Up and Running:

I’ve posted here several times about The Funded, which seems to me like an extremely useful database of venture capital firms, with reviews and comments added by entrepreneurs. This is a good resource for those rare high-end startups that are actually real candidates for venture capital. (You know who you are; and, in fact, if you have to ask, then you aren’t.)

Now, apparently, there’s another good site, with a different approach, but also offering useful related information. My thanks to Guy Kawasaki for his News Flash yesterday on his How to Change the World blog:

This morning young Matt Winn told me about a tool he created called the VCDB (venture capital database).

Indeed, you should check out this tool because it’s quite useful. You can enter “bio keywords” and find venture capitalists. You can also enter locations, and the tool shows you venture capitalists in the area. Matt explains the tool here.

And as I post this, I’d like to just add, as a reminder, that the days of sending shotgun blasts of hopeful messages to a database of venture capitalists are — if they ever even existed in the past, which I doubt — long, long gone. The correct use of a database like this is to pinpoint investors who might have the right kind of match and interests. You need quality targets, not quantity.

Here’s a new kind of venture capital, funded by donations more than by investors, looking to spur development in economically challenged areas.

I heard about it yesterday in The New York Times‘ Shifting Careers feature, headlined Venture Financing With a Mission Beyond Profit. Here’s a bit of it:

“But unlike a venture firm, Jumpstart relies on charitable donations, many of them from the private sector, for its financing and does not return a share of profits to those who provide the investment dollars. The return comes as satisfaction for elevating a region’s economic standing.

It’s an interesting new idea. The story features one organization called Jumpstart in Cleveland and cites several others.

People used to say you couldn’t be too thin or too rich, and I think we know now that both points are sometimes wrong. Too thin isn’t my problem, so let that one go; but too rich is a problem for some startups. Not when too rich refers to your own money, perhaps, but with startups it’s almost always investor money that creates a problem–meaning: not your money, but their money.

Taking their investment is your promise to deliver. And the more investment you take in, the more return you’re promising to deliver. So if you got more money in than you can spend productively, you’re in trouble.

I once heard a person suggest that he wanted more investment than his plan said he needed for “peace of mind.” Bad idea. You won’t get peace of mind by having somebody else’s money in your bank account gathering the implied promise of delivering something.

What you get sometimes is people wasting money on bad marketing spends because they can’t find good spends, and they have to spend the money before they face the investors. This explains a lot of very unproductive Super Bowl ads during the dot-com madness.

I picked up on that over the weekend reading Roger Ehrenberg’s “Monitor 110: a Post Mortem” on his Information Arbitrage blog.

We rarely get a chance to look backward as well or as openly as Ehrenberg does in this post. Calling his involvement with Monitor 110 “one of the most interesting and informative experiences of my life,” he offers us a view into the heart of it, well organized into a simple list of seven points:

1. The lack of a single, “the buck stops here” leader until too late in the game
2. No separation between the technology organization and the product organization
3. Too much PR, too early
4. Too much money
5. Not close enough to the customer
6. Slow to adapt to market reality
7. Disagreement on strategy both within the company and with the board

Those are good points, and the post expands on them well. It was “too much money” that caught my eye first because I’ve seen that problem in the past, but I think it’s not one a lot of people think of. Roger adds:

Too much money is like too much time; work expands to fill the time allotted, and ways to spend money multiply when abundant financial resources are available. By being simply too good at raising money, it enabled us to perpetuate poor organizational structure and suboptimal strategic decisions.

I also liked the reference to too much PR too early. I see that happening, too, and he puts it into a very understandable, concrete context:

[some] bad behaviors were reinforced by an unplanned event that sharply impacted our psyche: being on the front page of the Financial Times. It is hard to call it a mistake since we didn’t seek to get such exposure, but I put it down as Mistake #3. To be honest, this single fact was a very meaningful factor in our failure. It raised the level of expectations so high that it made us reluctant to release anything that wasn’t earth-shattering.

Both of these points are reminders that the hunt for financing is not just a simple quest for money. It’s about finding good partners, the right partners, and building long-term relationships and healthy businesses.

