Bear Market Comparison

Awesome chart from dshort.com that shows a side-by-side comparison of 4 significant recessions in US History.  What does this mean?  Well, you can’t really forecast from it, but it does provide a good perspective of where we stand relative to these other bear markets.  Judging by stock valuations (P/E ratios) and cash holdings vs market cap values, I would think we are close to a bottom.  But one thing about the market that is certain, they are not always rational.  As Warren Buffet says, “Markets can stay irrational longer than you can stay solvent”.  While I would like to say that stocks are on sale, it may be the case that the sale is only just beginning and the real deals are still to come…

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Sources:
http://www.dshort.com/

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VC Continues to fade away

Interesting article yesterday on venturebeat.com about why the VC market is broken.  The circumstances surrounding the economic climate and end of the “let’s create a cash burning internet startup and hope it gets bought out” mentality will cause an estimated 50% of VC firms to go under.  This consolidation of VC is probably needed as the easy-money VC-fund my friend’s startup fad is finally recognized as an ill founded business model.  A few interesting points made in the article:

• Less than 10% of startups that need capital get funded
• The companies that get funded are generally through knowing friends or “friend-of-friends”
• Endowments and pension funds are moving away from investing in VC funds
• VC funds are now consuming more capital then they are generating

At present moment, VCs are not a creator of value, but a diminisher of value!

Where I do agree with Ressi is in the ugly economics overall. Most daunting is that there’s more money being invested into venture firms than those same VC firms are generating from their investments in start-ups — in other words, Ressi argues, they’re now having a net negative affect on the economy. You’d expect this lopsided dynamic to exist temporarily in a downturn. But the worrying thing is that this state of affairs may last for quite some time.

I’m not sure how long this negative balance will last, but for now it certainly contradicts the message traditionally propagated by the VC industry — that it, that VC is a net creator of value, namely of stock market growth and job creation. That positive impact was indisputable — until now.

In order for the VC market to stabilize, the underperfoming firms will need to be weeded out.

However, a lot of VCs are likely to go under this time. This asset class significantly underperformed other asset classes between 1998 and 2006. A handful of firms — Sequoia, Kleiner, Benchmark, Accel and a handful of others — have pulled up the average performance somewhat, because they’ve produced an inordinate amount of the successes (a small group of homeruns, the eBays and the Googles, account for 25 percent of total VC returns over the past 20 years; see Ressi’s slides). But if you invest in the average firm, you’re doing very poorly. So limited partners will probably shift from endowments and foundations increasingly to fund-of-funds and sovereign wealth funds.

So, yes, the VC model is badly broken. This time, Bob Kagle’s statement about half of all VCs going out of business is more likely to be true.

The way I see it, the doors will be opening for those willing to create a solid business model to flourish.  Instead of spending time worrying about how to impress and sell whatever company we start to a VC firm, we will focus on building and evovling our business itself.  It seems that CollarFree has a pretty firm grasp on this concept, and we can learn a lot from them.

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Sources:
http://venturebeat.com/2008/11/12/the-vc-model-is-broken/

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The funding process and angel investors

As far as my understanding goes, this is the normal process for funding a startup:

1. Seed Capital: funding to get the initial concept off of the ground
2. Bank Loan: debt funding to get prove the business model works on a small scale
3. Angel Investor or Venture Capital: equity funding to take a proven business model to the next level and achieve dramatic growth and become profitable
   
4. Merger, Acquisition or Public Listing: Exit strategy that would include one of the following; at this point the founder could continue to lead the company or cash out.

The distance between these steps is widening, and step 3 in particular is beginning to favor Angels over VC for less established businesses.

As times change, so too does capital availability.  VC is closing their doors to new investments and focusing on developing their current portfolios.  This is making Angel Investors a more viable alternative, however, they are also becoming increasingly more picky.  A few things that I have gathered is that they are preferring the following:

• Shorter Sales Cycles in the business model
• Experienced Management over a brilliant newcomers
• Intellectual Property that can guarantee a competitive advantage
• A business model that will not require repeated cash infusions over the next several years

An example:

Meet the new breed of angel-backed entrepreneur. Donna Myers, president of software provider TowerCare Technologies, is in the process of securing $2 million in angel funding. But she’s no newbie: Her 22-person Wexford (Pa.) company has 160 customers and last year generated $500,000 in sales.

