Benjamin Kuo’s Blog

An online site — selling a set of silly tongue-in-cheek, venture capital themed T-shirts — only goes to reinforce the eerie feeling I get covering startups of my college days, where I used to get people pounding on my door before every football/basketball/etc. game with some game-themed T-shirts for sale. That, and strange requests on Facebook to compare movie compatibility, music, etc. with business contacts (?!?). (see below)

As many of you know, we are starting to post regular contributed articles from people in the community about various aspects of startups, entrepreneurship, and venture capital. Our latest addition is an Marc Averitt of Okapi Venture Capital on what venture investors look at in terms of risk assessment in startups. If you’ve got some useful advice you’d like to share — about anything of interest to high tech companies and entrepreneurs — let us know!

Glenn Kelman, CEO of Redfin — based in Seattle — recently posted a piece on the difference between Silicon Valley and Seattle’s high tech industries. In what looks like the begining of an old-fashioned flame war, TechCrunch’s Mike Arrington says Kelman has a flawed view of Silicon Valley.

It’s always fascinating to see these kinds of posts — awhile back there was one by Paul Graham (of Y Incubator) on how locating in Houston will kill your startup; and just this week a complaint by Fred Wilson, a New York VC on Silicon Valley arrogance. It seems like what there is a lot of in Silicon Valley–aside from venture capital and startups–is ego.

My personal opinion (having worked in Silicon Valley) is that although there are some advantages to Silicon Valley, there are a number of other high tech centers (Southern California of course being one of the more important ones) where there is a critical mass of high technology companies, venture capital, and service providers that make them robust places for startups. Particular areas outside of Southern California and New England (which have been fairly well established for awhile) worth watching include not only Seattle, but also New York City; Austin, Texas; and Boulder, Colorado; not to mention Tel Aviv and Mumbai.

There’s a good guest post by Clearstone’s Sumant Mandal over on VentureBeat today about Southern California’s venture capital environment. For those of us in Southern California, it’s old news, but it’s good to see the word getting out to the rest of the world. (VentureBeat is a Silicon Valley blog site run by former San Jose Mercury News reporter Matt Marshall, covering startups and high tech).

Clearstone (disclaimer: which is a sponsor of this blog) has been one of the venture firms here helping to bolster not just their own investments, but also events, groups, and other efforts to accelerate Soutehrn California’s rise in the high tech startup business.

Here’s a random, unsupported and unsubstantiated, list of five good, and five bad, reasons for raising venture capital — based on the opinions I’ve drawn from frequent interviews with entrepreneurs and learning a lot from the local venture capitalists in Southern California.

Five good reasons to raise venture capital:

1. Time to market is vital, and so is gaining market share, and raising capital is the best way to get there before others.
2. You’re working on truly revolutionary technology, which requires deep pockets to bring to market (ie. semiconductors, advanced materials, biopharmaceuticals, etc.)
3. You need to hire and scale out a team to bring products to market (i.e. you need to ramp your operations, put together a logistics chain, and otherwise expand ahead of launch.)
4. Adding capital will accelerate revenues and growth — ie, you’re business model is proven, there’s a big market, and spending ahead of revenue actually results in a multiplier effect. Prime example of this: You have a software-as-a-service tool which has a 98% retention rate, and will return you a hundred dollars for every dollar you spend on acquisition, and you just to acquire more customers to ramp revenues.
5. Venture capital will bring critical, strategic relationships to bear on your business. A typical deal here might be taking capital from Steamboat Ventures — which is Disney’s Venture Capital arm — to smooth a supplier relationship for your technology to their content divisions.

Five bad reasons to raise venture capital:

1. You’ve got a great idea, but no experience –engineering, marketing, sales, operations or otherwise–and you want to hire someone to do those for you.
2. Five other companies with your exact same idea/web site for the “next YouTube” have just gotten funding, and you think you ought to get venture capital too.
3. Your business model isn’t working, you’re bleeding cash, and you can’t see yourself getting cash flow positive soon.
4. You’re not very sure of your idea, and you’d rather risk someone else’s money than your own.
5. You’re tired of “working for the man” and want to use venture capital to give yourself a nice raise.

CNET has some further details this morning on Kaai and Soraa, two stealth startups in the LED market which were recently stealth funded by Vinod Khosla’s Khosla Ventures. The companies — both of which are apparently out of UC Santa Barbara — were founded by blue LED inventor Shuji Nakamura and fellow UCSB professor Stephen Denbaars.

Awards season continues here in Southern California, and Ernst & Young has just announced they are taking applications for their annual Entrepreneur of the Year awards event being held in June. The deadline for applications is March 28th. E&Y’s awards are a national program, and honor entrepreneurs across all sectors–not just technology. Last year’s winners included Errol Ginsberg of Ixia, Lawrence Ng of Oversee.net, Li Yu of Preferred Bank, Ming Hsieh of Cogent, Edward Wedbush of Wedbush Morgan Securities, and Isaac Larian of MGA Entertainment. To apply, contact Sandra Feldner Vandergriff at sandra.feldnervandergriff@ey.com.

