venture capital

The Future of Venture Capital is Hanging-Out Downtown: The Not So Big Secret

Wasp_drinking Drunk-hipsters

“What has been will be again, what has been done will be done again; there is nothing new under the sun.”

Ecclesiastes 1:9

This is part of my Series on Venture Capital.


Despite the hyped meme people are putting out there about the “venture model being broken”, I’m definitely of the school that believes Venture Capital is merely going back to its roots. Smaller, smarter, more agile, leaner, that’s all. Just look at the charts Kopelman’s been sharing of late. If you ask me, this is all a very good thing.

Speaking of Kopelman, here’s a guy who, along with a few other smaller/high-volume funds is executing very effectively on this leaner VC model (on the east coast at least).  I really do think his extremely effective special-forces model is part of the new wave we will be seeing a lot more of.

To give you a concrete example, this ostensibly “Philly-based” swat team recently executed the equivalent of a pub crawl through all the NYC incubators in a single day, all under the covering fire of a steady stream of tweets, four-square yawps and various other forms of digital pitter-patter that announced their comings and goings. No doubt their approach is catching the attention of their brethren VC’s ensconced in more conventional settings and habits. 

And let’s face it, who really needs an office in this climate? This new breed of bad-ass-VC will meet you in cafes, at the Ace Hotel, in noisy diners- they don’t care. Bring it on. Headquarters, what’s that? That’s silly to them. You go where the entrepreneurs are and you hang with them.

It’s actually been incredibly enjoyable to watch- and with the advent of widespread VC blogging, the Funded, the ubiquity of cloud computing, open source software, younger and younger entrepreneurs and hence much less funding needed to launch a web business- we are witnessing the opening-up of, accessibility of and democratization of the entire industry. And by the way, First Round is just one of an entirely new breed popping up all over the place which includes the Founder Collective, True Ventures, Andreessen/Horowitz and others.

Here’s my tongue-and-cheek take on what’s been happening and what’s going to happen (on the east coast at least).

What’s been happening:

  • Last summer, LP-types reading plays like “Waiting for Godot” on Herreshoff sailboats off the coast of Maine started calling the office sounding concerned and asking what’s going on.
  • This started a small panic and suddenly, guys comfortably ensconced on “VC Hill” in Waltham started driving to Cambridge a lot to get back in the action.
  • Extremely formal guys in French cuffs known for unwinding with $100 bottles of Sancerre after work suddenly started blogging enthusiastically about the arm-wrestling and bowling events for entrepreneurs they are hosting in various “cool-sounding” locations.
  • In NYC, uptown VC’s started trying on jeans they haven’t worn in years only to realize they don’t fit too well.


What’s going to happen:


  • In five years, there will be half as many funds operating as there are today.
  • The last ones standing will be the very established funds on one extreme and this new breed of small, agile, entrepreneur-run operation on the other.
  • Smaller, leaner, genuinely entrepreneur-friendly funds will thrive in this brave new world.
  • Most of them will be “hanging-out downtown”.


PS: (Oh, and by the way, I’m talking about tech VC, not biotech VC. Commissioning the optimization of molecules and the like from reserved and stately offices supported by enormous amounts of capital is not going anywhere for a while IMHO.)

Weekend Reading

The Verdict on Raising Venture or Angel Money "Pre-Anything"

The-verdict_l

This is part of my Series on Venture Capital and Angel Investing.

I have the privilege of meeting a lot of entrepreneurs in my dual role as technology investor and university entrepreneur-in-residence. Many of these entrepreneurs are first-timers and are out looking to raise capital for their fledgling companies which very often have no product, no team and no customers. A good number of these folks are also under the illusion that there are investors out there that would be interested in providing them with seed capital nonetheless. This is simply not how things work in the overwhelming majority of cases.

Here are a few quick thoughts for those of you out raising money pre-revenue, pre-customer, basically pre-anything:

  • At this point you need to realize that your sources of funding are limited to either grants, friends and family money or your own money. 
  • Without some traction in the form of a product, customers, revenue and other proofs of concept, very few investors in the world will even consider investing in your company.
  • The sooner you accept this reality, the better off you will be, because you will be spending your time achieving these milestones as opposed to wasting your time trying to pitch investors.

Are there exceptions to this? Of course there are.

  • Biotech/Drug Discovery is one of them. For example, if you are a world class scientist in biotech and make a break-through discovery in an area with a huge market and demonstrate this with animal studies, investors will be breaking down your door.
  • If you are a serial entrepreneur with a big success or two under your belt, you will be able to raise capital, oftentimes from investors who have backed you before, even if you are at the idea stage.
  • Lastly, if you have what I call the X-Factor, then there are no rules. You will be able to inspire certain adventurous investors to bet on you and help you make your vision a reality.

