Are DEMO's days numbered?

Has DEMO lost it's luster and relevance in 2010? I spent the past couple of days at the conference and certainly felt like it. There wasn't a lot of buzz in the air. This was the 20th Anniversary and possibly the last.

DEMO has always been one of my favorite tech conferences. All product, all the time. You can always check out the current and prior product demos at the DEMO site. The conference has launched a number of great companies including Tivo, WebEx and Palm, and historically draws top press and investor attendees. Also puts a ton of pressure on the CEO's to have a well rehearsed 6 minute pitch and hope that they don't end up in Demo Hell. One poor guy completely blanked on what his company did and after stammering for 20 seconds, pleaded with the crowd to come to his booth and find out what they do.

With all of the new ways to see early companies such as TechCrunch and YCombinator, I had a feeling that much of the luster was gone and debated whether it was worth the time to attend.The last time I went to DEMO was in 2005 for the launch of one of my companies, iControl Networks. It was the 15th anniversary and they made a big deal branding the event as Demo@15. This year, there was no swag to be had, although did bring home a couple of vuvuzelas from the nice guys at Loud3R. No conference bag, fleece jacket or even a t-shirt and the only mention of the 20th anniversary was a small sign off to the side by the entrance. The conference has also become a hand me down, passed from Stewart Alsop to Chris Shipley and now to Matt Marshall. This year, for the first time, the conference was in Santa Clara (rather than the normal dessert resort location), close to home, so decided to attend.

My fears were met on Day 1 with many presentations being unpolished, several me-too ideas and a general malaise. To be fair, the Day 1 categories were primarily infrastructure companies (Enterprise, Cloud and Mobile). Day 2 featured the consumer and social media, which were more interesting for me and much of the audience.

Everyone tries to have a memorable demo, often with a musical number, quasi celebrity or skit. Didn't see YCombinator fans Ashton Kutcher and Demi Moore in the crowd, but one of the presenting companies, Integrate, a customer interaction platform in the enterprise category had co-founder Jeremy Bloom give the pitch (picture on left) Bloom is a former NFL football player, Olympic and World's #1 freestyle skier and star at the University of Colorado. I guess if you've run a pattern across the middle with Ray Lewis waiting to knock your head off, a 6 minute pitch in front of a bunch of geeks is a piece of cake. Didn't get the chance to ask him if managed to visit Berkeley while he was in town and see the 52-7 whupping that the Buff's took at the hands of Cal. Go Bears!!

Day 2 was much more interesting. Jeffrey Mullen of Card 2.0 was the opening act and ended up grabbing the $1M People's Choice award along with one of the five DemoGod awards. You can watch all of the presentations at the DEMO site and can see if you agree with my favorites:

Card 2.0 - A very cool credit card with a programmable magnetic stripe that requires a password entry on the card to show the full card number (for card not present transactions) and enable the card to be swiped at retail locations.

Bump - These guys got my vote for the People's Choice. Bump.com is a social network based on license plate numbers as the identifier. Imagine the satisfaction of sending a nastygram to the guy who just stole your parking space or texting that hottie you saw for a second at the traffic light. Ok, does enable a whole new way to stalk and lots of privacy issues. I got a chance to ride in the backseat of the car as it drove through the convention center parking lot and logged in license plates at 5 per second (see picture above)

Needly - A cross between Craigslist and Ebay - a better way to sell your stuff and services.

Scayl -A slick way to email huge files, including HD Video.

VoiceBase - Transcription and search of voice communications (presentations, conference calls, etc.)

TuneUp - iTunes plug-in that cleans up your music library.

FootFeed - The only Day 1 company on my list. A check-in aggregation platform. I'm anti check-in and have been a conscienious objector in the whole category. However, liked the team, and Dennis Mink, FootFeed's CEO, convinced me of the value in check-ins as a white label service for brands to market to their customers. They also gave an entertaining pitch, with biz dev guy Kemp Mullaney playing the role of a harried guy about to enter the 12-step Check-In program before discovering FootFeed.

Back to the question posed up top. After an enjoyable day 2, maybe DEMO still has some life. I'm not going to write off DEMO completely, but will be surprised if it makes it to 25.

