Thursday, August 14, 2008

Fundraising Survival Guide

Paul Graham (of Y Combinator fame) has recently posted a great essay on how to survive the difficult task of fundraising.

I particularly like this because it talks about the pressures experienced by the entrepreneur and the behaviour witnessed by both parties - investor and entrepreneur. There are very rational reasons that lead VCs to act the way they do. One of my favourite quotes from him was the following:

Problem number 3: investors are very random. All investors, including us, are by ordinary standards incompetent. We constantly have to make decisions about things we don't understand, and more often than not we're wrong.

We don't like to call ourselves incompetent - but the truth is that being good at being a VC involves learning a lot about something new very quickly. Even with a certain degree of specialization, the entrepreneur will know more about the particular business than the VC. Of our areas of focus (life sciences, IT, and cleantech), I primarily focus on cleantech. However, within cleantech there are still a huge range of subsectors - solar, wind, fuel cells, batteries, smart meters, biofuels, grey water, black water, carbon storage, synfuels, etc. While I've had the privilege of being involved in startups in a number of these areas, if you come to me with a new material that dramatically improves the energy efficiency in some market somewhere, I'll need to understand how much value the market will place on your offering, the technical feasibility of what you've done, the difficulty it will be to ramp up manufacturing, the cost sensitivity of the inputs, the competitive landscape, etc. So, we get good at learning quickly.

However, all of this dance of information exchange can seem, to the entrepreneur, to be frustrating. The entrepreneur has been living this vision for the past "x" months/years and can't understand why everyone else doesn't see what they do. We try to recognize the situation from the entrepreneur's point of view. and this is why, if we aren't going to progress an investment, we strive to provide companies with a quick "no" rather than a slow "no", and this is why we try to give feedback where we can - although often it is difficult for us to provide feedback because the reasons for us progressing an investment can often be intertwined with other investments we are considering. Nevertheless, the road to funding can be a long one, and Paul's post I think helps chart the course.

Sunday, August 03, 2008

VC Fund Economics

I wanted to link to this great post by Fred Wilson - Venture Fund Economics.

"When I write about venture fund returns, there are always comments and questions that lead me to believe that the economics of a venture fund are not well understood. And since most of the readers and commenters on this blog are people who work in the startup ecosystem, I think its important that the economics are better understood. So I am planning on some posts on this topic in the coming weeks."

I thought a number of my readers may be interested in the drivers of VC returns. Note that these returns are also the aggregate of the entire fund. Each individual company invested in needs to be able to return a much higher amount to get this overall performance. I delve into that a little bit here.

Historic Oil Prices - Peak Oil Phenomenon

I think this link from Forbes is really interesting. It shows that the oil industry had pretty spectacular prices at the beginning of the industry (1861) that were driven down by efficiency and productivity improvements. This happened remarkably quickly because by 1880, the real price of oil hit the low where it would remain for almost 100 years.

1978 was understandably a pretty shocking time - oil prices shot up to the levels only seen more than 100 years previously, near the start of the oil industry. Fortunately, prices plummeted, and we all convinced ourselves everything was going to be ok. It's clear that that was only a fifteen year reprieve. Oil prices now are once again at spectacular prices. However, this time they are higher than ever seen previously in the history of the industry.

Given the concept of peak oil, which I wholly believe - in part due to what I learned during my stint at Esso (Exxon) as a reservoir engineer, we're going to continue to see price increases until substitutes can be obtained. While oil prices are often discussed, I think this graph really puts an interesting historical perspective on things.