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…

Y Combinator’s new 8.25 million USD fund shows that it’s funding model is definitely successful, but the question is can it transfer to other industries?

While Y Combinator may be focused on the web (and by we include mobile as the lines are ever more blurry), this new 8.25M fund shows that Y Combinator’s new approach to investment shows merit. The question however is, can those similar practices be transferable to other industries?

Typically an investment of up to $20k ($5,000 + $5,000 per founder) isn’t exactly big bucks and typically won’t provide sufficient capital to hire a team, program whatever, and devise a strong media campaign. What it does is give the founders of said startup enough cash to live for three months and develop the idea while having their hands held by the incubator.

Specialized business training on the go, or more likely during the building stages? Absolutely, look at the successful entrants, all programmers with little to no business experience, but now with successful companies, Reddit, ClickPass, Zenter.

However, this is the web, where businesses are easily and quickly scalable, but how about if we were to apply the same model to clean tech, could a micro investment also work?

Aside from what is undoubtedly the higher cost of a prototype, the model should be transferrable. Why? Because the recipe is the same.

Inexperienced Engineer in Business + Good Scalable Idea + Capable Mentoring = Higher probability of success

The only difference then is, how much money will a non-web company need, and what is the exit?

First off, we are definitely looking at larger figures of 50-100k+ per clean tech project total seed investment – longer lead times, longer, development times, and longer to market times. Not to mention of course that sales and profit generating activities typically will require more effort but should those same hand holding techniques be applied to a different tech sector we could very well see a paradigm shift in the way we go from prototype to market, and more so how early stage non web companies get financed.

Would be interesting to see if anyone will pick up on such a model in the coming 3 years.

This Saturday we would like to introduce you to CFI Partners, a crowd financing platform recently started by a couple of IMD MBA’s. What we find specifically interesting in CFI is their alternative approach to financing startups, it’s new, novel, and it’s taking a risk, it’s what we believe any startup should be, so without further ado, this week’s Startup Saturday: CFI Partners

How did you come up with the idea to crowdfinance?

Imagine the number of missed opportunities that are overlooked or can’t be addressed by the more traditional mechanisms of financing such as private equity and venture capital.

We ourselves saw several cases where entrepreneurs had a great idea but were unable to get past the initial seed funding, or where there idea had a potential for generating strong revenue, but not on the scale that would interest venture capital.

There are several reasons for this, the difficulty of evaluating each opportunity, the cost of the transaction, and the fact that risk capital is not as well developed in Continental Europe, let’s say in comparison to the US. These factors create a threshold where investment opportunities under <$2 Million are uneconomical for traditional venture financing. Furthermore, with more and more of the funding for venture capital and private equity coming from big funds, there is an increasing trend for larger investments.

With crowd financing we democratize the process and make it more efficient. The amount of money that can be raised can be quite significant. If you look at the Obama Presidential Campaign, he rose over $400 million from individual contributions of $200 or less. So substantial amounts of money can be raised. But another aspect that makes crowd financing attractive is the fact that by decreasing the amount that needs to be invested, you open up the process to a whole new market. As this market is more efficient, smaller investments remain attractive. Thus crowd financing allows us to address an interesting part of the innovation market, the area of 50,000 € to 2 Million €, which is underserved at the moment.

Another factor that attracted us to crowd financing, was the chance to develop a community where the considerable power of sharing information can be leveraged. Members of our community will help develop entrepreneurial ideas with their feedback. Basically we will act to bring together the information latent in members of our community, leading to more efficient and we hope more successful investments.

Interestingly, we set out initially to design a platform with the classical technology innovation entrepreneur in mind. However, we have seen a strong demand from film makers, bands, and designers who feel that crowdfinancing could be the best approach for them to raise funds.

Any milestones that you’d like to share?

We started out developing this idea in November 2009, and have been working on refining and developing the concept. Understanding the market and who are our customers. At the beginning of 2010, we refined the website of our company to explain more our ideas and elicit some feedback.

