Head in The Cloud(s)

Cleantech 2.0 is coming

As expected, a second wave of clean energy investing is now in force. Experienced investors from the first wave (2005-2014) who had less than impressive returns are back in action. Much like the second wave of internet investing that led to the massively valued social media companies, I anticipate the Cleantech 2.0 will yield a number of valuable franchises.

On a related note, the research on VC and cleantech that TBJ Investments contributed to is on Connected Papers, which links the paper to prior art and derivative works:

https://www.connectedpapers.com/main/61a95467ba058f0ced44cb5afd4ea5805f804ef3/Venture-Capital-and-Cleantech-The-wrong-model-for-energy-innovation/graph

Lots of big VC rounds are being raised. A number of companies have raised $100M+. It's probably important to note two things:

1. The collective market caps of companies in certain sectors exceed the market sizes of those sectors

2. 75% of most exists are below $100M.

This chart is a good primer on where most exits fall:

 

Getting awful bubbly out there...

New Year, New Location, New Investment Themes

2013 was a year of transition. 2014 is going to be a year of dramatic changes. First off, we've made a few key moves at TBJ Investments over the winter. The most dramatic of which is that we moved out of Boston to Washington DC. Some of this is related to career opportunities, but the essential fact is that DC is going to go through a significant set of changes, and with that will be a number of investment opportunities:

• Unstructured and Big/Social Data Analytics
• Reorganization of the Intelligence Community, as fallout of the NSA/PRISM disclosures
• Rebuilding of the Security Software Stack
• Jumping off point to Emerging and Frontier markets, where GDP growth rates outstrip those of the USA.

Each of these themes will be explored in greater depth, but expect 2014 to be a dramatically different year.

 

More Buzzient social media analytics on $BA Boeing Dreamliner

There's more evidence of $BA Boeing brand damage after the battery debacle. Some of this has been listed in a previous post on the Buzzient blog:

www.buzzient.com/blog/the-boeing-dreamli.../

Since this original post, there's been a lot of noise about various aircraft fleets delaying purchase of 787's or even shopping for alternative airframes. If we take a look at Buzzient sentiment analytics for the last month, we can see this clear divergence for the 787 product line, where sentiment drops appreciably when compared to other Boeing products:

(click to enlarge)

The dramatic drop in the red line (787 model) corresponds to the time period where it became known how bad the battery problems are. Since that time, Boeing announced decent results, but we can see in the social sentiment charts a lingering gap in product sentiment. Will this show up in delayed orders in subsequent quarters? I think prudent traders, using this Buzzient data alongside other measures would advise a HOLD on $BA.

Beat the Series A Crunch through M&A

As a follow up to the previous post on the Series A crunch(  Series A Crunch), it's important to also think of alternatives. Yes, my principal thesis is that seed-funded companies without institutional investment should focus first on their core business and customers in order to get over the financing hump. That being said, the smart company also looks at alternatives.

If you're a startup that has been bootstrapped, hasn't raised any institutional money, and will need money anytime in 2013, you should strongly consider selling. Why?

1. The angel market is about to dry up

Everyone feels it. There's lots of competition right now for angel money, and few angel groups really have an efficient process for looking at lots of deals. To be blunt, so few angel groups have high volume deal screening processes that there's a bottleneck in looking for angel money. So, if an angel group tells you that their process takes 30 days, well, it actually takes 60 to 90. If they say 60 days, it's really 6 months.

In addition, there are so few cash on cash returns at the seed stage that a lot of angels are illiquid as well.  That means they're waiting for cash buyers for existing portfolio companies in order to get back in the market.

2. VC's are being "Crunched" as well, and will act accordingly

There's another crunch going on; it's the Underperforming VC Crunch. Most venture capital firms underperform the S&P, and have done so for the last decade. A number of LP's are reconsidering their allocation to VC; CalPers for example is reducing their allocation from 7% to 2% or less.

That means that in order to justify their existence, those firms which aren't in a select few will have to drop eye-popping returns on at least 1 deal that captures headlines. That deal may/may not drive the overall portfolio, but will give the VC firm a reason to lobby for another LP allocation.  To do this, VC's will tend to do later stage deals, even though their charter might be to invest earlier stage (Series B at a Series A Price). This is all about survival and justification of that 2% management fee, so charter be damned.

So, if you're a seed funded company looking at a "true" Series A where you have some revenue, customers, product, etc, but haven't begun to auto-scale, you're SOL. 9 out of 10 VC firms are just not going to be up for company building right now. For them, they're in their own "crunch", and in the battle for survival between you and them, well, guess who they'll pick?

3. There is an innovation gap that advantages startups; this means YOU!

Since the financial crisis, the level of R&D by both public and private companies has been somewhat suppressed. What that means is that the VP of Engineering/VP of R&D for larger companies has a list of innovations he/she would love to have, but has never been able to fund. That's where startups come in. If you're seed funded and have an actual product, your offering helps those companies accelerate their own plan. For the seed-funded entrepreneur, you get access to larger distribution channels and resources you don't have. It's a Win-Win.

To survive the Series A Crunch is going to take a lot of nerve, hard work, and an iron stomach. As you gird yourself for more capital raising, don't turn away from the acquisition route  as well. If you find the right investors who are up for company building, carry on. If you don't find enough of them, M&A provides an alternative path that benefits your startup, your investors, the acquirer, and you the entrepreneur. Particularly without the "overhang" of VC preferences, M&A could be a BETTER outcome for early investors and entrepreneurs than with continued capital raising.

