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

A lot of people think cloud computing is one of the next big things.  It is obviously here, and there is a lot of hype and a lot of real activity.  MassNetComms is holding an event at the EEC (our offices in Waltham) on the topic.  Sim Simeonov wil the be the moderator.  John Considine (CloudSwitch), David Skok (Matrix), Omar Trajman (Vertica Systems) and Michael Werner (Microsoft) will be on the panel.  This promises to be an informative event. 

The cloud represents, I think, a significant economic opportunity not just for companies (and entrepreneurs who learn to use it) but for entrepreneurs that build it out.  The event is on 9/23 and starts at 8:00.  If you only attend one cloud related event this fall, it should be this one.

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We had a great kickoff to the new "season" of programs at the EEC on Tuesday night, when we hosted the IEEE Boston Entrepreneurs' Network (ENET) September meeting "Launching Your Successful Company."  There are many more upcoming events of interest to entrepreneurs at the EEC in September, so check out our events calendar.

The slides from the presenters will be posted to the ENET website shortly, so I won't try to summarize them in full, but some interesting take aways from the three presenters:

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The way capped preferences work is that in a sale of the business, the VC investor gets its investment back (a so-called 1x preference) and then participates with the common in any proceeds from the sale that exceed the preference. Imagine the fairly frequent case of a 2x or 3x capped participation. This means that the VC gets to participate until her return is 2x or 3x, as the case may be, their investment. (If the VC would get more by converting, they will simply convert.) This kind of structure helps the VC in low to intermediate return scenarios. They also really create a divergence of interest between the VC and the holder of common stock, since the VC can get an adequate return in the low to medium sale scenario and the holder of common stock can’t (in part because the money is going to the investors). In effect, there will be scenarios in which the investor is eager to sell and the holders of common stock are not.

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Below you'll find my article from the March '09 issue of EEC Perspectives, entitled The End of Gloom and Doom.

I like my gloom and doom as much as the next guy, but a whole year of unrelenting gloom and doom is overdoing it. Looking back on a year’s worth of numbers, it occurs to me that there is a lot to say that is not in the numbers.

Entrepreneurs are like weeds

If you just look at the national numbers you could come to the conclusion that there are fewer deals than last year, that the VCs are taking longer to invest and are investing at lower and lower valuations, and that all of this just acts as disincentive for entrepreneurs to start new ventures. But, anecdotal evidence is to the contrary. I polled some of my partners, and we all agree there is steady stream of new start-ups in all industries. They are not necessarily getting financing from VCs. In fact, the pattern that I see evolving is that entrepreneurs spend a bunch of time (many months) hiking up and down Winter Street to no avail. After that, they figure out other ways to keep moving forward by self-funding and going to family and friends or others with special affinity, and they make do with less. In a number of cases, they seem to me to be happier and more productive once they accept that there will be no VC money and they figure out something else. Entrepreneurs are like weeds; it will take more than a long dry spell to kill them off.

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A lot of years ago Joe Caruso, CEO of Palomar Medical Technologies, Inc., tried to convince me to go “in-house” at the company. Basically, he said, “look, nobody can blame you for taking a shot.” This was before Palomar’s hard times and, of course, before their current success. Needless to say, I didn’t take the job. Joe is many times a millionaire and I am still scratching around looking for billable hours. 

What is it that makes you want to take on an entrepreneurial mission?

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We present with pleasure the next issue of EEC Perspectives, our periodic look at venture activity in the New England region. With this issue we are back to Series A transactions, featuring those closing during the third quarter of 2008. (Prior issues of EEC Perspectives, which alternate between Series A and later rounds, can be found in the News and Publications section of  the EEC website.)

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I am pleased to announce that the next issue of EEC Perspectives is now available.   Each issue of EEC Perspectives presents quarterly data and analysis on the number and size of transactions in the New England region and, with respect to numbers of transactions, nationally, and provides analysis on certain key terms of the New England transactions. We have been publishing EEC Perspectives since last May, alternately focusing on early rounds and later rounds. (Prior issues of EEC Perspectives can be found in the News and Publications section of  the EEC website.)  The current issue is the second to focus on Series B and later rounds.   It includes a market perspective from entrepreneur and investor Vinit Nijhawan.  Among other things, Vinit has some helpful suggestions about steps you can take to help yourself prepare for a later stage round in today's circumstances.  The issue also contains commentary from Foley Hoag lawyers Amanda Vendig, Jerry O'Connor and me, including perspectives on the current investment environment.  You can find other comments about the impact of the current economic situation in my recent blog about the current venture capital outlook and other blogs below, such as Dave Broadwin's recent entry regarding terms in down times. 

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This morning  I attended a “CEO Breakfast” with Don Bulens, former CEO of EqualLogic (here's a video interview of him from YouTube), sponsored by The Massachusetts Network Communications Council. He commented on a couple of things that are recurring themes in this blog. 

Don made reference to slide 49 from the now famous (infamous?) Sequoia Capital’s 56 slide presentation of doom. This slide has a red line labeled “Death spiral” which shows a hypothetical company that does not trim its burn rate falling off a cliff to presumed extinction some time in ’09. It also has a green line that shows a hypothetical company that trims its expenses right away, then grows at a slow but steady rate and survives the downturn. Don’s point was that the same kind of thing happened at the end of the dotcom bubble. He notes that some companies did hunker down and survive. Constant Contact was an example that he pointed to.   His general advice is don't fall into the trap of thinking you will be the one who captures the market by maintaining spend -- if you don't make it to the other side you will be the red line.

Don also made reference to the difference between east coast and west coast VCs. As he put it (1) Silicon Valley “celebrates” risk taking in a way that is foreign to New England and (2) the significance of this difference of style between the two coasts is way overplayed. 

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The EEC's analysis of Series A transactions in New England for Q2 just came out.  It shows what is shows -- that there has been a decline in Series A deals compared to the same period in 2007.  As I look at our publication (which covers data through June -- three months ago), I have to note that so much changed so dramatically in Q3 that Q2 seems like it was thirty months ago.  We are in the process of finalizing our data for Q2 Series B and later stage financings and expect it to come out in the next couple or three weeks.  I have a sinking feeling that it also will feel like history rather than current events.  We have begun to gather the Q3 data but wont really know the numbers until well into November.  Stay tuned.  My sense is that (1) the number of Series A deals will continue to fall and (2) that we may start to see terms becoming more investor friendly, but don't hold me to it.

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