Don Dodge on The Next Big Thing

The Capital Gap or Where are the $Billion Startups?

Paul Graham wrote an interesting essay "Why There Aren't More Googles" where he basically places the blame on reluctant VCs who won't invest small amounts on tiny startups.

So what's the real reason there aren't more Googles? Curiously enough, it's the same reason Google and Facebook have remained independent: money guys undervalue the most innovative startups.
The reason there aren't more Googles is not that investors encourage innovative startups to sell out, but that they won't even fund them.

There is a Capital Gap between the $50K from Friends and Family, and the $3M to $5M from VCs. But, that gap is being filled by Angel Investors who invested $26B in over 57,000 companies in 2007.

How many Billion dollar ideas are there? Angels in vested $26 Billion in 57,000 companies last year, while VCs invested another $29.4B in 3,813 companies in 2007. The problem isn't a lack of capital, or even a lack of entrepreneurs. It is a lack of disruptive big ideas that can generate a Billion dollars.

Most startups are acquired before they reach $1B. Look at the M&A numbers over the past few years. Last year there were $25.4B in M&A transactions compared to just $10.3B in IPOs.

Paul Graham and Y Combinator are hatching some really cool companies. Is there a Billion dollar company in there? Certainly there are some $50M ideas, but a Billion? Possibly, but unlikely.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column.

Boston startup events and resources

Boston loves startups. The Massachusetts Technology Leadership Council is doing a great job setting up events. Watch the MTLC site for future dates. MITX, The Capital Network, the Angel Capital Assoc, and others are also putting on events. Here are just a few of the upcoming events this week and next.

Tech Tuesday - is a regular monthly meet-up organized by Dan Bricklin, of Visi-Calc spreadsheet fame. Tech Tuesday is for geeks, tech savvy professionals, DIY-ers, press, and other industry luminaries for an informal gathering. Bring your laptops, robots, OLPC XO's, Amazon Kindles, new cell phones, gadgets, and other new-fangled devices. Tech Tuesday meets the second Tuesday of every month. Microsoft is a sponsor this month.

New England Angel Capital Conference - The Angel Investor groups of greater Boston meet once a quarter to review their best companies. Each group nominates companies to present. They are all looking for a round of funding that is bigger than any one Angel Group can handle. This meeting lets all the groups get a look at promising companies and pool their investment dollars.

Entrepreneurial Team Building - a panel of entrepreneurs that have built companies from the ground up and know the ins and outs of building great teams. What really makes a team come together? How can you be sure that you are bringing in the right folks? Who should be hired first, second, next? We'll talk about teams at the senior management level and at the BOD level.

Entrepreneurial Series - Plain English Term Sheets - This is a webinar for startup entrepreneurs who want to understand the details of financing term sheets. What to ask for...and what to avoid.

MITX - Mass Innovation & Technology Exchange have lots of great events for technology based startups. The next session is "Building Social Applications and Widgets".

The Capital Network - TCN's network consists of entrepreneurs on their way, entrepreneurs who have lessons and talents to offer and investors who may have themselves drifted across the entrepreneurial line. TCN has 3 or 4 events a month. The next one is on Founders Equity Issues.

The 128 Innovation Capital Group -  The regular meetings are held on the second Thursday of every month at the Best Western Hotel on Totten Pond Road in Waltham. Every month an investor provides our formal program. After Q&A, our speaker generally remains to speak with audience members, one on one. After the meeting, a roster with the contact information of all attendees is made available to those who came to the meeting.

Web Innovators Group - WebInno was founded by David Beisel of Venrock Capital. Scott Kirsner is also deeply involved. WebInno has regular meetings. The usual format; early stage start-ups and individual innovators will briefly demo their product/service in two different forums. First, there will be a couple center-stage presenters giving five minute demos for the entire crowd (aka “main dishes”) at 7pm. In addition, there will be a number of tables set up at the periphery of the room for live informal demonstrations to smaller groups during the schmoozing sessions (aka “side dishes”). Each will help provide the community a glimpse of current local endeavors in the space and offer the basis for further conversation.

Nantucket Conference - The 2008 Nantucket Conference audience will consist of approximately 150 of New England's top entrepreneurs, investors, and tech executives. Rather than sitting through a series of speeches and PowerPoint presentations, the audience will be engaged in a dialogue - and sometimes a heated debate - with Conference presenters.

