Wednesday, March 5, 2014

Digital Currency and Bitcoinmania. Is ProfessorVC too Late to the Party?

Perhaps if my intention was to be a 49er and join in the Gold Rush and speculative frenzy...Unfortunately as much as I'd like to make a quick buck as the next guy or gal, I've never been very good at timing the market.

For example, I was on the waiting list for close to a year prior to the first Tesla Model S rolling off the robotic assembly line in Fremont.  When I finally bought the car in January, 2013, a single Bitcoin was worth $15. Had I skipped the car and bought Bitcoin instead, I'd have a nice $3.5M (assuming I didn't park it at Mt. Gox) and could buy 44 Teslas, enough for my entire extended family, a few students, and of course, some loyal readers of my blog.  Of course, I would've missed out on picking up the car after the Tesla factory tour (pic below).   I could've used the cash to buy Tesla stock at $33/share, which would now be worth over $600K.

Congratulations to those early miners and speculators who made a killing on Bitcoin.  For the rest of us, it is early days in the digital payments space and fortunes will be made by those starting, investing, and working at companies building payment infrastructure and applications.

We are excited to announce the launch of CrossCoin Ventures today, a Digital Currency Accelerator investing in entrepreneurs building on and advancing the Ripple ecosystem in collaboration with Ripple Labs.  Ripple Labs also announced it's developer portal and support of the CrossCoin accelerator

For those not familiar with Ripple, it is an open-source, distributed payment protocol. It enables nearly free and instant payments to merchants, consumers and developers with no chargebacks and in any currency -- including dollars, yen, euros, and even Bitcoin. Ripple's goal is to make payments just like communications -- global, distributed, instant and free.  Ripple Labs developed the protocol, promotes it's use, supports developers, and builds applications and SDKs to enhance it's utility worldwide.  If interested in learning more, here is a great primer to get started.

Why are we bullish on digital currency and Ripple specifically?  The banking industry is antiquated, inefficient and not built to support many areas of the information economy, including international commerce, financial services for the underbanked, and microtransactions.  Friction and fees are prevalent and we are beginning to see consumer adoption of alternative currencies with Bitcoin the obvious leader.  We love that Ripple works with Bitcoin, traditional currencies, and any other unit of value from frequent flyer miles to loyalty cards and in the future will support smart contracts for the exchange of specific assets. 

Some people make the analogy of digital currencies being at the same stage the Internet was at in 1994.  Huge new Internet businesses were created at that time and one of my partners in CrossCoin, Gary Kremen, invented online dating with the founding of  Clearly, we are not alone in this belief as many astute investors including Marc Andreessen, Jeremy Liew, Chris Dixon and Fred Wilson are backing companies in this space. 

If you are an entrepreneur or developer interested in leveraging the ripple ecosystem and looking for capital along with help in launching and building your business, we'd love to hear from you.  Some of the areas we are interested in involve remittance, wallets, analytics, along with other enterprise and consumer applications.  We are open to all ideas. You can find more information and contact us at CrossCoin Ventures.

Friday, October 18, 2013

What's wrong with Academia...

...partly, it might be a guy named Ivgot Tenure (not his real name).  I recently got in a flame war with a colleague in the marketing department that started with one of those emails Deans like to send out recognizing a faculty member who was awarded with an Endowed Professorship.

Ivgot Tenure responded to the dean, entire faculty, and the recipient of the appointment with a screed on another perk for administrators and nothing for peasants (his words) like him.  I generally let these things go, but since this was far from the first one of his rants, I decided to call him on it (see embed on exchange below for the gory details if you wish...)

One important thing to note about the endowed position is that it was funded by a donor interested in the work being done by that professor or the position at the University.  The budget situation for the California high ed system is in bad shape and unlikely to get materially better in the forseeable future. The mission of the CSU is to provide high-quality, affordable higher education.  I won't debate the overall quality here, but the affordable piece is clearly challenged.  State support has gone from close to 100% 15-20 years ago to close to 50% at undergraduate level and much less at graduate level today. My grad school alma mater (Anderson School at UCLA) was getting so little state funding, it said "to hell with it" and declared self sufficiency.

My experiential classes (ELAB and VLAB) require external funding as hard to justify small class sizes.  Luckily, we have donors interested in supporting the work we are doing in entrepreneurship at SJSU.   

