Last week West Corp announced it was buying Raindance Communications for $110 million.  This comes two weeks after West Corp announced it was buying Intrado for $465 million.  You could say this is “Omaha making a move to take over Boulder” as both Raindance and Intrado are based near Boulder (Raindance is in Louisville, CO and Intrado is in Longmont, CO – the two are 18 miles away from each other and the fastest way between them is through Boulder.)

I was a seed investor in Raindance and on the board through their IPO in 2000 (I left the board in 2001).  The three co-founders of Raindance – Paul Berberian, Jim Lejeal, and Todd Vernon are close friends.  While Raindance never hit their IPO valuation after the dotcom crash, the company became a real business that has been solidly profitable and cash generating over the years. 

Intrado – which is soon to be Raindance’s cousin – is also a strong Colorado company.  It’s been around for a long time and through plenty of ups and downs, but has done well under the leadership of George Heinrichs.  I met George once and – while I haven’t done much with Intrado – George and his team are extremely well regarded locally. 

I have no idea if West’s move into Colorado is deliberate, but they’ve just picked up two good local public companies.  While I can no longer buy conferencing or E911 services from a Boulder-based company, now that Crocs has gone public, I can still buy bizarre shoes.

A VC friend emailed me the following question(s) a few weeks ago:

The rumor this week regarding Yahoo acquiring Digg for $30M sparked a discussion here around company valuation. The discussions revolved around the key factors in valuing an early stage web technology business and how these factors are being evaluated by investors today. For example, would Yahoo or other companies be buying the technology? Are they buying subscribers? Are they buying a brand or is it a weighting of a number of these factors? Based on what you are hearing, how would Digg, Technorati, livemarks or another consumer internet business be both evaluated and valued today?

Remember the Jedi Mind Trick that goes as follows:

Stormtrooper: Let me see your identification.
Obi-Wan: [influencing the stormtrooper’s mind] You don’t need to see his identification.
Stormtrooper: We don’t need to see his identification.
Obi-Wan: These aren’t the droids you’re looking for.
Stormtrooper: These aren’t the droids we’re looking for.
Obi-Wan: He can go about his business.
Stormtrooper: You can go about your business.
Obi-Wan: Move along.
Stormtrooper: Move along… move along.

I recommend my VC friend meditate on it.  There’s been plenty said in the blogosphere about Web 2.0 companies, the notion of “build-to-flip”, the AGILEAMY gang looking to buy early stage technologies / features to plug into their platforms, and the need to transform / reform / change venture capital to accommodate these companies.  I won’t retread those discussions here.  However, I will add two things.

This is not the real VC game: While there is a category of VC firms that is deliberately looking for companies that are planning on raising a small amount of money (< $2m) and then selling quickly to AGILEAMY, this is a game best left to angel investors.  The ratios are bad (1000 companies created for every one acquisition), the upside is too small (even 10x a $2m investment – which is probably the best you could imagine – is not worth the risk / reward ratio), and ultimately there becomes fundamental tension between the VC (who wants to build) and the entrepreneur (who wants to flip).

This is a dangerous long term approach for any VC investor: Repeat after me – “there is a very limited amount of easy money.”  There’s some – but VC firms (and successful VC investments) are not made on easy money.  It’s definitely like candy – it tastes good in the moment, but isn’t particularly filling or long lasting.  Taking a great new idea with an entrepreneurial team that wants to create something significant and trying to build a real company is what is interesting.  Unfortunately, VCs will habitually over invest in new, trendy areas.  As a result, companies that have a clever product idea but don’t have a long term vision for a business will end up with $5m to $10m in the bank and the pressure to “grow.”  However, they’ll have no where to grow to – they should be small, scrappy, underfunded companies focused on trying to beat the 1000:1 odds and end up with a flip.  Once they’ve raised $5m+, they are on a different trajectory and – if in 12 months they haven’t turned their nifty product into a business – life can get really unpleasant for everyone involved.

Fundamentally, if you are a VC, these aren’t the droids you are looking for.  The same is true for the entrepreneur – be wary of the droid you pick.

Congrats to my cousin Jon Feld, his business partner Todd Price, and all the folks at Navigator Systems – they announced on Friday that Navigator Systems has been acquired by Hitachi Consulting. 

Jon and Todd started Navigator Systems 15 years ago.  At the time, I was running Feld Technologies – my first company.  I remember a seminal discussion in my grandparent’s garage in Florida when Jon told me that he was going to leave Frito-Lay and start Navigator.  At the time, Jon was a Lotus 1–2–3 stud so I hired Navigator (for one of its first contracts) to do some Lotus 1–2–3 modeling for one of our law firm clients.  I hope Jon still has the invoice he sent me – that’s definitely something that should end up in a frame on a wall somewhere.

