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Charles River Ventures – New Investment Strategy November 3, 2006

Posted by rajAT in entrepreneur, startup, vc, venture capital.
3 comments

I have blogged earlier here and here that present VC model is broken and it should be chnaged.

Charles River Ventures, an early stage venture capital firm, has launched a new investment strategy, offering rapid but tiny $250,000 checks to Internet start-ups.

The advantage of a seed round is that it done as a “convertible” loan, which means the $250,000 is essentially a no-strings-attached loan to an entrepreneur. There is no equity stake claim by the investor at the time, which is good for the entrepreneur, who can see how good his idea is first. If the idea gains traction, he can raise money in the series A and negotiate a high valuation for his company. If he can command a $5 million valuation, for example, the investor’s $250,000 seed money converts into only 5 percent of the company.

There is almost no liability for the entrepreneurs, because the loan is made to a corporation formed around the entrepreneur. If the company fails, the company goes away, and the founders aren’t liable.

From CRV’s site for an example:

If CRV loans your company $100,000 with a six percent interest rate, and six months later the company closed a Series A round, at that point the loan balance (with interest) would convert at a 25% discount (value = loan dollar amount plus interest / .75) into $137,333.33 worth of Series A stock. Given that seed funding amounts are typically very small compared to the amounts one might expect to raise in a Series A round, as the example illustrates, the aggregate discount amount, in this case $37K, is a tiny fraction of what is likely to be a multimillion dollar Series A financing.

Its good to see that VCs are trying to change their ways of working also. After all we entrepreneurs are their customers and they should keep us happy. 🙂

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Kinks in VC Industry October 9, 2006

Posted by rajAT in entrepreneur, startup, vc, venture capital.
3 comments

The high-risk, high-return venture capital business may have turned into all risk and no return.

“The traditional venture model seems to us to be broken,” Steve Dow, a general partner at Sevin Rosen Funds, said in an interview.

Sevin Rosen, a 25-year-old firm that is among the most respected in the industry, was in the process of closing its 10th fund and had received commitments from investors for $250 million to $300 million, Mr. Dow said. But in a letter sent to those investors yesterday, Sevin Rosen said it had decided to abort that process.

Explaining its decision, Sevin Rosen, which has offices in Dallas and Silicon Valley, said that too much money had flooded the venture business and too many companies were being given financing in every conceivable sector.

But excess of capital is only part of the problem, the firm said. In its letter, it bemoaned what it described as “a terribly weak exit environment,” a reference to the dearth of initial public offerings and to a market for acquisitions at valuations that it considers too low to deliver the kind of returns that venture investors expect.

Fred Wilson at A VC says that all this doesn’t mean that the “venture capital model” is broken. It means that we have to adapt to the changing nature of the technology business.

The big trends they saw when they raised the money for Union Square Ventures are following –

1 – commodization of the core infrastructure of the technology business
2 – community powered development environments – ie open source
3 – software delivered as a service over the internet
4 – a movement toward lightweight web services – ie web 2.0
5 – the globalization of technology development and consumption.

He suggested changes that VC model should be tweaked in the following ways.

  1. We’ve got to raise smaller funds.
  2. We’ve got to do less “hard tech” and more “soft tech”
  3. We’ve got to figure out how to make great returns on $100mm to $250mm exits
  4. We’ve got to limit our IPOs to our very best companies.

I actually think that many firms have already made many of these changes as part of the brutal restructuring of the venture capital business in the 2001-2003 time period and are much better off because of it.

I am not sure that model has already got tweaked becasue old VC ways are still continuing.

  • VCs still raise big funds. Couple of VC have raised billion dollar funds.
  • Pure idea plays get copied very fast. Look at the video uploading websites that have cropped up. And VCs are not very comfortable with this.
  • Exit strategy is M&A. IPOs are a pipe dream.

And all this is so true if we see in Indian context. Here entrepreneurs doesn’t need big money to start and that put them out of the radar of all the VCs.

Good news is that now lot more people are talking about the change in VC industry and so lets hope it will happen soon.

