The Venture Capital Market

There's a wonderful blog conversation ongoing between Paul Kedrosky and Fred Wilson on the optimal number of venture capital firms. To summarize, both advocate for a reduction in amount of capital and number of VC firms participating in the market.

Check out Kedrosky's post from this week - Fred Wilson and the Venture Capital (Non-)Cartel and Wilson's - The Venture Diet is Working.

I look at it from a market standpoint, driven by supply and demand. But like a good economic analyst, I've got more than two hands...

1. Good firms will survive and poor ones will exit. The challenge though is the slow speed of entry and exit in the VC market. Firms can take years to raise capital from investors, then need time to evaluate eventual investments, then ride them through to exit. Unsuccessful firms that enter the market take years to display their incompetence, so the market is stuck in the intermediate term with an over supply of VC firms and capital. Overall, you'd think that's a good thing for entrepreneurs - more investment money chasing fewer projects. But, VCs are not a commodity product - each have their advantages and strengths that abet entrepreneurs in their drive to successful exit. This means that entrepreneurs need to examine their options more closely - more money and more favorable terms doesn't always mean the best deal.

2. Maybe the challenge is not an over-supply of VC firms, but a dearth of investment targets. Are we out of good ideas? I'd say no way this is the case. There are always plenty of good ideas in today's global marketplace, with that number rising exponentially as countries like India and China gain increased access to technology and build a economic infrastructure that supports the development of new technologies to replace the old.

3. Market inefficiency could be an explanation - there isn't enough communication between aspiring entrepreneurs and VCs. I don't think this is the case either - VCs get hundreds of business plans submitted every week and "investable"start-ups only going to develop in markets with access to communication nodes and infrastructure that provides clear awareness and access to the existing VC firms.

4. Or maybe it's that the venture capital model is no longer relevant for a majority of emerging companies. Back in December 2008, I wrote that venture capital is moving "up the ladder." As deal size requirements get bigger and bigger, that means that the exit opportunities must be bigger and bigger. There's limited room for the mega-exits, so that means that more and more start-ups are seeking smaller investment amounts funded by angel investors, leaving the formal venture capital firms with fewer investment opportunities. Bigger exit requirements also mean smaller rewards for company founders and early-stage team members that accept venture capital. That makes the whole idea of funding with VC less attractive. Altos Research is bootstrapped, profitable, and quickly growing (gasp!). Our company founders never wanted to use VC as a vehicle for precisely this reason (and others...).

Technology & Start-ups in the Sacramento Valley

I've been spending some time of late researching some of the organizations focused on technology and start-ups in the Sacramento Valley of late. Couple of interesting items to share:

UC-Davis Center for Entrepreneurship - Based at the University of California, Davis in a brand new facility, this center focuses on Green Technology and Food & Health (but technology stuff too!). I've chatted with a couple of people over here - very engaging and committed from what I can see - looking forward to getting involved with them in 2010.

The Sacramento Area Regional Technology Alliance (SARTA) is a tech-focused corporation that supports entrepreneurial programs, companies and technology investment throughout Butte, El Dorado, Nevada, Placer, Sacramento, Solano, Sutter, Yolo and Yuba counties. I'm planning to attend a couple of their events in the next month or so to learn more about them.

More to come on this. Now that I'm getting settled in the area, I'm excited to get more proactive helping out and contributing to the technology and start-up efforts out here. With the state government situated in Sacramento, the inherent industries (food, agriculture, energy), and a number of research and state colleges nearby, it's seems to be a natural extension of Silicon Valley to diversify the economic base locally.

Google's "Brain Drain"

Came across an interesting presentation today on The Business Insider that they posted back in September - "The Google Brain Drain Goes On And On."

Interesting because it augments what I wrote back in June 2008 about Google's Employee Retention. The mental infrastructure of Silicon Valley encourages this behavior to the betterment of the technology, venture capital, and related industries. This trend is what makes Silicon Valley a great place - employees learn that their personal and professional growth becomes limited within a large organization, so they take what they learned and move on to the next big opportunity.

Milton Friedman on Phil Donahue (1979)

Heard this on the radio on Friday -

http://www.youtube.com/watch?v=RWsx1X8PV_A

This is the reason that Milton Friedman won a Nobel Prize in Economics. Taped in 1979, think about the parallels that we're hearing in today's economic and political activity.

