But when our client SCVNGR asked if we’d be interested in participating in one of their groundbreaking new LevelUp promotions, we jumped at the opportunity. LevelUp is SCVNGR’s exciting new pilot for building customer loyalty by combining online daily deals and location-based gaming mechanics.

Here’s how it works. LevelUp works with merchants to create the best deals in your city – say, a special on burritos, rock climbing, or fitness centers. Each business has three levels of deals - Level 1, Level 2 and Level 3. Buying Level 1 not only gives you a great discount, but it automatically “unlocks” Level 2, allowing you to “level up” to a great deal for a second visit. If after the second visit you like what you’re experiencing, you can “level up” again and get a third great deal.

We think this is genius, and we wanted to be a part of the fun. Although LevelUp is usually retail-focused, we worked with SCVNGR to create “LevelUp Your Startup,” a special LevelUp deal for entrepreneurs with great ideas who could use discounted legal and accounting advice as well as coveted access to premier investors.  As part of Level 1, Foley Hoag attorneys will meet with entrepreneurs to help get their companies incorporated with a startup legal package.  Entrepreneurs who buy Level 1 will unlock Level 2, which includes a startup accounting package. Buying Level 2 unlocks Level 3, where top-notch investors like Rich Miner from Google Ventures, Alex Taussig from Highland Capital Partners and folks from Common Angels, Robin Hood Ventures and Dreamit Ventures will take the entrepreneurs out to lunch and hear their pitch.

LevelUp Your Startup launched on April 5th. We offered 10 startups $2,800 worth of legal services for $250 (no, there’s no comma missing there). What’s more, a share of the proceeds of this promotion goes to support a very deserving organization: MassChallenge.  Within about an hour, the deals had sold out.  

Given the numbers involved, it’s probably obvious that in the case of this LevelUp our goal was not necessarily to make money.  Instead, we wanted to be part of a great team and show how an awesome new program could be used to foster our local entrepreneurial ecosystem and help new businesses get off on the right path.  By every measure, LevelUp Your Startup has been a huge success for Foley Hoag, SCVNGR, our new entrepreneurial clients, and MassChallenge.  I think this is where I yell “Woot!”

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.

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:

Jack Derby, who is a great speaker and on the board of one of my clients, then gave a presentation about the "architecture" of building a business.  He quoted SunTzu as his favorite entrepreneur, and also mentioned that the biggest mistake he sees startups make is "lack of consistency on the part of the CEO."  In talking about building the team, he mentioned that research has shown the most successful startups have three or more founders.

Finally, Alain Hanover talked about his experiences at NTV, including his best investment, Sandvideo.  He had a lot of great advice about starting a company and the steps to success.  But the part I found most interesting was his description of some of the problems he experienced with having a very small venture fund:

• even with a focus on capital efficiency, the companies always needed more money than they thought they would,   
• development (both of the products but also the customer base) always took longer than projected
• all of this often led to subsequent cram-down rounds without a fund large enough to always participate pro rata
• the need for deeper pocketed investors to be able to continue

None of these should be that surprising, but given the talk recently of the need for more small VC funds (such as the newly formed Founders Collective) to fill the "capital gap" these made for some interesting counterpoints. 

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.

Before writing this paragraph I went back and checked an old closing binder, and, yes there it was, a 5x participating preference. I have been waiting and bracing myself for what I imagined would be inevitable – the return of onerous terms (not to be confused with really really low valuations). The ones I have been expecting are multiple X participations and full ratchet antidilution provisions. The practical effect of a preferred stock with these provisions is, of course, to leave anyone who is not invested in that series (especially the common holders) with little or nothing. My sense is that investors discovered how disheartening and demotivating these provisions were in the last cyclical downturn (and that they left a very bad taste in the mouths of many entrepreneurs). So far, I have not seen them. I have seen bottom fishing valuations, but that is another matter. Investors may not learn from the mistakes of others, but at least they learn from their own.

