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Archive for the ‘Startups’ Category

AngelList’s Ravikant makes urgent plea for changes in new crowdfunding rules

Vicki Thompson

Naval Ravikant grew AngelList into the world’s™s foremost meeting place for founders and funders. Now he is laying plans to broaden its mission and make money.

Senior Technology Reporter- Silicon Valley Business Journal

AngelList co-founder and CEO Naval Ravikant sees potential disaster in proposed new crowdfunding regulations and is urging others on his founders and funders networking site to speak up.

In a letter to the Securities and Exchange Commission this week and an interview with me on Friday, Ravikant warned that the agency’s new Form D filing rules set to take effect on Sept. 23 could bring “disastrous unintended consequences for the startup community,”

“The proposed rules appear to be tailored to how Wall Street raises funds, not the startup community,”Ravikant said in his letter.

“My sense is that the SEC knows that this is an issue and is not going to put into effect some of these rules,” he told me in an interview late on Friday.

The agency last month voted to allow startups and private investment groups to openly solicit money, with restrictions that Ravikant and others in the angel investor community are very unhappy about. Ravikant’s letter was sent when the agency solicited feedback before enacting the new rules.

One of Ravikant’s biggest concerns centers around the proposed penalties. He worries that proposed sanctions may be too draconian, resulting in severe punishment for unintended violations. He notes that violating the rules could result in startups being banned from fundraising for a year and that AngelList could get swept up in those penalties.

“Rules that may be easy for Wall Street are a death sentence for startups. They are easy to break accidentally and the penalty for noncompliance is severe,” Ravikant wrote.

Businesses like AngelList, incubators, and VCs that surround startups are built to avoid getting in the way of a startup’s autonomy, Ravikant wrote. “they should not be penalized for activities that a startup undertakes on their own that the business can’t control.”

He also urges the SEC not to reduce the costs of compliance and keep filings confidential.

“Startups often want to control the timing of their financing announcement and prefer not to reveal amounts raised for competitive reasons,” he wrote. “If more of the Form D information was confidential rather than public, compliance rates would jump dramatically.”

Ravikant proposes that third parties like AngelList be allowed to make SEC filings on behalf of startups and serve as a repository where startups can update information about their fundraising.

The Angel Capital Association, which represents 200 investor groups and 10,000 accredited investors across the country, last month also strongly protested the new rules.

AngelList has 100,000 startups and about 20,000 accredited investors on its platform and Ravikant’s views are quite influential among them.

The new rules are coming to implement the federal JOBS Act, which was passed and signed into law more than a year ago.

They retain the requirement that only accredited investors (those with a liquid net worth of more than $1 million) can make equity investments in private companies. They also require private companies and funds to document that their investors meet that net worth standard.

The new rules also require anybody doing a general solicitation to file a Form D with the SEC at least 15 days before starting their campaign. They must file a followup within 30 days of ending the solicitation.

Ravikant wrote in his letter that the requirements probably won’t hinder startups that can afford the bankers and lawyers that will be needed to comply.

But, he warns that “the same rules applied to early stage startups will prevent them from forming. Since young companies are responsible for most of the job growth in the US, we believe this is against the spirit of the JOBS Act.”

“Startups are constantly raising money, sometimes before they have even hired a lawyer,” Ravikant told me. “With tech startups, it’s all loose-goosie. You raise money as you go, often from friends, family and investors. These companies will trip all over these rules and break them left and right.”

Ravikant’s specific complaints:

1” “The requirement to file a Form D 15 days prior to the financing, or at the close of financing even if a financing doesn’t close, is meaningless in our world. Startups are always financing.”

2” “The requirement to formally file all written materials provided to investors with the SEC is not feasible in a world where the materials are updated continuously.”

3” “The requirement to include disclosures every time you mention a financing doesn’t™t work for most places those appear (try tweeting boilerplate legal text in 140 characters, or requiring reporters to include it in stories).”

4” “These technical legal requirements place burdens on startups at a stage before they may have legal advice, and the very severe penalty for non-compliance (not fundraising for a year) is a death penalty for a not-yet-profitable business.”

Click here to read the profile of Naval Ravikant and AngelList that was the July 26 cover story in the Silicon Valley Business Journal.

