The Venture Edge

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. 

According to a recent article in the New York Times, a survey by the Graziadio School of Business and Management at Pepperdine University shows that venture capital firms are alive and well -- and investing in all sorts of enterprises. Last spring, researchers at the Graziado School surveyed 185 venture firms. Of these 185 firms, 46 percent said they planned to make at least two investments over the next 12 months within their current fund, and 54 percent said they planned to make three or more investments. As the pictured graph shows, the majority of VC investments are made in technology firms, with software, medical devices, and biotech leading the way. Financial services and consumer products companies are also-rans when it comes to attracting VC investments.