Emerging Enterprise Center Blog : Boston Startup Lawyer & Attorney : Foley Hoag Law Firm : Startup Financing, Venture Capital

Last Saturday’s Times had a number if interesting articles. In addition to the one I noted on Monday, there was an op ed piece by Bob Herbert entitled "No Recovery In Sight." The gist of his piece is that until there is a marked improvement in employment, any recovery is a hollow recovery. Of course he is right at least in so far as if people are not working then life continues to be hard even if the economy is expanding.

Paul Tsongas was a Partner in our law firm, and I distinctly remember him telling a story about his hard working parents in Lowell. The moral to the story was that no matter how hard they worked, and they worked hard, they were prisoners of larger economic trends. Unfortunately, I think the same will have to be said of the many many people who have lost their jobs in this recession. A lot of these jobs just aren’t coming back until it is equally cost efficient to build stuff here rather than elsewhere. The time necessary to level the playing field is not going to be measured in months. Also, if the process is just a leveling process, the end result may not be so great. Do we really want to look like a better China?

To state the obvious, this is why all the talk about entrepreneurial effort and new technologies is so critical to the equation. If we can’t bring the entrepreneurial world back in a big way, we are going to suffer for a really long long time. This is why I feel so committed to the Emerging Enterprise Center and why we should all care about the turmoil in the angel and venture world and, ultimately, in the world of exits and the capital markets.

• Email This
• Print
• Comments
• Trackbacks

This is an observation that I have made before in this blog, but I was a little surprised to see similar thoughts appear in an analysis piece by Joe Nocera in the New York Times on Saturday under the title "S.E.C. Chased Small Fry While Big Fish, Madoff, Swam Free." The article makes a pretty compelling case that there is an institutional bias in favor of chasing the small fry over the big fish. Among the points that Nocera makes is that the SEC enforcement people are judged on cases they bring and win.. As Nocera points out, the small fish tend to be easier marks. They settle and pay the fines, even if they may not be guilty. In part this has to with the fact that the small fry may not have the resources to fight. In Richard Kwak’s case (the case Nocera outlines in his article), Richard Kwak was essentially bankrupted by his fight against the SEC (which he won in the end).

• Email This
• Print
• Comments
• Trackbacks

As of now there are three: SolarWinds, OpenTable and Medidata. It looks like LogMeIn will make the fourth. Before these you have to go back to RackSpace in August of 2008. Nothing else need be said. 

• Email This
• Print
• Comments
• Trackbacks

In a recent press release Mark Heesen of the NVCA had this to say:

"The venture capital industry will evolve significantly in the next few years as the asset class responds to a Darwinian contraction resulting from the recession, the rise of innovative industry sectors such as clean technology and the continued interest in venture capital outside the United States," said Mark Heesen, president of the NVCA. "As the survey results suggest, we will see more globalization in the next decade, not only in terms of investments but also in fundraising and exits as well. Those countries that can nurture entrepreneurs and investors as well as offer attractive exit opportunities have the most to gain economically in the next decade."

This comment causes me to think back to my trip to China of a few months ago. While in Tianjin, I visited an incubator where 930 tech companies were being incubated. I don’t know about India, never having been there, but at lease one of our competitiors is working on a scale that is hard to comprehend.

Beyond the comment about venture capital outside the United States, is the comment about offering attractive exit opportunities. Exits have been few and far between in the last year and more. In the end exits drive the whole investment model and somehow, directly or indirectly, the deployment of new technology in business and personal life drives the rate at which companies will be acquired or go public. Obviously other factors impact it as well, but I wonder if the aging of the U.S. population doesn’t slow down the rate at which, as a country, we can/do absorb new technologies. Is demographics a drag on innovation?

Consider how comfortable your grandfather, father, you, your children are with Facebook, iphone apps, or whatever. I still have not programmed the automatic garage door opener in my new car. I write this blog and I send the occasional tweet, but if the world has to depend upon me to drive adoption of the next big thing, you could be waiting a while.