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Indian Tech Tour 2006 July 29, 2006

Posted by rajAT in entrepreneur, entrepreneurship, india, tie, tie asia, tie uk, vc, venture capital.
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techtour.PNG The Tech Tour will visit India for the first time and showcase its rich culture of technology and innovation. The Indian Tech Tour is co-organized with TiE UK and TiE Asia. The Indian Tech Tour will highlight this enormous potential and depth during its unique three-day tour across the country.

ETT is a leading non-profit organization of European VCs in the high-technology industry. ETT aims to provide a platform that allows interactions between the entrepreneurial eco-system in Europe with the entrepreneurial eco-system in the visited country eventually leading to facilitating or funding local high technology companies looking to expand internationally.

The delegate profile is top-notch and will comprise of successful entrepreneurs, representatives of national or international research organizations, directors of associations servicing the high-technology industry, partners and senior professionals of leading VC Firms, technology investment managers from development funds, business angels, professional service providers to the technology industry, investment bankers, politicians involved in technology development, global media representatives. Delegates comprising of VCs as well as other business leaders will be evaluating companies not only for investments but also for tie-ups, collaborations, and other strategic business relationships.

Visiting delegates are interested in the following categories.

  • New Materials & Processes
  • Wireless
  • Networking
    • Fixed
    • Management & Services
  • Software Applications
    • Enterprise
    • Consumers
  • Platform & Infrastructure
    • Computer-human interface
    • Search and navigation
    • Content delivery
    • Infrastructure management
    • Middleware
    • OS & Development tools
  • BPO
    • Healthcare
    • Financial Services
    • Content Development
    • Software Development
    • Elearning/Trading
  • Digital Media
  • Consumer Technology and Distribution
  • Energy Related Technologies
  • NANO Technology
  • Retail & Consumer technology
  • Semi-conductor technology/Research/Manufacturing
  • Media & Entertainment
  • Terminals and peripherals

Why only a few survive ? July 4, 2006

Posted by rajAT in barcamp, barcamphyderabad, community, entrepreneur, india, marketing, startup, vc, venture capital, web2.0.
8 comments

Life as an entrepreneur is taxing, emotionally charged, extremely gratifying and very very suprising. Yesterday was one such day not because of all this but it was a day of contradictions. So it goes like this –

I had a telephonic conversation with a big Menlo park VC firm in the morning. The call went great and I am hoping for some positive things to come out of it :D. But the point that was bothering me was how this VC firm got my address in first place. I never contacted them. During the conversation they told me that they have “READ MY BLOG”. That they keep track of entrepreneurs blog in India. I was surprised to hear that but I really liked the proactive approach. It is very important to have a direct link with grass roots. And if you want to invest in Web 2.0 world you should be using it yourself to know the power of it. I am so impressed with them.

In the evening, I had another telephonic conversation with another big Menlo park VC firm. This was for the sponsorships of Barcamp Hyderabad. After 10 days of discussion they refused to sponsor. That is just fine that they don’t want to sponsor. But the reasons given just reflected  that they don’t understand the change that is happening out there. And they want to support entrepreneurs and are great believers of Web 2.0. Duh !!

So let me just drill through some of the reasons that they have given  –

1) Sponsoring T-Shirts is Micro – Well guys micro is the new macro. Isn’t it good that you get to test waters by a small investment. That is what Ray Lane, Partner KPCB, calls Enterprise 2.0. Now enterprises could test and use web services at a fraction of cost and if it works, the investment could be increased. Gone are the days when organizations have to commit a big amount upfront. Same is barcamp an ad-hoc conference oraganized and attended by geeks and entrepreneurs. All for love. Best way to know them is engage with them and if it works out. Keep on engaging with them.

2) Long term association – Barcamps are fickle who is accountable for the next barcamp. A very valid point. Well the first question that one should ask – Do you believe in the story that India is going to be hot and the people who are going to make it hot are entrepreneurs. If yes, then what is the best of doing it is nurture the community that they have built. Support that community. Yep ! it can happen that my interests can change tomorrow or of the other people who are behind Barcamp here in Hyderabad. But then community is not about couple of individuals, because it is not top down. There is no hierarchy in first place. A thriving community will give rise to lot of other passionate individuals. And that will take care of the long term relationships.

