Wednesday, July 27, 2011

Steady as She Goes...

The business of venture backed internet companies is pretty hot these days with sky rocketing IPOs and a flurry of fundings. But finding the signal amidst the noise has never been harder. 60 days ago, a certain company was all the rage. At least half a dozen of the new pitches I took referenced the company’s assumed success as a comp for their own glorious future. I remember thinking how fast that happened and how people were providing so much assumed intelligence towards investors, who MUST know what they are doing. Here we are a mere 60 days later and the company (which shall remain anonymous, but there are plenty of examples) is getting pummeled in the press. The founder left. While the piling on is now most likely overly negative, an analysis finally focused on the data that mattered — mainly that nobody is using the product.

Venture is rife with gossip and suspicion and shadenfreund because we all don’t know how the future will unfold and we all take risk. Gossip and information is unavoidable and fine and well, but in venture capital all the information MUST culminate in an independent mind, taking an intelligent and supported point of view. This point of view is open to critique and attack and risk, but taking a stand among all the unknowns of our business is the only hardscape that decision makers in the highly ambiguous world of startups and venture capital can use to move forward.

Friday, July 1, 2011

HomeAway IPO

There has been a lot written, most negative, about the valuation of the HomeAway IPO this week. Here are a few comments from a shareholder, who admits he has some bias, but I believe his comments are credible....

"So I’m totally biased (I’m a shareholder but not an insider) but IMO HomeAway deserves to be lumped in much more with LinkedIn & Facebook & Ebay for that matter than a Pandora or a Groupon because of network effects. Huge market (at least 10X of OpenTable), low penetration, increasing economies of scale, killer management team. Having seen the pitch, I’m not at all surprised at the market’s reaction."

"What’s funny is there were a number of negative articles yesterday by TheStreet, SeekingAlpha, and Business Insider saying they didn’t like the business or the valuation and IMO their analysis was terrible."

Tuesday, January 18, 2011

Comments on Ryan Born

OK, Ryan Born posted the essay below (below my comments) and for some reason LinkedIn would not allow me to comment in length. My comments here and his post below.


OK, despite the obviously purposeful edgy tone, good post. And while I generally agree and give similar advice, here are three anecdotes or truths about SoCal investing and startups that contradict.....

1. On associates. One of my investments doing GREAT (and I mean GREAT) is SupplyFrame in Pasadena. I remember the day Clearstone associate Jaideep Singh came into my office and said "Dude, you got to meet these guys and you got to invest." They were pitching in the other room and I ran right in prepped for a good meeting. We made the investment two weeks later.

2. On Angel groups. So Cal is much less efficient than Northern Cal in its organization. You can find a diamond in the rough and you don't know where great advice and good investment money comes from. My advice is talk to everyone but DO definitely be ruthless with your time and make the party evaluating your company be responsible and professional and do not allow them to waste your precious time.

3. On available funds. True but there are all sorts of pots of money around a longtime venture firm. An example is Clearstone, where we are avoiding early stage investments into our main fund, but actively investing in early stage out of two other pools of money, one a super angel type fund. We just closed on new investments Cetus and CupidsPlay in the last two weeks (to be announced soon). I would assume that other long term venture firms have similar flexibility.



It’s been over 3 years since I moved to LA and started what I’ll call the Los Angeles Venture Capital “fundraising scene”. Over the past 3 years, I’ve raised a good deal of money (some disclosed, some undisclosed) and I’ve formed a few opinions along the way, which I’m going to share here in hopes that you can avoid wasting valuable time as you go about your own fundraising efforts in Los Angeles.

1. DON’T PITCH THE BITCH (i.e. Don’t pitch “Associates”)

In this instance, “the bitch” = “the associate at a VC firm” (gender agnostic). Don’t waste your time pitching associates at VC firms. In my opinion, VC associates have absolutely ZERO decision making ability / influence and will likely leave the firm within a 2 to 3 year period for one reason or another so any long term firm relationship you to wish establish through them will likely fade. Don’t bother with associates, it’s just a waste of your time. Instead, go straight for the VC partners with real check writing ability. If they pass you off to an associate, be wary. It’s straight out of the movie Boiler Room, except that in Boiler Room they chauvinistically advise not to sell stock to women. Here, I’m just advising that you not try to sell to VC firm associates, as it’s a waste of your time. Seriously, don’t pitch the bitch.


