Brad Feld

Month: October 2005

The meme of “Corporate Web Site As A Blog” is going around – and I like it.  While this has been popular for individuals for a while (e.g. – it’s starting to happen with companies.  Fred Wilson and Brad Burnham did this recently with their site at Union Square Ventures and Matt Blumberg just launched a new Return Path web site organized around a blog – launched with a post on Matt’s blog about why Return Path did this.

A friend of mine emailed me suggesting that a blog was a lousy basis for a web site – that instead I should be using traditional CMS tools because it’d be easier to control and tune the formatting.  I vociferously disagreed with him – I think the brilliance of organizing a corporate web site around a blog is that you can transform what has turned into largely static brochureware into a vibrant and ever changing articulation of a company. As I sit in a hotel room in Boston, all I need to do is type my new content (into Blogjet in my case) and hit post when I’m done – my blog deals with the rest. In addition – if one is bold enough to leave comments on, you can even turn it into a conversation with your constituency.  Now, you can configure CMS systems to behave this way, but why bother.

I’ve noticed recently that the only page that regularly changes on a typical corporate web site is the news / press release page (and – btw – where are the RSS feeds for these pages – if I want to know about what is going on at your company, make it easy for me.)  As Matt and Fred have artfully said, they want to incorporate the dynamic nature of their businesses and the markets in which they participate into their web site in order to communicate more effectively what they are doing and engage in a conversation with anyone who is interested in them. 

While there is a self-referential characteristic to this (USV invests in companies in this ecosystem, Return Path provides services to email marketers), this is a noble experiment that – as far as I’m concerned – has so far been extremely well executed by all involved. 

Chris Wand forwarded me DJ RX’s mashup of George Bush Singing U2’s Sunday Bloody SundayNewsweek has more on DJ RX in case you care.  Beautifully done.

Tom Barrack is a legendary real estate investor that few people know about.  The 10/31/05 Fortune has a good profile on him titled “I’m Tom Barrack and I’m Getting Out.”  Barrack’s lead quote concerns polo, of which he is an avid player.

“I feel totally safe playing polo on a field full of pros, but when amateurs are all over the field, someone can get killed.  They have more guts than brains.  They charge after every ball and don’t know when to hold back.”

Of course, this applies broadly.  Be careful out there – make sure you know who else is on the field with you.

I love running and I love Rome.  My brother Daniel knows this and forwarded me a link to Sight Jogging.  The next time I’m in Rome I can go for a run with Carolina and see the sights of Rome. That’s probably a little more fun than running up and down the Hudson River Park Greenway with Matt Blumberg.

Well – it’s about 20 days after the end of the quarter and the Ernst & Young / Venture One survey of venture capital funding is out and the Denver Post and Rocky Mountain News feel compelled to comment on it.  I really like Roger Fillion who wrote the RMN article (I don’t know Will Shanley who wrote the Denver Post article), but as I said to Ross Wehner from the Denver Post last quarter, “Who Gives A Fuck?

Whether the data is right or not, the conclusions are misleading.  Both articles assert that the market for VC investment in Colorado has “grown” over 2004 and that it – according to local VCs – “has definitely gotten stronger.”  But – no one really digs into the data beyond suggesting that through Q3 Colorado firms have raised $469.2m vs. $386.8m in 2004 and that in Q305 Colorado firms raised $131.7m vs. $107.8m in Q304. 

As I suggested last quarter, one deal – Webroot – raised $108m – and most of that was to buy out the founders (is this a VC deal or a private equity deal done by VC firms?).  This quarter, one deal – Replidyne – raised $62.5m – in a well executed late stage deal.  If you leave Replidyne in (it is a VC deal, albeit one that skews the numbers) but take Webroot out, Colorado is actually at $361.2 through Q305, behind 2004!  Interestingly, in the quarter, Colorado saw 13 deals in Q305 and 13 deals in Q304 – that seems equivalent to me (although my logic is rusty: 13=13 is true, correct?)

