A lucid analysis of the predicament facing VCs and their investments as a result of the liquidity crisis, from Techdirt/Mike Masnick. Included within is this:

Usually startups go through multiple rounds of funding, which the VC firm bakes into its calculations when doing the initial funding. That initial firm may not lead later rounds (in fact that’s rare), but it usually will participate, and now that may be more difficult. That could cause some VCs to push their portfolio companies to sell off or close up shop much faster than they normally would.

The statement assumes there will be buyers around, and while that may be I suspect the spread between arms-length exit price (if there is such a thing) and liquidation price is going to close very very quickly now.

Twelve actually.

Based on the length and descriptions, it might have been more productive to list the qualities you aren’t avoiding.

“We” as in investors - it’s about speaking in the third person here.

I had this argument a while back. The antagonist stated without hesitation that investors need more than 50% - it was about control, as in controlling the overzealous entrepreneurs. The protagonist (me) suggested that a lot of deals would fail with that mentality. Once the investors (in this case, we were talking angel investors) got control of the company, the game was already over - the company would soon fail. The crux of my argument was in such a deal the motivation would disappear - the entrepreneur would no longer see the carrot, professional management would take over, and the company would slide from there.

Bad way to start out, eh?

Instead, listen to people who get these concepts…

Fred Wilson understands entrepreneurs, and doesn’t even need 20%. Marc Andreessen already applied opinions on hiring folks to run your shop.

Enough said.

Interesting take, although there’s a faint scent of impatience. Smart money inevitably finds good deals.

Union Square Ventures just funded Twitter. Fred Wilson noted that the company has no business plan, but they’ll figure that out as they go. Paul Kedrosky threw in his two cents, coming to the broad conclusion that business plans give investors too much to nitpick. These guys are professional investors, so you have to listen. You don’t have to follow - it’s just the opinions of two investors who happen to know each other pretty well - but you do have to listen.

A good portion of the investment and entrepreneurial communities will proceed to adopt the same tack now that it’s been publicized. Others will call this attitude a sign of froth in the market, and become more cautious about ongoing opportunities. Giving investors what they want (or don’t want) should be viewed as a by-product of which camp they are in.

Listen to a few stories around the fire before you decide which camp that is.

Fred Wilson of Union Square Ventures touched a nerve when he cranked out this post debating the prime age for being an internet entrepreneur.

Dave Winer, the creator of RSS, was ticked off. Steven Hodson had this to say - “kiss my ass.” And Fred wound up having to defend his position.

A good ol’ fashioned pissing contest. Fortunately, Fred pointedly qualified the discussion right up front:

• Now don’t get me wrong. We’ve only funded one of these net natives out of close to fifteen portfolio companies. We’ll certainly fund more. There’s a lot more we look for in an investment than a 23 year old design whiz.

And even more fortunately, some folks did get him wrong - the ensuing “debate” would have never happened otherwise. Scattered amongst this interaction were some points I found interesting - I’ve grouped them together as a way of scalping away the noise:

On VC intent and business models…

• I really don’t want to be the guy who made it harder for anyone older than 30 to get funded in the web services market. - Fred Wilson
• The thing is that VC’s don’t want to deal with experience and knowledge because it is too expensive. It is cheaper to latch onto the 15 year olds, the 20 something’s because they don’t truly understand the value of knowledge. VC’s don’t want paradigm shifts because in the end it might threaten their business models. - Steven Hodson

Pretty self-explanatory, and Fred was certainly cognizant of the potential repercussions. I’m just curious as to what other think about this.

Where’s the “paradigm” shift…?

• The Internet is their medium and they are showing us how it needs to be used. - Fred Wilson
• Paradigm shifts come from knowledge of the past, the vision of the future and the ability to bring them together. Twenty something’s might be hot to trot and they might be able to JavaScript into the wee hours of the morning but they haven’t produced any paradigm shifts. - Steven Hodson

I’m going to chime in here. Creating a web full of widgets tied to other services tied to other widgets tied to Google Adsense isn’t exactly a paradigm shift, and this will become extremely clear the moment the money runs out.