Back to my buddy Ivgot Tenure.  Unlike a commercial enterprise, he does not need to produce results.  His job is safe due to our tenure system.  I am a firm believer in the tenure system as it relates to academic freedom.  However, a non-productive byproduct is that it provides a shield that protects faculty members who are not good educators nor producing valuable research.  It is also interesting that Ivgot refers to himself as a peasant when it is actually the non-tenured junior faculty and adjuncts who could make that claim.

At the end of our tete-a-tete, I did what I should've done at the beginning.  I blacklisted Ivgot so I don't have to see any more of his whining.  I'll just focus on teaching and providing my students opportunties to work in the new venture ecosystem and build their own startups.  Hopefully, many will be successful and able to fill some of the growing funding gap in the future.

Thursday, July 25, 2013

Pari Passu or F.U...little guy

Mike Markkula presenting Steve Jobs with first investment in Apple

I recently watched an excellent documentary on PBS, Something Ventured: Risk, Reward, and the Original Venture Capitalists.  It is the story of the founding of the venture capital industry in Silicon Valley and features many of the iconic companies created including Apple, Intel, Genentech and Cisco.  VCs profiled include Arthur Rock, Tom Perkins, Don Valentine, Dick Kramlich, Reid Dennis, Bill Draper and Pitch Johnson (fathers of the industry).  Yup, no women, unfortunately, and industry is still male dominated over 40 years later.

The documentary is well worth watching.  It is both entertaining and a stark contrast to today's venture climate, that is dominated by sharp elbows and the focus on personal gain and self promotion (or the more acceptable term of creating a "personal brand").

Perhaps, I'm becoming an old curmudgeon, but I like the focus on working together to create something really big. This is the feeling you get from watching the venture capitalists talk about the entrepreneurs and other investors in the film.

Pari Passu is a term that was used quite frequently in the early days of the venture industry and even when I got my feet wet in the late '80s and early '90s.  It is a Latin phrase that means "on equal footing" and has been translated to mean "ranking equally", "hand in hand", and "fairly" according to Wikipedia.  In investment parlance, it strictly means that new classes of stock have equal rights with prior classes in terms of liquidation preference, voting rights, etc.

However, I view pari passu as a more intrinsic definition that goes beyond simple legal definitions. I'm a strong believer in fairness (although my daughters may not agree) and investors and entrepreneurs working together as a team to create something valuable to all stakeholders (customers, employees, founders, investors).  Startup outcomes tend to be very binary. The company either fails and provides little or no return to investors or is a success and returns a multiple to investors.  Yes, there are a number of cases in the middle where having a senior or participating preference does make a difference in liquidation proceeds, but I argue that it does very little to overall returns in a diversified portfolio.

I've witnessed a lot of bad behavior by investors recently, along with other examples of greed that stray far from pari passu.  I'm all for transparency, but won't be naming names in this post as I don't want to put some entrepreneurs in a difficult position.  However, I'm sure some of ProfessorVC's readers will recognize themselves or others in these examples.  It's also interesting how a lot of this resembles toddler behavior on the playground from "show me a little more love" to "mine mine mine" and of course, the classic playground bully.

One area I've noticed a lot more recently are angel investors and seed stage funds trying to grab a little bit extra, whether it's warrants for leading the round, advisor shares to go along with the investment, or a common stock stake for just being who they are.  Entrepreneurs are put in a difficult position as they are trying to get a round closed, benefit from having certain investors committed, but at the same time can't feel very comfortable having to tell prospective investors they aren't getting the same deal.  I always ask the question if other investors have different terms and almost always don't invest on principal in these cases.

Another closely related area is that of variable pricing on convertible debt or equity deals where different investors have different caps.  Generally (but not always) it is investors that came on board a little earlier.  As regular readers of this blog know, I'm not a fan of convertible deals to begin with, and it is difficult for me to internalize how value in the company has been created in the two weeks a cap goes from $3 million to $5 million.  I have turned down several of these types of transactions recently.

Seems like my rant is picking up steam now.  I was working closely with an entrepreneur and introduced another angel investor to the company.  We considered a joint investment in the company and the entrepreneur decided not to take funding at the time.  A year or so later, the entrepreneur did raise a round from a seed stage fund that wanted to have most of the round, but the guy I introduced was able to invest, while I got left on the outside.  Company has now raised over $70 million and is growing rapidly.  Yes, the entrepreneur could've worked to get me in the round, but not the easiest position when you are a young CEO raising your first round.  The other investor could've certainly lobbied to get me an allocation.

