The VC model can be defined as:
a business model based on other people's money and labour utilising an asymmetric power position in respect to entrepreneurs.
It has been a while since my last post. Well, almost to date a year :-)
I have been involved with raising a funding for a start-up and getting a better view of the VC world. My previous posts still hold and my distilled wisdom in a word: don't. Naturally there are exceptions to the rule but those are hard to find if not impossible for the first-timers.
Anyway, if you are worried about the current economical climate you are right. Things are not how they should be. Unfortunately the reasons are deeper and worse than we would prefer to realise. If you a fan of Alan Greenspan maybe you like to hear it from his mouth: Gold and Economic Freedom. There's an excellent video that explains it as well: Money, Banking and Federal Reserve.
Here's also an excellent historical documentary: Part 1 Part 2 Part 3. The quality is not the greatest but the content is worth the effort. Note that you can also download the films and watch by Google Video Player.
I have been getting worried signals about the economy in US. And it is not just me but grey panthers who have been through the hard times (e.g. oil crises). And here's a recent book about "The coming collapse of the dollar.." which predicts that the US currency system must come down sooner than later.
An amateur web-site that nicely summarizes the US economy in a nutshell.
It came as a surprise for me that the US Federal Reserve is a private corporation and not a central bank per se. The government does not own the bureau but a number of largest banks/bankers do! Sounds quite amazing. Check Wikipedia and you start to get the picture. And here's a script you can ask a series of questions directly from Fed or just read the answers...
VCs have hard time saying no. I don't blame them. Burnham's Beat has a good post about the topic: "The Art of Saying No".
In advertising there is a golden rule that one should never use negative terms - they could stick. If there is a chance of getting a negative association the risk is not worth taking. The same applies for the VC world. Businesses are personal for the founders. One is not saying no to the business model but directly to the persons as well. Or at least that's how often it is taken.
There are plenty of ways not to say no but still deliver the same message. Often VCs are suggesting some improvements or more milestones to catch up before moving on. They want to see your demo / prototype, first customer reference, some revenue, complete team, another committed investor etc.
The art of raising funds is to read between the lines and understand when they are really interested but want more evidence and when is the case that they are not going to invest. Only by experience one can tell the difference.
Finally some words of comfort. A VC (don't mean Fred!) saying no (or meaning it) is not actually a big thing. There are plenty of reasons for the answer and often it does not even indicate anything about the case. Some of these reasons could be that:
- their fund is already invested (2/3 or so, the rest goes for follow-up rounds)
- they are not familiar with the business area / industry
- the management company is not able to get approval from their investment committee (change of focus, someone is pulling out etc.)
- your business does not fit to their current portfolio (breaks the balance, similar investments already in, current investment would look bad etc.)
- they are just too busy to evaluate the case!
No wonder why VCs are like politicians - it is not that simple.
It took me a long time to appreciate this but it is so true: it is better to say no to the next google, amazon or ebay than say yes to a turkey.
Business 2.0 has illustrated some potential new gadgets from Apple inspired by Apple's chief designer from 1989 to 1996.
Jeff Nolan opposes that VCs Are Jerks claimed by The Zeitgeist.
Teleo is the latest competitor to Skype. (via TJ's Weblog) Newsweek has abrief article about VOIP companies.
Fred explains how to get money quick and dirty either planner or ad hoc from the current invetors.
You might want to read this well prepared essay by Paul Graham. How to Start a Startup is another recent article by the author.
'Entrepreneurial Thought Leaders' is a seminar arranged by Stanford Business School. John Doerr gave a lecture that is available as streamed.
(Via TJ's Weblog.)
Fred had a great post why not to take VC money. 99% of startups do not need it. Exactly my point (and post). Here's the direct link for Fred's ppt.
Alarm:clock is a great weblog that covers start-ups and VC deals. It is run by ex Red Herring old timers.
Fred reveals this week's VC cliche of
world class CEOs. The beauty is in the eye of the beholder and even a great CEO cannot undo a lousy investment or strategic decisions...
Yahoo turns blogging into main stream with Yahoo 360. CNET tells more.
Creating a new venture requires a lot of attention and consideration. Each venture has its unique features and twists. What comes to the funding structure one has to appreciate the needs of the business and adjust the financing accordingly. Not the another way around or force the old formula for a case that is not fit for it.
I regard VC as a special case for a funding - not the norm. In many cases one do not need VC money. It just don't simply make any sense. Either the growth potential is too small or the funding requirements too limited for a serious VC to get interested.
On the opposite spectrum are the cases that are very lucrative and require capital injection but still are not an ideal for VC funding from owners' perspective. Here the threshold is the usual VC mode and its consequences. Bell curve works for VCs as well and this is the problem here. Most of the VCs are not innovative. They are stuck to their own business development formula mechanically and are not adjusting it to the case. This is a problem if the case does not follow the regular requirements and needs. One can easily turn a superb case into a mediocre lukewarm venture by poor case handling and management. VCs have the force to alter cases according to their likings if they desire so. Only few are sensitive and clever enough to use their power wisely. Ruining is way easier than creating.
Between these two opposites the VC model works nicely if one knows the name of the game and is willing to play according to the rules and risks involved.
How to become a successful entrepreneur?
Do it yourself. You have to take the responsibility, be persistent, do the hard work, be humble, learn, make mistakes but above all bite the bullet. There is no shortcuts or easy fixes.
Often we prefer to look solutions and let others to do the thinking and the hard labour instead of doing it ourselves. No matter whether it is the selling, putting the business case together or raising funds.
