Don Dodge on The Next Big Thing

New England Venture Summit – VCs are still investing

The New England Venture Summit started with a VC panel "Bridging the Capital Gap". VCs are still investing but only in high quality companies, with proven revenue models, focused on a growing market segment. Of the 7 VC firms represented on the panel all but one made investments in the last 8 weeks. A poll of the VCs on the panel revealed 10 follow on investments to existing portfolio companies, and 4 new investments in just the past 8 weeks. This mirrors the results I am seeing from VCs I have talked to over the past month or so. Most VC firms are focused first on their existing portfolio companies by making sure they have capital reserved for when they need it over the next two years. One VC on the panel, the one that hadn't made any recent investments, said that 7 of their 8 portfolio companies have enough cash to carry them through 2010.

Valuations coming down - Other VCs have said they are actively looking for good companies to invest in. Valuations are coming down to more reasonable levels. Later stage companies that raised money during the boom years are seeing valuations down 40% or more. That isn't too surprising given that most public technology companies are down 40% or more too.

Startups with advertising driven revenue models are being pressed to prove the numbers, show comparables, and really drill down on CPM rates and CPC click through rates. The reality is that there are very few web sites or services that can build a large enough audience to generate $1M in monthly advertising revenues. CPM rates are falling across the board, especially in the social networking area.

Management Investment Partnership – John Giannuzzi of Sherbrooke Capital introduced an interesting concept for aligning the interests of VCs with entrepreneurs. Sherbrooke asks its founder entrepreneurs to invest with them and invest 10% of the first round capital raised. For example, if a company is raising $2M, the founders would take $200K of the round, with 15% ($30K) up front and the balance financed over time. The company issues a 3 year note to the founders for the remaining $170K. If the founders meet their projections at the end of year one they get one third of the note forgiven and get the stock for free. If they miss their numbers they would pay for the stock...just like the VC. If the founders meet their projections in all three years they get the entire note forgiven and keep the stock for free. In essence the founders get to own 10% of the round for 15 cents on the dollar if they meet their targets. If they don't meet their targets they get to buy the stock at the same price as the VCs.

Do stock options motivate? – John Giannuzzi says "Stock options are a free pass. There is no downside risk. They don't motivate founders, and don't align interests." Hmmm…interesting viewpoint, one I haven't heard before. Founders are certainly motivated by stock options and market valuations, but it is true that there is usually no downside financial risk, or annual measurement. The Management Investment Partnership that Sherbrooke proposes is a novel approach to aligning interests with a "carrot and stick" model. It will be interesting to watch Sherbrooke portfolio companies to see if the concept works, and if the idea catches on with other VCs.

Founders Fund approach – Founders Fund has a completely different approach, allowing founders to cash in some of their stock in the first funding round. Founders Fund, as the name implies, is a VC firm started by founders of startup companies. Peter Thiel and two other PayPal principals, along with Sean Parker (Napster, Plaxo, Facebook) are the partners at Founders Fund, and each has been through all the phases of starting a company. They feel that investor's interests are more aligned if the founders have some money on the side so they aren't compelled to accept the first exit opportunity that comes along. They feel the startup founders will be more willing to hang in there for a longer period of time and hold out for a bigger exit.

There are very strongly held beliefs on both sides of this issue. Each side makes compelling arguments. In the end entrepreneurs need to decide which VC firm they will partner with based on shared vision and values. Taking on VC money is a big and long lasting decision. Entrepreneurs often quip "you can divorce your spouse…you can't divorce your VC".

MyPunchbowl launches eCard Studio just in time for holidays

MyPunchbowl today announced the launch of MyPunchbowl eCard Studio. MyPunchbowl eCard Studio offers hundreds of beautiful, free eCards that can be customized with colors, fonts, and images of your choice.

"In these challenging economic times, we're excited to introduce a product that makes it possible to send high-quality online greeting cards without the cost of paper and stamps," said Matt Douglas, CEO, Punchbowl Software. "MyPunchbowl eCard Studio surpasses what most people thought was possible for an eCard website."

With MyPunchbowl eCard Studio, users can easily share their customized eCard over email or on social networking sites such as Facebook and Twitter. These sharing features make it easy to send holiday greeting cards to your friends quickly and easily.

