To Be Or Not To Be An Entrepreneur
Bill Warner Sunday, July 26, 2009
Entrepreneurs take an idea for a business and do what it takes to create a company and make the business a success. Often, they join with other like-minded entrepreneurs in order to create the right kind of team to get the business started. In the midst of this recession, we see a lot more people starting new businesses due to the downturn of job opportunities. However, the lack of a job is not a sufficient reason to decide to become an entrepreneur. There’s a lot more that goes into the consideration of whether or not you are cut out to be an entrepreneur. Take a look at the insight perspective of Carl Schramm, President of the Kauffman Foundation.
Are you ready to be an entreprenreur?
Becoming an entrepreneur and starting your own business is a big deal, not to be taken lightly. If you are considering this, you need to think it through:
- Do you have the passion of an entrepreneur? In other words, does the business you want to start drive every ounce of your energy and you wake up every morning with the drive to keep it going. If you don’t, you should not attempt this because your passion will be the only thing that keeps you going during the hard times.
- Can you afford it? If you have a day job, don’t quite until you know you have something new to sustain you.
- Are you prepared? Before you start a business, you need a well thought out business plan that you can finance and execute. Do the due diligence needed to make sure.
- If you do have financial resources, do you really want to spend it on a new business? If you are not prepared to lose it all, don’t make the bet.
- Is your family with you? Better not leap into a new business if your family doesn’t know what they are in for. You will be working 14-16 hour days and making other sacrifices that they will need to know about. This could be the end of a good relationship if you don’t get their support.
This is still a good time to start a business, but really think it through before you attempt it. Maybe you should be getting another job instead.
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Venture Capital Needs To Go Back To Basics
Bill Warner Sunday, July 12, 2009
Some of the leading venture capital firms are being much more introspective about where their industry stands and why many venture firms are failing. See the complete report in the New Your Times.
The current venture capital model is not working
Sure, there have been a lot of external factors that have driven their failure, not the least of which are the economy and burdensome government regulation. But that’s not the whole story. Venture capitalists are now recognizing that their venture fund model is not working:
- Funds are too big causing returns to fall; now about 6 percent
- Too many inexperienced people are making investment decisions
- Senior partners are losing touch with their industries
Venture funds have to shrink
Many of the leading venture partners see that there will be massive fallout of venture firms, perhaps as much as a third to a half of the 882 active venture capital firms, over the next two years.
Today, this is a returns driven business. Venture firms simply figure out how many deals they can support with their professional staff, divide that into the size of the fund, and then force feed that amount of investing into their deals. This is an over simplification, but they definitely need to spend more time on figuring out how much a business needs and then provide that amount.
With the glut of money that has been flowing into the venture firms, an increasing redundancy of companies in the same industry space has emerged that tends to drive up their valuations. This also puts pressure on returns when it comes time to exit.
The look of the new venture capital firm
Firms like Greycroft and Andreesen Horowitz invest much smaller amounts of money in many more companies at earlier stages of maturity. Yes, venture firms that actually invest in start-ups. They handle the investor productivity issue by spending less time in taking board seats, focusing only on what they know best, and having a professional staff that is really current in the industry.
The capability of the people in the firm matters a lot. Many of these new firms are shying away from the young MBA’s being put in significant governance positions, when most of them have never run a company. They cite too many bad decisions have been made by people who really don’t have the appropriate background. Their advice for young MBA’s is to get a job in an operating company and learn the ropes before trying to become a venture capitalist.
Being current in technology is probably more important than many years of experience. Although both are important ingredients in a company, they cite the fact that too many companies are being run by people who have lost touch with technology. We are in a very dynamic and changing industry. Staying current means you have to pay attention to it every day.
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Stimulus Money - A Long Shot
Bill Warner Sunday, July 12, 2009
The likelihood of getting any of the stimulus money into your business is remote, but nevertheless, there is a chance. I read an interesting article in Entrepreneur that gives a step-by-step process for business owners to consider.
Considerations
Taking this on is not for the faint of heart. Do your research to see if it is worth your time.
- This is big money, a million or more. So, if you are not in that league, this may not be for you.
- Better know how to sell to the government. If you don’t, your chances are even smaller.
- Make sure that your industry is one of those targeted for the stimulus money.
- Follow the process offered by the agencies involved in making the decisions.
