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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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We Read All The VC Bloggers So You Don’t Have To

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As a VC who has been blogging for a long time I’ve been fascinated by the VC Blogger phenomenon. I’ve been subscribing to, reading, forwarding, occasionally commenting, and setting up networks of feeds for a while.

With the relaunch of AsktheVC we’ve resurrected something we used to do periodically which is highlight a great VC post. However, we are taking a different tact this time around with our new motto.

“We read all the VC Bloggers so you don’t have to.”

It’s not quite the gray lady, but hey, we are just VCs and bloggers, not real journalists. Jason and I already have some great posts up from guys like Jeff Bussgang (Flybridge), Mark Suster (GRP), Fred Wilson (Union Square Ventures), Roger Ehrenberg (IA Ventures), Charlie O’Donnell (First Round Capital) and 500 Startups. We’ll provide a little additional insight, or at least a pithy comment.

We’ve also got a full list of known VC bloggers (at least to us) on the sidebar of AsktheVC. If we are missing anyone (I’m sure we are), please email me and I’ll add them.

Warning To All Entrepreneurs About Bad Investor Behavior

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I received an email from an entrepreneur today asking me about something that made my stomach turn. It’s a first time entrepreneur who is raising a modest (< $750k) seed round). There are two founders and they’ve been talking to a VC they met several months ago. Recently, the VC told them he was leaving his firm and wanted to help them out. This was obviously appealing until he dropped the bomb that prompted their question to me.

This soon to be ex-VC said something to the effect of “I can easily raise you money with a couple of phone calls, but I want to be a co-founder of the company and have an equal share of the business.”

In my email exchange with the entrepreneur, I asked two questions. The first was “is he going to be full time with the company” and the other was “do you want him as a third full time partner.” The answer was no and no. More specifically, the VC was positioning himself as “the founder that would help raise the money.”

I dug a little deeper to find out who the person was in case it was just a random dude looking for gig flow. David Cohen, the CEO of TechStars, has written extensively about this in our book Do More Faster – for example, see the chapter Beware of Angel Investors Who Aren’t. I was shocked when I saw the name of the person and the firm he has been with (and is leaving) – it’s someone who has been in the VC business for a while and should know better.

I find this kind of behavior disgusting. If the person was offering to put in $25k – $100k in the round and then asking for an additional 1% or 2% as an “active advisor” (beyond whatever the investment bought) to help out with the company, I’d still be skeptical of the equity ask at this stage and encourage the founders to (a) vest it over time and (b) make sure there was a tangible commitment associated with it that was different from other investors. Instead, given the facts I was given, my feedback was to run far away, fast.

Entrepreneurs – beware. This is the kind of behavior that gives investors a bad name. Unfortunately, my impression of this particular person is that he’s not a constructive early stage investor but rather someone who is trying to prey on naive entrepreneurs. Whenever the markets heat up, this kind of thing starts happening. Just be careful out there.

Searching For VC Term Sheets Prior To 1990

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On the heels of all the noise around Groupon’s $100m financing at a $7.5b (billion) post valuation, I thought I’d put out a call for “old VC term sheets – prior to 1990.”

My partner Jason Mendelson and I are working on a book titled Venture Financings: How To Look Smarter Than Your Lawyer and VC.  The final draft is due at the end of February (feel free to give us your sympathy if you happen to see us between now an then) and based on my previous experience with our publisher (Wiley) on Do More Faster, I expect it’ll be out by the end of Q211.

The basis for the book comes from the Term Sheet series that Jason and I wrote on this blog in 2005.  We’ve updated the series for the current reality of 2010 (of which much is very similar to 2005, with some differences), talk about lots of different twists that have appeared, and tell plenty of stories to illustrate what the implications of various terms and financing configurations are.

