The problem is that we are all prisoners of our own experience.  I have represented a lot of technology startups over the years, but it is still not a representative sample.  Time is also a factor the “going rate” (if there can be said to be such a thing) was different ten years ago that it is today. 

Perhaps some of the larger more active VC funds can get a representative current sample by looking at their existing portfolio companies.  But, most people really need industry data. 

So, here is a web site CompStudy that looks like it may fill the data gap, and you can get their data.  Below are two paragraphs taken from the CompStudy site.

The CompStudy surveys focus on private companies in the Technology and Life Sciences industries. We have conducted these surveys annually since 2000. (I collaborate on the surveys with Ernst & Young, law firm WilmerHale, and executive-search firm Park Square.) Last year, more than 800 private startups participated, giving us an extremely detailed dataset to help you understand the market for executive talent. The first decade of CompStudy surveys – which included almost 10,000 founders from 3,600 startups – served as the data backbone of my book, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup.

As in past years, survey participants will receive free access to our sophisticated reporting/analysis website, including salaries, bonuses, and equity holdings for C-level and VP-level executives. To qualify for the free access, please complete the questionnaire by June 30th, 2012

If this survey lives up to its promise, it will be very useful.

I can’t help but note that a similar phenomena sort of exists (that is lack of actual data) with respect to other aspects of startups: for example, terms and valuation. 

Now, for some of this data you can go to our publication Perspectives (that covers New England, and shortly New York as well) or a similar publication from Fenwick & West (that covers the valley).  But although we (and I believe Fenwick) track every VC financing in our region, we don’t publish everything we know (I don’t believe Fenwick does either – although I have never discussed this with any of their attorneys).

So, when you hear someone say market is …..  You are probably hearing their subjective impression and, human nature being what it is, an impression designed to support the speaker’s agenda – good, bad or indifferent.

There is just too much out there – snow and blogs.

Finally, here is something that actually might be helpful.  Larry Cheng has published his 2011 directory of top VC blogs.  Here is the link.  His directory lists 149 VC, seed etc. blogs.  The top ones are ranked by number of monthly uniques in Q4.  Thank you Larry. 

But, who is really going to read all those blogs?  No one.

This kind of crowding happens just before a shakeout.  We are in the bubble before the burst.  Think .com in 1999 or tulips in 1624.  Whatever all these VCs think they are getting from all the blogging, the returns will not be there for almost all of them. 

Here are two predictions:

• Many will soon stop blogging (and by soon I mean 24 months). 

• Some will find nitches in industry or other verticles.

Blogging is on the verge of becoming a mature industry with a relatively small number of established players who express the mainstream opinions for the Venture industry, and they will be enough.  Blogging will soon be old and stodgy – my god even lawyers are doing it.  The wave of accountant bloggers can’t be too far behind. 

The recent FTC report envisions a do-not-track mechanism that lets consumers opt out of third party tracking for behavioral advertising, which is one of the most common forms of online tracking. If companies wish to share personal information with third parties for purposes other than online behavioral advertising, we think some greater form of user consent should be obtained. The system as currently envisioned would not apply to ordinary first party tracking or to a first party's use of a service provider for website analytics, assuming the service provider makes no additional use of the collected data.

It is important to keep in mind that the FTC is not proposing a blanket ban on all tracking.  Having said that, it is still not clear to me that the proposal is not based upon the perceived creepiness of tracking and the emotional response of many people to the idea that they are being tracked. 

The reason that third party tracking is “one of the most common forms of online tracking” is that there are substantial economic benefits to it.  No one has really answered the question:  What happens if do-not-track actually results in many people opting out?

One thing is likely, the people who make money as a result of this kind of tracking wont any more.  So, whatever “free” content is being supported this way will either disappear or will be paid for some other way.

Another thing that might happen was suggested to me by a well known entrepreneur and investor here in Boston.  A great deal of effort and ingenuity will be expended getting people to opt in.  If this happens, it could have a lot of ramifications.  One consequence that he suggested is that once people opt in, they will have expressly agreed to the use of their information and there is likely to be much more far reaching and free ranging use of their information compared to the current system in which abusers are likely to be outed unpleasantly one way or another.  A second consequence that he suggested is that businesses will try to position themselves as first party providers in various ways and thereby evade the ban.  Finally, he suggested that the cost getting people to opt in will simply be added to the cost of innovation.

