Are Startups Still Receiving Funding in Southern California?

I wrote this post earlier today and put it up on Startup Coast but thought I would re-blog it here.

This is one question that I have gotten quite a bit by entrepreneurs who are currently pitching or thinking about pitching their companies. There is a lot of rhetoric out there, so I decided to see if I could find some information on my own.

I went over to SoCalTech, where Ben Kuo’s team has been tracking investments in SoCal companies for many years, and here’s what I found out. 47 investing groups have invested in 105 early stage deals in the first half of 2009. The highest was Tech Coast Angels with five Seed and one 2nd round fundings. Now I am pretty sure that these numbers are down versus previous years, but not exactly zero.

Next, I thought I would see what the national numbers looked like. The Angel Capital numbers for 2009 are not out yet, but Price Waterhouse’s Money Tree Report is available for 1Q09. This shows that there were 549 deals representing $3.0B of investment. Of this, 47 were startup/seed investments worth $169M and 157 were early stage worth $683M.

Again not record breaking, but having $852M of VC funding going into early stage companies is no small amount. So, what exactly is the problem and why am I being asked this so often?

I think that one answer is that, overall, early stage investments are down while the number of people who think that a down economy is the perfect time to start a business. Result, is a bigger group of people going after a smaller amount of money. So the bar gets raised and entrepreneurs need to up their game to get noticed. You need a great story, documentation, with significant investor potential.

I also think that entrepreneurs are running in to investors who just don’t have available cash. The Exit landscape hasn’t been too rosy over the last 18 months. So, you have a lot of investors, especially in the Angel space, without cash. I think that a lot of them would rather tell you to get more traction, or fix some other problem with your opportunity rather than admit they are out of cash. Maybe if you work on your business a while, they will have money by the time you are done and come back to them.

The bottom line is that early stage companies will continue to be funded, but those that do will stand out head and shoulders above the rest. They will have compelling stories offering great returns for the investors, solve big problems that people are willing to pay for, and they will have squeaky clean documentation that meets investor expectations. What meets an investor’s expectation? Try asking before you decide to pitch!

My Plan is a Small Bridge to a Larger Round Next Year

This is the track for a lot of startups. Going after a small investment to accomplish some key milestones allows entrepreneurs to build some value in the company and positively affect the overallvaluation. In the past, this was a great concept and, even in the current economy, may be a great strategy. It also helps when the amount of money required is at a level that is difficult to attract.

For example, prior to a couple of weeks ago, the upper end of where Angels would tread was about $1.5M and the smallest amount most VC’s were interested was $5M although I did hear that is was around $7M in Silicon Valley. Companies needing $2.5M or $3M were having a difficult time. One of the recommendations was to re-look at the requirements to see if there was a way to raise $500K – $750K and get some traction and plan for a higher institutional raise in the future.

For many, this was a great plan. However in today’s environment, you just can’t plan that the next round will be available when you need it. The current economy suggests real financial creativity where you plan on a smaller round and then combine it with a ”Bootstrapping” mentality to get to self sustainability.  

Here’s another slide from Sequoia that makes a lot of sense:

Now it seems to me that these make good business sense in good or bad times.

What I Have to Say Is More Important than What You Want to Hear!

I had an interesting conversation with a startup entrepreneur this afternoon. He presented to our team earlier this week and was looking for some feedback. Now, like many entrepreneurs, this is his first experience with starting his own business and looking for outside financing. He had no idea of the funding process and what investors look for in companies.

However, the thing I found most amusing was when I told him that the best way to start a presentation was with a well constructed elevator pitch that gives an overview of the business and opportunity. So starting off with a story about how they came up with the idea while traveling across Europe doesn’t help. In fact it get the investor to “NO” fast.

He told me that he was given a sheet of recommendations for his presentation and starting off with an elevator pitch was at the top of this list. Now here is the punch line, he decided that doing the presentation that way would interfere with the way he wanted to present it, so he disregarded the recommendations.

Now can you imagine, presenting the opportinity in the way an investor wants to hear it is not as important as making sure he could tell his story his way!!!? We had gotten to a point in the conversation where he felt comfortable enough to admit it.

