Greg Foster’s Blog (A Noro-Moseley Partners Production)

In this climate, one of the more talked about issues in the venture community surrounds the way in which investors determine pre-money valuations for early stage businesses.  With little or no revenue traction, an incomplete management team, and immature technology, most early stage companies have to sell the promise of growth and market opportunity in order to justify a decent valuation.  It’s a tough sell in good times.  In times like these, it’s darn near impossible.  With fewer exits of significance and public markets still closed, VCs are increasingly back-solving from a reasonable exit value to get a pre-money valuation that makes sense.  If 90% of exits are sub-$100 mm acquisitions, and the goal of any early stage investment is to get a 5-10x return, post-money valuations on most Series A investments need to be less than $10 mm.  This is a reality that still hasn’t caught up with a lot of entrepreneurs.

So this is bad news for entrepreneurs, right?  I’m not so certain… one of the most important outcomes of these more reasonable valuations is that VCs get larger ownership in companies. Once most VCs have characterized the risk in a deal and the money has been wired to the company, they turn their attention to the opportunity – how big could this company get?  What kind of return could we see here?  With larger ownership stakes, the VC has more confidence in the potential return they may see.  That triggers a natural tendency to work harder for and on behalf of that business.  A 5% ownership stake in a company makes it hard for the VC to really visualize a great cash-on-cash return.  But make that stake 30%, and you can visualize that return – you think about it when you come in every morning, you spend that extra hour helping out where you can, you engage at a higher level.  So while it might seem painful to accept a smaller than expected valuation, smart entrepreneurs use this to their advantage – it helps them engage with their investors at a deeper level, they can expect more from those investors and they can expect a stronger follow on commitment from those investors.  Short term dilution can sometime translate into more stability in the investor base, a greater likelihood of success, and a happy investor base willing to invest in the entrepreneur’s next great idea. 

Stay tuned…

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Yes, right up there with my 2nd place finish in the 4th grade science fair and an honorable mention for my Native American diorama in kindergarten, I can now place upon my mantle another great achievement – I am joining the Board of Directors of The Onion, America’s only real, fake source of news.  With headlines like “Jessica Simpson Completes Elaborate Plan To Destroy Cowboys’ Season”, breaking news stories like “Treasury Department Issues Emergency Recall of All US Dollars”, and hard hitting journalistic triumphs such as “International Con Man Barack Obama Leaves U.S. With $85 Million In Campaign Fundraising”, it’s no wonder why The Onion calls itself “America’s Finest News Source”.

But seriously… I will be attending my first board meeting for this esteemed institution later this week and I am pretty excited.  No, NMP hasn’t made an investment in the company.  On occasion, our firm will allow a Partner to join the board of a company with which we have no investment relationship (e.g. Alan Taetle was on the board of ChoicePoint).  We make these exceptions when we believe our affiliation with the company has the potential to strengthen our network, provide valuable insight into an industry of interest, aid in the development of our portfolio, etc.  The Onion, for all of its craziness, is one of the last great independent media brands out there and has done a killer job of building several new digital extensions like The Onion News Network, A.V. Club, and Decider.com.  My hope is that the insight I gain from being a part of their board will aid in our development of better investment theories around digital media and will provide for us a deeper understanding of how high growth digital media brands live and grow.  I’m also hoping to provide a new perspective to the team charged with managing The Onion.  What started out as a small satirical newspaper found only in a handful of college towns has grown into a vast, unrivaled media empire… ok, that’s kind of an exaggeration, but it’s cool nonetheless and I’m honored to be part of it. 

Stay tuned…

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I’ve been thinking about what it means to build social capital within one’s community.  For entrepreneurs, investors and service providers in any location, big or small, one’s reputation can mean the difference between getting funded or not, hearing about that next big deal or not, getting introduced to a prospective client… or not.

