Smart venture investing quote

Jeff Nolan writes something very insightful about the potential changed nature of venture investing (which is near and dear to my betaworks heart):

"[I]n many ways I recoil at the notion that true invention and innovation matters less today, but it does appear to be the case. The fact remains that most acquisitions are in the $30-60 million range so if you want to generate a return across an entire portfolio of deals you simply have to adjust the economics of the deals and the process by which you engage them. Jeff Clavier is the epitome of this new model."

New York and early stage ventures

Roger Ehrenberg:

"As both an active angel investor and entrepreneur, I can say one thing for sure: macroeconomic woes aside, the New York early-stage investment scene is vibrant, exciting, and full of possibilities. I have seen more interesting deals with strong business models than any time over the past three years: deal quality is just getting better."

Could not agree more (and I've written about it at Alley Insider). The next few years, even with the macro uncertainty, should be a very interesting time for starting, and investing in, ventures in this area.

Venture Capital

Rarely have I read a more interesting essay about the psychology of venture investing than this piece written by Todd Jaquez-Fissori. I don't know Todd, but his post is a most welcome take written with a rare honesty and rich in both substance and fact:

"Point of this rambling was that there are a 1000 reasons to say no to a deal, and only one reason to say yes. Problem is you get tired of saying no. You get tired of fishing without results and you feel like you are hunting with endless ammunition but with nothing to catch. At last, the compromise.

One could argue what really causes the compromise. It is not the time sink of the deal and diligence process, but maybe the lack of quality deal flow, too much LP money in the system, everyone wanting in on the Internet boom (again!), all the VCs hoping to sell there’ technology-less’ web startup to Google, or maybe even weak partnerships that don’t properly challenge deals because of partnership dynamics."

If venture investing interests you, please read the whole thing.

Revenues kill the dream

Paul Kedrosky:

Whatever your feelings about Twitter, business plans are overrated, and profits perhaps even more so.

Why? Two reasons. First, because VCs are professional nit-pickers. Give them something to find fault with, and they'll do it with abandon. I generally tell people to come to pitch meetings with less information rather than more. Sure, you'll get pressed for more, but finesse it. Presenting a full and detailed plan is, nine times out of ten, a path to a "No" -- or at least more time-consuming than having said less.

More here.

Bubble, et al

A common topic of conversation these days seems to be whether or not we are in another tech/Internet bubble. Famous industry names have weighed in such as Forbes/Karlgaard (not sure), Scoble (yes but its different this time), Kedrosky (not only is it not different, its actually riskier this time).

While I don't pretend to be smart enough to begin to analyze such an esoteric question, having been involved in technology venture capital since 1998, I will make a few, lightweight, observations:

-At one, fundamentally important, level venture capitalists (VCs) are buyers of stock. The stock happens to be illiquid, unbelievable risky to get a return from, and hard to value, but VCs buy stock in companies nonetheless.

-All buyers of equity should attempt to buy at a low price and sell at a higher price.

-The valuations (ie, price of the stock) of venture backed companies are rising precipitously.

- I am seeing a marked increase in M&A books done by bankers pitching venture backed start ups, with astronomic valuations associated with the potential sales of such start ups

What does this mean? I lived through this same scenario in 1998-2001, and I think it always ends up badly for VCs and start ups in terms of returns (to both) and expectations (in running their businesses). Higher venture round valuations mean higher exits are required to sustain appropriate VC returns, which leads to entrepreneurial business decisions being made that are a function of expected returns, and not primarily on sound business judgment.

Whether this is a bubble or not, I don't know, but any lack of discipline in any investing arena can/may/will lead to money and time being lost.