Archive: venture capital

Forget Bubble Talk: A New Dawn for VC-funded Startups?

Msuster Chart

Marc Suster has  published a slideshare presentation that is required reading for any entrepreneur, at least any entrepreneur seeking or considering venture capital.

 

As have Marc Andreessen and Christian Hernandez, Marc Suster argues that after a 10 year “hangover” from the crash of the.com bubble in 2000 and a shift of LP investment focus away from traditional VCs after that crash, the market has bifurcated into a growing seed / early stage sector with many new funds and an increase in volumes in late-stage financing, especially after the financial crisis of 2008. This has led to the A/B-Round Crunch many have been decrying in the past 3-4 years.  However, new types of VC funds are aggressively pushing into this Gap. In other words, new VCs spot and fund new opportunities.

 

In a second slideshare, Marc also argues that far from being in a bubble, rising valuations reflect two factors.

  • social and mobile usage having hit the mainstream creates a wealth of opportunities
  • more importantly, Exits happen later, with more equity getting “in on the game” pre-IPO or pre-Exit. This is what happened with Facebook and is happening with Uber and others.

 

To summarize, comparing the 2000 bubble with today is apples to pears both with respect to the venture market, and in light of the tremendous and accelerating shifts in user behaviour, societal dynamics, technological impact, and the vastly reduced costs of creating a new enterprise today.

 

Let’s grasp these opportunities and build the future. We have no excuse.

 

 

Andreessen warns: don’t burn cash, or you’ll turn to ash

Cash Burn

Don’t burn cash, says Marc Andreessen. In a retweet of Fred Wilson’s Post on burning cash, losing money. Marc Andreessen warns that hyper valuations should be used by entrepreneurs to stash up on cash, not to have delusions of grandeur and spend it all until you have nothing left to spend.

 

This is an interesting and important point. Says Marc, we are not in a bubble unless the spending behaviour of entrepreneurs make it a bubble. Their companies can well create the value implied in high valuations, as has been proven by the many spectacular success cases of disruptive players from Facebook to Uber. But startups need to stay focused and not spend because they have.

 

As my early mentor Ken Morse was wont to say: the laws of gravity have not been repealed.

 

 

The Winds of Change in European Venture Capital

Lights in Europe

Recently I commented on my perception of the deficiencies of the Approach of European VCs to their investment decisions, criticizing what I perceive to be non-analytical herd investing reflexes. Startups are deemed “hot” or not, irrespective of their disruptive potential.

 

Two posts prove me a bit wrong and show that their may be a set of “new VCs” who are eating the world of the “old VCs”.

 

Ciaran O’Leary (@ciaranoleary) explains why he disregards business plan targets and focuses on the startup doing what is right to build its value proposition here: http://berlinvc.com/2014/09/19/doing-what-is-needed-to-achieve-the-plan-vs-doing-what-is-right/

 

Christian Hernandey (@christianhern) describes how a new(er) set of VCs are adressing the series A Crunch and taking a different approach, helping close the US-Europe gap in Startup Funding:

 

This is very encouraging, though understanding how Venture Capitalists decide remains the most important question LPs should ask themselves.

 

 

 

There’s something rotten in the Kingdom of Venture Capital

It’s generally a bad idea to generalize….(pun intended).

 

And criticizing VCs when you are in the process of fund raising is probably a bad idea and puts whatever you say at risk of being perceived as whining.

 

But having raised an excellent early stage round from some of the best Angel Investors and Entrepreneurs that I know, I cannot help but reflect on the contrast between the approach of the Angel Investors we have on board compared to the process and decision making that we – and others – experience with insitutional VCs.

 

The cliché of Venture Capital investments is that Angel Investors invest on a hunch, whereas insitutional VCs follow a more rational, risk-balanced and professional process.

 

Our experience has been that the really good, tough questions have been asked in detail by our Angels – to skim just the top of these questions:

- explain your metrics?

- what is the margin of error of your financial model?

- how do expect to scale?

- how much do you get out of a dollar spent?

- how big is your adressable market?

- what is your competitive moat (Buffet terminology)

- what are the strengths of your team, what do you need movong forward?

 

Too often, these were not the questions asked by VCs. It may be that in today’s market, they simply don’t have the time to parse their deal flow in depth and instead rely on market consensus that this or that startup is “hot”. This leads to herd investing, and that may explain the disappointment of portfolios largely kept alive by follow-on rounds and convenient “exits” to friend VCs portfolio companies. It even makes sense, in a way, by “pooling resources” – if, that is, the VC initially triggering the herd did actually ask and answer the hard questions.

 

What it does not do is create an environment for the type of long shot value creation that Silicon Valley excels at. Ueber, AirBnB, Twitter, Quora would not have stood a chance with how many European VCs – obviously not all – approach their deal flow.

