Venture Capital

Platform Wars, battle for startup mindshare

Posted on by Ed Sim

Have we been through this discussion before?  Remember the eWeek article from last year titled "Is .Net failing to draw VC loyalty?" and the corresponding discussion in the blogosphere, including my post?  Well, it seems that SAP is taking a page out of the old Java venture fund camp to seed companies and help them build on a Netweaver platform.  As I mentioned before, I do not fund a company based on what platform they build on but if they choose one that is not open source then there better be a go-to-market reason for it.  Being at the Microsoft Summit last week, I kept asking myself why one of my portfolio companies would want to deploy its software on a Microsoft Sofware as a Service platform if it could do the same thing using open source technology and not have to pay additional license fees?  It comes down to tradeoffs.  If there is a clear path to customer opportunities and market adoption then it may very well be worth it to lock yourself into one vendors’s technology platform even though a majority of the customer dollars may not go to you.  From a VC perspective, I want to reiterate to not focus on what platform you have built on but on what customer problem you are solving, what market you are going after, and how you plan on ramping up your customer base.  If the opportunity is large enough (the problem is that many specific .Net-based or Netweaver-based companies are nice businesses but pretty nichey) and the market you are going after maps well with one of the big platform vendors, then it may make sense to align your company closely with theirs.  In the case of SAP and Netweaver it will be interesting to see how the market reacts to their investment plans.  Clearly, having big exits will spur some entrepreneurs to make a bet with Netweaver.  Sap’s Virsa and Frictionless Commerce acquisitions are steps in the right direction to get everyone’s attention.

I look forward to hearing more about this topic from Jeff Nolan (we are grabbing dinner Monday night) as he is blogging from Sapphire now.

Update: this discussion is enterprise focused, not a consumer one

Venture Capital

Microsoft VC Summit

Posted on by Ed Sim

I had the opportunity to attend my third Microsoft VC Summit in California on Thursday.  It was a great opportunity for VCs to network with Microsoft’s top executives.  This year’s focus was on Unified Communications, Saas, and Windows Live (includes MSN).  While I won’t go into excruciating detail on the sessions, one of the highlights wass having Steve Ballmer give a frank discussion on how VCs and startups can work with Microsoft.  He made it very clear that the pace of acquisitions has increased, rising from 9 the prior year to 22 this past year.  And of course, his Corp Dev team has told Steve that they have the biggest pipeline of deals they have seen in years.  For those who care, the sweet spot for Microsoft is to buy a more engineering and technology focused company versus a sales and marketing oriented one.  In terms of price, I thought I heard acquisitions in the $50mm – 200mm range but Don Dodge of Microsoft (I suggest reading his post on the acquisitions) seemed to hear differently.  Anyway, the point is that there will be plenty of opportunities for VC-backed companies and startups to find a home in Microsoft.  Interestingly enough, of the 22 companies that were bought this past year 1/3 of them were not venture-backed.  This was surprising to Steve and also may be indicative of how many of the tech players have been snapping up interesting engineering teams and products before they really get to market.

One of the interesting questions posed by a VC was how Microsoft valued technology and engineering assets versus companies with lots of customers and revenues.  In short, Steve had a simple answer in that Microsoft knows how much a technology asset or new product is worth to Microsoft and then they can compare that to what the value would be using more traditional financial metrics.  In the end, Steve rightly said that it comes down to a negotiation since revenue ratios, etc. really do not apply to a bunch of engineers and it comes down to what the VC needs in terms of multiples and what the founders need to get the deal done.  I suggest keeping an eye out for Microsoft as it feels like they may even do more than the 22 acquisitions they did this past year.  As far as opportunities and trends are concerned, Steve pointed out the usual suspects:

  • Consumer market drives enterprise expectations
  • Open source – more pragmatism coming to the market, not just a religion but needs to deliver real value
  • SaaS – it works, it will grow, but there are still some opportunities like no higher level platform in the cloud – for example, how do you make presence work from site to site
  • Office 2007 – biggest area of innovation for Microsoft, think of Office as a client to all data, front end to SAP as an example.  Also will include Office Communicator in Office 2007 with Word, Excel, etc. highlighting how important communications and collaboration will be.  Btw, Office Communicator is SIP-based.
  • Mobility – Steve believes the hype was higher a couple years ago and that the reality is bigger today as we have smarter more intelligent devices at cheaper prices running over faster networks.  There will be a need for software to help intelligent devices in the cloud to talk to each other.