Boston based bloggers

Scott Kirsner, a writer for the Boston Globe, and a blogger at Innovation Economy is always organizing and promoting startup events. Watch Scott's blog for announcements of upcoming events.

Jeff Bussgang - VC partner at Flybridge Capital Partners (formerly IDG Ventures Boston). Jeff is a former entrepreneur and now a VC. His blog is appropriately called Seeing Both Sides.

Xconomy - Bob Buderi, Rebecca Zacks, and Wade Roush cover Boston based startups, technology trends, and VC investments.

Mike Hirshland - VC partner at Polaris Venture Partners in Boston.

Nicholas Carr - Nicholas is a former Harvard Business Review editor and author of several books.

Boston based entrepreneur bloggers - Ben Saren (founder & CEO of CitySquares Online), Matt Douglas (founder & CEO of Punchbowl Software), Pito Salas (former CTO of eRoom).

BlogString has an extensive list of Boston events. Thanks to Nathan Burke for the link.

Come on out to these events. I try to attend all of them, and would love to say hello. However, for the next two weeks I am working in Silicon Valley...my second home.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column.

Angel Investors put $26 Billion in 57,000 companies

The Center for Venture Research at UNH today released their annual Angel Capital report for 2007. Angels invested $26 Billion in 57,120 companies, up slightly from last year. The report says there are 258,200 active angel investors in the USA.  By comparison, Venture Capitalists invested to $29.4B in 3,813 companies in 2007.

Software accounted for the largest share of Angel investments, with 27%, followed by Healthcare Services/Medical Devices and Equipment (19%) and Biotech (12%).

Angel Investors continue to be the largest source of seed stage and early stage start-up capital, with 39% of 2007 angel investments going there.

Mergers and acquisitions represented 65% of the angel exits, and IPO's 4%, in 2007. Unfortunately, bankruptcies accounted for 27% of the exits. Overall annual returns for angel’s exits were 27.7%.

Angels tend to invest just like VCs except they do smaller investments $200K to $2M and they do about 15 times as many deals. However, Angels have the same investment criteria and expectations of significant returns. The "average" angel group makes 8 investments per year for a total of about $2M. The average deal size (seed stage) is about $250K.

The larger angel groups in Silicon Valley and Boston do significantly more deals and invest between $350K and $600K per round, and maybe $1.5M to $2M per company.

Keiretsu Forum is the largest angel investor group in Silicon Valley. I don't have the numbers for 2007, but I know they invested $51M in 2006 in 30 companies. Several of these were real estate deals so it skews the average deal size substantially. Keiretsu Forum has invested $115M in 125 deals since its founding.

Band of Angels is another large Angel group in Silicon Valley having invested $130M in 220 companies since its founding.

Boston has around 20 Angel Capital groups. Some of the larger groups are; Beacon Angels, Boston Harbor Angels, Common Angels, eCoast Angels, Hub Angels, and Launchpad. See the Angel Capital Association site for leads to angel groups in other parts of the country.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column.

Y Combinator Demo Day - which one will be the next Google?

Paul Graham, Jessica Livingston, and the Y Combinator gang held their Demo Day yesterday for 21 hopeful startups. In most cases these "companies" are only 3 months old, have two or three founders, and are just launching a beta product/service.

Google was once a two person startup - So was Microsoft, Oracle, Sun, Apple, and every other successful company. They all started with a couple founders and an idea. It is truly amazing to see how much these Y Combinator companies have accomplished in just 3 months.

What is Y Combinator? - Y Combinator is a seed stage investor/incubator with a large network of entrepreneurs, VCs, and all the people you need to start a company. It is hard to explain but it is a cross between a startup boot camp and a traditional startup incubator. The best description of Y Combinator is on its application page. BTW, they are accepting applications for the next round of companies now. Deadline is April 2, 2008.

Y Combinator success stories? - There have been a surprising number of exits/acquisitions. They include; Reddit.com, Zenter.com, TextPayMe, Anywhere.FM, and Parakey. Several have also closed Series A or B financing rounds and have gained significant traction. Examples are; Loopt, Xobni, Scribd, Justin.tv, Weebly, Disqus, Wufoo, and Virtualmin.