It’s all about how you analyze the numbers and – in the rush to simply publish that “things are good” or “things are bad” – the papers do everyone a disservice by not really digging into the actual data.  I’d love to see the full list of fundings in Q305 in the articles on the web compared to Q304 with some thoughtful analysis of what is actually going on in the market.  As a local player, it feels “about the same” to me as last year, although I spent two thirds of Q3 in Alaska and the balance of it on the road so I’m a lousy data point also.

Start-Up Sound

Oct 21, 2005
Category Random

Getting tired of that old Windows Start-Up Sound?  How about trying on a serious Mac Start-Up Symphony?

On Wednesday, IBM announced that it had acquired DataPowerBill Burnham (who originally did the investment for us when he was at Mobius) has a nice set of posts on his view of VC lessons from the deal and his view of the implications for software in general.

After Bill left Mobius, Gary Rieschel and Robin Bordoli took over responsibility for the company in our shop.  I got actively involved earlier this year (and eventually joined the board) when IBM made its initial overture to the company.  In 2004, IBM acquired Cyanea, another deal that Bill sourced that I took over after he left Mobius.  I spent a silly (large) amount of time last summer working on that deal and, while we were very happy with the outcome (as was IBM), the process and negotiation was brutal.  As a result, when the first overture came this time around it was logical for me to get involved.

The dance – as with many deals – took a while to get to the point where both sides were serious.  IBM and DataPower had a good business relationship that was developing nicely and – while IBM was very interested in the company – DataPower was well capitalized and growing like crazy.  At some point, IBM made an attractive enough offer and the real dance began.

This time around, it was much easier.  The IBM lead negotiator was the same person as on the Cyanea deal – as a result we were jointly able to establish a very effective approach to the negotiation early in the process. We had great M&A support on the DataPower side from both Steve Tonsfeldt at Heller Ehrman who has now done six deals with IBM in the past few years and Steve Cheheyl – previously EVP Operations at Bay Networks and CFO for three companies that went public (Applicon, Alliant, and Wellfleet) – who is now a consultant that helps on things like this (e.g. he was the principle negotiator and ringleader on our side of the deal.)  Dave Gammell and his team from Brown Rudnick also carried a huge amount of water on the deal.

Of course, the company wouldn’t exist without the incredible entrepreneurial, technical talent, and energy of Eugene Kuznetsov (the founder, chairman, and CTO), the steady hand and leadership of Jim Ricotta (the CEO), and the balance of their great team.  Congrats to all.

Wall of Voodoo

Oct 18, 2005

No – this isn’t going to be a screed on the crazy shit (at ridiculous prices) some of my early stage compatriots are doing these days.  On my run today while listening to Brian Ibbott’s awesome Coverville podcast I heard Authority Zero cover Mexican Radio by Wall of Voodoo (from the Call of the West album).  I was instantly transported back 15 years and sang along as my tempo picked up.  There are definitely days that I wish I was in Tiajuana eating barbecued iguana.


Oct 16, 2005

I had an awesome day on Saturday.  I spent the weekend with my fraternity at MIT (the Lambda Phi Chapter of Alpha Delta Phi) on an undergraduate retreat called ADPrentice (be patient, you’ll get it in a minute).  I co-sponsored this with two of my frat brothers – Sameer Gandhi (a partner at Sequioa Capital) and Mark Siegel (a partner at Menlo Ventures).

As I look back 20 years later, our fraternity generated a number of very significant entrepreneurs in a short period of time (the graduating classes from 1984 to 1990).  Several companies that effectively started in the house (at 351 Mass Ave in Cambridge) included my first company (Feld Technologies – co-founded by me ‘87 and Dave Jilk ‘84), Art Technology Group (started by Joe Chung and Jeet Singh ‘85), iRobot (started by Colin Angle ‘89). Sameer Gandhi ‘87 and Mark Siegel ‘90 are prominent VCs.  Ross Ortega ‘87 has started several companies.  And – while the 1984 to 1990 period was rich with entrepreneurship, it didn’t stop there – Pehr Anderson (I think originally ‘96) dropped out to start NBX which was acquired by 3Com in 1999 (Pehr eventually got his degree).