I have to admit I was pretty impressed by the openness of the Microsoft executives and the sheer amount of new technology they will be bringing to market in 2007.  My favorite technology which I saw in action was Windows Presentation Foundation (WPF, formerly called Avalon) and WPF/E (cross platform subset of WPF).  The demos that I saw really showed me what the next generation of rich, web-based interfaces could look like beyond today’s AJAX and Flash.  While WPF is great for applications, the fact that WPF/e is cross platform really opened my eyes to this being a potential Flash killer.  That being said, since WPF/e is programmed using XAML and Javascript, a couple of the demos I saw were web pages with some flash elements included as well.  For more detail on WPF/e, I suggest reading Ben Galbraith’s blog post on Ajaxian (excerpt below):

  1. WPF/E allows a subset of XAML to be rendered in a browser on IE and Firefox on Windows and Safari (Firefox?) on OS X (Linux and Solaris support uncertain).
  2. This subset consists of a pretty impressive set of functionality, including: 2D vector graphics, advanced text rendering, audio/video playback, imaging, animation, and advanced composition of graphical elements. In short, all of the pretty eye-candy coming in the new WinFX APIs with the exception of 3D graphics and the Metro document rendering (i.e., MSFT’s PDF killer; my my, they are really going after Adobe, aren’t they?).

Given the rich, interactive functionality that WPF and WPF/e offers end users and the productivity improvements it provides for developers and designers, I do believe that this will be one technology that will gain traction in the years ahead.

SaaSWeb/Tech

Can Microsoft reinvent itself?

Posted on by Ed Sim

Microsoft released its third quarter numbers the other day and while revenue growth was strong, the stock got hammered and dropped over 10%.  Why? Microsoft plans on investing for the long term and putting another $2b into the Internet and other new technologies like the XBox.  To sum it up, here is Rick Sherlund, Goldman Sachs’ Software analyst, "It sounds like you’re building a Google or building a Yahoo! inside the company."

Looking at the long term, I am quite excited about the prospects of all of this money coming into help grow the Internet sector and SaaS.  First, having another big player push the concept of software as a service will only help further educate and soften the market, particularly business customers  Secondly, this will mean that Microsoft will be aggressive with hiring and with acquisitions.  I remember being at the Microsoft VC Summit a couple of years ago and hearing Steve Ballmer talk about his acquisition strategy.  He would either do huge, billion dollar ones or look at acquisitions less than $20mm.  That has been changing and will change rapidly with this renewed empahsis and focus.  That only means good news for VCs and entrepreneurs.  And as a VC, I wholeheartedly agree with Microsoft’s CFO, Chris Lidell when he says, "Today, we believe we face the largest array of opportunities for growth and innovation the company has ever seen." I certainly feel the same way from a VC investment perspective.

Whether Microsoft succeeds or not is another story, but $2b invested in new technologies will go a long way towards solidifying their position.  I would say that they did alright in 1995 when they decided to point their guns at Netscape to make sure the browser and Internet would not circumvent their monopoly on the desktop.  The problem is that once they won the browser wars, Microsoft became satisfied, fat and happy. And as we all know, fat cats don’t hunt.  Others came around and outinnovated them – Firefox, Google, etc. 

This is Round 2, which really started with Microsoft’s purchase of Groove Networks and Ray Ozzie last year.  To refresh your memory, I suggest reading Bill’s email from October 2005 (also see the Ray Ozzie memo) where he leads the battle charge for the next generation web, the SaaS era. 

