Archive for the ‘Venture Capital’ Category

Follow-up from RRE Post

November 8th, 2008 Comments off

rre logo Eric Wiesen from RRE was kind of enough to provide some add-on thoughts regarding valuation.  He posted them as a comment in the previous post but because of the wordpress theme that I use I don’t feel like comments are easy to find (I’ll get around to fixing that one day).

Thanks for the additional insight and commentary Eric!

Here’s a reprint of what Eric had to say:

Sanjay – just to clarify a bit of my post on “What we want to hear”, I think you have hit the nail on the head when you ask the question – how do we find ideas that are big enough? It’s not that teams or their ideas aren’t good enough. But one of the first lessons any investor learns (hopefully the easy, academic way and not the difficult, practical way) is that success in a small market just, well, doesn’t matter very much. If you are targeting a $50 million market, even if you are hugely successful and take 50% market share, you top out at a $25 million business. That’s a good business, but if you step back and think about it from the investor perspective, it doesn’t justify the level of risk.

In that example, imagine that you actually get to $25 million in year 5 and can sell it for 4X revenues (in a market where there’s virtually no headroom for growth, this is optimistic, but let’s assume it anyway). You’ve got a $100M exit. That’s a nice exit. If I invested in you at $10M post-money valuation, I’m looking at a 10X return, and that’s a great return.

The problem, as I hopefully communicated at Five Years Too Late, is that we cannot simply assume that you will achieve best-case scenario. We have to discount for the very real possibility that you will not. Further, the rosy scenario where I fund this company at $10M and it exits for $100M and I make 10X assumes that they never need to take additional capital, which is a rare outcome. If another round needs to be raised, I am looking at having to put in more money at a higher valuation (but with the same upside) and probably taking dilution from new investors.

Now this is the world in which early-stage investors live in, and that’s fine. We know that it’s going to take a lot to get a new company to a big outcome, and that the process is fraught with risks. We are making bets on very speculative companies by their very nature. Without the belief in a big exit, it just doesn’t make sense. If you prefer the MBA approach, the discount rate required for this type of investing makes those investments with limited upside of questionable value when you consider the time it will take to get there in most cases.

So ultimately, I think you are looking at this the right way, the way I suggest on the blog. Entrepreneurs who want a firm like RRE to invest should try to have a product and market vision that’s large enough to justify the type of valuation that a Series A venture-backed company requires. Alternately, there are other investors who may be interested in companies promising smaller outcomes, but if they are rational they will need to envision lower risk to make the math work. There are examples of investors who invest in high-IP, post-development/pre-market companies where they believe risk has been taken off the table. These investments can have a lower upside and still make sense.

Hope this is helpful


Link:  Original comment here, Five Years Too Late – RRE blog

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VC views on opportunity sizing

November 8th, 2008 1 comment

I’ve met with and discussed business opportunities with a wide variety of Venture Capitalists here in the silicon valley.  I always ask VCs how they valuate opportunities and what criteria they use to determine whether an opportunity is big enough to invest in and pursue.  Beyond their usual pithy statements around “I invest in good teams not necessarily the strength of a single idea”, a few of them have given me insight into their investing patterns.  I’ve been challenging myself to write up more of what I learn but haven’t found as many hours in the day as I’d like (yes, we all have this problem and I’m waiting to invest in whoever can solve either by a) adding hours to the day or b) cloning).

My problem was solved recently when one of the VCs I know started writing an informative blog about their viewpoints and positions.  I’ve found the blog to be fairly fascinating written by RRE Ventures and I wanted to share two recent posts.

The first post I wanted to highlight was around how VCs come up with valuations.  RRE gives their thesis that everything is rooted in the public markets, that they have to use the most liquid market they can find to make valuation estimates on individual startups.  I like the point that RRE makes around using whatever tools are available no matter how “chunky” in nature:

The second post that was interesting to me revolves around making future projections on your revenue stream.  The RRE poster all but admits that if you can’t reasonably project $50M in revenue over the first 4-7 years they most likely won’t invest in you.  I highlight this post because I know this is the struggle that many of us are dealing with:  how do we find ideas that are big enough?

