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This is a continuation of my post about The VC Due Diligence Process and builds on The 3 Laws of Venture Capital . Both are commentaries of David Silver's book Venture Capital: The Complete Guide for Investors . Continuing with the audits that VC's should perform when reviewing investments, the second of the five audits is the review of the entrepreneurial team. The two team members that VC's should focus on are the entrepreneur and the manager partner . Entrepreneurs are responsible for the launch of the company while the manager is responsible for building the company into something that has value. Think of entrpreneurs as the technologist or visionaries and the manager partners as the "gray hairs" they bring on to make their dream a reality. Entrepreneurs generally don't select managers well and have trouble delegating. This is because entrepreneurs believe others can't do things as well as they can (and this is, in fact, usually true). A great

This is a continuation on my post about David Silver's The VC Due Diligence Process and builds on The 3 Laws of Venture Capital . Both are commentaries of A. David Silver's book Venture Capital: The Complete Guide for Investors . The first of five audits that VC's should do when reviewing investment opportunities is the audit of the problem and solution. Estimating the Problem Size The first step in evaluating the problem is to estimate the total size of the problem and then the expected market share once the market has been saturated with competitors. According to Silver, the maximum plausible market share is on the order of 10 - 15%. If the goal is to have $100M+ revenues after 5 to 10 years once the market has developed, the total market size must be at least $1B. There are many methods of estimating market size, so I'll defer on the best method. But an important step in this process is to actually talk to potential customers to gauge whether they perceive the

As has become my yearly tradition on July 4th, I read through the Declaration of Independence today just to remind myself of the significance of the occasion. Here's the text of the document off Wikisource for those interested. It's amazing that Thomas Jefferson was only 33 when he wrote this in 1776. He wrote the first draft in a day or two in parallel to several other projects he was working on; quite astonishing, but he was apparently a gifted writer of public documents so they put the task in the right hands. I learned today, though, that much of the text of the document was in fact borrowed. Many of the famous lines were Jefferson's own creation, including the concluding line "we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor." But much of it was adapted from state level declarations of independence, most notably the Virginia Declaration of Rights . For instance, the pre-amble which included the famous "all men are cr

Continuing on my post about The VC Due Diligence Process , I wanted to expand on David Silver's "3 Laws of Venture Capital" here. Again, the three laws are: Accept no more than two risks per investment V = P x S x E , where V = valuation, P = problem size, S = solution elegance, and E = entrepreneurial team quality Invest in big P companies , because the public market will accord to them unreasonably high V's, irrespective of S and E. In more detail, here's each one: 1. Accept no more than two risks per investment Silver outlines the five typical risks that start-ups or early stage companies face: The Development Risk: Can we develop the product? The Manufacturing Risk: If we can develop it, can we produce it? The Marketing Risk: If we can make it, can we sell it? The Management Risk: If we can sell it, can we sell it at a profit? The Growth Risk: If we can manage the company, can we grow it? The first two risks, Development and Manufacturing, need to be bo

In my continued trend of reading out-of-print books about venture capital checked out from the Ford Library at Fuqua, I'm in the process of reading a book titled Venture Capital: The Complete Guide for Investors by A. David Silver printed in 1985. David Silver is a venture capitalist and investment banker with Santa Fe Capital in Santa Fe, New Mexico. As I discovered recently, Silver's success as a venture capitalist is debatable. Nonetheless, I'm finding the book to be succinct yet extremely insightful and it's not surprising why Silver has written over 30 books on entrepreneurship and finance. The book is divided into six sections: 1) Formation of a Venture Capital Fund, 2) Generating a Deal Flow, 3) The Due Diligence Process, 4) Valuation, Terms, and Conditions, 5) Monitoring and Adding Value, and 6) Selling, Liquidifying, and Portfolio Management. The vast majority of the book is spent on section 3) The Due Diligence Process and I'm going to be summariz

I just finished reading a book I checked out from the Ford Library at Fuqua titled Greylock: An Adventure Capital Story .  Written by William Elfers , the founder of Greylock Partners , the book chronicles the founding of Greylock and ensuing growth from 1964 to 1995 when the book was published.  The book's out of print and when released was privately published by Greylock, so I feel lucky to have gotten my hands on a copy. Elfers goes into detail around how he raised the first fund, how he recruited the original general partners, and then he and other general partners provide accounts of individual investments.  One of things that really stood out to me about the book was the emphasis that Elfers put on his description of people - past colleagues from ARD, Greylock's limited partners, general partners, associates, entrepreneurs they invested in, CEO's they brought in to run their portfolio companies, investment bankers they worked with, other venture capital firms they rep