Let's stop with the talk about redistributing wealth as a means to solve our our personal economic and social situations.

American Business

I sat in a Starbucks today in Fort Washington, PA, checking email between meetings while on the road. At the table next to me were with two gentleman and a woman. The woman was a sales rep for ice cream shop supplies - ice cream mixes, ice cream cones, yogurt, etc. One guy was the owner/operator and the other was the managing partner.

After the 20 minutes that I eavesdropped on the conversation, she took the order, filled out the paperwork, and set up the account. "Diane" was so professional from start to finish - I actually went out to the parking lot when she left to compliment her.

Here's the best part - while sitting there and watching the two guys talk about their new ice cream shop this Spring, sharing the floor plan with Diane, and oozing excitement about the new venture, it gave me a certain sense of comfort and faith in the American businessman.

Despite Washington D.C.'s best efforts to waste a trillion dollars, the stock market's obvious disdain for the current economic situation, and the constant negative media that bombards every hour, here are two guys sitting in Fort Washington, PA - completely oblivious and thinking of nothing but their ice cream shop in a Starbucks when it's 40 degrees and windy outside.

This is why America is great.

Resources for "The Elevator Pitch"

Students in my Entrepreneurship class are required to produce a 30-second "Elevator Pitch" audio file as part of a business plan assignment each term.

Came across a few resources for those looking for more tips and help on developing the pitch for your business venture:

• TechCrunch's community video project - "Elevator Pitches"

• Dan Primack's blog post on PEHub - "Hey Entrepreneurs: Want Some VC Pitching Practice?"

• Your Elevator Pitch - Couple of good articles/tips

• "The (Perfect) Elevator Pitch" - by Aileen Pincus on BusinessWeek.com

• "Perfecting Your Pitch, Part One: Assume Short Buildings" - by John Hoult at Fast Company.
  

(And a personal hooray - This is my 100th blog post here on StrucTURa!)

Bernanke on Entrepreneurship

Watching Mr. Bernanke's testimony to the House of Representatives Budget Committee. He just said something very poignant (paraphrasing):

In1930s in US and more recently in Japan, the destabilization of the banking sector made it very difficult for entrepreneurs to get credit and very difficult to grow their business.

What I see in this statement is that business will lead us out of the current economic environment - not the government. Focus on financial market stabilization and business what it's good at - innovate and advance on new opportunities.

That is all.

Venture Capital Panel Discussion: Fred Wilson & Jordan Levy

This morning's sessions at the InmanNews Real Estate Connect Conference in New York City included a panel discussion with Fred Wilson of Union Square Ventures and Jordan Levy of Softbank. Some interesting insights and perspectives regarding the state of venture capital and the general economy.

From Fred Wilson (who also authors the A VC blog):

• Spoke the prospects of building additional business applications on the Twitter API - labeling Twitter more as a platform than a service.
• Said that given the economies of scale, a viable internet business can be built on $20 million of revenue instead of the traditional $50-100 million models.
• The issue with the smaller revenue scale is finding venture capitalists to invest in these enteprises since it presents an exit problem for VCs. Assuming a 25% profit margin, a $20 mln business yields $5 mln in profits. If a VC owns 50% of the venture, that equates to an annual dividend of $2.5 mln which doesn't mesh with the 10x IRR models on which VCs operate.
• As a result, he discussed SecondMarket as a potential market location to buy and sell private shares of these start-ups to enable better liquidity of these smaller internet companies even though the company was initially developed for bankrupcy and vendor claims.

From Jordan Levy:

• Read some well-known statistics about the number of IPOs in the market (8 total in 2008 and none in the second half of 2008)
• Said that the VC industry as a whole has returned 0.2% over the last seven year period.
  
• Relayed the regulatory burdens hindering the IPO market by using his own attempt at an IPO that cost $3.5 million and utimately led to the decision not to go public. This is a well-documented problem also described in Michael Malone's recent WSJ article.
• Said that there is still lots of venture and institutional money available for good ideas, but given the current economic state, competition for that money will continue increase.
• Felt that angel capital is less robust ("the angels are scared") which doesn't bode well for small scaling companies requiring start-up capital in the $50K - $3 mln range that falls below the VC channels.

