Entrepreneurial

Chicago’s startup community sticks by struggling Groupon

– Connie Loizos is a contributor for PE Hub, a Thomson Reuters publication. This article originally appeared here. The views expressed are her own. –

Not long ago, daily deals giant Groupon was the toast of Chicago, a press darling that received the blessing of Oprah Winfrey, was commended by Forbes as the “fastest growing company ever,” and even reportedly spurned a multibillion-dollar buyout offer from Google.

A Chicago Tribune headline from last December summed up its place in the ecosystem: “Groupon’s Success Adds Luster to Chicago’s Startup Community.”

Things have changed somewhat, of course, with Groupon experiencing numerous setbacks since filing for an IPO in June. Among them, the company has been forced to amend its S-1 three times to satisfy SEC concerns over its accounting practices; it lost a COO who’d joined five months prior; and an email leaked to the press led the company to cancel its IPO roadshow. Early this week, a financial analysis firm released a report suggesting that Groupon may now be on a “self-reinforcing path to insolvency.”

If Groupon suddenly looks to leave a mixed legacy in Chicago, the city’s startup community is loath to acknowledge it publicly or privately. Indeed, talk with regional entrepreneurs and investors and two things quickly become clear: they say they still believe in Groupon; they also think no matter what happens to the company, their fortunes will not be tied to it.

“Groupon put Chicago on the (startup) map,” said one longtime Chicago VC who asked not to be named. But if Groupon should stumble after all its advanced billing, “I don’t think it will blow up the community or cause venture money not to come into Chicago,” he added.

“It’s true that Groupon is closely associated with the Chicago tech scene,” said venture capitalist Steve Miller, co-founder of Origin Ventures outside of Chicago. “But as someone who has been closely involved here for the last 12 to 13 years, I can tell you there’s much more to Chicago than Groupon.”

Some lessons learned as an entrepreneur and VC

Chris Dixon

Sep 30, 2011 06:00 EDT

– Chris Dixon is the co-founder of Hunch and of seed fund Founder Collective. This blog originally appeared here. The views expressed are his own. –

Note: Google was kind enough to invite me to give a short talk at their Zeitgeist conference earlier this week. It was a really interesting conference and I got a chance to meet a lot of people I admire. For my talk, I decided to use material from some of my blog posts over the years that I thought might appeal to a broader audience. Unfortunately, I was still recovering from a nasty cold/flu so I didn’t deliver the talk as well as I’d like. Below is the text.

Today, I wanted to talk about some of the most important lessons I’ve learned over the years from my experiences as an investor and entrepreneur.

1. If you aren’t getting rejected on a daily basis, your goals aren’t ambitious enough

My most humbling and educational career experience was when I was starting out in the tech world. I applied to literally hundreds of jobs: low-level VC roles, startup jobs, and various positions at big tech companies. I had an unusual background: I was a philosophy undergrad and a self-taught programmer. I got rejected from every single job I applied to.

The reason this experience was so useful was that it helped me to develop a thick skin. I came to realize that employers weren’t really rejecting me as a person or on my potential – they were rejecting a resume. As the process became depersonalized, I became bolder in my tactics. Eventually, I landed a job that led to my first startup getting funded.

One of the great things about looking for a job is that your payoff is almost entirely a max function – the best of all outcomes – not an average. This is also generally true for lots of activities startups do: raising money, creating partnerships, hiring, marketing and so on.

Startups run the gamut from the sublime to the mundane

– Mark Boslet is a contributor to PE Hub, a Thomson Reuters publication. This article originally appeared here. –

Investors navigated the halls. Luminaries such as LinkedIn’s Reid Hoffman and SoftTech’s Jeff Clavier took the stage.

Demo Fall 2011 was in full swing yesterday. What stood out at the tech conference was an eclectic assortment of startups that varied from the sublime to the silly. Several of the most appealing enterprise-focused companies seemed poised to attract considerable interest. Several developing consumer technologies did not.

