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Has it suddenly gotten harder to do venture-backed startups? by Cromwell Schubarth Senior Technology Reporter- Silicon Valley Business Journal

Posted in Uncategorized, tagged , , , , , on April 8, 2014| Leave a Comment »

 

 

Rachel Chalmers Ignition Partners

Rachel Chalmers of Ignition Partners warns founders that VCs really aren’t their friends.


Senior Technology Reporter- Silicon Valley Business Journal

Pity the venture-backed startup founder. That’s the conclusion you might draw from pair of blogs posted this week.

“Why your company should avoid venture capital,” was the headline on the post from Pittsburgh-based growth consultant Andy Birol.

“Five reasons not to raise venture capital,” was the theme of a blog from Rachael Chalmers, the IT analyst turned VC at Ignition Capital in Palo Alto.

Birol’s advice seems focused on entrepreneurs that probably aren’t building the kind of businesses VCs would be interested in anyways. It’s often better to focus on pleasing customers than satisfying the demands and priorities of venture investors, he says.

“Turning to venture capital for money to grow your business is sort of like going to a bar looking for someone to marry. The longer the night goes on, the clearer it is that most people you meet have short-term objectives,” Birol writes.

Chalmer addressed Silicon Valley entrepreneurs more directly.

“The seductive narrative of Silicon Valley stars a genius-hero who goes on a journey, overcomes myriad obstacles, has a flash of insight and is rewarded by wise and benevolent investors with Series A funding. This narrative is bullshit, but it’s everywhere.”

The point of both blogs is that venture funding isn’t the best source of capital for a lot of businesses and getting VC backing is far from being a guarantee for success.

Chalmers estimates that of the 1,000 VC-backed enterprise startups she encountered in 13 years as an analyst, only eight got all the way to an IPO. A total of 188 were acquired and “28 of them failed so hard they don’t even fog a mirror any more.”

A report this week from CB Insights provides even more data on this point. Of all the VC-backed companies that raised seed money in 2009, 75 percent are orphaned, dead or became “self-sustaining.”

This last group is often termed, disdainfully, by VCs as “lifestyle businesses.” That means that there is probably a business that will spport the founders and their families but will never scale.

About 21 percent of the Class of 2009 were acquired. The rest, only about 4 percent, are still around.

The report and the two blogs make the point that the chances of success as a venture-backed startup aren’t great. They may even lead readers to wonder if things have gotten worse in that regard.

But very few VCs I have dealt with suffer fools gladly who think that startup success is easy. They actually go out of their way, as Chalmers does, to dissuade founders from that idea.

The reality is that it has never cost less to build a tech startup and it hasn’t been considered this cool to be a founder than during the tech bubble of the 1990s.

But the facts show that extremely few of these startups are likely to survive, and that doesn’t seem to be anything particularly new. It just runs counter to popular myth.

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

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The Venture Capital Secret: 3 Out of 4 Start-Ups Fail

Posted in Board Of Intellectual Capital, Entrepreneurship, Gerbsman Partners, Investments, tagged , , , , , , , , , , , , , , , , , , , , , , , , , on September 23, 2012| Leave a Comment »

Article from WSJ Online.

It looks so easy from the outside. An entrepreneur with a hot technology and venture-capital funding becomes a billionaire in his 20s.

But now there is evidence that venture-backed start-ups fail at far higher numbers than the rate the industry usually cites.

About three-quarters of venture-backed firms in the U.S. don’t return investors’ capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School.

The Wall Street Journal reveals its third annual ranking of the top 50 start-ups in the U.S. backed by venture capitalists.

Compare that with the figures that venture capitalists toss around. The common rule of thumb is that of 10 start-ups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns. The National Venture Capital Association estimates that 25% to 30% of venture-backed businesses fail.

Mr. Ghosh chalks up the discrepancy in part to a dearth of in-depth research into failures. “We’re just getting more light on the entrepreneurial process,” he says.

His findings are based on data from more than 2,000 companies that received venture funding, generally at least $1 million, from 2004 through 2010. He also combed the portfolios of VC firms and talked to people at start-ups, he says. The results were similar when he examined data for companies funded from 2000 to 2010, he says.

Venture capitalists “bury their dead very quietly,” Mr. Ghosh says. “They emphasize the successes but they don’t talk about the failures at all.”

There are also different definitions of failure. If failure means liquidating all assets, with investors losing all their money, an estimated 30% to 40% of high potential U.S. start-ups fail, he says. If failure is defined as failing to see the projected return on investment—say, a specific revenue growth rate or date to break even on cash flow—then more than 95% of start-ups fail, based on Mr. Ghosh’s research.

