Friday, December 7, 2012
Wednesday, November 28, 2012
The Series A crunch is hitting now. Have we even noticed?
http://pandodaily.com/2012/11/28/the-series-a-crunch-is-hitting-now-have-we-even-noticed/
By Sarah Lacy
On November 28, 2012
I’ve been hearing about the so-called Series A Crunch for at least six months, and in recent weeks, I’ve spoken with more than 20 venture capitalists, angel investors, incubator heads, lawyers, and other necessary cogs in the ecosystem trying to get some details about it.
Everyone — to a person — says it’s a real phenomenon. And everyone gives the exact same explanation of why it’s happening. But what it means for the Valley, and when this tidal wave of companies unable to raise more cash will hit the beach, remains frustratingly hard to quantify. Many worried investors have been asking me what I’m hearing as much as I’m asking them what they’re seeing.
We know this: As many as a thousand companies who’ve received seed rounds won’t be around in a year — maybe six months. There simply won’t be soft-landings and acqui-hires for all of them.
Essentially, we got here by entrepreneurs having too much of a good thing. The number of seed and angel investors has exploded in recent years, buoyed up by a number of factors.
They include a dramatic lowering of capital needed to start a company, substantially lowering the cash needed to become an angel. And because capital requirements are lower, entrepreneurs are holding onto more ownership, making it a lot easier to flip your company for less than, say, $30 million and become very rich. Angels begot quick wins that produced even more angels. Meanwhile, the rash of early liquidity and recent IPOs — unsatisfying as they were — gave liquidity to thousands of employees at large companies, and a subset of those made very real money.
Add to this regular angels becoming “super angels” — a much-mocked phrase for when someone goes from investing their own money to investing institutional funds. Essentially they became micro-VCs, still investing at the seed level but with much greater resources behind them. Incubators, too, helped flood the markets with even more startups, and AngelList played its part too. As All Things D reported yesterday incubators alone have yielded thousands of companies, created nearly 5,000 jobs, and raised $1.6 billion. Those numbers are likely conservative.
Because of all of this, traditional venture firms were getting edged out at earlier rounds. They decided to fight back. Firms like Accel and Greylock and Menlo Ventures announced discovery or seed funds, while other firms like Sequoia Capital and Andreessen Horowitz pioneered stealthy scout programs to give entrepreneurs their money, whether they knew it or not.
It seems everyone in this generation sought to emulate the Ron Conway-style of angel investing: Go wide and invest a little in a lot of things. A name like 500 Startups says it all.
At each turn, these market changes were heralded as wonderful developments for entrepreneurs. More cash equals more entrepreneurs who get to start companies. Many people in the ecosystem simply see no downside to that. Others have blamed the brutal hiring environment on everyone being able to start a company — whether they should or not — and argued that concentrating resources on fewer ideas would make the Valley a lot stronger.
But wherever you stand on that, there’s one very real consequence of this explosion in seed funding: There has not been a corresponding explosion in investors willing to lead the next round, the so-called Series A. In fact, if anything, there are fewer.
In the late 90s there was an explosion of capital at every level. This time around, there has been an explosion at the early stages, and the very late pre-IPO growth stages. But the Series A has remained the same. While Series A is what everyone is focusing on now, life doesn’t get much easier for those who survive. Finding a Series B will be even harder.
That means we’re getting a very different “nuclear winter” as a result of industry excesses this time around. And by most accounts, it’s a far more benign one, considering that potentially thousands of companies are — and will be — going out of business in droves over the next year.
You may never hear about these deaths, and their teams will get rapidly reabsorbed back into the system that’s still very hungry for talent and still seeding tons of new deals. By the math in that ATD post, each incubator grad only employs about three people on average. At most, we’ll see more stories like Erin Griffith’s this morning on the social travel space when eagle-eyed reporters follow up on a funding announcement they covered months ago, only to see a vague landing page about a much-needed vacation has taken the company’s place.
Companies we never really got to know are simply starting to fade away. Multiply that by literally a couple thousand, and that’s what 2013 is going to look like in Silicon Valley, and to a lesser degree some other startup ecosystems. “The numbers just don’t add up,” says Jon Callaghan of True Ventures. “There are a minimum of 2,000 companies per year getting funded and coming out if incubators, and there are only 750 VCs that call themselves ‘active.’ But when you look at who is doing at least two deals a quarter, the numbers fall to just 200 firms. Those firms are only going to do a few Series A deals a year.” When you look at the number of firms who invest at least $1 million a quarter for at least four straight quarters, the number drops further: To a paltry 97 firms.
The numbers I’ve heard from most everyone is that only about 20 percent of companies that have gotten a seed round in the last year will be able to raise a Series A. To put that in perspective, imagine a game of musical chairs with a hundred kids and just 20 seats. I recently went to a networking event for one of the seed funds that invested in PandoDaily, and I’ve never seen such worry on the faces of the entrepreneurs. They wondered as they looked around what lucky few of this crop the VC in question would actually back with a traditional venture round.
That much, we all agree on. But there’s no consensus on what it means for the Valley, and where we are in this crunch. Has it started? Will there be a big lump of companies running out of cash all at once? Or is this simply the new cycle of life in the Valley for the next few years? “It’s not a Series A crunch per se. It’s just getting easier to raise early rounds and harder to raise later rounds,” says Y Combinator’s Paul Graham over email, hewing to the latter view that this has merely become startup life in the Valley. “Investors will pay to see how an experiment turns out, but they are brutally unforgiving, if it doesn’t turn out well… What used to be an obelisk is now becoming a pyramid.”
Mike Maples of Floodgate Fund may have the most Darwinian take on it all — always a surprise delivered in his warm, folksy Andy Griffith-like Texas accent. “The tech industry creates roughly 10 awesome companies per year,” he says. “That’s independent of how much money VCs have or how many companies funded. There are 10 awesome companies a year, and they will get funded. It’s pretty simple.” He says if a company is going to be successful you can see it in 18 to 36 months. If you don’t, that company simply shouldn’t get to take up any more of the Valley’s rich resources — whether that’s talent or people. Sorry.
Hands down the people who are most concerned about this trend are the angel investors. And Maples would argue a lot of his peers have only themselves to blame — along with the venture industry at large.”The venture business in general is wildly undisciplined about throwing good money after bad,” he says. “There are so many companies in Silicon Valley that have raised $30 million and done absolutely nothing with it.”
On a micro level, failure is always painful. But at a macro level, widespread failure this early is far less painful than if it came at later stages. The stakes for everyone are lower. There is still enough froth in the Valley that entrepreneurs and their teams can easily get reabsorbed back into the system, or just head back to a place like YC for another try. The most resilient entrepreneurs embrace the experimental nature that Graham describes above. “I wouldn’t expect anyone except seed investors to complain about it,” Graham says. “Founders don’t think their problems are due to trends. And in fact, overall trends are a second-order effect for founders.”
Put another way: Maples is right. Great companies will thrive and find cash no matter what goes on in the outside world. They don’t have to worry. But the angels who’ve staked their funds on spreading bits of money all over the Valley are increasingly anxious that only 20 percent of their deals — in aggregate — will get the chance to keep going. That’s fine if you have a home run in that 20 percent. If all you have are a bunch of flips and acqui-hires, the picture isn’t pretty.
If the “great” companies will be okay, the ones these angels say they worry about are the “good” companies. Screw ‘em, say the Darwinists like Maples. Not so fast, say angels who’ve invested with the Ron Conway-like strategy. Maples — unsurprisingly — has little patience for that world view.
“The losing mentality is the mindset of playing a lot of hands of poker at the same time,” Maples says. “Investors should be saying, ‘What are all the things that need to be put in place to make this one of the 10 companies of the year?’”
Don’t even get Maples started on pivots. He helped coin the term, but it has been bastardized of late to mask failure. “Too many companies are one pivot away from something they can’t even articulate,” he says. “That’s just keeping the plates spinning.”
In off the record conversations, many angels have expressed the urgency of self-discipline. If they try to pass their dogs off to VCs, they ruin any credibility when advocating for an edge case company that may not yet have the traction but may have something intangible going for it.
Expect many more angels to back away from the category. Already we’ve seen “angels” like Chris Sacca, Ron Conway, and CrunchFund doing late stage and secondary cash-outs well before this crunch started. And noted New York angel Chris Dixon recently made the leap to the venture world.
He may be a canary in the coal mine for the industry. Most of these guys got into angel investing because that’s where the biggest gap was back in the mid-to-late 2000s. Now it’s glutted. “The real winners here are going to be the seed funds and early stage VCs that can write a $1 million to $2 million check,” says AngelList co-founder Naval Ravikant. “They’re buying into companies post-seed funding, with traction, at prices that aren’t significantly higher than angel prices.”
So when does this bizarre, quiet, slow-moving Armageddon hit? Out of the 20 or so people I spoke with for this story, only one told me there’s massive carnage happening right now. The rest said companies are mostly still hanging on. They’re cutting salaries and making the last tens of thousands — or if they’re lucky a hundred thousand — last.
Meanwhile, there’s been a surge in follow-on seed deals. Investors like First Round Capital and Jeff Clavier’s SoftTechVC all report doing way more of these than they have in the past. “It’s not the normal course of things, but you’re seeing a lot of companies raising second and third seed rounds,” First Round’s Josh Kopelman says. And not all of these have proven to be dogs. Some, like TaskRabbit, just needed a bit more time to get to that magical and vague term “traction.” “At some point, they won’t be able to raise a third or fourth extension,” Kopelman says.
Startups are scrappy, and many turn to AngelList when the money runs out. “We see a much larger number of companies coming in to fill out their bridges or to raise a second seed round,” says Ravikant of AngelList. “We tend not to feature those or be able to help much unless they have traction.” In other words: You’re increasingly on your own once that early cash runs out.
That’s the benefit of taking money from a microVC or super angel, say some entrepreneurs. They can stretch your seed round a bit further than an individual angel. Meanwhile, many of these angels are spending increased time looking for soft landings for these companies, hence the rash of acqui-hires in recent months. But there are nowhere near enough of those landings to go around.
These delays won’t last forever. Callaghan expects the meat of the crunch to hit in the first quarter of next year, but notes with a laugh he’s always a quarter or two early when it comes to predicting timing with any venture trend. Any shakeout moves more slowly than you’d expect. Entrepreneurs are survivors by nature.
If you are raising a seed round now, there are a few things you can do to protect yourself. There are still the same debates on whether or not you should take seed money from VCs. On the one hand, they are the guys who will be doing these rare Series As, so you may have a leg up on an entrepreneur they don’t know. But if you raise seed funds from a VC, and they chose not to invest your Series A, that can be a negative signal to anyone else who might be interested.