Various consultants, sales agents and outsourcing help you only as much as you are capable of utilising them. Getting external aid does not mean that one do not have to be in control and understanding the objectives and means to get there. Who do you think is making sure that your business targets are reached the optimal way? The external consultant, agent or your trusted business partner? It is pure naivism to expect others to do your your job and do the thinking for you.
Do it yourself does not mean that one should not get help and support from others. On the contrary - one cannot become successful alone. The pitfall is to rely on others on matters one has to understand and do oneself. The one who has the main interest and the most at stake is also responsible of the business. The hard fact is that it is a tough place to be and one is never enough. And there is always things to learn and more homework to do. There are always plenty of excuses not to do something or be aware of some issues. Mostly it is just pure ignorance and often pure arrogance. No one told making it to the top would be easy. That's what it takes - definitely not a journey for everyone.
There are no miracles or rainmakers. The successful people have earned their reputation and experience by hard work. They simply do more and are not afraid to put themselves at stake. Being vulnerable and humble does not make one less successful - often that's the only way to the top.
It's very pleasant to find evermore comments and hard core experiences of VCs by entrepreneurs in blogs. Tom Evslin shares his wisdom with ten lessons.
How much to leverage the company with debt and hover the freshly injected equity back? Max Headroom by Private Equity Online.
Yesterday I attended a small presentation from an entrepreneur who built a company from zero to €50m revenues with some 300 employees over a decade or so. They raised VC rounds of considerable amounts (in tens of millions) along the journey and their investors included top notch names known worldwide.
Knowing the success case very closely and following them during the years I must agree to his verdict about VCs: don't if you can without. Continuously all the investors promise value added which is often not industry specific or plain simply non-existing. Lower costs and increase sales is a good advice but does not help much to carry out the specific company strategy properly.
Of course there are exceptions and VCs can provide good expertise especially in the early stage investments. Also process knowledge and expertise can be useful even for companies with few hundred employees and international operations. Often the founders are not that keen on streamlining and improving things - they rather create and build.
Still, one phrase sticked to my mind: "founders squeezed continuously". It's high stakes, no prisoners.
Joel Spolsky has critised the VC-biz model and thinks that it should be fixed. Spolsky makes it sound that VCs have all the fun and they can just play the roulette on the entrepreneurs cost. From my experience it is more chance and coincidences than pure rational reasoning and planning. Everybody has to meet up their targets and objectives and unfortunately the entrepreneur and the VC usually are not in synch and aligned. A VC has also some comments about the issue.
When does a software company need a plus $90m round of VC money? Burnham's Beat tries to figure it out and the results are not that appealing.
Expensive country codes on int. phoning will most likely reduce their significance and the winners will be large areas with cheap rates such as US and UK. Tom Evslin tells more.
The problem from the inventor's point of view is how to harvest the maximum potential out of a drastic technology during the patent protection time period. Seldom one is taking this long perspective but in a few really drastic innovations this is relevant. The usual VC model is typically exploiting the inventions in a manner that is fast and easy without considering too much of the optimal total potential. After all a VC has more than one lottery cards and there will always be more deal flow material (provided that that the performance record remains good).
For example one could sell machines capable of providing the drastic benefits or keep the technology in the first phase and sell the offerings only as a service. The difference between these in the long term market (and profit) potential can be in magnitudes of 10 or 100 fold.
Patient money is something that an institutional VC does not have. His investment life cycle is usually 7-10 years where the investments should be made during the first 3-5 years. This leaves relatively short periods of time for the development and exit. Therefore the investment is not optimised from the overall company development perspective but from the investment fund's life-cycle targets and objectives. It is a no-brainer to realise the implicit conflicts of interest and short sighted optimisations. To make life more complicated fund's own investors usually have the own requirements and economical cycles. Sometimes one just simply needs to get their money back or withdraw from the investment commitments (e.g. after the dot bomb). Also the VC fund managers need to consider their longevity - they need to raise a new fund and hence positive results are required prior the new fund raising.
The above might sound a bit sarcastic or negative but that's not the point. It's the reality and one has to accept it if one is inviting the VC money in to the venture. But one should notice that VC concept is not omnipotent. There are other sources and structures for funding than pure traditional closed VC funding. They just might be more hard to find or they require more competence from the fund raiser. After all it's about the appeal of your case. Real drastic inventions should also have the special attraction to enable unconventional financing solutions.
I just finished Andy Kessler's Running money and Wall Street Meat. Andy's storytelling is very conversational but I did not like it as much as Micheal Lewis' style. However I must say that I enjoyed a lot reading both of the books.
Running money illustrated the tech investing era and Andy was right in the middle of the action. He talks from an investor point of view and especially from one who has his feet on the ground despite the hot market. Kessler is very low-key and direct with his writing. In addition to describing how to run a hedge fun and what does it really mean he explains as well very nicely the semiconductor business model. As macro-level he tries to put together how the US IP economy is working. I'm not buying his theory of profit margin surplus but definitely his quest for the driving force and new underlying growth factor of innovation sector puts one considering where the new opportunities could be identified.
Wall Street Meat overlaps with Running Money and this is very disturbing at least for me since I read the Running Money first. There are some 10 pages or so same stories and some of them even 100% 1:1 with the other book. Sounds like a rush to get things published... Anyhow, if you want to know what happened behind the scenes and how actually the investment banking business was run in the 80's and 90's Andy's book is a must. He spreads wide open the business model and way the Street banking was conducted. Liar's Poker was great but Andy walks the reader through the crazy days of the 90's and tells the story from an insider's point of view. Mary Meeker, Jack Grubman, Frank Quattrone and others are nicely illustrated and positioned from a co-worker's point of view. I was very pleased to find some analysing of the dot bomb boom from the liquidity angle. Kessler brings into limelight the institutional funds (momos etc.) that played a crucial role in making the bubble to happen.