Failure often is harder on entrepreneurs who lose money that they’ve borrowed on credit cards or from friends and relatives than it is on those who raised venture capital.

“When you’ve bootstrapped a business where you’re not drawing a salary and depleting whatever savings you have, that’s one of the very difficult things to do,” says Toby Stuart, a professor at the Haas School of Business at the University of California, Berkeley.

Venture capitalists make high-risk investments and expect some of them to fail, and entrepreneurs who raise venture capital often draw salaries, he says.

Consider Daniel Dreymann, a founder of Goodmail Systems Inc., a service for minimizing spam. Mr. Dreymann moved his family from Israel in 2004 after co-founding Goodmail in Mountain View, Calif., the previous year. The company raised $45 million in venture capital from firms including DCM, Emergence Capital Partners and Bessemer Venture Partners, and built partnerships with AOL Inc.,  Comcast Corp.,  and Verizon Communications Inc.  At its peak, in 2010, Goodmail had roughly 40 employees.

But the company began to struggle after its relationship with Yahoo Inc. fell apart early that year, Mr. Dreymann says. A Yahoo spokeswoman declined to comment.

In early 2011 an acquisition by a Fortune 500 company fell apart. Soon after, Mr. Dreymann turned over his Goodmail keys to a corporate liquidator.

All Goodmail investors incurred “substantial losses,” Mr. Dreymann says. He helped the liquidator return whatever he could to Goodmail’s investors, he says. “Those people believed in me and supported me.”

image

Daniel Dreymann’s antispam service Goodmail failed, despite getting $45 million in venture capital.

How well a failed entrepreneur has managed his company, and how well he worked with his previous investors, makes a difference in his ability to persuade U.S. venture capitalists to back his future start-ups, says Charles Holloway, director of Stanford University’s Center for Entrepreneurial Studies.

David Cowan of Bessemer Venture Partners has stuck with Mr. Dreymann. The 20-year venture capitalist is an “angel” investor in Mr. Dreymann’s new start-up, Mowingo Inc., which makes a mobile app that rewards shoppers for creating a personal shopping mall and following their favorite stores.

“People are embarrassed to talk about their failures, but the truth is that if you don’t have a lot of failures, then you’re just not doing it right, because that means that you’re not investing in risky ventures,” Mr. Cowan says. “I believe failure is an option for entrepreneurs and if you don’t believe that, then you can bang your head against the wall trying to make it work.”

Overall, nonventure-backed companies fail more often than venture-backed companies in the first four years of existence, typically because they don’t have the capital to keep going if the business model doesn’t work, Harvard’s Mr. Ghosh says. Venture-backed companies tend to fail following their fourth years—after investors stop injecting more capital, he says.

Of all companies, about 60% of start-ups survive to age three and roughly 35% survive to age 10, according to separate studies by the U.S. Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation, a nonprofit that promotes U.S. entrepreneurship. Both studies counted only incorporated companies with employees. And companies that didn’t survive might have closed their doors for reasons other than failure, for example, getting acquired or the founders moving on to new projects. Languishing businesses were counted as survivors.

Of the 6,613 U.S.-based companies initially funded by venture capital between 2006 and 2011, 84% now are closely held and operating independently, 11% were acquired or made initial public offerings of stock and 4% went out of business, according to Dow Jones VentureSource. Less than 1% are currently in IPO registration.

Read more here.

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Venture capital investments pick up with strong emphasis on mobile

Posted in Board Of Intellectual Capital, Economy, Entrepreneurship, Gerbsman Partners, Investments, Management, Market research, National Venture Capital Association, Social Commerce, Social Networks, Startups, Strategy, Technology, Venture Capital, tagged , , , , on July 17, 2012| Leave a Comment »

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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Opportunistic acquisitions: Blow money in Vegas instead

Posted in Board Of Intellectual Capital, Distressed Intellectual Property, Distressed IP, Economy, Gerbsman Partners, Intellectual capital, Investments, Market research, tagged , , , , , , , , , , , , , , , , , , on June 11, 2012| Leave a Comment »

Article from GigaOm.

“I meet a lot of owners of midmarket IT services companies who almost immediately ask me, “What is my company worth?” Even those who don’t ask want to know often ask.

It’s a fair question, with a complicated answer. I can do a back of the envelope calculation and determine the enterprise value of a company today based on 12 months trailing revenue or perhaps a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). But the real value of a company is based less on its past performance than on its potential worth to a future owner. What the buyer can bring to the party and how well its management believes it can execute the acquisition and business strategy going forward is where a company’s true value resides and where the domain expertise or strategy comes into play.