Click here to subscribe to TechFlash Silicon Valley, the free daily email newsletter about founders and funders in the region.

Cromwell Schubarth is the Senior Technology Reporter at the Business Journal. His phone number is 408.299.1823.

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Ben Horowitz warns startups: You’re worth less today, and you need to be OK with that

Andreessen Horowitz Partner Ben Horowitz says the fundraising environment for startups is particularly tough today. He says investors are increasingly pushing for more equity for less capital, and founders need to be OK with that.Andreessen Horowitz Partner Ben Horowitz says the fundraising environment for startups is particularly tough today. He says investors are increasingly pushing for more equity for less capital, and founders need to be OK with that.

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Contributing writer- Silicon Valley Business Journal

Legendary venture capitalist Ben Horowitz (who makes up the second half of Andreessen Horowitz) has a particularly bleak message for entrepreneurs raising money in the Valley right now: You’re probably worth less to investors today than you were the last time you raised money.

“If you are burning cash and running out of money, you are going to have to swallow your pride, face reality and raise money even if it hurts,” Horowitz wrote in a blog entry Tuesday. “Hoping that the fundraising climate will change before you die is a bad strategy because a dwindling cash balance will make it even more difficult to raise money than it already is, so even in a steady climate, your prospects will dim. You need to figure out how to stop the bleeding, as it is too late to prevent it from starting. Eating s— is horrible, but is far better than suicide.”

He’s partly talking to founders raising an A or B round—entrepreneurs who’ve been to the table at least once before, and raised earlier rounds at a particularly high valuation. The fundraising climate is tougher now, he says. Investors have more leverage and they’re increasingly pushing founders to accept “down rounds,” defined as funding that values their company for less than they were worth in a previous round.

“After, God willing, you successfully raise your round and it’s a down round or a disappointing round, you will need to explain things to your company,” Horowitz writes. “The best thing to do is to tell the truth. Yes, we did a down round. Yes, that kind of sucks. But no, it’s not the end of the world.”

Horowitz knows the feeling.

Twelve years ago, he and Marc Andreessen were entrepreneurs themselves, running a red-hot startup called Loudcloud. In June 2000, they raised $120 million from investors, at an $820 million valuation. By the end of the year, the dot-com bubble was popping fast, and they couldn’t raise another round. To stay afloat, they were forced to take the company public in 2001, at a $560 million valuation.

Describing that experience, Horowitz writes, “In some sense, you are like the captain of the Titanic. Had he not had the experience of being a ship captain for 25 years and never hit an iceberg, he would have seen the iceberg. Had you not had the experience of raising your last round so easily, you might have seen this round coming. But now is not the time to worry about that. Now is the time to make sure that your lifeboats are in order.”

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Jun 26, 2013

Whoever’s behind ‘My Startup has 30 Days to Live’ is hitting a chord

Senior Technology Reporter- Silicon Valley Business Journal

A Tumblr author claiming to be a startup entrepreneur is hooking techies, investors and the press with his My Startup Has 30 Days to Live blog.

Whether the anonymous author is telling a true tale, or whether he’s uncovered as the 2013 version of 2006 YouTube hoaxer “lonelygirl15,” his sad story of dashed entrepreneurial dreams is gripping Silicon Valley.

The writing has a ring of truth. The author claims to have been on the hamster wheel for about two years, getting into a top accelerator. He “hit the top of TechCrunch” and became viewed as a “rising star in the technology world,” the blog claims.

After compromising some vision for funding, the author claims to have gotten traction — but it didn’t keep the funders happy.

“I found myself sitting at my desk, afraid, alone and overwhelmed,” the blog says.

The first day’s blog ends with the author realizing he or she can’t make payroll and needing to fire the company’s first employee before he leaves on a planned vacation.

The second post, which went up today, is headlined “We’re killing it bro.”

“One of the first things you learn as an entrepreneur is that on some level, you’re only as good as your pitch,” it starts out. “The accelerators reinforce this by teaching you the art of storytelling, a skill that helps an investor sign a term sheet as much as it helps the father of a young child decide to take a pay cut to be part of something that’s amazing.”