If you like the financial world and are looking for some answers why some companies got funded and made huge IPOs. Those days it was really not about how solid your business was put how right your timing was (and who you knew).
Steve Jurvetson in J-Curve describes the next drastic innovation after Moore's law is totally consumed in the current silicon based semiconductors - the future is for molecular electronics. Ray Kurzwei puts the progress in to perspective by The Law of Accelerating Returns.
Jeff Nolan provides valuable advice about different VC types and their working methods - check it out . AVC adds some good comments for Jeff's post.
I visited Skype today and found out that they have reach a staggering 25m downloads in a year!
Last week I was a bit concerned of the professionalism of some VCs regarding disclosure. This week I attended a VC conference with some 230 attendants from top notch private equity firms and growth phase entrepreneurs who usually had already one or two rounds of financing under their belt. My concern might have been a bit overrated compared to the disclosure found from the seminar material. How comfortable would you be to disclosure this information in public?
- Current shareholder structure (name & amout of shares)
- previous rounds of financing (round date, stage, company valuation, total amount)
- Key figures for 2002-2006 (turnover, EVIT, equity, employment)
The sad part is that many of the companies gave almost all the info. I would not like to be the poor VC who did the previous round and sat in the room surrounded by collegues figuring out your deal details. Open door policy is OK to a point but this much information does not help to get the next round of financing. While making your initial sales pitch no one is interested of the financial details and shareholder structure per se. They come later if the overall value proposition is in place. If nothing else this information is very valuable to a company's competitors and clients.
One should also be consistent with the sales pitch. It is not convincing to tell first your profit margin and explain to a question about how to keep the high rate in the future by answering that we do not reveal our margin to our clients. But you just did it, in public. A real case is not missed by revealing too much info early in the financing process but way too much in a wrong place can be a serious deal breaker.
Often start-up companies are less structured and organised than their owners. This is natural since a young company has to achieve a lot during the early days of its operations. No one gives any rewards for having the top class internal processes and structures. Early results are the ones from which you're measured. Of course it helps the earlier you have implemented the processes and business conducts that enable to scale the organisation with ease together with the growth.
But how to deal with a case where the investors are the less structured ones? Usually owners can imply certain practices but how can a company to teach its shareholders? Mainly this is the issue with company secrets and handling of its proprietary information. Recently I found out a case where an investor made an offer for investment and the term sheet was exactly as discussed. However, the big surprise came from the fact that the term sheet was made by Word using the 'track changes' feature. The term sheet template had been used in the past for the previous deal and the deal terms were still readable... The immediate reaction is to expect that your deal terms will be distributed to the next potential deals the investor is doing. Very nice. Fortunately in the term sheet phase one can still consider alternative investors who can be more discreet with their investments.
It's amazing to see the differences in thinking among VCs. Totally opposite schools of thought can be present and we are not talking about some decades in time between the ideas.
What's the purpose of committing the management in an early stage deal?
The first line of thought is to tie the guys in as deep as possible. Demand a relatively large personal investment and keep it as the collateral that the management will do all they can to keep the thing afloat.
The second approach is to take the standing where risk-investing means dedicating money by the investor and a management means dedicating work to the deal. This means that since the management is earning their living from the venture there is enough risk exposure for them already. Naturally if one has created wealth already and has no mortgage loan on the line a small invest would not do any harm as a sign of commitment.
The first 'old school' counts on the fear and threat factor more than anything. The management cannot afford to mess up with the venture or at least it will have serious consequences for the personal situation. The other approach usually believes on positive incentives instead. It's more worthwhile to make the venture and the perks so appealing that it makes no sense to jump off the venture any time soon. Incentive metrics could include benchmark to profitability, growth and other important milestones as stated in the biz plan. In another words they look for the future and try to maximise the chances for the optimal outcome.
From the risk management perspective startup investing is anyhow risky. It's less than one third of all deals that are worthwhile even for the management. Portfolio management methods scream red when considering the case of a CEO & founder in a startup. First of all, the person has dedicated considerable amount of time and effort for the case from 0-2 years before the seed investment. When the seed investor comes in the founder can be required to invest some more personal wealth for the case. In this phase the entrepreneur earns the living from the venture, has invested additional money for the case (or taken another mortgage for the house) and is required to keep the company in the very steep growth track for several years for the optimal growth. All eggs are nicely in the same basket. (Life is risky and it is not necessary to become an entrepreneur...)
How about from the investors point of view? You get what you measure. If you are loading the management with high personal risks you are getting most likely what you ordered. This means that the management becomes extra cautions not to rock the boat. They prefer to take the safer route in order not to jeopardize the whole venture and become personally liable for the losses. This means that the startup cannot be geared optimally for the growth and targeted for the highest possible valuation alternative.
Similarly when the times are bad it takes a lot of courage from the management to keep calm and make the right choices and fight for the survival of the venture. I doubt it is possible to give 100% performance if one's own job is on the line together with the extra money committed to the venture by personal loans and second mortgage among others. If one has to worry about where to get the next month's living its difficult to be objective and positive about the future.
Finally it's interesting to think about the management cash commitment from the point of view of sunk costs. How much does it really matter how much money you have really committed to the deal? It's done already. No matter what you do or which way the venture is going, you still have to pay off the personal loans anyhow. Your thinking is guided by the thought that one has to secure the monthly loan payments in all the circumstances.
I had today an interesting valuation meeting. Mainly it was about the terms of the equity investment but for me it shed more light to the VC than anything else.
