Benjamin Kuo’s Blog

Speaking of venture capital funding numbers. It’s apparently clean technology funding week here in Southern California. Just in the last couple of days:

• Sapphire Energy - $50M for its technology for generating petroleum from algae
• PowerGenix scores $30M for its battery technology
• SolarReserve pulled in a huge, $140M round for its utility-scale solar power plants

Those fundings alone will be bumping up this quarter’s total Southern California venture capital totals.

Matt Ridenour has a problem. He thinks that there is a venture capital crisis in Southern California — namely, that there are not enough local, early stage investors helping fund early (Series A) companies, those that need more than $500K but less than $10M in funding.

Talking with Matt and Andy Wilson, his partner from Momentum Ventures, an early stage accelerator here in Los Angeles last night at a dinner, it’s a huge problem for the firm, which is finding that those companies looking for just a few million dollars in investment are having to go to Sand Hill Road for capital, or just not finding it at all. Matt held an entrepreneur’s only event last night to help out early stage companies–I was invited as a speaker, along with Tom McGovern of Snap.com and Jake Winebaum, formerly of Business.com–and mentioned it multiple times during the evening.

Matt writes in his blog:

The short story is that the number of funds who are willing (or able) to profitably invest in “Series A” is shrinking.   This is happening despite the fact that historically, early stage funds are the best performing funds.

This comes in spite of what has been a very healthy funding environment for startups, in general, here in the region. But, as Matt described to me last night, the problem is that a lot of those rounds are for bigger companies, and that the early stage, Series A fundings are often being done by out-of-the-area VCs — who would sooner move a company to Silicon Valley or wherever they are, than keep the companies here.

I don’t know if I entirely agree with Matt, but it’s an interesting perspective from a firm which is fairly active pitching companies to VCs, both here and on Sand Hill road.

Mike Speiser, a Managing Director at Sutter Hill Ventures, has a good post from this weekend doing the math behind ad-supported businesses. Worth a read — his argument, that at a $1 CPM, you would need to be the fourth ranked site globally to make $100M in revenues–something that is very, very difficult to do. Mike writes:

We are in a recession.  Worse, we are entering a prolonged period of weak consumer spending thanks to the housing debacle and the energy crises.  Discretionary marketing dollars (those without a clear ROI) will not grow at the same rate as internet audience — this will lead to an aggregate decrease in brand-based CPMs over time.

If you want to build a real business in consumer, I would encourage you to either sell something (software like Microsoft or Adobe, hardware like Apple, some service like eFax, ecommerce like Ebay or Amazon) or figure out how to build a business that measures and delivers REAL VALUE to advertisers.

These are dour times — just look at the continuing carnage on Wall Street — with a lot of question marks in the air and some visceral fear in the markets. However, it appears to me that much of the high tech industry — and particularly, startups — is in rampant denial about how an absolutely disastrous economy might impact high tech companies in general.

Unfortunately, I’ve seen this before — in the period which followed September 11, 2001 and which preceded the “dot com” nuclear wasteland. High tech companies, and particularly, venture-backed startups, have been spared from the overall bloodbath in the economy because of one reason: venture money.

Venture money is great, because it makes it possible to start great companies and create awesome technology. In fact, I think venture capital is an essential ingredient in creating the next big technology and company breakthroughs. However, there’s one problem which occurs when it’s a lousy economy and environment: it insulates entrepreneurs and executives from economic reality.

One thing I’ve noticed over the years is that there is a prolonged delay in how the high tech market reacts to the economy. The reason why, is because there’s a buffering effect that deep pocketbooks have on startups. Number one — there are plenty of startups where they are not making any money from customers, and are living in the sheltered world of venture capital cash; and number two — the presence of venture money tends to fund secondary business (servers, software, advertising, marketing, etc.) at related and other startups.