In years past, a firm of Myers’ size might have sought venture capital. But as venture capital funds have moved upstream, doing larger deals, angel investors are being pitched by much more established companies. Now it’s not just first-time entrepreneurs or those whose companies are in their infancy who are winning cash from angels, although those entrepreneurs are still pitching. Increasingly, successful candidates, like Myers, boast impressive experience and a significant customer base.

Click below for the slideshow on angel investors:

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Sources:
http://images.businessweek.com/ss/08/10/1017_sb_angel_investors/index.htm
http://www.businessweek.com/smallbiz/content/oct2008/sb20081016_778120.htm?link_position=link1

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Nikolaev Outlook on Startups and the economy

Spoke with Tim today and asked what his thoughts were on the dry-up of VC money.  He said that he wasn’t really all that concerned.  He felt that it didn’t apply to him because his business model makes money right away and in good quantity.  Tim also wasn’t necessarily going to go after traditional VC, he would be starting off with a good amount of Angel money from his rich Cutco customers he has great relationships with. 

He also reasoned that in times like these many wealthy people pull money from the stock market and put in cash, and that cash has to go somewhere to be invested. 

 

I guess that Tyler from Mahalo has been working with him on it a little and pretty much told TIm that if they can get it going he would be willing to leave Mahalo to go in on it full time!  Tyler knows a lot of people in the industry so that could be huge for their success on this project!

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It's weed out time

In the next 6 months we are likely going to see many tech businesses (and any businesses for that matter) go under.  This may include Spearhead Technologies.  This will be especially true of businesses that are facing any of the following:

1. A bad business model
2. A good product at the wrong time (waning market demand)
3. Insufficient capital reserves
4. Lack of continued/new funding options
5. Unsustainable burn rates

It is a rough time to own a small business.  This actually should help us if anything, as we can take note of who is failing and why.  The downside is that it become increasingly more difficult to pitch an idea to investors as skepticism kicks in a lot faster, and less capital is available to go around. Ron Conway, one of the most prolific investors in Silicon Valley, re-sounded the following warnings to start-ups this week.  What is kind of scary is the fact that this is exactly the same advice he issued right before the tech bubble burst in 2000.  Here is a summary of his emails:

1. If you are in a funding cycle, you should raise your funding as soon as possible and raise as much as possible.  The capital market window is shutting, including IPOs and VC Funding (VCs are looking at their existing portfolio funding needs – not new opportunities). Basically the market is now looking for PtoP (Path to Profitability) instead of BtoC, BtoB, etc! PtoE will prevail price to sales ratios!

2. Many companies are ignoring certain VC leads we’ve provided in order to concentrate on the top tier only. While we have preached that in the past, this is no longer the case. Currently, top-tier VC bandwidth constraints, coupled with the market down draft, make it very important to take meetings with any VCs where you can get their attention. We have been working hard to open up this new bandwidth.

3. You must aggressively examine and pursue M&A opportunities (unless you have over 12 months of cash reserves!) to insure you have critical mass (including funding, customers, rolodex power, market share, cash, synergy, etc.).

4. Be realistic on valuations – they will fall so be ready and willing to co-operate.

5. Look for corporate partners to invest so you can raise more money. You should also consider a sale of your company to your corporate partners.

6. If you are entering a funding cycle start raising money sooner rather than later.

7. While it’s safe to say entrepreneurs have had negotiating leverage with the “down draft” in the market, the VC community will start exercising their leverage.

Spearhead is currently pursuing step number 3, and if this doesn’t pan out, it’s most likely lights out.

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Sources:
http://www.techcrunch.com/2008/10/08/angel-investor-ron-conway-adresses-his-portfolio-companies-over-financial-meltdown/

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Frank Addante Profile and video on building companies in Los Angeles Vs. Silicon Valley

Frank Addante on startup location

Life and Work

Frank Addante (born 1976) is a serial entrepreneur, early Internet pioneer and well-known blogger. Addante has a successful entrepreneurial track record, having started 5 companies, resulting in one IPO and two acquisitions.