- Understand the reporting requirements and strings attached to the money. You don’t want your business tied down in a process that may be detrimental to your business.
Once you have thought this through and understand how much of your time is going to be involved and what future impacts to your business are at risk, you can decide whether or not stimulus money is for you.
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The New Big Three Economic Drivers
Bill Warner Sunday, July 12, 2009
How could curiosity, imagination and failure possibly be economic drivers? They certainly seem like important business factors, among many others, in running a business. Read the details in Open Forum.
How so?
Think about it. We are reading about companies that are circling the wagons on cost and expense reductions and driving current sales operations to bleed every ounce out of the stone of their current products and services. What makes the difference is recognizing when a product or service has reached the point of failure in its market. The idea is that failures drive the need for new innovations. Executives need to have the curiosity about their markets and customers to see when the failure milestone is being reached. Simultaneously, they have to have the imagination and innovativeness to create new products and services that address new market needs. Even in a recession, new innovation continues to play an essential role.
Identify failure and thrive
The lesson here is that business owners need to be courageous enough to recognize and act as they see failure approaching. Just responding to a failure that has already occurred is a death blow. Recognize the signals that indicate your business is failing:
- Loss of cost competitiveness
- Price reductions due to competitive offerings
- Changing customer priorities
- New market trends that weaken your market segment
- Strong competitive offerings impacting sales
Seeing failure coming gives you time to act and take a new direction. Have processes in place that give you the information you need to foresee failure.
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Business Owners Don’t Need Stimulus Money
Bill Warner Wednesday, July 08, 2009
That’s right. Business owners, you are on your own, and that’s OK. In its recent survey of 1,000 customers, Intuit discovered that an overwhelming number are relying on themselves, and not the government, to survive this recession.
What’s the situation?
An unbelievable 94 percent of small business owners say that they depend on themselves the old fashioned way. They use the same operational strategy they did when they bootstrapped their businesses in the first place. Almost none of them have received any stimulus money and don’t believe that the government’s stimulus plan will benefit them.
In fact, sources of financing have declined as shown by the Small Business Administration backing 30 percent fewer loans than it did a year ago. It is still unclear how this situation will change under the Americas Recovery Capital program.
So what are small businesses doing?
Small businesses are again demonstrating why they are the heart of America’s economy.
- Most of the surveyed companies see new opportunities for their companies, showing the adaptability, innovativeness and responsiveness of entrepreneurs, even in the face of continued recession.
- More than half of those surveyed expect to see business growth over the next 12 months, driven by their focus on marketing and sales.
- They also say that now is a good time to invest in a small business, exploiting new opportunities and innovative ideas.
What do entrepreneurs need to do?
Successful entrepreneurs are those that act decisively and quickly. They put their instincts and innovativeness to work to deal with the changes that have occurred in their markets. Some of the keys to success are:
- Financing is still available, but harder to find. In many cases, entrepreneurs need to go back to basics of identifying potential investors within their own scope of influence (friends and family). Strategic partnerships should be purposefully pursued to join with established companies who have the cash to invest in new products and services.
- Don’t let all the media hype get you down. Look deeply into your market segments and see what is really going on and respond to it. Let the facts that face you direct your decisions.
- Recessions also bring changes to markets. Make sure you understand the changes in yours and find the ways to exploit them with changes to what you are currently offering and providing new products and services.
- By all means, act. Do not simply let circumstances overtake you.
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A New Venture Capital Fund That Acts Like Angels
Bill Warner Monday, July 06, 2009
Mark Andreessen and Ben Horowitz just announced a new $300 million venture capital fund that looks, smells and walks like an angel fund. Andreessen Horowitz is focusing on the best entrepreneurs, products and technologies in the industry. Read the details in BLOG.PMARCA.COM.
The founding principles make a difference
Their founding principles are extraordinary and may spell what could be a refreshing new model for venture capital firms:
- Their claim is that technological advancement is at the core of human development. Although this is generally accepted, the founders’ backgrounds indicate how serious they are about moving technology forward.
- Furthermore, technology change fosters continuous opportunity for even greater changes in the future. In other words, investors need to understand that this a continuum that will drive even greater advancements as new technologies are developed.
- Here is the one that catches my eye. They say that the technology start-up is all about the entrepreneurial team and their vision. This kind of pokes a stick in the eye of the limited partners who mostly think it’s all about them. They obviously have investment partners who agree with this principle.