3) Marketing people are concerned about the mileage –  I think there marketing people haven’t heard or read a book called – “Communities dominate Brands” by Tomi Ahonen. Or they don’t know how Riya has used blogs, communities and built such a strong brand from ground up. If not then they should. Cluetrain manifesto anyone.

Change happens right in front of our eyes. But we refuse to acknowledge it. No wonder why big organizations fall.

Some people just don’t get it.

Is venture investing a gut business ? June 30, 2006

Posted by rajAT in entrepreneur, startup, technology, vc, venture capital.
5 comments

Yes, it is.

Paul Kedrosky a venture partner with Ventures West, who also writes a famous blog Infectious Greed, was moderating a VC panel where the same question was being debated – Is venture investing a gut business. And the conclusion is, that it is.

One of the main reasons is that after 4 decades of active investments the VC industry still doesnt have a formula for zeroing down on a winning company.

If you go to any conference where a VC is addressing the crowd. They will all state this statment religiously – We want “A” teams. An “A” team can save a mediocre technology, but a “B” or “C” team could screw up even the best technology. This statement is as hollow as Rakhi Savant kissing claims. In first place how you will conclude that a particular technology is mediocre or killer. In hindsight, one can always make big statments.

When the legendary VC John Doerr came down to Banglore. We asked a question to him when he repeated the same, “A” team – “B” technology statement. The questin was with a twist – Google didn’t have a management team or an “A” team when you guys invested in Google. To hell with management team they didn’t even have a plan how they are going to monetize this whole thing. Then what made you invest. John didnt offer any counter argument – infact he said Google is an outlier so its kind of pointless debating or discussing it. That really helped. Finally, he said we invested because Ram Shriram has invested. Talk about herds.

My 2 cents on it –
For a second if we look a little closer at the ideas or technology. They fall under two categories  – 
 1) Technologies that change the world. 
 2) Technologies that make things which are already present better, faster or bigger.

The ideas that fall under second category, for them the business models are already proven the entrepreneurs are trying to improve the user experience. These ventures don’t create new markets but may expand existing markets. For example – the travelling industry was always there but by taking it online, booking tickets become so easy.

The first category is the difficult one. When Apple computer started who had thought that the whole PC industry will get so big. But Steve Jobs and Steve Woz thought differently. When Google came up with their search technology noone thought that online searching will be an annual $10 Billion in revenues business. The ideas that fall under this category lead to the creation of a whole new industry.

Hence the difficult part is that there is no factual data that can prove that this new stuff will work. Anyone who is trying to prove this nothing but a fool. For such things one can only go from year to year or better quarter to quarter but you cannt have a 3 year Capex plan in place. It is just not possible. Who has dreamed that iPod will be such a hit, I doubt even Steve Jobs has dreamt that iPod will be such a killer. (iPod led to the creation of microcontent, MP3 players were always there).

The panel concluded finally that picking such trends is an art and not a science. Either you have it in you or not. No business guru or a professional service can help you in taking the decision. Only your gut can show you the way.

In the end, Spreadsheet jockeys are not needed but Dreamers. 😀

Blog Bucks June 26, 2006

Posted by rajAT in blog, bloggers, entrepreneur, startup, vc, venture capital.
2 comments

contentnext.JPGAs the print media ponder the possibilities presented by blogs, some journalists are raising money to turn their own independent blogs into businesses.

The latest example is, Rafat Ali, the publisher of PaidContent.org and two other news and analysis sites, MocoNews.net and Contentsutra.com, focused on digital media and other high-tech trends, has raised money to expand his Web-publishing business from venture capitalist Alan Patricof.

The financing, though small in comparison with most Web deals, is one of several in recent weeks that indicate optimism on the part of early-stage investors in the viability of blogs as an outlet for journalism, rather than the gossip and personal opinion that characterizes much of the medium.

Mr. Ali started PaidContent.org four years ago when he couldn't find work after two publications he wrote for, Inside.com and Silicon Alley Reporter, shut down. His site has since developed a following among people interested in how the Internet and other technologies are affecting the media business.