It's not very convincing to claim first that the business plan is not focused enough and then after a while start to talk about the terms of the investment. It was good enough for the investment?? In this case the analogy would be that a VC would ask from Edison about the light bulb market by stating that sorry your focus is too broad. You cannot offer your invention to all of lighting market. Where are you going to focus - on houses, stables, offices or factories? You have to find a niche... Yeah, right. Still the same bulbs for all the places.
I found a new VC and entrepreneurship focused blog called Dispatches. Its latest post reveals some interesting tricks of IRR with different cash flows.
If you think that a 'double dip' refers to dining and you are raising funds you better read Feld Thoughts excellent post on the matter. 'A VC' comments the participating preference from the VC side. And since double dip is an issue to negotiate liquidation preference is usually something you barely can remove from the agenda. And Only Once comments of both of the terms and gets my support by sheding light to the entrepreneurial side as well.
Portfolio valuation is an interesting piece of art in the VC circles. Some of the funds are public and they have to disclose their positions openly. Most of the funds are private and are more than secretive about their returns and valuations. Writing down your valuation of a target company gives a certain signal to your investors but your collegues can read between the lines as well if your valuation level is way above the realistic level. At least it should signal something about your relative position vis-a-vis your investors or about your overall performance. Or maybe you're just a gambler and waiting for the lady luck. My opinion is that window dressing will get you only so far. Eventually the truth will come about and usually time will not make up the errors. Just look up the Shell reserve problem which was already known in 1998 and finally resulted the company CEO to resign earlier this year.
EVCA offers a free valuation guide (pdf) for those interested in the topic.
Predicting your business is always tricky. Especially in cases where you have not yet started. A young industry with less than 10 years of overall history and high speed in technology development makes life no more easier. Still the VC guys want to get the full picture. They need a sense of security for things that will materialise in 3 to 5 years.
In one of my cases I'm seeking a seed financing for a startup. We have done the 5 year P&L and cash flow forecasts. Everything is cool expect that the final years include also licensing income. One of our potential investors who is not an expert in this particular field dropped me a mail the other day. He likes to know my future licensing partners (their names), the deal structures, prices, licensing policies and specific conditions and terms.
I was not so surprised by the question but more concerned of the issue itself. Is it realistic to ask for such details in the ground zero phase? I'm sure we have a lot of material and rough idea of these details after running the business for the first year and meeting with potential clients and industry partners. Would it help the VC to make a positive investment decision if I gave him the names and deal structures right now? Seriously, who can say with straight face where they will be in few years down the road and doing business with? Paralysis by analysis...
And for those readers who need something to get started with the forecasting and valuing your venture, Nesheim has some free pieces of advice.
And for the valuation algebra there is an excellent post by Feld Thoughts.
Jack Welch was once asked if he could do something differently what would it be. He replied that the hard decisions he would have done earlier and not waited as long as he did.
Do it earlier. I have learned it the hard way and I'm still in the learning curve. So what could be done earlier?
- selling your new product
- promoting your new venture
- starting your financial round
- penetrating new markets
- preparing for the strategic stretch
You don't need a ready product to approach your clients. Actually the earliest point I have been making a tour with potential customers was when I did have nothing but an idea. No business card or any reputation in that particular business field. But still the tour was worthwhile. People were helpful and I got confirmation of my business idea and great leads.
Being more willing. That's hard. Especially with hard decisions - cutting costs and loses. Still I prefer to do things almost too early than to figure out later that window of opportunity was missed due to slow decision-making. Right or wrong but just do it.
The other day I had a discussion with a well-known figure in the VC industry. He entered the VC scene some time ago with the biggest first timer fund ever in the market. Now he's putting together next fund which indicates a successful management of the first one. Not an easy job considered that the last years have been very hard for almost all high tech sectors and especially for ICT and telcom. In dot bomb times 100m was not a big fund or money at all. Now bn size funds are scaling down and it's difficult to find good returns for all the allocated money. Time value of money seems somehow reversed in the VC circles.
No doubt Google IPO is the high tech event of 2004. However I heard today that South Korea has had many high tech IPOs in the last years. The valuations are lower than in US but still. Haven't seen much IPO activity in Europe or US anyhow. Maybe some of my readers have a better insight for the South Korean market?
Usually investors are the ones who carry out the due diligence for the potential target company. It's not rare that an entrepreneur do not impose any questions for the investor. This is a clear mistake. Even though you might not have that much choice you still should be very careful and evaluate the potential investor(s). If nothing else you're showing active interest for the VC and weighting their competence and match for your case. Should not harm the negotiation situation...
Private equity injection is like a marriage. You're bound together for the good and bad times until the exit will set you apart (usually in 3-5 years). Here's a short list of items one should consider when evaluting the VCs candidates:
- fund focus (their expertise in the field)
- current target companies (any competitors / conflicts of interest)
- fund life cycle and conditions
- fund's investors and their backgrounds
- investment terms and size (follow up investments as well)
- type of investor (financial, 'smart money' and how)
- personal & fund history and references & success stories
- decision-making and management style (fast / slow, passive & participative, authorative etc.)
- motives and interest (why they want to make the investment)
- personal chemistry
- network (resources, clients, VCs, people etc.)
Those were just some examples. A seasoned entrepreneur might consider other factors as well. Who would be the most beneficial investor for my purposes (next rounds, board seats, influence power etc.) and hidden agenda...
When is a VC round easy to accomplish? My guess is that when one do not need one (same applies to bank loan - in general).
I've been in a seed finance round for a while now. The case seems to be OK from all the aspects. However either the funds required or the applicable business area are creating the complications. Today it's difficult to find a competent seed round institutional VC. The ones who are still around are focused more on the early stage and do not really bother to invest anything less than €4m. That's understandable if the VC fund is €100m or more. The partner time just cannot be fragmented to dozens of small companies.