The tip that everyone agrees on is to avoid the so-called party rounds. These were rampant over the last year, and are when a collection of angels all put in a little. The hope was having more firms involved would help with hiring, raising more money, or anything else a first time entrepreneur might need. In reality, no one has much skin in the game. If you are going to have a flood of investors, make sure there’s a clear lead who believes in you and your vision. Otherwise, you’ll have to show massive traction to compete with all the other entrepreneurs who have that kind of advocate in their corners.
Many have hoped, too, that the convertible note dies off somewhere in this quiet, rolling carnage of once-good ideas. VCs have never liked them, arguing they misalign investors with entrepreneurs. Now they’re pointing out to companies that they are only advantageous to startups when things go well.
Lastly, seed-stage entrepreneurs who have pushed for the maximum valuation possible haven’t done themselves any favors. Unless they show significant traction, getting an up-round will be a challenge. Meanwhile, their seed investors aren’t particularly incentivized to get them a Series A that crams the previous valuation down.
In a Valley that’s always had an uneasy relationship with where luck ends and skill begins, a little historical perspective may help entrepreneurs weather the next six months. In the history of the Valley’s booms and busts, many of great entrepreneurs have failed and many idiots have succeeded. It’s the tax for living somewhere that so many people get the chance to try.
----------
By Sarah Lacy
On November 28, 2012
I’ve been hearing about the so-called Series A Crunch for at least six months, and in recent weeks, I’ve spoken with more than 20 venture capitalists, angel investors, incubator heads, lawyers, and other necessary cogs in the ecosystem trying to get some details about it.
Everyone — to a person — says it’s a real phenomenon. And everyone gives the exact same explanation of why it’s happening. But what it means for the Valley, and when this tidal wave of companies unable to raise more cash will hit the beach, remains frustratingly hard to quantify. Many worried investors have been asking me what I’m hearing as much as I’m asking them what they’re seeing.
We know this: As many as a thousand companies who’ve received seed rounds won’t be around in a year — maybe six months. There simply won’t be soft-landings and acqui-hires for all of them.
Essentially, we got here by entrepreneurs having too much of a good thing. The number of seed and angel investors has exploded in recent years, buoyed up by a number of factors.
They include a dramatic lowering of capital needed to start a company, substantially lowering the cash needed to become an angel. And because capital requirements are lower, entrepreneurs are holding onto more ownership, making it a lot easier to flip your company for less than, say, $30 million and become very rich. Angels begot quick wins that produced even more angels. Meanwhile, the rash of early liquidity and recent IPOs — unsatisfying as they were — gave liquidity to thousands of employees at large companies, and a subset of those made very real money.
Add to this regular angels becoming “super angels” — a much-mocked phrase for when someone goes from investing their own money to investing institutional funds. Essentially they became micro-VCs, still investing at the seed level but with much greater resources behind them. Incubators, too, helped flood the markets with even more startups, and AngelList played its part too. As All Things D reported yesterday incubators alone have yielded thousands of companies, created nearly 5,000 jobs, and raised $1.6 billion. Those numbers are likely conservative.
Because of all of this, traditional venture firms were getting edged out at earlier rounds. They decided to fight back. Firms like Accel and Greylock and Menlo Ventures announced discovery or seed funds, while other firms like Sequoia Capital and Andreessen Horowitz pioneered stealthy scout programs to give entrepreneurs their money, whether they knew it or not.
It seems everyone in this generation sought to emulate the Ron Conway-style of angel investing: Go wide and invest a little in a lot of things. A name like 500 Startups says it all.
At each turn, these market changes were heralded as wonderful developments for entrepreneurs. More cash equals more entrepreneurs who get to start companies. Many people in the ecosystem simply see no downside to that. Others have blamed the brutal hiring environment on everyone being able to start a company — whether they should or not — and argued that concentrating resources on fewer ideas would make the Valley a lot stronger.
But wherever you stand on that, there’s one very real consequence of this explosion in seed funding: There has not been a corresponding explosion in investors willing to lead the next round, the so-called Series A. In fact, if anything, there are fewer.
In the late 90s there was an explosion of capital at every level. This time around, there has been an explosion at the early stages, and the very late pre-IPO growth stages. But the Series A has remained the same. While Series A is what everyone is focusing on now, life doesn’t get much easier for those who survive. Finding a Series B will be even harder.
That means we’re getting a very different “nuclear winter” as a result of industry excesses this time around. And by most accounts, it’s a far more benign one, considering that potentially thousands of companies are — and will be — going out of business in droves over the next year.
You may never hear about these deaths, and their teams will get rapidly reabsorbed back into the system that’s still very hungry for talent and still seeding tons of new deals. By the math in that ATD post, each incubator grad only employs about three people on average. At most, we’ll see more stories like Erin Griffith’s this morning on the social travel space when eagle-eyed reporters follow up on a funding announcement they covered months ago, only to see a vague landing page about a much-needed vacation has taken the company’s place.
Companies we never really got to know are simply starting to fade away. Multiply that by literally a couple thousand, and that’s what 2013 is going to look like in Silicon Valley, and to a lesser degree some other startup ecosystems. “The numbers just don’t add up,” says Jon Callaghan of True Ventures. “There are a minimum of 2,000 companies per year getting funded and coming out if incubators, and there are only 750 VCs that call themselves ‘active.’ But when you look at who is doing at least two deals a quarter, the numbers fall to just 200 firms. Those firms are only going to do a few Series A deals a year.” When you look at the number of firms who invest at least $1 million a quarter for at least four straight quarters, the number drops further: To a paltry 97 firms.
The numbers I’ve heard from most everyone is that only about 20 percent of companies that have gotten a seed round in the last year will be able to raise a Series A. To put that in perspective, imagine a game of musical chairs with a hundred kids and just 20 seats. I recently went to a networking event for one of the seed funds that invested in PandoDaily, and I’ve never seen such worry on the faces of the entrepreneurs. They wondered as they looked around what lucky few of this crop the VC in question would actually back with a traditional venture round.
That much, we all agree on. But there’s no consensus on what it means for the Valley, and where we are in this crunch. Has it started? Will there be a big lump of companies running out of cash all at once? Or is this simply the new cycle of life in the Valley for the next few years? “It’s not a Series A crunch per se. It’s just getting easier to raise early rounds and harder to raise later rounds,” says Y Combinator’s Paul Graham over email, hewing to the latter view that this has merely become startup life in the Valley. “Investors will pay to see how an experiment turns out, but they are brutally unforgiving, if it doesn’t turn out well… What used to be an obelisk is now becoming a pyramid.”
Mike Maples of Floodgate Fund may have the most Darwinian take on it all — always a surprise delivered in his warm, folksy Andy Griffith-like Texas accent. “The tech industry creates roughly 10 awesome companies per year,” he says. “That’s independent of how much money VCs have or how many companies funded. There are 10 awesome companies a year, and they will get funded. It’s pretty simple.” He says if a company is going to be successful you can see it in 18 to 36 months. If you don’t, that company simply shouldn’t get to take up any more of the Valley’s rich resources — whether that’s talent or people. Sorry.
Hands down the people who are most concerned about this trend are the angel investors. And Maples would argue a lot of his peers have only themselves to blame — along with the venture industry at large.”The venture business in general is wildly undisciplined about throwing good money after bad,” he says. “There are so many companies in Silicon Valley that have raised $30 million and done absolutely nothing with it.”
On a micro level, failure is always painful. But at a macro level, widespread failure this early is far less painful than if it came at later stages. The stakes for everyone are lower. There is still enough froth in the Valley that entrepreneurs and their teams can easily get reabsorbed back into the system, or just head back to a place like YC for another try. The most resilient entrepreneurs embrace the experimental nature that Graham describes above. “I wouldn’t expect anyone except seed investors to complain about it,” Graham says. “Founders don’t think their problems are due to trends. And in fact, overall trends are a second-order effect for founders.”
Put another way: Maples is right. Great companies will thrive and find cash no matter what goes on in the outside world. They don’t have to worry. But the angels who’ve staked their funds on spreading bits of money all over the Valley are increasingly anxious that only 20 percent of their deals — in aggregate — will get the chance to keep going. That’s fine if you have a home run in that 20 percent. If all you have are a bunch of flips and acqui-hires, the picture isn’t pretty.
If the “great” companies will be okay, the ones these angels say they worry about are the “good” companies. Screw ‘em, say the Darwinists like Maples. Not so fast, say angels who’ve invested with the Ron Conway-like strategy. Maples — unsurprisingly — has little patience for that world view.
“The losing mentality is the mindset of playing a lot of hands of poker at the same time,” Maples says. “Investors should be saying, ‘What are all the things that need to be put in place to make this one of the 10 companies of the year?’”
Don’t even get Maples started on pivots. He helped coin the term, but it has been bastardized of late to mask failure. “Too many companies are one pivot away from something they can’t even articulate,” he says. “That’s just keeping the plates spinning.”
In off the record conversations, many angels have expressed the urgency of self-discipline. If they try to pass their dogs off to VCs, they ruin any credibility when advocating for an edge case company that may not yet have the traction but may have something intangible going for it.
Expect many more angels to back away from the category. Already we’ve seen “angels” like Chris Sacca, Ron Conway, and CrunchFund doing late stage and secondary cash-outs well before this crunch started. And noted New York angel Chris Dixon recently made the leap to the venture world.
He may be a canary in the coal mine for the industry. Most of these guys got into angel investing because that’s where the biggest gap was back in the mid-to-late 2000s. Now it’s glutted. “The real winners here are going to be the seed funds and early stage VCs that can write a $1 million to $2 million check,” says AngelList co-founder Naval Ravikant. “They’re buying into companies post-seed funding, with traction, at prices that aren’t significantly higher than angel prices.”
So when does this bizarre, quiet, slow-moving Armageddon hit? Out of the 20 or so people I spoke with for this story, only one told me there’s massive carnage happening right now. The rest said companies are mostly still hanging on. They’re cutting salaries and making the last tens of thousands — or if they’re lucky a hundred thousand — last.
Meanwhile, there’s been a surge in follow-on seed deals. Investors like First Round Capital and Jeff Clavier’s SoftTechVC all report doing way more of these than they have in the past. “It’s not the normal course of things, but you’re seeing a lot of companies raising second and third seed rounds,” First Round’s Josh Kopelman says. And not all of these have proven to be dogs. Some, like TaskRabbit, just needed a bit more time to get to that magical and vague term “traction.” “At some point, they won’t be able to raise a third or fourth extension,” Kopelman says.
Startups are scrappy, and many turn to AngelList when the money runs out. “We see a much larger number of companies coming in to fill out their bridges or to raise a second seed round,” says Ravikant of AngelList. “We tend not to feature those or be able to help much unless they have traction.” In other words: You’re increasingly on your own once that early cash runs out.
