FountainBlue

On January 27th, SDForum's third annual PWC Quarterly Venture Breakfast Series was sponsored and moderated by Pillsbury Winthrop LLP, and focused on the "2008 Scorecard ." The PWC MoneyTree Report, Q3 2008 report was presented by Steve Bengston and is available at https://www.pwcmoneytree.com/MTPublic/ns/moneytree/filesource/exhibits/Q3%202008%20MoneyTree%20Report_final.pdf. Our panel included:

•          Steve Bengston, PricewaterhouseCoopers
•          Asheem Chandna, Greylock Partners
•          Peter Sonsini, NEA
•          Sharon Wienbar, Scale Venture Partners
•          Moderator: Allison Leopold Tilley, Pillsbury Winthrop Shaw Pittman LLP

The economy is on top of everyone's mind in Silicon Valley, and no wonder with the slew of bad news pounding us every day:

•          There were 6 IPOs in 2008, the lowest in 30 years
•          Fundraising in Q4 is lower and this is a predictor of investment dollars.
•          VCs have stopped funding some portfolio companies.
•          There are more layoffs/cost cutting/unemployment in corporations across the valley.

It does seem like conditions have changed in the valley, and it�s a lot harder to build another Google.

•          The time to IPO is longer.
•          New deals must now be more perfect than before.
•          There are lots of down-rounds.
•          There are fewer deals per fund, and higher reserves for each deal.
•          Of the total 2700 venture firms, only about 600 or so actively invested in new companies.
•          Some VCs are carrying the load of bad portfolio investments and also have the problems of their syndicate partners running out of funds.

However, the valley remains a hot investment area, despite the weak economy. For example, over the past 30 years, Silicon Valley has been a leader in venture investment dollars, and the trend continues. In addition, portfolio companies today are much better off than portfolio companies of 2001, where many of them lost 90% of their value. Today, even if valuations are down, many portfolio companies are doing well. And with the growth of Southern California investments, the overall California investments now total around 50% of all investments nationwide.

In addition, despite the message of doom and gloom, there is clear evidence that the venture model still works! On average, over the past 30 years, the venture has done well in comparison to S&P and NASDAQ for example, with the companies in the top quartile earning the bulk of the returns. In addition, there continues to be a strong demand for innovation, and this is less likely to occur in corporations as they are cutting back on R&D, relying more on partnerships with start-ups to remain innovative.

Over the past decade or so, there was a massive oversupply of crummy VCs who were funding crummy companies. This downturn helps to weed them out. Last year, valuations were extraordinarily high, and many seasoned VCs were waiting for more realistic valuations before investing. These investors know that investing in successful early stage companies will lead to the highest pay-offs, and are actively seeking investment opportunities now that valuations are more realistic.

When our panel was asked the question �Who is the next Google�, there were many questions in response:

• Which companies and industries were in the top quartile over the past few years, and what new opportunity may arise?
• What opportunities can arise from the disruption in the cloud computing and virtualization space?
• How can crowd-sourcing solutions bring together customers and providers and what business models will work in that space?
• How is the nascent clean tech area with its huge, global market going to evolve and how do you bring it to market?

But for early stage companies, the business fundamentals still apply, and are even more crucial!

•          It�s all about the people!
•         Build relationships of trust with your investors, staff, partners, and other key stakeholders.
•         Be transparent in your communication to all, especially if there�s something negative to communicate.
•          Only the dedicated and hard-working can succeed.
•         Have the passion and the persistence and guts to start a company, even in a tough market. Investors can respect that!
•         Show that you�re willing to work hard, and are coachable/easy to work with.
•         Put in your own sweat equity.
•         Investors fund people with a good idea that they�re passionate about and knowledgeable about.
•         If you�re doing an execution play, you better prove that you can execute!
•          Be Strategic About What You Want to Do
•         Focus on a plan that is capital efficient, an ROI that makes sense.
•         Know your market and have a �privileged insight into an emerging trend�.
•         First to market goes a long way. Build traction and show the �angle of the scent�.
•          Make Sure That You Execute on Commitments
•         Conserve cash and be operationally efficient/have a low ongoing burn rate.
•         Use metrics and timelines to report on your progress.
•         If you�ve already received funding, ensure that you�re one of the top 5-10 performing portfolio companies.

But in the end, despite economic challenges, it is a good time for passionate, dedicated entrepreneurs with game-changing ideas to start a new company. Indeed, investors in the top quartile will definitely pay attention to entrepreneurs who have the persistence and courage to start a company, especially during a downturn. Google was a product of the last downturn � so maybe YOUR start-up could become the next Google!

