Don't Stop Believin'

With Game 1 against Cliff Lee and the Texas Rangers tomorrow, the Giant's bandwagon is so full now, it's hard to find a seat. So why is ProfessorVC writing about the Giants? Do I need a reason?

On paper, the 2010 Giants shouldn't have finished in the top half of the national league, let alone won the division and the pennant. With Timmy, the Beard, Smiles, Kung Fu Panda, Juan "a lot of happy" Uribe, they are just a fun team to root for.

I had the opportunity to hang out with the left field bleacher crowd last Tuesday afternoon at Game 3 against the Phillies. Just one big party in Section 139 led by the guy in the picture above waving the giants flag and the guy in front of me leading the "What's the matter with Ibanez....He's a bum" chant.

So back to the entrepreneurial discussion. A couple of things came to mind. The first is Ashkon Davran's cover of Journey's Don't Stop Believin' ,which has become the Giant's theme song during the postseason run. If you haven't seen it yet (and to date over one million folks have), it is worth the 3 minute stop before finishing this blog entry.




Was that awesome or what? According to today's San Jose Mercury, Davaran has been trying to break into the music business for the past three years and after the release of this YouTube hit, has started getting calls about new projects. Entrepreneurial tip number 1: Follow your passion and you never know where it will lead.

The search for a world series ticket brought up some more thoughts about entrepreneurial finance. Got me thinking again about how I passed on investing in StubHub. I've written about this before and I certainly wasn't the only one, but what a great business. There are currently 5,492 tickets listed on StubHub for Game 6. That is well over 10% of capacity and certainly answers the chicken and egg question founder Jeff Fluhr was asked many times in the early days. Not only are many season ticket holders and those lucky enough to have grabbed standing room only tickets in the online lottery, but ticket brokers (theoretically StubHub's competition) are very active sellers in the marketplace.

Let's do some quick math. Out of those 5,492 tickets, let's assume 10% end up selling through StubHub at an average price of $800/ticket with combined buyer/seller fees of 25%. StubHub's take would be over $100K for one game! At a 90%+ margin with minimal risk. Now that's a money machine eBay acquired.

So, I've never been a Journey fan. In fact, I was at the Rolling Stones concert at JFK Stadium in Philadelphia in 1981 when Journey got booed off the stage. Of course, booing is second nature for the denizens of Philly, infamous for having booed Santa Claus at an Eagle's game. Even so, I just switched my ringtone for the next couple of weeks to Don't Stop Believin...Go Giants!!!

Is There Any Truth in "The Social Network"?

Got around to seeing The Social Network this past weekend. While the flick has gotten rave critical reviews (93% on Flixster), the question of what percentage of the movie is true has also gotten a lot of discussion in the blogosphere.

One thing that can be agreed upon is that is an entertaining movie and well worth $10 (or $11 with Fandango). The move topped the box office for the second straight weekend and has grossed $46M in less than two weeks. If you haven't seen it yet, can check out the trailer below.






I did a little searching around the web to try and find a truth vs. fiction comparison, but the closest I found was "The 10 Most Glaring Lies In 'The Social Network'" on the Business Insider. However, most of these are so minor that it is difficult to argue that they don't fall under artistic license. For example, the movie shows Sean Parker (a stellar performance by Justin Timberlake) arrested for cocaine possession at Stanford. According to the Business Insider, he was actually arrested in a different place and time. Co-founder Dustin Moscovitz is referred to as a programmer, but he is actually an operations guy. Aaron Sorkin sure missed that one (insert sarcasm here)...

Of course, they left off one of the biggest inaccuracies in the entire film, which my wife noticed right away. Several weeks after Zuckerberg and the team move to Palo Alto for the summer, co-founder Eduardo Saverin finally pays a visit. Zuckerberg forgets to pick him up at the airport and Saverin shows up at the front door dripping wet with rain pouring down. As my wife said, who would ever believe it raining in Palo Alto in the summer? She was also amused by Disney actress (Brenda Song of the Suite Life of Zack and Cody) having sex in the men's room of a Cambridge bar.