2nd Annual MIT Elevator Pitch contest

Just picked up this link from Guy Kawasaki on Twitter. Good stuff if you have a few minutes...

MIT hosted their 2nd Annual Elevator Pitch contest on October 18. Here's the video of the event.

An Entrepreneur's Lessons Learned

It’s been about a year since I closed up my consulting shop – Economic Information Services. The company provided business consulting services, focusing on Central Asia and Ukraine. Basically, our job was to develop local projects in these regions and find investment capital for them from international sources.

I occasionally find myself comparing work with my current company with my previous venture. Over the last couple of weeks, I’ve been recording retrospective thoughts about how I’d do things differently, and wanted to document them so my readers might pick up a useful tip or two. So here goes…

Understand the concept of “search”

Clients find you when they have a question. One aspect to my business about which I was certain – I knew as much or more than anyone about how business in these parts of the world was done. I attended conferences and events talking to companies considering overseas projects and partners. But I never put myself in a position to display my market knowledge to any of these people until I was engaged in a conversation with them.

I chose to build a traditional website (a.k.a. “a completely worthless use of time and resources”) and spent about $2000 to develop and launch an online marketing brochure that no one read, visited, or could find. Any time that I wanted to update the site’s content, I sent the new content to my web developer, waited a few days (or weeks) for the update, then paid an invoice for anywhere from $250-$500. Not too bright.

I set up Google Ads for key terms such as “Kazakhstan economy” and “Kazakhstan investment.” After 3-4 months of $300+ billing, I saw absolutely no ROI. This doesn’t mean Google Ads doesn’t work. It means that I didn’t know how to use the application effectively. I didn’t use Google Analytics to track incoming clicks. I never thought to research what keywords people searched. I hoped, and thus wasted about $1500 on this failed effort without ever understanding what I was doing wrong.

Had I built my website around a blog, I could have updated the site daily with new content - articles, commentary, observations, essays, and on-the-ground observations from my business travel there. Content, content, content. Given the relative obscurity of companies focusing in this part of the world, my company’s search result rankings could have been among the top in Google.

I failed to embrace search, and as such, I was the one searching for clients instead of the clients searching for me.

Skip marketing. Proceed with selling.

Forgive me Father, for I have sinned. I spent $6000 to host a cocktail hour at an investment conference organized by the Embassy of Kazakhstan.

I thought that this was the way to build a brand – show strength, success, and deep pockets. Hosting a cocktail party is a great way to waste $6000. You can’t possibly talk to everyone that attends. Inevitably, uninvited guests will show to poach free food. The important people that you want to talk to already have a line of people also waiting to talk to them. But you leave the event feeling like you made progress because people know who you are now. Fact is, they don’t even remember that you were there, let alone were responsible for the shrimp cocktail and bruschetta that they downed all night.

Small consulting companies don’t have time to build a brand. The clock is ticking – find clients that are willing to pay for your services.

Charge for services earlier in the client relationship

I was a busy guy. I was up at 5:00 AM nearly every day to talk to our local office in Kazakhstan about what happened that day or what projects they uncovered. I would spend my day translating business plans for local projects; setting up meetings with business organizations, investment promotion agencies, and government contacts for upcoming travel; and providing research to US companies I’d met at conferences and seminars that were interested to learn more about the region and business opportunities.

But I never asked for the business. When someone asked if I “could find out this and that,” I never told them the price or sent an invoice. I put myself in a middle-man situation – representing projects for local clients that couldn’t pay, and talking to potential investors that didn’t want to pay. I did sign some contracts and make some money, but some self-assurace could have improved the revenue flow substantially.

One of the most challenging aspects to consulting is converting a non-paying contact to a paying client. While you need to establish confidence with the client early in the relationship’s development, you also need to be firm about the way that you make money with the client. If they can’t understand it early in the relationship, then they never will.

It’s hard for firms to find good people to do good work. I was both and never leveraged this opportunity to develop clients for myself.