Angie's List or AngelList?

An excellent question to ponder as the school year begins, but the answer depends on whether you are looking for a plumber or an angel investor.

The fall semester at SJSU started this week and had the first class meeting of my Entrepreneurial Finance class, which was overflowing with students standing, sitting on the floor and begging to get in. I'd like to think that work of my excellent teaching has made it's way around campus or that the Entrepreneurial fervor has reached new heights, but I've seen my ratings on Rate My Professor. Still wondering who that student was loved the course, but said I was a dork with a voice like Steven Hawkins. More likely the reality is that many students are trying to fill that last elective to graduate, which has not been easy with all of the budget cuts resulting in fewer class offerings.

Many of my students are finance majors, so I spend the first class with a (very) brief corporate finance review with the hint that very little applies to start-up finance. In corporate finance, students are taught that capital markets are efficient and this is an underlying assumption for valuing stocks, bonds and other financial instruments. The theory states that all ifnormation is publicy available and it is not possible to earn returns above average on a risk-adjusted basis. Whether you buy this or not for public equities, the market for early stage private companies has always been wildly inefficient. Entrepreneurs struggle to find investors and investors struggle to find the best start-ups. When they do, it is often a competitive situation and the hot start-ups end up oversubscribed and instad of adjusting price and other terms to optimize the deal, they are forced to leave some interested parties out.

While VC firms have been easy to find from the old school days of Pratt's Guide to Venture Capital, to the early web presence of the 1990's and the current web sites, blogs, twitter feeds, facebook fan pages and sites such as The Funded, angels are still a bit harder to track down. We do have certain angels aggressively marketing themselves (Good to see my former student, Dave McClure, making a name for himself as part of the PayPal Mafia and "Super Angel" crowd), many others have no interest in publicizing their net worth or investing activities.

According to the Center for Venture Research at UNH, there are over 260,000 angel investors. How the hell are you going to find and ptich the one who is going to invest in your deal??? These angels invested $17.6 billion in 2009, which matches the amount invested by VC's. However, angels invested in 57,225 ventures vs. 2,795 for VC's. It goes without saying that a much higher percentage of the angels deals are seed than VC, so you are likely looking at a 1 in 50 shot of getting your company's initial funding from VC's vs. angels (if you are among those that are able to raise either!). And the 1 in 50 is a team that has already made that VC money. While the supply-demand equation will never be completely fixed, the information and accessibility to angel investors is only getting better.

There are several efforts being made to make this process better and will mention a couple below:

• Angel Capital Association Collaboration Committee - I was a charter member of the this group and the goal is to facilitate syndication among the angel groups via education and tools such as Angelsoft. One of the issues in angel group investing is that any one group often doesn't have the investor interest level to provide the total capital required for a round. At Sand Hill Angels, our initial investments are in the $100 - $500K range and rounds are typically $500K - $1.5M. The goal of cooperation is theoretically very interesting, but practically difficult. There tends to be a strong groupthink mentality in the angel groups, and once one group has decided to invest, the others still need to run through their process, which can take weeks to months. This is a brutal process for entrepreneurs and many have no interest in the angel groups for this reason. At SHA, we have instituted a fast track process where companies that have already lined up committed investors (including some SHA members), can expedite the process. We recently led a financing for AppBistro, that had a great group of investors committed, including Dave McClure and Alfred Lin. I joined the board and am looking forward to working closely with the team.
  

• The AngelList - a service where entrepreneurs can connect with angel investors an dangels can share interesting opportunities with other angels. I recently became aware of this list and just joined and have started reviewing some of the start-ups and looks like an excellent resource for both entrepenurs and investors. I'll follow-up in a future post on how it has worked for me.

Now back to the original question posed in the title. For angel funding, my choice would definitely be AngelList. Of course, if you are looking for a plumber, Angie's list would be better. However, you never know, you might find a start-up that has a cool mobile app to fix your leaky faucet...

Do you have a U.S. Strategy?