TechCrunch focused on the green angle "Save a tree…send an eCard". "…send customized greeting cards using its impressive card editor. Users will be able to choose from an array of holiday, birthday, and thank you cards, which they can embellish with family photos and a number of text effects."

MyPunchBowl is a party planning site with great invitations, pick-a-date functionality, and complete party management. They already had a really cool invitation designer so it was an easy jump to building a first class eCard Studio service. Millions of people want to design their own cards, and send them electronically to friends. The eCards will be a great way for MyPunchBowl to spread virally and bring in more party planning users.

50% of US engineering students dropout - Why?

The United States graduates about 70,000 engineers each year, and another 30,000 with advanced engineering degrees, according to Daniel Hastings, Dean of Undergraduate Education at MIT. The numbers could be double that. On average about 50% of U.S. engineering students dropout.

John Doerr of Kleiner Perkins argues that we must encourage more U.S. students to choose engineering. He notes that India graduates 450,000 engineers each year and China another 300,000. Actually, those numbers include all graduates in math, science, engineering, and technology, but his point is clear. At the recent Web 2.0 conference John suggested that the US should staple a Green Card to every foreign student's engineering diploma and encourage them to stay in the USA.

Why do students drop out? Student surveys say because the first year of an engineering program is all foundational theory and they don't see the connection to a career in engineering. The second most common complaint is poor quality teachers that are more interested in their own research than in teaching undergraduate students.

Why aren't these professors fired? How is it acceptable that 50% of students drop out? Why are the Deans and Professors of these schools still employed? Some wear it as a badge of honor. Engineering is supposed to be tough and it is expected that students will drop out. However, MIT, Olin College, and other elite engineering schools have dropout rates of less than 2%.

What is being done about this? The Olin College of Engineering has embarked on a mission to redefine engineering education. Today I attended the annual Presidents Council meeting that focused on "Catalyzing Change in Engineering Education". It was a fascinating workshop on what works and what doesn't in engineering education.

Dr. Joseph Bordogna, former deputy director and COO of the National Science Foundation (NSF), says the problem can be solved and Olin College of Engineering is an excellent example of how to do it. What does Olin do?

• Curriculum of engineering design and entrepreneurship. Students start by designing or reverse engineering popular products as a way to learn how things work. This hands on approach, right from the start, makes engineering real. Other engineering schools require students to take foundational courses in physics, thermo-dynamics, chemistry, and math for the first two years. Olin introduces these disciplines as needed throughout the 4 years.
• Entrepreneurship is part of the program - There is a startup incubator on campus. Students are required to create a product, write a business plan, and start a company.
• Internships in Engineering - Students do a a significant, year-long engineering project for an actual client.
• Faculty is measured on teaching success - Olin rewards professors for teaching success as opposed to research and technical papers published.
• Applicants are interviewed - Applicants are required to spend a weekend at Olin before acceptance. During the weekend they participate in team engineering projects to assess their teamwork and technical skill.
• All students receive 100% scholarships - Franklin W. Olin endowed the school sufficiently to provide 100% scholarships for all students.

Obviously all engineering schools can't implement all of these practices. But, some of them would definitely help reduce the high dropout rates. The University of Illinois at Urbana-Champaign recently signed an agreement with Olin to help transform engineering education. Other engineering schools should consider what they can do to increase enrollments and reduce dropout rates. The continued success of our country depends on it.

Advice from John Doerr of Kliener Perkins

John Doerr was interviewed by John Battelle at the Web 2.0 Summit today. It was a fascinating and far ranging interview with one of the top VC investors in the world. VentureBeat has a full rundown of the interview, but here is John Doerr's advice for startups, just the bullet points;

1. Act now, get more financing from existing investors.

2. Protect the vital core of the business. Be clear about what is core.

3. Have 18 months of cash on hand based on a conservative revenue forecast.

4. Defer all CapEx spending and large purchases

5. Re-evaluate R&D priorities

6. Renegotiate all contracts including rent. You will be surprised what can be renogitated for a lower price of better terms.

7. Everyone in the company should be selling... Everyone!

8. Offer equity instead of cash for everything.

9. Secure your cash in T-bills. Money markets aren't safe enough.

10. Figure out the leading indicators of your revenues so that you can react quickly if things get worse.

11. Over-communicate. Don't sugar coat anything. Be honest and don't be afraid to say you don't know.

Good advice for any times, but especially now. Having enough cash on hand is the key thing. Look your investors in the eye and ask them if they are willing to put more money in now. Better to know now then to be caught by surprise later.

