--------------- 2005 -------------
Sunshine VCs. In the first three quarters of this year, U.S. venture-capital firms funneled $67.7 million into the solar-energy sector, up from $31.4 million for all of 2004, according to the National Venture Capital Association, an Arlington, Va., trade group. That's more than 30 times the amount invested 10 years ago and presents more evidence that record-high energy prices have incited a monumental push for cheaper forms of energy. The NVCA says solar investments for the first three quarters of 2005 represented more than a third of the $194.6 million invested by venture-capital firms in the entire U.S. energy industry. [futurepundit.com, Dec 22, 05]
This year saw 202 IPOs with an average gain of 19.7%, a decline from 2004, says The Red Herring. There’s no question that 2004 was a better year than 2005. Nevertheless, the IPO market outperformed the underlying stock market in each year..
The Alliance of Angels, one of the largest networks of individual investors in the Puget Sound area, said 20 local startups this year raised $7 million, even more than in 1999, when the tech bubble was at its peak and the alliance was at its busiest. [Seattle Times, Dec 22, 05]
Venture capitalists have recently encouraged high-technology start-ups to set up offices in India, where they can hire low-cost engineers and outsource basic programming tasks. Now some of those financiers are taking a different tack: investing directly in Indian high-tech companies. The trend, still in its early stages, shows how India is slowly moving up the high-tech food chain. It is a development already seen in China, [Rebecca Buckman, Wall Street Journal, Dec 7]
Valuations for companies backed by venture capitalists soared to the highest level in four years during the third quarter, another indication of the large amounts of capital flowing into the venture industry and the frothiness now marking some investment sectors. The median valuation for venture-funded start-ups in the U.S. hit $16.8 million [Rebecca Buckman, Wall Street Journal, Nov 30]
The best estimate is that the total value of extant venture-funded companies is about $250 B (down from its peak of $450 B in 2000), vs. a value of $14 T in the US public stock markets and an equal amount in the rest of the world. [SUSAN WOODWARD, J Economic Literature, Sep 05, reviewing Venture Capital Contracting and the Valuation of High-Technology Firms. Ed by Joseph McCahery and Luc Renneboog.] OK, if VC isn't your route from idea to market, what is? Getting repeated SBIRs until the idea becomes obsolete?
New England got 16% more VC money than last year's quarter which is a little more than the 13% national growth. Nationally, venture firms poured $5.3 billion into 714 high-tech start-ups [R Weisman, Boston Globe, Oct 25] Want to get some of that early investment? Have a technology with a market future. If you were a buyer/user of your technology, would you buy it for the price at which you hope to sell it?
Venture capital, to be sure, is a sport played best by risk takers who understand that the cost of getting into a deal doesn't matter nearly as much as the price someone else - whether a larger company or investors through an initial public offering - is willing to pay at the exit. There were plenty of V.C.'s who once declared absurd the $4 million that Kleiner Perkins Caufield & Byers paid in 1994 for roughly a quarter of Netscape. That, of course, proved to be one of the more lucrative venture investments of the Internet era. [Gary Rivlin, New York Times, Sep 4]
venture capital turned in 19% returns last year,... Still, one well-known VC looked at these trends and got out of the business completely. Earlier this year, Howard Anderson, co-founder of Boston-area venture firms Battery Ventures and YankeeTek Ventures, was about to raise his ninth fund when he paused for a gut check. Anderson concluded that it would be nearly impossible to deliver attractive returns. Now he's quitting the venture business to teach and advise young companies. "We were, as an industry, funding too many companies that were nonviable," he says. "We were hoping the market would get irrational again and we would get bailed out." [Justin Hibbard, Business Week, Jul 4]
Want VC money? Hone your podcast pitch Noteworthy post here by David Hornik of August Capital, soliciting funding pitches from entrepreneurs via podcasts. Its called the Postcast Elevator Pitch. As he notes, Feedburner's Eric Lunt has already tried it with venture capitalist Fred Wilson. [Silicon Beat, The Mercury News, Jun 16]
VC Tuition: $20M. there are hundreds fewer venture capitalists around today than just two years ago. The business of financing start-ups, it turns out, may not be as easy as it seems. ... John Doerr at Kleiner Perkins (his hits include Google, Amazon, Netscape and Sun Microsystems), used to say that training a new venture capitalist was not unlike preparing a fighter pilot for battle: it takes "probably six to eight years and you should be prepared for losses of about $20 million. [Mitch Kapor, inventor of fabulously successful Lotus] failed to choose a single company that made him, his partners and their investors any money. He confesses he was 0-for-5 in the investments he made during his three years at Accel [Gary Rivlin, New York Times, May 22]
Venture capital is risky business in the hands of professionals. When done by the federal government it tends toward the disastrous, as the Small Business Administration is now admitting about its decade-long attempt to outsmart Warren Buffett. ... Republicans of all people should know better than to tax some Americans more so that the government can invest in businesses that couldn't raise enough private capital. Congress can't even balance the budget, much less pick a winning telecom or biotech stock. [Wall Street Journal editorial, Apr 13] But why would Congress kill a program that hands out money to small business whether in the Participating Securities program (the one at issue that has estimated losses of $2.7B) or SBIR which is not allowed to report losses.
There is even a new trade group, the Angel Capital Association, whose goal is to raise the public's awareness of angel investing (angels complain that VCs get all the glory) ... the Web site of the Angel Capital Association is angelcapitalassociation.org, though if you couldn't discover that on your own, you have no business being involved in this world in the first place [Lee Gomes, Wall Street Journal, Apr 11] Angels are local rich guys who could be likened to a warm-up act for the VC that has serious money and a break-your-knees approach to company management of its money.
It explains why VCs take so agonizingly long to make up their minds, and why their due diligence feels like a body cavity search. [2] With so much at stake, they have to be paranoid. It explains why they steal your ideas. [Paul Graham] Thanks to AMT's Jeff Bond who helps manufacturing companies get government support (money, that is; you don't want anything else).
Alarm:Clock --
Ventures in the Business of Technology. We've teamed up with Andrew
Madden, a former Red Herring editor who now runs his own blog,
alarm:clock, covering the business of technology startups. Each
Wednesday, he will write an in-depth piece about one company
exclusively for the TR, along with a brief synopsis of the week in VC
and technology.
http://www.technologyreview.com/articles/05/03/wo/wo_madden031605.asp?trk=nl
[MIT Tech Review, Mar 17]
For technology entrepreneurs, the old line may be true: It's not
paranoia if everyone really is out to get you. [Scott Kirsner,
Boston Globe, Mar 14] Brian Barth tells his story of
bringing his SideStep to some
VCs and then finding their funding a competing venture with the same
idea. While it would clearly be unethical for a VC to hand over
documents from one company to a second company she'd decided to fund,
nothing prevents VCs from sharing with that second company what they've
learned from the five or 10 companies they've had meetings with that
occupy that same industry niche. Peabody and Ittycheria both say it's
standard operating procedure.
Angels are flocking to biotech. And they're filling a critical financing gap. Venture capitalists are steering clear of startups, preferring to fund companies with drugs nearly ready for market. Stock investors are equally wary, since one biotech initial public offering after another has nosedived this year. So angels are stepping up, betting that biotech is poised to deliver major drugs for everything from cancer to brain disorders. They poured $1.98 billion into biotech last year, up 10% from 2003 and 52% from 2002, estimates Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. [Justin Hibbard, Business Week, Mar 7]
IPOs have raised $8.4B, an all-time high for this early in a year, Thomson Financial says. but it's not 1999 all over. only about 20% of the companies in the IPO pipeline are techs, Killian says. That's below the long-term average of 35% as well as the 60% level during the tech boom. [USA Today, Feb 17]
Biggies Also Have VCs on Board. HP announced [Thomas] Perkins, a partner in the Kleiner Perkins Caulfield & Byers, would re-join the board, Coming as it does after recent reports suggesting HP's board has been unhappy with the company's uneven performance under Fiorina, Perkins' return seems a bit more loaded than HP would have us believe. "Here is a guy who has deep, deep technology connections, has previous HP experience in his background, a long history in the PC industry, a guy who I think will vigorously review business decisions,'' said Harry Blount, a Lehman Brothers analyst who does not own any HP stock. [siliconvalley.com, Feb 8]
Tech Coast Angels invested $6.6M in 2004, a 53% jump from the year before and the highest level since 2000, the group says. The 250-member group also is announcing the opening of a Westlake-Santa Barbara network, its fourth chapter ... [they] funded 17 companies last year, including SpongeTech; Diver Entertainment Systems Inc. of San Diego, and Altadena's LeisureLink, ... [nationally] angels provided about $12.4 billion in financing to 27,500 entrepreneurial businesses through June 30, compared with $18.1 billion for all of 2003. [Josh Friedman, LA Times, Feb 7]
Money Is Out There. Investments in venture capital continued to rise, as universities, endowments and pension funds committed $17.6 billion to 170 venture funds in 2004, up 67% from 2003.. The bulk of the money, 52.4%, will go into early and seed stage funds, which back the youngest start-up companies [Wall Street Journal, Feb 1]
Exit-poll companies find work doing VC surveys: If you track Silicon Valley venture capital trends, you have every right to be confused today. You spend the weekend depressed over a report that venture funding in the last quarter had fallen to its lowest point in seven years, only to hear on Monday morning that investment was not down 12 percent, but was in fact up 12 percent. The managers of the two surveys said they use different methods of reporting that tend to skew quarterly data (and investor digestive systems), but which generally converge over longer periods. [siliconvalley.com, Jan 24]
Money Available. Venture capital financing climbed 7% last year to beyond $20B.
-------- 2005 -------------
-------- 2004 -------------
Applied Materials shut its VC operation after anticipating a 35% drop in orders next quarter. Some of the venture arm's investments include Infinera, Instant802 Networks, Grandis, Menara, M-Stream, FlexLight and Takumi. [San Jose Mercury News, Dec 17] Apparently risk taking is only for the very rich. Which is why government risk-taking should be a part of national innovation. And for small high-tech companies, the cash-rich SBIR - $1B a year is big money for small nursery-scale projects - could seed a thousand innovations if intelligently done. But not like it has been done for its life of funding mostly ordinary R&D for incremental advances in knowledge.
... more capital could be on its way to small businesses in the Northwest. The Alliance of Angels, one of the largest networks of individual investors in the Puget Sound area, said yesterday 2004 will be its busiest year since 1999.The alliance, with about 110 investors, meets monthly to hear business plans from three companies, then decides whether to invest on an individual basis. This year, nine companies received $4M, more than any year since 1999, when 15 companies received $4.3M. [Tricia Duryee, Seattle Times, Dec 21]
Fools rush in. With billions of dollars surging in from first-time investors, top U.S. venture-capital firms are demanding bigger fees, more of the profits and other concessions -- scaring off sophisticated longtime backers who fear the glut will depress returns. ...says Harvard Business School Professor Josh Lerner, who studies institutional investor trends. "The fact that the most sophisticated of them seem to be looking to get out hardly looks like an auspicious omen for returns going forward." [Ann Grimes, Wall Street Journal, Dec 14] NVCA foresees $18B this year, a 71% jump over last year. When Sweden and New Jersey dabble, Harvard and CalPers find something else to do.
Paul Gompers and Josh Lerner, in their influential 2001 book, “The Money of Invention”, calculate that over the years, “venture capitalists have created nearly one-third of the total market value of all public companies in the United States.” In 1999-2000, more venture capital was raised than in the entire previous life of the industry, stretching back to the 1940s. . ... venture-capital firms may raise as much as $25 billion this year, compared with only $11 billion in 1997 ... around 50 venture-funded firms are now said to be developing products to improve internet security, compared with the pre-bubble norm of 10-15 firms per sector. Clearly this is a recipe for many more corporate failures [The Economist, Nov 27]
Where's VC headed in 2005? Spam, for starters. Here's a noteworthy summary of where venture capitalists predict their money will be going in the coming year, published today by the National Venture Capital Association. [siliconbeat.com, Dec 15] NVCA says: Venture capitalists will be searching for true breakthrough innovations and will be avoiding “me-too” deals.
How to Pitch a VC. To get funding, different or original ideas proposed by unusual people are sometimes better than simply good ideas proposed by smart people. Sergey Brin and Larry Page had no business plan and no immediate prospect of generating any revenue, but they had an original idea that made me want to listen further. There is no hard-and-fast matrix that startups can follow to get Sequoia's attention. Factors like market size and intellectual property clearly play into our decisions, but there are no absolutes in the world of venture capital. The only thing that leaves me cold during a pitch from a startup is the use of the drop-dead words or phrases: "synergy," "no-brainer," and "slam dunk." [Michael Moritz, Sequoia Capital, Business 2.0, Dec 04]
The VCs Are Back; they never went away. The VC/BIO lobbyists hope the Congressional "Lame Duck" session will bless their SBIR opening to VC-controlled firms through SBIR law changes. The big difference between the VCs and their opponents is that the VCs want the government to invest in R&D with an economic payoff, and the SBIR advocates want to protect the jobs that the government pays for in economically mediocre firms. Says Red Herring, The spin doctor is in. Entrepreneurship expert Scott Shane has a word of advice for university spinoffs that want to succeed: get a VC. “VC-backed companies do 100 times better than non-VC-backed companies. The mediocre companies plead their case.
"Angel Investment Groups, Networks, and Funds" is targeted for those interested in forming angel groups and for entrepreneurial support professionals and community leaders looking to expand the financing resources available to start-up entrepreneurs. The guide also contains pointers for accredited investors interested in becoming angels. It is available at: http://www.kauffman.org/items.cfm/590 [SSTI, Nov 9]
"Venture capitalists follow the adage, 'Bet on the jockey, not on the horse.' They're looking for people who are dedicated, passionate, who have a high level of commitment. Knowing people counts for a lot. There's a notion that in today's world everything is governed by anonymous expertise. I question that. I think the world of techno-science is more like the premodern world." -- Steve Shapin, Professor of the History of Science. Shapin also subscribes to the Scottish tradition where you can't call yourself an educated person unless you can reflect on the enterprise in which you are engaged."
a handful of venture capitalists have started opening up about their thoughts. And they're doing it democratically: with blogs. .. We've counted 11 serious VC blogs ... www.ventureblog.com, one VC with SAP Ventures, a VC with the Pacifica Fund, Steve Jurvetson, a partner at Mobius, [Matt Marshall, San Jose Mercury, Sep 21]
New England Down, MN Up. VC investment dropped 26% nationally and 57% in New England in 2Q04 from 1Q04, normal drops say the experts for summer vacation time. Dave Furneaux, managing general partner at Kodiak Venture Partners said that New England VCs now are more likely to break their financing packages into several rounds, offering start-up companies additional "milestone funding" when they have met certain targets or goals. [Robert Weisman, Boston Globe, Oct 26] But in med-tech rich Minnesota, it rose 16%, says the Star Tribune. Around Puget Sound the total dropped by about a third but the number of deals rose, in line with a trend to much smaller deals.
