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Article from SFGate.

It’s suddenly a lot harder for venture capitalists and startups to raise funds, as investors fed up with low returns turn their backs on the sector.

Most industry observers agree that lots of young firms will simply not be able to raise their next round of funding, commencing a period of belt tightening, consolidation and closures. At a minimum, it seems to mark the beginning of a more level-headed investment climate in Silicon Valley, after years of insatiable lust for all things mobile and social.

But if the drop-off is too sudden and steep, this new austerity could spill over into an economy highly dependent on the tech sector. Indeed, as The Chronicle reported last week, the industry has an enormous impact, with each tech job creating 4.3 indirect jobs in the community, according to a Bay Area Council Economic Institute report.

The investors and venture capitalists I spoke to insisted that we’re not on the verge of anything like the dot-com meltdown, characterizing the shift as a minor and healthy correction, or a “rationalization.” One suggested it was little more than the usual process of separating good and bad ideas in the marketplace.

But the numbers suggest something new is afoot. In the third quarter, the amount that U.S. companies raised in venture capital dropped 32 percent from the prior year, according to Dow Jones VentureSource. Venture capital funds themselves raised 17 percent fewer dollars from the second to third quarter, even as the number of funds grew, according to a joint report from Thomson Reuters and the National Venture Capital Association.

Economic uncertainty

Some partially blame the economic uncertainty surrounding the outcome of the election and the “fiscal cliff.” But the main problem seems to be that many of the “limited partners” that fund venture capital are pulling back after years of frustration.

Ever since a brief period in the late 1990s when venture capital burned bright, the industry has been delivering consistently weak returns on the whole.

In fact, despite requiring greater risks and larger capital outlays, venture capital has been underperforming the stock market over the past decade, according to a report this year by the Ewing Marion Kauffman Foundation.

Joe Dear, chief investment officer for CalPERS, told Reuters this summer that venture capital “has been the most disappointing asset class over the past 10 years as far as returns.” The huge pension fund for California’s public employees didn’t return repeated calls from The Chronicle.

Investment horizons have steadily spread out, from five to 10 to sometimes 15 years, as exit opportunities like acquisitions and initial public offerings fail to materialize. This has sometimes forced investors to put in more money to protect their initial funds.

‘Pretty grumpy’

“The industry definitely, for the last decade, has been a tough place to be,” said Ray Rothrock of Palo Alto venture capital firm Venrock. “We’re all pretty grumpy right now.”

Some of this is due to macroeconomic conditions outside the control of venture capitalists, notably the housing and banking crises. But at least some of it has to do with poor picks and herd mentality, funding companies with few real prospects and driving up the entry price for legitimately promising companies beyond what they could pay off.

“The market overfunded the number of companies in the system,” said Hans Swildens, founder of Industry Ventures in San Francisco. “There’s a glut.”

Even the grand promise of Web 2.0 companies that lured so much recent money hasn’t generated the hoped-for returns. The ones that managed to go public were often disappointments, including Facebook, Zynga and Groupon, in some cases leaving late-stage investors underwater on their holdings.

That was a final straw for some.

Last week, Forbes dug up figures from CB Insights that highlighted a wide and growing gap between the number of companies that raised initial funding and companies securing the follow-on investments, known as a Series A, generally necessary to keep going. This year, there have been 1,747 seed or angel rounds but only 688 Series A deals, underscoring the coming crunch.

Bad businesses

Based on as scientific a survey as the PR pitches in my inbox, there’s a tremendous number of silly, redundant and poorly executed companies out there that don’t warrant additional funding. The real problem isn’t that many of these companies won’t raise more money; it’s that they raised money in the first place.

For the venture capital industry to get back on track, it needs to embrace a renewed sense of discipline – on company picks, deal terms and total spending.

But hope springs eternal in Silicon Valley.

Rothrock stresses that the industry’s trend-line averages mask very strong results and ongoing investment at top firms, as well as growing venture capital activity among corporations like Google. Companies are just being more selective and looking beyond consumer Internet opportunities.

