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FACEBOOK'S IPO NUMBERS, THE IPO PROCESS, KEY STAKEHOLDERS, POST-IPO BILLIONAIRES, AND MORE

For the handful of venture capitalists who backed Facebook (FB.O) in its early days, a huge financial payoff is not the only thing they may be celebrating when the company goes public later this week.

In a business in which the best investment opportunities flow to a small number of firms with big reputations, the prestige boost that Accel Partners, Greylock Partners and Meritech Capital have gained from their Facebook investments dating back to 2005 and 2006 could pay dividends for years to come.

Lisa Edgar, who tracks a range of venture investors in her work evaluating venture-capital firms for fund-of-funds firm Top Tier Capital Partners said. 

"The person, often the firm too, gets that patina.  It perpetuates. There's this deal-flow and network effect."

The dynamic is straightforward, but powerful. Entrepreneurs see a firm, or an individual partner, that not only made a great call but now has a special relationship with a company that could help their nascent business. That means that the venture capital firm gets first dibs on some of the most promising deals, which vastly increases their odds of success.

Facebook Numbers Based on IPO Filing (Click Image To Enlarge)

And their link to Facebook means in some cases an easy introduction, or even a deal down the road, for the venture capitalists' portfolio firms. Take Facebook's $1 billion acquisition last month of photo-sharing service Instagram - just after Greylock funded it.

Other venture capitalists also start paying more attention to what the successful firm is doing, and although they would be loath to admit it, they may become more inclined to back those same companies at richer valuations in later rounds of financing.

The limited partners who provide the funding for venture capitalists in turn see both the big financial return from the initial investment and the fringe benefits to other portfolio companies, and become more inclined to support the successful venture capital firm in the future.

Facebook's Process From IPO Filing  Date Through First Day of Trading (Click Image To Enlarge)

'GIVES THEM CONFIDENCE'

Josh James, the former chief executive officer of the software company Omniture, is just the sort of entrepreneur that most any venture capital firm wants to back - he had sold Omniture to Adobe Systems (ADBE.O) for $1.8 billion in 2009.

He had his choice of funders when he was building his new software company, Domo, and went with Benchmark Capital last year in part because of Benchmark Capital partner Matt Cohler's close ties to Facebook.

James said he has sealed a deal to hire more than one employee by telling them that likely they eventually would get to present to Cohler, and he has closed several sales because the Facebook connection makes it clear to customers that Domo is up on the latest technology.

He said.  

"It gives them confidence."

Earlier this year, Domo raised $20 million more from Institutional Venture Partners.

At education network Edmodo, which took $15 million in funding from Greylock and Benchmark last year, the Facebook connection "brings credibility to us, too," CEO Nic Borg said.

Borg said he believes several education companies developed applications to run on Edmodo's platform that they might not otherwise have done so.

At business software company Couchbase, CEO Bob Wiederhold says the upside lies in large part on the introductions that Accel's Kevin Efrusy, an investor in his company since 2010, can make. That includes to Bobby Johnson, director of engineering at Facebook and now an advisory board member at Couchbase.

"He can help surround the company with good people," Wiederhold said, referring to Efrusy.

THE BIG COMEBACK

Facebook's earliest backers are sitting on a veritable fortune. Meritech's and Greylock's slices of Facebook will be worth more than $1 billion each.

But Accel Partners, which initially invested $12.7 million in Facebook at a $98 million valuation back in 2005, the year after it was founded, is clearly the big winner. Come the IPO, the current stake of Accel and its affiliates will be worth $6.3 billion, assuming a mid-point stock price of $31.50. It plans to sell a portion of that stake worth about $1.2 billion, according to the IPO prospectus.

List of Facebook Stackholders With Percent of IPO Shares Held (Click Image To Enlarge)

Accel won in more than one way. It had been struggling in the wake of the dot-com bust that began in 2000, and the firm's fund that in 2005 first started investing in Facebook and other companies turned Accel's reputation around. Its latest funds, including last year's Accel XI, have been heavily oversubscribed by investors.

The deal was also a career-maker for Accel's Efrusy, who was not even a partner when he made the case for a big investment in Facebook at what was considered a very high valuation at the time. Efrusy went on to back social-discount company Groupon (GRPN.O) early on, in 2009, well before its IPO raised $700 million last year.

Top Facebook Billionaires After IPO (Click Image To Enlarge)

For Greylock Partners' David Sze and Meritech Capital's Paul Madera, both of whom jumped into Facebook as part of a $27.5 million round in 2006 that valued the company at $500 million, the deal was not their first big success.

Sze was an early investor in LinkedIn (LNKD.N), which raised $352.8 million in an IPO last year, and Madera backed enterprise-software giant Salesforce.com before it went public in 2004.

Cohler invested sweat equity by leaving a job at LinkedIn in early 2005 to become Facebook's seventh employee before becoming a venture capitalist. At his new employer, Benchmark Capital, which does not invest in Facebook, he led a $7 million investment last year in Instagram.

Despite their extraordinary success, none of the early Facebook investors appears ready to rest on the laurels.

Greylock's Sze said.  

"You have to be humble about whether you can do it again, and that's what keeps you hungry."

Kleiner Perkins' Chi-Hua Chien said.  

"If you look at the cycle, every four to six years another company of (Facebook's) caliber gets created."

Chi-Hua Chien is currently a partner at Kleiner Perkins and a former associate at Accel who first brought Facebook to the Accel team's attention. He rattled off a list of names including: Amazon AMNZ.O, in 1994; Google (GOOG.O), in 1998; and Facebook, in 2004.

The outsized importance of the occasional monster deals means that venture capital firms sometimes find it worthwhile to get in - even late in the game.

Andreessen Horowitz, a high-profile new firm, drew some snickers when it bought Facebook shares in 2010 at a very high valuation. But that investment stands to show a tidy profit, and with partner Marc Andreessen sitting on the Facebook board, it is not hard to see the benefit for the firm..

(Editing By Jonathan Weber and Will Dunham)

COMMENTARY:   

Here are some of the most interesting bits of information in Facebook’s IPO filing:

• Zynga accounted for approximately 12% of Facebook revenue
• Net income rose 65 percent to $1 billion in 2011, off revenue of $3.71 billion (85% from advertising)
• Sheryl Sandberg’s 2011 Facebook compensation: $30.9 million
• Facebook CFO David Ebersman’s 2011 total compensation was $18.65 million
• Advertising accounted for 85% of Facebook revenue in 2011
• Mark Zuckerberg’s compensation in 2011 was $1.49 million
• 845 million active users on Facebook (901 million as of February 29, 2012)
• Total capitalization as of Dec 31, 2011: $4,899 million
• Full time employees increased from 2,127 as of December 31, 2010 to 3,200 as of December 31, 2011
• Mark Zuckerberg holds stock with total voting power before IPO of 56.9%
• Facebook major ownership: Mark Zuckerberg : 28%, Accel (invested in 2005) :11.4% Co-founder Dustin Moskovitz 7.6% DST: 5.4% Peter Thiel: 2.5%
• Mark’s letter in the middle of the IPO filing
• Mark Zuckerberg’s annual salary will fall to one dollar starting 1/1/2013
• Facebook had 483 million daily active users on average in December 2011, an increase of 48% as compared to 327 million in December 2010
• 425 million monthly active users of Facebook’s mobile products in December 2011
• An average of 2.7 billion likes and comments per day were generated by users during the three months ending December 31, 2011
• Facebook cites Google+, Cyworld in Korea, Mixi in Japan, Orkut in Brazil and India, vKontakte in Russia as competitors
• Also cited by Facebook as competitors: Renren, Sina, and Tencent if they “are able to access the market in China in the future”

Peter Lauria points out that 85% of revenue dependent on advertising makes it more reliant than CBS, the most ad-dependent old-media firm.