Information Arbitrage: Monitor110: A Post Mortem

Fascinating startup: Add posterous.com to the mix of Twitter, Tumblr, new media and cool new websites. It’s like an instant blog platform, free and extremely easy to use. You just e-mail into it and, with your first e-mail, it sets up your site, automatically; then you can edit and tune it. I just heard about it in an instant message (see below) saying…

… posterous is going to find VC money in 5 seconds flat

For example, posterous lets you automatically post pictures into an instantly obvious and usable blog-like interface. and it has the quickest and easiest setup I’ve ever seen and, amazingly, it works.

Microblogging. This new instant small media, something that feels to me like instant messaging with a posting platform, seems all the rage. I’ve been on Twitter for a few weeks now, unable to decide whether it’s a gigantic waste of time or the next big thing. Twitter lets you post 140-character snippets. I’m finding some of my favorite people there, and they’re doing interesting things. There’s been a business plan contest and a poetry contest, I think, both limited to 140 characters. Think of the trade-offs.

Of course there’s the problem of attention span, as the instant messages interrupt my Twittering while I’m talking on my office phone, and then my cellphone rings, in between posting–drafting this post–and posting elsewhere at the same time.

Is it a good way to make money? I’m not really sure how or whether social media makes money, and I just finished posting (elsewhere) on an in-depth analysis of that in MIT Technology that is very much worth reading if you’re curious about that.

With respect to instant media and instant posting and a million interruptions, here’s the text of the instant message exchange about posterous.com this morning . . . my tip of the hat to the good side of instant interruptions.

Paul: http://www.posterous.com/
Paul: very interesting
Tim: OK I just tried it, with an e-mail. Interesting idea . . . I’ll see what happens . . .
Paul: yeah
Paul: it’s pretty impressive
Paul: great interesting and real startups
Paul: tumblr.com, posterous.com, twitter.com
Paul: http://www.newsweek.com/id/145216
Tim: hmm . . . btw, you know I’m on twitter?
Paul: yeah twitter is all the rage
Paul: it’s good to be them
Paul: posterous is going to find vc money in like 5 seconds flat
Tim: I don’t get it . . . why doesn’t posterous want me to register timberry.posterous.com?
Paul: oh it lets you bypass that
Tim: How do they know when I e-mail to them what site name I want to be?
Paul: but you can. you’ll see as soon as they e-mail you back. then it becomes clear.
Paul: The e-mail you got back should make it easy to switch that up to a domain you actually want.
Paul: it’s not so much your next blog–but the next trend in the path to microblogging
Tim: OK getting it now … timstuff.posterous.com
Paul: yeah, it’s clever
Tim: It is cool. You’re right.
Paul: check out what a nice slideshow it made for this post http://paul_8f3xz.posterous.com
Paul: just attaching 5 photos to e-mail and boom
Tim: wow
Paul: yeah that’s slick

So there you have it. Instant blogging, instant gratification, immediate interruptions and maybe VC money as well. I like this 21st century. Or at least I do this instant, until the next interruption changes my mind.

(Note: I posted this earlier on Huffington Post. Repeated here for my readers’ convenience on this blog.)

This is pretty bad news from yesterday, although I guess it is no surprise. The National Venture Capital Association announced that no venture-backed companies went public in the last quarter. That’s the first time since 1978 that the U.S. markets have gone three full months without a venture-backed IPO. I say no surprise because we’re so obviously in a recession, hoping it doesn’t become a depression.

For the first time since 1978, there were no venture-backed Initial Public Offerings (IPOs) in the second quarter of 2008, according to the Exit Poll report by the National Venture Capital Association (NVCA) and Thomson Reuters. The absence of any offerings this quarter follows an exceptionally slow first quarter when only five venture-backed companies went public. This number is a fraction of the first half of 2007, when 43 companies went public. According to the NVCA, the situation is concerning enough to be characterized as a capital markets crisis for the startup community.

And it gets worse with the additional information:

During the week of June 23, the NVCA surveyed its membership on the current IPO drought. The 660-plus responses that were received from venture capitalists across the country reinforced the concerns of the association, specifically:

• 81 percent of venture capitalists do not see the IPO window opening in 2008.
• Two-thirds of venture capitalists believe that venture-backed companies are less likely to want to go public today than they were three years ago.
• The three largest factors to which venture capitalists attribute the current IPO
  drought are:
  • Skittish investors (77 percent)
  • Credit crunch/mortgage crisis (64 percent)
  • Sarbanes-Oxley regulation (57 percent)
• Only 8 percent of venture capitalists characterize the current IPO drought as “not critical” to the future health of the venture capital and entrepreneurial communities.