“We’re steady as she goes in terms of funding enterprise,” he said.

Secondary opportunity

Swildens oversees a secondary fund that buys shares from limited partners and venture firms looking to liquidate part of their holdings. He sees this period as a ripe opportunity for bold investors to get into promising companies at suddenly reasonable rates.

“Ours is one of the few firms aggressively putting money into these funds,” he said.

Mark Heesen, president of National Venture Capital Association, is similarly optimistic. He says the industry could be primed for a strong comeback in 2013, as long as the broader economy strengthens.

Above all, what the industry needs are some wins – acquisitions or initial public offerings that put investors clearly in the black and start to restore some lost confidence.

“If we see these exit markets start to generate good returns, I think you’ll see limited partners look at this asset class again,” he said.

James Temple is a San Francisco Chronicle columnist. E-mail: jtemple@sfchronicle.com Twitter: @jtemple

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Article from TechCrunch.

No one got just how powerful it was that Facebook recently said it would allow ad targeting to lists of email addresses. Today at the Dreamforce conference it became clear, as Facebook ad chief David Fischer formally launched “Custom Audience” ads and how they tie into CRM. I’m convinced they’re going to be hugely profitable for advertisers and Facebook.

Why? A hotel company like Starwood has email addresses of its customers and could target “Come stay at the luxurious St. Regis” to high-end customers who’ve stayed there before, while targeting “Find cheap hotels nearby” to those who’ve stayed at its low-budget brands. That means more sales and more loyalty for advertisers, and more revenue for Facebook.

On August 30, Facebook told press that Custom Audiences was coming, but now it’s live with eight ads providers. Custom Audience ads let businesses submit a text or CSV file of privacy-protected hashed email addresses, phone numbers, or Facebook User IDs and have Facebook target those people with a specific ad. Businesses can also layer on additional ad targeting parameters, such as age or interests to reach a specific demographic within a customer segment.

Salesforce who brought in Fischer for its Dreamforce conference is uniquely suited to take advantage of custom audience ads because it owns both its massively popular eponymous customer relationship management system, but also a Facebook ads buying system Brighter Option that it got with its acquisition of Buddy Media this summer.

I’ve attained from Facebook a list of the seven other vendors working with custom audience ads, but none have their own CRM. They are AdParlor, Alchemy Social, GraphEffect, Kenshoo, Nanigans, Social Moov, and Optimal.

Custom audience targeted ads will be much more relevant than ads just targeted to a business fan’s or some biographical demographic. They can reach people who a business is sure purchased its products before, or that haven’t thanks to exclusionary targeting. Yes, businesses could just email these existing customers for free. However,  Facebook can help them hone in on certain demographic segments of their customers by overlaying additional targeting parameters, and reach them vividly through the news feed instead of their dry inbox.

Here are a few more examples of industries that could use custom audience ads:

  • A car company with email addresses of its customers could target “buy a new SUV” ads to people who bought an SUV 5+ years ago, while targeting “Find nearby charging stations” to those who recently bought an electric vehicle.
  • A bank company could target different ads to customers with savings of $5,000 versus customers with $5 million.
  • A Facebook game developer could plug in the user IDs of its gamers, targeting ads for its newest war-strategy games to those who played its old strategy game, while targeting ads for its latest shopping game to users who played its fashion game.
  • A B2B vendor could submit a file of the phone numbers of its biggest clients and target ads for a premium service to them to increase revenue, while targeting its newest clients with ads for discounts to increase loyalty.
  • Instead of targeting general ads to all its Facebook fans encouraging return visits, Amazon could advertise specific products to segments of its customers who’ve bought similar things.

Precise targeting of segments of existing customers like this could produce huge return on investment for advertisers and command high ad rates for Facebook. CRM-equipped companies might spend more when they know who they’re reaching, and that could help Facebook please Wall Street with higher revenues. In fact, it’s such a smart idea to plug CRM into ads that I bet we’ll see more advertising platforms integrate like this soon.