Early stage investors still writing checks - Web2.0 conference

21,000 companies got venture funding since 2001, but only 380 made it to an IPO (Initial Public Offering), according to Josh Kopelman at First Round Capital. Silicon Valley super angel Ron Conway said that 70% of the companies in his portfolio went out of business, total loss, in the last bust 2001 to 2003, also known as "Nuclear Winter in Silicon Valley". However, they kept writing checks to fund startups...and have done amazingly well.

Dave McClure moderated an outstanding panel at Web 2.0 Summit that focused on early stage investing. The panelists included; Ron Conway, Josh Kopelman, Paul Graham, and Jeff Clavier. These are the best early stage investors in the world, so when they talk, people listen.

There was so much great information from this panel it is hard to fit it all in one blog post. Let me just share some quotes;

Ron Conway "We want our companies to have at least 1 year of cash to cover expenses. They will need that much runway to weather this storm".

Paul Graham "We find teams that can build a product in 3 months, and start revenues quickly. They will have an infinite amount of cash if the can get to cash flow break even. I call it Raman noodle break even."

Jeff Clavier "I am doing 2 investments a month. In fact I did four last month. Investment size is about the same. We want to give our companies 2 years of runway so we figure out what the monthly burn rate is and raise the needed money."

Josh Kopelman "We take board seats but only for the first 18 months. This is when all the really important decisions get made where we can add value. After that it is all about execution, where we add little value."

Jeff Clavier "I sit on only 4 Boards out of the 51 investments I have made."

Ron Conway "I don't sit on any Boards, they are a waste of time. I add value at key inflection points; when they are raising money, when they are hiring key positions, when they are doing Biz Dev deals, or when they are negotiating an exit. I can use my experience and contacts to add value at those points."

Jeff Clavier "I always syndicate my deals with other early stage investors because they add a lot of value beyond the money."

Josh Kopelman "We don't compete for deals like VCs do. we work together because we don't need a huge percentage of the company to move the needle on our funds."

Paul Graham "We make tiny investments of $15K to $25K in 40 or more companies a year. It is more about the experience, advice, connections, and value add than it is about the money."

Paul Graham "We invest in 1 out of 30 companies that apply to Ycombinator. The odds are better getting into medical school. We do a pretty good job picking our companies. Many have already had exits and others are making great progress."

Josh Kopelman "We like investments where there are multiple exit points and we are happy to take an exit at $20M, $50M, or even let it ride to $200M. we look at it like the express train (VC) or the  local train with many stops. If the train door opens at $10M we might choose to exit. If it opens at $40M we might exit then. Or we might just ride the train all the way to the end. The entrepreneur really decides what is best, and we go along with them."

Microsoft launches BizSpark program for startups

Microsoft today announced BizSpark, a global program designed to help accelerate the success of early stage software Startups. Microsoft has worked with startups for many years by providing software, support, and introductions. But the programs were little known and narrow in scope. BizSpark is world wide, and now includes over 300 Network Partners who can offer the program directly to startups.

 

BizSpark provides Visual Studio, Windows Server, SQL Server, SharePoint, MSDN, Microsoft Office,  and lots more.

VentureBeat describes BizSpark;

It’s an enticing free upfront three-year package, bundling together software, support and promotion for no upfront cost — requiring merely a $100 payment when you leave the program. It’s an aggressive move by Microsoft to ensure that technology startups at least consider using Microsoft’s tools when they are putting together their initial infrastructure — and comes a time when competitors are bidding for the business of those same startups by offering them low cost, often open source initiatives.

ZocDoc chief executive Cyrus Massoumi says Microsoft approached him to join the program at this year’s TechCrunch50 conference, where ZocDoc had a booth. The startup has now been part of BizSpark for about six weeks, and although the service was already built on Microsoft’s platform, Massoumi and chief technology officer Nick Ganju say the program has already paid off by connecting them with expert help when needed, and helping them increase the site’s security and scalability.

The free software is nice, Massoumi says, but he’s even more excited about “being able to get access to people at Microsoft who are building these products. This is stuff that we couldn’t buy.”

