I have been looking at the “water sector” (broadly defined) for awhile now but haven’t seen many investments being done thus far… so I was pleased to see fellow local VC, SAIL Ventures, announce that they recently made such an investment.  In fact, I reached out to Walter Schindler and asked him to send me a brief Op-Ed on the company for my readers as one of the things I’m looking to do more of is to have guest bloggers of relevant interest to my readers.  So, without further adieu, tell us about your fund’s latest water investment:

“SAIL’s latest investment is in a company with breakthrough technology in the area of industrial waste water recycling.  MicroMedia Filtration (MMF) represents a remedy to the growing global problem of industrial waste water. According to the World Bank, 80 countries are now experiencing water shortages severe enough to have an impact on the health and economic output of their populations.  2 billion people - roughly 40% of the earth’s population - do not have access to clean drinking water or sanitation. In the midst of this emerging water shortage, many industries simply waste water or recycle waste water inefficiently.  MMF’s unique process changes how wastewater is treated. This system has an 80% smaller physical footprint, can be built at half the capital cost, uses 85% less electricity, resulting in clean water with virtually no greenhouse gas emissions. MMF is a win–win –win – recycling waste water more efficiently, allowing a greater supply of drinking water, and using less energy at lower cost.”

Stay tuned for more guest bloggers in the weeks to come and feel free to write me with suggestions.

For those of you that know me, you know I have always been a big fan of disintermediation (i.e. removing the middleman or intermediary) - both from a cost reduction perspective as well as from an operational efficiency perspective.  In fact, I am always intrigued by start-ups claiming to truly disintermediated an industry in a novel way and have actually invested in a few over the years.  My post today results for two reasons 1) several readers pointed out that I have not posted recently and 2) there is a real potential downside to disintermediation for start-ups that needs to be mitigated.

The downside to disintermediation is that, by practicing it, you are cutting someone out of the picture in some way…and such ways tend to cause materially negative economic consequences to the disintermediated…and such displaced companies (individuals) tend to react antagonistically towards the cause of their new economic pain.  So, what’s a start-up to do if they are attempting to disintermediate one or more “giants” with significantly more resources?  In a word, partner.  Consider developing channel partnerships rather than taking on the Goliaths with a direct sales force…consider ways to create true “co-opetition” such that you can partner with incumbant in one area and compete in another.  At one of my previous employers, we used to joke that it takes an oligopoly to bust a monopoly.  So all you start-ups out there attempting to disintermediate an 800lbs. gorilla or two, partner up!

Well, I was going to write a post about angel funding to go along with my “Start-Up Tool Kit” post from this past Thursday (see post immediately below)…but I’m a BIG believer in not inventing the wheel for the sake of doing so.  I will, therefore, simply point you to a great piece I found by fellow SoCal VC Mark Suster about Angel funding called “Angel Funding Advice“.  I agree with what Mark has written and implore you to read it if you’re an entrepreneur looking for your first financiers.  We VCs see far too many deals to invest in a company with encumbered cap tables…unless we are convinced that it will be substantially more than worth our efforts to do so.

Most of you know I am a “reformed” or “recovering” (take your pick of adjective) attorney and have written before about them in my posts (e.g., click here).  Most of you also know that I am friends with so many great attorneys that I never play favorites — I simply send people to My Attorney List, based on what type of attorney they need, and let them pick based on their own preferences… so I feel a bit weird writing about a particular firm’s offerings, but this struck me as something my readers would appreciate so I felt compelled to share.

Orrick recently launched what it is calling a “Start-Up Tool Kit“… a set of “resources designed to aid start-ups and their founders on the journey from the ‘garage’ to the global marketplace.”  Maybe I shouldn’t have been, but I was (pleasantly) surprised to see such a big firm offer this.  Way to go Orrick!  Along these lines, folks can also find useful model legal docs and resources on the National Venture Capital Association’s website here.  My recommendation would be that Orrick’s tool kit and the NVCA’s model docs are great places to start the process, but are in no way a substitute for a good corporate counsel (see my previous post on the matter).  Happy Lawyering!

I was at D7 the other week and spent a fair amount of time discussing the “value of free” with attendees.  The juxtaposition of traditional media and consumer Internet hinges on this concept so I thought I would explain a bit about what I am referring to.  At the risk of oversimplifying here, a vast majority of consumers expect information/entertainment (a.k.a. “content”) on the Internet to be free in that they are not accustomed to paying for the content the Internet provides them.  In fact, there is a whole generation of consumer digital denizens that only know the “Web 2.0 / free” world of the Internet.  This poses a potential problem for the related industries: how do we make money if the consumer of what we produce/source/distribute expect that it will remain free?