Another interesting section addresses risks:

Any number of factors could potentially negatively affect user retention, growth, and engagement, including if:

• users increasingly engage with competing products;
• we fail to introduce new and improved products or if we introduce new products or services that are not favorably received;
• we are unable to successfully balance our efforts to provide a compelling user experience with the decisions we make with respect to the frequency, prominence, and size of ads and other commercial content that we display;
• we are unable to continue to develop products for mobile devices that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance;
• there are changes in user sentiment about the quality or usefulness of our products or concerns related to privacy and sharing, safety, security, or other factors;
• we are unable to manage and prioritize information to ensure users are presented with content that is interesting, useful, and relevant to them;
• there are adverse changes in our products that are mandated by legislation, regulatory authorities, or litigation, including settlements or consent decrees;
• technical or other problems prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience;
• we adopt policies or procedures related to areas such as sharing or user data that are perceived negatively by our users or the general public;
• we fail to provide adequate customer service to users, developers, or advertisers;
• we, our Platform developers, or other companies in our industry are the subject of adverse media reports or other negative publicity; or our current or future products, such as the Facebook Platform, reduce user activity on Facebook by making it easier for our users to interact and share on third-party websites.

Facebook will offer 180,000,000 shares in its IPO and other stockholders will additionally sell 157,415,352 shares. This chart shows who these shareholders are and how much the shares they're planning to sell are worth given the price range of $28 to $35 per share.

Value of shares to be sold in Facebook's IPO (Click Image To Enlarge)

Courtesy of an article dated May 14, 2012 appearing in The Huffington Post (By Sarah McBride - Reuters) and an article dated February 1, 2012 appearing in Reuters blog

CROWDFUNDING GROWTH EXPLODING, 452 WORLDWIDE IN 2011, GROWING TO 530 IN 2012, OVER $1.5 BIL RAISED IN 2011

On Thursday, April 6, 2012, President Obama signed the JOBS Act which makes it easier to raise funds online. (Although not as easy as the original bill would've made it.)

Every day we hear from yet another crowdfunding site crowing about the situation.

Most of them were alive and well before the JOBS Act and they built their sites with the previous legal restrictions in mind. Project owners couldn't sell pieces of their company or pay back the money.  Instead they gave away rewards for different levels of investing like copies of the product, limited editions or weird things, like dinner with the inventors.

But a few new sites are in the works that will let investors get a financial return for their money.

All told, we know of seven sites to help you raise seed money online:

• Crowdfunder: A new site in beta that will take advantage of the new law. Although it's not open for business yet, its founders claim it has 1,121 investors ready to spend $15.44 million on projects. It says 1,055 companies already lined up to grab those funds.
• Wefunder -- Another new crowdfunding site in beta. It claims the site already has 3,649 funders who will invest $8,972,400 in startups.
• Funding Launch Pad: This site, also in beta, has a different angle. It will be geared towards Colorado companies. Boulder, CO, has become a regional hotspot for startups, so why not a crowdfunding site that focuses on them?
• Rock The Post:  A free network that helps entrepreneurs meet professionals and investors who can help turn their ideas into successful projects by offering funds, time or materials. (Named among The Hottest 10 Startups To Watch In NYC This Year)
• Indiegogo: This site specializes in creative ventures, like movies, music, theater, fashion, even sports. But its got its share of products and tech, too.
• AngelList: This site doesn't do the actual crowdfunding, but it helps a startup get discovered by angel investors.  Hopefuls post info about their company and the angels call them.
• Kickstarter: The granddaddy of crowdfunding sites. So far in 2012, two projects have raised over $1 million on Kickstarter. Several others have surpassed $250,000. (Here's a list).

COMMENTARY:  massolution(TM), a research firm specializing in crowdsourcing and crowdfunding solutions, released its first comprehensive Crowdfunding Industry Report. After collecting data from more than 170 crowdfunding platforms (CFPs) and other sources, the results revealed that CFPs raised almost $1.5 billion and successfully funded more than one million campaigns in 2011. The majority of these campaigns were in the donation-based category totaling 1,067 campaigns, and North America was the largest market for fundraising at $837 million.

As of April 2012, there were 452 crowdfunding platforms active worldwide; and massolution projects there will be more than 530 by the end of 2012. The report also found that the crowdfunding market is growing at the rate of 63% CAGR in terms of total amount of funds raised.

Massolution identifies, defines and tracks the market growth and composition of four categories of crowdfunding platforms:

1. Equity-based (for financial return): Platforms grew at 114% CAGR, primarily in Europe, and raised largest sums of funds per campaign; over 80% raised $25,000+
2. Donation-based (motivated by philanthropic or sponsorship incentive): Platforms raised the most funds at $676M, but are the slowest-growing at 43% CAGR
3. Lending-based (P2P, P2B, and social): Platforms represent the second largest category raising $552M, and grew at 78% CAGR faster than donation-based
4. Reward-based (for non-monetary rewards): Platforms show very high growth at 524% CAGR, but from a low base of close to $1.6M in 2009

Carl Esposti, CEO of massolution and founder of Crowdsourcing.org said.

"As large sums can be raised via crowdfunding, it has become a viable alternative for capital formation for new commercial ventures, projects and both social and community-based initiatives. Driven by equity-based and reward-based crowdfunding, our forecasts indicate total funds raised will nearly double this year.  Additionally, the signing  of the JOBS ACT by President Obama on April 6, 2012, will have a profound effect on the growth of crowdfunding in the U.S. In 2013, we expect securities-based crowdfunding to bring new sources of funding to many startups and early stage businesses."

Research Methodology Survey respondents were asked more than 30 detailed questions relating to the participants on their platforms, the functionality of their platforms and their fundraising activities for the calendar years 2009, 2010 and 2011. This was validated by direct communications with 170 Crowdfunding Platforms (CFPs) and significant secondary research. Crowdfunding platforms that participated in this research represent all key regions and all categories of the crowdfunding market. Massolution ensured the accuracy of the analyses by excluding questionable data and incomplete responses.

To obtain a complimentary copy of the abridged report or to access the full report, click HERE. Broad distribution of the report was made possible by Founding Research Sponsor EG&S and Research Sponsors GATE Technologies and J. H. Cohn.

Courtesy of an article dated April 2, 2012 appearing in Business Insider and an article dated May 8, 2012 appearing in MarketWatch

8 TYPES OF ANGEL INVESTORS THAT ENTREPRENEURS SHOULD AVOID

A few angel investors have slipped or fallen from their lofty perch, so entrepreneurs must take great care to validate the character and reputation of every prospective investor. The entrepreneur’s tendency to be in a huge hurry to obtain the funding can end up being disastrous, and play into the hands of these less scrupulous investors.

Many entrepreneurs believe all money is created equal. As long as somebody recognizes their million dollar idea and writes them a check, the source really doesn't matter. In fact, most angels are pure, but there are some exceptions that may cost you more than an investment:

1. Shark angels. This is the ultimate bad guy whose sole intention of getting involved in early-stage investing is to take advantage of what they believe is the entrepreneur’s lack of financial and deal-making experience. If the term sheet process turns to pure torture, it may be time to respectfully bow out.
2. Litigious angels. The litigious investor will look for almost any excuse to take you to court. This type of investor never really focuses on the returns your company can deliver, but instead tries to make money by intimidation, threats and lawsuits. They know you won't have the resources to fight them, so they count on you "caving.” Keep your attorney close by your side.
3. Superior angels. A number of successful business people, some of whom become angels, develop the belief that they are destined for greatness because of their clear superiority over everyone else. These are usually overbearing, negative people who are hypercritical of every decision you make. Don’t be intimidated into bad decisions.
4. Control freak angels. This angel starts out looking like your new best friend. Once you are funded, he waits until you hit your first pothole and then points out “gotcha” clauses in your agreement that give him more control. This escalates into a requirement that he must step in to run your company himself. Only your Board can save you here.
5. Tutorial angels. The tutorial investor is not after control, but wants to hold your hand on every issue. The mentoring offer always sounds good up front. But after they write the check, it soon becomes apparent that their desire to be helpful 24 hours a day is a nuisance at best. Initially, your gratitude for their investment may prompt tolerance, but eventually the burden wears you down. Keeping your distance is the best solution.
6. Has-been angels. These tend to appear with every perturbation in the economy. They are usually high-flyers with a liquidity problem. They are still at the country club every day, but are now running up a tab. They will meet with you, and ask a thousand questions, but never get around to closing the deal. Learn to ask the closing questions.
7. Dumb angels. Wealth is not synonymous with business savvy. You can spot dumb angels by the questions they ask (or don’t ask). If they ask superficial questions or don’t understand business, a successful long-term relationship is not likely. But don’t forget that people with wealth usually may have some savvy friends to meet.
8. Brokers posing as angels. These people are all over the place, often posing as lawyers and accountants. They have little intent to invest in your company, and will eventually solicit you to sign a fee agreement to pay them to introduce you to actual investors. Brokers are often worth the fee, but don’t be misled about who is the angel.