Best of Show? - There were 21 companies presenting. TechCrunch did a short review of all of them. Here are my picks for most interesting or promising.

Omnisio - Video editing, sharing, tagging, and annotating made easy. Omnisio lets you take a YouTube video you like and create a clip, add tags, comments. You can easily embed your custom clip in a blog or web site. Omnisio creates a link to the source video and starts playing it where you want. There is an obvious advertising play here. Omnisio could insert a short video ad anywhere in your custom clip. It also collects lots of meta data (tags, comments, links) that help describe the video for better ad targeting.

BaseShield - Provides security and virus protection by running applications virtualized, isolated environments. BaseShield effectively quarantines viruses, spyware, and malware inside the virtual environment where they can do no harm. I have seen this idea before but it is hard to get the right balance between usability and protection.

TipJoy - Makes it easy to click a tip button to donate or pay a small amount. Visitors are not required to create an account. Just click the button and type in your email address. TipJoy separates the financial transaction steps from the act of tipping, so it only takes on click. Their demo showed that PayPal takes 8 clicks to complete a payment, while Amazon takes 7 clicks. So, how does it work? When you have accumulated $5.00 in tips or payments TipJoy sends you an email and asks you to "settle" your account by paying with a credit card or PayPal. No one will chase after you if you choose not to honor your tip. TipJoy makes money by charging a 3% fee for transactions...much the same way PayPal or credit cards work.

280 North - They have developed a new way to build web applications that has the "look and feel" and performance of desktop apps. Their first application is 280 Slides, an online presentation tool, that looks and feels something like Powerpoint...if you squint and imagine what it can eventually be.

Others companies have tried to implement a PowerPoint like application in the browser...and they all come up short. 280 North has many more features and feels more like a desktop app. Most importantly, once you are finished creating your presentation you can export it to PowerPoint and present in full screen mode. The founders pointed out that it is very distracting to watch a presentation from a browser with all the tool bars visible. Presenting in full screen PowerPoint is much more engaging and professional.

The 280 North people are building a "platform" for developing lots of online applications that "feel" like desktop apps.

Other notable ideas - Capturing user data, click streams, and attention data, for better ad targeting, was a common theme among many of the companies. Addmired, MightyQuiz, Mixwit, Deluux, Wundrbar, 8aWeek, and WebMynd are fun, engaging applications,with ad targeting as an underlying monetization scheme. Each one of these applications is interesting in its own way, and will evolve into much bigger ideas than what we see today. Which one will be a big hit? Nobody knows. But, we do know there is a profitable market for good attention data for ad targeting. Someone will figure this out and make a lot of money.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column.

TechStars 2008 accepting applications

TechStars is an entrepreneur boot camp based in Boulder Colorado, founded by David Cohen. TechStars selects 10 startup teams from a pool of about 300 applications. The selected teams get up to $15,000 in funding, community office space, operational support, and mentorship from former entrepreneurs and business leaders.

TechStars takes a 5% equity position in each company. At the end of the 13 week Summer session the startups present to a large group of Venture Capitalists and Angel Investors. Last year I attended and wrote about the Investor Day. Eight of the 10 companies received Series A funding. Some even got acquisition offers.

TechStars is managed by Brad Feld, David Cohen, Jared Polis, and David Brown. They provide the money, offices, and support for the companies. There are also more than 20 mentors and former entrepreneurs who help the companies with advice and introductions.

Get details on how to apply here.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column.

Paul Graham on Y Combinator - startup incubator

Paul Graham is a serial entrepreneur and angel investor. Paul and Robert Morris founded Viaweb in 1995, the first online web store builder, and sold it to Yahoo in 1998. In 2005 they started Y Combinator, a seed stage investment company.

I got to know Paul personally just recently, after first engaging in a blog debate. Paul wrote an essay "Microsoft is Dead" to which I replied "Since when does growing $4 Billion a year = dead?". It is funny, some of my best friendships have come as a result of arguments and debates. I became friends with Mark Cuban in the same way.

  Y Combinator provides seed stage capital and a 10 week startup boot camp for budding entrepreneurs. At the end of the 10 week session Y Combinator invites VCs and angels to an investor day / demo day. I wrote about the YC demo day a few weeks ago.

