Venture Lending 101

By David Hornik

Many of the companies in which I invest spend more money than they make for considerable periods of time. Given the early stage at which I invest, this is neither surprising nor necessarily concerning (even those companies that could be cash flow positive if they so chose, often go negative in an effort to accelerate their growth). Nonetheless, it is an important factor with which I must deal as I try to help my portfolio companies move forward. After all, at some point any company burning more cash than it makes will have to acquire more money or go out of business.

The typical route for venture backed startups to bring more money into the company is to do a equity financing. The management of that company goes out and pitches various investors and, with any luck, sells equity in the company in exchange for some number of millions of dollars (that process is repeated as many times as is necessary until the company turns cash flow positive, is sold or goes out of business -- even the much coveted IPO is just another sale of equity for cash and if the company remains cash flow negative it will still ultimately need to do a secondary or it too will go out of business).

In the alternative, one way that a company can extend its runway without selling additional equity is to borrow money. There are a number of potential sources of debt for early stage companies. To my mind, the key issue for any company considering debt financing is whether or not the debt will actually extend that company's runway. Often times, proposed Debt will bring money into a company when it is already cash rich (usually shortly after a equity financing) but will bring with it a payment schedule that does not in fact give the company any more time before it runs out of money. In those circumstances, it is hard to see how borrowing the money makes economic sense.

There are, however, circumstances in which debt makes a pile of sense for a company. I recently received a newsletter from Lighthouse Capital that spoke directly to the issue. A buddy of mine named Anurag Chandra, who is a Managing Director at Lighthouse, wrote an article on how one may reasonably assess the appropriateness of venture debt for your company. I found the article to be a valuable overview of the issues at hand and Anurag has kindly agreed to let me reprint it here. So without further ado, here are Anurag's thoughts on venture debt.

There is no question that in today's fundraising environment, capital efficiency is paramount. Ray Lane, among other industry leaders, has commented that a software startup should require no more than $20-25 million to achieve positive liquidity. This means that today's entrepreneur needs to stretch every dollar to achieve success.

Making equity dollars last is particularly important – since they come at the high price of forking over a percentage of company ownership. Although the price is high, these precious equity dollars are often a critical factor in an emerging company's success. Yet taking this equity investment means accepting painful dilution due to the low valuations given to companies at this early stage. So what's the alternative?

Enter venture lending
Venture lending offers a low-cost method for venture-backed companies to leverage fixed assets and their enterprise value to get more runway out of their equity dollars. These types of loans can give a young company the extra time and resources needed to reach major product or customer milestones. And, being able to achieve important milestones such as shipped product or securing a first customer can provide real uplift in valuation and significantly reduce dilution at the next VC financing round.

Venture lending is usually offered in two forms: "growth capital" and equipment financing. Growth capital provides operating capital that can assist in product development, product or geographic expansion, acquisition of complementary technologies, or just about any key operational imperative. Typically the cost of such capital is interest, along with principal, paid over a fixed period of time (generally 24-48 months, depending on the company's risk profile) and a small pledge of stock warrants. There may also be a "final payment," which helps the lender earn the appropriate risk adjusted yield, but pushes off the cash outlay by the borrower to a future date so it doesn't have to part with precious (and typically more expensive) dollars in its early years. Some flexible providers are even willing to structure deals that provide companies with a period of interest-only payments to help preserve cash at critical junctures for a company. Meanwhile, equipment financing allows a company to borrow against the equipment it purchases, such as computers, manufacturing equipment or other assets, and frees up the equity dollars that would have otherwise been spent to obtain such items for higher value add use, namely research and development or sales and marketing. Like growth capital loans, the lender receives monthly payment of principal and interest plus warrants and possibly a final payment.

Both forms of venture lending are available to promising early-stage startups backed by top-tier venture capitalists, usually when they are still cash flow negative. Venture loans may either help you raise less equity than you otherwise would have or help you increase the total amount of capital available to your enterprise with less dilution. From a financial planning point of view, venture loans can be an attractive insurance policy. If there's risk that critical milestones may slip, having the ability to borrow and extend runway so those milestones can be safely achieved insures a trip to the equity fundraising market with a better valuation. If the milestones are not in jeopardy and you ending up not borrowing, your worst case is to have given away warrants that typically amount to less than one or two percent of dilution. (Compare this to raising money at a lower valuation by having to go to market with those significant milestones not achieved).

Bank loans vs. venture loans
Established companies leverage their balance sheet assets through typical asset based debt products offered by commercial banks. Venture lending is territory that most banks are wary to enter because early-stage companies just represent too much risk for traditional banks because such companies have no tangible assets. Typical bank financing is tied to receivables. You must have sales revenue and probably "meaningful" sales revenue to attract bank financing. Even then, an established company with a steady, predictable revenue stream can use accounts receivable financing at best to smooth out cash needs, not leverage its enterprise value to extend runway. For a company that is cash-flow negative or just starting to achieve revenue, it's worse because it's tough to rely at all on a formula based A/R line for expansion and growth. If you miss a monthly or quarterly revenue projection, chances are you'll have less in receivables than anticipated and may have to pay down your outstanding on your accounts receivable line of credit.

Having said that, there are banks that offer venture loans to early-stage companies. But be careful. At smaller dollar amounts bankers can convince their credit committees and the federal regulators that monitor their bank to make "aggressive" venture loans, but it is with the understanding that the goal is to grow the lender into a traditional commercial credit, replete with financial covenants and asset-based borrowing, which box in a company. Either it's the proverbial "banks are only willing to lend you money when you don't need it" or it's that the typical slippage in a startup's projections necessitates a talk with the banker about "waiving" a covenant violation. Banks also typically require young companies to maintain their deposits with them and require a "right of offset" in the loan agreement. This right of offset can be used by the bank at its discretion to pay down the loan in an event of default.

Independent venture lending providers, particularly ones that are private companies, have the ability to structure flexible deals that give you true runway extension. And, the better funded ones can support their companies with these structures at higher dollar amounts and through a startup's maturation process. The established venture lenders also know how to evaluate and manage the risks involved in dealing with early-stage companies. They are willing to take a lien on a company's assets when no real assets exist in anticipation of success.

Less expensive in the long run
Perhaps the greatest benefit of venture lending is that it injects money into a business without heavily diluting the equity stake of the entrepreneur or venture capital investors. While equity dollars are necessary in financing a company's development and a typical prerequisite to obtaining venture loans, they come at the high price of sharing significant ownership. Venture loans can be a real aid that can enable an early-stage company to have access to low-cost capital and minimize entrepreneurs' and VCs' dilution. An added benefit for VC's is that they can improve their ROI on a given deal by encouraging their portfolio companies to take on a responsible mix of debt along with their equity dollars.

Consider this example. A communications startup determined that they needed a round of financing totaling $47 million, of which $8 million would be needed for equipment. They evaluated whether it was in the company's best interest to finance the equipment using debt or equity. In other words, they were weighing whether they should raise $47 million from VC's, or $39 million from VC's with the expectation of financing the additional $8 million of equipment through a venture lease. After taking a careful look at options, they concluded that the larger equity sum would cause significant dilution that would be costly to company employees at time of liquidity; meanwhile the venture lending route would preserve more of the employees' stake in the company and simultaneously create a stronger balance sheet.

Choosing a venture lending partner
When considering venture loans, it is important to ask key questions that will determine if the provider is going to offer you the flexibility and resources needed to help finance growth of your company.

Important questions include:

Is the lender really offering you cash runway? Or do they require cash balances equal to the amount your borrowing? Will most of the loan be paid back before you run out of cash? It's important to examine exactly what the lender is offering. If the deal comes with too many restrictions, chances are you need a more flexible partner that will work with you to structure a deal that accommodates your company's specific needs.

Does the lender have a track record of supporting its companies through various market cycles? Every startup has hiccups. The need to restructure debt can happen to the most promising of companies. Ask your lender for case studies or referrals where they've demonstrated an "investor's mentality" of supporting its companies through various market conditions.
If the lender is a bank, is it their ultimate goal to help you achieve market success or is it to grow you into a traditional commercial credit customer? Beware of the limitations of commercial banks that claim to offer venture loans. Often times, they will finance an initial deal, but their goal is grow you into a commercial credit customer. Plus, they are burdened with heavy regulations that make it difficult to offer the kind of flexibility that startups often require.

Does the provider understand your market and your requirements for success? While venture lenders don't take board seats and offer the same level of day-to-day guidance companies as venture equity investors, it is critical not to underestimate the importance of the partner with whom you'll be working. The better he or she understands your business and the market you are playing in, the less likely they are to view your success or promise

Not surprisingly, Anurag, as a venture lender, puts a positive spin on the debt world. I believe that both debt and equity can serve a company well. The crucial question is how much the money will cost (in equity, interest, management time, etc.) and will it materially increase a company's options.

Should your startup release financial data?

by Alexander Muse

Two different companies I profiled last night shared their revenue numbers with me in virtual interviews, but were both shocked that I printed the numbers in their profiles.  Each company asked that I remove the numbers and I complied with their requests.  This got me thinking: when should you keep your revenues secret and when should you release them?

Do release them:

• if you are raising professional (vc or private equity) capital
• if you are experiencing rapid growth without any outside capital

Do not release them:

• if you have raised professional money and are experiencing rapid growth
• if your revenue numbers are NOT growing

If you are hoping to raise money from venture capital firms you might as well release your revenue numbers (current and projected).  Once your deal is shopped EVERYONE who cares will find out anyway.  Once you have raised your first round of professional money it may make sense to keep your numbers secret, at least until your existing investors decide that another venture capital firm needs to lead the series b round (i.e. because they are tired of the deal or they are out of dry powder).  Why? Perhaps you are able to grow VERY fast and instead of alerting your competitors to your hockey stick, you may want to keep a lower profile.