How do you avoid most of these? Whenever possible, only accept investments from individuals in credible, professional angel investing organizations - not people who solicit you. Even then, do your own due diligence in the business community. Ask what other companies they've invested in, and talk to the CEOs of those companies to find out what kind of investor they've been.

Also, make sure your lawyer writes the initial investment document or term sheet - not the investor. This document should be standard for all your investors and not negotiated on a one-on-one basis. Watch out for any attempts to add clauses that can come back to bite you. Not all angels these days are even trying to earn their wings.

Marty Zwilling

COMMENTARY:   Yes, avoid dickheads whenever possible.  I knew one investor who would invest in my bosses company, but he wanted his own office inside the building, plus he wanted us to pay him $5,000 per month to consult to tell us how to run a business he knew nothing about.  The interest on a $100,000 loan was 15% APR.   I told him not waste my time.  If you do the math the cost of the office and consulting fee plus the interest on the debt, was outrageous, if not illegal. That decision was an easy one.     

My best advice for startup owners is know how much capital you need and for what purpose, don't ask for more capital than you really need, know when to seek out investors instead of lenders, and be investor-ready.  When it comes to the latter, its a good idea to be prepared with a business plan and set of financial projections, and ready to due diligence.  Some angels actually charge you for that cost, which can easily run $5,000 to $10,000.  

Courtesy of an article dated April 8, 2012 appearing in the StartupProfessionals blog

 

5 THINGS YOU DIDN'T KNOW ABOUT MARK CUBAN, DALLAS MAVERICKS OWNER AN D INTERNET AND ENTERTAINMENT ENTREPRENEUR

Internet and entertainment mogul Mark Cuban may be most well known for owning the Dallas Mavericks and his roles on Shark Tank, Entourage and Dancing with the Stars, but here are some things you may not know about him:

• 1. He hates Silicon Valley.
• 2. He sold garbage bags door to door.
• 3. He believes in transactional VOD for video.
• 4. He started his blog to “combat media.”
• 5. He got naked with his investment Naked Pizza.

Cuban sat down with Jesse Draper of "The Valley Girl Show" in San Francisco to talk shop. We covered everything from his hatred of Silicon Valley “pretentious,” to the private jet he bought online and how he invests in people without meeting them.

 

He also shares his first entrepreneurial experiences, how the Mavs are his only investment not making money (because they have to win) and how his competitive nature is the reason he loves sports.

COMMENTARY:  Jesse Draper is creator and host of “The Valley Girl Show” through which she’s become a spokesperson for startups and helped pioneer the way of new media content distribution. Formerly a Nickelodeon star, Draper is now CEO of Valley Girl™ where she oversees the show and runs technology blog Lalawag.com.

I like Mark Cuban, because he is very outspoken and opinionated. Mark will always give you the straight scoop on a business startup or new innovative idea. If you have ever watched him on ABC TV's Shark Tank, you know he can be very arrogant, hard hitting and asks the hard questions and doesn't care if feelings are hurt.  He probes for the right answers and always looks for any signs of weakness in a startup business model.  He is definitely a lone wolf, often making investments other panelists on the Shark Tank would shun.           

Courtesy of an article dated April 25, 2012 appearingi n Mashable

 

VENTURE CAPITAL INVESTMENTS DECLINE IN DOLLARS AND DEAL VOLUME IN Q1 2012

WASHINGTON, April 20, 2012 – Venture capitalists invested $5.8 billion in 758 deals in the first quarter of 2012, according to the MoneyTree™ Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters.  

Quarterly venture capital (VC) investment activity fell 19 percent in terms of dollars and 15 percent in the number of deals compared to the fourth quarter of 2011 when $7.1 billion was invested in 889 deals. The Life Sciences (biotechnology and medical device industries combined) and Clean Technology sectors saw marked decreases in both dollars and number of deals in the first quarter.  However, there were double-digit percentage increases in dollars invested in the Consumer Products and Services, Medical Device, and Telecommunications industries. Additionally, investments into companies in the Later stage of development experienced an increase, rising 11 percent and accounting for 40 percent of total dollars invested during the first quarter of 2012. 

Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US remarked. 

"Venture capitalists remained cautious during the first quarter after a lackluster fourth quarter in the public markets, as evidenced by the shift from investing in earlier stage companies to a focus on later stage companies in Q1.  Given that we saw an improvement in the public markets during the first quarter, we could see VCs return to placing their bets on seed stage companies in the coming quarters.  While on the surface, the jump in dollars invested in the Medical Device industry during Q1 may seem surprising given the 22% drop in Life Sciences funding, a deeper dive shows that companies in the Later stage of development accounted for more than half of the investments in this industry.  A more active M&A market may be the reason that the Biotech industry experienced a decline in investing in Q1, as VCs saw more of their portfolio companies experience exits during the first quarter." 

Mark Heesen, president of the NVCA said.

“The overall decline in investment in the first quarter underlies several shifts occurring in the venture space.  The industry continues to contract and consolidate which is beginning to manifest itself in fewer dollars being invested in fewer deals. Yet, we feel that the overall impact will be positive for the asset class as only the best entrepreneurs and technologies will be funded at rational valuations.  As innovation continues to advance at a very quick pace, we suspect that many seed stage companies are being funded in stealth mode, forming a pipeline that is not yet visible to the public eye.  Lastly, with the exit market improving, we hope to see venture capitalists in a position to focus more on first time deals in the coming months and less on sustaining mature companies that have been held back over the last few years.  All of these factors equate to an industry that is well positioned to optimize its performance in the coming decade." 

Industry Analysis 

• Software - The Software industry received the highest level of funding for all industries with $1.6 billion invested during the first quarter of 2012.  This level of investment represents an 18 percent decrease in dollars, compared to $2.0 billion invested in the fourth quarter.  The Software industry also had the most deals completed in Q1 with 231 rounds, which represents a 12 percent decrease from the 262 rounds completed in the fourth quarter of 2011..   
• Biotechnology - The Biotechnology industry was the second largest sector for dollars invested with $780 million going into 99 deals, falling 43 percent in dollars and 14 percent in deals from the prior quarter. 
• Medical Devices & Equipment - The Medical Devices and Equipment industry experienced an increase, rising 33 percent in Q1 to $687 million, while the number of deals dropped 6 percent to 72 deals.  Overall, investments in the Life Sciences sector (Biotechnology and Medical Devices) fell 22 percent in dollars and 11 percent in deals, which was the fewest number of deals since the first quarter of 2009. 
• Internet - Internet-specific companies received more than one billion dollars for the eighth consecutive quarter with $1.4 billion going into 188 deals.  This investment level is 3 percent lower in dollars and 23 percent lower in deals than the fourth quarter of 2011 when $1.4 billion went into 244 deals.   Two of the top ten deals for the quarter were in the Internet-specific category.  InternetSpecific’ is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company’s primary industry category.   
• Clean Technology - The Clean Technology sector, which crosses traditional MoneyTree industries and comprises alternative energy, pollution and recycling, power supplies and conservation, saw $951 million go into 73 deals, representing a 30 percent decrease in dollars and an 11 percent decline in deals compared to the fourth quarter of 2011.   The relative decrease in Clean Technology investments was driven by fewer larger rounds in Q1 as well as the fact that the fourth quarter of 2011 was exceptionally active in the sector.  Still, three of the top deals from the quarter were classified as Clean Technology investments.   

