VC Confidential

So You Want to Be a VC

"...it's more about people skills and the ability to assess whether there's a market for something."
  -- Dick Kramlich, co-founder NEA

I was cleaning out my files the other day and came across a 2005 NYT article by Gary Rivlin on the venture industry titled "So You Want to Be a Venture Capitalist". It is well worth a read for any of you inspiring investors. Couple of takeaways from it:
-- "Below the surface, there's a huge amount of turnover."  I did not realize the degree of turnover at some firms, including 70% partner turnover at NEA (1997-2005) and 70+% partner turnover at Kleiner (1997-2005). Some is due to poor performance and other is due to strong performance and retirement.
-- Up or out. A large share of a fund's profits are often driven by 25-30% of the partners. This is a true meritocracy and the results are clear to quantify. Over half the partners will fail in the bigger picture.
-- Entrepreneurs have a hard transition to the investing side despite the large trend towards this.
-- Success is driven by being a good judge of people and for understanding when markets are getting ready for inflection. "you're a natural athlete or you're not"
-- It is a mentoring business with a long gestation period..."probably 6-8 years and you should be prepared for losses of about $20 million (per person)".

One last point that the article doesn't mention is that the entry period can be grueling. It is not as rosy as most people on the outside assume. 60% of a good fund's deal will lose money or breakeven. The loses come early and winners take time to compound. So, sometimes you have years of carnage while being out in the wilderness hoping for the hits to come through.

"By all rights Stewart Alsop should have been a terrific venture capitalist. So why did Mr. Alsop, long considered a cyber-prophet among technology leaders, wash out in a profession in which he seemed predestined to succeed?

In recent months, as venture capital firms have announced the formation of new investment funds, a hot topic among the Silicon Valley cognoscenti has been the exodus of "tourist V.C.'s," as people from nonfinancial backgrounds are known here. Some have left the field because they did not pick enough winners; others have gone on to pursue different projects. Whatever the reason, there are hundreds fewer venture capitalists around today than just two years ago...." (click here for rest)

It's for the Dogs

The nice thing about doing angel investing on the side is that I can invest in fun, if not wacky, ideas from time to time. I put a little money into a friend's (John Funk, wonderful serial entrepreneur) IP incubator called Evergreen IP. His partners come out of the CPG world and they have licensed an array of innovations/patents and are now bringing several to market. One of these is the Dog Pause Bowl (www.dogpausebowl.com) which is targeted at obese dogs or dogs that eat too quickly. Look out Weight Watchers... He describes this better than I in his post "We Have Liftoff!".

Short & Simple the Research Says

There seem to be two styles of bloggers. Those that drop shorter snippets into posts but do so once or twice a day and those that like to write longer posts but do so once a week/month. While I have always assumed that the former better fits people's consumption behavior, there have been a variety of studies that confirm this. In "Not Quite the Average: An Empirical Study of Web Use", the researchers concluded that the average web page has around 600 words and the average reader only spends time on around 100 of them (about 20-30%). So, keep the posts to under 100 words...(note to self!). We'll see if I can do it...whoops, I just hit 119 words.

Video Tsunami Coming

I was looking at the global statistics page at the back of the most recent Economist Magazine and noticed that it had a chart laying out the % of households in each country that use IPTV (internet) as their primary means of getting their television services (vs. cable, satellite, etc). Below are the top 7 countries on the list:

Hong Kong 31%
Iceland 27%
Estonia 10%
France 10%
Cyprus 10%
Sweden 8%
S Korea 7%
(US <1%)

Much like cellular has leapfrogged land lines as the primary telecom pipe in developing countries, many countries are going with IPTV as a prominent source of distributing content. Homes can get both internet access and video/TV delivered through one pipe. We have seen this phenomenon up close through our Growth Fund's investment in UUSee, the leading IPTV P2P provider in China with over 30 million users.

In addition to this IPTV trend, we are also seeing videos come at us from the hosted video sites like YouTube, Metacafe and specialized channels like Celebtv. My kids are watching entire episodes of their favorite shows on the show's website. While people complain about having too diverse a choice through the hundreds of cable/satellite channels, imagine the complexity when thousands of IPTV channels emerge. With the low cost of production and low cost of distribution, people will be able to set up extremely niched "channels".

This will create quite the challenge for advertisers, who are still trying to figure out how to use banner ads. Instead of a simple decision of what image to put in a banner that is broadcast out, they will have to figure out if they want to use pre/post roll advertising, sponsored advertising, contextual text links beside videos, overlays on top of videos or jump into the creative game and produce content itself. The permutations of types of content with types of channels is becoming mind boggling. However, for creative lead gen players, this will present a terrific opportunity to capitalize on the complexity and the glut of ad inventory arising.

Of course, this doesn't begin to get into the challenges of integrating cross-media promotions (text/SMS, website, etc) or the rise of mobile advertising. It's going to be a great couple of years here as the IPTV revolution swings through!

The VC World Inflates as Well

Following up on my post on the buyout world, the VC world has also experienced valuation inflation over the past year. As more and more liquidity comes into the sector (mostly acquisitions), VC's are beginning to feel bullet proof again. We are starting to see VC's promising entrepreneurs $80m and $90m pre-$ valuations if they can get some proof points in a given area (we'll see if they come through). Since venture does not use much debt, the debt crisis has not hit home yet (it will should the economy go into recession and ad budgets and cap-x budgets get slashed). If you want to get a sense of what is driving the increasing craziness, check out some members of the asylum. Slide at $550m and Rockyou at $325m??? While we have several on here (and fingers crossed they hit Henry's values!), I scratch my head a bit. While not the extremes of 1999, there are a lot of $'s for eyeballs (or "attention" as it is now called these days). Here is Blodgett's estimates of property values:

THE SAI 25: THE WORLD'S MOST VALUABLE STARTUPS

Rank
Company    Valuation
1.    Facebook $9 billion
2.    Wikipedia $7 billion
3.    Craigslist $5 billion
4.    Betfair $5 billion
5.    Mozilla Corp $4 billion
6.    Yandex $3 billion
7.    Webkinz $2 billion
8.    LinkedIn    $1.3 billion
9.    Habbo    $1.25 billion
10.    Oanda    $1.2 billion
11.    Linden Lab $1.1 billion
12.    Kayak $1 billion
13.    QlikTech $850 million
14.    Ning $560 million
15.    Slide $550 million
16.    TheLadders $500 million
17.    Stardoll $450 million
18.    Ozon $450 million
19.    Thumbplay $400 million
20.    Glam Media $400 million
21.    Rock You $325 million
22.    Tudou $300 million
23.    Efficient Frontier $275 million
24.    Zazzle    $250 million
25.    Spot Runner $250 million

Contenders
Federated Media    $245 million
Yelp    $225 million
Meebo    $220 million
Indeed    $200 million
Zillow    $200 million
LoveFilm    $200 million
Metacafe    $200 million
Adconion    $200 million
4INFO    $175 million
Photobox    $150 million
Vibrant Media    $150 million
Gawker Media    $150 million
Mahalo    $150 million
56.com $150 million
Youku    $125 million
Digg    $125 million
Etsy    $115 million
LinkExperts    $100 million
Powerset    $80 million
Trialpay    $80 million
Huffington Post    $75 million
Associated Content    $65 million
Live Gamer    $60 million
Twitter    $75 million
Mint    $50 million
Prosper    <$50 million