Silicon Valley Frontlines

My Holiday Season Resolution ... Volunteer Business Advisor!

Last Christmas Eve I did a post titled "A Beacon of Hope This Holiday Season ..." about the San Francisco Homeless PreNatal Program. Still there in their 20th year, still doing great work! If you supported them last year as a result of my post, a big thank you. If you can contribute now, please do!

This holiday season I'm personally trying something a bit different. Given my background I'm going to offer my help as a volunteer business advisor through Pacific Community Ventures, a Bay Area initiative that helps small businesses create jobs and opportunities in lower income communities. They have supported many entrepreneurs starting and running bakeries, restaurants, landscaping, bag making and including some higher profile businesses such as Flora Grubb, my favourite San Francisco garden store, or Heath Ceramics, a long-time Bay Area operation.

It's not usually visible to most of us just how hard it is for people to make these businesses work. This recent story about Flora (yes, Flora Grubb is her real name - isn't that perfect for a gardener!) in the San Francisco Chronicle is what piqued my interest in PCV. Without them Flora Grubb (the store) might no longer exist and her 25 employees would be joining the ranks of job seekers. And I'd miss a great place to browse, shop and drink Ritual Coffee Roasters fabulous blends! Here are some pictures I took at a recent visit to Flora's store:

So, not exactly high tech - but important grassroots in our bigger ecosystem (so to speak). Maybe I can help a little bit, and in a longer-term manner than just writing a check.

As always, I hope you and yours have a happy holiday season and prosperous 2011, look out for and take care of the ones you love, and thanks once again for reading my blog!

Cheers!

Philip

The Ten Hottest Private Companies in Tech - Good News for the Valley in 2011?

The good folks at Mashable just published a list of the Ten Hottest Private Companies in Tech, based on a survey by SecondMarket. SecondMarket is a rapidly growing exchange offering (among other things) the opportunity for sellers and buyers to trade private company stock prior to an IPO or other typical public liquidity event. (We can discuss another time how these exchanges operate but they are indeed offering a valuable service to liquidity seekers and prospective buyers). SecondMarket surveyed their buyers and potential buyers about these companies and, In order of most- to least-interest, they are:

1. Facebook
2. LinkedIn
3. Twitter
4. Zynga
5. Craigslist
6. Groupon
7. Yelp
8. SecondMarket(!)
9. Pandora
10. Bloom Energy

As an avid Silicon Valley fan, I love the fact that all except Groupon and SecondMarket itself are Valley companies. And all, except possibly the wacky guys at Craigslist, represent possible IPO opportunities in 2011. And this doesn't even include Skype (new headquarters in Palo Alto; IPO about to spring loose), Art.com, MedeAnalytics (both East Bay) and others in the wings.

Five great outcomes of some or all of these IPO'ing in 2011:

1. Liquidity events are a key driver of VC investment sentiment. While much of that liquidity happens through M&A activity, the big splashes and payoffs from IPO's will enable portfolios to show substantial returns, raise new funds and have the confidence to invest in new startups or growing existing ones.
2. More cash into the Valley economy from employees selling stock, hopefully stabilizing and improving the housing market and the general ecosystem.
3. Greater momentum on the job front as newly public companies scale up with the proceeds (at this stage they are not cash hoarders like the Apples of the world!).
4. A boost to the California economy and budget. Not only does the ripple effect of spending spread across the state but the taxes paid by employees and others in exercising and selling stock would be substantial. In 2006 California personal income tax receipts grew by $4.3 billion from the prior year due in no small measure to employees and others selling their Google stock. During that time Google's market cap grew from $70 billion to $100 billion - and as it happens many people believe Facebook is already approaching the lower number in that range.
5. Talking of which, one benefit is that it would not be all about Google any more ....!

Agreed, all this takes time to ripple through the system. For example, shareholders in an IPO usually have to wait 6 months in a lock-up period before they can actually sell. But sustained benefit over a long period is better anyway ...

Related articles

• The 10 Hottest Private Companies in Tech [REPORT] (mashable.com)
• SecondMarket Releases Q3 Private Company Stock Trading Report (eon.businesswire.com)

A Good Indicator of the Health of the Broader Silicon Valley Economy

One key indicator of the health of the broader Silicon Valley startup environment (my definition includes startups located pretty much anywhere in the greater Bay Area including San Francisco, Emeryville, San Mateo etc.) is the confidence in hiring plans evidenced by the signing of long-term leases for space. In some respects its starting to look like 1999 all over again - but with significant and encouraging differences.