I think his presentation will improve after our talk. I think he gets that he is the salesman and the investor is his customer and like any good salesman, he needs to understand and address the customer’s needs.

Podcast: Natalie Martin, CEO Blissport

On Valentine’s Day, I did a post on a new company Blissport focused on providing travel information and support, initially to grooms as they plan arguably the most important trip of their life, their Honeymoon. Well, this afternoon I had the pleasure of doing a Podcast with Natalie Martin, the CEO, who is in the process of raising capital as well as getting the business off the ground. Here is a hotlink to the cast. I hope you get a chance to listen and enjoy it and, if you are an interested investor, you can contact Natalie at natalie.martin@blissport.com.

The 2008 Economy and Startup Investing

I got an interesting email from an entrepreneur this morning asking my thoughts on the funding outlook for start-up companies this year and whether investors mood over the stock market and economy affect the number of dollars invested.

I thought a while about my answer. I didn’t want to sound flip or dismissive and I don’t have a crystal ball to peer into. Also, I have experienced a little pull back from some Angels on prospective investments.

I have attended a few pitch sessions this year and the investors, mostly Angels, have been enthusiastic about looking at companies. I haven’t seen a drop in attendance by investors. I won’t really know unless I see a drop in the number of fundings and it is a little too early in 2008 to for that data.

The last data I saw showed that Angels invested in 51,000 early stage companies in 2006. The Center for Venture Research at the University of New Hampshire reported that 24,000 early stage companies received Angel investments in the first half of 2007, which was down about 2%. So it seems that if the number of investments go down in single digits, there will still be plenty of deals being funded by Angels.

I haven’t heard about VC’s deciding on closing down funds based on the economy. On the other hand, the Price Waterhouse Money Tree report shows that there were more seed/early stage investments in 2007 than in 2006 both in terms of deals and total dollars invested ($6.3B vs. $5.3B).

 So, I would be less concerned about whether investments dollars will be available and more concerned about making sure that I am able to describe a great opportunity that clearly separates me from the myriad of companies competing for these dollars.

Remember somebody is out there with the next YouTube, Facebook, Digg or other potential high flier. So you really need to:

• take the time to create your story,
• see if it meets the expectations of your prospective investors,
• make sure that all your documentation is squeaky clean,
• lead with your elevator pitch, and,
• most importantly, look for that person who can make a warm introduction for you.

Is the Economy Affecting Startup Funding?

There was an interesting article in the Wall Street Journal Friday about whether the economy is having an impact on funding for startups. Now the on-line Journal is still a paid area, but if you have access to the paper, the article is titled In Silicon Valley, Start-Ups Begin Hitting the Brakes.

Now one of the premises is that if you are out raising money now, you might want to up your raise a bit in case there is downturn to tide you over. It also said that if you weren’t planning on raising money, maybe you should in case there is a downturn and funding dries up.

I think it is pretty clear that if your startup or plans are to target the financial industry, you might want to re-think your business. The sub-prime fiasco has slammed this industry and will continue to ripple for the foreseeable future.

On the other hand, the rest of the economy is doing fine. Now there might be some jitters or concern that the ripple will spread, but before you get caught up, consider fact versus supposition.

Entrepreneurs working in non-finance sectors might want to take advantage of investors concerns and look to get some of those funds they are probably trying hard to place before the downturn hits.

Hopefully, there won’t be a panic with thoughts of another bubble-burst. Things just aren’t adding up the way they did in the late ’90’s.

ENTREPRENEURS, Know Your Investors!!!

There is a consistent problem that I see with supposed Investor Level presentations. I saw it again today and I can’t figure out how to, if not fix, dramatically improve the entrepreneurs understanding of the investors they are searching out. I looked back and found that my last set of rants on the subject was last November. So, maybe I just need to do a quarterly rant.

It just doesn’t make any sense for an entrepreneur to expend all the time and financial resources around getting in front of investors and then wasting the effort by not covering the things that we want to hear and describing in the presentation and supporting documents a story that meets our expectations.

