Written by Jay Turo on Friday, February 22, 2008
Goldman Sachs recently came out with a report analyzing recent venture capital investing trends. Key takeaways from the report include:
Strong current investment interest in:
Concurrently, previous hot sectors of enterprise software, storage, and security software have and forecasted to see a cooling of interest.
It is important to note that the VC investment marketplace tends to move in waves - large crests of interests in certain investment spaces that as quickly crash and fall out of favor. Above all else, it is NOT advisable to start or re-focus a business based solely on "hot" investment interest in that sector. A chameleon business strategy of this nature is usually transparent, and almost always unsuccesful.
Written by Jay Turo on Thursday, February 21, 2008
Excellent post on PureVC (www.purevc.com) regarding the key elements of a due diligence (or background materials) binder for a company seeking financing. The short list of the key elements for the binder are:
1. Background of the company
The post goes on to discuss issues of confidentiality - which and to what detail of the items above to make publicly available and which to disclose only after confidentiality agreements have been executed. A good workaround is to have shortened, publicly circulable versions of the above, with sensitive detail withheld until under non-disclosure. The full post can be seen here.
Written by Jay Turo on Tuesday, February 19, 2008
From our experience consulting to entrepreneurs, start-ups, and small businesses over the past ten years, we've gained much exposure to the realities of starting and growing businesses. We thought it would be interesting -- and hopefully instructive -- to lay out some of the myths and assumptions of aspiring entrepreneurs.
7. It Is All Dependent on Hard Work. Hard work is an absolutely necessary, but not sufficient, condition for starting and growing a business. It is the given, but without a solid business plan and compelling value proposition for customers and partners, all of the hard work in the world will be for naught. The world is filled with over-worked, over-stressed, and not terrible successful small business people who struggle not because of lack of appropriate effort, but rather for lack of appropriate planning.
6. If Your Product or Service is Compelling Enough, Customers Will Beat a Path to your Door. Unless you are building a business based upon intellectual property and/or technology that provides and creates such a competitive advantage and compelling customer value proposition, the early success of your business will be based as much on your ability to market and sell your product and service as it will on the product or service offering itself. Remember: in a capitalistic marketplace there is NO distinction between value and perceived value.
5. If Your Product or Service is Compelling Enough, Investors Will Beat a Path to your Door. Those that identify themselves as prospective investors in earlier-stage, small companies are mostly INUNDATED with investment opportunities. As such, no matter how good and unique your business opportunity, there is always a strong, initial prejudice AGAINST investment that needs to be overcome.
4. It Is All About You. The myth of the charismatic, "do and be everything" entrepreneur is just that -- a myth. Any and all companies of value are great teams much more than they are the by-product of a highly talented individual. The best entrepreneurs and business leaders inspire the mission, values and philosophy of a company by their own example. This inspiration is then communicated to all of the business' stakeholders -- employees, customers, investors, partners, vendors, and its wider community.
3. The Government Is Your Friend. We are constantly astounded by the regulatory and paperwork maze that a startup company needs to negotiate and constantly monitor to both start and maintain a business. It is a significant time, money, and energy drain that detracts from the main value creation intent of a new business. Our best advice in this regard -- as resources are available -- is to find competent legal and accounting counsel, to both advise upon and outsource the regulatory burden, so you can focus on business-building.
2. The Government Is Your Enemy. Having said the above, in the mixed economy in which we live, government revenue opportunities, on a local, state, federal, and international level, have never been greater for small business. While slow, meandering, and confusing to approach, governments have much to recommend them as clients and customers, not the least of which is that once sold, government clients pay well and are not bad debt risks. A somewhat trite but very important credo to remember when selling to governments, even more so than in business, is that "it is not as much what you know but who you know."
1. It Is Only Worth Doing If You Become the Next Google. The vast majority of small businesses will always remain just that -- small businesses. The odds of starting a business and have it become the next Google or a publicly-traded company are very, very small. While we would never discourage entrepreneurs for aiming for the stars, it is also important to have success metrics grounded in probability. An expectation of a minimum of 2years of very, very hard work with little financial return but with a lot of learning (and some fun hopefully as well) involved is a good starting point. From this first milestone, then and only then should there start to be an expectation of significant wealth-building. Find that balance between the long term vision and the Monday morning action plan -- and success, while not guaranteed, is very likely.
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Written by Jay Turo on Saturday, February 16, 2008
Pointing to our theme here of both markets and the regulatory environment adjusting favorably for the small cap public and the private company investment markets, today the SEC reduced the holding period for Rule 144 restricted stock from one year to six months.
The change will greatly help smaller public and private companies raise capital by easing the liquidity concerns of outside investors in these companies. Liquidity concerns are one of the biggest, if not the biggest, challenges to overcome in securing investment in private placement transactions.
Quite simply, this change is great news and in our view will be part of a theme we will see over the next few years to ease the regulatory burden on smaller company financings.
Read the article here on the change.