Consulting is not scaleable

I occasionally contacted a friend of mine, an entrepreneur in the technology sector that successfully exited a company that he started. He’d often give me some general pointers on developing my business that were helpful, but I ignored the most important advice he gave. Early on, he looked at my website and asked me if there was something I could do to make the company more scalable - maybe offer some sort of service or product through my website. At the time, I said to myself – “doesn’t he know that I’m in the consulting business?”

Looking back, he knew exactly that I was in the consulting business, and that’s why he asked if there was a way to scale somehow.

Given the depth and breadth of my market information, there was an opportunity to develop a simple project database or a series of industry overview reports. Had I understood the concept of search, those looking for “investment projects in Kazakhstan” or “telecommunications Kazakhstan” would have found my company and possibly purchased access to the reports or project database. At a minimum, setting up a more functional website would have help with client lead development. These aren’t products that would tally much per month in revenue, but in could have provided some minor cash flow, and could have given me a way to qualified leads for myself.

See how this is all related? I do. Now.

Convert Visitors to Leads

Related to the previous point, I could have developed a clear value-proposition on my company website – such as offering a free report by industry (which I developed for a conference and never used otherwise), and perhaps I could have grabbed some contact information from those directly interested in business opportunities in this part of the world. Giving away a market report isn’t going to get you a six-month consulting contract, but at least it would have enabled me get in touch, begin the process, and most importantly, expand my network of contacts.

Developing this process also enables a clear ROI for marketing and sales efforts, to understand more on what gets you clients and what doesn’t.

Accounting Good, No Accounting Bad

Keep better accounting records. Like most entrepreneurs, the mind-numbing activity of tracking receipts and expenses every month lacked the glamour that I sought in running my business. My solution? Ignore it. And at the end of every year, I scrambled to organize my receipts, enter my expenses into Quickbooks (okay, so my wife did all the Quickbooks work….), and crank out some semblance of a balance sheet for my accountant. No methodology for understanding how and why I spent money, and how to determine its return.

When the audit came around from the IRS, I scrambled to prepare (and thankfully passed). When it came time to apply for a home mortgage last month, I was nearly dead in the water. (We’re still working out the details of the loan, but it’s looking positive...)

Know when to quit.

I know - not something you hear often.

Write down your dropout clause at the same time as your business plan. You owe it to yourself and your family to avoid the double-down philosophy of the Atlantic City gambler. Be responsible. Objectively find the point in your venture when you know you’ll stop, and stick to it. I know that there are successful entrepreneurs out there that have cashed in their 401k savings (yes, I considered it), maxed out credit cards, tapped friends and family for loans, and gone to other extreme measures to overcome a dearth of failures. Remember that you only hear about the successful ones. BusinessWeek and Wired don’t write articles about the other 99% that are still paying off their debts from failures past.

Two years into my venture, I reached a decision point brought about by financial constraints (read: “running out of money”). These two years included several trips to Kazakhstan (with a six-month stint to get things going there), meetings, bids on government contracts, meetings with government officials, conferences in Washington D.C., meetings with local project owners, subs-contractor submissions through beltway bandits, meetings with contractors, and a few meetings. (Did I mention the number of meetings that I had?) This activity resulted in a couple of small, sporadic contracts, but nothing that provided long-term financial stability.

An angel investor who believed in me and my company, decided to front the cash for another six months of operations. During that period, we won a sizable local project sponsored by the Kazakhstan government. “Yippee!” I thought. When that project was finally finished about a year later, I was faced with the same financial constraints. We couldn’t find new projects because we were tied up with the first one, local market dynamics didn’t change much, and our ill-conceived method of client development described in detail above left us without the next income source. It was then that I decided to close the doors.

Usually, you’ll hear from successful entrepreneurs that the mistakes were the most beneficial to their long term growth. That’s sort of true. It’s not the mistakes that offer the opportunity for growth, but the acknowledgement and deconstruction of mistakes.

There’s a difference between believing in something, and knowing it. (I once believed in the Easter Bunny...) Blind faith is important – you must always believe in yourself or your idea. Being blind to the obvious signs that your venture isn’t working is downright foolish.

I believe in myself, and that’s why I decided to close the shop. Good entrepreneurs know that there’s more than one good idea. Let the failures work for you, not against you.