SDForum�s and PWC�s April 21 Quarterly Venture Breakfast was on the topic of �Investments in Entertainment- Fun and Games� and was sponsored and moderated by Pillsbury Winthrop LLP. The PWC MoneyTree Report, Q4 2008 report was presented by Steve Bengston of PWC. Our panel included:

• Steve Bengston, Pricewaterhouse Coopers
• Ken Elephant, Opus Capital
• Michael Kim, Rustic Canyon Partners
• Eugene Yoo, Globespan Capital Partners
• Moderated by: Allison Leopold Tilley, Pillsbury Winthrop

Below is a summary of the conversation.

Steve Bengston of PWC framed the discussion highlighting Q4 08 investment dollars, noting that overall investments have been down, as much as 50% less than the same levels last year or the same as what we saw in Q1 97, the lowest in 11 years. However, the investment levels are still at 3 billion dollars, a LOT of money by any estimation. Presentations are available at https://www.pwcmoneytree.com/MTPublic/ns/nav.jsp?page=industry or at https://www.pwcmoneytree.com/MTPublic/ns/moneytree/filesource/exhibits/National_MoneyTree_full_year_Q4_2008_Final.pdf for full-year statistics.

Silicon Valley overall continue to dominant in terms of overall investment dollars, leading regions such as New England, Texas and the Northwest. In fact, Los Angeles and San Diego also have significant investment activities, making the combined California investment dollars a much larger share of the investment dollars. In other encouraging news, there has been a slight uptick in investments in earlier stage companies, including 30 early stage deals.

The panel then focused on investments in entertainment and why �Fun and Games� are attractive investments for early stage venture firms. Early wins in the entertainment space 20 years ago like Atari are no longer around � as they rose quickly into huge sales and returns and evaporated just as quickly. The panel had some sage advice on how early stage gaming entrepreneurs can launch a successful business.

The backbone of a successful gaming or virtual worlds company is how engaging the game is and how quickly the user base can spread, through word-of-mouth, with minimal investment in marketing. But having an engaging game is not enough � successful game must also be enticing enough for players to want to spread the word, growing the user base virally through word of mouth, and ideally to a niche audience.

Indeed, for gaming companies, there is a social/community aspect of gaming which can help add to the user experience and encourage users to grow the site through targeted word of mouth. In successfully growing niche communities virally, an entrepreneurial start-up can show not only that it can develop an enticing game and grow a user-base quickly and virally, but can also position itself to leverage its successes to other games and other niche markets, making it more attractive to customers, investors, partners and buyers alike.

Entrepreneurs who think strategically about developing a compelling game and leveraging viral marketing strategies to increase the user base should also contemplate innovative revenue business models for the business. There was much discussion about the importance of subscription revenue models, as well as leveraging micro-transactions rather than relying on advertising. Club Penguin is definitely a success story on how subscription business models can lead to multi-million dollar buy-outs for example. But the role of micro-transactions at high volumes should not be ruled out, particularly if the company develops a �free-mium� or �velvet rope� strategies, enticing new online users with free services and up-selling customers to full-featured functionality.

The panelists noted that advertising may also be part of the revenue mix, but cautioned that we should consider that most high-profile advertisers want only access to premium spaces � perhaps over 10% of a web site. This leaves 90% not attractive to advertisers, which limits the overall number and range of advertisers any site can have. In addition, advertisers are seeking sites with large, focused user bases, which is difficult for early stage companies. The advice is to adopt advertising when it makes sense, only after you have an established and large user base, and only if it adds to the value of the content and community created.

The panel further advised entrepreneurs to partner with effective distribution channels, whether they be in the form of retail partners in the case of Webkins or MiniClips for Club Penguin, while also steering clear of the big players and targeting complementary solutions, or smaller niche markets.

The panel ended with some ideas on some hot gaming opportunities:

• Successfully launched start-ups who adapt technology and business successes to nontraditional niches, from scrapbooking to charities to collections and communications for example, is a targeted way for a company to leverage past successes, aim beyond the one-trick successes which has historically limited growth and reach for companies.
• Developing games for new platforms from mobile to iPod to Android to television presents other opportunities.
• Piggyback on the successes of FaceBook, MySpace, Twitter, etc., and create a gaming solution which leverages these tools.
• There are opportunities in the whole area of managing micropayments and billing as current solutions have room for improvement.

With all the above said about standard business practices from creating a great technology, market channel and strategy, there is a serendipitous wildcard which is inherent in gaming companies.

