Posts from February 2009

Is There Such A Thing As A Blue Chip Stock Anymore?

On friday, we saw Citigroup do a recap and dilute the common stockholders significantly and we saw GE cut their dividend by 2/3 to conserve cash. Both stocks are trading at below $10/share and are at fifteen year lows. There's a significant chance that the common stockholders on Citigroup will end up with nothing if the bank is nationalized. And GE is facing a huge debt maturity next year that could cause a similar outcome for its shareholders. And what about GM?  That's another potential bankruptcy looming. The NY Times quoted an automotive consultant today about GM:

“G.M. can’t raise more capital in the private markets, it can’t
influence demand and it can’t adjust its cost structure enough in the
short-term,” Mr. Casesa said. “There is no economic solution, only a
political one.”

What do Citigroup, GE, and GM have in common? They are "blue chip" stocks and members of the elite Dow Jones Industrial Average. There are 30 stocks in DJIA and they are the biggest and, in theory, the strongest companies in America.

But the past six months have taught us that no company is bulletproof and just because a stock is a "blue chip" doesn't mean it is safe.

In fact, we are learning the opposite. Here's the chart of the Dow since Nov 1, 2008:
Dow

The Dow is down 25% since Nov 1, 2008 and is ~7% below the November lows.

Here's the chart of the NASDAQ since Nov 1, 2008:
Nasdaq

The NASDAQ is down 20% since Nov 1st and is 7% above the November lows.

Six months doesn't mean all that much, but I think its instructive that the "strongest" companies in America have underperformed their smaller brethren and I think this trend will continue as we work our way out of the mess we are in.

I've said this before and I'll say it again. This economic crisis is not limited to banks and housing. We are witnessing a "sea change" as my father in law called it today. Businesses that were built in the 19th and the first half of the 20th century are finding their underlying fundamentals challenged by a new economy that is global and driven by information and technology. Businesses that were built at the tail end of the 20th century and even in the 21st century are faring much better.

So be wary of "blue chips". They aren't such a sure thing anymore.

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One Thing You Don’t Need To Be An Entrepreneur: A College Degree

We were in a board meeting today and the founder/CEO made a comment about a deal he's working on and I said "well you learned that well in school." He smiled and said, "we didn't go to school" (meaning college). I didn't actually know that, but it did not surprise me. I have learned that where someone went to college (or even if they didn't go to college) has absolutely no correlation to whether they will be a good entrepreneur or not. I don't pay attention to that part of a resume. I focus on what they've done in the work world, what they've shown they can do, and most importantly what they've done to date on that specific startup.

We chuckled about that exchange and the other VC on the board said "I think twenty percent or more of our portfolio companies are led by entrepreneurs who didn't graduate from college."

That got me thinking about our portfolio. This is a guess because as I said, I don't really know for sure, but I think about seven or eight of the twenty-one portfolio companies listed on our website have founders who did not graduate from college. It's not half, but it's a large percentage.

There are some reasons for this. Several of the founders of our portfolio companies grew up in other parts of the world where college attendance is less common. Some of the founders didn't have the patience to sit through four years of education they didn't feel was relevant to them. And some of the founders were too busy starting companies to finish college.

Entrepreneurs don't need degrees like lawyers and doctors do. They are credentialed by virtue of their track record. The first startup is hard but if they make that one work, they end up with something much better than a college degree. They have a notch in their belt. They've got a track record of success. Even if the first one is a failure, I'd say that they've got something more than a degree. They've shown they can start something from nothing, build a team, a product, and maybe even a business.

We've been spending a lot of time lately thinking about, talking about, learning about, and looking at the whole education sector. Education is critically important. But you don't have to go to school to be educated and if being an entrepreneur is your goal in life, that's even more true.

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Mongo DB

Our portfolio company 10gen started out last year building an entire open source cloud computing stack and based on feedback from the market they recently opted to focus entirely on the data store component, called MongoDB.

My partner Albert, who sits on 10gen's board, has a blog post up today talking about MongoDB and who should be trying it out and why:

MongoDB is a much better fit for most web development than a
traditional relational database.  Instead of requiring an ORM layer,
MongoDB simply stores objects as documents in the database.  This is
very fast since it eliminates a lot of overhead and therefore scales
much better than a relational DB+ORM.  Yet it retains all the
flexibility for super agile development.  Need a new field in your
objects?  Just start saving new objects with that field.  Need a new
collection of objects?  Just start saving to it!

If you are a web developer and are curious what MondoDB can do for you, you can download it here

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Ten Thoughts On The President’s Speech Last Night

1) "The USA will emerge stronger than before" That's a tall order. I'd settle for we will recover. Given the demographics of the changing world we live in (read Zakaria's Post-American World), I wonder if that's a promise the President should be making.

