The downturn sure is making for interesting times. Here at FoG it started with the gloom of the Sequoia meeting notes and presentation of doom. Followed by the more upbeat link to Paul Graham's essay on "Why to Start a Startup in a Bad Economy."
Interesting times. And I have a pretty interesting job. A job that allows me to interact with lots of investor types. Individual angels, angel groups, angel funds, venture capitalists, venture bankers. And they don't mind telling me whats on their mind because at the moment I am somewhat like Switzerland (Entrepreneurs do the same thing BTW). Last week at Venture Atlanta and Meet the VC I had a chance to talk with a lot of investors over a brief period of time. And while I hesitate to quote anyone directly I can summarize what I learned over the past week.
Angels A Mixed Bunch
Some are frozen into inaction. Some, but not many, continue business as usual. The latter are being more selective. Asset allocations are being closely watched. Which is closely tied to the broader stock market. Many angles have to allocate more money for follow on. Overall not good for early stage.
VCs Intend To Keep Investing
This message is loud and clear. VCs have lots of money. Sitting in cash. They intend to invest it. They also will be more selective. Either gravitating towards later stage deals to shorten their exit horizon or doing less deals as the need to keep funds available for follow on increases. Also not good for early stage.
Business models will drive interest. Advertising is out. Platforms, analytics, and cost savings are in.
With that said some deals that would have been consummated fours weeks ago are not getting done today. I personally know of several. VCs are pulling back to conserve their funds for what they believe to be higher probability deals that can make it through the startup winter.
VC Advice
VCs are looking to help extend the cash runways of their deals by cutting costs. They want their companies to get more conservative. They are advising their companies to draw down their credit lines.
Startup Reaction
Startups are heeding this advice. TechCrunch offered up a layoff tracker. To date it is showing 3,689 laid off employees at 22 companies. Back out the more established eBay and Yahoo and you get 689 employees at 20 companies. Startup CEOs are acting, and acting fast.
Surveys
In an interesting side note DLA Piper released its "Technology Leaders Forecast Survey" this week. Conducted in late September and early October, the survey shows 47% of VCs believing that the financial crisis will adversely impact the tech industry while 33% of technology company executives (not just early stage) believe this is the case. Based what I have seen and heard in the past four weeks both parties are acting a bit counter to how they responded a month ago.
Some Key Quotes
"I'm getting a deal done."
"You will see a flight to quality."
"It's grim."
"I am looking for a real entrepreneurial spirit. Someone who can efficiently get to revenues and profits."
Wrap Up
Like the broader economic climate, times are not good in the technology startup world. But deals are going to get done. Good deals. With smart entrepreneurs. Helping each other to achieve a dream.
It will take longer. It will make a hard task even harder. But deals will get done. If you are an entrepreneur you need to adjust to the new realities of our times and go find yours.
Back in July Jason Calacanis said he was retiring from blogging and starting a private mailing list. Well the retirement turns out to be a bit Bret Favre style. Over the weekend he sent out an email entitled "(The) Startup Depression" which drew a great deal of attention and led to him posting the content on his blog.
It's both a rambling and greathearted article. A worthy read. And one that I can best supplement by book ending the beginning and end.
Jason started out by stating:
"It’s my believe that the economic downturn will be much worse than it
is today, and that 50-80% of the venture-backed startups currently
operating will shut down or go on life-support (i.e. 3-4 folks working
on them) within the next 18 months.
Make a list of every Web 2.0 startup to raise an A or B round and
cross 80% of them off the list, because they will not make it to their
next round of funding or profitability."
HE ended with a must read top ten list of specific things that an entrepreneur should do in trying times closing with:
"Raise money: I know I said above most folks won’t be able to raise
money in the down market, but that’s not because the money isn’t out
there–clearly it is. The issue is that the big money out there
doesn’t want to fund small ideas that are in the death spiral. Build a
plan based on revenue and taking market share and folks will consider
funding you."
I completely disagree with Jason's first assertion and agree totally with the last.
My take on the startup funding marketplace is that you are going to see the same things in this asset class that you see in all asset classes during cyclical downturns. A flight to quality.
If you are an entrepreneur running a venture backed startup you are going to have to prepare your team to weather the storm. Cut costs. Find customers. Tightly execute. Do this and do it well and your VCs will have funds in reserve to see you through the rough seas. VCs are going to batten down the hatches and start playing things more conservatively when it comes to new deals so that they have the dry powder they need to keep their current good deals going (assuming that their limited partners are willing to make their
capital calls and that may or may not be a safe assumption at this
point).
If you have yet to make it to the venture stage of life things might be a bit tougher. Individual angels are hurting.
