Emerging Enterprise Center Blog - Commentary and Analysis For Entrepreneurs and Startups

Having recently had a pretty bad skiing accident that required surgery and will require a long recovery (while chasing my son down the lift line at Ninety Nine 90 in the Canyons), I have not been able to write many posts, but now that I am past the initial stages of recovery, I have had some time to think about the tech world again.

Here is one of the somewhat intractable issues that have troubled me. I know, from internal research at our firm, that the average life of a venture financed client (from the time the company becomes a client until exit) is about 10 years. I also know from discussion with a VC friend that the average time to exit for companies in his portfolio is 8 years (at least that is what he is telling people). Remember, these are average numbers, so many investments take longer to get to exit. Also remember that our firm’s numbers reflect investments from a broad variety of VCs from the top tier to the little know funds. My friend is with a top tier firm, so their results may be somewhat better than those for the industry as a whole.

OK, so why waste time thinking about this number? Well, most funds have a ten year life. Ideally during that term, the fund is fully invested and fully liquidated. Most (all?) funds provide for extensions to liquidate laggard investments. Even still, limited partners in VC funds would like to get their return in ten years – that’s the plan.

If you know that your average time to exit is 10 years, then you know that investments made in years 3, 4, and 5 (let alone anything after that) are, on average, going to run way over. This accounts, in part, for the phenomena that many VC fundss will linger long after they are unable to raise new rounds.

But, it also may have an impact on investment style. Except in the earliest years of a fund, VCs will almost always be in the position of being under pressure to look for an exit. I am sure there are many ways in which VCs try to mitigate this pressure (doing follow on investments in new funds might be one, but that is a hassle for other reasons).

I suppose it is impossible to know how much pressure this situation exerts upon VCs to favor tightly defined business plans with a clear path to an exit over grander visions? I have commented elsewhere that VCs seem to me to favor narrowly focused tightly defined business plans that address clear pain points and have obvious exits. VCs also seem to me to have become very focused on domain expertise within their investment portfolios. This makes sense, why invest in something you don’t know about? But it also leads to a certain orthodoxy in the nature of investments.

In some sense the life of a normal fund is not suited to the life of a normal company. As a result, VCs are structurally driven to favor narrowly focused investments over grand visions.

For the first time in several years, I was able to actually attend (as opposed to sign up for and then not be able to go) the annual meeting of lawyers and VC in-house counsel that was organized by Sarah Reed  (of Charles River) long ago to develop what are now the NVCA document forms. In my view, this is one of (perhaps the) most successful forms projects ever undertaken. We are about to publish EEC Perspectives for Q4 (the link is to Q3, but Q4 will be available in the next day or so) and year end. It will show very high continued adoption rates.  For those of you who are not familiar with these forms, they are an annotated set of series A deal documents.  They are a great resource for any entreprenuer trying to understand what is in the docs and what is "market".

Based on comments at the meeting, there will be some modest revisions to the documents. Perhaps the most noteworthy is that we will be going back to the future: The next round of forms will (when done) include an additional form of charter with a pay-to-play provision. If my memory serves me well, we included pay-to-play when we did the original version of the charter seven or eight years ago (can it really be that long ago?).

Another noteworthy discussion revolved around whether or not registration rights should be deleted from the forms. They won’t be – at least not this time. Let’s hope that by the time this group meets again next year, there will have been a few (more than a few) IPOs and everyone will start feeling like reg rights are important after all, even if rarely used.

One final note, Ted Wang from Fenwick, discussed model seed series financing documents (based on the NVCA docs) that he prepared and will be making publicly available. This is another great project and great service to the entrepreneurial community.

I attended a presentation at the Mass Technology Leadership Council a while back on the subject of measuring the effects of social media. I have been thinking about it ever since. Mostly because I sometimes wonder why I am writing a legal related blog. After all, who wants to read legal stuff? (Lawyers? Foley’s marketing department? My daughter, Megan, who reads it religiously but admits she understands little of the legal stuff? The good folks at Lexblog who host this blog?)

The speaker was K. D. Paine, whose business is consulting in this area. Without question she made many many interesting points. But, and I suspect I will make a complete hash of this, her main point was that the effectiveness of social media (such as blogs) is in fact measureable and not by counting eyeballs. Here is a link to the slides from the speech.

Her point is that the effectiveness of social media revolves around engagement. So, it does not really matter how many people read your blog or follow you on Twitter. What matters is how many of them are "engaged" and how many act on this engagement. You can have a million people hitting your site, but if none comment and none forward a link to someone who they think might have an interest, then so what? A recommendation from trusted source is far better than a random hit from a Google search. If you have engagement, you are more likely to get referrals and valuable positive buzz with people who care about your product, service or message.

There are lots of ways to measure engagement. One might be how many times you are re-Tweeted or how many comments you get or how many times your blog is cited by others. If you are staying on message and readers are commenting, citing and retweeting, they you are likely to be impacting your market in a much more direct and powerful way than with mass spamming or just mountains of passive traffic.

So measuring effectiveness begins with measuring engagement and ends with calculating an ROI from the people who took action based on the engagement.

None of this, of course, tells you how to create engagement, and that is where the magic ultimately lies. Now I am on the trail looking for insights into how engagement is created (not just how it is measured). One site that seems to be focused on this aspect of web marketing is pistachioconsulting.com. A f riend at Valley View Ventures turned me on to this site.  There is currently a guest post on "Presenting with Twitter" that has some strategies for creating engagement. I am sure there are others. I will try to note them as I find them.

I am no Peak Oil maven, but I read some commentary about it in the comments to one or another blog that I read regularly (perhaps Fred Wilson’s blog or Brad Feld’s or Don Dodge’s, I am not sure). Anyway it the issue was what the effect of peak oil would be on technology companies. Aside from placing a huge premium on all sorts of energy related technologies (that is why some massive percentage of investment is going into this space), I am not sure why technology should be affected differently from other industries. Anyway, it caused me to read a little about peak oil and the various debunkers of the peak oil theory. No surprises there. But it reminded me of something I have thought from time to time. I bet that all the peak oil theorists and their debunkers have their facts wrong. I can’t believe this is an original observation, but here is why:

In my capacity as corporate/securities lawyer, I have been watching clients, investment bankers, and others (by they way back in the days of oil and gas limited partnerships – the people who put those together) put together projections and financial statements. I don’t think any (perhaps a few) ever put together projections or financial statements in bad faith. But, whenever you put together these kinds of numbers you have to make choices. They can be totally legitimate and appropriate choices. Here is an example, in determining the net present value of a future payment, you have to pick a discount rate. This is a judgment call. Within the range of fair and proper, almost everyone errs on the side that benefits them.

I am guessing that the calculation of oil reserves is not an exact science. It involves judgment calls like the one I just described. Within the range of what is fair and proper, what kind of estimates do you think big oil is making?

My guess is that nobody knows what the world’s oil reserves really are (or even has a reasonably accurate guestimate). The same, by the way, applies to the calculation of demand. My guess is that nobody knows what the demand will be (or even has a reasonably accurate guestimate). The inaccuracies, of course, compound each other (that is my guess anyway). I would guess that the world reserves are less than anyone thinks (including OPEC). We may, or may not, find additional new and vast reserves – who knows?

My theory is that people who are making big bets on new enery technologies are going to get a pleasant surprise. (Although the rest of us may not find it so pleasant.)