 

Add to that the rituals of pitching, event networking, and buzzword-slinging that are endemic, and it makes you wonder whether these VCs really are following the right path to identify truly ambitious startups correctly. Today’s hot startup often gets caught up tomorrow in business model issues that were recognizable from the outset. I sometime miss an analytical response and understanding of the market, at least from VCs that do not have an industry focus.

 

It’s hard to picture a barefoot Steve Jobs convincing any of today’s European VCs to invest in Apple.

 

 

the Hamlet VC

Rezession die beste Zeit für Social Media? [German]

Peter Turi hat ein Video – Interview geposted, dass er mit mir auf dem DLD 09 geführt haben. Darin stellt er solche spannenden Fragen wie:

1) Ist Rezession eine schlechte Zeit für Startups?

2) Wird sich bei den Startups die Spreu vom Weizen trennen?

3) Wird YouTube sevenload verdrängen?

4) Was ist das “nächste große Ding?”

Hier sind meine Antworten:

Interview Turi2 (2009): Interview with Axel Schmiegelow about his entrepreneurship (German) from curtis newton gmbh on Vimeo.

sevenload is Top 100 Global Startup (Red Herring)!!!

I am very proud that we won this Award (after winning ETRE 100 as one of Europe’s best Startups). Red Herring hands out this Award after a year-long selection process and winning a regional Award is a prerequisite. Red Herring is known to most as the chronicler of the tech industry, and has picked the global 100 from industries as diverse as biotech, optical technology, energy, cleantech and even pasteurized Eggs.

sevenload was one of two media companies selected and one of only a dozen IT / Internet / Software related business. So it is fair to say that Red Herring thinks we are one of the two hottest internet /media companies in the world!

We were also the only Social Media company to get the award!

Past award winners include Google, Yahoo!, Skype, Netscape, Salesforce.com, and YouTube.

Here is the official picture of me with Alex Vieux, Founder of Red Herring!

red herring
Thanks to Jeff Braverman (click picture for site)

And this was my reaction to the award ;-)

rh_global_yeah_as

What makes good leadership?

A lot is being said and has been written about how strategies and market mechanics determine the success or failure of ventures and large companies. But any entrepreneur will confirm that it usually is execution which decides the fate of the company, especially in venture companies. Thus, leadership capabilities may be the most important skill set of venture management.

Leadership, management, and the principles which guide how employees are motivated and directed in their tasks are usually treated either as a self help topic in management books or as the HR side of company organization.

It might be time to focus on leadership and HR capabilities in the strategic dimension they have for the company. This means to recognize that the best company strategy can be killed by the wrong leadership methods. Good leadership is not only an important requirement for management. It is the necessary condition for company success!

In the region of North Germany where part of my family comes from we say that a fish always stinks from the head, which in my opinion puts in a nutshell the essence of leadership. If your venture team is not motivated or doesn’t excel, start at the head.

Ted Levitt once said that

organizations exist to enable ordinary people to achieve extraordinary things,

which I believe is only a way to say that things happen only if people do them. The success of a company is only achieved if the employees and the managers of that company willingly take the necessary actions to enable that success.

That is certainly first and foremost a question of deciding which of the actions that are available in a given situation is chosen, but it is equally importantly a question of ensuring that every employee executes that strategy in the way that best ensures success, including feedback and adaptation of the strategy when problems arise.

Achieving this, however, is a question of leadership.

Since all dictatorships eventually fail, leadership cannot be reduced to the ability to bark orders. All great historic figures acclaimed for their leadership, from Julius Cesar to Napoleon, from Spartacus to Martin Luther King, are all admired for their ability to inspire, to motivate, and to convey a sense of purpose to a large number of people, i.e. to the organization that they led.

Inspiration however, is nothing without credibility. Credibility, in turn, is only achieved through authenticity. Authenticity is only achieved through honesty. Applied to the world of the 21st century and the context of leadership in business organizations, this means that a truly successful leader needs to combine the ability to inspire others with a set of skills and principles that are tenets of credibility as a leader:

1. An inspiring sense of purpose.

2. A clear set of unflinching values. Shifty leaders command no respect.

3. Honesty at all costs.

4. The ability to communicate necessities and convey a sense of urgency to a team.

5. The ability to define the organization as a community serving a common goal.

6. The ability to honestly admit own mistakes and address the weaknesses of the organization.

7. Relentless commitment to the company goal, including the necessary ability to “punish underperformance”, without humiliating anyone in the organization.

8. The ability to lead by example, including in personal matters such as health or respect for others.

9. The discipline to pursue a strategy and tactics that belong to that strategy and to adapt these whenever necessary, not only “acting from the gut”.

10. The intelligence to always overestimate competition and underestimate your own position.

Most of these traits require a certain level of self-assurance, respect for others, and clear view of your own shortcomings that is incompatible with most managerial egos. But while there are enough cases of at least temporarily successful egomaniacs, in the long run only those entrepreneurs intelligent enough to value, respect, and reward their performing team members, and self-critical enough to recognize their own mistakes become truly great.