Here are some from both sides of the aisle:

FLUXX

Among those destined to draw attention was Fluxx of San Francisco. The company hopes to develop an online dashboard where businesses can integrate information from key internal systems and better manage their operations.

Fluxx argues the product’s value is its ability to put the data in one, easily accessible place. Already the company sells a cloud-based dashboard product to half a dozen non-profit foundations, for which it expects $1 million in revenue this year.

How much money do I need for my startup?

– Tim Berry is the president and founder of Palo Alto Software. This post originally appeared on his blog, “Planning, Startups, Stories”. The views expressed are his own. –

It’s an obvious question. And if you’re looking for startup investors you’d better be able to answer it well, and quickly too. No wandering eyes. No doubt. If you’re doing a pitch, have a slide for it. And be specific.

I liked this from Ben Yoskovitz’s Instigator Blog on Use of Funds:

… most descriptions of “use of funds” are incredibly generic and standard, typically involving the following: hire key personnel, product development, sales & marketing. Hhhm…the phrase, “No s!@# Sherlock…” comes to mind.

And on the other hand, there’s this about that, from Perfecting Your Pitch, by Guy Kawasaki’s Garage.com Ventures:

It should be clear from your financials what your capital requirements will be. On this slide you should outline how you plan to take in funding — how big each round will be, and the timing of each — and map the funding against your key near-term and medium-term milestones. You should also include your key achievements to date. These milestones should tie to the key metrics in your financial projections, and they should provide a clear, crisp picture of your product introduction and market expansion roadmap. In essence, this is your operating plan for the funds you are raising. Do not spend time presenting a “use of funds” table. Investors want to see measures of accomplishment, not measures of activity.

So go figure. There are two opposite points of view from two good sources.

10 reasons not to seek investors for your startup

– Tim Berry is the president and founder of Palo Alto Software. This post originally appeared on his blog, “Planning, Startups, Stories”. The views expressed are his own. –

Sure, maybe you need the money. Maybe that’s what your business plan says. But seriously: Do you really want to have investors involved in your dream startup?

I’ve said it before: bootstrapping is underrated. I get frequent emails from people asking how they can get investment for their new startup, and I’ve admitted to being a member of an angel investor group. But let’s not forget, while we’re thinking about it, these 10 good reasons not to seek investors for your startup.

1. It’s almost impossible to get investment for your very first startup. If you don’t have startup experience, get somebody on your team who does. Chris Dixon said it best: either you’ve started a company or you haven’t. And if you haven’t, and nobody in your team has either, that makes it very hard.

2. You are selling ownership. Investors write checks to own a serious portion of your business. I admit that’s patently obvious, but you should see the emails I get in which people think of investors as if they were some sort of public agency. Once you get investment, you don’t own your entire company.

3. Investors are bosses. You are not your own person when you have investors; you’re part of a team. You can’t decide everything by yourself. Politics matter. Investor relations matter. If you screw up, you do it in front of other people, and it hurts those people.

4. Valuation is critical to them and you. Simply put, valuation means the price. If you want to give only 10 percent of your company to investors who pay $100,000, you’re saying your company is worth $1 million. And so on. Simple math, but wow, not so simple negotiation.

Angels vs VCs on business pitches

– Tim Berry is the president and founder of Palo Alto Software. This post originally appeared on his blog, “Planning, Startups, Stories“. The views expressed are his own. –

Recently I caught Business Insider’s “Five VCs Explain What They REALLY Think About Your Pitches“. It’s a great post, gathering points together from discussions with several high-end venture capitalists. If you’re looking at venture capital, read it.

Part of what they said reminded me that angel investors and VCs have a lot in common. For example, these important points:

• Keep it short
• Avoid buzzwords
• Answer questions quickly without getting defensive
• Be a good storyteller
• Know the people you’re pitching
• Don’t forget the financial info

I’m pretty sure all of the investors in my local angel investor group would agree with every one of those. I particularly like the three about answering questions, telling stories, and not to forget the financial info. Those three are critical.

Some of the other points, however, remind me of the differences between VCs and angels. For example, the VCs say introductions matter:

The person introducing the entrepreneur is a big deal — if (the VC quoted) doesn’t trust the referral, he won’t even take the meeting.