Read more here.

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Article from NYTimes.

Few investors have ridden the recent Internet boomlet like the GSV Capital Corporation.

After GSV announced in June 2011 that it was buying a stake in the privately held Facebook, the closed-end mutual fund surged 42 percent that day. Capitalizing on the euphoria, GSV sold another $247 million of its shares, using the money to expand its portfolio of hot start-ups like Groupon and Zynga.

Now, GSV is feeling the Facebook blues.

When the public offering of the social network flopped, GSV fell hard, and it still has not recovered. Shares of GSV, which were sold for an average of $15.35, are trading at $8.54.

“We probably benefited from our stake in Facebook more than we deserved on the way up,” said GSV’s chief executive, Michael T. Moe, “and were certainly punished more than we deserved on the way down.”

GSV, short for Global Silicon Valley, is the largest of several closed-end mutual funds that offer ordinary investors a chance to own stakes in privately held companies, at least indirectly. Closed-end funds like GSV typically sell a set number of shares, and their managers invest the proceeds. In essence, such portfolios operate like small venture capital funds, taking stakes in start-ups and betting they will turn a profit if the companies are sold or go public.

“I think GSV was really innovative in creating a kind of publicly traded venture capital fund,” said Jason Jones, founder of HighStep Capital, which also invests in private companies.

But the shares of closed-end funds trade on investor demand – and can go significantly higher or lower than the value of the underlying portfolios. The entire category has been hit by Facebook’s troubles, with GSV trading at a 38 percent discount to its so-called net asset value.

Mr. Moe, 49, has previously experienced the wild ups and downs of popular stocks.

A backup quarterback at the University of Minnesota, he started out as a stockbroker at the Minneapolis-based Dain Bosworth, where he wrote a stock-market newsletter called “Mike Moe’s Market Minutes.” He met the chief executive of Starbucks, Howard Schultz, on a visit to Seattle in 1992, and he began covering the coffee chain after its initial public offering.

“I left believing I had just met the next Ray Kroc,” Mr. Moe wrote in his 2006 book, “Finding the Next Starbucks,” referring to the executive who built the McDonald’s empire.

After stints at two other brokerage firms, Mr. Moe became the director of global growth research in San Francisco at Merrill Lynch in 1998. There he ran a group of a dozen analysts at a time when mere business models “were going public at billion-dollar valuations,” he said.

Shortly after the dot-com bubble burst, he founded a banking boutique now called ThinkEquity. At the time, he expected the I.P.O. market to shrug off the weakness and recover in a couple of years. Instead, it went into a decade-long slump.

“Market timing is not my best skill,” Mr. Moe said. In 2007, he sold ThinkEquity.

The next year, he started a new firm to provide research on private companies, NeXt Up Research. He later expanded into asset management, eventually changing the name to GSV. Within two months of starting his own fund, he bought the shares in Facebook through SecondMarket, a marketplace for private shares.

GSV soon raised additional funds from investors and put the money into start-ups in education, cloud computing, Internet commerce, social media and clean technology. Along with Groupon and Zynga, he bought Twitter, Gilt Groupe and Spotify Technology. The goal is finding “the fastest-growing companies in the world,” he said.

But Mr. Moe has paid a high price, picking up several start-ups at high valuations on the private market. He bought Facebook at $29.92 a share. That stock is now trading at $19.10. He purchased Groupon in August 2011 for $26.61 a share, well above its eventual public offering price of $20. It currently sells at $4.31.

Max Wolff, who tracks pre-I.P.O. stocks at GreenCrest Capital Management, said GSV sometimes bought “popular names to please investors.”

“This is such a sentiment-sensitive space, the stocks don’t trade on fundamentals,” Mr. Wolff said, adding, “If there’s a loss of faith, they fall without a net.”