Reps and Warranties in Venture Capital Deals

This weekend a friend of mine called me up, as he was completing – as a leading seed investor – the first round (series A) of a company that I have a minority stake in. He told me that the round being negotiated was just short of Signing, as all main deal elements had been agreed with the investor (a large and well-known VC Fund), but there was one last point of contention left, and – big surprise! – that was Reps and Warranties.

That made me think once again about the peculiar habit of venture capitalists to turn Reps and Warranties almost as much a difficult topic as in M&A. If you think about the term “Venture Capital”, the whole concept is that you venture into something and there is no precisely NO guarantee of success.

Of course it makes full sense to commit founders to proper representation of the state the company is in and to also make them liable for the so-called Title Guarantees, in effect making sure that the shares being transferred to the investor are free of third party rights, are indeed constituted legally and are not subject to any limitations. However, I do not understand why these Reps and Warranties so often go to the core of the risks of the business model, thereby in effect giving the venture capital investment more the character of debt financing, disguised in the Reps and Warranties clause.

Why do I say this?

Because if a founder signs up for – say – a 3 Mil. Euro investment and the company fails due to an event that is at the core of the typical risk of the business model, this may create a warranty case that in the worst of all contract agreements may include full damage to be paid by the founder. This then means that the investor may get up to the total sum of that investment in damages from the founder because of an event that constituted the essence of the typical venture risk.

So put very bluntly, by enforcing Reps & Warranties covering business risks, the investor covered his venture risk by making the founder liable for failure of exactly that risk.

We all know that founders who may be otherwise admirable do not like to focus on legal details and may have bad luck in a choice of their attorneys.

That can be a deadly mistake.

When founders find themselves in such a contract situation, it is not just a reflection of poor negotiation skills on the side of the founders, who – one might argue a bit unfairly – therefore would not deserve anything better.

Such contract clauses are also always a case of misguided priorities on the side of the investor.

While as an investor I have full sympathy for contractual rules that prevent an irresponsible founder from walking away, as in the old adage “with my time and your money to waste, we have nothing to lose”.

However, it is equally unfair to put the investor of a venture in a position where his investment becomes more a case of debt with higher returns and higher default risk than of real venture investment. Moreover, discussions and probable litigation about business risk damage retribution by the founder can divert vital energy from surviving the damaging event, since both the founder and the investor will bes spending considerable time hedging their risks or enforcing their rights. THat can ultimately be much more damaging than the damaging event itself.

Here is my advice to founders in any negotiation about Reps and Warranties:

1) Before negotiation of deal terms, identify the natural risk of your business model

2) Prepare to describe and argue to the investor what the typical risk of the venture is and make it clear from the outset that that risk cannot will not be carried by the founder(s).

3) Make the investor acknowledge these risks early in the process of negotiating the terms

4) At term sheet level make sure that the basic principles guiding an equal distribution of reps and warranties rights between founder and investor include the following

a. Liability of founders is limited to willful behavior and gross negligence

b. There must be a cap of a certain percentage of the investment, in my opinion not more than 50% of the investment sum.

c. For all cases of non-willfull behavior the warranty term should be at most 12 months

d. Each founder is only liable for the fraction of the cap that corresponds to his fraction of shares in the entire company, so a co-founder who has 20 % of shares in a company shall only be liable up to 20% of the cap.

e. All shareholder managers with shares smaller than 7% should be exempt from any liability unless there is a specific reason for that.

f. Damages should be paid only to the extent that the Founder / Manager liable had best knowledge of the Warranty issue.

g. Retribution of damage should be limited to the damage that is incurred directly by the damaging event, confirmed by court ruling and could be reasonably expected. There should be no damage retribution for a loss of valuation of the company, which should be explicitly excluded. Valuation loss is usually covered by downround protection clauses.

h. Retribution of damage should be limited to such damages as cannot be corrected or “repaired”.

i. No damage retribution should be given for damages that are incurred due to lack of cooperation on side of the investor. This could include anything ranging from late payment of investment funds, lack of cooperation in litigation cases, failure of the board members dispatched by the investor to agree in litigating to avoid the damage, and so forth.

k. The most important advice that can be given to any founder signing Reps and Warranties is to put a large amount of energy into the due diligence and disclosure process and the documentation of that due diligence and disclosure process. THis is where attention to detail is a very necessary evil. The contract must include a clause that no events or fact about the company that were or could reasonable have been expected to be known to the investor at the time of the investment can lead to a claim of the investor against the founder. Thus claims are excluded if the the facts that led to the damage were known to the investor.

l. Negotiate all these points, then focus on disclosing well all risks that are part of the business model or lie within the company.


Often investors will present the founders with tough Reps and Warranties basically to incentivize them to puta significant amount of energy in thinking through the risks of the company and the development stage the company is at.

However, founders should rate their investors on the basis on their willingness to accept clauses that correspond with or at least resemble what I advise.

Good Luck!


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