Yahoo's Entrepreneurial Capacity

Attending local Silicon Valley events always seems to provide great fodder for articles and conceptual gymnastics --

I attended an SVASE event last week – “Startup Founders – New Kids on the Block” – where Eric Marcoullier, Founder & CEO of Gnip, served as one of the panelist. Eric developed MyBlogLog (I'm a member) which sold to Yahoo! for $10 million back in January 2007. After less than a year, Eric left Yahoo! and is now in the process of launching Gnip, a stealth company that no one seems to know exactly what it does.

Could this showcase the pending problems that Yahoo! might have with its acquisition spree over the past few years? Yahoo’s strategy has been to acquire new technology companies and then fold them into their product and service offerings. To account for the prices that they pay for these companies, the “Goodwill” account on Yahoo’s Balance Sheet continues to grow – a practice that I’ve recently criticized. When a company’s accounts for intangible assets by using the “Goodwill” account, those intangible assets may include the future innovation and development that the acquisition’s management and employees with bring with them. Advocates of overpaying for an acquisition will often defend the price paid by infusing the argument with the future intangibles yet to be realized.

Entrepreneurs inherently dislike the bureaucracy and structure of a large corporate organization. So what happens when these unrealized intangible assets disappear when key managers decide to leave the acquiring firm? When key managers leave the acquiring firm in short order, then the expected future benefits from those managers are lost.

(Sidenote #1 - Gary Becker, Nobel Prize-winning economist for contributions to the concept of Human Capital, estimated that human capital represented 70-75% of a company’s value.)

(Sidenote #2 - this is one of the reasons that acquiring firms will use its own equity shares in acquisitions instead of cash – the equity paid to the target firm managers can be spread out over a period of time to increase retention of the acquired managers and key talent.)

When Yahoo is purchasing new technology companies such as MyBlogLog, they are attempting to buy “entrepreneurial capacity” that otherwise doesn’t exist organically within its own corporate structure. The struggle that acquiring firms face is that increasing entrepreneurial capacity, according to Becker, is accompanied by “significantly rising costs and that the “accumulation of human capital is not instantaneous” (from Becker’s book - “Human Capital”). If ineffective incentive programs are implemented, this purchase capacity flies out of the window as the key managers walk out of the door.

If other key managers like Eric are walking, so too are Yahoo’s "Goodwill" assets.

Angel Capital Moving to Debt

I read an interesting article on VC Experts today regarding the movement of Angel Capital from the traditional equity stake in early stage firms to debt instruments. This seems to make sense for angel investors if the payback period for their initial investments is 5-7 years or longer. And considering that following the traditional model of creating a portfolio of 10+ investments in order to meet ROI expectations, angel investing can create some anxiety disorders over time.

Angel capital is becoming more and more vital to seed and early stage companies. A couple of months ago, I examined how Venture Capital is moving up the ladder from the seed and early stage investments into latter stage and near-exit companies. Seems no one wants to take the risk once borne in days past, and the impatience for payback and ROI plays havoc for venture capital firms and their investor return requirements.

With angel investors, a debt-to-equity arrangement make sense in the right scenarios. In a debt-to-equity arrangement, the investor might be able to eek out some return with less successful companies that didn't make the 10x or 100x returns hoped for, but still manage to yield positive cash flow and the ability to repay a loan instrument. These surviving firms might not explode into IPOs, but the debt-to-equity arrangements allows for recovery of the initial investment with an interest rate reflecting appropriate risk levels and in shorter time periods.

When I founded my own consulting firm, we were initially staked in a debt-to-equity arrangement. Our investor was an angel and a very close personal friend. Knowing that the company didn't have to be "all or nothing" for our investor to recoup his investment took some of the stress out of the agreement. This is a key part that's often overlooked when it comes to working with angel investors. While angel groups are becoming more formalized and organized, there is almost often a long-standing interpersonal relationship between investor and target. This can make for tough sledding if not handled properly.

I find the migration of venture capital and the continued establishment of angel capital to be a fascinating development in the start-up world. I invite your thoughts and views on this.

By the way, here's a link to the article of VC Experts.

Update! University of San Francisco International Business Plan Competition

I spent the day today at the Hotel Kabuki in San Francisco, serving as a coach to aspiring young entrepreneurs and companies in developing their "elevator pitch" and venture capital presentations during the University of San Francisco International Business Plan Competition.

