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 Startup panel discussion
What types of startups are getting funded? – Consumer? Technology? Social? Wireless? or what?
- What are the most attractive markets – 5 million free members to the next Flagr/Fligr/Flikr, or the Fortune 500?
- What are VCs looking for from startup teams – management, management, management?
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What are VCs looking for in startup exits – a long term company, partnership, acquisition, or a quick flip to Google?
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What happened to the IPO?
- What business models are working, or not?
- What do VCs want to know about you – funding pitch-KISS, the technology, patentable IP, the market, or ?
The Panel:
- John C. Occhipinti, Managing Director, Woodside Fund
- Carol Sands, Founder and Managing Member of The Halo Funds
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Daniel Joensen, Deal Screening Committee, Band of Angels
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Anthony Lee, General Partner, Altos Ventures
- Moderator: Wes Rose, Senior Vice President, The Brenner Group
Opening question from Wes Rose, Moderator: have things tightened up in vc funding?
John Occhipinti: things have tightened up a bit since last year, except for green tech investments. Some startups are needing six months to raise capital. Mobile computing very hot. Doesn't require as much capital to start a company now.
Carol Sands: there is a lot of money out there. But the days of coming to a venture firm with an idea and saying "I need $10M" are gone. We want to see lean mean operations and invest in great teams, not a single miracle person founder. We had a blip called the dot com bubble and unfortunately a lot of entrepreneurs grew up in that bubble. It used to always take six months to raise capital; the dot com bubble was the exception. We need time to get to know you and do proper due diligence. But if you have a quality idea you have an excellent chance of getting funding.
Anthony Lee: The venture industry is investing $30B per year, there is little impact of the IPO market conditions on investments.
Daniel Joensen: If you have to wait two to four years extra for the IPO market to open, it may mean your venture doesn't survive. We're looking for lean operating styles that are saleable without necessarily going public.
Rose: How's the M&A market?
Occhipinti: Well, this panel is seed capital investors - the average vc fund is $500-600M, we're more like $150. If you're a $400M fund you can't afford to get involved in too many deals below $20M. This requires an IPO market to be there; whereas the average M&A deal is around $50M. The IPO market effects the bigger funds more. We're not seeing too much of a hit from the overall soft economy; but we are tightening belts a bit in our investments.
Rose: What sectors are big - software is a huge category with a bunch of verticals.
Lee: We're not as sector-driven. There is a lot of sheep mentality in the venture market. We are willing to think outside the box on deals. But as a whole, people are very interested in the SaaS model for software plays; and the crossover between business and consumer applications.
Sands: You need to spend some time figuring out who is the right type of investor; you can waste a huge amount of time talking to someone who is coming from the wrong place, or doesn't understand your industry. "Aiming" in your fund raising process makes all the difference in the world. You need to be sure that venture investing is the right type of funding for your firm. Federal and State grant, a ton of other ways to be able to get financing; venture capital is just one option.
Joensen: It's true, not everyone would want to look at software right now; but I would invest in things that I understand and think can add value; I don't want to be the dumb money in the deal. I like software and would invest in plays that I can understand and believe in.
Occhipinti: Software is a very broad category and is going through some changes. Open source is a huge force; one of our investments is radically changing financial applications that are sold to banks, used to be an enterprise class sale. It's true you can build a startup without needing venture capital investment. You need to be able to show at a micro-economic level, and let your customers speak for you in answering investors questions. We do believe in the one miracle founder who knows the industry and we can build a team around them.
Rose: Are investments in "web 2.0" played out? or is there room for more startups in that space?
Lee: We just closed several - a kids broadband virtual world, a mobile internet play, (etc) - the right entrepreneurs and the right individual plays are how we think; it's a fallacy that you can pick the hot sectors then cherry pick the right play.
Joensen: I don't see the multi-Billion dollar valuations for a lot of the web 2.0 plays, without mentioning any names; traffic levels are not enough to justify that.
Rose: is VC and Angel Investment going international?
Occhipiti: The way venture funded startups are being built has changed radically; our portfolio is spread around the world. Many of them are started here but they are much more geographically disbursed that they would have been ten years ago. Both in terms of their resources and their customer base (several examples). We look for partnerships with strong funds in regions we know well.
