I was watching President Bush pardon two turkeys this morning on CNBC (appropriately named “May” and “Flower”) and, as I often do this time of year, reflected on all the things I have to be thankful for.  After spending the day thinking about them all, I decided it really came down to four things:

1) my family;

2) my friends;

3) my fund, and

4) all the fun I’ve had this year living in their increasingly concentric “spheres of influence”.

May you be able to enjoy the holidays with your family and friends.  Happy Thanksgiving!!!

Well, it’s that time of year again. Please mark your calendars for December 11th and visit OCVG to register to attend OCVG’s Annual Holiday Party. This year, we’re going to Disneyland!!! You can go on-line to register to attend and to get discounted tickets to the park so bring your family and come learn who was naughty and nice this year. The party is from 5:30pm to 7:30pm and you can see the details at OCVG. I look forward to seeing you all there!

First, what is a “finder”?  For purposes of this discussion, a finder (a.k.a. broker) is someone who offers to help an entrepreneur secure venture capital in exchange for compensation (cash and/or equity).  Most finders typically charge an upfront fee (to keep them fed and keep their lights on) and also charge a percentage of the amount of money they “help” the entrepreneur raise and/or equity in the company.  Pursuant to the Investment Advisers Act of 1940, finders/brokers must be registered with the Securities Exchange Commission (”SEC”) and licensed to transact in such matters.  Pretty straight-forward.  So what’s the paradox?  The paradox is the finders themselves and whether entrepreneurs should use them to secure venture capital financing.  Before reading further, you should know I’m prefacing my thoughts here with respect to the stage of the companies seeking financing and VCs and referring to early-stage only.  I’ll discuss later stage situations at the end as my sentiments differ there.

So, should you use a finder to obtain venture capital?  I won’t tell you definitively whether you should or shouldn’t, but I will share my personal thoughts on the matter here and summarize by stating that I wouldn’t use one (knowing what I know) for the following reasons, in no particular order:

1. Most finders I have encountered here locally are, unfortunately, not registered under the ‘40 Act and are therefore in violation of securities regulations (i.e. doing so illegally).  As always, consult with your attorney(s) about this matter for the explanation as to why and BE VERY CAUTIOUS if someone offers to make some intros and/or help you “find” venture capital money in exchange for money and/or equity.

2. Most VCs have a ton of deal flow from folks they know very well, respect, and trust.  Why would they entertain a start-up referred from a finder?  Most won’t.  In fact, most financing transactions require the CEO/Founder(s) to represent and warrant that there aren’t any brokers involved so as to avoid potential equity encumbrances.

3.  VCs invest in people so they will want to hear from you, not a finder.  They will also want to establish a rapport with you throughout the process (if they don’t already have one with you) as the financing results in a long-term partnership analogous to marriage.

4. VCs don’t want a portion of their investment going to pay some finder as it is an inefficient use of capital.  They want the money spent to build the business.  Similarly, VCs don’t want the equity of the underlying company encumbered (i.e., have a clean cap table when you approach them).

I realize this post may discourage you entrepreneurs out there — especially if you’ve already retained a finder (legal or otherwise) — but all is not lost.  The good news is that almost all VCs post their phone numbers and email addresses and have a number of ways to reach them to inquire as to their interest in investing in your company.  Personally, I answer my own phone and try to respond to emails as fast as possible with my inclination either way.  Given how many deals come our way on a daily basis, it may take awhile before we respond but most of us will get back to you.  Using a finder certainly won’t expedite any such response and, in most cases, can hinder your ability to raise early-stage venture capital.

So when, if ever, should entrepreneurs consider using finders?  The situations where I have seen finders work is in the very late stages of a company just prior to a liquidity event.  For example, I’ve seen a number of companies retain an investment banks and/or placement agents  to secure large amounts of working capital just prior to their initial public offering.

Until next time, happy venturing.

