Fred Destin

The one-sentence e-mail turndown

Image via Wikipedia

If you have pitched VC's, you have probably received one of those:

Thanks Company X for sharing your proposal, this is not one for us, best of luck with the fundraising and stay in touch.  Best, VC Y

You are probably thinking, WTF.  After all, aren't VC's paid to look at pitches and business plans ?  Actually, we are not.  Here are reasons why I regularly write the above:

• If I won't invest in you, I can't spend time with you.  And before you ask, of course there are plenty of exceptions including some really naive entrepreneurs who I really like and spend time mentoring for no good reason, but I shouldn't be doing it, really.
• If I try to provide you with a smart and structured answer, it's going to take me 30 minutes I do not have. 
• If I try to provide summarized feedback, you will either take offense or think I am really dumb.  Here is one example of heroic summarisation:
  • Value chain dynamics too complex
  • Can't see how this scales given revenue model and the above
  • Does not feel like a large enough opportunity for the type of fund we have (or similarly evasive comment)

I used to call people systematically because I thought this was more polite -- let's just say it was a bad idea.

The Truth is, much of the time, I DON'T KNOW why I pass.  I just do pattern recognition and I pass, fast.  Example: average looking team - tough market - financials don't look ambitious - product replicable --> pass.  Time spent: 3 minutes and 12 seconds including writing the mail.  I hear you thinking it's not fair, after all you poured your heart and soul in that business ... and I know that.  Why do I do so ?  Because filtering effectively is a survival skill in my business. 

That is why you need ... intros.

The Ignorant VC as counterpart to the Ignorant Entrepreneur

I decided to fully republish a great post by David Woodward that was fuelled by an interview we did together but which captures the views I previously developed here better than I could express them.  Hope you enjoy !

A few days ago, I had an interesting chat with Fred Destin, Atlas Venture's ebullient technology partner. Atlas bought a stake in the property website Zoopla at the beginning of 2008, which wasn’t exactly a fun time to be involved in the property game. It was also a pretty difficult period to source capital in any sector—all in all an investment climate fit to make even the coolest of VCs twitch. Destin, who has a seat on Zoopla’s board, adds that at that stage, his firm’s investment was in “two people and some PowerPoint slides”, hardly an invulnerable guarantee of success.

It is often said of European VCs that they lack the gumption of the Sand Hill road mob—the kind of formalised chutzpah that turns garage upstarts into grade A businesses. European investors, it is said, need data, data and more data, followed by proof of concept, before they are willing to stump up any capital. And to some extent that remains true. But Destin added an interesting spin.

The problem with European investors, he told me, was that even when faced with unmistakeable proof of concept, they tend to undercapitalise, thus hampering their investment’s ability to scale to its full potential. Put it this way: not many US VC's get accused of undercapitalising a potential winner.

He also did a great job of making early-stage investments sound very much like sticking it all on red and preying to the gambling gods for clemency. Destin says he actually prefers working with unknowns. He says:

“Our job is to manage risk proactively. We don’t think about it as a casino at all. We scrutinise and think about it very hard. But it’s our job to take these shapeless risks. I am early-stage, my natural DNA is around early-stage. It’s tough to make investment decisions without much data, [but] that’s what makes it exciting. Your average market practitioner does not how to deal with that level of risk. You take data away and they panic.”

Conversely, Destin says he revels in a vacuum of information.

“I profess ignorance and I use that as a tool. I can assess market attractiveness. I can assess the management team. We then make absolutely no assumption as to what’s going to work because if you do, you lock yourself into a strategy that you haven’t [yet] proven. You tend to be internally led rather than market led. This is where the risk may seem inconsiderate because you’re willfully declaring ignorance about the market you’re addressing.”

But ignorance allows you to

“…force yourself to be smart. You use what you know in terms of company building, supporting entrepreneurs, discovering the market. We will design the product around what the market needs with an intuition, but then we’ll go and test it. We don’t want to be smarter than the market we are entering.”

And here’s Destin’s view on Europe’s investment weakness. There are, he says, three stages involved in readying a start-up for potential greatness:

“At Atlas we call it ‘prove-build-scale’. You spend very little at the prove stage. You have 6-15 people, spend as little as you can proving the hypothesis. The build stage is [about] scaling up the management team, adding talent, putting in place the technology you need to accelerate. Only when you’re ready can you understand how to scale properly, go into a big investment round and hit the accelerator.

“I think that Europe usually fails on the third category: we tend to undercapitalise the businesses that are doing well. And this is where we get a competitive disadvantage to the US. They have a tendency to overcapitalise early, but when they scale they scale well because they are able to raise repeat large rounds of money to really capture an opportunity.”

