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

Controlling your online identity is a really big deal – for a lot of reasons. Among other things, no one wants to be the victim of fraud, or constant spamming, or unwanted behavioral advertising.

It is probably no surprise that the National Broadband Plan contains several recommendations to Congress and the FTC for regulatory action in this area. Where these regulations come out will affect many things (online advertising is obviously one thing that will be affected).

Here is a partial list of the things the Broadband Plan is recommending in the privacy space:

Congress and the FTC should clarify the relationship between users and their online profiles by regulating the obligations of firms that collect personal data have to consumers in terms of data sharing, collection, storage, safeguarding and accountability.

 

Congress should consider helping spur the development of trusted “identity providers” to help consumers in managing their online data to maximize privacy and security.

 

The FCC and the FTC should jointly develop principles to require that customers provide informed consent before their information is shared with third parties.

 

The FTC and the Federal government should put additional resources to work to combat identity theft and related problems.

 

The Federal government should investigate establishing a national framework for digital goods and services taxation.

These rules, when adopted, will affect the entire U.S. online community. If you are working on a social network product, and your business plan involves monetizing personal information about the users of your social network, guess what: regulations yet to be adopted may make or break you. If you are starting a company in the online security space, these regulations yet to be adopted are likely to have some thing to say about what your product must (or can’t) do. If you are not using a opt in system right now, the upcoming regulations could cause you to revamp your processes.

Andy Payne put me on to this blog, which I admit is not one that regularly read, but Paul Kedrowsky wrote a post and it, with the attendant comments, gives a good picture of the debate around the supersede phenomena. My subjective sense is that a lot of the action is in fact at the superseed level.

Chris Sacca, who dropped a comment, has this to say about the superseed investment world:

While we are at it though, what your piece doesn't really recognize is that companies backed by Super-Seed funds don't have to IPO or see extraordinarily remarkable exits for everyone involved to have had a great outcome. This week, for example, I sold a company for $20m which I backed at a $2m post two years ago. I will take returns like that all day despite how dreadful they would seem to a traditional VC.

This is half of the question that I left on Andy Payne’s blog about certain kinds of investment just not needed “traditional” VC investment. In the end they don’t make sense for traditional VC funds.

At the other end of the spectrum, investments that consume large amounts of capital and need a long lead time to exit also don’t really make sense for “traditional” VCs. The best examples I can think of for this type of situation is renewable energy projects. Without a robust IPO market to pass these companies onto (after some level of initial investment and business progress), these investments don’t make sense in a 10 year fund.

This might account for what I believe is the low level of investment in the cleantech and renewables space.

We need more diverse fund structures to address the current opportunities.

The National Broadband Plan could be the best kept secret in entrepreneurial ecosystem. If you know about it, read no further. If you don’t (and that is most people including entrepreneurs and investors directly affected by it), you almost certainly need to read further. The National Broadband Plan could be the most entrepreneur and investor friendly thing the Feds have going. And, it will affect every business (and consumer) that uses broadband.

Fortunately, this is the beginning and it is not too late to get into the details. I met with Stuart Brotman (perhaps the country’s leading authority on the Broadband Plan) the other day. He made a good point. Knowing about the Broadband Plan now is like knowing about the impending adoption of the Internal Revenue Code in 1906 (I think). And, it will be just as important.

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After all my blather about how friends and family financing is the easiest and most common source of financing for start-ups a reader sends me the article:  Keys to luring investors: Simplicity and persistence. 

It's a great read in its own right and Seth Burgett has some excellent advice on a) how to get a start-up off the ground and raise some capital and b) no nonsense tips for would be founders. 

But one thing mystified me...the fact that he stays clear of freinds and family financing...well I thought about it a bit more and for Seth Burgett it makes sense...Why?

1) He's rich - he fronted what would usually be covered by friends and family fianancing himself.

2)  He's a rock-star as far as institutional investors are concerned - among other things, he led development for surgical robot company that eventually went public ! 

So here's my "rockstar-millionaire" exception to the path of family and friends financing:  If you already took a company public,  made your millions, and in the eyes of the VC and Angel community you/re a rock-star founder you might not go the family and friends financing route.

US Venture Capital Returns: Inception to 3/31/08

Source: Venture Economics, Prof. Paul Gompers HBS      n=1927

Yes… you might want to avert your eyes for this one.

The chart above was first brought to my attention by David Aranoff of Flybridge Capital and geekvc.com fame at a recent ENET event, where he coined it quite appropriately the “Yuck Chart” (a full presentation on the state of Venture Financing can be found on David's blog). Based on this, only the top 25% of VC companies have made a profitable return. The rest have lost money. The chart is even more skewed when you factor in the exit multiples from the milk and honey days of the internet boom.