This one could be the work of a writer hoping for a TV, movie or book deal. There is a lot of entertainment industry industry focus on Silicon Valley, evidenced by Mike Judge’s new HBO show and Bravo’s “Startups: Silicon Valley.”

Eventually, we will likely find out who is behind “My Startup Has 30 Days to Live” and will truly be able to evaluate its worth.

But for now, it has our attention.

Click here to subscribe to TechFlash Silicon Valley, the free daily email newsletter about the region’s founders and funders.

Cromwell Schubarth is the Senior Technology Reporter at the Business Journal.

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Apr 10, 2013, 12:03pm PDT

Foundation’s Paul Holland: Smaller fund, smaller fundings right for times

Foundation Capital Partner Paul Holland says the firm’s latest fund is smaller than the previous ones by design, a reaction to how little startups need these days to get off the ground.

Senior Technology Reporter- Silicon Valley Business Journal

A lot has happened in the year that Foundation Capital started raising money for its seventh fund, according to Partner Paul Holland.

Instead of what had been reportedly planned as a half billion fund, the Menlo Park firm on Tuesday closed a $282 million pool to invest from.

“Startups don’t need as much money now, thanks to the cloud and other factors,” Holland told me. “Startups are using about 40 percent less capital, on average, so we don’t need as much capital to invest.”

He said the smaller fund size was a conscious reaction to the changing startup environment.

“We raised our last fund, which was $750 million in 2008, when we thought we would be doing more cleantech and later-stage deals,” he said. “It took us five years to invest, which is frankly too long. We wanted to have a fund that we thought we could finish investing in three years.”

The new fund will be targeting about 60 percent of its cash at IT startups, about 30 percent to 35 percent at consumer startups and up to 10 percent in cleantech.

“We do about two-thirds of our investments in seed or Series A rounds but we will invest in later rounds when we find something that suits us,” Holland said.

There will be right of the firm’s 13 partners investing from the fund, including new partner Anamitra Banerji, who developed Twitter’s ad platform as one of the micro-blogging company’s earliest employees.

“We have a heritage of partners who stay around for quite a while after they have finished actively investing,” Holland said. “They stay involved with the firm and with the companies they have invested in.”

General Partner Rich Redelfs is the only partner who has newly stepped back from investing, he said.

Despite working with a smaller fund, Holland said he is more excited about the startups he sees now than he was 10 years ago.

“There is a real tailwind behind early stage investing right now,” he said. “The difference between now and 10 years ago is night and day. It’s a lot easier to create returns on small amounts of money now than ever in my experience.”

Click here to subscribe to TechFlash Silicon Valley, the daily email newsletter about startups, venture and angel investors.

Cromwell Schubarth is the Senior Technology Reporter at the Business Journal. His phone number is 408.299.1823.

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Apr 9, 2013, 11:03am PDT

VC, angel solar focus shifts as funding hits 5-year low

Solar funding by venture and angel investors hit a five-year low in the first quarter of this year.

Senior Technology Reporter- Silicon Valley Business Journal

Investments in the solar industry hit a five-year low in the first quarter, according to a new report, as venture funding focus shifts towards startups that do solar financing and installation.

CB Insights said there were just 18 investments in the first three months of the year that gave out $269 million. That contrasts dramatically with the nearly $3 billion in funding in almost 50 deals that came in the second quarter of 2011, just before the infamous shutdown of Fremont-based Solyndra.

Monday’s $37 million funding of Clean Power Finance is the type of activity that is more common these days. The San Francisco-based company’s revenue rose 325 percent in 2012, mostly from transaction fees earned through its online financing marketplace.

That’s because American consumers are still buying and installing solar power in growing numbers. The materials aren’t likely to be domestic, although the financing and installers are.

In another solar financing development this week, California officials told Oakland-based Mosaic that it can crowdfund $100 million worth of solar projects. The company lets state residents invest as little as $25 in projects and get paid back with interest from the revenue those projects generate.

CB Insights reports that despite the overall slowdown in solar deals, there are still early stage deals coming into the pipeline. It said that almost 45 percent of solar investments in the last year have been seed/angel and Series A fundings.

Click here to subscribe to TechFlash Silicon Valley, the daily email newsletter about startups, venture and angel investors.

