jump to navigation

VC funding dips, and seed investments nosedive October 23, 2011

Posted by Ian Cheng in Funding.
add a comment

By Colleen Taylor

It’s no secret that the larger economy has hit a rough patch in recent months. Although Silicon Valley has — in general – fared better than many other parts of the world, the venture capital industry is not immune to the negative effects of the macro-economic slowdown.

In the third quarter of 2011, venture capital investment activity fell 12 percent in terms of dollars and 14 percent in terms of deals compared to the previous quarter, according to the latest edition of the MoneyTree Report assembled by accounting giant Pricewaterhouse Coopers (PwC) and the National Venture Capital Association (NVCA).VCs invested $6.9 billion in 876 deals during the July through September timeframe in 2011, the MoneyTree report says, a notable decline from the $7.9 billion invested in 1,015 deals during the second quarter of 2011.

To be fair, the industry is still up compared to last year. For the first three quarters of 2011, VCs invested $21.2 billion, which is 20 percent more than VCs invested in the first three quarters of 2010. And 2010 saw an even bigger drop between the second and third quarters of the year. But VC funding is not exactly predictable according to the time of year — in 2009, for instance, the third quarter of the year was stronger than the second.

The VC industry is not as predictably cyclical as others because it generally takes its cues from a fluctuating variety of places: the worldwide economy, the entrepreneurial environment, the stock market’s appetite for IPOs, and larger companies’ appetite for acquisitions. It’s a complicated mix, but at the moment, it seems venture capitalists may be nervous about the larger environment of financial unrest, and the IPO window that opened earlier this year seems to be closing.

Seed funding takes a hit

Seed funding — which has recently been the hotshot of the industry as more angel and individual investors have become active in funding the startup scene — took a major hit in the third quarter of 2011. Seed stage investments fell a whopping 56 percent in terms of dollars quarter-over-quarter, and 41 percent year-over-year, to $179 million. It’s not just the total amount of seed investment that’s fallen, it’s also the amount of money per deal: The average seed deal in the third quarter was worth $2 million, a 43 percent drop from the average seed deal in the second quarter of 2011, which was $3.3 million.

And late stage deals have started to see major declines as well. Later stage startup investments decreased 20 percent in dollars and 30 percent in deals in the third quarter compared to the second, MoneyTree reported. Middle, or expansion, stage deals were relatively robust: Expansion stage dollars increased two percent quarter-over-quarter and 43 percent year-over-year, with $2.5 billion going into 260 deals.

Software is still strong

It’s not all doom and gloom, though. The software space has held up fairly well, receiving the highest level of funding for all industries during the third quarter with $2 billion invested from venture capitalists. That’s a 23-percent increase in dollars from the second quarter, and according to MoneyTree, the highest quarterly investment in the sector in nearly a decade, since the fourth quarter of 2001.

The web industry had a relatively soft quarter, as investments in Internet-specific companies fell 33 percent quarter-over-quarter during the third quarter to $1.6 billion. But it’s not exactly time to cry for Internet startups; the third quarter had a very tough act to follow, because Internet-specific VC deals hit a 10-year high in the second quarter of 2011.

Venture Firms Put $8.4B In U.S. Companies In Q3 Of 2011; Up 29 Percent October 21, 2011

Posted by Ian Cheng in Funding.
add a comment

According to the latest Dow Jones VentureSource report, venture funding in U.S. companies was on the rise in Q3 2011. Investors put $8.4 billion into 765 deals for U.S.-based venture companies during the third quarter of 2011, a 29% increase in investment and 8% increase in deals from the same period last year. The median amount raised for a round of financing during the third quarter was $6 million, up from the $5 million median a year earlier.

Dow Jones says these levels of investment put the industry on pace to near pre-recession investment levels by the end of the year. The report shows that investments in ‘Consumer Information Services’, which includes online search, entertainment and social media companies, totaled $1.3 billion for 104 deals during the third quarter, more than double the financing collected for 94 deals during the same period last year. Thus far, the consumer information services sector has raised $3.8 billion total in 2011, and is o pace to exceed the $4.2 billion companies raised in 2010.