In some cases — and the dot com bust was an example — what happens is that several months (often, six to nine months) after the rest of the world start seeing issues, the high tech world finally starts seeing some impact. That extra bit of dollars flowing into startups via venture capital is enough to keep things going even if overall business conditions are non-ideal–but only lasts so far. Eventually,  you hit not a slowdown but a cliff, when things pull back dramatically and adjust to the environment.

Does this mean we’re set to go off a cliff, or crash? No. There’s plenty of market opportunities where startups are ideally positioned for in bad economic waters — areas where faster, better, cheaper will rule, and where customers looking to save money or do more with less will be eagerly waiting. There are areas with very long lead times (biotech and clean technology come to mind) which will be in “build” mode for years yet. Plus, as is often repeated, starting a company in a bad economy (against the cycle) often results in stronger, better, and more successful companies.

However, I believe that the great faith of “Google-AdSense-advertising-will-pay-for-everything,” and the recent shifts towards focus on consumer Internet-only investments have more vulnerability to the economic environment than most startups believe. Plus, the “we’ll figure out our business model later” attitude ramps the risk up further (if you can’t figure out a way to make money and a business model when times are good, how are you going to make money when times are bad?). In the words of Wall Street, there’s a lot of risk out there.

I hope I’m wrong.

Omid Rahmat, former publisher of Tom’s Guide Publishing, has just added a new article to our Insights & Opinions section, entitle Don’t look for first mover advantage. Rahmat takes a slightly contrarian view of “innovation” and gives some business advice to entrepreneurs.

Microsoft didn’t invent the OS, Google didn’t invent search, Facebook didn’t make social networking, and Apple didn’t come up with WIMP, digital music, or mobile phones all on its own. Every entrepreneur looking to succeed should think seriously about how far ahead of the curve they want to be these days.

I was chatting with a local venture capitalist Friday, and we were talking about how there is a big imbalance in the “supply” and “demand” sides of the venture business. The “supply” side–new companies who venture capitalists are investing in–seems to be doing fairly well, with new businesses being created and funded. However, the “demand” side — the IPOs and acquisitions side — seems to be fairly dismal, and getting worse as Wall Street continues to implode.

At some point, most imbalances will even themselves out — either, the merger/acquisitions/IPOs will pick back up, or — worse — VCs will pull back on funding companies until there’s more of a market for their portfolio. The question is: will the reduced funding needs of startup companies help to insulate the venture market from the imbalance (ie, will companies only needing a smaller amount of venture money mean they can go farther, on less–and so that venture investors will be able to wait?); or, will venture firms pull back to conserve cash to keep their current portfolios alive?

On the other hand, we’re hearing from venture firms who are having good success with fundraising from LPs, mostly because venture capital–as an asset class–isn’t looking all that bad compared with the bloodbath on Wall Street right now.

It’s a big week for venture capital focused technology conferences, and Southern California startups — and we’re not done yet. Tomorrow is VentureNet in Costa Mesa, the Technology Council of Southern California’s annual venture pitching event, which promises to be an interesting local take on the venture capital conference.

VentureNet is put on by a local, volunteer organization which is less focused on technology celebrity, and more on getting worthy technology startups funded. VentureNet’s selection committee includes Southern California’s top venture capital funds, who are very involved in vetting and screening the presenters. (Disclaimer: I was also on the screening committee, and I’m on the Technology Council’s board).

Plus, the afternoon keynote will be by none other than the sometimes controversial, technology-celebrity-and-entrepreneur Jason Calacanis (of Mahalo.com, who co-produced TechCrunch50), who will have the tables turned on him and be interviewed by Matt Coffin of LowerMyBills.com.  Also, having seen the presenting companies list, there are some very interesting companies worth hearing about who will be at the conference. The conference is sold out, however, so I hope you already have tickets!

Not enough venture capital events for you? Next week LAVA presents Shaking the MoneyTree, a look at the venture activity over the last quarter, OCVG has VC in the OC on Wednesday, with a keynote by Mark Heesen, President of the National Venture Capital Association, and if you’re a biotech investor or entrepreneur the Southern California Biomedical Council has their 10th SoCal Bio Investor Conference.