It just doesn’t make sense to paint a rosy picture of a very opportunistic business, with large markets, unique products and then describe mediocre revenue projections and outlandish valuations. Oh yes, I love how many companies think that they will be acquired using multiples of companies like Double-Click, YouTube, Facebook, or MySpace. They overlook what kind of traction these companies had when acquired or got an investment.

OK, so what are we looking for: well we look for opportunities that have a believable story that looks like it will return 5X to 10X return on our investment in three to five years. If you present opportunities that in no way come close to this, then you are wasting your and our time.

As for valuations, this is always a touchy subject, but most Angel groups don’t want to invest in opportunities where the valuations at the seed stage are greater than $5m. So, what do you think happens when a company with no or few customers, unprofitable or miserable revenues, and a not so clear story has a $10M valuation. How did that happen?

If you want to use YouTube as an example, then show a company that with results similar to YouTube when they were acquired. I saw Chad Hurley interviewed a couple of months before Google’s acquisition where he stated that they still unclear about their business model. In case lots of entrepreneurs want to jump in and say “see there’s our justification for our valuation, we don’t completely understand our business model either”, he went on to describe that 110K new videos were being uploaded each day.

YouTube was launched in November 2005, experienced a meteoric rise in content and membership and were acquired by Google in 2006.

So, if you are going to be out raising money for your fledgling company please take the time to figure out what type of investor you think you will need and then what is important to them.

If you want a little help, I had an article published in the recent edition of Website Magazine on the subject. But don’t take my word on what is important, talk to the investors you are targeting and find out what they feel is important.

Hopefully, I won’t have to go over this again until May.

Blissport – New Company, Unique Concept

OK, so today is Valentine’s Day, another opportunity for many men to do the wrong thing, get the wrong present, forget to make to right dinner reservation or completely blow it by forgetting it all together. I know I am risking the wrath of many but bear with me for a second.

This morning I sat through a number of entrepreneur pitches and one, Blissport, is a new company focused on helping Grooms with the daunting task of arranging the, once in a life time, all important task in the Wedding process, the Honeymoon. So, here is a woman CEO, talking about a sight to help men work through the honeymoon process, an enormous potential minefield for men, on Valentine’s Day.

There are a number of things I like about the company:

• Solid CEO with previous successful startup experience
• Focus on a market segment completely under-served and, at the same time huge!
• Using the social and new media tools to create a unique user experience
  • very cool looking site that will be attractive to the 18-34 year old target market
  • Only focusing on the top 300-400 high end resort properties that excel as Honeymoon destinations.
  • Include reviews by people who use the site. Obviously these will build over time. As a side, Forrester just released a report that looked at what web users want in four different segments that included travel and found the one critical desire was to have access to user rating and reviews.

Their site went live in beta mode a couple of weeks ago and they are currently out raising a seed round to help them get the traction they need to extend the business and develop the metrics they need to go after an “A” round later in the year.  

So, if you have a few minutes, go check them out. If you are an investor and want to know more, you can reach them from the Contact section on their site or, if you have problems, send something to me at jim@socalbuzz.com and get it over to the CEO.

In the meantime, it was nice to hear a woman talking about doing something for men on Valentines Day. Thanks Natalie.

Conversation with Nikos Iatropoulos, CEO Lingospot

I had an opportunity to talk with Nikos this afternoon and learn more about Lingospotand what they are doing. I ran into the company at the Blogworld conference last November in Las Vegas. The best way to understand what they are doing is to see the demo on the web site.

As a blogger, I am always looking for ways to differentiate my blog and Lingospot is certainly one way to do it while providing a lot of additional content and explanations for key areas in your posts. For the service to work properly, they have to go through and index your articles and posts, which takes a couple of days. Hopefully, you will be able to see how it works when they are done indexing mine.

New Podcast – Interview with Ken Liu of Mindtouch

I had an opportunity do a Podcast with Ken Lie the CEO of Mindtouch, a Southern California company. I saw Mindtouch while attending the Blogworld and New Media conference in Las Vegas last month and thought they have an interesting product and story. They are taking the concept of a Wiki to a new level and giving it a lot more capability that the average company can benefit.

I also discovered that they are just about ready to go after a Series A, $5M round of financing. So for you investors who are interested in investing in the new media tools as they move into business, give Mindtouch a look and a listen.