Wednesday, March 28, 2012

The M&A Market: All the Right Conditions, but No Buyers

"Everybody showed up to the party but nobody wanted to dance," is how Dan Tiemann, Americas transactions and restructuring lead for KPMG, describes the global merger and acquisition scene in 2011.

The party he is referring to is what many consider the perfect setting for M&A: companies with ample amounts of cash on hand, record-low interest rates and countless undervalued firms waiting for buyers. And while the first half of 2011 looked strong, the second half trailed off considerably, hampered in part by the European debt crisis and continued uneasiness about the U.S. economy. Last year ended with $2.81 trillion in global merger and acquisition volume, just a 3% increase from a very tepid 2010, according to data compiled by Dealogic.

Tiemann and other observers agree that the same scene is present in 2012, and although confidence is growing, they expect only a slight increase in dealmakers to hit the dance floor. "I think it's going to be a little bit sideways," he says. "There are the same fundamentals as a year ago, but then there are other factors like the [upcoming presidential] election that are uncertain." Wharton finance professor Pavel Savor, however, is "cautiously optimistic. I see a little more [activity] in North America as the economy is doing better."

Corporate executives are feeling the same hesitation. Forty-one percent said they felt neither more nor less optimistic than last year about merger and acquisition activity, according to a recent Knowledge@Wharton/KPMG survey of 825 executives at U.S. corporations, private equity firms and investment funds. Still, seven out of 10 respondents said their company would make at least one acquisition this year, compared to just over half of the respondents in 2011.

But most of this new activity originates from the private equity and investment firms. When just corporate CFOs were queried, only 18% said they expect to participate in an acquisition in 2012, down from 26% from last year, according to a recent survey of 600 such executives conducted by Bank of America and Merrill Lynch. And with just two full months of deal activity logged in 2012, results are not looking up. Although February's global merger and acquisition activity was strong, January was the weakest in five years. Overall, both months brought in $390 billion of deal volume, down 16% from the first two months of 2011.

Searching for Motivation

When a company does want to buy, the top reason this year will most likely be simply to grow. According to the Knowledge@Wharton/KPMG survey, nearly one-third of respondents said the main reason they plan to make an acquisition was to "expand geographic reach." Wharton management professor Lawrence Hrebiniak notes that organic growth is costly and time consuming, which makes buying another company a more attractive option. "Acquisition allows a company to move more quickly, acquire the technical and marketing know-how in one transaction, and avoid the retraining and capabilities enhancements needed under organic growth," he says. Hrebiniak adds that large amounts of cash reserves are also making acquisitions more attractive for some businesses in 2012. "Many companies are cash-rich -- money is burning a hole in the pockets of a lot of CEOs and CFOs."

Nonfinancial companies have more than $2 trillion of cash or other liquid assets on their books, up nearly 5% from last year, according to the Federal Reserve. This accounts for 7% of the assets of nonfinancial companies, the most since 1963. In the Knowledge@Wharton/KPMG survey, nearly half of the respondents said one of the key factors that would facilitate a deal would be "large cash reserves."

Still, the state of the economy will be the largest factor in determining deal activity, Savor says. He notes that no matter how eager executives are to grow or spend their cash, deals will not get done if another debt crisis-like scenario is looming. "It's hard to track down a single driver of M&A," Savor states. "One thing that is often a prerequisite is some minimum level of macroeconomics. When there is a stressed macroeconomic environment, there is typically much less M&A."

Savor adds that a favorable political environment also helps spur merger activity, noting that tense politics make for uncertain taxes and, typically, lower investments. Consequently, in the United States, merger activity has been slow to pick up pace because of political wrangling between the two parties and the upcoming presidential election in November.

Industry Trends

Besides ongoing political party battles, recent legislation enacted by Congress is also likely to have an effect on merger activity. For example, implications of the Affordable Care Act of 2010 will start to hit the health care industry as providers find ways to give better service while making more money, according to John Kimberly, a Wharton management professor."My guess is that it's going to come down to incentives for consolidation for the provider side of the industry, and what you are going to see is the creation of integrated care networks," he notes.

On the research and development side of health care, Kimberly expects more mergers and acquisitions -- especially global ones -- as companies are pressed to create new products. Indeed, for 2011, health care saw $228 billion of merger and acquisition volume globally, nearly the same as 2010, according to Dealogic, making it the fifth most active industry worldwide. In the U.S., it was the top industry for deals with $164 billion of volume. Express Scripts' pending deal to buy Medco Health Solutions accounted for $34 billion of that total, making it the second largest deal for the year.

Recent legislation is also likely to stir up more acquisitions in the financial services industry in the United States. The Dodd Frank Act of 2010 increased the regulatory burden for banks of all sizes, which may now prompt many companies to consider selling out or merging to achieve economies of scale. "The rules in Dodd Frank really encourage consolidation for the smaller players," Tiemann says.

Hrebiniak also makes the economies of scale argument for the mining and utilities industries as operation costs are expected to increase in both areas. The utilities and energy industries had $253 billion of merger and acquisition volume globally for 2011, up 20% from the previous year, Dealogic reported. This included the third largest deal overall: Duke Energy's January announcement that it would buy Progress Energy for $25.8 billion. Mining saw a similar increase, with $165 billion of total volume.

The technology sector should also continue its merger and acquisition streak, according to Tiemann and others. He notes that because technology is an industry that experiences constant change and development, acquisitions are expected to continue as smaller companies make it big with the latest innovations, and larger companies seek to expand their reach. In 2011, the technology sector saw a 44% increase in volume from the previous year to $222.6 billion in deals, according to Dealogic. And while the sector recorded average overall volume, the number of deals -- 5,795 --was far and away the most of any industry.

How to Move the Market

Regardless of the specific industry, experts agree that M&A growth in 2012 will be most plentiful in the U.S. In 2011, M&A activity in the country was up 18% from the previous year, topping $1 trillion in volume, and eight of the 10 largest deals involved U.S. companies. Despite the still recovering economy, Savor says that the United States will continue to dominate deals globally simply because -- together with Europe -- it typically makes up three-fourths of all global mergers and acquisitions activity. And with Europe's economy on much shakier ground, the U.S. is likely to be the main M&A arena.

As Europe digs out of a far-reaching debt crisis and continues to experience a very difficult borrowing environment, experts note that deal activity there will continue to be very sporadic. For all of 2011, merger and acquisition volume in Europe was up 4%, to $811 billion, compared to the previous year. However, it was down 25% when comparing the fourth quarters of both years, according to Dealogic. "My sense is there is a lot of pent up M&A activity, and my guess going forward would be that levels are going to pick up in the U.S.," Kimberly says. "But it's not going to pick up in Europe bcause [that region] is still struggling."