GSV’s peers have also struggled. Firsthand Technology Value Fund, which owns stakes in Facebook and solar power businesses like SolarCity and Intevac, is off 65 percent from its peak in April. “We paid too much” for Facebook, said Firsthand’s chief executive, Kevin Landis.

Two other funds with similar strategies have sidestepped the bulk of the pain. Harris & Harris Group owns 32 companies in microscale technology. Keating Capital, with $75 million in assets, owns pieces of 20 venture-backed companies. But neither Harris nor Keating owns Facebook, Groupon or Zynga, so shares in those companies have not fallen as steeply.

GSV is now dealing with the fallout.

In a conference call in August, Mr. Moe was confronted by one investor who said, “the recent public positions have been a disaster,” according to a transcript on Seeking Alpha, a stock market news Web site. While Mr. Moe expressed similar disappointment, he emphasized the companies’ fundamentals. Collectively, he said, their revenue was growing by more than 100 percent.

“We have been around this for quite some time, and we are going to be wrong from time to time,” Mr. Moe said in the call. “But we are focused on the batting average.”

In the same call, Mr. Moe remained enthusiastic – if not hyperbolic – about the group’s prospects. Many of GSV’s 40 holdings are in “game-changing companies” with the potential to drive outsize growth, he told the investors.

Twitter, the largest, “continues to just be a rocket ship in terms of growth, and we think value creation,” he said. The data analysis provider Palantir Technologies helps the Central Intelligence Agency “track terrorists and bad guys all over the world.” The flash memory maker Violin Memory “is experiencing hyper-growth,” he wrote in an e-mail.

But Mr. Moe was a bit more muted in recent interviews. While he says he still believes in giving public investors access to private company stocks, he recognizes the cloud over GSV. “We unfortunately have a social media segment that got tainted. I completely get why our stock is where it is. It’s going to be a show-me situation for a while.”

Acknowledging some regrets, Mr. Moe said he was angriest about overpaying for Groupon, saying, “Yeah, I blew Groupon.” He said that he also did not anticipate what he called a deceleration in Facebook’s growth rate, and that it was “kind of infuriating” that some of its early investors were allowed to exit before others. GSV often must hold its shares until six months after a public offering.

But the downturn in pre-I.P.O. shares has a silver lining, Mr. Moe said. Since the Facebook public offering, he has been able to put money to work “at better prices.” He recently bought shares of Spotify at a valuation of about $3 billion, roughly 25 percent below the target in its latest round of financing.

The I.P.O. market is also showing signs of life, he said, with the strong debuts of Palo Alto Networks and Kayak Software. And he still has faith in Facebook.

Whatever its current stock price, at least it is a “real company” with revenue and profit, Mr. Moe said, adding, “It’s not being valued off eyeballs and fairy dust.”

Read more here.

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Article from GigaOm.

Venture capital investments picked up significantly this quarter, with a 37 percent increase in funding and 3 percent increase in deals over the previous quarter. The period also saw strong emphasis on mobile investments and seed funding, according to a report released by CB Insights. There was a total of $8.1 billion in financing for 812 companies, the highest totals since Q2 of 2001.

About 13 percent of the activity — or 102 deals — was in the mobile sector, marking an all-time high, with 30 percent of those companies involved in photo or video technology.

“Without being too self-congratulatory, the Instagram Effect we speculated about in Q1 2012 seems to have taken shape as the mobile sector saw 102 deals, an all-time high… For skeptics, it may also be indicative of a VC herd mentality. Time will tell.”

Below is a breakdown of investments by dollar amounts in the different subsets of mobile and telecom industry:

Some other highlights from the report include:

  • Seed investing also hit an all-time high, with 22 percent of all deals happening at the seed stage this quarter, as compared to 12 percent from the same quarter in 2011.
  • The most successful sectors with respect to number of deals were internet companies with 46 percent, healthcare at 17 percent, and mobile and telecommunications at 13 percent. With respect to dollars in funding, the top sectors were internet at 38 percent and healthcare and “other” each at 19 percent.
  • 50 percent of deals occurred at either seed funding or Series A rounds, although they made up only 19 percent of funding dollars.
  • California took the most number of deals per state at 45 percent of deals, up from 40 percent in Q1. New York remained in second place with 10 percent of deals, and Massachusetts in third place with 9 percent.