Today, the opportunity is to utilize the Internet to make software far more powerful by incorporating a services model which will simplify the work that IT departments and developers have to do while providing new capabilities…..

However, to lead we need to do far more. The broad and rich foundation of the internet will unleash a "services wave" of applications and experiences available instantly over the internet to millions of users. Advertising has emerged as a powerful new means by which to directly and indirectly fund the creation and delivery of software and services along with subscriptions and license fees. Services designed to scale to tens or hundreds of millions will dramatically change the nature and cost of solutions deliverable to enterprises or small businesses.

And yes, it sounds alot like the memo Bill Gates wrote 10 years ago called the Internet Tidal Wave where he helped the big battleship called Microsoft reposition itself and point its guns at Netscape and others.  Round 2 is no different from Round 1 but the stakes are higher and it will cost Microsoft oodles more cash this time to create a dent in this market.  While we all know that memos often do not mean a whole lot, it is clear that Microsoft is quite serious as they are not afraid to piss off Wall Street and really put dollars to work for the long term position of the business.  This will certainly be an interesting battle to watch over the next few years.

SaaSWeb/Tech

DIY in the Enterprise

Posted on by Ed Sim

As I wrote last year, this "web as platform" gospel is starting to spread quickly from consumer to thoughts on the enterprise.  In my mind, what has enabled this enterprise web phenonomenon has been two thoughts – lightweight and simple.  Of course, lightweight and simple equals cheap and fast to implement.  It is quite easy now for sophisticated users to find and download new software and run it themselves, for them to take simple scripts and tie together various web apps.  We are quickly moving to a world where the end user on the edge can and has taken matters into his own hands rather than wait for IT to get something done for them. I call this the age of DIY (do it yourself) in the Enterprise.  Why go through centralized IT and their processes when I can get something done with my own departmental budget?  Linux, Jboss, and many of the open source opportunities started at the edges first before being brought into the centralized IT organization.  As we all know, many new technologies are typically adopted by consumers and then pulled into the enterprise, not pushed.  Amazon and other web apps started exposing their APIs and existed long before Salesforce.com. 

Jeff Nolan points to an interesting post from John Hagel which highlights this changing enterprise world. What has been deemed as the agile enterprise driven by SOA has actually turned into anything but.  The enterprise version of "lightweight" called SOA stands in stark contrast to the next generation web perspective of lightweight.  As John correctly points out, enterprise lightweight in the form of SOA means plumbing, it means expensive, it means complex, it means lots of consultants, and it means lots of dollars.  In contrast, next generation web technologies are easy, incremental, and driven by the edge and focused on people, not plumbing.  While some of these next generation apps may not scale, there is clearly something that centralized IT can learn from the edge, their frustrated internal customer, that things can get done more quickly and more cheaply.  As these two philosophies become more tightly coupled we will have some interesting opportunities to invest and make money.  While not directly related to this SOA/web mashup discussion, one of the companies I have always found interesting is Splunk which is bringing a Google-like approach to network management.  It is downloaded, driven by the edge user, and then pulled into the corporation from the bottom-up rather than the top-down.  It stands in stark contrast to EMC’s (Smarts) and IBM’s (Micromuse) way of selling and using their respective products.  There will be many more opportunities like this in the enterprise as enterpreneurs leverage user interfaces and technology from the consumer world in the enterprise. Of course, this means a whole new way of reaching customers (frictionless sales), selling to them, and supporting them but this is saved for another future post.  The good news is that this new age of DIY in the Enterprise is not going away and is only getting stronger everyday.  This also means the creation of many more disruptive enterprise software opportunities in the next 5 years.  I agree with Jeff that this is an interesting area to watch and is beyond web mashups-rather, it is a philosophy enabled by all of this new technology, the philosophy of DIY in the Enterprise.

