the reflexions insider

For anyone who caught the Powerpoint slide deck from what has come to be known as Sequoia Capital’s “Holy Sh*t” Meeting, this is shaping up to be a challenging environment for even the most innovative startups to raise capital or indeed, survive at all.

But if you heard the who’s-who of Silicon Valley venture fund partners that were gathered for a panel at the recent Web 3.0 Conference, or even a recent NYSIA panel discussion featuring Fred Wilson from Union Square Ventures, you’d come away with more of a sense of cautious optimism rather than the “OMG it’s the freaking apocalypse” ethos that many seem to have adopted as the the startup worldview du jour.

So for the benefit of those who might have an interest in what some of Silicon Valley’s VC wonks were saying, I’ve compiled the highlights from the discussion in this third installment from the Web 3.0 Conference. The panel was moderated by Rebekah Wu, CEO of Right Hand Partners. I’ve done my best to attribute comments where possible.

On what should make it into a presentation or pitch to potential investors:

• The most important elements of a startup’s presentation are are the quality of the team, capital efficiency, market strategy, return on investent, and dependencies: what needs to fall into place for you to be successful. (Curtis Feeny, General Partner at Voyager Capital)
• Most VC firms want to know: what do you need to believe in to believe in this deal? It might involve a leap of faith. But what can we prove or disprove? You need to define any assumptions up front. (Salil Deshpande, General Partner at Bay Partners)
• My biggest compaint about semantic startups is that they’re typically trying to find a problem to solve. VCs don’t care about semantic web solutions and technologies — they care about the business case. So don’t mention RFP, OWL, etc. We just don’t care. (Amanda Reed, General Partner at Palomar Ventures)
• VCs want to understand how many people are funded in the space. They don’t want to see too many companies funded — this is almost always a cause for concern. (Steve Baloff, General Partner at ATV Capital)
• Show me a projection of what it takes to get a user and what that user is worth. (Amanda Reed, Palomar Ventures)
• Show me your team, your technology, and your marketplace/market dynamics. Even in a tough economic situation the right spaces can get funding. Example: right now virtualization is very current. Remember that “rising waters will float all boats.” Similarly, if you’re in a terrible market, no matter how good your technology or team, you’re just not going to win. (Prashant Shah, General Parnter at Hummer Winblad)

On defensibility of IP and business models:

• Typically our portfolio companies don’t have defensible IP because traction is often the barrier to entry, not the IP; traction begets more traction. (Salil Deshpande, Bay Partners)
• Defensibility is largely derived from having the best people in your domain rather than from IP protection per se. (Steve Baloff, ATV Capital)
• Stealth and speed are critical. You want to rapidly fail at areas that don’t work. Trying to follow the Salesforce.com example doesn’t work anymore because they spent $70-100 million on defining a new model. The ramp up for a SaaS based model is always slower than your budget. (Curtis Feeny, Voyager Capital)
• You first need to figure out if your defensibility will be determined by your IP or your quality. First figure out if your IP is defensible; sometimes software happens to be really hard to build; other times it’s trivial. (Prashant Shah, Hummer Winblad)

On exit strategies:

• Everybody wants an IPO to be plausible but it rarely is. Rather than shoot for an IPO, most startups should look at being acquired. The most successful startups will align themselves with logical partners and potential acquirers (proactive exit planning). Then when your segment starts to consolidate, you’ve blocked your competition from consolidating with those players. Especially in great IPO markets, M&A deals tend to go up and most exits in your space will be M&A, not IPO. (Curtis Feeny, Voyager Capital)
• The only thing we know about financial projections is that they’re wrong. An IPO is a very unnatural thing. People who take their companies to IPO are really weird people. If you’re starting your first company, your goal should be to simply put enough money in the bank so you don’t have to work again. (Salil Deshpande, Bay Partners)
• Don’t confuse your go-to market with your market plan. Market size has to be somewhat intuitive — either what you’ve proposed seems reasonable or it doesn’t. Whatever you do, don’t rely on Gartner studies to come up with overstated market sizes. (Amanda Reed, Palomar Ventures)
• If looking at an IPO, a VC will ask: have you looked at an S1 for something that’s gone public as a basis for comparison? VCs will care a lot about whether you’ve done your homework and have building blocks for your basic financial model. (Prashant Shah, Hummer Winblad)
• Whatever you do, don’t say that your plan is to be acquired by Google, Yahoo, or Microsoft. It’s simply not plausible and is very, very unlikely. (Lara Druyan, Allegis Capital)

Other insights:

• Plan to need $50-70 million to get a successful SaaS company off the ground. (Amanda Reed, Palomar Ventures)
• When pitching an idea, present a framework in which you can have a dialogue about your idea. There’s no metric or ratio like consumer adoption rates that will compel VCs to invest — they want to see a context and engage in a dialogue. Be prepared to answer: what does success mean to you? (Amanda Reed, Palomar Ventures)
• When evaluating a business plan, the players involved will often determine whether a deal happens. Having seasoned executives who are already financially independent and are committed and “couldn’t say no” to a new idea is a very different profile than a group of 20-somethings with no prior startup experience. (Amanda Reed, Palomar Ventures)
• The SaaS type of model will be more successful in a recession than a licensed software model as companies avoid large up front cash expenditures — these will be the companies that are better positioned to weather the storm. (Steve Baloff, ATV Capital)
• Important question: what precedents can you hold up as a model? VCs will look for an “ACID test” that will provide a basis for your projections. Do your homework — look at what the comparables are. (Steve Baloff, ATV Capital)
• M&A can happen to pre-revenue companies, but you need to be familiar with that ecosystem to have any expectation of being acquired. (Steve Baloff, ATV Capital)
• One risk often encountered by startups: not failing early enough. Your time is incredibly valuable. Often you won’t fail early enough when you don’t define your customer segment. (Lara Druyan, Allegis Capital)
• Target big markets. Dealing with a lot of small markets is not that interesting. This is why most of the companies Hummer Winblad invests in tend to be horizontal or “diagonal” rather than vertical in their market.
• To get a faster sales cycle, bring down your price point - especially with SaaS models. (Prashant Shah, Hummer Winblad)
• On your revenue slide, want to see where revenue is derived from: is it products, contracts, etc.? Show the breakout of each of these categories. Show cost of sales (COGS), gross margins. Costs should be 80% of gross margins. For consulting and service providers, sales costs might be 50% of gross revenue. For a software company, net margins might be 20-30%. (Prashant Shah, Hummer Winblad)
• Think about headcount and how fast it needs to grow. (Prashant Shah, Hummer Winblad)
• Think about how far round A gets you, how far round B gets you, etc. How much invetment is needed to be “all in”? (Prashant Shah, Hummer Winblad)
• At Hummer Winblad, they don’t want to see an exit plan. IRR will be controlled by buyers in the market, not sellers. They’re not investors in quarterly cycles, they are looking for the companies who will become the giants of tomorrow. (Prashant Shah, Hummer Winblad)
• The fundamental difference between now and the dot com crash: this time, we’re not at the center of the event. (Prashant Shah, Hummer Winblad)

I hope this summary was helpful. Also check out the other entries from my Web 3.0 Conference blog series, Part I: Strategy and Part II: Technology

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