Professor Raiton’s Inside Perspectives: Entrepreneurship, Creativity, Innovation

From Voodoo Ventures - Idea Fuel Blog 

If you’re not freaking out a bit right now with the current economic crisis then you must have ice in your veins.  With the meltdown on Wall Street, a lot of us are thinking about how this is going to affect our own businesses.  In the web world, some have felt insulated from the downturn, but warning signs are coming in from VC’s loud and clear.

Our business was affected by the credit crisis starting about a year and a half ago.  It has been challenging, but actually has led to a refocusing on low-cost services model through Flatsourcing which I believe is poised to thrive in the current enviroment.  We got credit when we didn’t need it, which I’m glad we have now, and we have trimmed our cost structure to weather the storm.

This is what other start-ups clearly need to be doing.  Launching a product in this market is going to be tough, if you don’t have cash for a long runway, you better have a revenue model that gets you to cash-flow positive quickly.  If you are solely dependent on advertising revenue, buckle up, its going to be a wild ride.

The embedded presentation that TechCrunch posted is what Sequoia Capital made to the CEO’s of its startups is interesting for its clear and (relatively) consise explanation of where we are, and how we got here.  It’s one of the most comprehensive analyses of the current crisis that I’ve seen and I recommend you take time to understand it and the impact the current enviroment is going to have on your business.

While VCs make much larger investments, angel groups give from around $25,000 to $50,000—and tend to want real involvement with the company

By Tom Taulli, Business Week 

Is your company looking for an equity investment under a few million dollars? You might first think of approaching venture capitalists, but I suggest you try angel groups. For the most part, VCs manage large pools of money—sometimes in excess of $1 billion—and do not have the time to deal with many investments. They prefer to make large investments that range from $5 million to $10 million per transaction.

Angels, on the other hand, are wealthy individuals who invest funds in early-stage companies (BusinessWeek, 4/17/08). The amounts often range from $25,000 to $50,000 per deal. Over the past decade, angel investors have formed angel groups that meet either monthly or quarterly—and pool together their deal flow, resources, and capital.

(Read More)

Valuations of U.S. venture-backed companies jumped in the first half of this year to the highest point since 2000, perhaps reflecting market exuberance from 2007 that is taking time to dissipate.

Valuations had climbed steadily since 2003, from a median value of $10 million to $18 million in 2006 before leveling off at $17.5 million in 2007. Through the first half of this year, the value hit $23.9 million, according to data from VentureSource, a research unit of Dow Jones & Co, publisher of this newsletter.

That inflation is especially noticeable in the information technology sector, where median valuations climbed to $28 million in the first half, compared with $19 million in full-year 2007. In fact, this year’s number is fast approaching the previous high in 2000 during the tech bubble days when IT valuations reached $29.5 million.

The same growth doesn’t apply to health-care companies, which saw valuations in the first half drop a bit to $19.7 million from $21.1 million in all of 2007. Specifically, biopharmaceutical companies saw valuations fall to $9.5 million from $20.5 million in 2007.

Overall later-round valuations (third round or higher) especially rose, with median prices reaching $51.2 million for the first half, compared with last year’s overall median of $42 million. This is the highest median price since 2000, when prices reached $89.5 million for the full year before dropping off precipitously in 2001.

By Tim Mullaney, Bloomberg.com

Venture capital investments will probably fall this year for the first time since 2003 as the financial crisis cripples the markets for acquisitions and initial public offerings.

U.S. startup funding may drop in the third quarter, said Tracy Lefteroff, a managing partner at PricewaterhouseCoopers LLP, which does consulting work for venture capital firms. In July, Lefteroff said investments in 2008 would be “on par” with the $30.7 billion invested last year.

Turmoil in the credit markets is making it more difficult for young companies to raise money as venture capital firms concentrate on existing investments instead of making new ones. The number of deals closing sank last month, and the aversion to risk is even spreading to clean-energy companies, one of Silicon Valley’s hottest sectors since 2006, said Greg Blonder, a partner at Morgenthaler Ventures.

“Everyone I know has had their come-to-Jesus partners meeting,” said Blonder, referring to sessions where people confront unpleasant truths. “This will create another hole in the market.”