Back then, in the dot.com heyday, what did we have? OK, some companies of true staying power starting to emerge - Google, Ebay and so on. But mostly wreckage in the making - Pets.com (major asset: one sock puppet), Webvan, Excite@Home ... gazillions of dollars raised from VC's and the public and a chunk of it spent in bidding wars South of Market for anything with a roof. And I mean anything - converted auto repair shops, derelict warehouses, rotting death traps with a quick coat of paint and a hundred employees stuffed in. I remember - I was there trying to find space for my first startup! Interesting aside: our original space South of Market was a wonderful old converted smokehouse, all brick and timber, that is now reincarnated as an upscale restaurant, Twenty Five Lusk, opening this coming Saturday - check it out:

Today the demand is back. Zynga just signed up for 270,000 square feet in San Francisco on a seven year lease. Twitter is leasing more space every quarter, it seems. Other startups are ramping up, getting funding, making commitments. San Francisco - specifically South of Market (the old Multimedia Gulch as it was called around South Park) is once again the center of gravity for many internet, media, social networking, gaming and other companies.

But other parts of the Valley also have their share of demand. Want space in downtown Palo Alto? Well, good luck with that. Facebook had to move to California Avenue, well away from downtown, to find enough space. If you can find it you'll pay upwards of $5 a square foot per month ($600,000 a year for a 10,000 square foot space in downtown P.A. In the second quarter of this year Cornish & Carey, a major broker, reported that Class A office space in Mountain View had just a 4.5% vacancy rate (basically fully occupied) - perhaps in part becase you'll pay soemthing like 60% of the downtown Palo Alto rate but with similar ambiance (and fewer panhandlers). Broader Palo Alto had a 14% vacancy rate - though I bet this was more like Mountain View's in the downtown area - along with similar rates in Santa Clara and Menlo Park.

Is the Valley as a whole doing well? Not yet. Class A vacancy rates in Sunnyvale? 42.6% in Q2. San Jose? 37.7% vacancy rate. Drive through San Jose's office parks, as I did recently, and it seems like For Lease signs are on every other building.

So what's really going on and is it sustainable? Well, like the parson's egg, you can see it's "good in parts". And getting better. Clearly a lot is dictated by the type and location of the space and the type of company seeking it. Many of these startups want character, proximity to transport or restaurants and general ambiance. They wouldn't be found dead in a San Jose business park. And the traditional occupiers of those business parks? Still downsizing or "rightsizing" or whatever Mark Hurd was axing to get HP profits up (good riddance to him, and good luck Oracle!). And the manufacturing is still gone.

Is it sustainable? Well, only time will tell. But I'm betting that the Zynga's and Facebooks and many others are far more sustainable long-term businesses than the Webvans and the Sock Puppets. We seem to have learned some lessons, for sure. And once again the broader Valley - certainly compared to the dreadful state of the rest of the economy - shows that there is hope!

 

 

Why Silicon Valley is Still the Only Silicon Valley ...

One of my LinkedIn groups, "European Entrepreneurship & Innovation @ Silicon Valley" has an active discussion thread going on about where the next Silicon Valley might be. I thought it would be interesting to share with you my own contribution to this ...

I've worked a lot with startups in Silicon Valley and have close connections with the Plug and Play incubator in Sunnyvale as well as throughout the ecosystem here. While I agree that things are steadily improving elsewhere (and Plug and Play itself is trying to expand it’s concept outside the U.S.) there is lots of evidence that creating another “Silicon Valley” elsewhere still has a long way to go.

As evidence, I’d point to the significant and rapidly growing group of European startups coming to the Valley, from Barcelona, Austria, Rome, the UK and elsewhere. Their reasons for coming here? In their home countries or generally in Europe the ecosystem of funding, expertise (particularly management expertise), talent, mindset, advisors, legal and so on is still far less well-developed than here in the Valley. The fact is that it’s still incredibly difficult to build a successful business from scratch even with all the tools and resources such as cloud-based platforms available today and a lot of it is nothing to do with the technology itself.

