ClearCreek publishes a monthly newsletter on trends and events in the capital markets for entrepreneurs and CEOs of private companies. Our subscribers include company founders and executives, investment advisors, lawyers, accountants, consultants, and a variety of other professionals.  The most recent version is below; please use the following link if you wish to receive the email edition of Capital Solutions.

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   2010:  June   • May   •   April  •   March   •   February   |  2009:  December   •    October  •    September  •    July

Capital Solutions Newsletter…                                                                                                            download pdf
July, 2010

Recent numbers on venture capital fundraising detail a forest when all the action is in the trees; the tech IPO might be on it's way back, or it might just be an acquisition in disguise; and our recommended reading compares the founding of nations and companies -- and the end of men (hey - just in time for football season!). And individual software programmers hoping for quick profits off smart phone applications -- well, there may not be an app for that.

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Venture Voodoo, all over again...
 
Exactly a year ago we saw media reports on venture fundraising that contorted themselves, depending if the half they saw was empty or full.  So here we go again, but now it's not even clear how much water the glass holds.  The WSJ uses data from Dow Jones to report 2010 venture fundraising to date of $7.5 billion -- which is up 13.5% YOY -- and posits a possible industry rebound, even as they acknowledge 10-year venture fund returns performing like a bad checking account, but without the free toaster. Then a day later came the NVCA report, which detailed just $5.6 billion in venture fundraising, and noted that Q2 had the distinction of being the lowest quarterly total in seven years.

Truth is that rather than try to solve the nearly $2 billion discrepancy, it's better to worry less about the view from the airplane, and focus more on ground fundamentals: venture is changing, but it is still viable.  Quality companies showing growth or exceptional promise will still get interest -- but it will require more time and a broader search, and terms will continue to favor funds, not companies.

Perhaps more interesting than fundraising statistics is the shifting dynamics of the venture industry, particularly the rise of seed funds and the so-called super angels.  Rob Go, who recently left a traditional venture firm to go micro, provides a brief primer on this trend (most of which which should be highly familiar to readers of this newsletter). And the stutteringly named Simeon Simeonov, an EIR at General Catalyst, runs some numbers on angel investing and sees the value of a highly diversified, volume-attentive portfolio approach that somewhat counters the broader belief that traditional venture firms should narrow their focus. All this activity has various implications for the industry overall, with Mark Suster providing a very cogent summary.

Roughly two years into the seismic shifts in the capital markets and it's apparent that the traditional metrics of venture fundraising are less and less relevant as the industry both consolidates and reinvents itself.  The trends we have been following for some time -- increased capital efficiency, faster product cycles, increased network effects, smaller investments -- are shaping the new landscape.  And the best view into the venture markets is not from the airplane, it's from the ground.

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Tech IPO: Comeback Kid or Merger Catalyst?

After venture-backed IPOs went MIA in 2009, VentureBeat notes the oddly imprecise appearance of 15-17 IPOs in Q2 alone, close to 2007 levels.  But even VentureBeat sounds a cautious note, since post-IPO performance has been poor, with most securities trading below their opening price.  More interesting is that the median time from firm creation to IPO in this data set was about 5 years, with a total of $18 million in venture investment -- a standard amount of capital, but the longest time period since the data began being collected in 1992.  And, as Fred Wilson notes, IPOs sure ain't what they used to be, citing first the harsh expenses of an failed IPO, and public valuations that are lower than the private marketplace.

However, even if there is still uncertainty in the IPO exit, a study (gated) in the Journal of Business Venturing finds that companies acquired after filing for an IPO command a price premium as high as 26% over those that only look for acquirers.  The dual-track approach combines the weakness of both markets to provide multiple exit options as well as a clear signal to acquirers that they may not be able to revisit the deal at a later date.  This lesson should not be lost on emerging companies: if you are raising private capital, it may well be worth putting out a few additional hooks for strategic acquirers.

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Reading List: Startup Nations and the End of Men

With the July 4th holiday and cookout hangover dissipating into their respective synapses, there were a few interesting commentaries that compared the founding and innovation of nations with that of startups.  As one author writes:

America did not merely secede and copy the governing documents or style of the United Kingdom.  Rather, it innovated, creating a system based on the English Common Law, yet different, one with explicit checks and balances to restrain government, and with no place for a monarch.  It was an experiment with a more radical form of democracy than existed anywhere in the 18th-century world.

And it was an incredibly successful experiment, as the combination of that innovative rule-set and the empty frontier resulted in America growing rapidly in population, wealth, and influence. 

Software Profits: where's the App for that?

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Capital Solutions is sent irregularly, and generally not more than once each month.  All content and any errors are mine exclusively, while the occasional sharp insight is probably borrowed.  As always, feel free to contact me at the number below if you have any questions, or just to catch up.

 Regards,

 
Alexander Ooms | Managing Partner                      

alex@clearcreekpartners.com

303.731.2960