However from our perspective this does not make things any more easier. The seed financing companies that are still alive are either focused on something very traditional like software or mobile which is more than over-crowded and -invested or they are just pure opportunistic players who do not take leads and invest only for syndicate cases. From the list I have scaled out those guys who do traditional industries outside of high tech since one cannot expect to fit to their world without losing all the aspirations of an international growth company.
I bet I'm not the only one with the gap. A seed of 0,4-1m€ should not be that uncommon. However this amount of money is a bit out of range from pure private angels in Europe (maybe except Switzerland or so). Still, it's unattractive for early stage guys. Friends and families are hard to find with that thick pile of cash especially in countries where private pension contributions are carried out by state in form of taxation leaving no cushion for private individual's investements.
George Colony of Forrester Research has some interesting points on Google. Check also the comments below the article.
Sorry for my infrequent posting. I'm quite loaded with a VC round & consulting work. My prediction of the next big thing is definetely optoelectronics. European & US VCs have still underinvested for the sector and desperately looking for good investment targets. Asia has been ahead of the rest of the pack. Here's a good starting point to explore the near future applications to arrive and already existing in the market. The good thing is that the market shares are not divided yet. An innovative player can still make a home run. Drop me a private mail if you wanna learn more :-)
Booz Allen Hamilton made an extensive study of different organisational types and their behaviour: www.orgdna.com. Different types of management include: The Military, The Passive-Aggressive, and The Overmanaged Organization among other. The article is worth checking out.
VCs seem to be optimistic about the future. Actually there has been quite a significant activity in the market: in the exit market. Many mobile companies have been sold as trade sales and many deals are still to be made. The ones who survived the though times are now leaner and fitter for action but they haven't got the time to get their sales bell ringing continously, yet. It's a perfect time to catch good companies with reasonable market price.
Here's the Forbes' list of Midas Venture Capitalist of 2004. Familiar names in the list. Funnilly enough the top amount of people from a same company seems to be five: Benchmark Capital, Kleiner Perkins Caufield & Byers, and Matrix Partners.
It seems that the most expected IPO might be in doubt. Quicken.com reports. Here's the article where it all started last week.
According to a survey European retailers are starting to see the benefits of RDIF. 41% of top retailers are plannig RFID pilot for this year.
What To Expect From A Venture Capitalist? by Guy Kawasaki in Forbes.
The VC market is finally catching up. Since the dollar is sliding so fast the European start-ups should get their funding in Euro terms :-) However, the European VC market has some differences to its bigger brother, US.
Should European VCs be required to consolidate their accounts? EVCA takes the standing that they should not.
Google is heading for the IPO. Underwriters are already on board and the company is expecting to raise as much as $4bn!
Bush in 30 seconds is worth checking out.
Fortune run a cover story about Google. Tony Perkins comments the article.
I was amazed today to find a VC who is willing to sign an NDA prior any discussions. And even better - they provide you a NDA template in their web-site if you have trouble finding your own. The VC has been successfully in the business over ten years which tells that this was not just some sudden adjustment in panic mode in the troubled industry. I really love to work with transparent and highly skilled people...
Nokia denied its staff the usage of LinkedIn today. This was interesting since the total number of employees was over 250 already and those people were not in the lower levels of the organisation. Well, it was evident that the organizational structure and people in the delicate places became just too widely exposed.
Hotspot market seems to have more supply than actual demand. In average people are using the available services only 6 times a year and spending on average only $12.10 per month. Another gold rush?
Hollywood turned into California - Arnold won.
Sony is innovating once again: PSX game & entertainment system will be launched soon in their home market, Japan. The set includes: a satellite TV tuner, DVD recorder, hard drive (vs. VCR) and a PlayStation 2.
University of California is going to release IRR figures from their private equity portfolio of top-notch VCs such as Kleiner Perkins Caufield & Byers and Sequoia Capital.
Small businesses are growing and hiring by BusinessWeek.
Some VCs have stated that there has not been enough 'good' startups to invest for in the last years. Today I heard that one of them was having their offering as 30% of your equity for €50k investment combined with some pretty nasty liquidation rules. No wonder the startup material has become so 'bad' these days...
Recent FT had a review of Samsung's SPHi-500 that combines Palm with a phone with clever looks. My Palm V is wearing out and this sounds like a good idea.
Moviemercials are coming as well as advergaming. I have been waiting this to happen while trying to help companies to make their first trials in the field.
Maybe it's just me but I'm receiving pretty positive signals from the high tech scene. I'm not talking about any hard core facts but just how people talk and the buzz & excitement in the community. It might be just the holiday energy converted into first days enthusiasm before turning into the usual apathy. Well, Jim Breyer of Accel Partners thinks that the VC cycle has hit rock bottom.
In the last few months I have discovered some new exiciting ventures that have previously been in the stealth mode. What's typical for those ventures is that they are not pure software but more 'concrete' products that might have some software components bundled in them. Investors seem to favour tangible products over pure bits based businesses. Well, for the readers of this blog this should not come as a surprise. Horizontal software market is gone and long live the vertical application areas!
The Economist had a great piece about the changes in the IT industry globally (subs req.). Outsourcing is taking its toll for the industry and the focal points are moving away from US and Western Europe to places like India, Russia and China. Are the old 'hotspots' able to compete with the new-comers and renew themselves in order to shift for the next level? How much of the current IT business is actually rocket science - most of the work is pure converting, merging and tinkering of the old business processes and systems...