Read more here.

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Article from NYTimes.

 

Institutional Venture Partners has another billion to play with.

The venture capital firm, an investor in Twitter, Zynga and LivingSocial, has raised $1 billion for I.V.P. XIV, its 14th and largest fund to date.

According to a partner, Sandy Miller, the firm initially set a $750 million target but increased it on robust demand. The fund, which was raised over four months, relied mainly on capital from previous investors.

Unlike some of its peers, Institutional Venture Partners does not write a lot of checks, usually not more than a dozen a year. As a later-stage investment firm, it invests $10 million to $100 million in seasoned start-ups in three main buckets: Internet, enterprise technology and mobile.

“I hate to sound dull but we’re doing the same strategy,” Mr. Miller said.

Mr. Miller, a longtime technology investor and co-founder of Thomas Weisel Partners, is optimistic despite recent setbacks in the technology sector.

Skepticism in the public markets, most recently highlighted by Facebook‘s underwhelming initial public offering, has damped enthusiasm for some late-stage start-ups. Zynga, for instance, an Institutional Venture Partners portfolio company, has tumbled more than 44 percent since its debut last year. And plenty of experts question whether another start-up it has backed, LivingSocial, is worth such a high valuation after Groupon, its far bigger rival, has fallen about 50 percent since its I.P.O.

Mr. Miller acknowledges that some valuations may pull back, but he says he invests for the long term.

“I’ve watched the technology market over a 30-year period,” he said. “There’s more interesting, high quality companies today than there has ever been and by a very wide margin.”

He added, “In every market, most deals don’t make sense, and that’s true now, but that’s always been true.”

Read more here.

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Article from TechCrunch.

Your Powerpoint pitchdeck is so boring. So. Freaking. Boring. Although tech bloggers aren’t sent startup’s actual pitchdecks as often as investors are (thankfully), we’re still walked through them on dreadful, “let me read to you from my Powerpoint” phone calls more often than should be socially acceptable. That’s why when image aggregator Piccsy, which is simultaneously a competitor to Pinterest as well as a top 20 content source for the site,  pinged us to take a look at its pitch deck, we were pleasantly surprised. A pitchdeck that’s actually fun to read? Can such a thing exist?

Piccsy.com/investors hosts the company’s public pitchdeck, and it’s a striking, visual representation of the data that would be typically found in bullet-pointed slideshows. The format leads you to wander through content and explore, much like Piccsy itself does. CEO Daniel Eckler admits that he doesn’t even know how to use Powerpoint. “I’ve only ever opened the program once or twice in my life,” he says. But it wasn’t just lack of know-how that led the company to ditch the idea of the traditional deck. As outsiders from Toronto, they wanted to stand out, Eckler says.

“We began with a problem (how to get investors to see our deck) and came up with a solution (create something unique, beautiful, informative, and easy to share), as opposed to going with the status quo,” Eckler explains. “This is conceivably the first thing investors are going to relate to when they see a company. Lots of companies that are innovative in other areas are sticking to an old model with their deck, even though they have the resources (dev/design) to do something special.”

Plus, he adds, a generic, Powerpoint-style deck wouldn’t be right for a site that’s all about discovering beautiful imagery.

For what it’s worth, the novel deck has been working. 50,000 pageviews and 15 inbound investor requests came in over the weekend, and the site got linked on Hacker News (where discussion delved into criticisms over content, however, but not the style.) Said one commenter, “it’s a beautiful presentation. I’m jealous….I’d absolutely pay to get a site like that.”

