Benjamin Kuo’s Blog

On of the more perennial questions I am asked by people is “how do I get into venture capital?”. There are plenty of venture capitalists offering up their words of advice, but here’s mine: sell your company for $1.4 billion dollars.

Jeffrey Stiefler, former Chairman and CEO of Calabasas-based Digital Insight, just joined a Bay Area venture firm, Emergence Capital Partners, and is just one of the many post-big-sale CEOs who have moved to the venture capital industry. Stiefler sold Digital Insight in February of 2007 for $1.4 billion. The firm was already public (having made its backers money in an IPO already), but the pattern is consistent with a long tradition of finding those deal makers who know how to build — and sell — their firms as venture partners.

I get countless numbers of people — from all parts of the high tech industry — who ask me how to get a gig as a venture capitalist. There’s lot of MBAs, quite a few business development folks, a few product managers, and countless VPs who’ve approached me over the years. Unfortunately — unless you’re lucky — it’s actually quite tough to find a position at a venture firm. Most VC firms are fairly static, not likely to hire very often, and there’s not a lot of latent demand for new talent.

However, successfully selling your company seems to be a more sure route to a venture role; some folks who have done this include Leo Spiegel over at Mission Ventures (he was chairman/CEO of Sandpiper Networks); Bill Woodward at Anthem Ventures (founder of Paracomp, which merged with MacroMind and went IPO); and Dave Gross and Rusty Reed of Great Pacific Capital (founded Fastclick, made enough to just start their own VC fund) — just a few of the folks that come to mind.

We’ve recently been chasing down a local company which has raised a Series D round of funding, but so far has refused to directly respond to questions about the round, who is included, and details of the funding (even after being presented with a complete list of facts and asking for a “yes” or “no”). In fact, it’s all too common now to be rebuffed by companies beyond their Series C funding rounds.

Why the hesitance of the firm? Quite simply, in today’s investment climate, it appears that a Series D can often be a black mark on a company. While early rounds (A, B, C) are almost always a very good thing, the Series D is much more ambivalent.  Sometimes–but not always–a company which has raised a Series D may have just had to recap the firm; may have had to take a serious down round, if it has raised a lot of capital in the past; usually, but not always, is looking for a buyer.  On the other hand, sometimes a Series D can indicate a company is doing very well — in particular, if that Series D was actually used to provide some liquidity to founders ahead of an IPO; if a company has pulled in a significant strategic and/or private equity firm; or if it’s honestly expanding so rapidly it just needs some additional capital.

How should potential employees, partners, and others view these? Some things we look at:

1. Did the company raise more in its Series D than earlier round, or was it a single digit round?
2. Has the company had significant executive turnover in recent months?
3. Did all of the prior investors re-up in the new round, or did some mysteriously disappear? And was there a new, high profile lead?
4. Was the round announced, or found out — ie, did they want the world to know or did it just leak out by accident?
5. How much has the company raised — i.e. has the company just raised so much as to preclude a decent return on the firm?

If a company which just raised a Series D just got a new CEO, lost a slew of VPs, only got a few of its prior investors to participate, and is now heading to around $100M in funding — watch out. If, on the other hand, the founder is still in charge, the firm has added some high profile execs (and in particular, a CFO with public experience), and signed up a brand new, high profile investor or investment bank — that’s good.

The Financial Times just ran an article today commenting on Southern California’s increasing presence in the technology world. From Silicon Valley investors discover LA’s star appeal:

After two decades watching their neighbours in Silicon Valley attract more venture capital investment than anywhere else in the US, companies in southern California are making a comeback.

Successive technology booms have made the northern California technology corridor the undisputed leader when it comes to start-up investment.

But a new generation of internet companies specialising in content management, online advertising and search optimisation has established headquarters in Los Angeles, which is acting as a magnet for investors.

The good and bad of all of this attention Southern California has been getting: the good — is there’s a lot more, deserving companies being funded here in Southern California, and it’s much less of a struggle for companies started here to get past the initial hurdle in funding. The bad: the cutthroat, ego-driven, and (frankly) elitist culture of Silicon Valley is threatening to creep into what has been more of a supportive, honest atmosphere for startups and entrepreneurs here. There’s was a recent, relevant post by 37Signals talking about the problems with Silicon Valley thinking and culture, which is worth reading.

I’ve been quite interested to speak to a number of entrepreneurs recently, who have either recently raised some angel or venture capital, or are in the process of raising some money. They’ve all told me something — which (given the number of people looking for funding, and the correspondingly smaller number of sources of capital) isn’t very surprising: it takes time. A lot of time. A lot more time than you’d think, or want.

One startup I spoke to — whose principals, although they had lots of experience in their own industry but hadn’t had any experience raising money, and had just started fundraising — asked me if I thought they could get an investor signed next week. The vast majority of (funded) entrepreneurs I talk to had been looking for capital for at least six months to a year, if not more, before they scored their first funding round. I have seldom heard of anyone instantly getting a venture round — if nothing else, because of the time involved in pitching, arranging meetings, followup meetings, due diligence, getting all the legal ducks in a row, etc. etc. etc. Even after you’ve got a term sheet in hand, it may still be a few months until you actually have a check in hand.