Tiemann notes that China will also be a "big player" when it comes to mergers and acquisitions, adding that the government recently added $30 billion to the Chinese Investment Corp., a state-run fund that invests in companies around the world. In 2010, China had $188 billion of deal volume, up 5% from 2010, making it a very distant second to the U.S. when it comes to country rankings for merger activity.

The emerging markets are also places to watch in 2012, Tiemann adds. He notes the growing number of private equity funds in Brazil that are looking to buy companies in other parts of the world. In 2011, Brazil was the seventh most active country for deals, with $83 billion of volume, although it was down 45% compared to the previous year. Overall, emerging markets saw a 17% decline in mergers and acquisitions from 2010 to 2011, Dealogic reported. According to Tiemann, this is partly because there is more local competition in emerging markets, which means that global interest in these areas has leveled off. "The story around the emerging markets is how much capital is flowing out of these countries," Tiemann says. "It used to be how much was flowing into them."

Monday, March 26, 2012

Entrepreneurs create jobs, but that is not their chief virtue

A MAN walks into a conference room at the W hotel in downtown Austin. The setting, sleek and hushed, says business. The trainers—red, puffy, and paired with a sports coat—add a wink: new business.

“There are crazy awesome start-ups happening in every nook and cranny in this country,” says Scott Case, the man in question. He is the boss of the non-profit Start-up America Partnership, which means to help fledgling entrepreneurs by smoothing their access to private-sector money and mentoring. The idea is that as these young companies grow, they will create jobs—new jobs, good jobs—and related economic activity that enriches the entire community. Some of the start-ups may even be “gazelles”, companies that grow by leaps and bounds.

Last year the Kauffman Foundation, a think-tank focused on entrepreneurship (and which provided initial funding for Mr Case’s partnership), released a report explaining that new firms typically create about 3m jobs in America each year. Between 1980 and 2005 they contributed some 40m net new jobs—as many as the country’s entire private sector managed over that time.

So people are keen to help. Barack Obama announced a start-up initiative at the beginning of last year, and last month he renewed the call. Congress is considering a bipartisan Start-up Act that could provide some tax credits, regulatory exemptions, and so on. Regional economic development groups have taken up the idea of economic “gardening”. The philosophy there is that regions should focus on core strengths and home-grown businesses, rather than squabbling with their neighbours in an effort to win a new car plant.

This is mostly sensible. Many of the proposals mooted for start-ups—expanding the number of visas for highly skilled immigrants, for example—are generally sound. And some start-ups do turn out to be gazelles. Next month, for example, will mark five years since Twitter came to national attention at SXSW, Austin’s annual internet festival.

Still, there is cause for caution. For one thing, there is some ambiguity over what sort of companies the policymakers are trying to promote. Mr Obama talks about “start-ups and small businesses”. Private-sector people, however, seem to have less interest in the latter. They would rather live in Silicon Valley than on Main Street. But high-tech concepts are not the only viable business ideas. The Austin metro area, for example, is home to just two Fortune 500 companies, Dell and Whole Foods; both, oddly, were founded in the early 1980s by dropouts from the local university.

Another issue is that the effects of start-ups on employment may be modest. Perhaps as a result of the recession, the number of new companies that actually employ people is declining. The cohort of companies born in 2009, according to Kauffman, created only 2.3m jobs.

Last month the White House invited Mike Krieger, the co-founder of Instagram, to attend the state-of-the-union message to show off America’s fastest-growing social mobile start-up. “What began as a small, two-person start-up working out of a pier in San Francisco has grown to a dozen employees,” Mr Krieger wrote. Even the bigger companies may not be labour-intensive. There is a danger that start-up jobs will be the next variant of “green jobs”: worthwhile, but slightly overhyped.

Monday, March 19, 2012

A Boom Time for Education Start-Ups

Despite recession investors see technology companies' Internet moment
By Nick DeSantis

Harsh economic realities mean trouble for college leaders. But where administrators perceive an impending crisis, investors increasingly see opportunity.

In recent years, venture capitalists have poured millions into education-technology start-ups, trying to cash in on a market they see as ripe for a digital makeover. And lately, those wagers have been getting bigger.

Investments in education-technology companies nationwide tripled in the last decade, shooting up to $429-million in 2011 from $146-million in 2002, according to the Na­tional Venture Capital Association. The boom really took off in 2009, when venture capitalists pushed $150-million more into education-technology firms than they did in the previous year, even as the economy sank into recession.

"The investing community believes that the Internet is hitting edu­cation, that education is having its Internet moment," said Jose Ferreira, founder of the interactive-learning company Knewton. Last year Mr. Ferreira's company scored a $33-million investment of its own in one of the biggest deals of the year.

The scramble to make bets on a tech-infused college revolution has led to so many new companies that even Mr. Ferreira can't keep track.

Udacity, Udemy, and University­Now all have plans to revolutionize online learning. There's the Coursebook, a young online-learning start-up. And Coursekit, a nascent challenger to Blackboard in the market for learning-management software. And Courseload, the Indiana-based digital-textbook enterprise. And CourseRank, the class-sorting outfit acquired by the textbook vendor Chegg two years ago.

This isn't the first ed-tech boom to crowd the market with companies whose names sound alike. A similar wave hit in the late 90s, during the larger dot-com frenzy. But today's investors believe this round of growth is different. Michael Moe, co-founder of the investment-advisory firm GSV Asset Management, said the first ed-tech wave had been based mostly on euphoria that anything digital would work.

"There were just a bunch of things that were, candidly, thrown against the wall," he said of the 90s start-ups. Some companies pitched ideas that had no sustainable business model. Others, Mr. Moe added, were years ahead of their time. (Courseload, the digital-textbook start-up revived in 2009, was born in 2000, but its leaders say tools weren't available to support it until more recently.) When the dot-com bubble burst, investors fled the market.

Since then, huge ad­vances in computing power at colleges have created a fertile ground for companies offering technology services. Rob Go, a partner at the Boston-based venture firm Nextview Ventures, said near-universal wireless Internet access, high-speed connections, and growing comfort with cloud-based software make it easier for today's start-ups to get traction on campuses.

"The promise may be very similar to what people were promising 10 years ago," Mr. Go said. "It's just that rolling it out was way more challenging."

Silicon Valley's strong feedback loop has also helped connect engineers sporting impressive track records from their work in other Internet sectors to investors with deep pockets. "The level of talent that's being attracted to the education-technology world today is insane," Mr. Moe said.

More Money in Play

Michael Staton, the founder of a start-up called Inigral, was early to the ed-tech party. He started the company, which offers a Facebook-powered application for universities, nearly five years ago.