On the other hand, if you manage to achieve 'hockey stick' growth on your own with little or no outside investment, revealing that fact could help you take your business to the next level.  Savvy investors who 'discover' your business (i.e. the fact that without outside capital you are kicking butt) can easily figure out how to put more capital to work within your business to take advantage of the 'hockey stick' you have built.  Does this make sense?  Having an investor come to you is SOOO much better than trying to get an investor to see you.

If you keep your revenues secret (prior to accepting professional investments) people may assume they are lower than they actually are or even worse that you don't have a real company.  Perhaps YOU think they are too low.  Get over it, you are a startup ~ the size of your revenues aren't as important as their trend.  Don't be embarrassed that your startup has little or no revenue, especially in technology related startups ~ don't apologize.

Finally, NEVER lie about your revenues.  I repeat, NEVER lie to ANYONE about your revenues.  The problem about lies is that you will need to keep them straight and it is impossible to keep them straight over time.  For example, we meet at a network event and you suggest in 2003 "we are doing $1MM in revenues and are growing by 20% per year."  Two years later we run into each other at another event and you tell me, "We are about to raise money from Austin Ventures."  I ask, "have the growth numbers held up?"  You tell the truth and say, "Actually, they are better than we expected, we have growth 300% over the last two years!"  I do the math in my head and ask, "Wow, you guys are doing $3MM in revenue?"  You are actually doing $1,000,000, but your growth has really been 300%.  You have taken your great story and completely screwed it up by lying two years earlier.  I am good friends with one of the guys at Austin Ventures and mention to him, "I can't believe company x is doing $3,000,000 in revenue! 300% revenue growth in two years is amazing!"  You get where this is going?  At best you have caused your integrity to be called into question and at worst you may have cost yourself the deal.  NEVER LIE ABOUT REVENUES, EVER!

Note to companies I profile: if you don't specifically ask me NOT to print something you can expect it to be posted in your profile.

Taking Risk and Mitigating Risk

by Fred Wilson

When I think about the venture capital business, I think about risk. It's one of the riskiest investment types there is. But as they teach you in business school, risk and return are highly correlated over the long haul.

What we want to do in the venture capital business is take a lot of risk (which should be rewarded with a low entry valuation) and then actively mitigate the risk we took as much as we can (thereby reducing the risk for future investors and increasing the valuation).

It's the same thing that entrepreneurs want to do. When they leave their safe job and go out on their own, they are taking a lot of risk. Their entry valuation should be zero, meaning they (collectively if they have partners) own 100% of the business for whatever startup capital they invest.

By the time they offer equity to new investors, they should have reduced some of the risk. By developing a product, or by developing a technical and operating plan, by attracting other talented people to the team, or by getting customers and revenues (and sometimes even profits).

However markets are not rational. Investors will price risk (and therefore value a business) differently at different times.

I think a good example is comScore, a company I helped provide the first venture capital to in 1999. Along with Bruce Golden of Accel Partners, we invested something like $6mm into comScore in August 1999. It was a typical early stage venture round where the investors purchased approximately 1/3 of the business for the invested capital.

A year late, in the summer of 2000, investors valued comScore at something like $140mm. The company had mitigated a lot of risk in the year that had passed. The technology was built, the service was launching, the team was hired, and the future was bright. But investors missed the fact that the Internet market (ie the customers), at least version 1.0 of the Internet market, was a mess and getting worse. And the next twelve months were ugly, really ugly.

The next round was completed at a fraction of that $140mm valuation and it took something like five or six years for the company to get back to that $140mm valuation. Today, comScore is a public company with a market cap of $670mm.

comScore's founders Magid Abraham and Gian Fulgoni did a great job of mitigating the risk in the deal year after year and they and their shareholders, including me, have been rewarded. But it wasn't a straight line up. Partially because markets are irrational and partly because new risks showed up that we had no idea were coming.

Both of those things are always going to be true. Markets are never rational in the short term. And almost always rational in the long run. So my approach to that fact is to keep a lot of "dry powder" and invest in every round at our pro-rata share or less if the price seems truly irrational. Early stage venture capital is often less susceptible to market gyrations because we get our ownership at a low valuation and keep it but generally don't increase it much as the valuations increase. And you have to be patient and ride the gyrations out, as long as the company is doing its job of mitigating risk.

And new risks will always show up. No investment plays out the way you think it is going to play out when you make the investment. So you can never price the risks you are taking correctly. My approach to that is to two fold. Don't freak out too badly when the risks you never saw show up. And have a lot of "dry powder" to insure that you and the company can face the risks, deal with them, and mitigate them as well.

Risk and return are correlated in the long run. Taking risks is the key to making big returns. But you must learn to live with risk, mitigate risk, and price risk as best you can.

VCs and Deal Flow: Seeing Everything, Doing (Nearly) Nothing

by Jeff Bussgang

The VC business is a funny one and, in my sixth year at it, I am amazed at how much I am still learning with time.  One of the fascinating things about the business is the way VCs process deals, known in the vernacular as "deal flow".

On the one hand, a VC wants to see absolutely every start-up that is happening out there, particularly those led by high quality entrepreneurs.  Obviously, the more high quality deals you see, the more likely you will have the opportunity to select a high quality deal to do.  But there's a more subtle benefit to high volume, high quality deal flow.  Looking at as many deals as possible makes you a better investor - you learn something from every deal you see and are able to detect patterns that can help you in deal selection.  A VC with good deal flow may get an opportunity to review as many as 300-500 deals per year.

On the other hand, a VC only has the bandwidth to do one or two deals per year (assuming they are an "active" VC that joins the board of the companies they invest in - "passive" VCs who don't join the board have greater deal capacity, perhaps three or four per year).  As is the case with any sales process, there are many stages to a deal.  Typically, a deal flows from the first meeting to the follow-up meeting to the light diligence (in-person visit, a few diligence calls) to heavy diligence (extensive market, competitive and technical due diligence as well as personal references) to partnership buy-in to term sheet to close.  To beat the long odds of, say, 300:1, a deal must be compelling at every stage in the process to flow through -- VCs are always looking for ways to say "no" more than they are looking to say "yes" (see related blog post:  "Dr. Seuss and the Land of No").

As one wise old VC once told me, "the trick in this business is to spend very little time on alot of deals, and then alot of time on very few deals."  In other words, see everything to be a better investor, but exert a very tough first filter so that you only spend time on very, very few deals.  In my experience, a typical VC has the bandwidth to actively "spend time" or actively work on only one to two deals at any given time and perhaps 10-20 in a year -- as compared to those 300-500 they get exposed to.

What's surprising to me is that entrepreneurs often don't seem to know where they stand in the deal process.  Admittedly, VCs aren't known necessarily as great communicators!  But as an entrepreneur, you should know whether you are clearly one of the one or two most important new deals the VC you're talking to is working on.  If not, then you know your deal isn't going to get done and stop wasting your time.  The odds are just too long that you're stuck at the wrong end of the funnel.

Harvard Negotiation Project: 5 Lasting Rules For Negotiating Anything

by Carleen Hawn

I recently had dinner with a friend of mine, a physician-turned-businessperson-turned-founder. We were discussing the virtues of transferable skills, and I asked him what management tools he brings to entrepreneurship from his earlier career in medicine. He pondered a bit before confessing that radiology skills don't, in fact, translate so easily. Instead he referred me to what he called "one of the most valuable books" he's ever read.

Turns out he was referring to one of the original publications to come out of the famed Harvard Negotiation Project, a seminal workshop that was started in 1979 with a mission to improve dispute and conflict resolution. Harvard’s researchers focused on negotiation for all kinds of conflicts, from the interpersonal to the international geopolitical. But since conflict negotiation is something businesspeople do daily, it's not surprising that the fruits of their work were also published as a business book just two years later in the now classic best-seller, "Getting to YES: Negotiating Agreement Without Giving In," by Roger Fisher, Bill Ury and Bruce Patton.

I picked it up. As my friend suggested, it's as relevant as it always was, a common sense approach to effective negotiation rooted in five basic ideas. And if you can manage to absorb and apply these five rules, you’ll be much better off going into your next deal.

1. Don’t Bargain Over Positions
Most of us begin negotiation by identifying a position and arguing for it, such as: "I want to retain the CEO title." But such positional bargaining can limit your ability to arrive at a "wise agreement" that benefits both parties — the proverbial middle ground and the whole purpose of negotiation. Instead of thinking of a "position," identify the goal. You want remuneration for the sweat you put into your company. You want, for example, status (to remain CEO). But a specific position is binary — you either get it or you don't. A goal can be attained in many ways, giving you many more options for arriving at a solution.

2. Separate the People From the Problem
Most negotiation is emotional. You want something, after all. And emotion clouds our objectivity. But you can limit the emotional content of your negotiation by thinking of the person you're talking to as your partner and the problem you're trying to solve as an object. Take, for example, the question of how much a company's equity is worth. In this case, you're not negotiating against the investor over a position, you're engaged with that person to arrive at the right answer to the question. Some will urge you to make your negotiation opponent a partner, but this can lead to Stockholm Syndrome. Instead just think of engaging the other person, using their input to arrive at the right answer. Maintain your independence.

3. Focus on Interests
We all have interests. The pursuit to fulfill our interests leads up to adopt positions. But bargaining for stated positions, such as titles, will not necessarily produce a wise agreement that takes care of the interests that led you to adopt the positions in the first place. Think instead: I want to remain engaged in the business. There are many ways to achieve goals without having specific positions.

