings increased in deals and dollars to the highest levels since 2001, with 1,093 companies receiving $5.8 billion in venture capital for the first time.   This marks an increase of 10 percent in the number of companies entering the venture-financed arena.


The top industries for first-time financing growth in 2006 were Software with 234 deals valued at $1.2 billion, followed by Biotechnology with 127 deals for $773 million.  This follows 2005's pattern, when 249 Software companies garnered $1.2 billion.


Seventy percent of first time financings in 2006 were in the Seed/Early Stage of development, followed by Expansion Stage companies at 23 percent and Later Stage companies at 7 percent.


International Investing
In 2006, U.S.-based venture capitalists invested $856 million in 71 deals in India and $1.1 billion in 105 deals in China.  These figures are reported separately and are not included in the aggregate totals above.

 

Additional info and conference call replay:

Digitized Replay: Scheduled to begin on:  1/22/07 at 08:00P   end on: 1/29/07 at 11:59P (TZ: Eastern)
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Conference Call Speakers:
John Taylor, VP Research, NVCA
Tracy Lefteroff, global managing partner, Venture Capital & Private Equity Practice, PwC
Darrell Pinto, director of global private equity performance, Thomson Financial
Terry McGuire, Polaris Venture Partners
Steve Krausz from US Venture Partners

No money down: How IBM leverages Silicon Valley's VC billions

IBM, the world's largest computer company, has a successful venture capital group operating  in the heart of Silicon Valley, yet it makes no investments in startup companies. Instead, it tells VC firms what types of startups it might want to acquire and waits for the Silicon Valley innovation machine to do the rest.

It's a very good system for IBM. There is no need to make risky investments, to spend years on boards helping to nurture and grow startup companies, and certainly no need to hit the road to raise new venture capital funds.

It is a beautiful system that leverages tens of billions of dollars of other people's money, and it can all be done with just a few people. IBM's Venture Capital Group in Menlo Park consists of just half-a-dozen specialists plus some support staff.

Because there is virtually no tech IPO market to provide exits for investors in thousands of startups, VCs are more than happy to offer IBM the cream of the startup crop. Since the IBM Venture Capital Group was formed in 2000, it has had a hand in 15 acquisitions, and that rate is increasing.

But acquisitions are just one way IBM benefits from Silicon Valley's bountiful crop of startups.  It also partners with about 1200 startups in various endeavors in which it uses their technologies in IT services deals through business partnerships. Business partnerships as a whole account for one third of its annual revenues, or about $27bn.

There is also a very nice business to be had in selling technology licenses to startups. IBM has a massive portfolio of patents and it offers favorable terms to startups. This might be a good insurance policy since Big Blue has lately become much more aggressive in pursuing companies that it believes are using its technologies without payment.  (See News.com: IBM: Amazon violates our patents – October 23, 2006.)

Tomorrow on Silicon Valley Watcher: Interview with Drew Clark, co-founder of IBM Venture Capital Group - find out what types of startups are on his shopping list.

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Additional info:


VC-backed ISVs: Open Source Opens Doors

Startups to have access to IBM's entire patent portfolio with simplified terms



IBM announces formation of Venture Capital Advisory Council


IBM launches new initiative to help developers in emerging markets build skills and open standards solutions

1999 all over again? VCs setting funding records

By Richard Koman for SiliconValleyWatcher

The Valley is back. How do you know? Follow the money.

AP reports that VCs sunk $6.35 billion into 856 startups in Q2 - the hottest quarter for VC investing since Q4 of 2001. And surely you remember that quarter with fond memories. VCs also set records in fundraising for future investments - $11.2 billion.

VCs delivered first-time financing to 282 companies for a total of $1.2 billion in the quarter. That's the most in five years.

And what are they funding? Yup, Web 2.0. PricewaterhouseCoopers just compiled a list of Q1 funding to W2s (.xls file) and it comes in at $870m, up from $786 in 2005's Q4. But Ajay Sanghani at ITVidya.com notes that the list is a little funky, as it includes such back-end companies as Riverbed and Netli

So Bubble 2.0? Ajay talked to Tracy Lefteroff, the global managing partner of PwC's venture capital practice. "People are trying to contrast this with the Internet bubble, and want to know if we're getting in the same risk category we saw developing in late 1999, early 2000.You always run that risk, but I still don't see the frenzy to invest in these companies that we saw in the late 1990s."