"There was no ed-tech start-up ecosystem," he said. When he founded Inigral at 27, most of the networking events he attended were meant for other Internet companies, advertising networks, or gaming start-ups. At most, there were two ed-tech companies in the room. "It was kind of a lonely world to be saying, I'm starting a company in education," he added.

But recently, Mr. Staton said, "something in the zeitgeist" is giving education entrepreneurs access to money, advice, and talent that was once reserved for other sectors. And it's not all coming from for-profit outfits; last year, the Bill & Melinda Gates Foundation gave Inigral $2-million of a $4-million investment.

Mr. Staton believes that a growing acceptance of online learning, rather than any particular new technology, has allowed start-ups to gain support for new products. Now 31, Mr. Staton said he's become known as a "grandfather" in the ed-tech scene, which has changed drastically since Inigral's early days.

"There are events where it's standing-room only specifically for education entrepreneurs," he said. One example is the Seattle nonprofit group Startup Weekend's series of 54-hour EDU gatherings, at which entrepreneurs get together to pitch and create education-technology businesses in the course of one jam-packed weekend. The events began in September 2011, and their leaders announced a one-year partnership with the education giant Pearson early this year.
The market is so crowded that it even spawned its own news outlet, called EdSurge. The weekly newsletter covers the education-technology sector and recently celebrated its first birthday. Its editors have also rolled out an early version of a database that seeks to track the market's biggest players.

Last October, Mr. Staton did his own legwork to help other start-ups get off the ground. He teamed up with Educause, the education-technology group, to organize a new exhibition area called Start-Up Alley at the association's annual conference. Eighteen emerging companies participated.

The lucrative investment climate for education-technology companies enticed the young founders of one Start-Up Alley outfit, OneSchool, to leave Pennsylvania State University and focus on their enterprise full time.

"There's a reason that we got in our car, we drove 3,000 miles across the country from Happy Valley to Silicon Valley, and that's because we knew that there was a lot of opportunities in terms of talent, in terms of advisers, and also in terms of investors," said David Adewumi, 24, a OneSchool co-founder. The company, whose mobile application was inspired by a cellphone photo of a homework problem, pulls in publicly available data to connect students with real-time bus maps, faculty directories, and local eateries near their campuses. It has raised $750,000 in seed money so far. Some of it came from Learn Capital, a firm investing in education start-ups that counts Pearson among its partners.

Mr. Adewumi's group saw opportunity in the ubiquity of smartphones, since he said few official college apps put all their students' campus-specific needs in one place. OneSchool chose to market primarily to students instead of brokering deals with administrators, betting that thousands of users would adopt its applications.

Bureaucratic Hurdles

The cultural differences between education and business can present challenges to these upstarts, and to their investors.

Mr. Ferreira, Knewton's foun­der, said educational institutions sometimes harbor "reflexive skepticism" toward for-profit enterprises, making it hard for education start-ups to earn trust through official partnerships. So some venture capitalists choose to circumvent the college bureaucracy, investing in companies that market informal education products like tutoring services or language-learning programs directly to consumers.

And Mr. Ferreira said the typical venture capitalist's approach—investing seed money that allows a young company to cobble together a bare-bones product—usually leads to piecemeal improvements that aren't big enough to attract institutional interest.

"Education start-ups have to think big," said Mr. Ferreira. "I don't think they can try to produce something that's incremental, which is a little bit antithetical to the way venture capitalists think." He added that future investments in emerging companies that have secured early-stage backing might not appear if those firms don't make enough progress.

Mr. Staton is undaunted by the bureaucratic hurdles he faces in selling to colleges. He said his company believes that in two or three decades, students will still be attending traditional colleges. But he doesn't refrain from warning administrators that they will hobble innovation if they move too slowly along the way.

"Universities are actually shooting themselves in the foot within this market transformation by being slow in their procurement decisions," he said. "There would be a lot more investment in companies that are figuring out how to serve schools if schools simply streamlined the process of making decisions about whether or not to adopt technology." Colleges have students' best interests in mind, but "in a world full of good intentions, our biggest competition is indecision," Mr. Staton said.

Colleges are hampered more often by student-privacy concerns than they are by slow buying cycles, according to Shelton M. Waggener, associate vice chancellor for information technology at the University of California at Berkeley. In making their purchasing choices, Mr. Waggener said, universities have to navigate privacy questions that don't always occur to executives courting institutions or students lobbying their administrations to adopt their favorite tools.

"Our goal is to get out of the way wherever possible," said Mr. Waggener. Yet administrators' hands are tied by laws they don't have the power to change, such as Ferpa, the Family Educational Rights and Privacy Act. "As an institution, you can't sign an agreement endorsing a consumer tool that violates your own policies," he added. Some of the outdated privacy regulations are due for an overhaul, Mr. Waggener said; as they're written, those laws don't allow institutions to use good products that they could otherwise adopt with very little risk. For its part, Inigral says its Facebook application complies with the privacy law.

Mr. Waggener believes investors are backing education-technology companies because they can cater to institutions and students at the same time, developing both "enter­prise" versions to sell to institutions and consumer products to offer to individual students. Companies no longer have to stake their sales strategies on a single tactic because the higher-education market is "not one thing, it's not one model," he added.

Mr. Staton said his fellow entrepreneurs had also flocked to education because they know its chal­lenges better than any other industry.

"When you ask a 19-year-old what problem in the world they want to solve, it's highly likely that the problems that they're most familiar with are problems from their own education," Mr. Staton said. By the time they graduate, he added, many of those students are "looking two opportunities in the face: a substandard job market, or creating their own company and trying to be Mark Zuckerberg."

And entrepreneurs like to solve problems that they care about, Mr. Staton said: "There are a lot of people that are passionate about this, that know it, that want to do something about it."

Sunday, March 18, 2012

Hatch Labs CEO Dinesh Moorjani On What Makes A Successful Incubator

15-month-old Hatch Labs is but a baby compared to incubators like Y Combinator, but CEO Dinesh Moorjani has a very different idea on what an incubator should look like.

The “sandbox”, as Moorjani would call it, is a joint venture between IAC and Xtreme Labs, and aims to grow mobile startups that are scalable and move beyond being minimally viable, and actually offer the user a sense of delight. How very Microsoft of them.

Moorjani says what makes Hatch really different from other incubators is that it finds the middle ground between seed funding/accelerators and VC.

On the accelerator side, says Moorjani, there is a significant problem being solved. Programs accept talented entrepreneurs for three to four months and help get the product off the ground. We can all agree this is necessary.

But Moorjani says that of the usual $25,000 in seed funding exchanged for up to a 10 percent material stake in the company, most of it goes to office space, bandwidth, a community of entrepreneurs and access to mentors.

