google ventures is up and running

Announcement last night on the Official Google Blog:

Today we’re excited to announce Google Ventures, Google’s new venture capital fund.

At its core, Google Ventures is charged with finding and helping to develop exceptional start-ups. We’ll be focusing on early stage investments across a diverse range of industries, including consumer Internet, software, clean-tech, bio-tech, health care and, no doubt, other areas we haven’t thought of yet.

Perhaps not a surprise, as there were reports (like this one in the WSJ) in mid-2008 that this was in the works. So far, it seems reactions are mixed – not necessarily to Google Ventures per se but to corporate VCs in general. The WSJ had this to say:

Their track records have been mixed. Corporate venture-capital arms have been hampered by challenges that traditional venture-capital businesses don’t face. Venture capitalists invest in private start-ups at an early stage, usually in hopes of a big payout if the company is sold or if its stock goes public.

Many start-ups fear that taking corporate money limits their options and comes with strings that could turn away other potential investors — such as a right to buy the company at a later date. Some funds with less competitive compensation have struggled to retain managers, and corporate venture funds often don’t allow senior employees to invest personal money in their funds, while other venture funds typically do.

This is also echoed by some traditional VCs, including Fred Wilson of Union Square Ventures (who by the way writes a great blog – highly recommended) who concluded in his post:

But I do think that venture investing is not the best use of a corporation’s capital and that it is inevitable that it will produce sub-par returns at best and significant losses at worst.

He cites the same reasons above in the WSJ article and also suggests that corporate VCs will have difficulty retaining talented fund management.

Corporate VCs, like strategic purchasers in M&A deals, may have longer term strategic objectives that, over a longer term, will result in benefits to them. In this regard, corporate VCs can be likened to some extent to strategic purchasers in an M&A context (while traditional VCs can be liked more to financial purchasers). In this regard, one of the advantages of corporate VCs to investees is that they will often have a longer term view of their investment than their traditional VC counterparts – they won’t be under the same constraints to book gains and make their LPs happy or to meet the horizon of their fund. In this case, the very thing that Fred suggests is a weakness of corporate VCs could well be an advantage to an investee company, depending of course on the objectives of the investee.

For the same reason, I’m not sure if it would be valid to say that corporate VCs are or are likelier to (as compared with traditional VCs) fail, because if the focus is on longer term objectives, realized profits as reported on the corporate VC’s income statement might not accurately reflect the actual benefit. At the simplest level, it could allow a company like Google, which has traditionally simply acquired companies that interest it outright, to hedge it’s bets. If the company is wildly successful, and Google wants to buy it outright, it will have saved a few dollars by having put in money at an earlier stage (and presumably much lower valuations). Depending on how things are structured and accounted for, I’m not sure whether the savings in that situation would necessarily be reflected in the measured earnings of the corporate VC. But apart from actual savings, VC investing will also allow Google to gain an insider’s perspective on its investees at an earlier stage and to better assess how things are coming along, and to help them along. This itself may be worthwhile relative to the costs associated with researching potential acquisition targets at a later stage.

I’m not suggesting that in all cases Google will be using Google Ventures as a farm team for potential acquisitions. But even if it isn’t, it may well develop better and deeper relationships with entrepreneurial companies that it could later partner with or enter into some sort of strategic relationship that will enable it to realize financial benefits going beyond those measured in the VC arm’s financials. And it will be better positioned to do so as an investor in the company.

Not to say that life with corporate VCs is all wine and roses. There are often thorny issues to deal with, particularly when it comes to commercial dealings between an investee and an investor, as Fred notes, and things like purchase options (which I’ve seen proposed a few times and for which the answer is a relatively consistent “no” from investees).

All that being said, an article in Wired suggests Google Ventures will act more like a traditional VC:

The fund, to be called Google Ventures, will be wholly owned by Google, but will operate as a separate entity and will seek investment opportunities to maximize returns rather than looking for investments that strictly fit with Google’s strategic vision.

Several high-tech companies have in-house venture capital arms, including Intel and Motorola, But Maris said that Google Ventures will have more in common with traditional venture capital firms.