We all talk and we all talk about each other – it’s the way the world works in spite of our parents’ best efforts to prevent us from gossiping, spreading rumors, talking behind others’ backs.  To make things worse, efficiency in communication compels us to categorize people and benchmark them against an index of more widely known folks.  So what does this mean for individuals making their way through a clique-y (sp?) local ecosystem?  I don’t have all the answers, but a few classifications come to mind that you want to try to avoid being placed in.  Those include:

• That entrepreneur who seems to be onto some other deal every 6 months or so – but, oh man, this is the one, this is the one!
• That VC who tweets that a top tier VC firm just invested in one of his companies and that instantly means they will be the next Google
• That lawyer who takes advantage of the doe-eyed entrepreneur by selling them on a cadre of services they don’t need
• That entrepreneur who is awesome at raising capital, but lousy at building a business
• That VC who can’t say no so he wastes your time with words like “we’re still evaluating your deal”
• That entrepreneur who applies the scorched earth theory on their way out of the VC’s office – “you guys are idiots and you don’t get it.  We’re the next Microsoft!”
• That VC who doesn’t realize that building a start-up is a team sport
• That VC, entrepreneur, lawyer who’s a taker

And here are a few classifications you want to be a part of…

• That entrepreneur guy who seems to always get the best folks on his/her team
• That VC who rolls up his sleeves and works for his portfolio companies as if he was part of the mgt team
• That lawyer who works late to review a term sheet, attends your board meetings at no charge, who seems to be connected to pretty much everyone
• That entrepreneur who seems to handle every conversation with a potential investor with grace – so much so that investors who’ve said no kinda regret doing so when they see the entrepreneur’s reaction
• That VC who doesn’t brag about the last cool deal they did, but brags about the folks at the company who are making it happen
• That entrepreneur who has that right combination of courage, anxiety and patience
• That VC, entrepreneur, lawyer who’s a giver

This is a tiny subset of Goofus and Gallant classifications – feel free to add to, edit, or debate!

Stay tuned…

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Ever watch Celebrity Apprentice?  Great show because it gives the viewer a chance to see people with great talent for doing one thing try to do another thing for which they have no talent or expertise.  Sure, Dennis Rodman is one of the greatest defensive players in NBA history, but he stinks at selling cupcakes.  Want the very best custom bike money can buy?  Call Jesse James.  Want the very best marketing plan money can buy?  Don’t call Jesse James.

And so it goes with the recent bailouts of banks and AIG by the US Government.  Want to build the kind of huge bureaucracy necessary to manage our nation’s defense?  Want to build an entire interstate highway system connecting every major city?  Call the US Government.  Need someone to run a business?  Don’t call the US Government.  Bad idea, bad idea jeans (you know what that means if you’re a longtime SNL fan). 

And so why is all this mess we’re dealing with today a good thing?  It’s a good thing because it has clearly shown to every man, woman and child in America that the US Government should not be in the business of business.  There could be no clearer evidence of that fact.  The other good thing – there is no real partisan winner in this mess.  Everyone has to share the blame – a Republican President, a Democrat President, a Democrat (but not filibuster proof) Congress. 

With all that said, what should be the US Government’s role in the affairs of private business?  Pure and simple – to provide for the minimum amount of regulation necessary for the preservation of transparency in our system, trust in our system, and a level playing field for participants in our system.  Winston Churchill said it best – “the problem with socialism is socialism.  The problem with capitalism is capitalists”.  I am not suggesting that the US Government is not a necessary and vital player in ensuring that private enterprise continues to thrive in this country.  Those capitalists Churchill spoke about need rules, they need bright line boundaries.  I’m simply suggesting that the US Government sticks to doing what it does best – running businesses isn’t one of those things. 

Stay tuned…

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Tonight, I want the President to do something that only the President can do.  I want him to inspire us…  Here’s what I would love to hear from President Obama…