As part of this, I’m looking for some early VC term sheets.  I started by trying to hunt down the original Digital Equipment Corporation term sheet (or letter describing the investment) from AR&D to Ken Olson but came up dry.  Today, as I was working on some stuff, I realized it would be interesting to look at some term sheets from the 1970′s and 1980′s in whatever form they are in.

If you happen to be in possession of an older VC term sheet – either for a company that was successful or one that was a failure – I’d love to see it.  You can email it to me if easy, or drop me a note and I’ll tell you where to fax it.  I’ll make sure I honor your request to keep it anonymous if you want me to (either you, the company, or both) but of course would love the ability to weave it into the book where appropriate.

What Percentage of 2010 Seed Deals Won’t Raise The Next Round?

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There have been a number of thoughtful “early warning sign” posts in the past few days including one from Fred Wilson (Storm Clouds), one from Mark Suster (What Angel Investing & Florida Condos Have in Common), and Roger Ehrenberg (Investing in a frenzied market).

The seed investing phenomenon of 2010 has been awesome to watch and participate in.  The velocity of activity from individual angels, angel groups, seed VCs (the correct phrase for most of the “super angels” which have now raised actual funds), and even traditional VCs has been on a steep climb throughout the year.  When the numbers are tallied up at the end of the year (I’m sure someone will do it – and it won’t be me) I expect there will be all kinds of new records set.

But the warning signs from Fred, Mark, and Roger are worth reading and pondering carefully.  I have a few choice quotes to add to the mix that I’ve heard over the past thirty days.

  • Prolific Seed VC: I only expect that 30% of the companies I funded this year will raise another round.
  • Established VC With A New Seed Program: We are planning to make 30 seed investments out of our new fund.  We’ll do follow on investments in 10 of them.

In both cases, when I speculate on the next sentence they would have said if they were being direct and blunt, it would be something like “I expect the balance of them will go out of business after thrashing around for a while.”  The optimist would have a different view (e.g. that they would be quickly acquired or they would never need additional capital), but anyone that has been investing for a while knows this isn’t the likely outcome for any but a small number of these companies.

Mid-year I felt compelled to write a post titled Suggestions for Angel Investors. When I reflect on that post, my fear is that most seed investors aren’t implementing a “double down on the first round” strategy.  Some percentage of seed deals will quickly raise their next round (30% if you believe the two anecdotes above.)  Some percentage of seed deals will fizzle out.  But some percentage will get stuck in the middle.  They will be interesting ideas with solid teams that realize their first idea out of the gate needs a pivot.  Or they’ll be in the middle of a pivot when they run out of cash.  In the absence of the existing seed investors stepping up and writing another check (without any new / outside validation) it’s going to be hard for these companies to get to the place where they raise a next round financing.

While all entrepreneurs are optimistic on the day they raise their seed round that they’ll be one of the hot deals that easily raises a significant next round, it’s worth starting to plan from the beginning for the case where you “are interesting, but not unambiguously compelling.”  In these cases, you need more time and the only place you are likely to get it is from your existing investors.  If they are willing to keep investing on their own without a new outside lead, you’ll at least have a chance to get to the next level.  But if they aren’t, you could find yourself in a very uncomfortable situation.

I’ll end with Fred’s money quote:

“Anything that is unsustainable will eventually stop happening. And when it stops happening, there will be a dislocation event that will cause people to change their behavior. ,,, When will it stop? Who knows? But be prepared for it to end. And when it does, things will be different. And we should all be prepared for that time.”

Having worked alongside Fred for a long time in a number of companies through several cycles, I can assure you these words come from a place of wisdom, experience, and shared pain.

Interview on Meet the Angels

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Earlier this week I did a one hour interview on “Meet the Angels” sponsored by Tech Coast Angels (one of the LA Angel groups.)  It was supposed to live but for some reason there were some problems getting into the webcast.  It’s now up on the web – if you were trying to watch it and couldn’t, it’s posted below.

Live video event with Brad Feld from TechCoastAngels on Vimeo.

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