Within the Consumer Internet sector, deal activity for young start-ups was strong as 57% of deals were seed- or first-rounds. While 30% of deals went to later-stage companies, these companies accounted for $1 billion of the $1.3 billion companies in the sector collected. Thirteen percent of deals were second rounds.

Dow Jones explains that VCs are pouring significant amounts of capital in later stage deals but second rounds are ‘lagging.’

Companies in the software and information technology industry raised $2.1 billion for 227 deals in the third quarter, which is a 9% increase in financing but 7% drop in deal flow. The Software sector continued to be a bright spot for IT and collected the lion’s share of investment as 165 deals raised $1.3 billion. While investments in the Semiconductors and Hardware sectors declined, deal flow for Communications and Networking companies showed some strength as 25 deals raised $354 million, up from 22 deals that raised $246 million in the same period last year.

Deal flow for Business and Financial Services companies rose 7%, and capital invested spiked 65% as 139 deals collected $1.5 billion. Business Support Services saw the biggest jump, primarily driven by interest in marketing, advertising and data management companies. Business Support Services start-ups raised $1.2 billion for 104 deals in the third quarter.

The Energy and Utilities industry raised $635 million for 33 deals, an increase from the same period last year when 23 deals raised $381 million. Renewable Energy companies claimed almost all of the industry’s investment as 30 deals raised $621 million.

In the third quarter, Medical Device companies raised more venture financing than Biopharmaceutical companies for the first time since 1998. Sixty-eight Medical Device deals raised $857 million, a 15% rise in deal activity and 30% increase in capital invested from the same period last year. In the Biopharmaceuticals sector, 78 deals raised $715 million, a drop in capital invested from the year-ago period when 71 deals raised $865 million. Overall, the Healthcare industry raised $1.9 billion for 184 deals, an 11% decline in capital invested and 9% increase in deal flow.

Early-stage deals continued to boom in this quarter. Seed and first-rounds accounted for 42% of deals and 21% of capital invested during the third quarter, compared to last year when early-stage rounds claimed 36% of deals and 22% of capital raised. Second rounds dropped from 23% of deal activity in the third quarter of 2010 to 20% in the most recent quarter. Later-stage deals accounted for 37% of the quarter’s deals and 58% of total capital raised, compared to last year they accounted for 39% of deals and 57% of capital raised.

Understanding How Dilution Affects You At A Startup October 15, 2011

Posted by Ian Cheng in Funding.
add a comment

Mark Suster, a 2x entrepreneur, now VC at GRP Partners.

Everybody knows that when you raise money at a startup your ownership percentage of the company goes down. The goal is to have the value of the startup go up by enough that you own a smaller percentage of a much larger business and therefore your total personal value goes up.

The simplest way to think about this is: If you own 20% of a $2 million company your stake is worth $400,000. If you raise a new round of venture capital (say $2.5 million at a $7.5 million pre-money valuation, which is a $10 million post-money) you get diluted by 25% (2.5m / 10m). So you own 15% of the new company but that 15% is now worth $1.5 million or a gain of $1.1 million.

But understanding how you’re likely to get diluted over time is a more difficult concept. And figuring out how much your equity may be worth over the course of a 5-year stint at a startup is even more complicated.

I’ve had to simplify a bit, but to make it easier to understand I’ve teamed up with Jess Bachman at Visual.ly. If you want to see a view of the power of their work check out this Steve Jobs infographic. I’m a huge believer in Infographics and the ability to create deeper understanding of complicated topics through visual means. As “Big Data” becomes more pervasive the power to visualize will become increasingly important.

And Jess is awesome at his trade. His personal blog with some great example is here.

So here is our crack at explaining the world of dilution to you. Let us know what you think. And if you want more goodness like this don’t forget to sign up to my newsletter and to follow Jess on Twitter. We’ll bring you some more goodness again. Let us know what topics you want us to break down for ya.