That’s the benefit of taking money from a microVC or super angel, say some entrepreneurs. They can stretch your seed round a bit further than an individual angel. Meanwhile, many of these angels are spending increased time looking for soft landings for these companies, hence the rash of acqui-hires in recent months. But there are nowhere near enough of those landings to go around.
These delays won’t last forever. Callaghan expects the meat of the crunch to hit in the first quarter of next year, but notes with a laugh he’s always a quarter or two early when it comes to predicting timing with any venture trend. Any shakeout moves more slowly than you’d expect. Entrepreneurs are survivors by nature.
If you are raising a seed round now, there are a few things you can do to protect yourself. There are still the same debates on whether or not you should take seed money from VCs. On the one hand, they are the guys who will be doing these rare Series As, so you may have a leg up on an entrepreneur they don’t know. But if you raise seed funds from a VC, and they chose not to invest your Series A, that can be a negative signal to anyone else who might be interested.
The tip that everyone agrees on is to avoid the so-called party rounds. These were rampant over the last year, and are when a collection of angels all put in a little. The hope was having more firms involved would help with hiring, raising more money, or anything else a first time entrepreneur might need. In reality, no one has much skin in the game. If you are going to have a flood of investors, make sure there’s a clear lead who believes in you and your vision. Otherwise, you’ll have to show massive traction to compete with all the other entrepreneurs who have that kind of advocate in their corners.
Many have hoped, too, that the convertible note dies off somewhere in this quiet, rolling carnage of once-good ideas. VCs have never liked them, arguing they misalign investors with entrepreneurs. Now they’re pointing out to companies that they are only advantageous to startups when things go well.
Lastly, seed-stage entrepreneurs who have pushed for the maximum valuation possible haven’t done themselves any favors. Unless they show significant traction, getting an up-round will be a challenge. Meanwhile, their seed investors aren’t particularly incentivized to get them a Series A that crams the previous valuation down.
In a Valley that’s always had an uneasy relationship with where luck ends and skill begins, a little historical perspective may help entrepreneurs weather the next six months. In the history of the Valley’s booms and busts, many of great entrepreneurs have failed and many idiots have succeeded. It’s the tax for living somewhere that so many people get the chance to try.
----------
Wednesday, November 7, 2012
Monday, October 15, 2012
Take the Plunge: Now may be a good time to launch that start-up
http://www.economist.com/node/21564532
TOUGH times in the economy have often been the best times to start a new business. Great companies born in a recession include General Electric, Walt Disney, Burger King and Microsoft. With unemployment remaining stubbornly high across the rich world and big companies still blaming “unprecedented uncertainty” for their reluctance to dip into record profits to bet on risky new ideas, people with ideas are increasingly asking: why not launch my own start-up? There is an abundance of new books to help them answer that question, and they fall into three broad categories: the big picture, self-help and the inspirational success story.
Makers: The New Industrial Revolution. By Chris Anderson.
http://www.amazon.com/Makers-The-New-Industrial-Revolution/dp/0307720950/
Heart, Smarts, Guts, and Luck: What It Takes to Be an Entrepreneur and Build a Great Business. By Anthony Tjan, Richard Harrington and Tsun-Yan Hsieh.
http://www.amazon.com/Heart-Smarts-Guts-Luck-Entrepreneur/dp/1422161943/
A Slice of the Pie: How to Build a Big Little Business. By Nick Sarillo.
http://www.amazon.com/Slice-Pie-Build-Little-Business/dp/1591844584/
In some ways opportunities for entrepreneurs have never been greater. As Chris Anderson explains in “Makers”, the mix of technological innovation and intensifying globalisation is ushering in a new industrial revolution that is now spreading from software to manufacturing in ways that promise to give a huge boost to innovative entrepreneurs. This “industrialising of the do-it-yourself spirit” is built on the growing ability to be at once small and global, artisanal and innovative, and high tech and low cost, argues Mr Anderson, who wrote for The Economist before becoming editor-in-chief of Wired in 2001.
The transformation is well illustrated by Mr Anderson’s success in creating a version 2.0 of a garden sprinkler invented and patented by his grandfather. Anderson grand-père took years to profit from his idea and then only by selling it to an existing company. But with the help of the open-source community, his grandson was able to design a better sprinkler that thanks to modern global supply chains could be made and sold at a modest profit for around $100—maybe a third of the price of the existing commercial alternative. Getting the product to market cost under $5,000, less than his grandfather had paid in fees to patent lawyers.
As with his previous bestsellers, “The Long Tail” (2006) and “Free” (2009), Mr Anderson has exaggerated a bit to make a point. Desk-side 3D printers, attending makers’ fairs and fund-raising via Kickstarter are in their early days. Yet, even if this revolution advances more slowly than he hopes, the trends he writes about are real and important, and his descriptions of how big companies are opening up their innovation processes to outsiders and the new ecosystem that is forming to finance start-ups should gladden the heart of any budding entrepreneur.
Heart is one of the four key factors anyone considering starting a business needs, argue Anthony Tjan, Richard Harrington and Tsun-Yan Hsieh, three successful businessmen. It was added to an original three factors they had identified earlier: smarts, balls and luck. (The balls were then replaced with guts, at the behest of a timid publisher.) “Without heart, few businesses ever become truly successful; passion and purpose are crucial instigators and guides,” they write, illustrating this with colourful examples such as Ferran Adrià, the chef behind elBulli, and Guy Laliberté, the founder of Cirque du Soleil.
For those not put off by its remorselessly chirpy tone, this book contains some valuable self-help advice, not least in a discussion about luck, which, apart from the dumb kind, the authors believe is something that can be influenced. To develop a “lucky network” of helpful contacts, for instance, they recommend practising humility, intellectual curiosity, optimism, vulnerability, authenticity, generosity and openness. They also offer tips on how to overcome and even benefit from failure, a fact of life for most entrepreneurs.
Readers are invited to take an Entrepreneurial Aptitude Test to assess their prospects for achieving a successful start-up. Some questions are harder than others; are you, for instance, more brilliant than bold? Perhaps the most controversial aspect of the book is the authors’ conviction that greater self-awareness is an asset for an entrepreneur, a view that challenges today’s conventional wisdom that the magic ingredient for entrepreneurial success is an unreasonable bloody-minded determination to keep going come hell or high water.
Nick Sarillo came perilously close to giving up the struggle after the 2008 financial crisis made his recent expansion look foolish and threatened to plunge Nick’s Pizza & Pub, his restaurant chain, into bankruptcy. It was only in early 2011 when, against the advice of his public-relations firm, he sent an e-mail to 16,000 customers spelling out the company’s difficulties that things turned around. In the week after the e-mail, sales doubled as customers who had long appreciated the quality of service and the pizza, upped their orders to keep their favourite restaurant alive.
In “Makers” Mr Anderson notes that, at least until now, of the small firms that create most new jobs in America “too few are innovative and too many are strictly local”, citing pizza restaurants as an example, along with dry cleaners and corner shops. For Mr Sarillo, who embodies the characteristics celebrated by Messrs Tjan et al right down to his meatballs, even local pizza joints can be as good as a global leader.
From the moment Mr Sarillo quit his job as a carpenter in the mid-1990s to open a restaurant, he set out to prove that even a small business can build a world-class culture, “by disciplining yourself and your organisation to work the company’s culture into every decision you make and every action you take.” The result has been profit margins twice those of the average pizza joint, employee turnover less than 20% of the industry average, and customers who are loyal enough to buy more to help avoid bankruptcy. If any of today’s army of would-be entrepreneurs needs inspiration to take the plunge, Mr Sarillo offers not just a great pizza but a fine role model.
TOUGH times in the economy have often been the best times to start a new business. Great companies born in a recession include General Electric, Walt Disney, Burger King and Microsoft. With unemployment remaining stubbornly high across the rich world and big companies still blaming “unprecedented uncertainty” for their reluctance to dip into record profits to bet on risky new ideas, people with ideas are increasingly asking: why not launch my own start-up? There is an abundance of new books to help them answer that question, and they fall into three broad categories: the big picture, self-help and the inspirational success story.
Makers: The New Industrial Revolution. By Chris Anderson.
http://www.amazon.com/Makers-The-New-Industrial-Revolution/dp/0307720950/
Heart, Smarts, Guts, and Luck: What It Takes to Be an Entrepreneur and Build a Great Business. By Anthony Tjan, Richard Harrington and Tsun-Yan Hsieh.
http://www.amazon.com/Heart-Smarts-Guts-Luck-Entrepreneur/dp/1422161943/
A Slice of the Pie: How to Build a Big Little Business. By Nick Sarillo.
http://www.amazon.com/Slice-Pie-Build-Little-Business/dp/1591844584/
In some ways opportunities for entrepreneurs have never been greater. As Chris Anderson explains in “Makers”, the mix of technological innovation and intensifying globalisation is ushering in a new industrial revolution that is now spreading from software to manufacturing in ways that promise to give a huge boost to innovative entrepreneurs. This “industrialising of the do-it-yourself spirit” is built on the growing ability to be at once small and global, artisanal and innovative, and high tech and low cost, argues Mr Anderson, who wrote for The Economist before becoming editor-in-chief of Wired in 2001.
The transformation is well illustrated by Mr Anderson’s success in creating a version 2.0 of a garden sprinkler invented and patented by his grandfather. Anderson grand-père took years to profit from his idea and then only by selling it to an existing company. But with the help of the open-source community, his grandson was able to design a better sprinkler that thanks to modern global supply chains could be made and sold at a modest profit for around $100—maybe a third of the price of the existing commercial alternative. Getting the product to market cost under $5,000, less than his grandfather had paid in fees to patent lawyers.
As with his previous bestsellers, “The Long Tail” (2006) and “Free” (2009), Mr Anderson has exaggerated a bit to make a point. Desk-side 3D printers, attending makers’ fairs and fund-raising via Kickstarter are in their early days. Yet, even if this revolution advances more slowly than he hopes, the trends he writes about are real and important, and his descriptions of how big companies are opening up their innovation processes to outsiders and the new ecosystem that is forming to finance start-ups should gladden the heart of any budding entrepreneur.
Heart is one of the four key factors anyone considering starting a business needs, argue Anthony Tjan, Richard Harrington and Tsun-Yan Hsieh, three successful businessmen. It was added to an original three factors they had identified earlier: smarts, balls and luck. (The balls were then replaced with guts, at the behest of a timid publisher.) “Without heart, few businesses ever become truly successful; passion and purpose are crucial instigators and guides,” they write, illustrating this with colourful examples such as Ferran Adrià, the chef behind elBulli, and Guy Laliberté, the founder of Cirque du Soleil.
For those not put off by its remorselessly chirpy tone, this book contains some valuable self-help advice, not least in a discussion about luck, which, apart from the dumb kind, the authors believe is something that can be influenced. To develop a “lucky network” of helpful contacts, for instance, they recommend practising humility, intellectual curiosity, optimism, vulnerability, authenticity, generosity and openness. They also offer tips on how to overcome and even benefit from failure, a fact of life for most entrepreneurs.
