Feeds:
Posts
Comments

Archive for the ‘Venture Capital Dispatch’ Category

Investors Weigh In With Convertible Note Caveats for Start-Ups – Venture Capital Dispatch

Posted in Entrepreneurship, Investments, Venture Capital, Venture Capital Dispatch on September 15, 2012| Leave a Comment »

  • September 13, 2012, 6:45 PM

Investors Weigh In With Convertible Note Caveats for Start-Ups

By Lizette Chapman

Tech entrepreneurs take note: Convertible notes are not free money and, if not structured properly, can prevent you from raising additional financing.

Investors speaking at the TechCrunch Disrupt SF 12 conference in San Francisco this week had this gem and a few other choice observations about early-stage financing for start-ups.

“We’ve had companies come in for their Series A and not realize  that  they’d already given up 25% of their company” in the seed round,” said Sequoia Capital Partner Alfred Lin, referring to the fact that convertible notes are unpriced, but convert to equity stakes when founders go on to raise a priced Series A round. He added: “That you raise money at a higher valuation than your friend? That’s a false milestone for you.”

Another false milestone, according Google Ventures Partner Joe Kraus, is thinking that raising a bigger round is better for the company when a smaller one will do. While Kraus said he “had no bones to pick” with the convertible note structure, he cautioned it can lead to companies over-raising their seed round and then  ending up with a “weird” cap table that makes  backing a  company at the Series A level difficult  for new investors because there’s  not enough equity left to go around.

While none of the investors speaking (Cowboy Ventures Partner Aileen Lee, SV Angel Managing Director David Lee and Greylock Partners Partner James Slavet were also on the panel) mentioned Y Combinator companies specifically, they might as well have.

Many of the 75 companies who graduated from the three-month accelerator program last month have been talking to investors to raise capital on top of the $150,000 offered to all YC graduates by the Start Fund. Along with the note structure, valuation (which sets expectations for the Series A round) has become an unusually public discussion, with YC co-founder Paul Graham last week accusing Google Ventures of lowballing YC companies on valuation and following up on a prediction last spring that valuations may be dropping.

Although the Start Fund (which is backed by Yuri Milner, SV Angel, General Catalyst Partners and Andreessen Horowitz) offers the cash at no cap and no discount, other early seed investors have been unwilling to offer a similar blank check lest their equity gets washed out in a later round.

And, judging from investor comments–Lee said he’s now seeing down valuations in more sectors than previously–the amount and valuations of convertible notes are becoming more disciplined.

“It’s feast or famine,” said Slavet, of start-up  funding. “Seed valuations fluctuate on the ability of seed companies in the previous months to set Series A funding. Seeds, in many ways, are a lagging indicator of Series A valuations.”

Write to Lizette Chapman at lizette.chapman@dowjones.com. Follow her on Twitter @zettewil

Read Full Post »

Webvan Who? Investors Hungry for Online Specialty-Food Start-Ups – Venture Capital Dispatch

Posted in Venture Capital Dispatch on September 3, 2012| Leave a Comment »

By Lora Kolodny

Although online grocery services like Webvan and HomeRuns failed badly in the dot-com era, venture and angel investors now appear bullish on the digital grocery business.

Bloomberg News

In particular, start-ups that meet consumer demand for organic and specialty food in the U.S. are drawing seed and venture investments.

Among the digital grocery businesses that attained funding recently are Good Eggs, Relay Foods and Instacart, backed by Collaborative Fund, Battery Ventures and Y Combinator, respectively.

Beyond these, AngelList—a site where accredited investors can learn about, connect with and fund promising start-ups—currently features 74 start-ups seeking funding in the “grocery” category.

Organic and specialty food sellers on that platform, Greenling in Austin and Mouth Foods in New York, already raised some funding, among others. More than 600 accredited investors follow the grocery category.

Do investors have Webvan amnesia? If they do, that’s a good thing, according to entrepreneur and investor Ali Partovi. An early backer of Facebook, Zappos and Dropbox, he recently invested in Farmigo, a Palo Alto, Calif., start-up helping food producers use the Web to sell directly to consumers, including on a subscription (community-supported agriculture, or CSA) basis.

