Wednesday, June 11, 2008

The CEO Roundtable of Web 2.0 Companies Talk about the Current State of Angel and VC Funding

A recent Roundtable of Web 2.0 companies including highlights the participating companies including, Babblesoft, Edioma, iTaggit, KeyIngredient, Mindbites, Moximity, MusicGorilla, NaturallyCurly, OtherInbox, VolunteerSpot, and Wowio posted this summary which captured best practices for CEOs. The group offered their views on the funding situation with what angels and VCs fund these days:

“Angels: A working product, a scalable model, revenue, and a willingness to exit. It also really helps to have a serial entrepreneur as a founder. Your raise should be between $250k and $1M.

Some smaller funds like G51 have been active B2C funders, as have a few out-of-town VC’s like True Ventures, Benchmark Capital, and DAG Ventures. Here’s my take on the profile of successful VC raises:

VC’s: A working product, a scalable model, a compelling, innovative, and defensible take on an emerging market, and the potential for a billion dollar exit in 5-7 years. Your raise should be $1M or more, although there was some talk that $1-$3M is no man’s land right now. If the founders are first time entrepreneurs, it also doesn’t hurt to have some ivy on their resumes.”

I think they are right about the angel investor’s view of the fundable startup especially the point about a working product. I would add that the management team needs someone with experience and a permanent CEO is a must.

A clear go-to-market strategy is also key. Sometimes I see entrepreneurs try to paint a picture of a market full of opportunities but instead leave the investor wondering which of the twenty segments highlighted will actually be pursued.

Best regards,
Hall T.

Tuesday, June 10, 2008

Mike Maples speaks at Acton Angel Network Event on the State of Angel Investing

Mike Maples speaks at Acton Angel Network Event on the State of Angel Investing, what he sees as warning flags in a startup, and what he looks for in deal.

I had the opportunity to hear Mike Maples Sr. speak on the state of angel investing at the Acton Angel Network event last Thursday. The event highlighted Matt Lyons of Andrews Kurth who led a Mock Terms Sheet practice. For those who have not heard about it, the program involved a case study and a terms sheet. Participants are divided into angel investors and entrepreneurs and invited to “negotiate” through the terms sheet.

The event was great fun and educational too. In fact, at the end of the day, I gave a few closing remarks and invited everyone to move to the room next door for drinks and food. Typically, this generates a rush of people but instead the participants continued their negotiations for another 15 minutes before closing it off.

Mike Maples keynote started off with a review of the bubble days in which hype ruled. Mike pointed out that in many cases the hype turned into reality such as:
1. B-B e-commerce reaching $1.3 trillion by 2003 – actual $2.4 Trillion
2. Consumer e-commerce reaching $108 billion by 2003 - $95 billion
3. Productivity gains from e-commerce would pump $250 billion into economy by 2005 - $450 billion
4. Industry’s would change – Music, Travel, Movies, Yellow Pages, Retail

But the bad news is that business cycles do exist and that the bubble days created a lot of bad habits among entrepreneurs and investors. The VCs are currently in disarray. The bottom half of the VC community went out with the bubble burst and aren’t coming back. Twenty of the top VC funds in the 1990s went away and aren’t coming back either. Entrepreneurs receiving large investments tended to overspend on unnecessary things.

The old investment cycle of the 1990s of Angel investment leading to VC funding leading to Mezzanine funding is giving way to a new model of angel investment first and VC funding only for expansion after success.

The three warning flags Mike looks for in a deal are

1. The entrepreneur claiming there’s no competition,
2. The entrepreneur asking the investor to sign a confidentiality agreement up front.
3. High management salaries

Mike advised the entrepreneurs in the room to bootstrap as long as you can. He encouraged the audience to pick a focus and execute well including:

1. Build the right product
2. Build the product
3. Manage spending
4. Hire the best

Mike closed out with what he looks for in a deal

1. ‘Entrepreneurs that want to Learn
2. Idea, product, service you can explain to your spouse
3. Invest with people you like to work with
4. 3-5 yr –
a. 15 X return
b. 25% year annuity
5. Sharp, narrow focus
a. In big area or
b. Protected Niche
6. Hard technical problem, not a feature

Best regards,
Hall T.