- New companies today need a lot less money than they used to in order to get started. The services available on the internet today make it much easier to launch a company. Once a company is successfully launched, more money will be needed for market expansion.
- Having the best possible team of advisors and investors to support an outstanding entrepreneurial team is also a refreshing principle. This firm can certainly bring the best of the best to support great entrepreneurs.
- They cite the importance of trust in building a great company. This too is revolutionary and bodes well for a new attitude between venture capital and entrepreneurs.
- They are not buying into the promise of clean tech, biotech, transportation, nanotech and life sciences, and will stick to their guns by investing exclusively in information technology innovation.
- Just like angels, they will focus on their own geographic area of Silicon Valley.
Focus on start-ups
Their fund is huge. Nevertheless, they are building their firm on the idea that it should be the kind of firm they would want to work with when they were young entrepreneurs starting new companies.
They will invest anywhere between $50 thousand to $50 million, depending on the company’s stage of maturity. This will include start-ups with seed round financing as well as later stage financing rounds for high-growth companies.
Andreessen and Horowitz will be the only general partners of the firm, and will personally make investment decisions aided by a small staff of other professionals.
It’s all about the entrepreneur
They are looking for the best of the best in entrepreneurs who have a compelling vision about taking on a big market opportunity. They favor strong technologists who know what they want to build and know how to go about it. They also have the belief that the founder needs to be the CEO, and favor entrepreneurs who have that potential. They believe that the CEO skills can be developed.
They are all about the product and that companies are build around products. Investors need to intimately understand the company’s products. Surely, Andreessen and Horowitz are very capable of carrying out this principle.
It is exciting to see the emergence of this venture capital firm, run by two leading entrepreneurs and investors. Their ideas are refreshing and bold and may spell a new investment model for venture capital firms for the future.
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Venture-Backed Liquidity Continues to Plunge
Bill Warner Thursday, July 02, 2009
Venture-backed liquidity continues its plunge that started in 1Q08. It’s now down to $2.8 billion, a 57% drop since this time last year, and down from $18.4 billion in 4Q07. The number of venture-backed IPO transactions continues to be anemic with three so far this year, versus seven for all of last year. M&A is also down to 67 deals totaling $2.6 billion, down from $16.2 billion in 4Q07 and a drop of 23 percent since last quarter. See all the data at VentureSource.
Venture’s life blood continuing to be squeezed
As you know, these two types of transactions are the life blood of liquidity for venture capital firms. With so few transactions, venture firms are feeling the pain with no viable way to exit from their portfolio companies. Their entire business model is built with the assumption that there will be a sizable exit. Of course, very few of their investments achieve this goal, but they are supposed to more than offset the lower performance or losses experienced in the rest of their portfolio. With M&A’s and IPO’s continuing their decline, venture capital firms are faced with not being able to meet their commitments to their limited partners.
The fallout continues
Unfortunately, there are also an increasing number of venture capital firms backing away from the market in the face of these realities. You have read about the optimism of the National Venture Capital Association’s initiatives to find new venture capital business models and several venture capital firms experimenting with new markets as well as smaller investments with small expectations for returns. These are far too late for many firms, especially those that need to raise new funds. We will continue to see the fallout through the remainder of the year.
What is the future of venture capital
With the continued anti-business and anti-venture capital regulation by the federal government, it is hard to imagine how the current venture capital market will survive. We are more likely to see a continued weeding out of the weakest firms as others redefine themselves with business models that are much more modest with respect to amount invested per company, expected returns and time to exit. Models like this are being tried as some firms actually are dipping down to take on some pure start-ups. Others are playing in the debt markets which would be an entirely different model for achieving returns to their limited partners.
What about entrepreneurs
As for entrepreneurs, you have to analyze the viability of any venture firm that you approach by taking a hard look at the value of their current portfolio and where they stand with their current fund. You want to determine if they are going to be able to be with you in subsequent rounds and whether or not their key personnel will be there to assist you. A lot of hard questions need to be asked about their business model so that you can satisfy yourself that they will be a long lasting partner or not.
They will certainly offer low valuations and strict terms, but the negotiation is a two way street. Make sure they are really going to be worth what they claim to be.