2004IPOs picking up. Third quarter saw 65 US IPOs more than in any quarter since the dot-com boom burst. They raised $14B. For the near future, about 170 more companies have registered for IPOs [Robert Weisman, Boston Globe, Oct 5]
David J. Muchow, President & CEO, Skybuilt Power, will describe SkyBuilt’s innovative garage size unit that can produce, condition and put to immediate use, a wide variety of renewable and other power sources. The Center for Economic and Environmental Partnership, Inc., will sponsor its next Washington, DC Energy & Environmental Funders’ meeting on Friday, November 5, 2004. online registration
Angels Flying Again. Once again, angel investors -- wealthy individuals who advise start-up companies at their earliest stage -- are returning. So are "emerging" venture funds, in many cases backed with big bucks from public pension funds eager to get into the next hot venture-capital firm. New state-backed venture funds are popping up around the country, targeting local entrepreneurs. So are venture firms run by corporations, which are usually the first to dive in during an up-cycle and the first to jump out when things get rough. And there are tourists of a different stripe: foreign investors who were bit players during the last boom. ... At least 200 more venture firms are in the marketplace trying to reel in investors, called limited partners. [Ann Grimes, Wall Street Journal, Sep 8]
ARISE and Renew. The Center for Economic and Environmental Partnership, Inc., will sponsor its next Washington, DC Energy Environmental Funders’ meeting on Friday, September 15. Speakers will be Ian MacLellan; CEO of ARISE Technologies on US Solar Energy Products and Projects, and Michael T. Eckhart, President of the American Council on Renewable Energy on the mushrooming market for solar equipment and services. Info from Gelvin Stevenson at gelvins@earthlink.net. Money will be there looking for investment opportunities.
When Nanosys pulled its IPO, one hedge fund manager said, If this company couldn't make it, no one else can, especially companies without any profits and vague product plans. ... Overall, the IPO market has been edgy. More than half the companies than went public in July, for instance, were forced to sell their shares below expectations, according to data from Thomson Financial in New York. [Wall Street Journal, Aug 5] Nanotech and biotech are two fields with great promise for the future of humanity but not for investors looking for outsize returns in the short or medium term. Unless, of course, the dot.com-style frenzy repeats itself.
When John Jaeger set out to raise $3 million for his year-old tech start-up in January, he skipped right past Silicon Valley's top-tier venture-capital firms. "It might be difficult for somebody who has an $800M fund to take an active role" in such a small investment, Jaeger says. His company, telecommunications gear maker OnSite Systems, got the money from the $330M Woodside Fund, which specializes in nurturing embryonic companies. [Justin Hibbard, Business Week, Jul 19] So you would like some of that newly free-flowing VC money that does not come with management oversight from your new part-owners? Sorry, only the government gives away money without meddling in your company, because the government only cares about your contract performance and not about your survival after the contract ends.
It's Better With VC, even if only eventually. National Venture Capital Association.says that VC-backed firms do better than others. VC-backed firms had a 6.5% employment growth 2000-2003 versus a 2.3% loss for total US employment. While that sounds great, The study, which counted 26,494 companies, includes the performance of 9,924 start-ups that received funding in 2000 to 2003. But it also reflects the recent employment and revenue growth of 59 industry leaders -- such as Microsoft Corp., Apple Computer Inc. and Cisco Systems Inc. -- that received venture capital decades ago. The study doesn't break down which category of company accounts for how much job or revenue growth. But Josh Lerner, a Harvard Business School professor who is an expert in venture capital, said employment and revenue probably would have declined from 2000 to 2003 if only recently funded companies were included. [Ann Grimes, Wall Street Journal, Jul 20]
Anxious and Idle Money. Sevin Rosen was inundated by would-be investors. On July 8, the firm announced a new $300M fund, but Mr. Jaggers said it could have raised at least five times that much. Potential investors, many from Europe and Asia, called out of the blue; some even provided references in the hope of persuading the partners to take their money. "We were just swamped with interest from new investors," Mr. Jaggers said. [NY Times, Jul 18] When interest rates are dirt-cheap and stock markets merely quiver, hot money seeks action elsewhere.
An IPO. Phase Forward after market price rose to the range where it originally tried to price the IPO. The Waltham MA software company makes a package of products that automate many of the processes used in drug research, such as data capture of patient information, data management, and monitoring of drug safety. SBA's two-year lag records shows no SBIR history.
Bye Bye Dot.com, Hello Nano. The chief executive of Nano-Tex LLC warned about the mounting hype around his company and other nanotechnology startups at a recent investor conference. But the first question from the audience showed how his message had been digested. "When is your IPO?" ... a closely watched startup Nanosys is expected to go public this year. [AP, Jul 13] Like in biotech and dot.com, hype is not profits, and without profits the bubble will burst.
Tech Stock Fun Coming? hedge-fund managers may take on more risk to try to make up the lost ground. Mr. Boldt-Christmas thinks that means they may start piling into technology stocks. When hedge funds start chasing performance like that, the rallies that result can be powerful -- particularly as mutual-fund managers join in. Such moves usually end in tears, but at the outset they can be a lot fun. [Justin Lahart, Wall Street Journal, Jun 25]
| "We have moved from cautious to dangerous optimism," says Peter Wagner, with Accel Partners in Palo Alto, Calif. ... While nowhere near levels of the late 1990s, the pace of investment in new companies has picked up noticeably. So far this year, dollars invested are up 28% from the year-earlier period, to $11.3B, according to VentureWire, a Dow Jones & Co. publication. Venture investing slid to $18.4 B in 2003 from its high of $105.8B in 2000, according to the PricewaterhouseCoopers/ Thomson Venture Economics/National Venture Capital Association MoneyTree Survey. Fund raising is at a two-year high. Nearly half of U.S. venture firms are raising new funds this year or plan to do so next year. ... In Silicon Valley, valuations of companies that raised money in the first quarter were up 17% from previous financing rounds, ... Despite poor returns in recent years, institutional investors appear as eager to invest in venture capital as before. And there's a new money source: foreign investors. Finland's government pension fund, for example, [Ann Grimes, Wall Street Journal, Jun 24] | Double Bubble Pension funds
madly rushing into venture capital think they are going to get the next
Google. They may get toil and trouble. ... Just 20
months after the bottoming of Nasdaq, and with only a modest uptick in
initial public offerings, bubble-era enthusiasm is back ... Pension funds in the U.S. and investors as
far-flung as Dubai, Finland and Singapore are all but knocking one
another down to get into the best Silicon Valley funds. Failing that,
they may end up giving their money to anyone who'll take it. And the
valuations of the upstarts that get the money are starting to suggest
mania. [Forbes,
2004
|
Ol' Man Ribber just keeps flowing along. VC investing in New England start-up companies dipped 9.7% to $743.5 million in the first quarter .. But the venture outlays climbed 9% in the last three months of 2003. For the nation as a whole, venture investments ... were 9.5% higher than a year ago, but 11.5% below the fourth quarter. says the quarterly MoneyTree survey. [Boston Globe, Apr 27] Although the $4-5B is a lot less than the flood of $28B at the height of the IT bubble.
Seven Keys to VC: Find the right VC; It's all about the team; Bring more than just an idea; PowerPoint with a point; Be specific about the opportunity; Master the basics; Don't promise the moon. [Business 2.0, Apr 04] The sine qua nons: management, profitability, competitive advantage.
Money is Money, But .... A sure sign of springtime for the economy, particularly in Southern California, is that venture capital investors are eager to back technology start-ups for the first time since the 1990s boom went bust. And there's a new twist this time: globalization. Money and companies are coming here from all over the world to invest in software, Internet communications and biotechnology. [James Flanigan, LA Times, Apr 4] If you are planning on dazzling the government with your private sector investment, be careful how you tell the government about foreign money. SBIRs have some uber-nationalist reviewers and deciders, especially in DOD, and could well mark down your story as un-American and a security risk. You'll never know it happened since the law does not permit them to decline a proposal on that basis.
Ever the optimists, venture capitalists are starting to return to their investors to raise new funds, an indication that a new generation of start-up businesses may again begin to get backing. ... Nearly 53% of U.S. venture firms have said they planned to raise new funds in 2004. [Ann Grimes, Wall Street Journal, Apr 1] VC money is good at finding the best business opportunities among new technologies. Unfortunately, the SBIR advocates quake in fear that the government might actually use such information in deciding which SBIR proposals have an economic future and which are merely service contracts for government knowledge.
New Enterprise Associates has assembled its 11th VC fund, $1.1B for start-ups in IT and health care. Everyone will need IT and health care for a long time. Want some of it? Get yourself a technology with an economic future; that's ECONOMIC future, not technical sweetness. And maybe get some SBIR for openers just to gain more maturity for the technical aspects. SBIR will NOT help you with showing economic value; the government simply does not do that.
VC flowing. Last quarter (4Q03) VCs put in the highest since 2Q02, $5M of which 27% went into the Bay Area. It could be characterized that VCs are investing rather than throwing money at fantasy business models. If you're an SBIR company with a product with a competitive advantage you can compete for such investment, or perhaps better still, get an industry wanting to partner. Face it, industries have the structure to put your product into play. Not the government, which has almost no capacity to put a product into competitive play. But industries are driven by economics and profit potential with little regard to the sweetness of your technology. Governments can be beguiled but sweetness but are subject to politically whims on money to spend on your technology. With deficits looming, there will be pressure for government to spend less (or at least relatively less) on almost everything, even health care for the growing population of seniors with an attitude.
-------------- 2004 ---------------
-------------- 2003 ---------------
Venture Blog www.ventureblog.com A group effort begun by partners in the eight-year-old Silicon Valley venture-capital firm of August Partners, this particularly well-organized blog launched in the spring. It offers a useful window into the minds of folks who put their money on technology that may, or may not, change the economy as we know it. [Wall Street Journal, Dec 4, 03]
$16B To Get Organized. Angel investors, acting alone or in the 170 angel capital groups, sunk $16B into new businesses in 2002. Now they will have an organization, IF they want one. the Ewing Marion Kauffman Foundation has got up an Angel Capital Alliance to collect data about how and where it is done well. About 10% of start-up or early-stage companies in the U.S. get equity capital from angels. [SSTI, Nov 14]
How much venture-capital funding still sits on the sidelines? billions, but in the Northwest, companies haven't been able to grab much of it — especially not in the third quarter, when the amount of money raised by local companies dipped to seven-year lows. It's been estimated that there is $55B waiting on the sidelines in the United States, ... how come there aren't more bets being placed? Some doubt $55B is an accurate figure, while others say it's not the right time in the Seattle area's business life cycle to be investing. [Tricia Duryee, Seattle Times, Oct 27]
Rising Cash, Falling Courage. Not even $84B can buy courage. Venture firms have a staggering $84 billion in their coffers to invest, a near-record amount. And institutional investors are eager to give them more dough. ... "Even today, after all the problems the business is having, there are tons of institutional investors clamoring to get into the venture business," says Joshua Lerner, a professor at Harvard Business School. ... too much caution could be costly. If the VCs focus their time and money on later-stage deals, they may not have the resources for big, new ideas. Experts say some of the most innovative, swing-for-the-fences business plans could suffer significant delays or, worse, never get off the ground. [Linda Himelstein, Business Week, Sep 29] OK, if the VCs won't invest in new ideas, who will? Ah, the government with start-up starters like SBIR. Hah! Those guys are even more gun-shy than the $84B. Congress's big talk about little business and American innovation and blah, blah, blah, come to naught because Congress gave the money to the gun-shy federal bureaucrats with no demand for accountability.
James Bond Meets John Doerr. Herman Louie answers a few questions for Wired (Sep 03), such as "What's the goofiest idea you've heard?", from the "wingnuts". Perpetual motion, zero latency, putting an idea into someone else's brain. "We keep them in a 'best of' collection." Why didn't I think of that in the 80s and 90s. Because there is sometimes a closer line than many government people think between madness and genius. They tend to reject "different" just because it is different. Louie says ideas from 2% of 3400 companies are off-the-wall technologies. If you have an off-the-wall revolution, re-calculate where your physical assumptions have carried you too far. Then make a convincing case of the merits in some frame that appeals to whomever you going to address it. "A new world order" is not a convincing case.
While other segments of the venture industry are slowly returning to historical norms, the market for start-up and seed money continues to lag, despite the better performance in the second quarter. In 2002, seed money represented less than 2 percent of U.S. venture capital investment, a stunning reversal from the 1980s and 1990s, when it regularly represented anywhere from 15 to 25 percent of overall investment. ... The problem isn't a lack of venture money. In fact, the market is awash in money. .... When you've got that much money, it's hard to invest it in small chunks. ... Venture capitalists also got burned on emerging companies during the crash ... Start-up companies are job engines. ... [Rick Brimacomb and Mark Sides, Minneapolis Star Tribune, Sep 21, 03] So, if start-up companies are engines for what politicians most want - jobs - why doesn't the government do something to get start-ups started? Actually, it did try in 1982 with SBIR that was supposed to shovel money to promising tech start-ups. But the program was hijacked by the federal agencies for their usual R&D as revenge for the money having been robbed from those programs in the first place. The result has been a lot of ordinary R&D done by a lot of ordinary small companies and no measurable job growth that wouldn't have happened anyway.
Corporate venturer sells out (for what it can get). Corning said it sold most of its venture capital arm to Saudi Arabia-based Scimitar Capital Partners, moving to exit a non-core business. Corning, (which has a marvelous glass museum at its Corning NY HQ) didn't disclose the terms of the transaction. Greg Smith, president of Corning Innovation Ventures, said the sale included 16 portfolio companies involved in optical communication technology. The company said in January that CIV had invested more than $50M since founding in 2000 but that it took $47M in write-downs as valuations declined in the technology meltdown. [Reuters, Sep 15 (thanks to Leslie Aitcheson for noticing)] At least three BMDO SBIR supported companies were acquired by Corning's venture: Intellisense, NZ Applied Technologies, and OCA Applied Optics. BMDO (in its former venture mode) supported those companies because they were good candidates for taking new technology to some market that would develop the technologies without gobs of government money (which SBIR did not have anyway and which mainline BMDO developers were too timid to invest).
raising money successfully is amazing," he said . Seattle-based venture capitalist Jon Staenberg has joined forces with a Los Angeles-based venture-capital company to raise a new fund and connect Seattle to the broader West Coast. Staenberg and Rustic Canyon Group have raised about $130 million for a new investment pool to fund storage, wireless and e-commerce companies .... The fund also has received a SBIC license which provides $2 in government funding for every $1 raised from other sources. [Tricia Duryee, Seattle Times , July 19, 2003 ].