On the venture capital end of the spectrum, entrepreneurs typically have to bootstrap their money. VCs weed out entrepreneurs because some may have a family or not be in a position to afford financing a new company. They have to finance themselves from anywhere between $25,000 to $500,000 through friends, family, and their own finances, and may end up in a Series A if they’re fortunate enough, according to Moorjani.

“We think there is a big hole in the market where entrepreneurs who are proven, who are repeat entrepreneurs, who are extremely talented and want downside risk protection and equity in what they’re building, can come and build something great,” said Moorjani. “We believe that the hardest problems to solve are around building product and marketing,” which is what Hatch Labs funding is centered around.

He says this model helps entrepreneurs who haven’t been addressed by accelerators or venture capital.

The secret sauce is that each startup has equity in Hatch Labs as well as their own product, so each individual is encouraged to help grow the success of Hatch as a whole.

Hatch wants its startups to focus on two areas: improving mobility with existing products and transformation. Improving current mobile technology is pretty self-explanatory. Hatch takes technology that may be a decade old, and turns it into something that meets consumer expectations for mobile products. Transformation, on the other hand, is a bit more cryptic.

So what did Moorjani mean by that?

“We take a bet on a hypothesis and it’s unclear if users will engage with it or whether or the ecosystem will build around it, but we’re actually trying to transform the experience to be more fun, more innovative, and make our lives more convenient,” explained Moorjani. “And that’s about transforming mobility.”

Expect at least six startups to come out of Hatch before the end of 2012.

Thursday, March 15, 2012

The Fight Over Crowdfunding's Potential

By Karen E. Klein

The bipartisan crowdfunding legislation approved by the U.S. House of Representatives in recent months is intended to make it easier for individuals to use online marketplaces to buy equity stakes in private companies. The push to loosen securities regulations was spurred by the struggles of small business in the wake of the financial crisis and the ensuing credit crunch. President Barack Obama has publicly pledged to help small businesses find innovative ways to access startup capital; he has repeatedly called on Congress to pass legislation he can sign.

The biggest stumbling block to getting the legislation passed, beyond election-year politics? Worries about fraud, says Mercer Bullard, a securities attorney and associate professor of law at the University of Mississippi School of Law. Calling the crowdfunding advocates naïve, he notes that when he testified before Congress on the issue, some scoffed at his warnings about past fraud. “All they can see is the love and trust that online communities engender. They don’t see the ugly, dark side of what goes on in the marketplace,” Bullard says.

Barbara Roper, director of investor protection for the Consumer Federation of America, remembers how the telephone boiler rooms and penny stock scandals of the 1980s undermined public confidence in capital markets. She worries that crooks unleashed to harness the viral nature and anonymity of the Internet could dwarf those scams by posing as small business owners, collecting money, and then disappearing. “To the degree that this becomes a mecca for fraud and generates a round of bad headlines about how investors are being defrauded,” legitimate small business owners will suffer, she says.

Investor groups also worry that startups with dozens or more early stage funders would be considered bad bets by venture capital firms with deeper pockets.

Such concerns are “alarmist and ill-informed,” says Michael H. Shuman, a long-time advocate for local small business investment and director of research and marketing at Cutting Edge Capital in Oakland, Calif. The securities regulations that currently govern capital-raising for independent businesses are cumbersome and outdated, he says: “We allow anyone to go to a casino with no income requirements and they can lose everything, but when you’re talking about a neighborhood small business, we demand $100,000 of legal work before the first dollar can come in. That’s way out of balance.”

Shuman predicts that even if the federal legislation ultimately fails, the pressure to allow individual investors to fund local businesses will loosen state rules. In fact, local groups operating under state law are already forming investment clubs that funnel capital to small businesses.

Kristie Arslan, president and chief executive of the National Association for the Self-Employed, says crowdfunding could be a godsend for the 22 million Americans who are self-employed and who often struggle to raise capital. “The smallest businesses have the most limited choices when it comes to accessing financing,” she says. While crowdfunding would not be the right option for every self-employed individual, it could help many who can’t get traditional bank loans, she notes.

David Millard, a securities attorney with Indianapolis law firm Barnes & Thornburg, says he is sympathetic to the goals of crowdfunding. “It could unleash the innovation we’ve been looking to unleash for years,” he says. But he thinks existing capital regulations, particularly the “accredited investor” standard (which requires investors to have $1 million in assets or $200,000 in annual income) have served the test of time. He finds the bipartisan support for crowdfunding “amusing in historical perspective,” he says, especially when so many have pointed to the unintended consequences of financial deregulation as a major cause of the recent financial crisis. “How far away are we from so many people losing their money to the Bernie Madoffs of the world—or the situation where sellers talked these little people into mortgages that they couldn’t understand and afford?” Millard asks.

Crowdfunding advocates believe that appropriate controls can be built into new laws, either in the legislative text or in the way they are implemented by the Securities and Exchange Commission and overseen by the president’s new Consumer Financial Protection Bureau. Dana Mauriello, co-founder of, a crowdfunding site that allowed entrepreneurs to raise investor capital before it dissolved last week, believes crowdfunding can be accomplished responsibly. Her site was scrutinized by the California Department of Corporations last year and was ultimately required to secure a broker-dealer license and follow securities disclosure laws that would have been cost-prohibitive, she says.

“I think initially [crowdfunding] supporters had a Pollyannish view, but things are mellowing out in a productive way where we can all agree there is fraud potential and figure out how to prevent it,” Mauriello says.

Wednesday, March 14, 2012

A Big Idea: Y Combinator Now Lets Founders Apply Without… An Idea

By Eric Eldon

Venture firms like to pull in experienced founders to become entrepreneurs in residence — people who typically come in without a clear idea of what they want to do, who may simply be tasked with thinking up a new company.

Y Combinator is now bringing this type of free-form entrepreneurialism to its seed-stage fund. With a twist.

If you’re a prospective founding team (or a uniquely promising individual), it is now letting you apply to join its next class of founders without an idea. This might sound contrarian at first, but it perfectly fits the early-stage startup model, where the team is what makes the company win, rather than the initial concept. Here’s more, from the description out today from Paul Graham and Co:

Why are we doing this? Partly because we realized we already were. A lot of the startups we accept change their ideas completely, and some of those do really well. Reddit was originally going to be a way to order food on your cellphone. (This is a viable idea now, but it wasn’t before smartphones.) Scribd was originally going to be a ridesharing service.

Another way to look at this is that YC now has an even lower-friction way to attract talent. Which, again, is sometimes what VCs do with EIRs. But better, because unlike venture portfolio companies in various stages of maturity, each YC class is chock full of other companies iterating on and often completely switching plans. It’s not hard to imagine that talented people without ideas of their own might become cofounders around stronger projects if they don’t finalize their own, even if that’s not the primary intention here.

