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Start-Up Investors Grow Wary of Tech Ventures After Facebook’s I.P.O.

January 14, 2013 by Leave a Comment

“Earlier, entrepreneurs didn’t need a real monetization strategy,” said Brian O’Malley, an early investor at Battery Ventures. “They could punt on revenue indefinitely because their investment dollars were their revenue. They could fund their start-ups with funding versus customers.”

No longer favored are e-commerce start-ups, which face logistical hurdles and require a lot of money. The celebrated shift to smartphones, once welcomed with an outpouring of investments, is now making some investors nervous as monetization proves harder for mobile devices than it did for the Web.

Investors have also grown weary of start-ups and applications that rely entirely on Facebook, Twitter and LinkedIn for customers, now that those companies are focused on their own bottom lines. And Silicon Valley is discovering that while it may be easier than ever to start a company, it is harder than ever to build an enduring business.

Younger start-ups are beginning to feel the pinch. CB Insights, a research firm, analyzed 4,056 initial, or seed, investments made in tech start-ups in the United States since 2009. It found that more than 1,000 start-ups that attracted seed financing from angel investors — wealthy investors who put in money from their own pockets — will find themselves orphaned this year when venture capitalists reject their requests for more money. As a result, $1 billion in angel investments will evaporate.

That carnage hardly compares to the bursting of the dot-com bubble in 2000, when $3 trillion was lost on the Nasdaq, but it is enough to give Internet investors and entrepreneurs pause.

CB Insights predicts that Internet start-ups will be the hardest hit, because they have attracted more seed money than enterprise and hardware companies but will most likely have a harder time securing follow-up investments.

Part of the problem is simple math. Angel investors seed businesses with small sums, often less than $1.5 million. But to grow a business, entrepreneurs eventually have to solicit financing from the venture capitalists who invest on behalf of endowments, pension funds, foundations and the like. And while the number of angels eager to write checks has increased, the number of active venture capitalists has decreased.

But investors say it is not just the bottleneck that is to blame. The realities of building an enduring business are starting to sink in. “It has never been easier to start a company, and never harder to build one,” said David Lee, a venture capitalist at SV Angel, an early-stage investment firm.

David O. Sacks, a Silicon Valley executive who sold Yammer to Microsoft for $1.2 billion last year, summed up the challenges in a bearish note on Facebook last August.

“I think Silicon Valley as we know it may be coming to an end,” Mr. Sacks wrote. “To create a successful new company,” he said, entrepreneurs have to find an idea that “has escaped the attention of the major Internet companies, which are better run than before.” To attract follow-up money, new companies now have to prove themselves for less than $5 million.

On top of that, they must be “protectable from the onslaught of those big companies once they figure out what you’re on to,” Mr. Sacks said. “How many ideas like that are left?”

Mr. Sacks’s comments were widely debated within Silicon Valley. One of his most vocal critics was Marc Andreessen, the co-founder of Netscape and of Andreessen-Horowitz, a venture capital firm, who said on Facebook that the opportunities for start-ups were “unending.”

But start-ups are finding that their supply of capital is not. “The valuations got ahead of themselves,” said Rich Wong, a venture investor at Accel Partners. “Where people only paid attention to multiple quarters, now they are looking more than a year ahead for projected results.”

Mr. Wong said e-commerce companies in particular were drawing closer scrutiny. Investors who took note of Amazon’s $1.2 billion acquisition of Zappos and its $540 million purchase of Quidsi, the owner of Diapers.com, poured millions into e-commerce sites, only to discover that they are difficult to run.

Gilt Groupe, a flash deal site for fashion, raised some $220 million in capital but is still not profitable. Last year, the company was forced to cut staff. It is scaling back on smaller brands like Gilt Taste and Park Bond, and it has put Jetsetter, its popular online travel site, up for sale. Fab.com, a daily deal site for design, raised money at a lower valuation than it had planned because of Facebook’s troubled I.P.O. Investors also predict that Zulily, a flash deal site for mothers, will have a hard time justifying its recent $1 billion valuation.

ShoeDazzle, Kim Kardashian’s shoe site, raised $66 million and Lot18, a flash deal site for wine, raised $45 million from investors impressed with their user growth. Both companies were forced to make staff cuts last year.

Article source: http://www.nytimes.com/2013/01/14/technology/start-up-investors-grow-wary-of-tech-ventures-after-facebooks-ipo.html?partner=rss&emc=rss

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Bits Blog: Is New York’s Tech Boom Sustainable?

September 27, 2011 by Leave a Comment

The battle royale brewing between New York and Silicon Valley to be the nation’s dominant epicenter for tech innovation and hot start-ups wages on.

On Monday night in downtown Manhattan, Paul Graham stood before a jam-packed auditorium of 800 entrepreneurs, developers, programmers and others who were curious about what makes a city a fertile environment for a thriving community of start-ups. Mr. Graham is a well-known investor and esteemed figure in Silicon Valley because he created Y-Combinator, an incubator in Menlo Park, Calif., that has given seed money and mentorship to start-ups,

At the Y-Combinator event, Mr. Graham raised the question of the sustainability of New York’s future as a hotbed of technology innovation and whether the city could ever grow to rival Silicon Valley.

“The truth is that I don’t know what’s going to happen,” he said. “Hubs tend to stay hubs.”

Mr. Graham gave the keynote talk of the evening, but also welcomed several Y-Combinator alumni to the stage, including Sam Altman of Loopt, Alexis Ohanian of Reddit and Joe Gebbia of Airbnb. Mr. Graham kidded that his keynote talk could have been titled “On the Other Hand,” because for each theory he had about why New York, a decade after the dot-com bust, is springing back to life and might give rise to the next Facebook or Google, he had a counterpoint to rival it.

