Tom Churchwell Venture Capital Speech at University of Chicago GSB

The following are high level notes of Tom Churchwell’s speech discussing venture capital at The University of Chicago Graduate School of Business (Chicago GSB). This talk took place in Chicago on January 22, 2008. I’m posting it today in celebration of this week’s Midwest Venture Summit.

Typical Fund Structure
- Management Fee 2.5% of committed capital
- Carried Interest – after losses offset by profits
- 80% Net Profit – Investors
- 20% Net Profit – General Partner
- 50-70% desired return…
- Vesting occurs over 5 years

- Experienced, successful entrepreneurs abound throughout the country
- Start-up companies have access to abundant early-stage venture capital
- Skilled attorneys, accountants, consultants are readily available
- The majority of start-ups can result in successful IPO’s within 2-3 years
- Increasingly hedge funds are an alternative financing source
- Angel capital is more available in Chicago than it used to be

- The space a VC plays in is extremely important - industry sector, growth

- Tom has changed management 3 times on average in the 60 companies he’s invested in

- Buckets of entrepreneurship seed entrepreneurs, beta stage, scaling skills

- Discipline = Success

Criteria:
- Proprietary product or service
- Sustainable competitive advantage
- Viable business model
- Large markets
- Experienced management team
- Appropriate use of funds
- Target 10-15x growth 5-7 years
- Objective: Sale of IPO in 5-7 years

Management:
- The most critical resource
- More important than all other elements
- Stage appropriate, later stages may require different management
- Must have a significant stake in success
- Tom says “Management experience is management experience, big company experience is just as good as small company experience in his view.” (Note: I actually find a *mixture* of both sizes in your experience to be of high value)
“We don’t make money on IPO’s, we make money selling to the Baxter’s, Motorola’s etc.”

“Nothing succeeds like revenue, it’s the cheapest form of capital.”

In 60+ company investments, I can only say that once it was the technology that made the company fail. It’s about getting the product in the marketplace.

What makes you say yes?
Passion. A product I have to get on the marketplace that solves a real problem. Management discipline which means they can step back and say realistically this is how long it will take, this is the team you will need, etc.

Revenue is an outcome, it’s not a driver. What is going to cause the business to scale? It’s business model testing. I don’t care about year 5, I care about what will get us more proof of concept and closer to a success.

The first screening process is where did this plan come from, if another VC sent it to us, we pay attention more. I ask, “Do I want to have a beer with this guy? You shouldn’t be there if you can’t say yes. ”

60% of the time we at least get our money back.

Scientific Board of Directors (compensated with a point of equity +/- a bit)
- Should be at least equivalent in stature to the scientific founders
- Like the Board of Directors, should have complementary skills
- Used properly, play a vital strategic role
- Typically meet semi-annually

Tom never signs an NDA.

The Business Plan
- Executive Summary is most important
- Shorter is better
- Assume the full appreciation of the technology will come in the due diligence
- Avoid jargon
- Avoid the hockey stick
- Focus on the revenue model
- Have a realistic exit strategy
- IPO’s are rare – most VCs are quite happy with a nice M&A exit
- Nobody reads the full business plan - I care about the executive summary
- Cashflow is more important than revenue during this phase

Venture Capital Speed Dating - Entrepreneurship Week at Stanford University

As part of Entrepreneurship Week at Stanford University, they are holding a Venture Capital Speed Dating event and mixer. This event looks like so much fun, I wish we had casual events like this here in Chicago, especially since Stanford encourages lifetime social interaction with the community and properly sees it’s role as larger than simply current students. They state “Events are open to all students, alumni, members of the greater Stanford community, and the general public.” Chicago university leaders, take note!

Venture Capital Speed Dating

Date:
Friday, February 29th

Time:
1:00-3:30 PM Student pitches
3:30-4:30 PM Mixer

Location:
Wallenberg Hall Learning Theater (Building 160)

For more detailed directions, please visit the Searchable Campus Map
Host:
Asia-Pacific Student Entrepreneurship Society (ASES)

Student Application/VC Registration:
http://ases.stanford.edu/vc3/
No registration required for mixer

Cost:
Free

Overview:
Students, pitch your business ideas to Silicon Valley venture capitalists (VCs). Apply in advance for 3-4 opportunities to give three-minute pitches to VC pairs and receive three minutes of feedback. This portion of the event is closed to pre-registered students and VCs (see above for registration information).

At 3:30, the event opens to the public for a networking mixer. Come join us to meet entrepreneurial students and VCs. Event will end promptly at 4:30; continue networking at Arrillaga as you wait for the Innovation Tournament Showcase to begin.

Have We Entered The Era of The Functional Web?

The New York Times has an article on how the potential sale of Yahoo! to Microsoft could be bad for minnows, i.e. small Silicon Valley companies looking to be acquired. I think this is a short sighted viewpoint.

In the late 1990’s dot.com era, the web was slanted too much towards wall street involvement that led IPO’s that were questionable and in retrospect not advisable.