Just read a good article in BusinessWeek titled " Super Angels Shake Up Venture Capital " about how new, smaller venture capital funds are filling the gap in early-stage venture funding.  The article focuses on Josh Kopelman's First Round Capital .  The "super-angels" are basically just early-stage venture funds that are near or under $100 million.  Kopelman argues that the economics of large venture funds ($1 billion+) aren't sustainable, particularly in this economy.  Most of these funds need to return 3x in three years (for a 20% annual return).  With a $1 billion fund, that means you need your investments to have exits in excess of $15 billion (assuming you're invested at 20%).  Given there are no IPO's these days, it's tough to have those kinds of exits.  Makes sense I suppose for investments that don't need much capital to get going (IT, web, etc.).  But it seems the mega-funds still have their place.  To get an alternative energy start

Read an article in the WSJ titled " High-Tech Start-Ups Put Down Roots in New Soil " about how many high-tech start-ups are considering moving their operations to lower cost locations in America.  States such as Ohio and Michigan are offering significant incentives for these companies to move, including grants and tax breaks.  The downside for these companies is that the funding infrastructure may not be fully in place in those new locations.  For example, venture banking, venture capital, and other sources of finance don't have a significant presence or interest in places like central Ohio.  Says one start-up CEO: "When it comes to raising larger amounts as the company grows," he says, "it remains to be seen if the financing infrastructure [in Ohio] is up to par with the operational side. I think it would be a mistake if we ceased connection to the West Coast."

I know very little about it.  But if I ever do need to, I thought this was a good post on VentureBeat - " The top 12 trends of the video game industry ".

Came across this article in the New York Times about how venture capitalists and other early stage investors pay little heed to comprehensive business plans.  The research behind the article was conducted by the University of Maryland business school.  Why is the business plan not looked at by investors?  The reason, apparently, is that most of what's in a business plan is not relevant to an early stage investor.  Five or ten year financial projections, work experience, etc. aren't what investors are looking for.  Instead, they're looking for what one VC mentions as:  ... “ market validation ,” hard evidence that the entrepreneur has actually sold his product or at least lined up enthusiastic potential customers. Mr. Fagnan [general partner of Atlas Ventures] says that, rather than reading a report, he wants to hear the evidence in PowerPoint slides, white board presentations or “ somebody just talking .” And the number one way of getting an audience with a VC is through a

There are a few articles and blog posts I read recently that highlight some exciting emerging technologies for the future of electronic displays, networking, and interfaces.  One I saw a few months back was Microsoft's 2019 vision video  (scroll down for the long version).  It's a 5 min video that runs through not only advances in physical devices and materials, but also associated networking and interfaces.  Another one was Nokia's Morph concept.  It's their take on the impact that nanotechnology can have on devices. It looks pretty science fiction-like when you watch the videos, but it's closer to reality than you would think.  The obvious one that's already a reality in the Microsoft video is the Surface technology.  I just came across the flexible OLED display technology that Sony is working on.  Awesome to see a working prototype.  Another one is a company called Plastic Logic  who have built display technologies where transistors are placed on plastic

Read a post in VentureBeat about how VC's are upset about the fees that major i-banks like Goldman Sachs charge small companies for IPO'ing.  They feel that the larger banks have traditionally demanded large fees (e.g. $7M in a $100M IPO), while smaller banks in the syndicate that do most of the work get a much smaller piece of the fees.  Reminds me of the research I saw last fall about how IPO's from the large investment banks (based on the league tables) actually perform worse than those from smaller investment banks.