[Republished with permission, authored by David Woodward, an Awarded Alien who also writes at Director]

DailyMotion raises EUR17M and defies expectations

Image via CrunchBase

DailyMotion today officially announces its new round of EUR17M, defying the fate that has befallen most video sharing startups (see: Veoh's hail mary) as it breaches through 60M Uniques Users.  Atlas Venture participates above pro-rata in this round and grows ownership.

As for most video-sharing sites it's been a rollercoaster four years of hypergrowth, legal woes, scaling challenges peppered with some great moments of exhilaration.  The segment remains challenging, not least because your main competitor is not an old school media business but a fast-moving platform company called Google and its monstrously successful video acquisition.

Over the last few years we have taken incredible flack over this investment with many industry pundits and fellow VCs predicting imminent gloom.  Well, the company is still here, and here to stay.  Somehow we have managed to define a positioning that is our own and appeals to our users, and to build a business around this.   I am not declaring victory yet, but I am proud that we built a sustainable business.

Challenges remain and the list is long.  We have new Hulu-like competitors (every media company seems to have understood that catch-up TV is actually helpful to the ratings of TV shows - duh !), we have to keep innovating against the best tech business in the world, we have to fix some current issues and have fallen behind in some areas (our MotionMaker is overdue an upgrade, our search is still average) and so on...

... but we also have

• a fantastic recurring user base
• enduring brand appeal as the independent, creatively focused video sharing destination
• a strong new CEO and a strong VP team 
• a board that has been working together for years and been through some tough times together
• a sustainable business

The real challenge now is to demonstrate that this company is worth a half billion.  Clearly we are not there yet !  That will take further patient and systematic company building.  Personally I have not gone this far to lose patience now.

I want to extend special thanks to Ian Brotherston who was a fantastic interim CEO for us. 

Onwards and upwards !

Related articles by Zemanta

• YouTube now serves more than 1 billion money-losing views per day (venturebeat.com)
• Online Video Surges: 11.2 Billion Video Streams in July (mashable.com)
• Upon Hitting Profitability, Dailymotion Raises $22 Million More (uk.techcrunch.com)

The problem with VC Motivation

Many VC's, particularly in Europe, are disappointing in their (lack of) intensity.  They are not 24/7, passionate advocates of the businesses they fund; neither do you meet them at random conferences scouting for new companies; nor do they necessarily come across as particularly engaged at board meetings.  Why is that ?  Let's talk VC compensation and motivation for a second.

My motivation as a VC

Introspection is as good a place as any to start.  Here are my top motivations for being a VC (leaving out the personal stuff):

1. Company building: every VC is different, some like doing the deals but don't really care for the long-term relationship that ensues.  With me it's the "deal management" (as we call it) that provides me with the greatest satisfaction.  An engaged relationship with management team and co-directors towards building a great business.  That's when I feel I am part of a greater whole, of creating jobs, of the whole great forward human movement of innovation and entrepreneurship.
2. Intellectual stimulation: I am a fairly consistent guy, but I do get bored.  As a VC you get to see 100's of new projects every year and meet a ton of creative people, and understanding each one challenges your (dwindling number of) neurons in a different way.  Every company you invest in is different, and requires fresh thinking.  So being a VC keeps me entertained, frankly.  This is the primary reason why I never started a company.  The trade-off is that you work through others (the management teams you fund) and hence never quite get that satisfaction of achievement in the same way.
3. Personal recognition: Let's face it, I love being recognised for what I do.  Thankfully my wife keeps that ever-burgeoning ego firmly in check.
4. The Hunt and the Deal: I don't think you can be an effective VC if you do not like to be a Hunter, to be always out on the move looking for the next big thing, to want to win the confidence and trust of entrepreneurs and co-investors to take your money and no-one else's.  Inking that term-sheet and closing that deal gives me a great buzz every time.  After all, I grew up on a trading floor !
5. Money : more on this later.
6. Lifestyle: I work hard, but on my own terms, when and where I choose.  The less glamorous reality is that I spend 2/3 of my time on the road and that they greet me by name at hotels in at least 3 different cities, but I remain a master of my own destiny.

That's my list. 

Let's zoom in on money

Here is the issue with venture capital as a way of making money:

• It's easy to get a comfortable lifestyle (say $300,000+ a year, often multiples thereof)
• It's (really) hard to make it really big (say $20,000,000+)

The not-so-secret fact about venture capital is that it has not made serious money for 10 years now.  That means many if not most venture capitalists have not seen a large carry check in a decade.  For those who don't know venture economics, the partners in a fund contribute the first 1-3% of a fund on their own cash, which means most of us write checks worth > $100,000 every year to our own funds, sometimes a lot more.  So if you are a VC in a median return fund, you keep writing these checks vaguely hoping you will make your money back; some will tend to get more and more focused on the nice salary they can take out every year.

To generate real carry, you need to work hard with no obvious improvement in the probability that your fund will be a wild success.  In other words, the marginal return on effort expanded is not obvious and may well be zero.  You won't know until much later... And that, my friends, is the core problem with VC motivation.

