Supernova 2007 - State of Investing

On the panel: Ron Conway, Band of Angels; Flip Gianos; Jeff Clavie; Alex Gove, Waldon VC

Markets have changed for investing - people are taking elss money, taking money later - what does that mean in the investment community. What does this mean in return on investment? Greentech takes a lot longer than three to five years.

Question: where do you see the world of investing, from the angel POV
Ron: from 30K in Silicon Valley is the best it has ever been (even better than 98 and 99) - multiple monetization paths forbecoming viable businesses. Cost of company is a lot lower - before $1MM for Oracle DB, $1MM or Sun machines. Now, entrepreneurs can test out the product after it is out there - and can raise products now. Ron and Jeff invest in mainly Web 2.0 companies.
Flip: 600M fund investing in life sciences. Venture business is expanding - growth in life sciences and you can get a lot of money.
Jeff: "I agree with Ron." Capital efficiency plays on this scale now - money can create a lot more companies. Last three years, there is capital efficiency and monetization that we could bring companies to the next level of the market. e.g. Dogster is reaching profitability on 100k in investment. And now, angel invests are now receiving better valuations and angels now can be rewarded much better. VCs are not doing small investments (<100k to couple million), so opportunity for angels.
Alex: agrees with everything that has been said. Similar focus as Jeff and Ron. Points that are really important:

• looking to invest earlier (from past funds) - Series A deals
• more cooperation with angels (post boom, angels got the short end of the stick)
• cheaper to start companies, want to help nuture the companies
• VCs now need to prove themselves more - now VCs are unable to drag entrepreneurs, entrepreneurs are looking for real action from VCs

Question: what mistakes are you seeing this go around?
Ron: spending too much money, too soon - not enough to show after investment. Need to be frugal and accomplish something with each round of fundraising - something tangible. Last 18 months, no companies go out of business until this month. Now, four companies are going out of business. Attribute it to entrepreneurs that said, "give me $2M and I will accomplish X" - then if they did not, they could not get more. If you can not deliver, find a way to give the money back - and then the investor will look more kindly on that.

Question to Flip: what are the changes/evolutions to the investment?
Broadly, there is a lot of angel/web 2.0 services - people are investing smaller amounts but expecting more tangible progress. The mistake they are making, people do not have a very clear idea of what they are starting. If you have to go through a long, arduous process - the ones that get funded are the ones that have a focused targeted effort. Good news: iterative development. All about tangible progress.
Jeff: point out that in this market: the cost of failure is very low. With $25-50K of investment can determine viability. A plan that is not well-defined could still get funded, if there is a good team.
Flip: but if you do not deliver quickly, you are eliminated very quickly. Advertising is a spiggot - it can be turned on very easily, but turning from a small company to a big company is a challenge for most. Big VC want money opportunities that have BIG returns.
Jeff: entrepreneuers without doing their homework - who are the investors, who are the right guys to talk to, where is the ecosystem. Do the research - find the five firm, five angels so you can refine your pitch.

How does an entrepreneur do this?
Jeff: Look what are the names in the people that are invested in - surf the web
Alex: Need to come in with a warm intro. All money is not created equal - angels/VCs are aligned with particular areas. Not everyone competing in the global space. List of names that have done deals in this space - the whole notion of just blast is not the right way it works.
Alex: if you can raise cheap money from angels, go for it.

Question from audience: smarter investors are interested in more "real things" - she sees an ecosystem that is interested in the "unreal" than the "real". More important to see the "unreal" than "real". She is not a PT Barnum - how do we move forward? How do we compete?
Flip: put your head down and get the work done. The financial markets respond to things that are outside of the control of entrepreneurs. In the long term, building a real business with real users and real revenue, that is the way to go.

Ron: Angels are partners for the long run - only 2% of the cases does the investor get cashed out before the major event.
Jeff: there is an open market - control: term sheets are trying to be flexible and reasonable. Angels take a huge amount of risk with a bet on the fact that they will beat the odds - but will have casualties.

Question: what is your success rate - now? Early stage - 50% failing is fine. Ron has had 1%/2% casualty, Jeff has not. Flip: varies by marketplace (med devices: more than 50%, biotech: about 50%, semiconductors: 40% successful, software/services - failure rate is 80%) - produce more than 3x the money.

Question from audience: how do you now evaluate outsourcing?
Ron: if the CTO and he VP of Eng are employed by the company and proven track record, no problem. If all outsourced - run away. Phenominal outsourcing company (PhoDeath???).
Flip: outsourcing is good for later - not so early.