“Amnesia is one of Silicon Valley’s greatest strengths,” Partovi says. “Things change, and an idea that was bad several years ago may be a good one today because of a change in underlying circumstances.”

In food consumption and purchasing in the U.S., key circumstances began to shift in the early 2000s, around the buzzwords “organic and local.”

Focusing on organics and locally made products, the brick-and-mortar grocery Whole Foods Market helped drive the trend. So did films like Super Size Me by Morgan Spurlock in 2004, and books like The Omnivore’s Dilemma by Michael Pollan, in 2006.

According to the U.S. Department of Agriculture, over the past decade consumer demand for organic food and other products has grown by double digits every year.

An angel investor in Mouth Foods (and 24 other start-ups), Jason Calacanis says that “food is the new health care.” Mouth Foods bills itself as “an online store for local, artisanal foods.” Namely, they sell subscriptions and one-time gift bags full of organic and locally made snacks from around New York.

Consumers would rather spend money on a healthier diet than pay “large surgery and drug bills when they get sick from eating poorly,” Calacanis says. Artisan food and co-op markets, including digital ones, provide an “antidote to mainstream food…that is somewhere between low quality, garbage and dangerous.”

Mass consumer buy-in to organic and local food has created some problems in the market, however.

“The food supply chain was caught off guard,” Partovi said. ”It hasn’t grown fast enough for the frenzy of people seeking out organic and local food.”

But supply and distribution problems represent new opportunities for investors and entrepreneurs.

Brian O’Malley, general partner with Battery Ventures, says that the lower cost of starting a tech business and the higher cost of food represent stronger potential margins for companies working to solve food supply and delivery problems today, compared with the early dot-com era of Webvan.

Battery has backed Relay Foods and another undisclosed food business, O’Malley said. Relay Foods, like Capital Factory-funded Greenling in Austin, Texas, operates food pick-up sites around U.S. cities. Shoppers order locally made and organic groceries online through the site, then pick them up later at a designated place.

Many prefer this option to spending time at a crowded store, driving around to different local farm stands, or buying goods from conglomerates like Nestle, PepsiCo, Kraft and Coca-Cola.

According to O’Malley, investors all hope the food sellers they’ve backed will be able to scale. The trick is to do so while providing a great user experience and food to consumers, minimizing overhead costs, and winning the love and loyalty of food producers, market-by-market.

Write to Lora Kolodny at lora. kolodny @dowjones.com. Follow her on Twitter @lorakolodny

Read Full Post »

The Daily Start-Up: AQT Solar Looks to Sell Off Assets, IP -Venture Capital Dispatch

Posted in AQT Solar, Distressed Intellectual Property, Distressed IP, Gerbsman Partners, Inetellectual Property, Solar, Uncategorized, Venture Capital Dispatch on August 23, 2012| Leave a Comment »

The Daily Start-Up: AQT Solar Looks to Sell Off Assets, IP

Top stories in today’s VentureWire:

dailystartup_D_20090806101628.jpgArt by Mike Lucas

AQT Solar has joined several other small private solar manufacturers in search of a partner or an acquirer, as conditions in the market continue to deteriorate for such companies. The Sunnyvale, Calif.-based company, which raised about $32 million in equity since founding, retained Gerbsman Partners to handle the sale of its assets and intellectual property, VentureWire has learned.

Read Full Post »

Biotech Start-Ups See Benefits from Changing Structure, Lawyer Says – Venture Capital Dispatch

Posted in Biotech, Inetellectual Property, Life Science, Venture Capital, Venture Capital Dispatch on August 11, 2012| Leave a Comment »

Biotech Start-Ups See Benefits from Changing Structure, Lawyer Says

By Brian Gormley

Albert L. Sokol has been pondering the problems facing biotechnology start-ups and has come to a conclusion: many could improve their outlook by shifting their structures.

Sokol, a partner with the law firm Edwards Wildman Palmer, recently has helped two venture-backed biotechs convert from C corporations to limited liability companies, a change that he and some venture capitalists say could help many young drug-makers.