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Valuation advice from a VC

October 1st, 2008 Comments off

I’ve been reading a blog by two of the Partners at RRE Ventures.  It’s fairly fascinating and quite honest (in a refreshing way).  They wrote a post today about what kind of valuation you want for your startup in the first round.  Their logic is sound but definitely would make a founding team think they’re giving something up :-)  It’s worth a read and definitely worth keeping in mind in challenging financial times.

Here’s the basic premise:

There are at least two very good reasons why you might not want to go for the highest possible valuation.

1. You are probably going to have to raise money again.

2. The valuation you get today impacts your exit possibilities.

Link:  Five Years Too Late by RRE Ventures

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Churchill Club – 9th Annual Tech Trends Debate

June 26th, 2007 Comments off

churchillclub (I forgot to post this from many months ago! I had blogged this on an internal corporate blog.)

Similar to last year I attended the Churchill Club’s 9th Annual Tech Trends Debate. This year was more intriguing than last year (fewer “enterprise software is dead!” pronouncements). The speakers were John Doerr, Steve Jurvetson, Roger McNamee, Joe Schoendorf and the moderator was Tony Perkins (of AlwaysOn fame). Similar to last year I believe you can find a podcast (thru ZDNet or iTunes) if you want to hear the whole thing, it was entertaining and thought provoking.

I also took some notes on my phone (moblogging? kind of) which I’ll share below. I’ve got many opinons about what was said and discussed, but I’ll leave my opinions out for now. Maybe in the next post 🙂

The trends weren’t listed in any particular order.

Mobile Devices (by Roger McNamee): The market for mobile devices will see multiple new design centers, giving consumers more choices, but also requiring more belt space.

John Doerr wholehartedly believes every bit of iPhone propaganda out there and thinks it’s going to be a game changer. The fundamental argument from McNamee here was that people don’t want all-in-one devices, they’ll be comfortable with lots of smaller devices as long as they can swap out the “brains” and battery from device to device. The analogy made was similar to shoes or belts, you’ll have many.

Broadband Networks (by John Doerr): The cellphone is the next PC. the FCC will approve at least one new network for broadband in the next year.

Doerr said the he believes a new broadband network was the single most important thing we can do for economic developing for the next ten years. I think he also said that going green was the single most important thing later, so I guess everything is equally important 🙂

Web 2.0 Shakeout (by Tony Perkins): Within the next twelve months we will see the beginning of the Consumer Web 2.0 shakeout.

Perkins was talking about Web 2.0 sites that weren’t mobile focused. None of the four VC’s agreed as they all said that there is way too much money in venture right now, so no reason to see a reduction in investment. Schoendorf said “we always overestimate the short-term and waaaaaaay underestimate the longer term” with regards to the probable success of a startup. He also said (and I’m paraphrasing here), the last thousand years were about the written word (Gutenberg) and the next fifty are all about video.

Moore’s Law (by Steve Jurvetson): Moore’s Law will begin to bifurcate, where technical advances in memory precede logic by several years.

Jurvetson said that memory innovations are happening faster than those on the logic side. He said that the majority of transistors are used for memory; as an example, he said that 96% of the Itanium 2 is for memory not logic. He then started talking about how the emerging methods of assembly for chip fabrications are not good for homogeneity (like logic) but better for heterogeneity. (Side note: Talk to Sean Stauth about this if you’re interested as I believe his Master’s work was int his area). Doerr said that new HW startups need to develop a process advantage now just an architecture advantage.

Economic Power Shift (by Joe Schoendorf): The shift in economic power will profoundly impact current business.

This was kind of a no brainer. Schoendorf said that economic power is shifting and that there will only be one European country left in the G7 in next 5 to 10 years (his guess was the UK). In his view, this will significantly change the perspective on who the customer is and who the market is and who your competitors are. He gave an example of how the highest unemployment rate in the Silicon Valley (post dot com crash) is still lower than lowest unemployment rate in Germany in the last 20 years. He talked about taking risks but also being able to shut things down if you were wrong (he gave examples of discussions he had with German ministers and Merkel evidently where the idea of shutting something down rapidly would not fly). If Schoendorf had to make a 20 year bet on the BRIC countries he said he would pick India not China. He said this because India has 3 workers for each retiree which is far ahead of any other country (as far as economic stability). He felt that Brazil and Russia have too high of a beta.