David posits quite logically that this is a result of something going terribly wrong along the way…and I don’t think he was talking about just the economy. The VC model went from being one where an overabundance of great ideas and an undersupply of capital resulted in only the best ideas being funded to one where an overabundance of similar ideas and an oversupply of capital results in nearly every good idea being funded. Literally, there was just too much cash chasing ideas that just were not up to par. As a result today there are too many entrepreneurs out there who fairly, given the experience over the last decade or so, believe that their ventures are prime candidates for VC financing. Unfortunately, they just might be wrong, 

And with the emperors slowly realizing that their fine new clothes might not be what they originally thought they were, entrepreneurs who think that their venture is VC fundable or a good candidate for VC funding might do well to take a long hard look at their company/start-up and ask if they fit the “best” idea or “good” idea model. From the looks of it from a VC investor perspective, "good" might just be enough for VC funding in the future.

Since I generally hate playing hide the ball, look for a future blog entry that helps shed some light on determining whether VC money is right for your company….

 I have been giving more thought to this issue of signaling and VC seed notes. As I have pointed out before there is a lot of chatter about it in the blogosphere. My initial thinking in an earlier post was that this is really much ado about nothing.

I was going to leave it at that, but one of my partners passed along a rumor to the effect that one of the top tier VC funds in Boston was pursuing (or considering pursuing) the following strategy. They, apparently, propose to do a whole bunch of seed notes with the intention of following up with an A round on only a small fraction of the seeded companies. I don’t believe this is likely to be good for entreprenuers

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 Jeff Bussgang has a recent post on why vesting schedules should anticipate the time to exit (the gist of it is that vesting should align VC and employee expectations). In his post he notes that time to exit these days is 6 to 8 years.   His fund is likely performing better than the industry because it is more like 8 than like 6.

In response to a comment from me the effect that vesting should be more keyed around expected milestones than arbitrary time frames, he notes that this is what employees get a salary for. Here is the quote:

Employees get paid salaries to deliver results and cash or stock bonuses help focus on milestones. Stock options are really about earning into equity ownership over time. That equity value is only really realized at exit.

I gave this some thought and I agree and disagree. Options, like money and everything else, have a time value and are only motivating if the option holder really thinks she has a decent chance of actually realizing on their value in this lifetime.

Here is a comment to Jeff Busgang’s post from Healy Jones,

Jeff, this is crazy talk! Keep your hands off my vesting schedule; it seems really long to me as is. ;)

Many of the early employees are not likely to be there in 6, let alone 8, years. (No doubt some will.) Many people who are highly suited for the early stage environment and can (and do) make significant contributions are not well suited for the middle or later stage environments.   A classic example is the first CEO. Let’s be honest, a lot of these folks make a real contribution then get moved on. 

Another point is that many people take employment with start-ups for the equity and not for the salary. My sense is that start-ups don’t pay what IBM or Google pay for the same resumes. The equity is an important (perhaps critical) part of the compensation for the day to day work (for which they are being underpaid in the sense that they could get more cash from Microsoft).

So, my point is that pure time based vesting (whether it is slow or fast) does not make sense because it does not compensate for the work done and the contribution made. I have noted this before from the point of view of founders with co-founders or employees that do not perform.

Milestone vesting may not make sense because milestones can sometimes be hard to define and they can be all over the place. 

So, perhaps some amount of time that makes sense in terms of the horizon in which the employee is expected to make a material contribution is a sensible compromise. Whether that should be 2 years, 4 years or 8 years, perhaps depends. 

Jeff is probably right to point out that the industry seems to have settled on 4 because it reflected some sense of historical time to exit.  That does not mean that we have to live with the logic and change the time frames. 

I work with a lot of very early stage companies and as among founder and very early contributors the vesting time frames vary dramatically. Very short time frames (such as one year or even less) and milestone vesting is common. The reason for this is the one I originally gave. Very early stage companies need to get work done, they can’t pay dollars so they pay equity. In this situation, vesting has to make sense in terms of expected contribution. When the contribution is made, you get your stock. 

If you want to hire W2 employees (people looking to work for a salary) and you want to keep them around, pay the salaries, provide the benefits, and vest the options at a slow rate because the options will be one more good benefit, like a 401K.

Many start-ups would like to be at the stage where this is the need. Unfortunately, the nature of the animal is that there are a lot of other phases you have to go through to get to this place. Vesting is one tool you can use to attract people to work for you for less cash than it might otherwise take. Vesting has a time value. The longer it takes the lower the value to the employee and therefore the lower value options have as a form of currency.