Archive for the 'Investing' Category

VC’s Go to Washington to Talk About Medical Device Approval Process

I ran across this post on the Wall Street Journal’s Venture Capital Dispatch blog. A group of Venture Capitalists that invest in medical devices went to Washington to talk about the issues associated with getting medical devices cleared through the FDA. Main point was they were focusing on making the process consistent, predictable and transparent. They also talked about how the current process is driving more entrepreneurs overseas along with all their innovations.

It seems they got to speak their minds, but doesn’t sound like they got commitments to resolve the problems. Now that’s not good.

Internet Startups – Something for Entrepreneurs to Consider

I just put this up on Startup Coast, but thought I would put it over here also,

Many times when I am listening to a pitch for a new Internet or Social Media company, the entrepreneur attempts to categorize their company as another YouTube or Facebook. Now it is entirely possible that this may be true, but it is highly unlikely. More importantly, using companies like YouTube or Facebook create an impression of the type of story we should be listening to hear.

I thought it might be interesting to look at YouTube for the type of story they were able to tell. First, they were created in February 2005 and officially launched in November of 2005. They had their first public beta in July 2006 at which point they were getting 65,000 new videos per day and by January 2009 they had about 6 Billion videos. They estimate they now upload 24 hours of video every minute of every day.

Back in 2005, their story was something radical but apparently believable to Sequoia Capital who invested $11.5M shortly after their launch in November 2005. I remember seeing Chad Hurley on stage at the June, 2006 Always On Stamford event where he was asked what his business model is and he said they hadn’t figured it out quite yet.  Google announced a $1.65B offer for the company two months later.

My point is that over a very short period of time, about 19 months, they went from creation to acquisition with a huge payoff, but clearly had some meteoric results to back up their story. They could demonstrate their growth even though they couldn’t tell you they planned to make money. Their service was up and running and delivering results!

So, if you want to make a pitch that your startup is on track to be the next YouTube, remember to show that your service is up and running and bring in the results that shows your ability to be the next YouTube. That’s what they did.

As I have said many times, investors look for reasons to say NO and positioning oneself as the next YouTube without a compelling story of exactly how this is going to happen, gets me to NO fast.

As a side, YouTube is currently the third most visited site on the Internet behind Google and Facebook and is the second most popular search engine behind their parent Google.

Entrepreneur Mistake from Not Knowing the Investor

I am constantly surprised when I see an Entrepreneur presenting to a group of investors and they make a real minor league mistake. The one I encountered recently was a company who passed out a Fact Sheet and in the Pro Forma Financial Projections indicated that the financials were available via an NDA.

The first, obvious problem is that investors don’t sign NDA’s to listen to an introductory presentation and anyone who does the slightest due diligence would uncover this. Second, since these are basically projections, they are, in fact, part of a story that the entrepreneur creates to explain their opportunity. If you tell me that you believe the financial projections are so sensitive that you will only provide them under an NDA, I assume there is something you are trying to hide. Since I am looking for a reason to say “NO” to a deal, this certainly qualifies.

You work pretty hard to get your business/plan together, and it seems like such a waste to get to the point where you are talking to investors and then eliminate yourself with such a rookie mistake. If this is new to you, take some time to learn about the investors and what we look for, both positive and negative. There are a number of venues where you can talk with investors in Southern California and I recommend you attend a couple and get some insight. It may be the difference between funding and frustration.

Finally, Some Sanity in the Financial Reform Bill

I ran across a post at Tech Flash, Seattle’s Technology News Source, that says that Senator Dodd’s Financial Reform bill has changed the two provisions that would have negatively affected entrepreneurs search for early stage investors. Originally, one provision sought to raise the limit of an accredited investor from $1M to $2.3M. The current language leaves the level at the $1M but now excludes the value of the primary residence. It also provided that the SEC consider the economic impact of any future changes.

The second provision required entrepreneurs to register with the SEC if they intended to raise money. The new language makes this a requirement for what they call “bad actors” or those entrepreneurs who consistently start bad businesses and lose their investors money.

All in all, not so bad and, more importantly good for entrepreneurs and investors.

What is Driving Senator Dodd in His Financial Reform Bill?

I was catching up on reading through blogs when I came across this post on Venture Capitalist’s Fred Wilson blog AVC http://tinyurl.com/y8nm5vy. If you are an entrepreneur who is currently or will be looking for early stage financing or a person who provides early stage capital, then you need to understand what is being proposed and aggressively oppose it.

Senator Dodd of Connecticut has a Finance Reform Bill moving through the Senate that has a couple of provisions in it that will adversely effect early stage company investing. One is a proposal to raise the criteria of an Accredited Investor from a net worth of $1M to $2.3M. Now I have no idea why this is relevant to bank finance reform? The only connection that I can come up with around the last financial crisis and Angel investing is that Angels now have significantly less money to invest in companies! So, if the passage of this bill shrinks the pool of investors, then even fewer companies will get the funding they need and one of America’s economic development engines will be seriously effected. Has Senator Dodd forgotten how many private sector jobs are created through startups? Is Senator Dodd proposing that people with $2,3M of net worth are that much more able to understand the risks in early stage investing? All the Angel investors that I know are quite aware of the risks.

The other provision, if I understand it, requires businesses to make an SEC filing before seeking capital or they will have to register with each state where they intend to fund raise. There is a post at TechFlash, http://bit.ly/96uuEx, that covers this in much greater detail.

Angel investors and entrepreneurs need to read through these and then think about how this bill will adversely effect them in the future, and, if you come to the same conclusion that I did, contact your Senators and Representatives to oppose the passage of these two provisions.

I also think that someone needs to educate Senator Dodd on the differences between funding early stage companies and bank finance reform. Maybe someone should have him look at the Fortune 500 today and what it looked like ten years ago. How many companies on the list were started in the last 10 years? How many jobs and how much economic impact would be missing if these new companies had not received early stage funding they needed and weren’t able to get started?

This is just so bad in so many ways.

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.


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