Because it takes a very long time to know whether you are a good VC, partners can keep taking comfortable salaries for a decade or more before any form of verdict is placed on their money-making abilities.  In the meantime, they manage their own calendar and work at their chosen intensity, with no immediately obvious return on effort expanded.  Q.E.D.

 

The Solution

... is not simple.  As an LP you would only want to invest in partnerships that provide:

• Accountability
• Meritocracy
• Paranoia
• Professionalism
• Absolute hunger
• True Passion for the business

... and of course, deal picking skills, deal building skills, and returns !

Paul Kedrosky at Xconomy has considered this problem from the LP angle with the following recommendation: pre-agree on budgets and / or find out what your chosen partnership uses its money on.  Good advice, with plenty of practical problems but clearly sound.

In a good partnership, paranoia and professionalism mean that emulation keeps everyone on their toes.  And your passion for the business keeps you working all the time.  And you really want to make a ton of money.  And you want to be remembered for all the great business you contributed to.  All of the above !

Hence:

VC is only a lifestyle business if you do not fundamentally care about being wildly successful.  Now how do you screen for that, when every manager that comes into your office sings the same song ?

 

<--- Get Carl on your board.  He goes the extra mile.

Boring is good: A global view of the housing bubble

Unusually for me, a short post on property on the back of this great illustrative graph from McKinseyQuarterly.

These graphs are general to the point of being useless and regional differences remain stark.  As a personal example, I sold my house in London in July of last year (check it out on Zoopla), just as the market was shutting down and subsequently bought a house in Switzerland; a lucky escape. It is surprising to me that the Swiss market is depicted as not having really budged that much despite the fact that a decent house anywhere between Geneva and Montreux will probably set you back CHF 3M.  I also happen to be from Brussels where €1M still buys you significant property, in spite of the runaway performance highlighted on the graph.  So there are catchup effects and areas where access (the Lemanic region being the classic example) guarantees sustained prices.

The core lesson for me in this crisis was learned through the eye-opening process of borrowing in Switzerland to buy the farmhouse: only about 20% of people own a house here, and to get one is tough: leverage ratios will rarely exceed 66%, the appraised value on which the ratios are based takes a significant haircut from the assessed or market value, and there are harsh assumptions made on maintenance costs (5% per annum) and where floating interest rates might go.  Al these factors contribute to much more difficult access to home ownership.  On top of that, most people do not really care about owning a house at all.

Compare and contrast to the UK where equity release to buy consumables became the thing to do, and where one felt like home gym and home cinema were commodities one could not function without.  Now we are into forced savings and no hope of a consumer led recovery, a textbook case of unsustainable wealth creation.

What we need is for most people to take luck out of the equation but go for long-term, suitably defensive value creation methods based on reasonable appreciation of their assets and gradual increases in wealth.  A world where everyone thinks they can be Warren Buffett, Bill Gates, win the lottery and generally hit it lucky is not a healthy one.  Boring is good.  As Taleb would say, don't confuse luck with talent.

TUGG: a New England venture party not to miss on 10/22

Hemant Taneja at General Catalyst and Jeff Fagnan are launching a new social initiative called whilst also throwing a great wine tasting cum party (or vice versa)  at the 4th Annual New England Venture Charity Wine Party (ANEVCWP ?).

TUGG is meant to grow and thrive well beyond its original founders so the point here is to harness as much horsepower as possible from Boston Metro / New England as a whole.  Bob Buderi at Xconomy covered it in detail.

TICKETS FROM THE TUGG SITE

When:October 22

Where: Artists for Humanity in South Boston

Who: anyone in the life sciences, tech, mediatech, startup, venture communities

Why attend: I guess that if you are not into the giving back thing, you can still meet VC's and pitch your wares... right now there is representation from Spark, Northbridge, Battery, Sigma, Bain, Charles River, Castile, Polaris, Commonwealth, Flybridge, Advent Healthcare, North Hill Ventures…   Apparently it was also a REAL party last year.

 

Is Europe going to emasculate venture with misguided regulation ?

I recently received a document from Simon Walker at BVCA highlighting some of the regulatory efforts driven by European politicians and in particular Poul Nyrop Rasmussen, the leader of the Party of European Socialists.

Basically Mr Rasmussen feels like we need to be transparent and seems to think that we pose a systemic risk to the economy.  He echoes the "locusts" comments and the general distaste for private equity and hedge funds found in the press.  They seem to think everyone involved in private capital is a Gordon Gekko figure intent on dismembering companies and shifting all jobs to Asia !  Rasumssen has since agreed to get some form of consultation going, but apparently with the pre-agreed conclusion that the directive should really be tightened further...