“We’re making financial return our first lens,” said Maris. But he noted that a part of the appeal of Google Ventures for start-up firms is the relationship to Google and its 20,000 employees.

Interesting. I guess we’ll see. In the meantime, if you’re looking for financing, go to the Google Ventures site.

vc monster

Saw a very interesting interview with a gentleman by the name of Rob Monster, who heads up Monster Venture Partners in the US. Mr. Monster is a well-heeled entrepreneur who has had considerable success as such. In the story, he outlines his particular investment strategy and the reasons for it:

In an interview this week, Monster said he plans to invest in about three to five companies each year in the healthcare services and online marketing sectors, with investments ranging in size from $250,000 to $1.2 million. That’s a hefty amount for an individual investor, but Monster – who has been investing since he was 12 years old and started working at the American Stock Exchange at 17 – is experimenting with a new approach he dubs “angel (investing) on steroids.”

“There is a middle ground between angel investing and venture investing and that sweet spot is woefully underserved,” said Monster.

As well as his perception of the existing VC market:

MONSTER: “Venture has earned, deservedly, a bad rap for being not forward looking in its approach to creating value in partnership with the entrepreneur. (Venture capitalists) have become short sighted … and tend to design financing structures in a way that biases toward preferences that are not aligned with the objectives of the common shareholders. And they can optimize certain outcomes in favor of the preferred shareholder, none of which, per se, is wrong. But from the standpoint of the entrepreneur they have figured it out…. Entrepreneurs are kind of backlashing a little bit… There is now an accountability for VCs to behave and to follow through on their commitments of being a partner of building a company. But a lot of times VCs get involved and say they have all of these strategic relationships and will make all of these introductions and then it doesn’t happen. This is the universal rant of most entrepreneurs that have interacted with VCs.”

MVP plans to invest through simple common shares, rather than the typical preferred shares with minimum returns and liquidation preferences, anti-dilution rights and so on. His reasons:

“Whatever happened to investing and being right there in the trenches with the fellow company builder, as opposed to baking in a preference whereby I can win and you can lose? My personal view is that the guys who back a company have a responsibility to help the company be successful.”

I recall giving a speech (an admittedly poor one to be perfectly honest) a couple of years ago about how the use of common shares seemed to be increasing as a financing vehicle for not only angel type rounds, but also early stage VC rounds. It didn’t quite ring with some of the VCs that were also presenting, so its interesting to now see a fund specifically and deliberately adopting common shares as its primary investment vehicle.

I’ve had the pleasure of some (very limited) interaction with MVP – quick, straightforward and candid. However, he’s not without his detractors (see for example some of the rather stinging comments in the above article). It will be very interesting to see how things work out.

Startup Financing Article

Interesting  article in Venture Law Lines on what usually takes too much time in startup financing deals and what is usually not given adequate attention. I’d tend to agree, particularly on one:

1. Registration rights (Some VCs still require these in early stage companies, although mercifully this is a declining trend)

I can’t recall a single instance of anyone actually invoking a demand right (or for that matter any other right) under a registration rights agreement. That being said, its primarily a US oriented document so there may be some in the US I’m not aware of (if you know of one please do let me know in the comments).

That being said, if too much time is spent on reg rights, the question still remains as to whether it should be cut out altogether, or, given the very low probability it will be exercised, whether to avoid a long drawn out debate and sign it and move on. Needless to say, these two perspectives are usually the ones that result in the discussion taking longer than it should…


Shares and How Not to Give Them Away

Interesting post by Rick Segal on how a financing deal died mid-stream due to paperwork. The nub:

Last week I watched, live, a promising young start up die because of pesky paperwork and a VC that felt the need to go the distance when it came to covering thy butt. It was ugly and it will be nothing shy of a miracle if the lawsuits don’t come flying.

A VC offers up a term sheet, does due diligence, and decides, yep, we’re in, let’s go to legals.  The terms are negotiated, everybody appears happy, capital is ready to transfer.

VC lawyers offer up the shareholders agreement as one of the documents that needs to get signed off by all the shareholders.  No problem. Well, almost no problem.

All told, 42 shareholders which owned 22% of the company.  42 people spread out over three countries.  42 signatures required.  And, as fate would have it 21 missing shareholders.  Moved, not returning phone calls, no emails, etc.