Another area where I'm not sure I stand is with some of the more formal referral and syndication programs that are emerging now.  Funders Club (which I've written about previously)  recently launched a referral program where angels can receive 10% of the carried interest in a deal they refer that ultimately gets investment from an FC fund.  Since this only impacts the investors participating in the deal through FC, I don't have a big problem with this, although not something I would participate in.  Not sure how much value in just a referral, but also going back to pari passu, I'm just as likely to refer the next opportunity and am happy investing at the same terms on one I refer as one that you refer.

AngelList (which I remain a big fan) also recently launched a syndicate program.  In this program, an angel can ask the entrepreneur for an allocation of the round and then syndicate through AngelList.  It is assumed that the angel has done diligence and will be working with the company going forward to earn a carried interest from others investing in the syndicate.  Effectively, the angel is acting as a VC and works in a similar manner to a pledge fund, where a firm's LPs commit on a deal by deal basis.  I could see potentially getting involved in this type of transaction, but am curious if the investor is committing to the full allocation whether she can syndicate or not.  If it is contingent, then this could provide some perverse incentives.

Finally, I have to bring up some bad behavior by a name Sand Hill Road firm (SH).  An entrepreneur received two Series A term sheets, one lead by an international investor and the other from SH.  The seed round had participation from two venture firms that were committed to doing their pro-rata and seed round was done with a very clean term sheet (1x preference, non participating, no anti-dilution).  SH wanted a senior preference over the seed investors (full disclosure: I'm one) and we tried to push back that precedent was being set for Series B and whoever comes after them, to demand the same, which will negate the value of their seniority at A.  Unfortunately, not everyone follows the KISS principle.  Their response was that we should be happy they didn't ask for a participating preference on top of the seniority.  Lucky us!!

We went ahead and accepted the term sheet, partially due to the fact that they knew the company well from 3 months of diligence, had expertise in the domain, and promised a quick close in 3 weeks from term sheet signing.  Well, those 3 weeks came and went, and they decided they weren't sure about the market and needed to get other partners in the firm on board.  That is VC speak, for get ready to bend over...After several meetings with different partners, principals, venture partners and associates, they scheduled a partner meeting for one month after the original close date to decide if they wanted to move ahead.  They did get the partners on board on the condition that the term sheet is renegotiated at a lower valuation.  Don't know why I'm thinking of Kevin Bacon from Animal House all of a sudden. "Thank you sir, may I have another!"

Just in case you are forgetting at this point, I'm not a pollyanna. It's also not a Rodney King "Can't we all just get along" thing.  I'm a capitalist, a CFO and investor.  I know it's all about capital and using wealth to create more wealth.  However, Wall Street was never an appealing destination for me (unlike the majority of my Wharton classmates) and as much as I snickered, I liked it when VCs started referring to their investments as projects rather than deals. The venture industry has clearly changed and grown since the early days profiled in Something Ventured, but it would be good not to forget all of the lessons shared in the documentary.

Tuesday, May 7, 2013

RIP Blackberry...I finally quit you

Over the past 15 years, I've probably been one of the most loyal blackberry users on this side of the Canadian border.  The running joke when I'd pull out my blackberry among a sea of iphones was that I was Jake Gyllenhall's character in Brokeback Mountain and my beloved blackberry was Heath Ledger.  "Blackberry, you sonofawhoreson bitch! I wish I knew how to quit you."  Well, I finally did it two weeks ago and entered the Android camp with a Samsung Galaxy S4.  I'm still getting used to the device and sorely miss the blackberry keyboard, but not much else. 

My Original Mobile Email Device

My love affair with RIM started with my first blackberry I purchased in 1998 - the fat pager pictured above. This was years before "crackberry" entered the lexicon and became a must-have for every ibanker and lawyer in a Brooks Brothers suit in New York along with the jeans clad techies and VC's in Silicon Valley.  At the time, it's only purpose was email and the occasional lighter substitution at a rock concert to beg for another encore. It wasn't the first time I had email on the go (see picture on the right), but was a much slicker solution than the combination of Ricochet wireless model and Palm Pilot (now there's a story to tell the grandkids - reminds me a bit of those annoying AT&T Uverse commercials).  I even had an unoffical antique museum or perhaps mausoleum to my beloved blackberries buried in
Blackberry Mausoleum
my desk drawer containing many retired devices.