2003Finally! Venture Capitalists have crawled out of their bomb shelters and are funding startups again. ... America needs startup companies. ... They are our economy's secret sauce, the only thing that distinguishes the still-dynamic U.S. economy from those of sclerotic Europe and Japan. ... Startups and gazelles exert competitive pressure on large companies. We all benefit. ... Startups put the U.S. on a steeper learning curve. ,,, it is crucial to understanding why startups make America dynamic. ... most startups fail. Statistics vary, but a good rule of thumb is that 90% of startups die within their first three years. Startups backed by professional venture capital do better--maybe three out of ten succeed in some fashion. ... Every time a startup takes a risky chance and careens over the guardrail, something beneficial is learned. A valuable technology or marketplace experiment has taken place. Looked at this way, no other country in the world invests as much in R&D--i.e., in its own future--as America does. [Rich Karlgaard, Forbes, Jul 17] If the federal agencies cared at all about the American economy, they would stop handing out SBIRs to experienced mediocrities and hand the money to dynamic startups. They would trade their conservatism of preferring a 99% chance of a 1% advance for a 1% chance of changing the world. No, they just haven't got the entrepreneurial spirit; if they had it, they wouldn't be working for the government anyway. Which is why SBIR as practiced is a national waste of their time.
Raising venture capital for a start-up business can be an enjoyable process if you like "chewing glass while putting hot needles in your eyeballs," Nazie Eftekhari told a University of Minnesota luncheon group. Using plain, entertaining language, Eftekhari recounted her experience raising money for HealthEZ, a Bloomington start-up where she serves as CEO. .. Eftekhari has raised almost $15M million, but has received relatively little from traditional venture capitalists. She has relied on "angel investors ... Her hunt for capital, she said, has taught her that entrepreneurs with new ideas, especially women, must develop a thick skin to weather rejection and stupid questions. A favorite questions from venture capitalists, she said, is: "If this is such a good idea, why did you come up with it?" Her favorite answer, she said, is that the idea probably has occurred to others, but they didn't pursue it, "because they're surrounded by jerks like you." [Larry Werner, Minneapolis Star Tribune, Jul 1, 03]
Warm Winters, Warm Tax Breaks.. Phoenix is offering $12M worth of tax credits to encourage venture capitalists to invest in biotech in or near downtown. ... venture-capital funds that raise up to $30M in two years to invest in biotech would receive federal tax credits that could be passed on to fund investors. The venture-capital firms could invest in new or existing companies [Jodie Snyder, The Arizona Republic, Jun. 17, 03]
Jurvetson is determined not to let the next wave slip by again. While most of Silicon Valley's surviving entrepreneurs and venture capitalists are now doing 12-step programs to break their addiction to Next Big Things, Jurvetson, at the ripe old age of 36, is loudly championing the latest N.B.T.: nanotechnology. [Forbes, 06.23.03]
2003if you have the right experience, and a good idea, venture capitalists will fight to give you their money -- and even shower you with gifts to make sure you take it. ..Scalix is just one of several hot deals in recent months that some say underscore a new era. During the downturn, most start-ups were reeling: Their sales were non-existent or declining, few could sell products to skeptical larger corporations, and venture capitalists were like deer frozen in the headlights. But lately, some companies are finding fresh ideas, showing growing sales, and boasting experienced management teams cherry-picked from a large pool of available labor. The average deal still takes about three to four months, says Jesse Reyes, vice president of Venture Economics. ... Besides offering a good idea, Farris boasts 15 years of experience in the messaging space, and has hired a team of messaging experts -- the sort of recipe that investors like. Other such start-ups are getting multiple suitors. {Matt Marshall, San Jose Mercury News, Jun 5]
Bob Lozano raised millions of dollars for his first company during the Internet boom. .. Lozano is one of 20 entrepreneurs who are going, hat in hand, to Thursday's InvestMidwest Venture Capital Forum in Kansas City. They'll face an audience that's smaller and less flush with cash than in years past. But Lozano thinks it's an audience that will value his experience and his focused business plan. "Because we've built a successful company before, we can at least get venture capitalists to return our calls, and we've even started getting some cold calls," Lozano said. "That didn't happen before." ... For the last couple of weeks, Lozano has been rehearsing the 10-minute sales pitch that he'll make at the annual showcase for promising startup companies from Missouri and surrounding states. ... But venture capitalists aren't parting with their money easily these days. In the first quarter of this year, they invested just $3.8 billion in U.S. companies, according to the MoneyTree survey by Pricewaterhouse Coopers and the NVCA. That was down 41% from last year, and is the lowest quarterly total in nearly six years. [David Nicklaus Post-Dispatch, 05/20/03]
Here's one reason why venture capital investing keeps falling: A growing number of entrepreneurs are shunning venture capitalists. With enough cash to scrape by without venture backing, many veteran entrepreneurs are making do. Raising money is too time-consuming, VCs are offering terrible terms, and lower operating costs mean less cash is needed. Others feel burned by VCs. They say some VCs pushed entrepreneurs in too many directions during the boom years, pressing them to sell products for more than they were worth, hire too many people and pitch to too many customers before they were ready. [Mercury News, May 18]
Wake of the crash Seven of every 10 Silicon Valley companies that Wall Street first sold to the public during the technology boom -- a group that generated some of the biggest first-day gains in stock market history -- are now dead or valued at less than half their initial price. The grim toll raises the question of how much investment bankers, who arranged the stock deals for billions of dollars in fees, were to blame for the carnage. [ .
"the general feeling is that things aren't going to get worse," said Anthony Warren, a partner with Adams Capital Management, and a professor at Penn State,. He expects IPO and M/A opportunities for VC-backed firms to pick up within about a year. But Mr Warren also pointed to continued uncertainty that could hurt VCs. [Peter Loftus, Wall Street Journal, Apr 30]
For those few SBIR companies looking to get venture capital to exploit their technical success, prospects got grimmer. VCs invested under $4B in the first quarter, the first time for such a low number since 1997, and the smallest number of investments since 1996.
Microvision, still struggling to turn a profit in optical gear after losing another $27M last fiscal year, raised another $12M from a private equity sale, which brings its capital raising to $50M since going public in 1996. Its early public days saw two Phase 2 SBIRs from DOD in 1998. Unfortunately for the investors, the stock price dove 20%. [story from Tricia Duryee, Seattle Times, Mar 6]
VC
friend or fiend:
Jonathan
Dickey, one of the lawyers who defended a group of venture capital
firms against
the Mercury News' demands for disclosure of their performance results
in
December, has switched sides, and is now suing venture capital firms.
.... [
San Jose Mercury News, Mar 6,03]
Private Placement a Bad Omen. Public companies who get private purchases of equity usually do 30-40% worse than market averages over the next three years, says a U Georgia study. Why? Who knows. The authors speculate that the private investor paid less than the market price.which is in itself an indicator that the market price over-estimates the company worth. [Business Week, Feb 3]
According to Jesse Reyes at Venture Economics, 9,900 venture-backed companies are still scrambling for the exits. Most of them won't make it. A mere 22 went public in 2002. The median sale price for the 214 venture-backed companies sold last year was $19 million. Investors put up a median $16 million to start those companies. And these were, by and large, the winners. [Erika Brown, Forbes, 02/10/03]
Privately held U.S. companies raised $20.3B venture capital last year down by almost half from a year earlier as cautious investors backed away from deals in the second half, according to a report on Friday. Last year's funding level was "far removed from the boom years of 1999 and 2000" and down 46% from the $37.7B for 2001, the VentureWire venture industry newsletter said. [Jim Christie, Reuters, Jan 3]
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Still hurting from the dot-com bust, shellshocked VCs in 2002 curtailed their fund raising for future investments to a 21-year low, according to a report released yesterday. While 108 venture-capital funds raised a total of $6.9B during 2002, another 26 funds refunded $5B to investors, according to data compiled by Thomson Venture Economics for the NVCA. The net fund-raising total of $1.9B represented the smallest inflow of venture capital since $1.6 billion flowed into the industry in 1981. Last year's $1.9B trickle represented a 95% drop from the $40.7B raised in 2001. [Michael Liedtke, The Associated Press]
It's not that VC firms have thin wallets; they simply have short arms. VCs must get out of their offices and do what they're supposed to do: back promising entrepreneurs developing promising products, and form companies that make the products people want and will pay for. There may be some magic involved, but it's not rocket science. [editors, The Red Herring, Dec 02]
VCs Still Hopeful. A $900M Boston biotech VC fund is the largest life-sciences portfolio in the industry for biotechnology companies, drug developers, and medical technology worldide in the $5-60M range. Said Nicholas Galakatos, a general partner, For two out of three diseases, there are no cures. The pharmaceutical industry has been half as productive at putting out innovative new drugs as all of us would have hoped. [Boston Globe , 12/10/02]
Angel groups used to be informal clubs, secret societies of elite techies with time and money on their hands. But the clubs are changing. They're opening offices, putting up Web sites, running small venture funds and, amazingly enough, holding national meetings to compare notes and set standards for what's become a booming little industry. [Beth Healy, Boston Globe, 11/25/02]
Too Much Ventured Nothing Gained. VCs are a hurting bunch. New companies feel their pain. The venture capital business has a size problem. A monstrous, staggering, stupefying one. Brobdingnagian even. In three years, from 1999 to 2001, venture capitalists raised $204 billion to back young companies in what are now known as Bubble Funds. That's a lot of money, but to appreciate the magnitude, match it against the past: Between 1970 and 1998, VCs attracted a total of $132 billion to finance startups. In other words they raised more money in three manic years than they had during the nearly three decades that preceded them. If you include money from previously raised funds, VCs have $252 billion in capital under management today. ... Now consider the pickle in which the industry finds itself. Venture funds run ten years. To earn 18% annual returns for their investors--the low end of historical venture capital returns--the funds would have to create $1.3 trillion in market value by selling or taking public their portfolio companies over the remainder of the decade.[Russ Mitchell, FORTUNE, November 25, 02]
Capital Punishment. The boom gave rise to hundreds of new venture capital firms that collected obscenely rich fees. Postbust, howling investors think most of them should die. ... The venture world is reeling from its rotten investments. Limited partners are bailing out, demanding cheaper fees, insisting on outright refunds--and even violating nondisclosure agreements to go public with just how bad some funds have performed. The atmosphere has gotten so poisonous that some VCs are buying liability insurance against negligence lawsuits. ... In the [2d] quarter VCs raised $1.8 billion, and returned even more, $2.7 billion, the first time ever this has happened. [Forbes,
Like other later-stage start-ups, five-year-old Authentica has seen the bar for raising money rise dramatically since the late 1990s. VCs are taking far fewer leaps of faith, demanding that companies have customers, revenues, realistic profit forecasts, and unassailable technology. Second and third rounds don't exist for pipedreams, investors say. Even fresh, new start-ups are expected to have far more substance than their flashy peers of the boom years. ''The VCs are still willing to invest in early-stage companies,'' said Lance Urbas, 50, Authentica's chief executive. ''What they're more leery about is the later stage.'' [Beth Healy, Boston Globe, 11/13/2002]
2002VC Still Diving. VC investments dove to $4.5B, says PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree Survey, 26% below the first quarter and a third of the 2001 second quarter. [ANN GRIMES, THE WALL STREET JOURNAL, Oct 29] Is there something the government could do to compensate for the cooling of the start-up investment fire? Yes! It could use the billion a year of SBIR for real innovative technology in innovative companies instead of pouring most of into safe predictable R&D that serves only government programs.
Venture capital investments into private start-ups plunged in the third quarter to the lowest level in more than four years, led by health care, which declined 47 percent [which] deflates the assumption that the venture industry had neared its bottom. ... In one hopeful sign, investments in information technology start-ups appeared to stabilize, particularly in the Bay Area. Nationally, they declined 1.7 percent to $2.5 billion. [Matt Marshall, San Jose Mercury News, Oct 27,02]
2002
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Incubated. CMGI continues to pump money down the toilet, posting a $1.27B fourth-quarter loss. It's funny that, while many investors lost a great deal of money, Chairman of the Board and CEO David Wetherell still has a $23M airplane. [Upside, J/F02]
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What’s $30M to a venture capital firm? It’s about the max they’re now expecting a company to need before it becomes self-sustaining. That’s the figure I’m hearing bandied about, at least. .., VCs want companies with products that save money for their customers, period. And current buzz among CEOs is that big customers want to see their purchase pay for itself, not in three years, but in 12 months or less.If you’ve got a cool revolutionary technology that will change the world, your best bet is to convince a corporate muckety-muck to sign on as an early adopter. ... It’s tough getting money these days. And frankly, that’s a good thing. In some sectors there are 10 times more companies than customers.Besides, even with all the moaning about tight-fisted VCs, this will still be the third biggest year for private equity investment ever. So quit yer bellyaching and start bootstrapping. Once again, the world belongs to the entrepreneur who can squeeze a dollar out of a dime. [Jeff Miller, Mass High Tech, Nov 19] You could appeal to the government (SBIR) for the first million, and then what? SBIR these days shows no interest in the next $29M and gives no preference in choosing technology projects to companies that could cope with raising $29M. Just look at the Army's lists of winners over the years. It's filled with companies who couldn't raise 29 cents for their technologies.