Venture CapitalVOIP

VCs and VOIP

Posted on by Ed Sim

Here is a link to an article on VCs and VOIP (via Andy Abramson of VOIPWatch).  There are some VCs who think it it too crowded and others (like myself) who still see opportunities.  However, the one thing I was not pleased about is that the only quote the author uses for me did not include the rest of our conversation.  I should have just pointed her to my blog post from last September on the topic where I say that:

This battleground is about software and not devices which is why I believe companies entering this market from a telephone-centric view of the world will miss out on a big opportunity.

When I say, VOIP is "moving beyond Vonage" what I mean is that the opportunity is not about making and receiving calls but about how VOIP becomes seamlessly embedded in all applications, into the very fabric of the web.  Imagine seeing any phone number on a web page and clicking it to dial seamlessly.  Or how about being in your CRM application and knowing which of your sales reps are online as you are reviewing the pipeline and clicking to IM or call them through the CRM app.  When you call them, you have no idea if they receive the call on their home phone, computer, wifi device, or cell phone.  All you know is that they are available and that you can call them with one click.  This is the direction we are heading in – it will take time, but it will be interesting and it is certainly more than just a phone call.  If you want to learn more about this I suggest reading Alec Saunders from Iotum’s post on Voice 2.0.   As Alec says, :

In the voice 2.0 world any application, within the bounds of permissions set by the subscriber, can access presence; initiate, accept, and redirect calls; and query directories.

Alec gets it and this is certainly some of the stuff we have up our sleeve at Sipphone, developers of Gizmo Project.

Open Source

Red Boss – will it truly be open?

Posted on by Ed Sim

It seems that the open source business model has been top of mind for many in the technology industry as of late.  First comes Checkpoint’s attempted purchase of Sourcefire and now comes Red Hat’s announcement that it will acquire JBoss.  The acquisition price of $350mm is pretty sweet validation for the open source model considering that the multiples are about 20x trailing revenue ($20mm estimated revenue in 2005) and 6-7x forward ($50-60mm estimate for 2006).  And on top of that the company only raised $10mm which means it was incredibly capital efficient.  That being said, we have to remember that this is not going to change the corporate IT landscape overnight.  First Red Hat may end up competing with many of its partners like IBM who have helped validate Red Hat by offering the muscle and handholding of the IBM brand and employees.  Secondly, just because Red Hat’s name is on it does not mean that CIOs will immediately change their buying decisions.  As I mention in an earlier post in 2004, Red Hat has needed to find more avenues for growth and what better way to do that than moving up the stack from the OS.  Here is an excerpt from my post in 2004:

It seems that many of the bigger open source players are building out their own stacks ala Microsoft and others in the pursuit of growth and profits like traditional closed-sourced software companies.  Isn’t this the antithesis of what open source stands for?  Rick Sherlund, Goldman’s software analyst, says that it makes sense from a financial perspective since it allows vendors to cross-sell and lock-in the customer – customer retention is a good thing after all, isn’t it? While all of the open source players did their best to dodge this question and claim that they are really open, MySQl was the only company that really seemed credible here as its goal was to be part of everyone’s stack, including the Microsoft .NET one.  JBoss and RHAT clearly seemed to be building their own middleware and open source stacks while at the same time claiming an open architecture.

Fast forward 18 months later and you have the first move in that model – Red Boss.  Sounds like Microsoft?  I thought part of the reason technologists bought open source was to not be locked in to any one vendor.  This will be interesting to see as the need for revenue, growth, and profits drives some of the larger open source players and to see if they continue to remain 100% truly open.  Should I tweak the JBoss app server just a tad to make it work better on Red Hate vs. Suse or .NET?  Let’s watch how Red Boss balances the need to meet Wall Street expectations for quarterly numbers with the need to make its customers happy by helping them avoid proprietary vendor lock-in.

EntrepreneurshipVenture Capital

Kinnernet 2006 – geek camp

Posted on by Ed Sim

I just got back from a week in Israel having spent some time in Jerusalem for an Answers board meeting and then making my way to the Ohalo Resort on the Sea of Galilee for Kinnernet 2006.  Kinnernet is a techie geek camp organized and run by Yossi Vardi (cofounder of ICQ).  At Kinnernet, I had the privilege to spend time with some great people from Israel, Europe, and the US.  I suggest checking out Jeff Pulver’s blog and going to Flickr and searching for Kinnernet2006 for pictures and more thoughts on Kinnernet.  There were lots of robots, aerial shows with model planes and helicopters, great discussions on current technology trends, and of course, plenty of beer and laughs. 

One of the discussion groups that I led with Simon Levene (heads up Corp Dev in Europe for Yahoo and Yair Goldfinger (founder and CTO of ICQ and Dotomi) was titled "Are Internet VCs Dead."  You know the backdrop – it costs less to get a company started and to generate users and Google and Yahoo are agressively snapping up companies before VC rounds.  Google’s expertise seems to be buying engineers, many times before a product is even launched.  Yahoo, on the other hand, prefers to buy companies that have some nice user base, maybe no revenue model yet, but also before a VC round.  The last point is that companies are now more capital efficient (see an earlier blog post) where $10-15mm can get a company to cash flow breakeven vs. $30mm.  So what do VCs that invest in Internet companies do? Before I go there, I would flip the question and ask what do entrepreneurs do?  From my perspective, I wouldn’t take in more than $1-2mm to get my company started with a developed product and an idea of what usage will look like.  At that point, as Yair suggests, it is decision time.  Some of the questions to ask include:

1. Do I have a product or feature or can I build a real company (i.e., a growing cash flow sustaining business)? 
2. What is the risk I face in building a company for the long term vs. selling today. 
3. And finally, do the math – if I take in VC money I will clearly have to sell for alot more tomorrow than what I sell for today in order to generate the same or greater value.
4. Do I want to do it?

As a VC, I truly would not want to invest in a company that has not thought about all of the above with a founding team that is fully behind building out the company for a longer term play. All that being said, the numbers are still against the entrepreneur.  While there have been a number of acquisitions in the past year, it is still a fraction of the number of companies started.  Since it is so cheap to start a business, you can have anywhere from 5-10 companies out there in each category.  In addition, it is not clear that many of the acqusitions during the past year could have built real businesses rather than being a feature of a much larger entity.  While the math worked for a number of enterpreneurs that sold, one of the decisions you need to make is the likelihood and timing of being crushed by a larger player if you decide to go alone and raise VC funding.  Whatever you start, I would suggest thinking about what your potential revenue model is from day 1 and thinking through the economics.  Hell, it may change a couple of times, but building a company with the sole purpose of flipping is the wrong idea as your odds of success are very low.

Despite this, the opportunity for entrepeneurs and VCs could not be greater.  There are clearly more users globally, broadband is everywhere, users are more educated, companies can target more, capital efficiency has increased, and there are real business models out there generating tons of profits.  I do not think that Internet VCs are dead, but rather, need to reinvent themselves.   It is also clear that the VC model is broken and needs to change.  As you can see this is slowly starting to happen as smaller funds ($200mm vs $750mm) are being raised, VCs are doing less new deals per year and sitting on less boards, and many are trying to get in earlier.  Having a smaller, more focused fund allows a VC to make some investments during the Angel round ($500k-$1mm), watch the company closely, and give VCs the opportunity to lead the first real institutional round.  If the company has the chance to flip, then great, everyone wins.  If the company want to take the next step, then we can be there to lead or co-lead the next funding round.  It is imperative for VCs to get in early and structure their funds around this because in the Internet space companies can build momentum quite quickly which also means that valuations tend to move quickly as well.  That is also why the Googles and Yahoos of the world are trying to identify the emerging opportunities before the VCs get involved. 

All in all, it was a wonderful time, and I feel honored to have been one of Yossi’s guests and for having had the opportunity to network and participate with Israel’s tech elite.  Unfortunately, I had to head home on a redye Saturday night, but many of the attendees ventured to the Marker Tech Conference where 3500 people were expected to attend and hear panel discussions led by many of the participants at Yossi’s Kinnernet.  Kinnernet was great and I had a blast, made many new friends, and came away clearly impressed with Israel’s thriving and talented startup community.

Web/Tech

Remember Long Term Capital?

Posted on by Ed Sim

In 1994, the smartest guys in the financial trading and academic world got together to start Long Term Capital.  John Meriwether from Liar’s Poker fame assembled a stellar group from Wall Street and academia including Myron Scholes (one of the creators of the Black-Scholes option pricing model) and Robert Merton who together shared the Nobel Prize in Economics in 1997.  They raised $1.25b in an instant and that giant sucking sound you heard on Wall Street was LTC hiring the best and brightest minds to its hedge fund.  LTC prided itself on hiring PhDs and other brilliant talent to add to the mystique of the group.  And the hedge fund performed spectacularly.  It used proprietary computer driven models (think sexy algorithms) to find miniscule misprincings in markets and would use leverage and derivatives to exploit those mispricings.  At one point in time, $5b of equity was levered up to a $130b of total assets or bets outstanding. While I won’t go into the specifics of the trading model (think high leverage or vacuuming nickels from a train track, it works for awhile but the train will get you one day), they crashed, burned and died in 1998 almost bringing down the global financial markets. The bigger it got, the more risk it had to take on to deliver higher returns.  In other words, it is harder to drive significant percantage based returns on a huge capital base. What also set LTC apart was its culture.  It was one of incredible hubris and arrogance.  Their models were designed by Noble Prize winners and it was unbelievable for them to think that mere mortasl could even understand their models.  They didn’t even share their investment trading strategy with their investors.

So what does this have to do with my blog?  I was having lunch with a friend recently who was telling me about some of his dealings with Google over the last year.  As an ex-Wall Street guy, it struck him that some of the meetings he had with Google were like the ones he had at Long Term Capital years ago.  Even when LTC was about to crater, he remembers going to their offices, being sequestered into an off-campus conference room, and not being able to get any information out of them to even help bail them out.  In addition, people would show up and leave during the meeting, take notes, and not even introduce themselves.  Well, it turns out that his meetings with Google over the last year were pretty similar.  While the Google employees were clearly bright and technical, my friend was not sure who the decision maker was and what they actually wanted to do with the company.  In addition, he felt pretty uncomfortable showing up to Google and having to sign an NDA on the spot, and then going into a meeting where people would walk in and out, sit on their laptop and take notes, and not even introduce themselves.  Hmmm-it really does sound like Long Term Capital.  There are other parallels-Google has an appetite for hiring PhDs. is driven by an incredible proprietary algorithm, and is by far the best web company on the street and performing like a rock star.  Like LTC, the bigger and bigger Google gets, the harder it will be for them to drive significant percentage based growth.  In addition, the culture, since it is one driven by engineers, can also be driven by a NIH or not invented here syndrome.  Ultimately, since history always does repeat itself, I hope that Google understands that self-confidence is imperative but hubris and arrogance can kill.  Look at Long Term Capital and the chronicles of its short lived performance in a book so aptly titled, When Genius Failed.  Hell, Microsoft was the same way in the mid-to-late 90s and as time goes by I hear that they are becoming a bit friendlier to startups and partners.  I guess that is what happens when you get your ass whooped by a newcomer.  Hopefully, Microsoft hasn’t learned its lesson too late.  And I hope that Google remembers its mantra of Do No Evil as they are going to need partners to continue to grow their business and build great product.

SaaS

Grid 2.0

Posted on by Ed Sim

The hype cycle for grid computing started many years ago, and today it is mostly relegated to uses in bioinformatics, financial services, and 3d modeling (think crash testing, oil discovery, etc.).  With yesterday’s announcement, Sun is making this grid infrastructure available to anyone, anytime, and on demand at Network.com.  As Jonathan Schwartz points out, consumer plays have been driving the surge behind massively scalable web services.  Think Google, Yahoo, eBay.  On the enterprise side think about any dozen of SaaS vendors like Salesforce, LivePerson and Rightnow.  Rather than building your own infrastructure, imagine being able to create your app or service and deploy it with no wires to pull, no datacenter or storage infrastructure to manage, and all with the frictionless use of a credit card or PayPal?  Pretty interesting thought?  I haven’t done the ROI analysis of $1 per CPU/hr (would love to see someone’s rough cut at this including operating overhead) but this certainly levels the playing field for scalable backends.  Imagine if you are a startup and can’t get VC funding but have a killer app to deploy.  Without any upfront capital expenditure, why not throw your service on the grid, pay per use, and build from there.  That is a big concept, if it works. I believe this is the beginning, the very early beginning, of on-demand utility computing.  With Microsoft moving behind software as a service, I see them deploying their own grid on their own stack on a rent per use basis.  IBM will too.  Competition will breed even better pricing and more opportunities for startups to focus on their apps and product and less about the back-end. I don’t see startups rushing to deploy their whole infrastructure on the Sun grid right away, but it certainly is worth looking at and monitoring over time.  What has changed from 10 years ago is that the focus is not on corporate computing (those guys still want their own grids) but as Jonathan so aptly points out, the long tail-the renegade departments who don’t want to wait, the many startups that have new web services, etc.  Ironically it was Sun that printed money from the VCs and startup community during the bubble-our checks went to a startup and they bought a Sun, Oracle, EMC backend.  Well today the open source wave has killed that business and maybe this is another take for Sun to get at this capital.  So how about that ROI analysis? 

EntrepreneurshipVenture Capital

Eat when dinner is served

Posted on by Ed Sim

There is an article in the Wall Street Journal (sorry-requires subscription) today on pre-emptive financings or financings that happen when a company is not actually looking for capital.  It is common wisdom amongst the investment community for entrepreneurs to "eat when dinner is being served."  In other words, companies should take cash even if they don’t really need it because you never know when the next meal will be served.  This can be great for a company because it can provide a nice cash cushion for the operations, allow a company to spend real time with a potential investor, and help them avoid spending too many cycles on financing down the road. The article also points out that this is a new trend not unlike one that happened during the bubble period.  To be honest with you, I don’t see this as a new trend and a negative thing for VCs to do.  It is a VC’s job to find the best investment opportunities which means being proactive about generating deal flow and not sitting back waiting for new deals to come to us.  Being proactive about new deals means spending time with entrepreneurs before they need money, staying in dialogue with them as they grow their business, and helping lead discussions on the next round of financing.

Being an early stage investor, I have played on both sides of the fence.  I have been on boards where we have been approached preemptively by other investors.  In those cases, it is helpful to think about two points:

1. Valuation isn’t everything – sure, you want to take cash at a good price but if you take too much cash at too high a price too early, it builds unrealistic expectations for you, your company, your existing investor, and your new investors.  You may end up chasing too many different opportunities, losing focus, and having a fractured board because of these lofty expectations.
2. Having too much cash can be a curse and not a blessing – speaks for itself (see my last post)

On the other side of the fence, it is important for us proactive VCs to maintain our discipline, value the opportunity fairly, and really understand and work with the company to determine how the money will be used.  In addition, we need to be careful about helping our companies use their bullets on the right opportunities and not every opportunity.  Let’s not forget the lessons learned during the bubble where companies with too much cash just crashed, burned, and died faster and more spectacularly than ones with less cash.  In general, pre-emptive financings can be a great thing for both VCs and entrepreneurs, but we must be careful about managing expectations and staying focused.