A locked-up market for IPOs and a 30 percent drop in the average price acquirers pay for venture-backed companies are causing the most pain, said Geoff Yang, a founding partner of Redpoint Ventures in Menlo Park, California.

(Read More)

The article was written by Leia Mahalo a freelance SEO and SEM specialist working for i-trepreneur.com.

A business must have marketing strategies on how it is going to attract customers and sell its product and services at the same time. The formulated marketing strategies must also be concerned with the product, place, price and promotion mix of the marketing plan. Pricing strategies include the amount needed by the company to cover the cost or expenses of their products. They must think about how they would price their products so that they would also gain profit as well. Product strategies include how the product will be positioned in the market. Companies must also consider the perceptions of the customer regarding their product. The features and characteristics of the product must be clear to their target market. Companies must also decide on the differentiation of the products in the current market. This is necessary to create a distinction from the existing products of other competitors and make a mark in the customers’ minds when they think about the product.

(Read More)

Tomio Geron writes this dispatch about the venture capitalists behind Bill Me Later. Geron is a reporter for VentureWire, a Dow Jones publication and contributor to Deal Journal.

Bill Me Later’s agreement to be acquired by eBay for $945 million in cash and options is the third-largest acquisition of a venture-backed company this year and looks to have earned its venture investors some sizable returns.

Bill Me Later’s first venture investor was Crosspoint Venture Partners, which in 2000 put $17 million into the company, a service that enables Web shoppers to extend payment for products for a fee. James Dorrian, a general partner at the firm, said the investment was “very successful,” especially given the tough environment at that time. “For anybody making any investment in early 2000, there was no exit strategy really,” Dorrian said. “You had to say, ‘Can this be a good company?’ And let the market take care of itself.”

Azure Capital Partners was Bill Me Later’s largest venture investor, first investing in the Timonium, Md., company at a valuation below $100 million, according to Mike Kwatinetz, general partner at Azure. Kwatinetz declined to specify his firm’s overall return, though the return from the initial investment would be at a multiple of about eight. Azure returned to invest in later rounds.

Later institutional investors included T. Rowe Price and Legg Mason, while strategic investors included Amazon.com, First Data and Chase Paymentech Solutions.

The third venture-capital firm to invest in Bill Me Later, GRP Partners, expects a return of five to six times its investment, according to Steve Lebow, managing partner and co-founder of GRP. “I loved the deal,” Lebow said. “(CEO) Gary Marino and his team are brilliant.” Bill Me Later was ahead of its time in figuring out how to quickly provide credit to consumers, he said. It just took time to build the company to where it is today, Lebow said.

Venture capitalists have endured a tough environment for exiting investments, with the industry on track for the lowest number of M&A deals involving venture-backed companies this decade. The only bigger venture-backed M&A deals this year were Dell’s purchase of EqualLogic in January for $1.4 billion and Sun Microsystems’ purchase of MySQL for $1 billion in February.

From Get Venture by Mark Davis

VCs understand that the fundraising process is time consuming, taking entrepreneurs away from building the company.  Creating documents for investors can be one of the most time-consuming parts of the process.  While not all of the documents are likely to assist in operations, some of the materials can and should be created with operational purposes in mind to make more use of these efforts.

Here are five ways to make the fundraising process more useful to your operation:

1. Create projections in a manner that makes them easy to use for future planning and budgeting,
2. Design your uses of capital raised analysis to play into your short term budgets by making it sufficiently detailed,
3. Leverage the addressable market analysis to identify the most attractive target customer segments,
4. Revisit your competitive landscape when preparing investor materials to look for best practices and opportunities to enhance your model, and
5. Generate a sales pipelines document that can be leveraged by your sales department going forward (you’ll probably need an operational version of this document to share with your board in the future).

Fundraising can be a tedious process – try to get as much operational value out of it as possible.

From  A Sack of Seattle blog

An alternate title for this post. Use money deodorant.

I just had coffee with an entrepreneur who was bemoaning the woes of the fund raising process.  He’s been unsuccessful to date in raising 600K for his internet company.  And he’s dismayed and disheartened by success that others are having raising their rounds.  He asked me, what is he missing?

