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Entrepreneurial Tips From Four Venture Capitalists

I sat in on a venture capital panel at earlier this month at eBay’s DevCon at San Jose headquarters. Below are some highlights.

Here’s the panel:

Sergio Monsalve, Partner, Northwest Venture Partners

  • Five years at eBay; then went to PhotoBucket
  • Last fund was $650MM
  • Nothwest focuses on investments of $1MM to $50MM (sweet spot is someone who has a product with traction (perhaps early revenue or no revenue)

Rob Hayes, Partner, First Round Capital

  • Background includes Pam, Geoworks, Go Corp, Japan External Trade Organization
  • First Round focuses on investments less than $1MM investments (from 2 to 20 people) (likes to invest in companies with “two guys and a dog.”)

Ravi Mohan, Managing Director, Shasta Ventures

  • Background includes Accentutre, Hyperion, MIC (in India) and McKinsey

Mark Gorenberg, Managing Director, Hummer Winblad

  • Background includes Sun Microsystems
  • Has sat on many boards including Omniture, AdForce, HomeGrocer

(The questions were asked by Moderator Charline Li, Founder of Altimeter Group)

Where do you see the new opportunities to invest your venture capital?

Mark: We see four trends:

  1. Common Inventory Model
  2. Commerce on the Internet is Blending With Offline — We invested in Crillian Krillion — eight or nine percent of people want to shop online but want to pick it up in the store.
  3. MobCommerce — Wisdom of the crowds.
  4. Analytics is Now Just Table Stakes — (Mark invested in Omniture). Every company has to have core analytics.

Ravi: The word is commerce. Not just e-commerce. Where do people want to buy?

I believe the mobile device is the platform to bring that together.

The second thing is that everything that is happening in the offline world, is increasingly happening in the online world.

Rob: One of the themes we invest in is the Implicit Web. People don’t really care where they buy things from. If I can reach into ebay though an API, Amazon through an API, etc…where can I put all this data together to tap into all this?

E-commerce used to be about getting the best price. Now it’s more about getting the best experience.

That’s why we’re invested in BazaarVoice— Companies have to get used to people saying bad things about them online (even on their own Web site).

Sergio: There’s a trend of big companies working with small companies.

I think we’re in the third inning of e-commerce. It’s now that the incumbents (big companies like eBay) are starting to reach out with small companies to have symbiotic relationships.

We’re seeing a lot agencies investing with us.

How does an entrepreneur get venture capital funding

Rob: If it’s a really good idea in a really big market with a really good team (and can they pivot when things don’t go exactly according to plan).

Mark: I think you’d be surprised at how many of us fund things that really early. We funded Ace Metrix even though we’d never met them. They had really done their homework.

Ravi: There are a lot of great business ideas…as entrepreneurs you have to really look at the market size and how disruptive your idea is.

Sergio: The question of pivoting is important to underline. I see innovation…as continuous innovation throughout the life of a company. If you look at a company like RackSpace (now a $1.5 Bil. market cap) the defining moment was not when they started the company…it was in 2001 during the meltdown.

Look at Qumranet (a year before selling to Red Hat) they completely scratched their plan. The market wasn’t there…so they were able to pivot the company and then get sold a year later (for $107MM).

When’s a good time for an entrepreneur to look for venture capital funding?

Mark: With Arbor Software — we talked to them when they were really young…we worked together for six months and we funded the company six months later.

Ravi — Plastic Jungle (an online exchange for gift cards) — we met with them last summer and it was a complete offline business. We began looking at the vision and what this could be.

Gary Briggs (eBay’s ex CMO) was an advisor and we started to look at it together. The whole process took seven to eight months. During that time we helped expand the vision of the company and bring in additional team members.

What are some alternatives to venture capital funding?

Mark: Bootstrapping is natural. The lines between angel and venture firms has really blurred. Angels have seen 30% to 40% of their net worth go away. As a result, we (VCs) are seeing entrepreneurs earlier.

What do you think about exit scenarios (liquidity events) for startups these days?

Ravi: You need to build a business that is worth something. I’m thinking of a business that will reach $100MM and is growing 20% to 30% with EBIDTA of 20% to 30%…and then apply 10 to 30 cash flow multiple.

If there is no exit, then we may end up dividending the cash to management and investors. Or sell to private equity firms.

Rob: I believe that we’re going to see a lot of exits between $50MM and $100MM. So, if you’re going for the billion dollar company exit, you should be talking to venture capitalists.

An entrepreneur with a $50 million exit could be taking care of their great grandchildren.

Ravi: Rob and I are invested in a company called Outright, a free accounting service — everything that a small business doesn’t want to do. One of our target markets is ebay sellers.

Now we’re going to roll Outright out on ebay Selling Manager in August or September.

Would you invest in a company that has done a DPO (Direct Public Offering)?

Mark: We tend to shy away from that. We like clean paperwork…private stock only.

What’s the biggest mistakes entrepreneurs make?

Rob: Not taking enough money. Entrepreneurs get so tied up in the dilution math. It’s the most painful thing.

Mark: Entrepreneurs saying they have no competition. That’s indicative of not doing enough homework.

Ravi: It’s market size. Just being intellectually honest about the market size is important.

Sergio: There’s a balance between optimism and being intellectually honest that is needed.

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