• Club Penguin was started by three fathers without business experience.
• Established games, like Texas Hold �em, in a new context, executed virally had been a worthy investment.
• Even in these times when funding is tight and the banner for capital efficiency is being waved by investors big and small, large investments have been made for established teams who want to go head-to-head with the big players in the market!
• Even if investors caution against one-hit wonders, ONE success in this area can lead to a very successful exit for entrepreneurs.

The bottom line is that the winners are those that change the rules of the game, while also leveraging core business practices to satisfy users, grow exponentially and execute seamlessly.

SDForum�s October 20 Quarterly Venture Breakfast was on the topic of �Enterprise Software� and was sponsored and moderated by Pillsbury Winthrop LLP. The PWC MoneyTree Report, Q3 2009 report was presented by Danny Wallace of PWC. A press release summarizing Q3 results is available at https://www.pwcmoneytree.com/MTPublic/ns/moneytree/filesource/exhibits/09Q3MTPressRelease_10%2020_2009_FINAL.pdf and the full report is available at http://www.pwcmoneytree.com. The panel included:

• Savinay Berry, Granite Ventures
• Jim Lussier, Norwest Venture Partners
• Ho Nam, Altos Ventures
• Prashant Shah, Hummer Winblad
• Danny Wallace, Partner & Nat'l Co-Chair of Startups, PricewaterhouseCoopers
• Moderator: Sylvia Burks, Pillsbury Winthrop

Below is a summary of the conversation.

Enterprise software was a huge category for the venture industry for many years and then collapsed with the Internet bubble as many companies found they never implemented many of the packages they bought, or were disappointed with the results. Indeed, 15 12.94% of total investments for Q3 2009, Enterprise Software ranked only 3^rd of the largest investment areas for the quarter, with biotech investments leading at 18.82%, industry/energy investments second at 17.97%, and only slightly leading medical devices and equipment with 12.82% of investments and with media and entertainment rounding out the top five with 9.29% of investments. It�s notable to remark that at 622 million, software is at it lowest investment since Q3 1996.

Asked to comment on these findings, the panelists remarked first that decreased investments in alignment with the overall reduction in investment dollars is expected, and that the enterprise software business will remain strong, and that Silicon Valley remains the best place to start and run a software company. To justify these comments and attest to the overall long-term health of the industry, the panelists proclaimed that:

• Software companies are less capital intensive, requiring less investment dollars,
• Software companies are more nimble, requiring less time and resources to change products and services in response to market needs,
• Software companies have historically taken less time to exit than their clean energy and life science counterparts, AND
• The number of Q3 2009 software investment deals actually ranked #1 at 12 deals in software overall, with more opportunities for software successes as there are more deals.

The panelists added that there are 20-25 SaaS companies which are commanding 30% plus growth, even in these economically challenging times, and that software maintenance contracts are outpacing licensing contracts in terms of growth. They clearly agreed that the industry is at a transition point, poised to take off, with drivers such as the reduction in network costs, the pressure to optimize computer and human resources, the emergence of virtualization solutions, and the advancements of cross-platform technology solutions including Java.

The panel then offered the following pearls of wisdom to entrepreneurs and other stakeholders interested in riding this next wave of growth in the enterprise software industry:

1. Build a company that provides a needed service for a large market, and continue to serve the needs of the customer while efficiency managing capital and resources.
2. Although M&As will remain the predominant exit path,
3. Build relationships with all stakeholders while continuing to build a sustainable, standalone company, no matter what your exit path is.
4. Start first with serving real customers efficiently and effectively and be flexible with revenue and business models on how that need is served.
5. Efficiently and effectively provide a solution to a real need � reducing bandwidth, reducing development and/or deployment costs, facilitating collaboration, increasing security and personalization, etc.
6. Focus on the business results rather than the technology innovation. What would remote monitoring, data management, application management, analytics enable your customers to do, for example?
7. Be as innovative in the way you think about your business model as you are in the way you deliver technology to your customer.
8. Exits will be fairly depressed with the consolidation of the big players in the market and IPO opportunities still slim. However, for those passionate and committed enough to continue to build a sustainable company and an exit and/or investment opportunity will appear.
9. The macro economy does affect a start-up, however, beware of the start-up that blames the macro economy for its stunted growth.
10. With that said, there are signs that the economy is turning around, and start-ups that emerge during a downturn are well positioned to take advantage of the upswing.