Eleven of the 17 MoneyTree sectors experienced decreases in dollars invested in the first quarter, including Semiconductors (43 percent decrease), IT Services (26 percent decrease), and Industrial/Energy (14 percent decrease).  The Consumer Products & Services sector experienced a 78 percent increase during the quarter due to the largest deal of the quarter ($238 million) occurring in that sector. 

Stage of Development   

• Seed stage investments fell 9 percent in dollars and 41 percent in deals with $141 million invested into 53 deals in the first quarter. The average Seed deal in the first quarter was $2.7 million, up from $1.7 million in the fourth quarter.
• Early stage investments fell 31 percent in dollars and 24 percent in deals with $1.6 billion going into 290 deals.   The average Early stage deal was $5.6 million in Q1, down from $6.1 million in the prior quarter.    
• Seed/Early stage deals accounted for 45 percent of total deal volume in Q1, compared to 53 percent in the fourth quarter of 2011.  
• Expansion stage dollars decreased 32 percent in the first quarter, with $1.7 billion going into 207 deals.  Overall, Expansion stage deals accounted for 27 percent of venture deals in the first quarter, a slight uptick from 26 percent in the fourth quarter of 2011.  The average Expansion stage deal was $8.3 million, down from $10.9 million in the prior quarter.   
• Later stage deals increased 11 percent in dollars and 13 percent in deals to $2.3 billion going into 208 rounds in the first quarter.  Later stage deals accounted for 27 percent of total deal volume in Q1, compared to 21 percent in Q4 when $2.1 billion went into 184 deals.  The average Later stage deal in the first quarter was $11.0 million, which decreased slightly from $11.2 million in the prior quarter. 

Venture Capital Investment Stages (Click Image To Enlarge)

First-Time Financings 

First-time financing (companies receiving venture capital for the first time) dollars decreased 22 percent to $783 million in Q1, the third lowest level in survey history.  And, the number of deals fell 28 percent to 195 deals in the first quarter, the lowest level since the third quarter of 2009.  First-time financings accounted for 14 percent of all dollars and 26 percent of all deals in the first quarter, compared to 14 percent of all dollars and 30 percent of all deals in the fourth quarter of 2011.

Companies in the Software, Media & Entertainment, and IT services industries received the most first-time rounds in the first quarter.  The Life Sciences sector experienced a dramatic drop, falling 60 percent in dollars and 43 percent in deals during the first quarter to $120 million going into 21 companies. The average first-time deal in the first quarter was $4.0 million, up slightly from $3.7 million in the prior quarter.  Seed/Early stage companies received the bulk of firsttime investments, garnering 81 percent of the deals.  

MoneyTree Report results are available online at www.pwcmoneytree.com and www.nvca.org.  

COMMENTARY:   As discouraging the Q1 2012 venture capital investment numbers appear to be, startups with clearly defined value propositions, defensible competitive advantages, sustainable business models and profitability or a path to profitability are must-have's before you make the plunge to raise venture capital.   Your value proposition should be real and truly compelling, not something concocted or imagined.   Your startup should be solving a real problem or filling a real need in the marketplace.  Your management team must proven and experienced in the chosen industry sector all of them should be 100% committed and passionate about the startup.  

For entrepreneurs in the early stage of development and thinking of raising venture capital, I encourage you to view the following videos of Guy Kawasaki, founder of Garage Ventures.  Guy is always very blung, and talks in plain language that we can all understand, and he points out the six key things that are very important when raising venture capital.

• Are you a VC-fundable deal or a viable deal?   Viable is not the same as fundable.
• Hot or Not?   Can you explain your deal in under 15 seconds.  
• Are you a 'clean' VC deal?
• The "10 slide PowerPoint presentation" Rule, delivered within 20 minutes, and a maximum of 30 bullet points.
• Raising venture capital is a time-consuming numbers game, so you must "drill a lot of wholes" to find the right VC that will ultimately fund you.
• You need capital to scale because you have problems keeping up with the growth is preferable over finishing a prototype. 

 

  

 

Courtesy of a press release dated April 20, 2012 by the NVCA and PricewaterhouseCoopers 

CROWDFUNDING RULES NOW IN THE HANDS OF THE SEC, IT HAS 270 DAYS TO MEET THE DEADLINE MANDATED BY CONGRESS

The future of crowdfunding is now in the hands of the Securities and Exchange Commission. When Congress passed the law making it legal to sell small stakes in private companies to the general public online, lawmakers left it up to regulators to determine the mechanics of how such transactions will actually work.

In the crowdfunding portion of the Jumpstart Our Business Startups Act, there are 22 places for the SEC to make rules, Karen Kerrigan, president of the Small Business and Entrepreneurship Council, said Thursday at the first Crowdfunding Conference in New York. That’s just one section of the law. The agency, which raised concerns about aspects of the statute as it was debated, has 270 days from its April 5 enactment to make rules. That means they should be in place by Jan. 1, 2013. The SEC started taking public comments last week.

The commission will have to make rules for crowdfunding websites—”intermediaries” in the law’s jargon—including, for example, what disclosures they must make to investors, how they’ll make sure people don’t invest more of their money than the law allows, and how they’ll vet the people behind the companies selling shares.

For Kerrigan, who was among the law’s most vocal backers, it means the SEC might tie up the industry in red tape.   She told the conference.

“There is a lot of opportunity for the SEC to do more regulatory damage, if you will, to this space.” 

The law puts a lot of new work on the table for securities regulators who are already behind on implementing the Dodd-Frank reforms, says Joan MacLeod Heminway, a law professor at the University of Tennessee who spoke on a panel with Kerrigan. It’s not clear if the agency has the resources to police a new class of unregistered securities and the websites that will connect issuers and investors. Says Heminway:

“I think the SEC’s got a big problem on its hands.”

COMMENTARY:    The Crowdfund Intermediary Regulatory Association will commit to providing investor protection and market integrity through effective and efficient regulation of those within the crowdfunding industry. CFIRA will create rules, oversight and a united voice for the CrowdFund Investing platform companies as the industry is formed. CFIRA announced today that the founding partners will be:

• Startup Exemption, The CrowdFund Investing authors that wrote the framework for the Crowdfund legislation passed by Congress.
• The SoHo Loft Capital Creation (TSLCC) Events, the definitive event platform for the private markets aimed at facilitating capital formation and job creation.
• Gate Technologies & GATE Impact, a platform and electronic marketplace and that provides regulatory compliant private market transactions.

CFIRA is a membership organization that includes members of the CrowdFund Investing and donation-based crowdfunding community as well as representatives of related industries including angel and venture capital firms.

CFIRA will provide intermediaries with regulation, reporting, and compliance oversight and will provide investors with educational tools to help make more informed decisions about the opportunities and risks of CrowdFund Investing. CFIRA is committed to working with the SEC to create reasonable and appropriate regulations and oversight to reduce fraud and protect investors.

The JOBS Act now allow entrepreneurs to directly solicit investors, something that Regulation D of the SEC forbid, provided that investors are fully-accredited.  It does exempt startups from filing financial disclosures the SEC once they reach 500 individual investors.  The limit has now been raised to 2,000 individual investors, but 1,500 of those investors must be fully-accredited investors as defined by the SEC.  Employees issued stock under employee benefit plan securities (stock options) are excluded from the 2,000 investor limit.