Paul is a great guy and has built a huge following in the startup community. I have a lot of respect for him and what he has done. Y Combinator is a great story. Paul agreed to share some details with me. Here it is live and uncut.

When did you start Y Combinator and how did you come up with the idea? 

We started YC in March 2005, after I gave a talk to undergrads at Harvard about how to start a startup.  I realized then that it had been 7 years since we'd sold our company and we still hadn't done any angel investments, which seemed kind of lazy.  So we set up YC as a vehicle for angel investing.  Initially we were just going to do the occasional deal, like other investors.  We were only going to work on this part time.  But once I started thinking about the project I got sucked into it, and our plans became more ambitious.

When did you do the first session? How many companies?

The first was in the summer of 2005.  There were 8 startups in that batch.

How did you recruit the companies for the first batch when YC was unknown?

YC was not so unknown as you might think.  When we started it, a good fraction of hackers had heard of me or Robert.

How many applicants were there for the 1st session?  How many applicants for the most recent session?

There were a huge number of applications the first time because initially we pitched YC as an alternative to a summer job for college students.  We got 225 total.  After that we started discouraging students from applying unless they really wanted to drop out of school, and the number of applications went down to 96 in the next cycle.  It has grown steadily since.  There were 435 for this summer.

How many sessions have you done? How many companies are in the YC alumni?

This summer's was the 5th batch.  We've funded 58 companies total.

Reddit and Zenter are YC success stories. It is still early, but are there others?

Actually Loopt is probably the biggest success so far.  Reddit and Zenter are famous because they got bought early, but there are a whole bunch of companies that could do better eventually.  Six have had series A rounds from big VCs, for example.  Several others have made it to profitability just on angel money.

What kinds of help does YC provide? Legal advice, equity structure, VC intros, hiring, market definition, business models?

This is a long one to answer.  The best place to look is our site.

http://ycombinator.com/about.html

But the two biggest things we do are work with people on their ideas, and help them  raise money from investors.  We also do a bunch of little things, like getting them incorporated, introducing them to lawyers, arbitrating disputes, helping them hire people, etc.

Does YC provide infrastructure during the session? Office space, Servers, Networks, Telephone, etc?

No.  We could easily afford to, but we think this would be bad for them.  Saving people from dealing with legal documents is good, but working in our building or using our servers would make them start to feel like employees.  I think that may be why "incubators" were such a bust in the 90s.

You hold sessions in San Francisco and Boston each year. Any differences in the setup, approach, or nature of companies?

The main difference between the Boston and Silicon Valley cycles is that the Boston startups present twice, once to Boston investors, and then again a week later at our Silicon Valley office.  Otherwise things are much the same.

Are YC companies typically ready for VCs after 10 weeks or are angel investors a better choice?

Angels are a better choice for most young startups, whether they were funded by YC or not.  But there are usually a few in each batch that are ready to raise full series A rounds.

VCs like to invest $3M to $5M, but most YC companies don't need that much. Have you found VCs and angels to fill the gap?

Actually a lot of VCs are starting to invest less.  VCs will do whatever it takes if they like a deal enough, no matter what their stated policies are.  But of course in addition there are a whole bunch of angels that invest in the startups, and these probably account for the majority of the deals.

Has YC had any liquidity events yet? How do you keep score on successful investments?

Four startups have been acquired so far.  Reddit was a merger of two, plus Zenter, plus another one we still can't talk about.  For us, success = the founders get rich, roughly.

What level of involvement does YC have after the three month session? Do companies stay in the area, mentor new companies, come back for advice, stay connected via email and social networks?

We keep doing everything we've been doing, except we don't have dinner every week.  The startups help one another a lot, and obviously this continues too.

I assume you do this because you love building companies, have had success building companies yourself, and want to help new entrepreneurs. Do you think this is a viable investment model? Is 5% to 6% equity enough to compensate for the overall investment risk?

Actually we're doing it more to help the world than individual founders.  We think the world would be immensely more productive if the best hackers started their own companies instead of marching off to work in cube farms.  Think how much more Larry and Sergey did as startup founders than they would have done if they'd gone to work for a big company.  Imagine that multiplied by a hundred or a thousand.