Seems like an appropriate question to ask as we enter the 4th of July Holiday weekend. My wife's boss, Andy Grove, penned the cover article on the current issue of Business Week, "How America Can Create Jobs". Andy argues against common wisdom here in Silicon Valley that start-ups are behind all new job creation. He points out that manufacturing employment in the U.S. computer industry is less than it was 35 years ago, while at the same time, a very effective manufacturing industry has emerged in Asia employing 1.5 million workers. A similar trend is happening in alternative energy, the industry that has greatly benefited from both venture capital and US government assistance over the past decade.

Never one to propose popular or easy plans, Andy suggests rebuilding our industrial infrastructure and employment through financial incentives and taxing products of offshore labor and using the proceeds to incent companies to scale their American operations. He believes that this transfer of manufacturing and engineering expertise out of the country will ultimately lead to less innovation.

When my wife first mentioned this Job Wars research project she was working on a few months ago, I responded with the traditional view that start-ups are the vehicle of job creation and government policy should be to not get in the way of this ecosystem, as New York Times Columnist Thomas Friedman argues in "Start-Ups, Not Bailouts." I sent her a bunch of data to refute these claims. According to the Venture Impact Study sponsored by the National Venture Capital Association ("NVCA"):

• In 2008, Venture Backed companies employed more than 12 million people and generated nearly $3 trillion in revenue (11% of private sector employment and 21% of GDP)
• Venture Backed Company Job Growth was 8x private sector job growth from 2006-08
• In 2008, one U.S. job existed for every $37,702 of venture capital invested from 1970-2008

Let's assume these statistics are true (of course that may be a leap, as my wise father-in-law used to say, "Figures Lie and Liars figure"). This does show that venture backed companies have a huge impact on the US economy. However, it doesn't tell the rest of the story about how much larger these numbers might be without transferring a large portion of GDP overseas. As I think more about this, Andy may have a point.

Perhaps a discussion worth having at your beach parties and barbecues this weekend. Enjoy the fireworks!

Negotiating an Angel Deal in your PJ's

Well, not exactly...I was part of a Dow Jones VentureWire webinar last week titled Negotiating An Angel Deal: What Angels, Entrepreneurs & VCs Need to Know. I prefer the traditional face to face where you can interact with the other panelists and audience, but was the first panel I did wearing my favorite flannel penguin pajamas...

It had a good mix of viewpoints with east (James Geshwiler, Common Angels) and west coast (yours truly) angels, early stage venture capitalist (Jason Mendelson, Foundry Group), and a couple of attorneys (Dan Hansen and Mario Rosati). It is obviously too late to dial-in to the call, but you can still order a CD of the session. If you don't want to spring for that or spend 90 minutes listening for that one nugget you are looking for, I'll share a few of the topics I found interesting.

• Dumb Money - Are we as dumb as we look? One comment made by Jason was that angels tend to be less sensitive than VC's on valuation and can potentially make it difficult to get a venture financing done at acceptable valuation. While this may certainly be the case with unsophisticated angels (much less of these now) or in cases with no lead investor, I'd argue the opposite. We are typically looking at either smaller exits or require a lower valuation to get a reasonable step-up to a venture round. In my experience, venture investors are more focused on percentage ownership, which obviously requires a trade-off with the amount invested and valuation.
  

• KISS - No, not one of the guys on the left. The old Keep It Simple Stupid Principle. I had a discussion with another angel investor a few months ago and he was bragging about the deal he just struck that included a 3X participating liquidation preference. I let him know that he just accomplished two things - left a bad taste with the entrepreneur and opened the door for the next investor to ask for a multiple preference that is senior to yours. While upstream investors can certainly ask for more in any financing (The Golden Rule), it will be much easier to get simple terms if the precedent has been set from the beginning.

• A related topic is the standardization of terms. There has been a lot of discussion and publishing of standard term sheets, including Y Combinator, TechStars and SeriesSeed. A good comparison of the various "standard" term sheets can be found at Start-up Company Lawyer. Mario's firm, Wilson, Sonsini, even has a term sheet generator on their site. You answer a few questions and similar to TurboTax, out pops a term sheet instead of your tax return. Not quite as much fun to play with as the Dilbert Mission Statement Generator, but probably more useful. Consensus seemed to be that all of these "standard" terms are a bit different and while not possible to completely standardize (no company or financing is exactly the same), the guiding principle should be to keep it simple (see above) and minimize legal fees.

