Felicis Ventures Blog

VCtips: Tweets Worth a Thousand Experiences...

My friend Bryce Roberts from OATV started VCtips on Twitter to leverage the collective wisdom of some great investors to help founders. The initial group consists of early stage VCs and angels, many whom I feel fortunate to count as friends: Josh Kopelman, Chris Sacca, Rob Hayes, David Hornik, Andy Weissman, Bijan Sabet, Albert Wenger and yours truly.

Too Much Money Chasing Too Few Exits ?

  Fundraising by VCs hit a crescendo in 2007 according to NVCA, jumping almost 10% from 2006, totaling to about $34.7 billion. What's even more impressive is that number is almost 9 times (!) the amount of money raised in 2002, merely 5 years back. Contrast that with recent statistics on exits: first quarter of 2008 saw just 5 IPOs amounting to just over $280 million according to research by NVCA and Thompson Financial. The IPOs hit a low not seen since 5 years ago. Similarly the number of M&A deals totaled 56, the lowest in a decade.

While it's incredibly difficult to reconcile the exits with the investments, since most of the former transactions occur years after the latter, it's clear that the venture industry will face tremendous pressure this year.

It will be interesting to watch this space in the next months. Without a doubt, this trend is likely to bring a lot more attention to early stage investing, as well as force funds to move up on the funding cycle chasing lower risk deals, and acting more like PE funds.

Top 20 Worst Venture Capital Investments of All Times

$1.7B is the total investment lost in just the first 4 of top 20 Worst Venture Capital Investments of All Times as compiled by InsideCRM. The common theme in all of these companies from what I can tell is that the majority of them burned through more than $100 million each in venture funding before closing the doors, being sold at a major loss or losing significant chunk of their market value in a short time. I think it should serve as a great reminder to all founders and investors, that throwing good money after bad, chasing "boil the ocean" kind of ideas, does not make a recipe for success.

Immigration's impact on US economy: $500B in market cap

There is no doubt that immigration is on top of many agendas around the country, including Washington DC. When I was visiting DC in November 2005 with Lead21, almost every Congressman and Senator we met with made a remark about immigration - but mostly limited to the public concerns about cross-border issues with Mexico. Disappointed, I left our capital wondering why no detailed reports have been published to quantify the actual [and positive] impact of immigration on US economy.

Fast forward 12 months, Venture Beat ran an awesome piece today on the impact of immigration from the perspective of venture capital. It's eye opening to say the least: the study by NVCA found that:

• Venture backed companies started by immigrants contributed $500 Billion in market capitalization to the US economy
• A quarter of of the venture-backed companies that were started in the last 15 years and have gone public were started by immigrants
• Immigrant-founded companies employ about 220 thousand people in the US

This is probably just the tip of the iceberg, as the positive impact of immigration, called "America's Secret Weapon" by Deepak Chopra, an immigrant himself, is likely to exceed all of the above numbers because of the multiplier effects, especially since most high-tech jobs are white collar, high income and result in additional wealth creation as the beneficiaries of those public companies boost the economy by investing in return in new start-ups and spending locally.

When I was frequently asked about Google's secrets of success by visiting delegations from Europe while at Google, my favorite answer was immigration. Most people from Europe didn't realize that some of America's most successful companies like Google, Intel, and Yahoo, not only were started by immigrant entrepreneurs but also employed a large number of immigrants. We had people from tens of countries, as early as when we had merely 100 employees at Google.

I hope the NVCA study mentioned by Mark Heesen becomes another wake-up call for our politicians in DC: immigration is one of the biggest contributors to the success and resilience of the US economy. As such it should not be viewed as a threat but as a competitive advantage that needs to fostered and reinforced, not shot down.

Median Pre-Money Valuation Going Up But Exits Limited

One of the more sobering messages from the recent Web 2.0 Conference in San Francisco was succinctly put by Ram Shriram - he mentioned that compared to only 2 IPOs this year, he expected most exits to come in the form of M&A deals in the sub $100 million range. According to Dow Jones Venture Capital Analyst's October issue, median pre-money valuation  for a company shipping product (in the IT segment) jumped to about $24  million in the first half of 2006 while median second round pre-money valuation in the same segment was about $20 million. That doesn't leave much room for great returns on investment, let alone killer paybacks such as on YouTube or Google that can easily boost a whole venture portfolio's returns.

This of course can be interpreted in several different ways, but as an angel investor my personal takeaway is to stay focused on early stage investing where chances for greater returns are higher, and then reducing the risk through a combination of portfolio approach, investing in what you know (to add value when needed) and then leveraging new innovative offerings like Amazon's S3, EC2 when applicable, to flex the limited resources of the start-up and pay more attention to developing the product, the revenue model and execution.

As for scrappy and frugal start-ups, I'd rather not subsist on a diet of ramen noodles, was lucky to experience the other side at Google as an entrepreneur in the beginning when we could enjoy pizza or even sushi delivery, so I don't think I will go as far as asking what the founding team usually eats for dinner - especially when my brain works best on good food. Nevertheless, I do have to say that we also did use door panels for table to save money on office furniture and were always very conscious about spending capital most efficiently.