One thing is for sure, there is significant money to be made through behavioral advertising.  Until the cost of getting to good quality behavioral advertising becomes so high that it become uneconomical to go there, the money will be seeking ways to get there. 

As WiredPrNews.com puts it, “If the Do Not Track plan is approved and implemented, the repercussions for the online ad industry could be catastrophic.”

You can think it is creepy, you can think it is an invasion of your privacy, whatever.  But, make no mistake about it.  If the Feds actually do away with tracking (by having a super easy opt out or in some other way), the basic business models that bring you (an everyone else) all that cool free stuff, will have to change.

It will have to be paid for some other way.  Subscription fees and pay per use are my bets.  Maybe that is OK because it protects privacy.  But, have no illusions about it, such a change would favor those who have the means to pay and make the internet a difficult place for those who do not.  It will change the fundamental egalitarian nature of the web and will make it a less robust less valuable place.

I have not addressed the free rider problem.  That is can you (as an individual) opt out and still get all the goodies from Google that require that all the rest of us agree to be tracked?  The problem with this is, of course, that each person is likely to be incentivized to opt out because they will not pay the cost in “lost” privacy but will get the benefit of “free” stuff.  If enough people opt out, the goodies wont be there for anyone.  And, by the way, the rate of development of new “goodies” will slow to a crawl.

So, what should the Feds do?  Perhaps, the Feds should consider a regulatory structure along these lines: (1) promulgate rules that protect populations that need protections (such as children) with specific substantive rules around what information can be gathered, stored and monetized about these populations, (2) promulgate rules that protect specific types of information that are rife with the possibility for abuse (such as social security numbers or personal medical information), and (3) for everyone and everything else promulgate rules that require full and fair disclosure around what is and is not being tracked.  Other than these three things, the FEDs should consider doing nothing at all.

If you really want to opt out, you will be able to do so by simply not using Google, Facebook, MapQuest or any of the others.  You won’t be free riding, and, frankly, the value each of us gets from all these “free” online services is so great that few, if any, will opt out when the direct choice is not to have these “free” services.

The Federal Trade Commission (FTC) just published its preliminary Staff report setting out its proposed framework for protecting privacy in the digital economy. View the FTC’s press release here. The FTC is seeking comments on its proposed framework by January 31, 2011 and expects to issue a final report in 2011.

Every digital media business that attracts advertising revenue online and/or through mobile devices, as well as the venture capital and private equity funds that invest in them, has a stake in the outcome of this proposed framework. It can affect current business models, future financial performance and potential exit opportunities for current and potential companies that rely on collecting data from consumers.

The final report, and possible new regulations and/or federal legislation to follow, will help shape substantive law, enforcement policies and commercial best practices regarding consumer privacy practices that will need to be followed.

Notably, the FTC staff cites flaws in commercially available, privacy-related plug-ins and browser features, and supports a more uniform and comprehensive consumer choice mechanism for online behavioral advertising than currently exists. This is often called “Do Not Track,” in a nod to the currently mandated “Do Not Call” registry that restricts the activities of telemarketers. FTC staff identified and requested comment on a number of issues concerning the formulation and adoption of any such “Do Not Track” mechanism.

Other important components of the proposed framework include:

• Scope: The proposed framework would apply to all commercial entities that collect or use consumer data that can reasonably be linked to a specific consumer, computer or other device. Here, the FTC staff recognizes the erosion of the distinction between personally- identifiable information (e.g., name, address and social security number) and supposedly anonymous information that may be collected without the knowledge of the web- or mobile device-user.
• Promotion of consumer privacy: The proposed framework would require companies to promote consumer privacy and security protections into their daily practices and to consider privacy issues at every stage of design and development of products and services. Suggested steps include:1) providing security for consumer data; 2) limiting data collection to the relevancy of a specific business practice; 3) enforcing sound retention policies; 4) providing assurances of data accuracy; and 5) implementing comprehensive data management procedures throughout the lifecycle of products and services.
• Consumer choice: In addition to the “Do Not Track” mechanism described above, the proposed framework would require companies to provide consumers with a notice-and-choice mechanism at the point when the consumer is providing data to the company. This would not be required in the context of commonly- accepted practices, such as order fulfillment or first-party marketing, however.
• Transparency and Access to Data: The proposed framework would require vastly- increased transparency with respect to data collection practices and allow for increased consumer access to data collected. As part of implementing this component, the Commission suggests a level of simplification and standardization for currently loosely governed website privacy policies.