Did I mention how great Timberlake was? The scenes in the NY restaurant, Stanford dorm room, and Facebook office were some of the funniest in the whole movie. Got me thinking back to one of the best start-up pitches I ever saw. It was early in 2005 and the company was Facebook. Sean Parker showed up about an hour late and gave an incredibly compelling pitch about the business, growth, etc. Unfortunately, wasn't an opportunity to invest at the time.

Ok, so what are the lessons here.

• Be careful what you write in email, chat or text. It could come back and hit you in the face during a deposition
• Make sure that your co-founders have the right skills and commitment before doling out equity. Also, be sure to include vesting for all founders.
• If there are any promises (written, verbal or otherwise) regarding equity, address early rather than later.
• Once you become rich and/or famous, anyone you have wronged throughout your life will surface
  

One other thing. Not saying Zuckerberg took the high road in any of this, but Facebook was all about the execution and not the idea. At the end of the day, the settlements were a relatively small piece of the company, but a huge windfall for those who sued. Whether true or not, at the end of the day, just doesn't matter.

Are DEMO's days numbered?

Has DEMO lost it's luster and relevance in 2010? I spent the past couple of days at the conference and certainly felt like it. There wasn't a lot of buzz in the air. This was the 20th Anniversary and possibly the last.

DEMO has always been one of my favorite tech conferences. All product, all the time. You can always check out the current and prior product demos at the DEMO site. The conference has launched a number of great companies including Tivo, WebEx and Palm, and historically draws top press and investor attendees. Also puts a ton of pressure on the CEO's to have a well rehearsed 6 minute pitch and hope that they don't end up in Demo Hell. One poor guy completely blanked on what his company did and after stammering for 20 seconds, pleaded with the crowd to come to his booth and find out what they do.

With all of the new ways to see early companies such as TechCrunch and YCombinator, I had a feeling that much of the luster was gone and debated whether it was worth the time to attend.The last time I went to DEMO was in 2005 for the launch of one of my companies, iControl Networks. It was the 15th anniversary and they made a big deal branding the event as Demo@15. This year, there was no swag to be had, although did bring home a couple of vuvuzelas from the nice guys at Loud3R. No conference bag, fleece jacket or even a t-shirt and the only mention of the 20th anniversary was a small sign off to the side by the entrance. The conference has also become a hand me down, passed from Stewart Alsop to Chris Shipley and now to Matt Marshall. This year, for the first time, the conference was in Santa Clara (rather than the normal dessert resort location), close to home, so decided to attend.

My fears were met on Day 1 with many presentations being unpolished, several me-too ideas and a general malaise. To be fair, the Day 1 categories were primarily infrastructure companies (Enterprise, Cloud and Mobile). Day 2 featured the consumer and social media, which were more interesting for me and much of the audience.

Everyone tries to have a memorable demo, often with a musical number, quasi celebrity or skit. Didn't see YCombinator fans Ashton Kutcher and Demi Moore in the crowd, but one of the presenting companies, Integrate, a customer interaction platform in the enterprise category had co-founder Jeremy Bloom give the pitch (picture on left) Bloom is a former NFL football player, Olympic and World's #1 freestyle skier and star at the University of Colorado. I guess if you've run a pattern across the middle with Ray Lewis waiting to knock your head off, a 6 minute pitch in front of a bunch of geeks is a piece of cake. Didn't get the chance to ask him if managed to visit Berkeley while he was in town and see the 52-7 whupping that the Buff's took at the hands of Cal. Go Bears!!

Day 2 was much more interesting. Jeffrey Mullen of Card 2.0 was the opening act and ended up grabbing the $1M People's Choice award along with one of the five DemoGod awards. You can watch all of the presentations at the DEMO site and can see if you agree with my favorites:

Card 2.0 - A very cool credit card with a programmable magnetic stripe that requires a password entry on the card to show the full card number (for card not present transactions) and enable the card to be swiped at retail locations.

Bump - These guys got my vote for the People's Choice. Bump.com is a social network based on license plate numbers as the identifier. Imagine the satisfaction of sending a nastygram to the guy who just stole your parking space or texting that hottie you saw for a second at the traffic light. Ok, does enable a whole new way to stalk and lots of privacy issues. I got a chance to ride in the backseat of the car as it drove through the convention center parking lot and logged in license plates at 5 per second (see picture above)

Needly - A cross between Craigslist and Ebay - a better way to sell your stuff and services.