Finally–speaking of entrepreneurs–a self-plug, I am going to be at MVM Partners Entrepreneur’s Only Event along with Tom McGovern of Snap.com and Jake Winebaum of Business.com on Wednesday the 17th.

Howard Anderson, a venture capitalist at Battery Ventures and a professor at MIT, has an interesting post on GigaOM about 5 Reasons To Move Your Startup Out of Silicon Valley.

Anderson doesn’t mention Southern California–maybe because we keep beating New England in venture funding, or because his first point–that cities where the weather sucks are good for keeping people at work–doesn’t apply. But, he does make a good point:

All tech startups need just a few ingredients to germinate: sophisticated money; first-rate technology universities; and a few template successes (a Google or a Facebook, and so on) to encourage founders to get off their duffs.

Here’s in Southern California, that first-rate sophisticated money includes both a good pool of venture investors (not to mention lots of transitory money from Sand Hill Road); lots of technology universities (Caltech, UCLA, USC, UC Santa Barbara, UC Irvine, UC San Diego, Harvey Mudd, etc. etc.); and lots of “template successes” over the years (Qualcomm, Broadcom, MySpace, Overture, LowermyBills, Pricegrabber, JAMDAT, Proflowers, and literally hundreds of others).

Hi all–I have a few tickets to VentureNet–the venture capital conference being held Friday in Costa Mesa. The event is almost entirely sold out. If you’re an early stage entrepreneur who’d like to see how the companies pitch the VCs at this event, let me know–or, if you missed paying $3000 + whatever for a plane ticket to go to TechCrunch50 and hear Jason Calacanis speak, he’s the keynote for Venturenet.

I know how hard it is for entrepreneurs — especially those just starting out — to justify paying for conferences. I have a few extra tickets. (No service providers on this one…) The companies pitching have been vetted by a great selection committee made up a good chunk of Southern California’s VC community, so it should be very instructive. Email me/twitter/facebook/etc. me if you’re interested!

It may be obvious to everyone else, but I’ve suddenly realized that social media and blogging is  much more closely linked with evangelism than with personal expression. While blogging started out really as a way to communicate and express personal thoughts and ideas, it seems to me that blogging’s current incarnation is much closer to corporate or product evangelism–the process of convincing people to believe in a cause/effort/and/or product. In fact, I’d almost say that blogging and social media (whether that’s through social networking sites like Facebook, or communications services like twitter)–is the natural home of product and corporate evangelists.

Evangelism — in the corporate sense — really took off in the 1980’s with Apple Computer, which had a very organized program of user groups, support programs, free t-shirt giveaways, and–most importantly–product evangelists who helped get the word out about the firm’s Macintosh computers. In fact, that legacy — and process — continues today, with the company’s retail stores essentially storefronts for Apple evangelists, and a near religious following for the company’s products.

The entire idea of product evangelism at Apple was Guy Kawasaki, who wrote the book on product evangelism, and helped push the idea of evangelism into Silicon Valley. Not surprisingly, in this new world he’s a popular blogger as well.

I’ve been seeing this more and more. Instead of blogs, social networking sites, and other social media as being a means for personal expression, they are driven by primarily by product evangelists from companies, fans of certain products/companies, or by evangelism-savvy public relations and marketing folks. In fact, the most popular blogs — IMHO — are absolutely evangelizing specific causes. Hence, you see the popularity of Robert Scoble — an evangelist for cool new technology (once a product evangelist at Microsoft); TechCrunch – an evangelist for Web 2.0 startups; Guy Kawasaki, mentioned above, an evangelist for startups and venture capital; and Seth Godin, an evangelist for marketing. Evangelists have a natural affinity for convincing and advocating for their cause — an natural and essential trait for a blogger/social media guru. Social media is really the new home for the corporate evangelist.