If this new piece of the YC program proves to be successful — the firm is careful to describe this as an experiment — I suspect we’ll see it get adopted by the many other early-stage firms, accelerators and incubators out there.

Monday, March 12, 2012

Stripe Aims to Reinvent E-Payments

By Peter Burrows

When Patrick Collison began trying to sell Marc Andreessen on the need for a drop-dead simple way for website owners to accept credit cards, the venture capitalist and creator of the Netscape browser cut him off. “I know!” Andreessen said excitedly before launching into a story about how he and the original Netscape team had wanted to make payment processing as fundamental to the Web as the ability to e-mail or display pictures. They were foiled by the complexity of working with banks, credit card companies, and other essential partners.

Stripe aims to pick up where Andreessen left off. Founded by Collison and his brother John, both Irish emigrés and college dropouts, the four-month-old service is winning praise from Web developers. E-commerce sites typically accept credit cards online by connecting with PayPal (EBAY) software, which some say is hard to use, or by spending time and money to set up a merchant bank account and build a network for storing card information. Big companies such as (AMZN) have already mastered this; Stripe lets Web developers of any size do the same thing in minutes. “Using Stripe is almost as easy as embedding a YouTube video into a website,” says Mike Moritz, a venture capitalist with Sequoia Capital. The Collisons expect that ease of use to inspire entrepreneurs to proceed with ideas they might have scuttled due to the hassle of getting paid. Making payments easier “doesn’t just make it more pleasant. It also changes what gets done,” says Patrick.

The idea is big enough to make Stripe one of the most highly valued early-stage startups in years. In early February, Sequoia led an $18 million investment at a valuation of about $100 million, according to the venture capital firm. Andreessen invested, as did three PayPal founders—Peter Thiel, Elon Musk, and Max Levchin—say the Collisons.

To a consumer, a Stripe-powered website looks ordinary, with the same credit card submission forms seen anywhere else. Developers love it because Stripe handles the dirty work. They simply sign up for an account and enter a few lines of JavaScript into their site’s source code. When users enter their card information, it goes straight to Stripe’s servers, so site owners don’t have to worry about securely storing sensitive data. Stripe processes the payment, checks for fraud, and takes a fee of 2.9 percent plus 30¢. The merchant gets a deposit in its bank account with the proceeds seven days later.

The brothers Collison, who hail from tiny Dromineer, Ireland, built Stripe because they wanted something like it for their own projects. The pair stand out even in an industry known for precociousness. Patrick, now 23, won an Irish national science award in high school for creating a new version of a 50-year-old artificial-intelligence computing language called Lisp. At the Massachusetts Institute of Technology, he majored in math and physics. John, 21, received the highest score ever on Ireland’s nationwide college entrance exam, then headed to Harvard. While in Boston, the pair built an Ebay competitor called Auctomatic and sold it less than a year later for $5 million.

The idea for Stripe came when Patrick realized that although the brothers had created a number of programs, the only ones they’d charged for were iPhone apps that rely on Apple’s (AAPL) easy-to-use payments infrastructure. The Web software they ended up distributing for free. “We’d looked into various payment options, but they all seemed like way too much of a hassle,” Patrick says. Just complying with government regulations would have required hiring payments experts, he says.

The most common alternative is PayPal, which has a mixed reputation with merchants. Some dislike that PayPal whisks customers off to its own site to complete a transaction, reducing the merchant’s control over user experience. And the pricing of PayPal’s many features mystifies some. “It was very hard to tell how much PayPal would cost,” says Russell Quinn, digital media director for McSweeney’s, a San Francisco publishing company that ended up using Stripe. PayPal spokesman Anuj Nayar says that over half a million small businesses started using it to collect payments in 2011, and “we are already light-years ahead” of startups just developing their technology now.

The Collisons started building Stripe in January 2010 and dropped out of school that summer. The service launched in late September of last year. “It’s cheaper than PayPal,” says Arthur Cinader, executive vice president of engineering for Sugar, a news site for women. “I don’t know how all of this payments stuff works, and I just don’t care. If the money is ending up in the bank, what more could I want?”

Stripe has a long way to go to live up to expectations. The seven-day wait time before businesses get their money (which Stripe requires for its fraud-checking process) could create a cash crunch for some small companies. While it processes payments worth millions of dollars a month, that’s a rounding error to PayPal, which processed $118 billion from more than 100 million consumers in 2011. And Stripe has decided to focus only on the Web and ignore the mobile apps market where rival startup Square is making headway.

The Collisons say they’ve been impressed by the diversity of businesses that signed up for Stripe over the last few months: yoga studios, Midwestern newspapers, tax preparers—even a nonprofit that donates goats to African families. “There are very few ideas that aren’t worth exploring,” says Patrick.

The bottom line: Stripe raised $18 million in a recent round of funding from A-list investors to simplify online credit-card use.

Wednesday, March 7, 2012

How Three Germans Are Cloning the Web

A purple rooster sculpture made from recycled grape Fanta bottle labels. Clocks designed to hang in corners. Bauhaus posters from the 1920s. Hand-painted vintage typewriters. These are some of the carefully curated objects for sale on, the fast-growing flash-deal site for designer goods. Launched out of a loft in New York City’s Garment District last June, Fab had sales of $20 million in its first six months and is on track to earn $100 million in 2012. “We owe our success to keeping it real, authenticity, being close to designers,” says Jason Goldberg, Fab’s chief executive officer. That, and “offering people objects and design products they wouldn’t find elsewhere. No knockoffs.”

Six months after Fab launched, it was knocked off. An e-commerce design site called Bamarang opened for business in Germany, the U.K., France, Australia, and Brazil. Bamarang sells cake stands made from vinyl records, miniature speakers handcrafted out of apricot wood, and plates painted to look cracked. Like Fab, it offers discounts of up to 70 percent on designer goods. The layout, color scheme, and typefaces are also suspiciously Fab-like. Bamarang even has a beautiful shot of an Eames chair as the background photo for its sign-in page, just as Fab does.

Bamarang is the creation of Oliver, Marc, and Alexander Samwer, a trio of German brothers who have a wildly successful business model: Find a promising Internet business, in the U.S., and clone it internationally. Since starting their first dot-clone in 1999, a German version of EBay (EBAY), they’ve duplicated Airbnb, eHarmony, Pinterest, and other high-profile businesses. In total, they’ve launched more than 100 companies. Their Zappos (AMZN) clone, Zalando, now dominates six European markets and is estimated to be worth $1 billion by Financial Times Deutschland. Through their venture capital firm, the European Founders Fund, they also invested in European knockoffs of Facebook and YouTube (GOOG), which sold for $112 million and $36 million, respectively.