4. Invent Options for Mutual Gain
This is the creative part. You must examine each other's interests to come up with options in which both parties gain. Your investors have an interest in a pro-CEO who can sell into large corporations (you've never done that). You need funding, but also want to remain engaged. Both parties can draft a list of options for your new role that satisfy everyone's needs: COO, president, chief innovation officer, etc. Negotiate from this list.

5. Insist on Using Objective Criteria
We all have personal standards. CEO conveys more status than chairman, etc. The key is to let go of personal standards in favor of objective ones upon which both parties can agree. (Think of the Kelley Blue Book, a set of agreed-upon standards for those looking to buy or sell a car). But here you have to do some real homework and investigate the objective standards that apply to your negotiation ahead of time. Some to consider: market value; legal or business precedent; scientific judgments (patents); efficiency; and reciprocity.

Red Herring North America: Do's and Don'ts in Startup Fund Raising

by Eze Vidra

A week ago, I took Caltrain south to San Jose and attended Red Herring North America 2008 as a media guest. The conference featured two days of keynote presentations, roundtable panels and corporate presentations from approximately 100 companies in the region selected by Red Herring as the top 100 private companies in North America.  One of my favorite panels was "When and how should a company raise money?"

Moderated by Alex Vieux, Red Herring's CEO, the panel had three VCs in the valley, Rich Wong (Accel Partners) Saad Khan (CMEA Ventures),  Vispi Daver (Sierra Ventures) and angel investor Aydin Senkut (Felicis Ventures), and also Google's first product manager. Alex Vieux has a very particular style of interviewing - you will often hear him say "stop bullshitting me" or "you are giving me the corporate answer", which made the panel more fun and dynamic.

Here ismy ten-point summary of the do's and don'ts of startup fund raising:

Don''t

1. Don't raise money when you don't have alternatives and when you need it most.

2. Avoid truisms such as: the internet is going to be big, search is huge on the web, social and mobile are meant to be, etc

3. Don't put closes that will come to bite you back. When you have strategic investors they might hurt your value.

4. Don't over negotiate the terms - in the valley, most of the deals have similar terms and conditions and don't need to be negotiated too much. Outside the valley, terms may vary, and international investors will be opening a can of worms.

5. Don't take NO for an answer. Try to do your homework before talking to the VC and understand how you fit in the the fund's portfolio.

6. When you find yourself with VCs wanting to put too much money, they might be fees oriented. Beware.

Do's

1. When should  you raise money? Find the right window of time: technology, team and market need to click. Momentum that leads to progress could determine if you get funded.

2. Find the VC through connections - It's important to have a connection and make sure you've done your homework. It will increase your value in the eyes of the VC. Find the right person in your network to reach the right person.

3. Show people the unique competitive advantage. What makes you special?

4. Make sure you go for smart money – some funds and in some cases specific partners, can bring you more than just money: connections, mentorship, sales, head hunting, etc

5. Take as little as possible but enough to reach the next milestone. You don't want to go back to Sand Hill Road before you accomplished something major with your previous round.

6. Be sure you have a good lawyer. Ask him to brief you on basic terms in advance.

In conclusion

The VC funding process is a sales job – but getting the money is just the beginning. VC investment is a relationship, and it's polygamist - which makes it more complicated. Like in marriage, make sure you pick the right partner (within the fund) and get to meet the family (fund) before making a long term commitment.

10 Investment lessons learned over 10 years

Over the last 10 years I've also been closely involved with early stage technology funding (advising VC firms and Angels) and have invested personal time and money in early stage ventures. That has given me a unique perspective of the challenges between entrepreneurs and investors.

I've written about my Top 10 fund raising lessons for entrepreneurs, and dare to follow up with my Top 10 investment strategies that may be useful to investors and entrepreneurs, here:

1) Invest in the founders, but be wary if the company consists of technologists only. The ones that come in without an operating plan clearly do not understand what you as an investor are looking for. Get a real operator in early.

2) Invest in the business, don't invest in technology. The statistics prove it: ninety-nine out of a hundred of the most innovative technologies never turn into successful businesses. Especially investors (both VC and Angels) that made their money in the hay-days of technology have a tendency to underfund the business side, providing a weak foundation for any technology to succeed.

3) Don't invest in an early stage company with more than one product or service. Let the company become the King-of-One, rather than the King-of-None. Multiple products or services require more money to support successfully and dramatically dilutes the focus of the company. Multiple products or services also "invite" a larger group of competitors, making it hard for customers to perceive true differentiation and unknowingly, slows down adoption.

4) Don't invest in an early stage company with more than one business model. Keep it simple. Multiple revenue models sound good, but usually don't yield the projected outcome. The company should make all of its money in advertising or in subscriptions, not in both. Dilution of focus is costly and provides yet another reason for failure.

5) Don't invest in companies that rely heavily on partner support early on. This is the typical David and Goliath phenomenon. Partners sell once the company does in overwhelming numbers. The company should always have direct control of its own business model first, before they allow any partner to reduce its margins.

6) Invest money or time, don't do both. I very much relate to Carl Icahn in an interview with Dan Primack (on PEhub) with regards to CEOs responsibility to make the numbers work, and not to rely on investors to "add value". The CEO is in the driver seat, take him out if he doesn't produce.

7) Look for fundamental changes in customer experience. The Ultimate Driving Experience is what sets BMW apart, not just the timing in their engines. Customer experience is much more than a pretty user interface, it is an overall experience that spawns disruptive purchasing.

Watch how professional the team operates pre-funding as an indication of their interaction post-funding and with customers. Real professionals do everything with a purpose and I have mastered the art of detecting them. So well that I can tell from a visit to a trade-show floor whether a company is going places.

9) Don't categorize investment allocations based on past investments or trends. Every company is unique and requires an amount of money unique to their assets: people, timing, market and ecosystem. If you don't think you have a unique scenario, you probably don't have a valuable investment opportunity.

10) Invest with passion but don't fall in love with the company. Investing is the ultimate flirting game, but it is usually a bad idea to get really involved. Your asset value is the selection and performance of all the companies in your fund. Stick with what you do best.

From an investment perspective I see many "sub-optimizations" but not a lot of real great innovations these days. I do blame the current investment model for that sometimes. We, in Silicon Valley, have too many technology investors using the same rear view-mirror investment criteria. Although I have a lot of admiration for Apple, it is a bad sign when we need to leave real innovation in the hands of large companies like theirs.

The landscape for investors is about to change dramatically, no longer can they just continue to invest in proprietary technology silos at single digit valuations. They'll soon need to broaden their experience ("in search of the Economist VC") to understand the macro-economic impact of marketplaces, platforms and the impact of technology to other industries.

A wonderful long road for technology innovation and investing still lies ahead.

Why Raising VC Funding Does Not Equal Success

by Dharmesh Shah

However...

Raising VC Funding <> Success

Getting a round of funding from venture capitalists is not really "success". Sure, it provides resources to build a great company, but it's not success. Sure, it demonstrates that some really smart people think the opportunity is big enough to invest money in it, but it's not success. Sure, it provides some credibility that will help recruit employees, get customers and sign-up partners -- but it's not success.

VC Funding = an opportunity to create success

Success is different for different startups. For HubSpot, success is building a real, sustainable and significant business that has lots of delighted customers. For others, it might mean being bought by Google/Microsoft/whoever someday. Regardless of what you think of as success, it's unlikely that simply getting some outside funding qualifies. It's just a step down the path -- and even then, it's not the only path.

Having said all that, it's great to have received the vote of confidence from some super-smart people (our investors) and the cash in the bank is nice too. [smile].

Now that this milestone has passed, it is time to get back to (real) work. For me, that means increasing TDC (Total Delighted Customers). Right now, TC (Total Customers) = 401 and I'm not foolish enough to believe that TDC = TC.

Hopefully, we'll make all the folks that have believed in HubSpot (customers, employees, investors) look brilliant. In fact, that's not a bad definition for success.

Success = Make Those That Believed In You Look Brilliant

Cheers.

For PE Firms, the Game Is Set to Restart

by Rick Carew

One of the private-equity world's leading figures says he sees the light at the end of the tunnel.

David Rubenstein, co-founder of Carlyle Group, expects the flow of private-equity deals to pick up in coming months as companies begin to adapt to life beyond the era of megabuyouts.

Early last year, private-equity firms struck deals that were as large as $45 billion, fueled by easy credit. Later in the year, as credit markets seized up, deal making ground to a halt and some of those buyouts collapsed.

Now, as credit markets show signs of thawing, Rubenstein says, private-equity firms will cast their nets wider and close more deals that range in value from $2 billion to $4 billion and that require less debt. One example is Carlyle's recent purchase of a majority stake in the U.S. government-consulting business of Booz Allen Hamilton for $2.54 billion.

"We think that the bottom has been hit in terms of private-equity investing activity and you're now beginning to see the upward swing," he said in a telephone interview from Beijing, where he was meeting with Chinese government officials and business leaders.

Global private-equity firms such as Carlyle are looking to take advantage of lower valuations for public companies by targeting the wounded U.S. financial sector and doing more deals elsewhere. As banks begin to clear piles of unwanted debt from their books, they are showing a willingness to lend again, albeit under stricter terms.

"Now I think it's reasonable to believe you can do a buyout in the $2 billion-to-$4 billion range with less leverage than you would have had before," Rubenstein said.

In some ways, the shift is a return to value investing within the private-equity industry. "If the debt is not going to be as favorable, then the price needs to be more favorable if you're going to get the returns," Rubenstein said. He added that "you should look at these private-equity firms as global investment vehicles from now on and not just U.S. buyout firms. In our case…we invest more money outside the U.S. buyout arena than we do in the U.S. buyout arena."