Let's first take a look at some of the key proposals (from Simon's summarisation of the mammoth document found here):

• The proposed legislation affects all managers with funds under management of over €500M (most of us in venture fall firmly in that camp)
• The transparency requirements will require you to publish a detailed annual report about your fund, disclosing financial statements and other sensitive information. You will also have to publish an annual report for each portfolio company, including financial information and the development strategy for the company (oh really ??).
• There is also the cost of implementation: A ball-park figure would be around £10,000-£15,000 per quarter.
• Capital requirements will oblige you to have at least €125,000 set aside and also additional capital equal to 0.02% where funds exceed €250m.
• Firms would be required to appoint an independent valuer, which could result in someone who understands your business and its value being replaced by someone who doesn’t. Early indications are that valuation fees could be £40k per annum per portfolio company (sounds high to me).
• Applies to non-domestic funds too, so rest assured the Americans would be coming near our shores again (we finally won ! through regulation !)

What's wrong with this picture ?

• We build companies: My job is to raise money from institutional investors in the world and to channel it to promising tech startups -- I have no clue how I would be contributing to any form of systemic risk.  We hardly ever use leverage (although even that is a moot point, nothing wrong with leverage per se), we create jobs, we build value (sometimes).
• My investors do not need protection: we only raise money from sophisticated institutionals who have access to all the information they need and ask for.  They don't need or want to be nannied.
• Our companies simply cannot survive without confidentiality.  Gosh, it's hard enough to build our startups and help them strive against better funded competition without some disconnected professional politician at the European Commission declaring that we need to publish our numbers !! We rely on discretion when we acquire new customers (so we can make ourselves sound bigger than we are and get their business !), when we acquire companies (I don't want to overpay for targets) , quite simply whenever we  compete.  Imagine you are a small startup from the south of France posing a threat to IBM on one of its product lines but currently bridge financed by your investors .... do you really want to give IBM the sweet relief of brandishing your accounts in front of every potential customer to scare them off ?
• People outside the industry frankly cannot process the information.  Transparency is great for MP's Expenses but has no place in early-stage venture.  Imagine company X goes through a downround with full-ratchet anti-dilution which drives the price per share down by 75%.  Is this a dead company or simply a promising business going through a recap ?  How can you communicate stuff like that to the outside world through simple reporting ?  The answer is clear: you can't.
• Cost: an estimate of $2.8 billion in year one has been put forward

So please, Mr Rasmussen, take the time to understand what we do.  And don't force us to take our business elsewhere -- if this gets passed into law, I will surely be taking myself and the cash I invest out of Europe and probably into the US.  Simple.  It's hard enough as it is to make European venture work without these added competitive disadvantages.

But hey, maybe I am missing the point here -- maybe this is a coy attempt at protectionism, maybe the plan is for EIF Mark II to run all venture money in Europe.  Go figure.  From down in the trenches, it certainly makes no sense at all !

PS I wrote this rant a couple of months back and never published, you can read more about it in Martin Arnold's great FT article on the topic: "Venture Capitalists Caught in Crossfire".

<--- Greed is good, greed works.  But man, venture capital sucks.  I mean, no leverage, c'mon.

<--- A new direction for Europe.  Self-Serving Populism.  Hardly new...

On Spotify, Deezer and music platforms ... in the rearview mirror

You are now the CEO of music major X.  Challenge: the value of recorded music is trending fast towards zero.  What do you do ?  Why, of course, embrace Spotify as the future of music (and games, and TV...).  Ever wondered about that €200M enterprise value ?  Mais bien sur !

Now, girls and boys ... let's dig. 

Majors: the slow car crash, or "thank god for the Beatles"

Let's think about the dynamics of music for a second to see how you get to embrace a formerly little-known and formerly hardly funded Swedish startup as your saviour.  Here you are, sitting on a legacy catalogue of music and you are faced with a few issues:

• No paying customers: The next-gen consumers of your product have forgotten or never learnt what copyright means, a problem in large part of your own making (see Gerd Leonhard: the system is "certified dysfunctional").  As a result the average kid walks around with 30,000+ songs in his library, most of which he never listened too, none of which he paid for.
• No market stranglehold: you used to be the king of physical distribution, but in 10 years this will be a tiny portion of the industry's revenues.
• No hits: You are having trouble "manufacturing" your next hits.  You traditional marketing techniques don't work and you cannot remember the last time you sold 10,000,000 copies of an album
• No top acts: Your top artists are getting syphoned off by LiveNation in a live entertainment industry dominated by 80 or so acts that they can mostly pay better than you.  Bye Bye Madonna.  Then of course some of them die before the Tour and sell a ton of CDs still, so sometimes you get one back.
• No new acts: let's face it, you are hardly the aspirational brand for the new artists out there, themselves digital natives who grew up on P2P networks

So your traditional method has been: let's license our content at silly MG's per stream and ask for the payment upfront, since most of these guys will go bust anyway.   Oh wait, was that a self fulfilling prophecy ?   Did we shoot ourselves in the other foot too ?  No wonder a second-gen company that promises a premium service predicated on streaming music with a traceable set of users and that offers you some equity pre-lawsuit is a godsend.  Well done Spotify for embracing so well the current woes of the music industry in a way that delights users too.  And let these licensing fees flow !! Move over iTunes ?  Not sure.

