I spent an extended July 4th weekend with good family friends at Lake Arrowhead and returned to a partially flooded house. Normally, I would have been irate. Instead, I simply chalked it up to shit happening and have rolled with the punches this week for the simple reason that I returned completely relaxed (thanks Will, et al!!!). In fact, a thought occurred to me while swimming up to the surface during one of our swims after discussing deep sea diving. Whether or not you one needs it, “decompression” should be mandatory. What do I mean? I suppose it is a self-realization that stress accumulates whether we realize it or not so it’s good to release it frequently regardless of whether we think we need to or not. I have always been even-keeled and tend to stay calm through any calamity so have never focused on relaxing. Sure, I take vacations and spend time away from “work” but more and more of my time away from the office is spent intertwined with work such that I do not consider it work. In fact, I would venture to say that I am doing exactly what I would do if I did not have to “do” anything and feel truly blessed for that fact. So go out and do some decompression this week!
I had an interesting conversation this week about Twitter. I explained to a friend that I have an account, used it for awhile, abandoned it for awhile, and have revived it in an attempt to learn more about it as a social medium. Here is how I view it and my three self-imposed rules of thumb:
1) Utility - I only follow folks that might learn something unique and useful from on a weekly basis. If I find that I’m not learning anything unique and useful on a weekly basis, I stop following them.
2) No Reciprocity - I don’t follow folks because they follow me. In fact, I’m not sure why anyone would follow me as my tweets are rarely insightful (you can see for yourself here at http://twitter.com/ocvc if you’re so inclined).
3) No Location Details - I learned (the hard way) never to post with specificity my location in real-time unless I’m prepared to be approached. Nothing like having a dinner out with my family interrupted by someone “eager” to meet me. Yeah, I know…common sense here but I was naive enough to think all would be good.
I’m still not sure just how useful Twitter is to me but am giving it another go in an attempt to learn. Wish me luck and if you have an interesting Twitter experience, please share it!!!
I have been blogging less frequently these days and spent some time thinking about the reasons why over the long weekend. Before I get into that, I thought I’d reiterate the reasons why I blog in the first place. I originally started blogging when I was at Intel as a way to inform my team and fellow travelers what I was up to, where I was, and what was occupying my then current thoughts. I did this as I spent ~15 nights a month out of the country and the other ~15 nights so incredibly busy catching up here in the U.S. it was hard to stay in touch with folks. I picked the proverbial pen back up after my partner and I got Okapi up and running as way to more effectively communicate to the masses (family, friends, fellow travelers, and followers) and share a bit of my life with them in our increasingly busy lives. I suppose a secondary reason was to my small part to help increase awareness for the under-served SoCal VC ecosystem and just what was going on down here in the shadow of Silicon Valley. Well, my reasons for blogging are changing so I find myself blogging less frequently. Let me explain.
I’ve noticed that I’ve been spending more time with my family, friends, and fellow travelers and less time with the general masses at the various conferences and industry events so I feel less compelled to communicate through my blog. Additionally, since I started blogging about the SoCal VC ecosystem and number of blogs written/maintained by “relevant” authors have sprung up to cover the area (just take a look at my Blogroll for examples). Once again, I feel less compelled to showcase what is happening down here given the expanded coverage. In light of these facts and feelings, my rationale for blogging has morphed. I now see it as a way to dynamically interact with the SoCal VC community and regularly engage members of my audience and am having a blast doing so. Maybe I’ll blog once a week, once a month, or once a quarter. It will now just depend on how busy I am and how much time I spend sharing/communicating in person rather than through my blog. Having said that, I have a few posts stockpiled from my weekend off the clock that I’ll now share…
I was at D7 the other week and spent a fair amount of time discussing the “value of free” with attendees. The juxtaposition of traditional media and consumer Internet hinges on this concept so I thought I would explain a bit about what I am referring to. At the risk of oversimplifying here, a vast majority of consumers expect information/entertainment (a.k.a. “content”) on the Internet to be free in that they are not accustomed to paying for the content the Internet provides them. In fact, there is a whole generation of consumer digital denizens that only know the “Web 2.0 / free” world of the Internet. This poses a potential problem for the related industries: how do we make money if the consumer of what we produce/source/distribute expect that it will remain free?