Surprisingly, the idea that suddenly a rich investor with a fat checkbook can write you a check, today, is a very common misperception I hear from early entrepreneurs. Too many of them are — frankly — in somewhat desperate situations where they need capital NOW to pay their employees or vendors.

So, what’s my unsolicited advice to entrepreneurs, as it pertains to funding?

1. Assume it’s going to take some time to get funding–if it happens at all — and make sure you structure your business so you’re not desperate if there’s a delay. That means, you probably shouldn’t be hiring that employee before you can afford it, and you should forgo those cool Aeron chairs you saw the other day.
2. Look early, look often — if you are going to have some significant capital needs, you should be looking well before you need it — not the day before. And, make sure you’re constantly networking with sources of capital (angels, venture capitalists, others) before you need it.
3. Get your ducks in a row — especially for those early entrepreneurs, make sure you’ve already engaged with an attorney, have the proper legal structure for your firm, and have an adviser who has helped other companies through funding.  It also means you have to absolutely have the stuff that a venture capitalists or angel will want to see–ie, PowerPoint, financials, etc. –ready in your pocket. Not having all of that in order will just delay (if not kill) your funding.
4. Don’t rely on the timing of your first venture round — if you’ve never done this before, you have to assume that you will have to fund your business out of pocket, from family or friends, or another source until at some time you actually might have something venture fundable.
5. Keep moving forward – if you can, given your business, keep moving forward no matter what. The farther you go with your business — in developing your product, service, or market — the more likely it is you’ll actually get funding. A huge number of companies never get beyond the idea stage because the entrepreneur gets stuck in idea stage, where a company is least likely to find funding.

Storm clouds are gathering on the venture industry, as M&A and IPO exits are declining — at least according to the Dow Jones report on VC-backed liquidity released today. Dow Jones reported just $8.2B in exits, and only a handful of IPOs in Q1. It remains to be seen whether slowing liquidity opportunities will scare off venture investors (as it did post dot-com) or whether, this time, the investors in the market are instead set for the long haul and not “quick flips.”

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.

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.

Interesting quote in VentureWire this morning from David Siminoff of Venrock on their new Southern California media fund:

“L.A. is just not the place you go for cutting-edge semiconductors, but it’s the place for storytellers,” Venrock General Partner David Siminoff said. “I have a feeling deal flow will lean toward the storytellers.”

The quote shows quite a bit of the stereotypes (and unawareness) of the Los Angeles and surrounding area in terms of technology. Unfortunately, usually when people think “Los Angeles” they really are thinking “Hollywood.” So, they ignore the greater Los Angeles area — and its strong semiconductor background — and think the only opportunities in the area are Hollywood media deals. If you’re thinking West Los Angeles, maybe. But if you look at the area as a whole (and in particular, Orange County), you’re wrong.

Some examples of why:

• Broadcom (Irvine) - $3.8B, 6400 employees
• Conexant (Newport Beach) - $750M, 2400 employees
• GloNav (Newport Beach) - recently acquired for $110M by NXP Semiconductor - cutting edge GPS chipsets
• U-Nav (Irvine) - GPS chipsets and software, acquired for $54M by Atheros
• Inphi  (Westlake Village) - high speed InP/GaAs components, funded by Cadence, Dali-Hook, Flextronics, Mayfield, Tallwood, Walden
• Fulcrum Micro (Calabasas) - clockless chips, funded by Granite Global Ventures, NEA, Palomar, Worldview
• Xirrus (Westlake Village) - WiFi chipsets/systems, funding from August Capital, Canaan Partners, QuestMark, and USVP.
• Jazz Semiconductor (Newport Beach) - high speed communications chips
• Quartics (Irvine) - wireless video semiconductors, headed by AST’s Safi Qureshey, funded by Foundation Capital and Enterprise Partners
• Solarflare (Irvine) - 10GBASE-T chipsets. Funding from Oak, Sequoia Capital, Intel, etc.
• QLogic (Aliso Viejo) - storage/networking systems and semiconductors

And that’s just to name a few of the firms here…  There’s a significant amount of latent semiconductor potential (if VCs ever get back to funding it) coming out of Caltech, USC, and UCLA — schools which have all spawned very significant advances in the semiconductor world. There’s also significant number of companies providing design tools and software, electronics components, hardware, and much more much closer to the semconductor than content/Hollywood world.  So please, don’t stereotype LA as being content…

The William Morris Agency and venture capital firms Venrock and Accel are reportedly creating a new, digital media fund to invest specifically in startups in Southern California, according to the New York Times. The new fund is going to be overseen by former RealNetworks executive Richard Wolpert. (Wolpert is a Southern California resident, and was previously commuting between Westlake Village and Seattle).

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!