Consumer internet is still the hottest US VC investment category, swiftly followed by clean tech and energy

The sector was voted the hottest growth area in the industry with 73.5% of those VCs polled backing it. Cleantech and energy is the second hottest growth area in the venture capital industry, according to more than half of (53.1 per cent) venture capital executives, third place goes to Internet Marketing with 40.8%.

Perhaps the question for those hunting more innovative products and business models at better valuations is whether they should be following this trend? Although it is a positive sign for early stage growth companies whose investors are looking to exit in upcoming fundraising rounds.

Overall, the annual study’s results indicate optimism in the venture capital scene compared to previous years. Over half, 56 per cent, of US venture capital executives are more confident and optimistic about the industry today, compared to a year ago when an overwhelming number of executives felt the industry was ‘broken’.

The survey found executives to be split down the middle when it comes to which geographical region currently represents the area of hottest investment opportunities, with 42 per cent indicating the east coast, namely Boston and New York, and 42 per cent Silicon Valley.

Seventy-one per cent of respondents are not worried about new deals and 72.9 per cent indicate they expect to see a steady deal-flow over the next six months.

When asked to identify which functional trends they were most concerned about, 62 per cent of the executives indicated they were very worried about the uncertain return of exit markets.

The survey also asked how the tax legislation on carried interest will impact the venture business and 46 per cent indicated it will have a major negative impact, while 16 per cent believe a ‘work around’ will be found.

This (second) annual VC survey was undertaken by Polachi Inc, a provider of Access Executive Search, canvassing VC executives across the US of which more than 98% are partners or managing partners.

I recently came across a commentary that goes along the lines of VCs know what to do with engineers but engineers don’t know how to deal with VCs. As with all good lists, and entrepreneurs like making lists, it centres around recurring issues for the inventor when dealing with a VC. Issues that are worth refreshing in this author’s opinion:

VC’s don’t sign non disclosure agreements – it affords them protection if they like your ideas, but they want to fund someone else to do them. How do you legislate against that when they have all the financial muscle and contatcts? The answer is it is not just about NDAs and patents but core competencies and brand, so approach with caution.

VC’s are sheep – they will either all fund something or none of them will, so if you have an idea that’s too new and too different you may struggle to find funding. Too right! It’s not just about self promotion, you have to promote your sector and hang a big sign over the exit..

VC’s aren’t technical – they dismiss what they don’t understand, your novel ideas, and they focus on what they know, usually irrelevant marketing terms or growth predictions. If your idea’s too new and different for the expert to understand then you may not get funding. BUT isn’t there much more to achieving commercial growth than building a great product? Have you considered treating your VC as your target customer? Maybe engineers should run the world but they don’t – Deepwater Horizon anyone?

VC’s don’t take risks – VC’s have a reputation as risk takers – they are not. They collect money from rich people to build investment funds. The rich investors take some risk, though their risk is spread across the fund’s investment and is often a tax benefit. Are they solely interested in making blockbusters and sequels? They certainly have a formula and like to stick with it, this is why you need to know A LOT about your investors and choose them carefully. You wouldn’t sell a Ferrarri in a Wal-mart, place your investment just as you place your product and pray you can find some like-minded people with influence and some discretion over the capital in play.

Venture funds are big – If your idea needs a lot of money, then you have a better chance of getting money than an idea that promises the same rate of return for much lower investment. This is because it’s easier for the VC to manage fewer big investments than many smaller ones. True, but most are transparent on deal size, the important thing isn’t how much your company is worth or how much you can spend, but that you spend it well and with purpose.

VCs collude – They price fix by discussing among themselves funding and pricing for candidate start-ups. They will probably between them only fund between two or three companies in an industry – this limits competition and makes success of the few more likely. Absolutely, they hate competition to fund good ideas and the worst thing is they are spoilt, so spoilt they invest next to nothing in enhancing dealflow, how many sponsor or educate & participate in conferences freely? Are they trying to innovate or harvest ideas?