Before this framework is submitted in final form to the FTC for a vote by its commissioners, which will accelerate the process further, the FTC is requesting comment by interested parties on a variety of key related issues, including:

• Scope: Are there practical considerations that support excluding certain types of companies or businesses from the framework?
• Substantive Privacy Protections: What substantive protections should companies provide, and how should the costs and benefits of such protections be balanced?
• Comprehensive Data Management Procedures: How can the full range of stakeholders be given an incentive to develop and deploy privacy-enhancing technologies? 
• Consumer Choice; “Do Not Track”:
  • How should a universal choice mechanism be designed for consumers to control online behavioral advertising?
  • What are the costs and benefits of offering a standardized uniform choice mechanism to control online behavioral advertising?
  • What is the likely impact if large numbers of consumers elect to opt out?
  • Should a universal choice mechanism include an option that allows consumers more granular control over the types of advertising they want to receive and the type of data they are willing to have collected about them?
• Transparency of Data Practices: With respect to website privacy notices, is it feasible to standardize the format and terminology for describing data practices across industries? Should companies inform consumers of the identity of those with whom the company has shared data about the consumer, as well as the source of that data?
• Notifying Consumers of Changes in Data-Use Practices: What is the appropriate level of transparency and consent for prospective changes to data-handling practices?

“Lets apply this to existing services clearly covered by Title II. Verizon offers me a choice of two Title II voice services on my landline, analog voice and digital voice. Digital voice is a higher level of service and costs more, in that (Verizon tells me) the sound quality is better and it comes with many more exciting features. That’s clearly a “higher level of service” in the same way that buying a 5 mbps down pipe is a “higher level of service” than buying a 1 mbps down pipe, and Verizon may properly charge me more for it. That hardly counts as precedent for Verizon to start selling me Domino’s Pizza “priority service” so that my calls to them go through 100% of the time crystal clear, while my calls to Joe’s Local Pizzeria drop on occasion and when they go through, the line has all kinds of annoying static. Similarly, it doesn’t count as precedent for AT&T selling me super swift access to Hulu while (comparatively) degrading my access to Youtube -- whether they are charging me, charging Hulu, or charging both of us the "QoS fee."”

 The whole argument around paid prioritization revolves around whether the carriers can maximize individual profits at the expense of the network as a whole and the consequential effects on innovation and growth. 

As many people have noted, the internet, social media, mobile web etc. are all near their infancy.  Nobody knows what forms they will take in the future.  Would you have predicted Twitter just a few years ago?  But, there is no arguing that Twitter has created a lot of new real estate and added a lot of value to the web.  If paid prioritization would have created an impediment to the creation of Twitter, Foursquare, or many others, we would all be the poorer for it. 

The paid prioritization debate needs to revolve around Metcalf’s law: the power of networks expands [exponentially] with the number users [sort of].  The FCC (and Congress) needs to look at paid prioritization through this lens.  Only then can they decide if paid prioritization (or some version of it) is good, bad or indifferent.

In the end, when it comes to the new Accredited Investor definition - it’s not that bad.  The new standard for accredited investor does raise the bar (but not by much).  To qualify under the new standard an individual’s net worth (or joint net worth with their spouse) must be greater than $1,000,000.  However, the net worth must exclude the value of the person’s (or couple’s) primary residence.  Perhaps the government does not want people to make investments based on the purported value of their house.  Why should you be able to claim that you have the ability to make a liquid investment in a speculative investment when most of your assets are illiquid?  The alternative income test of annual income over the last two years of at least 200K annually (or 300K if factoring in a spouse’s income) stays the same.  As a tangential thought, should someone who meets the income test but not the new net worth test be making what is in reality a speculative investment?