Rubenstein said Carlyle's network of relationships in Washington can help Chinese companies looking to enter the U.S. market when officials are wary of Chinese investments in industries deemed related to national security.

Not everyone believes the credit crunch has hit its worst.

European Central Bank President Jean-Claude Trichet warned that the credit crunch is far from over and that the euro-zone central bank would focus on inflation. "Price stability and credibility in price stability in the medium term is the best way to have a high level of sustainable growth and sustainable job creation," he said. He also warned of a situation in credit markets that continued to show "an ongoing, very significant market correction."

How VCs Make Decisions Internally

by Mark Peter Davis

While no two VC firms make decisions the same way, there are a few models which have developed based upon several constraining factors.

In an ideal world every partner at a VC fund would spend considerable time evaluating each startup that they invest in. This would enable the fund to benefit from the diverse perspectives and experiences that the various members of the partnership bring to bear, ultimately enabling the partnership to make better investment decisions.

However, evaluating a business takes a lot of time and is an accretive process. As a partner learns more about a company they are more likely to uncover investment risks. As a result, it is critical for there to be continuity in the due diligence process – VCs want the same person digging deeper and deeper. If every partner was trying to become a specialist on the same company, the firm wouldn't be able to evaluate many companies.

Given all of this, in a world where the only goal is to make the absolute best investment decisions every time, it would be optimal for every partner of a VC fund to focus all of their time on the same deal until they are ready to invest. Unfortunately, that's not realistic because each venture fund needs to deploy a target amount of capital in a given time period in order to meet their investor's expectations. In order to meet these expectations, partnerships collectively need to evaluate numerous businesses at any given time. As a result, in order to make enough high quality investments in a given time period firms "divide and conquer".

This dynamic has led to the creation of a few different decision making models which I have described below.  It is worth noting that not every fund's decision making model will fit cleanly into one of these categories, however, this framework should give entrepreneurs a way to think about how a fund's decisions are made (see Disclaimer):

• The Union: In small firms (typically no more than 5 partners) one partner will lead the due diligence effort, but provide frequent updates about their finding to help all of the partners remain relatively knowledgeable about the deal as the lead partner learns more. When the due diligence phase is complete the partnership requires a unanimous (or close to unanimous) vote to approve investment.
  Pros: This model enables the partnership to leverage the diverse experience of the partners to make better decisions.
  Cons: This requires a significant amount of time from the partners who are not leading the due diligence effort.
• The Federacy: Firms that are too large to use the consensus model, because it is too time consuming to keep all of the partners up to speed, may opt to give individual partners decision making power. While the partners inevitably leverage the advice of each other, they have more autonomy in making their own decisions.
  Pros: This enables larger partnerships to operate dynamically, making decisions more quickly with fewer man-hours.
  Cons: The value of the diverse experiences of the partnership is not fully leveraged, as few of the partners have spent a significant amount of time evaluating each investment.
• The Democracy: Some larger firms try to maintain a consensus model, whereby a voting mechanism is used to make decisions. However, unlike the Union model in small firms, partners who are not leading the due diligence effort typically know less about the business opportunity in larger partnerships. Rather than being tangentially involved in the due diligence process, non-lead partners rely on a presentation from the lead-partner to determine whether or not they want to make an investment.
  Pros: This enables the wisdom of the group to be tapped when it's time to vote.
  Cons: The firm's investment strategy tends to become less risky, which can lead to missing some of the more cutting edge opportunities. It typically takes longer to fully understand the value proposition and business model underlying some of the more cutting edge companies. As a result, a relatively short presentation of the company may not be sufficient to sell partners who have not been thinking about the business for several weeks.

Social Enterprise Investments

by Jean-Luc

VC has evolved over the years.  People have established expectations of "risk adjusted market rate return".

There is a certain hurdle (let's say 10x) that seed/early stage companies are supposed to be able to hit, in order for them to be considered risk adjusted market rate return investments.  If you're at 8x, you're outta luck.  The returns are not high enough to compensate for the risks.

Non profits/foundations have been around for awhile as well.

There they look at providing funds to have a social value, or high social impact.  Essentially to better the world.  But these grants are usually done with no expectation of return, or essentially 100% loss.

So in the spectrum of possible investments, we have the range of -100% return, all the way up to +10x and beyond.

The extremes of the spectrum have a lot of activity.

But what about the area in between?

Is it impossible to deploy capital into those areas?  Opportunities where the total benefits of investment is not strictly financial?

The answer is, people are looking.

I use CALPERS/CALSTERS as an example where their stakeholders, the firefighters/teachers/etc. in the state of California can enjoy the non financial benefits of investment activity.  Their Greenwave initiative put money into cleaning up the air/water/land within the state of CA.  Thus the stakeholders were able to directly benefit and enjoy the improved environment made possible through investment. 

You can easily argue that there is financial/economic benefit to cleaner air/water/land/environment.  Take a look a housing.  What's a house worth in a good, clean, quiet, neighborhood vs. the same "house" located down wind of the coal plant? in the flight path of the local airport, right next to the train tracks, down stream of the industrial park, etc.  the value of the home is not just in the proximity to shops, or square footage, or acreage.

So if foundations are able to give grants, and use their corpus to make money.  Can they use some of their corpus to align with the goals of the foundation?  At the very least, shouldn't they stop using their investment money to combat the goals they are trying to promote?  Gates Foundation got raked over the coals in 2007 by the LA times and Seattle times for their investments in Africa, and the health care support they were providing to the same people harmed by the monetary investment activity.

It is not an easy task,  but the concept of:

instead of donating $10 mil over 5 years in grants.  What if you took $50 mil, invested in below market rate vehicles with high social impact, and ended up with a $10 mil loss?

Ignore time value of money, etc.   We can make adjustments as needed.  But the concept is leveraging the money.  Instead of trying to maximize the cash flow, maximize the impact of the cash.

Some groups are starting to come around to this type of thinking.

The good news is, even if the company looks like an 8x return business, a lot of early stage investments go to $0.  So there's not much difference between a failed company that was trying to make the world a better place, and one that was just trying to make a buck.  Except for the impact that is left as these companies disappear.

And here is the secret.  Some of these companies that look like a 5x return business can become a +10x return.  They've been ignored for so long, no one really knows what value lies in the spectrum.  If you want to earn real money, work where others are shying away.  This area is one where people have turned their backs.  For a while, maybe shorter because of this post, the pickings will be good, low hanging fruit will be there.  But just like Solar/Wind/Microfinance, I expect the space to become crowded in a bit.

Are serial entrepreneurs any better than first time entrepreneurs?

by Nic Brisbourne

Until this morning my answer to this question would have 'Yes, absolutely', but new research reported today in the Financial Times casts doubt on that assumption:

In the UK, the evidence is that novices are neither more nor less likely to have a business that either grows or survives than experienced founders. In Germany, where much more extensive statistical work has been undertaken, it is clear that those whose business had failed had worse-performing businesses if they restarted than did novices.

They postulate that the reason experience doesn't seem to make a difference is that luck plays a huge part:

One reason for this is the role of chance in determining whether a business prospers. In spite of volumes of airport lounge books identifying simple recipes for success, the reality is that starting a business is risky. The outcome depends heavily on luck - whether parking is suddenly banned outside your hairdressing shop, whether you or a member of your family become ill, or whether your Great Aunt Mabel dies and leaves you an unexpected legacy. This unpredictability means that it is difficult for entrepreneurs to learn. The best analogy is with a lottery: it is not possible to learn to win a lottery.

When I read this I started thinking about the serial entrepreneurs I know and who I'm working with and quickly came up with a bank of anecdotal evidence that seemed to run counter to this research. Then I remembered a blog post from Dick Costollo, founder of Feedburner where he was lauding Marc Andreessen, saying that Ning was looking like it would become his third billion dollar business, and that nobody could be that lucky.

So I started to doubt the research. Specifically I wondered if the same conclusions would hold if the sample of companies was limited to the sorts of businesses we invest in. They are (in general) less exposed to the sorts of risks outlined in the paragraph above (not least because the money we invest gives them the ability to survive a bit of bad luck).

But then I started to hear the voice of Taleb in my ear. Of Andreessen's success he would doubtless say 'given the number of people starting businesses these days an someone was bound to build three billion dollar businesses eventually, based on luck alone'. Then I realised I was falling for what he would describe as the Platonic Fallacy - i.e. looking for order, structure and predictability in the world (experience makes an entrepreneur better) where the available evidence points to the fact that randomness prevails.

It is also worth repeating a fact that my Californian colleagues at DFJ like to point out - many of the most successful tech businesses have been built by young, first time entrepreneurs - e.g. Bill Gates at Microsoft, Larry and Sergey at Google, Larry Ellison at Oracle, and Yang and Filo at Yahoo!

To wrap up, I guess I'm not ready to ditch the belief that experience helps, but it feels uncomfortable going against the research, even with the concerns I mention. It would be great to see the research done again to answer the more specific question "do serial entrepreneurs outperform first time entrepreneurs in venture backed companies?"

Finally - this is also a reminder on the importance of judging people on process rather than results. It is better to back the second time entrepreneur who did everything right in her first business but narrowly failed because she was unlucky than the guy who hit a home run solely because he was fortunate. Not that it is easy to tell.

When it's other people's money....monkey around

by Krishna Mony

My logic hasn't been out of place entirely. I had this belief that if I have to make it big as a fund manager or in Private Equity, I need to be a good judge of an early investment opportunity. I was too dumb not to take the easier B-school route to PE superstardom. Instead I began using my sparse savings and tried out my luck investing in the stock market to prove myself in an old fashioned way, back in 1995. If I can win with my money, I could do it with others' as well. I needed that validation.

