Good Riddance 2009…Hello to a Better 2010 in the VC Market

23 12 2009

As most know, throughout 2009, I’ve posted about the dismal VC market in ConnTIP.  The drying up of exit opportunities, with fewer M&A’s and even fewer IPOs, didn’t help matters much.   Here’s a chart posted by the WSJ which is a pretty way of showing the awful 2009 VC market:

[VCYEAR]

 Still, an article posted today on WSJ suggests that 2010 may be a pretty good year in the VC market (After Dry Year, Start-Ups Are Poised to Get Cash).  Some encouraging observations made by VCs in the post:

  • Geoff Yang, a general partner at venture firm Redpoint Ventures, is quoted:  “When the year started it couldn’t possibly have been worse…Now there’s a significantly more optimistic view” .
  • Tom Baruch, of CMEA Capital, says that with the IPO window now appears to be opening, and expects up to half a dozen of his firm’s start-ups to file to go public in the foreseeable future.

Bottom line is for everyone in the field to chalk up 2009 as a learning experience, and, hopefully, start ramping things up to 2010!

-Gregg J. Lallier


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Some States Doing Their Part: Tax Credits for Venture Investments

10 12 2009

Wall Street Journal has a blog entry from last week about a recently passed law in North Dakota that extends a 45% tax credit to angel investors who back homegrown businesses (North Dakota: More Than A Flyover State).  Two new angel funds, the Grow Dakota fund (estimated $2 million) and Aurora Angel Fund ($5 million) are being created as vehicles for the program, where investors can invest in these funds, and receive the tax credits, and the funds would invest in target companies in the state.  This is a great example of states doing their part to help solve the Need for Seed problem that exists throughout the country.  Some other states have similar tax credit incentives for local venture investment:

  •  Maine Seed Capital Tax Credit Program offers state income tax credits to investors for up to 60% of the cash equity provided to eligible Maine businesses, which may be used for fixed assets, research or working capital.
  • Iowa Venture Capital Credit is allowed for investments made into the Iowa fund of funds.  The Iowa fund of funds makes investments in venture capital funds who make a commitment to consider investments in Iowa businesses (capped at $100 million in the aggregate, and $20 million of credits in one year).
  • Wisconsin has two tax credit programs:  Angel Investment and Venture Capital. Under the Angel Investor Tax Credit Program, angel investors and angel investor networks that invest in qualified new business in Wisconsin can claim an income tax credit on that investment, equal to 12.5% in each of two years. Under the Venture Capital Tax Credit Program, venture capital funds that are certified by the WI Department of Commerce and that invest in qualified new businesses may be eligible to claim a 25% income tax credit on that investment. 

These are great ways for states to help incentive intrastate venture/angel investments, and a direction that Connecticut and other states hopefully will soon follow.

- Gregg J. Lallier


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Golden Rule Is Still the Rule

10 12 2009

He Who Has the Gold Makes the Rules

The Golden Rule, as the above is known, is something that I use often when counseling start-ups going through their first round of venture capital/seed money.  It comes into play not only at the term sheet stage of negotiating the preferential privileges of the venture capitalist’s investment (e.g. liquidation preferences, anti-dilution rights, veto rights, board seats, etc.), but also after the investment as the venture capitalist tries to ensure the maximum value of its investment through macro (and sometimes micro) management.   A recent Wall Street Journal article highlights this give-and-take with VCs in Who Has The Gold To Make The Rule – VC Or Entrepreneur?.

The current market environment, where venture (and early stage/seed) money is hard to come by, only helps to reinforce the Golden Rule (which exists also in a good market environment…although, maybe, in a less stringent form).  I recently attended the New England Venture Summit in MA, and the panels of VCs continually brought up the fact that tight venture market is going to continue for some time.  Given that, entrepreneurs need to recognize that, in order to get the money needed, they will need to cede some power and control to their investors.  Still, my advice to these start-ups is to (1) still try to get the best deal that they can get and (2) more importantly, try to look at the increased VC presence as a good thing for their business.   The right VC can add more than just their money:  experience, connections and advice all should come along.  Thus, it’s important to do one’s due diligence of prospective VCs to find one that will fit with the culture and plans of the company.  Jeff Glass, a managing director with Bain Capital Ventures, brings up this point in the WSJ article:

A huge part on both ends is just personal chemistry between management and board; board and CEO; investor and management…I would advise to spend more time diligencing the VC or PE firm. Everyone’s cash is green until you have a problem.

Everyone’s cash is green until you have a problem….maybe that should be called The Green Rule.

- Gregg J. Lallier


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Investment Considerations for Start-Ups

4 12 2009

Just as start-ups are creatively developing ways in which to do more with less money in today’s environment, start-ups and VCs are developing creative plans and alternatives for investment.  Two recent Mass High Tech articles highlight this trend:

  • Three alternate routes to financing a startup, as the title implies, describes three alternative ways that VCs and angels are structuring early stage investment in this tight VC/angel market: 
    • “Pay for Play” is an alternative used by Revolutionary Angels.  Start-ups looking for capital pays the organization $4,995 to present its business plan to the Revolutionary Angels’ board of entrepreneurs and executives as part of a business plan competition (current competition submission period of 10/1 – 12/31 described here).  Revolutionary Angels will accept 100 business plans, and invest up to $300,000 in two winning companies (up to $250,000 for the leading plan and up to $50,000 for the runner-up).   In exchange, Revolutionary Angels takes up to 10% in common equity in the companies.
    • Debt Funding is an alternative used by LaunchCapital Small Business (see previous ConnTIP post LaunchCapital Small Business Product).
    • Customer Financing is where the a potential customer of the start-up’s product pays for the product in advance (i.e. prior to be ready for market) in exchange for an equity position.
  • Four values in family financing of startups, as the name also implies, describes four things to consider when a start-up takes early money from friends/family.   A great alternative to traditional equity investment by friends/family is presented in the first value:  debt which is convertible into equity upon the closing of professional investment.  A hard thing to know, or even estimate, is the price per share/unit of equity that a friend or family member (or, really, any early-stage, non-sophisticated investor) would be charged.  As the post says:

Taking equity investment is complicated and expensive.   At the early stages of launch, a startup can ill afford the legal fees required to generate an equity term sheet.  Dealing with inexperienced friends-and-family investors, it may be nearly impossible to set a reasonable valuation.