Overview of Crowdfunding Exemption Component of JOBS Act

In a blog post dated April 6, 2012, I described in  great detail the major compoents of the JOBS Act as it relates to the new crowdfunding exemption.  

The JOBS Act establishes the new crowdfunding exemption, which is designated as Section 4(6) of the Securities Act, with the following parameters:

• The aggregate proceeds from all investments in the issuer, including amounts sold under the crowdfunding exemption during the preceding 12 months, must be less than $1,000,000.
• The aggregate amount invested by any investor in all issuers pursuant to the crowdfunding exemption must not exceed a limit determined on a sliding scale based on net worth or annual income. The limit is 5% of net worth or annual income that is less than $100,000 (or $2,000, if greater than the 5% calculation), and 10% of net worth or annual income that is $100,000 or more. No investor may invest more than $100,000 in an issuer pursuant to the crowdfunding exemption. Income and net worth are to be calculated in the same fashion as the tests for accredited investors. Accordingly, equity in a principal residence is excluded from net worth.
• The transaction must be conducted through an intermediary that is either a registered broker-dealer or “funding portal.”
• Funding portals are not required to register as broker-dealers, but are subject to SEC registration and must be members of a national securities association, such as FINRA.
• The intermediary must provide disclosures, including disclosures related to risks and other investor education materials (as determined by SEC rules).
• The intermediary must ensure that investors review investor-education information (as determined by SEC rules).
• The intermediary must ensure that investors answer questions demonstrating that they understand the risks of investing in startups, including the risk of loss of the entire investment, and that each investor can afford such loss.
• The intermediary must provide the disclosures to the SEC and to investors at least 21 days prior to accepting any investments.
• The intermediary must take fraud-prevention measures to be determined by SEC rules, including background checks of officers, directors and 20% holders.
• The intermediary must ensure that proceeds are not released to issuers until a set target amount is reached and must allow investors to withdraw their commitment in accordance with SEC rules.
• The intermediary must take steps to be determined by SEC rules to ensure that each investor has not exceeded its crowdfunding limit in a 12-month period, which as noted above applies to all investments in all issuers under the crowdfunding exemption.
• The intermediary must take steps to ensure the privacy of information collected from investors in accordance with SEC rules.
• Intermediaries cannot pay finders fees.
• Directors, officers and partners of the intermediary may not have a financial interest in the issuer.
• The issuer must make the following mandatory disclosures to the SEC, the intermediary and investors:
  • identifying information about the issuer, including its website
  • the names of officers, directors and 20% shareholders
  • a description of the business and the anticipated business plan
  • a description of the financial condition of the issuer, with scaled requirements depending on the target amount of the offering.
    • For offerings of $100,000 or less, the income tax return for the last completed year and financial statements certified by the principal executive officer to be true and correct
    • For offerings of $100,000 to $499,999, financial statements reviewed by an independent public accountant
    • For offerings over $500,000, financial statements audited by an independent public accountant
  • the intended use of proceeds
  • the target offering amount, the deadline to meet the target offering amount, and regular updates regarding the progress of the issuer toward the target
  • the price or the method of determining the price, and if the price is not fixed, a reasonable opportunity for the investor to rescind its commitment once the price is determined
  • detailed information about the capital structure of the issuer, the securities being offered and the risks associated with those securities
  • how the securities being offered are being valued, and how they might be valued in the future in connection with a corporate transaction
• The issuer may not advertise the terms of the offering except for notices which direct investors to the intermediary.
• The issuer may not compensate finders except in accordance with SEC rules that will ensure the recipient clearly discloses such compensation.
• The issuer must file annual reports of results of operations and financial statements with the SEC and provide to investors, in accordance with SEC rules.
• No resales are permitted for one year except to the issuer, an accredited investor, a member of the investor’s family or pursuant to a registered offering.
• The exemption is available only for U.S. issuers that are not investment companies and are not subject to periodic reporting under the Exchange Act.
• The issuer and its directors, partners, principal executive officer, principal financial officers and controller/principal accounting officer will be liable to investors for any material omissions or misstatements unless they can sustain the burden of proof that they did not know, and in the exercise of reasonable care, could not have known, of such untruth or omission.

CFIRA Update

On Monday, April 23, 2012, there will be a live chat  at 9 am PST / 12pm EST / 5pm BST with CFIRA leadership group, the group organizing to develop a self-regulatory framework for the crowdfunding industry.  The chat will provide updates from a recent leadership group meeting held in NY on Wednesday, April 18 and meetings with FINRA and the SEC on Friday, April 20. You can submit your questions for this panel of experts right now in the comments at the end of this post, or to eric.mack@crowdsourcing.org.

It's was a busy and fruitful week with well attended meetings held in NY on Wednesday, April 18. The group agreed on two important mandates.

• Firstly, the efforts to work with the SEC to guide the development of a framework for the regulation of the US crowdfunding industry. 
• Secondly, the need to work to coalesce the industry in order to form a united group that could represent the needs of the industry, beyond the development of a workable regulatory framework.

In this weeks Live Chat Crowdfunding.org will be providing updates on the progress that has been made including details of meetings held with FINRA and the SEC.

Crowdfunding.org invites you to join members of CFIRA's leadership group and its securities attorney's for this week's live chat in order to learn of the progress that has been made and to invite you to continue to ask questions and provide input.

Please post any questions you have for this next Live Chat as comments to this post or to eric.mack@crowdsourcing.org. We will field the questions.

As I indicated in my blog post dated April 6, 2012, the crowdfunding exemption is going to require that the SEC establish regulations that insure investor disclosures, qualifications and protection.  

Courtesy of an article dated April 19, 2012 appearing in Bloomberg Businessweek

UNREASONABLE AT SEA, THE FIRST OCEAN-GOING STARTUP INCUBATOR WITH A CAMPUS-ON-A-SHIP BEGINS SAILING IN 2013

The ship MV Explorer will serve as a Semester at Sea and Unreasonable at Sea's tech incubator floating campus beginning in 2013 (Click Image To Enlarge)    

Last year, we wrote about Blueseed, an incubator-on-a-ship that is anchored near Silicon Valley.

We think we’ve found something cooler. Check out Unreasonable at Sea, an accelerator program geared towards tech entrepreneurs who want to take their products to different shores.

Unreasonable at Sea will make port at 14 different countries and circumnavigate the globe during its 100-day incubator program aboard the MV Explorer (Click Image To Enlarge)

They are doing it quite literally too: Ten teams from around the globe will participate in a 100-day program aboard a ship that will port at 14 different countries (subject to changes):

• EMBARK: San Diego, CA, USA
• Hilo, Hawaii
• Yokohama, Japan
• Kobe, Japan
• Shanghai, China
• Hong Kong
• Ho Chi Minh City, Vietnam
• Singapore
• Penang, Malaysia
• Cochin, India
• Port Louis, Mauritius
• Cape Town, South Africa
• Tema (Accra), Ghana
• Casablanca, Morocco
• DEBARK: Barcelona, Spain

Curious? Watch this 3-minute trailer:

 

If you think this is some kind of extended cruise trip, you’re wrong. Teams will be expected to perfect, tweak, and adjust their business model and product. Daily workshops will be held by mentors on the ship.

When porting at the different countries, events will be held to put these entrepreneurs in front of their land-based peers, as well as investors, politicians, and philanthropists. An opportunity will also be presented for them to test their products in various markets.

Which is a lot of hard work.

General Requirements To Quality 

To be eligible for this accelerator your company must meet the following requirements:  

• Your company must be for-profit. 
• Your company must be technology-based. 
• Your company should consist of at least two people. 
• You must also have a prototype, and prove that it is highly-scalable and has the potential to gain user traction. 
• Being revenue-generating is a plus. 

This accelerator, a collaboration between Semester at Sea and Unreasonable Institute, will start in January 2013. Applications close on 15th May 2012.