1. To the American Worker - Government’s efforts to end the recession will continue in a coordinated fashion, HOWEVER, government is not the solution to the current crisis.  This is a crisis of faith in our system.  Let me assure you the American People and the people of the world – American capitalism is alive and well.  We are open for business.  While the problems facing us are serious, they still pale in comparison to the larger, healthy system in place here in America.  I ask you, the American worker, to go in tomorrow with a renewed vigor for what you do.  Help provide real evidence to those who invest in America that their investment is a solid one.  That power rests with you. 
2. To the Business Community - As the President, I am making a very important request of everyone in the business community – it’s time to get out from under the desk and start growing again.  To our country’s business leaders, I need you all to step up.  Tomorrow when you go in, look at your plans to grow and make the necessary investments to meet those plans.  Be bold, take this opportunity to gain competitive advantage.  Hire that extra worker, buy that piece of equipment you need to improve productivity.  Over the next several months, we will be constructing a comprehensive tax incentive program to make those decisions even easier.  You make a commitment to me tonight and I will follow up with mine tomorrow.  We’re going to lessen government’s burden on your back so that you can help carry more weight for all of us. 
3. To the Investment Community - To those of you who are afraid of putting money to work in our public markets, I tell you tonight that there has not been a better time to invest in nearly a decade.  Do your homework and I can assure you that you will come to the same conclusion I have come to – hundreds of publicly listed companies are trading at levels that do not reflect the true value of their equity.  We can all change that… we can all be part of a self-fulfilling prophecy.  But we have to do it together.  I know this is risky because there will be short term profit takers looking to take advantage of our collective optimism.  But if we stick together, and if we stick it out, we will all win in the end. 

Stay tuned…

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Yeah, I read Tom Friedman’s NYTimes article over the weekend.  Granted, I was sitting in the backseat of our car coming home from RTP trying to get my 8 month old to take a nap, but I did read it.  I thought the Twitter traffic over the weekend and several other posts around the topic were interesting in that some people took Friedman’s thoughts literally and others took them to represent a few larger points.  Here is my basic POV on what I took as Friedman’s larger points:

1. Stop throwing taxpayer money down the drain - stop wasting tax dollars by giving it to a domestic auto industry that is dying.  Here in the South, we lived through the death of the domestic textiles industry – the result was capital shifting to other industries and a resurgence of a new textiles industry based on real comparative advantage.  The auto industry needs to die a controlled death and come back in a different form, a more competitive form. 
2. Plow money into VCs who know how to invest in growth industries – not sure if he was serious about this point or not but I think the larger issue is that government should be removing the friction from the start-up ecosystem.  So, a few important steps toward that end:
   1. The President needs to kill the idea that carried interest should be taxed as regular income.  That reduces the incentive for VCs to make big, interesting bets. 
   2. State pension funds allocating money toward alternative investments should push some of it toward local or regional funds and make a condition that some of that money be invested inside the state.  This provides for a potential double return for the state – good upside for the pensioners and an investment in high wage jobs inside the state.
   3. Get creative about other interesting tax incentives at the federal level for companies getting started in the industries that Friedman points to – CleanTech, General Technology, Health Care IT, etc.
3. America needs to get back to thriving, not just surviving – this is maybe the most important point in the article.  Friedman is 100% right here – we are so focused (with the recent stimulus and our political discourse) on saving the past that we are failing to see this as an opportunity to build a new future.  When so many things are so broken at the same time, it’s a chance to clear away all of the old thinking; it’s a time to renew.  I see America as a desperate, out of work, middle-aged, overweight man (who wasn’t always that way) looking in the mirror – the road he’s on is a dead end.  He can’t just change one or two things, he has to overhaul his life.  He’s gotta stop drinking so much, he’s gotta stop eating pizza every night, he needs to get on the treadmill more than once a year, he needs to quit smoking once and for all, he needs to spend more time with his kids, he needs to pray more, and he needs to pick himself up and get back in the game.  The cycle of trying to make the old ways work, believing that everything will eventually work out – that’s a losing strategy.  He knows it, and he knows that an overhaul will pay huge dividends, it’s just hard to take that first step. 

And so, I take Friedman’s thoughts as a more complex editorial about the test we face as a nation – will we solve this problem using the best things, the rare things that are uniquely American and uniquely at our disposal, or will we retreat into the old ways of thinking?  Thinking that says government can solve our problems, it’s not our fault, we’ve just gotta save this industry or that industry… that’s the thinking of failed, less relevant economies in the Old World.  I hope we ultimately choose the road less traveled – the one that faces these challenges with courage and new thinking and sees an opportunity to come out of this mess in a stronger position.  That’s the America I know! 

Stay tuned…

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With a visit by the Governor of Florida and even a chimpanzee from the local petting zoo, the Florida Venture Capital Conference put on by the Florida Venture Forum, held this past week in Naples, FL, did not disappoint. 