The 100 most influential VCs and angels

– Mark Boslet is a contributor to PE Hub, a Thomson Reuters publication. This article originally appeared here. –

Any list of the 100 most influential venture capitalists and angels should include the likes of John Doerr, Ron Conway and Michael Moritz, right?

Not necessarily. And not if the list you’re referring to is the “100 Most Influential VCs, Angels and Investors” compiled by Lucy Marcus, the Huffington Post columnist and the non-executive board chair of the Mobius Life Science Fund.

Call this list one for the new, social decade. Marcus, who also is founder of the Marcus Venture Consulting, posted her list this week on PeerIndex, a site that ranks people based on their digital footprints.

Some of its influencers will come as no surprise. Union Square Ventures’ Fred Wilson is number 3 and blogger investor Paul Kedrosky, number 4.

But what about Kevin Rose, Digg founder, at the top of the chart (he does have 1.2 million Twitter followers)? And how about Twitter investor Chris Sacca number 2? (He also has 1.3 million followers on Twitter.)

Other notables: 500 Startups’ Dave McClure, 9, Foundry Group’s Brad Feld, 11, and cleantech investor Vinod Khosla, 14.

It’s not a bubble, people; It’s a pyramid scheme

– Connie Loizos is a contributor for PE Hub, a Thomson Reuters publication. This article originally appeared on PE Hub. The views expressed are her own. –

Mark Cuban knows a thing or two about bubbles, having profited handsomely from an earlier Internet boom. But ask him if we’re seeing Bubble 2.0 and he’ll give you a different theory.

“It’s almost the 2011 version of a private equity chain letter,” said Cuban, who sold Broadcast.com to Yahoo in 1999 for $5.7 billion and went on to buy the the NBA’s Dallas Mavericks.

“Remember the old chain letter, where you put up some money, then you got other people to put up some money, and you gave it to the people who were in the deal before you? That’s what’s happening today,” said Cuban. “The early (VCs) are getting the new (VCs) to invest enough money at high enough valuations that they get most, if not all of their money back. Then the next round (sees) someone else invest more money at a higher valuation, returning cash to the last two rounds of investors. By the time you get to the last (VC) standing, those last few rounds hope they can get a return from the public markets. That may be very tough. But the only players really on the hook are the guys from the last rounds. Just like in a chain letter.”

It’s a valid point. As certain Internet company valuations reach astronomic new heights, it’s easy to conclude that Silicon Valley has spawned another giant bubble–one that will eventually bounce its way onto the public market and soak investors. But unlike the dot.com mania of a decade ago, today’s soaring valuations don’t involve hundreds of companies and thousands of retail investors. They center on a select group of wealthy VCs chasing after a comparatively small number of very richly valued tech companies–most of which are in Silicon Valley.

Over the last three months alone, Facebook’s roughly $33 billion valuation has roughly doubled, to an estimated $60 billion. Zynga’s reported valuation has jumped to upwards of $9 billion from $4 billion last May. And both pale in comparison to Twitter, which generated an estimated $150 million in revenue in 2010 yet has reportedly received overtures that peg its worth at between $8 billion and $10 billion. (Just two months ago, when Kleiner Perkins led a $200 million investment in Twitter, its valuation was $3.7 billion.)

Fueling the fire are firms like Andreessen Horowitz, which last week sunk $80 million into secondary shares of Twitter, and Kleiner Perkins, which this week threw $38 million at Facebook shareholders to (finally) add the company to its portfolio. But they’re certainly not alone. According to the secondary shares marketplace SecondMarket, VCs have represented the majority of SecondMarket’s buyers since the third quarter of 2010 and they accounted for more than 40 percent of its transactions in the fourth quarter.

Venture capitalists are not your friends

– Steve Blank is a teacher, writer, and serial entrepreneur. He teaches at Stanford University, U.C. Berkeley’s Haas Business School and at Columbia. He is the author of “The Four Steps to the Epiphany” and “Not All Those Who Wander Are Lost”. This article originally appeared on www.steveblank.com. The views expressed are his own. –

One of the biggest mistakes entrepreneurs make is not understanding the relationship they have with their investors. At times they confuse venture capitalist’s with their friends.