Cromwell Schubarth is the Senior Technology Reporter at the Business Journal. His phone number is 408.299.1823.

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Your Business CAN Avoid The Series A Crunch – Here’s How

Jim Andelman, my Partner at Rincon Venture Partners, aptly describes the genesis of the Series A crunch, stating that: “Over the next 12-to-18 months, a lot of good companies that have been Seed financed are going to have a tough time raising a Series A from a new outside lead. This is due to a fundamental disconnect between the increased activity of high-volume seed investors (that fill out lots of Seed rounds) and the relatively small number of Series A investors, who only make 1 or 2 investments, per partner, per year.”

Turtle Eggs And Startups

I was in a board meeting recently at Connexity when Dave Gross, the company’s Co-Founder and CEO, made an insightful observation regarding the shortage of Series A funds. He joked that it is akin to turtles hatching on a beach and running in mass toward the ocean. Thousands of turtles are hatched, but only a fraction evades the grasp of predatory birds and reach the safety of the water.

Once in the water, another significant percentage of the baby turtles is quickly devoured by hungry sea creatures. The nasty and brutish  deaths of the unfortunate turtles are disquieting , but the process ensures that  the survivors are (on average) strong, healthy and able to capitalize on the ecosystem’s resources.

There is a similar Darwinian aspect to venture capital investing. Companies that exhibit the greatest prospects are those that attract the necessary capital to survive. Non-performing companies (unless they are artificially propped up by a Washington bureaucrat with tax dollars) are usually unable to garner adequate financing. Their demise, albeit painful in the short term, frees the employees (and in some cases the underlying technology) to pursue more productive opportunities.

There are no villains in the current Series A drama. The rapid growth of seed investments is the natural result of a number of industry trends, which continue to drive down the cost of launching and operating a web-based business. Some seed investors execute over one hundred investments per year, each in the $25k to $200k range. Paul Singh, a partner at the seed stage firm 500-Startups, effectively articulates the market forces driving this investment strategy in his Money Ball presentation.

The other primary factor contributing to the Series A shortfall is the concentration of venture capital funds in the hands of a shrinking number of large firms. This has been driven by venture partners’ desire for larger and larger fees (which are a function of the amount of capital they manage) and institutional investors’ allocation of funds to a handful of VC firms with long (but not necessarily stellar) legacies. This is the “no one ever got fired for buying IBM” approach to investing.

Due to their size, these legacy funds must invest relatively large amounts of capital in each of their deployments, which ill-equips them for participation in most Series A rounds. This flow of funds to large, mediocre VC firms has been widely discussed, usually under the heading, “Is Venture Capital Broken?”

According to Jim Andelman, “These market dynamics combine to leave good companies unfunded, even when they do not need ‘much’ more capital to achieve a good exit. If a venture does not have a reasonably high-perceived chance of a $250 million exit, most Series A investors are passing.  The crunch is especially acute outside of Silicon Valley, as the Bay Area VCs focus on their home market, and the relatively fewer Series A investors in other markets can thus afford to be especially picky.”

Avoiding The Series A Crunch

Many of the unlucky baby turtles are healthy and speedy but still fail to reach the relative safety of the ocean. Similarly, companies with a viable value prop and promising future are finding it challenging to raise  adequate capital. Fortunately, there is a key difference between startups and baby turtles: entrepreneurs can make their own luck.

To this end, some of the tactics entrepreneurs can execute to avoid becoming a victim of the Series A crunch, include:

Take more money at the Seed stage – Although the incremental dilution will be painful, it is prudent to accept 30% – 50% more capital in your Seed round than you would historically, as it will give you a longer runway in which to create value in advance of seeking Series A funds.

Court Seed Investors with a demonstrated history of participating in a post-Seed rounds – As noted in Extracting More Than Cash From Your Angel Investors, there are a variety of parameters you should use to identify and target potential seed investors. Given the current paucity of Series A funds, the depth of an investor’s pockets should be given special prioritization.

Be realistic about your Series A valuation – Although it may seem counterintuitive, the lack of equilibrium between Seed and Series A investors is causing valuation inflation. Per Mr. Andelman, “The Series A investors are now paying more for businesses they think will have outlier exits.” These high-profile deals, which are covered extensively in the tech press and pursued by numerous investors, contribute to unrealistic expectations among rank and file entrepreneurs regarding a reasonable Series A market-rate.