The Samwers’ base of operations is a startup accelerator in Berlin called Rocket Internet. Rocket launches companies, hires staff, and provides marketing, design, search engine optimization, and day-to-day management until the startup can fend for itself. Rocket’s executives won’t disclose revenue, but a former high-level employee estimates the company is worth at least $1 billion. Oliver Samwer, the middle brother and de facto head of the operation, says the firm has offices in at least 20 countries and has created 20,000 jobs over the years. “I’m in love with startups,” says Oliver, who, like his siblings, rarely talks to the press. He elaborated in an e-mail: “The power of Rocket is really this huge galaxy of stars.”

Groupon (GRPN) got cloned by the Samwers two years ago, and the results were expensive for the daily-deal site. In November 2008 Groupon went live in Chicago and soon became one of the fastest-growing Internet businesses ever. In January 2010 the Samwers launched a knockoff called Citydeal. Within five months it was the top deal-of-the-day site in the U.K., France, Spain, Italy, Ireland, the Netherlands, Switzerland, Austria, Poland, Finland, Denmark, Sweden, and Turkey. Groupon could have fought Citydeal in the marketplace. It also could have filed an intellectual property lawsuit, though the chances of winning would have been slim. Companies can’t be patented, and trademarks apply only within the countries where they’re registered. Perhaps taking the path of least resistance, Groupon in May 2010 bought its German clone for 14 percent of Groupon’s shares. (Rocket now owns 6 percent of Groupon, a stake worth about $1 billion.)

The Samwers are revered for putting Berlin’s startup scene on the map and despised for sticking Germany with a reputation as the copycat capital of Europe. Not that the brothers take offense at the label. “There are pioneering entrepreneurs and execution entrepreneurs, and maybe we belong more to the execution entrepreneurs,” says Oliver, who speaks at a rapid clip, frequently punctuating thoughts with a rhetorical “ja?”

“I think the most admirable entrepreneurs are those with original ideas, ja? It’s a unique gift that you either have or you don’t. Just as we might have a very good gift of execution, others have a unique gift for the purest form of innovation.” As for the similarity between, for example, Bamarang and Fab, he says, “There’s a certain humbleness. First you need to learn from people who are more experienced. … From there, you can start innovating yourself.”

Marc, Oliver, and Alexander—ages 41, 39, and 36, respectively—grew up in Cologne, the sons of two corporate lawyers. Their parents often brought clients home, and the brothers developed a love of entrepreneurial ventures. Much of their time was spent dreaming up companies. “Before we started university, we were thinking of starting an airline or a shipping company,” says Oliver. Marc studied law at the University of Cologne; Oliver attended Germany’s elite Otto Beisheim School of Management (known as the WHU); and Alexander majored in politics and philosophy at Oxford before getting an MBA at Harvard. In early 1998, Oliver persuaded a professor at the WHU to sponsor his dissertation on U.S. startups and spent three months doing five or six interviews a day with businessmen in Silicon Valley and Boston. He later published his observations under the title America’s Most Successful Start-ups: An Entrepreneur’s Handbook.

Later that year the Samwers declined job offers in Germany and moved to Mountain View, Calif., where they shared a one-bedroom apartment and interned at various tech companies. “In ’98 it was just amazing,” says Oliver. “Everything was popular, and everything was possible. America at its best, ja?” The brothers studied how people find ideas, raise money, start businesses, and scale up. After a few months they recognized a huge market opportunity: Start an e-commerce company, but in Germany. Their home country had few Internet companies and little venture capital, but it had a lot of budding Internet users with disposable income.

EBay’s business model appealed to them from the start. “It’s a marketplace, you earn a commission, and it’s something we thought maybe German hobbyists would also like,” says Oliver. The brothers moved back to Germany and launched their clone, Alando, in early 1999. They worried right up until the last minute whether they shouldn’t be copying Priceline (PCLN) instead. “Even on the day of our launch we were asking ourselves, ‘Is Priceline maybe bigger?’ ” says Oliver. “Everything is easy now in hindsight, but at that point we wondered who sends something to someone they’ve never met, ja?”

Among the first items for sale on Alando were the brothers’ childhood toys, including a model train and some roller skates. “My mother, who wanted to save the toys for her grandchildren, wasn’t so happy, but of course we needed everything,” says Oliver, remembering the scramble to stock the site. Oliver was in charge of signing up stamp and coin collectors, among others. He called the sellers one by one, persuading them to put their wares on Alando, often scanning their photos and putting them online himself.

Four months after launch, EBay bought Alando for $53 million—and the Samwers became Germany’s first Internet millionaires. “That had a major impact on the entrepreneurial scene in Germany,” says Holger Ernst, a professor of technology and innovation management at the WHU. In the old days, he says, his students mostly went into investment banking, consulting, or corporate careers. Now, “they all want to be like the Samwers.”

Rocket Internet’s headquarters are in a drafty brick factory building set back from a graffiti-sprayed street in Berlin’s Prenzlauer Berg district. A concrete stairwell connects three floors of undecorated conference rooms and open office space. Each floor is eerily silent despite the dozens of casually dressed employees, packed around Ikea tables, working on flat-screen monitors. Space is tight. Workers say the company is hiring so fast that newcomers sometimes have to sit on the floor.

The CEOs of Samwer companies generally reap only 5 percent to 10 percent equity. They also get a lot of phone calls from the Samwers. “It’s probably not common with other investors to call you multiple times per day and at night, or set up early-morning calls to walk through things,” says Johannes Kreibohm, CEO at the Rocket startup Plinga. Although Oliver is the front man, the brothers are equal partners. Alexander focuses largely on Zalando and other Rocket portfolio companies. Oliver manages Rocket companies but spends about half his time working for Groupon. Marc, for the moment, has stepped back from Rocket to concentrate on Groupon full-time. The American daily-deal company hired the two older brothers as consultants in 2010 to guide its international operations in 46 countries and help oversee 7,000 of its 10,000 employees. At this year’s DLD conference in Munich, Groupon CEO Andrew Mason praised the Samwers: “What people have to realize is the idea is the easy part, and that execution is the hard part, and Marc and Oli are the best operators I’ve ever seen in my life—they’re just inhuman,” he said. Says Oliver: “Groupon taught us about the business, and we taught them about internationalization.” He stresses that company-clone relationships often become symbiotic. “It’s not necessarily in the blood of every American to go abroad, but it’s in the blood of every European to go abroad.”

Oliver, who sets the pace and tone of the Samwer empire, once described Rocket Internet as “McKinsey on steroids.” He was referring to his company’s international network, but he could just as well have been talking about its corporate culture. Rocket’s employees work long hours—often from 9 a.m. to 11 p.m. One former high-ranking employee, who says he left the company in part because of a climate of aggression, recalls seeing a list of international managing directors accompanied by a note that read, “Keep this list updated and check it regularly because fluctuation should be around 5 percent every month.”