At Rocket Science our video game company was struggling. Hubris, bad CEO decisions (mine) and a fundamental lack of understanding that we were in a “hits-based” entertainment business not in a Silicon Valley technology company were slowly killing us.

One day I got a call from my two investors, “Hey Steve, we’re both going to be up in San Francisco, lets grab lunch.” I liked my two investors. I’d known them for years, they were smart, trying to figure out the video game market with me, (in hindsight a business that none of us knew anything about and shouldn’t have been in), coached me when needed, etc. Our board meetings were collegial and often fun.

We were just about to have a board meeting in another week to talk about raising another round of financing to keep our struggling disaster afloat. I had assumed that my VCs were behind me. Thinking we were having a social call, I was completely unprepared for the discussion. (Lesson – never take a VC meeting without knowing the agenda.)

“Steve, we thought we’d tell you this before the board meeting, but both our firms are going to pass on leading your next round.” I was speechless. I felt like I had just been kicked in the gut and stabbed in the back. These were my lead investors. It was the ultimate vote of no confidence. If they passed the odds of anyone in the entire country funding us was zero. I knew they had been questioning our ability to stay afloat as a company in the board meetings so this wasn’t a complete surprise, but I would have expected some offer of a bridge loan or some sign of support. (I finally got them to agree if I could find someone else to lead the round they would put in a token amount to say they were still supportive.)

“Is this about me as the CEO?” I asked. “I’ll resign if you guys think you can hire someone else you want to back.” They looked a bit sheepish and replied, “No it’s not you. You should stay and run the company. However, we realized that we’ve backed a business we don’t know much about, the company is a money sink and both our firms have no stomach for this industry.”

from The Great Debate:

Venture capital harms your wealth

-- Lance Knobel is a guest columnist. The views expressed are his own. He is an independent strategy advisor and writer based in the United States. His professional site is www.lknobel.com --

The promise was certainly seductive: Lock up your money with me for five years and I'll give you double-digit annual returns.

For years, that was an accurate equation for venture capital. From 1981 to 1998, there were ups and downs, but the 10-year return generally hovered around 20 percent, well above most other asset classes. That return came at a price of course. It was illiquid and there was no secondary market. And there was a further catch. Most potential investors were excluded: Venture funds were relatively modest in size, there weren't very many of them and they were picky about whose money they'd take.

The dotcom boom changed all of that. Venture capitalists became business magazine stars, new funds sprouted up all over, and established firms with a decent track record were suddenly able to raise nine- and ten-figure funds. The 20 percent mark began to look pallid. In 1999, the U.S. venture industry was boasting five-year returns of nearly 50 percent, as a flood of IPOs provided swift and lucrative exits. The end-to-end return, net of fees, expenses and carried interest, for the year ended March, 2000, was 310 percent.

Alas, that was then. New York VC Fred Wilson, principal of Union Square Ventures, reckons average returns over the last 10 years are in the range of 6 to 8 percent. Aggregate industry figures are still flattered by the anni mirabili of the dotcom era, and the staggering venture bonanza of the Google IPO for a handful of elite firms. But when 1999 drops out of the 10-year calculation, average returns will slump to the low single figures or negative.

The returns have shrunk, yet the industry hasn't contracted all that much. According to Thomson Reuters data, in 2008 there were 882 existing venture capital firms with $197.3 billion under management. That represents an increase from the go-go year of 1998, when there were 624 firms with $92 billion under management.

Venture investments have been ticking along at a fairly constant rate as well. There were two astoundingly anomalous years -- 1999 and 2000 -- when U.S. venture investment was $52 billion and $102 billion. After the dotcom crash, that slumped to $19 billion in 2003. Last year's $28 billion was down from 2007's $30 billion, but before 1999 the biggest year in the industry's history, 1998, had seen just over $20 billion invested.