Some of the mentors that will join the program include: Ben Casnocha, co-author of The Start-Up of You, as well as George Kembel, who leads the Institute for Design at Stanford.

I guess spending 100 days out at sea is an experience very few have gone through, so expect some tough competition for a place.

Here’s the kicker: The cost of attending the program, estimated at US$120K per team, will be sponsored. On top of that, you’ll get a US$500 stipend for the whole trip.

But if you’re prone to sea-sickness, perhaps you should look elsewhere.

COMMENTARY:    If you read through the Unreasonable at Sea website you will find that this is a very serious incubator program, and it is going to be very selective.  You will be expected to meet ALL the criteria (see below) in order to quality for selection.   

Unreasonable at Sea is looking for entrepreneurs using technology to address massive social or environmental problems and using certain types of technologies.  This incubator program is not for social networks, mobile app developers, game makers, and so forth.   

The selected entrepreneurial teams will be quite unique and will undero brutal schedules that will include long hours in the class room and mentoring, meetings and presentations at each port of call, and very little sleep.   This is not your normal party boat.

This would be a perfect situation for a reality TV program.  Wish I had the time and financial resources to do it myself. 

Full Criteria To Qualify

You Must Answer YES to All The Following

• Is your company using technology to address a massive social or environmental problem?  We are looking for ventures focusing on telemedicine, mobile banking, clean-tech, democratized education, disaster relief…etc. In short, we are searching for companies leveraging technology to have significant impact.
• Is your company at a stage where it is strategic to work  internationally?  Unreasonable at Sea presents an incredible opportunity to leverage technologies that are already working in one market, and help move them globally. We are looking for companies who can convince us that their company will benefit wildly from the experience of an international accelerator at sea.
• Are you currently working full time on your venture?  A full-time commitment is defined as a minimum of 40 hours per week.
• Do you have at least one team member who is currently working full-time with you?   We believe in the power of teams and will only accept applications on behalf of teams that are at least 2 people in size. If you have 100 employees and individuals on your team, that is ok with us, but if you are going at this alone, we will not read your application.
• At minimum, do you have a prototype to market or have you run a pilot?  We do not select ventures at an idea stage. You must have a prototype or have completed a pilot program at minimum to be accepted. As noted above, we prefer to work with companies ready to scale internationally and who have already gained significant traction in at least one market.
• Is your venture a for-profit company?  We are capitalists at heart in that we believe in the power of markets to solve needs at scale. Consequently we do not work with NGO’s or non-profit organizations.
• Has your venture generated at least $1 in revenue from selling a core product or service?  We hold all companies who apply to this standard unless there is a compelling reason they have not yet sold their product or service (for example, many bio-tech companies need to run years of trials before they can sell a product).
• Do you have a relentless entrepreneurial spirit & are you hungry to take your venture to global scale?  You get where we are going with this.
• Are you 18 years of age or older?  You could be 80 years old, but due to a number of legal issues, we can’t accept applications under the age of 18.
• Are you a Founder or Co-Founder of your organization?  Although we will be accepting 2 to 3 individuals from each company selected, we insist that the founder or co-founder joins us on the voyage.
• Are you able to make key, high-level, direction-shifting decisions?  (such as investment and major partnerships) on behalf of your organization? Typically, this is the role of a CEO or CTO, but doesn’t necessarily have to be.
• Can you read, write, and speak in English fluently?  The entire program will be taught in English. English doesn’t need to be your first language, nor do you need to be prolific in English, but you will need to be able to read, write, and speak in English. 

If accepted, will you be able to attend the ENTIRE Unreasonable at Sea program from January 6, 2013 –April 25, 2013.

Semester at Sea

The mission of Semester at Sea is to educate individuals with the global understanding necessary to address the challenges of our interdependent world. Established in 1963, Semester at Sea is the only study abroad program of its kind in the world. Using a ship as a traveling campus, undergraduates, lifelong learners, faculty, and lecturers live and learn together while circumnavigating the globe each fall and spring semester and exploring a world region each May and summer term. To date, Semester at Sea has launched 100 voyages, educated more than 50,000 students from 1,500 universities, and traveled to more than 60 countries.

Unreasonable Institute

The Unreasonable Institute is a mentorship-driven acceleration program for entrepreneurs tackling social and environmental problems. Each year, the Institute unites 25 entrepreneurs from every corner of the globe to live under the same roof for six weeks in Boulder, Colorado. These entrepreneurs receive training from 50 world-class mentors, ranging from the Former Director of Google.org, to the CTO of HP, to an entrepreneur who’s enabled over 19 million farmers to move out of poverty. In the process, they form relationships with 20 investment funds, receive legal advice & design consulting, and pitch to hundreds of investors and partners. 

After seeing the success of the model of the Unreasonable Institute, it’s founder,Daniel Epstein, is eager to launch Unreasonable at Sea with a new approach. Instead of uniting entrepreneurs in the entrepreneurial Hub of Boulder (as Institute does), this accelerator will take place on a ship as it travels more than 25,000 nautical miles around the globe to 14 international destinations. 

Courtesy of an article dated April 18, 2012 appearing in SGEntrepreneurs

DOOM & GLOOM HITS GREEN ENERGY AS FUNDING COLLAPSES IN Q1 2012, BUT U.S. RECLAIMS CLEAN ENERGY FUNDING LEAD FROM CHINA IN 2011

Bloomberg New Energy Finance clocks a first-quarter drop in clean energy investment to $27 billion, the worst since Q1 2009.

Global green energy investment stumbled badly in the first quarter of 2012, falling to levels not seen since the financial crisis of 2009. Looks like expiring U.S. incentives, European economic crisis, well-publicized solar bankruptcies and the threat of more high-profile green tech companies going under has taken its toll.  

Bloomberg New Energy Finance reported Thursday (PDF) that global clean energy investment fell to a mere $27 billion in the first three months of 2012, down 28 percent from the previous quarter and down 22 percent from the first quarter of 2011. It’s the worst showing since the first quarter of 2009, when the research firm counted $20 billion in venture capital, private equity, public markets and asset finance.

Broken out by sector, the first quarter of 2012 saw $24.2 billion in utility-scale renewable energy project asset finance, down 30 percent from the fourth quarter of 2011 and down 13 percent from the same quarter last year.

Bloomberg New Energy Finance CEO Michael Liebreich pointed to some key factors leading up to the decline. A combination of faltering incentives and ongoing financial uncertainty in Europe, and the expiration of stimulus supports and an uncertain political climate in the United States, has sapped investor confidence, he said.

This year has seen Germany and other key European countries lower their feed-in tariffs for solar power, as well as a string of bankruptcies of German solar companies unable to compete against cheap Chinese solar panel manufacturers. In the United States, a stimulus program that allowed solar power project developers to claim cash grants in lieu of investment tax credits expired, and an attempt to revive it failed last month.

There’s little to show that things will be getting much better over the next 12 months, Liebreich added. Wind power’s production tax credits are set to expire at the end of this year, for example. Renewal is never certain, but the general pall that’s been cast over federal support for green technology -- summed up in the conservative anger and accusations around the bankruptcy of U.S. loan guarantee-backed solar startup Solyndra -- makes it particularly hard to predict this year.

IPO activity took a particularly poor turn, with only $601 million raised on the public markets in the quarter. The two biggest IPOs of the quarter were the $74.8 million debut of Ceres, maker of genetically-modified energy crops, and the $68.8 million public launch of biodiesel maker Renewable Energy Group.

In the meantime, we’ve seen a host of companies delay or cancel their IPO plans amidst ongoing market turmoil and falling prices for publicly listed green technology companies. While solar microinverter maker Enphase raised $54 million in its IPO last week, it also reduced its initial share price by nearly half beforehand. And this morning, massive solar thermal power startup BrightSource suspended its IPO plans after a year of waiting for market conditions to improve.