If launching a blog and filling it up with tons of widgets is the path to embracing this groundbreaking new web, I guess I’m missing something.

The only option I see is to quit now (right after I turn off my browser’s Javascript). But I won’t be blaming Fred Wilson for the decision.

UPDATE: Wilson concurs that the discussion was “the beginning of something”, although what “that” constitutes is still undecided.

UPDATE 2: The money isn’t even there for some.

Fortunately, I think happy hour should be longer, even if it does have to start a little later.

According to yesterday’s report from E&Y and DJ’s VentureOne, venture capital investing hit its best quarter since the first of 2001. That’s great for startups. Unfortunately, the party doesn’t seem to be happening in my neighborhood.

You could provide the standard reasoning that local funds are more mature, and they are doing more follow-ons and portfolio consolidation right now. You could also go out on a limb by saying there is a “right brain drain” going on, so there are less ideas floating around. I don’t buy any of the notions, and I think the phenomena is actually a good thing.

First, less capital floating around means only the choice opportunities get funded, and the chance of success of any given deal should jump a notch or two. Getting more wins (and less fiascos) under the belt will attract additional capital over the long term. And it’s the “left brain” that usually keeps the books anyway.

Second, I suspect a big part of the local economy has been real estate driven, at least that’s my guess based on the impression that all people seem to want to talk about is their new houses, and all everyone seems to be doing is getting real estate licenses. Time to wake up there - the housing party looks like it is ending, and while it could actually get really ugly, at least that will prime a lot of people to get down to the business of creating value instead of waiting for someone or something to conjure it for them.

In summary, a little restriction of liquidity gets the juices flowing. We’ll see more bootstraps, more ideas popping up out of the woodwork (I love those kinds of surprises) - more ingenuity, and less waste. And that is really the entrepreneurial way.

According to the WSJ:

“The market for high-technology start-up businesses is so intense in Silicon Valley that some companies are being showered with millions of dollars from investors — without even asking for it.”

I don’t see a problem with all the liquidity here. The IPO market is not wide open, therefore exits are based on M&A instead of someone’s IRA. In other words, the right people are buying into the investments. Private equity overhang has been part and parcel low startup costs, so it is nice to see the capital finally being deployed. It is going to lead to job creation, and a few blockbuster products.

There is no question that some hype is good - all we need to ask now is where we are in the hype cycle, and how much hype is too much.

But no matter, Aunty Belle’s retirement money likely won’t get burned this time.

***UPDATE***

Ah, and someone else agrees. The level of risk depend on who is taking it, not how much capital is being deployed.

And Sam Angus of Fenwick & West is making sure it isn’t.

I give kudos to Sam’s list, which includes:

1) Guarding your intellectual property
2) Finding good partners
3) Taking care with the distribution of equity
4) Timing your rounds, and choosing your capital sources, carefully
5) Not going your raise alone
6) Building a good board
7) Worrying less about valuation

Never forget - execution comes first, and all of Sam’s recommendations thoughfully respect the idea that the deal alone is not going to make your company work. The points above should be easy to manage, yet entrepreneurs allow it to take up too much of their time, and mind. Those energies are better directed towards bring ideas to fruition.

Venture capital firms have been pouring money into open source technologies, and now folks are saying it could be a bubble about to burst. Is this money sitting on the table, looking for someplace to go, or a sign of things to come? I think it is a little of both.

Venture capital “overhang” was hitting new highs at about the same time the open source fervor was gaining momentum. So its natural that investors would take a peek. One only has to look as far as SourceForge to see there is a lot going on.

Whether all those projects can be turned into profit generating opportunities is another matter, and I believe it will all boil down to application execution. While a lot of the investments are centered on giving away software, then making money from support, some of the technologies will simply not gain ground in that manner. That is the risk an investor takes. However, someone may USE that technology to build a valuable product or service, and that is where I think the value will wind up being generated over the long haul. How the original technology developers insert themselves into that mix is what remains to be seen.

Then again, what the hell do I know?