The SV ecosystem is still second to none in helping in the broader aspects of this. In almost every case I’ve seen the only local advantages in Europe seem to be lower cost structures (a SW developer outside Rome costs $30k a year, same as an outsourced India person and a lot less than the Valley) and government-backed loans (if you have the patience of Job). On top of which too many prospective employees in these locations just want a 9-to-5 job with benefits (not the go-for-it mentality of startups in the Valley). And labour laws prevent you getting rid of them if they don't work out.

Another example - a local VC in Spain taking the attitude of "if I invest and you leave, then the equity you already earned and vested comes back to me". So, I punish you if you leave. What kind of stupid attitude is this? Why would you join the company in the first place? I don’t know any Valley VC who will do this – or even think of doing it. Golden handcuffs inasmuch as you earn and keep more the longer you stay, and topping up the options regularly – yes, here in the Valley. But not over there, apparently.

Yet another example - you can incorporate here in the Valley overnight with the help of a top-notch Valley lawyer from Orrick (who will do this for free and a $600 filing fee). OK, his time is minimal and he wants the relationship. But try doing that in Rome or Barcelona or Prague and they look at you like you’re mad (and you would be).

If other locations are really becoming new Silicon Valley, then they would start to siphon off a decent share of the financial lubricant needed to prove an idea and scale it up as a business. Do they? I don’t think so. According to the NVCA about 276 Silicon Valley deals raised $2.92 billion in Q2 2010 versus 216 deals that raised $1.57 billion in Q1 2010. Part of a general recovery? Yes. But in bigger picture this is almost half all the VC money invested in the total U.S. ($6.52Bn) going to the few square miles of the Valley. According to Dow Jones Venture Wire “Venture investors put €1.1 billion into 289 deals for European companies during the second quarter of 2010”. Even though this is a 50% increase over last year its still saying that all of Europe raised less than half the money going into Silicon Valley. China? Raised $689m in the same 3 months. Less than a quarter of the SV amount.

So, who is winning the fundraising game? Today anyway …

Don’t get me wrong. It would actually be a wonderful thing if there were Silicon Valley's in Poland or Abu Dhabi or Kandy or Phuket (my vote). And yes it is slowly changing out there. Not just in Europe - Asia is following suit. But they’re all still a long way from being in the same league as Silicon Valley.

My prediction is actually a bit different anyway. I think the truly successful startups will become multinational early in life and stay that way. They may be headquartered and funded in one place – maybe Silicon Valley or London, develop their software in another – maybe Prague or Hanoi (with employees motivated as part of the global team, not outsourced coders who don’t give a hoot who they’re working for), partner globally and locally and be connected directly with customers all over the world. But that’s not the old 1000+ person multinational. This is 15 people in a quasi-virtual organization yet all bound together with a common identity. And of course this is how we’ll really bring the world together in the future!

Financing Improved In The Fourth Quarter - And So Did Valuations And Deal Terms

In my recent blog I noted that the volume of venture financing completed in the fourth quarter of last year improved somewhat - at least compared to the experience of the previous 9 - 12 months. [I also said that my next post would be on some of the gathering clouds in the Valley funding picture - I'm deferring that for a moment while I fill in some other fourth-quarter details first].

Perhaps even more encouragingly than the simple volume of financings, the terms under which the fourth-quarter deals were completed also showed significant improvement, according to a report from law firm Cooley Godward. For example, the median Series A round was done at an average valuation of $6.15 million - an improvement from the average $5.0 million in the first three quarters and moving back towards the average $7.0 million seen in the prior three years. Similar improvements were seen in Series B and higher rounds as well. Notably, however, in 2009 there were only 11 deals done a at a pre-money valuation of more than $100 million - far fewer, not surprisingly, than the 188 such deals done in the three years 2006 through 2008.

It’s also encouraging to see that the percentage of up-rounds [rounds completed with an increase in valuation from the prior round] improved to 45% in the fourth quarter compared to just 26% in the prior three quarters. While this is still short of the 60 to 80% up-round versus down-round ratio seen in prior years, things have clearly stabilized and improved.

Liquidation preferences continue to be done largely at 1x, although in the fourth quarter was a slight increase in the proportion of series A deals done with between a 1x and a 2x preference. [In simple terms the liquidation preference represents the multiple of the money put in that an investor gets back at a liquidity event, such as a sale of the company or an IPO]. These liquidation preference multiples are still far better than the 3x or more that we used to see in 2002 through 2004 after the dotcom implosion. 58% of the deals done in the fourth quarter included fully participating preferred-which is pretty much the same level as we've seen in the last four years. In simple terms participation means the ability of preferred stock to share in the liquidity proceeds alongside common stock, after the payment of their liquidation preferences.

In non-financial terms, the number of deals with pay-to-play provisions declined in the fourth quarter compared to recent history, while there was a continued increase in the proportion of deals done with drag-along provisions. [Pay-to-play provisions are typically used to motivate investors to participate fully in their pro-rata percentage of subsequent financing rounds, while drag-along provisions are employed to insure that a majority of investors may force a reluctant minority to pursue a liquidity event, for example].

There are various other items worth looking at in this report, so I’ve attached a full copy. Enjoy!

Download Cooley Godward Q4 2009 Venture Financing Terms

The State of Play in Silicon Valley Venture Funding - Clouds on the Horizon?

I went to a session the other day to get the update on PriceWaterhouse Coopers quarterly "MoneyTree" VC funding trend report and thought you'd be interested in some of the observations. If you're in the Valley and likely to be raising money you need to know what's going on out there. So here's the update for Q4 2009 and the year as a whole:

• In Q4 about $5.0Bn was invested in almost 800 deals - a dollar amount in line with Q3 and about 100 more deals being done.
• For the year 2009 a total of $17.7Bn was invested in startups by VC's - the lowest since 1997 and $10Bn less than in 2008.
• 38% of the Q4 number, and 40% of the full year, was invested in Silicon Valley companies, with an additional 15% and 10% respectively in the rest of California. So CA-based businesses account for about half of all U.S. VC investing. By comparison in 2009 just 8% was invested in the NY Metro area and 12% in New England (Boston).
• The number of Valley deals done in Q4 was around 260 - better than any quarter since Q3 2008 and on a par with the rate of deals getting done in 2006
• Early stage (Series A rounds) bounced back in the Valley in Q4 after a dry Q2 and Q3 - good news for newer startups.

Despite the efforts of many regions to create startup hubs and try and replicate the Valley, the share of funding taken by startups in Silicon Valley has been increasing steadily from 23% in 1995 to the 40% mentioned above in 2009. 

Sounds like we're turning the corner on the pace of investment and that the Valley continues to lead the geographical pack substantially. However, if you just pay attention to the dollars you miss a big theme - which is that the bulk of the money gets sucked up by the major capital-intensive segments in the Valley. These are Biotech, Medical Devices and Cleantech. If you're in those businesses you need lots of capital to develop products, gain regulatory approvals and so on - and the good news is that they were getting funded. The growth of these sectors is also a key element in the increasing SV share of funding I noted above. You don't have to go back far to remember the days when the number of companies in those sectors could be counted on the fingers of one hand - Genentech (now wholly-owned by Roche), Acuson (now Siemens) and a few others. And of course Cleantech, as such, didn't exist at all. The diversification of the Valley away from semiconductors, computer and then networking equipment manufacturing towards these newer, major segments has been a huge boon and, again, evidence of the ability of the Valley to reinvent itself time and again.

All that said, the software/internet space still had 177 companies funded in Q4 in the Valley for almost $1Bn (one third of the 2009 total) and the number was a 22% increase over Q3 of 2008. In 2009 as a whole the 619 software/internet companies funded was a 40% decrease vs. 2008. So Q4 was a good exit to the year in this segment. And its still clear that, despite the ease with which many startups in Internet, Social Media, Software etc can get started pretty much anywhere, the majority still get started and grow here, in Silicon Valley.

So where does that leave us? Well, things are definitely better than a year ago. However the panel discussing the results was largely gloomy about the outlook. And not just for this year, but particularly for 2011. In my next post I'll summarize the panel's opinions and add some of my own. Its enough to say that if you can get funded this year then take as much as you can while you can because the longer term has many clouds forming ...

A Beacon of Hope This Holiday Season ...

Every now and then I come across something touching, sharply contrasting - something that reminds me that there are many other human stories that serve to put a better perspective on my own life. It seems particularly appropriate to share this during the holiday season and after such a tough year for so many less-fortunate people.

Whenever I'm in San Francisco I head over to Coffee Bar on 17th St. and Florida to check my email and  catch up with friends on Twitter. A block or so away on 18th St. I often pass a building with the sign "Homeless Prenatal Program". There's a wonderfully touching 8-minute video on the site that really captures the spirit and hope this organization has provided to homeless women and children whose lives have been turned around with their help. Check it out at Homeless Prenatal Program.