For the next post in this Series, click here.

Notable News: "Read All About It"

The Parable of the Venture Capitalist, the Entrepreneur and the Professor

Uni_at_night
 
This is part of my Series on University Entrepreneurship.

Entrepreneurs and venture capitalists know all too well that launching a successful startup is perhaps one of the most challenging and difficult of all human endeavors. (Please note my stress on the word "successful"). We've also learned that only a small sub-section of the human population are actually suited for this line of work. (They all must share some rare strain of DNA yet to be identified!)

I also like to say that there is actually an even more difficult endeavor. And though I say it in a tongue-and-cheek way- it's actually true. In my opinion, launching a successful university spinoff is much harder. 

The higher degree of difficulty has everything to do with the fact that the entrepreneur/vc/angel has the added hurdle of navigating the oftentimes arcane atmosphere of a given university before he or she can "spin-out" the technology. And depending on the particular university, this process can take anywhere from a couple of months to over a year!

You see, unlike a "normal startup", launching a university spinoff involves such steps as identifying and validating the university intellectual property, cultivating a strong relationship with the professor and the students in his lab, building a relationship with the appropriate people in the university's technology transfer office, and ultimately negotiating a license agreement and stock purchase agreement with them. This will entail agreeing to diligence milestones, sub-licensing fees, minimum annual royalties, reimbursing patent costs incurred by the university, paying royalties back to the university once you have a product and often making the university a minority equity partner in your venture.

It takes a special kind of person to pull all of these moving parts together and it is more than many seasoned entrepreneurs and/or investors can stomach. "It takes forever to get anything done there.... Why should I pay royalties to the university? ... The IP is just sitting there in the lab and I'm the one that's going to create all the value!", are all common refrains I have heard many times.

Mind you- these reactions are totally legitimate and natural without a doubt. For many, it may certainly not be worth the effort. Yet these criticisms always overlook a couple of key points about the nature of university technology that should be mentioned. First, some of the best and most commercializable work going on within the academy is world class and has often been under development for years- in some cases for almost a decade. Second, it is often the case that hundreds of thousands, even millions of research dollars have already gone into the underlying work by the time the entrepreneur/investor shows up for the first time. In many such cases, there is enormous value waiting to be unlocked. This would no doubt have something to do with the stunning historical IPO rate that university spinoffs enjoy.

Probably the most important and overlooked point of all, however, is the fact that the professor has often devoted his or her entire professional life to this work! In many cases these professors are world experts in this particular domain/technology.  This can simply be a priceless asset! Involving the professor as your chief scientific advisor and equity partner can thus bring with it an enormous positive effect.

I've actually posted about bridging this cultural divide between VC, Entrepreneur and Professor before, and have advocated for cultural sensitivity on both sides. Upon reflection I've come to realize that this is really not enough. After four years and with some fifty plus university spinoffs under my belt, I now understand that something much deeper needs to occur, and in this sense, a university spinoff is no different from any other startup. It will always be a story of human relationships and how successful and enduring these relationships will be. So now we arrive at a university spinoff distilled to its very core:

It is the parable of the VC, the Entrepreneur and the Professor...

It is their story to write and it will be a human story about their relationships, their level of trust, their communication and their collegiality and fellowship. 

If it is a story rife with avarice and smallness and conflict- all is lost and we have a failure on our hands. Time, money and resources will have been wasted. Years of people's lives. It is a tragedy.

On the other hand, if it becomes a story of respect, of trust, of friendship and cooperation, we have the necessary foundation upon which a successful university venture can flourish. I have not seen it work any other way.

 

For Part 25 in in this Series, click here

High Peaks Ventures Announces Fourth Annual "Peak Pitch" Ski Event

high peaks venture partners

My friends at High Peaks Venture Partners are putting on their annual Peak Pitch event this coming March. It's a one of a kind event where entrepreneurs pitch investors while they ride the ski lifts up Hunter Mountain. Any interested investors and/or companies that wish to attend just let me know by either commenting to this post and/or sending an email to info@hpvp.com. See the invite from Managing Director, Brad Svrluga below:

Investor friends-

Happy New Year to all.  I think most of you should have received a Save the Date regarding High Peaks’ fourth annual Peak Pitch event, being held this March 11-12 at Hunter Mountain in the Catskills (a couple hours north from Manhattan, 3 hrs from Rte 128).  This was a great event the past three years, as those who have attended can attest.  Good companies to meet and a great and fun environment to hang out with some investor friends.  We’re returning to Hunter Mountain this year, which proved an outstanding location last year with its terrific lodging and dining right at the base of the mountain, nice rooms, and good bar.  The slopeside accomodatons mean you can arrive Thursday night for the dinner and not get into your car until Friday afternoon after skiing.  Hunter’s convenience to NYC and Boston make it a great location.  