Startups, Seed Funding, And Avoiding Empty Pockets October 15, 2011

Posted by Ian Cheng in Funding.
add a comment

Ryan Spoon is a Principal at Polaris Venture Partners and focuses on investments in internet, technology and digital media.

Thanks in part to the Wall Street Journal’s “Web Startups Face Cash Crunch“, much has been made about the state of early stage investments and investing. While there is debate as to whether the article is accurate and/or overstated, let’s look at how we arrived here:

1. Pace of innovation. It is unlike anything we’ve seen before. This is happening because today is a better time to launch a company than ever before: technology, speed, cost, and capital all support the trend. The continued maturation of the internet, the cloud and the emergence of mobile platforms have changed everything involved in building product, targeting users and engaging customers. It has changed the fundamental operating and time constructs behind building compelling businesses.

As a result “entrepreneurship is in vogue”, using Fred Wilson’s words.

2. Capital. Over the past few years, it has flowed quickly into early stage technology – and it’s come from all directions:

Like entrepreneurship, angel investing is in vogue. Mark Suster summed it up: “Everyone Now is a F**king Angel. Look at Twitter Bios. Everybody is ‘my day job’ + ‘angel investor.’” ‘Super angel’ funds have also become more common. These funds can range from $10-50m and they represent a willingness and appetite to make larger investments: $100,000 – $500,000 or more. The fund size allows for larger investments… and the fund economics dictate it.

Meanwhile, large venture funds are more actively participating in seed deals. These deals vary in size and type: many participate on a convertible note and others are larger investments that lead and price the round. Some firms have dedicated seed investors and/or capital pools.

3. Cascades. As more money flows into the seed stage, it affects the investments.

Most obviously: more financings get done.
Less obviously: the financings look different.

There are more early stage investors and those investors want to put more money to work…and invariably the deal economics shift. Entrepreneurs have a desired dilution amount and investors have a desired ownership amount —those move in relative concert. For instance, those rates are the same for a $500,000 round on a $2.5m pre-money valuation as they are for a $1m raise on a $5m pre.

Furthermore, it affects the deal structure. The majority of today’s seed deals are done on convertible notes—in part because it is often a more efficient way to raise a round and in part because the investor makeup looks different: a slew of great investors perhaps, but no true lead(s). These ‘headless seed’ rounds—without a lead investor to help support and shepherd the raise process alongside the founding team—can make downstream Series A fundraising challenging for those other than the rocket ship startups.

4. Cash Crunch. The “cash crunch” for a company comes when it is time to raise the subsequent round.

There has been a surge of seed-funded companies, many financed at strong valuations and by a wide network of investors; consequently, the burden is on the company to differentiate itself, show meaningful progress and grow into a subsequent funding in-part influenced by the initial round (capital and valuation).

Great companies won’t struggle here, but the reality is that there is a limited number of firms who can write these size checks and a limited number of companies that can support those valuations. Hence the “crunch”.

So what does this mean? Some simple advice I’d offer early stage founders:

Stay lean before and after funding. Sounds obvious but early capital infusions should be raised and spent according to plan.

Raise enough capital for 12-18 months. I meet too many seed companies who optimize against dilution and in turn plan to go to market in 6-9 months. This is frightening because it requires you to demonstrably grow within a very tight timeframe. And you will have to go to market well before the capital dries up.

Optimize for near term success and long term company value — not for seed valuation. Sure, it sounds self-serving coming from an investor… But it’s true. Craft your seed round such that it puts you in the best position to grow, deliver on your vision, and raise a strong Series A. one of those factors is people. Be thoughtful about your investors. Think about the value each investor brings and what the larger investor makeup looks like. Can the group help you achieve those non-financial milestones? And if needed, can the group guide and help you if you feel “crunched”.

Two questions I always ask seed companies:

“What will success look like at the end of the seed phase?”

“When do you know it’s time to raise your A round?”

If you have a great handle on those questions, the rest will fall into place.