To explain via an example let's say that angel Jill Rich had investable assets of $10 million entering 2008. Of that Jill had set aside 5% of her portfolio or $500k. Over the past four years she had invested $200k with $200k reserved for follow on and was looking to put another $50k to work this year. But Jill has a problem. That $10 million is now only worth $8 million. So Jill has gone from being under allocated in her angel investing asset class by 20% to being fully allocated in the asset class. She has no room for new investments. Repeat this over and over again with angels and all of a sudden you have them not making any new investments.
Angel funds are a bit of a different situation. They behave like VC funds. The ones that I have talked to are merely looking at a exit time horizon in the 7 - 9 year range versus the 5 - 7 year range they were thinking about in early September. Like VCs they are going to get a little more conservative too. But they will keep investing.
So things are going to get tough. New technology startups will be able to get seed. But only the those with truly superior concepts and management. Big ideas will continue to garner venture funding, there is too much money out there for that not to happen.
The next two years are going to require focus, something that I preach in both good times and bad. They are going to require the courage and honesty that Jason reflected in his post. And the resiliency that he and countless other entrepreneurs have demonstrated over the years.
Perhaps the biggest issue that I have with Jason's musings is this; there's nothing to be depressed about. I can't predict or control what is going to happen in the broader economy. To win in a down market all I can do is get up, go to work, and move things forward in a way that attracts interest. Interest from employees. Interest from customers. Interest from investors. Big interest.
For entrepreneurs there is never time to be depressed. There is always time for realistic optimism, good business thought, and execution. And that is now you win in any market be it up or down.
The Atlanta Technology Angels are sponsoring a "Power of Angel Investing" seminar next Tuesday from 12 - 5. The topic of this seminar is "Doing the Deal: Term Sheet Workshop." The seminar is going to cover term sheet deal terms and feature a panel including Jeff Leavitt, Melanie Leeth, and Clark Gilder.
I intend to be there and Knox Massey has been kind enough to offer up a few seats for aspiring entrepreneurs who are marching down the road toward raising an angel round. If you are interested in attending please contact me directly and we will make something happen as room allows.
Update: The Session is Now Full.
I was talking with an aspiring young tech startup entrepreneur last week about getting his one pager together for distribution when somehow or the other the topic of what to do at entrepreneur/investor semi-social mixer came up.
My advice. Don't pitch, qualify.
Rationale. Raising money is a bit like job hunting. In either instance the most effective way to get somebody to cut you a check is to get to the hidden market. Networking is one of the most effective methods to get to a hidden market. In this instance the hidden market is of angel investors not jobs. Like job hunting, if an entrepreneur is pitching people on giving them money they are going to end up with a bunch of "no's" and dead ends. An entrepreneur's objective at a networking event should be to identify potential investors that may help them get to their fundraising goal and arrange follow up meetings with them.
How do you do such a thing as an entrepreneur? Introduce yourself. Don't pitch. Ask questions. Example:
Budding entrepreneur (BE): Hi, my name is Joe Smoe. What does DoReMi Ventures do? (Never ever ask this question of a venture firm at a formal meeting, it wastes the valuable time that you have in the moment and demosntrates a lack of thoroughness.)
DoReMi: We do seed stage in the online music space.
BE: How did you get involved with that? (Or some other prepared opening line to get them to talk about themselves. Who, what, when, where, why questions all work well.)
DoReMi: {Important background info on the firm/individual, with interesting tidbit or two to help you understand the early stage market.}
BE: Well my firm does (insert one liner here) and; {option 1, if there is a potential fit} I would love to get together with you and get your advice on what we are doing over coffee, or {option 2, and much more likely} would you happen to know anyone who might have an interest in what we are doing?
End of conversation, move on. There is a roomful of people to have this conversation with. Hit them all. Monopolize no one's time. If there are 40 investors in the room and you spend two minutes with each of them doing this process you have made good use of an hour and a half.
Your objective at industry events should be to qualify. Find two or three angels/VCs to have follow on conversations with about your startup. That's it. Nothing more.
Don't pitch, qualify.
You will find yourself getting more out of entrepreneur/investor networking events.
*"Don't Pitch Me, Bro" copyrighted by Venture Capital Wear.
The good folks over at StartupLounge recently had Sig Mosley and Charlie Paparelli, two of the cornerstones of Atlanta angel investing on the show. One (and there are many others) of my key takeaways from the chatter that has been happening over the past week or so, is that there is an opportunity to increase the knowledge that entrepreneurs have about the fund raising process. A good place to start is to listen to this podcast. Money quote:
"I spend very little time looking at the numbers. I don't believe any numbers that any entrepreneur puts in front of me. I am an accountant, you just tell me what you want the numbers to be and I will make them that way." Sig Mosley
While listening to angels being interviewed is great, the best way to learn about the angel investing process is to go talk with some angels. You can do that at the CapitalLounge events, the next one quickly approaching on August 27. And rumor has it that Michael and Scott are going to announce an exciting new program that will enable entrepreneurs to get their business in front of a lot of angels.