Seven of the top W2 deals in the first quarter were in Silicon Valley, it's Seattle that's grabbing headlines this week. Jobster, a Web 2.0 approach to head-hunting is now valued at $100m, the Merc's Matt Marshall reported last week.

And yesterday, Zillow.com, which provides value estimates on homes, landed a $25m round and has now raised $57m.

All of which leaves Jason Wood in a cold sweat. He commented: "Seeing some of these new rounds is absolutely sending a chill down my spine as a public investor. Where's the exit strategy? I would love to know the post money valuation Zillow got for this round. Wow."

Exclusive interview: Terry Garnett explains his firm's VC buyout strategy...

. . . and the launch of Ingres and Wyse Technology--two well established companies with large market potential


I recently met with Terry Garnett of Garnett & Helfrich Capital--the venture buyout firm behind behind Ingres and Wyse Technology. These are two very interesting companies that had caught my eye and I didn't realize the same investment team was behind both ventures.

I have been writing a lot about Ingres because it is a small open source software company that has been assembling a dream team of top executives more suited to running multi-billion dollar business groups. So you can bet that Ingres won't be sitting on its hands. (Please see SVW: The ambitions of Ingres: A small company with the executive team of a giant )

And Wyse Technology is another interesting company, essentially reinventing the whole thin computer concept and renaming it Thin Computing. It takes a systems approach to driving down the cost of installing and operating large numbers of PC systems which can be replaced with Thin Computing systems and the users don't even know it. (Please see SVW: Wyse says in talks with Google and Yahoo on thin computing)

Garnett & Helfrich Capital has a modest buyout fund by the standards of Silver Lake Partners and others that have raised multi-billion dollar funds. But, it's not the amount of money you have, its the operational abilities, and long experience in the industry to be able to read the evolving trends--that Mr Garnett and his partner David Helfrich bring to the table.

Their current fund of $350m has done some very interesting deals and there are more to come plus plans to raise yet another fund around the end of the year.

I popped in on Mr Garnett last week, in the "VC Gulag" a raggle taggle sprawl of small office buildings on Sandhill Road (they are moving to larger quarters in Hillsdale). We covered a lot of ground, here is part of our conversation:

Mr Garnett said he used to be a venture capitalist at Venrock but he also has a long career in the software industry at many different companies. Here is his bio:

From 1990 to 1994, he worked with Oracle Corporation reporting to Larry Ellison, as Senior Vice President, Worldwide Marketing and Business Development and other positions. He has helped establish and build CrossWorlds, Lightyear, he has worked at McKinsey & Company; and held management positions with Tandem Computers. From 1995 to 2003, he was at Venrock where he led early stage financing and served on the boards of: New Era of Networks acquired by Sybase, Niku, CrossWorlds Software acquired by IBM, Neoforma, Netobjects; he was an early stage personal investor in Siebel Systems and Checkpoint Software.

It's clear that he understands the enterprise software market and his partner David Helfrich has led what he calls, a "parallel career." The two met at a horse riding school for their kids, and they spent two years "at the rail" getting to know each other before they decided to pool their skills and created Garnett & Helfrich Capital in March 2004, with an initial fund of over $250m, soon expanded to $350m.

"I sometimes explain what we do as 'there is a little bit of chocolate in my peanut butter' by which I mean it is a little bit of venture capital investing combined with venture buyout."

The investment firm was founded on the belief that there were decent sized business groups within larger tech companies that were good businesses but were not getting the attention or the funds from their parent organisations.

The firm analyzed hundreds of IPOs and acquisitions over the past few years and started to identify business groups of at least $50m in revenues, that could survive a buyout, and the temporary disruption that such events create for a business.

Ingres was one of those businesses, a database software group spun out of Computer Associates, a business with great revenues, large numbers of customers and a solid reputation within enterprise software markets.

"It was important that Ingres had a long history, it wasn't a new startup with an uncertain product and an uncertain future. Enterprises want to buy from companies that are stable and will be around for a long time" Mr Garnett said.