I met Mr. Rafat at a mixer in New Delhi in December. At that time Mr. Trehan, VP Indiatimes, mentioned that Rafat is a million dollar guy. AOL purchase of Weblogs Inc. was still wet and all professional bloggers were eyeing similar deals. Rafat and team continued their good work and now this deal can go along way in building PaidContent a big money spinner.

Between did I mention that ContentSutra was the first professional blog I started reading way back in 2005 (internet years 😀 ). And it openned the doors of a whole new world. Thanks Rafat and all the best.  

University Venture Fund June 25, 2006

Posted by rajAT in DFJ, entrepreneur, startup, tim draper, vc, venture capital.
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The University Venture Fund (UVF) announced today it has achieved a final closing of $18 million in funding, an unprecedented amount of capital for a student-run education-based business program. UVF is one of only a few business school venture capital funds, which teach students entrepreneurship by investing in risky — yet potentially rewarding — startup companies rather than in safer stocks of public corporations.

UVF is collaboration between students, the University of Utah's David Eccles School of Business and the professional investment community. Created in 2001, UVF broke new ground by modeling an aggressive, real-world approach to business education with a self-sustaining private equity fund in which students raise the capital, research the investments and pitch the deals. It is also the first fund to have a traditional limited partner relationship with investors who anticipate reasonable payback.

One of Silicon Valley's highest-profile venture capitalists praised the UVF concept. "I love the idea of the next generation of entrepreneurs being energized and educated by operating a true private equity fund," said Tim Draper, who was an early investor in Hotmail and was at the center of several record-breaking venture capital deals this past year, including the lucrative initial public offering of Baidu, dubbed "the Google of China," and the purchase of Skype by eBay for $4.1 billion. "I'd like to see this kind of education in entrepreneurship spread everywhere," he said. Draper put $1 million in UVF and is its largest private investor.

The student-run fund has other prestigious backers. UVF's largest institutional investor is UBS Bank USA, a subsidiary of UBS AG, one of the world's largest private banking institutions and one of the largest asset managers globally. This final closing of UVF added CapitalSource of Chevy Chase, Md., to UVF's group of investors. CapitalSource is a commercial finance company with offices in major cities across the United States.

The Salt Lake family of two successful entrepreneurs, billionaire medical device inventor James LeVoy Sorenson and son James Lee Sorenson, CEO of Sorenson Media and Sorenson Medical, contributed the founding $500,000 to UVF in 2001 and challenged students to create a self-sustaining investment fund.

Few such higher education programs exist today. Stock clubs and student-led investment funds of public corporate stocks are common, but the educational benefits of UVF derive from the big risks and rewards of investing in little-known, innovative private enterprises for which there are no public market valuations and so are tricky to bet on, even for seasoned professionals.

Twenty-five students commit 20 hours per week to performing due diligence on venture capital investments for professional private equity companies participating in the UVF program. Startup businesses the students find potentially lucrative are then pitched to volunteer investment professionals who oversee which ones are included in the UVF portfolio. A wide range of graduates and undergraduates are enrolled, including engineering students and medical students, and the program has expanded to include students from Westminster College in Salt Lake City and Brigham Young University in Provo. The University of Michigan and Cornell offer similar, student-involved private equity funds that are smaller, with $3 million and $500,000 invested respectively.

A recent graduate credits his current business success to the learning experience provided by UVF. "Everything I needed to get our new-concept business going, I learned from working with UVF," said Nate Thurgood, who graduated in 2003 and recently played a lead role in developing BelleHavens, a high-end equity destination club. Launched in 2004, BelleHavens already has properties in three countries with 11 destinations and has a member satisfaction rating of 97 percent. "From business valuation to deal-structuring to due diligence, I really couldn't have done it without participating in UVF. It's not just the entrepreneurial experience that was so helpful, but working with sophisticated investors for the first time was very important for me," he said.

Undergrads gain real-world experience through the risky business of seeding startups with money from limited investors who expect a satisfactory return on their investment.

Risk Capital in India June 20, 2006

Posted by rajAT in bangalore, entrepreneur, entrepreneurship, hyderabad, IIIT, iit, india, isb, startup, tie, vc, venture capital.
9 comments

Rafiq Dossani from Stanford and Asawari Desai from TiE has written a report on what is holding the growth of risk capital in India [Via Venturewoods]. Below are some of excerpts from the report and my supporting thoughts on it.