Case in point: In 1996, IBM bought Tivoli Systems for $743 million, paying about 10 times trailing revenue. Many analysts concluded at the time of the sale that IBM grossly overpaid for the asset. Within a year, IBM was able to leverage Tivoli into almost a billion dollars in revenue. Just like beauty, value is in the eye of the beholder. Tivoli had more value to IBM than Tivoli had to itself at the time. So did IBM pay 10 times revenue or less than one times revenue for Tivoli?

Unfortunately, I don’t have a crystal ball. So I don’t know what potential buyers can do to leverage a company’s value. And a calculation on the back of an envelope almost always fails to satisfy.

Here is something else the owners I talk with really don’t want to hear: Chances are they have taken actions that over time have eroded — or even destroyed — the value of their company without even realizing it. In my last post for GigaOM, I wrote about “5 things that destroy a company’s value.” In this post and in future posts, I’m going to examine these value killers one at a time in greater detail.

Today, my topic is opportunistic acquisitions. And to be clear, my message is for owners of midmarket companies who are interested in making acquisitions designed to increase their own value. In doing so, they hope to become attractive acquisition candidates to buyers in the future.

Acquisitions fail 70 to 90 percent of the time

If you search for the phrase “acquisition failure rates,” you’ll be treated to study after study that peg failure rates at somewhere between 70 percent and 90 percent. Dig a little deeper, and you’ll find articles enumerating the many reasons most acquisitions don’t work.

Nearly all of these reasons can be boiled down to two:

  1. The acquisition was a bad match between what the seller had and what the buyer could do to create value. The bad match often occurs because the buyer was fooled, misled, or overlooked key points of the deal, or the buyer simply suffered from hubris.
  2.  The buyer did a poor job of integrating the acquisition and executing on the business strategy designed for its new asset.

In both situations, acquisitions fail because the buyer doesn’t really know what or why it’s buying — let alone what to do with the acquisition.

Think about when HP bought Compaq or when Time Warner bought AOL.

Of course there are companies that are successful with acquisitions. Cisco has acquired 150 companies since its first acquisition in 1993. In fact, acquisitions are a core competency of Cisco — few companies are better at it.

Cisco’s purchases are fueled by the desire to speed up the rate at which the company can offer new technologies in a market that is hyper-competitive and evolving rapidly.

Not all of Cisco’s acquisitions are hits. Remember the Flip video camera that Cisco shut down in 2011? But many were successful, especially in the early days. At the peak of its acquisition activity in 2001, Cisco’s purchases were widely credited with laying the foundation for about half of its business at the time.

The secret to Cisco’s fruitful acquisitions is its ability to successfully onboard companies. Cisco employs a full-time staff solely focused on integrating new companies into the fold — instead of haphazardly assembling part-time transition teams whose members are all busy with their regular jobs.

In terms of strategy and execution, Oracle is even better at acquisitions. The company has spent billions on about 90 companies since its acquisition of PeopleSoft closed in 2005. Oracle’s chief skills are identifying companies that fit well into its longterm business strategy at the front end of the process, and its ability to integrate and act on these strategies at the back end. In 2011, readers of The Deal Magazine recognized Oracle’s track record with an award for most admired corporate dealmaker in information technology for deals completed from 2008 to 2010.

Until late in 2011, Oracle’s acquisition drive was to create the broadest portfolio of traditional enterprise software applications in the industry. With the company’s $1.5 billion acquisition of SaaS CRM applications provider RightNow Technologies (announced in September 2011 and completed in January 2012), Oracle now hopes to work its magic in the SaaS market. Oracle paid more than seven times trailing revenue for RightNow. I bet that in the next year or two, Oracle will make that multiple look like a bargain — just like when IBM bought Tivoli.

Still, Cisco, Oracle and other exceptions to the rule underscore the difficulty of making acquisitions work. It’s even harder when an acquisition happens because a buyer is presented with an unexpected “opportunity” and management decides it’s just “too good to pass up.” These so-called “opportunistic” acquisitions often lead to disappointment or disaster.

The reasons for failure are obvious. Acquirers lured by such a passive approach often have no clearly defined goals, have not thought through the attributes of ideal acquisition candidates, have done little or no pre-acquisition planning, and suffer from a lack of choice.

It reminds me of people who go to Las Vegas for the weekend and end up married. Getting married in Nevada is quick, easy and relatively inexpensive. All you need is a marriage license — no blood tests and no waiting period. And there is a wedding chapel on every corner.

Of course, when you wake up the next morning, there may be hell to pay.