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Drooping Venture Capital. Venture firms invested 27% less in San Francisco Bay area start-ups during the quarter. says Venture Economics. national decline in VC investment as well. Just like the national decline, compared to last year's same quarter it is down 74%. When VCs say that it's a good time to invest, they mean it. Desperate entrepreneurs are letting VCs scoop up large stakes in the start-ups in return for their money. The economic slowdown has also lowered cost of doing business: More executives are hunting for jobs, and can be hired cheaply, and commercial real estate is abundant. But this year VCs are focusing on tiding over existing companies. That won't change until the market turns upward, [MATT MARSHALL, San Jose Mercury, Oct 30] And although VC investment has slowed dramatically from its overheated 2000, an NCVA study claims that VC money has created 7.6M jobs and $1.3T revenue in 30 years. As of the end of 2000, 5.9% of the nation's jobs and 13% of GDP were created by $273B of VC created companies. [Janet Whitman, Wall Street Journal, Oct 30]
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Shrink Your Way to Success. Just as prospects for startup financing were beginning to brighten, the current economic shock has sent venture capital back into a tailspin. Before the terrorist attacks on Sept. 11, VC purse strings had tightened so much that the outlook for startups with less than 12 to 18 months of cash on hand was considered iffy. Now, with a recession all but certain and Fortune 1000 companies cutting technology spending, startups might need to live off their cash reserves for 24 or even 30 months, said John Taylor, vice president with the National Venture Capital Association. ... Meanwhile, many market watchers have extended their estimate of an opening in the IPO market to 2003. So companies that had hoped to go public this year or next may need private financing to see them through a much longer period. ... The new approach has been dubbed, "shrink your way to success," [Carol Emert, San Francisco Chronicle, September 27, 2001]
2001
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Angel Network to get new wings. The Houston Angel Network -- maybe not as heavenly as many had hoped -- is about to undergo a complete conversion. The organization of high-wealth individuals interested in investing in start-up companies was created by the Houston Technology Center a year ago. Dozens of investors signed up immediately, with membership eventually reaching 110. The process seemed like a no-brainer. Get a bunch of angels together once a month or so. Have a small group of entrepreneurs give their pitches. Then sit back and watch the money flow. The only problem was, not a lot of deals were getting done. Local investor Billy Ladin doesn't fault the Houston Technology Center for the lack of deals. The HTC got the two sides together, but it was up to the angels to take it from there. However, the typical investor is too busy to spend a lot of time considering each deal, Ladin says. After polling the membership, several Houston Angel Network members formed a steering committee to make some improvements. "We decided that after a year, it ought to be gangbusters. There ought to be 500 people out there seeing every deal in town." [Jennifer Darwin, Houston Business Journal, Aug 13]
A Slower Stream The VCs raised under $10B last quarter, down from $17B the previous quarter, and down 68% from the geyser of spring 2000. Venture Economics estimates that the VCs still have $45B from previous raisings that they haven't put to work yet. SBIR hopefuls proposing to agencies that care (not many) can have a shot at some of that for the few good business ideas that SBIR funds.
The perfect storm. Just a few months ago, that's how Rick Fritz, chief of BancBoston Capital, described the confluence of factors thrashing the venture capital market. How right he was. After flying high in 2000 on big VC gains, FleetBoston Financial, parent of BancBoston Capital, last week reported a $290M write-down in its equity portfolio for the second quarter - or 10% of the total. The write-off wasn't as bad as J.P. Morgan Chase's, which exceeded $1B. But it will surely test Fleet's willingness to stick with a business that has quietly made a lot of money for two decades - but that is now feeling the same pain as the rest of the venture industry. ... Indeed, this could prove to be the worst year on record for venture capital investors nationwide, according to a report by Venture Economics [Beth Healy, Boston Globe, 7/23/2001
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Much ventured, nothing gained. So says Suzanne McGee's WSJ piece (Jul 18) on how VCs lost money for two consecutive quarters, the first time since the mid-70s (when there weren't many VCs anyway). Of all the classes of VC investing, only mezzanines made a profit and that 1.6% was not enough to attract a crowd.
Come Under the Umbrella CitiGroup Venture Capital is running ads for acquisition candidates. The umbrella is, of course, the symbol of Travellers Insurance that basically acquired CitiBank. The companies it names as its wins do not sound like struggling new innovation companies. B8ut, who knows, at what stage they might like to acquire a high-tech company and for how much. If you are such a company, you will eventuall have to face a decision about whether you are a lifestyle company that stays frimly in the grasp of the founder, or a capitalist company intent on maximizing return for the shareholders. For the former, there is always DOD or NIH SBIR to live on. For the latter, there is the possibility of untold riches to start a new line of work.
VC-Backed IPOs Down Again. It's hardly a surprise these days that turmoil in the public markets is hurting venture capitalists. The latest data dramatizes what most of them already know: after a glut of initial public offerings during the past few years hardly any venture-backed companies are going public anymore. Just four companies backed by venture capitalists went public in the second quarter, slipping from five the previous quarter and 42 in the second quarter of last year according to new data from San Francisco research firm VentureOne. [Lisa Bransten, Wall Street Journal, Jul 9]
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How Many Out There? The U.S. is home to some 700 venture firms, according to the National Venture Capital Association and Venture Economics. Yet Mark Yusko is sure there must be at least 2,800. Why's that? Well, in the last year as chief investment officer for the University of North Carolina at Chapel Hill, he says, he feels like he has met with all 700 firms. Every one, he says, has told him that they have posted returns in the top quartile of all funds. Do the math and that means that there must be another 2,100 or so funds out there to make up the other three quartiles, he jokes. And certainly those "other" firms must be the ones that invested in all of those dying dot-com companies, he quips. After all, those top 700 all claim to have avoided investing in e-commerce or content companies. Given that Venture Economics and the NVCA say about $55 billion went into Internet commerce and content companies in 1999 and 2000, "I'm really amazed how few Internet investments were made," he laughs. [Lisa Bransten, Wall Street Journal, May 21]
Seattle-based 4thpass Inc., announced it had snagged $8 million in seed capital. [CEO] Ramadan attributes his good fortune to a solid business plan, a seasoned management team, and promising technology. "There is money,But you have to have a really good story, have done your homework, and be ready with customers. Venture capitalists aren't just going to buy anything." The amazing thing is that they're still buying at all. Total VC investing sank 43%, from $20.5B in the fourth quarter of 2000, to $11.7B in the first quarter of 2001, according to researcher Venture Economics. But when VCs do buy, it looks increasingly like startups are where they want to put their money. Although the percentage of early-stage financings remained steady at 14% over the previous two quarters, 21% of all venture dollars have gone into startups so far this quarter. [Linda Himelstein, Business Week, May 28]
Managers of [National Capital] area angel groups say there has been a slowdown in investment activity, but it's difficult to find specific numbers. One area angel investor estimates there are 2,000 to 4,000 angels, about 500 of whom belong to an angel investment group. But there no sources tracking regional angel deals. Although angel activity has diminished, many area angel and early-stage investment groups indicate they remain eager to invest, especially when promising ideas come with proven entrepreneurs.
That scribbling sound coming from the bottom of the venture-capital food chain is the mad dash to retool nearly every business plan written over the past two years.There is a perception among private-equity investors that entrepreneurs are remaining blissfully ignorant to the economic conditions that have addled everyone else. Venture capitalists have cut back their investments. Underwriters can't bring an IPO to market. Whole sectors, particularly related to the Internet, are withering on the vine. Yet the average entrepreneur remains confident, so much so that the paper blizzard of business plans continues to build up in the offices of venture capitalists, even though many of these firms have said they plan to cut back on their funding. So, why are entrepreneurs still smiling? The answer appears to lie in the very attributes that prompted these people to quit their day jobs in the first place: they're adaptable. They're independent. They're prone to taking risks, no matter what the economic backdrop.And they're a little crazy. [Ray Hennessey, Wall Street Journal, May 16]
corporations invest in venture capital opportunities to gain strategic benefits. But the fact is that corporations have made too many investments that have gone awry, or that have spawned lawsuits, or resulted in dissension in the management ranks. I've got one company [an investor in Mr. Edelson's VC fund] that has made 45 investments over a three-year period. When I asked, after the downturn in the market, how many of those had panned out, they said maybe two. Despite the strategic benefits, corporations almost always end up dissolving their venture capital operations. They revert back to old-fashioned corporate development, which may entail large acquisitions and the occasional investment in a small company. Boosters of corporate VC are in the early stage of euphoria. It's like being a boxer. In the early years, he wins most of his fights, and he feels great. But then he has one fight where he's punch drunk and is forced to quit. [Harry Edelson, redherring.com,May 16]
Aether VC halts tech investing Reeling from an unforgiving stock market that wiped out nearly half the value of its investment portfolio, Aether Systems Inc. has shut the door on venture capital investing for the foreseeable future. Over the past two years, Owings Mills-based Aether (http://www.aethersystems.com), which makes wireless communications products, has made more than $150 million in venture capital and private equity investments in technology companies. Last August, Aether formed a venture capital subsidiary, Aether Capital LLC, and earmarked $125 million for the fund. At the time, Aether officials said venture capital investing would be an integral part of the company's growth into a dominant player in the wireless technology industry. But when many of the investments were made, market values for technology companies were at an all-time high. Over the past year, the technology stock market bubble has burst, and so did Aether's investments. Aether was forced to write off nearly $89 million in investments this past quarter, and its venture capital portfolio is now worth $81 million. [Larry Rulison, Baltimore Business Journal, May 14]
Pacific NW Suddenly Dry. In the first quarter of 2001, the amount of money invested in Northwest companies dropped 70% to $307M from a year earlier, according to the PricewaterhouseCoopers MoneyTree Survey in partnership with VentureOne. The number of start-ups getting investments fell to 32 in the first quarter from 48 in the fourth quarter of 2000, the survey said. "The numbers support what we feel in our guts and what we are observing out in the industry," said Gould, chief executive and president of Clinicient of Woodinville. "Eighteen months ago, VCs were throwing money at any deal that made sense. Now it's like pulling teeth." Just in time to support another plea for more SBIR/STTR for a community that doesn't want the VC money anyway.
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Entrepreneurs who read VC P.S. often bombard the VCs featured in the column with the equivalent of junk mail. But there are some small signs that suggest that entrepreneurs may finally be "getting" the fact that VCs only want to see business plans that have a very high probability of success.After he was featured here last week, Sanjay Subhedar received two plans over the transom that he says are interesting enough for him to look into. (Bravo!) Mr. Subhedar's Storm Ventures -- like most venture firms -- rarely pursues unsolicited deals. [redherring.com, Apr 18]
Failure of VC investments Dozens of Silicon Valley companies that jumped on the venture capital bandwagon last year are now paying for it in failed investments -- raising fears about the future of start-ups they've been funding. In the wave of market euphoria that began in 1999, a growing number of companies -- including blue-chips like Hewlett-Packard, Dell and Oracle -- started venture branches or aggressively stepped up venture funding. Corporate investors accounted for almost a fifth of venture capital last year.But now the cost is becoming clear. As investments have crashed in a market no longer receptive to IPOs, many companies have written off millions -- in some cases billions -- of dollars. And some experts fear these companies will turn the funding spigot down or even off -- which could spell ruin for hundreds of start-ups in the Valley and across the nation who depend on them. ...The corporate pullout has happened before. Corporations stepped up their venture investments during economic booms ending around 1974 and 1987, according to David Barry, editor of the Corporate Venturing Report. Both times they fled when the stock market turned downward. ``Most of them went `bye, bye,' '' he says. But this time, corporate venture capital makes up a greater portion of the industry, and its departure would be even more painful. In 1994, corporate venture capital made up only 4 percent of total venture capital investments. In 2000, that number was up to 17 percent.About 350 corporations have a unit dedicated to venture capital or make regular investments -- up from about 100 three years ago, according to Barry. Now the losses are coming in. HP announced last week that its portfolio lost more than half of its worth, .. Dell's portfolio dropped to a value of $1 billion, about half of what it was worth about a year ago. Compaq's venture arm recently was forced to write down $1.8 billion in the fourth quarter. ... It is hard to tell how much corporations are investing or losing on their investments, because accounting rules don't force them to break out venture results. Still, some companies have clearly slowed their investments. .... And Intel can't shrug off venture capital as a side show to its business. Last year, Intel invested a relatively small $1.3 billion of the company's total revenue of $33.7 billion. But it realized $3.8 billion in gains from its VC branch -- more than a third its entire $10.5 billion in operating profits.... Critics say it is difficult to invest strategically and make money too. ....Still, he says, corporations are likely to do more due diligence in the future before they invest: ``Corporate investors are going back to ask the traditional question: Is this a strategic technology?'' [MATT MARSHALL, Mercury News, Apr 4]
Startups won't be the only folks cut off from future funding. Red Herring predicts that many of the more than 400 VC funds started during the Internet boom will also be forced to wind down because of insufficient funding. Exits from the venture industry after the PC and biotech booms generally have gone in this order: first, corporate venture arms start reining in because venture capital is not their core business. Second, angel investors drop off the face of the earth because they are investing their own money. And third, newer funds go by the wayside because of their late entry and inexperience. [Tony Perkins, redherring.com, Mar 20]
"A Successful Startup Begins With a 'Talk to the Angels' "Seed Stage Startups, Apply Now! March 5 is the deadline for applying to participate in the next "Talk to the Angels: A Diagnostic Salon for Seed Stage Ventures" (http://mitef.org/angels/AngelsHome.htm), which we be held on the evening of March 20.As a result of the continuing success of the "Talk to the Angels," the MIT Enterprise Forum of Washington, DC/Baltimore (www.mitef.org) is getting ready to do it again in cooperation with the Private Investors Network (http://www.bmgt.umd.edu/Dingman/docs/pin/) and Virginia's Center for Innovative Technology (www.cit.org)."Talk to the Angels" is a unique educational diagnostic salon for seed stage ventures. In a round-table discussion format, a select few seed stage startups are given the opportunity to briefly describe their seed stage venture and pose a critical question to a panel of experienced local executives/angels. The local executives/angels then do what they do best, provide valuable interactive guidance and wisdom. Participation is limited to a small number of seed stage startups so as to provide a conducive environment for discussions with the angels.To be considered to fill one of the few open slots in this unique event, please apply at http://mitef.org/angels/AngelsHome.htm
Crunch Time for VCs. The industry is headed for a nasty shakeout that will hurt startups and the economy. ... Think of the industry as an overinflated balloon. During the past five years, the number of venture firms more than doubled to 1,010, the number of companies financed surged 150%, to 5,380 last year, and the amount of money invested soared nearly tenfold to $103 billion, according to researcher Venture Economics. 'Real debacle.' Now comes the pinprick. Many of the tech companies that have gone public over the past two years--most financed by venture firms--are proving to be downright terrible businesses. Venture-backed companies taken public in 2000 fell an average of 24% from their offering price, the first negative return since Venture Economics started keeping the statistics 15 years ago. Burned investors have slammed the door shut on the market for initial public offerings. ...The average one-year return to venture funds has sunk from a high of 164% in 1999 to 43% in the first nine months of 2000. And Venture Economics is predicting that returns will dip into negative territory for the 2000 fourth quarter. ... Harvard Business School professor Morten T. Hansen estimates that at least half of the 200 U. S. incubators will go under within two years. ... ''The impact of venture capital on innovation is four to five times greater than corporate research and development,'' says Harvard B-school professor Joshua Lerner. Already, that flow of capital is contracting: Venture bucks slowed to $19.6 billion in the last quarter of 2000, down 26% from an average of $27 billion for the three preceding quarters, according to the National Venture Capital Assn. and Venture Economics. It's the largest percentage drop in funding since 1993--and the biggest overall dollar decline ever. ... Venture firms are backing away from risky, change-the-world companies and focusing on safer, more incremental technologies. ...How bad could it get? Venture Economics' research shows that investments are still being made at an $80 billion annual rate, sky-high for a business that was only $22 billion in 1998. ... ''Venture capitalists need to get back to building companies as opposed to building stocks,'' says Adams Street CEO T. Bondurant French. ... That's not to say that there still won't be great technologies emerging. Nor is it a verdict that venture capital will cease to be one of the best-performing asset classes around. It will be. [Linda Himelstein, Business Week e.biz, Feb 19,01]