I attended this morning’s Orange County Venture Group program: “That was fun — let’s do it again!” Serial Entrepreneurs Share Their Secrets of Success and thought I’d share my observations from the event.  However, before I do, I want to recognize Jim, Scott, Al, and Ryan again for serving on the panel and for making it such a great session — thanks again, guys.  Now, back to our irregularly scheduled programming…

We had Jim Armstrong (Clearstone Venture Partners) moderate a panel of seasoned, successful, serial entrepreneurs (I know, a rarity in these parts compared to Silicon Valley) that included Scott Painter (Zag, CarsDirect, Build-To-Order), Al Eisaian (Integrien, LowerMyBills, USWeb/CKS), and Ryan Steelberg (dMark, AdForce, 2CAN Media).  Collectively, they have raised hundreds of millions of dollars and have had a number of successful exits totaling over $1B!  As each panelist articulated his relevant background and how he got to where he is today, a few things stuck out: 1) they all know what they’re good at and what they’re not good at; 2) they have consistently surrounded themselves with great people; and 3) they’re always selling…  What do I mean?

First, they each independently acknowledged that while they were good at taking a company from “0 to 1″, they weren’t / aren’t necessarily good at taking companies from “1 to 1,000″.  As prolific inventor Kazuhiko Nishi puts it, “There are two types of creativity: the creativity of making zero to one, and the creativity of making one to 1,000.”  The panelists realize that most founding CEOs don’t remain CEOs from inception to liquidity and have “mastered” taking companies from the inception point to the hand-off point to those CEOs able to scale the business after traction has been established.  In general, the two activities are distinct, require different skill sets, and are geared to solving different problem sets.

Second, the panelists have consistently surrounded themselves with great people.  They have sought out and hired folks capable of augmenting their skills and even manning the ship when they were away.  I guess it just continues to prove the old adage, “‘A’ people hire other ‘A’ people.”

Finally, I asked the panel at what point they realized they had shifted from “sales mode” to “buy mode” in terms of raising capital for their various endeavors and they’re answer was telling — they’re always selling.  The fact that these guys have been very successful, have investors constantly approaching them to fund their next endeavors, and yet still feel compelled to sell themselves and their visions says a lot about why they have been so successful in my opinion (see my previous post).  Until next time, happy venturing.

For the uninitiated, raising funds (for any endeavor) is nothing if not an exercise in sales.  What do I mean?  Simple.  If you are a start-up looking for capital, you are essentially selling potential investors your vision for the company and that you and your team have the unique abilities and experiences to see the vision through to fruition.  So what does this mean?  It means you need to target the right customers, understand what it is they are looking for, and actually go out and sell them.  All customers these days have an inordinate abundance of choices so why should they choose what you’re selling?  I’ll post more on this topic later, but enjoy my brief thoughts here in the interim.

I was listening to Tim Draper’s The Riskmaster the other night (I’m not sure why, but it has something to do with a newborn and late nights…) and it got me thinking about the “risk” associated with venture capital investments and how most VCs judge the risk associated with any particular start-up…so I thought I’d write a bit on the topic. As I have no desire to delve into the “art” of risk assessment (for want of time), I thought I could at least share a bit of the formalistic “science” (ie questions posed) behind VC risk analysis so that you have a better idea of the type of questions VCs ask entrepreneurs (and themselves) when making investment decisions.

Most VCs generally categorize risk into one of several buckets — the most common buckets being, in no particular order: market, technical, operational, and financial. Each VC weighs the risk associated with any potential deal across these buckets relative to the stage of investments that his or her fund intends on doing, the stage of the company in question, and what it will take to eliminate/mitigate any such risks — and whether doing so is worth his or her time. You see, we VCs are simply risk arbiters when you really break it down. The tools we use to assess, eliminate, and mitigate investment risks may vary by stage of funds and our own personal backgrounds and abilities but, in the end, we are simply “risk masters” that have been both glorified and vilified by the public in the past decade or two.

Market Risks - There are a number of risks associated with this bucket. Some are mutually-dependent and some could arguably be potential single points of failure for a company. The types of questions VCs ask here are along the following lines. What specific market will/does your product or service address? Or does one even exist (ie, do you intend to create a “new” market)? How big is the total available market? How big is the total addressable market (as a subset of the total available market)? Is the market expanding or contracting…and at what speed? Do the targeted customers routinely buy from start-ups? How long are the sales cycles?In summary, you could have the best ____, but it doesn’t matter if there isn’t a market for it.  Answers to these questions will help VCs determine whether the company can become of great value (at least as a function of revenue multiples).

Technical Risks - As most VCs invest in “technology / innovation” types of companies, we will inevitably need to understand the underlying technology / innovation for your product. The types of questions we will be asking you and/or ourselves here are as follows. What is the technology (ie what is its intended function)? Is it theoretical or proven? How is it better than what currently exists? What problem is it solving (or is it simply a “nice to have” rather than a “need to have”)? If it is still just theoretical, how will you prove it (we will need definitive data and lots of it). Is the technology in question part of a system or is it a “stand alone” type of thing? Is the technology defensible from an IP perspective? Any technical dependencies that need to be accounted for? The basis PLC considerations (e.g., design, development, QA, distribution, support, etc.) all come into play here as well depending on what it is your product (or service) is.  Answers to these questions will help VCs determine a number of other risks (eg financial) as well as what the value of the company may become based on its innovation (IP).

Operational Risks - From my perspective, this is the biggest/broadest category as it has to do with everything from the people involved in the endeavor to the business model, legal mechanics, logistical considerations and everything in between. While this category merits its own post, I’ll just leave you with a few questions to think about for now. Are the people involved the “right” people to get the company up and running? Alright, let’s stop here. If you’re like most entrepreneurs, you’re probably asking yourself “what the hell does ‘right’ mean???” Good question and one that you’ll rarely get a straight answer from a VC on but I’ll give it a shot here. By right, I mean to say what is it about you and your back ground that will give me the confidence needed to invest in your company and that you will be successful in building a very valuable company. Put another way, what we are really asking is whether you possess the relevant knowledge to do what needs to be done or will you/we need to bring in someone who does. In the essence of time, I’ll post more later on what it means to be “right” vs. “wrong” in a separate post and move on here. Does the company have the right business model for the targeted market? Is the model efficient from a financial and time perspective? Are there any legal considerations with respect to the start-up (e.g., IP, labor, contracts, securities, regulatory matters, litigation, etc.)? As you can see, operational risks are broad and mutually-dependent with many other risks.

Financial Risks - The financial risk analysis starts with the simple question:  how much money can we realistically expect to make if we did the deal and in what amount of time?  The next question here, based on the answer to the first question, is also simple: is it worth it?  As I’ve explained before,  VC funds are typically limited partnerships with a definitive end-date by which they must “liquidate by” (see VC’s Circle of Life) so any investment must give the fund a degree of confidence that they can invest XXX number of dollars into the company and sell the corresponding stock for ___x (fill in the blank here) their total investment within the term of their fund.  The second question is, therefore, the most important one as it may be possible to make money by investing in a company but the expected return may be too small or take too much time relative to other investments that the fund might do.  Remember, just because VCs don’t invest, doesn’t mean that the company can’t be a going concern and make money for its founders.  It may simply be too little or take too long for VCs given the dynamics under which they operate.  Or, the company may simply require more capital than the VC in question is comfortable with from a dilution perspective.

I’ll write more on each of these “buckets” in the months to come as they each merit further discussion, in my opinion.  Until then, happy venturing!

One of my portfolio companies, My Damn Channel, is up for a couple of TV Guide 2007 Online Video Awards so I thought I’d give them a shameless plug on my blog in case any of you aren’t already aware of them.  I wish them the best of luck for both professional and personal reasons and encourage you to check them out.

In addition to Twitter, I’ve been playing around with Facebook and find it an interesting “tool” to reconnect with old friends and colleagues and to meet new ones. The fact that CRV has earmarked funds for Facebook apps intrigues me and I look forward to seeing how Facebook and Google come to terms considering Google’s recently announced Open Social play.

“Paternal hiatus”… that’s what I’m calling my recent absence from my office and blog.  A long story cut short, my then pregnant wife was diagnosed with pre-eclampsia and put on strict bed rest several weeks ago so I checked out to attend to her and our 2.5 year old son.  The pre-eclampsia developed into eclampsia and necessitated the delivery of our second child  5 weeks early.  We now have a beautiful (thanks to her mother) and healthy baby girl and both she and my wife are now doing fine.  I thank God for both.  Since the birth of our daughter, I’ve spent a number of my sleepless nights thinking (as I always seem to do) and will publish several posts based on my recent thoughts in the days to come.  I thank all of you that reached out to my wife and I during the past couple of months.   We greatly appreciate your kindness and support.