I hung on to my Bold waiting for the very late arriving OS 10.  As the launch of the Z10 got delayed again, I finally began to consider the switch.  However, even up until a few weeks ago, I was considering hanging on for the Q10 to experience the slick new operating system and still have the trusty blackberry keyboard. 

When the Z10 finally showed up in March, I paid close attention to the reviews and analyst reports.  I was even amused by the tête-à-tête between the Blackberry CEO and Analyst over reports that the Z10 was experiencing very high return rate.  I stopped in the local AT&T store to get my hands on the new device.  When the salesman approached me, I asked him about the phone and if they were selling a lot of them.  He gave me a look, scratched his head, and responded with "nope".  If you ever want to know how products are doing in the marketplace, often better off visiting the point of sale than reading a bunch of analyst reports.  With a dwindling market base, nobody is going to develp on the platform, which is a death knell for anyone in the smartphone business.  That was the final straw! I decided it was time for a divorce.

So where did Blackberry go wrong?  Where didn't they??? In addition to a number of product failures (Storm, Torch, Playbook) and a really crappy web browser, the biggest issue was probably the hubris of the founders.  Rather than anticipating or even coming up with a competitive response to the iPhone, the Co-CEO Jim Balsillie spent several years trying to buy an NHL team.  The other co-CEO  Mike Lazridis was famously quoted as saying that nobody would want "the equivalent of a personal computer on a phone".  I (and many others) believe the company could've been saved if it had adopted android several years ago.  In August 2010, Dan Frommer wrote an article declaring that RIM must switch to Android before it is too late.  At the time, RIM still had the leading share of the smartphone OS market at 18%, with Android (17%) and iOS (14%) close behind.  Shift to 3 years later and it's game over.  Android has 52%, iOS 39% with Blackberry (5%) and Windows (3%) with also ran status.  Once Windows passes Blackberry, it may be time for hari-kiri.

So what am I going to do with that desk drawer full of blackberries?  Not sure what I'll do with most of them, but I did put my most recent Bold up for auction on eBay and surprisingly someone paid $194 for it, only $5 less than I paid for my new Samsung S4.  Guess there are blackberry fans still out there, but can't imagine there will be for much longer.

Monday, March 11, 2013

Was Launch the right platform to Launch?

While the rest of Silicon Valley is slamming drinks at SXSW in Austin and trying out the mobile app Bang with Friends, I'm sitting in my office thinking about last week's Launch Festival.  Seriously, Bang with Friends?? We decided to launch SocialParent at the conference (full disclosure: I'm an adviser, part-time CFO and investor). 

SocialParent is a social network for those who have moved beyond the Bang with Friends stage, have settled down, had a family and are looking for a social network that mirrors their real life social network.

 My proposed tagline for the company was "Powering the Modern Family" (with pic below), but the CEO (Reza Raji) shot that one down and reminded me that I was the CFO and not in charge of marketing.  I do love the tv show, but if they all used SocialParent, they wouldn't get involved with nearly as many predicaments as they would be on top of their schedules and where the rest of the family was at any given time.

(For more info download the app or listen to SocialParent CEO explain the service on PandoDaily below).

The founding duo of SocialParent (Reza Raji and Gerry Gutt) were also co-founders of iControl Networks, where I was also an investor and part-time CFO.  We used the DEMO conference in 2005 as the launch vehicle for iControl and got me thinking about how the seed funding landscape has changed in the past eight years.

In 2005, incubators were thought of as either bubble era disasters or university science projects.  The term accelerator wasn't in the vernacular and YCombinator had yet to set their first class free.  First Round Capital (one of the early entrants in the post bubble seed/micro VC funding category) was just getting going and it's primary focus was investing in companies coming out of DEMO.  The term "super angel" had yet been coined, and Naval and Nivi were several years away from sending out the first interesting deals email which ultimately became AngelList.  Demo days were weeks spent hiking up and down Sand Hill Road not a single afternoon when you can pitch to 150 angel investors and VC's. 

When we launched iControl at DEMO in 2005, the conference was not the only show in town, but was definitely a big deal.  Investors and press would flock to the desert to see future hot startups unwrap their products and mature tech companies show off their latest and greatest.  It was expensive ($20K+) but no better way to get major mainstream and tech press coverage, not to mention interest from venture capitalists.  6 minutes on stage were truly a CEO's 15 minutes of fame. There was a ton of energy, great networking and the jam sessions were epic!