We want to make at least enough money that we don't have to stop. It would be nice to make more, but so far we have no idea whether this would be worth doing from a purely financial point of view. Classic VC funding is a well-understood model.  What we're doing is very different.  We have no idea if it will work.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column.

Y Combinator accepting applications for Winter 2008

Y Combinator is now accepting applications for their winter start up boot camp in San Francisco which runs from January through March 2008. I attended the Summer 2007 Y Combinator Investor Day recently.

Y Combinator is a seed stage investor with a large network of entrepreneurs, VCs, and all the people you need to start a company. It is hard to explain but it is a cross between a startup boot camp and a traditional startup incubator. The best description of Y Combinator is on its application page.

Here it is in its entirety;

1. If you want to apply, please submit your application online by 10 pm EST on October 11, 2007. Groups that submit early have a slight advantage because we have more time to read their applications.
2. We'll review applications by October 18 and invite the groups that seem most promising to meet us in Cambridge on the weekend of November 3-4. We'll reimburse up to $600 per group for travel expenses.
3. We'll decide who to fund that weekend, and tell you by phone on Sunday evening.
4. Yes decisions will include the amount we'll invest and the percent of the company we'd want for it. We usually invest $5000 + $5000n, where n is the number of participating founders (i.e. 2 founders get $15,000, 3 get $20,000), in return for between 2% and 10% of the company. The median is 6%.
5. If you accept our offer, we'll write you a check immediately for as much as you need to cover your initial expenses.
6. If we invest in you, your group is expected to move to the Bay Area for January through March 2008. (You can of course leave afterward if you want, but it's a good place for a startup to be.)
7. After you're accepted, we'll set up all your paperwork for you, including getting you incorporated.
8. Once your company exists, we'll write a check to it for the rest of the money. You can spend the money however you want.
9. Y Combinator is not an incubator. We have space you can use if you need to, but we expect you to work out of wherever you find to live. It is no coincidence that so many successful startups have started this way; it's the ideal setup for the initial phase.
10. From January through March we'll have dinners every Tuesday for all the founders. At each dinner we'll invite an expert in some aspect of startups to speak.
11. On Wednesday afternoons we'll have an open house at YC for founders who want to demo their latest work or talk about strategy. You can arrange to meet with us any time during the week, but the open houses ensure no one has to wait more than a week.
12. You're encouraged to ask the founders of other YC-funded companies for help. There are now almost 150 of them, and they're usually very willing to give advice or make introductions.
13. About 10 weeks in, we'll organize an investor day at which startups that want additional funding can present to investors. You can of course seek additional funding from any investor whenever you want.
14. YC doesn't really end after three months; only the dinners do. We continue to give advice and make introductions as long as founders need—and so does the informal network of YC-funded companies.

How do we choose who to fund? The people in your group are what matter most to us. We look for brains, motivation, and a sense of design. Experience is helpful but not critical.

Your idea is important too, but mainly as evidence that you can have good ideas. Most successful startups change their idea substantially.

We're more likely to fund people we know are smart from their submissions and comments on Hacker News. In fact, that was one of the main reasons we wrote it: so that we could get to know people before they applied.

The ideal company would have two or three founders. We'll consider those with four or five. We're very reluctant to accept one-person companies, though we have funded a couple.

We don't expect you to have a formal business plan yet. All you have to do is fill out our application.

$5000 + $5000n is not a lot, but it turns out to be enough. It will cover at least 4 months' living expenses, and that is enough time to build something nontrivial. It's in your interest to take little money in the earliest stages, because you give up less control for it.

The original motivation for Y Combinator was benevolent, but this is not a charity. If our investments pay off, we can invest in more startups, and if they don't, we can't keep doing this indefinitely. So we're looking for startups we think will succeed.

My next post will be an interview with Paul Graham, founder of Y Combinator. I ask Paul lots of questions about how the program works and his philosophy on building startups.

Subscribe - To get a FREE automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column.

TechStars Demo Day - 10 new companies ready to launch

TechStars is a startup incubator based in Boulder, Colorado. TechStars selected 10 teams and provided funding of about $15,000 per team, free office space, operational support, and mentorship from former entrepreneurs and business leaders. TechStars takes a 5% equity position in each company.