[edit] Entrepreneurial career

Addante founded the Rubicon Project in early 2007. As the founding CEO, he set a mission for the company to automate the massive, yet highly inefficient online advertising market.

Prior to the Rubicon Project Addante served as the Founding CEO of StrongMail Systems, the leading email and digital messaging infrastructure provider for thousands of companies worldwide, including Fox Sports/MSN, Ticketmaster, Williams Sonoma, FTD, Real Networks, Netflix, AAA and Stanford University.

StrongMail Systems was incubated by Addante and Associates, LLC, a technology incubator company created by Addante in 2001 during the dot-com fallout, a time when many were reluctant to start new companies. Addante incubated and then lead StrongMail from inception, to an initial cash-flow positive business, to becoming the market leader in less than 4 years, raising over $30 million in venture capital from top-tier investors including Sequoia Capital (investors behind Google, Yahoo, Oracle, Cisco and Apple).

Addante was formerly Chief Technology Officer and technology Founder of L90, Inc., a publicly-held Internet advertising company. Addante was actively involved in sales, marketing and corporate development efforts leading to a $112 million IPO led by SG Cowen. Addante invented adMonitor, one of the Internet’s top Internet advertising applications for the Global 2000. adMonitor delivered over 8 billion ad transactions per month for over 3,000 customers, reached 65% of the worldwide Internet population and produced over $75M in revenues. adMonitor was acquired by DoubleClick in October, 2001.

Shortly after L90’s IPO, Addante left the company and was the Founding CEO of Zondigo, a wireless and voice software company partnered with Intel. Addante successfully raised a second round of financing for Zondigo in 2001 and shortly thereafter, he returned the money to the company’s investors, realizing that the wireless market opportunity was quickly declining at the time. Zondigo was later acquired by Voxicom. As an early pioneer of the Internet, Addante developed Starting Point, a search engine portal that became the 7th most popular Internet site from 1995–1997 and was acquired by CMGI/YesMail.

In addition to starting his own companies, Addante helped Ticketmaster gain entry into the $10 Billion ticketing resale market by leading the creation and development of a very high profile ticketing auction platform called TicketExchange. TicketExchange now services millions of consumers at Ticketmaster.com.

Addante received his education in electrical and computer engineering at the Illinois Institute of Technology and serves on various boards of innovative technology and marketing companies including StrongMail Systems, mobileStorm, AnswerU, Neovision, Webtigo, Flukiest.com, Whizler.com and the Rubicon Project.

A Chicago native, Frank lives in Los Angeles with his wife, Rita, and spends his free time mentoring young entrepreneurs, surfing, practicing martial arts and running.

[edit] Companies

• Starting Point Directory – Internet search engine and directory
• ReaXions – Web development & marketing technology company
• L90, Inc. – Publicly-held Internet advertising company (LNTY)
• Zondigo, Inc. – Wireless and voice application software company
• StrongMail Systems, Inc. – Email and digital messaging infrastructure software company

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Peter Thiel at TechCrunch 50

This is taken straight from the TechCrunch Website.  This was a great excerpt from the interview with Peter Thiel (VC, founder of PayPal) last night.  The interesting point that he makes is that MOST people that do get VC funding do not ever reach the point where they can sell their company for their big payday.

 

In a long-ranging discussion today at TechCrunch50, investor Peter Thiel (PayPal, Facebook, Slide) gave his thoughts on what is the best predictor of startup success.  At the Founder’s Fund, one of the most important factors he likes to look at before deciding to invest in a startup is how much the CEO is paying himself. (This is also a factor that one of his investments, YouNoodle, looks at tovalue private startups). Says Thiel:

The lower the CEO salary, the more likely it is to succeed.

The CEO’s salary sets a cap for everyone else.  If it is set at a high level, you end up burning a whole lot more money. It aligns his interest with the equity holders.  But [beyond that], it goes to whether the mission of the company is to build something new or just collect paychecks.

In practice we have found that if you only ask one question, ask that.

In Startupland, everybody should be working towards the same goal: that big juicy exit. That’s the only payday any CEO should be worried about (even though more than half of them will never get it).

