What color are these glasses?
I spent half of the last two weeks in California working with the California Healthcare Foundation (see the website for current projects), which always prompts the question of "what did I come back for?" Leaving that aside, I was amazed to see that the lead article in the September 20th edition of the small business section in the New York Times was titled "Getting in on the Next Little Thing", by Gary Rivlin & that it was an anecdotal account of high times returning to high-tech venture investing. To be fair, it did have some actual statistics, but for the most part it described several small company's highly positive experiences in the current (West Coast) venture environment. I spent 1999-2001 doing consulting for technology companies in the Bay Area & Silicon Valley (as CTO for Upstream Consulting), so I experienced the VC thing of the dot-com boom first hand. I am currently looking for zero stage funding for a company here in the Boston area, so I am experiencing the angel funder & VC thing of this era (no name yet?) here first hand - All I can say is "What is Gary Rivlin smoking?"
I remember 1999. I remember sitting in Upstream's offices in Emeryville, CA interviewing a prospective client. This was a 36 year old (i.e old) CEO whose last company was failing largely because of him & his management team, & who was being put in place as CEO of a newly funded company in a similar segment by the VCs. My business partner (John Rymer, now a Research VP at Forrester Research) asked him what his business plan for the new company was. His reply was immediate - "World domination". That company failed too, but not before about $26M had been funneled into it. In 1999 there were 1009 IPOs with a total amount of capital raised of about $115B (all figures from ipohome.com). Remember ICG that opened at $12, & closed the year at $170 for a 2733% gain or my personal favorite (I was CTO there two years later), Agile Software that opened at $21 & closed the year at $217 for a 934% gain? Last year (2004) there were 360 IPOs that raised a total of $44.5B. The biggest gainer was not Google, which opened at $85 at closed the year at $184 for a 117% gain, but 51jobs, a Chinese human resource & recruiting speciality firm that publishes newletters to connect the parties in hiring process. It opened at $14 & closed the year at $52.5 for a 275% gain. The average gain of the top 25 IPOs in 2004 was 130% - the average gain of the top 25 IPOs in 1999 was 1300%. It's not 1999 anymore.
In the first half of 2005 there were 91 venture-backed IPOs which raised ~$28B. It's really not 1999 anymore. Which brings me to my recent experience. I have been trying to raise zero stage money for a software & services company for about the last 4 months. I have been talking with groups who do angel funding & zero stage VC companies. The company is in a hot area with a technology that I know well and was one of the early developers of. I have a local company that has agreed to do a product prototype with us & to support the development in kind (contribute their people's time as well as server & software access). The funders have been telling me several things:
Thing1: We realize that you have yet to build the product, but please tell us in detail the specific value proposition, the business plan including hiring plan & budget, the expected return on investment for both the investors & customers & any metrics you can suggest or evidence for your assumptions.
Thing 2: It's interesting that this company will allow you to do a prototype, but why aren't they paying in full for its development. Don't they think it's worth the investment? If they don't, why should we?
Thing 3: We understand that your plan calls for 2000 additional effort-hours of development above what you do for this company, but if they did pay for their part of the development work, why would you need an investment from us?
Thing 4: If we did invest, we would need to get all of our investment back plus a return when we sell your "stock" to the Series A funder. We would want a 150-200% return.
Most of this is a win for them, lose for me proposition. I was the fifth person into Riverton Software in 1995. We went from that to shipping two product versions & over 200 customers in 24 months, but we did not have a 200% return. The chance of any zero state start-up doing this these days is slim. The company Gary Rivlin wrote about, that had VCs chasing them, was 18 months old & had shipped two versions of their product - hardly a zero state venture. Maybe I should ask Gary Rivlin to invest... stay tuned.
I remember 1999. I remember sitting in Upstream's offices in Emeryville, CA interviewing a prospective client. This was a 36 year old (i.e old) CEO whose last company was failing largely because of him & his management team, & who was being put in place as CEO of a newly funded company in a similar segment by the VCs. My business partner (John Rymer, now a Research VP at Forrester Research) asked him what his business plan for the new company was. His reply was immediate - "World domination". That company failed too, but not before about $26M had been funneled into it. In 1999 there were 1009 IPOs with a total amount of capital raised of about $115B (all figures from ipohome.com). Remember ICG that opened at $12, & closed the year at $170 for a 2733% gain or my personal favorite (I was CTO there two years later), Agile Software that opened at $21 & closed the year at $217 for a 934% gain? Last year (2004) there were 360 IPOs that raised a total of $44.5B. The biggest gainer was not Google, which opened at $85 at closed the year at $184 for a 117% gain, but 51jobs, a Chinese human resource & recruiting speciality firm that publishes newletters to connect the parties in hiring process. It opened at $14 & closed the year at $52.5 for a 275% gain. The average gain of the top 25 IPOs in 2004 was 130% - the average gain of the top 25 IPOs in 1999 was 1300%. It's not 1999 anymore.
In the first half of 2005 there were 91 venture-backed IPOs which raised ~$28B. It's really not 1999 anymore. Which brings me to my recent experience. I have been trying to raise zero stage money for a software & services company for about the last 4 months. I have been talking with groups who do angel funding & zero stage VC companies. The company is in a hot area with a technology that I know well and was one of the early developers of. I have a local company that has agreed to do a product prototype with us & to support the development in kind (contribute their people's time as well as server & software access). The funders have been telling me several things:
Thing1: We realize that you have yet to build the product, but please tell us in detail the specific value proposition, the business plan including hiring plan & budget, the expected return on investment for both the investors & customers & any metrics you can suggest or evidence for your assumptions.
Thing 2: It's interesting that this company will allow you to do a prototype, but why aren't they paying in full for its development. Don't they think it's worth the investment? If they don't, why should we?
Thing 3: We understand that your plan calls for 2000 additional effort-hours of development above what you do for this company, but if they did pay for their part of the development work, why would you need an investment from us?
Thing 4: If we did invest, we would need to get all of our investment back plus a return when we sell your "stock" to the Series A funder. We would want a 150-200% return.
Most of this is a win for them, lose for me proposition. I was the fifth person into Riverton Software in 1995. We went from that to shipping two product versions & over 200 customers in 24 months, but we did not have a 200% return. The chance of any zero state start-up doing this these days is slim. The company Gary Rivlin wrote about, that had VCs chasing them, was 18 months old & had shipped two versions of their product - hardly a zero state venture. Maybe I should ask Gary Rivlin to invest... stay tuned.
posted by David Hartzband at 10:12 AM
1 Comments:
like tumbler and tipsy days hopefully we will remain in high spirits. well, good day
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