2) I read the speech in its entirety twice and did not find one mention of immigration. The President says we owe our prosperity to our ingenuity and tenacity. I think that's true but a lot of that ingenuity and tenacity came from first and second generation immigrants. If we are not prepared to open up our borders more broadly to the best and brightest and toughest in this world, all the rest is just words

3) His recovery plan has three initiatives, a revised TARP, HASP, and stimulus. That's it. I did not get the sense that there is more after that. I don't know if that's good or bad, but that's the hand he's playing.

4) Hardest working people on earth? C'mon Barack. Don't bullshit us. Go back and read number two.

5) He's also got three domestic priorities; energy, health care, and education. He's right that our economy is highly impacted by them. I'm limpressed that he's picked some stuff to focus on and I think these are three great areas to focus on for long term sustainability.

6) 95pcnt of the jobs created with stimulus will be private sector jobs. That's a great factoid. Let's put a big pie chart on the front page of recovery.gov and chart that in real time please.

7) A new accountability for money spent saving banks. Barack said "I intend to hold these banks fully accountable for the assitance they receive". Good luck with that. Money is fungible. It doesn't have RFID tags on it. Trust me on this one. I know a bit about handing over money to companies. There's only one way to know it will be spent well and that is smart, honest, and capable management. An army of accountants is going to get unleashed on the banking sector and god help them and us.

8) "its not about helping banks – its about helping people" I'm with the president on this. I also appreciate his statement that his job is to solve the problem. He's got that right. I'll be measuring him on how he does on that measure. Its a hard problem made harder by the people whose house he was in last night. I'm rooting for him. We should all be rooting for him.

9) Energy – the best part of his speech was the bit about energy. He gets it. But the auto sector has the potential to be the "vietnam" of his energy plan. Act swiftly and courageously there Mr President or it could be a noose around your neck. Just look at GM. In two short months they are back on your doorstep with their hands out. When a portfolio company acts like that in our business, they are dead on arrival.

10) Education – I think the President missed an opportunity last night to call on the private sector to invest in education. There are literally thousands of amazing entrepreneurs working in this industry and I think they'll collectively do more to reform and reinvent education than anything that comes out of washington.

11) Fiscal discipline. Its a bit surreal to be talking about balancing the budget in light of stimulus, HASP, and TARP. The only way its going to happen is huge cuts in defense spending and a wholesale re-evaluation of our domestic spending priorities. Watching Pelosi and Biden behind the President was distracting and a reminder that as well intenioned as Obama is, he's got an impossible job.

That's all I've got. Please let me know what you thought of it in the comments.

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A Time For Assessing “Strategic Opportunities”

This morning I am going to talk at Pillsbury's invitation only session for their entrepreneur clients. Bo Yaghmaie has asked several VCs to talk about situations in their portfolios where they've had to engage deeply with a company in reaction to the changing environment we are now in.

It's a good topic for sure. While I am uncomfortable talking specifically about any of our companies and the goings on inside the companies (either here or at Bo's event this morning), I will say that I think its time for all companies to assess their "strategic opportunities".

"Strategic opportunities" is often a code world for "sale process" and I think that is certainly one thing that all companies should think about. But I am talking about a more comprehensive strategic process.

We've been asking many of our companies to do a deep strategic planning process. The most developed of them already do this as a matter of practice. But many of the younger companies have been largely focused on product and engineering issues and have not stepped back and thought deeply about the big picture.

In a difficult market environment, it's time well spent. Money is tight and who knows if there will be another round of venture funding. So it's critical to step away from the product roadmap and think a bit about "what you want to be when you grow up" and set some clear goals for the business in addition to the product.

That process should also include a clear assessment of the resources required to achieve the goals and the time frame involved. Then end result should be a business plan that includes both a strategic and financial plan. The financial plan should be at least for the next 18 months and ideally a bit further than that if it's possible to see out that far.

Once that is completed, all the stakeholders can have a conversation about the economics of the plan, the risks involved, and the ideal way to capitalize the plan.

That can sometimes lead back to the "strategic opportunities" aka sale process. When founders, managers, and investors stare at the cold reality of the business plan, they sometimes conclude that the plan is better financed by a strategic buyer than the venture capital or other capital markets.

But more often, the plan is a catalyzing event for a round of financing. And in this market, that is often provided by the existing investors, who after going through the strategic process conclude that there is value in the opportunity and they are willing to see it through.

The worst place you can be in this market is out of money and without a plan. The liklihood is high that you'll be out of money at some point. Just don't be there without a plan.

Help Boxee Build Its Pitch To Content Owners

I blogged last week my thoughts on why Hulu and other content owners should want to work with, not against, our portfolio company Boxee.

