The Most Important Venture Capital Statistic

A couple of headlines caught my eye in this morning's VentureWire:

• Deals Slow As VC Feels Economic Chill
• Web Video Platform Fliqz Gains $6M In Series C Funding

The funding news and general condition of the economy has been no secret and certainly wasn't a surprise that venture funding in the fourth quarter was the lowest level in four years and most expect the decline to continue at least through the end of 2009. The latest statistics from VentureSource show 554 financings in Q4, down from 620 in Q3 and 718 in Q4 2007. Total amount raised fell from $7.5 billion to $5.5 billion quarter over quarter. First round median investment size fell to $3.8 million and $4.2 million for the year, which is the first time it has been below $5 million since 2001, a sign that capital efficiency will be even more important than it has.

Of course, the most important funding statistic to an entrepreneur relates to one specific company, and whether there is sufficient capital available to build and scale his business. On that front, I take pride in the second headline with news that Fliqz, where I am CFO, just closed on $6 million in Series C financing. From first hand experience, we certainly felt the market conditions and the funding process was much more difficult than anticipated.

I'll share a few points about how we were successful, but most of the credit goes to Benjamin Wayne, founder and CEO of Fliqz, a passionate, strategic and tactical executive. The funding search began the day after Labor Day and continued throughout the fall as the environment continued to worsen, and resulted in a term sheet the day before Thanksgiving.

Here are a few takeaways from the process:

• Extend Runway - As we planned out our investment process last spring, we realized that there were still a number of areas we needed more proof points and the optimal time to raise capital might not be for another 2-3 quarters. We decided to raise some venture debt as an insurance policy and extend our cash runway. We drew $1.5 million from Lighthouse Capital Partners, which ultimately became critical to our balance sheet and they turned out to be a great partner as we worked through the equity financing process.
  

• Evaluate Business and Financing Needs - We initially went out seeking $10 million in financing, but listened to the prospective investors and watched the market. Mid-way through the process, we took another cut at our business plan and built a model where $5 million would be sufficient to get us beyond breakeven. This brought in a new set of prospective investors and required a lower investment from the lead investor as our existing investors were committed and on board.
  

• Don't miss Plan - This may seem obvious, but I've seen a number of CEO's shot for missing the first quarter's numbers after going public, which is a great way to shrink your market cap well before the lock-up period is up. Same principle here. Prospective investors have a free look to see how you execute under the gun. At Fliqz, we met or exceeded the sales plan every month during the due diligence process.
  

• Look beyond the usual suspects - With Mohr Davidow Ventures, one of the premier Sand Hill Road firms already in the company, it would have been easy to focus on a short list of other top tier firms with long track records in the valley. However, as we soon discovered, many of these firms were forced to hoard capital for existing portfolio companies and focus most of their time and energy on deciding which ones deserved these reserves. Some were also dealing with issues of limited partners struggles with capital calls and asset allocations. With that in mind, new funds are a great place to focus. Without all of the legacy issues, they have the capital and time to seek, evaluate and actively work on new opportunities. Our lead investor, Triangle Peak Partners closed on a $170 million first fund in late 2008.

Of course, timing and luck are still a big part of a successful capital campaign, particularly with these market conditions. Many companies that have raised capital are going to need to spend it wisely to win and others will be forced to bootstrap.

Speaking of bootstrapping, this is always a subject near and dear to my heart and I'll be moderating a panel on the topic on March 9th as part of our eminent speaker series at the Silicon Valley Center for Entrepreneurship. More on that in a future post.

CFO's - More Guardian, Less Angel?

Just received this month's issue of CFO Magazine (yes, I know, it should be a very exciting weekend) and found an article I was interviewed for a couple of months ago. The article, "More Guardian, Less Angel" discusses how CFO's add value to angel groups by helping to kill deals. I spent most of the time with the reporter talking about Sand Hill Angels and how we add value to the start-ups and entrepreneurs that we partner with, which is why I just have a small mention in the article.

It is certainly true that we can pick apart the financial projections or pour through contracts, legal and financial diligence, but none of those areas tend to be the most important areas in deciding whether to make an early stage investment. No company's future ever matches their projections and it is the assumptions and how the entrepreneur understands the market and sees the opportunity evolving that we care about.

As I am quoted in the article, it is easy to pick holes in a business plan. It is certainly good to take an analytical approach to any investment opportunity and many venture capital firms and angel groups do an excellent job of diligence. However, at the end of the day, your gut can tell you a lot more about whether to make an investment or not. How passionate are the entrepreneurs about their business? Can they recruit and get others excited? Do I believe they can succeed? Does the business model pass the smell test?

While no real data exists on returns in angel groups vs. individual angels, I often wonder which is the better way to invest. I enjoy my colleagues at Sand Hill Angels and like investing as a group as it enables us to lead investments, take board seats and have more influence. The downside is the groupthink mentality, which can work in both directions, killing deals and also creating a bandwagon effect. In a lot of our deals, there is often a tipping point where the deal will either move forward or die.

Even though I am an active member of an angel group, I often advise entrepreneurs that they may be better off raising money from individual angels rather than groups. A lot is based on how much money they are raising, terms being sought, entrepreneur's experience, stage and total funding required for the business. I'm going to do some more thinking on this topic and write another post sometime in the near future.

Baby's All Grown Up

It's been a while since my last post and it appears I missed the entire month of March. Not to worry, I was busy working on closing the Series B financing for iControl Networks. We ended up raising $15.5M, led by John Doerr of Kleiner Perkins.

This got me thinking about my role in helping companies grow up. I started working with the founders of iControl at the concept stage, prior to the first $100K of angel financing. For a while, it seemed like we were constantly walking along the edge of a cliff and had several near death experiences. In fact, for a good laugh, I just went back and checked our accounting system, and at the end of one quarter in 2005, we were down to $143 cash on the balance sheet. The CEO and I ended up funding the company ourselves until we were able to scrape together a larger angel round.

Now, the company is poised to change the home security industry, one that is in dire need of change. However, my role changes and I am moving from CFO and member of the executive team to cheerleader and advisor. It is not unlike watching your children grow up. With two teenage daughters, I am becoming quite familiar with the changes as your babies become toddlers, pre-schoolers, enter kindergarten, middle and high school. My oldest won't be off to college for a few years, but will probably happen in a blink of an eye.

At times, I do miss being part of a team that takes a company from infancy all the way to IPO and beyond. I have been tempted at various times to join one of my companies as full time CFO, but have decided that is not in the best interest of either party (me or the company). As the company grows, it is more important to have a CFO that is both strategic and skilled in process, rather than a "seat of the pants" entrepreneurial CFO. I personally enjoy the earliest stages and building a portfolio of start-ups and entrepreneurial teams.

The cheerleader role isn't all bad. Anonymizer, a company where I was an early investor, advisor and board member, just got acquired by Abraxas Corporation for a very nice multiple. Rather than home security, these guys are helping with our nation's security. Anonymizer raised a small amount of equity and was able to build a business that became very profitable. It took almost a decade from the initial investment, but in the end, worked out well for all involved. Come to think of it, this will help pay for those college tuition bills that will be coming....