Why you should shun VC conferences

I've received a number of phone messages and direct mail solicitations for the Venture Capital Workshop and Conference, which will be held in New York City on Tuesday, March 4, and in Boston on April 8.

I was surprised to get invitations to this type of conference for two reasons. First, because Black Duck Software is not an early stage venture, and we don’t need the money. And second, because I thought this form of investor jamboree was dead. Maybe that was wishful thinking. It seems like such a '80s thing to do.

The appeal is of these conference is that – for a fee – an early stage company can find a room full of eager venture investors who want to hear an investor pitch. This beats having to make individual pitches on Winter Street in Waltham, MA, or on Sand Hill Road in Palo Alto, CA, or in front of standalone VCs on the east and west coasts.

I think these conferences are a total waste of time and money for entrepreneurs seeking venture capital. Let me tell you why.

You remember that room full of VCs? Well, it actually contains an audience consisting mostly of other parties with other interests. Or undesirable investors. One quarter of the room is occupied by other entrepreneurs waiting their turn to make a pitch, listening to pitches to polish their own. Approximately one half are accountants, attorneys, business brokers, consultants, and others who will try to sell you their services. And the remaining quarter are junior, ill-advised, or simply stupid investors. (A slightly old but still relevant description of an entrepreneur's experience at a venture conference can be found here.)

My Dear Brothers and Sisters: There is a better way.

First, do a Google search of your area VCs. Type in, for example, “Boston venture capital”. VCs like to invest locally, no matter what they say about doing remote investments. Traveling is not fun, detracts from their current investments, and cuts into sourcing time. If you are located far away from the center of VC clusters (Silicon Valley and Boston), then use Google to vector in on some closer locations. Also, I would recommend getting at least one advisor who has been VC-funded and network your way into a VC pitch.

Second, call on a partner in the firm with an interest in your venture area. If you do not know any partners in the firm personally, you have a choice: Cold call them starting with their executive assistant (the key to scheduling any partner), or identify a principal or associate. Get their names from their website.

Alter your approach according to your audience. With a partner, you should go in assuming you have one shot. With a principal or associate, come prepared to encounter stupid questions, but your aim is to make them your evangelist inside the firm. In either case, you objective is another meeting.

Finally, bring a great story -- your total addressable market, growth plans, and other elements of the business. Answer the question: Is this a billion dollar idea? If it isn't, how can it built to be?

Whatever else you do to attract the attention of VCs, don’t waste your valuable time and money at a venture conference. You're far better off taking that time and money and churning it into your business.

Boston VC Panel Discussion at the Vilna Shul

Tonight there was a panel discussion held at the historic Vilna Shul entitled “The Venture Capital Industry: Looking Back on 2007 and Looking Forward to 2008” with three leading venture capital investor from the Boston-area: Larry Bohn from General Catalyst Partners, Jonathan Seelig from Globespan Capital Partners and Alan Spoon from Polaris Venture Partners. Scott Kirsner, Innovation Economy columnist from the Boston Globe, was the moderator and did a great job, as usual.

This was a candid, insightful discussion. An excellent panel Paraphrasing, here’s what they said:

With respect to 2007:

• Alan: There is a great value at this time in this market for startup investments; venture investing is well positioned as an asset class.
• Larry: the enthusiasm is back and innovation is back at rational prices.
• Jonathan: Ditto points made by Alan and Larry, plus enthusiasm for web and capital efficient investments.

With respect to 2008 and beyond:

• Alan: The rate of change is indeed accelerating. He will invest in portability and mobility; customization and vertical markets; e-commerce; the notion of cloud computing; life sciences – nanotech, stem cell research, and green or ener-tech, plus Asia.
• Jonathan: Energy, technology and Japanese investment interests. He asks what is the right capital structure for these investments, in particular, ener-tech companies? Also investment interests include advertizing measurement of the effectiveness of media spending, and companies addressing the battle over the utility bill.
• Larry: Indicated that the market has become frothy. Companies have to hunker down this year. If Boston-area companies are doing a C round, they should consider going to CA for investors.

There was some whining about Boston vs. CA. There was also concern expressed across the panel about a recession this year and it’s impact on investments, in particular, enterprise or B2B plays.

Other bloggers covered the event, including:

• Chris Herot wrote a nice summary of the event on his blog.

• Scott Kirsner wrote a brief summary on his blog.

• Dan Bricklin wrote an thorough blog posting complete with pictures.
  

Assessments of '07-'08 by Leading VCs

On January 8th, 2008, there’s a panel discussion at the historic Vilna Shul moderated by Scott Kirsner, Innovation Economy columnist from the Boston Globe that promises to be really interesting. The panel is entitled “The Venture Capital Industry: Looking Back on 2007 and Looking Forward to 2008” and draws on three VCs from the Boston-area: Larry Bohn, Managing Director, General Catalyst Partners, Jonathan Seelig, Managing Director, Globespan Capital Partners and Alan Spoon, Managing General Partner, Polaris Venture Partners.

My hope is that Scott asks the panel about the deals they did in 2007 and expect to do in 2008. Are there any singularly distinctive deals done last year? Which were the best deals of 2007 by way of return and other VC-metrics? Which deals are illustrative of Boston-area investments and reflect differentiation from what’s being done on the left-coast? Will there be a change in investments in 2008. What can we expect by way of industry (VC and entrepreneurial) trends? And, of course, which VC threw the best holiday party?

Open Source Acquisitions - Accretive? Strategic?

Will Open Source industry ventures -- based on an open source project, VC-backed and ultimately purchased by a public company -- ultimately be accretive or strategic acquisitions?

An accretive acquisition is supposed to increase the acquiring company's earnings per share (EPS) or future earnings. Typically, the price paid by the acquiring firm is smaller than the addition to its EPS.

Alternatively, an acquisition is "strategic". These acquisitions do not necessary decrease the acquiring company's future earnings but when an acquisition is positioned as "strategic" it is a message to the Street that the price paid by the acquiring firm will not contribute positively to its EPS.

For example, SleepyCat (purchased by Oracle) was, by contract to JBoss, cash-flow-positive and did not take any VC-funding. As an operating entity inside Oracle, it is more likely to be accretive in addition to being strategic.

As another example, JBoss gives Red Hat is an open source Java EE-based application server. It changes the game for Red Hat: They become more vertically integrated, competing with the likes of IBM, Oracle, BEA, CA and others as opposed to competing 1:1 against Microsoft in the operating systems market. While RHAT has other products, RHEL is the their flagship product. Now RHAT has more to sell. This shows that Matthew is smart and strategic.

Oracle, by contrast, needed SleepyCat as an offering in the not-huge-but-important embedded database market and instant "street cred" in the Open Source world. Also, by not acquiring JBoss, they offloaded Mark Fleury (now on paternity leave) on RHAT and increased industry alignments against RHAT while increasing the perception that Oracle is the place for all enterprise-class solutions. This shows that Larry is smart and strategic.

There is no answer available, yet, if JBoss or SleepyCat was the more strategic acquisition. At this point it's a dead heat.

Most open source projects which become operating companies have limited IP, have marginally loyal communities, require lots of capital to make subscription models work optimally and often have employees (read engineers) who are not prepared for corporate life or making a long-term commitment to work for the acquiring company. Merely contributing, or better yet adding, to an acquiring company's earnings means that the company had to be executing prior to the acquisition and also means that the acquired company is able to be more efficient, effective and productive inside the acquired company. It will be interesting to see in 5+ years how many open source companies are accretive.