2001Venture capitalists need to think long term. In early 1998, Phil Baker and his co-founders at a fledgling company called Think Outside Inc. got the idea of creating a folding keyboard for handheld computers. They checked in with some prominent venture capital firms but found scant interest.``The initial reaction from VCs was, basically, that it didn't fit their model at the time, which was primarily focused on the Internet and dot-coms,'' says Baker, Think Outside's co-founder and president. The company rounded up $9 million from individual investors. ``They were too busy with their formula, and when someone came along with a different formula, they didn't have time for it.'' The dot-com bubble has collapsed. Think Outside, based in Carlsbad, has done the opposite. Today, less than a year after launching the Stowaway, a full-size keyboard that folds up to a size not much bigger than a Palm handheld, the company has shipped more than a million keyboards. It's also running an operating profit. .... Picking on venture capitalists is almost too easy these days. Stories like Baker's tend to feed skepticism about some of what goes on along Sand Hill Road. But VCs are roughly as human as the rest of us. Like other people in other fields, such as journalism, they run in herds. They can be oblivious to clever ideas, and in love with stupid ones. They're also essential to the workings of modern capitalism -- and the best ones have a lot to show for what they've done... The panic buying and fast profits are gone now. Yet the short term still motivates people. Maybe that's a function of Internet Time. Maybe we're stuck with it. [DAN GILLMOR, San Jose Mercury News, Feb 16]
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For months young technology companies have lamented the lack of early-stage investment capital, but now LiveOak is putting $15M into the market. After postponing fund-raising for its $150M LiveOak Equity follow-on venture fund, LiveOak has closed on its $15M LiveOak Seed Capital fund to invest in early-stage technology companies. The new fund is targeting an area of investing that usually relies on "angels" to fund a company's growth until a traditional venture capitalist gets involved. However, as volatile public markets have forced initial-public-offering-focused venture capitalists to slow their investment pace, angel investing also has slowed dramatically from a year ago. ... Most investments will be between $250,000 and $500,000 and will never be more than $1 million. The fund will be focused on a broad area of early-stage technology companies. ... Because the venture fund is not expected to produce a return for seven to 10 years, much of McCall's early success will be based on how well his portfolio companies are able to attract their next round of capital, said Martin Tilson, lead technology lawyer for Kilpatrick Stockton LLP. ... "Seed funds spring up as an adjunct with the theory that the larger fund can come in and hold up the pricing," Richardson said. The odds are that many seed-stage investments will not become viable companies. ... ... McCall said he intends to be an active member of the boards of many of the companies LiveOak invests in. He also looks to co-invest with the other early-stage investors and make connections with the existing angel investors in town. "Duty No. 1 has to be to build and establish strong deal flow among the angel community," McCall said. ... "You'll be surprised how much an additional $200,000 can do, and it's a lot easier to dole out the money if you are not alone." [Brian Moran, Atlanta Business Journal, Jan 22]
------------ 2001 ------------------
------------ 2000 ------------------
Frequently Asked Venture Capital Questions Inc magazine has a short tutorial on finding venture money interested to invest in your idea of a business. For example, How much equity will venture capitalists want in my start-up? Answer: 20-40% in the first round. It basically depends on how much risk you are asking them to take that your idea will not work as a going business. Note that you will not get a lot of money if both you and your idea are unproven. Only government "invests" in such situations. You can try SBIR first to avoid any risk to either you or your investors. Only the taxpayers get stuck. Rob Ryan looks more like an audience member at the Grand Ole Opry than a hotshot startup mentor and cofounder of Ascend Communications. Ryan, 52, doesn't have to dress the part of a Silicon Valley venture capitalist. His track record speaks for itself. His biggest hit was Ascend which was bought by Lucent last year for $24B. He also helped start and fund 17 other companies, including 3 that have gone public or been sold: Looksmart, Silicon Spice (sold to Broadcom), and Softcom (sold to Hayes Microcomputing). After 17 years of startups, Mr. Ryan doesn't balk at offering his opinion to anyone trying to raise money in today's funding environment: "You'd better walk on water, sing 'Dixie' and 'The Star-Spangled Banner,' and piss golden coins." That's the kind of unvarnished opinion you'll get in his new book, "Entrepreneur America," to be published in February by HarperCollins. [redherring.com, Dec 20] Of course, if all you can do is sing the Star Spangled Banner, you'll have to rely on government for your start-up capital, and probably for your continuing livelihood after that. A whole bunch of companies have done it, just have a look at the Army's SBIR Phase 2 award list for suspects.
Venture investing as marketing. Compaq might make you a deal for your new and irrestible innovation - a capital investment with a catch that you have to buy Compaq equipment and services. You can bet, though, that Compaq only wants to invest in computer-intensive technology, like genomics. Bob Sechler's piece (Wall Street Journal, Nov 13) says IBM and Intel are doing it too. These are big guys with deep pockets (and note, lots of lawyers) that make world-class equipment.
Murray Alter, for one, doesn't see VCs running out of money to invest any time soon. He estimates that VC funds are sitting on more than $100B, possibly as much as $150 billion. If they continue at this year's pace, investing $70 billion a year, they still have two years of running room ahead.
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VC predicts optics shakeout Like tobacco companies, makers of optical equipment should carry the following disclaimer: investing in these companies can be harmful to your wealth. Venture capitalist Vinod Khosla, the dean of optical networking, boldly predicts that 90 percent of optics startups will fail, while the remaining 10 percent will flourish. "What you see going on right now is greed, and I know it sounds harsh," he says. This does not mean that Mr. Khosla has given up on the optical sector. "We continue to remain bullish on the whole sector, but we are being very discriminating about the companies we are investing in," he notes.Mr. Khosla, a general partner at Kleiner Perkins Caufield & Byers, made the prediction in an extensive interview with Red Herring. The full interview with Mr. Khosla, who rarely talks at length with the press, will be published in one of Red Herring magazine's January issues. ... The amount of money invested in optical companies rose from $58 million in the first quarter to $360 million in the third, according to venture research firm Venture Economics [Om Malik, Redherring.com, November 03, 2000]
VC Rolls OnMany entrepreneurs have been moaning lately about how hard it has become to raise money from venture capitalists. But not Ken Lewis, chief executive of Chiaro Networks of Richardson, TX who jokes that venture capitalists who gave Chiaro $100M last quarter saw less information about the company than the bank where he applied for a corporate credit card. Mr. Lewis raised the money by preparing about 16 slides and some revenue projections, but not giving any forecast about when Chiaro would be profitable. "The VCs are a little like cattle, you get a good lead steer and the others just fall into line without much due diligence," he says, explaining that the most important element of his financing seemed to be securing a respected lead investor, Polaris Venture Capital. ... There was a modest drop from the second quarter in money flowing to new companies, but investments so far this year have already topped last year's record levels. ... venture capitalists say that the go-go days of investing in optical networking are ending as the valuations have fallen off in public optical networking companies such as JDS Uniphase Corp. and Ciena Corp. ... while venture investing may be hitting a plateau, it is unlikely to drop significantly over the next few years. [LISA BRANSTEN, THE WALL STREET JOURNAL, Nov 1]
Got a
big-promise technology
looking for money? The Egg
Factory only pursues innovative opportunities that pass four major
hurdles:
1. The opportunity must have the potential to produce $1+ billion in
annual revenues within five years of commercial launch by a large
global company.
2. The opportunity must be proprietary.
3. The development horizon for the opportunity must be within three
years.
4. The opportunity must benefit society.
One of the drivers of The Egg Factory is a guy who knows SBIR, Dwight
Duston, who oversaw BMDO's SBIR for a decade.
Scenario
1: Daddy needs a
drink The rise in funds can be attributed, to some extent, to
good old-fashioned, scotch-on-the-rocks, because-I-said-so machismo: If
I made that much profit with $500 million, think of what I can do with
$1.5 billion! It's not a strategy that would go over well in any other
business, but venture investing has always been about gambling. It's
high-stakes poker without the nasty associations of secondhand smoke.
Scenario 2: The entrepreneur and the pea It's still an
entrepreneur's market. Despite the thousands of unsolicited business
plans that fill the recycling bins behind Sand Hill Road, the recent
era of prosperity means most simply that the need to invest money is
greater than ever. So when good ideas surface, they will be the subject
of intense competition.
[James Judd, "The top 50 VC firms: Green is the new black",
November 2000 issue of UPSIDE magazine
Airsick
Angels Several
companies got caught in a dot.com downdraft when the tried to be angel
investors. General Cinema, the movie theater company, filed for
Chapter 11 bankruptcy protection this month - just a few weeks after
saying it had to write off a $9.5 million investment in Internet loser
MotherNature.com. Never mind that more people than ever are going to
the movies and the screening industry can't figure out how to make a
buck. Poor old General Cinema caught the VC bug and took it on the chin.,
says Beth Healy, Boston Globe, Oct 23. The lessons she distilled from
the experiences of such amateur investors:
Lesson 1: Don't try your hand at a tough business when you've got
enough trouble managing your own.
Lesson 2: Just because you're from Seattle and techies love your joe,
don't start thinking you're a venture capitalist.
Lesson 3: No matter what they tell you, betting on private deals is
different from picking stocks.
Lesson 4: It may be flattering when young guys ask for help. But it's
not always profitable.
VCs spent $14.4M on three Bay area optical networking deals in 1995. Last year they pumped $608M into 86 local optical networking startups. The the first half of this year they have spent $795M on 65 local deals. [Laser Focus World, Oct 00] This is an industry that needs government help from programs like SBIR and ATP to make America competitive?
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We are starting a software technology company in Boston, Mass. How should we look for smart angel money? Guy Kawasaki responds: According to Dan Roach, managing director of Garage.com's Boston office, "Smart angels have a web of contacts, and these contacts will often feed them interesting early-stage start-up deals." He suggests tapping into the network you already have, including your attorney, accountant, and other service providers. Ask these contacts to introduce you to potential sources of capital, including angel investors. To broaden your network, you should also attend industry conferences or join strong organizations related to your business. Because you are starting a software technology company, Roach recommends getting involved with Massachusetts Software Council, or some other high-tech or nonprofit Boston-area business organization. Don't forget to mingle at these events; get to know others in your industry. Disclaimer: Garage.com helps connect high-tech start-ups with angels, corporate investors, and venture capitalists. [inc.com, Oct 5]
ignited the big technology revolutions. Once the province of wealthy families such as the Rockefellers and Whitneys, the U.S. venture-capital industry has widened out to become a uniquely American institution that has helped to build the prosperity of the postwar era. In recent decades, venture capitalists, more than investment or commercial banks, have ignited the big technology revolutions, from microprocessors to personal computers to the Internet. To take one spectacular example -- as veteran venture capitalist John Doerr notes in his essay -- the firm of Kleiner Perkins has backed the founding individuals who went on to become Compaq, Sun, Intuit, Netscape, @Home and Amazon. The best venture capitalists are superb futurists. Mr. Doerr says that every December he and his colleagues "think ahead five to ten years and discuss the largest, most important new opportunities in science, communications, society, computers and consulting." Venture capitalists wear other hats as well, including those of headhunter, coach, board member, consultant and, of course, financier. Like record-company talent scouts scouring smoky clubs, they hang around universities and laboratories to woo the geeks whose idea may someday turn into a $1 billion initial public offering. James Breyer of Accel Partners judges his firm's chances for success by asking: "Are we the first phone call that an entrepreneur makes when he or she goes off and starts a new company?" [Leah Spiro, Wall Street Journal, Oct 4] Spiro's review of Gupta's book "Done Deals" does not yield any credit to government's attempts at funding technology revolutions. Government, after all, hands out only money and no management help, provides no help raising capital as the company grows, keeps the technology rights for its own use, and has no interest in the compoany's success.
The Georgia Technology Forum picked 20 of the newest high-growth technology companies to dance for VCs as candidates for the next wave of start-ups in Georgia. 150 companies applied for a ten-minute dance chance. The companies chosen were: AmericaUtility Inc., Artisan Network Inc., CareerStream Inc., CollectionsX.com Inc., DistributedAudio, Enkia Corp., Excellatron Corp., FundraisingInfo.com, Intelligent Sensor Systems Inc., Iotronics Corp., Javakitty Media Inc., Media1st.com Inc., Microwave Science LLC, MostChoice.com Inc., N2 Broadband Inc., Racemi, Requip, Touchworx Inc., TradePulpPaper.com LLC and TrueShopping Inc. [Atlanta Business Chronicle, Oct 2]
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Tech boosters target 'angels'. For more than a year, a group of wealthy San Antonio investors has met for breakfast on the first Friday morning of each month to pick over scrambled eggs and business plans presented by nervous high-tech entrepreneurs. The group, which has grown to about 35 individuals, keeps the location of its breakfast meetings a secret. But the financial clout of the individuals participating in this breakfast club is no secret, which is why their gatherings are being talked about as the spark for a drive to organize the city's major private investors -- so-called angels. The goal of the organizing effort is to put more tech entrepreneurs in touch with local financiers and to make more of the city's angel investors comfortable with technology investments. The plan for better focusing the financial muscle of these angels is being spearheaded as part of the San Antonio Technology Accelerator Initiative (SATAI). [Greg Jefferson, San Antonio Business Journal, Oct 2]
New Enterprise Expects Venture Fund of $2.2B New Enterprise Associates, one of Silicon Valley's best-known venture firms, is about to mark a milestone: a venture fund expected to total about $2.2 billion.That would be the largest fund raised to date for purely venture investing, according to VentureOne, a San Francisco research firm that tracks the industry. But it is just one of many signs that the dot-com downturn and a hit-or-miss market for other technology stocks has not stemmed a tide of money aimed at start-up companies. So far this year, more than 11 venture firms have raised funds of $1 billion or more. Just four such funds were raised last year and just one in 1998. [LISA BRANSTEN, Wall St Journal, Sep 15]
VC Dreaming. For most venture capitalists, New Hampshire is still an adventure. It's hard to believe, but just 46 miles north of Boston, over the New Hampshire border, there is virtually zero venture capital.Don't blame it on a shortage of technology or entrepreneurial spirit. New Hampshire has been noted as one of the fastest-growing states in the country, thanks to new-economy jobs and an enviable lifestyle, according to recent national studies. It claims more than 1,000 software and Internet companies, strewn about the state. And big high-tech companies are attracted to it: Corning Inc. is building a $225 million photonics plant in Nashua, to house 850 employees. So why the lack of venture capitalists? The fact is, money people do seem to cluster. There are gobs of venture capitalists in Silicon Valley, of course, and scores of them around Boston and Cambridge, with billions of dollars in their funds. By contrast, New Hampshire houses but a handful of small venture outfits, keeping company with the likes of Iowa, Kentucky, and Mississippi. [Beth Healy, Boston Globe, Sep 18,00] Never mind the facts; politicians will still try to invent venture capital with handout programs that pretend to create local jobs. Which they will, as long as the handout continues. Look at the federal experience with SBIR - lots of jobs paid for while the money lasts. And then another request for another handout. Which is also why SBIR need an economic evaluation to expose the flimsy assumptions.