The VC refused to close without the signatures and, to make a long (painful) story short, the company died for lack of funding.

Ouch. Rick suggests setting up a voting trust agreement as one way to avoid running into this issue. That’s definitely a good idea. Another would be to avoid, as much as possible, handing out shares to folks. Many entrepreneurs seem to think of their stock as an easy or cheap way to pay people. That’s only true if your company turns out to be worthless. If it doesn’t, then you can rest assured it won’t be as cheap as you thought.

Think of this way – every time you give someone shares, you are also giving them a little stake in your company and some ability to decide what your company does. So think of shares like bits of your body – before you give away your pinkie, or foot, think about what you are getting in return, and whether its really worth it. And keep very close track of it – before you know it, you might be missing a leg.

And I know this sounds a bit self-serving (at least for my profession) but please, please, please spend just a few minutes talking to a lawyer before you  ever give away shares, options to buy shares, or even promise anyone that you’ll give them shares. It may save you a world of trouble later on, as Rick’s story quite clearly illustrates….


Top Ten Twenty Lies

Yes, this is a bit old, but quite good. I was wandering around and found these two articles on Guy Kawasaki’s website, about The Top Ten Lies of Venture Capitalists and The Top Ten Lies of Entrepreneurs. Great, great reading. One small snippet from each. On the VC side:

“This is a vanilla term sheet.” There is no such thing as a vanilla term sheet. Do you think corporate finance attorneys are paid $400/hour to push out vanilla term sheets? If entrepreneurs insist on using a flavor of ice cream to describe term sheets, the only flavor that works is Rocky Road. This is why they need their own $400/hour attorney too–as opposed to Uncle Joe the divorce lawyer.

and one on the Entrepreneur side:

“Oracle is too big/dumb/slow to be a threat.” Larry Ellison has his own jet. He can keep the San Jose Airport open for his late night landings. His boat is so big that it can barely get under the Golden Gate Bridge. Meanwhile, entrepreneurs are flying on Southwest out of Oakland and stealing the free peanuts. There’s a reason why Larry is where he is, and entrepreneurs are where they are, and it’s not that he’s big, dumb, and slow. Competing with Oracle, Microsoft, and other large companies is a very difficult task. Entrepreneurs who utter this lie look at best naive. You think it’s bravado, but venture capitalists think it’s stupidity.

Great stuff.

Of Search Engines and Competition

Interesting post on the Wellington Financial blog. In short, sounds like they think the success of a new vc financed search engine hakia is unlikely to be around very long. An excerpt.

But it really isn’t clear why the rest of us will rip out the Google toolbars or Yahoo Finance pages and convert to another aggregator. Well, maybe we could stand t dump Yahoo Finance.

Youtube, flickr and the like were serving a need. There’s no obvious need for a better search engine. And if there is, Google has proven that they have a few billion to invest on improvements and the currency to acquire along the way.

imho the better question would be why not? changing a search engine is about as hard as changing your undies – either type it in or change your homepage. why even bother with a toolbar? no idea about hakia but i do remember yahoo, altavista, hotbot and a couple of other engines that were at one time or another at the top of the heap.

relatively speaking, in terms of switching costs from the user perspective a search engine isn’t close to most other things (e.g. operating system, office applications, etc.).

and sure, google has lots of coin. but at one point it didn’t. and there wasn’t exactly an absence of search engines when they popped up…

will it be a success? no idea. could it? why not? I’d certainly use it if it’s better than google.

BTW, in case someone from WF is reading this here, tried leaving a comment, couldn’t as your captcha doesn’t seem to be working and PS you might want to try hashcash instead.

Update: and its not like Google hasn’t had its fair share of troubles lately.