Scayl -A slick way to email huge files, including HD Video.

VoiceBase - Transcription and search of voice communications (presentations, conference calls, etc.)

TuneUp - iTunes plug-in that cleans up your music library.

FootFeed - The only Day 1 company on my list. A check-in aggregation platform. I'm anti check-in and have been a conscienious objector in the whole category. However, liked the team, and Dennis Mink, FootFeed's CEO, convinced me of the value in check-ins as a white label service for brands to market to their customers. They also gave an entertaining pitch, with biz dev guy Kemp Mullaney playing the role of a harried guy about to enter the 12-step Check-In program before discovering FootFeed.

Back to the question posed up top. After an enjoyable day 2, maybe DEMO still has some life. I'm not going to write off DEMO completely, but will be surprised if it makes it to 25.

Angie's List or AngelList?

An excellent question to ponder as the school year begins, but the answer depends on whether you are looking for a plumber or an angel investor.

The fall semester at SJSU started this week and had the first class meeting of my Entrepreneurial Finance class, which was overflowing with students standing, sitting on the floor and begging to get in. I'd like to think that work of my excellent teaching has made it's way around campus or that the Entrepreneurial fervor has reached new heights, but I've seen my ratings on Rate My Professor. Still wondering who that student was loved the course, but said I was a dork with a voice like Steven Hawkins. More likely the reality is that many students are trying to fill that last elective to graduate, which has not been easy with all of the budget cuts resulting in fewer class offerings.

Many of my students are finance majors, so I spend the first class with a (very) brief corporate finance review with the hint that very little applies to start-up finance. In corporate finance, students are taught that capital markets are efficient and this is an underlying assumption for valuing stocks, bonds and other financial instruments. The theory states that all ifnormation is publicy available and it is not possible to earn returns above average on a risk-adjusted basis. Whether you buy this or not for public equities, the market for early stage private companies has always been wildly inefficient. Entrepreneurs struggle to find investors and investors struggle to find the best start-ups. When they do, it is often a competitive situation and the hot start-ups end up oversubscribed and instad of adjusting price and other terms to optimize the deal, they are forced to leave some interested parties out.

While VC firms have been easy to find from the old school days of Pratt's Guide to Venture Capital, to the early web presence of the 1990's and the current web sites, blogs, twitter feeds, facebook fan pages and sites such as The Funded, angels are still a bit harder to track down. We do have certain angels aggressively marketing themselves (Good to see my former student, Dave McClure, making a name for himself as part of the PayPal Mafia and "Super Angel" crowd), many others have no interest in publicizing their net worth or investing activities.

According to the Center for Venture Research at UNH, there are over 260,000 angel investors. How the hell are you going to find and ptich the one who is going to invest in your deal??? These angels invested $17.6 billion in 2009, which matches the amount invested by VC's. However, angels invested in 57,225 ventures vs. 2,795 for VC's. It goes without saying that a much higher percentage of the angels deals are seed than VC, so you are likely looking at a 1 in 50 shot of getting your company's initial funding from VC's vs. angels (if you are among those that are able to raise either!). And the 1 in 50 is a team that has already made that VC money. While the supply-demand equation will never be completely fixed, the information and accessibility to angel investors is only getting better.

There are several efforts being made to make this process better and will mention a couple below:

• Angel Capital Association Collaboration Committee - I was a charter member of the this group and the goal is to facilitate syndication among the angel groups via education and tools such as Angelsoft. One of the issues in angel group investing is that any one group often doesn't have the investor interest level to provide the total capital required for a round. At Sand Hill Angels, our initial investments are in the $100 - $500K range and rounds are typically $500K - $1.5M. The goal of cooperation is theoretically very interesting, but practically difficult. There tends to be a strong groupthink mentality in the angel groups, and once one group has decided to invest, the others still need to run through their process, which can take weeks to months. This is a brutal process for entrepreneurs and many have no interest in the angel groups for this reason. At SHA, we have instituted a fast track process where companies that have already lined up committed investors (including some SHA members), can expedite the process. We recently led a financing for AppBistro, that had a great group of investors committed, including Dave McClure and Alfred Lin. I joined the board and am looking forward to working closely with the team.
  