I know. I’ve been there. Not in Las Vegas on the morning after, but at an organization that for many years only bought companies that showed up on its doorstep. We had no strategy and no process for integrating acquisitions into the mothership. I’m convinced that if the owner of the neighborhood car wash had offered us a “good” deal, we’d have taken it.

So here’s my advice for owners of companies seeking to enhance their value through opportunistic acquisitions. Acquisitions can do a lot of good. They can add to your growth and earnings, speed your entry into new markets, allow you to acquire human capital or intellectual property more quickly, and lower your costs through economies of scale. All of these things have the potential to increase the value of your company to a prospective buyer.

But just like marriage, acquisitions should never be decided on a whim. And you should never buy a company just because it’s for sale. Frankly, companies that are not for sale offer juicier profits and are likely a better strategic fit. Better to take some of that money and go have fun with it in Las Vegas.

And if you go there, don’t get married.”

Read more here.

 

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Silicon Valley Venture Survey – First Quarter 2012

Posted in Board Of Intellectual Capital, boic, Economy, Entrepreneurship, Fenwick & West, Investments, Market research, Strategy, tagged , , , , , , , on May 28, 2012| Leave a Comment »

Article from Fenwick & West.

Background—We analyzed the terms of venture financings for 114 companies headquartered in Silicon Valley that reported raising money in the first quarter of 2012.

Overview of Fenwick & West Results

  • Up rounds exceeded down rounds in 1Q12, 65% to 22%, with 13% of rounds flat. This showed continued solid valuations in the venture environment, although a small drop off from 3Q11 and 4Q11, when 70% of rounds were up rounds. This was the eleventh quarter in a row in which up rounds exceeded down rounds.
  • The Fenwick & West Venture Capital Barometer™ showed an average price increase of 52% in 1Q12, a decline from the 85% reported in 4Q11, but still a solid showing.
  • We note some weakness in late stage financing (Series E and higher) valuations, where 37% of the financings were down rounds and the Barometer reported only a 12% increase. Series B financings were also not as frothy as they have been, with a Barometer reading of 58%, the lowest since 4Q09, but still very solid.

The results by industry are set forth below. In general software and digital media/internet companies continued to see the strongest valuation increases, with hardware and life sciences lagging.

Overview of Other Industry Data

  • Venture valuations were healthy, but investment was down.
  • M&A valuations were up, but the number of deals was down.
  • Venture fundraising was mixed, but corporate venture investing was up.
  • IPOs were up, and the passage of the JOBS Act is a further encouraging signal for the public market, but continuing global financial uncertainty, especially in Europe, is a concern.

So what is the take-away? Venture fundraising continues to be problematic, and likely contributed to the decreased venture investment the last two quarters. However with IPOs improving, and interest rates still extremely low, there is reason to believe that venture fundraising will improve, if the global economic environment doesn’t further increase risk averseness. The M&A market slowed a bit in 1Q12, possibly to give participants a chance to evaluate the improvement in IPOs, and its possible effect on valuations, but corporate America has plenty to spend, evidenced by their increasing participation in venture investment. And the areas of entrepreneurial focus and innovation are broad, with mobile, cloud, security, big data and of course social media all attracting substantial attention.

Venture Capital Investment.

  • Venture capital investment in the U.S. declined for the second quarter in a row, with the decline evident in most major industry segments, including internet/digital media.
  • Dow Jones VentureSource (“VentureSource”) reported $6.2 billion of venture investment in 717 deals in 1Q12, a 16% decline in dollars from the $7.4 billion invested in 803 deals in 4Q11 (as reported in January 2012).
  • The PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the “MoneyTree Report”) reported $5.8 billion of venture investment in 758 deals in 1Q12, a 12% decline from the $6.6 billion invested in 844 deals in 4Q11 (as reported in January 2012).

Merger and Acquisitions Activity.

  • M&A activity for venture-backed companies had mixed results in 1Q12, with deal volume declining for the second quarter in a row, to the lowest quarterly amount since 2009, but with Dow Jones reporting a significant increase in deal proceeds.
  • Dow Jones reported 94 acquisitions of venture-backed companies in 1Q12 for $18.1 billion, a 12% decline in transaction volume, but a 93% increase in dollars, from the 107 transactions for $9.4 billion in 4Q11 (as reported in January 2012).
  • Thomson Reuters and the NVCA (“Thomson/NVCA”) reported 86 transactions in 1Q12, a 7% decline from the 92 reported in 4Q11 (as reported in January 2012). Sixty-eight of the 86 deals were in the IT sector.
  • Dealogic reported that Google, Facebook, Groupon and Zynga purchased a combined 34 companies in 1Q12 (not necessarily all venture-backed).