The panel offered these trends, which may lead to hot market opportunities:

• The big players in the market, including SAP, Salesforce, Oracle, IBM, Microsoft, Amazon etc. have certain markets and solutions locked down, so it doesn�t make sense to go after these markets head-on. However, there will be niche markets which might be considered too small for the larger market players, which can spell great opportunities and a possible exit path for the right nimble start-up.
• There are huge opportunities within the areas of security, data analytics, collaboration, infrastructure management, consumerization of the internet, online media, and other areas. The key is to deliver customized, personalized solutions while dynamically accessing volumes of data to better serve customers. 
• As the industry evolves, we are moving away from large investments in enterprise software solutions by big players who have not optimally leveraged these solutions (sometimes not even fully installing them), we are moving toward smaller companies making smaller investments in enterprise solutions, and only staying with these solutions as long as they continue to provide value. Enter the Facebook generation! What does this mean for your company?

The bottom line remains the same � build a great company, servicing a real need to best position yourself for the imminent resurgence of software as an industry!

Advantages of being in the Corporate World:

Advantages of Having an Entrepreneurial Mindset:

Articles about Entrepreneurship

FountainBlue is pleased to speak on entrepreneurship and intrapreneurship to companies and associations across the valley. See our Something from Nothing: A Message to the 'Preneur in You  for more information about our speaking topics.

We are also pleased to write articles about entrepreneurship and speak on the topic. Below is a summary of the articles we've written and the conversations we had on the topic of entrepreneurship.

http://wsradio.com/internet-talk-radio.cfm/shows/PricewaterhouseCoopers-Start-Up-Show.html

INTRO: Our next guest, Linda Holroyd, is founder and CEO of FountainBlue, a for-profit that promotes entrepreneurship. She is also writing a book on entrepreneurship called "Something from Nothing: A Primer for the Entrepreneur in You. Linda. 

Tell me what you mean by 'Something from Nothing'?
I define an entrepreneur as someone who has a new way of doing something that may defy current convention, coupled with the passion and the persistence necessary to generate results. The �Something from Nothing� concept is a celebration of the spirit of entrepreneurship, the innovation, creativity and out-of-the box thinking that fuels the economic engine for a person, a company, a nation.

The �Something from Nothing� concept is not just about entrepreneurs with the novel idea that launch companies. It is also about the corporate executives at all levels who think outside the box and integrate new ideas to broaden products and markets, leveraging the strengths of established corporations, from existing customer base, to infrastructure, to operational and process support, to distribution channels. 

How does the 'something from nothing' concept fit with your current organization FountainBlue?
�Something from Nothing� also stands for combining the stable, solid resources of organizations and investors (represented by the �Fountain� in the name) with vibrant, creative, innovative energies and ideas (represented by the �blue� in the name). FountainBlue�s business is to connect people with good ideas with people who have the finances, resources, and skills to help them succeed. Making the introductions and connections will help entrepreneurs to navigate what people have called the �valley of death�, the challenges that prevent most start-ups from succeeding. These hurdles might be legal problems or business plan creation problems, or management team challenges and product development challenges.

FountainBlue produces six events a month to convene the region�s leaders in the high-tech, life science and clean energy industries. In addition, we refer entrepreneurs to the service providers who assist in navigating the �valley of death�, to prepare them for introductions to the investors, and we consult with larger, established companies on integrating new ideas and concepts into existing product and service offerings. And from the people side, we develop a leadership pipeline focusing on mentorship programs, and work with our clients to foster a culture embracing entrepreneurship and innovation.

What is your advice for helping entrepreneurs generate momentum with little resources?
We launched FountainBlue in January 2006, and are pleased with the momentum generated, the communities established, the quality of our programs, the caliber of our partners, and the success of our customers. We started with a big idea: to positively impact the way organizations work, one conversation, one leader, one organization at a time. Here is some advice for how you can leverage our lessons to create something from nothing:

• Start with the Heart � Know what you�re passionate about.
• Integrate the Head � Understand what you know about your own strengths and weaknesses and intersect that with your passion and the needs of the market.
• Develop a Plan Before Acting � (the Hands Phase) Create a plan on how to get from where you are to where you want to be, and just as importantly, what people and organizations can help you get there.
  Find a Win-Win Solution � work with people you can trust and find a collaborative path to success for both of you.
• Measure your results � Focus on milestones and quantifiable results.

What is your advice for executives to integrate innovative ideas in a corporate setting?

• Integrate the same heart/head/hand concept � follow your passion, intersect it with the needs of the market and your skill set, and plan and act in alignment with both your passion and the organization�s needs. 
  
• Think and act outside the box; follow the HP way of informed dissent, and welcome others in your organization to do so, while focusing on business results. This is the best way to leverage the creativity and diversity around us, the kind of innovative thinking which brings business results.
  
• Build relationships that are more bigger and important than goals
  
• Persevere despite adversity
  
• Welcome process, but know its place
  

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