Question from audience: what is your ballpark figure of multiple on return from companies?
Ron: If I invest in 100 companies - 1/3 will die, 1/3 will get 1-2x return, 15% will get 5-10x, 15-20% will give me 15-30x, the remainder will get 50x.
Jeff: Personal hurdle is 10x in X percent of companies in his portfolio then applies a decision analysis effort on the metrics.

Question from Owen Davis: how do you look at an investment decision?
Jeff: when I invest in a company, there is a shot at a 10x return - but it is not in the documents.
Ron: pro-rata investment rights
Flip: couple of different circumstances - it is more common these days, if a small amount goes in ($200-400K) and they have to raise later, a lot of times this is done with notes or warrants. Setting a price at that point is really hard. If you are putting $1-3M, then much more sense to put structured financing.

Question from audience: what is your time frame nowadays?
Jeff: can not plan on when you will have a liquidity event. Ron: usually there is a wave of companies getting acquired quickly - five recently, then 3 to 5 years later.

Question from audience: how has the liquidity events changes and how does it change (e.g. 144 markets)
Ron: facebook and Zappos will more than likely IPO, but all the others are about M&A. The goal is about acquiring by bigger firms. I am constantly presenting companies that are ready for M&A. It is all about M&A.

Question: how does that fly in the face in the product versus feature companies?
Ron: i like them to focus on the metrics and then M&A will play later.

Question from ustream person: where can angels help?
Ron: If a company gets valued at a reasonable valuation, the M&A transaction is just fine. Just do not get reckless with valuation so that investors want to come back when you start a company.

Metrics: I asked - need to get the details from the video - but general answer - relevant to the marketplace.

Question: what is the reasonable exit ballpark?
Alex: bio-tech, nanotech is a longer terms investment, others 3-5 years.
Ron: 3-5 years is the norm. TellMe just sold - after 12 years.
Flip: we are in the money management business - do a 20% return over 25 years. This requires
Question: syndicate of investors - can you talk about the "kind" of money. How do you communicate the opportunity to non-sophisticated angels? Relationship with other investors?
Jeff: does not work with unsophisticated angels. Can not rely on the money to come back at some point. A) never get non-qualified investors in these deals. B) network of co-investors that you have invested with in the past.

Question: when to seek angel versus VC? Benefits in raising angel?
Ron: if you need $1.5M or more, go to VCs. Try this from angels, not easy.
Flip: think of this as project finance - if a small amount of money can get you users and revenue, then go for angels. Map out the milestones, and that will help determine your metrics.
Jeff: cost of capital from angels is higher than VCs, the angels and VCs work together
Alex: talk to VCs early since they can refer entrepreneurs to the "right" kind of angels. Good karma will pay off in the long run. All angels (like VCs) are not created equal.

Question: how do you approach valuation? How much art/science?
Ron: I do not spend a lot of time on valuations - this market $2-5M. Series A - $5-10M. If an entrepreneur is negotiating too much, leave the deal. Chemistry with the entrepreneur is the #1 characteristic that determines the deal.
Jeff: completely agree with Ron - their are parameters. There is an opportunity, could be risky, is the valuation appropriate. If going to take too much of the company, will not play. Maybe go find friends and family money.
Flip: hard question to answer - needs to be specific to the issue. Irrespective to this conversation, the company will have to raise more money, and it will be another issue later. Some point, the company will have to determine a market price within the greater world.

Question: convertable debt - good or bad?
Ron, Jeff: prefer to invest at a set valuation, rather than a bridge loan
Jeff: remember - you can start choosing from different sources of capital

Question: semiconductor companies - different time frames? Differences?
Flip: semicondutor cos are far more capital intensive. More complete team, business plan, tangible product - very challenging - and has a longer time horizon, large capital investment. We are talking here about quick-start processes.
What kind of multipliers? Time frame? 5 years

Question: Patent applications - reasonable to finance patents via angels?
Ron: used to funding patents.Jeff: trying to build a company to flip it is like playing Russian Roulette

Ron: LA and New York, mostly media - absolutely innovation
Jeff: established friend that goes to Europe, then I will invest. The challenge is finding engineering talent outside of the The Valley. Wall Street is recruiting the good engineers
Ron: Greylock, Vessimer, Cannon; General Catalyst loves to seed invest.
Flip: high touch business - be geographically local. Some people invest vertically - disadvantage is being on the airplanes. Angels are working out of their own pocket. There are ways - find the people that are working in that industry segment.
Alex: look at investments all along the West Coast.

Question: what do you see as the future?
Ron: Silicon Valley's dominance is only going to get better/stronger.
Flip: the 90s was building infrastructure. People are now discovering new business models. People are finding new models for monetizing the infrastructure. Going to look more like applied technologies versus fundamental technologies.
Jeff: Agree with Ron - looking forward to the next 25.
Alex: can never predict the future, looking forward to working with entrepreneurs