If your company is not perceived to have the potential of a huge exit, do not expect a major uptick from your Seed valuation. If you are forced to accept a lower value, consider reducing the dilutive impact by raising a mix of equity and debt, as described more fully below.

Consider venture debt – If your business has a predictable, reliable cash stream and you have a high degree of confidence that you can reach sustaining profitability, it might be prudent to supplement a smaller Series A raise with debt. With current interest rates in the low-single digits, the cost of such capital has never been cheaper. Expect such debt to include a modest equity kicker component, in the form of warrant coverage. In addition, be on alert for camouflaged fees.

Customer dollars – Sophisticated entrepreneurs understand that the ideal source of capital is from customers’ wallets. Not only does revenue validate a startup’s value proposition, it results in zero dilution. The sooner you generate customer revenue and internalize paying customers’ feedback, the shorter your path to self-sustainability.

If you follow these tips, you are not guaranteed to avoid the Series A crunch, but you will undoubtedly increase your odds of adequately funding your startup, through its Series A round and beyond.

Follow my startup-oriented Twitter feed here: @johngreathouse. I promise I will never tweet about double rainbows or that killer burrito I just ate. You can also check out my hands-on startup advice blog HERE.

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martinzwilling_136Martin Zwilling Contributor

A startup begins with a great idea, but all too often, that’s where it ends. Ideas have to be implemented well to get the desired results. Good implementation requires a plan, and a good plan and good operational decisions come from good people. That’s why investors invest in entrepreneurs, rather than ideas.

People and operational excellence have to converge in every business, large or small. Microsoft found this out last year when their market capitalization, once at $560 billion in the year 2000, had fallen to $219 billion, allowing them to be passed by Apple at $222 billion, who grew from $15.6 billion during the same period. Both had access to the same technology, people, and market.

So what could have happened here? I found a good summary of the relevant keys to business operational excellence in a new book by Faisal Hoque, called “The Power of Convergence.” His focus is on repeatable practices to maximize business opportunities in large companies, but I’m convinced that these apply equally well to startups:

1.  Clearly define your value chain. Your value chain consists of customers, partners, vendors, internal systems, and your own team. Make sure you understand this chain, as well as market dynamics, to drive operational innovations and every decision. Apple has been able to innovate at an amazing pace to define and meet new market opportunities.
2.  Visualize abnormal or suboptimal performance. Recognizing and understanding deviations enables a startup or any business to take corrective action quickly. This requires executives and a team that understands the parameters, and is focused on customers, quality, and continuous improvement.
3.  Facilitate the power of your team. Startups need to empower their people to take action in the absence of orders. That doesn’t mean abdication in setting corporate policies, which provide parameters to ensure that individuals have to ability to act collectively in the company’s best interest. Steve Jobs has a committed team.
4.  Communicate effectively with the team and customers. Communication is a challenge in any organization, but it’s a particular challenge when you’re working in a startup, where customers, products, processes, and the team are new. Most founders forget that communication becomes exponentially more difficult as the business grows.
5.  Measure value flow and performance. Measuring performance may seem self-evident, but many entrepreneurs mistake this task as a point-in-time or a one-time event. In operationally excellent startups, performance measurement is an ongoing effort throughout the process chain, not just at the outcome.
6.  Define response mechanisms. Anticipating and planning for worst-case scenarios, and having a Plan-B, will enable the quick-response and pivots required to put a startup back on track. Metrics are required for ensuring the return to a known good baseline.
7.  Maximize technology architecture and standards. Continuous innovation to maintain your competitive advantage does not mean that you can ignore current architectures and standards. These must always be leveraged produce optimal intended product outcomes.
What every business needs is a convergence of business and technology elements to optimize return and competitive positioning. All too often, entrepreneurs posit a new technology or idea, without understanding that a successful business is a never-ending process of adapting and improving all the elements in a business – especially business model, processes, and people, as well as technology.

Apple, with Steve Jobs, has demonstrated a rare convergence of technology, market understanding, business process, and people. Are you focused on all the right execution principles in your startup to do the same?

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