I spoke about the new standard and its impact with one the firm’s senior securities lawyers, and his response: “Sure they raised it, they have been talking about doing that for ages, and frankly I am bit surprised that they only raised it the amount they did”.  On the other hand, there are good arguments as to why the old standard was sufficient given how the world has changed over the last three decades and the ability for more investors to protect themselves via access to information and services that was once only available to the very wealthy (see Dave’s blog on this very subject).  At the end of the day, any way you slice it a higher bar means less people who can invest in start-ups without going through the cumbersome registration process which mean less angel financers and unfortunately harder time for start-ups to raise capital to bridge the valley of death.

Check out Foley Hoag’s official advisory on the Revised Accredited Investor Standard and talk to your lawyer to see how the new standard applies to you.

Well, the Q2 results have now been reported on by many sources, including the three law firms that publish data, Foley Hoag (my firm), Fenwick & West (a Silicon Valley based firm), and Cooley.  Unfortunately, I think Dave Pierson from my firm put it well in his analysis of New England based activity, “the environment for venture investing … has generally improved compared to the dismal conditions prevailing last year, but also that pace of improvement has stalled.”

Fenwick described third party analysis of the venture industry as follows, “2010 reported a significant increase in venture investment, mild improvement in venture funded company liquidity, and continued difficulty in capital-raising by venture funds.”

Cooley had this to say, “the second quarter of 2010 produced mixed signals for the venture financing environment.”

In my last post on quarterly results, I described what each firm covers in its reports so I won’t go into that again except to say that my firm’s publication, Foley Hoag Venture Perspectives, is devoted to venture financings for companies headquartered in New England.  Fenwick’s publication is devoted to companies headquartered in Silicon Valley.  Cooley’s is devoted to information taken from transactions in which Cooley served as counsel and is not focused on any particular geography.

Activity Levels

According to Foley Hoag’s research, as a general matter, activity levels for both Series A and Series B and later rounds in New England were up significantly when compared to Q2 of last year.  The data shows a more mixed performance when compared to Q1 of this year.  Perhaps the most striking piece of data is that there were no (as in none) cleantech deals in New England in Q2.  Variability is too great from quarter to quarter to draw much of a conclusion from this fact.  Having said that, it is consistent with anecdotal evidence indicating that VCs are being very cautious about cleantech deals.  Also the flattening between Q1 and Q2 is consistent with anecdotal evidence of a general slowing in the economy.

Fenwick had this to say about activity in the Valley, “Up rounds exceeded down rounds in 2Q10 55% to 27%, with 18% of rounds flat.  This was an improvement over 1Q10, when up rounds exceeded down rounds 49% to 32%, with 19% of rounds flat.  This was the fourth quarter in a row in which up rounds exceeded down rounds. … In general, the cleantech, software and internet/digital media industries had the best valuation-related results in 2Q10, while the life science and hardware industries trailed.”

But, Cooley seems to have slightly different experience.  Cooley had this to say about their findings, “Overall, our data points to mixed signals in the venture financing environment. In Q2, we saw a reversal in a recent trend of increasing up rounds. Though the majority of deals were still up rounds, the percentage decreased to 52% from 61% in the prior quarter. Median pre-money valuations were also mixed. The data showed valuation increases for Series A and C deals, while pre-money valuations declined for Series B and D+ rounds.”

Looked at from 30,000 feet, reports from all three firms seem to have picked up on some mixed results for Q2.  While it is not clear what this augers for Q3 and beyond, it does seem to reflect the general queasiness of the general U.S. economy.

Terms

The flattening trend, if that is a fair description, is also reflected in the terms for transactions.  I have tried to consolidate the deal terms reported on by the three firms in the table below.  This table shows the percentage of deals having a particular term and compares the findings of each firm (to the extent that the firm covers the particular term) with respect to particular terms that appeared in deals closed during the first quarter of 2010.

Cumulative Dividends

Consistent with a long standing trend and as was the case last quarter, the most striking comparison in this table is the fact that more than half of all New England deals carry cumulative dividends but less than 10% of Silicon Valley deals have them.  As I noted last time, “That is huge difference.  And, it is hard to explain. Many VC funds have offices in both markets.  Based on that fact alone, I would have guessed that there would be a tendency to have some homogeneity within a fund and that this alone would cause differences to be much narrower than an order of magnitude.  So, I checked out historical numbers going back a couple of years and this seems to be a persistent and consistent difference between New England and Silicon Valley.  It certainly suggests that Silicon Valley is more founder friendly than New England, I am sorry to say.”