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Venture Capital Firms Chase New IPO’s
Bill Warner Friday, June 19, 2009
We all know that the IPO market for venture-backed companies has pretty much disappeared, substantially destroying their business model that requires high value exits via an IPO. Dixon Doll, in his interview with the Wall Street Journal gives us an update on the reshaping of the venture capital industry. Doll is a seasoned business consultant, a leading venture capitalist and the outgoing Chairman of the National Venture Capital Association (NVCA).
NVCA’s “Four-Pillar Plan”
The NVCA’s Four-Pillar Plan is targeted at restoring the venture-backed IPO market, and it takes unprecedented cooperation between the private sector and the government’s taxation and regulatory policies. Given the slap that the venture capital world just took in the SBIR renewal bill, that cooperation is not evident.
The NVCA’s direction is to convince venture capital firms to modify their financial models and business practices to focus on small-cap IPO’s, moving away from blockbuster winners. Another bubble is bursting. This will require substantial reshaping of the way venture capital firms structure their deals and the transition will take five to seven years to complete. But, given the state of the IPO market, this makes sense.
This means that venture capital firms will have to go after more deals, with less money per deal, driving for quicker exits, and culminating in smaller IPO’s. This opens up the venture-backed IPO market to a whole new set of investment banking firms that will be able to service this opportunity. It won’t be just the big firms like Goldman Sachs and Morgan Stanley.
The task ahead
Doll points out that this is going to be a painful transition. Some venture firms won’t make it. It will require a massive education initiative to explain how this can work. This education will have to include entrepreneurs, venture capital firms and investments banks who currently don’t view that they have an IPO market available to them.
There is considerable skepticism throughout the industry. Even if the NVCA pulls off this first pillar, the government regulatory and taxation policies will represent another giant hurdle to jump over. Doll has always been a positive and aggressive thinker. If anyone can make this change happen, he can.
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Venture Capital Snubbed By SBIR Bill
Bill Warner Thursday, June 18, 2009
The Senate committee unanimously passed the bill to renew the Small Business Innovation Research (SBIR) program with only partial support for venture backed company eligibility, allowing them to have access to 18 percent of the Department of Health and Human Services and 8 percent of all other agencies. Read the details in the Wall Street Journal.
The problem with venture capital backed companies
This debate has gone on for years and comes down to two opposing views. The first is those that think that grant funding is an integral part of a company’s financing strategy and that there should be no restrictions on the amount of private equity money invested in the company. The other view is that grant financing should be devoted to private companies that are not substantially owned by venture capital firms.
The debate continues
This is not the last we will hear about this debate. The National Venture Capital Association and the Angel Capital Association are strong advocates for lifting the restrictions on venture capital backed companies. In any economy, it seems like a good idea to strengthen the financing capability of entrepreneurial businesses.
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Institutions Decrease Private Equity Investments
Bill Warner Tuesday, June 16, 2009
As we all know by now, institutions who invest in venture capital are backing away from this asset class. Now, the Coller Capital report provides some quantitative evidence in its most recent survey.
Institutions reduce investments
The bottom line result is that 20 percent of institutional investors plan to decrease their allocations to private equity this year; the largest decrease since the survey started in 2004. Another 15% plan to increase their investment, but even that is substantially down from previous years.
The core problems with institutional investors
The report cites the fact that there are fewer private equity firms to invest in, and many more will not be able to raise additional capital because of their poor performance. The survey predicts that there will be a 28 percent decline in the number of venture capital firms that will be able to raise additional funds. A shocking 84 percent of the institutions have chosen not to reinvest with their existing general partners. We know that the IPO market for venture capital backed companies has dropped to near zero, and that acquisitions are harder to get as well. This puts a major hole in the venture capital firm’s business model which requires a huge upside exit in order to achieve their expected returns.
Well, institutions haven’t fared that well either. Many have experienced 30 to 40 percent declines in their value with the market downturn, putting pressure on the ratios that govern how much they should be investing in this asset class. So, there are problems on both sides of this coin.
Expect a power shift in venture capital
There is good reason to believe that institutions are going to have more power in any negotiations for new funds. It’s a buyer’s market. There will be a lot of pressure on getting higher value for the fees that venture firms charge and deal terms between them are going to be more favorable to the institutions.
All said and done, this means that entrepreneurs have really got to have a great business story to attract venture money. It has been getting harder and harder to acquire venture money since the end of 2008, and it doesn’t like it is going to get any better this year.