Rumors of the death of venture capital

How many times have your heard (or read): the venture model is broken or average venture returns were about 1.5% in the last eight years (or something like that), or there is way too much money invested in venture funds, or the like? There is, of course, some kernel of truth to each of those statements, but they need to be looked at in some context. It would be hard to deny that there are great opportunities to found and build great new companies. These opportunities seem self-evident in certain sectors such as renewable energy and clean technology, but they will also exist in sectors that don’t have as much play in the media as renewable energy and clean tech. Mobile technologies, cloud computing, data storage, industrial efficiency and robotics come to mind. Institutions are going to see the opportunities and they will want to invest. To date I have not heard anyone suggest a more efficient way for large funds to make these investments than through venture funds. Furthermore, venture funds were raised in 2008 (way less than in 2007, but raised nonetheless). If people are putting money in venture funds at this point in the cycle, they will continue to do so in increasing amounts in ’09 and ’10. Rumors of the death of venture capital are greatly exaggerated.

The darkest hour

As of this writing, it is hard to find any good news. The Dow looks like it could easily drop below 6000, there are no IPOs, acquisition activity is way off and a lot of it seems to be fire sales, and venture funding is very hard to get even at rock bottom valuations. I think Bernanke said that the current recession might be over by year end. That is Fedspeak for “under the most optimistic circumstances it will stop getting worse in the fourth quarter.” This is hardly an optimistic statement. I keep searching for a harbinger of better times, but nothing obvious has appeared to me. Having said that, you would not expect to see, touch and feel specific evidence of a rebound until after hitting bottom. Right now visibility is nil, but the darkest hour is just before dawn.

Maybe I have been down so long it looks like up to me, but I am an optimist. All the gloom and doom has given everyone something to talk to complete strangers about, but it is time to move on.

To download the entire March issue of EEC Perspectives just click here (.pdf).

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

I did a bunch of background work, and fundamentally the project did not make sense. There was no set of projections that I could come up with that showed us making money on this office in a reasonable time frame. Furthermore, it was never clear that any partner would want to lead the effort.

Consider this from the point of view of a venture capitalist. Would you do a start up in a mature industry  with several large robust and deeply entrenched competitors in which there is no barrier to entry? There is not a logical business argument for this plan, and with all respect to our Executive Committee, we decided to proceed on a split vote. The decision to go forward was made on the narrowest of margins.

So, why on earth did we do this? I could give a lot of reasons why: a creative business plan (which I believe we have), certain market dynamics (who wants to be a small client at a huge multinational law firm or who wants to be a small client at remote office of a west coast firm) etc., but the real reason, if the truth be told, is that I believe in the mission and I was willing to lead the effort. At some level I can’t imagine doing anything else.

Hokey as it may sound, to me the mission is not just making money for Foley Hoag.  Entrepreneurship is our future as a society. It is the new ideas that will make for a quality future for my kids (and yours). A world in which everyone competes for who can make the lowest cost shoes will not make a vibrant future for our children (nor, frankly, will it feed the starving masses in Africa). So part of my motivation is the mission: help to foster great entrepreneurs and great new companies.

The other reason, the real reason, is fun. A lot of years ago another friend of mine told me, “There is no excuse for not having fun.” The most fun I have had in the practice of law has been representing and developing a close relationship with entrepreneurs. [If you want to represent Citibank or Goldman, it is OK with me. I would rather represent Tom Burgess or Foster Hinshaw.] Joe is still a great client, but we really had fun when things were crazy and we didn’t know where the next paycheck would come from.

We hope that you enjoy this issue and we plan to continue to bring you other points of view in future issues of EEC Perspectives.

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. 

We also want to be a source of market analysis and insight, especially during these tough economic times. An active discussion about these topics and issues is what we’re hoping to foster so please don’t hesitate to ask questions or post your thoughts.

We look forward to the conversation.

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.