CNET says "In its boldest bid yet to win the affections of emerging businesses, Microsoft on Wednesday announced a program that will allow some start-ups to use its server software free of charge. "

 

eWeek included this quote "“We think Microsoft BizSpark addresses a fundamental challenge startups face: access to current, full-featured tools and technologies that help turn ideas into a thriving business,” said Suren Dutia, CEO of TiE Global, in a statement. “We will work closely with Microsoft to help startups bring their innovative solutions to market more quickly and effectively by providing educational programs, business mentoring and peer networking."

 

TechMeme has lots of other stories covering BizSpark.

 

By joining BizSpark, Startups get:

o   Software:  fast and easy access to Microsoft’s current full-featured development tools, platform technologies, and unlimited production licenses of server products for immediate use in developing and bringing to market innovative and interoperable solutions with no upfront costs and minimal requirements. Startups will also get access to the community technology preview (CTP) of the Microsoft Azure Services Platform.

o   Support:  professional technical support from Microsoft (MSDN) and community support from BizSpark Network Partners around the world who provide a wide range of support resources for software startups.  Network Partners are incubators, investors, advisors, government agencies and hosters who are vested in software-fueled innovation and entrepreneurship.

o   Visibility:  a dedicated online startup directory, BizSparkDB, on the Microsoft  Startup Zone website (www.microsoftstartupzone.com)where we will highlight  promising companies from around the world, including the “BizSpark Startup of the Day”. Through their relationship with Microsoft and BizSpark Network Partners, startups will achieve global visibility to an audience of potential investors, clients and partners.

Startups get access to BizSpark through Network Partners like TiE, NVCA, select Venture Capitalists, and over 300+ entrepreneurial-focused organizations with a strong track record of helping young and promising technology companies. Startups can find both at Microsoft.com/bizspark.

In the US, partners like Kliener Perkins, NVCA, Sigma Partners,Hummer Winblad, Polaris Venture Partners, Common Angels, eCoast Angels, TechStars, Angel Capital Association, and over 200 others are ready to help startups get into the BizSpark program.

Program Details:

·        Eligibility:BizSpark is available to startups that fit the following criteria, nominated by Network Partners:

o   A private company building a software-based product or service

o   In business for less than 3 years

o   Less than USD $1M in revenue

o   Participation lasts up to three years

Advertising winners and losers in a recession

Advertising is the first expense to be cut in an economic downturn. This spells trouble for businesses with an advertising revenue model. But, does everyone lose? No. There will be some winners. Every business needs to focus on increasing revenue and that means they need to advertise...effectively.

TechMeme headlines lots of gloom and doom stories on the decline in advertising. Despite all the negative talk, Online display advertising revenues should actually be up slightly for the year. Search CPC advertising continues to grow, and should be up in 2009. PaidContent cites a JP Morgan analyst who predicts; display ads will be up 6% in 2009, while search advertising will grow 17% in the U.S. and 34% globally.

So, we need to look deeper to the various forms of advertising to see who will win and lose.

Search Advertising is cost effective for e-commerce or transaction oriented businesses. CPC means the advertiser only pays if someone clicks on their ad, making it a very cost effective way to acquire customers or get to a sales transaction. More ad dollars are moving towards this model. A recession actually makes CPC more appealing.

TV advertising for brand awareness is still the most effective and far reaching medium. The biggest advertisers in the world are CPG (Consumer Packaged Goods) companies like Proctor & Gamble and consumer brand companies. They don't sell directly over the web, and they don't sell direct to consumers. They sell through retailers. So, they advertise for brand awareness. They want enormous reach and repetition. TV advertising does a better job of building emotional ties to a brand and conveying brand identity. TV also provides the huge audience advertisers crave. There are well established measurement systems for TV advertising, even though they seem crude compared to direct response CPC advertising.

Who wins? For transaction oriented e-commerce companies, Search is the clear winner. For brand awareness advertisers TV is still the best choice.

Who loses? Newspapers are once again getting killed. Only coupon supplements have a direct impact on purchases. Online display ads are losing out to search advertising. Newer forms of advertising like mobile and online video will struggle in this environment. Social networks/content sites already have the lowest CPM rates and will likely decline even further. Other forms of advertising and promotion like trade shows, conferences, and give-aways are likely to see big cuts.

This is a tough economic environment, and will be for another year or so. But, advertising mediums that deliver customers in a measurable way will do well.