The latest Economist was pretty skeptical about the VC industry. According to the article the downfall is not quite over for VCs. The whole industry should still shring into a half. Also the latest IRR reveal cases are not that important or significant. 'Even some of the rocket scientists have difficulties of comprehending the basis for the figures'... Well, I could not agree more. Until the exit has been done everything is just pure speculation. VCs have a plenty of different reasons to back their current portfolio valuations whether in their top or bottom range of the valuation scale.
Recently I visited a publicly listed company that had its IPO on the boom times. The stock price has had only one direction even since - down. They listed around 3€ and the current going rate is only 0.20€. The only way is up? Well, the atmosphere in the company was pretty forward-looking. Lots of management issues behind but the product is solid and a favourite of clients. The oldtimers of the ten years old tech company had a common understanding about the founders and their high flying ideas: passé. Time for real business and forget all the great ideas. Only deeds, please. Also the clear message from the senior management was that they are going to forget the quartal capitalism and concentrate on the business. 'Cook the books' times are over and only the real doers are left behind. Well, that was the message for the VC industry as well. Value added, please: put your hard paid MBAs for the dirty operational work...
Well, tough times but never mind. One should enjoy life still. It's been a hard day's night...
Always-ON has released their choice of TOP 10 VCs for 2003. The list seemed pretty US focused but at least 3i from UK was included.
My excitment for RFID chips seems to get hotter and hotter. Rafle Needleman probes the emerging area from a musical point of view. A friend of mine is in the crime prevention business in South Africa. He opened my eyes for this massive industry: stolen cars, illegal spare parts, pieces of art, counterfait goods (gems, garments, CDs) etc. Funnily enough, there are even factories who are specialised on counterfait BMW spare parts such as bonnets, doors and so on... Almost all areas of life would benefit from unique identification no matter whether the things are broken into aparts or sold as complete items. Currently the tracking and proving are the heel of Achilles for crime prevention.
More about the Wi-Fi boom (or to-be-expected-bust). Hotels I understand and coffee shops also but otherwise I have difficulties to understand the user charged business model. Free Wi-Fi based on sponsoring and advertising will be a killer when smaller devices catch up the technology. I don't mind using my mobile device with Wi-Fi while on metro or in a railway station. But would I open my laptop and start to play around with my Outlook or Opera - too lazy for that.
IPO.com has shut down. The company raised $10m in 2000 and covered the IPO, secondary and VC transaction markets in the haydays of the late 90's.
EVCA released the final survey of 2002 VC activity in Europe (req required):
Fundraising was down 31 per cent from last year, with E27.5bn raised in 2002, compared to E40bn in 2001. Buyout- focused funds had less difficulty in fund raising than venture-stage funds. Buyout funds raised E18.3bn, or 66 per cent of total funds raised in 2002, compared to E8.5bn, or 31 per cent, for venture capital funds. In 2001, the corresponding figures were E23.3bn (58 per cent) for buyout and E15bn (37.6 per cent) for venture capital.
1st of July, EU will start to collect VAT on sales of digital goods and other electronic transactions made outside of the EU-zone (e.g. USA). This can increase the consumer prices up to 25%...
Venture Capital industry has been through a lot lately. I have mixed feelings whether they have hurt more than their portfolio companies (IT). When the times get tough, the tough get's going. It seems that there a plenty of negotiations going on about restructuring or raising new funds. PrivateEquityOnline provides some light for the latest talks about carry and how to share it between LPs and GPs in Europe.
Angel investors are feeling the greed and rush again: TrafficGauge got enough of Washington's traffic jams and decided to advice commuters in real-time.
Big guys are having fun all the way. Now, J.D. Edwards has sued Oracle for harassing their merge offer with Peoplesoft.
Some serious fun: Samsung has released a handset that has embedded a TV receiver! No additional costs and you can spend your time watching your favourite soap opera while on move.
Ready-to-travel business gear for 24 or 96 hours by Puma: www.96hours.com. Even the case included. Not bad!
Siebel's shareholders had their say for turning employee options as expenses and the answer was clear 'no, thank you'. Warren Buffet would have decided otherwise (and has).
Vinod Khosla (Kleiner Perkins Caufield & Byers) has raised into opposition in the VC arena by stating that he supports counting stock options as expenses in publicly listed companies. Khosla reasons that this would enable to attract the best talents and the smartets people from big companies to small and innovative start-ups. John Doerr ( Kleiner Perkins Caufield & Byers) thinks differently and has been against the initiative ever since the beginning.
Gateway is extending its brand for consumer electronics. Who's still saying that PC market ain't saturated?
'Due diligence' is a commonly used term in the VC environment. What does it mean depends on the context and also from the person / entity in question. Ventureblog offers some explanations how they see it.
Ventureblog reminds how a great success is made in small incremental improvements such as in Dell's case.
A friend of mine just closed a nice round of financing worth $19,5m. MySQL tripled its turnover last year till 5m$ and now they are expecting to grow even faster. They are profitable and were just taking the money for leverage purposes. Good luck Mårten and Monty!
What does it tell when 20% of all restaurants in a capital city are for sale? Hmm, are we really gaining consumer confidence and getting bullish again. Just wondering. Maybe entrepreneurs are throwing the towel in when the better times are just about to gloom. That would not be any surprise either.
Be aware, Net Boom, Act II is coming. Now the real break-through starts to happen. "Digital Rules" by Rich Karlgaard.
Some 50 VC funds are active in the security sector thanks to terrorism and 9/11. In Europe the security has not been such a big issue. At least VCs are not focused on the sector by new funds. Is the trend a bubble or has it lasting effects? Business2.0 wrote a piece.
"If you don't present well, it can break your company" . Sounds dramatic if the task is to present your company to VCs... Well, is it the story or the deeds? Washingtonpost tells you more.