As a refresher, and for those who don’t know, the format is a mashup of the elevator pitch and the traditional venture business plan competition, where investors – wearing green ski bibs – pair off in the lift line with an entrepreneur – wearing a blue bib – and then the entrepreneur has the length of the chairlift to make their pitch.  It’s been a lot of fun the last two years – great networking for the investors at the dinners the night before, and a handful of successful funding connections made.  We in fact just had a successful exit from a company we met at the first Peak Pitch in 2007.  It’s been amazing to see the commitment of some of the entrepreneurs, too – a handful of them in the past had never skied before but then took one day of lessons in advance just so they could come out and meet the VCs.  

I hope you’ll be able to join us for this.  More details coming soon, but let me know if you have any questions now.  Note that novice skiers are more than welcome – we hold the event on a relatively short chair that has access to some very easy slopes down.

Please forward this along to colleagues in your shop or friends from other firms.  The more investors the merrier.

Best,

Brad

Notable News: "Read All About It"

Notable News in the New Year: "Read All About It"

Some Thoughts and Best Wishes for the New Year: Here Comes 2010!

Usain_bolt_234252s

As 2010 approaches, a few wishes and thoughts come to mind:

1)     First, I want to thank you, the readers of this blog for all your encouragement, thoughtful comments and words of wisdom throughout the year. I wish you all much success and happiness in 2010 and look forward to our continuing dialogue.

2)    I also want to wish the entrepreneurs and investors I work with on a daily basis all the best for the coming year. It is truly a privilege to work with so many enthusiastic and dynamic individuals in a city with such a close-knit start-up community and so many great companies. The New York tech scene is on a huge roll. Let’s continue to make it happen!

3)    2009 was certainly a tough year and the difficult economic climate may well persist.  The keys for fledgling start-up companies will no doubt be to stay focused, flexible and ultra-determined. Stick to the basics of “getting from zero-to-one” at all costs so as to survive and thrive.  Surround yourself with high-quality missionaries who are all about “making it happen” and run like Usain Bolt from everyone else. In this environment there is literally no time for mercenaries, negativity, complainers and/or bureaucrats any more. The stakes are simply too high.

4)    Lastly, as good old Mark Suster says, JFDI and take the plunge!

Monkmakestheleap

Notable News: "Holiday Edition"

Heard it from the Horses' Mouth: What Venture Capitalists Like and Don’t Like to See when Doing University Spinoffs

Horsesmouth
This is part of my ongoing series on University Entrepreneurship.

The annual University Startups Conference put on by NCET was held in Washington DC last week and was well attended by investors and university personnel alike.  Through the course of multiple panels and discussions, a good cross-section of venture investors from very reputable firms weighed-in candidly on both what they like to see and what they don’t like to see when they try to spin-out companies from university tech transfer offices.  Many colorful stories were exchanged to say the least.

Here are some quick bullets straight from the proverbial horses’ mouth that may be of help.

 VC’s like to see:

·       Platform technologies

·       Great faculty “stars”, great scientists, great science

·       Rich entrepreneurial culture and community throughout the university

·       A "go-to person" at the tech transfer office with entrepreneurial experience

·       A tech transfer office that’s “all about throughput” and getting deals done quickly

·       Deal terms that are flexible because "business models change over time"

VC’s do not like to see:

·       Slow-moving offices that take too long to get a deal done

·       "Mismatches" in terms of respective legal counsel (turn-around time, skill, expertise)

·       “Greedy” tech transfer offices with onerous deal terms

·       "Big egos" at the tech transfer office that get in the way of deals

·       Business plans. VC's prefer to have a short summary and decide for themselves

 

For Part 22 in this Series, click here

Notable News: "Read All About It"

Newspaper_boy

Mark Suster: Both Sides of the Table:  "Hiring at a Startup? Know Thy Weaknesses"

Fred Wilson: Musings of a VC in New York: "The Herd Instinct"

Martin Zwilling: Startup Pro: "Bootstrap Your Business to Retain Control"

Charlie O'Donnell: This is Going to be Big: "To Poach or Not to Poach"

Bethany McLean: Vanity Fair: "The Bank Job"

Paul Kedrosky: Infectious Greed: "The Case for Start-Up Visas"

Vivek Wadhwa: Business Week: "Let's Give Visas to Startup Founders"

Notable News "Read All About It"

Notable News "Read All About It"

Notable News: "Read All About It"

Venture Capital: The Elusive Anti-Portfolio: A Rare Sighting

This is part of my Series on Venture Capital.