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Grassroots Venture Capital. Your odds of getting VC funding if your company isn't a dot-com have never been better. But you have to know where to look. Popular wisdom holds that CEOs of traditional companies have about as much chance of winning venture capital as the average New Yorker has of snagging a reservation at the hottest new Manhattan restaurant. And so most companies don't even bother trying to get VC money. Why face certain rejection? Yet now, more than any other time in history, even founders of unglamorous (read: nontechnology) companies can lay that fear of rejection to rest. We won't kid you: fledgling tech plays bright with the promise of high-ROI "liquidity events" remain the polestars of the investment universe, but companies of all stripes are getting the nod from a VC community that is flush with cash. Last year alone, VCs gave away $36 billion to companies, and as you'll see from the following stories, some of that money went to early-stage businesses in fields as mundane as work gloves and toilet retrofitting. Here's a look at how this newly available capital is influencing the start-up scene and how you, too, can join the few, the proud, the funded. [Thea Singer, Inc. magazine September 01, 00]
The authors argue that one type of incubator, called a networked incubator, represents a fundamentally new and enduring organizational model uniquely suited to growing businesses in the Internet economy. It shares certain features with other incubators mainly, it fosters a spirit of entrepreneurship and offers economies of scale. But its key distinguishing feature is its ability to give start-ups preferential access to a network of potential partners. Such incubators institutionalize their networking they have systems in place to encourage networking, helping start-ups, for example, to meet with potential business allies. That doesn't mean incubatees get preferential treatment; it means only that they have built-in access to partnerships that might not have existed without the incubator. Even with this advantage, however, networked incubators can easily follow the road to ruin. To avoid failure, they must create a portfolio of companies and advisers that their incubatees can leverage. That can be done by strategically investing in portfolio firms and by enlisting a large set of business allies. It can also be done by establishing connections and relationships that are anchored more to the incubator than to particular individuals. [Networked Incubators: Hothouses of the New Economy by Morten T. Hansen, Henry W. Chesbrough, Nitin Nohria, and Donald N. Sull, Harvard Business Review, S/O 00]
2000Mentor Capital Management's Stacey Moore is often asked, "What is the least risky way I can play in the riskiest area of investing?" Moore, who previously managed small-cap funds for Bank of America Corp., says he wanted to start a fund that would offer investors early-stage opportunities and minimize risk through his expertise. ... The young Charlotte Angel Partners, a group of 100 investors who each contributed $50,000 to an early-stage fund, has had to turn people away.When that group meets monthly, it reviews business plans that have been pre-screened and carefully chosen by its board. So far, Charlotte Angel Partners has invested in one company, Research Triangle-based zoomculture.com, but the group has received 80 business plans. ... eStreetCapital.com, an angel-round investment group, will open its Charlotte office by Oct. 1 and is looking for investors to pony up $25,000 to $250,000 [Charlotte Business Journal, Sep 4] SBIR proposers, for example, who cannot find co-investment either haven't looked or don't have an investable project. In either case, the government should be wary of claims of great value for the business of the technology.
Venture capitalists find new markets amid dot-com fallout. The VCs are still at it despite all the dotcom out-of-cash news. In the second quarter, funding for business-to-consumer and business-to-business e-commerce companies fell about 50 percent, according to statistics released by the Arlington, Va.-based National Venture Capital Association. Where did all the money go? Telecommunications, wireless applications (up 24$) and biotechnology plays. Mark Heesen, president of the NVCA, said the retreat from e-commerce in favor of traditional technology companies shows that VCs are returning to their roots and once again investing for the long-term. Wall Street also seems to like anything and everything wireless these days. Just last week, no less than five wireless, telecom and broadband companies priced for their initial public offerings, including Telecommunications Systems, Repeater Technologies, Vina Technologies, WJ Communications and O2wireless. [Seattle Times]
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New Enterprise Associates is the latest venture-capital firm hoping to join the elite billion-dollar club, which has seen its ranks swell in recent months. The Menlo Park, Calif., firm is just starting to raise money for its next fund and is looking for $1.5 billion, but could raise up to $2 billion. Raising huge stashes of cash is becoming the norm these days. So far this year, 11 firms have closed funds of $1 billion or more, compared with just four last year (all between September and December) and just one in 1998. [Lisa Bransten, Wall Street Journal, Aug 7,00]
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IPOs Heat Up The market expects 40 IPOs to price this week. Friday was the highest number, ten, for one day since Feb 1996. Notable was the lower proportion of pure dot,com plays and lots of good old new technology. Tony Perkins of Red Herring throws some cool water on the flames by noting Riddle me this, Bat-investors: Why is it that all of these fiber- optics stocks have market valuations well in excess of $1B, when not even one of them has annual sales over $100M, much less any earnings to speak of? Will these fiber-optics IPOs still look like huge successes after several months? I'm skeptical. The one constant in this ever-changing market is that investors find new fads.
(Jul 25)VCs scale a mountain of money, says Matthew A. DeBellis,
Redherring.com, July 19.Greed isn't always good. Venture
capitalists have hit up their investors for so much money that they may
be tapping them out. VC firms raised a record $25.2B through June of
this year, 2.7 times more than they did in the first half of 1999,
according to Asset Alternatives. The amount raised overall for private
equity funds is even more staggering: Investors committed $69.7B to
private equity funds (including leveraged buyout funds), up from $28.5B
in the first half of last year. .. Limited partners had no problem
helping build the mega-funds because they raked in amazing investment
returns. In the past two years the initial public offering market was
afire, so they've been eager work that angle all over again. VC firms
have enough cash to fund new companies for the next few years, but it
seems unlikely that they'll continue to raise money at such a breakneck
pace if the public markets remain skittish. If the cooling trend
continues, investors will quickly reduce their VC investments -- and
that will translate to less money for startups. Red Herring
invites you to discuss venture capital in the Venture
Capital Funds and Firms forum. Or check out forums, video, and
events at the Discussions
home page.
IPOs Are Back. Last spring’s tech market meltdown has left a full pipeline of companies waiting to go public--and a whopping 27 of them think the week of July 24 is the time to do it. Of course, most of the deals are tiny. The week’s slate totals just $3.2 billion--and one deal is expected to raise one-third of that amount. [Forbes, Jul 24]
The venture-capital boom continued unabated in the first quarter, reports PricewaterhouseCoopers, which tracks the industry. According to its tally, venture funding hit a new high of $17.2 billion, four times the year-earlier level. At the same time, both the number of companies getting funds and the average amount doled out doubled.Technology companies accounted for 93% of the quarterly total, of which Internet-related companies received the lion's share. Some 45% of the pie went to companies in the early stages of development. [Business Week]
Bullish in a bear market. As the Nasdaq bear market in technology stocks looks more and more like a long-term correction rather than a short-term hiccup, the implications for the local economy are starting to become more evident. The most obvious impact has been the carnage of planned IPOs -- withdrawals, delays and downward offering prices. The mythical "window" for IPOs has been largely shut, with many companies left outside looking longingly and disconcertedly inside. The difficulty is that, like the windows of IPO opportunity in the past, there is no real way to predict when it will open again. Corporate planning is therefore left in a haze of uncertainty. ... Once you get beyond the immediate pre-IPO group of companies, the climate in the region for high-tech companies at the early and middle stages of development has remained remarkably unchanged. Venture capital has been plentiful and early stage money from angel investors is growing as well, thanks to more organized angel networks. Clearly, there is still a lot of money out there looking for the next big dot.com winner. Institutional investors, the source of much venture capital, have not lost their willingness to risk a portion of their funds for the potential big pay-off. For venture capitalists, the obvious downside of the frigid IPO market -- the closing off of one of their prime exit vehicles -- is at least partially offset by a drop in valuations they will have to make for their companies. . [Robert Snyder, Washington Techway, June 12,00]
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There's still money available, but it costs more. The VCs have oodles of moolah to invest -- they raised an estimated $46.5 billion last year, up from $27.9 billion in 1998. So they're still doing deals. But now they're valuing startups 30% to 50% lower than they were before, so founders have to give up more equity to get the same amount of money. This means entrepreneurs can no longer afford a burn rate reminiscent of the Los Alamos fire. [Max Boot, Wall Street Journal, June 12]
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Whether the Nasdaq goes up or down, the venture capital industry is poised to shove another $50 billion or so into start-ups this year. Having raised their funds, the VCs really don't have much choice in this matter. They have to invest the money. So no matter what the market does, there will continue to be new companies, new technologies, and new ideas. [RX Cringley, worth.com, April 14]
...if venture capital in the pioneering era was classy, and in the Doerr era was cool, in the Internet age it is...lucrative. For three years now, venture capital has been a failureproof proposition--and the VCs running those swollen funds (the latest are worth $1 billion) are happily making themselves some of the richest folks on the planet. For that kind of money, you'll eagerly suck up to postadolescents and rip off your friends. [Michael Malone, Forbes ASAP, May]
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Says Kathleen Pander in the SF Chronicle, Glub, glub, glub. That's the sound of more and more IPOs going underwater ... Of the 156 Bay Area companies that went public this year or last, 41 are trading below their IPO prices. [including] high-profile sinkings like Palm, Webvan, Pets.com, E-stamp, Salon.com, Fogdog, Quokka Sports, Women.com and Next Card. The next sound you will hear is the IPO window slowly scraping shut. For whom is all the blood good news? For the SBIR mediocrities who don't want to compare badly with entrepreneurial companies that make something of their technology besides a government story about commercialization potential.
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A VC firm, Adams Capital Management, says Tony Warren is now a venture partner specializing in SBIR companies. Tony, who has been a fixture at national SBIR conferences says he will prepare early-stage companies for equity investment. Adams's press release cites as an example Tony's arranging a VC for CoreTek which cascaded a couple of BMDO SBIR Phase 2s and a lot of genius work into a $1.4B buyout from Nortel Networks. Says Tony, "There is a shortage of equity financing to bridge the gap between federal R&D funding and later-stage venture capital. This gap has been a major barrier preventing the results of the SBIR program transferring to the private sector. Together we plan to unlock much of the pent-up value. Unfortunately for SBIR, most of the projects funded and most of the companies will never get Tony's help because they don't want it. They want to do good R&D for the government, collect a regular paycheck, and sleep well, never dreaming of owning a luxury hotel with golf course in Boca Raton or a private jet with intercontinental legs. Look for Tony at the next SBIR conference in Washington May 5-7.
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Intel Matched SBIR. Few investors have ever heard of any of these fledgling technology companies. But at least one very important investor has: Leslie L. Vadasz, a man with deep pockets. Very deep pockets. As head of corporate investments at Intel Corp., he invested $1.2B last year alone in these and 245 other startups, mostly Internet companies but also desktop and server computing concerns. Some, no doubt, will go bust. And, based on past experience, Mr. Vadasz knows he will be ribbed mercilessly for missing megawinners among the 4,750 investment deals turned down in 1999 by Intel Capital, .... Mr. Vadasz and Intel represent the new breed of venture investor: the successful multinational, often in the technology business itself, that views investing in start-ups as a strategic mission with an added fillip -- the prospect of staggering profits. "You judge your return on how you met your strategic goals, and count the money later," he notes. Microsoft Corp., Cisco Systems Inc. and Dell Computer Corp. have also poured large sums into start-ups. Intel's portfolio alone consists of 350 companies valued at $8.2 billion at the end of 1999, compared with just 50 companies valued at $500 million two years earlier. [DEAN TAKAHASHI, WALL STREET JOURNAL, Feb 8] Intel invested last year about what SBIR did. Which made the better investments? Out of which program will come a larger array of socially-useful technology? You have to be hard-core government to think that NASA or the Air Force would look to the wider picture in its SBIR investments. How does the Air Force even decide what return it got for its "investments"?
Venture
Capital Tsunami
(Feb 8) It is no secret that venture capitalists invested a lot of
money in 1999. But the surge turned out to be a tsunami. Driven by the
dot-com frenzy, venture-capital investments in U.S. companies more than
tripled in the fourth quarter and more than doubled for the entire
year, according to reports being released this week by rival research
organizations. Records were set in nearly every measure of investment
activity. Venture investments soared to $48.2B in 1999 from $19.3B the
prior year, according to the National Venture Capital Association and
Venture Economics, ... The number of companies funded was 3,619, up
24%. ... The median amount raised by each firm rose to $10.5M, up an
unprecedented 43% from last quarter.
One sign of the new mood is the explosion of the venture-capital market.Venture capitalists sank $45 billion into fledgling companies last year,compared with $3.7 billion in 1990, according to Venture Economics in Newark, N.J. Venture cash is transforming half-formed ideas into world-beating products and services. Back in the 1980s, even though Tyrone F. Pike had worked for a venture-capital firm, he had to use his own savings to start his first company, LAN Systems Inc. In the 1990s, the money came to him. [Business Week, Feb 14]
Another $24B in tech stock mutual funds, up from $19B in November, says the Investment Company Institute. Those funds have to bid up the price of listed tech stocks and raise the interest level of early investors in early stage companies. Money is sloshing around in a mockery of the SBIR advocates' special pleading for government funding. New technologies that cannot attract backing in these market conditions will probably never get anywhere with SBIR funding either. Only in a few circumstances is there any hope of "jump-starting" a technology that cannot attract at least one private dollar for every government dollar.