(Cross posted on Peachseedz)
All the chatter that has been going on online sure has the early stage entrepreneurial group buzzing. About 40 or so showed up for Open Coffee yesterday at Tech Square. Heck, there were even at least two investors in the mix (Greg Foster of NMP and Clark Gilder) and at least one company (I ain't saying) that attended was talking raising venture capital. I am expecting to see an equally energetic crowd at Startup Drinks this evening at Fado.
Given all this activity Alan Taetle and I have decided to hold off on the Open VC gathering he announced in the comments over the weekend. ATDC wants to officially get involved and work with Alan, other investors, and the entrepreneurial community to more comprehensively have an impact in moving things forward. Once that gets in place it will be announced over on PeachSeedz.
If you have any constructive thoughts (please no more self flagellation) leave them in the comments. Or if you think they are better shared face to face I am now open on 2 this Friday and may just cruise over to Starbucks and be MOOF if you want some quiet conversation.
That according to Charlie Paparelli of Paparelli Ventures is the question going through an angel investor's mind during the first one on one meeting with an entrepreneur. Cindy Cheatham has a full write up over on PeachSeedz.
The three step process Charlie laid out to get the first meeting were; 1. Get ready to pitch by clearly understanding the opportunity, how to exploit it, and build the team to do it; 2. Qualify investors (and Charlie's web site does a great job of laying out the type of entrepreneur he wants to talk to); and 3. Pitch.
Make an investor believe that you can do it and you will get the second meeting and more.
My friend Jeff Haynie wrote a nice missive on why he moved to the Valley entitled "What's wrong with the Atlanta startup ecosystem and how to fix it." It's a pretty long post and a worthy read. Jeff's a smart guy and I generally agree with him on most things. I have some observations of Jeff's musings.
"My parents personally invested $250,000 of their own money as well."
Jeff hit up his relatives for early stage funding. Have you? If you can't get your Mom to write you a check (I don't care for how much) how can you expect a stranger to do so.
"I didn’t want to raise outside investment until we had a product, revenue and customers."
Like I said, Jeff is a smart guy. Waiting until have have a product before raising capital significantly increases valuation. Waiting until you have revenue before raising capital significantly increases valuation.
"Local VC money is mostly non-existant. It’s a supply-demand problem essentially. Low supply of great startups and some big hits, very little demand. (Note: I didn’t say lack of money)"
I agree 100% with this statement. And this is not the "fault" of the people that invest.
"The local community is a relationship-based economy. It’s who you know … The ‘ole boy network. The valley is a meritocracy."
I disagree 50% with this statement. As I said last week, if you have a good idea and a good team you can get funded in Atlanta. The valley is indeed a meritocracy. So is Atlanta, but you gotta perform.
"We have no real track record of big successes we can tout."
100% disagree. See here. And regardless of who funded them they count.
"What few winners we’ve had, they don’t feel compelled (or even obliged) to re-invest / give-back to the local community."
With the exception of Tom Noonan lately this is pretty much the case. His and John Imlay's commitment to giving back has spawned too many startups to count. Stephen Fleming and I were talking the other day how we need to create a culture of successful entrepreneurs that compete with each other to get in on the best startup deals so they have bragging rights. There are about five four people in Atlanta that could make a huge difference here. Tom, Tripp Rackley, Chris Klaus, Marc Fluery and Jeff Arnold immediately come to mind. Goading them will not increase their involvement.
"We don’t have any real early stage venture investors in Atlanta."
But we do. I was sitting in a room of about 50 of them on Thursday. Mike Eckert, Tom Noonan, and Mitch Free all actively do pre-product/pre-revenue deals. So does Imlay. Clearleap, Endgame, Damballa, Flux Media, Global Crypto, Pramana, Purewire, Qoil, Qualtre, SparkIP, Suniva, and WorthPoint were all funded as early stage companies.
"Nor would they (NMP) have done the deal if it was 3 guys just out of GA tech with no experience."
I can't speak for NMP and wish that they would speak for themselves. But I think that if you removed Nolan and Jeff from the equation and replaced it with somebody like Paul Stamatiou and another equally savvy person I don't think it would have changed the interest level much. They just would want to bring in some experienced members to the team. And BTW, a quick look through Storm's portfolio does not show any such beasts.