He said that geographically speaking, there are several elements that contribute to a healthy ecosystem to nurture young start-ups. After all, he acknowledged, most start-ups don’t make it past their infancy.

“But places aren’t sprayed with start-upicide,” he said. “A start-up needs keys to success.”

He noted that New York, like Silicon Valley, had the same density of tech-savvy types working in similar industries that is required for the kinds of happenstance encounters and introductions that could revive a company’s flailing fortunes and help right its trajectory.

He recalled the serendipitous sidewalk meeting of Mark Zuckerberg and Sean Parker, the founder of Napster, who helped shape Facebook in its early days and became its founding president.

“The antidote for a failing start-up is Sean Parker,” he said.

However, Mr. Graham also said that New Yorkers tended to prize making money above all other goals — which could prove to be advantageous or disastrous for a fledging company or business idea.

“The Valley is a magnet for nerdy visionaries,” he said. “New York is for rapacious dealmakers.”

Mr. Graham went on to list a few other factors that detract from New York’s viability, including the distractions of city life and other, more lucrative industries, like Wall Street, along with the Valley’s perennially sunny climate.

But he did note that New York had surpassed Boston, long considered a nexus of technology and start-up culture.

“New York is solidly No. 2 right now,” he said.

New York, Mr. Graham said, was ripe for the kinds of companies that can disrupt and transform some of the city’s legacy businesses, like fashion, advertising and finance. Whether or not they can give rise to a large-scale technology company along the lines of Google and Facebook, he said, remains to be seen for now.

However, even Mr. Graham isn’t immune to the siren call of the hot start-ups cropping up around the boroughs of New York. Although he said he had no plans to bring a version of his incubator to the East Coast, like Ron Conway, a lauded angel investor, and Accel Partners, a well-known investment firm, who each have turned a keener eye to New York in recent months, Mr. Graham did say that he hoped to lure more New Yorkers to the annual Y-Combinator start-up class.

But for those entrepreneurs who are accepted into Y-Combinator and, after finishing their three-month incubation period, want to move back to New York? He wishes them the best of luck on their journey.

“I don’t try to stop them,” he said.

Article source: http://feeds.nytimes.com/click.phdo?i=07a28879481c7c566d6822cc20a3df3a

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Reality TV, Shaking Off Recession, Takes Entrepreneurial Turn

March 28, 2011 by Leave a Comment

Two networks are betting on shows based on entrepreneurs competing for seed money for their business ideas. NBC’s “America’s Next Great Restaurant” features aspiring restaurateurs trying to impress a panel of judges to win financing for a new chain. And ABC has reintroduced “Shark Tank,” in which entrepreneurs try to get backing from a panel of venture capitalists who bet with their own money — in exchange for a piece of the action.

“We think this area is a gold mine — where business hits reality television,” said Paul Telegdy, the executive in charge of reality programming for NBC. “Wealth creation and the concept of capitalism are things that are inherently top-of-mind in America.”

Three years ago, as the economy crashed, reality television producers rushed out shows about pawnshops and scavenging like AE’s “Pawn Stars” and “Storage Wars” — a reflection of the desperate mood across the country. Are viewers now ready for a more optimistic view?

So far the results are not worthy of a buy order. “Shark Tank” showed improvement over its first year’s ratings in its return last week, but still attracted less than a hit-level audience at 6.1 million viewers. NBC’s restaurant show, which has averaged only about 4.3 million viewers, is being buffeted by other reality competition on Sunday (especially “The Amazing Race” on CBS and another, more heart-tugging money-oriented show on ABC, “Secret Millionaire”), but it showed an unexpected sign of life when NBC ran a repeat on Tuesday night.

Mark Burnett, the most successful reality producer in television, with “Survivor” and another business show, “The Apprentice,” on his résumé, jumped at the chance to produce “Shark Tank” both because he was familiar with the show from British television (where it was called “Dragon’s Den”) and because of his personal entrepreneurial experience.

“I emigrated here from England and started out selling T-shirts on the beach,” Mr. Burnett said. “I can really identify with these entrepreneurs.” He said he had also produced a pilot for VH1 about “business turnarounds.”

Last year, “Shark Tank” was a marginal success on Sunday night. This year, it is playing regularly on Friday nights and has added some celebrity juice to its panel of venture capitalists, in the form of the comedian Jeff Foxworthy and the prominent businessman — and sports franchise owner — Mark Cuban.

Mr. Cuban certainly believes in the concept of putting up his own money for entrepreneurial ideas. He said in a telephone interview, “I get amped up about a lot of things, as people know, but this was exciting.” One of the aspiring entrepreneurs managed to get the bidding up to $4 million, a sum that Mr. Burnett said was probably “the biggest amount ever available in a nonfiction TV show.”

“Dragon’s Den” began in Japan, and the format is owned by Sony. Steve Mosko, the president of Sony Pictures Television, said the format for “Dragon’s Den” had been sold in 38 countries, and had become a hit in many. (The most recent editions are in Poland and Saudi Arabia.) Mr. Burnett changed the title thinking that, in the United States, dragons would not conjure the image of tough venture capitalists as well as sharks would. “Blood in the water and all that,” Mr. Burnett said.

Mr. Mosko said it should be “the perfect format” for American audiences, given the whole “American dream thing.” From a business point of view it has another advantage, as one former reality-show producer noted: it’s cheap to make.

Article source: http://feeds.nytimes.com/click.phdo?i=a0cadfa26628e32aa5c0916ac5815dee

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