 

Digital NYC is Real; Observations as an angel investor and CEO

I had an awesome last week in NYC while presenting my portfolio company Buzzient (www.buzzient.com) to potential business partners and investors at the Gridley and JEGI conferences.  So good that I've tried to step back and understand why Buzzient seems to get more customer and investor traction in NYC?  IMHO, there are a few characteristics of the NYC scene that make it (second only to Silicon Valley)  a dynamic place for tech businesses:

1. Sense of Urgency

One of the things I've always loved about NYC is the sense of urgency in business conversations. There is very little of the "let's see what happens, come back in 6-12 months" inertia that you find in a number of other areas. Some of this is the "trader" mentality which has moved uptown from Wall Street to the technology clusters in the city. This awareness of the fleeting nature of opportunity makes business conversations in NYC move faster, and have a definite action or endpoint.

2. Availability

I've found CEO's, financial executives, and prospective customers FAR easier to get to in NYC. I think this is related to the sense of urgency, but doors and rolodexes seem to spring open with far less advance notice in NYC. I was pleasantly surprised on this trip to have senior people in a variety of organizations re-arrange their schedules to accomodate my trip.  I find that in the Valley, VC's are booked so far in advance(with a lot higher volume demand) that this is hard to do.

3. New Perspective

NYC has changed a lot from the Silicon Alley era. During that time, one could experiment with a tech startup and if things didn't work out, you could always go "Back to Banking". What's different now is that several of the banks are themselves gone (Lehman, Bear Stearns) and others are laying off (Morgan Stanley). For the first time I believe there's a new perspective where, short-term compensation aside, tech startups are not necessarily more risky than staying in financial services.  With this fresh perspective, I believe the NYC tech community has a more balanced view of risk and reward that makes the tech community more long-term focused.

4. Community Building

I'm impressed by the amount of community building I see going on in NYC. As mentioned, I was in town to attend Gridley 2013 as well as the JEGI (Jordan Edmiston Group) Conference. In both cases, members of the firm reached out to me proactively to attend, as well as made time for introductions and connections to other companies. I saw a real "can do" attitude in hooking Buzzient up to at least one flagship firm and reknowned investor.  Extremely refreshing attitude and one of the reasons why I believe startups from all over the world are seeing NYC as an easy place to get established.

I'll have another chance to evaluate the ecosystem Jan 30 when Buzzient will present as one of the SIIA Class of 2013 at SIIA Breakthrough:

http://www.siia.net/iis/2013/previews.asp

If you happen to be at Chelsea Piers (Pier 60) on Jan 30th, please come by and say hello!

 

The Big Whiff; Facebook IPO and the Boston Investment Community

This post has been a long time coming. Maybe it's the historic date itself, the wooziness from a stomach virus, or the realization that you rarely see such a stark contrast between success and failure.

Namely, the Facebook IPO, valuing the company at $100B, exposes the sharp distinctions between the Boston and Silicon Valley investment communities. In effect, the inability of the Boston investment community to put even a sliver of investment in Facebook, a company that started here, is probably one of the largest squandered opportunities in business.

Facebook raised over $2B in the march from dorm room to IPO. Not a single dollar is from a Boston angel investor, venture fund, hedge fund side pocket, or corporate strategic investor. Not $1. The closest claims are the west coast office of Greylock and the trivia that Jim Breyer of Accel grew up in Newton, MA. That's it.

Not being a baseball guy, I may have my analogies wrong, but this reminds me of Babe Ruth. The Boston Red Sox undervalued Babe Ruth and traded him away to the Yankees. The Babe went on to a storied carrier, and 80+ years later the Red Sox finally won something. Boston had first crack, but just whiffed.

The failure doesn't just end at the first up at bat, the Seed/Series A, but in every successive round. Whiff, Whiff, Whiff.

The question is why?

When I first came back to Boston in March 2006, I saw major cultural differences with Silicon Valley. These differences were based on my having had ~20 years experience in high tech as an early employee, entrepreneur, CEO, Limited Partner, and even VC associate. That experience was in areas as diverse as SF/The Valley, London, Paris, Atlanta, and DC.

At the time, I compiled my ideas into a short deck:

http://www.slideshare.net/tbjbuzzient/boston-vs-the-bay

Now, obviously many of the points raised in this presentation have changed. There still do remain, IMHO, some fundamental differences in the regions that led to this outcome.

1. Risk Tolerance:

Frankly, Boston has essentially none when compared to the Valley. Sorry, but that's just the way I feel. Even the "risky" deals I've heard certain investors beat their chests about have some sort of hedge, financial or otherwise. I've had conversations with a ton of investors who are really growth/momentum investors in VC clothing.

2. The Outcome, not the Process:

I've never been exposed to as many so-called investors who really are interested in multiples of Revenue/EBITDA and not actually building a company.  The shift to SaaS in the software industry has created an even better cover for this behavior, with companies being reduced purely to CMRR, CAC, CLV and assorted other metrics. I don't know any successful Valley entrepreneurs who started a company to maximize CMRR or CLV. The Process of building a great company is what drives the best entrepreneurs I've known; their investors thus support that belief system and help the entrepreneurs BUILD companies vs. harvest the financials.

3. Clubbiness, not Competition:

Boston investors seem way more driven by colluding with whom else might be in the deal, vs. originating a deal and having to compete.  There is far less outright competition between Boston VC firms to invest in new deals. So, that creates a slower tempo, less risk-taking behavior, and little desire to do something out of the box.

There are plenty of other factors that I will analyze in successive posts. I'll also make a series of suggestions on how to avoid whiffing on the next big pitch.