Here’s the monkey…

And here’s the Governor…

For years now, this has been the key annual VC event in Florida.  When I walked in on Monday night to the VC dinner, I saw nearly every VC with an office south of the Mason-Dixon and several other big named funds from Boston, NY, the mid-Atlantic and the Valley.  The event was very well designed and I took a few notes:

1. There was a lot of “unprogrammed” time.  VCs like this – it gives us a chance to talk informally with a lot of people and set up meetings with local start-ups looking for funding.
2. The event is fun – the moment you step into the event, you make a mental note to make sure to come next year.  This is important for the VCs, yes, but just as important to the start-ups as they are assured to get exposure to a ton of VCs who really want to be at this conference every year.
3. The selection of presenting companies was managed very well and those companies got a chance to showcase their company through the duration of the conference, not just at the presentations.  This allows for follow up conversations between investor and entrepreneur.
4. Everything was confined to a very small space and there was no reason to leave the resort. 

Given the fact that so much activity in Florida is spread out between Tallahassee, Gainesville, Jacksonville, Orlando, Tampa and Miami, it’s a minor miracle that this conference was able to provide both a wide and deep exposition of start-up opportunities from across the state.  Kudos to the Florida Venture Forum on a fantastic event!

Stay tuned…

P.S.  I saw Allyson Eman at the conference.  Allyson is the Executive Director for Venture Atlanta.  Last year’s Venture Atlanta was an awesome event.  I was impressed that she took the time to come down to the Florida VC Conference to take some notes of her own.  Knowing Allyson, this year’s Venture Atlanta event will be even bigger and better. 

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Note the “Skribit” widget below my blogroll.  Skribit is a start-up based in Atlanta.  The idea is very cool – it allows blog readers to contribute topic suggestions to the blogger…. Great cure for writer’s block <grin>. 

My first suggestion came from Lance Weatherby.  Lance is a Venture Catalyst at ATDC (Advanced Technology Development Center) here in Atlanta.  He’s got a great blog.  His suggestion was that I write about my pathway to becoming a VC.  So here’s my story (abridged version)…

I’m sure there are VCs out there who went to college with the specific goal of one day becoming a VC, still others who went to business school with the same goal.  I’m not one of them.  My parents didn’t go to college, so I had limited context for any career outside of doctor, lawyer, preacher and teacher.  After finishing Georgia Tech (where I maintained my sanity as a Mechanical Engineering major by minoring in Political Science and American Literature and working in Student Government), I became a business consultant (great job when you don’t really know what you want to do) and spent most of my first year out of school contemplating law school.  I didn’t know much about business school, but I was fortunate enough to work for a guy who would become a mentor.  Marco Bonilla, a Partner at Deloitte Consulting, allowed me to really engage with client problems (coolest assignment I had was to help the NYC Transit Authority figure out how to lease a ton of lit fiber they had pulled through their stations in the early 90s) and I learned to love business as a discipline.  He was also building the firm’s “Networking” practice which was the name given to the early beginnings of the Internet as a business tool.  I got hooked on the wave of innovation that was beginning to build in the mid-90s. 

Fast forwarding a bit – I left consulting and went to Harvard Business School for my MBA.  Fantastic experience and I finally learned about Venture Capital, mostly from the VC analysts in my class all hoping to be Partners one day.  I also learned a lot about VC from entrepreneurs in my class.  I fell in love with what it is VCs do, the role they play not just in business, but the broader world.  I had been looking for a career path in which I could pair up two passions – business and public service – and I came to realize that VC is just that.  I knew that VC was what I ultimately wanted to do, but I also knew my pathway would be very different from many of the young VCs I met in school.  I realized I would have to go down the entrepreneurial path toward a career in Venture Capital.  After all the requisite recruiting activities in my 2^nd year at HBS, I made the decision (thanks to some good advice from professors and fellow students) to take a job with a start-up in Atlanta called iXL (high flying internet consultancy in the late 90s – went public in 99)  When I met with the CEO, Bill Nussey, I just knew that this was where I belonged.  Sure, the salary was half of what McKinsey offered me, I stayed at the Holiday Inn on Howell Mill the night before my interview, not the Ritz-Buckhead I stayed in prior to my McKinsey interview, but I just felt like I had a chance to do something special at iXL.  Turns out it was the best career decision I could have ever made.  At iXL, I got to do a ton in a short period of time – going from the position of head lackey to the CEO to the GM of our office in Spain to the SVP of Corporate Development for a public company, all in less than 3 years… craziness. 