Venture capital and private equity investment in “specialist clean energy companies” stood at $1.9 billion in the first quarter, down only 2 percent from the previous quarter and up 12 percent from the first quarter of 2011, Bloomberg New Energy Finance reported. Whether this indicates strength in the sector, or companies going back to private investors to manage their way through a poor climate for public market financing, is less clear, however.

For example, one of the first quarter’s biggest raises was the $263 million for beleaguered plug-in hybrid automaker Fisker Automotive, which has been struggling with production delays, recalls and the apparent freezing of its $529 million Department of Energy loan guarantee. In fact, the company has since gone back to investors for another $130 million, which may be aimed at meeting the financial benchmarks needed to restart access to that loan.

Another big first-quarter investment was solar installer and financier SolarCity’s $81 million from Silver Lake Kraftwerk, marking the first big investment for the fund started by billionaire George Soros and bigwigs from the VC and DOE greentech world. SolarCity is rumored to be seeking an IPO, but may feel safer sticking to private investors for the time being.

COMMENTARY:  

End To Clean Energy Federal Tax Incentives and Debt Problems in the Eurozone Hit Clean Energy Investments Hard

Michael Liebreich, BNEF chief executive, said the performance represented the lowest quarterly level of clean energy investment in several years.  He said in a statement.

"A $27bn quarterly figure is not a disaster, but it is the weakest since the dismal $20bn seen in the first quarter of 2009, when the financial crisis was at its worst.  The weak Q1 2012 number reflects the destabilising uncertainty over future clean energy support in both the European Union (driven by the financial crisis) and the US (driven by the expiry of stimulus programmes and the electoral cycle)."

He warned that after seeing clean energy investment reach record levels during 2011, the sector could face a relatively tough year, despite continued improvements in the cost and effectiveness of renewable energy systems.  He said.  

"There is no sign of a rapid turnaround in either of these regions in the next 12 months. Clean energy technologies, particularly solar photovoltaics and onshore wind, continue to fall in price and approach competitiveness with fossil-fuel power, but politicians in many countries appear to be ducking the decisions that would ensure the sector maintains its growth trajectory. We are seeing growth in some of the non-core markets around the world, but they will have a tough job replacing weakening demand in the developed world."

The clean tech venture capital market provided the one bright spot for the sector, with the report confirming that venture capital and private equity investment during the quarter rose six per cent year on year to $1.9bn.  However, Liebreich warned that the wider clean energy sector could see investment levels stall this year, despite strong long-term prospects for the industry.  He said.  

"The outlook for investment in the remainder of the year remains difficult. The rapidly improving cost-competitiveness of renewable energy technologies is stimulating activity, particularly in developing countries. However, it is becoming harder to see the sector worldwide beating last year's record, unless the storm-clouds lift in Europe and US Congress stops bickering and sends some clear signals about the importance of new energy technologies. Meanwhile, continuing improvements in the sector's economics mean companies that survive these next few years, whether on the industry's supply or demand side, will be well positioned for the next growth phase."

U. S. Takes Lead Over China In Green Energy Investment in 2011

In spite of the huge drop in U.S. clean energy investment during the first quarter 2012, the United States has regained the lead in the clean energy race during 2011, investing $48 billion last year to surpass China, which held the world's top spending spot since 2009, said a study Wednesday.

The US surge in private investment was a 42 percent increase over 2010 and saw Washington maintain its lead worldwide in both venture capital and research and development cash, said the Pew Charitable Trusts annual report on clean energy.

However, the US boom was largely driven by expiring tax incentives, highlighting "a persistent phenomenon in which the country fails to deploy into the marketplace the clean energy innovations it creates in the laboratory." 

China, which fell to second, invested $45.5 billion in 2011, a one percent increase over 2010, but maintained its global lead in wind energy investment and in solar manufacturing, said the report.

Experts say a key difference between the U.S. and China is in how they attract investment -- China by having solid green energy policies that reassure investors and the United States by offering tax breaks for investment.

Phyllis Cuttino, director of Pew's Clean Energy Program said.

"China has been able to fuel its growth by having very consistent and long-term policies in place that really tell investors there is an opportunity for them to make a profit. The United States has no renewable energy target but they have decided to try and incentivize clean energy investment through a variety of tax incentives, tax credits, tax subsidies, loan guarantees." 

Some of those programs were instituted under the George W. Bush administration and some under President Barack Obama, she said.

A Review of The U.S. Solar Industry During 2011

It seems that only yesterday that the U.S. solar industry was experiencing incredible growth when we compared key indicators for Q1 2011 versus Q1 2010:

A Review of The U.S. Wind Energy Industry 2011

In a blog post dated January 29, 2011, I reported that wind energy installations in 2011 totaled 6,810 megawatts, an increase of 31% over the 2010 total.  Q4 2011 wind energy installations were 3,444 megawatts, beating the 2010 Q4 total of 3,296 megawatts.  And there hasn’t been so much wind capacity under construction since the middle two quarters of 2008, just before the recession hit.  This time, however, it is not ambition but desperation that is driving growth.

AWEA CEO Denise Bode observed why wind energy installations had such a great 2011.

“This tremendous activity is being driven by the federal Production Tax Credit (PTC), which leveraged an average of more than $16 billion a year in private investment over the last several years and supported tens of thousands of manufacturing jobs.” 

The wind industry’s PTC of 2.2 cents per kilowatt-hour tax credit expired on December 31, 2012.   On February 17, 2012, Congress voted and refused to extend the PTC credits for 2012. As a result of the failure to extend PTC's, the wind energy industry is predicting massive layoffs and stalled or abandoned wind projects.

Just recently in a blog post dated April 12, 2012, BrightSource Energy, which had planned an IPO in May 2012, cancelled it after only three days, citing volatility in the stock markets, but it makes you wonder if the failure to extend federal tax incentives and PTC credits will impact clean energy IPO's during 2012.  I have a feeling it definitely will.

What a difference a year makes.  Once the clean energy investment tax credits and PTC credits ended, investors no longer saw green energy as a good investment, and they appeared to have abandoned clean energy in mass.  Things look very gloomy for  clean energy investments throughout the remainder of 2012.   

Courtesy of an article dated April 12, 2012 appearing in GreenTechMedia and an article dated April 12, 2012 appearing in Phys.Org

VENTURE CAPITAL FUNDING COMMITTMENTS FOR THE YEAR 2011 BOUNCE BACK, UP 30% OVER 2010, ROI'S UP AND VC EXITS ABOUND

On April 5, 2012, nearly 1,000 attendees, including 500 VC's, met at MIT’s Kresge Auditorium for 'VC65,' which was organized by the NVCA and MIT Museum (Click Image To Enlarge)

Venture capital has been getting a lot of support from politicians and the press recently, notably the passage of the JOBS (“Jump-start Our Business Start-ups”) Act. A key provision, much mentioned by President Obama, lets Joe Ordinary become a venture capital investor via legalization of Crowd Funding (more).

Committments To U.S. Venture Capital Funds and No of Active Funds - 2006 through 2011 - Source: NVCA - (Click Image To Enlarge) 

It’s ironic that just as the barriers for small investors have been lowered, the large institutional investors have been backing away from venture capital. As the chart shows, the amount of money committed to venture capital funds in the U.S. (most of which comes from institutions) and the number of funds making active investments have shrunk by about half in the last five years.

Institutions invest by the numbers, which leads to a focus on the past. The average return on venture capital investments for the past ten years, a common institutional benchmark, has been pathetic:  2%-3% per year. By comparison, liquid public equities returned 5%-7% and buy-out funds returned 8%-9%. Creating new businesses may be more politically popular, but investing in old businesses has paid investors better (1).