One other topic discussed was the recent legislation introduced by Sen. Dodd that could have a big impact on angel investing and job creation. A couple of items buried in the 1300 page bill include changing the definition of an accredited investor and moving regulatory roles on private3 placements from federal to stage level. This will both reduce the number of angel investors and make it more difficult to syndicate across stage lines. Lobbying is ongoing by both the National Venture Capital Association and Angel Capital Association and James Geshwiler on the panel wrote a recent post on the ramification.

I will be speaking on a related topic next week at an SVASE event in Palo Alto, "Founders vs. Investors - Are we all on the same page" Hope to see some of you there and promise I won't show up in my pajamas.

Would a Dart Board Provide better VC Returns?

For those of you that are regular visitors at ProfessorVC, I apologize for the long hiatus over the holidays and beyond. I know there are at least a few of you as I received several emails this week along the lines of "no new posts since November???"

Well, I'm back. Was amused to read about Right Side Capital this week. They have raised a fund to provide seed funding of $50-$250K to 100-200 start-ups. Rather than going through their networks or targeting specific sectors for deal flow, they are going to rely on an algorithm to select companies. The formula will be based on the founders' experience, schools they attended and other background information to gauge the likelihood of success. This certainly gives new meaning to "drive by investing" which became popular in the late 90's....

My first reaction is incredulity that limited partners would buy into this idea. Of course, when 10-year returns for the entire venture capital asset class is about to drop below zero, drastic measures may be in order. Seed stage investing is all about the team, so there may be something to this idea. For firms that don't have access to the most successful entrepreneurs, trying to predict an individual or individual teams success rate based on experience, personal attributes, intellect, etc. might very well be a good way to find some promising first time entrepreneurs. This is not far from the Y Combinator model, except they put a lot of time and energy into working with the entrepreneurs. With 2 or 4 new investments per week that Right Side is projecting, it will be challenging enough to remember the names of the entrepreneurs in their portfolio, let along help build companies.

This got me thinking about the debate over serial entrepreneurs and whether success breeds success or complacency. My colleague, Anu Basu, Director of the Silicon Valley Center for Entrepreneurship at San Jose State, recently completed a paper on this topic, "Does Experience Matter? A Comparison Between Novice and Serial Entrepreneurs" Her research shows that there is a positive correlation between prior founding experience and new venture performance due to stronger and more diverse social networks, access to capital, reliance on collaborators and other factors.

While this is not surprising, it would be interesting to look at returns provided to venture capital firms from novice and serial entrepreneurs. Serial entrepreneurs would be more likely to have larger personal investment in the company, have taken outside investment at higher valuations and possibly less open to taking big "bet the company" type risks.

Of course, given the state of venture returns, perhaps randomly picking from a stack of business plans would provide as good or better results than an entrepreneur selection algorithm or detailed due diligence. I recall that the WSJ used to run a contest in stock picking between investment analysts and selection by darts. The random selection fared quite well against the analysts and now the contest has shifted to readers vs. darts. The darts seem to be doing quite well over the past few years...

Can Entrepreneurship Be Taught?

I attended the annual LP meeting for a venture capital firm this week and got into a discussion about the above question. Seems like a good question to ponder given that I spend several hours each week as a professor of Entrepreneurship.

At a high level, I definitely agree that being an entrepreneur and being in school don't necessarily mix. Most of us know of Exhibits 1 (Bill Gates) and 2 (Mark Zuckerberg) from Harvard, but I have met dozens of other successful entrepreneurs who felt a greater need to get going on an opportunity than to wait around to complete a degree.

However, for most of the rest of us, the analytical skills honed in college or grad school, along with the opportunity to network and explore different fields prove invaluable later. With that in mind, I created a new course at San Jose State last year, the Entrepreneurship Lab (E-Lab). The seminar course combined an internship at a start-up or venture firm with classroom learning and sharing of experiences. There was an application and interview process to be admitted to the class so I was able to have a diverse group of students with varied educational and work backgrounds. Business, Engineering, Computer Science, and Design were all represented.