In December the blog TechCrunch published an internal e-mail from Oliver Samwer to his employees. In it, Oliver exhorts his team to do business like “a blitz-krieg invasion.” The e-mail continues (punctuation Samwer’s): “i do not accept surprises. i want this planned confirmed by all three of you: you must sign it with your blood … I am the most aggressive guy on internet on the planet. I will die to win and i expect the same from you!” The e-mail went viral in Germany, even inspiring a song called Blitzkrieg, the New Single By Oliver Samba, in which Samwer’s manic commands are set to a throbbing techno beat. He apologized for his word choice but said, “I write 4,000 e-mails a day or something, lots of e-mails; I often write them after midnight, whatever midnight means in whatever country I’m in … and I think that, just like a lot of people we build companies with, I’m very passionate.”

The Samwer style may have spread to Groupon. On Feb. 17 the respected German magazine Gründerszene published internal Groupon e-mails and letters from employees that paint “a shocking picture of personal attacks, massive psychological pressure, problems making deals, and crammed work quarters.” One of the leaked e-mails, reprinted by Gründerszene’s sister site, VentureVillage, is from Daniel Glasner, a former managing director at Citydeal who’s now Groupon’s Central European CEO. In it, he threatens managers with demotion if they fail to achieve a certain number of deal targets and customer acquisitions. “Any one of you who does not achieve the following two goals in the next week will lose his ‘Director’ title,” he writes. An unknown sender of another leaked e-mail complained to VentureVillage in September that “team meetings are full of insults, non-performers openly bashed in meetings as well as via e-mail.” Groupon declined to comment to Bloomberg Businessweek, but in a statement to VentureVillage it said the complaints “in no manner mirror the daily working routine at Groupon.”

The Samwers’ reputation for ruthlessness extends well beyond their offices. In 2007 another set of German brothers, the billionaires Andreas and Thomas Strüngmann, who founded the generic drug company Hexal, agreed to collaborate with the Samwers in joint investments. The plan, according to a 2011 article in Manager Magazin, was for the Strüngmanns to provide 80 percent of the cash, with the rest coming from the Samwers. To get things going while a contract was being legally vetted, the Strüngmann twins handed over €10 million ($13 million) to invest in several companies. That included the German Facebook clone StudiVZ (from the German for “student directory”) founded by Ehssan Dariani. The Samwers then took a 13 percent stake in StudiVZ and helped stage a bidding war for StudiVZ, finally selling the company to Holtzbrinck Ventures, one of Germany’s biggest publishing houses, for €85 million ($112 million). Shortly before the sale, they returned the Strüngmanns’ €10 million, saying they hadn’t needed the money and effectively cutting the Strüngmann twins out of several million dollars. Insiders confirmed the details for Bloomberg Businessweek but refused to speak on the record for fear of reprisal. Oliver Samwer says joint investments with the Strüngmanns had been planned, though a final agreement was never reached.

Even the Samwers’ longtime business partner, Holtzbrinck Group, hasn’t gone unscathed. Just months after offloading the German social network, the Samwers invested in Facebook (a stake they’ve since sold), and Alexander went on record with Germany’s Der Spiegel magazine, saying Facebook was “light-years ahead” of StudiVZ. Asked whether siding with Facebook would seem like “competing with your own child,” Alexander answered, “StudiVZ is now owned by the Holtzbrinck Group and not by us. It’s open competition between the best ideas, and the best company will be the winner.” The German site has since tanked.

For the past two years the Samwers have been at war with yet another set of German brothers—Fabian and Ferry Heilemann, founders of a rival Groupon clone called DailyDeal. In early 2010 they sent job offers to nearly all of DailyDeal’s employees, luring them with promotions and raises, according to a person close to the Heilemanns. Of the handful of DailyDeal employees who defected to Citydeal, most lost their jobs in a mass firing a few months later.

Next, the Samwer company began spreading rumors that the Heilemann company was close to bankruptcy and that it was instituting a punitive arrangement with vendors, whose money would be held in special escrow accounts for three years—all untrue statements, according to the acquaintance of the Heilemanns. Asked about these tactics, Oliver Samwer was not apologetic. “I cannot speak for every single sales person, but it definitely didn’t happen systematically,” he said. “I think it’s all within the normal laws of competition.”

Normal or not, StudiVZ’s Dariani told Manager Magazin in February 2011: “To put it nicely: I wouldn’t recommend that anyone do business with the Samwers.”

Rocket is in the process of relocating its headquarters to a beautifully renovated building in Berlin’s chic Mitte district. “We’re moving into a building that is five times the size of the old Rocket building, ja?” says Oliver. The new digs will give Rocket some much needed space and, perhaps, an image upgrade. “I think they’re trying to look a bit like Google (GOOG), be this Web company, kind of friendly, with these amazing offices,” says Ciáran O’Leary, a partner at the German venture capital firm Earlybird. “But there’s the saying, ‘If you hire sharks, you can’t expect them to act like dolphins.’”

An image boost couldn’t hurt. Last summer a local startup called 6Wunderkinder called for an anti-copycat revolution. And Berlin has begun to attract non-clone entrepreneurial ventures. Some say the Samwers have provided a bridge from the old risk-averse Germany to a more fertile startup climate. “OK, we respect the fact that you’re really good at execution and copying business models,” says Jessica Erickson, 6Wunderkinder’s communications director. “But we can do better than this.”

In January about 20 Rocket employees, some the Samwers’ closest allies, announced they were leaving to launch a rival startup factory, called Project A Ventures, that will focus on backing original ideas. “Things have changed, gotten speedier in terms of rollout, more aggressive, and done more in a copying way,” says Uwe Horstmann, who worked as a managing director at Rocket and is a founding partner at Project A Ventures. “The shift was maybe from quality to quantity. Not everybody was fully on board with that.” In February, Russian entrepreneur Yuri Milner, an investor in Facebook, Zynga (ZNGA), and Twitter, pulled out of a plan to invest in Rocket. The German media speculated it was because of Oliver’s bad reputation. Responding to this claim, Oliver says, “None of this is a problem. Over the years probably 20 VC firms have invested with us, private equity firms have invested with us, media companies have invested with us.”

As for, the design site on Feb. 21 announced its acquisition of a German non-Samwer facsimile, Casacanda. “They’re less of a copycat and more a group of people who came up with a similar idea,” says Goldberg. “There are other clones that copy Fab very closely out there, but at least they use different colors,” says Goldberg, who’s sitting at his desk flipping back and forth between Fab and the Samwers’ Bamarang site. He points out the similar font and word choices on the “About” pages. “We even saw a job posting they had that was basically copied and pasted from Fab. It’s kind of flattering, but come on: If you’re going to do something about design, at least design your own website.”