What’s the average salary for CEOs from funded startups? Thiel was hesitant to answer, but eventually said “$100-125k.”

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Source:
http://www.techcrunch.com/2008/09/08/peter-thiel-best-predictor-of-startup-success-is-low-ceo-pay/

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Demo 2008

Wow, how did I not know about this?!  Demo 2008 is a pretty big conference here in San Diego this year, (PalmSprings next year) with 72 different technology  demos 6 minutes apiece.  Its like the alternative for Tech Crunch 50, but with 72 instead.

Check out www.demo.com to see the videos as they are loaded up at the end of each day.  I am going to go work out right now, I will update the Nikolaev post when I get back as well as the Mike Meinzen post.

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TechStars

A quick review of TechStars is in order so we can file this away in our website.  Tech stars is an interesting idea that was developed in 2006.  They are essentially a tech startup incubator that operates by offering seed capital and mentorship the most promising applicants.  A 3 month mentorship takes place in Boulder, CO to bring an idea throught the developmental stages.  Upon completion, TechStars can choose to continue in the relationship by taking a larger equity stake to continue development or release the company to pursue alternate forms of financing.

PROS:

• Work with people that only have an idea and help them get started
• Comprehensive mentor list
• Great way to get started when there is no other alternative
• Have connections with Angel Investors, VCs

CONS:

• Not much funding, 10-15k
• Sounds like they still require entrepreneurs to do their own coding and development
• Only takes place in the summertime
• Requires moving to Boulder, CO

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Get your startup funded and off the ground while learning from the best.

Only ten spots. TechStars takes only ten companies each summer. Last year more than 300 companies applied. Getting in is hard, and it means something special.

Seed funding. TechStars fills the startup funding gap by providing just enough capital to get your idea off the ground. Your new company receives up to $15,000 in seed funding.

Advice and Mentoring. TechStars fills the experience gap by bringing together the best and the brightest in one place and surrounding you with incredible proven mentors for the summer. With this much talent in one place you’ll get great advice on your product and strategy, thereby ensuring the best possible start for your new business.

Connections. TechStars companies get immeasurable benefits that come from introductions and connections to potential partners and customers. At the end of the summer, each company also has the opportunity to pitch during an investor event that we organize.

A great deal and a great co-founder. In exchange for the TechStars summer program, seed funding, advice, mentorship, connections, and investor demo day, TechStars receives a 5% equity stake in your new company. TechStars receives “founders stock” which is just like yours. We want to be thought of as an experienced and well connected co-founder so we have the same risk and reward system that you do. Learn more.  

 

• Also, they are beginning a free monthly call the first Wednesday of every month that addresses different topics on starting up a Tech company.  (724) 444-7444 and enter call ID: 24767

 

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MY SUMMARY: Might be a good place to begin networking, but this seems like it is very much dependent on “nurturing” programmers and coders that have no business acumen and helping them through the business process.  In any case, a good company to keep in mind as we get started.  I have a feeling we could learn a lot from attending one of their events.

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How to Demo your Startup

Found this on TechCrunch, see the links at the bottom.  This applies mainly to the tech industry, but will be a good resource to keep handy none-the-less. 

Here is an overview of the 18 Tips:

1. Show your product within the first 60 seconds
2. The best products take less than five minutes to demo
3. Leave people wanting more.
4. Talk about what you’ve done, not what you’re going to do.
5. Understand your competitive landscape–current and historical.
6. Short answers are best.
7. PowerPoint bullet slides are death
8. How to use this new device called the phone.
9. How to handle questions you don’t know the answer to
10. Always confirm the time of your meeting/call, and always be 15 minutes early.
11. Show, Don’t Tell
12. Use inclusive words, live in the present
13. One driver, one navigator
14. How to handle technical issues
15. The Setup
16. Horrible ways to start your presentation:
17. Describe your product five times
18. Change up your style (i.e. shift your tone)

 

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References:

http://www.techcrunch.com/2008/08/09/how-to-demo-your-startup/
http://www.techcrunch.com/2008/09/01/how-to-demo-your-startup-part-two/

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