I’m not suggesting we jump to any conclusions with this–your startup will make it or not on other factors than this–but still, it’s good to stay informed. The economy is really suffering the effects of a combination of downward factors.

Sarbanes-Oxley, by the way, is a big deal for some companies … that’s the law that requires a collection of new hoops regarding documentation and securities and so forth, that companies have to jump through to go public.

Imagine yourself in a conference room, presenting your business plan to potential investors. How do you answer the question: “Where’d you get that idea?”

This comes to my mind today because of a post I read yesterday on Ask the VC. An e-mailer asked what it means when investors ask that question:

Are they looking for an emotional and inspiring story or are they worried that we may have taken our idea from someone else or, what I believe is the case, do they want to see if we were driven by an opening in the market that we observed?

Jason Mendelson answers that question, from the VC’s point of view, in his post “How Did We Get the Idea for Our Startup?” Yes, inspiration and emotion are nice, he says. And yes, a great new market is even better, for obvious reasons. However:

“Taken Our Idea from someone else”–This is a big one. If you come and pitch a next-generation social networking site and previously worked at Facebook, we are going to have an in-depth discussion. Maybe you didn’t steal it, but maybe your former employer will have a claim on the intellectual property developed while you were employed.

That last one is one that I’ve run into more than once, in reading business plans and consulting. When entrepreneurs are employed already in the same industry, that sends up red flags.

And I also enjoyed Mendelson’s last couple of possibilities. Maybe the VCs want to see how well you pitch an idea, giving you a stage to play on; or “perhaps it is just a trite icebreaker and the VCs are just asking you this so they’ll have time to answer e-mails on their Blackberry while you wax poetically.”

The discussion reminds me of the critical scene in the 1988 movie Working Girl. The old guy asks the two women where they got the idea–a contested idea, where ownership is being argued. One of them just hems and haws. The other reconstructs the thought thread in detail, with references to news pieces, gossip and other connections. Guess whose idea it really was?

Here’s a question I was asked this morning:

My company operates in a highly competitive environment in a
specialized category. To gain more power in this category, we are
looking to raise more money. If you could create a list of Top 10
Things that represent value for investors, what would those be?

I’d like to answer with a top 10 list, but hey, when you think of it, there are two things that represent value for investors:

1. Money now.
2. Much, much more money later.

Investors write a check now because they believe that money invested will multiply. They want as much return as they think they can get, on as little investment as they think they can get away with. And don’t blame them for it; that’s their job. That’s what investment means.

Those people who write checks for startups and entrepreneurs have options. They can buy houses, cars, jets, stocks, bonds or gold bars.

You’d think that’s obvious. But I deal with this all the time, and I’m amazed at how many people confuse having a good, healthy business with making money for investors. Lots of good, healthy businesses never make money for investors. One of the worst things that can happen to investors’ money is getting trapped into a holding in a healthy, happy company that’s never going to generate any liquidity for investors.

But of course you want me to stop pontificating and list some things that will make investors believe they’re going to make much, much more money later. So here’s the rest of the top 10 list, which, by the way, ends up with nine items in total, because I’m not going to slavishly think up a tenth:

3. Credible exit strategy.
4. Sales growth. Proven, actual growth in the very recent past. Actual realized 50 percent per year growth for the past two years is 10 or 20 or 200 times more interesting than a sales forecast showing growth to come in the future.
5. Potential sales growth. Future sales growth. Like they say, “It could happen.” Why future if not present and recent past? Investors will ask. Sometimes you can come up with a reason, something you’ve done, a new product, new technology, a relationship just won.
6. Believable potential appreciation. Things that will make your company’s valuation grow. Of course that’s almost redundant, because sales growth drives valuation. But if you have a lot of Internet traffic, a special position, new technology or some other angle, that’s useful. Why will your company be worth more later? Is there a secret sauce? Is it defensible?
7. Profitability. Funny how profitability isn’t as important as growth, but it isn’t. Growth builds valuation.
8. Management team. People with a track record and, in the best of cases, people who have some traction with other investors, who can build your business’ valuation.
9. Battle scars. The “the sadder but wiser ” factor. Last week I heard David Johnson, a venture capital fund formation expert, say: “Past failure is not a problem. It’s good to know what that feels like.”