If you don't bother travelling for a meeting how about being virtually present in the meeting room? Needleman covers an exciting technology under development at HP Labs.
Check the interview of Intel Capital's Les Vadasz about the current condition of the VC market.
Ever dreamed of a personal flying vehicle? Well, it might be closer than you have thought. Technologyreview has an excellent piece about aircars.
How to raise money and get publicity for your venture - reinvent the 'road show'. Mr. Emond is riding 450km with Segway in order to get some $1,5m...
Ventureblog has explained some VC jargon for deal makers. Ratchet antidilution, Pay to Play, Capped Participation...
CalPERS has released the performance records of its $3bn venture invesment portfolio. For Sand Hill Road this may be the beginning for higher transparency other investors have been facing for a quite some time.
How VCs are valuating their target companies? Check the short version in BusinessWeek.
Tornado-Insider has nominated the top 100 emerging technogy companies. Some familiar names and some strangers for me. Personally, I'm a bit sceptical about these lists. During the boom time I used to work for one of the most hyped future promises listed by Time Magazine, Tornado etc. I'm tired of these 'future promises'. How about companies that have been profitable since the beginning? Funnily enough there are also those ones that have VC backing just for leveraging the growth not to prove the case and find their biz model... Huge demand ever since the start and make money now and money in the future. The old way of growing companies. From my point of view those companies are the real winners. Obviously those are more difficult to find and they do not brag about their success. They are too busy to deliver and grow - pure deeds, not talk.
You feel sometimes to old to learn new tricks? Read this: 102 and emailing and reconsider.
Why big companies need small entreprises? For the innovation and growth, for example. Reinventing R&D Through Open Innovation by Henry Chesbrough.
High achievement always takes place in the framework of high expectation. Jack Kinder
Experience is a hard teacher because she gives the test first, the lesson afterwards. Vernon Sanders LawWhere there is a lack, there is the talk: Ballmer is talking about Windows' advantages over Linux. I especially liked this one: "Linux itself is a clone of an operating system that is 20- plus years old. That's what it is. That is what you can get today, a clone of a 20-year- old system". Well, that 'clone' ain't releasing security patches every second day for their shipped products...
More funds are funneled to totally new ventures. That's my feeling also. A VC was telling today that they have two new investements on their table about to be signed. Both of them were new seed phase fundings. Gradually we're getting there...
Ventureblog had a nice term called 'Alpha Geek" for people who are the leading indicators for something brand new and valuable. It's always a pleasure to talk to these 'Alpha Geek' persons. They are enthusiastic and always having something new and exciting on their mind. And most of all they are the rolling stones that never stop. I admire people who can reinvent themselves and change constantly. That's exciting. Even when you're just their friends...
And my bike episode has become to a culmination point that was to be expected: I cannot keep my bike in the yard. Without any reasons It just bothers someone in the house. Well, it cannot be the noise since I haven't kept it on. Well, now I have to test my insurance and park it on the nearby streets. That's so groovy!
There's nothing like a long Monday to remind you that you work for money, assuming you do, rather than having your money work for you, which is rare. - G. Armour Van HornI wish it would be a Tuesday... So grey day. Raining all day long and business was somehow sticky. In brief, I did not feel like working today. And bold I was and did nothing!
Well, due to a bit dull economics maybe you're also in a biz where some fundamentals are about to change. If 'Service orientation' does not ring any bells then most likely you should read this.
One more reason to scrap Windows and start to use Linux - Office XP runs on penguin.
A great piece about secondary VC market. Is it buyers' or sellers' heaven?
How to Make Money on the Net? Business2.0 did find out and you bet that eBay, Google and Yahoo are on the list. Nope.
On Friday I had a good discussion with an old friend of mine. He's a sales man in a small IT outsourcing company that has only a few big clients. He told that Jan & Feb of this year have been horrible. Not even a single sales done. And it was not only him who had trouble. Even traditional businesses such has house manufacturers that are in consumer biz had pure nil months. The good news was that March compensated the frustrated times and opened finally the order book. Hopefully for good.
I must admit that I admire his persistence. He told that one should not give up and let the bad times put your down. One must just try a bit harder. And keep the good moods - especially when talking with prospects. A good tip was that talk about sports or any other stuff except your business when doing cold calls. Just briefly mention about the purpose and then change the topic. People turn into a better mood and open up for your case in the next call. Even saying no must be tiresome if one has to do it all the time...
No worries, yesterday I had some jolly good time. A good dinner, Taylor's port, champagne and a few cigars, of course. So, maybe it was just a hangover after all?
If entrepreneurs are having hard time raising money, the situation ain't any sweeter for General Partners (GPs) of VCs. PrivateEquityOnline describes different types of Limited Partners (LP) according to their behaviour. Sounds like ordinary sales for me...
The good times are here again! I got a call today from Tokyo. First I thought it was some new biz and I got a bit excited. Afterall it was just an attempt to sell me some stocks. The harrasment was twofold. First a junior sales rep was warming up and checking my financial feasibility. Mr. X, how are you Mr. X. Are you able to commit a minimum of 5.000US Mr. X. After a while Mr. X started to be fed up and not least for hearing his name every 5 seconds. A few hours later a senior sales rep was calling again. Conforming my feasibility and my email address again. What a waste of money and resources! For a principal I'm not buying anything out of a phone call abroad. What has rotten so badly that they cannot sell domesticly? Who's-the-greatest-fool used to be the name of the game in the last phases of the bubble when investment bankers called randomly people around the world for good investment tips. So, I'm still sticking to my prediction of Q3 this year. Good times here we come!
Ninety percent of everything is crap.