A force outside the web, namely Sarbanes-Oxley in the Enron aftermath, has made the IPO considerably more challenging to achieve and costly to navigate - even for highly legitimate ideas.

In the web 2.0 era, the slant often went way too far to the left in terms of engineering. Some ideas with little actual business purpose have received unwarranted acclaim and without artificial sources of acquisition, some might not even exist.

Before I go onto explain why that development might create an alignment that I’ll tentatively call the functional web, let me state that I think there are plenty of other companies out there that could emerge to pick up the slack such as Fox, Intuit, Apple or any of a number of traditional media companies who “get it”.

This web might emerge even if the Yahoo! acquisition does not take place. If the functional web emerges a place where engineering and business purpose mix in equally important parts instead of the excesses in one direction or another, who potentially gains and who potentially has something to lose?

Potential Gainers:

- Strong Internet business skill generalists with strong system architecture, product management and the ability to network with geeks and non-geeks alike and iterate from feedback will be in higher demand.

- Companies who would like to challenge the big three who would get an opening.

- People who understand how to create revenue models that could provide for great stand alone businesses.

- People pushing for Sarbanes-Oxley reform to reopen the IPO spiggot a tad. They will push even harder.

Potential Losers:

- Funding sources who either fund ideas in a me-too fashion or just because they’ve known the people since the dot.com era and/or those who can’t define and lead a path to monetization or bring strong execution partners to the table.

- Domain name squatters and sellers.

- Passive executive recruiters who will have to actually analyze comprehensive skill sets instead of simply poaching from a direct competitor.

How to Be a Startup Marketing Warrior By Josh Kopelman

Josh Kopelman writes some extremely effective and highly useful blog posts. This one happens to be about what startup marketing really means.

I’m planning a series of venture capital interviews in the near future, I’d be flattered if Josh was one of the participants in that series.

TECH cocktail Chicago 7

No other words are necessary, you should know the drill by now.

RSVP now.

Jim Lanzone Leaves Ask to Join Redpoint Ventures as Entrepreneur in Residence

Rustybrick reports that Jim Safka has taken over as CEO of Ask.com and that Jim Lanzone has joined Redpoint Ventures as an entrepreneur in residence. Some point to the recent increase traffic at ask.com traffic and ask why? It’s hard to tell exactly what terms Jim left under, nevertheless it’s great to see that he either left on his own or was given time to set up this new gig at Redpoint Ventures (if so class move by Mr. Diller). I promise not to overload you with business plan ideas right away but hey reach out to me via phone sometime soon…

In theory, the email admin guy only has to change the email account password - but time will tell there. :)

Mr. Safka is notable as the first Top 10 MBA executive of a major search engine (someone correct me if I’m wrong on this) and he gets points in my book for having spent time in Chicago as well as his Top 10 MBA is from the J.L. Kellogg Graduate School of Management at Northwestern University.

IAC /Ask.com gave full text bios of Mr. Safka and other executive appointments:

Jim Safka has been named CEO of Ask.com. Effective immediately, he will oversee Ask.com’s global operations. He will also continue in his role as CEO of Primal Ventures, a new-venture entity that identifies seeds and incubates business opportunities for IAC.

Mr. Safka, 39, served as CEO of Match.com from 2004 to 2006. Under his leadership, the company grew revenue and operating income before amortization at an annual rate of 25% and 52% respectively. Today, Match.com has more than 15 million members in 35 countries. Prior to Match.com, he held senior management roles at AT&T Wireless and E*TRADE Financial Corporation, and brand and product management positions at Intuit, Alberto-Culver, Inc., Warner Bros. Inc., and Paramount Pictures. Mr. Safka holds an MBA from the J.L. Kellogg Graduate School of Management at Northwestern University and a BS in accounting from the University of Southern California.

Scott Garell has been named President of Ask.com, where he will report to Mr. Safka and manage daily business operations worldwide. Since 2005, Mr. Garell has been CEO of IAC Consumer Applications & Portals. Under his leadership the Consumer Applications and Portals businesses (including Fun Web Products, Portals, Evite and Pronto) have grown by 74% in the past 3 years.

Prior to his role as CEO of IAC Consumer Applications & Portals, Mr. Garell, 42, served as Executive Vice President of domestic sites and search, where he managed the division’s destination sites (Ask.com, iWon, and My Way), as well as the optimization of its proprietary information retrieval technologies and products across all brands. Mr. Garell joined IAC Search & Media in April 2004 as Senior Vice President of Marketing. Formerly, Mr. Garell served in senior roles at Computer Associates, Citysearch and Clorox. He holds an MBA from the Harvard Business School and a bachelor’s degree in political economy from the University of California at Berkeley.

John Park will replace Mr. Garell and is named President of IAC Consumer Applications and Portals, which includes Smiley Central, Webfetti, Zwinky, My Fun Cards, CursorMania, Popular Screensavers, Excite.com, iWon, and My Way. Mr. Park is currently Executive Vice President and General Manager of Toolbars and Portals at IAC Consumer Applications & Portals and has served in various senior management roles in the company since 1999. Under his leadership, the Fun Web Products Business has become one of the fastest growing businesses at IAC.