Readers are invited to take an Entrepreneurial Aptitude Test to assess their prospects for achieving a successful start-up. Some questions are harder than others; are you, for instance, more brilliant than bold? Perhaps the most controversial aspect of the book is the authors’ conviction that greater self-awareness is an asset for an entrepreneur, a view that challenges today’s conventional wisdom that the magic ingredient for entrepreneurial success is an unreasonable bloody-minded determination to keep going come hell or high water.
Nick Sarillo came perilously close to giving up the struggle after the 2008 financial crisis made his recent expansion look foolish and threatened to plunge Nick’s Pizza & Pub, his restaurant chain, into bankruptcy. It was only in early 2011 when, against the advice of his public-relations firm, he sent an e-mail to 16,000 customers spelling out the company’s difficulties that things turned around. In the week after the e-mail, sales doubled as customers who had long appreciated the quality of service and the pizza, upped their orders to keep their favourite restaurant alive.
In “Makers” Mr Anderson notes that, at least until now, of the small firms that create most new jobs in America “too few are innovative and too many are strictly local”, citing pizza restaurants as an example, along with dry cleaners and corner shops. For Mr Sarillo, who embodies the characteristics celebrated by Messrs Tjan et al right down to his meatballs, even local pizza joints can be as good as a global leader.
From the moment Mr Sarillo quit his job as a carpenter in the mid-1990s to open a restaurant, he set out to prove that even a small business can build a world-class culture, “by disciplining yourself and your organisation to work the company’s culture into every decision you make and every action you take.” The result has been profit margins twice those of the average pizza joint, employee turnover less than 20% of the industry average, and customers who are loyal enough to buy more to help avoid bankruptcy. If any of today’s army of would-be entrepreneurs needs inspiration to take the plunge, Mr Sarillo offers not just a great pizza but a fine role model.
Thursday, October 4, 2012
Tuesday, September 18, 2012
College Students Who Pivoted Into Entrepreneurship
http://www.entrepreneur.com/article/224399
Posted by Brian Patrick Eha | September 17, 2012
To succeed as an entrepreneur, you occasionally have to be willing to give up something good for something great. Austin Hackett was halfway through a medical degree at Columbia University in New York when he decided to devote himself fulltime to his startup discussion platform, CrowdHall.
His mother was supportive, but his father had doubts. Wouldn’t it be better, his father asked, to complete the medical degree before risking his future? Although Hackett was interested in helping people, he knew then that the physician’s life wasn’t for him.
“I was always more drawn to creative problem solving,” says the 27-year-old Hackett, who now lives in Cincinnati. “Medicine doesn’t really have creative problem solving. It has prescriptive problem solving. It didn’t really excite me.”
For Hackett and many more young people like him, it’s painful to discover that the decisions made as a 17- or 18-year-old college student don’t always continue to ring true at 21 or even 27 years old. But what do you do? Stick it out in a career that’s not your dream or pursue your real passions instead?
That’s a question serial entrepreneur and Brown University entrepreneurship professor Danny Warshay often helps his current students and new grads grapple with. Students have considerably more options than they realize, he says. But too often they narrow their choices before performing a true self-assessment and figuring out where their passions lie. “Unfortunately, many of them end up unhappy and come back to me for guidance,” adds Warshay.
To prevent this fate, Hackett turned to more creative pursuits. He is creating a communications platform that he claims will be especially useful to celebrities and politicians.
On CrowdHall, users can create individual profile pages, called “halls,” and followers can post questions to them. The entire audience has the ability to vote on which questions they would most like answered. You can check your hall on a regular basis to answer the top questions, and the answers will be sent out to those who voted and archived in the hall for everyone to read.
Hackett and his co-founder Jordan Menzel have already made some progress. After selling an early CrowdHall prototype to the U.S. Agency for International Development, the founders are planning a soft launch of the full platform this month. The site will also host the Columbia University Earth Institute’s State of the Planet conference in October.
Like many entrepreneurs who’ve transitioned into business from alternative career paths, Hackett says his previous experience has been an asset. Being a doctor, he says, is about “trying to understand patients and letting them feel like they have a voice that matters. And that’s exactly the thing we’re trying to do with CrowdHall. Every person has a voice that matters and they have an opportunity to be heard in the wider public space.”
Perhaps the most important catalyst to pivoting away from a college major or first job is finding a need that you connect with. Just ask Julie Sygiel.
In 2008, Sygiel was a junior at Brown University studying chemical engineering. But after taking Warshay’s entrepreneurship course, she realized her true vocation.
During the class, she and two classmates were tasked with creating a business idea that solved an everyday problem.
The problem Sygiel’s group picked: accidents that befall women during menstruation. And the idea, which would eventually become Underbrella, was a line of high-tech undergarments in breathable fabric with a thin, leak-resistant layer.
Upon graduation, Sygiel started up the company, which the now 24-year-old says will hold its first preview sale on its website in October. Soon after, the line will be available in at least 16 boutiques across the country as well as on ActivewearUSA.
Although Sygiel once considered going into food science or the cosmetics industry, she now says she doesn’t think she’ll ever work as an engineer.
“You’re going to be way more successful doing something that you love,” she says. “Sure, there are going to be hard days. But don’t settle if you’re not really happy doing what you majored in.”
Posted by Brian Patrick Eha | September 17, 2012
To succeed as an entrepreneur, you occasionally have to be willing to give up something good for something great. Austin Hackett was halfway through a medical degree at Columbia University in New York when he decided to devote himself fulltime to his startup discussion platform, CrowdHall.
His mother was supportive, but his father had doubts. Wouldn’t it be better, his father asked, to complete the medical degree before risking his future? Although Hackett was interested in helping people, he knew then that the physician’s life wasn’t for him.
“I was always more drawn to creative problem solving,” says the 27-year-old Hackett, who now lives in Cincinnati. “Medicine doesn’t really have creative problem solving. It has prescriptive problem solving. It didn’t really excite me.”
For Hackett and many more young people like him, it’s painful to discover that the decisions made as a 17- or 18-year-old college student don’t always continue to ring true at 21 or even 27 years old. But what do you do? Stick it out in a career that’s not your dream or pursue your real passions instead?
That’s a question serial entrepreneur and Brown University entrepreneurship professor Danny Warshay often helps his current students and new grads grapple with. Students have considerably more options than they realize, he says. But too often they narrow their choices before performing a true self-assessment and figuring out where their passions lie. “Unfortunately, many of them end up unhappy and come back to me for guidance,” adds Warshay.
To prevent this fate, Hackett turned to more creative pursuits. He is creating a communications platform that he claims will be especially useful to celebrities and politicians.
On CrowdHall, users can create individual profile pages, called “halls,” and followers can post questions to them. The entire audience has the ability to vote on which questions they would most like answered. You can check your hall on a regular basis to answer the top questions, and the answers will be sent out to those who voted and archived in the hall for everyone to read.
Hackett and his co-founder Jordan Menzel have already made some progress. After selling an early CrowdHall prototype to the U.S. Agency for International Development, the founders are planning a soft launch of the full platform this month. The site will also host the Columbia University Earth Institute’s State of the Planet conference in October.
Like many entrepreneurs who’ve transitioned into business from alternative career paths, Hackett says his previous experience has been an asset. Being a doctor, he says, is about “trying to understand patients and letting them feel like they have a voice that matters. And that’s exactly the thing we’re trying to do with CrowdHall. Every person has a voice that matters and they have an opportunity to be heard in the wider public space.”
Julie Sygiel (in Blue) turned her chemical engineering background into a business.
In 2008, Sygiel was a junior at Brown University studying chemical engineering. But after taking Warshay’s entrepreneurship course, she realized her true vocation.
During the class, she and two classmates were tasked with creating a business idea that solved an everyday problem.
The problem Sygiel’s group picked: accidents that befall women during menstruation. And the idea, which would eventually become Underbrella, was a line of high-tech undergarments in breathable fabric with a thin, leak-resistant layer.
Upon graduation, Sygiel started up the company, which the now 24-year-old says will hold its first preview sale on its website in October. Soon after, the line will be available in at least 16 boutiques across the country as well as on ActivewearUSA.
Although Sygiel once considered going into food science or the cosmetics industry, she now says she doesn’t think she’ll ever work as an engineer.
“You’re going to be way more successful doing something that you love,” she says. “Sure, there are going to be hard days. But don’t settle if you’re not really happy doing what you majored in.”
Tuesday, September 4, 2012
The 7 Deadly Sales Sins Committed By Startups
http://techcrunch.com/2012/09/01/the-7-deadly-sales-sins-committed-by-startups/
By, Steli Efti
Editor’s note: Steli is the Co-Founder / Chief Hustler of ElasticSales and an advisor to several startups and entrepreneurs. You can follow Steli on Twitter here.
At ElasticSales, we’ve had the honor to create and run sales campaigns for some of the hottest Silicon Valley startups today. We’ve also consulted with dozens more each week to learn the challenges their sales team face. We realize we can’t work with every startup just yet, but we have seen the same, avoidable mistakes made by many young companies as they conduct their sales campaigns.
Below are “7 Deadly Sales Sins” committed by many startups today. Some of these may sound familiar to you, but by identifying and address these mistakes, you will help your company succeed.
1. Not Understanding Your Customer: Many startups make generalizations as to what their customers want. There may be a specific market for your product or service, but each customer’s challenges are going to be different. I’ve seen founders conduct poor research into their prospective customer before pitching them, and then fail to ask those customers specific questions in regards to their unique needs and pain-points. Instead, they’ll talk on and on about how great their product is and its 10 unique features. Founders need passion for their idea, but not at the expense of taking the time to understand your customers and asking the right questions.
2. Not Selling: Most startups explain all the bells and whistles of their product, but fail to sell the core solution to their customer’s problem. To do that, you need to ask the customer questions to understand what they really need. A prospective customer needs to be sold on the 2-3 benefits your product provides to them, rather than the 100 features you’re planning to build into the product in the future.
3. Not Showing Up: Most founders don’t go out into the market to pitch real people and close actual customers. As a result, they miss out on two key experiences crucial to a young company. First, the founders miss the opportunity to connect directly with their earliest customers and develop long-term relationships. Second, they miss direct customer feedback, which often provides the best recommendations to improve a young company’s product or service.
4. Not Following Up: Most startups pitch once and never follow up again. Maybe they follow up once or twice, but not relentlessly. Startup founders are not shameless enough. They worry too much about intruding on the prospect’s time or being too persistent out of fear of losing the sale. If you lose a prospective customer because you followed up too much, then they weren’t going to close anyways. I’m not advocating calling someone every few minutes, until they rip their phone line out of the wall; but giving up on a prospect won’t lead to a new customer. Keep up with them until they come to a decision, either a “yes” or a “no.” Everything else doesn’t count.