The next time I went to DEMO was 2010 and it had moved from a nice resort in Scottsdale, to a Hyatt Hotel in Santa Clara, right in the middle of Silicon Valley.  The energy level was much lower, the startups less interesting, and the jam session gone...I've found through the years that conferences are much better when attendees aren't stopping by between the office and meetings.  I wrote a post forecasting the demise of the conference, Are DEMO's days numbered?  I'm surprised it is still around in 2013, but am sure the selectivity criteria has changed to whoever is willing to pay.

The Launch Festival was Jason Calacanis' response to the pay-to-play of DEMO and other similar conferences.  Launch is a bit of an entrepreneurial orgy (not in a Bang with Friends kind of way).  It is held at the San Francisco Design Center (125,000 sf), had over 5,000 attendees, a massive Hackathon up in the loft, demo pit with over 150 companies, and a cavernous hall where the entrepreneurs took to the stage and Jason held fireside chats with a number of interesting entrepreneurs and investors.  I had the opportunity to judge the Hackathon and was blown away by what the teams were able to build over a weekend.  The winning team (WizzyWig) flew in from Pittsburgh and walked away with over $100K in cash prizes!

While the investors and press made up a relatively small number of the attendees, the overall vibe of the conference was great.  One new addition to the conference was a crowdfunding simulation in partnership with MicroVentures.  I imagine the original intent was to make this real, but with the SEC dragging their feet, this provision of the JOBs Act is far from final.  The simulation was interesting, and was glad to see SocialParent finish on top of the leaderboard.

Hopefully, we can turn that fake investment to real financing.  You can watch the real investment meter go up on AngelList

Back to my original question on whether the Launch Festival is the right platform to launch your start-up.  It obviously depends on a number of factors, one of which is timing.  At a conference held once a year, this is clearly important.  For SocialParent, timing was good.  Also, as experienced entrepreneurs, an accelerator program wasn't that appealing.  For many entrepreneurs, you'll get more investor traction and press coverage out of a YCombinator, 500 Startups or AngelPad demo day.

However, I definitely look forward to Launch 2014.  I hear Jason is looking for a bigger venue.  I wouldn't doubt him and perhaps he can even give those folks in Washington a nudge to make the crowdfunding real next year.

Monday, February 11, 2013

Immigration Reform: Now or Never?

ProfessorVC celebrated his 50th birthday this past week in his hometown of Washington, DC, with visits to the Capitol Hill and the White House to meet with legislators and White House officials on immigration reform.  It was a very timely visit and hopefully our group along with many others descending on Capitol Hill over the coming weeks will help spur action.

Our delegation was led by Carl Guardino (CEO of Silicon Valley Leadership Group) and Greg Becker (CEO of Silicon Valley Bank) and included a number of young Silicon Valley CEO's, VC's, and university representatives.  I fell in to all three camps representing San Jose State University, Startups (through my CFO/board roles) and Investors (with my angel investor hat on).  We met with a wide range of legislators from both sides of the aisle, including Senators Orrin Hatch (R-UT) and Dianne Feinstein (D-CA), and Representatives Luis Gutierrez (D-IL), Mario Diaz-Balart (R-FL), Raul Labrador (R-ID), Bob Goodlatte (R-VA), David Schweikert (R-AZ), Lamar Smith (R-TX) and Jeff Flake (R-AZ).  We also had breakfast with our local house delegation of Zoe Lofgren, Anna Eshoo, Mike Honda, Jackie Speier and Eric Swalwell (the junior member who happens to be tall and decided to stand in front of me in the picture below.) At the White House, we met with Cecilia Munoz (Director, Domestic Policy Counsel), Ari Matusiak (Executive Director Office of Business Liaison), Doug Rand (Policy Advisor Science and Technology), and Nick Sinai (advisor to US CTO).

For somebody who grew up in DC and has high school classmates in both the Senate and House, but have been geographically removed for the past 25 years, it was very interesting to get a glimpse of the political machine, but it also confirms the reasons I've spent the past 25 years in Silicon Valley.