Ohio Capital. A New Albany venture capital firm plans to launch a $40M technology transformation venture fund this month with the hope of channeling some of the money to fledgling Ohio companies. It would become the fourth venture capital fund for Custer Capital Inc, which specializes in financing early-stage companies in technology, telecommunications and health-care industries. The newest venture fund would be made up of investments from 50 families from Ohio and Michigan, as well as contributions from angel and institutional investors, said CEO William Custer. [Columbus Business Journal, Jan 10]
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Spectrum Equity bucks trend, builds funds to $1B. Six years ago, the firm saw value in telco startups now raking in cash. At a time when venture capital is flooding the technology sector, a new venture firm with roots in Boston is flooding the communications market with a fund that recently topped $1B.Spectrum Equity Investors, in Boston and Menlo Park, raised $650M for its latest fund and is now opening an office in London to find more companies to invest in.... [when they started] venture firms did not fund many of the new communications companies. When they first considered the idea, the venture capital world had been a stable one, but was on the cusp of a tremendous rise that would help change the country’s economy. For the 15 years ending in 1993, funds raised by venture capital firms in the United States were steady, totaling $3-5B each year. But in the last five years, venture funds have exploded, reaching a total of $14.3B last year, according to Pricewater-houseCoopers’ Money Tree Survey. Meanwhile, the total dollars already under management soared from $31B in 1993 to $80B last year. By the third quarter of this year, venture capital firms invested $21B, with about 90% of those investments going into technology. [Kate Munro Mass High Tech, 20 Dec 99]
Too Much Venture Capital? Rich Karlgaard scorns the idea of to much VC as expounded by NYT's Charles Ferguson. Karlgaard claims VC is a cartel dominated by white geeks in Menlo Park, Cambridge, Seattle, and lower Manhattan. Some firms of the venture cartel have averaged triple-digit returns since 1995. .. VCs oppose reducing capital gains taxes because even though VC stand to benefit individually, the reduced rates would also lower entry barriers for new competition in the form of angels and corporations. His solution: A trillion dollars a year [of VC] would be much better. Cut taxes (He works for Steve Forbes)Let a million entrepreneurs bloom. [Forbes, Jan 10]
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| Corporate VC, Too Says JH Prager (WSJ Dec 28), corporate VC has gone from a blip to an established sector. From 2% to 15% of all VC since 1994 and double its percentage of just 1998. $4.4B in 1999. 163 companies playing. Not for the first time, says Harvard prof Josh Lerner, they tried it in the 60s and the 80s. What's changed this time is that corporations are doing it for the money and not just to acquire the new technology and they are less afraid to throw money at an early-stage idea. Which names are prominent in corporate VC? GE, Intel, Lucent, SmithKilneBeecham. | Japanese Incubators From Duncan Brown, now president of ATMI Japan, comes a story from The Nikkei Weekly, the English language "Japan's Leading Business Newspaper", Incubators in the boonies - not for chickens, but for high-tech startups. With a twist - welcome to foreign start-ups. Eight of 120 companies in the Kyoto Research Park are foreign. Love those Indian software companies. Threat to the US high-tech industry? Not yet, but surely we can stir a few fearful economic nationalists with a re-run of the VCR story and bang the drum for a government incubator program. |
And a savings-and-loan company, Washington Mutual, started a $150M VC fund; everybody's a VC these days to back more companies like Cree. Got a good e-commerce idea? See an S&L. Meanwhile, all the companies that will never be a Cree but still want to play at science will be getting SBIR subsidies to dance to the government's tune. Join in.
IPO Bonanza Year. By virtually all measures, the IPO market had its best year ever in 1999. In all, U.S. initial public offerings of stock have raised a record $69.2B this year, or nearly 20% of the $350.8B raised since 1989, according to Thomson Financial Securities Data of Newark, N.J. While the number of actual deals has gone down, no other year has come close to 1999 for an overall-proceeds figure.The previous high was 1996, when companies raised $49.9B. [RAYMOND HENNESSEY, Wall Street Journal, Dec 27] What is government's role in all this wealth and investment? Keep the markets clean and keep a stable money supply and rule of law. Otherwise, leave it alone, including avoiding silly subsidies to companies who claim they are deprived of feeding at this banquet.
Investing in IPOs is the drunken tryst of personal finance - it seemed like an awfully good idea at the time, but you will probably regret it in the morning. [Pete McArthur, Bloomberg Personal]
The spiraling increase has, among other things, led to the rise of ``instant'' Internet companies in the consumer sector. The breakneck speed at which deals are being consummated, and the pressure on companies to grow really big really fast, could end up distorting the culture of start-ups as well as of the venture business, observers said. [San Jose Mercury, Nov 14] So, the Silicon Valley greyhounds and the government sponsored turtles get money and the intermediate innovators with good commercial prospects all have top squeeze through BMDO's door?
We are all venture capitalists now. OK, that's an exaggeration. But not much of one. The venture capital business is booming. An estimated $30B will be invested nationally in new ventures this year, a tenfold increase since the start of the decade. More remarkable than the growth in dollars is the growth in the number and nature of the investors. Simply put, corporate America is jumping into the venture business in a big way. According to Steven Galante, publisher of Venture Capital and Information Technology, a Wellesley newsletter, 160 companies now have venture capital operations, up from 70 two years ago. [Steve Bailey and Steven Syre, Bostom Globe, Dec 23] Oh, don't worry, SBIR aficionados, the fix is in! Even though you have no economic case for SBIR, the politicians will grease your palms with a handout to your right hand taken from your left hand. In your glee, you won't even notice the trickery (they hope).
Wall Street's thirst for new stock simply couldn't be quenched in 1999. So far this year, there have been 514 deals, more than in any other year, and the companies that went public raised an unprecedented amount of money. The good news is that the market's appetite for new stock remains strong at the threshold of the new year, according to Salomon Smith Barney strategist Marshall Acuff. [Forbes.com, Dec 21]
Intel's VC Empire Intel's large VC arm has long been investing in companies that stretch computing beyond the PC. Intel's $4.8B VC portfolio, with stakes in more than 300 companies, has become increasingly focused on next-generation Internet infrastructure and content companies. In fact, by mid-October, it had already concluded more than 150 deals, and the company expected that by the end of 1999 it would have invested more than the $800M it doled out the preceding year.With its size and penchant for investing as much as $10M per round in multiple rounds of financing, the company can provide a big boost to tech startups. In fact, with a staff of more than 100, Intel has one of the largest VC operations in the world. [Chief VC,Les] Vadasz, who was one of the original employees when Intel was founded in 1968, "For the foreseeable future, I see the PC as the main device for access to the Internet." Whatever the future holds, Intel's venture arm will be there--and probably earlier than Intel's main business. Says Vadasz, "Our investment activities try to lead our business strategies. In many ways, it's a window into new technologies." [Loren Fox, UPSIDE, Jan 00]
Another month, another billion in ammunition for venture capitalists. Actually this time it is at least $1.1B, as U.S. Venture Partners earlier this month closed a $600M fund, and Canaan Partners is in the midst of closing a $500M fund. "It's taking more money to roll out these business models," says John Balen, general partner at Canaan. "If you starve these companies of capital, the competition will come after you." .[Lisa Bransten, Wall Street Journal, Dec 20]
More VC Funds. The University of North Carolina's $464M endowment, after chalking up a 30% return on venture investments last year, is pumping millions more into VC firms. In their latest foray into the high-risk, high-return VC field, UNC endowment officials have committed $14M to a trio of VC managers and to a firm specializing in corporate buyouts. [Raleigh Business Journal, Dec 13]
Too Much Venture Capital? Charles Ferguson [New York Times, Dec 11] notes that a typical daily issue of VentureWire lists 20 deals for $100-200M and extropolates to $50B for the year - ten times 1994. He also notes that high technology start-ups are not just stocks; they are also businesses, and they have to operate. The giddiness about stock prices is obscuring the real needs of the companies. It didn't used to be this way - in fact, we used to have the opposite problem. Until very recently, the VC industry was a small club, verging on a cartel, the the technology sector was for geeks in Claifornia, period. Money was tight, particulalry during the technology sector recession in the early 1990s. ... But the fact that movirtually any idea - no matter how dubious - can obtain money, and that so much money is avaialble, is also causing problems. Competition among Internet companies is increasingly a financial arms race. They must raise huge war chests, give away their products, advertise on television, and pay insanely high salaries - simply because their competitiors do. In such a world, what is government's role? Add fuel to the fire by backing start-ups who claim they are denied access to capital? If $50B a year isn't enopugh to fund all the sensible ideas, what good can government do with programs like SBIR and ATP? Force the federal agencies to fund the deadbeats who cry to Congress for protection from their own business incompetence?
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After taking a short breather, the IPO market is back in full effect. With $1.6 billion and 21 deals waiting in the pipeline, the flood of new offerings has regained its momentum. "Last year's market crawled like a cockroach compared to this," says Jeff Hirschkorn, senior analyst at IPO.com. "The Nasdaq's continued record setting performance shows that the market's appetite for these offerings is high. It’s a case of Internet domination at its best." [Nicole Koffey, IPO Outlook, Forbes on-Line, Dec 7]
Technology stocks aren't just leading the rest of the market. They're practically suffocating it. Not only have technology (including Internet-related) shares led this year's tremendous rise in stocks, especially during the past few months, they are hogging all of the attention of investors and Wall Street. Technology dominates the Internet chat rooms, the business-news media and Wall Street's research efforts. A noninvestor could be forgiven for wondering if there is anything else in the stock market. In fact, technology and Internet-related issues make up only about 22% of the stock market's value (based on the Russell indexes of the market's 3,000 largest companies).... "It's become a mania on Wall Street," says Byron Wien, U.S. investment strategist for Morgan Stanley Dean Witter & Co. "It doesn't matter who you talk to, retail or institutional, very few feel they own enough tech. Even if they own tech they want to own more, and if they own a lot, they want to own only tech." [GREG IP and GREGORY ZUCKERMAN, THE WALL STREET JOURNAL, Dec 6]
Strength in Numbers. Venture capitalists increasingly want to continue funding their young charges well into corporate adolescence. Exhibit A: a new fund, one of the biggest ever raised in Silicon Valley. The information-technology arm of Brentwood Venture Capital (which is becoming Redpoint Ventures), Accel Partners, Oak Investment Partners and Worldview Technology Partners teamed up to manage a new, $1.1 billion fund, Meritech Capital Partners, that will make big investments in companies they financed earlier. Meritech shows that entrepreneurs are now looking for investors that can see them through from initial investment to initial public offering. Japan's Softbank Corp., for example, boasts that it can fund companies from "napkin drawings to global leadership" with its separate funds for seed and late-stage investments. [Wall Street Journal, Nov 22]
Report says shortage of tech workers makes it hard to grow firms Venture capital money is pouring in to Massachusetts Internet-oriented companies and their employment rosters are exploding, but the state seems to face a mounting problem of keeping small start-ups here to grow, according to a new state report. [Peter J. Howe, Boston Globe Nov 16]
Trend
8: Venture funding is
reinvented. Panelists' responses:
John Doerr: disagree; Esther Dyson: agree
Roger McNamee: agree; Stewart Alsop: wimpy prediction
Mr. Alsop: "VCs used to invest in companies no one else
would invest in. What happened to the risk? Now we are just
like investment bankers."
Mr. Doerr: "We will still back seven burrito-eating college
students who invent a search engine. What has changed is the
scale of the markets we're addressing, and those markets
demand that you get big fast. There is plenty of money and
there are plenty of ideas. What's in short supply are great
teams, and teams win." The Red Herring's annual prediction
session at the Churchill Club in Silicon Valley.
42% for 15 years. Chase Manhattan Corp. has a business that has been earning more than 40% annual return on equity for years now- venture capital. Chase is leading a herd of old-line banks into a blossoming market for new-business investment, ... pouring money into everything from new telecom businesses to "dot-com" start-ups with eye-catching results....Chase Capital says its internal rate of return for the past 15 years averages 42%. That compares with a 20% average for the industry...Banks like Chase have come full circle in venture capital. They started the business in the 1960s, only to see their specialists go independent to get a bigger share of the huge sums they were making. Chase says it pioneered a new partnership structure at its venture unit in the 1980s, a move that allowed it to retain staff. Other banks followed suit, but it wasn't until this decade that banks regained their dominance of the business. Chase's growth, ultimately, has been driven by Chase Capital's willingness to tap its parent bank for more than just capital. [Jathon Sapsford, Wall Street Journal, Nov 17] With 42% as a bogie, why would not every dollar of loose money by in VC and why does the government need to meddle?
Business is booming for venture capitalists. Out of the 14 companies that ZeroStage Capital has funded in the last five years, only 1 has failed. Draper Fisher Jurvetson has had internal rates of return in the hundreds of millions of dollars for the last three funbds it raised, and Highland Capital is experiencing similar success. [Note: return means equity value, not sales of products and services as the government uses to evaluate SBIR.] And in just three years, Flatiron Capital has made 30 investments with no losses and has boasted $2.7B in gains on $1.75M. [AB Perkins, (ed) The Red Herring, Dec 99]
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Venture Capitalists. Fewer than 100 of them are singlehandedly creating the companies of the future. They're not only bankrolling the "dot.coms" (the stock market value of amazon.com is twice the value of the entire steel industry) but are also supplying most of their key talent. [Robert Reich, The American Prospect, Nov 23]
Life has never been so good for VCs and for private companies seeking funding. VC-backed investments in 2Q99 reached record level of $7.7B, obliterating the previous record of $4.3B in 1Q99. ... No amount of strategic shuffling, however, can change the fact that -because money is everywhere right now - VCs are hard pressed to find the time or resources to invest it all. [Andrew Madden, The Red Herring, Nov99] Has NASA read this situation and abandoned any pretense of commercial intent because it has no hope of competing with VCs for the best companies, and that there is no national need for government pump priming for technology? Could NASA be that smart?
Can you clone Red Hat? Can you hatch more SASes? If you could help launch the next Gates or Andreessen, wouldn't you want to know what they need to hit the jackpot? The Council for Entrepreneurial Development is embarking on a study to measure the impact hot start-ups have on the region's economy and identify things that help or hinder them. Called the Entrepreneurial Index, the study is expected to be completed this spring and will cost the CED about $50,000. The newly formed National Commission on Entrepreneurship in Washington will help with the study and has chosen it as a pilot project to be later replicated in other regions. [CHRISTINA DYRNESS, Raleigh News & Observer, Oct 2] The commission was organized by Ewing Marion Kauffman Foundation of Kansas City The promote public policy to create an environment that will support entrepreneurs. Does that include converting SBIR to some shape that will actually produce its stated goal?