Over 90% of the money invested by VC firms is in late state ventures. And the remaining More than 90% of the money invested in VC firms in India ventures lie in the category of late stage funding. The rest of the funding also goes into the firms who are replicating proven business models. Hence, the risk capital as such is totally absent in India. There are multiple reasons for such a scenario –

1. Domestic Risk capital providers who are skilled at risk assessment and portfolio diversification lack technical skills and market awareness.

This is very true. Most of the HNI (High Networth Individuals) one will find here will be from IT/ ITES industries who will have little or no clue about what is latest in the industry. Some of them who might be able to dish out the names of hottest startups like Riya, Skype (now eBay), Flikr (now Yahoo) etc. but they won't have clear idea as in why they are hot.

2. Early-stage entrepreneurs, though skilled at cost-control and technology, lack market awareness, product development skills, global standards of professional and ethical behavior and team building skills.

a. Some of the entrepreneurs here will simply try to replicate what has been done in US without understanding the whole idea in depth.
b. Early startups will not have discipline which is essential to certain extent.
c. The ideas that they are chasing can get changed very radically because some other quick opportunity will knock their door. Mostly in services side.

3. Inadequate pipeline of angel/university/state funded seed-stage firms.

Univeristy funding or support is happenning at few IITs (Bombay, Chennai) very actively. Now IIIT-H has also started supporting startups. But a wider penetration will take a lot lot more time.
You cannot create a vibrant entrepreneur community in pockets. If Stanford students were crucial in creating Sillicon valley than students from other universities have also played a very important role. All top 100 univs in US have an active Incubation cells. This imbibes a spirit of entrepreneurship in the students right from the beginning.

4. Seed and early-stage entrepreneurs’ professional networks consist primarily of a few strong personal connections and brokers. A wider network of professional associates, incubators and prior-stage financiers, is largely absent.

TiE is the only entrepreneurship network in India. It has chapters all over India, but TiE Bangalore is the most active one. Recently it launched TiE-EAP which is great foot forward. ISB in Hyderabad is also trying to build the same along with TiE Hyderabad and IIIT-H.

At grassroots alot is happenning now days. All Tier 1 IT hubs (Delhi, Hyderabad, Chennai, Bangalore, Mumbai, Pune) have successfully organized Barcamps which were hugely successful. A small step but can go a long way as it gives a platform to the like minded to come and meet.

5. Underdeveloped equity markets for listing early-stage firms.
All big internet companies in India get themselves listed at NASDAQ or NYSE. This shows that Indian investor is not ready for the new age companies.

6. Shortage of complementary capital, such as debt capital.

Organized debt markets in India doesn't exist. One can get debt from improper channels at very high rate of interest. Mr. Finance minister are you listening.

7. The business environment discourages sophisticated standards of – corporate governance.

8.University-Industry partnership was an alien concept 5 years back. Corporate India is still trying to discover how such alliances can affect its topline.  

9.Domestic consumption of IT is not very high. When labor is cheap why bother about IT. This is the mantra at most of the organizations.

10. Bureaucratic, regulatory, legal and tax hurdles affects smallers VC firms and angel investors. Need of the hour is such firms and not big ones. Read my views on it here.

Well this all means we have long way to go. And we will go 🙂 :).

VC delegation visiting IIIT Hyderabad June 19, 2006

Posted by rajAT in entrepreneur, hyderabad, IIIT, india, vc, venture capital.
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A VC delegation is visiting IIIT-H campus today. few of the names I came to know are-

Mr Gordon Campbell founded and operated a number of Silicon Valley technology companies. He established Techfarm, Inc. and Techfarm Ventures as models for partnering start-ups, creating cutting-edge technologies, with seasoned managerial and financial experience.

Mr. Lauro has 25 years of engineering, operating and venture capital investing experience in the IT, electronics and semiconductor sectors. Prior to joining Techfarm in 2005, he was Managing Director at Wasserstein Venture Capital.