How to Get on TV to Promote Your Startup October 12, 2011

Posted by Ian Cheng in Funding.
add a comment

Adam Hoeksema

Recently I was interviewed on a state wide business news TV program to talk about a new web-based startup company of which I am a Co-Founder. My interview aired on CBS across the state, and was also sent out to an email list of approximately 45,000 people. I am a 23 year old entrepreneur, so today I wanted to share some tips with other young business owners on how to land a TV interview to promote your startup.

Connect to Past Interviews – The first thing you need to do is to be familiar with the program. You can’t expect to simply walk on to a show you have never seen before. You should not only watch past programs, you should find similar stories to connect your company to. For instance, if the station consistently discusses the cultural impact that startups and entrepreneurs have, then suggest a story that shows how your startup company is impacting the culture of your city.

Send a Short Pitch – Next you should send the station a short pitch about your company, with a couple of different story angles. Typically, a headline and no more than three sentences will be sufficient. You need to remember that most news stations and reporters get dozens of stories pitched at them every day, and they are likely to only consider stories from sources they are familiar with. That being said, you should follow up with a phone call the next day and ask whether or not they received your story. This gives you a chance to win them over with your personality, passion, and persistence.

Use a Video Pitch – Of course it is important to have a unique story to tell, but you can deliver your pitch in a way that will stand out from the crowd as well. I have had success with sending a short video pitch to the producer. This gives the station some level of comfort in your ability to interview well on TV. Simply be allowing the station to see you dressed professionally and speaking clearly about your company, they will have a higher level of confidence in their decision to interview you.

Be Flexible In Terms of Timing – If you are trying to get a story for the first time, you need to be flexible. Breaking news stories will come and go, so be flexible in terms of timing. Assure the station that you would be happy to fill in whenever they are slow. This helps you get your foot in the door, so that you can continue to build that relationship.

Say Thank You – If you are a young startup company, the station took a risk by having you on the show. It is safe to interview industry veterans with 30 years of experience in their business, but young entrepreneurs can be risky. Will you show up on time? Will you remember the interview? Will you dress professionally? These are all questions the producer might be worried about. So, at the very least, make sure to send a thank you email after the interview. If you really want to stand out from the crowd, send a thank you card. Recognize the station for their work and support of your young company.

Will one TV spot take your company to the next level? Probably not, but you gain credibility by appearing on TV. You will be able to reference that story as you seek to connect with more reporters and producers. The key take away is that gaining press on television is not impossible for a young company. With passion and persistence you will be making your first TV appearance in no time.

Why Startups Fail [Infographic] October 3, 2011

Posted by Ian Cheng in Funding.
add a comment

Starting a company consists of many different levels which you, as the owner, must cross in order to make it a profitable enough business to stay afloat. It’s not always easy to always find solutions for your ideas to keep the revenue coming in. Diana always tells me that keeping your mind set on success will make the success come to you. That’s what we have both been doing since we started working together, and if we didn’t do that, I don’t think that we would have been able to stay dedicated as long as we have. It’s always fun when you find new ways to do things that will not only optimize your time, but also allow for another revenue stream to enter your company.

If there are no ideas, there is no progression. As a business owner, you really have to stay focused during the whole process. So, why is it that startups fail? Well, if you have a look at this infographic from Visual.ly, you’ll get a good look at the reasons. Of course, it’s different for each company, but insufficient dedication and ideas are probably the main reasons why a company doesn’t succeed and stay afloat. There are many levels within these two, and you will understand that by looking at this information.

I was surprised to see that most companies out-scale themselves before they have even seen sufficient progress to use up their acquired capacity. It may be a little bit hard to understand what I mean, but for example, if a company buys more servers than they have traffic, they have obviously spent their money on the wrong thing. It’s always better to scale slow and when needed, instead of the other way around. Even Twitter is doing that… remember the Fail Whale?

When it comes to ideas, even the giant Google had trouble figuring out how to monetize in the beginning. It was someone else’s idea that made them profitable, and they are now paying for his discovery. So as you see, even the most successful companies have struggled with some decisions in their past, and that is probably why they are so successful today, because they found a way around their growth.

%d bloggers like this: