Am I just a greedy VC?
My partner Jason has an impassioned post up about the carried interest debate currently taking place in Congress. No matter how you feel about Congress’ efforts to change the tax classification of VC profits from capital gains to ordinary income it’s worth a read (and keeping an open mind). Obviously this issue is important to me and to all VCs. And while I know there are differences of opinions on the subject (clearly given the intense debate going on right now) I think Jason does a nice job of talking through the personal (this feels overstepping), professional (there are other markets where innovation is taking place where investor are actually being completely exempt from taxes that will draw talent away from the US) and legal (how do you differentiate between a VCs partnership interest from other partnership interests not subject to the proposed tax change?) arguments against the tripling of tax on the long term profits of investors. …
May 19, 2010· 4 min read
The new era of venture capital
You already know the about the state of the venture capital industry in 2009: venture investing down (32%), exits down (14%; slowest exit year for VC backed companies since 1995), fundraising down (56%), IPO’s almost non-existent (8 venture backed IPOs in 2009). It’s a bleak picture for the industry overall, even if there’s a group of us that continue to believe this is a great market in which to be investing (and it clearly is). These stats got me thinking about the future of the venture industry and I thought I’d offer up some thoughts on where we might be headed. …
March 22, 2010· 3 min read
First round valuations
I get quite a few questions sent in by readers and am going to make more of an effort to post some of the ones that I think would be of general interest (please – keep them coming). Recently Jonathan asked: Do you have any reference regarding recent pre seed, seed, and first round valuations for B2C companies? We had several back and forth e-mails about this over the past week and I thought they were worth summarizing here. First, some additional background from a subsequent e-mail from Jonathan: I am actually doing two simultaneous rounds: one for 125K and another for 1.4 million. The first one aims at testing the viral potential of the application. We will focus on improving our site, doing PR and furthering our relationship with bloggers in the field. The distinctive aim of the second – 1.4M – round is to do conventional online advertising. The idea is that if our 122K round is successful (meaning we acquire users at a very cheap rate and manage generate some income early on) we can improve our barging power for the 1.4 M round or skip it altogether and take it to the next level. The main problem with this process is in the valuation. Here was my response: Classically in this type of situation you’d probably try to structure the first $125k as a bridge that converts into the next preferred round at a slight discount (from 10-20% depending on risk and timing of the second round). That way you essentially punt the value conversation until later and if you execute well on the first set of money you get the benefit of your stellar execution in the form of less dilution when you put together the big round (and at the end of the day from your perspective this is all about getting money into the business so you end up with as much of your company as possible). HOWEVER, if the money for both rounds is coming from the same set of investors, you need to be careful here because they’ll have the ability to foreclose on the business because of the debt structure of the financing instrument in this case. If that’s the case, I’d look at trying to roll this together into a single round that is traunched based on your hitting milestones (so the first $125k funds at closing but the $1.4m doesn’t fund until you hit some level of traffic or something like that). You’ll have to have the valuation conversation up front in that case, but the benefit is that you’ll have a deal for $1.525m instead of just $125k. As for valuation, it varies a lot depending on the type of investor you are bringing in, the amount of money you are raising and the region of the country in which you are located. If you were just raising a $125k angel round, you pre-money value would be ~ $1.5m – $2m. If you raise $1.5m you could probably push that a bit – maybe to $3m. First round venture deals (true institutional Series A – product with some interest, but not yet generating any real revenue) are generally in the $5m range. BtoC is in favor again, so there’s some room to push your valuation based on market interest, but that’s likely for your next round and based on strong execution (and lots of subscribers).