But spinning out from CA was not easy because of the huge management shakeup that was going on in the wake of a scandal that is currently in the courts (Please see: Former CA chief Kumar pleads guilty to fraud.)

The deal was further complicated in that Mr Garnett had to recreate three offices from scratch, set up the telephone systems, the billing systems etc. He had to create the entire infrastructure for a 100 plus employee company from nothing, and hire the executive team, and act as the CEO.

He says he would love to give up the CEO position and get back to his regular work but that, "Finding a CEO is more difficult because of the A-list caliber of the current executive team, they are going to demand an A-list CEO." Mr Garnett said he loves to recruit and his philosophy is to recruit 10 A-list executives because they will bring in another 40 top people.

Buyouts are very popular these days, and Silver Lake is one of the top firms in this area. But Mr Garnett points out that its much easier for Silver Lake to write a check to take, for example, Serena Software private--there is no infrastructure building that had to be done, as in the case of Ingres. That's why Silver Lake might find it difficult to compete against Mr Garnett's team, if it wants to target this middle sector of the buyout market.

Mr Garnett hopes to do about five or six deals with the first fund, and he sees lots of opportunities to buy out healthy business groups from within tech giants such as Siemens for example. "In a lot of cases the seller is not getting any credit from Wall Street for owning those business groups," he said. So the deals can be very compelling for these large tech businesses. Usually, the seller will retain about a 20 per cent stake in the new company, which helps with customer continuity.

A good example is the blade server switch business bought out from Nortel. Here is a list of deals.

Mr Garnett's many years in the enterprise software business have given him an understanding and an appreciation for brands, and the realization that brand building is long and difficult. Therefore if he can acquire products such as Ingres and Wyse, that have long established brands, that brings with it a significant amount of credibility among customers that is very valuable.

I think this is an important understanding of how markets and customers buy products. During Internet 1.0 and the dotcom boom, there was a lot brand building attempted, but throwing money, billboards, and cute sock puppets at the challenge of establishing lasting brands didn't work. Brands are built slowly, over time, they are trust-built relationships just like human relationships.

What's the exit strategy? The same as for other ventures: IPO or sell to larger players. But building a $50m to $100m dollar revenue businesses to the next stage, is a lot less riskier than trying to build a startup and take it beyond several millions dollars in revenue. It's smart investing and there are still plenty of deals to be done. It'll be interesting to see which other players emerge in this field.

DARPA TinyOS developers get $5m from Intel and others

By Tom Foremski for SiliconValleyWatcher

Big-Bro_Arch-Rock.jpgWho says Big Brother/Sister isn't coming? It is but under a different guise...Here is mesh/sensor network company Arch Rock, who today announced $5m in funding for:

Arch Rock’s vision is to help customers create and manage billions of sensor-based touch points with the physical world of matter and space and generate new actionable intelligence that can be leveraged in a wide variety of new industrial and consumer applications.

An investor said:

By being able to measure anything, monitor it on the Internet and act on the information, businesses will be able not only to predict the outcome of a situation, but actually influence or control that outcome. That’s the promise of wireless sensor and control networks” said Forest Baskett, general partner with NEA.

The Series A funding comes from New Enterprise Associates, Shasta Ventures and Intel Capital. And the Berkeley inventors of TinyOS (DARPA funded) are the founders of the new company.

I predicted such investments two months ago: Big Brother brings business opportunities

Here is the release:

Story continues...


Mohr, Davidow Ventures and the Gordian Knot

By Tom Foremski, Silicon Valley Watcher

Gordian_Knot.jpgPamela Mahoney from the veteran venture capital firm Mohr, Davidow Ventures (MDV) invited me to stop in and chat with a couple of their in-house entrepreneurs about media technology products they are developing.

Ted Shelton and Nick Chim showed me some of their work and I'm glad I got to see it because I got to glimpse a new class of emerging internet applications that could provide that next, defining edge that is lacking in the morass of so many similar "web 2.0" applications out there.

Story continues...


