Venture Capital Background - Grunge Wordcloud Concept.

By Shomit Ghose, Managing Director & Partner at Onset Ventures, member of ICDK’s advisory board

In the midst of Silicon Valley ‘s current climate – specifically The-Bubble-That’s-Not-A-Bubble in which we live – we’ve seen an explosion of company financings and an explosion in company valuations. At the earliest stages, there were an astounding 70,730 start-ups receiving angel funding in 2013. At the same time, at the latest stages of financing, there are now over 100 private companies – “unicorns” – with valuations in excess of $1 billion. In this frothy environment, what’s the best way for a start-up, particularly one based in Denmark, to secure interest and start-up funding from Silicon Valley venture investors?

Despite today’s frenetic funding environment, the best path to getting start-up financing remains the same well-worn path that’s always prevailed: getting a personal introduction to a partner at the right venture fund; focusing on an addressable market that’s multiple billions of dollars in size; having a disruptive business model; having unique and defensible technology; having a talented and tenacious founding team; and deal terms that are appropriate for the company.

In addition, companies that garner the most investment interest nowadays are the ones with business models that are relentlessly data-centric. Whether it’s wearables, the Internet of Things (IoT), 3-D printing, next-generation cyber-security, or the sharing economy, everything today is driven by masses of data. For example, wearables and the IoT provide an interface for the physical world to the Internet; these devices are producing huge volumes of data at the network’s edge. But wearables and the IoT can only provide value when their data can be captured and analyzed. Consequently, the business model here is explicitly not about the devices themselves but about understanding the data produced.

Similarly, 3-D printing largely presents an exercise in personalized manufacturing that is driven by data. Just as Big Data personalizes content in print (Google), video (Netflix), and audio (Pandora), Big Data will also drive the content (aka. personalized manufacturing) of 3-D printing. With the Big Data dynamic in mind, Danish IT start-ups wishing to attract the attention of Silicon Valley VCs today should be advised to define their value propositions and business models from an acutely data-centric perspective. The IT industry has only just begun to harness the power of Big Data, and start-ups who are pioneering new ways of examining and gaining insight from huge volumes of data will be tomorrow’s biggest success stories.

In addition, Danish start-ups should be prepared to move their management teams – though not the rest of their companies – to Silicon Valley for the first few years of the company’s life. Early-stage start-ups face extremely high execution risk, and those risks are best mitigated by having the founders proximal to their company’s Silicon Valley investors. Of course, about half of US venture capital dollars today continues to be invested in Silicon Valley. But crucially, the Valley also has the world’s deepest supply of risk-willing investors, the majority of whom are former entrepreneurs and battle-hardened veterans of the start-up wars themselves.

Today, the climate for early-stage start-ups in Silicon Valley is the best it’s ever been. The combination of passionate entrepreneurs, experienced investors with plentiful capital, and new business models founded on Big Data make it the best time in history to start a company that may become tomorrow’s Next Big Thing.

From downturn to recovery – 2011 Silicon Valley venture capital stats

SVForum quarterly venture overview: 2011 year review

On Feb. 7 2012 SVForum gathered a group of venture capitalists, entrepreneurs and the business community to report on 2011 venture statistics. Following the presentation of stats, SVForum invited partners from Norwest Venture Partners, Venrock and Hummer Winblad to a panel debate on the broader outlook of the Venture Capital industry in 2012.

On the road to recovery

The general picture of the venture capital (VC) industry in 2011 once again confirms the often-cited fact that one-third of world total venture capital is located in Silicon Valley. Another one-third of the remaining capital is located in the rest of the US, while the last part is scattered around the world.

Many other stats presented also validate that Silicon Valley continue to be the strongest area in the US in terms of VC. More specific, the total amount invested in Silicon Valley was $11.6 billion in 2011 up from $9.1 billion in 2010. Compared to the New England region, which ranked second in the US, where the total amount invested was $3.2 billion in 2011 and $2.6 billion in 2010. Also, by looking at number of deals made in each region in 2011, we see evidence of Silicon Valley and its venture capital dominance, namely 1.158 deals were made compared to New England with only 441 deals.

In terms of industry-specific investments, we find that Software is the sector receiving the most funds from VCs. Software based firms received a total of $6.7 billion in venture capital in 2011, up 38% from 2010. The second most valued sector is biotechnology which raised $4.7 billion in 2011 – an increase of 22% compared to 2010.

A VC industry in disequilibrium?

From these figures, it was argued that the VC industry in general has made a smooth landing after the economic downturn that began in 2008. The total investment in 2011 was $28,4 billion, up 22% compared to 2010. This level of investment is close to reaching the levels of 2007 (and 2008 before the downturn).

On the negative side, there are some reasons for being concerned about the future of the VC industry as whole. The stats presented at the meeting also indicate a disequilibrium between the amount of VC investment and the inflow in venture capital funding. This has created a funding gap that could influence VCs ability to provide funding in the future. The gap is not a new phenomenon, indeed in the last four years the industry has had a year-end deficit of $4 billion in 2008, $3 billion in 2009, $9 billion in 2010 and $10 billion in 2011. On top of that, one of the major institutional venture capital contributors in the US, Calpers, is planning to drop their venture capital allocation in 2012 from 7% to 1%, which will further hurt VC funding opportunities for some time to come.

On a separate note, Steve Goldberg from Venrock, commented that the upcoming IPO of Facebook will funnel money back into the Angel/VC environment, providing some optimism to the entrepreneurial community in spite of the expected decline in VC fundraising.

Implications for entrepreneurs

What do these stats mean? And how will it affect entrepreneurs in 2012? The panel debate with three venture capitalists tried to address together with other issues faced be entrepreneurs and VCs.