• The AngelList - a service where entrepreneurs can connect with angel investors an dangels can share interesting opportunities with other angels. I recently became aware of this list and just joined and have started reviewing some of the start-ups and looks like an excellent resource for both entrepenurs and investors. I'll follow-up in a future post on how it has worked for me.

Now back to the original question posed in the title. For angel funding, my choice would definitely be AngelList. Of course, if you are looking for a plumber, Angie's list would be better. However, you never know, you might find a start-up that has a cool mobile app to fix your leaky faucet...

Do you have a U.S. Strategy?

Seems like an appropriate question to ask as we enter the 4th of July Holiday weekend. My wife's boss, Andy Grove, penned the cover article on the current issue of Business Week, "How America Can Create Jobs". Andy argues against common wisdom here in Silicon Valley that start-ups are behind all new job creation. He points out that manufacturing employment in the U.S. computer industry is less than it was 35 years ago, while at the same time, a very effective manufacturing industry has emerged in Asia employing 1.5 million workers. A similar trend is happening in alternative energy, the industry that has greatly benefited from both venture capital and US government assistance over the past decade.

Never one to propose popular or easy plans, Andy suggests rebuilding our industrial infrastructure and employment through financial incentives and taxing products of offshore labor and using the proceeds to incent companies to scale their American operations. He believes that this transfer of manufacturing and engineering expertise out of the country will ultimately lead to less innovation.

When my wife first mentioned this Job Wars research project she was working on a few months ago, I responded with the traditional view that start-ups are the vehicle of job creation and government policy should be to not get in the way of this ecosystem, as New York Times Columnist Thomas Friedman argues in "Start-Ups, Not Bailouts." I sent her a bunch of data to refute these claims. According to the Venture Impact Study sponsored by the National Venture Capital Association ("NVCA"):

• In 2008, Venture Backed companies employed more than 12 million people and generated nearly $3 trillion in revenue (11% of private sector employment and 21% of GDP)
• Venture Backed Company Job Growth was 8x private sector job growth from 2006-08
• In 2008, one U.S. job existed for every $37,702 of venture capital invested from 1970-2008

Let's assume these statistics are true (of course that may be a leap, as my wise father-in-law used to say, "Figures Lie and Liars figure"). This does show that venture backed companies have a huge impact on the US economy. However, it doesn't tell the rest of the story about how much larger these numbers might be without transferring a large portion of GDP overseas. As I think more about this, Andy may have a point.

Perhaps a discussion worth having at your beach parties and barbecues this weekend. Enjoy the fireworks!

Negotiating an Angel Deal in your PJ's

Well, not exactly...I was part of a Dow Jones VentureWire webinar last week titled Negotiating An Angel Deal: What Angels, Entrepreneurs & VCs Need to Know. I prefer the traditional face to face where you can interact with the other panelists and audience, but was the first panel I did wearing my favorite flannel penguin pajamas...

It had a good mix of viewpoints with east (James Geshwiler, Common Angels) and west coast (yours truly) angels, early stage venture capitalist (Jason Mendelson, Foundry Group), and a couple of attorneys (Dan Hansen and Mario Rosati). It is obviously too late to dial-in to the call, but you can still order a CD of the session. If you don't want to spring for that or spend 90 minutes listening for that one nugget you are looking for, I'll share a few of the topics I found interesting.

• Dumb Money - Are we as dumb as we look? One comment made by Jason was that angels tend to be less sensitive than VC's on valuation and can potentially make it difficult to get a venture financing done at acceptable valuation. While this may certainly be the case with unsophisticated angels (much less of these now) or in cases with no lead investor, I'd argue the opposite. We are typically looking at either smaller exits or require a lower valuation to get a reasonable step-up to a venture round. In my experience, venture investors are more focused on percentage ownership, which obviously requires a trade-off with the amount invested and valuation.
  