5. No Process in Place: Startups love to optimize their UI/UX but not their sales funnel. Most don’t even have a sales funnel to optimize. Startups today have access to a vast amount of data but often fail to track some basic metrics for their sales funnel; calls/emails, connections to decision makers, qualified leads, closed deals/deal value and time to close.
6. Not the Right Price: Founders often think the cheaper their service the better. While a low price tag does lower the barrier to entry for your customers, it can also dilute the value of your product. If your email or website plugin provides massive value for your customers, why is it the same monthly subscription price as Netflix? When you have a viral product that gets massive traction online, you can have a low price. When you need sales people to sell your product or enterprise customers, you need to consider if your product is priced appropriately to sustain your business. Ultimately, startups need to charge their customers what their product is worth and sell them on its value, not its price tag.
7. Not Asking for the Sale: Sometimes simply asking for the sale makes the process move forward in the direction that you want. After all of the phone calls, demos, and follow up, some founders are still afraid to ask for a customer’s business out of fear of losing the sale. If you spent so long cultivating your relationship with the customer, wouldn’t it be easy to close your new best friend?
Some entrepreneurs start their business out of love for art or fashion, some for science and technology. At the end of the day, every entrepreneur needs to be a successful salesperson to pitch their product or service to make their vision a reality. The great thing about the mistakes above is that they are all addressable. Once they’ve been identified in your startup, sales won’t be a barrier to your company’s success.
By, Steli Efti
Editor’s note: Steli is the Co-Founder / Chief Hustler of ElasticSales and an advisor to several startups and entrepreneurs. You can follow Steli on Twitter here.
At ElasticSales, we’ve had the honor to create and run sales campaigns for some of the hottest Silicon Valley startups today. We’ve also consulted with dozens more each week to learn the challenges their sales team face. We realize we can’t work with every startup just yet, but we have seen the same, avoidable mistakes made by many young companies as they conduct their sales campaigns.
Below are “7 Deadly Sales Sins” committed by many startups today. Some of these may sound familiar to you, but by identifying and address these mistakes, you will help your company succeed.
1. Not Understanding Your Customer: Many startups make generalizations as to what their customers want. There may be a specific market for your product or service, but each customer’s challenges are going to be different. I’ve seen founders conduct poor research into their prospective customer before pitching them, and then fail to ask those customers specific questions in regards to their unique needs and pain-points. Instead, they’ll talk on and on about how great their product is and its 10 unique features. Founders need passion for their idea, but not at the expense of taking the time to understand your customers and asking the right questions.
2. Not Selling: Most startups explain all the bells and whistles of their product, but fail to sell the core solution to their customer’s problem. To do that, you need to ask the customer questions to understand what they really need. A prospective customer needs to be sold on the 2-3 benefits your product provides to them, rather than the 100 features you’re planning to build into the product in the future.
3. Not Showing Up: Most founders don’t go out into the market to pitch real people and close actual customers. As a result, they miss out on two key experiences crucial to a young company. First, the founders miss the opportunity to connect directly with their earliest customers and develop long-term relationships. Second, they miss direct customer feedback, which often provides the best recommendations to improve a young company’s product or service.
4. Not Following Up: Most startups pitch once and never follow up again. Maybe they follow up once or twice, but not relentlessly. Startup founders are not shameless enough. They worry too much about intruding on the prospect’s time or being too persistent out of fear of losing the sale. If you lose a prospective customer because you followed up too much, then they weren’t going to close anyways. I’m not advocating calling someone every few minutes, until they rip their phone line out of the wall; but giving up on a prospect won’t lead to a new customer. Keep up with them until they come to a decision, either a “yes” or a “no.” Everything else doesn’t count.
5. No Process in Place: Startups love to optimize their UI/UX but not their sales funnel. Most don’t even have a sales funnel to optimize. Startups today have access to a vast amount of data but often fail to track some basic metrics for their sales funnel; calls/emails, connections to decision makers, qualified leads, closed deals/deal value and time to close.
6. Not the Right Price: Founders often think the cheaper their service the better. While a low price tag does lower the barrier to entry for your customers, it can also dilute the value of your product. If your email or website plugin provides massive value for your customers, why is it the same monthly subscription price as Netflix? When you have a viral product that gets massive traction online, you can have a low price. When you need sales people to sell your product or enterprise customers, you need to consider if your product is priced appropriately to sustain your business. Ultimately, startups need to charge their customers what their product is worth and sell them on its value, not its price tag.
7. Not Asking for the Sale: Sometimes simply asking for the sale makes the process move forward in the direction that you want. After all of the phone calls, demos, and follow up, some founders are still afraid to ask for a customer’s business out of fear of losing the sale. If you spent so long cultivating your relationship with the customer, wouldn’t it be easy to close your new best friend?
Some entrepreneurs start their business out of love for art or fashion, some for science and technology. At the end of the day, every entrepreneur needs to be a successful salesperson to pitch their product or service to make their vision a reality. The great thing about the mistakes above is that they are all addressable. Once they’ve been identified in your startup, sales won’t be a barrier to your company’s success.
Saturday, September 1, 2012
Thursday, August 30, 2012
Tuesday, August 28, 2012
Monday, August 27, 2012
flexReceipts Receives Investment from venVelo
http://www.pr.com/press-release/436624
Winter Park, FL, August 27, 2012 --(PR.com)--
flexReceipts, a leading provider of digital receipt technology, announced today that it has received a substantial investment from venVelo, a business accelerator in Winter Park, Florida. flexReceipts’ target customers are retailers that print paper receipts and want a better way to engage their consumers.
flexReceipts already enjoys established relationships with many of the largest point-of-sale (POS) providers and is in use at the Orange County Convention Center in Orlando, the second largest such facility in the United States with over 1.4 million annual attendees.
Allen H. Kupetz, COO of venVelo and the author of “The Future of Less: What the Wireless, Paperless, and Cashless Revolutions Mean to You” sees the flexReceipts solution as the logical next step in the cashless revolution. “flexReceipts offers consumers an easy way to manage their receipts digitally rather than saving little odd-shaped pieces of paper. It offers businesses superior data analytics and customer engagement tools, both of which offer marketers a unique insight into the buying habits of consumers.”
flexReceipts recently won both the Rollins College Venture Plan Competition and the Florida Venture Forum.
The flexReceipts team is led by Tomas Diaz, a 2002 MBA graduate of the Crummer Graduate School of Business at Rollins College. According to Diaz, “Eliminating the expense retailers are currently incurring for paper receipts, coupled with their total spend on online advertising, creates a multi-billion dollar total addressable market. This investment will allow us to ramp our sales and marketing effort and add more features to our core offering.”
Richard Licursi, CEO of venVelo, added, “flexReceipts aligns perfectly with our strategy of finding and investing in Florida companies that hold great promise as local job creators, can benefit from our experience and involvement, and provide the opportunity for a significant return to our investors.”
Winter Park, FL, August 27, 2012 --(PR.com)--
flexReceipts, a leading provider of digital receipt technology, announced today that it has received a substantial investment from venVelo, a business accelerator in Winter Park, Florida. flexReceipts’ target customers are retailers that print paper receipts and want a better way to engage their consumers.
flexReceipts already enjoys established relationships with many of the largest point-of-sale (POS) providers and is in use at the Orange County Convention Center in Orlando, the second largest such facility in the United States with over 1.4 million annual attendees.
Allen H. Kupetz, COO of venVelo and the author of “The Future of Less: What the Wireless, Paperless, and Cashless Revolutions Mean to You” sees the flexReceipts solution as the logical next step in the cashless revolution. “flexReceipts offers consumers an easy way to manage their receipts digitally rather than saving little odd-shaped pieces of paper. It offers businesses superior data analytics and customer engagement tools, both of which offer marketers a unique insight into the buying habits of consumers.”
flexReceipts recently won both the Rollins College Venture Plan Competition and the Florida Venture Forum.
The flexReceipts team is led by Tomas Diaz, a 2002 MBA graduate of the Crummer Graduate School of Business at Rollins College. According to Diaz, “Eliminating the expense retailers are currently incurring for paper receipts, coupled with their total spend on online advertising, creates a multi-billion dollar total addressable market. This investment will allow us to ramp our sales and marketing effort and add more features to our core offering.”
Richard Licursi, CEO of venVelo, added, “flexReceipts aligns perfectly with our strategy of finding and investing in Florida companies that hold great promise as local job creators, can benefit from our experience and involvement, and provide the opportunity for a significant return to our investors.”
Tuesday, August 14, 2012
Three Reasons to Look to the Angels for Start-up Funding
VCs can pack a powerful punch. But here's why you should hold that
thought.
By Langley Steinert | Aug 7, 2012
You're starting a business. You need capital. All the headlines say that
venture capital firms (VCs) are looking for the next great thing, and you've got
it.
But at the initial seed financing stage of your start-up, VCs are not always the better option In fact, angel investors often have more to offer. VCs serve a great purpose, but are often better suited for later stage growth funding.
Here are three benefits you'll enjoy from angel investors as you build a foundation for your start-up:
While there certainly are venture capitalists with operations experience, the majority of VCs come from finance backgrounds, with experience in areas like investment banking. Let's be clear: VCs play a vital role in helping with growth equity (your second or third round of financing). They can help you build your board, hire great executives and strategize on your business model. However, for your very first seed stage funding, a few angel investors from your specific industry will most likely provide greater input on how to master those first months of operations.
At CarGurus, we reached profitability with no VC funding. Our investors are friends and family, and they have never once voiced the topic of "exit strategy" or asked me when they will get their money back. All of them are happy to keep their money invested, growing pre-tax at a nice rate of return. If they were to get the money back, they would have to go find another investment that does as well, and that takes tremendous time and energy. Remember, angels usually have other day jobs and are not professional investors.
Venture capitalists have limited partners (the VC's own investors) and by definition have to return capital to their investors within a fund's lifecycle, usually five years. For venture firms to raise their next fund, they have to show not only that they can invest money but that they can get liquid and exit their investments in a timely manner. During your first year of operation, that's not an ideal mindset, but in your later stages of financing, having such a VC focus on growth and liquidity may be just the boost you need.
After you have established traction on your product and business model (i.e., shipped a product and generated some revenue), you can and most likely should raise venture capital. But at that point you can do so at much more favorable terms.
I've been involved as a co-founder in two profitable, successful start-ups. One was done with venture capital and one was done without venture capital. Truth be told, I was once a venture partner at a venture capital firm (www.flagshipventures.com) myself. Flagship Ventures provided the seed money when I co-founded TripAdvisor. Flagship did a great job and was a valuable partner in growing TripAdvisor into what it is today.