Thursday, March 1, 2012

Video: HubSpot philosophy with Dharmesh Shah

To Get Venture Capital Funding, Know the Risks and Tell a Good Story

In 22 years of working with venture capitalists, Steven M. Cohen, co-manager of Morgan Lewis's emerging business and technology practice, can only remember one time when a venture capitalist returned feedback to a presenter and ultimately invested. When the odds are that slim, "how do you get that first meeting and give yourself the best shot at getting a potential investor?" he asked.

Cohen moderated a panel titled, "VC Confessionals: Why We Funded, Why We Passed," during Wharton's recent 2012 Entrepreneurship Conference, whose theme was "Turning Painpoints into Opportunity". In explaining that tagline, the conference organizers noted that "pain has often been embedded in entrepreneurship. The pain of a personal frustration inspired a new venture. The pain, sweat and tears of an idea turned it into a viable business. The growing pains of the startup helped it morph from being in a league of its own, to one in which it became an industry leader. Pain has often revealed opportunity."

Perspiration has helped, too. As conference panelist Gil Beyda, founder and managing partner of Genacast Ventures, a venture capital firm in partnership with Comcast Ventures, noted: "I like to paraphrase Thomas Edison, who said that genius is 1% inspiration and 99% perspiration. To me, a startup is 1% a good idea and 99% perspiration and execution." According to Beyda, while millions of people have good ideas, it is not about the idea; it's about the execution.

Gauging the Risks

To bring an idea to fruition, Cohen reminded the audience of the importance of evaluating various types of risk: the size of the market, the potential for market penetration, the ability to secure financing, adequate technology development, and an assessment of barriers presented by the competition.

All risks are not equal, said venture capitalist Josh Kopelman, who has helped found many companies, including, Infonautics and TurnTide. As a seed stage firm, his current company funds prelaunch concepts. "We bet on the team," he said. "The bulk of what you are selling in your first pitch is yourself. The investor has to have confidence in you and in your ideas." Then Kopelman looks at the product and its market through the "lens of the entrepreneur ... how you prioritized your key decisions."

To Beyda, it's about evaluating the risk-reward ratio. The more an entrepreneur can reduce the risks -- including team risk, market risk, competitive risk, product risk, etc. -- the more interested his company will be. Also, considering that it is so easy to start many businesses on the web or in the cloud, he asked, "Why not find a technology co-founder and build a prototype?"

Panelist Rob Coneybeer, co-founder of Shasta Ventures, which focuses on mobile and web start-ups, noted that for his firm, "a high quality introduction" reduces some of the risk; "it's a test of whether you are any good at partner building." He doesn't care where you went to school; what he is looking for are "entrepreneurs who understand storytelling to build brand."

An entrepreneur who fits the model that Coneybeer outlined -- i.e., a good storyteller -- is panelist Joe Cohen, co-founder and CEO of Coursekit, an academic social network, for which he has raised two rounds of capital to date. "I spend all day, every day, selling to venture capitalists, to recruits, to our team. Everything is sold, not bought," said Cohen, who came up with the idea for his company when he was a freshman at Wharton. In his sophomore year, he left school to make his vision -- a product that gives instructors the tools they need to manage their class -- a reality. His ability to tell his story, in a compelling way, was key to his success securing funding. Coursekit's website describes the company's product as combining "tools like ... file management, communication, and calendaring with social networking features so students can communicate with each other."

To bring the storytelling process into focus, Kopelman asked the audience: "How many of you have read Stephen King, John Grisham or Danielle Steele?" Many raised their hands. "And how many of you have read those books twice?" The number of hands significantly declined. That was his pitch for, which sold used books and was eventually acquired by eBay. "I could have said that I was going to create a person-to-person marketplace for used consumer mass media products," he said.

According to Coneybeer, your story is not a novel; it's a short story or a two-minute elevator pitch. And in telling that story, he added, you need to talk about your product, not yourself. Your product is a lens for who you are and for your company's sell.

Other Ways to Evaluate Ideas

For a company that evaluates ideas at the seed stage, Kopelman noted that it is easier to evaluate a "save time" product, such as Uber, which enables users to request a car from their mobile phones, than it is to evaluate a "kill time" product, such as YouTube. "When we saw Aaron Patzer, the founder of [an online personal financial management service], he pulled out his laptop and we understood the benefit that was there. The same was true when we saw Uber." He added that "kill time" products can make money, but it's harder to see until after the product is built.

One of the lenses that Coneybeer uses to evaluate products is mobile. Some products, such as Facebook and other social networking tools, are strictly in the mobile environment. Other products have been strongly influenced by mobile, such as Uber or Cherry, which he described as an Uber for car washing. Car washing, he added, is an example of an industry that hasn't experienced significant innovations for a long time but that is now being woken up by mobile.

As a venture capitalist with a lead limited partner, Genacast's Beyda uses Comcast's resources as a lens to evaluate companies for his firm to consider supporting. The companies he does choose to invest in do not need to have any connection to Comcast, but "Comcast NBC Universal is a great platform for diligence," he said. When Genacast's executives looked at a fashion e-commerce company, they checked with Comcast's E! and Style networks; when they looked at a social marketing research company, they talked with the NBC research division.

All the panelists left attendees with one final thought. "The most frequent reason we pass is not because a business is not a good business, and not because you can't make good money there, but because it may not fit the profile of what a VC is looking for ... [in terms of] expected returns or performance or market size," Kopelman said. "One of the biggest challenges I have is to say, 'I think you will make a lot of money, but I don't think I will make a lot of money,' which is why I'm not going to fund you."

For Beyda, the last take-away was the need for entrepreneurs to ask themselves the tough questions first. He is surprised by the number of startups that have gaping holes in either their business model or their research. "You have invested your time and life in this. Don't you want to know the competitive landscape? Don't you want to know how big this opportunity can be? Aren't you interested in building some defensibility?"

Coneybeer cautioned the audience to always prepare well for presentations, to make sure they understand their competition, their product and their customer. The better your preparation, the deeper and more interactive the meeting can be, Coneybeer noted, adding that he spends at least 40 minutes trying to understand each idea and or product he is asked to review.

The conference ended with the straightforward advice of recently minted entrepreneur Joe Cohen: "In starting a company, there are a few things you need -- a new idea, a team, product, capital. You need all these things. What happens is because you don't have one, you don't do it, or because you only have one of out of three, you don't. There is inertia, so you go to school or do something else. What I found is that these are excuses." In the words of a famous Nike advertising slogan, Cohen's parting words were: "Just do it."