Enterprise software might not be dead after all. . . at least not in early April

By Tom Foremski for SiliconValleyWatcher

Death-of-Enterprise_Redux.jpgM.R. Rangaswami is a venture capitalist who produces one of the best enterprise software publications. I'm a big fan of his online magazine Sandhill.com, and also his conferences, with one coming up in early April. He just sent out his latest edition of the Software Pulse newsletter, with an interesting opinion piece by Geoffrey Moore. (More here. . .)

M.R.'s interest in the subject of enterprise software comes from a different direction than traditional publishers, he's interested in the trends and issues so that he and other investors can better understand the deal flow and improve on their funding decisions.

A traditional trade publisher such as an IDG with Computerworld, or a ZDNet, takes a different approach to the subject--writing from the users/customers/decision makers' points of view. Both approaches, it turns out, produce equally high-quality editorial products.

I tend to favor M.R.'s approach: I like to look at companies and products as existing within a framework of business models; pulled by trends in markets; and all bobbing around within the fluid dynamics of their capital markets.

Story continues...


Slave Girl reads the Watcher!

I found this in my comments . . .

Fear and Loathing in VC Land? Try a pleasure to hard to resist...

Sneers and roasting are abundant in the realm of http://www.sandhillslave.com

Rants on Life in VC through the eyes of an assistant.

You should go and visit this site. This is very se.x.x.x.y writing (!)

Story continues...


Fear and Loathing in VC land--animosity towards VCs is rampant

By Tom Foremski for SiliconValleyWatcher

SVW reader Penguin points to VC Rick Segal's recent post about the quandary venture capital is in.

To summarize: Web 2.0 companies don't need much capital and GOOG, YHOO and MSFT can step in and buy them just for the heck of it for a few million and the VCs don't get a look in. Plus there is not much distinction between the Web 2.0 startups.

Welcome to the world of the new rules startups; no VCs required, although an Angel or two helps... It's a knowledge capital world these days and GOOG and pals offer the largest platform for rolling out Web 2.0 services/products. How can VCs compete against that?

But also, there is widespread animosity towards VCs today. I've been covering Silicon Valley since 1984 and I haven't come across as much hostility towards VCs from startups, as I have over the past 18 months.

Why? Because of the many outrageous VC practices during the dotcom boom and afterwards. VCs always get their pound of flesh and then some.

But what goes around comes around. We live in a serial entrepreneur community here in Silicon Valley, and memories are still very fresh.

The strategy for startups these days is to bootstrap--go for Angels if you need money. And if you do need to pitch the Sandhill row, first raise your valuation as much as possible through your own efforts and financing.

I have a lot of respect for many VCs. Those are usually the ones I come into contact with, because they are out and about and pitching their investments.

There are hundreds of VCs that I never come across and seem to be baffled about what to invest in; they follow each other with a herd mentality and thus mess up the markets for all; and with almost no IPO market exit strategies rely on selling out to one of a small number of large companies--which keeps valuations in check.

When I recently met with VC M.R. Rangaswami of Sandhill.com, he said there were still too many VCs, and that the industry must come to terms with the fact that future returns on investments will be far lower than at traditional levels.

That means VCs have to tell investors in their funds to expect smaller gains. That's a tough sell, especially since the risk has not decreased. I could argue that the risk of failure for VC-backed startups has increased. . .(more on that in future posts).

While some VCs are twiddling their thumbs thinking about what to fund, they would do well to hire a PR agency to spruce up their image. Something along the lines of a benevolent "uncle" looking out for the best interests of their young charges might be an appropriate image to shoot for :-)

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Please also see SVW: That giant sucking sound...will massive tech companies vacuum up all the cool/hot tech companies?

Big Brother brings business opportunities

With all the chatter about Big Brother, and government subpoenas for internet usage data, there are business opportunities to be had...

Take a look at my idea for the Big Bro Co-investors VC fund--focusing on telemetry applications. Monitoring advertising, or network performance, or people--it's all the same: essential to both commerce and government.

It's a huge business opportunity. Take a look at my ZDNet blog/column IMHO and let me know what you think.

A new VC fund to help develop the next-stage internet technologies

Great ideas do not make for successful startups and VCs need more V....so say survey results

Survey_Says.jpgInteresting survey results from Foley & Lardner on startup companies--things we knew but sometimes forget.

Who was surveyed: "The survey, measuring the attitudes and perspectives of top executives, advisors, outside consultants and investors in the emerging technology industry."