Say, Piccsy – if that whole image aggregation thing doesn’t work out…

The screenshot above is just a snippet. The full site is here.

Read more on Piccsy at www.piccsy.com.

Read the original article here.

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Article from NYTimes.

MENLO PARK, Calif. — Matt Cohler was employee No. 7 at Facebook. Adam D’Angelo joined his high school friend Mark Zuckerberg’s quirky little start-up in 2004 — and became its chief technology officer. Ruchi Sanghvi was the first woman on its engineering team.

All have left Facebook. None are retiring. With lucrative shares and a web of valuable industry contacts, they have left to either create their own companies, or bankroll their friends.

With Facebook’s public offering in mid-May, more will probably join their ranks in what could be one of Facebook’s lasting legacies — a new generation of tech tycoons looking to create or invest in, well, the next Facebook.

“The history of Silicon Valley has always been one generation of companies gives birth to great companies that follow,” said Mr. Cohler, who, at 35, is now a partner at Benchmark Capital, and an investor in several start-ups created by his old friends from Facebook. “People who learned at one set of companies often go on to start new companies on their own.”

“The very best companies, like Facebook,” he continued, “end up being places where people who come there really learn to build things.”

This is the story line of Silicon Valley, from Apple to Netscape to PayPal and now, to Facebook. Every public offering creates a new circle of tech magnates with money to invest. This one, though, with a jaw-dropping $100 billion valuation, will create a far richer fraternity.

Its members will be, by and large, young men, mostly white and Asian who, if nothing else, understand the value of social networks. And they have the money. Some early executives at Facebook have already sold their shares on the private market and have millions of dollars at their disposal.

Mr. Cohler, for example, is at the center of a complex web of business and social connections stemming from Facebook.

In 2002, barely two years out of Yale, he was at a party where he met Reid Hoffman, a former PayPal executive who was part of a slightly older social circle. The two men “hit it off,” as Mr. Cohler recalled on the online question-and-answer platform, Quora (which was co-founded by Mr. D’Angelo). He became Mr. Hoffman’s protégé, assisting him with his entrepreneurial investments, and following him to his new start-up, LinkedIn.

Then, Mr. Cohler joined a company that Mr. Hoffman and several other ex-PayPal executives were backing: Facebook.

Mr. Cohler stayed at Facebook from 2005 to 2008, as it went from being a college site to a mainstream social network. One of his responsibilities was to recruit the best talent he could find, including from other companies.

Mr. Cohler left the company to retool himself into a venture capitalist. He has since been valuable to his old friends from Facebook.

Through his venture firm, Mr. Cohler has raised money for several companies founded by Facebook alumni, including Quora, created in 2010 by Mr. D’Angelo and another early Facebook engineer, Charlie Cheever. Other companies include Asana, which provides software for work management and was created in 2009 by Dustin Moskovitz, a Facebook co-founder; and Peixe Urbano, a Brazilian commerce Web site conceived by Julio Vasconcellos, who managed Facebook’s Brazil office in São Paulo.

Mr. Cohler has put his own money into Path, a photo-sharing application formed in 2010 by yet another former Facebook colleague, Dave Morin. Path is also bankrolled by one of Facebook’s venture backers: Greylock Partners, where Mr. Hoffman is a partner.

And he has invested in Instagram, which was scooped up by Facebook itself for a spectacular $1 billion. “Thrilled to see two companies near and dear to my heart joining forces!” Mr. Cohler posted on Twitter after the acquisition.

Instagram clearly was a good bet; it is impossible to say whether any of the other investments Mr. Cohler or other Facebookers are making will catch fire or whether the start-ups they found will last. Certainly, there is so much money in the Valley today that start-ups have room to grow without even a notion of turning a profit.

Ms. Sanghvi, one of the company’s first 20 employees, married a fellow Facebook engineer, Aditya Agarwal. Mr. Zuckerberg attended their wedding in Goa, India.

Read the rest of this article here.

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