SuperAngels running out of cash...Startups asked to deliver User Sustainability

The word coming out these days from the dozens of incubators launched in Silicon Valley and other Silicon "corners"  across the U.S.  is that many of the Demo Day showcased startups are not finding many takers. Each incubator graduates a dozen or so startups every 3 to 6 months, and while the first batches of graduates in 2009 and 2010  were quickly financed by Venture Funds, it seems that that fever may be cooling off in 2011.

Two reasons are frequently cited. The first is on quality; many venture capitalists are finding innovations to be more like evolutions rather than revolutions. Many founders are jumping on the incubator bandwagon with one-trick-poney startups, and even the poney is a warmed-over idea from 1999-2000 with a social networking sauce to it. I've had venture colleagues who like me have been around in venture for more than 15 years complain that it is the same PowerPoint pitches of 10-12 years ago except that the 1999 "B2B Marketplace" buzzword has been replaced by the 2009 "Social Networking" buzzword.

The second reason is quantity; Venture Capitalists are complaining that some startups have commoditized the MVP go-to-market strategy (Minimum Viable Product). They focus on getting those first 100,000 users without necessarily focusing on their sustainability. So VCs have gotten wise to that and have asked a number of startups to go back to the drawing board and figure out their model on the basis of user sustainability, not user recruitment.  The argument here is that you build companies on recurring revenues based on a sustained user base.

So with the slowing Venture Capital uptake of incubator graduates, SuperAngels and angels-alike have to dip deeper in their pockets to sustain their companies longer, rather than invest in new ones. And as we all know it, Angels are investing out of their own finite cash pocket, which is not all that deep when you have a dozen investments and you have to re-up on each one of them.

 

Stay tuned...

Crowdfunding: the Next Big Scam

In the age of social networks, connections-galore and friends of friends lists, it was a matter of time before a few clever entrepreneurs came up with the concept of bypassing professional investors (super angels and venture capital funds).

In the last few months, I must have seen a dozen good pitches about funding a crowdfunding platform. A few are already live on the web.

Why would hard working high net worth investors "give away" their hard earned savings to a far away entrepreneur without "adult supervision" (i.e. board governance)?  this doesn't sound to me like an investment exercise, rather it smacks of cash giveaways. So it is a pass for me.

The SEC is now considering "whether to let fast-growing companies use social networks such as Facebook and Twitter to raise funding by tapping thousands of investors for small amounts of money, according to the Wall Street Journal." 

Has the SEC forgotten the 1992 fiasco where they let startups raise up to a $1M without any disclosures to investors? They had to shut down that brilliant idea in 1999. why? frauds-galore.

I simply think that if "it ain't broke, don't fix it". The reason angels and venture capital funds exist is because the capitalist system made that food chain efficient. The invisible hand of Adam Smith works wonders between the supply of innovations from entrepreneurs and the demand from the limited capital in the hands of angels and VCs. The best ideas rise to the top, and attract more capital for subsequent rounds.

Norwegian Govt Pension Fund out of Venture Capital, altogether.

According to RealDeals Europe,  "the Norwegian Government Pension Fund Global (GPFG) has announced that it will diversify its investments into alternative assets, but has rejected private equity in favour of real estate due to unfavourable returns.

The CPFG's report compares GPFG to Calpers as they are of a similar size and observes that their returns from private equity are close to returns from public equity. The report recognises that the future may be different from the past... Historically, when little capital is allocated to a private equity segment (e.g. venture capital) expected returns are high, probably because there is always a steady flow of future Googles and Starbucks out there awaiting venture capitalists. Thus, while knowledge of past returns is apposite, these past returns should not be too naively extrapolated into the future.”

Well that sounds like giving up too easily on the asset class. It would seem to me that reducing the asset allocation percentage to the Private Equity & Venture Capital asset class would be a more sensible position, rather than just write it all off.

Indeed there is always a steady flow of future winners, Facebook, Twitter, Zynga, Quora, LinkedIn etc, that the CPFG might miss out on. Notwithstanding the private equity funds that fuel the growth of mid-sized companies in both Norway, Europe and the rest of the World. As we all know, it is startups and mid-sized companies that fuel job growth rather than large multinationals.

Norway’s Government Pension Fund Global (GPFG) tops a ranking of 53 sovereign wealth funds (SWFs) in 37 countries. 

Maybe they'll change their position in the future and hopefully they won't influence other SWFs.

LPs returning to Venture Asset Class will have to diversify beyond Tier 1 funds

The news today from DowJones LP Source that more money has been committed to venture funds in 1Q2011 than in any of the preceding quarters since 2001 is encouraging. It reaffirms comments made by certain LPs at the recent NVCA National Conference in Boston.

Though most dollars committed in 1Q2011 went to Tier 1 funds such as Sequoia ($1.3B) , Bessemer ($1.6B), Greylock ($1B), it begs the question: is it going to stop there?

Many gatekeepers have recommended over the years to their LPclients that a commitment to a class such as venture comes with the diversification over many managers and over a number of vintages. So indeed if an LP has the opportunity to commit to a Tier 1 VC, he should. But ultimately, that LP will have to follow the commitment allocation curve and "trickle down" some commitments to the next Tier funds and even some emerging managers.

Tier 1 VCs do not have a monopoly on deal flow, nor do they have a sure fire returns strategy. Just like any fashion designer, "you're only as good as your last season"...and for VCs, you're only as good asyour last great exit. So maybe the next category definer (Facebook having defined Social networking) will come from a Tier 2 fund or even an emerging manager.

92% of job growth in venture-backed companies occurs post-IPO

It is a double-edged sword to want better access to publicmarkets, as the venture capital community would like, and to loosen private company ownership rules. The SEC is currently considering loosening rules onprivate companies so that they can continue to grow as private companies and avoid reporting to the SEC past 500 shareholders.

Of course, this is not in the interest of the venturecapital community, of which I am a member. As a venture capitalist, my goal is to get companies to go public as fast as possible. Mainly for two principal reasons: 1/ the IPO process and the post-IPO reporting requirements force financial discipline on a company, and most importantly 2/ it gives the company access to capital, debt, mezzanine financing and even PIPEs.

The latter reason is the most fundamental as the capital markets at large are in the trillions of dollars, whereas the venture capital industry is at $20 billion annually. This is critical for a rapidly expanding company in need of working capital, capex and LT investment capital. It can access all the different pockets of capital out there. Venture capitalists on the other hand are only one pocket of capital, and it is an expensive one (~25%).

Statistics by the NVCA have clearly demonstrated that once a startup becomes venture-backed, its chances of survival increase 100-fold, and once a venture-backed company goes public, its chances of growing to massive levels increase 10.000-fold. Just look at Amazon, eBay, Dell, Staples, Starbucks, Microsoft etc.

As venture capitalists, we keep battling these non-sensical topics: Sarbanes-Oxley, carried-interest taxation, venture fund reporting, systemic risk reporting, and now private company ownership. Access to public markets is what the SEC needs to focus on if we want a strong and vibrant startup community that creates jobs in the hundreds of thousands. 

The recycling of venture capital through the IPO process allows the U.S. to continue its leadership in financing innovation.