Theodore Sturgeon (1918 - 1985)
Experience is the name everyone gives to their mistakes. Oscar Wilde (1854 - 1900), Lady Windermere's Fan, 1892, Act III
According to Windmill Reports survey there were 148 wireless-related companies receiving VC funding in Europe in 2002. The average deal size was €6,6m breaking down to the average seed of €400.000, 1st round of €3,2m and 2nd round of €6,4m.
I was visiting a seminar where a marketing director of an insurance company was presenting their marketing strategy. The lady was in her 40's and was as enthusiasitic about her presentation as I would be while reading the terms and conditions of an insurance. A question was bounced from the audience asking about the differentiating factors of their new positioning and visual appearence since it appeared to be almost identical to one of their competitors. I was expecting to get something like "we're the company who listens to our customers and care, the other is offering their products and putting them in the spotlight". Something one could feel, smell, associate oneself with. Nope, she told that even though both company's have the same main colour as their visual outlook the supporting colors differ. Also some other technical details of their internal policies and guidelines was given... Auts.
Some VCs are having trouble of not getting enough technical details out of entrepreneurs' presentations. My experience is that it's damn difficult to get the VCs to understand even the basics of their (invested) portfolio companies technologies. This sounds very frightening and thus many VCs are also in deep trouble nowadays. The promised smart money has actually proven to been pretty stupid after all. Pure numbers and bankers. Risk management and stress tests with volatilities. No business substance and value building.
A VC was drawing me a nice picture about agent problems and different agendas even in the same board room. Imagine a situation where there are four VCs with approximately same size private placements for a high tech company. The investments have been made in various rounds with different valuations, terms and sequences. This results that each VC has a bit different point of view, risk position and own hidden agenda depending on their own situation. No obvious lead investor can be pointed either. So, who has the most to lose? For those four investors this is just one investment of their overall exposure, i.e. their portfolio. Things turn interesting if the four VCs are sharing the same limited partner. Just one of the many point of view suddenly turns into a major risk exposure of one target company via four different funds...Who should be sitting in the board of the high tech company?
Finally someone is trying to penetrate the new issues market. Fingers crossed that they will make it!
Hardware industry has become a mature industry with saturated future prospects. Mobile devices are gradually starting to have the same faith - talk is cheap and plain vanilla. There is a rumour that Jobs is bidding for Vivendi. Hardware is irrelevant and content is king?
Universities are keen on biz plan competitions. I cannot avoid of the immediate association for the hype 90's. Create an excellent story/script and we will finance your movie/venture... Many consultancies were busy writing business plan in a few days. Never mind studying the market or getting to know the real demand. I always felt uncomfortable of creating something hypothetical and offered to do it the hard way (and more costly). Now we are getting back to bases were the real deeds are more important than the fancy outlook.
Never mind the calendar - the spring is here. The best way to confim it is my fever for restless vehicles. A few years ago I had to buy a sports car. The next spring it was a must to tune it since it was not fast enough. The following it was the time to change the whole thing into more powerful one. Now it's bikes. I'm a total rookie. I felt so stupid in a fair the other day with all the available models and brands.
The biggest dilemma is whether I have the guts to do it. I'm a bit afraid for my life. Driving with four wheels with cars accelerating better than 7 sec to 60mph is no equal for bikes with 2-3 secs. I have a history of lifting the back wheel of Audi TT Quattro 225hp in a ramp...
My all time favourite of start-up handbooks is Nesheim's: High tech start up. It's in my 'must-list' for new entrepreneurs founding their new ventures. The book describes in detail the different phases and mindsets the founder is required to go through from an idea till IPO / trade sale. To summarise the book: be paranoid and especially with your investors.
'VCs are not nice people' is a good reminder of the routhless world we're living in. Darwinism is alive and kicking well. Nokia Network's announced layoffs are the biggest in Finland since the early 1990's. 700 R&D engineers have suddenly more time for their families. I wonder whether they can find any applicable jobs since Eriksson is even worse shape.
Iraqi information minister Mohammed Saeed al-Sahaf has made it to the history books. A web-site has been opened for his entertaining comments and ever-positive approach.
Matrix2 is here! Check the latest trailers.
Still not convinced about the paradigm shift? Be conviced and read the excellent article series by Bill Reichert, Garage Technology Ventures. They have been through pretty hard times as well. The name 'Garage' should give enough of hints about their past biz logic as an incubator...
If the VC funded IT companies are in trouble, so are the companies that funded them. A Washington Post article predicts that some 200 out of the 800 US VCs will vanish within the next five years. The other day I heard that only 15 of Sweden's 200 VCs are survivors. Quite a bumpy road...
Some are still getting bigger and stronger. Forbes listed the fastest growing high tech companies.
Aargh! I crave for action. The flu is persistent and I'm not. Fuzzy feeling and all the filters on. No ideas or great emotions encountered. Just pure frustration.
I had a lunch with a CEO of one of the VCs in the neigbourhood. He was hopeful that the biz environment will get better in Q3 this year. Not the great boom times but a turn to the better anyhow. That was the good news. The bad news is that the paradigm has changed - for good. No more free money or almost any investments for new startups. Basically one has to be estalished in order to fulfil the investment criteria. Proven product, existing customers, market risk reduced or erased, scalable biz model etc. It sounds and de facto is a situation where one has to create the company by oneself without any risk money involved. The "risk" money will come around when you have already a cash positive situation and clients around. So, where is the risk? It is here, in VCs portfolios. They have materialised it or they have to do it soon. Therefore they do not like any more additional risks, i.e. new unproven technologies or companies. Only sure bets, later stage investments. That's the change of the paradigm. The New Normal!