A Prozac economy for entrepreneurs? No way, no how!

Posted by Prithvi Tanwar on December 23, 2009

David Wessel’s recent article in the Journal, “A Prozac Economy has its Costs,” asks: If we were able to invent the economic equivalent of Prozac – something that would take away the high-highs and the low-lows of our current economy (think the tech bubble of the late 90’s and the current recession) – would we elect for a prescription? Would we, given the choice between a dynamic, volatile economy with painful depressive phases, and a more mellow economy with fewer crises but a slower growth rate over the long term than its manic doppelganger, settle for a calmer existence? Though my understanding of economics is limited to my college-level macro and micro courses, from an entrepreneur’s and VC’s point of view, I think my answer would be: give me manic any day.

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Transaction Costs

Posted by Dave Broadwin on December 23, 2009

My last post reminded me to come back to a theme that I address from time to time – transaction costs for small transactions. While it is true that smaller deals are not necessarily less complex than larger deals (sometimes it seems like just the opposite), you just can’t paper a $1,000,000 deal (let alone a smaller one) the way you can a $10,000,000. $40,000 is 4% of $1,000,000 – it might be a material item that eats into the money you have to put to work in your business in significant way. (By the way, I picked $40,000 randomly because it is not far off the cost of a typical Series A investment from a VC (that is the cost of one side’s lawyer).) But, there are risks in doing a less than thorough and careful job of documenting a transaction. I am sure there are many horror stories out there. Having said that, all businesses have to manage risk one way or another to preserve the value of the transaction. At the risk of stating the obvious, the best thing you can do is use an attorney experienced in representing early stage companies and hope the other side does too. The other thing you can do is be sensible about your own deal strategy – pick your battles. If you feel the need to negotiate every sentence of a document, guess what – your transaction costs will reflect that.

Seed and Angel Investor Notes

Posted by Dave Broadwin on December 21, 2009

Seed and angel investments often come in the form of convertible notes – often notes that are convertible into some future round of equity investment at a discount to the valuation at the time of conversion. They have other terms as well such as interest rates, maturity dates, prepayment premiums in the event of an early sale of the business, waiver of certain debtor protections etc. These all may form the focus of future posts. I want to focus on what, if any, influence seed/angel investors who invest in these types of notes want (or get) concerning the terms of the equity into which they are planning to convert.

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VC Fundraising - 2010 will be a telling year

Posted by Dave Broadwin on December 16, 2009

The Dow Jones webinar I did with David Bell (Fenwick & West), Sarah Reed (Charles River Ventures), and Lizette Perez-Deisboeck (Battery Ventures) has provided me with a lot of eye catching numbers. I will comment on the VC fundraising numbers in this post (and maybe some others in the future).

According to Dow Jones, VC fundraising by venture funds has risen steadily, from a low of $10.3 billion in 2003, to a recent high of $41.0 billion in 2007. I say recent because in 2000 the raise was $82.3 billion. Year to date numbers for 2009 show a total raise of $8.1 billion. There is still a month to go, and maybe a fund or two will have a closing in December, but this looks like an historic low.

Based on a discussion over lunch with Rick Grinnell of Fairhaven, I believe that there will be an unusually high number of big "A" list funds that will be looking to raise new funds in 2010. In some ways this makes 2010 the year to watch. If a large number of strong players are in the market and the amount raised does not spike up it may reflect that a new, lower, equilibrium has been reached in the market. In effect, 2010 may well tell us how much smaller the venture world will become for the next half decade.

East Coast versus West Coast

Posted by Dave Broadwin on December 14, 2009

Should you jump on a plane to look for money on the west coast?

Last Friday David Bell (from Fenwick & West), Sarah Reed (Charles River Ventures), Lizette Perez-Deisboeck (Battery Ventures) and I were the panel for a Dow Jones sponsored Webinar on the subject of "The Evolving Venture Term Sheet: What VCs & Execs Must Do To Secure the Best Deal." This Webinar was built around the deal statistics published by Fenwick (a west coast law firm) and Foley (an east coast law firm). As you might expect, the numbers appear to confirm that there are some identifiable differences in practices between the west and the east.

David Bell summed it up better than I can, and I know I can’t now recreate his exact words, but the gist of what he said was that activity and valuations are picking up on the west coast sooner than on the east coast and that deal terms are slightly better on the west coast than on the east coast. In essence, the east coast lags the west coast a little bit in good times and bad. So, in bad times terms are a little less draconian on the west coast than on the east coast, and in good times terms are a little better on the west coast than on the east coast.

This observation is, I think consistent with the statistics gathered by Fenwick and by Foley. It is also consistent with anecdotal information. On the west coast there are more deals with stronger valuations than on the east coast. Also, one the west coast there are relatively fewer deals with terms like a 1x preference and full participation. It is not that there are wildly different practices, but there does seem to be a small but consistent difference.

This persistent difference seems all the more odd because the VCs (who presumably drive all this) do deals on both coasts. Battery and Charles River both have offices in Waltham and Palo Alto. It is hard to account for this difference. One facile answer is to say that it is cultural. But, that seems too easy. Also, I would think that if this were the case, west coast firms would bring their attitudes east and grab lots of good deals. Perhaps it has to do with the relative mix of industries – the east having a relatively higher percentage of biotech and life science. Biotech being relatively more expensive and requiring a relatively longer investment horizon than, say, IT, might breed more conservative practices.

While I don’t really know, I am guessing that the explanation is more along the lines of some economic factor than a purely cultural one. I think getting a west coast VC into your mix is probably a good thing, but I would not stop looking for investors in Boston.

Thoughts on risk management and incorporation

Posted by Prithvi Tanwar on December 02, 2009

Entrepreneurs are risk takers; lawyers risk managers. An inherent tension exists. Take too much risk or over-manage the risk and the results can range from unsatisfactory to disastrous. However, in every venture, there are manageable risks and uncontrollable risks. The trick is to realize which is which and deal with them accordingly. I have met some smart, innovative first-time entrepreneurs with thought-provoking business plans that illustrate foresight and a nuanced understanding of market forces. However, more often than not, these very same entrepreneurs are more than willing to lump all their risks in the “uncontrollable” category.

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Dubai: Shock and Surprise

Posted by Dave Broadwin on December 01, 2009

The big financial news in WSJ over the past few days has been the debt debacle in Dubai. How this situation could be a surprise to anyone is a mystery to me. These guys built an indoor ski slope in the desert. If that is not a sure sign that things are out of control, I don’t know what is. 

I wrote on April 13 of this year that a “ski slope number” is one that demonstrates palpably that something is wrong. What I wrote was, “I have it on good authority that in Dubai, they built an indoor ski slope. Imagine building an indoor ski slope in the middle of the desert. Just stating the proposition demonstrates its absurdity and hubris. It palpably demonstrates that the pendulum has swung too far.”

 

If you lend money to people who build ski slopes in the desert and new islands upon which to build luxury housing, you checked your common sense at the door (or maybe you just decided to gamble). In no event should you be shocked or surprised when they can’t pay you back. The bad news is that, once again, the rest of the world will suffer because the masters of the financial universe engaged in this kind of speculation.