• KISS - No, not one of the guys on the left. The old Keep It Simple Stupid Principle. I had a discussion with another angel investor a few months ago and he was bragging about the deal he just struck that included a 3X participating liquidation preference. I let him know that he just accomplished two things - left a bad taste with the entrepreneur and opened the door for the next investor to ask for a multiple preference that is senior to yours. While upstream investors can certainly ask for more in any financing (The Golden Rule), it will be much easier to get simple terms if the precedent has been set from the beginning.

• A related topic is the standardization of terms. There has been a lot of discussion and publishing of standard term sheets, including Y Combinator, TechStars and SeriesSeed. A good comparison of the various "standard" term sheets can be found at Start-up Company Lawyer. Mario's firm, Wilson, Sonsini, even has a term sheet generator on their site. You answer a few questions and similar to TurboTax, out pops a term sheet instead of your tax return. Not quite as much fun to play with as the Dilbert Mission Statement Generator, but probably more useful. Consensus seemed to be that all of these "standard" terms are a bit different and while not possible to completely standardize (no company or financing is exactly the same), the guiding principle should be to keep it simple (see above) and minimize legal fees.

One other topic discussed was the recent legislation introduced by Sen. Dodd that could have a big impact on angel investing and job creation. A couple of items buried in the 1300 page bill include changing the definition of an accredited investor and moving regulatory roles on private3 placements from federal to stage level. This will both reduce the number of angel investors and make it more difficult to syndicate across stage lines. Lobbying is ongoing by both the National Venture Capital Association and Angel Capital Association and James Geshwiler on the panel wrote a recent post on the ramification.

I will be speaking on a related topic next week at an SVASE event in Palo Alto, "Founders vs. Investors - Are we all on the same page" Hope to see some of you there and promise I won't show up in my pajamas.

Would a Dart Board Provide better VC Returns?

For those of you that are regular visitors at ProfessorVC, I apologize for the long hiatus over the holidays and beyond. I know there are at least a few of you as I received several emails this week along the lines of "no new posts since November???"

Well, I'm back. Was amused to read about Right Side Capital this week. They have raised a fund to provide seed funding of $50-$250K to 100-200 start-ups. Rather than going through their networks or targeting specific sectors for deal flow, they are going to rely on an algorithm to select companies. The formula will be based on the founders' experience, schools they attended and other background information to gauge the likelihood of success. This certainly gives new meaning to "drive by investing" which became popular in the late 90's....

My first reaction is incredulity that limited partners would buy into this idea. Of course, when 10-year returns for the entire venture capital asset class is about to drop below zero, drastic measures may be in order. Seed stage investing is all about the team, so there may be something to this idea. For firms that don't have access to the most successful entrepreneurs, trying to predict an individual or individual teams success rate based on experience, personal attributes, intellect, etc. might very well be a good way to find some promising first time entrepreneurs. This is not far from the Y Combinator model, except they put a lot of time and energy into working with the entrepreneurs. With 2 or 4 new investments per week that Right Side is projecting, it will be challenging enough to remember the names of the entrepreneurs in their portfolio, let along help build companies.

This got me thinking about the debate over serial entrepreneurs and whether success breeds success or complacency. My colleague, Anu Basu, Director of the Silicon Valley Center for Entrepreneurship at San Jose State, recently completed a paper on this topic, "Does Experience Matter? A Comparison Between Novice and Serial Entrepreneurs" Her research shows that there is a positive correlation between prior founding experience and new venture performance due to stronger and more diverse social networks, access to capital, reliance on collaborators and other factors.

While this is not surprising, it would be interesting to look at returns provided to venture capital firms from novice and serial entrepreneurs. Serial entrepreneurs would be more likely to have larger personal investment in the company, have taken outside investment at higher valuations and possibly less open to taking big "bet the company" type risks.

Of course, given the state of venture returns, perhaps randomly picking from a stack of business plans would provide as good or better results than an entrepreneur selection algorithm or detailed due diligence. I recall that the WSJ used to run a contest in stock picking between investment analysts and selection by darts. The random selection fared quite well against the analysts and now the contest has shifted to readers vs. darts. The darts seem to be doing quite well over the past few years...