Rose: the role of technology vs marketing today?
Sands: Depends upon the industry. Medical devices very technology-driven; Internet not so much. For many years silicon valley was driven by engineers who didn't see the value in sales & marketing, but that has changed a lot.
Question from audience: $400B in venture capital invested in the past ten years; that's 40,000 companies, right? Where are those forty companies?
Joensen: venture capital investing has a risky profile. Five failures out of ten is typical. A lot of the $400B was lost in Telecom and Semiconductors; semiconductor firms lost more than dot come (internet) startups.
Audience question: What kind of time frame, investment to exit?
Sands: some deals need 7 to 10 years; some 18 months.
Occhipinti: VC's get preferred shares, get paid first which is fair.
Lee: Don't try and predict the time frame of the exit; who knows where these things go. It's important to understand what your investors need in terms of ROI and time frame. We are looking to get our plays to $20M revenue inside of five years, that's where we can start to play.
Question from audience: What kind of valuation criteria do you use for investments?
Lee: Early stage investors will want at least 30 to 40% of your company, regardless of what they are investing. It's the same whether you are raising $1M $2M or $5M.
Question from audience about deal structure: LLC OK for VC market?
Sands: Don't mess with being creative; hire a top tier, high quality valley law firm and get your deal structured right. They understand the process and will get it right. If you don't structure it right it may well become non venture-backable; for example an LLC structure is not.
Rose: What is the main thing that makes a deal venture capital fundable?
Lee: Start it without venture capital if you can. Venture capital is a pain in the __. We set on your board, call you every week, and have high expectations. Get profitable in bootstrap mode first, if you must raise venture money.
Joensen: Things that need a lot of hardware, or biology over time take the most time. Avoid taking money from people that need 5 to 10 times their money as return on investment to be successful, if you can at all avoid it.
Occhipinti: Surround yourself with people that have experience in starting things, who are networked. Bootstrap yourself to a meaningful milestone. Find investors who have been successful in the sector you're in, network to them versus approaching directly; that is key. Use your advisors.
Sands: Too many startups are paranoid that someone is going to steal their idea. If you are so lucky to have an idea that great, when they steal it it'll just validate your idea and it's likely the space can support six startups.
Lee: It's important to do your homework on venture firms; a lot of $800M firms call themselves seed investors but aren't.
Occhipinti: re: structure, we like to see deals structured as convertible notes with a discount, so that they come in with us but at a discount. We greatly value if you really tried to prove something with your seed capital, if you did a feasibility test.
Lee: just do not PRICE (set a hard # valuation) on a Friends and Family round.
Rose: What are you looking for in a first meeting with an entrepreneur?
Occhipinti: First, get the meeting. You'll need an executive summary, powerpoint, and a DEMO. You want to be very prepared to capture the attention of the vc right away; not after a 20-minute exposition on the market. Tell them what you do and how you're different - their brain won't engage until they get "that". So start with the demo; tell me a story about a customer. Have 20 minutes of slides (12 or less) and lots of discussion. It's a sales process; you're trying to engage them intellectually and emotionally so they'll want to meet again and take it to the next level. The first sales call will stink so get feedback, but don't try to counter objections; send an email addressing it later.
Joensen: the F2F meeting with an Angel screening committe is based upon the executive summary getting through. You spend most of the 25 minutes getting grilled by 7 people; you just have to know everything cold; you have to have really thought about the business and have answers for everything that is thrown at you. You have to have spent a lot of time thinking about your business and we are looking at how you are thinking on your feet.
Sands: Make sure that meeting is NOT the first time you have practiced that presentation; use your advisors and develop, revise, rehearse that a number of times. You should have practiced it for 3 days getting feedback from F&F, spouse, lawyers, consultants, advisors, etc. What is the problem, what is your solution, and why should i invest in you; to get to the next meeting.
Lee: Mechanics - in the larger firms you'll start with an associate; the purpose of that is to get a second meeting. Help the partner or associate by giving him a soundbite to take to the partners meeting. We like to hear the history of the company and what you've done. Do not send the whole team, but send the key people. Don't make the classic beginner mistakes like listing every bio; or predict $100M revenue in 3 years, or say we only need 1% of the market.
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