Bill Nussey became a mentor, brought me along as he transitioned from iXL to Silverpop, and convinced me to hunker down again, this time in a smaller business facing tougher economic times.  There I ran business and corporate development, worked to build our initial sales team, and learned how to pitch a product nobody had ever heard of.  He knew I wanted to eventually work as a VC (few people in Atlanta know that Bill worked for Greylock for several years before iXL), and he convinced me that living the experience within a high growth company would make me a better VC when the right opportunity came along.  Having been the bridesmaid a couple of times, I decided it was time to be the bride (ok, that’s a bit funny when I see it written out).  I built a business (Southern Direct) that provided an e-commerce platform for cable networks.  When I sold that business to Turner Broadcasting, another opportunity presented itself – I was hired to run Corporate Development there and we built a formal process to make venture investments on behalf of the company (Turner New Media Investments).  My time there was invaluable – I learned how to be a venture investor the hard way, without a lot of guidance.  Three years into my time at Turner, I felt like I was finally ready for a VC opportunity, should it present itself – member of the mgt team of two successful start-ups, founder and CEO of my own company which I later sold, corporate venture investor for 3 years. 

All of this led up to a discussion over breakfast last Fall with Noro-Moseley Partner Alan Taetle.  I had known Alan for many years, and knew NMP and several of its other Partners, too.  For me, Taetle was the gold standard when it came to technology investors in the Southeast (I’m already here, so no need to butter him up, I’m just speaking the truth <grin>).  He told me they were raising their 6^th fund and they were talking about adding a Partner.  That began a discussion that ultimately led to me joining the firm in early 2008.  When the opportunity was presented, I couldn’t have been more thrilled.  And the last year has been an incredible experience.  Our community has spoken about the dearth of Venture Capital in Atlanta and the Southeast.  During the ups and downs, NMP has always been there and yeah this is a shameless plug for our firm (like most of the last few sentences or so), but I am proud to be a part of a group of folks who have dedicated themselves for so many years to the growth of our city and region. 

Whew… it didn’t seem all that circuitous or disjointed when I was actually on the journey. For me, my arrival as a VC (in my home town – bonus) was a nearly 15 year effort.  I am thankful to my mentors, to the Big Man upstairs, to my wife, and to serendipity.  Yeah, I said serendipity (fancy word for luck)… if you don’t think luck has anything to do with accomplishing your goals in life, you need to wake up and smell the coffee.  The question isn’t whether you will need luck to accomplish your goals, the question is will you be prepared to take advantage of that good luck when it arrives on your doorstep.  OK, Tony Robbins has left the building.

Stay tuned…

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Pull out your Democratic or Republican membership cards and put them aside for a second.  Today is special – Republicans and Democrats marched with Martin Luther King, Jr. in the 60s, and his dream is realized (at least to some extent) at a few minutes before noon.  Democrat Barack Obama will be sworn in as President using the same bible that the 16^th President (and most well known Republican) used when he took office.  Tomorrow is historic – soak it up, whether you voted for the guy or not.  Change, whether you agree with this President’s change agenda, means a fresh start, and those of us who rely on optimism and growth in the economy to make a living, welcome the fresh start that this new administration represents.  We need optimism; we need a push for the next level.  As I stated in an earlier post the day after Obama was elected, while some things will surely change, others will not.  We in the investment community will still live by the same rules we’ve always lived by, knowing that our most worthy pursuit is to build companies that endure, companies that grow, companies that employ good people and create shareholder value every day.  As VCs, we thrive when growth is the agenda, when our portfolios have unfettered access to success.  I think it’s safe to say that most of us (if not all of us) will support our new President and wish him the best of luck.  We will hope for him what we hope for our Partners and the businesses in which we invest – longevity and prosperity.  We can all come together to celebrate what tomorrow means for the world at large and for the piece of the world for which we are caretakers. 

Stay tuned…

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