By using a convertible debt instrument, you’re basically leaving the valuation process to the professional investors (or, as the post describes, “punting” it).  This is a great consideration that more start-ups should consider.

- Gregg J. Lallier


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Start-Ups Learning (or Need to Learn) to Do More With Less

3 12 2009

As most start-ups looking for capital knows, the availability of such start-up capital has been decreasing over the past 10 years, and has accelerated with the recent economic downturn.  Jill Gambon writes about this on Mass High Tech (Startups learn to stretch their finances).   Any start-up looking for a “reality check” should recognize the following points made in the article:

Gone are the days when ideas sketched on the back of a Starbuck’s napkin or a business existing only as a PowerPoint presentation could woo investors. Venture capital investors now expect thorough business plans, revenue forecasts and even an early version of the product or service with paying customers before they’ll write a check.

“We are expecting firms to go much farther on a short dollar,” said Elon Boms, managing director of LaunchCapital LLC, a Boston-based investment firm that provides early-stage capital to startups and small businesses.

Given this environment, it is now more important than ever for start-ups to efficiently use the dollars that they have, including things like founders deferring salaries, outsourcing developmental work, home offices, and other virtual type business models.

- Gregg J. Lallier


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LaunchCapital Small Business Product

6 11 2009

LaunchCapital is a Cambridge, MA-based firm focused on early-stage financing, with offices located in New Haven, CT.  It has recently unveiled “LaunchCapital Small Business” (LCSB), which is a lending product for small businesses (See description from LaunchCapital here).  LCSB lends up to $150,000 to early-stage, small businesses that are within six months of gaining revenue.  Because of the high-risk nature of such loans, LaunchCapital will receive a small equity stake in the businesses rather than charging high interest rates.

Another innovative way that LaunchCapital is helping to keep entrepreneurship going in the marketplace.

-Gregg J. Lallier


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Alternatives to VC Financing

6 11 2009

Start-ups should give a read to a recent Mass High Tech article entitled Cleantech tries on corporate funding and expertise in lieu of venture capital.  It talks about cleantech companies like, A123Systems Inc., looking at strategic investments from other operating companies as an alternative to venture capital investment.  Although the article centers around cleantech, it has validity for most hi-tech start-ups.  Given the tight VC market, start-up tech companies need to be creative about sources for the capital needed to get to their next stage of product/business development.  Furthermore, larger companies have significantly cut back on their R&D departments, and may be looking for these types of strategic investments as an alternative to their in-house R&D. 

-Gregg J. Lallier


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Tips to Score VC Funds

21 10 2009

A recent article on Entrepreneur lists 7 important factors that VC’s are considering in investing in companies in this tight VC market.  Nothing really groundbreaking there, but it’s important for start-ups to realize, as expressed by John Elton of iNovia capital, that:

Remember that VC dollars are very expensive and come with very high expectations of growth and outcomes

- Gregg J. Lallier


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Start-Ups with Revenues More Attractive to VCs

4 05 2009

Cheng Wu, co-founder and chairman of Azuki Systems Inc., has an article at Mass High Tech explaining how, in today’s market, those start-ups which can show low burn-rates and higher revenues are more attractive to venture capital investment (“Entrepreneurs need more than great ideas to land VC funds“).  As ConnTIP has highlighted in the past, the recent downward trends in VC activity (see 1Q VC activity here) makes those start-ups with low overhead have an inside track to VC funding (See “Lowdown on LILO’s“).  This is in large part due to the concurrent downward trends in “exit” opportunities, whether that exit is  in the form of a merger/acquisition or IPO (See 1Q M&A activity here). 

It’s always important for tech start-ups to know of VC/exit market trends in order to be in a position to fully take advantage of VC paradigms.

- Gregg J. Lallier


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VC Deals Down for 1Q Nationwide; Not as Bad in New England

20 04 2009

A bunch of reports today about venture deals being down 50% nationwide in 1st quarter of 2009 when compared with 1st quarter of 2008; however, VC deals in New England fared much better with the slippage only being in the 15.5-16% range (See, MHT story, Information Week story and xconomy.com story).  As noted in xconomy.com, this has a “glass half full” spin to it; still, as xconomy goes on to say:

the New England figures, from Dow Jones VentureSource, showed $594 million pumped into 61 regional deals during the first quarter, against $703 million invested in 83 deals in the same period of 2008.  Compare that to, oh, say, the San Francisco Bay Area (which includes Silicon Valley in the VentureSource data). It still led the nation, with $1.14 billion invested in 139 deals. But the dollar figure was 57 percent off the first quarter of 2008, when $2.67 billion was pumped into 254 deals—and Q1 2009 saw the area’s lowest totals, in both dollars and deals, in at least a decade, according to VentureSource.

A Connecticut company, Marinus Pharmaceuticals of Branford, CT, made the top 10 list for venture deals in the 1Q with a $20 million Series B raise from its existing investors, Canaan Partners, Domain Associates, Foundation Medical Partners, and Sofinnova Ventures (See press release here).

Moral of the story for Connecticut tech start-ups? 

Keep your head up…it could be worse.

- Gregg J. Lallier


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