IPO Activity.

  • IPO activity for venture-backed companies improved again in 1Q12, which was the best quarter for number of IPOs since 4Q07.
  • VentureSource reported 20 venture-backed IPOs raising $1.4 billion in 1Q12, compared to 10 IPOs raising $2.4 billion in 4Q11 (as reported in January 2012). There were 50 companies in registration at the end of the quarter.

We note that the new law that permits confidential IPO filings may delay future information on the number of companies in registration, as a substantial number of companies appear to be taking advantage of this alternative.

Thomson/NVCA reported 19 IPOs for $1.5 billion in 1Q12, compared to 12 IPOs raising $2.6 billion in 4Q11. Eleven of the IPOs were in IT and five in healthcare, and 95% were U.S.-based companies.

Venture Capital Fundraising.

  • Industry sources reported conflicting fundraising results for 1Q12, with Dow Jones reporting an increase in dollars raised and Thomson/NVCA reporting a decline. Taking an average of the two, venture capital fundraising and venture capital investing were approximately equal this quarter, but the number of funds raising money continues to be low.
  • Dow Jones reported that 47 U.S. venture funds raised $7 billion in 1Q12, a 35% increase in dollars over the $5.2 billion that was raised in 4Q11 (as reported in January 2012).

Thomson/NVCA reported that 42 U.S. venture capital funds raised $4.9 billion in 1Q12, a 13% decrease in dollars over the $5.6 billion raised by 38 U.S. funds in 4Q12 (as reported in January 2012). The top 5 fundraisers accounted for 75% of the total amount raised, with Andreessen Horowitz raising $1.5 billion and leading the way.

Secondary Markets.

  • The secondary market for venture-backed company shares is in uncharted waters.
  • The recently passed JOBS Act made filing for an IPO more appealing to companies, which could decrease the number of late stage private companies whose shares would be available for secondary trading. However, the Act also increased the maximum number of shareholders that private companies could have before registering with the SEC, which allows private companies to stay private longer, which could increase the pool of late stage private companies whose shares would be available for secondary trading.
  • Additionally, Facebook, which accounted for a large percentage of the trading on secondary exchanges, and whose shares were also purchased by secondary funds, just went public, and secondary trading of their shares ended at the end of March 2012.
  • And the venture-backed IPO market seems to be improving in general, providing more opportunity for late stage private companies to go public.
  • Second Market reported that issuers were the buyer in 54% of second market transactions, but only accounted for 1.7% of transaction proceeds, suggesting that issuers are using Second Market to purchase small amounts of shares from numerous sellers, likely to limit their number of shareholders.

Corporate Venture Capital.

  • With a challenging venture fundraising environment, we thought it would be useful to provide some information on corporate venture capital (“CVC”).
  • In general, CVC declined precipitously in 2009 as a result of the stock market decline and global financial problems in 2008. Since then it has rebounded significantly with corporate venture investment increasing from $1.4 billion in 2009 to $2.0 billion in 2010 to $2.3 billion in 2011. Similarly, CVCs participated in 12.7% of all venture deals in 2009, 13.6% in 2010 and 14.9% in 2011. That said, these amounts significantly lag 2007, the best year for CVC in the past decade, when CVCs invested $2.6 billion and participated in 19% of deals (data from the MoneyTree Report).
  • While companies like Intel and Cisco have long been significant players in CVC investing, it will be interesting to see how heavily the current wave of major Silicon Valley companies participate in CVC. One indiciation is that Google started Google Ventures two years ago with the goal of investing $100 million a year, and has invested in 20 start-ups through March 2012. (Data from San Jose Mercury)
  • Another indication of CVC activity is that the number of CVCs who are members of the NVCA has grown from 50 to 62 members in the past year, and now comprises 7% of the total membership. (Data from Dow Jones VentureWire)
  • CVC investment seems more focused in industries with large capital requirements like cleantech and biotech, which accounted for 23% and 16% of CVC investment respectively in 2010/2011, than are independent venture capitalists. (Data from the MoneyTree Report)

Venture Capital Sentiment.

The Silicon Valley Venture Capitalist Confidence Index® produced by Professor Mark Cannice at the University of San Francisco reported that the confidence level of Silicon Valley venture capitalists was 3.79 on a 5 point sale in 1Q12, a significant increase from the 3.27 reported in 4Q11, and the first increase in four quarters.

Nasdaq.
Nasdaq increased 16% in 1Q12, but has declined 10% in 2Q12 through May 21.

Read more here.

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