Although the competition is a compilation of student-led groups that have been vetted at previous competitions, I wasn't quite sure what to expect.

As one of the coaches, I worked with Judith McGarry of Keen Consulting and A.C. Ross of Indigo Partners (and a few other colleagues) to listen to five student group presentations and then provided advice on how to tighten things up. Judith consults with firms seeking venture funding, and clearly understands Silicon Valley and what it takes to get funding. Her breadth of knowledge in numerous industries is striking. A.C. is a Silicon Valley veteran with vast experience on the strategy consulting side of the equation.

We watched presentations about software for the nanotechnology industry, online men's shopping, product development for emerging economies, online media, and HDTV. After spending the day, my observation is that some people are just more prepared that others.

The creme always rises to the top. The most interesting and compelling of the day - the presentation that turned into an collaboration session - was Project Einstein out of MIT. Couple of guys that are launching a men's clothing online shopping site with a strong Web 2.0 flavor to it. I think they have a chance! The presenters, Bob Meese and Will O'Brien, were very well-prepared and have clearly thought through the concept realistically. Their concept hit home as I remembered my painstaking afternoon in Macy's a couple of weeks ago trying to find the right casual shirt and sportcoat for my Spring wardrobe... Nice job guys, and good luck!

To check out this company, and all of the others in the competition, the semi-final and finals are open to the public. Check out the schedule and stop by - worth the price of admission for sure!

University of San Francisco International Business Plan Competition

Quick update on a great event upcoming --

April 24 - 26 - Hotel Kabuki (San Francisco's Japan Town)

The University of San Francisco Contest will feature 20 graduate student entrepreneur teams from around the world (MIT, Hong Kong UST, Cambridge, USF, Stanford, etc.) pitching their new venture proposals to panels of venture capitalists, top executives, and venture attorneys.

The USF Contest has become internationally recognized as a serious venue for launching new technology companies and provides an exceptionally enjoyable and exciting learning experience.

Here's the schedule:

Trade Show Reception and Elevator Pitch Challenge
April 24 (Thursday) 6pm - 9:30pm
Hotel Kabuki
USF Faculty, Staff or Students, free. Alumni ($20 at the door), Other guests ($40 at the door)

Final Round
April 26 (Saturday) 9am - 1pm
Hotel Kabuki
USF Faculty, Staff or Students, free. Alumni ($10 at the door), Other guests ($20 at the door).

Go Entrepreneurial Dons!

The program is organized by Mark V. Cannice, Ph.D.Executive Director and Founder of the USF Entrepreneurship Program.

Tips for Entrepreneurs from Sequoia Capital

If you're an aspiring entrepreneur, the "Ideas" page on the Sequoia Capital website is an outstanding resource. It's rare (very rare) that a start-up can submit a business plan without any prior contacts and meetings with a venture capital firm and receive financing. But, this page is an outstanding primer of the themes and ideas that you'll need to tackle in order to build a successful company.

University of San Francisco Entrepreneur Team Wins 3rd place in Business Plan Competition

Congratulations to Tom Monaghan (University of San Francisco, EMBA 2007) and Tesh Khullar (University of San Francisco, EMBA 2006) for their outstanding achievement in winning 3rd place in the National Seed Business Plan Competition in Santa Barbara last weekend.

Tom and Tesh were one of 10 teams invited from among the 72 applications for the contest. They edged out teams from Harvard and Univ. of Wisconsin-Madison and others for one of the 4 finalist positions.

They will compete again at the San Diego State University Business Plan Competition (the nation's oldest event) next week.

Venture Capital Investment Trends since 1995 (Deal Sizes)

Another snapshot of data provided by PWCMoneyTree.showing the size per venture capital per deal in companies of various stages since 1995.

The magnitude of the upward spike for Expansion and Late State companies is rather startling, but not surprising in retrospect, with the quick upslope from 1998 through 2000. Of course, this was the heydey of the first Internet boom, only to be followed by the impending crash in 2000-2001. One can only surmise that this free flow of capital into later stage companies is the 3rd, 4th, 5th round financings to get the original dotcoms to IPO.