Giles Bowkett: A Tale of Two Startups

Came across this article through reddit from Giles Bowkett, an entrepreneur type in the US. Interesting in the conclusion on VCs:

The irony is, the biggest disruptive innovation that ever came from the Internet could in fact be open source software, and the old industry it destroys will probably be venture capital.Think about it. Free software and cheap infrastructure basically eliminates the whole raison d’etre for venture capitalists. Companies are cheap to start. All the stuff you used to need millions for is now free. That means venture capitalists just don’t matter any more. It isn’t about being lucky enough to get $5 million in funding; it’s about starting something with the cash in your pocket. If you make something and it’s good enough, the guys with $5 million in funding will come to you, because those guys are basically just money in search of intelligence, and it’s a lot better to be intelligence in search of money. If you’re intelligence in search of money, you’ll choose the best way to get money. The best way to get money isn’t to find some VCs to beg, borrow, or steal from; the best way to get money is to make something people will pay for. So if you’re intelligence in search of money, you’ll make stuff people want to pay for, and you won’t even bother with the VCs, because they need you more than you need them.

My own, personal take? Fat chance. Yes yes, free software is nice and so is cheap bandwidth. But the world runs on money. People cost money. Development costs money. Money money money money. So fine, you’re a super ultratalented uber-geek that shows leadership skills, blah blah blah. Still need to create the thing that people will want to pay for. And unless you’re going to be coding everything yourself, you’ll need to hire people to help you. And you’ll need to pay the accountants to pay the bills. And the lawyers to draft the agreements. And the admin guys to, uh, do the admin. Its not as if a magic sprinkle of open source will all of a sudden obviate the need to invest to build a product – if that were the case, then absence of barriers to entry would quickly reduce what was otherwise a very profitable niche into one that looks less and less desirable – both to entrepreneurs as well as investors, be they VCs or others. And even in the case of two folks setting up shop – Company A who chooses the cheap route, builds a really neat widget (but of course doesn’t have the budget for marketing, promo, etc.) vs. Company B who gets a $10 million first round, uses to ramp up and gets to market in 1/2 the time, establishes critical mass, and basically kills off Company A. Hmmm.
I also don’t agree with the “they need you more than you need them” thing – VC money, as with most things in business, are driven by the market – more VCs chasing fewer opportunities just means the cost of their money will come down, not that they will disappear.

So, long story short, I doubt tech VCs will go away any time soon. Besides, they’re fun guys.

about

This site was created and is maintained by me, David Ma. For the technical details of the site, please see the colophon. For the details on me, peek at my LinkedIn profile. The short story is that I’m a corporate/commercial lawyer in Toronto, Ontario (Canada), specializing in technology-related transactions and companies.

Why this site? Primarily as an outlet to make personal and informal observations on developments in the technology industry as I see them. And to let me poke around with a little bit of technology.

Views expressed here are solely my own. Don’t rely on anything on this site as if it were legal advice (or for that matter “legal information”), because it’s not. Questions? Feedback? Feel free to e-mail me or contact me through LinkedIn, or if you like, by carrier pigeon.

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Interested in Pitching to a Bunch of Real VCs?

Are you an entrepreneur? Do you have a really, really neat business? Are you at the stage where you’re close to looking, or actively looking for venture capital financing? Would you like the chance to polish your pitch? Would you like to get the opportunity to get feedback on it from six of the leading venture capital firms in Canada? Would you also like to get help with your pitch and selling your company to VCs from some of the best and brightest MBA students in Canada (and some from the US as well)?

What if I were to tell you that you could get all of this – and more – for free, other than perhaps a full day of your time, and perhaps some time to prepare? And yes, I know I sound like I’m selling diet pills on late night TV. But I’m not.

What I’m describing is a competition called the Venture Capital Investment Competition. It was started in the US a few years ago by a brilliant prof by the name of Patrick Vernon. Designed primarily as an educational activity to help MBA students learn about VCs and what they do, it also has had some great side-effects. Following is an excerpt from the VCIC site:

At the core of the event is a creative turn of the tables. Unlike business plan competitions in which students pitch their own ideas to investors, at VCIC the students are the investors, and real entrepreneurs pitch to them. It is a very powerful learning experience for both parties. Add to the mix a dozen VC judges, and you have what the VCIC website describes as a “win-win-win.” Students learn (and win cash), entrepreneurs connect with investors and VCs get an early peek at some viable deals. How viable? Last year, one-third of the entrepreneurs (11 out of 33) pitching at VCIC went on to raise $30M in venture capital VCIC. Of the 200 entrepreneurs who have pitched at VCIC regional events since 1998, 40 have gone on to raise $300M. That is a hit rate of 20%, remarkable considering that most of these events occurred post-bubble, including a dismal one-out-of-30 in 2002. With an overall rate of 20%, and the recent 33% mark, VCIC is headed back towards its pre-bubble hit rate of 50% in ’98 and ’99.