Preferences with Participation

Also consistent with last quarter, the similarities are striking when it comes to participation.  Foley Hoag’s numbers for Series B and later stage deals and Cooley’s numbers for Series C transactions seem to be higher than the norm, but this may well be due to peculiarities in the sample.  As I noted last time, “This really begs the question why there is a seeming convergence around participation but not dividends.”  I would love to get some commentary from readers on this inconsistency in convergence.  BTW, I have again run across a New England based VC (and counsel) who insist that founder reps (covering all the company reps in a superseed deal but with recourse limited to the founder’s equity) are the norm.  I don’t think this is ever asked for on the West Coast, and I think it has been many years since some version of this was the “norm” on the East Coast, but I would also love to get some commentary on founder reps in the context of superseed deals, as well.

Redemption

With respect to redemption provisions, Foley Hoag continues to find that redemptions provisions exist in more than half of all deals or twice as much as Fenwick reports.  Last quarter I thought I had identified a trend away from redemption, but the numbers seem to be holding steady.  I will be curious to see how the numbers trend over the next few quarters.

Pay to Play

The incidence of pay to play provision is low across the board, and I don’t think the small differences are meaningful.

Antidilution

No surprises here:  Weighted average antidilution rules.  Full ratchet deals are rare everywhere, and, I believe, that they reflect unique circumstances.

Conclusion

While it would be nice to be able to report a steady upward trend across the country and across various factors, it ain’t happening.  But the news if not great is not all bad.  As one of my partners, Dave Pierson, put it in his article in Foley Hoag Venture Perspectives, “Thomson Reuters and the National Venture Capital Association have reported that exit activity for venture-backed companies was up during Q2 2010…..There were … 92 M&A exits, down from Q1 2010 but up significantly from Q2 2009.  The M&A exits with reported values generally yielded more favorable returns than in Q1 2010.  Venture-backed M&A exits with reported values greater than 4X the venture investment represented 65% of the Q2 2010 total versus only 45% of the Q1 2010 total. Venture-backed M&A exits with reported values less than 1X the venture investment represented 15% of the Q2 2010 total versus 31% of the Q1 2010 total.”  In addition, there were 17 venture-backed IPO’s in Q2.  This is the most in any quarter since 2007.

Somehow net neutrality got painted as "regulating the Internet" when it is really all about not regulating the Internet. Net Neutrality is about keeping the way the Internet works today; an open Internet where innovation is allowed and freedom reigns.

While I agree, here is how I think of it: The internet can only exist with the consumption of limited public resources. A clear example of this is its use of broadband spectrum. Spectrum exists in nature, but there is only so much of it.  In order for all of us to benefit from it, we have permitted many companies to exploit the resource (and they need to get a return – which they are doing).

Unlike oil, for example, we don’t know how this resource may be used in the future. In the last 20 years the uses have both expanded and changed dramatically. In the case of oil it is still basically electricity, heat and gas (not much change since way before WWII). The story of the last 20 years is that the internet has grown to bring ever greater numbers of people into it for ever greater and more diverse uses.

To permit a few companies with a vested interest to control a limited public resource would put an end to the growth and evolution of the internet. Here part of the comment I put on Fred Wilson’s post:

Here is a bit of a tangent -- a different kind of tragedy of the commons. Would your cow get any grass if a few big herd owners were allowed to control access to the commons? The commons needs to be available to all on some fair basis. It can't be controlled by a few whose economic interest is to exact a toll for use of a resource that isn't theirs in the first place. (I know carriers (and others) invested in the infrastructure and need a return so it isn't as simple as I am making it out, but this is the gist of it.)

BTW: Metcalfe’s law says that the value of a communications network grows exponentially with the number of users. According to Wikipedia it can be state as follows: Metcalfe's law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2). To the extent that we put an end to growth in the internet, we will pay for that with lost value.

Well let’s begin here: According to the US Census Bureau the U.S. as of right now population of the U.S is 309,956,552. According to the 2008 American Community Survey just under 5% of the U.S. population over the age of 18 has some hearing difficulty. This percentage increases to 55 for persons over the age of 55, almost 10% for persons over the age of 65 and over 20% for persons over the age of 75. According to the same survey, about 3% of the total U.S. population has vision difficulty. This percentage rises to almost 5% in persons over the age of 65 and to over 10% for persons over the age of 75. Based on these numbers, you might make the crude calculation that approximately 8% of the U.S. population over the age of 18 has some hearing or vision issue. That means almost 25 million people. BTW, it did not bother to try to find out the numbers for other forms of disability such as poor dexterity. That is a lot of people, and it is a growing population.