The answer has historically been that the value exchange for such content was simply this: I provide you with my (valuable) time and you provide me with the content to occupy such time. In the exchange, you then sell advertising against my time based on my gender, age, socio-economic status, and other such demographics (a la broadcast television through most of its history). This has historically worked reasonably well for all when there were finite choices for content. See where I’m going here? That’s right, this model becomes a bit challenging as the sources of content outpace the Total Consumers Time (a.k.a. “TCT” - calculated as the total number of targeted consumers multiplied by the daily total number of minutes they spend on line). The issue has become somewhat exacerbated the past couple of years as the rise of social media and Web 2.0 tools has turned these consumer into creators of content themselves such that all consumers may someday become creators of content on-line. Additionally, the number of minutes consumers spend creating content and consuming consumer created content (a.k.a. “User Generated Content” or “UGC”) only lessen the TCT…which, in turn, negatively affects the advertising revenue of the “professional” content creators and distributors. The primary current solution is to spread advertising budgets across more and more content sources such that even when annual ad budgets increase, they are allocated across a broader spectrum of destinations…for the time being. Less you think I’m against consumer Internet, I’m not. Not even close…
The power of the Internet and all it entails is that it is becoming easier to qualitatively and quantifiably measure the reach and impact of advertising relative to an advertiser’s targeted demographic. Furthermore, advertising is changing to take advantage of such technical capabilities and the sophistication of tech-savvy consumers and is becoming much more interactive. More and more brands are exploring “branded entertainment” and looking to develop certain deep psychological associations with their products and services based on where and how they advertise. While I strongly believe that this will, eventually, lead brands away from UGC to high-quality professionally-produced content for the bulk of their advertising budgets, I’m really curious to get all of your thoughts on this matter. So, what do you think about the “value of free” and where online advertising is headed???
A fellow SoCal VC and friend of mine, Peter Lee, recently joined Baroda Ventures and has just launched his own blog as well. Please visit it here and support him in his efforts.
As you might imagine, I am constantly asked out to raise capital from VCs and what VCs are looking for. In fact, I am asked so often that I wrote a piece about it awhile back titled Hope is Not a Strategy simply to be able to point folks to the post. Well, I recently had an “epiphany for a post” while at D7 this week and spent the short drive home thinking about it some more.
Let me first set the stage. We were at lunch and sitting at a table of 8. To my left was an entrepreneur (to his left was Rupert Murdoch) and to my right was a VC friend of mine. The entrepreneur and Rupert were in a discussion and, at one point, the entrepreneur leans over and asked my friend what he will invest in. My friend’s response: “whatever I happen to be interested in.” The response may seem flippant at first, but let me explain why it isn’t and why more entrepreneurs should pay attention to what VCs are interested in and only target those with an expressed interest in companies in their areas of interest.
One of the frustrations entrepreneurs commonly lament is that it is so hard to get a meeting with a VC. Well, we VCs are extremely busy and very sensitive to the “return on time” factor as to how we allocate the hours of any given day. Here in SoCal, there are so few of us (by comparison to Silicon Valley and New England and despite the population of SoCal), that the matter is further exacerbated. So, what does this mean? It simply means that we allocate our time towards areas of interest. We are all looking for the companies that meet the general criteria I list in the above referenced post so it is even more important to learn what we are interested in…and understand that our areas of interest may (and likely will) change over time based on numerous considerations. As I was thinking about this matter, I called a friend/entrepreneur I know and discussed the matter a bit with him and he quickly suggested that while my thoughts here were solid, I overlooked the fact that it can be very difficult for entrepreneurs to determine which VCs are interested in what and that their websites can provide clues but tend to be deficient to the degree that I’m talking about here. Good point. In fact, I’m hereby declaring to make some changes to this blog to clarify my interests and will also make some changes to our fund’s website in the coming weeks that hopefully helps explain a bit more about what I/we are interested in…so stay tuned.
Hi, my name is Marc… and I’m a recovering attorney. Well, maybe I should say “reformed” instead. Actually, while I like to make jokes at my former profession’s expense, a good number of my friends are attorneys (or ex-attorneys) and I am privileged to work closely enough with some of them on a weekly basis so please don’t misconstrue any animosity here. I thought I’d re-post a popular piece I wrote in early 2007 about choosing legal counsel after being inspired by a recent piece by Jason Mendelson titled: Quick Ways to Get Fired as a Lawyer. I strongly encourage you to read Jason’s piece in addition to my spiel below.
I’ve had the good fortune to work with some really great attorneys over the past fifteen or so years and would like to spend a few minutes explaining just how important they are to the VC ecosystem and, in particular, to entrepreneurs given the number of questions I’ve fielded of late as to whom to go to for legal service in OC. Rather than try to address each situation that I was presented with here, I’ll answer generally like any good (reformed) attorney and simply say it depends…and then provide you some general considerations when choosing an attorney.
First, I strongly believe that having one or more good attorneys in your corner can really help you at the inception of your new business endeavor and you should get them involved early and often (once you’ve decided on who you want) as they can truly help you avoid the frequent initial mistakes at a minimum. Some will tell you that a good attorney can be worth his or her weight in gold, but I prefer to think in terms of diamonds; namely, the right one can shine as brightly under the right light and should also be chosen based on the “4 Cs”. So, what are they? Simply put, they’re Competence, Chemistry, Collaboration, and Cost and I’ll take each in order.