I'm teaching the class again this coming semester and held an information session for prospective students this week. I had several of the students from E-Lab I come to share their experience with those interested in applying for E-Lab II (went with the Super Bowl numbering scheme to see if I can convince the powers that be to make this a permanent part of the curriculum). I was blown away by some of the testimonials of how the course was a career and life altering experience for the students. I realized that opportunities like this are so rare and students don't get enough of this type of experiential education.

Here are a couple of quotes from the students:

"The internship provoked by thinking and challenged me to pursue my interests with more drive and determination. The opportunity provided by the [E-Lab] has been truly inspiring. And now I know exactly where I want to spend my time"

"This internship truly provide me an entry point into the private equity world. I am still not certain about exactly what I would like to do for the next 30 years, but I am certain that it will have something to do with funding/valuing/investing in start-up companies."

I think something else they liked was that there was no final exam, since in the real world, you are judged by the market and investors rather than on a grading curve...Instead, we spent the designated exam time with a final debriefing of the semester at Gordon Biersch brewpub (see below)


Special shout-out to Dan Gordon, founder of Gordon Biersch, who has been a great supporter of our entrepreneurship program at SJSU and is hosting my Entrepreneurial Finance class at the brewery next week.

If you are interested in getting involved in the E-Lab, there are a few opportunities. If you are an SJSU student, the priority application deadline is December 10 and you can find more information and an application here. If you are interested in hosting an intern, we will be accepting employer applications in December and January for internships beginning in February. If you are interested in sponsoring the course, would love to hear from you as being part of a state institution in California provides its own special challenges.

Now back to the question at hand. Entrepreneurship can be taught, but the jury is out on whether you can teach someone to be an entrepreneur. However, I've seen a number of students not find their entrepreneurial DNA until exposed to the content and guest speakers in the entrepreneurial program. That's enough to keep me teaching!

Watch Out for the Red W(h)ine

I have been following the rallying cry of entrepreneurs with some amusement over the past couple of weeks in response to a blog post by Jason Calacanis, "Why Start-ups Shouldn't have to pay to pitch angel investors." In fact, I was cornered by a member of this camp at our recent Sand Hill Angels annual social event at the Wine Room in Palo Alto (great place, by the way). I was afraid if I didn't answer the question of whether Sand Hill charges entrepreneurs to pitch properly, I might be wearing a very nice pinot.

I've written about the practice of charging entrepreneurs in earlier blog posts and it is not something we would ever do at SHA. However, the individual above was adamant that we should have a PR campaign to let the entrepreneurial community know that we don't participate or support this practice. I laughed and said that our web site made this clear and we may have even put a brief posting to this effect on our twitter feed. I'm also a strong believer that your track record and reputation are your most valuable assets in the venture community. This is not something that can happen overnight by putting a press release on the wire.

However, this is a great question to ask at the front of the process. I have put together a list of questions to ask your angel investor group contact:

• Do you charge any fees to present or during the due diligence process?
• How many investments have you made this year? Last year? Average size?
• How many of those investments are initial investments? Follow-on?
• In how many of those were you a lead investor?
  
• How many do you have a board seat?
  
• What percentage of your members have made an investment in the past 12 months?
• What percentage of your members are not active angel investors (i.e. service providers)?
• Do you invest as a fund, single purpose entity or as individuals?
  

This is not a comprehensive list of questions, but certainly a good start? At Sand Hill, we are very active and often lead investor and Series A board representative. We made 12 investments last year (5 new and 7 follow-on) and are on the same pace in 2009.

For those who do charge, should you avoid them like the plague or burn at the stake? I wouldn't go that far, but certainly fair to determine what you are getting for your limited amount of cash. Here is a list of questions I'd ask:

• How much is the fee?
• When are we obligated to pay?
• What do we get?
• Are you a broker-dealer? (Note: Finders fees are illegal in California for non broker-dealers, not sure about other states)
• Do you have any service provider members? Do you charge them a fee?
• If you do charge, why are you you charging me for the privilege of being added to a telemarketing list? Shouldn't you be paying me?
• How many companies have paid fees in the last year?
• How many of these have received investment for your group?
  

I don't think it's time to hang all angel investors in effigy, but remember that due diligence goes two ways...