We had the opportunity to meet with people behind the four major proposals that have (or will) be put on the table since the end of January: Senate (Gang of Eight), Senate (I-Squared), House, and White House.  We were specifically advocating to fix the broken H1-B and Green Card programs and to provide visas and green cards to startup entrepreneurs and STEM degree holders.

Along with my academic colleagues on the trip from Stanford, Berkeley, and UC Santa Cruz, I've had many exceptional students take advantage of our higher education system and then be forced to return home after graduation to work at and build companies.  One of my recent students went through the 500 Startups Accelerator, raised $1M in funding and is now in process of building the next Instagram in Bangalore, at least according to the Business Standard, India's leading business daily.

The backlog of those waiting for employment and family visas is huge (estimates at 4.5 million and wait times as long as 24 years), not to mention those playing the visa lottery and dealing with per country caps.  120,000 tech jobs are available every year, yet we can only fill 40,000 of these.  Over half of the graduate students in STEM related fields are from outside the U.S.  We are providing them skills and sending a majority back home.  In addition, we have many college students and graduates who came to the US as children, have been educated here, consider the US their home, yet can't legally work.  According to the Center for American Progress, an estimated 2.1 million youth (out of approximately 12 million total undocumented population) could be given a pathway to citizenship with the DREAM Act.  This could add $329 billion to the US economy and create 1.4 million new jobs by 2030.  Comprehensive reform would address both the high tech skilled worker issues as well as DREAM Act and agricultural workers.

A few takeaways from the trip:

  • Go Big or Go Home (similar to the venture capital model).  Baby steps aren't going to happen.  If it doesn't, many of these legislators will be sent back after 2014 mid-term elections and could also be a stain on Obama's legacy.  It seems clear that the people spoke last November (Mitt, you could've played this one better), but that doesn't necessarily move the political football down the field. While Orrin Hatch seems to believe a narrow solution (I-Squared) can be a starting point with additional reforms added afterward, most of the democrats we met with and the White House officials believe nothing short of comprehensive will pass.  We pushed Hatch to at a minimum add the Startup Visa to his proposal, but he was concerned with the challenge of adding a new visa category. He believes that the O-1 Extraordinary ability visa covers this, but that feels like a kluge to me. 
  • The government is trying to get more entrepreneurial.  The US CTO is looking for "bad ass entrepreneurs" (White House term) for the next group of Innovation Fellows.  These 6-12 month paid stints are a great opportunity to get involved if you are between start-ups or can get a leave from your tech employer.  We also met with the SBA, which seems to be trying to make working with the government much more startup and investor friendly, although for some reason it was easier to enter the West Wing of the White House than the SBA.  One of the guys we met with (Andrew Lee) is an EIR at the SBA and came from Zynga who bought his start-up, Jam Legend.
  • Blackberry is alive and well in DC.  Haven't seen so many blackberries since before the launch of the iPhone.  And many of these look like they date from early in Obama's first term.
  • Pictures aren't allowed in the West Wing (go figure) so was forced to take this picture of me and the Jarrett Fishpaw (the 25-year old mayor of Los Altos) outside the White House gates.  Yes, it was not only my 50th birthday that made me feel old.

What can you do? Write your legislators! Visit Washington! Apply to be a Presidential Fellow! Just get involved! As one of my mentors advised me years ago, if you don't get involved in the solution, you can't complain about the problem.  Good advice I'll take in to my next 50 years...

Wednesday, December 26, 2012

Series A Crunch...just Darwin at work

As December and 2012 draws to a close, I've decided to weigh in with my thoughts on the impending (or not depending on which blogs you read) Series A Crunch.  It seems that The Series A Crunch has been discussed almost as much as the Mayan calendar this month and I've mostly sat on the sidelines figuring that if the world were really going to end, I had better things to do than write a blog post.  Alas, we survived 12/21 and looks like we will have to get back to work in 2013.

For those readers not already familiar with this concept, it refers to the bottleneck for Series A financing created by the increasing number of seed financings and constant number of Series A financings.  While this has been discussed ad nauseum on twitter and the blogosphere, I have relevant perspective given my three different roles in the new venture ecosystem - investing in seed deals as an angel, raising seed investment as a start-up CFO and teaching entrepreneurial finance as a Professor. 