Laura Onopchenko joined Techfarm in July 1998 from 3Dfx Interactive where she was the director of investor relations and business development. During her tenure at 3Dfx, she positioned the company, to the institutional investment community for an initial public offering and a successful secondary.

Sateesh Andra is a seasoned entrepreneur and executive. Sateesh co-founded Euclid in 2000, a leading provider of IT Management Software that enables Global 2000 companies to align IT spending with business priorities. He has launched an India focussed Angel Fund. He is based out of Hyderabad.

Mr Campbell will also formally launch the activities of the Entrepreneurial and Venture Capital Club (EVC) at ISB.

Enterprise 2.0 June 6, 2006

Posted by rajAT in blog, entrepreneur, india, media2.0, peer production, social, startup, technology, vc, web2.0.
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Ray Lane takes a shot at an enterprise 2.0 in an interview with Businessweek. Ray Lane is a partner at KPCB and before that he was president and COO at ORACLe. Now he is working with startups like Visible Path ( MySpace for enterprises ) and SpikeSource. Now that is quite a career shift , isn't it. 🙂

Some of the key points from the interview with my thoughts on them –

1. Innovation is a six month cycle instead of a 3 year cycle. This means window of opportunity where you can cash on your idea is now 6 months. Think, Build, Sell your idea in a six months time. Not because if you fail to capitalize on it someone else would do it, but the idea will get obsolete.

2. In the enterprise 2.0 the IT decisions will not be taken by the CTOs or CIOs, but the individuals. Some might be wondering how this will happen. If people will be free to use their own software,imagine the havoc that will be caused. Ray give some examples of the technology which was adopted bottom up – Blackberryl, Good Technology and Skype. Another good example is that a small group wants to collaborate on some project and they use any wiki software that is available out there.

3. The advantage of providing software as a service is huge. Another benefit is that corporations don't have to commit big sums of money for this. A typical enterprise software implementation take couple of years and millions of dollars.

4. Data is a concern though. Executives will nt like confidential enterprise information residing elsewhere. But for a moment, think of a teen who is living on myspace today when he joins workforce tomorrow, is he going to give a damn to such concerns.

5. All software cann't be provided this way.

6. Existing giants cann't adapt to the service model because they just can't.

7. America is not China. So employees will talk about what is going in the company through podcasts, blogs and any other channels available. You can't dooce them :). Companies view this as a grave security concern but see the brighter side of it. It can take customer enagement with the products they love, to a different dimension. I now can know who has designed the Tshirt I am wearing. Voila !

Btw all this is going to be a great boon for the developing countries. If Indian people are going to leapfrog to mobiles, Indian enterprises are going to leapfrog to all these light weight enterprise solutions. :).

Any enterpreneurs out there listening ?

Is VC industry decaying ? May 31, 2006

Posted by rajAT in entrepreneur, entrepreneurship, startup, vc, venture capital.
4 comments

We normally hear VC's saying with lots of pride that we only write big cheques. And the bigger cheque in VC parlance normally means not less than couple of million dollars. If we look at today scenario, then we will notice that startups don’t need big money. Thanks to LAMP and open source software, burn rate of startups have gone down by an order of magnitude. To top it all, because of the stellar success of technology startups the whole ecosystem has matured quite a lot. At any tech hub you can find couple of technology entrepreneurs who have tasted success and are more than willing to advice young entrepreneurs. The presence of organizations like TiE can help you to connect to right kind of people.

So the two major roles, apart from funding, that VC's used to perform are being done by other agencies. Shouldn't that sound alarm bells to VC's. If you look a little more deeply into the VC industry then you will notice that the VC's are the one who understands the change the best as they invest in it. They are the ones who walk at the bleeding edge of change in any industry (technology, pharma etc.) But while chasing things elsewhere they forgot to take a stock of the situation at their own home.

In today’s changing scenario, when the capital requirements of startups have gone down considerably and other roles of advisory and networking are being performed by other agencies, VC's should take a fresh look at their position.

I think for some of the reasons stated above we are seeing such kind of events happening quite regularly.

In coming years it would be very interesting to see the changes that will take place in VC business. Change is constant. Amen.