Mr. Park, 38, joined IAC Search; Media from Interactive Search Holdings, which he joined in 1999 as Group Vice President of Product Management and where he was responsible for the original development of iWon.com and MyWay.com, as well as the revamping of Excite.com following the 2001 acquisition of the brand from @Home. Prior to ISH, Mr. Park held senior product development and management roles at Ameritrade, Prodigy Services and New York Web. He earned a BS in Information Systems and Management from New York University.

Peter Horan, CEO of IAC Media and Advertising since January 2007, will continue to oversee IAC Advertising Solutions as well as Evite, Pronto, IAC Mobile and Ask Sponsored Listings.

Mr. Horan, 52, has spent more than 30 years in media and advertising. As CEO of About.com he pioneered the company’s turnaround and its sale to The New York Times Company. He served as President & CEO of DevX.com, an Internet media company that was later acquired by JupiterMedia Corporation. Mr. Horan spent 10 years at International Data Group, a global technology media company, where he spearheaded relationships with top advertisers and served as Senior Vice President and Publisher of Computerworld. Prior to that, he spent more than 15 years in senior account management roles at leading advertising agencies, including BBDO and Ogilvy & Mather.

I look forward to meeting and learning about all these new senior Ask.com executives and their plans. Good luck to Jim Lanzone, Jim Safka and everyone else in their new roles.

Matt McCall on Ray Kurzweil’s Accelerating Investment Returns and Black Swans

Matt McCall writes about his talk last Thursday at Ignite Chicago on the issues of Black Swan and on Ray Kurzweil’s theme of accelerating returns. The Powerpoint of Matt McCall’s speech is here.

Quick points:
– a Black Swan is 1) a rare event, 2) with high impact, 3) that is hard to predict (pattern attributed post event)* examples include 9/11, stock market crashes, discoveries like Penicillin, start-ups (eBay, etc)
– most of mankind’s development has been driven by black swans (unstructured randomness) — black swans key in driving big entrepreneurial successes (payoff inverse to predictability)

Speaking of Ray Kurzweil, a few months ago he was in Chicago for Transvision 07, I had a chance to sit down for a chat with Ray at that time (scroll to the bottom for the podcast), but I’ve had some problems with my Wordpress audio software that I fixed over the weekend. My apologies to both Ray and his many fans for the delay.

Ray Kurweil talks about some of the following:

hedge funds

reading device for the blind

dietary supplements

his newsletter and web site

by the late 2020’s artificial intelligence eventually matching the ability human brains

becoming non-biological

seeing the intersection of artificial intelligence and biology

the ability to track history and information to create predictive models and time device introductions properly

exponential growth

his passion for ideas

developing his own treatment solution for type II diabetes

health and biology has not become information technology

pocket computing technology to help the blind with OCR readers

Second Life’s potential and indication of things to come and his breakfast with Philip Rosedale

Second Life’s potential to be as real as real life

icon for podpress  Ray Kurzweil Interview [10:34m]: Download

Web 2.0 was NEVER a Business Strategy

You saw the craze. People built up Web 2.0. It’s frequently a term that people used to avoid business principles and focus entirely on technology without any end goal. I have always disdain it. Many folks surprisingly jumped in with funding for some of these ideas, likely more due to existing dot bomb relationships that business principle.

Yet Internet startups who focus on the following business issues closely will always have a good chance at succeeding:

1. Have a clear value proposition that meets some area of unmet need: Something that says, “We provide a first in industry solution to the problem of blah, blah, blah”. Not “This is kinda like part Digg, Youtube with a bit of Facebook - just way better”. I meet lots of people that say this stuff in the second category, I cringe when I hear it.

2. Realize that Internet companies are marketing companies first and technology companies second: I can’t tell you how many startups I see who hire a programmer, program something and then go hire a salesperson. They go through the whole process without a well crafted, customer focused value proposition.

3 . Have a clear data model that focuses on data integrity and creating a monetizable store of value:
Does your Internet startup attempt to focus on data integrity issues? Will it eventually create a monetizable store of value? I ask this question in the startups that I’ve assisted. It comes from my background in financial services where not having accurate information can cost you millions in an instant, the true Internet time.

4. Have a business model for the company as a stand alone entity. Key partners invested in your outcome? Good.

5. Have people that have worked in high performance startup cultures on your team who understand that real-time iteration of your offerings are critical to your success!

6. Look at and study the history of business and technology innovation. Then use it in your transactions and execution.

These are the five that are most critical, though I’m sure you can think of more critical drivers. Please join the conversation. I can also think of several blogs that focus on buzzwords instead of business principles that are now more than a bit obsolete. It’s time to focus on business success principles at the party. it’s a smaller party, but one that will drive hundreds of new Internet startups for years and years.

AlwaysOn Top Dealmakers List

As I explore the path of joining a start up management team or potentially returning to the financing side, I will analyze the Alwayon Dealmakers list with great interest when time permits. You should too.

Limited Partners
Limited partners are the big, quiet kahunas at the front of the technology finance food chain. Venture capital firms are just one thing they invest in, but they’re what provides most of the money VCs have under management.
1 TIAA-CREF
2 CalPERS
3 CalSTRS
4 Harvard Management Co. (HMC)
5 Yale Endowment
6 University of Texas (UTIMCO)
7 Stanford Management Co. (SMC)
8 Princeton University Investment Company (PRINCO)
9 MIT (MITIMCO)
10 Ford Foundation

Venture Capital – Early-Stage
You have a business plan and a bunch of code. Now you need to raise a million dollars or two to productize your concept and get an office. Besides providing operating startup capital, early-stage VCs will help you form your board and build your team.
1 Sequoia Capital
2 New Enterprise Associates
3 Benchmark Capital
4 Draper Fisher Jurvetson
5 Bessemer Venture Partners
6 Accel Partners
7 Charles River Ventures
8 Matrix Partners
9 Greylock Partners
10 Doll Capital Management
11 Lightspeed Venture Partners
12 Index Ventures
13 Norwest Venture Partners
14 Madrona Venture Group
15 Hummer Winblad

Venture Capital – Late-Stage
You’re hiring a sales force, building a channel, upgrading your executive team, and bringing products to market. At this point, until you’re fully profitable, get acquired, or raise public equity through an IPO, your operating capital comes from late-stage venture investors. Some VC firms do both early- and late-stage VC, as you’ll see in our picks below.
1 Sequoia Capital
2 New Enterprise Associates
3 Kleiner Perkins Caufield & Byers
4 Greylock Partners
5 Menlo Ventures
6 Mobius Venture Capital
7 Draper Fisher Jurvetson
8 Benchmark Capital
9 Accel Partners
10 Bessemer Venture Partners
11 Oak Investment Partners
12 Redpoint Ventures
13 U.S. Venture Partners
14 Mayfield Fund
15 DCM - Doll Capital Management

Venture Capital – Corporate Investors
Corporate VCs are a little different. They can invest in early- or late-stage deals, but they usually focus on sub-sectors and investments with potential business benefits for their limited partner – the corporate parent.
1 Intel Capital
2 Comcast Interactive Capital
3 Hearst Corporation/Hearst Interative Media
4 Time Warner Investments
5 IDG Ventures
6 Qualcomm Ventures
7 Motorola Ventures
8 Cisco
9 Adobe Ventures
10 SAP Ventures

Corporate Law Firms
First, let’s call the lawyers – at least, that’s a good plan in the world of technology finance. Some of these firms have done well by providing low or deferred-fee incorporation services to brand-new startups, sometimes for shares, and some not only provide counsel but also introductions during mergers, IPOs, or other financing events.
1 Wilson Sonsini Goodrich & Rosati PC
2 Latham & Watkins
3 Fenwick & West
4 Gunderson Dettmer
5 Wilmer Cutler Pickering Hale & Dorr LLP
6 Goodwin Procter LLP
7 Cooley Godward LLP
8 DLA Piper US LLP
9 Cravath Swaine & Moore
10 Manatt Phelps Philips

Investment Banks
When the time is right to take your company public or get bought, you work with investment banks. If it’s an IPO, they underwrite you – helping prepare your prospectus, setting the share price, promoting you to institutional investors, and once you’re public, providing analyst coverage of your stock to keep public investors up to date on your financial performance. If it’s an M&A, they act as advisers to either party, structuring the deal, and providing acquisition capital. There are two types of ibanks: the bulge brackets, that deal with any and every kind of company, and the boutiques, which are smaller and focus on a few sectors.

Investment Banks — Bulge Bracket
1 Morgan Stanley
2 Goldman Sachs
3 Lehman Brothers
4 Credit Suisse
5 JP Morgan Chase
6 Merrill Lynch
7 Citigroup
8 Deutsche Bank
9 UBS Investment Bank
10 Banc of America Securities

Investment Banks — Boutiques
1 Jefferies & Company Inc
2 Evercore Partners
3 Thomas Weisel Partners
4 Needham & Company, LLC
5 Montgomery & Co. LLC
6 Cowen & Company LLC
7 William Blair & Co., LLC
8 Wachovia Securities
9 Houlihan Lokey Howard & Zukin
10 Greenhill & Co.

Private Equity
Private equity, or leveraged buyout, firms are the ones that take public companies private, or buy their stock with the goal of turning them around and selling them.
1 Carlyle Group, The
2 Texas Pacific
3 Blackstone Group, The
4 Kohlberg Kravis Roberts & Company
5 Silver Lake Partners
6 General Atlantic
7 Hellman & Friedman LLC
8 Vista Equity Partners
9 Vector Capital
10 Welsh, Carson, Anderson & Stowe

Institutional Public Investors
Asset management firms of all stripes (mutual funds, hedge funds, etc.) fall into this category. Besides investing in technology stocks, they may also become limited partners in private equity firm funds.
1 Fidelity Management & Research
2 T. Rowe Price Associates, Inc.
3 Wellington Management Co. LLP
4 Capital Research & Management Co.
5 AllianceBernstein LP
6 Capital Guardian Trust Co.
7 Vanguard Group, Inc.
8 Gilder, Gagnon, Howe & Co. LLC
9 Goldman Sachs Asset Management LP (US)
10 Wells Capital Management, Inc.

Corporate Buyers – Global Tech
Big companies want to acquire successful startups that have a strategic fit, breakthrough technologies, masses of customers and profit margins.
1 Cisco Systems, Inc.
2 Oracle Corp.
3 Microsoft
4 Motorola, Inc.
5 LSI Logic Corp.
6 International Business Machines Corp.
7 Siemens AG
8 Google, Inc.
9 Seagate Technology, Inc.
10 EMC Corp.

Corporate Buyers - Media
Big companies want to acquire successful startups that have a strategic fit, breakthrough technologies, masses of customers and profit margins.
1 Publicis Groupe
2 CBS Corporation
3 Lagardere SCA
4 Dominion Enterprises
5 Axel Springer AG
6 Walt Disney Company
7 Hearst Corp.
8 MTV Networks
9 Pearson Education, Inc.
10 EMAP plc

Chicago TiECon ‘07 Mentorship: Boosting Tomorrow’s Business Leaders

There are still a few seats left! TiE puts on amazingly high quality events, I greatly look forward to seeing you there! Sign up now, don’t delay!

TiECon Midwest is the premier event organized by TiE-Midwest held every two years. Join us in Chicago this October 5th for TiECon ‘07 Mentorship: Boosting Tomorrow’s Business Leaders, a half-day event for leading Midwest entrepreneurs to share thoughts and ideas on business and innovation.

Over 400 attendees will hear a keynote address by local, successful, serial entrepreneurs Glen Tullman and Howard Tullman. Following the keynote, distinguished panelists will present topics aimed to increase Entrepreneurial IQ through a series of sessions. Panels topics are: Right Dollars at the Right Time, Business Model Refinement, Attracting and Retaining Talent and Executive Coach for the Entrepreneur. The event will conclude with a cocktail reception designed to foster networking.

TiE stands for Talent, Ideas and Enterprise and is a not-for-profit global network of entrepreneurs and professionals. Founded in Silicon Valley in 1992, TiE is an open and inclusive organization that has rapidly grown to more than forty chapters in nine countries. TIE Global is the world leader in cultivating and nurturing entrepreneurship.

Suburban Chicago Silicon Prairie Social Internet and Technology Mixer Thursday

Tim Courtney sent me the following note late last week, I hope to see you there….

When: Thursday, September 20, 2007 from 6:30-10:00pm
Where: Mullen’s Bar & Grill 3080 Warrenville Rd., Lisle, IL 60532

An opportunity to connect in an informal setting with like-minded people in technology; whether you’re an upwardly mobile professional, a job seeker, an entrepreneur, or a VC. We welcome everyone, including IT workers, e-commerce companies, Internet and Web 2.0 startups, mobile and mobile marketing, and B2B services.

The event is free to attend, free drinks and food will be provided. RSVP is required at http://siliconprairiesocial.eventbrite.com.

For more information see www.siliconprairiesocial.com or call Tim Courtney at 630.983.6064 or tcourtney at xnet.com.

Like Many in Chicago, Facebook Moved West to Silicon Valley

The Boston Globe has a well researched story about how and why Facebook moved to Silicon Valley. Why can’t the Chicago newspapers cover technology in such a thorough and complete manner?

I thought I’d rip some of the better quotes out of it that apply to VC, Internet and Chicago and discuss them:

Zuckerberg told the senior associate that he was planning to go to California for the summer, and he wasn’t sure whether he would return to Harvard for his junior year. Summer was less than two months away. The senior associate was pretty sure that if Battery Ventures didn’t invest before then, a Silicon Valley venture firm would discover the deal. For venture capital firms, getting in first can often mean getting a bigger chunk of a start-up for less money - especially if the start-up isn’t talking to other firms. And Facebook wasn’t.

After a second meeting at the Charles, and a visit to Battery’s offices above the reservoir in Waltham, Zuckerberg said he thought Facebook was worth about $15 million, and was willing to accept an investment ranging from $1 million to $3 million, which would have given Battery a substantial chunk of the start-up.

But Battery had already made an investment in an earlier social networking site, Friendster, which was foundering. Zuckerberg struck some partners at the firm as a little too brash. And no one was sure whether Facebook would appeal to anyone other than college students, its target.

From my days in mutual funds and institutional investing, there is an old saying that says “Past performance does not indicate future results.” Why did these VC’s let it cloud their judgment? I especially like the next sentence about Zuckerberg being “too brash”. Many entrepreneurs and great business leaders share this quality, yet these particular VC’s thought that was a problem? Makes little sense.

Through a chance connection, Zuckerberg was introduced to Peter Thiel, a cofounder of the online payment system PayPal, who was running a hedge fund called Clarium Capital. He met with Thiel in August, at Thiel’s office in downtown San Francisco.

Thiel had also been an investor in Friendster, and he knew that the conventional wisdom was that all the social networking sites “were just fads that would come and go,” he says. Thiel listened to Zuckerberg’s pitch in the morning, asked him to go out and grab lunch, and by the time Zuckerberg returned in the afternoon, “we said we’d invest, and we agreed to the basic valuation parameters,” Thiel says.

“It seemed like a good company,” he said, adding, “Most of the time, we’re not that fast.”

Thiel put in $500,000 of his own money in return for 10 percent of the company.

Though I don’t fully believe the chance introduction thing, if the time line is accurate you have to respect Peter Thiel.

“Facebook was perhaps the most controversial deal we’ve done in several years,” says Jim Breyer of Accel Partners. “Some of my best friends in the business were wondering why we’d write a check to a company that had very little defensibility to their business.” Indeed, anyone could potentially build a better site and lure Facebook’s users away.

This is true of almost all start ups, especially ones in social networking.

Greylock partner David Sze, who works on the West Coast, admits that he had the opportunity to invest in Facebook in 2005, but says, “I was too busy - I just didn’t have the cycles to look at it. In retrospect, that was a mistake.”

Smart people always make time to meet with entrepreneurs and potential employees. I actually checked to see if Mr. Sze had a Chicago connection after this statement, but could find none. I do admire his honesty in regards to this after the fact though. According to his Linkedin profile, he’s a Board Member at Digg so he indeed was busy (David if you’re reading this I have a support problem with Digg that is not getting resolved with an email to support - would be happy to discuss privately).

(Looming over Facebook’s success - and any eventual public offering - is a lawsuit filed by several fellow Harvard students who allege that Zuckerberg built Facebook using software code he had originally written for their site, ConnectU.com, and that he also borrowed parts of their business plan. A Facebook representative said that none of its founders were available to comment.)

I can think of several situations like this in Chicago, but will not name them publicly as I would not want to give the situations undue publicity.

“We don’t want to make Facebook the cornerstone of our growth strategy, but we’re happy to ride the wave,” says Dina Pradel, StyleFeeder’s vice president of marketing.

Very nicely stated.

When I put that question to Accel Partners’ Breyer, who is a native of Natick, he had a one-word answer: no.

“So many of the Facebook employees have come from top Internet companies like Yahoo, eBay, and Google that the culture that has been built at Facebook is fundamentally more consumer Internet savvy than if it would’ve been built anywhere else on the planet,” Breyer says, after praising the engineering talent in Boston.

I think this is a most unfortunate limiting belief.

“Folks in the Valley are incredibly geo-centric to a point of snobbery,” writes Battery Ventures’ Scott Tobin via e-mail. He acknowledges that Silicon Valley is producing more companies than Boston but “to make an argument that great companies can’t be built in any one place is bunk in my mind.”

He mentions Microsoft Corp. in Redmond, Wash., and Qualcomm Inc. in San Diego as examples. “It just takes a good driving attitude to make it happen.”

As for passing on Facebook, “that may turn out to have been a mistake,” Tobin admits.

Scott Tobin, it would be nice to meet you. I agree completely with your comment about driving attitude and I’d also unfortunately have to agree with your geo-centric comment. What do you think the root cause of this behavior is? Does Silicon Valley need more outside thought? I’d like to hear your thoughts.

I’d love to hear Don Dodge’s views on this subject, so I’ll tag him.

I’m also in touch with several mobile advertising and local concepts in the early funding stage, so reading this article was more than a bit fascinating to me. I look forward to hearing your thoughts.

Update: The author of this article has a blog post about it.

How the Credit Crunch Could be Good for Venture Capital and Other Sectors

There is discussion tonight around the blogosphere regarding the potentially positive impact of the credit crunch on the venture capital flows.

Based on the history of past cycles, like the post dot com bust and 9/11 era created the low interest rate environment that fueled the inappropriate allocation of capital to the housing market. Some would also argue this led to an overfunding of the private equity market. It’s likely a healthy development to see some of this capital shift to potentially higher return projects. The question is will they be Internet, green or mobile search/advertising related? Nobody can say for sure which one will take the lead. Fortunately, I’m in touch with some good ideas in all of these spaces if anyone is looking for early round ideas to fund.

How Much Equity For Your Venture Capital Funding and Employees?

As discussed in my recent post about a TiE event on Chicago start ups, there are many factors to consider when taking in funding and employees. Don Dodge discussed in great detail Paul Graham’s The Equity Equation post.

So I’d like to ask the blogosphere, “How does one judge this inflection point of being better off with this asset, person or money infusion?”I’d say this is an especially tough question when the many startups aren’t focusing on the priorities in the correct order. When I advise a start up or look to join an Internet, Web 2.0, search engine or mobile start ups, I look for the following things:

1) A workable revenue plan either now or that can be communicated in a believable timeline and/or a data model that collects opt-in data that would allow monetization once scaled.

2) An understanding that bringing in a person with strong knowledge of data models and marketing methods early in the process is critical to success and to reducing the revisions to applications later. A CTO without a logical end goal is all too often a wasted resource that could and should wait until there is a clear execution vision.