This activity all happened well before the Internet bubble.  MIT has always been a huge generator of entrepreneurial activity and the fraternity system / independent living groups (FSILG) at MIT – which used to be critical to the Institute as there wasn’t enough dorm space to house all the students – was a uniquely vibrant source of entrepreneurial activity.  In recent years, MIT has shifted emphasis away from FSILG as they’ve built more dorm capacity, been concerned about liability issues associated with the FSILG system, and generally wanted more control over the behavior and experience of the undergraduate community.

Last year, Sameer, Mark, and I decided to contribute a modest amount of money to the chapter.  Since Lambda Phi is chartered as a “literary society”, we were determined to do something intellectual as part of our gift.  We wanted to impact the house in a meaningful way, especially since all three of us had been disengaged for some time.  It took a while before several of the alumni and undergraduates engaged and during this process we started to learn about the challenge that our fraternity – and others at MIT – are having with the new rules and constraints that MIT has imposed on FSILG.  I won’t go into them here, but we were surprised and as a result more motivated to try something different to get the undergraduates excited and reconnected to several of us.

A team of folks – led by Manish, Ruben, and Zach – put together an incredible event.  We spent Saturday at MIT’s Endicott House – MIT’s fantastic off campus retreat facility – and had an Apprentice-like day (now you get it: ADP + Apprentice = ADPrentice).  This acted as the “fall retreat” – most fraternities have something similar where all the undergraduates go away for a weekend and do something together.  Usually (at least 20 years ago when I was in college), the retreat devolved into a drunken bash that – while it included some “activities” – was primarily social, often a lot of fun, but rarely intellectual.

ADPrentice had three discrete challenges:

  1. Marketing Challenge: Present teams with a product or service. Their task will be to market or sell this product/service to a group of investors. They will need to focus on the product’s features, realizing its full potential, and communicate that effectively. This challenge will culminate in a power-point presentation to the VC panel to be judged. A/V equipment will be available.
  2. Hiring / Interview Challenge: Teams will be given a ‘resume book’ of possible candidates to hire for a pre-described position. They will be asked to consult and pick 3 resumes they’d like to interview. Short mock interviews will be conducted with organizers role-playing as the candidates. After the interviews teams will pick a candidate to hire. They will have to defend their choice to the VC Panel.
  3. 5-Year Plan & Budget Challenge: Teams will be presented with a business concept and 5-year budget. They will have to come up with what they perceive as the best course of action for a 5-year plan, and budget accordingly. Plans will be critiqued and judged. (Since teams aren’t expected to have much previous knowledge in creating business plans, perhaps this event should come after a seminar.)

In between challenges, Mark, Sameer, and I gave the following lectures.

  • Mark: How Does Venture Capital Work
  • Sameer: Business Plan 101
  • Brad: Do You Have The Balls To Start A Company?

During the day, Mark, Sameer, and I observed the teams and scored them on each challenge.  At the end of the day, we totaled up the scores and picked the winner.  We awarded the first place team with $1,000 – second and third received $500 each.

I was completely blown away by the quality of work these guys did.  Remember – we are talking about undergraduates with no real work experience (albeit they are MIT undergrads).  The quality of what they did was unbelievable and reminded me how incredible MIT is at teaching people to think.

As the day wore on, we were worried that the energy level would start to wane.  The opposite happened – folks became more engaged, the competition became more intense, and the level of conversation increased.  Now – this is a Saturday – these guys didn’t go to sleep early Friday night (well – some of them didn’t bother going to sleep since they had to be ready to leave at 8am) – but they just powered through.  Awesome.

Sameer, Mark, and I had plenty of time to talk about entrepreneurship.  One of the things this day reminded us of was the incredible raw material that exists in the US.  While there is endless talk about China and India – and undoubtably the US is no longer undeniably at the top of the heap in the innovation game – we shouldn’t forget the quality and potential of the kids currently in our top tier schools in the US.  In addition, as a guy approaching 40, it’s just a blast to hang out with 20 year olds, remember what it was like to be 20, and participate in influencing these guys’ lives, even if only a little bit.

Jason and I have engaged in a little foreplay with you in our Letter of Intent series.  While you might think the length of time that has passed since my last post is excessive, it’s often the length of time that passes between the first overture and an actual LOI (although there are plenty of situations where the buyer and the seller hook up after 24 hours, just like in real life.) 