The answer has historically been that the value exchange for such content was simply this: I provide you with my (valuable) time and you provide me with the content to occupy such time.  In the exchange, you then sell advertising against my time based on my gender, age, socio-economic status, and other such demographics (a la broadcast television through most of its history).  This has historically worked reasonably well for all when there were finite choices for content.  See where I’m going here?  That’s right, this model becomes a bit challenging as the sources of content outpace the Total Consumers Time (a.k.a. “TCT” - calculated as the total number of targeted consumers multiplied by the daily total number of minutes they spend on line).  The issue has become somewhat exacerbated  the past couple of years as the rise of social media and Web 2.0 tools has turned these consumer into creators of content themselves such that all consumers may someday become creators of content on-line.  Additionally, the number of minutes consumers spend creating content and consuming consumer created content (a.k.a. “User Generated Content” or “UGC”) only lessen the TCT…which, in turn, negatively affects the advertising revenue of the “professional” content creators and distributors.  The primary current solution is to spread advertising budgets across more and more content sources such that even when annual ad budgets increase, they are allocated across a broader spectrum of destinations…for the time being.  Less you think I’m against consumer Internet, I’m not.  Not even close…

The power of the Internet and all it entails is that it is becoming easier to qualitatively and quantifiably measure the reach and impact of advertising relative to an advertiser’s targeted demographic.   Furthermore, advertising is changing to take advantage of such technical capabilities and the sophistication of tech-savvy consumers and is becoming much more interactive.  More and more brands are exploring “branded entertainment” and looking to develop certain deep psychological associations with their products and services based on where and how they advertise.  While I strongly believe that this will, eventually, lead brands away from UGC to high-quality professionally-produced content for the bulk of their advertising budgets, I’m really curious to get all of your thoughts on this matter.  So, what do you think about the “value of free” and where online advertising is headed???

As you might imagine, I am constantly asked out to raise capital from VCs and what VCs are looking for.  In fact, I am asked so often that I wrote a piece about it awhile back titled Hope is Not a Strategy simply to be able to point folks to the post.  Well, I recently had an “epiphany for a post” while at D7 this week and spent the short drive home thinking about it some more.

Let me first set the stage.  We were at lunch and sitting at a table of 8.  To my left was an entrepreneur (to his left was Rupert Murdoch) and to my right was a VC friend of mine.  The entrepreneur and Rupert were in a discussion and, at one point, the entrepreneur leans over and asked my friend what he will invest in.  My friend’s response: “whatever I happen to be interested in.”  The response may seem flippant at first, but let me explain why it isn’t and why more entrepreneurs should pay attention to what VCs are interested in and only target those with an expressed interest in companies in their areas of interest.

One of the frustrations entrepreneurs commonly lament is that it is so hard to get a meeting with a VC.  Well, we VCs are extremely busy and very sensitive to the “return on time” factor as to how we allocate the hours of any given day.  Here in SoCal, there are so few of us (by comparison to Silicon Valley and New England and despite the population of SoCal), that the matter is further exacerbated.  So, what does this mean?  It simply means that we allocate our time towards areas of interest.  We are all looking for the companies that meet the general criteria I list in the above referenced post so it is even more important to learn what we are interested in…and understand that our areas of interest may (and likely will) change over time based on numerous considerations.  As I was thinking about this matter, I called a friend/entrepreneur I know and discussed the matter a bit with him and he quickly suggested that while my thoughts here were solid, I overlooked the fact that it can be very difficult for entrepreneurs to determine which VCs are interested in what and that their websites can provide clues but tend to be deficient to the degree that I’m talking about here.  Good point.  In fact, I’m hereby declaring to make some changes to this blog to clarify my interests and will also make some changes to our fund’s website in the coming weeks that hopefully helps explain a bit more about what I/we are interested in…so stay tuned.

Hi, my name is Marc… and I’m a recovering attorney.  Well, maybe I should say “reformed” instead.  Actually, while I like to make jokes at my former profession’s expense, a good number of my friends are attorneys (or ex-attorneys) and I am privileged to work closely enough with some of them on a weekly basis so please don’t misconstrue any animosity here.  I thought I’d re-post a popular piece I wrote in early 2007 about choosing legal counsel after being inspired by a recent piece by Jason Mendelson titled: Quick Ways to Get Fired as a Lawyer.  I strongly encourage you to read Jason’s piece in addition to my spiel below.