To go from $7 mln/deal to nearly $25/mln deal provides some perspective on where the Internet IPOs took the imagination of venture capitalists and Wall Street alike, and where the imagination of venture capitalists and Wall Street took the Internet IPOs.

Venture Capital - Moving up the Ladder

In an article earlier this month, I examined an interesting trend in venture capital based on data provided by PWCMoneyTree. In short, the data appears to indicate that venture capital is moving away from investments in the "Start-up/Seed stage" and more towards later stage companies - those companies in "Expansion" or "Later Stage."

A recent article by Joseph Bartlett on VC Experts seems to find similar observations, using Jensen's "Eclipse of the Public Corporation" for support to his argument. Bartlett refers to Rebecca Buckman's October 2007 article in The Wall Street Journal - "Venture Capital Goes Big" that discusses venture capital's increasing activity in the buyout arena of private equity.

While the private equity industry seemed to nicely partition itself in recent years - venture funds here, LBO/MBO firms there - a funny thing happened - the walls between participants in the private equity industry seem to have disintegrated to some degree. I referred to this in an article last summer based on Mark Boslet's article in the San Jose Mercury News.

The net result? Greater demand for LBO/MBO deals, causing valuations to rise and profit margins on these deals to fall, and in turn possibly contributing to private equity's troubles as the 2007 credit crunch hit the financial markets. Bartlett also discussess the increasing price of LBO activity due to this increased demand, more plainly referring to the "winner's curse" that haunts firms that overpay for acquisitions.

If this trends continues, the entrepreneur in her garage with next big thing will find that traditional venture funding may be more difficult to attain than ever, and start-up capital will likely to be better accessed through the increasing angel capital networks emerging throughout the country.

Launch: Silicon Valley 2008

Well, it's here (or at least it's on coming...) - Launch: Silicon Valley 2008. I attended last year's event and found the event to be a raw look at the start-up world.

At Launch: Silicon Valley, 30 presenting companies make a 10-minute onstage presentation, then receive candid feedback from a panel of venture capitalist and Silicon Valley professionals.

Companies that presented last year included several in the social media space, data security, and Guy Kawasaki's Truemors. Guy is well-known for his presenting ability - worth the price of admission on his own.

For entrepreneurs interesting in seeing companies that have gotten over some initial hurdles - developing a working organization, getting a product to market - but still a ways from getting to the finish line, this a great event. Check it out.

Venture Capital Investment Trends since 1995 (Deals by Stage)

Doing some research about Venture Capital trends, I came across some interesting data provided by PWCMoneyTree.showing convergence in the number of venture capital deals between Early Stage, Expansion, and Later Stage deals, while the Start-up/Seed Stage dropped considerably over the past 12-13 years:

Reading nothing more than the data presented in these graphs, I'm hypothesizing that this decline was a function of a number of factors:

1. Venture Capital followed itself.

If there were a plethora of start-ups in the mid-1990s at the start of the internet/tech bubble, then it would make sense that targets that received venture capital in the "Start-up/Seed Stage" would then receive subsequent rounds of funding while in their "Early Stage" and "Expansion Stages", then eventually as "Late Stage" investments. Seems there may be some evidence of this effect as you examine the decrease of Start-up/Seed Stage funding with increases (and then decreases) in Early Stage and Expansion targets. These Early Stage and Expansion investment targets then became targets for Late Stage funding.

2. Venture Capital has become more risk averse.

Following the fallout of the last tech bubble in the late 1990's, venture capitalists turned their attention to firms that were past the start-up stage and had a better chance of survival. This would certainly explain the dramatic rise in the percentage of deals in Later Stage companies from approximately 10% to 30% of investments.

3. Venture Capital has become more selective

Certainly there was not a drastic decrease in the number of firms seeking Start-up/Seed Stage funding during the past 12-13 years - just the number of venture capitalists willing and able to fund these start-ups.

4. The ongoing emergence of Angel Capital

As angel capital groups continue their emergence, they may be filling the void - funding Start-up/Seed Stage companies instead of traditional Venture Capital.

I am actively researching these thoughts to support with further evidence, but this certainly provides some interesting fodder for discussion. I'm interested in your feedback on this thought process.