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Billion Here, ... (Sep 27) With $650M from institutions and $350M from individuals, Benchmark Capital is starting another big VC fund. Benchmark's earlier success with the likes of eBay have created an aura of success that is causing rich people to push and shove for a chance to be in the new fund. Even the CEO of eBay cannot invest as much as she would like. [Wall Street Journal, Sep 16] OK, let's hear once again from SBIR's backers about the lack of adventuresome capital. Well, they are right: capital won't invest in most of the stuff government buys with SBIR. Nor would you. |
there may well be an acceleration of the rate of innovation. New growth theory predicts that as the size of the global market gets bigger, the rewards for uncovering lucrative new ideas get bigger and bigger. Moreover, as new ideas flow back and forth across national boundaries faster and more easily, everybody will benefit. [Business Week, Oct 4] Who will benefit and will be left behind? Real entrepreneurs will adapt; dinosaurs, like federal agencies, are still hoping to control the pace of innovation. |
SoCal Moves to the Entrepreneurs. A prominent Southern California venture capital firm that helped launch successful Web startups like GoTo.com, NetZero, Free-PC.com and eToys opened a new business incubator yesterday in Silicon Valley. Idealab of Pasadena recently raised $350 million to make it the largest venture capital fund in Southern California. The new incubator, on Macara Avenue in Sunnyvale, moves Idealab squarely into the heart of Silicon Valley, where venture capital funds attract sums 20 times larger. But Idealab Chairman Bill Gross said he wanted to expand into Silicon Valley to tap a wealth of startup entrepreneurs not found in Southern California. [Benny Evangelista, San Francisco Chronicle, Sep 14]
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Watch Out for Hype. A Columbus (OH) startup offers "research coverage" for smaller companies who want to attract more investors to small- to mid-cap companies. Researchstock.com says it wants to be an independent voice for companies wanting coverage and for investors looking for undervalued stocks. It could be an unwitting agent for pump-and-dump scamps. Much of the information on the site is free and users can take advantage of the Internet's "universal distribution," Wayman said. Subscribers,who pay $20 a month, can access more reports, read bulletin boards and get e-mail updates.... Wayman said he will post research reports on companies that interest him and on clients who pay for the service. He said credibility will not be a problem because Researchstock.com willfully disclose when a report is for a paying client, and he will tell his clients that he has to be completely objective for people to take the site seriously. [Columbus Business Journal, Sep 13]
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Anatomy of a Buy. What the pros look for when examining an Internet start-up. Investing in unproven technology stocks is a matter of fear and faith. An Internet start-up can be scary stuff: a company in which earnings are nonexistent and not likely to appear soon; a CEO born the same year you entered college; a product that can't be described in 150 words or less. Yet instant fortunes are being amassed daily. Why miss out on the gold rush? [Allison Kopicki, Bloomberg Personal,October 1999]
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Is Anyone in Silicon Valley Still Making Things? asks Po Bronson (author). Has the cutting edge of technology left Silicon Valley behind? As the valley's venture capitalists pour money into "dot commerce" ventures, are they ignoring more important innovations? ... MIT has a weighty legacy of inspiring can-doers to take bold, often impractical risks. And wonder of wonders, they're still making things here. Engineering hasn't been completely co-opted by Web programming. Past midnight and into the next morning, I was given some astonishing demonstrations. After a spring spent in the inspiration-parched valley, it nourished me to bathe in such fertile and raw invention. .. Among my most memorable encounters was one with 25-year-old Gregg Favalora, founder of Actuality Systems. In the basement of the house he shares with four physicists, he has set up the midscale prototype for what could be the display device of the next century. .. This was Mr. Favalora's senior project at Yale, and the old prototype he donated to the campus still runs 14 trouble-free hours a day, three years later. He took his work to Harvard to pursue a doctorate in engineering, but along the road was named a runner-up of the prestigious MIT 50K Entrepreneurship Competition. .. Favalora's business tactics are solid. Because his project is so cool, engineers are happy to work for equity stakes. ... as chairman he recruited Rob Ryan, the founder of Ascend Communications, who also runs an entrepreneurs boot camp in Montana. Mr. Ryan has no trouble opening doors for Mr. Favalora. A single phone call and the prime-time Monday-morning slot is cleared on the schedule of first-tier venture capitalists. After making his presentation, the response Mr. Favalora hears is, appropriately, "Wow!" and then, predictably, "Great Team!" and then, sadly: "But we're only investing in dot-coms." They began to talk less about return on capital than return on time invested. Five years ago, venture capitalists would have thrown money at Mr. Favalora's company. Even today, I don't think he's going to have any trouble getting angel funding from obvious corporate partners - biotech firms and 3-D software companies and entertainment giants. But the point is clear: Just because venture-capital investments this year will dwarf last year's record $5.7 billion, don't presume they're funding the technology of the future. ... Many venture firms were in the midst of raising their fifth fund. While previous funds promised to get the capital pool fully invested in startups in three to four years, the new funds promised to repeat the feat in just a year or two. They no longer have the luxury to look far and wide for the next big thing. Most were content to look for the next little thing. They began to talk less about return on capital than return on time invested. [Wall Street Journal, August 16]
If you ever want inspiration on writing SBIR proposals, read Bronson. Here Bronson adds volume to the SBIR advocates' cry that VC is ignoring good technology. Which is true of most SBIR-funded projects. No VC would touch them - ever - even if dot.com weren't competing for so much of the money. But the not-too-careful reader would fall for the advocates' line. Nor would almost any agency have funded Favalora's dream even if he had asked.
in the second quarter of 1999, it came to Illinois: Venture capitalists were pounding on the doors of Internet-related companies, virtually begging to give them funding. Illinois companies have never experienced that kind of interest before from venture capital firms, which provide money in return for a slice of a company's equity. More often, the companies are begging the funders for capital. But the growing number of Internet companies in Illinois has interested venture capitalists so much that the companies are getting to choose which firms they want to fund them. That dynamic set the stage for an amazing second quarter for venture capital funding in Illinois. In 27 deals statewide, venture firms invested more than $207M. [Chicago Tribune, Aug 13]
The only thing cheaper than a desktop browser these days is money. The technology industry is awash with cash. "Angel" investors are everywhere -wealthy individuals are eager to get in on the action. [Ilan Greenberg, Bloomberg Personal Finance]
| Money all but rained from the sky for Bay Area start-ups in the second quarter of 1999, as venture capitalists poured $2.7 billion -- almost $1 billion more than the record set in the previous quarter -- into scores of new Internet companies and other tech start-ups. While some increase in venture funding was expected, the latest infusion of cash astounded many Silicon Valley insiders by its sheer magnitude. Already, in the first half of this year, venture capitalists have invested practically as much as the entire year of 1998. By itself, the second quarter was a 58 percent increase from the first. [JONATHAN RABINOVITZ, San Jose Mercury News, Aug 9] Keep those federal subsidies going to compensate for a lack of venture money! | Forget the recent heat wave that has left many people dropping like lazy hits into the outfield at Fenway Park. What's really been knocking people out of late has been the venture capital deals of summer. You can almost picture the chief executive officers cooling themselves off with fans made of crisp $100 bills straight from the U.S. Mint. [Boston Business Journal, Aug 9] |
A fair amount of the venture capital for new corporations comes from the old ones. Some 27% of all venture rounds now have a corporate investor. Cisco and Microsoft have invested $1.5B in 300 companies. Oracle launched a $100M fund in Jan 99, E*Trade $150M, Frontier Communications $100M, VISA $30M which has grown to $400M which encourages VISA to raise a new fund, UPS $25M, ... [Forbes, May 3] Intel $2.5B. So, let's have more government subsidy to so-called entrepreneurs who "cannot" raise capital (or will not do so because they would lose management control). If you are an entrepreneur, couple your dreams.
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Yet
More Venture Capital.
(Aug 4) VC firms fire-hosed $6.8B into start-ups in the second quarter,
45% more than the first quarter (more spring planting) and VC firms
raised another $9.5B, 4% more than the previous quarter. Says David
Toll of Private Equity Analyst, Even if suddenly a stock market
swooned, the VC would have so much capital that they could conceivably
continue to fund those companies through private investment. [Wall
Street Journal, Aug 3]
Even the Savings Banks Troy (NY) Savings Bank finally received a license for its venture capital subsidiary and made its first investment--$250,000 in Saratoga Springs health care software and services firm Flow Management Inc. .. TS Capital Corp. was licensed as a small-business investment company, or SBIC, by the U.S. Small Business Administration. It is starting out with $3M in capital but plans to add another $2M over the next 18 months, [Albany Business Journal, Aug 2]
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Dallas Angels. More money looking for a home. The Dallas Angels are about 60 rich individuals looking to invest in budding technology firms in North Texas. They meet monthly to hear entrepreneurs looking for dough. And they're looking for more business plans. Members want to put in roughly $200-900K earlier than almost anyone else. Angels include Jerry Mills, Jerry Rogers, founder of Cyrix; Gary Weber, a local financier; Dal Berry, a high-tech entrepreneur; and Mike Corboy, who launched Amtech. (214)520-3688. [facts from Dallas Busness Journal, Jun 21]
"If you're looking for where the glitterati of the financial world is, it's migrated out to venture capital, where people can make a $5 million to $10 million investment and sometimes turn it into $1 billion," says Frank Yeary, partner at Carlyle Group, a buyout firm based in Washington, D.C. He should know. In February, Carlyle's $1.3 billion buyout fund spent $37.5 million for a 22% stake in Northpoint Communications Group, a money-losing start-up provider of high-speed Internet access. When Northpoint went public May 5, the value of Carlyle's stake soared to $1 billion, the fund's biggest, fastest percentage pop ever for an investment. ... "All our clients are clamoring for venture-capital funds," says Erica Bushner, vice president in charge of alternative investments at Wilshire Associates, an investment-advisory firm. ... in recent years, venture-capital returns have zoomed ahead [of buyout returns]. The average buyout fund returned 10.9% last year, compared with 17.2% for venture capital, according to Venture Economics. Over five years, buyout funds returned 17.2% compared with 27.4% for venture capital, while over 20 years, buyout returns exceeded venture returns, 19.6% to 15.1%. [Mitchell Pacelle, "Venture Firms Dethroning Buyout Kings", Wall Street Journal, June 7]
Looking for angel money? Business Week says see Off Road Capital or garage. But you should know why you want the money in terms that the investor will smile on. Your advancing knowledge in a "critical technology" means nothing to them. Only government responds to that stuff, and even then not as well as you hope.
Where's the Cash? Business Week, June 7, reports VCs as 2.4% and angels as 4.9% of small business finance. Owner equity 27%, bank loans 20%, trade credit 17%, friends and family 13%, other debt 15%. Note that government does NOT appear as a category.
Arch Ventures Partners, a Chicago venture fund, raised $175M to invest in early-stage technology companies in Seattle. Arch is currently in the process of funding "two more Internet start-ups and one biotech company" in the Seattle area. One way it gets involved is working closely with some of the area's "angel investors" in small, very early rounds of financings. "We've done rounds as small as $100,000, we did $200,000 recently," he said. "We like to put $3 million to $10 million to work in a company." [Seattle Business Journal, May 24]
Looking for angels? They prefer to find you, and now they have a new way - new Internet services designed to list your opportunity. Bloomberg Personal Finance June 99 discusses Garage.com (see a picture of the garage of Hewlett and Packard), Rule506.com, and the SBA's ACE-NET.
Venture capitalists pumped a record $1.7B into 213 enterprises in the nine-county Bay Area, up 42 % from the previous quarter. The average investment per deal also broke new ground, at $8.1 million, a 30% jump from the old high of $6.2 million. The results come from the latest survey of the Money Tree, the Mercury News/ PricewaterhouseCoopers LLP report on venture capital. The total of 213 deals is the second-most ever after the 224 in spring 1998. [San Jose Mercury, May 6]
| Little Johnny Appleseeds: Venture catalysts provide advice, money to small startups A new breed of startup consultant and investor has sprung up in the Bay Area. In addition to dispensing cash, these so- called venture catalysts provide plenty of advice to help entrepreneurs hone their strategies, develop their markets and recruit management talent. While most big-name venture capital firms put a partner on the board of companies they invest in and allocate maybe a day a month for hand holding, partners of catalyst firms invest much more of their time. Christine Comaford, founder of Artemis Ventures in Sausalito, says she spends as much as a week per month helping an individual business software or e-commerce client build its enterprise.The venture catalyst firms have been a godsend to startups ranging from Vanishing Point, which specializes in long-term hair removal and other nonsurgical skin treatments, to Again Technologies, a vendor of financial software. Like wealthy individual investors who are often dubbed angels, venture catalyst companies are filling a niche vacated by some of the more established venture firms. Confronted by a record number of business plans and needy entrepreneurs, the big VCs increasingly are investing larger amounts in later-stage companies to avoid stretching their partners' time and talents too thin. That leaves room for venture catalysts to provide $500,000 of ``seed capital'' in most cases to nurture startups until they are ready to graduate to the next investment round. Jennifer Lea Reed, editor of the Venture Capital Journal, compares smaller VC investor/consultants and the growing number of angel investor networks to ``preparatory schools'' that get entrepreneurs ready for bigger institutions. More than 30,000 high-tech business plans are submitted to U.S. venture capitalists a year, but less than 3 percent obtain financing, according to Artemis Ventures. In most cases, that's because the entrepreneurs don't have the right connections with the right VCs and they don't present their plans in the best way. ... Venture Strategy Partners of San Francisco is another venture catalyst firm that focuses on consulting. The $25 million fund is an outgrowth of Venture Strategy Group, which began in 1996 advising companies across various industries on how to build their brands. Since June, it has seeded a handful of startups with about $500,000 each. | Four
venture catalyst firms in the Bay area:
-- Artemis Ventures specializes in helping software companies focused on e-commerce and business applications develop their business plans, build management and secure financing. Its Web site contains useful information and links to other resources. 207 Second St., Suite E (3rd Floor), Sausalito, Calif. 94965; (415) 289-2500; Web site: www. artemisventures.com. -- Frontier Ventures. provide management assistance to networking, communications and software startups and link them to four venture funds for financing. Its Web site offers information on business plans, financial forecasting and making presentations to investors. 655 Mariners Island Blvd., Suite 303; San Mateo, Calif. 94404; (650) 638-1222; Web site: www. frontiervc.com. -- Interactive Minds helps early- stage interactive commerce companies design and develop their businesses and provides executive search services as well as seed capital. 5776 Stoneridge Mall Road, Suite 270; Pleasanton, Calif. 94588; (925) 467-1200; Web site: www. iminds.com. --Venture Strategy
Partners. Started in 1996, Venture Strategy helps emerging
businesses in the consumer, retail, packaged goods and technology
sectors build brand value and raise capital; Hamm's Building, 1550
Bryant St., Suite 510, San Francisco, Calif. 94103; (415) 558-8600; Web
site:www.venturestrategy.com. |