3) People that have a passion for creating, implementing and executing on an idea first and foremost.

4) A willingness to march into a new direction without limiting beliefs. This is where breakthroughs originate.

Again, in the end it’s all about judgment and knowing the current teams strengths and weaknesses! I wish you well in your start up ventures.

TiE Chicago Chapter Start Up Stories

Moderator: Jai Shekhawat, CEO of Fieldglass

Alan Warms, former CEO of Participate and now Publisher of Real Politics (Buzztracker)

Matt Moog, CEO of Viewpoints

James Malackowski, CEO of Ocean Tomo

First up is Alan, founder of Buzztracker. Was part of Freeloader, eShare, Participate Systems, Realclearpolitics.com and now Buzztracker. The opportunity is to build the custom content feeds that can be delivered and used by the entire ecosystem of the Internet domain owners and management companies. I kept waiting for an explanation of how his site(s) added value to the Internet ecosystem from the user’s perspective - I’m still waiting for him to distinguish it significantly from a MFA Splog network.

Matt Moog, CEO and Founder of Viewpoints. Used to work at Q Interactive and Microsoft. We raised $50 Million and then $25 Million in the market and blew through that in 6 months. Recovered to be cashflow positive (2003) and net income (2004). Viewpoints has raised $4.7 Million in series A, currently 7 employees. The business is about reviews in different verticals.

James says that 79.2% of the economy is driven by intangible assets in 2005 and up from 16.2% in 1975. We created Ocean Tomo after we sold our first business. We are the Sotheby’s of intellectual property. People recognize it. Ocean Tomo 300 is now published. Innovation actually outperforms commodities. Ocean Tomo has not taken outside capital at this time.

Throughout the evening one could not help but be impressed by the uniqueness of James Malackowski’s ideas and execution and Matt Moog’s perseverance, transparency and desire to build anew.

What is the best way to become an entrepreneur?

Alan: Live for some period of time without a W-2. Test out a new hypothesis. Go to conferences seeing what people are doing. Start building some things, hire a developer, and try to get a customer or two. How do you decide whether the idea is big enough? Is the market ready for it?

Matt: I was working at Microsoft and was 25 years old. On the side, I took some money and built an application. It was on CD, pre-Internet. Speed up ten years, I wrote the initial plan in 2005 for Viewpoints. Then I left to found it 2006.

James: Unique combination of greed and panic!

Is it about the money?

James: Yes. It’s about sacrificing family and other things.

Alan: You care about the money.

Matt: You have an informal formula. I have not paid myself anything for the past year. I’d be currently willing to do this for up to 3 years.

James: People don’t hedge their bet. There is market space and risk. You can recover your investment.

Matt: With Coolsavings we raised angel money, then got on the hyper growth track of raising more money. A well known investment banker was telling us to raise more money. Then I had $15 Million in debt and $100,000 in cash. I needed to raise some money to hire a staff to do the stuff I couldn’t do. The later you spend the money, the smarter you’ll spend it.

How do you raise too much money?

Matt: I didn’t set out to raise as much as I did at Viewpoints. It’s possible to lose control. Each dollar raised the higher the investor expectation. This is kind of a funny dynamic.

Alan: You’re at point A and you want to get to point F. We try to raise $3 Million and got $13 Million. You get scar tissue.

James, you did it the smart way?

James: Over three years, I was burning up that non-compete, I went to institutional side looking for loans, Harris Bank told us no. Then we asked if they’d lend us $15,000 for a car and there were five of us so we raised $75,000. It’s all about the capital structure and how you communicate a request.

Matt: Always be transparent in everything you do.

Ron May brought up that Moog’s dad had invented the Moog synthesizer. (Matt seems to have a strong desire to stand on his own accomplishments). There was then a question on hiring.

James: The smartest person we hire at Ocean Tomo is the person we hire today.

How do you keep the group in tact?

James: We try to take people outside our industry. That is a huge attraction. You will be richer for the experience even if it doesn’t work. They not only have to believe in the vision, they have to believe in you.

Matt: Lon offered an office out of the blue. Most of the people come from Orbitz. People have to be jazzed about working at our company. I like the people who like to ask questions.

Matt: Lon Chow gave me a book. It’s a “The Four Obsessions of an Extraordinary Executives”. Are people aligned and communicating? In terms of the revenue model figure out how much do ads sell for, what do they look like? On the west coast, build an audience then figure it rules the day. Businesses never grow at the rate that they say they do. Sometimes you’ll grow three times as fast other times not as fast.

Great conversation and event by TiE!!!

Matt McCall Gives Venture Capital Investing Tips at Barcamp Chicago

As I’ve gotten to know Matt McCall more, I begin to appreciate his approach. He doesn’t fit the preconceived mold that many would think of when they picture the typical venture capitalist. He’s more of the “people’s VC”. He understands that he uncovers unique future management team talent, investment ideas and can contribute to the public relations success of his portfolio companies by attending and sponsoring events like Techcocktail and Barcamp Chicago. Each time I interact with Matt, I learn a little bit more about how the game is played and come closer to mastering it.