The organizers of VCIC are quick to point out that the mission of the program is educational, not commercial, and none of the deals are known to have been initiated at a VCIC event. “We’re not in the business of playing dealmaker,” comments VCIC director Patrick Vernon from UNC’s Kenan-Flagler Business School. “We are focused on teaching students about financing new ventures, and the most effective way to do that is to expose them to the best deals and investors. Lucky for us, the best entrepreneurs and VCs like to meet each other, too.”

And the students also like meeting the VCs. Many of the competitors aspire to become venture capitalists, a dream that is difficult if not impossible to fulfill. Nonetheless, quite a few have achieved it. Six VCIC alumni have gone on to participate in the prestigious Kauffman Fellows Program, working in VC firms from Silicon Valley to Munich, Germany. A dozen VCIC alumni working in VC, headed by Don Herzog from the 2000 Carnegie Mellon championship team, organized a new alumni prize money fund in 2006, then came to the finals to deliver the 2nd place prize money check. “I have been back to judge the finals every year since I competed as a student,” commented Herzog, who currently works at Bluegrass Growth Fund. VCIC has even had individuals play all three roles in different years: competed one year as a student, got a job at a VC firm and returned as a judge, then went on to start a new company and came back to pitch. (For the record, it is most fun being a judge.)

What began as an experiment in 1998 at UNC in response to the bubble of business plan competitions popping up at most business schools, VCIC has grown into a virtual venture job fair and marketplace. In 2007 the program will include ten regional and 30 single-school events in North America, Europe and Asia. World-wide, 50 top business schools will participate. The program culminates every April in Chapel Hill, NC, with the International Finals, where the winning team takes home $10,000 in prize money. This year’s finals will include a special 10th anniversary celebration that will be attended by many former students, VC judges and entrepreneurs.

I am very proud to say that McCarthy Tétrault, the firm I work at, was one of the primary sponsors of the first VCIC competition in Canada last year. Held in Toronto at the University of Toronto’s Joseph L. Rotman School of Management, it was considered a great success. I was fortunate enough to have stumbled onto an article describing VCIC and got in touch with Pat Vernon to help facilitate the inaugural event in Canada (though it was really one of my partners – Ian Palm – whose support and ties with the VC community were instrumental in making the event a success).

We expect this year to be another rousing success, and have put most of the pieces into place, including the participating schools, lining up VC judges, and organizing the event. However, what remains is finding three real-life entrepreneurs who are willing to participate. The event is scheduled to take place on February 16, 2006. Fit the profile? Interested? If so, feel free to get in touch with me at dma[at]mccarthy.ca. Unfortunately, due to time constraints the event can only accommodate three entrepreneurs so no guarantees that you will be selected to participate, but hey, doesn’t hurt to check…

A Public Private Stock Market

This is pretty neat. The Genesis Exchange calls itself a “private equity exchange”. Sort of like a platform where private companies can issue securities, and investors can buy them, presumably under applicable registration and prospectus exemption rules. That being said, it seems to be less a trading platform than it is an introduction and screening system of sorts. Companies who want to raise funds complete a profile through which their “Genesis Score” is calculated. Angel investors then set a minimum score and only receive info about companies with scores above that.

Not necessarily a new concept (other than perhaps the Genesis Score) but of course could be useful nonetheless. That being said, I’m not necessarily sure how well this score thing would work – I mean, it certainly could, but I have my doubts about whether any model can simply boil a business down to number that is used to screen – if that were the case, then you’d likely see a lot of VCs exiting the industry fairly quickly.

Certainly worthwhile investigating, though of course anyone looking for private equity dollars should also of course look into things like the Toronto Venture Group (as well as the Toronto Angel Group) which try to do the same thing in meatspace and without a one number score…