Here are my takeaway points:

-There is a lot of capital wanting to invest in startups but there is a lack of good managers.

-60 per cent said quality of management is single most important factor for success: "Overall market dynamics (18 percent), access to funding (10 percent) and quality of the business plan (eight percent) were distant choices."

-Only 3 per cent said intellectual property was the most important aspect of founding a startup.

My take: This means a good, even great idea for a startup is not enough, you need a great team. If all you have is a great idea you don't really have anything of much value. Many startups I meet won't talk about their "great idea" beyond a certain point but you should be free to talk about your great idea because only you can execute on it. Otherwise, anybody can run with it.

-More than 75 per cent said M&A is most likely exit strategy in next few years.

-IPO is unattractive because of high costs in being a public company and all the other related issues.

-It is very difficult to find directors for startups. "A majority (64 percent) cited “management” as the most important factor—over cash compensation (36 percent) and equity incentives (32 percent) —for attracting qualified directors."

My Take: This is exactly why I have been saying that the next generation of emerging companies, the new rules enterprise/venture will be private. Being private also means your competitors cannot benchmark themselves against you.

And, my favorite quote from one of those surveyed:

“VCs should take more V and act less like a bank.”

My take: Too true. In fact, I meet more ex-VCs these days, using their venture knowledge to run their own companies. It is a knowledge capital world now, uppercase V and lowercase c, is how the Vcs should present themselves, and the better ones do. imho.

More here: http://www.foley.com/ecsurvey

Moderating at Under the Radar. . .startups face the VCs

By Tom Foremski, Silicon Valley Watcher

I haven't been able to post much because of preparation for moderating at the IDB Under the Radar event. I got to moderate all two tracks of the morning session on enterprise mobile apps and the second session of enterprise RFID (radio chip tags).

What was fascinating was how few companies were able to explain what they do. But, let me backup a second and tell you what the event is about.

The Under the Radar series organized by Debbie Landa and Alison Murdock has become almost an institution. It brings startup companies in front of panels of venture capitalist judges. They get rated on their presentation, their business model, and their strategy.

I've been to several of these Under the Radar events and they are always different. This time around there was a lot more energy in the air, a real feeling the valley is back (again...maybe this time, for sure.)

The overall winner of the event was our old friend Zimbra--the AJAX poster child software company.

And overall, the 32 startups presented and interesting mix. But what continues to puzzle me is how few of the startups can say what they do. At least in less than 30 minutes--which is a problem at Under the Radar, because you only get five minutes (moderators are armed with stun guns to enforce the time limit very strictly:-)

I didn't have to reach under the podium and stun anybody--my lot were very well behaved. A mobile apps company called Soonr won the audience vote but the judges preferred Funambol, an open software middleware stackette for the mobile space.

Soonr, I think, deserved a bit more attention. Because when asked what was their business model, they said we have none. Smirks all around, as you can imagine.

But on later reflection, I think Soonr is on the right track. Yes, they lack a business model but, they are focusing on users And this is precisely the right strategy because if you have users you know you have a useful product. If you don't have a useful product, it doesn't matter how clever your business model is.

- - -

The RFID companies on my second panel were a good contrast to the first lot. Interestingly, most of the senior management of those companies had some connection or background in supply chain management.

And supply chain management is one of the big failures of enterprise software markets...so who is to say that RFID will improve this? But at least the people running thse companies knew what a tough problem it is, and were still working at trying to solve it,


- - -

The Under the Radar event was at the Microsoft Silicon Valley center, which is a couple of stone- throws from Google.

This time, in contrast to past visits over the past few years, the MSFT car park was full, and it was early in the morning and there was bustle about the place. It used to be not very busy at all...

Oh, and I spotted Robert Scoble in the cafeteria, MSFT's second most famous employee!

More under the radar stories later in the day...

PS: I will soon start writing a blog for ZDNet, in addition to here, and lately also AlwaysOn.

Coming Events: Roger McNamee talk with George Zachary about the $100bn new media market

. . . will content finally be king?