I’ve had the good fortune to work with some really great attorneys over the past fifteen or so years and would like to spend a few minutes explaining just how important they are to the VC ecosystem and, in particular, to entrepreneurs given the number of questions I’ve fielded of late as to whom to go to for legal service in OC. Rather than try to address each situation that I was presented with here, I’ll answer generally like any good (reformed) attorney and simply say it depends…and then provide you some general considerations when choosing an attorney.

First, I strongly believe that having one or more good attorneys in your corner can really help you at the inception of your new business endeavor and you should get them involved early and often (once you’ve decided on who you want) as they can truly help you avoid the frequent initial mistakes at a minimum. Some will tell you that a good attorney can be worth his or her weight in gold, but I prefer to think in terms of diamonds; namely, the right one can shine as brightly under the right light and should also be chosen based on the “4 Cs”. So, what are they? Simply put, they’re Competence, Chemistry, Collaboration, and Cost and I’ll take each in order.

Competence: You should retain the right attorney for the job based on the job at hand and the attorney’s competence in performing such job. This may seem like common sense, but you’d be amazed at how many people simply use their friend, neighbor, [fill in the blank], regardless of his or her specialty, out of convenience rather hire a domain expert. Doing so can be extremely detrimental to an entrepreneur, especially one in a sector where intellectual property truly matters. For the record, I’m not suggesting you don’t confer with your friend, neighbor, etc that is a litigator or maritime lawyer, I’m simply pointing out that (in my humble opinion) you should consult an expert in the subject matter you need help in. For example, you should consult with a corporate finance attorney with experience in representing start-ups in company formation and financings rather than a general practice attorney who dabble in a number of areas of law. Most good attorneys will be more than willing to refer you to an expert in a particular field when the matter is one off their proverbial reservation. Fortunately, there is a number of competent attorneys right here in OC with a vast array of specialties and extensive experience.

Chemistry: Bottom-line, you need to be able to work with your attorney and to trust him or her implicitly given the nature of the business you will likely be conducting with him or her. If you’re constantly at odds with your attorney, it can hinder your progress as a start-up. Spend some time upfront getting to know each other to see if he or she is someone you can work with. A good attorney will be rowing the boat right along side you and become a true team member. Again, it may seem like common sense but I’ve seen the uglier side of this relationship and it’s a very big distraction at a minimum.

Collaboration: This is similar to chemistry. You need to retain an attorney that not only understands your issues, but can dynamically work well with you to resolve the issues and get the work done. It is also a good idea to choose a local attorney as working with someone from afar on the litany of start-up legal issues can be a challenge and, in my opinion, deprives you from getting the most bang for your buck. It’s much better to be able to pop into your attorney’s office and chat, review docs, etc. than to attempt to do so by electronic means. Choosing a local attorney may also come with the fringe benefit of utilizing his or her offices and conference rooms for meetings with your team, investors, and the like (you know, when you don’t have an office yet and/or are trying to keep your burn down like a good entrepreneur). The other thing to consider here is whether your attorney is part of a larger firm that has a diverse set of practices to grow with you as your company grows. Having said that, I’m reminded of a plaque my father (a career pilot) had on his desk that read something like: “It’s hard to soar with eagles when you’re surrounded by a bunch of turkeys...” so I feel compelled to point out that it’s not always a good idea to rely on a single firm for all your matters just because you like and work well with one particular attorney. Make sure you’re getting the expert advice you need and will be presumably paying for rather than deal with a bunch of turkeys just because they share a nest with your legal eagle.

Cost: Before all you big-firm attorneys panic and think that I’m going to suggest that entrepreneurs simply get the cheapest attorney they can to preserve their much needed cash, relax…that isn’t even remotely close to what I have to say here. I use the term “cost” here but I just as easily could have used the phrase “value exchange”…but it wouldn’t have started with a “C” and would have therefore thrown off my analogy. The value exchange I’m talking about here is simply making sure you receive appropriate value for the money you spend on your attorney (which goes to the other 3 Cs). It can actually be, and often is, more expensive to go with a particular attorney just because he or she is cheaper. How? Simple. A good attorney brings more to the table than just basic legal service. He or she has presumably worked with a number of companies you might want to work with but are unaware of, know a variety of capital sources, know a number of potential employees that you’d be interested in hiring, etc. Additionally, a really good attorney will help you avoid some common mistakes with respect to incorporation, patent prosecution, equity/debt financing, etc. that a lesser attorney may inadequately do. Avoiding such initial mistakes can save you money in the long run and ultimately prove to be cheaper for you overall. So go forth you brave entrepreneurs, lawyer-up, and build great companies here in OC.

I thought I’d expand on a post written by Ben Kuo (Venture Capital Booms in the OC) and point out while our county’s start-ups have raised ~$110M in the last week or so, we have also had our recent share of liquidity events.  A very big congratulations to Michael Hajeck and his team at SiliconSystems and to their new parent, Western Digital, as it was announced last week that WDC acquired SiliconSystems for $65M cash!!!  I also feel compelled to congratulate the guys over at Miramar Venture Partners as they were early investors in SiliconSystems.  Looks like a “3-way” win for Orange County to me…

As most of you know, I am a big supporter of almost all things pertaining to the Tech Coast and in helping SoCal grow its venture ecosystem (now #2 in the U.S.)… so today I am excited to announce the launch of:

Southern California Tech Central

Tony Karrer has spear-headed this effort and is off to a great start.  Southern California Tech Central is a community of people in Southern California who have come together to help find and organize the best content from blogs, news sources and other web sites all around technology in So Cal.  The goal is to create a place where it’s easy to find current and highly relevant content.  And perhaps to stimulate new connections.  This site is being sponsored by the Technology Council of Southern California and TechEmpower.  If you are involved in SoCal’s tech scene, you truly owe it to yourself to check it out.

For all you night-owl entrepreneurs who struggle to make it  to our early morning affairs, we’ve heard you and are responding.  Register FAST, this will “sell out” ’cause, what’s not to love???  Booze, food, digital media, and Laguna Beach… 3 of my favorite things.

DATE: Thursday, April 23rd

TIME: 5:30-9:00PM

LOCATION: [seven-degrees] 891 Laguna Canyon Rd. Laguna Beach

At OCVG’s first evening event of ‘09, learn from some of the quickest minds in Digital Media how they’re challenging the powers that be, raising BIG $$$ from VC’s and creating some of the coolest companies on planet earth.  As an added bonus, OCVG will host this mega networking event at [seven-degrees] in Laguna Beach — one of the hottest venues in Orange County.  We’ll have lots of munchies and FREE wine & beer.  Don’t miss out.  Stake your claim and RSVP NOW at www.OCVG.com.Our panelists include:

Dennis Mudd, Founder & CEO, Slacker, Inc. – Slacker creates the perfect personalized radio station for every listener by combining the knowledge of music experts with your preferences..  Since inception five years ago, the company has raised $53 million from “A-list” VC’s including Mission, Centennial, Rho, Austin Ventures and Sevin Rosen.  Before Slacker, Dennis was CEO at MusicMatch, sold to Yahoo for $160 million in 2004.

Jason Feffer, Founder & CEO, SodaHead.com – SodaHead is the premiere opinion-based social community for user-generated Q&A on today’s hottest topics.  Founded only two years ago, the company has raised more than $12 million from savvy investors including Mission Ventures, Mohr Davidow, the Tech Coast Angels and legendary Silicon Valley “über angel” Ron Conway.  Before founding SodaHead, Jason was VP Operations at MySpace.

Mark Kern, Founder & CEO, RED 5 Studios Inc. – Red5 is an independent online game developer led by the talent behind Blizzard Entertainment’s Massively Multiplayer Online (MMO) hit, “World of Warcraft.”  To help fund their drive to become the leading studio for creative, original MMO games for global markets, the company has raised more than $18 million from top-tier Silicon Valley VC’s Benchmark and Sierra Ventures. 

MODERATOR: Bong Koh, Venture Partner, Prism Venture Partners – An expert in starting, growing and selling companies, Bong focuses on digital media and consumer Internet investments at Prism’s Santa Monica office.  With $1.25 billion under management, bi-coastal Prism is a leading investor in digital media start-ups. Before joining Prism two years ago, Bong was a VC at Advanced Technology Ventures.  Prior to this, Bong was co-founder of Mobilocity, a mobile solutions provider he sold to a joint venture of Qualcomm and global ad agency Omnicom.