Every young entrepreneur in LA has heard of the Tech Coast Angels and their unaffiliated clones / red headed step children – The Pasadena Angels and The Maverick Angels (who actually charge you to pitch – run to the hills). In particular, if you have a “consumer internet” company, i.e. the kind of company you see regularly covered on TechCrunch, then my advice is to not bother with any of the LA based formalized angel groups. The reasons are too numerous to mention (HINT: They are Dinosaurs and although they’ll be bragging about Green Dot for the next decade or more, don’t be fooled, you’ll be wasting your valuable time and energy trying to get in front of them).

Rather than ranting aimlessly about these groups (NOTE: I’d be happy to debate them publicly about my issues with them), I’ll just simplify my reasoning behind this point with the following short story: Someone very high up (i.e. an executive / board member) at one of the groups recently told me that he’s fundraising for a new company of his own. When I asked if he planned on pitching the same formalized angel group at which he holds office, said NO (I’ll refrain from detailing why in an effort not to sell him up the river). Amazing right? I could go on and on and ultimately into a tirade ripping into these groups but I’ll keep it professional and just tell you that if a member of the group thinks it’s a waste of time to pitch the group itself, then it’s likely a waste of time for you too. If you are absolutely set on pitching members of formalized LA based angel groups (TCA, Pasadena Angels, and Maverick Angels), then go directly to the individual angel members themselves for personal investments (rather than the group) or better yet, go and pitch angels that don’t associate themselves with one of these formalized groups.


This may sound totally obvious but reality, it’s not always easy to tell, and there are at least a handful of “cashless VCs” in LA. Due to the awful economy of 2008, 2009 (RIP Good Times), and beyond, some VCs have died off or are in the process of slow downward spiral. Some have had a hard time raising new funds and are close to or already out of cash. Those that still have cash are slow playing their hands, or have reserved their remaining cash exclusively for follow on investments (i.e. topping off their existing portfolio companies when cash gets low). That being said, these VCs still hang around the “fundraising scene” and will often take a meeting with you, even though they have little to no cash to actively invest, just to ensure themselves that there are not passing on the next Twitter, Groupon, or Zynga. The problem here being that they wouldn’t have the check to write even if they though you were the next $1B+ exit. So how do you know which firms are out of money? Here’s 3 easy ways…

1. Ask them point blank how much cash they have to put towards new investments, the last investment they made, and the amount of the check.

2. Ask around – i.e. other VCs and entrepreneurs to get a 2nd opinion of the firm and it’s financial position, and

3. Do a little research and find out when they closed their last fund and the amount of the fund.

If everything passes the smell test, then by all means go ahead and court the heck out of them. If things don’t add up, be sure to ask for intros to other investors that are more active.

Wednesday, January 12, 2011

The Problem with the Super Angels

There is a lot of talk these days about the growing number of angel funds and super angel funds, that is funds that quickly invest 250k to 2MM (roughly) into a company and remain very hands off. To be sure these super angel funds do indeed properly fit into the new trends around company creation. At Clearstone, we have also launched a super angel fund and strategy.

What I worry about is the path that most companies take to success and the staying power of this capital. In my 15 years plus in venture I can think of only two portfolio companies, Overture ( and Rubicon, which were able to flawlessly hit their launch plan. Overture pioneered the pay for placement search market and raced to $100MM in revenues. Rubicon hit the market just right with a publisher centric advertising solution. Otherwise, all of our other successes, a dozen IPOs and an equal amount of large M&A exits, took a very crooked path to success.

In each of these cases, what was needed was conviction and a belief that the company and product we were building was going to be needed and valuable in the marketplace -- eventually. What was needed was smart, educated capital that had been heavily involved with customers and products and other, more nuanced sources of credibility around the growth of the company.

It is rare for any "1.0" version of anything to work just right. More often than not products, and the messaging and marketing around them, need lots of reiteration and market testing to hit their inflection points. The same is true with companies. In my experience the super angel money has been "hot money" that develops "alligator arms" and runs when the hat is passed in a conviction round. In addition, the small amounts of capital available from these funds put unnecessary and complicated restrictions on the already difficult business of making a start-up venture successful and driving it towards a large exit.

The success rate of start-ups is low and experience can make it higher. However, my experience tells me that capital providers that are small and hands off are by definition seeking (i.e. "hoping for") a quick hit and start-up success rarely works that way.