"Dialtone" Startups galore, Giant Jukeboxes everywhere !

The promise is the same across the board: a continuous music/media experience, whatever your location and device, supported by advertising or subscription.    It's not exactly groundbreaking, but a few enablers are in place to make it happen:

• Quasi-negligible bandwidth costs
• Embrace of the industry including better deal terms
• Monetization methods getting to scale ... combined with the overdue love affair between media and advertising (think Moby / Groove Armada licensing deals)

It's not really that complicated, is it :-) 

Besides Spotify, take a look at Deezer: an interesting case.  Great entrepreneurs (Jonathan Benassaya, Daniel Marhely), decent player and tech, the pirate players who decided to play ball with the support of the "best French entrepreneur you have never met", Xavier Niel.  A grassroots success (remember BlogMusik) as we like them, application-less for those who prefer that paradigm, to date with bigger traction than Spotify but less hype, tech and industry endorsement.  But watch that space, I would hate to bet against this entrepreneur.

I should add we7 (StevePurdham-run, well executed, less extreme than either, funny how we all fit to our national stereotypes),  GoomRadio (huh, I still don't get that player guys ?) and a bunch of others.  Special kudos to granddaddy Pandora, shame we cannot get you over here anymore.  Personally I love both Deezer and Spotify but could never quite stomach the aggressive valuations achieved from an early stage.  But that's just me;  I have been very wrong before.

Side benefit: Fred Wilson gets his "music dial tone".  Let a thousand startups bloom... 

Streaming is for old men

Most of the data I have on young kids is that they prefer downloads and want a lot of them.  Those who predict the death of the iPod and piracy might be drinking too much Kool Aid, time will tell.  What I am sure pretty sure of is that paid-for streaming or download is for that rather large population of people who would prefer a good legal alternative, but I am not sure it's for everyone.  The industry would be smart to look at its overall global licensing policies to stop making it so f@@@@ hard to deal with them on a global basis.

Screwing the artists ?

Hmmmm...   Ever wondered if equity payout were included in artists' compensation and contracts ?  But I digress, let's move on...  I know, let's talk about piracy instead, at least we have a common (if highly distributed) enemy :-)

Next step: platform plays

I have been meaning to write this post for about two years, a nice email from Mika Salmi and some time wasted on the Eurostar and I finally get to it (a bit late).  But the debate keeps moving, thankfully.  Next horizon: majors are now faced with a plethora of semi-long tail artists which are difficult to market in the classical ways that they master so well.

What is a young aspiring musician to do ?   The future of the industry will not be written by today's catalogue owners, I am convinced of that.  The answer is simple: we need a tech platform approach to self publishing and distribution for quality music.  Anyone come to mind ?

On risk taking in the venture world

Nick Britton wrote a great, well-researched piece on venture capital which I encourage you to read (A Crisis in Venture Capital).  We had a long chat on the topic and as you can see I provided him in the process with some fun quotes to lighten up the mood of this appropriately downbeat article.   I want to look at risk-return in more detail here.

Spurred by my combative quote at the end of article, Paul Fisher from Advent last night commented that I had to watch painting a black-and-white picture of "those who take risk" versus "those who don't".  Robert Loch chimed in with an interesting theory: for him the trouble with next-gen European venture capitalists is that we all got kids at the same time (Court, Destin, Fisher, Klein, De Rycker and so on) and changed our outlook on risk both at home and at work.  He has a point, but the capital crunch maybe more of a driving factor here :-).  Anyway we proceeded to mention CAPM and the like together and I think it's worth re-emphasizing a simple framework for risk in venture as you can't provide much subtlety through colourful one-liners in the press.

Venture is all about taking managed risk.  That means risk that can be handled appropriately both by management and investors and returns that are commensurate with the exposure taken.  There is endless strife between venture investors and entrepreneurs usually around the idea that "venture capitalists are dumb lemmings who are susceptible to irrational investments in bubble times and irrational capital preservation in tough times" whilst "entrepreneurs think cash grows on trees and that they should not suffer the consequences of their actions" or similar helpful lines of argument.  As an example, there is a well-argumented Vivek Wadhwa post on Techcrunch that is a really good read but perpetuates this fairly useless battle (Yes, VC's follow Entrepreneurs who are the real heroes of innovation, let's put that one to bed once and for all please).