Till date, my least lucrative exit over a one year horizon has been at an ROI of 165%. Now as I told you I started with my sparse savings and I was totally aware of the need to stay liquid to buy into the next opportunity; hence my horizon was restricted to just one year (so that my returns come tax free).

Then come the PE champion investors. I marveled at the ability of these guys that raise huge funds and thought they must be wunderkinder notching up stunning returns. I looked up their profile and thought the degrees from Harvard and Wharton must have magic in them. Everyone had an Ivy League record and some excellent career profile. No wonder they are where they are – right at the top of PE fund houses. Moreover since PE being alternative investment thro negotiated deals, they have access to classified information (`insider information' if I have that) besides some special rights granted by covenants built into term sheets (such as veto, tag along, pay for play, ratchets etc. etc.)

So I thought the game's up for average folks like me. How do I stack up if the game starts with such a mighty disadvantage? I began to watch their investments in Indian companies (that I relate better) and often wondered why they take exposures in companies at such high valuations. "Silly, they're from Harvard and Wharton; they are not dumbasses". "May be, they see value that you don't - they have access to classified information, you know?" I taunted myself.

But today I read this. The portfolio companies where PE funds invested are all trading at steep discounts to their acquisition price and now the same PE funds are on a Rupee cost averaging spree by mopping up shares from the secondary market to even out the gap. Apax partners bought 11.41% in Appollo Hospitals at Rs.605/- a share. Now they are buying from the market at Rs.505-550 a share hiking their stake to 14.52%. Several others including Standard Chartered PE (in M&M Financial services), Blackstone in Gokaldas partners, Promethean in Nitco Tiles/EIH, New Vernon in Shriram EPC are also hurriedly playing catch up.

Now wait a minute! That's how I too build my portfolio. How different are these guys? Why are they perched in a higher league? I managed minimum 165% returns over just one year but these guys wait for over 6-7 years to get a CAGR of 25% or even less. I don't have a Wharton degree alright, but I beat these guys in their own game by many a wide mile. Isn't that endorsement enough for my stock picking skills? I don't follow analysts. I just look at managements, their track record, state of health of the business and a few key ratios like ROE, RONW, Debt:Equity and P/BV besides an occasional peep at price/volume charts. By keeping things simple yet systematic, the stocks that I pick end up as sure winners.

Perhaps the awareness that I could go wrong keeps me on the edge. A bit fearful at times that always makes me keep looking over the shoulders even after I invest. The feeling that I am up against informed investors that wield mighty clout never allows me to be smug. Over and above, it's my own money and I need to be liquid always. These factors have put together a strong foundation for my portfolio architecture. The PE managers can afford to cover their conscience and be reckless. After all, it's not their money at stake. They do get their management fee whether they win or lose. More than an occasional freebie from stock brokers that manage their portfolio as well. Why should they care? It's their investors that pay a price.

Now I know why I could be a misfit in a PE environment. No regrets.

Is GreenTech the new Bubble?

by Steve Newcomb

In 2007, investment in Green technologies broke through the $5 billion dollar mark, according to The CleanTech Group.  Are we sitting on the verge of a Green Explosion? or are we just a bubble driven society that needs a fix?

If you look at the investment trends, the news and the fact that it seems like every Venture Capital Company in the valley is starting up fund dedicated to Green investment, it certainly does look like the next boom. There are many important questions to be answered:

1. Will it be the same as the .com boom, or different?
2. Will the invetor community learn lessons from the .com bust or not?
3. Will there be a wave of optomism followed by a strong reality check?

Here is an exerpt from the press release from CleanTech.

North America (NA) and Europe produced stronger than expected growth in Q407, with total cleantech investment across the regions more than doubling year-over-year, from $676 million in Q406 to $1.38 billion in Q407. This brings the level of venture investment in NA and Europe for 2007 to $5.18 billion and historical results for the cleantech category as:
2007: $5.18 billion 2006: $3.6 billion 2005: $2.5 billion 2004: $1.8 billion 2003: $1.7 billion 2002: $899 million 2001: $714 million Source: Cleantech Group, LLC (TM)

NA cleantech investing in 2007 grew by 38 percent, from $2.87 billion invested in 2006 to $3.95 billion invested in 2007. The number of deals increased by 15 percent, from 233 in 2006 to 268 in 2007. The average deal size increased by 20 percent, from an average of $12.3 million in 2006 to $14.7 million in 2007.

European cleantech investing grew by 34 percent, from $915 million in 2006 to $1.23 billion in 2007. The number of deals increased by 56 percent, from 67 in 2006 to 105 deals in 2007. Average deal size in Europe increased by 26 percent from $7.8 million in 2006 to $9.8 million in 2007 (excluding the outliers of the $395 million Airtricity financing in 2006 and the $205 million Isofoton financing in 2007).

North American companies continue to receive the lion's share of cleantech venture investing, with North American-based companies receiving over 3x the investment of European-based companies.

"Despite strong headwinds building in the global economy and tightening credit markets, the medium and long-term value propositions for cleantech opportunities sustained the sixth consecutive year with unexpectedly robust growth," said Nicholas Parker, co-founder and Chairman, Cleantech Group. "High carbon-based energy prices, global resource competition and increasingly favorable policy frameworks provide stronger than ever fundamental drivers for cleantech investors, and we foresee continued growth over 2008 as the cleantech market cycle moves from early adoption to mainstream driver of wealth and job creation."

2007 Top 5 Cleantech Investment Sectors

The cleantech investment category is composed of 11 industry segments. (full details and definitions on the cleantech category can be found at http://www.cleantech.com/.) Over 2007, the top five categories by total financings were:
Energy Generation: $2.75 billion; 172 deals
Energy Storage: $471 million; 20 deals
Transportation: $445 million; 20 deals
Energy Efficiency: $356 million; 41 deals
Recycling & Waste: $291 million; 17 deals
Source: Cleantech Group, LLC (TM)

How is the GreenTech boom going to be different than the Internet Boom?
One of the biggest mistakes is to assume that the Green Boom is exactly the same as the Internet boom.  So how is it different. 

1. The average deal size, posted at $14 million in 2007, is much larger (at least for the early companies) and that means that some VCs may not be able to participate as a lead and may have become follow-on investors;

2. The follow-on investment (that is past Series A) is significantly larger than that of .com companies creating a space for non-vc investment firms to get involved.  Companies such as Isofoton SA Spain ($205 million), Brazilian Renewable Energy Co., Ltd. Brazil ($200 million), Project Better Place US ($200 million), Yingli Green Energy Holding Co. Ltd. China ($118 million) and NanoSolar ($112 million); For comparison Google, the Internet's biggest winner, worth billions today raised a meager $30 million in comparison;

3. Many CleanTech energy companies skip angel investment which will force angels to band together, group their funds and try to create fund of funds to invest VCs in order to get in the action;

4. The skills needed to be a successfull investor in startup GreenTech companies are somewhat different that the skills needed to invest in .com companies. Many VCs are starting up their teams with generalist venture capitalists instead of specialists.  Many say this is a dangerous strategy;

5. The make up of the team needed to create a successfull GreenTech company is very different. The average age of an Energy entrepreneur is also probably a little bit older and if they have a PhD it may be much more likely it is in materials engineering than software engineering.3. The time horizon for a GreenTech company to take off are significantly longer that .com companies;

5. Most GreenTech companies today are energy companies in one way or another.  How many people have heard of an energy entreprenuer?  Where are these people comming from?  Teams are not always right around the corner from Stanford University like they often are in the .com space;

6. Many GreenTech companies are at serious risk of being science experiments rather than businesses that could ever really make a product that makes money; 

7. A GreenTech explosion will involve nearly every government and every existing corporation with a large consumer footprint, every utility company and every energy company.  .Com companies never needed to worry about these factors like CleanTech companies.  A CleanTech company can live or die by legislation, by the reaction of a powerful energy company or lobby and who would have thought that Wal Mart would be in such a power position to save the earth and create the CleanTech explosion;

How is it the same? Did we learn anything from the .com boom?
Over the history of venture capital there have been several booms, so it would seem to make sense that there were some patterns, but when you look at the patterns that are the same, it really makes you wonder if we have learned anything at all.

1. There is no real track record for setting and legitimizing valuations in the GreenTech space.  However, just as it was in the .com space, valuations are through the roof yet there has been no real exits to point to;

2. Nobody is profitable, many companies aren't even shipping products; 

3. Lots of hype followed by lots of nothing, then the CEOs start getting fired; 

4. Everybody wants in, and there seems to be a real crowd mentality when it comes to investing;

5. Every VC in the valley seems to be putting together a GreenFund with a Green team, but does anyone know what they are doing yet?  Ask a VC to give you a sector by sector analysis of the GreenTech space and tell you what is interesting or dangerous about each sector and they look at you funny.  I seem to remember that being the case back in 1996;

6. Everyone thinks that Green is going to change the world but almost nobody has been changed by it yet; Interesting experiment: Get a group of people together and ask everyone if they think Green is a big deal.  Then ask them if any of them has changed their lives because of the Green movement.  When you filter for the prius owners, you get zero.

7. The consumer population doesn't even know what going green actually means.  Ask that same group of people to tell you the priorty climate impact between changing out light bulbs, changing their heater or changing their driving habits and you watch everyone get into an argument.  If you want to see a fight, ask them to discuss the pros and cons of ethanol and for bonus points cellulosic ethanol.