• Email This
• Print
• Comments
• Trackbacks

This is a theme to which I keep returning – email (and other electronic records) is forever. At this point everyone has a horror story about the email that got sent to the wrong person or that had some embarrassing statement. The observation that email seems to inspire people with a freedom to say – whatever, has been made so many times that it can’t possibly bear repeating, can it? Well, despite the well know phenomena of misdirected email, embarrassing statements and etc., all these email faux pas seem to continue unabated.

• Email This
• Print
• Comments
• Trackbacks

I recently had occasion to look back through the data we have gathered on the presence (or absence) of cumulative accruing dividends in New England transactions and noticed what appears to me to be an interesting pattern. According to our research, 55% of Series A transactions had cumulative accruing dividends ranging from 6% to 10% per annum (and, obviously, 45% did not have such dividends). But, only 33% of Series B and later round transactions had these dividends (and the rates ranged from 6% to 8%). So, 67% of later round financings did not carry dividends. The sample is small (covering under 100 transactions) but it is somewhat random and covers 2008 and the first quarter of 2009. So, maybe the results are just random. It seems odd that Series A deals are more likely to carry dividends than later stage deals. I am not sure what the reason could be, if the results of our survey reflect a trend. One possibility is that Series A deals are riskier than later deals and investors are trying to gross up their yield.

• Email This
• Print
• Comments
• Trackbacks

Last week I noted that Fred Wilson had the last word on what is "standard" and quoted a paragraph from his blog. The gist of the quote was that you need to be able to articulate a reason for the "standard" provision you want. (By the way, often things get to be standard because they address some important and recurring issue.)

• Email This
• Print
• Comments
• Trackbacks

It being the middle of June the numbers for Q2 are about to come out, with the inevitable result that many new blog posts will be added to the blogosphere providing all kinds of analysis. Our firm contributes to this quarterly cacophony with our EEC Perspectives publication which analyzes what is going on in New England. When we started this publication, we gave some thought to what we could/should publish and from what base sources. So, we look at the quarterly data that we derive from mining VentureSource and various searches of Delaware filings. We analyze the data ourselves and make judgments about its quality and significance and try to turn it into useable information. The way we think about the data is as follows:

• Email This
• Print
• Comments
• Trackbacks

Mike Feinstein makes an interesting point on his blog about VC compensation and that it how it affects motivation.

The last thing that has to happen is for VC compensation to get more aligned with their investors making money. The 2% fee and 20% carry model can provide too much current income for VCs with little regard to capital loss. That doesn't work for LPs except for well-established funds that have a high likelihood of doing well. In addition to looking for some unique investment strategies, LPs should also look for some innovative compensation models from their venture funds that align everyone's interests more directly.

This is the last paragraph of his post, but the rest is well worth the reading.

Another post with some interesting analysis is Marc Theermann on How Big is the Mobile Publishing Industry.  He concludes his analysis with "That brings the total mobile publishing industry pie to $937 million for 2009. "

• Email This
• Print
• Comments
• Trackbacks

Fred Wilson's post on a Lesson from Morty has, perhaps, the final word on what is standard.  Here it is:

• Email This
• Print
• Comments
• Trackbacks

Even in a field in which transactions are in many respects highly repetitive, as in the case of venture investments, and even when the parties agree upon a standard form for a starting point, there is still a lot to consider in any give deal. These considerations range from the most material (say valuation) to the annoyingly trivial (say nuances in the reg rights language). At some point in the proceedings when confronted with open issues, entrepreneurs ask what’s market?

• Email This
• Print
• Comments
• Trackbacks

My post on the NVCA forms and levels of adoption did get one comment, which I did not get to releasing until yesterday because it got buried under an avalanche of work related email. The gist of the comment is that adoption levels for the NVCA forms are way lower on the west coast than the east coast – Yokum Taku (of Wilson Sonsinni) suggests in the 5% to 10% range. Our firm does not track west coast deals for the obvious reason that our home base is Boston. So, I don’t have a basis for disagreement with Yokum Taku. Having said that, I believe there are huge efficiencies in using widely accepted agreed upon forms in a field in which so much is basically repetitive and in which efficient use of resources is so important. I find myself surprised that competitive pressures and the ever increasing need to provide cost efficient services has not driven west coast firms in this direction as much as it appears to be doing in New England.

