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.

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.

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.

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.

Pitching Your Company To Investors

Although I have posted on this topic before, it was about 16 months ago. So, I guess it is time to bring it up again.

I regularly sit on panels and listen to business owners and entrepreneurs present their companies to investors hoping to gain interest and get some capital. Now I know that they have been working hard to get to this stage, but there is a difference between working hard and working smart! So, what is working smart?

From their presentations, I believe that less than one-tenth of one percent have spent any time trying to understand what investors look for. If they did, they would understand that we are not really interested in hearing about a company or technology before we hear about the business opportunity. If there is no clear business opportunity, then why spend the time learning about someones idea of a great technology?

I sat on a panel last Thursday. The CEO was energetic, slides were nice, he was able to explain his technology, but there were very few things that an investor would like to know in his presentation in spite of the fact that he believed that he had an Investor Level Presentation. He didn’t have an idea about how an acquisition would work for his company even though that is the exit he is planning on. He didn’t know what he thought is current valuation is, so that I could get an idea about what a $2M investment would buy. In fact, he didn’t talk at all about what he is offering until I asked him.

Oh yeah, a $2M first round. Who helped him decide on that number? It is at the high end of an Angel round and much to low for VC. Getting $2M from Angels might take forever. With an average Angel investing $25K-$50K per deal, he will have to convince somewhere between 40 and 80 Angels to invest. to do that, he will have to get in front of all the Southern California Angel groups. It will take forever and probably be extremely frustrating.

This CEO didn’t realize that he needed to, not only explain why his was a good deal, but why it was better than the six I saw two days earlier at a Keiretsu Forum meeting or the 150+ we are tracking at California Capital Partners.

One of the other panelists recommended that he not both thinking about his exit. It is too far away. He had to leave early, which is to bad since I disagree with him. I realize that things change and whatever he thinks today will probably be different in the future. However, I am interested in understanding how he is thinking. Is he saying he believes that he will be acquired  because someone told him to check this box. Or has he really thought about being acquire and how that might work. Equity investors, Angels or VC’s, want to hear about how a company can build a 5X to 10X return for them  in 3-5 years. Yeah, yeah I know that doesn’t always happen, but we do want to have someone focused on this type of goal in to beginning.

Let’s see, $2M investment, 5X to 10X return in 3 to 5 years; so I want to hear about a company that is planning to build to a point where an acquisition will pay out $10M to $20M. So, what’s their Proforma say? 5th year revenues at $24M. Hmmmm, not even close.  

What can the early stage entrepreneur do? Spend as much time learning about your potential investors as you do learning about your companies potential customers.  After all, investors are truly your first customers. More importantly, they have to buy into your company not just your products. Work smarter, do the research and find out what your investors are looking for and then tell them how your company will make it happen.

Venture Fund Distributions

One of the Venture Capitalists I follow is Fred Wilson of Union Square Ventures. Fred put up a great post on Venture Fund Distributions and Cash versus Stock. I like that Fred goes into sufficient detail for readers to understand and still is able to clearly reflect his viewpoint no matter how complex the subject.

If this is the first time you run across him, by all means, not only add him to your list, but go back and read his back-posts.

Thanks Fred.

Interview With Kathy Woolverton, President of SoftSearch

Although it is Memorial Day, I had an opportunity to talk with Kathy Woolverton the President of a new business software distribution company called SoftSearch. I found out today that one of the downsides of being a global company is that there are some holidays that are just not followed outside the US and Memorial Day is one of them.

I met Kathy while she was presenting to the Chapters of the Southern California, Keiretsu Forum Angel group. She is in an interesting space with an in place system, quality team, distribution agreements and is generating revenues.

You can hear the cast at http://socalbuzz.podbus.com/softsearch2.mp3 So, if you have about 15 minutes, give a listen and hear about her company.

One Big Tip for Startups

On April 25th, I attended the California Tech 100 Showcase in Irvine. I was invited since I am a Venture Partner with California Capital Partners and we were a sponsor of the event. With four partners from our team sitting on panels, I got to watch two panels and sit on one so I was able to see about 20 company presentations.

It drives me a little crazy to see companies spend so much time on the products and technologies, throw it all together into a power point presentation and then not spend very much time on their sales and distribution strategies and tactics. An investor is listening for reasons to say no and not hearing a clear description of how the company intends to sell their products and services that ties to the overall financial plans they present, is just such a reason.

It also doesn’t help to have half of your proposed capital going for Marketing and Sales while you don’t have those management seats filled. How do you know you need that much? If you have identified the people and they have helped you with your capital requirements and uses of funds, then say so. Otherwise, it seems like you are shooting in the dark.

Obviously, you need products to sell but they usually don’t sell themselves. Be smart, think through your distribution strategy, get some help from some resources who understand the area and then then present a cohesive picture of how your products and/or services will get to customers. Give us one less reason to say NO.