Boxee's management team has been working hard on its pitch to content owners and took the extra step this weekend of creating a wiki so that the entire Boxee community of users and developers can help them with the pitch.

I spent some time on the wiki yesterday adding my thoughts and editing others' thoughts and am a big fan of this idea of engaging the community in the pitch to content owners.

If you have thoughts to share, please jump into the wiki and add them.

A Stimulus Plan For Venture Capital? No Thanks.

Tom Friedman, who I admire in many ways, has an op-ed piece in today's NY Times where he suggests that the US government take the bailout money they are thinking of giving to the auto industry and instead give it to the top venture capital firms.

You want to spend $20 billion of taxpayer money creating jobs? Fine.
Call up the top 20 venture capital firms in America, which are short of
cash today because their partners — university endowments and pension
funds — are tapped out, and make them this offer: The U.S. Treasury
will give you each up to $1 billion to fund the best venture capital
ideas that have come your way. If they go bust, we all lose. If any of
them turns out to be the next Microsoft or Intel, taxpayers will give
you 20 percent of the investors’ upside and keep 80 percent for
themselves.

I understand the point Tom is making – that we ought to be investing in the future instead of the past. And for that, I applaud him.

But the venture capital business, thankfully, does not need any more capital. It's got too much money in it, not too little. Just ask the limited partners who have been overfunding the venture capital business for the past 15-20 years what they think. You don't even need to ask them. They are taking money out of the sector because the returns have been weak.

And the top 20 firms in the venture capital business are the least in need of a bailout of any group I've ever thought about. These firms, the Sequoias and Benchmarks and Accels and Kleiner Perkins etc etc can raise a fund anytime they want. Accel raised a ton of money last fall in the midst of the worst global financial meltdown in my lifetime.

The venture capital business is an asset class where the top 10-20 percent of the firms make 80%+ of the returns. That's how its always been and that's how it will likely always be. It's because the best entrepreneurs want to work with firms with reputations for making money, making connections, recruting top talent, and getting the right exit at the right time. And those are the top 10-20 percent of the firms.

So Tom's idea, while it looks good on paper, is a dream. The top venture firms don't want, don't need, and are never going to take government money. The same is true of the top entrepreneurs.

The worst firms, on the other hand, will gladly accept government money. And that is what is going to happen with all of these government efforts to pour more money into the "innovation sector". That money will go to bad investors and weak entrepreneurs and management teams for the most part. It's a problem of adverse selection.

If you take a look at all of the economically targeted investment programs that have been built and managed over the past twenty years in the venture capital industry, you'll see this plain and clearly.

There are some good ideas out there. My friend Brad Feld told me about a new legislative effort in Colorado to give angel investors a 50% tax credit for making investments in early stage companies. That makes better sense to me. Let the market work but lubricate it a bit with tax credits, particularly for the angel sector which has been the most hurt in this downturn.

But please leave the venture business alone. It's working pretty well as it is and it certainly doesn't need more money or some kind of stimulus plan.

Founder Dilution – How Much Is “Normal”?

This is a subject near and dear to entrepreneurs, maybe the dearest subject of them all. Founders start out with 100% of the company and every time they raise capital and/or issue stock and options to their management team, that number goes down.

Founders who "go all the way" through the process of building a lasting and sustainable/profitable business (as opposed to an early exit) will generally suffer the most dilution. In my experience, it will generally take three to four rounds of equity capital to finance the business and 20-25% of the company to recruit and retain a management team. That will typically leave the founder/founder team with 10-20% of the business when it's all said and done. The equity split at 20% for the founders will typically be; 20-25% for the management team, 20% for the founders, and 55-60% for the investors (angel all the way to late stage VC).

That's a rule of thumb and it can be worse (I've seen founders end up with less than 5%) and it can be better (the google founders own >25% of the company after the dilution of an IPO). It all depends on the amount of capital a company needs to raise and the valuations it can raise it at and the timing of those financings.

Founders who opt for a "quick flip" or any form of early exit (early means to me before the company becomes sustainable/profitable) can see much less dilution. Joshua Schachter owned more than 50% of delicious when it was bought by Yahoo! The four founders of FeedBurner owned well north of 25% of the company when it was sold to Google. Those exits are generally for less money so its more ownership times less total value. But even so, that can work out well for the founders and is a big reason why early exits continue to be part of the venture capital landscape.

Most of what I've just written is pretty well known in the venture capital/startup world. Sim Simeonov of Polaris Venture Partners would like to get a more exact set of data on this and he's put up an online survey hoping that entrepreneurs of all kinds will take the time to fill it out so we can be more exact.

It's a short survey and won't take long to fill it out. So if you've got data to share, please take a minute or two and fill out the survey. Sim will publish the data on his blog and I'll reblog it here as well.

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