Just flipped through a quick slide-show on BusinessWeek titled " Recession Lessons " about companies that were founded during recessions and that have hence been quite successful.  Here's the list: GE - 1876 (1873 - 96 recesssion) - leveraged US financial system to grow Johnson & Johnson - 1887 (1873 - 96 recession) - same Allstate - 1931 (Great Depression) - pulled together smart team from collapsed banks, took advantage of financial upheaval Morgan Stanley - 1935 (Great Depression) - same Krispy Kreme - 1937 (Great Depression) - cheap comfort food when people needed both Hewlett-Packard - 1939 - cheap Burger King - 1954 (decade's first recession) - rode the expansion of the Interstate Highway System Hyatt - 1957 (decade's second recession) - rode the wave of mass standardized travel Trader Joes - 1958 - rode demand of discount dry-goods from "Russia scare" IHOP - 1958 - piggy-backed on trend of eating cheap lunch and dinner out of your house So

I just read a good article in BusinessWeek titled " The Biofuel Bubble ".  The gist of the article is that biofuels start-ups (particularly those focused on ethanol) are going to fail or be absorbed by oil and gas majors.  Ethanol will be limited by the infrastructure that can absorb it (i.e. current automobiles can't take much more than 10% ethanol in the gasoline mix).  Firms, like LS9, that are more focused on diesel or gasoline-like fuels will be better off.  The article also discusses some of the limitations around feedstock.  The article highlights: Producing 30 billion gallons of fuel takes 300 million or more tons of plant material. That's more than the total weight of cars and light trucks sold in the U.S. over the past 10 years. Growing this much cellulose would take at least 30 million acres of land. "I think the biggest problem for everybody is how are we going to grow, gather, store, and treat the biomass," says Brent Erickson, lobbyist for the

I just read this posting in VentureBeat about the FCC's $7.2 billion investment in broadband infrastructure coming from the stimulus package.  The investment is focused on developing the rural and underserved areas of the US.  What I found most interesting was how far behind the US is in terms of broadband penetration around the world.  We are 20th!  Here's the excerpt: To understand the vital nature of these hearings, it’s important to first understand how widespread the lack of broadband access is in the U.S. It might come as a surprise, but the U.S. is at at No. 20 in the world for per- capita  broadband penetration. A study by  Point Topic says that only 26.4% of people in the country have regular broadband access. To give you some context,  another report issued by the  Brookings  Institute and MIT  determined that for every percent increase in per- capita  penetration, 300,000 more jobs are created. This is an opportunity that can’t go overlooked right now. Incidentally,

From my last post about search funds , I took a closer look at some of the documents on the Stanford CES website .  Specifically, I read through a 2007 study on the state of search funds.  It covered the stages search funds go through and typical characteristics at each stage - profiles of principals, typical fund and acquisition sizes, range of returns for the funds, etc. Some highlights from the four stages of search funds are as follows: Raising the search fund (3 months):  Write a formal proposal and business plan for the fund.  Sections of the plan include - executive summary, overview of process, list of screening criteria, detailed timeline and milestones, explanation of financing sought, outline of exit alternatives, backgrounds of principals and allocation of future responsibilities in the target.  Raising a fund typically takes around 3 months. Identifying and making the acquisition (20 months): The three steps in identifying an acquisition are 1) generating deal flow, scre

The WSJ put out a three part video series on the source and events of the financial crisis.  It's about 25 minutes in length.  Good follow-ups to my previous posts - The Weekend that Wall Street Died and The End of Wall Street and Misaligned Incentives . Chapter 1: What Happened Chapter 2: Why it Happened Chapter 3: What Happens Next

I saw this post titled "How to Spot Subprime VC" from Georges van Hoegaerden on PEHUB and thought it was interesting.  Here are the highlights: Seems more interested in how it is built rather than what the disruptive business proposition is. Seems more worried about cost of development than cost of greenfield customer acquisition. Talks about valuations before you’ve explained the value of becoming the market leader. Seems more occupied with categorizing the investment than understanding its unique business value. Talks about capital efficiency without probing market inefficiency. Doesn’t question market entry risk, but focuses on cost . Doesn’t ask about the runway to profitability, but the initial round to get in. Asks you which other investors you’ve spoken to. Asks you to talk with his associates first. Asks you more about your education than your work experience.

I've heard the term cloud computing thrown around a lot and never quite knew what it was.  I quickly Google'd it.  I may be simplifying things, but it basically sounds like software (or hardware)-as-a-service.  Amazon's Web Services ( AWS ) is likely the leader in this category.  It seems like a natural evolution in computing - just a further packaging and abstraction of computing power.  I think what's important about it, though, is that from a strategic perspective, IT will become less and less of a differentiator among companies.  In the long-run, if everyone can quickly integrate and bring applications from a salesforce.com or AWS online in their business quickly, IT in and of itself will become more commoditized as an input in the value chain.  Or maybe it will kick-off another round of IT innovation that could serve as a differentiator.