Benjamin Kuo’s Blog

File this under one more thing you really ought to know as a startup: don’t invest in auction rate bonds.

For those who aren’t familiar with them, auction rates are a type of long term bond which are sold via a dutch auction by investment banks. They are typically used by companies to manage their cash, and have been popularly used by companies of all sizes to eke out additional gains on the cash they are sitting on. However–along with lots of the rest of Wall Street–there is a liquidity crisis here, which has resulted in a cash crunch for many startups.

Essentially, what has happened is that there are many VC-backed companies who had parked their VC investments temporarily in these auction rate instruments, as a way to pick up some additional interest. Auction rates are an alternative to things such as money market accounts, or just plain cash sitting in a bank account.  The problem is, the market for those investments has essentially collapsed, locking companies from their cash. Even though those companies may have a bunch of VC financing, they cannot touch that cash until the market resumes–and it’s unclear when that might happen. For a startup with a rapid burn rate, that can mean they run out of cash very quickly — unless their venture capitalist steps in with a loan, or they are able to finagle some other kind of loan from an investment bank.  There’s also the potential that a VC — seeing that a company has managed to muck up its handling of its cash, and looking at how a startup is doing–might reconsider their investment in a firm.

It appears that many of the companies caught in this crisis may have been caught because the folks managing that VC cash — a part time controller or even just an accountant — wasn’t aware of the liquidity dangers. I have heard that those with actual CFOs have for the most part been spared, since CFOs generally do more due diligence and are more conservative in their investments for their cash. But, in any case it’s a case of “what you don’t know CAN hurt you.”

I chatted yesterday with Joe Morgan, who has been credited as being the very first person to start warning about the liquidity danger of auction rates, and he told me the whole story behind this fiasco.

There’s been more than enough written on the public launch of the NBC/News Corp. venture Hulu today, and perhaps I’m in the minority; but looking over the titles streaming out of Hulu, I’m suddenly realizing that network television lost me long ago. Out of the dozens of TV shows available — either as episodes, or even only with clips — on the site, I realize I’ve maybe (maybe) watched a couple of shows, and even then probably in passing at the airport waiting for a flight. Albeit, I’m probably a fraction of the population, since I very rarely watch TV, but the networks have a big job in front of them to attract back folks who they’ve lost long ago to cable/satellite, the Internet, and elsewhere.

Looking for a job at a high tech company here? It looks like there’s plenty of demand–here’s some of the latest Southern California technology jobs on our job board:

• Director of Network Operations, inQ, Agoura Hills
• Director of Search Engine Optimization, Santa Monica
• Web Development Lead, Practice Technologies
• Associate, Momentum Venture Management

Our job board is slightly different than the run of the mill job posting services; currently the way it works is members of our premium services can post unlimited local job positions–our focus is on providing this as a resource to the community, and we think that’s the best way to get lots of the positions from the local high tech and startup community listed.

The latest report from the NVCA has ranked the Los Angeles area as among the top areas for 10 year growth in venture investments, citing the change from 1997 to 2007 in terms of companies and dollars invested in the area. That growth–which only includes Los Angeles, and does not include Orange County or San Diego–is just a small part of the upsurge in startup activity in Southern California that I’ve personally observed over the last 10 years (socalTECH — in its hand-copied email form — started in 1998).

Interestingly, what appears to have happened — or is happening — here, is that we are going beyond what I think of as simple “critical mass” of self-sustaining startup activity and funding. Critical mass — which we’ve had for some number of years — is having enough entrepreneurs, anchor high tech companies, universities, capital, and service providers to create a healthy environment for startups. That can be achieved anywhere you have a set of anchor industries and companies — typically, larger and well established companies which attract and spin off engineering, marketing, and executive talent — and enough interested capital providers and the like to create new companies now and then. The key here is that most of the activity is generated by people in the community, moving from existing companies in the area. I’d argue this has been achieved in many “high tech” centers nationally.

However, going beyond that “critical mass” is what is only known as the “Silicon Valley” magic. That is, you are not just creating a few related new companies, spawing out new firms related to your existing industries; you’re now at the point where people relocate and seek your region out to start new companies. This is where people — with no family ties or company ties to your area — seek to relocate and start up their company where you are because it’s the “place to be.”

In technology, in the past this has always been Silicon Valley — which is packed with engineers and MBAs and others who have picked themselves up and moved to Silicon Valley, just to be “there.” Los Angeles — or more specifically, Hollywood — has always been “the place” for entertainment.  It’s the same with New York — think Madison Avenue, or Wall Street, or Broadway. Or, if you’re in Private Equity, Greenwich, Connecticut.