To donate to their highly-regarded and effective programs please click here! Here is the video - it's worth watching the entire segment:

I hope you and your family have a happy and joyous holiday season and, no matter what your circumstances, I hope you find a space in your heart to help someone less-fortunate than yourself in some small way.

Best regards and many thanks for reading my blog this year.

Philip

IDC's Top 10 Predictions for 2010

Yes, it's that time of year again. Prognostications and predictions from "experts" all over the world and, my guess, most of them will be saying how next year will be better than this. Er, I guess that's also a prediction! One thing I think will be true - a burst of tech IPO's in the first few months of 2010 unless the markets tank big time. A post coming up on that.

I was able to get a copy of IDC's predictions for technology in 2010 today and I'll reproduce their summary (in italics) below. High level, very general. But sets the tone for a more positive and highly interesting year, I think. All of them augur well for Silicon Valley, one way or another.

"2010 will be a year of modest recovery for the IT and telecommunications industries. But the recovery will not mean a return to the pre-recession status quo. Rather, we'll see a radically transforming marketplace — driven by surging demand in emerging markets, growing impact from the cloud services model, an explosion of mobile devices and applications, and the continuing rollout of higher-speed networks. These transformational forces will drive key players to redefine themselves and their
offerings and will spark lots of M&A activity.

1. Growth will return to the IT industry in 2010. We predict 3.2% growth for the year, returning the industry to 2008 spending levels of about $1.5 trillion.
2. 2010 will also see improved growth and stability in the worldwide telecommunications market, with worldwide spending predicted to increase 3%.
   
3. Emerging markets will lead the IT recovery, with BRIC countries growing 8–13%.
4. Cloud computing will expand and mature as we see a strategic battle for cloud platform leadership, new public cloud hot spots, private cloud offerings, cloud appliances, and offerings that bridge public and private clouds.
5. It will be a watershed year in the ascension of mobile devices as strategic platforms for commercial and enterprise developers as over 1 billion access the Internet, iPhone apps triple, Android apps quintuple, and Apple's "iPad" arrives.
6. Public networks — more important than ever — will continue their aggressive evolution to fiber and 3G and 4G wireless. 4G will be overhyped, more wireless networks will become "invisible," and the FCC will regulate over-the-top VoIP.
   
7. Business applications will undergo a fundamental transformation — fusing business applications with social/collaboration software and analytics into a new generation of "socialytic" apps, challenging current market leaders.
8. Rising energy costs and pressure from the Copenhagen Climate Change Conference will make sustainability a source of renewed opportunity for the IT industry in 2010. 
9. Other industries will come out of the recession with a transformation agenda and look to IT as an increasingly important lever for these initiatives. Smart meters and electronic medical records will hit important adoption levels.
10. The IT industry's transformations will drive a frenetic pace of M&A activity."

For a full copy of the report you can register with IDC and download here

Things Are Looking Up!

Well, I've been taking a little breather from the blog for a few weeks and now it's time to get back in the swing of things!

One reason for the breather - in the last few weeks things have become incredibly busy! While that's good news for me personally after such a quiet year so far, I think it's even more encouraging for the startup community as a whole.

I think we should be encouraged by the apparent stabilization in the business environment, even though problems still abound. It's clear there is improving sentiment and higher confidence and it's showing even for early stage companies. Some examples I'm seeing (I have to avoid using names due to the confidential nature of the information and the fact that I do work for each of the companies mentioned):

• One company is finding significant new interest in it's voice solutions including from a major service provider in Asia
• A software company is engaged in a new customer opportunity that - alone - could increase it's bookings this year by 50%
• A third received a favourable mention in a major trade publication and as a result is getting significant interest from big-name advertisers for opportunities in it's social network
• A fourth just closed it's first revenue deals after launching many trials earlier this year
• A fifth is accelerating it's efforts to ramp up business here in the U.S. on top of it's European successes
• I've just been approached by a company looking for help in evaluating multiple possible acquisition offers

I could not say any of this earlier this year. And it's both refreshing and welcome to be saying it now! Unfortunately this has not yet translated into closing of new funding for these companies - but you know that this kind of progress will get VC attention sooner or later.