If you believe Metcalfe’s law, there is an obvious case for spending some money on making broadband accessible to these folks. 

One of the bad things about the National Broadband Plan is that, while it makes numerous recommendations for action to “allow Americans with disabilities to experience the benefits of broadband…” based upon fairness and equity, it fails to make the case based on the economics. 25 million and growing is a lot of users. 8% (and growing?) is a goodly percentage.

I could do the math, but I won’t. Suffice it to say that 25 million additional connections (I know that this is not an exact number) will greatly increase the value of the network.

There is no question but that regulation enhancing access is coming but there will not be anything specific in 2010 and, according to our research, the process won’t really begin until the second have of 2011. Your guess is as good as mine as to when the process will result in tangible action, but it will eventually. 

This is the kind of regulation that many businesses hate because someone in Washington is making them spend money for no apparent value. But this is not about parking spaces that are underutilized, when you consider the operation of Metcalfe’s law adding many millions of users (25 million?) will add a lot of value.

There is surprisingly little buzz around the combination of broadband and medical devices. 

But, there is surprisingly much R&D in the space (and it will grow massively, I predict). There are today heart monitoring, glucose monitoring and responsive intervention devices that use broadband. All these devices, and many more that exist or will exist, are subject to regulation from the FCC and the FDA. If these two agencies don’t coordinate, it will be really bad news for med device entrepreneurs and investors.

Well, they (the FCC and the FDA) are trying. The joint meeting (a first of its kind between these two agencies) is a start. But here is something even more stunning: The FCC and the FDA have announced and published a memorandum of understanding between them. This is the beginning of a collaboration in which they “agree to work together to promote initiatives related to the review and use of FDA regulated medical devices…that utilize radiofrequency emissions or otherwise fall under the jurisdiction of the FCC.” The purpose of this collaboration is to “increase regulatory predictability and understating of regulatory requirements for medical device providers.”

This is an excellent example of where regulation can do some good and actually grow the market for these new medical technologies. If there is a clear regulatory process that makes the approval process for these types of so-called convergent devices predictable and (hopefully) short, it will reduce uncertainty and risk and, as a result, the cost of innovation in this space. It will also mean more access for more people sooner. In effect, it will grow the market. But no regulation or uncoordinated regulation will lead to chaos, increased uncertainty and increased risk. All of which is anathema to entrepreneurs and investors. 

According to Wikipedia, Metcalfe’s Law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n²). Done right, this regulatory process can enable Metcalfe's law to operate and grow the power and value of the network; done wrong it can stifle growth and innovation.

Stuart Brotman referred to this MOU as an “historic” event. There might be a touch of hyperbole in there, but he is probably not far off.

This type of cross agency collaboration is rare, but given the fact that so many industries will be using broadband for more and more activities, collaboration will be needed across way more agencies in the near future. 

If you are innovating in the medical device space, the educational space, the security space, and others or, if your revenue model involves targeted mobile (or on-line) advertising, watch out the regulatory wave is coming. 

Well, it is true that there are dozens of pages in the Plan about telephone poles and wireless access etc.  

But, the Plan is not (let me repeat not) just about building a better broadband network. It is about developing the entire ecosystem that revolves around broadband access. It is about applications and content (yup: that means email, search, video, news etc. etc.). It is also about devices including ebook readers, smartphones, the iPad etc.

The Plan is the government’s effort to grow the country’s digital ecosystem. It is intended to set in motion an organic process that will set the direction for the entire digital ecosystem, starting now, through a massive and complex rulemaking process involving many three letter agencies (the FCC, the FTC, the FDA, HHS, and etc.). All of this will affect entrepreneurs who are working on companies that use broadband and investors backing, or planning to back, these entrepreneurs.

As Stuart puts it, “The Plan functions as a roadmap which will evolve and emerge over the next months perhaps year or two and will send profound signals to the marketplace about investment, operating and exit decisions --all of which are the lifeblood of VCs with any current or future portfolio interest in the digital ecosystem.”