The teams presented today to about 50 VCs and Angel investors for the first time. These companies are three to six months old and have two or three founder employees.

EventVue - Social networking for conferences and trade shows. Works like Facebook for conferences, complete with pictures, bios, and contact info. Allows attendees to find each other and network during and after the conference. EventVue gets an affiliate fee for each new conference registration. EventVue is already in use at several conferences. You can see it in use on Brad Feld's blog. Competes with eXtreme Networking and IntroNetworks. Seeking $150K to continue product development.

IntenseDebate - A blog widget that provides threading and organization to comments. It includes a reputation ranking system, moderation tools, usage statistics, and user/topic tracking across multiple blogs. RSS feeds for comment threads or individual users. Supports WordPress, Typepad, and Blogger. Ad revenue model and up sell to premium services. Currently in use on 30 blogs, 500 more have signed up for beta. Seeking $500K.

SocialThing - A consolidated profile page for all your digital content; blogs, photos, music, friends, social networks, and links. Synchronize all your friends on all your social networks, from one profile page. Post pictures or other content once and have them appear on any of your social network sites. SocialThing is also a development platform for multiple social networks. Ad revenue model. Viral distribution through networks, and branded widgets. Seeking $500K.

StickyNotes - A post-it-note type app for Facebook. One of the top 30 Facebook apps. Over 1,700,000 users signed up in just six weeks, and have sent over 4M StickyNotes to date. They are working on several other Facebook apps in related areas. Cost Per Action advertising generating $30K per month. They will also use CPM and CPC in the future. Two developers, cash flow positive, not seeking funding at this time.

Search-To-Phone - Find local products and services by calling Search To Phone. Leave a voice mail asking about a product or service. The request is then routed to relevant local businesses, who respond back to you with information or an offer. SearchToPhone uses Microsoft's TellMe and Gold Systems technologies for voice recognition. They have just signed a deal with Excell Services to process 10 million calls. Ready to launch, looking for more partners, and a small investment.

Villij - A people recommendation engine that analyzes your online content, blogs, and bookmarks to find people of similar interests. When you register for Villij you are presented with a list of social networks, blogs, and websites. You check off the sites you use. Your profile on these sites is compared to other members to find profiles of people like you. Advertising and subscription model. Seeking $500K.

MadKast - A new way to share (push) blog posts with friends. It is a widget that can be placed on a blog to allow readers to send the blog post via email, mobile MMS, or social bookmarking networks, to friends in their network. MadKast also has a widget distribution network for other widgets, and they are working on a blog analytics service. Currently in use on 350 blogs, including Brad Feld, and mine. See the green MadKast icon next to the title of this post. Advertising revenue share model, split with bloggers, They will also charge a premium for the analytics package. Seeking $300K.

FiltrBox - A content filtering service that finds relevant content (blogs, news sites, and other web sites) and delivers it to you via RSS, email, and text messaging. Filtrbox uses topics, keywords, and context to rank relevant content.  There are sliders to adjust the sensitivity or depth of information to filter and retrieve. There is a "thumbs up / thumbs down" voting system to help refine your filter. The system learns what you like. Seeking $500K.

KBLabs - Developers of Facebook apps and widgets. They launched their first application (Wah! Cool) 4 weeks ago. They already have 100,000 users and 1.5 million page views per week. They have built several other apps called Post Secrets, Motivate Me, and Track Bot. Each of these apps has more than 4,000 users and is growing over 100% per week. Advertising model. Not currently seeking funding. KBLabs founders are going back to college this Fall, but will do consulting projects building Facebook apps.

BrightKite - Location Based Notifications via email, IM or SMS. The notifications are all about location or what they call "place-streaming". Streaming content about a "place" from a "place".  Alerts you when friends are nearby, or about great deals at nearby businesses, movie listings, etc. It could be used for conferences, events, bars, parties, or public places. BrightKite is also a platform for other location based apps from third party developers. Advertising model. Seeking $500K.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column.

