The Venture Edge

Lately, private equity has gotten a lot more attention than it probably wants.  That’s because most of the attention has been negative as reporters and political pundits have gone all out to expose their lack of knowledge on the subject including confusing venture capital with private equity and making wildly unsubstantiated claims about the “vulture” nature of private equity.

A bit more than a year ago, I wrote a blog post about a relatively new way to raise money to start up or grow an enterprise: Kickstarter. As I mentioned in my post, Kickstarter is "...a funding platform for artists, designers, filmmakers, musicians, journalists, inventors, and explorers." Kickstarter leverages the power of online crowdsourcing to gather together potential investors for new creative and business ventures. As it turns out, Kickstarter is still around, and an increasing number of companies are getting the funding they need from the organization. According to a recent article, design company Studio Neat used Kickstarter to successfully fund two projects. The first, a miniature iPhone tripod called the Glif, raised $10,000 in just 30 days while eventually landing the company almost $140,000 -- far exceeding its original request. Studio Neat was able to ship the Glif to customers just a month and a half after the funding period ended. The second product -- a pen stylus for the iPad -- also raised about $140,000 via Kickstarter. Says company cofounder Tom Gerhardt,  “If Kickstarter wasn’t around I don’t think the Glif, or projects like it, would have even gotten off the ground. It’s probably naive, but we had more fears and perceived more risk going the traditional [VC] route.” 

Here's a funny look at how NOT to pitch a venture capitalist. I love the text-to-video technology used in this video that was developed by xtranormal, a Montreal-based startup. It's a fun, fast, and cool way to make movies on the Web. As the company says, "If you can type, you can make movies."

 I'm going to deviate from our small business economy posts for one post because I think it will help many of you focus your pitch about your business, whether that's a new business you're designing or one you have up and running.  Last night in my graduate tech feasibility course at USC, my VC in residence, Scott Lenet (DFJ Frontier Fund), brought his partner David Cremin to give the students a lesson in pitching to the needs of the investor.  Needless to say, it was eye-opening for many.

This week I had the pleasure of meeting and talking with Scott Lenet, co-founder and managing partner of DFJFrontier, an early-stage venture capital fund with offices in Los Angeles, Portland OR, Sacramento, and Santa Barbara.  To be quite honest, until now I did not have a very favorable impression of venture capitalists--hence the term vulture capitalist, which is often applied to disparage them.  Venture capital funds are professionally managed investment funds that typically invest in companies at the rapid growth stage or just prior to an IPO (initial public offering) or M&A (merger or acquisition).  If you've ever been in a room with a bunch of venture capitalists, you know that the arrogance is palpable.  And you've no doubt heard the horror stories of the nasty VCs who wanted to steal a company from its hard-working entrepreneur.  In some cases, the stories are true...but not always.

Continuing with our recent discussions about angel investors and FFF (friends, family, and fools) money, I just heard about an interesting new way to raise funds for new ventures: Kickstarter (www.kickstarter.com). According to the website, Kickstarter is "...a funding platform for artists, designers, filmmakers, musicians, journalists, inventors, and explorers." Kickstarter leverages the power of online crowdsourcing to gather together potential investors for new creative and business ventures. Current projects include someone building a Bussard fusion reactor ($3,099 pledged from 71 backers), a cinematic exploration of Calvin and Hobbes ($21,369 pledged from 302 backers),  a new video game by the name of Glorkian Warrior ($10,417 pledged from 109 backers), and 8-Bit NYC, a map of the city rendered to look like something out of Zelda ($3,374 pledged from 54 backers -- pictured at right).

 I want to follow up Peter's great post about angel investors with my two cents from the perspective of an angel investor.  In addition to all the great advice in that post, it's important to note that angels are generally bypassing companies that don't have customers yet.  They might get involved to mentor the team to prepare them for money, but they won't risk their money in this economy until the business is revenue generating.  

In 1985, brothers Arnie and Ron Koss started the country's first organic baby food manufacturer. The company they started -- Earth's Best Baby Food -- was eventually acquired by H.J. Heinz for $30 million, but not before Arnie was removed as president of the company by the same venture capitalists who provided the funds they needed to survive and grow. The brothers recently wrote a book about their experience: The Earth's Best Story: A Bittersweet Tale of Twin Brothers Who Sparked an Organic Revolution (Chelsea Green Publishing, March 2010). The following guest post -- 8 Tips for Finding Angel Investors -- was written by Arnie Koss, a man who knows a thing or two (or three) about angel investors.

Some years ago, I cowrote (with venture capital expert Joe Bartlett) the book Raising Capital For Dummies. Although entrepreneurs often raise money to start up their new ventures -- or grow their current ventures -- from a variety of outside sources (angel investors, friends and family, private equity offerings, commercial banks, venture capital firms, and more), about 20 percent turn to a readily available source of cash: themselves.

Peter reported on a very upbeat VC study in his his last post.  I'm not disagreeing with the study, but I'm not sure I'm ready to declare anything close to robust investment activity.  The reason I'm skeptical is that the most recent MoneyTree Report from PricewaterhouseCoopers LLP and the National Venture Capital Association (July 21, 2009) is claiming that although there's an "overall increase in investment levels...," the number of deals has remained flat at 1996/1997 levels.