It is clear from the comments by the panelists that requirements for getting your start-up funded by VCs is increasing. The bar will simply be set higher. VCs will be more selective and will focus even more on picking only the really good deals. The evaluation of a start-up should add up to a multi-million market potential before the start-up becomes interesting from a VC perspective. Also they want to see ideas that present a clear value proposition.

Generally the panelists commented that they give a lot of attention to the team behind the start-up. Proven record and experience with dealing with critical stakeholders to your start-up is regarded as highly valued.

The comments from the venture capitalists are all rather well known – nothing really unexpected was expressed. If you are a start-up, getting funded should never be considered an easy task. Ann Winblad from Hummer-Winblad venture partners noted that, in the end, “building a start-up is about assumptions, which is also why it’s called venture capital. As the start-up unfolds its execution plan these assumptions will be tested against the market, revealing whether the assumption was right or not”. On top of that, some concluding advise from the panelists to the entrepreneurs was to “unwrap” your ideas and get feedback from relevant people. Too often entrepreneurs are afraid of having ideas stolen – which rarely happens – resulting in good ideas being lost because experienced executives could not provide feedback.

Recent Trends in Cleantech Investment and Innovation

This week, the Cleantech Group in cooperation with law firm Foley and Lardner released its quarterly report on “Cleantech Investment and Innovation Trends”. The Cleantech Group provides data and analysis and the report takes a closer look at recent trends within venture capital, technology, innovation, patents and IP within the cleantech sector. The Cleantech team at Innovation Center Denmark took a look at the report and some of its main points.

Second Quarter of 2011

The report highlights that the second quarter of 2011 saw a global cleantech VC investment of about $1,835 million across a total 161 deals made. Although this is a lot less than Q1, which came in at the second highest VC investment quarter ever ($2,747 million), Q2 did end up slightly higher than the second half of 2010.One reason for the drop is that Q2 only saw one deal for $100 million when American automaker Fisker Automotive managed to raise capital. On the contrary, Q1 saw no less than seven $100+ million deals which is part of the explanation for the bump that quarter.

Trends to watch

The Cleantech Group sees four trends that VCs and techies should be aware of. These are:

  • Large markets in particularly Solar and Wind are still areas of great potential for growth as there are many market niches to be found.
  • Taking out patents in the Energy Efficiency sector is not an easy job. The sector is highly driven by software, which makes IP very difficult to control. Rather, it’s about the business model and the execution of it.
  • The impact of corporate cleantech innovation should not be underestimated. Corporates still play a large role in investments and patent filings.
  • Countries leading in corporate innovation are not proportionately backed by venture investments. Japan and Germany are leading in corporate innovation whereas Canada and the UK are leading in venture capital investments, both after the US though.

Especially the two first spring to mind, partly because Solar and Energy Efficiency were by far the biggest sectors in Q2 – both in terms of dollars spent and number of deals.

In Solar, Cleantech Group still sees the traditional upstream photovoltaics value chain as going strong. Solar Cell manufacturer Suniva, for instance, signed the largest deal of $94 million in Solar in Q2. However, growth opportunities can be seen in more and more downstream solar companies such as Enecsys, Sun Run, or SolarReserve. The reason for this shift in focus is that the traditional solar market is maturing and moving towards end systems. This is also seen as one of the reasons that Energy Efficiency was the leader both by amount raised and number of deals.

Focus is shifting towards end-user technology also for energy management and lighting companies. These operate in many different niche markets and this is what creates a lot of investment opportunities for VCs.

In Silicon Valley we’re all Gold Diggers
Silicon gold rush 2.0: The next wave of high-tech IPOs

Monday nights at Stanford University europhiles come together to listen to the most inspiring entrepreneurs from the old world. In late January Juha Christensen a Dane and Vassilis Nikolopoulos from Greece let the crowd walk away with some Silicon Valley principles to follow for those hoping to be part of the next gold rush.

A general agreement between our two tale telling European entrepreneurs is that the VC industry in Europe needs to put much more focus on choosing winners. As Juha Christensen puts it “In Denmark the peanut butter is spread evenly on the bread – really it is about putting it on in chunks”. For the gold digger the lesson is to dig for the biggest nugget one can imagine.

In Silicon Valley the appetite for risk is essential for the entrepreneurial ecosystem. The fact that failure is not a career killer as it is in many European countries is one of the reasons why people dare to take on much more risk. “The first question investors asked me when I arrived in the valley was: How many times did you fail? And not how many times I succeeded,” says Vassillis Nikolopoulos. The lesson for the gold digger is that you probably will not find that nugget you’re looking for on day one. In order to sort gold from stone you need to have mistaken the two before. So keep on digging.

As in the 1849 gold rush the supply has created the demand. 1/3rd  of the world’s venture capital is found in Silicon Valley. And the availability of capital is one of the reasons why Silicon Valley continues to be such a good place to be an entrepreneur. So as during the California Gold Rush people still go where they believe they can cash the big prize and the hopeful entrepreneurs in Silicon Valley today are not much different from the gold diggers of 1849.

Hvilken slags kapital skal jeg søge?

Jeg deltog i torsdags i et iværksætter event som (igen!) omhandlede anskaffelse af kapital i disse svære økonomiske tider. Foredragsholder Côme Laguë, ejer af Nueva Ventures, fortalte om hvilke muligheder, man som iværksætter har, når man skal anskaffe kapital til sin virksomhed, samt hvad der gør nutidens økonomi både attraktiv og uattraktiv som iværksætter.  Her er hans udtalelser og gode råd. Continue reading “Hvilken slags kapital skal jeg søge?”

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