Archive for September, 2006

To VC or Not to VC Panel Report

September 26th, 2006

I attended a forum at San Francisco’s Commonwealth Club the other night entitled “To VC or Not to VC”. The panel consisted of a great mix of entrepreneurs and venture capitalists who shared their thoughts on the state of the venture industry.
Discussion was lively on several topics, including the relative merits of early entry to the marketplace (made possible by a venture-backed team) vs. bootstrapping to a prototype and seeking market feedback on the product before getting financed. The latter strategy could be paraphrased as “version 1.0 probably won’t hit the mark dead on, so save yourself a bigger piece of the company by waiting for market feedback before you take venture money”.

Doubtless both strategies have merit and each probably works well in certain situations. Dave Samuel from Brondell, Inc. tried to cover the third alternative, which is to bootstrap all the way. Since his business is selling electronic toilet seats he has not received (or sought) much interest from VCs.

Remembering that Microsoft, Sun and other major technology companies built their businesses with very little venture funding, I would have been intrigued to hear someone from a more traditional (successful) technology company talk about how bootstrapping worked, or didn’t, for him or her.

Specifically, I wonder whether the big companies are useful measuring sticks in 2006: with so much more venture capital available than in the 1970s and 1980s, is it possible for a technology company to make it without hefty chunks of outside capital?

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Tips and Tricks: Google Analytics

September 26th, 2006

I recently discovered Google Analytics, a remarkably powerful and free set of tools for analyzing website traffic. My site hardly does justice to the power of the tools, but in the brief time I have been using it I have been amazed at the amount of data it provides. Google picked up this toolset through its acquisition of a company called Urchin, which apparently charged $200/month or more for use of the tools.

One especially nice feature in the toolset is the ability to automatically filter out one’s own pageviews from traffic reports. For many small sites, “internal” page views may skew traffic data significantly, so this can make a difference.

Of course, nothing is really free. Analytics looks like yet another step toward Google’s goal of storing all of our data. I do wonder what Google plans to do with all this data and Google’s retention policies make me uncomfortable using gmail to store my mail. For some reason I feel less squeamish about the traffic to my website- perhaps I would feel differently if I had commerce or other proprietary activities happening there. This privacy tradeoff is a one each company must make for itself.

The Small Business Podcast did an interesting 2-part feature with the authors of a new book on how to get the most out of the Analytics toolset. As of this writing the book had just come out, so I haven’t read it yet. If anyone has, please drop me a note and let me know what you think.

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Model Financing Documents and Term Data

September 21st, 2006

The National Venture Capital Association maintains a set of “standard” transaction documents for venture financing. The documents are interesting, perhaps especially for businesses that aren’t familiar with the process and don’t know what to expect for transaction terms.

At the same time, the limitations of presenting a single set of documents as “standard” become quickly apparent on review. There are multiple alternatives offered for most of the key terms with no indication of what circumstances lead parties to settle on one or another set. East Coast/West Coast differences within the investing community lead to further alternative sets of terms.

It is useful to see a range of sample terms, but what is even more interesting is to see how often these terms get used. VentureOne’s Deal Terms Report collects this data. I haven’t seen the report, but it would be fascinating to compare its data to the NVCA terms and see, for example, the average number of investors joining the Board of Directors in a Series A financing, or the percentage of financings where founders gave personal reps & warranties.

The other interesting thing to note is that the California State Bar Association’s Corporations Committee has published a set of adaptations to the NVCA forms. The forms are published in pdf, which makes them hard to compare easily with the NVCA’s Word documents, but the adaptations generally reflect (i) wrinkles in California law that may bear on transaction terms, and (ii) a feeling (typifed by Wilson Sonsini’s letter to the Committee) that the documents skew toward investor-friendly provisions.

The WSGR letter points out that most law firms have their own sets of form documents and asks whether another set of forms is beneficial. I agree that law firms and investors certainly have access to plenty of forms (such as the set I have generally worked from), but most entrepreneurs aren’t interested in paying money for a set of professional-reference tools. Good work to the NVCA for making its forms publicly available, and to the Corporations Committee for providing its comments and adaptations. Transparency and public discussion are good for business.

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Should I Raise Money from Venture Capitalists?

September 14th, 2006

In the course of my legal career I have worked with a number of companies on the “venture capital track” as well as many that don’t fit the VC mold. Many clients come to me saying an infusion of capital would be a huge boost to their growth plans, and asking what they need to know about the process.For some businesses venture capital investment makes sense, while for others it doesn’t. Here are a few key questions company principals should consider before trying to raise money:

• Do we need investors or customers? Bear in mind that raising money from venture capitalists can be a 6 month or longer process, and very time-consuming along the way. If you could bring in a customer with the same effort, would this bring your goals within reach?

• Are we ready to get married? The best investors bring to a company not just cash, but also experience, business acumen and a strong network of useful relationships. On the other hand, you will be required to consider their interests as shareholders in addition to your own as you guide the company. This may sound a lot like getting married, and the analogy is quite good. Do the benefits of getting hitched to your investors outweigh the added responsibilities you will take on toward them?

• What is our exit? VCs look to get their money back, with a healthy return, in 6-8 years (more or less). For the uninitiated, this means selling the company or going public- buying out investors from revenue won’t work. Will your company make an attractive acquisition target or IPO candidate down the line?

• Can we give up control? There are companies of all stripes where the founders have retained control over the long term. At least as frequently, however, the people skilled at starting a new business are not the ones equipped to build out and sustain the company over the long term. Are you prepared to step aside when the Board decides it is time for new management?

Of course, this is only the first step in the long capital-raising process, but addressing these questions can help companies figure out if venture financing makes any sense for them. If any of the questions above give principals significant pause, then it probably makes sense to look closely at alternative ways of bringing in capital.

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