We have been also working on getting feedback from both entrepreneurs and investors. These inputs are going into the development of our web platform for crowd financing, which we are scheduling for launch in Spring/early Summer 2010.

Another important aspect, of course, is raising funding for our own platform. A process which we have just begun.

Can you tell us a bit about the team?

Hervé and I met as classmates in the executive MBA program of IMD. We have rather different backgrounds, but high levels of experience. Hervé has a strong background in marketing and finance, having worked both in large corporations such as GE, but also for smaller startups. He not only has experience working for start-ups, but also has worked with private equity. Thus he has a good experience with both sides of the equation.

Myself, I have over 16 years of driving innovation in Biotechnology. Initially, leading research at top Universities (I have a PhD in Molecular Pharmacology from Stanford) and more recently working in start-ups driving the R&D program and supporting product development. I have a strong insight of the needs that start-ups have when it comes to innovation support. Hence, my excitement in supporting our project.

Any difficulties you’ve experienced in the startup process of your company?

I think what has been the most surprising thing for us is the speed at which the interest and demand has developed around this idea and our platform. Hence, the biggest difficulty we’ve had has been the lack of resources. Hervé and I are bootstrapping the company, while keeping our full time jobs, and still making time for our families. Luckily for us, we seem not to need a lot of sleep! ☺

But seriously, the lack of the time and limited financial resources has meant that we have difficulty keeping up with the pace of the project.

To make sure we capture this opportunity is why we are pushing to launch this spring.

Any advice to pass on to budding entrepreneurs?

Engage with other entrepreneurs about your ideas, they can help you develop your ideas and evolve them. To many times entrepreneurs keep their ideas to themselves and lose the power of other peoples input to convert their ideas into successful ones.

And Tthe next time you are considering fundraising, consider the power of using crowdfinancing. You can a get more details at our website. www.cfi-partners.eu and consider using our platform this Spring for your fundraising needs!

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 F3FINDIT

Let’s face it, getting money to finance your business is no easy task, and especially so when you’re talking about recessions where people’s pockets are harder and harder to get into, but say you’ve got a good idea for a business that in any other economy would work, but it just cant provide the 30x ROI that Business Angels (BAs) are looking for now. Nor do you have the capital yourself that you need to develop a prototype, or start selling, so what on earth can you do?

Small Business Loans

Small business loans are a great way to get yourself a prototype or a launch product, but the truth is in this climate banks are just about as stingy with their money as BA’s and most other investors. So the short story is, getting a loan may not be easy, but all the while bring in a biz plan, talk to your local banker, and see if you can’t squeeze any money out of them.

This is one option, but by no means should you stick to this one, and anyways, it’s old, outdated, adds additional risk to the entrepreneur and you may have to put down collateral, which quite frankly is not ideal.

Peer 2 Peer Lending Options

A great option to getting cash is P2P Lending – basically there are websites out there, usually two or three per country, that put lenders and borrowers in touch with one another. The website tends to manage risk, provide the lenders with the borrowers debt rating etc… one such site in the UK, and Italy is Zopa, Spain has Comuniate, and doing a Google search ought to point you in the right direction for the service in your country. Rates are typically fixed, and it’s much easier to get

Crowd Funding

This is by far the favorite, but also requires a bit more leg work than the others, and if time is on your side, we highly recommend trying to get Crowdfunded. What is it though, basically it’s getting the community at large to help fund your project, it’s worked well in the music industry, people have made movies based on crowd funding, as well as started all sorts of projects, businesses, etc… To see a few examples of what it does we recommend heading over to Kickstarter, and as for a quick portal where you can start your own fund we recommend Create A Fund.

When it comes down to funding a project though, we highly recommend offering something in return. After all people are giving up their own hard earned cash to help you reach for the sky, so give them something back, be it a page on your website, a personalized letter, inclusion in materials, adding them in the credits of a film, whatever you feel like.

Another good thing about crowd-funding is that it typically happens via PayPal, meaning if your entire project costs €2000, but the payment needs to be done in stages you can raise your first 500, start the project, etc… and develop it as the money comes in.

Did we miss anything? Let us know.