Forces Shaping the Broadband Ecosystem in the United States

According to the Plan:

The broadband ecosystem includes applications and content: e-mail, search, news, maps, sales and marketing applications used by businesses, user-generated video and hundreds of thousands of more specialized uses. Ultimately, the value of broadband is realized when it delivers useful applications and content to end-users.

Applications run on devices that attach to the network and allow users to communicate: computers, smartphones, set-top boxes, e-book readers, sensors, private branch exchanges (PBX), local area network routers, modems and an ever-growing list of other devices. New devices mean new opportunities for applications and content.

Finally, broadband networks can take multiple forms: wired or wireless, fixed or mobile, terrestrial or satellite. Different types of networks have different capabilities, benefits and costs.

Here are a couple of stunning stats quoted from the Plan: 

Investment in information and communications technologies accounted for almost two-thirds of all economic growth attributed to capital investment in the United States between 1995 and 2005.

And:

Video is quickly becoming an important element of many applications, including desktop videoconference calls between family members and online training applications for businesses. Cisco forecasts that video consumption on fixed and mobile networks will grow at over 40% and 120% per year, respectively, through 2013.

BTW, it can’t be a surprise that VC investing is following this trend. According to Fenwick & West, a respected Silicon Valley law firm (see their publication on VC financing),

In general the internet/digital media industry had the most positive valuation-related results in 1Q10 (e.g. 83% up rounds). The cleantech industry had the least positive results in 1Q10 (17% up rounds).

This is consistent with anecdotal evidence for the New England VC marketplace. 

The Plan contains something on the order of 200 recommendations for regulatory action of some sort that will affect all players in all aspects of this ecosystem. To make points that I have made before, these regulations will affect applications that touch upon internet privacy, healthcare IT (including devices that use broadband in connection with patient care known in the Plan as convergent devices (not just electronic medical records)), energy (including smartgrid applications), education, access for persons with disabilities, and public safety.

These regulations are in the process of being considered and adopted. For example, on July 26 and 27 in Washington there be the first ever (I think) joint public meeting of the FCC and the FDA on the “Impact on Regulation of Converged Communications and Health Care Devices.” As quoted on the Benton Foundation web site, “Following up on the National Broadband Plan's recommendation to use the power of broadband to improve health care, the nation's lead agencies overseeing communications and medical devices have scheduled a joint meeting to discuss ways to promote investment and innovation in health technology by streamlining government processes.”

If you are developing a medical device or piece of health care related software that uses the internet in any way, whatever comes out of these hearings could very well positively (or negatively) affect you. If you are contemplating making investments in this space, you are going to want to know which way the government is likely to go.

Stay tuned because I will be watching this hearing (and others that seem more relevant than other to the entrepreneurial community in New England) and will report on them.

Anyway, coming back to Stuart’s initial point about the name.  The Plan is not about “networks” it is about everything that uses them as well. His suggestion is “The National Digital Plan.” That, at least, makes clear that the Plan affects applications, content and devices as well as networks.

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.

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….

Numbers are always fun, especially when they are positive. Some people watch the Dow, in Houston they follow the rig count, some people obsess over how much venture money was put to work last quarter. There must be a lot of well earned satisfaction in having a large and growing audience. I don’t know how 100,000 uniques per month compares to traditional print media, but it sounds like a lot.

Neither Mark Suster nor any of the people like him who write on the general topic of VC stuff are selling subscriptions nor are they (generally) advertising. Nor, frankly, is it likely to benefit them a lot professionally. Although, I suppose in their business visibility and profile may increase deal flow and access to fellow investors. So, there is a possible motive there.

Having said that, I wonder if Suster, Wilson or any of the other successful VC bloggers would stop posting if their numbers were say 8,000 uniques instead of 80,000 uniques. I am going to guess that they would write anyway. If something else is true.

Again, I don’t have any idea what their motives are, but I am going to guess that the kick is more from the comments than the anonymous numbers. My bet is that it is the interaction with the 10, 20, 40, 80 or more people who comment and provide insight and interaction around topics that keep the writers juiced. The tens of thousands who merely read are nice, but it you just wanted readers you could write for the print media. 

My guess: It is the interaction, and you don’t need cool analytics to see and feel it.