When I started CarGurus, I decided to forego venture financing and go the angel financing route. I do concede that raising money from angels is not necessarily the easier path. Chasing down ten angel investors to get them to agree on a financing document and actually give you money is a bit like herding cats. However, for CarGurus, the benefits have far outweighed those challenges.
There is no right or wrong answer about taking VC money in your seed round or taking VC money at all. As I mention above it can be done successfully both ways. However, if you can raise money from angel investors in your first seed round, it will allow you to conserve more equity, retain more board control and get more operational input in those first few months. When you do raise venture money it will also allow you to raise that second or third round at more favorable terms.
In those early days of your start-up, look up to the angels and you may receive the blessings that set you on the right path...
But at the initial seed financing stage of your start-up, VCs are not always the better option In fact, angel investors often have more to offer. VCs serve a great purpose, but are often better suited for later stage growth funding.
Here are three benefits you'll enjoy from angel investors as you build a foundation for your start-up:
1. Operational Experience
Having investors and board members with operational experience (especially within your industry) can provide invaluable contacts and advice, and angel investors are almost always current or former industry executives themselves. My current company, CarGurus, is an online automotive shopping site, and we benefit from having investors like the former founder of eBay motors, the current CEO of TripAdvisor and one of the first 10 employees from Yahoo! To date these folks have provided connections and guidance that comes from their own operational backgrounds.While there certainly are venture capitalists with operations experience, the majority of VCs come from finance backgrounds, with experience in areas like investment banking. Let's be clear: VCs play a vital role in helping with growth equity (your second or third round of financing). They can help you build your board, hire great executives and strategize on your business model. However, for your very first seed stage funding, a few angel investors from your specific industry will most likely provide greater input on how to master those first months of operations.
2. Patience, Patience, Patience
Angels invest less money individually than a VC firm, so the amount of capital you can raise from a group of angels will certainly be far less than that of a VC financing. The flip side of that coin is that angels are by definition not professional money managers. Angels don't expect to get their money out within three to five years at some pre-determined rate of return. As long as your company is doing well, most angels are happy to let their investment "ride" for the long haul. For the most part, angels are patient, long-term investors.At CarGurus, we reached profitability with no VC funding. Our investors are friends and family, and they have never once voiced the topic of "exit strategy" or asked me when they will get their money back. All of them are happy to keep their money invested, growing pre-tax at a nice rate of return. If they were to get the money back, they would have to go find another investment that does as well, and that takes tremendous time and energy. Remember, angels usually have other day jobs and are not professional investors.
Venture capitalists have limited partners (the VC's own investors) and by definition have to return capital to their investors within a fund's lifecycle, usually five years. For venture firms to raise their next fund, they have to show not only that they can invest money but that they can get liquid and exit their investments in a timely manner. During your first year of operation, that's not an ideal mindset, but in your later stages of financing, having such a VC focus on growth and liquidity may be just the boost you need.
3. Valuation and Ownership
Again, angels are not professional money managers and as such will usually give you a better valuation and financing terms, allowing you to retain more of the equity and board control of your company. Angels certainly want to make money, but they are not "in the market" every month and therefore are not as experienced--nor do they care to be--when it comes to valuations or governance issues.After you have established traction on your product and business model (i.e., shipped a product and generated some revenue), you can and most likely should raise venture capital. But at that point you can do so at much more favorable terms.
I've been involved as a co-founder in two profitable, successful start-ups. One was done with venture capital and one was done without venture capital. Truth be told, I was once a venture partner at a venture capital firm (www.flagshipventures.com) myself. Flagship Ventures provided the seed money when I co-founded TripAdvisor. Flagship did a great job and was a valuable partner in growing TripAdvisor into what it is today.
When I started CarGurus, I decided to forego venture financing and go the angel financing route. I do concede that raising money from angels is not necessarily the easier path. Chasing down ten angel investors to get them to agree on a financing document and actually give you money is a bit like herding cats. However, for CarGurus, the benefits have far outweighed those challenges.
There is no right or wrong answer about taking VC money in your seed round or taking VC money at all. As I mention above it can be done successfully both ways. However, if you can raise money from angel investors in your first seed round, it will allow you to conserve more equity, retain more board control and get more operational input in those first few months. When you do raise venture money it will also allow you to raise that second or third round at more favorable terms.
In those early days of your start-up, look up to the angels and you may receive the blessings that set you on the right path...
Wednesday, August 1, 2012
The Paradox Of VC Seed Investing
http://techcrunch.com/2012/07/29/the-paradox-of-vc-seed-investing/
This is the first in a series of articles I am writing to bring more transparency and honesty to the field of venture capital. While many of the themes may be contrarian or controversial, I have two primary goals: First, I want to help entrepreneurs and startup enthusiasts understand what motivates investors.
Second, I hope to draw attention to some of the fallacies venture capitalists use in their negotiations with entrepreneurs. Aligning the incentives of entrepreneurs and VCs will lead to much stronger relationships and innovation.
Entrepreneurs regularly come to Founders Fund asking us to lead or participate in their seed/angel round. They are often confused or shocked when I try to convince them that with very few exceptions, it is not in entrepreneurs’ best interest to raise seed capital from large venture firms and neither is it beneficial for large firms to invest in seed stage companies. Among the reasons: the structure of VC economics and unavoidable perception issues. Since this conversation happens frequently, I’d like to share my honest thoughts on why large funds should avoid angel investing -‐ and also why Founders Fund nevertheless does so through its wholly owned FF Angel funds.
The economics of VC explain a lot about why large funds should not do seed investing, so let’s start with a quick review of those dynamics. VCs raise money from a pool of capital known as limited partners (the fund is the general partner), which include accredited individuals and large financial institutions . The VCs usually charge 2% of this capital annually for operating expenses (the management fee) and 20% of the profits (the carry). This is known in the industry as a 2-‐and-‐20 structure but varies from fund to fund. While the management fees from a large fund can be an important source of revenue, the real incentive is (or anyway, should be) the carry. For of every dollar committed to a fund, the firm will take home approximately $.15-20 of management fees (which ratchet down over the life of a fund), but $.40 in carry if the fund triples. And good VC managers aim to get a return of at least 3-5x committed capital. Established firms have been raising more capital lately and this has important consequences for the kinds of investments they make. For the remainder of this article, when I refer to “VCs,” I am referring top tier funds in the range of $400 million to $1 billion+. As I am a partner at Founders Fund, I will use our latest $625 million fund as
the example.
There are many reasons to work in venture capital. Founders Fund, for instance, has remained steadfast in its mission to transform our world for the better, as presented in our manifesto. At the same time, venture capitalists are capitalists, with a duty to provide returns. With a 2-‐and-‐20 structure, we and every other VC in the world are incentivized to make money for LPs and ourselves. In order to achieve meaningful carry, we need to return several multiples of the fund, or multiples of $625 million in our case. Consider the basic implications here: we make a traditional seed investment in a company of $250k, and that investment returns. 20x, which by anyone’s standards is a home run. The problem is that it only returns $5 million and we need to make another 124 “home-‐run” seed investments to return our fund. In a more extreme example, take Andreessen Horowitz’s $250K seed investment in Instagram. This was one of the most successful seed investments of all time and netted its fund $78 million. In our case, we would need eight Instagrams to get to $625 million—a feat that no single fund has ever achieved in the history of venture capital. The case would be very different if we were a smaller early-‐stage firm where the Instagram investment may have returned its fund multiple times over.
This begs the question: why do VCs do seed investing at all? The standard reason is “option value”, or the ability to put in more money later as the company scales and gains traction. That’s a terrible answer.. Example: You are the founder of Acme Computing Technologies (ACT), and raise $250K in your seed round from a moderately successful venture firm. That firm has not been bad to you in any way, and may have even been helpful. Six months later, ACT is doing well so you are thinking about a $5 million Series A to scale the business. Your original VC would love to do this deal, but you get a call one day from a legendary Silicon Valley firm. Are you really not going to take that call? Of course you will! And if she offers you competitive terms, are you not going to strongly consider taking the money? Of course you will! Top tier firms almost ALWAYS have an option on a company, even if they did not participate in the seed round. Firms with great reputations bring many benefits, from branding and signaling to good advice and great connections. For good companies, this scenario happens frequently.
On the flip side, entrepreneurs should be cautious of taking seed money from top tier VCs because of this “option value.” Let’s change the story and say that a top tier made a seed investment in ACT from the start. We will ignore the subset of companies that die or “crush it” and focus on the large majority of companies in the grey area. If the top tier fund skips the next round for whatever reason, ACT would have a serious problem on its hand. The most common question other firms will ask is “Why didn’t the fund take this round”? Passing sends a negative signal to the market, and in some cases, may actually kill the company. The perceived option value comes at a potential huge cost to company, and is the main reason entrepreneurs need to strongly consider this downside.
Those are the structural problems with VCs doing seed investing – it’s challenging for a seed investment to have an impact on the fund’s total returns and there can be all sorts of signaling problems. So why would an entrepreneur take money from a top VC, and why would the VC itself ever make seed investments?
A potential reason to take money from large VCs is because of their size and ability to move quickly on a small seed investment. In general, if any $400mm+ fund VC takes more than 24 hours to decide on a $250k seed investment, the entrepreneur should run away, fast. Rapid access to capital allows entrepreneurs to waste less time fundraising and spend more time on product or business development. Furthermore, since the fund is so large, and the investment a small fraction of committed capital, the VC will likely leave the entrepreneur alone to run her company with no interference. VC meddling is potentially very detrimental to a company’s early success. Convenience and autonomy seem like great reasons to take money from a large fund, but the negative signaling potential to kill the company in the future outweighs these.
Despite these reasons, there are some cases where it does make sense for us (and indeed, any VC firm) to invest in seed stage companies. First, we invest in very high risk tech companies that otherwise would have a difficult time raising funds. We do this because we believe that IF these companies achieve their technical milestones, they open up huge new markets. This is usually a big IF, and also mitigates any signaling risk since other firms might not be willing to invest in the first place. Second, we invest in our network, who are typically amazing entrepreneurs or visionaries (e.g., the PayPal mafia, Facebook mafia, etc.). Investing in our network means we do not need to exert much incremental effort sourcing and helping out on deals because we already know the entrepreneurs and what they are working on. That kind of investing is a process that is almost infinitely scalable and thus incredibly efficient. These companies often do not fall under our manifesto criteria which we apply to our large main fund investments, so there is very little signaling risk if we do not participate in the Series A round. At Founders Fund, we do these seed investments through FF Angel to signal one of these cases, both to other VC firms as well as our own investors.
At the end of the day, we are venture capitalists. We strongly believe in stimulating innovation through capitalism. We are in this profession not simply to make money, but to help fund some of the most important technology the world has ever seen. Making our industry more transparent is an important part of what we do, as it can help cut through all the myths of venture capital, and empower founders to focus on the most important thing: progress.