1. Green will be a much bigger deal than the .Com boom because consumers, businesses and governments believe that we must build sustainable solutions or the human race will be at risk.  One of the first things you learn in business school is to find a motivated consumer.  Well, GreenTech's consumer is all dwellers of Earth who are trying not to die;

2. It doesn't actually matter if the scientists who say its too late to save Earth are right when it comes to a GreenTech boom or not because everyone has decided that we going to try and they are about to spend a lot of moeny; 

3. Green will be more important than the .Com boom because it will change the way we interact with Government, it will change what corporations value, because consumers will be demanding different products;

4. The GreenTech boom will suffer early loosers that die just like in the .Com boom.  Just as much investment money may be lost, but on a lot fewer deals. 

5. VCs will not let hype dominate for as long as it did in the .com era.  I would say right now, VCs don't know what they are doing as a whole.  However, the VC industry is among the most agile in the world and they have a way of getting smart very fast when there is a lot of money involved;

6. Early VC Green teams will be dominated by generalists who will help create and analysis the sectors.  Once that is done, the specialists will arrive to round out the team.  As in most markets and most industries, expect the tier 1 VCs from the .Com era to participate heavily in the GreenTech era, but also, look for a few new entrants;

7. Any billionairre with a heart is going to create a GreenVC fund.  They will be in for the short term, but will generally move on;

8. Most serious VC funds are $100 million on the low end to $800 million  or maybe even a billion on the high end.  Look for new multi-billion dollar funds in the $10-20 billion dollar range being created that will compete with the World Bank in funding country level infrastructures.  These funds will likely be private equity and will not share the identity of their LPs;

9. Look for governments to play an active role in infrastructure decisions and try to fight these new billion dollar funds;

10. 3rd world countries will be spotilighted because at peak oil capacity, they get none and therefore must build infrastructures that are not oil based.  Look for these type of countries to try to leapfrog in their infrastructures and look for them to try to get funding from non-traditional sources;

11. Smaller first world countries like Japan, UK, France, Germany will not want to get in a natural resource fight between China, India and the US.  These countries will either adopt a seriously strong sustainability initiative or tensions will increase between the powers that be.

My overall feeling about Green is that I believe it was a big enough deal to get out of what I was doing (founder of Powerset a .com search engine company) to work full time on Green initiatives.  I truly think that it will be the defining era of this century and will set the tone for government, corporate a social structures for a long time to come.

That's all I got for now.

Steve Newcomb

"I don't know when, I don't know where and I don't know how, but I'm going green"
"Hi, my name is Steve Newcomb and I've been addicted to carbon for 38 years"
"Why do we believe we can save Earth by convincing every single government, corporation and person on earth to change every habit they have ever had, when we can't even convert to the metric system?"
"Of coarse I'm green, I own an iPhone and a MAC"

Angel Poison

by Rob Shurtleff

I was helping an entrepreneur evaluate a term sheet recently.  He was very excited to have a Venture Investor leading his series A round, but as is often the case, the devil (or in this case poison) was in the details:

In the Investors Agreement

For purposes of the Section A, "Major Investor" means any Investor that holds at least ten percent (10%) of the shares of the Series A Preferred Stock or the Common Stock issued upon conversion thereof (subject to adjustment for stock splits, stock dividends, combinations, reclassifications or the like) originally issued to all Investors pursuant to the Purchase Agreement.  A Major Investor includes any general partners, managing members and affiliates of a Major Investor, including Affiliated Funds.

A._    Right of First Offer.  Subject to the terms and
conditions specified in this Section A._, the Company hereby grants to each Major Investor a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined).  For purposes of this Section A._, Major Investor includes any general partners, managing members and affiliates of a Major Investor, including Affiliated Funds.

So "what is this all about?", he asked.  The thought that popped into my head was "angel poison".  Basically the Big Valley VC doesn’t want to share if this deal turns into a rocket ship, or their lawyer isn’t interested in chasing down a bunch of individual investors for signatures (which having done it multiple times, is in fact a pain in the neck).  Bottom line, unless you are a "Major Investor" you don’t get the guaranteed right to continue to invest in future rounds. 

What should the entrepreneur do. ?

1:  Ideally have multiple term sheets so you can quickly negotiate terms like this away.

2:  Have a frank discussion with the VC along the lines of:  "Look Mr. Big VC, my angel investors have been very good to this company.  I don’t expect most of them will play along in future rounds, but it really is kicking sand in their faces to tell them they can’t."   Regardless this dialog will tell you a lot about how your potential new partners are going to be to deal with down the road.  If they aren’t going to be unreasonable on a term such as this, you can bet on more difficult issues, they will be even more difficult.

3:  There are cases when a limit on future participation make sense, these primarily come into play when angels own a significant portion of the company when the first professional round is negotiated.  Nobody wants prior funding to block future rounds, this has to be worked out on a case by case basis, but requiring no participation is over the top.

The entrepreneur wanted to know what these "Affiliated Funds" were all about.  This is topic is worthy of a separate post, however the quick answer is most venture funds also have "side car" or "affiliate fund" where partners in the firm, and friends of the firm are committed to funding a portion of each of the fund’s investments (frequently with different internal economics which is why they are done in separate funds).  This arrangement doesn’t change the total committed capital a VC is putting into a deal, just provides a mechanism for meeting their contractual obligation to share an investment with their partners and friends… yes there is an irony here.

Do you really want to work in Venture Capital?

by: Steven Fisher

I have heard this from many people I have met "I really want to be a VC". First, why are you asking me when I am not one and don't have a desire to be one? Let me direct you to some people in the industry and a few who left it to get a good perspective on the business. So I went ahead and asked the question "do you think people should really become VC's". Surprisingly, many said no. Why? I will tell you.

The origins of this post were motivated by Seth Levine's post today How to get a job in Venture Capital revisited his earlier post, How to become a VC and it seems to hit on the same advice that I got from my VC friends in the business.

The gist of it seems to revolve around either going to a top B-school, being a banker or consultant, working in a startup or starting one of your own.

So instead of telling you how to become a VC, let me take a different angle and tell you why you don't want to be one.

Everyone acts like they want to be your friend but all they really want is your money

When you are an entrepreneur you go to networking events in the hope of meeting investors, you leverage VC networked lawyers and accounting firms to get you introductions. What are you there for? To get money. As a VC you are just on the other side of the table and now when you go to dinner parties you are faced with the "Doctor's dilemma". That is when they find out you are a doctor and then they tell you something hurts them and expect a free diagnosis and prescription write up. As a VC you might suffer through people with "hey, I have this business looking funding" or "I have a really great idea, would you fund it?" crap. Just tell them you sell insurance and they will stay away from you.

You get stuck in board meeting hell

As a VC you will sit on boards to meet with the company on a regular basis to see if they are meeting their milestones and vote on critical issues (i.e. stock options, new key hires). The only problem is that this most of your interaction with a company and as a former entrepreneur you will have a tendency to want to be more involved. You can't. You must keep the deal flow coming through for the firm to make the investments that will create good exits for great payoff to the fund's limited partners. Yeah, I think that kinda sucks too.

You only really work day-to-day with a startup when it is having trouble

As I mentioned above, you are really only working with them in a board capacity when things are going well. When things start to go bad you have to spend more time and usually have to be the bad guy. You might have to kick out the founder, recommend budget cutting strategies, etc. Yep, that sucks too.

You have to read the most insane business plans

The average VC firm sees about 2000, that's right 2000 business plans a year. Do the math. If you are an associate you have read around 50-100 per week depending on the size of your firm as an associate. You have to filter the crap from the interesting and then further find the fundable in the interesting ones. Many people blindly send plans that don't fit the investment size or focus of the firm so they are immediately tossed. Still, you have to find the ones that are good and then have a phone conversation with them. If the chat goes well, they will come and pitch you so can report to the partners about the ones that they should really sit in on. If they end up sucking it reflects badly on you.

Do you like Excel?

When you join a firm as an associate you are analyzing deals from every perspective tearing apart an entrepreneur's business model to see if it is actually not full of shit. You are also looking at it from various bad-to-great scenarios to understand the risk exposure the firm would be taking in the deal. I hate excel and the thought of living in it just makes me shudder.

You have to work insane hours to close a deal

You work insane hours as an entrepreneur but there is a long term payoff that can be huge. To get a deal done especially if it is syndicated or there is competition from other firms means you have to work insane hours to get it closed. If you don't you risk losing the opportunity and looking like a lazy idiot to the partners. What is the upside? Maybe a bonus when the fund exits? Maybe. At least as an entrepreneur you can have a little more control over getting a big pay day.

Limited Partners are worse than investors

Investors in a startup expect risk and are betting on you to succeed. They hedge their bets and usually 7 out of 10 deals funded crash and burn. The remaining 2 get a good exit and the remaining one you hope will be the next google. Limited Partners have a long term outlook (7-10 years) for a fund to complete. But boy do they expect results. You might return a solid 20-30% return which is fantastic for any other investments but they might just bitch. Especially if the previous fund had better returns. Yeah…I would love to have that to deal with.

Are there any VC's in the house?

Many people read the blog and hopefully there are some who are VC's and could comment. It would be especially great if there are a few out there that have been in the business and left it.

The Entrepreneurs Dilemma - Sell now for $Millions or holdout for $Billions?