In the last six months or so, I’ve run increasingly into entrepeneurs who have specifically moved into the Los Angeles area to start up their companies. Often, it’s because of the convergence of technology, the Internet, and entertainment; in some cases, it’s the strong consumer orientation and online strength here. I’ve even heard of people who have relocated here because they want to be close partners with MySpace, and several because of the game studio presence here. It “feels” — very unscientifically — like we’re going beyond critical mass and becoming a destination where entrepreneurs go to fund and grow their companies.

Gary Augusta, CEO of OCTANe, the Orange County-based organization focused on bolstering the county’s high tech industry, has just launched his own blog. Augusta writes:

What will I write about? Well it will MOSTLY be about various issues related to entrepreneurship, capital, university, medical devices, digital technology, finance, clean and green tech, innovation, communications and similar science/tech/money topics and people.

Yet another venture firm has turned their eyes toward the new media sector, with the latest — Saban Capital — hiring VantagePoint’s Craig Cooper to head up new media investing in Southern California.  Cooper said the fund “will scour the U.S. and international markets for opportunities across all investment stages” in an interview with the Hollywood Reporter. The fund is the second within the last few weeks to specifically target new media in Southern California. Last week, William Morris, Venrock, and Accel, along with AT&T, booted up their new fund headed by Richard Wolpert with the same goal — new media investments in Southern California.  The new funds follow a yet-to-be announced (or closed, as we hear) fund from Draper Fisher Jurvetson and the CAA also specifically targeting new media in SoCal.

One of the helpful angel investor groups here in the region has recently opened up a new blog, focused on providing useful advice to entrepreneurs. The group has launched Ask The Angels. Pasadena Angel Joe Platnick describes the blog:

Each week one (or more) of our team members will be writing about a topic of particular interest to entrepreneurs. And they’ll also be available to answer your specific questions on a wide array of topics. Over the next few months, you’ll see a number of noteworthy guest contributors as well.

The members of the Pasadena Angels are heavily involved in a number of efforts within the Los Angeles area to bolster entrepreneurs and high tech companies; the group, which is centered around Pasadena, also makes investments in the greater Los Angeles area as a whole, and members can often be seen working alongside the Tech Coast Angels.

Inagural posts include one by Steve Yeich on A Silver Bullet For Early Stage Marketing, and one from Barry Paulk on Recruiting and Team Building.

Forbes has just posted their list of the World’s richest billionaires. Southern California’s contribution from the technology industry:

• #462, John Tu ($2.5B) - founder of Fountain Valley-based memory manufacturer Kingston Technology
•  #553, Alfred Mann ($2.2B) - founder of Medtronic, PaceSetter, Minimed, and MannKind.
• #652 Henry Samueli ($1.9B), co-founder of Broadcom
• #677 Henry Nicholas III ($1.8B), co-founder of Broadcom
• #785 Alec Gores ($1.5B), Gores Group
• #785 Theodore Waitt ($1.5B), Gateway

Michael Robertson — founder of controversial MP3.com, along with such firms as SIPphone and Linspire (formerly Lindows) — has a new, and again controversial, quest–rallying against sending students to college. Robertson details his bone against going to college in a post on why he believes not everyone should go to college.

Robertson is no stranger to controversy. MP3.com’s entire premise — allowing the download of MP3 files — resulted in a major legal tussle with the RIAA, which eventually killed the firm. His firm Lindows (now Linspire)  was in a protracted struggle with Microsoft over the name of the company. AnywhereCD, a venture to sell both MP3 and physical copies of CD albums, was embroiled in a lawsuit with Warner Bros. over AnywhereCD’s interpretation of its license with the music studio.

Southern California appears to be the new frontier — or at least the newest center of attention — for high tech and digital media startups. In the last week, there’s been widespread coverage — in both new media and (countless) blog sites, as well as major news outlets like the Wall Street Journal, New York Times, and others — on a number of stories ranging from the Velocity Interactive’s new media studio Generate, to the acquisition of Pluck by Richard Rosenblatt’s Demand Media, to new startups in the region.

It’s interesting to see the momentum (at least in terms of coverage) firms here in Southern California are getting recently, which is a huge contrast to the level of attention we normally get in the course of business. I’d hesitate to say we haven’t seen this level of fascination with companies here since the Dot Com boom (and unfortunately, bust).