Navigator was an early pioneer in providing “business intelligence” consulting before anyone really had defined “business intelligence” (and yes – I know you Dilbert fans will still consider this phrase to be an oxymoron.)  We shared an early client – Mittler Supply Company – where Feld Technologies provided the custom software and Navigator provided the business intelligence consulting.  Mittler was a large, multi-location industrial gas supply company headquartered in South Bend, Indiana.  Jon and I spent a lot of time there (yet I was never alert enough to go see a Notre Dame game) wrestling with an AS/400 based accounting system, a set of Clarion applications to transform the data, and a FoxPro application to let the Mittler folks play around with the resulting data warehouse.  All of this was well ahead of its time, but I’d like to think we helped Mittler a lot over the years – they were good people.

Navigator has been very successful over the years, making the Inc. Magazine 500 Hall of Fame (for being on the Inc. 500 list five years in a row.)  Navigator was largely self-funded and – although they did take a small mezzanine debt round around 2000 – and should act as an inspiration for all of you entrepreneurs out there that don’t want to take VC money.  Jon and crew have been approached numerous times of the years about being acquired – they were patient and only chose to go forward when the deal on the table was great for all involved (in this case, including Hitachi Consulting who just added a superb company to their portfolio.)  I’m proud of Jon and team – congrats!

I guess it is only fair that while Jason and I rip on the IRS, accountants, and lawyers regarding 409A, we make take a few shots at the VC community.  VC’s are perhaps the most uninformed population with respect to the 409A guidelines. In general, it’s been very disappointing to here other VCs speak about the regulations and make grotesque over-generalizations regarding their applicability. At this point, I can’t remember how many “this isn’t right” emails that I’ve had to send. At least I have a blog that I can send them to (of course – not for “official advice”), as opposed to having to type the same email 100 times.

Following is an example that came up last week that made my head spin.  One of our companies – a relatively young one that has only had one round of financing – is in the middle of raising a new financing.  They are doing well, have a competitive financing situation going on, and I expect they will have multiple options to choose from.   The company is well informed about 409A, has done all the things you’d expect them to, and are planning to have an outside audit done by the end of April.  The financing is expected to close by the end of March – they are holding off on the 409A audit to wait for the financing to be completed.  They have decided to hold off granting any new options until after the financing and have accepted that the option price will be driven by the 409A audit based on the new preferred stock price associated with the financing.

One of the VCs they are talking to has asserted that they cannot close a financing without an outside audit. The assertion from the VC is that “it’s too risky and creates too much liability for the new investor.”  Huh?  In addition to being a completely illogical statement, it’s clear the VC simply doesn’t understand 409A since holding off on the financing will likely drive the value of the common stock down (since the company is running out of money) while doing the financing will drive the value of the common stock up (since it’ll be well-financed at a higher per share price then before.)  Which is a more conservative position to take?  Actually, it doesn’t really matter – since it’s an early stage companies we are likely talking about pennies a share in any scenario.

Add one “point” to the “noise” column under 409A. It blows my mind that major business decisions (e.g. the financing of an early stage company) are being driven by the IRS guidelines. Shame on you IRS, but more shame on the VCs who remain ignorant about the real facts.

Tom Evslin – founder/CEO of ITXC and author of hackoff.com – has started writing a series called “VC Primer from an Entrepreneur’s POV.”  His audience is “an entrepreneur who hasn’t had VC funding – even a wannabe entrepreneur – read on.  These posts are for you. “

EDS announced yesterday that it was awarded the majority of the five-year multibillion-dollar General Motors system integration services awards.  This is worth $3.8 billion over five years and – when added to the existing GM business that EDS has that was not rebid – results in annualized revenues of $1.2 billion to $1.4 billion of revenue for EDS.

This is a huge deal for EDS.  In early 2004 when EDS acquired the Feld Group (my uncle Charlie Feld’s company – I was an investor), the GM contract renewal was one of the major concerns that investment analysts had about the future success of EDS, as there was a substantial amount of business being rebid and there were concerns that most of it would go to companies other than EDS. While EDS’s share of GM’s outsourcing revenue will be reduced, the going forward revenue is higher then most people expected.  As a result, a major long term concern about EDS has been put to rest. 

Congrats to all my friends at EDS.

What Fred said.  Absolutely spectacular and brilliant.

Pascal Levensohn just released his latest white paper titled “Rites of Passage: Managing CEO Transition in Venture-Backed Technology Companies.”  Last fall I posted my partner Heidi Roizen’s responses to a set of questions Pascal posed as he was doing research for this paper.

“Rites of Passage” is an excellent addition to every entrepreneur and VC’s bookshelf.  It’s a great compliment to Pascal’s previous white paper “After the Term Sheet: How Venture Boards Influence the Success or Failure of Technology Companies.”

At a board meeting last week we were discussing the dynamics of keeping VC’s informed that expressed interest in “being kept up to date” on the company for the purpose of being somewhat up to speed when the next financing came around.  We ended up talking through a list of about 10 different VC’s and at one point one of the other board members muttered “this sounds like the shits.”  I gave him a perplexed look and he said “you know – “Signal High Interest Then Stall.”  Yeah – well – we’ve all experienced the shits at one time or another.