Written by Jay Turo on Friday, February 15, 2008
In 2007, for the first time Southern California passed the Boston area as the 2nd largest venture capital market in the country. According to Dow Jones Venture One, Southern California saw a 12 percent increase in amount of funded deals - to $3.8 billion. Venture funding in general was up 8 percent in 2007 - and VC's raised over $35 billion in fresh capital from limited partners to invest.
A few takeaways:
Written by Jay Turo on Thursday, February 14, 2008
The "Roger Clemens Goes To Washington" side show was the lead mindshare item across arenas today - sports obviously, but also popular culture and surprisingly the business press as well. CNBC broke in extensively from their market coverage in the morning to cover portions of the hearing, and the lead items on most Internet news sites were reports and analysis of the hearing.
Against my will, I found myself both anticipating the big event as well as excitedly following its course. And since my business plan and Internet marketing minds are, for better or worse, always on, I couldn't help but have my wheels turn in regards to the value of the millions of eyeballs tuned to the spectacle.
On some levels, it would seem impossible to put a marketing plan together for a profit-making enterprise that could capture so much free media so cheaply as these hearings (and let's be real here folks - there was really no point nor lesson to be learned from these hearings other than their "pleasure in other's misfortune" appeal of watching a rich and famous and seemingly untouchable sports icon fall from his pedestal).
But heck, the combination of the sheer numbers involved and our celebrity-obsessed culture certainly make "voyeuristic-based" promotion and PR worth exploring -- especially for consumer-facing product and service offerings having difficulty being heard above the noise (and operating, as we all are, with limited marketing budgets). GoDaddy and their racy Super Bowl commercials come to mind as a great example in this regard. So does Mark Ecko and his purchasing and then online vote regarding what do with the Bonds home run ball.
While certainly a lot of this kind of promotion is done in what we will call the "You Tube" marketing channel, it hasn't bled over to mainstream media as much perhaps as it should. My gut says that enterprising marketers will be putting this kind of "scandal marketing" more and more in their business plans in the years to come.
Written by Jay Turo on Wednesday, February 13, 2008
Raising capital for a startup or small business is without question one of the most challenging aspects of growing a business. The stories are manifold of entrepreneurs and small business owners becoming both frustrated and discouraged by the amount of time it takes to secure capital, the rejections they endure, and the lack of linearity and progress checkpoints over the course of the fundraising process. Complaints we hear repeatedly from entrepreneurs regarding fund raising include the following:
Written by Jay Turo on Wednesday, February 6, 2008
According to 20-plus years of data collected by Thomson Financial, early, or seed stage, private equity investing has over the long-term, outperformed all other investment classes -- with average annual returns of over 20.6%.
Written by Jay Turo on Tuesday, January 29, 2008
An overlooked benefit of The Federal Reserve Board cutting interest rates by 75 basis points last week and an expected additional 50 points is the palatable benefit it has and will have for equity investments:
Further to this point, the noise of the chattering classes often drowns out the remarkable resiliency of American capital system. In America, there is an enormous institutional commitment to maintaining stability and fluidity to economic markets. Rarely do things, on a macro level, get out of balance either very badly or very exuberantly (or when there is exuberance, it is usually contained to a particular sector).
It is no accident that the United States is the unrivaled venture capital investment center of the world, and no accident that a significant plurality of most the leading technology companies in the world are American firms. Capital usually feels safe in the United States, and it is safe capital that inve sts in growth investments. Stable monetary policy, which Americans often take for granted, plays a key part in inculcating this sense of safety.
Written by Jay Turo on Wednesday, January 23, 2008
Amid the tumult in the public markets, venture capital investments in U.S. startups remains very, very strong -- climbing to a six-year high of $29.4 billion in 2007. It was the busiest venture capital investing year since 2001, with investment spread across 3813 deals, and 11% more money invested than in 2006.
Perhaps most encouragingly, both the venture and individual investor forecasts for 2008 early-stage investments are robust - in spite of and perhaps even driven by public market equity and debt investment uncertainty.This robust outlook is confirmed by the amount of new investment capital that venture capitalists raised in 2007 - $34.7 billion -- 9 percent more than in 2006.
Key market arenas spurring this optimistic outlook include health care and biotechnology, Internet-based business models, and alternative energy. These three sectors accounted for more than 55.1% of 2007 VC investment -- with positive and recession-resistant outlooks for these sectors in 2008.
Growthink's long-term view regarding the early-stage private company investment market remains strongly bullish. Long-term investment return data supports our view that early, or seed stage, private equity investing will always, over the long-term, out-perform all other classes of investment. According to Thomson Financial's US Private Equity Performance Index, 20-year early/seed stage private equity investment has averaged over 20.6%/year in investment return - easily out-performing investment classes including later-stage private equity and public market indices.
Our more prescient short term guidance -- avoid listening to the chattering classes with their "it bleeds it leads" mindset to stoke fear and crisis. The capitalist system that has and will continue to create prosperity to the world is led and driven by entrepreneurs and managers with the resiliency and foresight to act while others dawdle and fret. The great ones are acting now. What will you do?
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