Total Venture-Backed Exits - 2006 through 2011 - Source: NVCA (Click Image To Enlarge)

The good news is, venture capital is bouncing back, pushed by several forces:

1. The U.S. innovation sector is performing well. Smart phones, the cloud, and the good old web are clearly the most powerful innovation platform the world has ever seen. Flash commerce, daily deals, new forms of media, digital advertising technology, social networking, and mobile and casual gaming are just some of the major innovation categories that have become important in the last five years.
2. Exits have come back in both quantity and quality. Pandora, Zynga, GroupOn, and LinkedIn are examples of recent high-profile exits, with Twitter and Facebook (the mother of all venture exits) in the pipeline. Total venture exits are up by close to 2x from the doldrums of 2008 and 2oo9.
3. New software methods, cloud infrastructure, and marketing via app stores and social networks have shrunk the cost of building a new software company versus ten years ago. As a result, many more are started, with many failures, but an increasing number of successes, too.

Venture capital certainly has its challenges. Current success is very concentrated in a narrow range of market segments (social/local/mobile and deal businesses like GroupOn) and geographies (Silicon Valley, New York, and Boston). In too many cases investors are trying to do the same thing: invest in the same kinds of deals, pile into the same funds, etc. Usually that is a recipe for disappointment. Venture capital has always been a hit-driven business, however, I think the industry will be stronger when it is hitting on more cylinders.

Pooled U.S. Venture Capital Internal Rate of Return (%) - 2003 through 2011 - Source: NVCA (Click Image To Enlarge)

Venture capital returns are coming back, however, and the data shows that this has been developing steadily over the last eight years. The chart above divides the ten-year venture return into five two-year periods (the ten-year return cited above is the geometric average of these returns (2)).

Venture capital returns took a huge hit in 2001-2003, when the tech bubble collapsed — investors lost 40%  in two years. Since then the industry has been recovering, and the severe 2008-2009 financial crisis produced only a small dip. Absent the financial crisis, returns have been in the 12%-16% range.

Half the supply of venture capital has disappeared since 2006. The cost of starting businesses is way down. Exits have rebounded, and the “IPO On-Ramp” provisions of the JOBS Act promise further upside. Fundamentally, the prospects for Venture Capital investment look very bright. I’m looking forward to the next few years very much.

COMMENTARY:    Committments to venture capital funds for the year ending 2011 have increased from $13.5 billion in 2010 to $17.5 billion.  However, this is still way down from the year ending 2006 when committments to venture capital funds were $32.5 billion.  

The number of active VC funds has also dropped preciptiously, from 415 in 2006 to 255 at the end of 2011.  Active venture capital funds dropped by 160 or nearly 39% between 2006 and 2011.  The main cause:   The Great Recession.    Investors to active venture capital funds were wiped out by the recession and have gotten cold feet.

Another reason why active venture capital funds have dropped so much is because returns have dropped dramatically at the height of the Dotcom boom, when they were well over 30% to less than half or 14.75% at the end of 2011.   Investors are still trying to get out from under the collapse of returns that occured right after the financial meltdown at the end of 2008-2009 when returns hit a negative 6.5%.   

The stock markets still remain volatile, but have been mostly up since the beginning of 2012, and this has given investors to venture capital funds, more optimism, and they have responded by investing $50 billion more in 2011 than they did in 2010.  

The number of IPO's have nearly tripled between 2011 and 2010, and the prospects for future IPO's look promising in spite of the volatile stock markets.  

Courtesy of an article dated April 12, 2012 appearing in Forbes

THE ANGEL INVESTMENT MARKET UP IN 2011, 66,230 DEALS FUNDED, $22.5 BILLION INVESTED IN ANGEL DEALS, UP 12.1% OVER 2010

DURHAM, N.H. – Following a considerable contraction in investment dollars in 2008 and 2009, the angel investor market continued to recover in 2011, a trend that began in 2010 in investment dollars and in the number of investments, according to the 2011 Angel Market Analysis released by the Center for Venture Research at the University of New Hampshire.

Angel Investment Highlights for 2011

• Total investments in 2011 were $22.5 billion, an increase of 12.1 percent over 2010 when investments totaled $20.1 billion. 
• A total of 66,230 entrepreneurial ventures received angel funding in 2011, an increase of 7.3 percent over 2010 investments. 
• The number of active investors in 2011 reached 318,480 individuals, a substantial growth of 20 percent from 2010.

According to Jeffrey Sohl, director of the UNH Center for Venture Research at the Whittemore School of Business and Economics,

“The significant increase in total dollars, coupled with the rise in the number of investments resulted in a larger deal size for 2011 -- an increase in deal size of 4.7 percent from 2010. These data indicate that angels have significantly increased their investment activity, and are committing more dollars resulting from higher valuations. It appears that an optimism in angel investing is taking hold.” 

Angel Investment Leaders By Industry Segment for 2011

• Software regained the top sector position with 23 percent of total angel investments in 2011.
• Healthcare services/medical devices and equipment  were no 2 with a 19 percent of total angel investments in 2011. 
• Industrial/energy had a 13 percent share of total angel investments.  Industrial/energy investing has remained a significant sector for angels for the last few years, reflecting a continued appetite for clean tech.
• Biotech  had a 13 percent share of total angel investments. 
• IT services  had a 7 percent share of total angel investments. 
• Media  had a 5 percent share of total angel investments.  

Angel Investment Exits for 2011

• Mergers and acquisitions represented 54 percent of the angel exits, and bankruptcies accounted for 24 percent of the exits in 2011. 
• Slightly more than half of the angel exits were at a profit and annual returns for angel’s exits.
• Mergers and acquisitions, notes and IPOs were between 18 percent amd 28 percent; however, these returns were quite variable.

Seed Stage Angel Investments Up in 2011

Angels increased their investments of seed and start-up capital, with 42 percent of 2011 angel investments in the seed and start-up stage, reversing a two year decline in seed and start-up investing and a significant increase from 2010 (31 percent in seed/start-up). Angels also exhibited a decreased interest in post-seed/start-up investing with 55 percent of investments in the early and expansion stage, down from 67 percent in 2010. New, first sequence, investments represented 52 percent of 2011 angel activity, also an increase of 11 percent from last year.  Sohl said.

“This increase in seed/start-up stage and first sequence investing is promising and this renewed interest in seed and start-up financing is an encouraging development for our nation’s entrepreneurs."

Angel investments continue to be a significant contributor to job growth with the creation of 165,600 new jobs in the United States in 2011, or 2.5 jobs per angel investment.

The Center for Venture Research has been conducting research on the angel market since 1980. The center’s mission is to provide an understanding of the angel market and the critical role of angels in the early stage equity financing of high growth entrepreneurial ventures. Through the tenet of academic research in an applied area of study, the center is dedicated to providing reliable and timely information on the angel market to entrepreneurs, private investors and public policymakers. For more information visit http://wsbe.unh.edu/cvr or contact the center at 603-862-3341. To view an archive of all of the center’s angel research, visit http://wsbe.unh.edu/cvr- analysis-reports.

The University of New Hampshire, founded in 1866, is a world-class public research university with the feel of a New England liberal arts college. A land, sea, and space- grant university, UNH is the state's flagship public institution, enrolling 12,200 undergraduate and 2,300 graduate students.

COMMENTARY:   In a blog post dated March 26, 2012, I reported on the angel investment boom in Silicon Valley.   The Great Recession has greatly affected angel deals.   The average angel deal increased from $324,717 in 2010 to $338,400 in the first half of 2011--an increase of 4.21%, but it was down from $523,232 in 2005.  

• Average Angel deal 1st Half 2011 - The average angel investment in the first half of 2011 was $338,400 ($8.9 billion divided by 26,300 deals).  
• Average Angel Deal for 2010 - The average angel investment in 2010 was $324,717 ($20.1 billion divided by 61,900 deals).   
• Average Angel Deal for 2005 - The average angel investment in 2005 was $523,232 ($17.6 billion divided by 49,500 deals). 

Courtesy of an article dated April 4, 2012 appearing in the University of New Hampshire Center For Venture Research's The Angel Investor Market in 2011: The Recovery Continues Report