This past Sunday, Matt gave an informal speech during Barcamp Chicago. It was a great pleasure to see him talk in such unstructured detail. You may wish to see my past TiE entrepreneurs venture capital discussion panel writeup to learn more about Matt as he moderated an excellent panel back in 2006. Be sure to click through to the link of the full transcript in the Wiglaf Journal.

I was busy asking Matt questions during the talk. I noticed that John Mascarenhas was taking notes and invited John to be a guest blogger with his notes. John has been on the founding teams of three startups, including Fullaudio (Musicnow). John is looking for opportunities with early stage tech ventures including clean tech and has had experiences in strategy, business development, financial modeling, marketing and early sales roles – in operations and as consultant.

Here are John Mascarenhas’ guest blogging notes on Matt McCall’s talk on venture capital at Barcamp Chicago 2007:

Matt McCall, a partner with Draper Fisher Jurvetson Portage, speaks about venture capital. In the spirit of BARcamp, keeps his presentation informal and open, answering questions with the perspective and insight of an experienced investor in early stage technology.

Following are my notes, based more on what is interesting to me than attempting to cover everything that is said. [My comments are in brackets]

VC is right for a minority of start-ups – self-funded or angel investments are right for most tech start-ups. Remember the 10x rule. VC’s need every investment to have a potential for a 10x return, because of the high-risk nature of early stage investments.

Entrepreneurs should ask themselves:
1. Is my idea/nascent business a ‘business’, a ‘product’ or a ‘feature set’
2. How big is the pain I’m solving? Has anyone ever paid for this? (Evangelizing is tough.) Generally, either behavior or infrastructure drives the inflection point. (e.g., widespread broadband made web-video business viable) Who is paying and how much

Size the market from the bottom up. Need to know – we have sold or can sell this widget for $X to Y number of customers. Then, there are x thousand other target customers with the same needs/pain.

Matt likes pay for performance lead generation. Everyone is already trained to give you a cut. It’s not just ad dollars.
Harder models to make work are a) productivity gains…hard to quantify and b) cost savings. Hard to set a test and say here are the cost savings. For cost savings the best route is often outsourcing, so customers do not have to pay a lot of $ to get started

In response to a question, Matt discusses why NDA’s aren’t appropriate for a VC to sign. For example FeedBurner has been successful not because of a proprietary technology, but more because of the excellent customer experience.
1. They cycled very fast, improvements, great customer service.
2. they focused. One thing: syndication services for publishers

FeedBurner would continually iterate to keep ahead of the competition, and not let them get a foothold. The point is you have to know what the comp is doing, [and looking ahead to what could become a competitive advantage for them if you don’t focus on getting there first] Jonathan Wolter of Feedburner was here confirming and adding to what Matt says.

We’re in an era when tech is a commodity. Need to out-execute, and become a standard. (e.g. ruby on rails) User experience is the key. Simpler, no change in customer behavior. Michael Moritz, one of Silicon Valley’s most successful VC’s is highly focused on the user interface.

More advice for entrepreneurs from Matt:

Find teams that are plugged into the network they are dealing with:
- Shows in good understanding of the revenue model
- Shows in knowing your competition doing it now. (if vc asks you about it, don’t say they are no good…shows lack of diligence)
- Don’t quote Gartner etc…it’s meaningless (or worse) to a VC

Response to a question. As VCs use their network to poke around the market place and know more than what the entrepreneur said, that’s not a good sign. With FeedBurner, Matt and his team did early due diligence, checking around the space before investing. What they found confirmed what they were being told by the Feedburner team.

Responds to question asking why he invested in Viewpoints. Matt loves the idea of consumer reviews and re-syndicating it back out. Matt believes that Matt Moog will be continuing star in our region. They are proactively engaging communities and iterating quickly.

Thinking of Viewpoints and other opportunities, Matt talks about the growing model of consolidating content (like reviews) from pools, building community interaction, and re-syndicating that back out. As the Internet evolves, some of the major ways to monetize traffic evolved from banner ads, then search, then/now social networks. Matt thinks the 4th wave is interactive cascading of markets in IPTV, web, mobile etc…two way communication.

Pitch – business plan should be as detailed as you need it to be to get your thinking straight. For VC, 5-7 page summary and 25 or less slide presentation. VC’s all have ADD. Going to win or lose in the first 2-3 slides.
Funding Process: couple weeks to get meeting, few weeks, then one more pitch, then term sheet – then massive due diligence. 4-6 weeks. Assume 6-7 months from start of looking to closing on money.

Market research: loves to see this - we sell x product for x money or something similar for something close to x money. Go deep in a given vertical…how you productize and sell. That is how it works. Prove P, then give visibility on Q, in that vertical. Think in terms of Account worth = y heads $x per month…pipeline of next 100. Matt wants some visibility of how the company will get to $50MM or $100MM revenue.

Responding to a question – says focus will be on one vertical, but also look at analogs to show how you can move into other verticals.

Thanks again to John Mascarenhas for sharing his notes as a guest blogger in the section above.