I told him investors will invest — even in this crazy economic climate — if his deal smelled like money.  He then asked what makes a deal smell like money. Below is my list of things that make your deal smell like money (you don’t need all of these things but the more the better ):

• Proven entrepreneur — someone who has sold a business before for 20MM or more
• Proven technologist — some high level geek at Google, Oracle, or Microsoft
• A determined, hungry entrepreneur with integrity
• An easy to understand product or business, and preferably one that is fun
• A clear path to making money, and preferably proof on making money is even better
• Customer traction — the more the better, and preferably evidence of accelerating customer traction
• The stamps of big company endorsements always helps — as customers or partners

Sun Microsystem co-founder and chairman shares his life and business lessons

By VatorNews

Back in the 80’s, Scott McNealy and Vinod Khosla founded a company called The Data Dump, which Scott told me was a “huge disaster.” But as one idea failed, another took off. That other was Sun Microsystems. Together with Vinod, Andy Bechtolsheim, and Bil Joy, the foursome raised about $200,000 to start Sun Microsystems. Scott served as CEO from 1984 to 2006, and brought Sun public in 1986.

In this “Lessons learned” segment, Scott advises entrepreneurs to “hang out with really smart, innovative, super bright, off-the-charts people and stay at the party as late as they do and become their best friends.” Apparently, it worked for Scott, who spent late nights with Vinod at many parties.

Besides hanging with the right crowd, Scott also advises entrepreneurs to “break the rules of business.”

Look for ideas that are “off the beaten path of conventional wisdom,” and not “intuitively obvious.” 

The more people it’s not obvious to, he said, the better chance you have. 

At the same time, Scott says don’t “cut corners on legal and moral issues.” 

“Break the rules of business,” he said. “but not the rules of the land.” 

Additionally, Scott said not to worry too much about raising capital. “Bill Joy says there’s never been a successful well-funded startup. If you’re well-funded, you’ll do it the old way.  If you don’t have a lot of money, you’ll find a new and efficient way… Don’t look too hard for too much money - it’ll force you to do things the wrong way.”

Finally, Scott suggests that entrepreneurs wait to get married. Scott got married at 39 years old. He also talks about why your decision about a spouse is far more important than any business decision you’ll ever make.

(View the Video)

From Angel Investment Journal - Angel Investing and Entrepreneur Blog 

Gigaom has a post discussing Lookery’s recent round of funding that was raised entirely from Angel’s. Lookery’s CEO, Scott Rafer (former CEO of MyBlogLog), talked about 5 reasons why getting angel investing is better than VC money:

1) Focus. “Angels can concentrate on the individual strategy of your company, rather than the larger portfolio management strategy a VC must bear in mind.”

2) Deal Terms. Angels generally don’t demand as much in liquidation preferences and other deal terms.

3) Future Funding Rounds. You will generally have more control over future negotiations in getting additional funding.

4) Transactional Control. “You won’t have to seek permission from investors who aren’t on your board or worry about what a VC needs to have happen vis á vis managing his limited partners… Angels have no LPs, so their agendas tend to be far more transparent.”

5) Exit. “Angels aren’t compensated in ratios. Angels get 100 percent of the profit they generate with their investment in your company. A VC only gets a fraction of the ‘carry’ generated on your deal. This is one reason a VC might be motivated to urge you to sell bigger.”

Rob Conway, a well known “super angel”, follows up with 3 more reasons why Angel money is more attractive than VC money.

1) The due diligence process will be less rigorous since angels are acting in their own interest and not investing OPM (other people’s money).

2) Angels are generally more vertical specialists than compared to VC’s.

3) “Angels have one-degree of separation from people in their professional network — not two, or three, or four. But because angels tend to be operational types, the business relationships they bring to the table are personal, not transactional. ”

Finally, Allan Leinwand, follows up with a counterpoint on why Entrepreneurs should prefer VC money over angel money. He claims VC’s will be better able to stick with the startup over the long term, if things don’t work out quickly. However, Tom Perkins, of Kleiner Perkins Caufield & Byers, says they put companies in the “ICU” if they are not performing well. They either see if they can get out of it or they shut off everything right away.