King_Content.jpgManish Chandra over at TiE, has put together an interesting event Tuesday, July 26 in Santa Clara featuring Roger McNamee. Mr McNamee has had a midas touch over the past five years with investments at SilverLake Partners. And those years have been the toughest ever for Silicon Valley.

Also, Mr McNamee is very interested in new media which, happens to be an interest of mine also.

From the TiE pitch about the event:


The confluence of technology, new delivery mechanisms from podcasting to TV on the cell-phones is creating a revolution that remains only partially understood. It is changing how we create, consume and distribute entertainment. The emphasis on distribution technologies has overlooked the role of creation of content for the new media.

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We're off to the races...the first RSS focused VC fund is announced--$100m

...let freedom reign

By Tom Foremski for SiliconValleyWatcher

At the Races.jpgJim Moore and John Palfrey have launched RSS Investors with $100m of capital. It is the first VC fund with a focus on Really Simple Syndication, (RSS), the syndication technology at the heart of media technologies such as blogging and corporate news communication.


Jim Moore, RSS Investors partner says:

RSS is emerging as the next great tool in the spread of information and ultimately freedom: freedom of expression, freedom of communication and freedom of information.

This reminds me of years ago when Kleiner Perkins launched a $100m Java fund in 1996. It is milestone for RSS and its use.

RSS is very much a core technology for this next phase of the internet. It is a unique animal: neither email or web page, but with characteristics of both. It is opt-in, in that users or applications subscribe to RSS feeds which are pushed out — it is, in fact, a pushme-pullme technology (a nod to Dr Dolittle ;-)

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Startups on parade at IBD Under the Radar event

By Tom Foremski for SiliconValleyWatcher

Startups-on-Parade.jpgThere was a good turnout at the IBD "Under the Radar" consumer technologies event Tuesday as 32 young startups paraded in front of very skeptical panels of VCs.

The event is partly promoted as one in which startups can potentially raise funds from the exposure to VCs. But at the previous Under the Radar event, VCs told me they would not consider funding any of the startups appearing because they had no exclusivity in the deals.

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One of San Francisco's last venture capital firms quietly bets on the next generation of media tech companies

By Tom Foremski for SiliconValleyWatcher

Walden VC.gifI've often discussed how best to fund development of new media technologies - and I've said that I believe many new companies will use private funding, rather than venture capital. So it was interesting to talk recently with Alex Gove and Steve Eskenazi from WaldenVC, one of the last VC firms in San Francisco.

I was delighted to find that these guys "get" this whole thing I'm calling media technologies. WaldenVC has been quietly making some very astute investments in digital media companies, leading rounds for ten companies. They've accumulated an interesting portfolio with a lot of diversity.

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Notes from Software 2005: Lunch with the Swami of the enterprise software sector...

cd 0745
By Tom Foremski for SiliconValleyWatcher M.R. Rangaswami has to be one of the hardest working venture capitalists in the valley. He is constantly on the go, networking and networking and networking.

I saw MR in his element on Tuesday, when I dropped into Software 2005, the second annual enterprise software conference organised by MR and his team at the Sand Hill Group. And judging by the Silicon Valley hack pack and top exec and VC turnout at the VIP lunch, MR's hustling and bustling has been rewarded.

I spent an interesting afternoon at Software 2005, which surprised me because I have found the enterprise software space much less interesting now that consolidation has reduced the sector to a few giants and many smaller software-as-a-feature companies :-)

I sat with MR at lunch, (he is a big SiliconValleyWatcher fan BTW). Here are some notes from my chat with the "swami of the software sector".

M.R. Rangaswami:

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VCs can’t find the Goldilocks deals--everything is either too small or too big

by Tom Foremski for SiliconValleyWatcher.com

VCs are managing large funds, which means they need to make decent sized investments, much larger than before. The trouble is that there isn’t the type of deal flow that can accommodate those large sized investments and provide decent sized returns.

Most VCs know the IT enterprise sector, chip design, networking, software applications. The largest investment area has traditionally been the IT enterprise sector, but with all the consolidation of recent years, the handful of large dominant IT vendors are formidable competition to startups. They have a large customer base and that customer base is very conservative and reluctant to buy from small private companies--unless they are partnered with a large IT vendor. This means the encumbent IT vendors have great control over valuation since the exit strategy these days is to sell the business to a larger player.