I’m getting email now from several new “list-your-startup-for investment” sites on the Web. If you’re not familiar with these, there are several. Generally you pay to have your new business listed there as an investment opportunity. You’re hoping an investor will find you there, contact you, and eventually invest.

One of these listing sites asked me to put a link up on this blog, and offered a 50% commission for anybody who follows that link and signs up.

Sorry, no deal. True, there are ads on this blog, but they are controlled by the people who pay the bills.

I’ve met some honest and well-meaning people offering listing services, and charging money for them; but frankly, I just can’t believe that works. In my mind, people who have money to invest, and people who are paid money to manage other people’s money by investing it, don’t browse websites looking for places to put their money. Instead, people who have companies needing investment seek out the investors. There’s that whole matter of contacts, introductions, who do you know, and all that. In short, the deals chase the money, not vice-versa.

Maybe I’m wrong on this. Some venture capitalists run great blogs, and if you ask them, they say that one of their purposes is “deal flow.” So that contradicts my basic assumption. I did learn once of a venture that was funded through one of these listing services; that was five years ago, that service no longer exists.

But I am not putting any listing service on this blog, that’s for sure.

Browsing the Wall Street Journal’s online offerings, I just picked up Why Venture Capitalists Don’t Want You to Have a Sex Life. It’s one of several online reactions to John Doerr’s (of Kleinert Perkins Caufield & Byers) much-quoted comment on how many successful entrepreneurs had no lives outside of their work.

The source of all that is an interview published on Venturewire. Specifically, Doerr says:

“That correlates more with any other success factor that I’ve seen in the world’s greatest entrepreneurs. If you look at Bezos, or [Netscape Communications Corp. founder Marc] Andreessen, [Yahoo Inc. co-founder] David Filo, the founders of Google, they all seem to be white, male, nerds who’ve dropped out of Harvard or Stanford and they absolutely have no social life. So when I see that pattern coming in — which was true of Google — it was very easy to decide to invest.”

Final thought: the title of this post, which was also the title of the WSJ piece, is a good illustration of how titles work in blogs.

Photo by Randy Son of Robert, From Why Venture Capitalists Don’t Want You to Have a Sex Life.

Launch Silicon Valley 2008 is accepting executive summaries for about one more week, until May 9. This is the best kind of venture contest — sponsored by venture capital for venture capital — looking at what it wants to be the best and most interesting startups around. Organizers want startups that are already launched, that have something to show, but haven’t been around very long.

The prize? The right kind of audience. Journalists, other opinion makers and, generally, people with money to invest.

For more information, go to launchsiliconvalley.org.

Two interesting reports on venture capital last week. The first shows venture capital returns hitting their highest point since 1999, and the second says venture capital investment fell last quarter for the first time in years.

The good news comes from Don Dodge in Venture Capital Returns in 2007 best since 1999, which he posted on his blog at Microsoft Startup Zone. Here are his numbers:

He concludes:

There is a popular refrain heard around Silicon Valley “Party like its 1999″. From an investment return perspective it is a lot like 1999. The difference, I hope, is that the stock market is not in a similar bubble condition.

The bad news is from Dow Jones Venturesource. I picked it up from Sunday’s San Francisco Chronicle, in a story by Deborah Gage: Venture capitalists cut back 7 percent nationally last quarter. She also highlighted the good news for the local coverage, which was a 10 percent increase in investments in the San Francisco Bay area.

The actual numbers were $6.84 billion invested last quarter, compared with $7.35 billion in the same period of 2007. That was on 603 deals this year, 628 deals last year.

It’s Microsoft, but it also has startup success stories and a story to tell. I collected this video from the Microsoft startup site:

This is a six-minute interview with Dan’l Lewin, corporate vice president for Microsoft and its emerging business initiatives. It’s posted on microsoftstartupzone.com, which has some interesting content. Click here for that post if you have video problems or you want to see a text transcript of that interview.