My observations are as follows:

• You have to think of risk /return tradeoffs as a continuum from initial idea to $10bn business.  At different levels of developments investors will need to deploy different skills to analyse investments and help their companies.  Venture capital covers a broad variety of risk/return tradeoffs.
• A $20M revenue business is not a de-risked business.  Tough and risky decisions continue to be required and often require greater skill and analysis then at the early stage, particularly as these decisions tend to be "non-reversible".
• Each venture firm tends to have a "risk-return DNA" that determines the natural risk habitat in which they will feel comfortable investing.  Some folks are highly comfortable with taking on two technical co-founders in an unproven market whilst others like to help companies scale and like to use reliable KPI's and financial models as a guideline to decision making.  The best, most experienced investors and outstanding partnerships may be able to operate across the spectrum.
• Trouble arises when investors stray to far from their natural habitat.  A couple of years ago, a potential investor in Zoopla asked us to produce a 3-year budget that we could stick in the legal documentation as a roadmap for execution for the company.  Whilst this is a sound business practice for more mature businesses, it was a clear indication that this investor was not ready to take on a "quick iteration" team that was testing its market continuously and revising pricing and product mix on the fly.  Better not sour the relationship and keep the potential investor relationship alive for a time when the company would be ready (and need) this type of expertise.

So it is all about taking "the right type of risk".  To take a practical example, Peter Baines, a proven investor at Advent Venture Partners, provides myself and Philippe Collombel with a great complementary set of skills on the board of DailyMotion.  I don't think he would have been too happy with the kind of acrobatics that Phil and I had to do in the early days of the business, but by the same token I am extremely grateful for the added discipline and financial focus that he now brings as we progress to and beyond breakeven.

The current crisis of confidence in venture is driven by a long-overdue realisation that the assumptions on exit values and capital intensity were just plain wrong.  As Mike Chalfen, again of Advent, notes in the article:

The key to survival in a post-credit crunch world is to accept that businesses are going to sell for less. It follows that investors need to put smaller amounts of money into more “capital-efficient” companies in order to generate attractive returns.

What Mike is referring to is a late-stage portfolio build strategy that probably looks like this:

• Return profiles are 3-5X rather than 5-10X and over
• Very low default rate on the companies rather than the usual 30+ % ("don't drop the ball")
• Controlled capital intensity and hopefully shorter holding periods

I will come back to the relationship between capital intensity and risk taking in a separate post as it deserves more discussion, but I think Mike nicely captures:

• The current malaise in venture capital as companies and entrepreneurs continuously struggle to achieve the "right" risk-return tradeoffs for investors
• The need for venture capital firms to sharply focus on consistent portfolio build strategies that fit their natural DNA
• The absolute focus on capital efficiency that is currently permeating the market, driven both by outside events (liquidity crunch) and a return to the artisan roots of venture business building

The industry clearly needs to shrink and get back to its roots, with VC's being realistic about what they are good at and those who seek a quick buck exiting the industry.

For my side, I remain focused on early stage and high upside, risky deals with combative, scrappy entrepreneurs.  Once Segerstrale, Ek, Chesterman, Cohen and co have realized the substantial exits we're expecting of them, and provided we have the right metrics to woo our investors, we will have earned the right to continue doing what we do, with all the passion and determination that it takes to succeed.  And that, my son, is how the West was won :-)

Seedcamp 2009 shows spirit of the Bay Area is gaining momentum in Europe too

I have been involved with Seedcamp from the outset but I did not always believe we would achieve the high quality objectives I would expect from such an initiative.  Well, I have been confounded this year.

When a bunch of entrepreneurs coalesced around the original concept (Saul Klein, I think Sara Murray, Paul Birch and others), the principles were clear but the ability to systematically source high quality companies was not obvious.  For anyone who has been to seed stage events in Europe, you know that company quality is uneven at best and often quite challenged.

Nothing to do with me at all (we just talk budget and structure together), but I have to say that Reshma and the team have really over-delivered.  The quality of the founders, their level of intent and the obvious market appeal of some of these companies was a joy to see.

The Seedcamp team has also refined the "value add aspects", with many companies offering spontaneous praise for the quality of mentoring and exposure they received during the week.  It was pretty cool to see the likes of PirateMcClure, Sean Ellis or Fred Wilson showing up and sharing with the teams.

Winners to be announced shortly...

 

Seedcamp Day 3 Highlights from Seedcamp on Vimeo.

Getting it completely wrong

Sitting on the plane from Geneva to London this Monday, squeezed against the window of my overcrowded Airbus by a huge Mainland Chinese guy, I was reminded of how comically fallible we investors can be in our most strongly held beliefs. 