Prince Andrew, Duke of York, has been making the rounds this week at high tech companies in Southern California, as part of a tour to promote investment and trade with the United Kingdom. Prince Andrew — who serves as the United Kindom’s Special Representative for International Trade and Investment, and is the third child of Queen Elizabeth, as well as fourth in line for the throne — dropped by Avery Dennison in Pasadena today, stopped at Aliso Viejo-based Quest Software, and has also been attending countless dinners and receptions across the Southland.

At a dinner held Thursday night at the Ritz Carlton Marina Del Rey, the Prince spoke about the common links between the United Kingdom and the United States, promoted investment and trade by U.S. companies in the UK, about the economy and fears of–as he termed it, the “R” word–and also spoke for some time about global warming and how technology could be used to help move towards a carbon neutral economy. I was invited by the folks at UK Trade & Investment to attend, and I had a chance to talk with many of the companies and people there — including a number of high tech firms in the region, Hollywood and entertainment executives, investment bankers, and many others.

It’s somewhat unusual for the industry to be courted by royalty, but it’s clear that there’s a concerted effort by the UK–and other countries–to get mindshare, investment, and business from Southern California’s high tech industry, which can only be considered a good thing.

I’ve noticed some speculation lately across the web about how the proposed acquisition of Yahoo might have an affect on possible exit opportunities for startups, how startups might want to raise more to live longer because of a perceived reduction in exit opportunities, and so on.

Those sentiments echo the comments I have been hearing during the last few years, where startups have told me that they’re strategy is to be acquired by Google/Yahoo/Microsoft (or name any other large, market leading company).

I might be jaded, but usually, starting and/or running your company hoping that Google, or Yahoo, or some other company will suddenly notice your company and buy you for millions is not high on the list of ways to build a business. If you’re spending all your time trying to figure out how to get in front of the M&A folks at those firms, you’re most likely not spending enough time building your product and business, and gaining true traction in the market. If you’ve truly built something useful, Google, Yahoo, or Microsoft will come and find you.

If you look at the list of recent acquisitions by those firms, it’s not a huge list. Yahoo acquired something like six companies in 2007; Google acquired 17, including the giant acquisition of DoubleClick, which is not relevant to startups; Microsoft only acquired 8 companies in 2007. I see at least that many companies venture funded every week; making the assumption that Yahoo disappears, that’s a whopping six companies acquired we’re talking about. You have a better chance of going to Vegas, putting all that venture money on black, than one of the big guys acquiring your startup.

It’s fairly instructive to look at depth at the firms Microsoft bought in 2007. Their acquisitions in 2007 included:

• Multimap (mapping): market leading position in the UK; huge number of users; founded in 1996
• Global Care Solutions (healthcare software): product since 2000; big Microsoft partner; deployments everywhere in Asia
• Parlano (enterprise chat): founded in 2000; lots of enterprise customers at acquisition
• AdECN (advertising network): founded in 2003; already had a business that was working well, and was contacted by Microsoft (see my interview with Bill Urschel at AdECN here about that deal)
• aQuantive (big public company)
• Tellme Networks; founded in 1999; market leading position in voice call services
• Medstory (health search); founded in 2000; product well-launched and meshed into Microsoft’s build up of a health division.

Key takeaways from this, at least if you want to be acquired by Microsoft: you really need to expect to be in business for at least seven to 10 years; you need a lot of traction and a product that people have been using for awhile; enterprise software is hot, consumer web services are not; and you need to have a fit to their strategic plans. That’s not exactly a prime candidate for making your Web 2.0 startup rich.

Quickly glancing at Yahoo, they only made around six acquisitions last year:

• BlueLithium (online ad network, founded 2004)
• Rivals.com (online sports content, founded in 2001)
• Right Media (founded 2003, online advertising) - Yahoo was an investor in 2006
• MyBlogLog (blog tools, founded in 2005)
• Zimbra (collaboration tools, founded somewhere around 2004)

Of those, MyBlogLog and is the closest to the “cool web startup with no revenues” — and MyBlogLog was a fairly small, $10M deal. Zimbra, which went for $350M, was actually an enterprise software play with a lot of companies using them for their collaboration tools. BlueLithium and Right Media were in the Internet advertising space, and clearly in Microsoft’s strategic sights on that market. Not a lot of exits there of “cool”, Web 2.0 startups, either.

CNET reports that Los Angeles-based video sharing site Revver has put itself on sale for between $300K and $500K — a fire sale considering the millions that have been invested in the company. Revver has raised capital from Bessemer Venture Partners, Comcast Interactive Capital, Draper Fisher Jurvetson, Draper Richards, and Turner New Media.

Revver is one of a (huge) number of YouTube-era companies which provide user-generated video sharing: a few of the other local firms  that started in this space are Veoh Networks (tilt towards professional content distribution), VMIX (shifting towards selling its software for social networking sites) ; LiveDigital (an offshoot experiment of Oversee.net; the site now reads “looking for a new home”); and Eefoof (angel backed, renamed VuMe, and now appears to be filled with blog posts about how bad the service is).