I'll summarize some of the varied opinions and data before weighing in with my own thoughts. A good place to start for data is CBInsights' Seed Investing Report- Startup Orphans and the Series A Crunch.  According to their research, 2,283 companies received seed funding over a 5-quarter period beginning Q3 2011.  Out of these companies, 102 have received follow-on funding and 212 have been acquired (or more likely acqui-hired).  Out of the remaining 2,200, they estimate that 1,200 will not be able to raise follow-on financing (see visual explanation below) and $1 billion in angel investment will likely evaporate.

Is this a high success rate?  Is this a low success rate?  Is this Armageddon?  Depends on who you read.  Sarah Lacy started this round of debate a few weeks ago with The Series A Crunch is hitting now.  Jason Calacanis responded and argues in There is No Series A Crunch that this is a non-issue and up to the seed financed start-ups to prove they are worthy.  If there are more companies that have met Series A milestones and metrics, VCs will increase the number of Series A financings.  If you are entrepreneur that isn't in a position for Series A, find other financing sources and/or figure out how to bootstrap to cash flow breakeven or in Jason's words "put on your big boy undies". Sarah, of course, responded with Jason is Wrong. Have we reached the "Jane, you ignorant slut" point?

For those who haven't already left this post to catch the latest YouTube cat video, let me see if I can bring these divergent opinions together.  I did finally chime in on the twitter discussion yesterday:

I first blogged about this topic almost two years ago when I called out the large number of convertible debt seed financings that weren't going to have any conversion event.  It turns out the financing instrument probably isn't as material as I had thought, although it doesn make the mechanics different.  From an investor standpoint, I've discovered there actually can be greater leverage with convertible debt if the appropriate protections have been included.  I've had a couple of deals where investors were paid out a multiple on exit and in a better position than if holding preferred stock, where the payout would have been subject to escrow and over multiple years.

Is it a good thing that so many entrepreneurs are able to get $250K - $1.5M in seed financing? HELL YES!!! Investors know (or damn well should) the risk they are taking in making seed investments.  The accelerators clearly know the game and the ground rules.  If as CBInsights posits, $1B is going to be lost by angels in seed financings, one Instagram makes most of that back and presumably there will be positive returns on a material percentage of the remaining companies.

Giving more entrepreneurs the ability to step up to the plate is a good thing.  I love the accelerators and am a regular on Demo Days for 500 Startups, YC, AngelPad and others.  However, many of the graduates of the accelerators aren't even companies, let alone businesses.  They are projects and experiments.  These are part of the entrepreneurs' education.  Learn how to build a product, pitch investors, raise a small amount of angel funding, hire the early team, acquire users, sell, iterate.  If it works, great.  If not, move on and join another team or come up with another idea with the same or different co-founders.  With my academic hat on, this is wonderful.  I specialize in experiential education and there is no better way to learn entrepreneurship than doing it.

My recommendation used to be that it was best to do this learning on someone else's dime and would advise students to spend a few years working in a start-up or potentially large tech company before doing own start-up.  However, they now can still do this on someone else's dime, but it is the angel investor and not an employer.  As an angel, do I take this kind of gamble?  Sometimes, if I feel the opportunity is big and the team is fully committed.  But generally, I'm also looking for those proof points that go beyond what most entrepreneurs coming out of an accelerator have.  Domain expertise is critical and many of these entrepreneurs don't have enough.

So, what are the key takeaways for entrepreneurs besides pulling up their big boy (or girl) undies:

  1. Keep your options open.  Don't raise seed financing with only one path to raise Series A.  I'm not a fan of "Go Big or Go Home".  That works great for big venture funds with a broad portfolio, but not so good for an entrepreneur committed to a market opportunity.  Have a plan for Series A, but also have a plan for slower growth, intermediate funding, and a route to cash flow breakeven.
  2. Seek appropriate financing.  Most businesses don't fit the venture model and if that is your only path, the most likely outcome is hitting the wall.  I always hate when folks disparage an entrepreneur who is building a "lifestyle business".  If you can build a business that provides a good income, doing something you love, living where you want, and pursuing passions outside of the business, more power to you.  I'm guessing that's how Richard Branson started and he seems to have a nice lifestyle.
  3. Nothing wrong with a cash flow business.  Follow around a middle market private equity investor for a few months and you will likely discover some businesses that have great cash flow potential. Unless yoru only end game is being acquired (and if so read point 1 above again), the experiments need to yield a business model that can create a sustainable business that isn't dependent on continued funding to remain off life support.

That advice should work in good times, bad times and all those in between.