Competence: You should retain the right attorney for the job based on the job at hand and the attorney’s competence in performing such job. This may seem like common sense, but you’d be amazed at how many people simply use their friend, neighbor, [fill in the blank], regardless of his or her specialty, out of convenience rather hire a domain expert. Doing so can be extremely detrimental to an entrepreneur, especially one in a sector where intellectual property truly matters. For the record, I’m not suggesting you don’t confer with your friend, neighbor, etc that is a litigator or maritime lawyer, I’m simply pointing out that (in my humble opinion) you should consult an expert in the subject matter you need help in. For example, you should consult with a corporate finance attorney with experience in representing start-ups in company formation and financings rather than a general practice attorney who dabble in a number of areas of law. Most good attorneys will be more than willing to refer you to an expert in a particular field when the matter is one off their proverbial reservation. Fortunately, there is a number of competent attorneys right here in OC with a vast array of specialties and extensive experience.
Chemistry: Bottom-line, you need to be able to work with your attorney and to trust him or her implicitly given the nature of the business you will likely be conducting with him or her. If you’re constantly at odds with your attorney, it can hinder your progress as a start-up. Spend some time upfront getting to know each other to see if he or she is someone you can work with. A good attorney will be rowing the boat right along side you and become a true team member. Again, it may seem like common sense but I’ve seen the uglier side of this relationship and it’s a very big distraction at a minimum.
Collaboration: This is similar to chemistry. You need to retain an attorney that not only understands your issues, but can dynamically work well with you to resolve the issues and get the work done. It is also a good idea to choose a local attorney as working with someone from afar on the litany of start-up legal issues can be a challenge and, in my opinion, deprives you from getting the most bang for your buck. It’s much better to be able to pop into your attorney’s office and chat, review docs, etc. than to attempt to do so by electronic means. Choosing a local attorney may also come with the fringe benefit of utilizing his or her offices and conference rooms for meetings with your team, investors, and the like (you know, when you don’t have an office yet and/or are trying to keep your burn down like a good entrepreneur). The other thing to consider here is whether your attorney is part of a larger firm that has a diverse set of practices to grow with you as your company grows. Having said that, I’m reminded of a plaque my father (a career pilot) had on his desk that read something like: “It’s hard to soar with eagles when you’re surrounded by a bunch of turkeys...” so I feel compelled to point out that it’s not always a good idea to rely on a single firm for all your matters just because you like and work well with one particular attorney. Make sure you’re getting the expert advice you need and will be presumably paying for rather than deal with a bunch of turkeys just because they share a nest with your legal eagle.
Cost: Before all you big-firm attorneys panic and think that I’m going to suggest that entrepreneurs simply get the cheapest attorney they can to preserve their much needed cash, relax…that isn’t even remotely close to what I have to say here. I use the term “cost” here but I just as easily could have used the phrase “value exchange”…but it wouldn’t have started with a “C” and would have therefore thrown off my analogy. The value exchange I’m talking about here is simply making sure you receive appropriate value for the money you spend on your attorney (which goes to the other 3 Cs). It can actually be, and often is, more expensive to go with a particular attorney just because he or she is cheaper. How? Simple. A good attorney brings more to the table than just basic legal service. He or she has presumably worked with a number of companies you might want to work with but are unaware of, know a variety of capital sources, know a number of potential employees that you’d be interested in hiring, etc. Additionally, a really good attorney will help you avoid some common mistakes with respect to incorporation, patent prosecution, equity/debt financing, etc. that a lesser attorney may inadequately do. Avoiding such initial mistakes can save you money in the long run and ultimately prove to be cheaper for you overall. So go forth you brave entrepreneurs, lawyer-up, and build great companies here in OC.
I thought I’d re-post on due diligence given how much more of it we VCs tend to do during economic downturns. For the uninitiated, due diligence is the process in which a fund decides whether it will make an investment in a particular company and I will include some generic items for consideration later in this post. The earlier the stage of company, the more “art” than “science” there is in analyzing whether to make an investment but most early-stage funds follow the guidelines below to one degree or another. The other aspect of due diligence is often left unsaid, despite the fact it is equally important — the due diligence entrepreneurs SHOULD perform when deciding which fund they would like to work with and whether they want to partner with a particular fund that may have expressed interest in investing in them. It is, after all, a two-way street and both VC and entrepreneur will be essentially “marrying” for the next few years (exceptions/divorces aside).