Because not enough of these companies have been acquired or gone public in the past few years, venture firms have been investing less in biotech. U.S. investment fell 45% to just over $1 billion in the first half of this year compared to the same period of 2011, according to VentureSource, which is owned by Dow Jones & Co., publisher of Venture Capital Dispatch.

The problem for many biotechs is that they try to sell themselves whole in one large transaction, according to Sokol. While that’s possible, it’s become more difficult given that the pool of acquirers has become shallower after a recent series of pharmaceutical-industry mergers. Many biotechs would be better off selling individual drugs from their pipelines in a series of smaller deals that, in the aggregate, would add up to more than they would have gotten if they had sold their business all at once, according to Sokol.

When corporations buy a biotech whole, they typically make offers that primarily reflect the value of the drugs that interest them. Start-ups that agree to these deals get little or nothing for their other products. By selling drugs piecemeal, a start-up can wring more value from each one, and buyers don’t have to spend time evaluating therapies that don’t interest them, according to Sokol. The biotech can then pass the gains from each sale on to venture investors, giving these firms a steady stream of income.

The approach is well-suited to biotechs with technology to continually produce new drugs, Sokol said. That would describe Forma Therapeutics and Viamet Pharmaceuticals, the two companies he has helped convert into LLCs, a more tax-efficient structure for passing on profits of asset sales to investors than a C corp.

There’s another reason to consider reorganizing as an LLC: employees are often better off if the company is sold whole, according to Sokol.

“Don’t think just about making life better for your investors,” Sokol said. “It’s all about optimizing it for all your constituencies.”

Employees in a C corp. usually receive stock options instead of shares. This way, they don’t have to pay for the shares and be taxed on them right way. But most people wait too long to exercise their options, Sokol said. As a result, they pay the short-term capital-gains tax rate, which is roughly double that of the long-term rate, when the company is sold. This isn’t a problem in an LLC, because employees are granted shares instead of options.

Employees of an LLC receive profits-interest shares, which aren’t taxed when they’re issued. Here’s the reason: if a start-up is worth $20 million on the day an employee receives profits-interest shares, and the company is sold that same day, the new worker would get nothing until his more senior colleagues got at least $20 million. If the company is sold five years later, when the business is worth more, that employee would pay the long-term capital-gains tax rate on the gains he makes from the sale of the profits-interest shares.

During his five-year employment, he has every incentive to help increase the company’s value. Otherwise, he’ll get nothing for his profits-interest shares.

“If you have a group of employees you’re trying to incentivize, that’s pretty cool,” Sokol said.

Write to Brian Gormley at brian.gormley@dowjones.com

Read Full Post »

$10M Would Be Seventh Heaven for China’s AngelVest – Venture Capital Dispatch

Posted in China, Entrepreneurship, Inetellectual Property, Technology Incubators, Venture Capital, Venture Capital Dispatch on August 9, 2012| Leave a Comment »

ugust 9, 2012, 9:52 AM

$10M Would Be Seventh Heaven for China’s AngelVest

By Sonja Cheung

Shanghai-based AngelVest is targeting up to $10 million for its inaugural fund that will invest in China-based start ups, said co-founder David Chen.

Having “literally” just completed the legal documents for AngelVest Fund LP, the firm expects to close the fund in the next 12 to 18 months, with commitments largely from family offices based in Hong Kong, Singapore and the U.S., he said.

Read the full story here.

Traditionally, AngelVest members have clubbed together to invest in portfolio companies that include mobile business SmarTots and foreign language website iTalki.com. The latter recently closed a second round of angel investment that was partly backed by AngelVest, said Kevin Chen, co-founder of the Shanghai-based business. It will likely tap the venture market for a $2 million to $3 million Series A round in the first half of 2013, he added, declining to disclose the size of the recent angel round.

AngelVest invests $250,000 per company, and has no immediate intentions of increasing that amount and graduating to venture capital-size rounds, said David Chen.  “We’re sticking to our guns, if anything, we’d look to raise multiple funds in different cities,” he added, noting that AngelVest is considering setting up a group for angel investors based around the south of China in Guangzhou and Shenzhen, as well as Hong Kong.

Write to Sonja Cheung at Sonja.Cheung@dowjones.com. Follow her on Twitter at @SonjaCheung

Read Full Post »

« Newer Posts