Second, I hope to draw attention to some of the fallacies venture capitalists use in their negotiations with entrepreneurs. Aligning the incentives of entrepreneurs and VCs will lead to much stronger relationships and innovation.
Entrepreneurs regularly come to Founders Fund asking us to lead or participate in their seed/angel round. They are often confused or shocked when I try to convince them that with very few exceptions, it is not in entrepreneurs’ best interest to raise seed capital from large venture firms and neither is it beneficial for large firms to invest in seed stage companies. Among the reasons: the structure of VC economics and unavoidable perception issues. Since this conversation happens frequently, I’d like to share my honest thoughts on why large funds should avoid angel investing -‐ and also why Founders Fund nevertheless does so through its wholly owned FF Angel funds.
The economics of VC explain a lot about why large funds should not do seed investing, so let’s start with a quick review of those dynamics. VCs raise money from a pool of capital known as limited partners (the fund is the general partner), which include accredited individuals and large financial institutions . The VCs usually charge 2% of this capital annually for operating expenses (the management fee) and 20% of the profits (the carry). This is known in the industry as a 2-‐and-‐20 structure but varies from fund to fund. While the management fees from a large fund can be an important source of revenue, the real incentive is (or anyway, should be) the carry. For of every dollar committed to a fund, the firm will take home approximately $.15-20 of management fees (which ratchet down over the life of a fund), but $.40 in carry if the fund triples. And good VC managers aim to get a return of at least 3-5x committed capital. Established firms have been raising more capital lately and this has important consequences for the kinds of investments they make. For the remainder of this article, when I refer to “VCs,” I am referring top tier funds in the range of $400 million to $1 billion+. As I am a partner at Founders Fund, I will use our latest $625 million fund as
the example.
There are many reasons to work in venture capital. Founders Fund, for instance, has remained steadfast in its mission to transform our world for the better, as presented in our manifesto. At the same time, venture capitalists are capitalists, with a duty to provide returns. With a 2-‐and-‐20 structure, we and every other VC in the world are incentivized to make money for LPs and ourselves. In order to achieve meaningful carry, we need to return several multiples of the fund, or multiples of $625 million in our case. Consider the basic implications here: we make a traditional seed investment in a company of $250k, and that investment returns. 20x, which by anyone’s standards is a home run. The problem is that it only returns $5 million and we need to make another 124 “home-‐run” seed investments to return our fund. In a more extreme example, take Andreessen Horowitz’s $250K seed investment in Instagram. This was one of the most successful seed investments of all time and netted its fund $78 million. In our case, we would need eight Instagrams to get to $625 million—a feat that no single fund has ever achieved in the history of venture capital. The case would be very different if we were a smaller early-‐stage firm where the Instagram investment may have returned its fund multiple times over.
This begs the question: why do VCs do seed investing at all? The standard reason is “option value”, or the ability to put in more money later as the company scales and gains traction. That’s a terrible answer.. Example: You are the founder of Acme Computing Technologies (ACT), and raise $250K in your seed round from a moderately successful venture firm. That firm has not been bad to you in any way, and may have even been helpful. Six months later, ACT is doing well so you are thinking about a $5 million Series A to scale the business. Your original VC would love to do this deal, but you get a call one day from a legendary Silicon Valley firm. Are you really not going to take that call? Of course you will! And if she offers you competitive terms, are you not going to strongly consider taking the money? Of course you will! Top tier firms almost ALWAYS have an option on a company, even if they did not participate in the seed round. Firms with great reputations bring many benefits, from branding and signaling to good advice and great connections. For good companies, this scenario happens frequently.
On the flip side, entrepreneurs should be cautious of taking seed money from top tier VCs because of this “option value.” Let’s change the story and say that a top tier made a seed investment in ACT from the start. We will ignore the subset of companies that die or “crush it” and focus on the large majority of companies in the grey area. If the top tier fund skips the next round for whatever reason, ACT would have a serious problem on its hand. The most common question other firms will ask is “Why didn’t the fund take this round”? Passing sends a negative signal to the market, and in some cases, may actually kill the company. The perceived option value comes at a potential huge cost to company, and is the main reason entrepreneurs need to strongly consider this downside.
Those are the structural problems with VCs doing seed investing – it’s challenging for a seed investment to have an impact on the fund’s total returns and there can be all sorts of signaling problems. So why would an entrepreneur take money from a top VC, and why would the VC itself ever make seed investments?
A potential reason to take money from large VCs is because of their size and ability to move quickly on a small seed investment. In general, if any $400mm+ fund VC takes more than 24 hours to decide on a $250k seed investment, the entrepreneur should run away, fast. Rapid access to capital allows entrepreneurs to waste less time fundraising and spend more time on product or business development. Furthermore, since the fund is so large, and the investment a small fraction of committed capital, the VC will likely leave the entrepreneur alone to run her company with no interference. VC meddling is potentially very detrimental to a company’s early success. Convenience and autonomy seem like great reasons to take money from a large fund, but the negative signaling potential to kill the company in the future outweighs these.
Despite these reasons, there are some cases where it does make sense for us (and indeed, any VC firm) to invest in seed stage companies. First, we invest in very high risk tech companies that otherwise would have a difficult time raising funds. We do this because we believe that IF these companies achieve their technical milestones, they open up huge new markets. This is usually a big IF, and also mitigates any signaling risk since other firms might not be willing to invest in the first place. Second, we invest in our network, who are typically amazing entrepreneurs or visionaries (e.g., the PayPal mafia, Facebook mafia, etc.). Investing in our network means we do not need to exert much incremental effort sourcing and helping out on deals because we already know the entrepreneurs and what they are working on. That kind of investing is a process that is almost infinitely scalable and thus incredibly efficient. These companies often do not fall under our manifesto criteria which we apply to our large main fund investments, so there is very little signaling risk if we do not participate in the Series A round. At Founders Fund, we do these seed investments through FF Angel to signal one of these cases, both to other VC firms as well as our own investors.
At the end of the day, we are venture capitalists. We strongly believe in stimulating innovation through capitalism. We are in this profession not simply to make money, but to help fund some of the most important technology the world has ever seen. Making our industry more transparent is an important part of what we do, as it can help cut through all the myths of venture capital, and empower founders to focus on the most important thing: progress.
Wednesday, July 11, 2012
Accelerators Try to Get Startups to Stick Around
http://www.businessweek.com/articles/2012-07-06/accelerators-try-to-get-startups-to-stick-around
A few years ago, when Bryan Jowers and Justin Stanislaw were dreaming up an app to help friends pool money to give gifts, they felt they needed to leave Houston to improve their chances of finding investors and forging connections. Instead of relocating to a Silicon Valley hotspot, they moved to Cincinnati, lured by a startup accelerator called The Brandery. As one of six startups participating in the summer of 2010, they got 12 weeks of intensive help building their product, called Giftiki.
Startup accelerators, which give fledgling ventures seed money, office space, and mentoring through boot camps that typically last a few months, were born in tech hubs such as Silicon Valley and Boulder, Colo. The federal government and economic development groups around the country are banking on accelerators to create jobs and revive local economies in cities like Nashville, Tenn., and Greenville, S.C. The challenge in those places is whether the new crop of accelerators can get more companies like Giftiki—which left for San Francisco after raising more than $1 million in venture capital—to stick around.
Officials in Fayetteville, Ark., think they can. In August, 15 startups will arrive at ARK Challenge, a new accelerator with mentors from prominent Arkansas companies including Wal-Mart (WMT) and Tyson Foods (TSN). It’s partially funded by a $2.1 million federal grant. The ARK Challenge received 83 applications, including some from startups in Australia and Croatia, for its 15 spots. Director Jeannette Balleza hopes the graduates will move permanently to the region. “There’s a model in the Valley that we’re emphasizing to figure out: How do we spur innovation and create jobs but keep it specific to Northwest Arkansas?” she says.
ARK is one of 20 projects to receive a chunk of $37 million in federal money as part of the Obama administration’s strategy of using accelerator and incubator programs to create jobs in different regions. “If you really look at how America is going to be competitive, we need all of our entrepreneurs to be successful,” says Karen Mills, head of the U.S. Small Business Administration.
“We need to make sure they have access and opportunity, not just in Silicon Valley, but in Iowa, in West Virginia, in Arkansas.”
Keeping accelerator participants rooted in an area after a program ends requires the right combination of seasoned mentors, investors, and nearby research institutions, says Aziz Gilani, a Houston-based venture capitalist at DFJ Mercury. While many programs are too new to judge, Gilani found that in nearly half of the 29 accelerators he researched for a ranking, none of the graduating companies went on to raise more money. TechStars in Boulder and Y Combinator, located in Mountain View, Calif., were at the top of the chart. The Brandery ranked 10th. Gilani says the most successful ones are “directly tied to what the region is best in the world at.” Houston won’t become a consumer Internet hub, Gilani says, “but an energy-company accelerator would be a slam dunk.”
Two-year-old Brandery, which focuses on consumer marketing startups, highlights connections to big consumer companies, such as Proctor & Gamble (PG) and Macy’s (M), that call Cincinnati home. Co-founder Dave Knox says the burden is on accelerators to give startups reasons to stay. “We’re big believers of playing to the natural resources of a city,” he says.
The accelerator draws entrepreneurs from across the U.S. Many of the startups from the program’s first two classes, like Giftiki, departed in the months after graduating. Knox says an accelerator’s first concern needs to be the success of its companies. If staying close to home limits a startup’s prospects, it limits the potential of the accelerator’s investment as well.
Cities and investors alike are betting on accelerators to uncover new pockets of entrepreneurial talent around the country. Kristian Andersen, co-founder of Indianapolis angel investment fund Gravity Ventures, is a mentor for several accelerators in Indiana and will serve as one for the ARK beginning in August. He estimates that there 150 accelerators in the U.S. alone, and believes that “there are parts of the country that are genetically predisposed to entrepreneurship,” but that not all those places have gotten attention yet.
“It’s really good for a startup as an entity to have a bit of a chip on its shoulder,” Andersen says. “There’s no better fuel in the world than to tell a smart guy that he can’t do something.” The same holds true for regions trying to breed homegrown startups, he says: “Being the underdog can be a really powerful motivator.”
Wednesday, June 13, 2012
Visas for entrepreneurs
Where creators are welcome
Australia, Canada and even Chile are more open than America
Jun 9th 2012 | from the print edition
MOST governments say they want to encourage entrepreneurs. Yet when foreigners with ideas come knocking, they slam doors in their faces. America, surprisingly, is one of the worst offenders. It has no specific visa for foreigners who wish to create new companies. It does offer a visa for investors, but the requirements are so stiff—usually an initial investment of $1m, or half that if the firm is in a depressed neighbourhood—that the annual quota of 10,000 visas is seldom filled.