So here I am, forced to consider the East-meets-West equation in a new way, and attempting to read a Financial Times update on RIM / Blackberry's performance in recent years ahead of their results announcement.  Seeing another sign that RIM continues to shine, I saw myself sitting at a public markets conference back in 1999 and listening to the RIM team pitching their wares and thinking, with absolute conviction, "these guys do not have a chance in hell".  What struck me at the time was how cobbled together their server architecture and security model seemed to be, how far from industry best practice they seemed to be.  I thought "first gen company that will never make it".  Here were my "strikes against" as I remember them:

• device, device software AND server infrastructure: they will never pull it off !  My perception was of a clunky server solution stuck on a decent device, but a device whose main claim to fame was a highly thumb friendly keyboard.  Think first gen "Apple vs Microsoft", and Apple's ill fated decision to not partner up with Linux (doh!) UNIX and stick with proprietary hardware.
• direct selling to enterprises: they will never scale it !  Think of a more horrifying business model than needing carrier partners but selling directly to enterprises, one server at a time, having to crank that demand wheel all the time.  Remember at the time we still mostly thought carriers could actually sell value-added services to enterprises :-)
• clunky device and terrible phone: it will never work in Europe !  from the continent that loved pagers, here was a device that would not really ever make it through the European market.
• In one sentence from Disruption Group: "BlackBerry started in 1999 as a non-Windows compatible, non-Palm compatible, non cell-network compatible, non-phone, non-text message, non-web, e-mail only device. It was inferior to mainstream cellphones in most every way... but it did one new thing really well by solving a new problem: It gave access to instant information anywhere.  And the technology was improving."

<--- Remember the RIM ?

So how wrong can you be ?  It turns out that a company controlling the device and the server could actually do a few things well, such as deliver on the fundamental requirement of its user base (absolutely reliable email access on the move) and getting the rest right over time (such as the phone).

My lesson from this is that what may seem to be sound strategic thinking from a VC standpoint (absolute focus on one core area of expertise, search for extreme scalability, natural preference for software and "atom-free plays") can lead you to overlook the best companies, those that go all out to crack the user's need in an imperfect but perfectly appropriate way.  And yes, we passed on TomTom too...

There was also somehow a lesson about empowerment.  I really did not envisage "thumb speed contests" between BlackBerry cradling investment bankers, but this is exactly what happened.  Users made this device their own, including its perceived weaknesses.  From folks using Skype as a baby monitoring device to families loving Ikea despite the fact that transport and assembly (the most expensive parts of furniture production) are on their dime, there must be nothing more satisfying for an entrepreneur that seeing customers appropriate your product like that.

Another useful reminder that scrutinising user behaviour and acceptance is the best yardstick for determining which companies will succeed, rather than one's grand opinions about long term market evolution or deep theories about the future of tech !

DataXu: MIT Rocket Scientists take Advertising to Next level

So a lot of what we do in e-commerce and digital media is based on backing great entrepreneurs, watching our capital intensity and helping them execute well on a given opportunity.  It's not for nothing that my hardware colleagues and competitors consider us to be the "light tech guys".  We pride ourselves on being simple :-)  But everyone now and then, as is the case for DataXu, we will attack a really hard problem with some serious tech.

How do you help large ad buyers move their efficiency to the next level ?  Ad exchanges are out there, all the tools are in place yet most folks still buy undifferentiated volume CPM for their display budgets.

What you really want to do is bid on single impressions depending on the criteria you care about or, even better, based on data you (and only you) own.  It's easy in theory but to get there you need to be able to make decisions in real-time in 1/10 of a second.

So i am extremely proud that today we take the wrap off one of our first investments in Fund VIII in the form of DataXu.  In one sentence, "the DataXu platform values, bid manages and buys each ad impression individually, making real-time decisions on each ad opportunity, as it occurs."

Think campaign-specific self-learning bidding algorithms.  How cool is that ?    DataXu even has a blog  (so far it has one entry, with no links.  Hey, it's OK, they are about optimising display ad spend right ?).  And even a Twitter Account: It's one cool company.  Seriously, taking rocket guiding tech to ad optimisation excellence is exactly what makes me excited about this job!

It goes to show that early financings still get done by VC's, but that the bar has been set very high.

If you are looking for the ingredients that make this a great deal, here they are:

• Hard tech from MIT's Astronautics department (yes, we have real rocket scientists at the heart of this, Sandro and Willard)
• A great and passionate CEO to run the show (Mike Baker, CEO and founding investor, whatever this means, at Enpocket -- a Nokia acquisition)
• A close and collaborative set of VCs to take this out of the lab (Jeff Fagnan, Jeff Bussgang)
• And a great, kickass, major global reference customer (Havas Digital) who will agree to be quoted in the launch release

For us it's one more example of a promising MIT spinoff, but this gives you a sense of the ingredients you need to make a great deal come together.

<--- On his maiden flight, Mike takes a grilling from Andreessen, Mayer and Graham.  Nice !

We had to wait for my friend and fellow Belgian Robin to get his exclusive, which you can read at TC here.  The Press Release is here.