As Mike notes, legislation on noncompetes in Massachusetts took a step forward. When it, or if, it will pass remains to be seen. 

I am generally in favor of the legislation. I don’t see how it can hurt the tech community to get rid of this restraint on freedom of enterprise. 

But, I hasten to add that I am not particularly excited about the issue. Let’s look at what the law is in California. Certain noncompetes (employment related ones) were made illegal by statute. OK, that sounds great but… consider the basic elements of protection that a company might want from a noncompete. 

First and foremost: Don’t solicit my customers. Well, nonsolicits are not illegal in California (and no one is proposing to make them illegal in Massachusetts).

Second and secondmost: Don’t solicit my employees. Well, employee nonsolicits are not illegal in California (and no one is proposing to make the illegal in Mass).

Third and thirdmost (I guess I should give up with this rhetorical device before I get to sixth and sixthmost):   Don’t disclose (or use) my proprietary IP. Well, NDAs are perfectly fine in California. Does anyone think they should not be?

Fourth: If an employee invents something on company time or using company resources – should it belong to the company? Well, that is what the typical inventions agreement provides. 

You get the idea. It is like a venn diagram. There is a circle in the middle called noncompetition and there are many overlapping circles called NDA, nonsolicit, inventions and whatnot. If there is any part of the noncompetition circle that is not covered by one or another circle , it ain’t very big.

My point is that making employment related noncompete’s illegal won’t change much. Even Bijan Sabet (who says he tries to avoid noncompetes - see the end of his post on east coast term sheets) probably asks for all these other things (maybe he will comment here and set me straight by saying that he doesn’t go for non-solicits etc.). I could be wrong.

Many people in the tech community (myself included) think getting rid of noncompetes is a good idea, but it is not worth a ton of effort, and we got way bigger fish to fry – like net neutrality.

So, trying and get something like that financed can be a challenge. The usual VC suspects don’t often have the domain expertise. 

Anyway, the point of this post is that I am interested in meeting VCs (and other investors) who have an interest in material technologies. 

The domains that people are exploring for new businesses are constantly evolving. In particular, what can be done with social media as a platform or a source of data is striking. There are plenty of companies around that are using social media (be it Facebook, Twitter or something else) as a platform for their business. Farmville is, of course, a huge example of this phenom. But, it’s clear that there is a lot of raw data out there in tweetstreams and other places that can be used for many business purposes. Advertising is an obvious one, but by no means the only one. My sense is that folks are just starting to scratch the surface of what can be done with these platforms and the data they generate. 

Here is a prediction, if this year is the year of mobile, next year will see and explosion in the social media derivatives (for lack of a better term). 

This should be of particular concern to directors appointed by holders of preferred stock. 

At the recent NVCA document group meeting there was a lot of discussion around a recent Delaware case (Trados) that pushes the law of fiduciary duty owed by directors generally in the direction of common stockholders. Jeffrey Wolters of the well known Delaware firm Morris, Nichols, Arsht & Tunnell LLP, recently sent around an email to the group noting another recent Delaware decision (QuadraMed) that is consistent with the Trados case. 

This is not going to be a lawyer's discussion of the case and the fact and the holding. We may prepare a client alert separately (and I am happy to discuss it with anyone who wants to).

The larger point is that the way Delaware law is trending is that the directors owe their fiduciary duties to the holders of common stock and the holders of preferred stock will have whatever rights they bargained for and that is that.

While those of you who “represent” the holders of preferred stock may not like this result, it does lend conceptual clarity to fiduciary the obligations of directors. Companies enter into contracts (and preferred stock is a contract albeit one among three parties the company that issues the stock, the purchaser/holder of the preferred stock and the State of Delaware whose corporation laws define certain rights limits etc of the preferred stock), and companies have a legal obligation to meet their contractual obligations. 

If companies fail to meet their obligations, bad things happen: They get sued for breach. But companies are not obligated to do more than is required under a contract. You fulfill the contract and that is the end of the obligation.

Once the company has fulfilled its contractual obligations, the board owes a duty to the common stock to run the company with the interest of the common stock in mind.

While this seeming conceptual clarification leaves a lot of questions to be decided and worked out, at least it starts to get us away from a world in which directors could, potentially, have conflicting duties to holders of preferred and common.