August 22, 2006· 3 min read
Why NOLs should be transferable
Dad stopped by the other day on his way back from a meeting and we were kicking around some ideas. One of the things that he brought up that I’d been toying around with as well was the notion of enabling companies to sell their NOLs. I think this is an outstanding idea – both at the state and the federal level. I don’t really want to get into it here, but you should assume a priori that I believe that NOLs should also be more transferable in acquisitions as well. That’s a related topic for sure but here I’d just like to address the ability of companies to literally sell their NOLs to the highest bidder. Let my address this from the perspective of the three entities most affected by this idea: –The selling company. The company selling its NOLs clearly benefits. It turns an asset that it can not currently make use of (and one that has a limited lifetime) into immediate cash to fund its current operations (and perhaps to generate more NOLs). Clearly this is a way for the selling company’s investors to double down their investment, to the extent to which their money is spent on things that give rise to expenses. Depending on how the market for NOLs develops and the company’s expected near to medium term prospects for generating taxable income it can plan with some accuracy to balance the generation of near-term benefit (cash) with expected later benefit (the tax shelter their NOLs would provide). -ont-size: 7pt; line-height: normal; font-size-adjust: none; font-stretch: normal;”> The buying company. Different companies would derive different benefits from purchasing NOLs – companies have different tax rates, tax rates vary by domicile, companies have different expected needs for sheltering income, etc. Presumably a relatively perfect market would develop for the buying and selling of NOLs and these differences would work themselves out in the form of different prices companies would be willing to pay for $1 of NOL shelter. I don’t see much downside for buying companies if this idea were implemented – they’ll be able to do similar planning as the selling companies and determin the right balance of NOL need vs. price based on their individual outlook. -ont-size: 7pt; line-height: normal; font-size-adjust: none; font-stretch: normal;”> The government successful because they have access to additional investment capital. This will. The government clearly ‘pays’ for all of this NOL transfer activity. In their best case scenario they’ve just lost the time value of money, if you assume that all of these NOLs would have been used anyway. In reality there will also be a real cost to a program such as this because under the current system there are lots of ways companies lose the ability to use their NOL balances (the NOLs run out; the company is purchased by another entity limiting the use of transfered NOLs; companies go out of business before they use their NOL balances; etc.). That said, there will also be some tangible benefits from businesses that stay in business longer and become more result in higher employment (and employment related taxes) and a more stable business climate (i.e., more profitable companies in a region and the resulting increased corporate tax base). I’m scaring myself because this sounds a lot like trickle down economics, but in this case I think society as a whole benefits. I’m not ready to argue that for government this will be a zero sum game (i.e., I think there will likely be a true hard dollar cost to government revenue if a plan like this were implemented), but I think there are real benefits to business that would ultimately make their way back to government coffers in the form of future business and personal tax revenue. Clearly there would need to be some limits to a program like this – limits to the total NOLs that a company could buy or sell over a certain period; limits to the total income a company could shelter with purchased NOLs; etc. I did some searching around and found a few state level initiatives that are pushing a program like the one I’m describing (and at least one – in New Jersey of all places – that was already in place, allthough in a limited form). My dad told me that there’s a group working on this idea in Colorado (I couldn’t find any reference to it on-line) and that he’s been talking this idea up on some of his recent trips to Washington. I hope the right people are listening . . . …
March 13, 2006· 4 min read
Some Venture Math
I’m in the middle of writing a few posts on the economics of venture investing (actually on venture “exiting”) and was therefore pretty interested in the VentureWire 2005 venture m&a stats that came out last week (there were a bunch of articles recapping the 2005 venture exits if you want to Google for them). Here’s some of what was reported: – m&a dollar volume rose 17% to $27.4bn -ont-size: 7pt; line-height: normal; font-size-adjust: none; font-stretch: normal;”> the number of companies bought fell to 356 (from 407 last year) -ont-size: 7pt; line-height: normal; font-size-adjust: none; font-stretch: normal;”> IT companies accounted for $11.73bn of this amount across 221 companies So if you do the math, of the venture backed companies that were bought last year the average purchase price was about $77m. IT companies were lower than the total average, coming in at just over $53m per deal. VC’s spend plenty of time thinking about the exit dynamics of their businesses (thus my future posts on the subject) – it’s interesting to consider the dynamics of tech investing in a market with these kinds of exit profiles. Specifically, sometimes exit expectations don’t match the reality of the market – and these exits (driven by both reality and perception) have important ramifications on the dynamics of capital allocation, company valuations, financing strategies and other key principles of venture investing. It may not exactly be like the real estate market (where they say you make your money by how well you negotiate your initial investment), but optimizing your capital structure is more important than ever before in venture investing. …
January 9, 2006· 2 min read