Private Equity Firms Squeeze Investors For More Fees

文/桂曙光 李永林

什么是天使投资人

中国已经成为投资的天堂，国外VC相继涌进，国内VC迅速成长。但繁荣的背后，大量最需要资金支持的创业企业却拿不到资金。当前，活跃在中国的VC大都投资成长期的、成熟的企业，大量的早期项目、初创企业要获得VC投资非常困难，天使投资人看中的正是这个有待开发的领域。

天使投资人（Angel Investor）是指富裕个人，他们为处于创业初期企业、甚至是创意期的创业者提供最初的资金支持，以帮助创业企业启动、迅速成长。作为个人投资者，天使投资人是给未来企业家提供早期资金来源，资金额从几十万人民币，到几百万、上千万人民币不等，他们的投资对象主要是VC认为太早期和风险太大的创业企业。

在美国，证券法规定天使投资人必须是合格投资者（Accredited Investors），主要是要满足以下要求：

• 是投资目标企业的董事、高管、合伙人等；或
• 个人或家庭流动资产超过100万美元；或
• 过去两年的个人收入均超过20万美元，或家庭收入均超过30万美元，并且当年的收入也要维持这个水平。

这个是硬性规定，如果有某个投资人不是合格投资者，那么法律上，这家创业企业在引入后续VC资金、尤其是IPO的时候会比较麻烦，因为证券交易委员会将会认真研究该公司之前的所有股票发行情况，并且要求公司立即采取行动补救过去违反证券法的行为，这就会延迟、暂停、甚至是毁掉企业的IPO。

天使投资的风险是最大的，因此需要的回报也是最高的，由于高失败比例，天使投资人一般要求在5-7年内有20X-30X的回报，IRR一般在20-30%之间。退出方式与VC类似，包括IPO、并购。

根据创业研究中心（Center for Venture Research）发布的天使投资报告，美国2007年天使投资的退出有65%通过并购，IPO只占4%，破产占27%。尽管种子期和创业期是天使投资的重点阶段，但有21%的投资额投向了发展期、成长期企业，而这个比例比上年大幅增加。另外，63%的天使投资是新投资，而非后续追加投资，可见天使更喜欢新鲜事物。

谁是你理想的天使

用“4F”形容天使投资人类型再也合适不过了：创始人（Founder）、朋友（Friends）、家人（Family）、傻子（Fools）。这是因为，初创企业的第一笔资金通常来自自己的积蓄或者从朋友和家庭成员中获得，早期企业，风险巨大，只有朋友、亲人，或“傻子”一类的人可能会被你的项目打动，而为你投资。

朋友和家人，只能算作是创业者的天使，严格说来，他们并不能算是天使投资人。从他们那里融资会给创业者带来一些问题：首先他们的钱不够多，100万人民币对他们可能是个天文数字；其次，融资之后，创业者的生意和私人生活会混在一起了；另外，他们可能并没有像职业天使投资人或者VC那样好的商业关系网络，对企业的发展没有更多帮助。

而上文所谓的“傻子”，并不是这些人真傻，实际上往往相反，这些人都是独具慧眼，思维前瞻，投钱给一些别人没有眼光看出其前景的企业。这些人可能在某个领域经验丰富，或者本身就有成功的创业经历，他们才是真正意义上的天使投资人。

对于理想的天使投资人，国内知名天使周鸿祎认为至少要满足三个条件：第一，对产业了解，才能规划方向；第二，至少干过企业，知道创业是怎么回事，能够给创业者一些很具体的指点；第三，要有很好的人脉关系，要跟VC熟，给创业企业融到后续资金。

另外，如果天使投资人可以在业务、资源、等方面提供帮助，那也不错。比如一位律师作为天使投资人，这意味着创业企业不需要从微薄的初始资金中分出一部分去支付法律事务的账单了。

天使投资的方式

不管是什么背景的天使投资人，首先要把天使投资作为一个真正的投资，并在法律文件上正规处理，避免给以后的经营管理、继续融资埋下地雷。

首先，天使投资没有标准的估值。通常天使投资项目的投资前估值是1百万至1、2千万人民币之间，但偶尔也会在这个区间之外。要注意的是，创业者不要对天使投资定价过高，因为VC――最可能的下家――也许不认同这个定价，无论是VC融资失败还是降价融资，创业者都很难对天使交代――他们可是在你最困难的时候给予企业支持的！。

大卫·比尔（David Beer）在英国经营着一个天使投资网络联盟20余年，他得出了一个简单“真理”：“如果只是一个想法（Idea），那么它值1万英镑；如果有一个可以信任的管理团队到位，它可能值10万英镑；如果它把东西卖给了真实的人，并且挣到了真实的钱，那么它值50万英镑”。

其次，不同的天使投资人喜欢不同的投资形式：优先股（普通股）或者可转债。

优先股（普通股）方式，也可以说是Pre-VC投资，跟VC投资获得的优先股（普通股）类似，但是附加的投资条款要少一些。对于一个早期创业公司，50万的投资可以获得25%-50%的股份，所以，典型VC的很多条款对天使投资来说杀伤力太大（简直是杀鸡用牛刀）。

可转债方式，就是运用可转债的债权及期权双重属性，天使投资人每年可以获得约定的利息（通常年息6%-8%），还拥有在未来某个合适的时机（通常是A轮融资时）将其投资转换成股份的权利，并以后续融资的折扣价（25%-40%）转换，以补偿天使投资人所承担的早期风险。

假设天使投资人投入10万元人民币，他得到拥有25%折扣权利的可转债。A轮VC融资时，如果创业者是以$4元/股的价格给VC发行股份，天使投资人就可以将其投资额以$3元/股（25%折扣）的价格转换成普通股。如果创业者是以$2元/股的价格给VC发行股份，天使投资人的转换价格为$1.5元/股。

为了保护天使投资人的利益，可转债还可以做一些巧妙的设计：

• 根据后续融资时机调整价格折扣。比如，如果6个月之后创业者还没有完成超过$100万美元的A轮融资，转换折扣从25%提高为35%。
• 控制估值上限。假如创业企业A轮投资前估值为$400万，VC投资$100万，VC获得企业20%的所有权，每股价格为$4元（100万股的原始股份）。天使投资人的可转债以25%的价格折扣转成股份，他的股价就是$3元。要是A轮融资的投资前估值提高到$1000万呢？VC投资$250万，获得20%的股份，股价为$10元，天使投资人25%折扣的股价将是$8元。不太妙，这个价格可能对天使来说太高了。如果先设置一个$800万的估值上限，天使投资人的股份价格上限就是$6元，对比VC的$10美元的股价而言，是40%的折扣了。

美国的天使――欣欣向荣

在硅谷，天使投资最著名、最经典的案例就是Google了。1998年，两位还没毕业的穷学生拉里·佩奇（Larry Page）和谢尔盖·布林（Sergey Brin）去向Sun公司的共同创始人安迪·贝托尔斯海姆（Andy Bechtolsheim）讲述他们的创业梦想，在看完他们演示的搜索引擎软件之后，Andy就写支票了。那张10万美元支票开始是没法兑换成现金的，因为Google那个时候还没有成立，还不是一个合法的企业，但当公司注册文件完成后，这笔钱让Page和Brin从他们的宿舍走向市场，最终成长为今天的传奇公司，而Andy的10万美元后来演变成近3亿美元的传奇回报。

类似的，亚马逊网站、苹果公司、星巴克、等等著名企业都是在天使投资人的帮助下开始的。目前的互联网新星Digg, LinkedIn等也获得了天使投资人的资助。

根据美国创业研究中心（Center for Venture Research）发布的天使投资报告，2007年美国有258,200个活跃的天使投资人，投资了57,120个企业，投资总额为260亿美元，各项数据都比2006年有所增长。而2007年同期风险投资只投资了3,813个企业，投资总额为294亿美元。按照上述统计，天使投资的平均投资额为45.5万美元。

从1980年后期开始，很多天使投资人就开始互相组织各种形式的俱乐部，共同分享项目源，共同做尽职调查，共同投资以提高投资额度和承担风险。

中国的天使――犹抱琵琶

国内的天使投资在这几年开始逐步得到媒体和社会关注，但天使投资人已经大量存在，只不过缺少官方的引导和民间的组织，他们也投资了大量耳熟能详的优秀企业

最让人津津乐道有这么几个案例：张朝阳得到其老师－美国麻省理工学院尼古拉·尼葛洛庞帝（Nicholas Negroponte）教授的20多万美元天使投资，做成了搜狐网；李彦宏和徐勇借助120万美元的天使投资，创建了中国的Google － 百度；田溯宁和丁健获得了25万美元的天使投资，创建“亚信”。

在国内，一批曾受益于天使投资和风险投资的企业家，在其企业上市或出售之后，手持大量资金，以天使投资人的身份再次投身于创业圈，扶持在他们眼中富有潜在价值的初创期甚至是种子期的企业，于是出现了像沈南鹏、邓峰、江南春、钱永强、周鸿祎等一批具有代表性的具有成功创业经历的天使投资人。

但总的说来，国内的天使投资还处于初级阶段。美国的天使投资人数以万计，投资项目数是风险投资的10多倍。而据业内保守估计，中国的天使投资人只能以百为计，投资案例及投资额更是少得可怜。

你对得上天使的口味吗？

在VC越来越务实的今天，早期创业企业向VC融资越来越困难，“太早期”这三个字已经成为VC的口头禅。有一些很早期的创业企业，尽管他们将来可能会成长为伟大的公司，但从发展阶段来讲，它们并不适合去寻找VC，那就换个角度，去寻找天使投资。

在找天使投资人之前，创业者要问自己几个问题：

• 你愿意出让公司的部分所有权和控制权吗？
• 你可以证明公司在未来3－7年之内实现可观的收入和利润吗？
• 你可以证明公司将会给投资人可观的回报吗？
• 即使你不同意投资人的建议，或者董事会的决定，但仍然可以接受吗？
• 你的企业在3－7年内有退出计划吗？