• Email This
• Print
• Comments (1)
• Trackbacks

Bullying is not often seen in negotiation. I think this is because in many negotiations, the parties need to be able to work together after the negotiation is complete, and bullying just leaves a very bad taste in the mouth of the person who was bullied. Having said that, some negotiators take that tack and it can be hard to deal with if you really want the deal for some reason. The bully is, in effect, counting on your unwillingness to break up the deal to push you into all kinds of concessions.

• Email This
• Print
• Comments
• Trackbacks

Negotiation can be about a lot of things. A great attorney that I know, he is now retired, once said that the most difficult thing to overcome in a negotiation is a good reason for something. A good reason – one that can be articulated so that the other side recognizes it as self-evidently rational – will often (very often) trump the power, the money and the clever posturing.

• Email This
• Print
• Comments
• Trackbacks

The venture industry has spawned a fairly standard set of legal forms. Sarah Reed, formerly general counsel to Charles River Ventures, was the primary moving force behind the forms project. I was one of the early participants along with representatives from many of the major venture funds and law firms that regularly practice in the venture space. This includes east coast and west coast firms.. The project is perhaps six or seven years old. The project has produces a comprehensive set of investment documents and the group meets annually to upkeep and improve the documents. These docs are publicly available on the NVCA web site. Perhaps the greatest testimony to the success of the forms project is that the forms have gained wide acceptance in the industry.

• Email This
• Print
• Comments (1)
• Trackbacks

I have already tried to attack the delicate subject of the use of legal forms once. Certainly one of the more abused "forms" is the nondisclosure agreement or NDA. Clients often like to get a "standard" NDA which they then apply in all sorts of circumstances. Some clients are very savvy about NDAs and really know the issues and how to edit and negotiate them. Some clients have themselves developed a set of very sophisticated NDA forms covering the universe of business circumstances with which they deal. For may reasons, it is really nice to have clients who can and do deal with their own NDAs. For one, the need for an NDAs tends to come up fast and clients sometimes do not want to slow down a deal to negotiate one. This is especially true if getting their lawyer involved will mean the other party gets their lawyer and soon cycle times start going up. But, if you are not one of those clients that knows, you can make missteps. Here is an example:

• Email This
• Print
• Comments
• Trackbacks

Clients often ask for a standard form of NDA or a standard set of representations or some other "normal" agreement. You know, "the usual thing…" A corollary to this request is the request that the lawyer turn (sometimes the word is "spin") the document instantly. The problem with this approach to legal documentation is that in the legal world, facts are critical and context is king – not that "standard" forms are not useful, but their utility depends upon the facts and circumstances of their use. So here is one example to make the point:

• Email This
• Print
• Comments
• Trackbacks

One of my favorite quotes is from Steve Jobs. I believe he said, "those overnight successes sure take a long time." As I, and others, have noted, the VC investment model is based on a ten year cycle of fund raising, investing and exiting. This model works well for a lot of companies, but one size does not fit all. A quick look at my client base, suggests a couple of issues with the time dimension of the VC model. (There are, of course, other dimensions to be considered such as the amount of money needing to find a home etc.)

• Email This
• Print
• Comments
• Trackbacks

Sometimes you have to take your financing where you can find it and deal with the consequences later. If there were but world enough and time, you could negotiate the correct fair valuation for you business and the correct fair terms for you and the investors. But there never is (world enough and time) nor is this the best of all possible worlds. So, in the end you will have to settle, and, with luck, if you don’t get what you want at least you will get what you need. Along the lines of dealing with the real imperfect world, here are a few thoughts based on some client experiences.

• Email This
• Print
• Comments
• Trackbacks

Twitter is still the hottest thing going, and the odd thing is that I have become something of a convert. After a long time, I got to place where I realized that it is useful and has different uses for different people.

• Email This
• Print
• Comments
• Trackbacks