"The problem with Noro isn’t that they’re not a good firm. They are not experienced early stage investors. They haven’t had a great track record and most of their partners haven’t had any amount of reasonable success."
Before this all sprung up I was having lunch with Greg Foster. He told me that NMP could expect to do about 20 deals with their current fund. Of these deals they expect around 30% to be pre-revenue. I can't speak to the level of success that they have had with early versus late and would welcome seeing the analysis of such things. All I know is Alan Taetle lives in a nicer house than mine.
"West coast money specifically told me they did not want local money involved."
The comment stream would indicate that this is not the case.
"All the local events (that are meaningful) are being driven almost exclusively by entrepreneurs (myself included). The burden is heavy. Everyone needs to participate. Everyone needs to be involved."
First my creds on this. Spearheaded Startup Weekend, give BarCamp a little push and helped out, PitchCamp mentor, and too many ATDC related activities to mention. Younger entrepreneurs are driving a lot of the new events in town. Everyone does indeed need to participate. But some of the calls that I have seen demanding that investors and VCs fund things is just misguided. More on this later but as an entrepreneur, and I am speaking as an entrepreneur, the investor is your customer. You have to treat them as such. Go look at the BarCamp SF sponsors. VCs are not funding such things there, why should they here (except of course Startup Weekend: ))?
I don't have a horse in this race. I sit right in the middle. At the intersection of entrepreneurs wanting to get funding and investors looking for deals. What I see is people talking on two different planes. I will close with this thought. In the world of biology species adopt to their ecosystem in order to thrive and only after they thrive do they significantly impact the ecosystem. The same holds true for Atlanta technology.
Big day for Purewire. Today they announced $2 million in funding, Tom Noonan joined their Board of Directors, and the general availability of the Purewire Web Security Service.
The Purewire team quietly formed about nine months ago and began working on their concept. They announced the formation of the company in May. And now today.
The company was founded by my former partners in crime from CipherTrust, which was acquired by Secure Computing in 2006 for around $300 million. The founding team included Mike Van Bruinisse, President & COO; Dr. Paul Judge, CTO; and Mark Caldwell, Vice President of Sales. Since then they have recruited Steve Raber to join as CEO, Brad McArthur as Vice President of Operations, and Mary Catherine Peterman as Vice President of Marketing.
The $2 million raise was a "friends & family" round led by Imlay Investments. Those guys have some really great friends (one of them is me) to pull together that much coin. They can do so at this stage because the story is compelling, they have done it before together, the team has the passion that it takes to succeed, and MVB and company are thinking big.
Essentailly Purewire is offering a cloud computing security service. The product platform is strong. The four core technologies are Sandbox which protects browsers from script-based attacks; Reputation, a real-time URL classification engine; Trust that correlates user reputation, Web reputation and other heuristics; and Webcelerator an acceleration technology that maintains speed and responsiveness while all the other activity is going on in the background.
If you are looking to join an early stage company that intends to make a big splash Purewire is hiring developers and engineers.
Tell them I sent you. I don't think they will hold that against you.
The comment stream generated by the word "discuss" in my quote of the week Friday is simply amazing. The quotes are not that important. Read the comments. Some really good stuff in there.
Several of the comments pointed out the need for a seed stage investment company like Y Combinator in the Southeast. I was a bit surprised that no one mentioned the previous efforts to create such entities in Atlanta. There are two. Boostphase, which Stephen Fleming, Wayt King, Keith McGreggor, myself, and others attempted to form last fall. And Profounder (that has a slightly different model) which was put together by Merrick Furst this year and in which I am involved.
So the comments got me thinking. Is it time to try and wind up Boostphase again from an angel perspective and do we have enough entrepreneurs in the Southeast, to quote Wei, to take a shotgun approach. So I am interested in knowing how many of you entrepreneurs out there believe you can answer the following questions, pulled straight from the YC application, in a compelling way.
What is your company going to make?
Please tell us about an interesting project, preferably outside of class or work, that two or more of you created together. Include urls if possible.
How long have the founders known one another and how did you meet?
What's new about what you're doing? What are people forced to do now because what you plan to make doesn't exist yet?
What do you understand about your business that other companies in it
just don't get?
How will you make money?
How long will it take before you have a prototype? A beta? A version you can charge for?
If we fund you, which of the founders will commit to working exclusively (no school, no other jobs) on this project for the next year?
And if you can answer the questions in a compelling way, would you accept a deal where you got $25K and some expertise on how to get your concept to the angel/VC/buyout stage for 5 - 10% of your company?
I am going to try this one more time.
Discuss.
4