In that we were speaking of "negative" or "anti-portfolios" in this earlier post, just have a look at Bessemer Venture Partners' vaunted list below and the sometimes hilarious explanations they give for having passed on the opportunity. They've been in business since 1911 and obviously have the sort of self-confidence, sense of humor and terrific track-record to put some of these mammoth misses up on their own site. How many VC's would advertise the fact that they turned down the likes of Google, FedEx, Ebay, PayPal, Apple, Cisco and others of this ilk? ( Of course, just have a gander at their top 50 exits and you'll see why they feel as if they can).

My favorite line is the pass they took on PayPal: "Rookie team, regulatory nightmare, and, 4 years later a $1.5billion acquisition by Ebay." 

This one's pretty good too:  "Whatever the reason, we would like to honor these companies -- our "anti-portfolio" -- whose phenomenal success inspires us in our ongoing endeavors to build growing businesses. Or, to put it another way: if we had invested in any of these companies, we might not still be working."

  

A123 Systems
In 2004, Northbridge and Sequoia offered Rob Chandra an opportunity to invest in the A123 Series C financing. Rob thought the world would have to freeze over before GM and Ford would seriously support battery powered cars. Sure enough, in 2008 Lehman collapsed, the world nearly froze over, GM restructured itself and emerged from bankruptcy with an appetite for building an electric car. A123 went public in 2009 with a $1.3 billion valuation.

  

Apollo Computer
(acquired by Hewlett Packard)
BVP's Felda Hardymon was offered a small position in the company's last private round, and waved it away: too small a position, he thought, at too high a price. In less than a year it was worth 17x.

  

Apple Computer
BVP had the opportunity to invest in pre-IPO secondary stock in Apple at a $60M valuation. BVP's Neill Brownstein called it "outrageously expensive."

  

Check Point
In 1994, Gil Schwed pitched his idea to BVP's David Cowan, who said that Gil would never get distribution in the US. The next year, Check Point got a huge Sun OEM deal and sold $25M of firewall software.

  

eBay
"Stamps? Coins? Comic books? You've GOT to be kidding," thought Cowan. "No-brainer pass."

  

Federal Express
Incredibly, BVP passed on Federal Express seven times.

  

Google
Cowan's college friend rented her garage to Sergey and Larry for their first year. In 1999 and 2000 she tried to introduce Cowan to "these two really smart Stanford students writing a search engine". Students? A new search engine? In the most important moment ever for Bessemer's anti-portfolio, Cowan asked her, "How can I get out of this house without going anywhere near your garage?"

  

Ikanos
Rob Chandra met these guys in 2000 at the start of the telecom meltdown, and remembers saying something like, "Rajesh, I like you a lot but do you really want to build a communications semiconductor business right now?" He looked at Rob in a sort of funny way and then raised money from Greylock, Sequoia and others. They are now running at a $60 million revenue run rate by focusing 90% of their effort on the telecom boom in China.

  

Intel
BVP's Pete Bancroft never quite settled on terms with Bob Noyce, who instead took venture financing from a guy named Arthur Rock.

  

Intuit
Along with every venture capitalist on Sand Hill Road, Neill Brownstein turned down Intuit founder Scott Cook. Scott managed to scrape together only $225K from friends, including HBS classmate and Sierra Ventures founder Peter Wendell, who personally invested $25K to get Scott off his back.

  

Lotus and Compaq
(formerly known as Gateway Computer)
Ben Rosen, one of the founders of Sevin Rosen, offered Felda Hardymon the chance to invest in both Lotus and Gateway Computer on the same day. Says Hardymon: "Lotus wasn't proven yet, and I was worried about the situation there. As for Gateway, I told him there was no real future in transportable computers since IBM could do it."

  

Paypal
David Cowan passed on the Series A round. Rookie team, regulatory nightmare, and, 4 years later, a $1.5 billion acquisition by eBay.

  

StrataCom
(acquired by Cisco)
Felda Hardymon: "[Sierra's] Pete Wendell asked if I'd like to look at Stratacom, which was doing a 'fast packet switch.' I gave him a blank stare."