Active Media (by Roger McNamee): Consumers are choosing active or passive media, which will further erode the power of today’s media companies and will require a reengineering of the advertising business.

Scarce supply of mass advertising but then tipping point where you can’t support all the brands out there. He used TV advertising as the example here, they are making more revenue for ads for a little bit because there are fewer “mass audience” shows and also not an understanding of where you can advertise in new channels to get the same impact. Schoendorf said “watch P&G, as they go, so will the rest of the advertisers”.

Web 2.0 to Enterprise (by Tony Perkins): Consumer Web 2.0 functionality moves into enterprise and media worlds in a big way.

Again this was a no brainer. Kids will want to have community across companies. Passive workforce communities will move to active workforce collaboration. Enterprise SW will go Web 2.0. Collaboration is so important and wiki model is brilliant for institutional memory. Schoendorf explained how one of his kids asked him “what was your e-mail address in high school?” which got a big laugh from everyone. Schoendorf is probably in his late-60s. He used this point to illustrate that our new joiners are going to expect Web 2.0 capabilities (social networking, etc.) inside their companies and across companies.

Synthetic Life Forms (by Steve Jurvetson): The next couple years will herald the first synthetic life form.

Jurvetson was talking about creating bacteria or viruses from scratch engineered to do exactly what we want. Not humans being created from scratch J Jurvetson said the first synthetic virus was created in 2002. That Polio was created from scratch. He said that scientists can generate DNA code. In the next 6 months he said that scientists will be reproducing bacteria in lab environment that grows and consumes. As an example of the type of innovation that could come out that people don’t immediately think of is harvesting energy from the Sun. Jurvetson said bacteria are the most efficient at converting energy from the Sun and they are inherently green and clean methods. He also said that you ou can swap out entire DNA codebase now to change species. This wasn’t substantiated, he claimed the papers would be published slow. The last interesting claim was that he thinks progress in this field will make Moore’s Law look slow. Jurvetson talked about Jay Keasling who was working on creating a much cheaper malaria drug (and did so, all your Berkeley grads can be proud) and is now working on biofuels.

The brain (by Joe Schoendorf): Rise of radical approaches to treating brain diseases.

Schoendorf said we are at an understanding of brain diseases and conditions similar to what we understood about cancer ten years ago. He felt that the next few years would bring about tremendous change in understanding and treatment. Jurvetson exhorted the audience to make sure they exercise their brains, have a hobby etc., to help stave off many of the natural problems. He gave as an example, feel free to check it out.

Going Green (by John Doerr): Going green could be the largest economic opportunity – and imperative – of the 21st century.

Thinks Congress will send mandatory greenhouse gas emissions cap to this President. Need to reduce carbon footprint, but more importantly really need to go negative. One negative example: Doerr said that the USA has 700 ethanol pumps across the country, with only 2 in California. He said that Brazil has 23,000 ethanol pumps as the largest user of biofuel. Brazil has reduced their own emissions by 10% in the last few years, but they are only 1.3% of the world’s emissions. So, the US and Europe have to lead (positive example with the UK legislation recently). China will be 23 gigatons of greenhouse gas emissions by 2050 which is more than the world total today, but how can you tell them now to have economic development, when per capita, the US is the biggest polluter in the world. One right answer is for the US to reduce emissions while India/China are increasing. Schoendorf brought up a really good point around not just reducing carbon emissions, but how do we go negative? What eats carbon (someone in the audience yelled out “trees!” J )? Is the problem bigger than just man made carbon? Schoendorf was playing the other side by saying we absolutely should reduce our emissions, but also understand the other dimensions of the problem and the world ecosystem to see where else we can make a different to go negative.

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