UK and Ireland venture investment: slooooow

Stuart at Ascendant has sent me his regular data update which is worth a look:

• Q2 : 42 deals (over £0.5M) for £129m invested by 61 investors
• Q1-Q2: 90 transactions and £244m
• ... compared to 129 companies receiving £557m in Q1-Q2-2009
• The 10 biggest deals received 61% of funds invested
• Key deals: Wonga (£19m), Seatwave (£10m), Glasses Direct (£10m), Alertme (£8m); Blue Ocean Wireless (£7m), Advanced Plasma Power (£6m), Enecsys (£6m), Metalysis (£5m); Liquavista (£4m), and i2O Water (£4m)
• Busiest investors: Enterprise Ireland, Scottish Enterprise, Accel and Delta Partners

My conclusion is simple: Irishmen, Scotsmen and Sonali de Rycker kept the market afloat in the first half of this year.  Well done to all and keep it up !

<--- Who would give real money to these muppets ?

The Funding Drought

Don't believe the hype.  Yes, it's a nice environment to be starting the winners of tomorrow and seed funding has not dried up.  And yes, Wellington and friends feel Spotify is the [Google][Apple] of media and pay (supposedly) €200m pre for the privilege of working with the excellent Messieurs Ek and Lorentzon.

But do not let these facts distract you, for most companies are facing a period of extended drought.

The focus should not only be on current activity but also on forward looking indicators such as this one: 75% of funds surveyed by Ernst and Young in Q1 indicate they are increasing reserves.

A number of effects are at work here:

• LPs closed for new business: Many funds are either failing to raise or are deciding to postpone their fundraising.  Hence they have to live for longer with the cash at hand.  That means reduced investment pace and a generally defensive stance.
• Companies in need: Companies are needing more cash.  Even late stage "safe" businesses suddenly revert to spending hundreds of thousands a month as they grapple with a tough economy and expansion plans gone wrong.  Exit are few and far between and the alternative sources of finance have dried up (venture debt, public markets etc).
• Optimistic funds chastened: Most funds were under-reserved for this crisis.  In other words, the ratio of reserves held back versus capital invested was too low.  Now, as you decide to hold back say $2 per $1 invested, all of a sudden cash planning shows a massive gap.  The result is ruthless portfolio triage and weakened syndicates.
• Uncertain future: most of all, lack of visibility on when this crisis ends and when liquidity returns block decision making and risk taking
• Existential crisis:  the industry must shrink, the GP's often need to reinvent what is they do, the legitimacy of the sector as a whole is in question.  Behind the short-term angst are some good questions about the abundance of fairly undifferentiated venture capital out there chasing fairly undifferentiated deals in shrinking niches.  But more on that some other day.

Net-net, the result is a two speed market where

• Atlas / Accel / Balderton/ Index / Wellington / Greylock / fill the blank are fighting hard for the "must-do" deals (wonga, just-eat, spotify etc)
• 75% of companies receive a firm but polite "no thanks, unless this is a recap" and are having to rely on their existing syndicates

Welcome to "pay-to-play" country where weakened investors who cannot follow their cash get washed out and often entrepreneurs along with them.  I have an aboslute sense of deja-vu from Q2-Q3 2003 here that is hard to shake.  Sure, this may the coming of age of VC-less bootstrapping and low capital intensity, no question.  But this exicting view of the world is oflittle solace to all the existing businesses out there who are VC backed and will have to rely on their existing investors for survival. 

We seem to be turning a corner and the worst may well be behind us, with some new fund initiatives such as Birch/Hoberman's ProFounders or the Boyz at Atomico.  But this will not solve the funding crunch fast.  For most companies out there in the "grey zone" (worthy but not obviously hot), it's tough and it's going to remain that way.

Zoopla acquires PropertyFinder from Newscorp for #2 slot in UK online real estate

Alex Chesterman, Doug, Simon and team Zoopla just completed on the acquisition of PropertyFinder to change the playing field in online property in the UK.  Zoopla has also acquired ThinkProperty.com last month from the Guardian Media Group.  Atlas Venture is the largest shareholder in Zoopla and has been there since the start alongside the management team.

We are delighted to welcome the new team members on board and to keep building on the work they have done at PropertyFinder to take aim at RightMove. 

Together we all hope we can build an innovative market leader that will continue to deliver great service to agents and a truly differentiated consumer offering, merging listings, pricing and other features unique to Zoopla.  Besides the talent there are other tangible assets including over 3 million uniques and £7M of mostly recurring revenues.

Transformational is what it is, but for me it is not surprising to see innovative startups being the natural consolidators.  The intense difficulty involved in building and retaining traffic extremely cheaply and delivering fantastic front-end experience is not diminished by the ease of launching new services and decreased technology costs.  The extremely disappointing PropertyLive.co.uk is a perfect example of how tough it is to make it work.

Solace will come from the innovators !

Covered eslewhere;

• Guardian
• Techcrunch
• The Negotiator