With thanks to Nick Tredennick, Brian Shimamoto and Alan Barrell. To be continued…

There is good news for start-ups this Monday. Index Ventures, a EU based firm has launched a new fund focusing on early stage deals, and plans to invest in twenty companies over the coming 24 months. Aside from the positive indicator that money is being raised in order to invest in new companies and that we’re seeing signs of life from the VC sector, what really differentiates this move by Index Ventures is its strong focus on the startup, and it’s approach to investment in them.

What this means is that the partners of the firm will take an active stake in the start-ups by joining their boards, this is a shift away from the status-quo of larger firms whose partners typically don’t engage the startup team due to time constraints or otherwise.

Index Ventures new seed fund is exactly what needs to happen in the VC industry. VC’s need to take a more hands on approach in their invested firms to ensure a greater success to failure ratio, and at the same time, they need to fill the gap in early stage capital that is lacking in many European markets. Some of Index Ventures prior investments are MySQL, Skype, Playfish and RightScale.

In more financing news, the Guaridan has reported that Luke Johnson, the man who brought Pizza Express to market in the 1990’s has acquired a 27% stake in the Beer & Partners angel investment network.

As a whole, good indicators, and again it seems that those who will lead the world out of its current slump will once again be entrepreneurs.

BY F3FUNDIT

Who pays the fees, should it be the startup? Most Investors will tell you yes. Or should it be the Investor, which most startups will simply expect. The story is however that is depends on a number of factors.

What are hose factors and how do you know who, when, how, why, what, where, and huh? Well that’s why we’re here to help navigate some of the murkier waters of your startupedness. With that, first thing’s first. You need a solicitor (attorney, lawyer), someone you can trust and who knows the corporate side of things, remember each country’s laws are different so if your an S.A. don’t get a lawyer do deals with Ltd.’s. In terms of getting one, network, network, and then network some more.

Now that you’ve got a solicitor, you can go and start talking about financing. If you were introduced to a BA by someone, chances are they’ll want a finders fee, this can range anywhere from 3% – 10% of deal size, and in some extreme examples has even hit 15%, mostly the % will be a +/- 1% of the market you’re in. Spain averages on the lower side of the spectrum, whereas the UK is on the higher side of it.

Aside from this you’ll have legal fees – issuance of new shares, dilution of your own, and even if you do have an MBA, all this will undoubtedly still be confusing at the onset, add to that a finders fee for a facilitation intermediary if there is one, hourly solicitor rates, administrative expenses, filing expenses, etc… etc… and with a seed investment of say €100.000, those bills can quickly add up to 10-20% of the total investment, and all of a sudden your 100k that was supposed to take your co. international looks like it just might flop on its bottom.

So who pays the fees? At the end of the whole fiasco it’s both of you. If the startup pays from invested capital, it’s really getting a fraction of that invested capital, and if an angel pays then that angel is throwing that money away ontop of the investment. Likewise, if the money comes out of company coffers it’s pretty silly as that cash is inherently dedicated towards operational expenses. In which case if you’re lucky enough to find yourself with a willing investor, we recommend the following.

When dealing with an angel be up front about the fees and additional costs, if you need 100k to get to operational business level 2, find out before hand what fees and additional costs will come into play.

Now, say you do need that investment of 100k into your company to bring it to the next level, fees will be 10% meaning a total 110k for the cash transaction. That 10k will go to lawyers, administrative expenses, what have you, and is a sunk cost, no ends or buts about it. But aside from the lawyers who can benefit from it? The truth is the investor more so than the startup. Why? Because many nations in the EU, (mind you not all, so be sure to look at your local laws) – offer a tax shield for business angels. Meaning, that if I as a business angel invest 100k into company X, I can write of 10-20-30% of that investment off of my taxes for the year of investment, additionally, if the company fails, I may be able to write off an additional say 20%, thus decreasing my risk and making my investment contribution a fraction of the actual sum.

In which case, if you can write off that 10% in year one per se, the investment on behalf of the angel would really be 99k instead of the equity for cash injection of 110k. That shield does not apply to the startup, and your law / admin fees will go on your books as just that, the are not depreciable, the are sunk costs that eat up your cash.

So the next time you find yourself at a round table with a few BA’s or are a BA yourself, just remember that there are numerous things you can do to lower your risk in any new venture. It’s not just about investing, it’s about doing it in an intelligent manner.

BY F3FUNDIT

One thing about providing a good service to all our readers is to try and provide it on an almost continuous basis, and while we do talk about starups, entrepreneurship, best practices, capital and a whole array of other topics relating to new and small enterprises – we figured, if most entrepreneurs are working six days a week, so should we, after all, we don’t want to be called hypocrites here at F3FundIt.

So we got to thinking, Saturday should be a time to at least wind down a bit, and what better way to wind down than to each Saturday feature a new promising startup. Now this being week zero of this feature series we figured we might as well give you a general guideline on what to send us in order to qualify for … wait for it….

Startup Saturdays…

Just send an e-mail to info@f3fundit.com with the subject line “Startup Satuday Submission” or “S3” with the following information.

: Satrtup Name -
: Website -
: Industry -
: Where are you located? -
: What exactly do you do? In one sentence please. -
: How did you come up with the idea? -
: What stage of the startup process are you currently in? -
: Any milestones we should tell the world about?
: How about your team? Who are they? -
: Any fears, phobias, anxieties? -
: Any advice to pass onto new budding entrepreners? -
: Anything you want to add? -

Groovy, that ought to cover it. And when you do submit your startup, it’d be killer if you could provide a logo that we could throw up and if you have a video or any other media, well… you can submit that as well.

BY F3FUNDIT

Part 1 of 2

You’ve been working for days on end, the business plan is more or less finished, you’ve started developing your product, and still putting some polish onto the conceptual side of things. You figure you can get the basics up and running, or simply put you’re at a wall, and the best way, and only way to get over it is cash.

Every business hits a lack of funding wall, and while small business loans are great for a number of SME’s and start ups alike, certain companies need an injection of capital to materialize and start seeing those revenues that are slated for years 3+ on the estimated cash flows of the business plan.
But the question then presents itself – how do I manage to do this?

First, is the three F’s – like in property – Location, Location, Location, is key, so in start ups Friends, Family and Fools are just as important. When you’re starting up, your personal network is key to sustaining your business – talk to family, talk to friends about investing – if need be sell shares, or bonds, you need little else than a piece of plain white paper, and a notary to make it legit. If you’re looking for a formal doc, a Google Search will provide you with the documentation you need.

But FFF’s can only take you so far – and depending if your business is capital investment heavy or not, you most likely WILL need investment capital.

So how do you go about getting it? First thing is first. Find out if you’re ready. Venture Navigator has online assessments that you can take to gage the state of your idea, online surveys such as the “General Business Viability” and “Investment Readiness” among others will give you a good insight into whether or not approaching investors is a good idea.

If your results are favorable, or even if you’re determined the next step is identifying those individuals who want to invest. The best way of doing this is to network, see if you know someone who knows someone. If this isn’t on your plate – check for any Business Incubators in your area, they are often associated with universities, and are private, your local government office will probably know of ones in your area. If they don’t call up the local universities, business schools and asks to talk to entrepreneurship professors. The whole thing about the entrepreneurship community is that entrepreneurs are very keen on spreading best practices, and helping each other out. Also try looking for groups of people who are interested in start up activity – the OpenCoffee Club is great for this and they’re very international and pretty much all over the place. This is a GOOD Idea – your network is key!

Once you’ve been networking, got some good contacts, and ins into individuals at seed funds, and incubators, the next step is presenting your idea to people who will in all likelihood be your first real investors. They will inject anywhere from $, €, £20-500k depending on your location, and your idea. They will also take your hand and provide advice, help you source individuals whose skills will help you grow your idea and company, and put you in touch with someone who will most likely be a mentor (more on mentors in future articles) and help provide you with the type of knowledge only an industry specialist can provide. Like everything in life, this isn’t free and expect to give up anywhere from 8-50% of your company. Nonetheless, should you get funding you’ll be well on your way to building that business you’ve always dreamt about.

In the next article in the series – we’ll be covering Angel and Venture Capital sourcing, funding, presenting do’s and dont’s as well as what you should expect. As an added bonus, I’ll also provide you with some useful links to Angel, VC, and Seed networks in the U.S., U.K., and Spain