Deal Due Diligence
Most VCs generally break this down to 1) market; 2) technology; 3) financial; and 4) “operations”. Performing due diligence on a particular market should result in the VC being very familiar (and comfortable) with the size of the market(s) the particular company is targeting with its product(s)/service(s), the direction the market seems to be heading based on historical statistics and the forecast rate of growth (e.g., most funds don’t necessarily like investing in markets that are dying…), the typical sales cycles for the product(s)/serivice(s), and who the players are in a given market (i.e., both the real and potential competition). Technical due diligence depends on what is being offered for sale by the company and whether their success depends on any particular competitive technological advantage (i.e. intellectual property). During technical due diligence, VCs attempt to determine the defensibility of the company’s business, any differentiation, whether the company will have the necessary freedom to operate (i.e., potential patent infringement issues), and any product life-cycle issues. Financial due diligence is essentially two parts: one part is determining how much capital the company will require and whether that fits with the fund’s model and the other part has to do with analyzing the company’s financials (e.g., how much cash they have, their cap table, whether they have any debt, etc.). A part of financial due diligence may also involve determining whether the VC and/or company will be able to pull together a syndicate for larger and/or later rounds of financing. Finally, performing “operational” due diligence involves background checks on the folks involved to determine whether they are the right folks to be able to take the company to the next level based on their past experience and personal characteristics. Operational due diligence also involves making sure the business model is sound, the company doesn’t have any pending or potential legal issues, and the that the general logistics of making the investment make sense. The entire due diligence exercise serves, at a minimum, to identify and mitigate the risks associated with the deal to the extent necessary honor the VC’s fiduciary duties to its LPs. For more information about the types of risks VCs attempt to identify/mitigate, see my Arbiters of Risk post by clicking here.
Fund Due Diligence
A far too often overlooked aspect of the start-up / VC deal consumation is the diligence the start-up should perform on its prospective VCs. You would be amazed at how much “spaghetti” I get wherein folks are simply looking for funding from anyone and everyone regardless of whether their deal would be a good fit given the stage, size, and investment model of my fund. So, before I provide more specifics here, do I have all your entrepreneurs’ and would-be-entrepreneurs’ undivided attention??? I thought so… As sites like The Funded take root, I think you’ll see more transparency in the venture capital industry. In the interim, here is a short list to get you started. I started with a list that one of my attorneys, Craig Dauchy, provided for me and added my own items based on my experience as a VC and someone that has raised “OPM”. So here we go… Here’s a laundry list of questions you should be asking yourself and/or the VC to determine whether the fund in question is a good fit.:
What stage fund is it? Do they invest in your stage of company?
Where is the fund in its life cycle?
What is the time horizon for this investment?
What kind of return does the VC need to make on this investment?
What happens if there is no exit event providing liquidity by that date?
What other companies in your sector has the fund invested in?
Are there any other companies in the fund’s portfolio that would be direct competitors?
What deals has this particular VC done?
On what boards does the VC sit?
Will the VC be willing and able to participate in the next round of financing?
Would the VC be willing to work alongside other VCs with whom the entrepreneur is already in discussions?
Who has the VC syndicated with in the past?
Are there other funds that the VC thinks should be invited into the deal?
How has the VC handled management changes in the past?
Are there any founders in the fund’s portfolio who were pushed aside or pushed out?
Will the VC introduce you to the founders of other companies the VC has invested in?
For more on fund due diligence and general entrepreneurial advice, I recommend you see my VCs Circle of Life post and spend $45 to pick up a copy of Craig’s book, The Entrepreneur’s Guide to Business Law. Of the two, his book is better and maybe you can convince him to autograph it for you — just tell him I suggested it ;-) With that, all you entrepreneurs do your own homework and pick the right partner for the deal at hand and happy venturing.
As for why due diligence seem to take longer these days, there are a number of reasons but they merit their own post so stay tuned…
I thought I’d expand on a post written by Ben Kuo (Venture Capital Booms in the OC) and point out while our county’s start-ups have raised ~$110M in the last week or so, we have also had our recent share of liquidity events. A very big congratulations to Michael Hajeck and his team at SiliconSystems and to their new parent, Western Digital, as it was announced last week that WDC acquired SiliconSystems for $65M cash!!! I also feel compelled to congratulate the guys over at Miramar Venture Partners as they were early investors in SiliconSystems. Looks like a “3-way” win for Orange County to me…
As most of you know, I am a big supporter of almost all things pertaining to the Tech Coast and in helping SoCal grow its venture ecosystem (now #2 in the U.S.)… so today I am excited to announce the launch of:
Tony Karrer has spear-headed this effort and is off to a great start. Southern California Tech Central is a community of people in Southern California who have come together to help find and organize the best content from blogs, news sources and other web sites all around technology in So Cal. The goal is to create a place where it’s easy to find current and highly relevant content. And perhaps to stimulate new connections. This site is being sponsored by the Technology Council of Southern California and TechEmpower. If you are involved in SoCal’s tech scene, you truly owe it to yourself to check it out.