As with other “transactions”, there’s a time to get hot and heavy.  In most deals, there are two primary thing that the buyer should have on his mind – price and structure.  Since the first question anyone involved in a deal typically asks is “what is the price?” we’ll start there.

Unlike in a venture financing where price is usually pretty straightforward to understand, figuring out what the “price” is in a merger situation can be more difficult. While there is usually some number floated in early discussions (e.g. “$150 million”), this isn’t really the actual price since there are a lot of factors that can (and generally will) effect the final price of a deal by the time the negotiations are finished and the deal is closed.  It’s usually a safe bet to assume that the “easy to read number” on the first page of the LOI is the best case scenario purchase price. Following is an example of what you might see in a typical LOI.

Purchase Price / Consideration: $100 million of cash will be paid at closing; $15 million of which will be subject to the terms of the escrow provisions described in paragraph 3 of this Letter of Intent.  Working capital of at least $1 million shall be delivered at closing. $40 million of cash will be subject to an earnout and $10 million of cash will be part of a management retention pool. Buyer will not assume outstanding options to purchase Company Common Stock, and any options to purchase shares of Company Common Stock not exercised prior to the Closing will be terminated as of the Closing. Warrants to purchase shares of Company capital stock not exercised prior to the Closing will be terminated as of the Closing.

Hmm – I thought this was a $150 million dollar deal?  What does the $15 million escrow mean?  The escrow (also known as a “holdback”) is money that the buyer is going to hang on to for some period of time to satisfy any “issues” that come up post financing that are not disclosed in the purchase agreement.  In some LOIs we’ve seen extensive details, in so much as each provision of the escrow is spelled out, including the percentage of the holdback(s), length of time, and carve outs to the indemnity agreement.  In other cases, there is mention that “standard escrow and indemnity terms shall apply.” We’ll discuss specific escrow language later (e.g. you’ll have to wait until “paragraph 3”), but it’s safe to say two things: first, there is no such thing as “standard” language and second, whatever the escrow arrangement is, it will decrease the actual purchase price should any claim be brought under it. So clearly the amount and terms of the escrow / indemnity provisions are very important.

Well – that working capital thing shouldn’t be a big deal, should it?  True – but it’s $1 million.  Many young companies – while operating businesses – end up with negative working capital at closing (working capital is current assets minus current liabilities) due to debt, deferred revenue, warranty reserves, inventory carry costs, and expenses and fees associated with the deal.  As a result, these working capital adjustments directly decrease the purchase price in the event upon closing (or other pre-determined date after the closing) that the seller’s working capital is less than an agreed upon amount. Assume that unless it is a “slam dunk” situation where the company has clearly complied with this requirement, the determination will be a battle that can have a real impact on the purchase price. In some cases, this can act in the seller’s favor to increase the value of the deal if they have more working capital on the balance sheet than the buyer requires – often the seller has to jump through some hoops to make this happen.

While earn outs sound like a mechanism to increase price, in our experience, they really are tool that allows the acquirer to under pay at time of closing and only pay “true” value if certain hurdles are met in the future. In our example, the acquirer suggested that they were willing to pay $150 million, but they are only really paying $100 million with $40 million of the deal subject to an earnout.  We’ll cover earnouts separately, as there are a lot of permutations, especially if the seller is receiving stock (instead of cash) as their consideration

In our example, the buyer has explicitly carved out $10 million for a management retention pool.  This has become very common as buyers wants to make sure that management has a clear and direct future financial incentive.  In this case, it’s explicitly built into the purchase price (e.g. $150 million) – we’ve found that buyers tend to be split between building it in and putting it on top of the purchase price.  In either case, it is effectively part of the deal consideration, but is at risk since it’ll typically be paid out over several years to the members of management that continue their role at the acquirer – if someone leaves, that portion of the management retention tends to vanish into the same place lost socks in the dryer go.

Finally, there’s a bunch of words in our example about the buyer not assuming stock options and warrants. We’ll explain this in more detail later, but, like the working capital clause, can affect the overall value of the deal based on what people are expecting to receive.