Boston VCs gets first look at Y Combinator Demo Day

Y Combinator held its Demo Day in Boston unveiling 19 new startups to VCs and investors. The event was hosted by Paul Graham and Jessica Livingston. The companies covered areas like; video streaming; concert recommendations; enterprise wikis; a music player; an ad network; music games; hosted forums; price search; file synchronization; web promotions; an image editor; music rating; a stock-picking community; video dating; fantasy sports betting; music sharing; hosted applications; universal login, and Wikipedia like biographies.

Prominent VCs from around the country came to Boston for the event including; Fred Wilson (Union Square), David Hornik (August Capital), Jeffrey Bier (North Bridge ), Eric Hjerpe (Atlas), Austin Westerling (Charles River), Rich Levandov (Avalon). There were also people from Highland Capital, General Catalyst, Matrix Partners, Fidelity, Venrock, and others. That is Fred Wilson on the left in the photo.

Most of the companies are two person, very early stage, startups still in stealth mode. We got a good look at all the teams and technology, but I can only mention four of the companies that have actually launched a beta. They are; Adpinion, Anywhere.FM, Fuzzwich, and Versionate.

The companies were much higher quality than I expected. The founders were nearly all coders and hackers but did a surprisingly good job at presenting their idea, target market, and business model, and usually a demo in just 7 minutes. That takes talent. Several VCs said the presentations were better than many they see in their offices.

Like any VC portfolio, the Y Combinator companies will include a couple big winners, a handful of moderate successes, and a large number that will fail to gain traction. However, even those that fail to gain traction will try again and emerge with a new idea. These guys are real entrepreneurs.

Anywhere.FM looks like a (possible) winner. There are several others still in stealth mode that I can't talk about but they are focusing on music, fantasy sports, and photo editing.

Scott Kirsner, Boston Globe writer, was at the event and wrote a blog noting that several of the companies are planning to relocate to Silicon Valley because the VCs are more aggressive and the partnership opportunities are better. Come on Boston VCs! Step up and make the investments.

Next week I will be at TechStars Demo Day where 10 more companies will show their stuff to investors. And later next month I will be at TechCrunch 20 where Michael Arrington and Jason Calacanis will promote their top 20 picks. Fifty hot startups in less than a month. That is my idea of a good geek time.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column.

Angel investors deserve respect from VCs

Rick Segal from the VC firm JLA Ventures has an excellent post about the importance of Angel investors to the startup ecosystem... and how some shortsighted VCs stomp on them every chance they get. Entrepreneurs remember this; a VC who abuses your angel investors will also be quick to fire you and replace you with one of their inside guys.

Angel investors are critical to the startup ecosystem. They invest seed stage money when no one else will. Angels have invested more in startups than VCs the past four years. They take enormous risks, and work hard to help these small companies get to the next level. Angels are former entrepreneurs themselves. They have built companies, have an extensive network of friends in high places, and many times have specific domain experience that can be extremely valuable to your business.

In my day job at Microsoft I work with VCs every day. Most of them are seasoned professionals who understand the ecosystem. They love building companies and have great respect for entrepreneurs.

Sometimes you run into arrogant B-School jocks, turned VCs, who think they are experts at financial engineering. They take joy in squeezing angels and even the entrepreneur. They negotiate hard on terms and put all kinds of complicated preference provisions in the deal. These are the same guys who will fire a founder and put their own people in...just because they can. Listen to this true story from Rick Segal from JLA Ventures;

I recently had a conversation with two 'grand old men' of the VC community regarding an investment they had just completed.  It was a small start up which had taken angel money to get going.  The terms of that original deal were a simple debt instrument that converted (at a discount) upon the next round.

These two guys were all high five like because they had killed the discount upon conversion.  The phrase that bugged me the most was: "We made the angels blink and understand the real money had arrived."

Over time these guys will get squeezed themselves, and left out of good deals because of their history. To be fair, there are also "devilish" and greedy angel investors who will try to take advantage of you. Here the VCs will come in and pound down the bad angel.

The VC business is a small world built on reputation and trust. Most VCs and Angels I know are honest, hard working, former entrepreneurs, who do this because they love building companies. They understand the importance of angel investors to the whole ecosystem. Brad Feld, Rick Segal, Ron Conway, Luis Villalobos, and the people at Common Angels, eCoast Angels, and many others are critical supporters and financial backers of seed stage companies. VCs would do well to embrace them.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column.