Other countries are more open (see table). Singapore offers visas to people who invest $40,000; for some, the government provides additional investment. Britain gives visas to entrepreneurs who meet certain conditions and attract £50,000 ($77,000) of venture funding. New Zealand has no specific capital requirement but offers residency to entrepreneurs whose firms are deemed to benefit the country. Chile is wildly generous: its government gives selected start-ups $40,000 without taking any equity in return. All these schemes have been introduced or expanded since 2008.
Where an entrepreneurial visa is not available, other routes may be. Australia and Canada use a points system that emphasises youth and skills. Since 2007 Australia has curbed the total number of permanent-residency visas it issues, but expanded the number of visas for skilled workers and their dependents from 103,000 to 126,000 a year. That is nearly as many as America (140,000), though America’s population is 14 times larger.
A similar side door let Mohamed Alborno into Canada. The young Egyptian-born entrepreneur incorporated his company, Crowdsway, in Delaware. He had done well in a contest for budding entrepreneurs. But getting a visa to live in America is slow, confusing and unpredictable.
In the end he went to Canada instead, where setting up a company is just as easy as in America, but the visa process is much more straightforward. He now says he is very happy to have settled in Vancouver. His firm, which connects online video-makers with clients, has just launched a beta service.
America’s scorn for skills is extraordinary. The share of permanent visas granted for economic reasons (as opposed to kinship) fell from 18% to 13% between 1991 and 2011. In Canada it rose from 18% to 67%. The Partnership for a New American Economy, a pro-immigration group, warns that America is “falling behind in the global race for talent.” China, meanwhile, offers some highly skilled returners not only free homes but also cash to buy furniture.
Monday, June 4, 2012
Venture capital in emerging markets: Making money by bringing old ideas to new markets
http://www.economist.com/node/21556269
SOME venture capitalists call it “geo-arbitrage”; others know it as “tropicalisation”. The term refers to the practice of backing start-ups that take an established business model and adapt it to an emerging market. Whatever you call it, it is becoming a bigger part of the venture-capital industry as competition at home forces Silicon Valley investors to look farther afield.
Julio Vasconcellos, one of the founders of Peixe Urbano, a Brazilian site offering users discounted deals, is thrilled by the “huge flood” of American investors he has noticed coming to Brazil, for instance. No wonder. Some of them, including Benchmark Capital and General Atlantic, have invested in his own company alongside Brazilian venture capitalists. The financiers have reason to be upbeat, too. Peixe Urbano is a clone of Groupon, an American start-up that went public last year; its business model is one they know can take off.
The idea of tropicalisation has been around for a while. It has already been lucrative for venture capitalists in India and China. Take Baidu, a Chinese interpretation of Google, which made early venture investors a killing; or Alibaba.com, a Chinese version of eBay, an online-auction site. Now venture capitalists are looking at other markets, including Brazil, Indonesia, Russia, South Africa and Turkey. Last year $3.4 billion of venture-capital deals were done in emerging markets, more than double the amount in 2008.
This push into emerging markets has gained momentum because venture capital is experiencing problems in its traditional markets. Silicon Valley was once so inward-looking that venture capitalists used to say they would not back a start-up unless they could cycle to its office. But valuations in North America have risen for both early-stage and later-stage investments (see chart), making it much harder to make great returns.
That is partly because there are too many firms; 369 of them are currently in the market trying to raise $50 billion, according to Preqin, a research firm. There is a lot less competition in emerging markets. The pressure from investors is also rising. A damning new report by the Kauffman Foundation, an outfit which promotes entrepreneurship, analysed its venture-capital portfolio and concluded that 62 out of 100 funds failed to exceed the returns offered by the public market.
Most venture-capital firms do not head abroad with the sole aim of looking for copycats, but plenty of their investments end up that way. Douglas Leone of Sequoia Capital, a big venture-capital firm, reckons that in emerging markets like China around 50% of start-ups backed by foreign venture capitalists in the internet and mobile sectors are copycats, and in markets like Brazil it is closer to 70%.
That is not so surprising. Backing tested concepts mitigates the risk inherent in start-ups and means companies are likely to grow quickly, because the original firm has already worked out the kinks. Often the originator of the business does not have the expertise to enter new countries quickly, so copycats can get there first.
They can also gain an edge by tailoring businesses to local habits. Flipkart, an online-commerce site in India founded by two former Amazon employees, has received funding from Tiger Global, a New York-based hedge fund that specialises in this kind of investing, and Accel Partners, a venture-capital firm. Flipkart has taken off in part because credit cards are less common in India and it offers the option of payment on delivery.
Another example is Trendyol, a Turkish “flash sale” site that mimics Vente-privee.com and Gilt Groupe, which popularised the idea of time-limited online sales of designer clothing. But Trendyol, whose backers include Kleiner Perkins Caufield & Byers, also sells its own mass-market clothing line, with seasonal designs “crowdsourced” from users in Turkey.
There are different ways to play the copycat game. Rocket Internet, started by the Samwer brothers—Alexander, Marc and Oliver—in Germany, is a cloning “factory” that copies American and European businesses, hiring entrepreneurs to run them and exporting these start-ups to emerging markets as fast as possible so they are the first entrants. More traditional venture capitalists are setting up offices and selectively backing local entrepreneurs. American venture investors often prefer to bring in a local partner to provide more consistent mentorship to these entrepreneurs and give advice on how to navigate the domestic market.
Such advice can be valuable, given the specific risks of setting up in emerging markets. First, companies can take longer to get off their feet, given grinding local bureaucracy. “An eight-year fund might not be sufficient in Brazil,” says José Luiz Osorio of Jardim Botânico, a Brazilian seed investor. Second, there are cultural barriers: it can be hard to recruit employees to work for an unknown company in exchange for equity, for instance. Third, exiting through large initial public offerings is unlikely in countries like Turkey and Brazil, where IPO activity is muted and investors like to buy well-known firms; that means venture firms are reliant on strategic buyers to gobble up their creations.
Tropicalisation piles on an additional set of risks. Copycats can easily lose share when the original company eventually enters the local market. Sonico, once the Facebook of Latin America, got “pummelled” when Facebook arrived, says Nenad Marovac of DN Capital, which was behind Sonico. And even if they can see off competition, the copycats are unlikely to be mega-blockbusters because, by definition, they are not new. “With innovation you have a global upside, but with copycat innovation you have geographical limits,” says Eric Archer of Monashees Capital, a Brazilian venture firm.
It will not be long before emerging markets spawn their own innovations that can be trotted out on a global scale. That would be closer to the spirit of venture capital, which is supposed to ferret out and fund new ideas, not imitations. Until then, however, tropicalisation is set to become an ever more popular strategy. Copy that.
Wednesday, April 4, 2012
Sausage vs. Meatballs: A Study in Start-ups
http://www.inc.com/jon-burgstone/the-epicurious-case-of-currywurst-bros.html?nav=pick
Why did the Currywurst Bros. chain fail in New York, while little Meatball Obsession is thriving? Entrepreneurs, take note.
By Jon Burgstone and Bill Murphy, Jr.
This is a story of meat, square feet, and microeconomics. It's the tale of how two food entrepreneurs opened up shop about 10 blocks from each another in Lower Manhattan. One crashed and burned. The other might just make it.Like any good story, there's a moral. Two, actually. And since you're a busy entrepreneur we'll give them both to you up front. First, keep your overhead low. And second, at all times, do everything you can to obtain maximum information for minimum cost.
Meet the Meat Vendors
Exhibit A is Currywurst Bros., a German chain that opened its first U.S. location in Greenwich Village, not far from New York University. It served an inexpensive sausage dish, very popular in Germany, called—yes—currywurst. If you're not familiar with it, it’s basically chopped up pork sausage smothered in curry powder and ketchup.
Sorry to say, but if you haven't tried Currywurst Bros., you've missed your chance to do so in New York. The restaurant opened in May 2011 in a high-priced storefront, "after a long build-out that took many months," according to The Village Voice. But it closed for good just seven months later.
Against this, we submit Meatball Obsession, which sells "meatballs in a cup"—one, two or three of them, plus tomato sauce and a piece of bread. According to the company's founder, Dan Mancini, the place grew out of his memories of meatballs his grandmother used to make.
Meatball Obsession opened this past week about 10 blocks from where Currywurst Bros. stood, but it has a very different setup. In fact, the eatery is, "a stall—just a window, really—embedded near the PATH train entrance on the east side of Sixth Avenue just short of 14th Street," as the Village Voice puts it..
So why did the sausage place go kaput after just seven months? And what might the meatball place learn from it? (Even more important, what can you learn?)
Pay heed to what customers need
We're using "need" in a generic sense here, but currywurst was basically new to New York City. It's a German food, and while New Yorkers are pretty much willing to try anything once, it hadn't been proven before. Who knew if anyone would really like it?
That's not the case with meatballs. Many if not most people have eaten a few meatballs in their life. More than that, Meatball Obsession isn't the first New York City eatery focusing on the humble meatball. There's The Meatball Shop, for instance, with three locations in the city.
Even more important, Mancini had been selling meatballs and sauce to New York City supermarkets for four years before he opened Meatball Obsession. He must have had pretty good information on New Yorkers' tastes before he started.
Keep überhead under control
Meatball Obsession is operating out of a window outside a subway stop. But Currywurst was paying rent for a much bigger place, around $16,000 a month, according to The Village Voice. Do the math: If you cleared $1 on every sausage you sold, you'd have to sell more than 500 of them every single day simply to pay the landlord. That doesn't leave a lot for other all your other business expenses---you know, like paying your employees and yourself.
Mind your p's: Process and profitability
Of course costs play right into profitablity, but there are other factors as well. According to The Voice, Currywurst Bros. needed 10 minutes to cook each sausage after it was ordered. That's kind of a long time to wait for a $7 hot dog substitute. (Especially, as one commenter pointed out, when you can buy a hot dog for a couple of bucks from a street vendor for about $2.)
We didn't actually eat any meatballs in the course of writing this article, but it looks as if the prep time at Meatball Obsession is much faster. And yet, one meatball goes for $4 at Meatball Obsession; $10 will get you three. There's likely a lot more room for profit with that kind of math.
The restaurant business can be brutal, and there's no guarantee that Meatball Obsession will survive any longer than Currywurst did. But their odds look more favorable. Gather the best insights you can achieve into customer needs and tastes before you launch, and keep costs low, especially before your idea is proven. It's good advice for just about any entrepreneur in any field.
Wednesday, March 28, 2012
The M&A Market: All the Right Conditions, but No Buyers
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2967
"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
http://www.economist.com/node/21548258
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
http://chronicle.com/article/A-Boom-Time-for-Education/131229/
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."
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."
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