In chip design, with the fabless model, and with offshoring work, some of the chip design deals are too small for many VCs. And in networking and software apps, there is little room for manouvre in those markets. In security, there is way too much competition. And mobile and wireless markets are also overcrowded. So, where do the VCs invest?

There are many other sectors, but there are problems with most of them. VCs generally don’t like pharma because the capital investments are too high and drug development is too risky. Many life sciences investments are also capital intensive and they don't understand those markets. VCs don’t like consumer based businesses because brand building is difficult, extremely expensive and consumers are fickle.

So what’s left? I see a lot of companies being formed, deals being made where the startup capital costs can almost be covered by pooling credit cards. This is also the terrain where angel investors are very active, and where they bring many advantages compared with VC firms. In fact, there are VCs in many of the angel networks, betting their personal money on some of these deals.

And why not? I heard you still get paid generous management fees even if you don't invest the funds. I’d like a job like that. I'm sure I would be very good at it too. I can hack most business plans to pieces, (I've done it many, many times). I would come to work on time and be a team player, and I'd share insightful things. Anybody have any vacancies?!

I should point out that the VCs that I meet are a hard working bunch because they are a self-selected group. The VCs I meet are the ones that are out and about, talking up their investments, working their networks, scouting for deals. I don't know the other guys, but their LPs probably do.

Dour VCs lack enthusiasm for anything-- quick takes from Under the Radar conference

by Tom Foremski for SiliconValleyWatcher.com

IBD Network recently put together another one of its popular Under the Radar events, which features hand-picked startups performing in front of a panels of VCs. It was interesting, but not for the reasons you might expect.

The startups are allowed a six-minute pitch and the judging panels are separated into categories, such as security, the digital home, etc. At the end of the day, the VCs give their feedback and highlight which companies they liked. This is part of the pre-cocktail panel called VC Outlook, which featured Neeraj Bharadwaj from Apax Partners, Lara Druyan from Allegis Capital, Robert Simon from Alta Partners, and Chad Waite from OVP Venture Partners.

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Silicon Valley is Back, Baby.......Dotcom

by Tom Foremski for SiliconValleyWatcher.com

I've had lots of chats about Silicon Valley lately and I’m of the Bachman Turner opinion that you ain’t seen nothing yet.

When I arrived here November 8, 1984, Silicon Valley was going through the down cycle following the PC boom. A hundred PC companies wanted just 10 per cent of the market, wanting to strike it rich, as rich as the Apple IPO—the Google celebrity IPO of its day.

Hundreds of Apple staff became millionaires, including secretaries and the guy that ran the parking lot. The media coverage was massive. VCs rushed in like a herd and funded a huge number of PC companies and when the bubble popped, the down cycle was harsh. Stories about Silicon Valley’s death were constant and grinding for several years. I’ve seen several business cycles and the same thing happens in each down cycle, endless speculation about Silicon Valley’s future. What future does Silicon Valley have?

I think I can answer that question very easily—and I’ll accept any size bet on this call: when Silicon Valley comes back, it will be bigger than before. (Actually, it’s been back for a while--hence this venture.)

I was chatting with Ron Piovesan, from Cisco on this topic recently, and he says has also seen signs of improvement. He laughed when I said I own the dotcom name: SiliconValleyIsBack.com.

I said I’m serious, I do own it. I also have SiliconValleyisBackBaby.com! I'm going to set them up as headlines--heck, they were only $8 apiece. I bought SiliconValleyGarage.com for $8 too. Maybe I'll set it up as a tribute to HP?

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VC Watch: Google share surge could lead to VCs cashing out to avoid huge expiring lockup

By Tom Foremski - SiliconValleyWatcher.com

Wall Street’s delight with Google’s first quarterly financial report late last week led to a big jump in Google’s share price as analysts boosted their earnings estimates. This seemed a little worrying in that it reminded some of the internet bubble years when analysts were accused of hyping dotcoms with large upgrades…and we know the rest of the story.

It’s not quite the same this time around. The Google jump stems more from analysts getting to grips with Google’s business model and understanding the dynamics of the surge in online advertising. Analysts now have more information to make a better judgement on Google’s future performance.

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