如果对以上问题的答案都是肯定的，那么创业者应该去寻找他的天使投资人。一般来讲，适合去寻找天使投资的创业企业有如下的特征：

• 有个不错的创业团队，在行业经验上、技术上等有独到之处；
• 有创新的商业模式或产品，也许还处于Idea阶段，企业没有正式开始运营；
• 创业企业已经开始运作，已经有了一定的发展，商业模式也得到市场验证，比如网站访问量、产品销售量等都有了一定的数据；
• 所在的行业并不热门，可能还没有吸引VC的注意，但潜在空间很大；
• 创始人已经倾其所有，创业者不应该还在别人的公司里兼职或者开着汽车、住着大房子；
• 资金的需求量不大，可能是几十万人民币到几百万人民币之间。

当然，还有一些其他的情况，比较适合去寻找天使投资。VC们号称的每年看几百、上千个项目中，大多数都是上面这些类型的创业企业。

在国内如何做好天使投资人

国内由于环境和政策的不明朗，以及创业者和投资者之间的信息不对称，甚至包括和后续的VC之间的沟通，都有可能使得天使投资的风险变大，收益得不到保证。

在国内，做天使投资，有几点是需要注意的：

• 多和其他天使投资人进行合作。在美国，从80年代后期，就开始有各种各样的天使投资人俱乐部，比如著名的天使投资人网络目录（Directory of Angel Investor Network）就专门收集了各种各样的俱乐部。在这一行，单干是非常危险的，很多时候，一个人的投资，可能最后连为什么失败的原因都会找不到，而联合投资，会少走很多弯路。
• 和VC一样，仔细调查要投的团队，要充分了解创业团队，进行深入交流。投资最重要的就是看人，做任何投资都是这样。除了仔细研究商业计划书之外，更要了解团队的各个方面。一个值得信任的人，哪怕他的商业模式后来改变了也没有关系。IDG在中国投资的所有案例中，只有如家的商业模式从头到尾是一样的，其他的都经过各种各样的修改。天使投资也是这样，商业模式可以改进，但是人却是不会变的。
• 做好服务的心态，投资是为了获得高风险补偿的高回报，但是同时要以服务的心态去对待创业企业，成为他们的顾问，理解创业者的困境和他们的目标。对他们提出自己的建议，多给他们带来除了钱以外的资源，用心去帮助企业成长。要像尊重客户那样尊重接受投资的创业者，千万不要有出资人就是老大的想法，那样只会不利于公司的发展。
• 保护自己的权益，和VC进行沟通，企业在后续的发展过程中肯定需要更多的外来资金的帮助，向VC融资是天使投资人在投资的时候就应该考虑到的问题。因此，要帮助创业者制定企业的整体融资规划。由于天使投资一般没有足够的资金进行后续追加，这个时候要注意保护自己的权益，尽量避免因为后续融资过多地稀释自己的股份或者减少自己在创业企业中的权利。

你的天使在哪里？

大部分初创企业并不需要太多资金，很多企业者并不知道天使投资人是他们理想的资金来源。但是，天使投资人并不像海滩上的贝壳，要找到他们就像寻找珍珠一样。寻找天使投资人不是一件容易的事，但是一旦找到愿意投资的天使投资人，为创业所付出的努力就会得到回报。除了提供资金给创业企业之外，天使投资人的建议、知识将能够帮助企业更快走向成功。

那么，创业者如何找到自己的天使呢？请参考下面几条建议：

知道你要找谁

要知道你找的人的是什么样的人对于找到他们很重要，通常，天使投资人是一些这样的人：

• 30－60岁
• 年收入超过50万人民币，流动资产超过500万人民币
• 有过成功的创业经验
• 愿意长期投资（5－7年）
• 喜欢为创业者出谋划策，一同做事
• 投资自己熟悉的行业
• 通过推荐的方式获得投资机会

在国内，满足上面条件的人，可能是一些民营上市企业的高管、私营公司的老板、VC合伙人等，创业者应该从这个角度去寻找自己的天使。

了解不同天使的喜好

不同背景的天使，对不同行业、不同类型的创业企业有兴趣。爱瑞克·哈恩（Eric Hahn）是硅谷的一个超级天使，Netscape的前CTO，他投资的初创企业有好几个都上市了。他只投资掌握有不容易被复制的技术型创业企业。比如他说“我会放弃投资eBay，这是一家伟大的公司，但它主要是做品牌。”

马克·库班（Mark Cuban），现在是NBA达拉斯小牛队的老板，1999年他将Broadcast以57亿美元卖给了Yahoo。作为天使投资人，2005年投资了Brondell，一家生产日式便后冲洗及烘干马桶的公司。在库班之前，很多天使投资人放弃了这个公司，但Brondell的创始人说“库班寻找的是面向大众群体的公司，美国有2.2亿家庭卫生间，这是让库班兴奋的原因。”库班投资之后，其他天使也蜂拥而至，Brondell最后获得了130万美元的种子期融资。

运用社交网络

通常情况下，天使投资人不像风险投资人到处寻找投资目标，他们喜欢投资熟人和信任的人推荐的创业公司，所以，创业者需要通过人际网络把企业推荐给天使投资人。比如，被天使或VC投资过的企业家、专注做股权投资顾问、律师、会计师和商业顾问。

关注成功的企业家，他们也许是，或者将会是天使投资人，或者他们认识天使投资人。经常参加一些天使投资俱乐部、商业活动、投融资洽谈会、展会等，让更多的人知道企业。

不过，最重要的还是公司的质量，否则，这些人可不会把一个不好的投资目标介绍给天使投资人，否则就会损害他们在天使投资人心目中的形象。

提供有效的商业计划

准备好融资材料，虽然很多时候不用准备详细的商业计划书，但是一份令人信服的、能够说明问题的文档是必须的。投资人需要看到创业者为企业制定的发展目标，以及如何达到目标。他们希望在材料中清晰地看到企业的管理团队、产品和服务、潜在用户、市场机会和规模、市场推广计划、产品销售规划、如何面对竞争对手、财务预测等。

另外，天使投资人希望看到退出策略。尽管天使投资人有耐心，愿意做长期投资，他们也需要看到投资的最后退出渠道和回报是什么样的。

天使投资人都是天使吗？

创业者在被天使投资人挑选和考察的同时，也要了解天使投资人。在跟他们打交道的时候，要确信他们是真正天使，而不是魔鬼。这么说并不是耸人听闻，选择错误的合作伙伴，很有可能会毁掉还处于艰难期的创业企业。

首先，要了解对方，多花点时间研究他们的背景和以前的投资业绩。曾经有过天使投资人剽窃创业者的创意，帮助其他企业的案例。创业企业的核心价值可能在于自己独特的商业模式或业务模式，而恰恰这种东西容易被别有用心的人以光明正大的方式获得。

其次，最好是能找到专业的天使投资人，他们懂得投资后的管理，知道如何帮助创业企业，也有一定的资源可以利用。而偶尔做1、2次投资的投资人、或者家人、朋友，他们一旦把钱交给创业者，会非常关心他，可能隔几天就要去公司看看，或者每天打电话问问公司情况。刚开始，创业者处于感激，是可以接受和理解的，时间长了，就受不了这种“骚扰”了，而投资者也会觉得企业的发展不像创业者说的那样乐观，双方就会逐渐产生隔阂、矛盾了。

另外，由于天使投资人是个人投资者，他们是没有太多的名声需要保护的，这点跟VC有很大区别。一般VC不会把创业者压迫的太无法容忍，因为如果这传出去，别的创业者就不会再去找他们了。天使投资人的交易条款差别很大，没有普遍接受的标准。有时天使投资者的交易条款像VC的条款一样可怕，而有些天使投资者，只用一份两页纸的协议就可以投资。创业者可能没有钱请律师来帮他，所以自己更要小心。

创业者在寻造天使投资人的时候，要牢记网络上流行的一句话“长翅膀的不一定是天使，还可能是鸟人。”

Raising venture capital in Dallas?

by Alexander Muse

Over the past three years I have been writing about entrepreneurship and startups and as a result I get to see hundreds of deals each year.  This afternoon  I was meeting with a local entrepreneur/investor and he showed me a deal for a 'new' social network he was considering investing in.  The deal was a prototypical 'Dallas' deal.  The team was stellar, lots of people with important titles from important companies like EDS, Nortel and Belo.  These guys simply need $5MM to build the next big social network.  What do they have to show us besides a PowerPoint and a business plan?  How about the social network - i.e. the site?  I wanted to touch and feel the site.  I wanted to 'get' why it was so important we fund their venture.  But I had nothing more than a few impressive resumes and hockey stick projections to review.  It was frustrating, but I have no doubt they will be able to raise capital (just not from me).

Had that same deal be located in San Francisco, New York or Boston, it would have likely included a link to the site and an extensive demo of the application.  We wonder why the vast majority of deals are done on either coast, but we fail to realize it is because we, as Dallas-based entrepreneurs, keep pitching the same crap over and over.  The same crap being, "give me your money and then I will build it!" Want to get funded?  My advice is to become a 'maker', become a 'builder' or if you can't make or build find a partner who can.  Build something, show it to customers, get some traction and then raise money.  Quit paying $10,000 to a 'broker' to write your business plan and use that money to actually create whatever it is you want to build.  Stop sending business plans out like hotcakes before you have something to show potential investors.  Get it?  Sorry for the rant, but I sorted all of the plans I received in 2007 and my findings were startling:

In 2007 I received 230 business plans/pitch sheets.  Around 100 of these were for Dallas based startups and 130 of them were for Bay Area startups (I threw out the rest of the country for purposes of my research).  I classified each startup in two categories a) Green (i.e. there was no business, only a concept for a business) and b) Real (i.e. there was already a business or they had built the thing they needed money to grow).  Only 11 of the Dallas startups were real, out of 100 submitted.  The Bay Area numbers were completely reversed, with 121 real startups, out of 130 submitted.  What is wrong with this picture: