I’m joining ff Venture Capital

 

I am delighted to announce that I’m joining ff Venture Capital as a Partner. Official blog post and more details here. In addition, Michael Yavonditte, CEO of Hashable, is joining as a Venture Partner.  

 

Since 1999, ff has made over 100 investments in over 35 companies, and from the beginning has been highly focused on generating industry leading returns. Among the firm’s most successful seed investments that have reached maturity are Cornerstone OnDemand (which raised $137m in a March 2011 IPO, ticker CSOD) and Quigo Technologies (sold to AOL for a reported $340m). We have a large crop of exciting growth companies that are starting to come into their own.

 

I’ve known John Frankel, the firm’s founder, for a year and a half. I’m very impressed by the organization he’s built and his track record. I’m honored to be the second partner in the firm’s history.

 

Before making the decision to join the firm, I did some research on early-stage tech investing as an asset class. What was striking was what an attractive asset class it was. Although any given early-stage company is quite risky, when aggregated across a large portfolio, returns are very attractive. There is also low correlation to risks that investors inherently have in most of their other investments, e.g., interest rate volatility, exchange rates, macro factors such as unrest in the Middle East, commodity fluctuations, unfunded pensions, etc. In addition, angel investments historically have a low correlation level with other asset classes, given the nimbleness with which small companies can adjust to changes in the economy, and the great diversity of companies in the typical early-stage portfolio. As a result, various analyses have shown annualized returns of 18-37%, 27%, and 30%.

 

As part of my new role, my mandate is to continue the institutionalization of the Firm, accelerate the growth of our portfolio companies, and look for great entrepreneurs and companies with which we can work. In addition, we’re extending our successful summer intern program and looking for some fall interns . If you know of any companies or people with whom we should talk, please be in touch! 

 

Due to my new responsibilities with ff, I’m transitioning to a Chairman role with Navon Partners, the startup that I’ve been working on with our all-star team for the last year.

How the Networked Economy is Changing the Deal Origination ROI Paradigm

 

Peter Lehrman of AxialMarket posted on his blog this must-read Powerpoint on the evolution of private equity deal sourcing.  I definitely agree with the points he makes here.  Most interesting are his estimates of the cost for different methods of deal sourcing.  We discuss in more depth a lot of these ideas in The Virtual Handshake.

Oodle acquires Grouply

Grouply Logo Congratulations to the team at Grouply on their sale to Oodle!  I’ve been on the Advisory Board of Grouply since its very early days, and am an enthusiastic user.  It very significantly increase my efficiency by allowing me to monitor more online communities than I could otherwise keep an eye on. 

 

I have to admit I was surprised that Yahoo/Google didn’t either acquire them or copy all their functionality, given how dramatically Grouply increases the functionality of traditional Google/Yahoo groups.  However, lately Yahoo at least seems to be focusing much more on shedding assets (and sometimes people) than on acquiring them.

 

Free release below:

Oodle Acquires Grouply

Oodle announced today that it has acquired Grouply, the online hub for social groups that offers features for building customized social networking groups. Oodle, a pioneer in social commerce, is reinventing the online experience for "classifieds" by building a social marketplace.

 

The Grouply platform and the groups hosted there will continue to function as before.

 

“Affinity groups such as mother’s clubs, neighborhood groups, and alumni organizations can be hot spots for trading activity,” says Craig Donato, CEO and founder of Oodle. “People care about who they are transacting with and would prefer to deal with others they know or who share their interests. With over 500,000 active groups, Grouply is a leading platform for interest-based social networks and is a natural partner for Oodle.”

 

The majority of Grouply’s employees will move to Oodle.

 

“Oodle is the perfect fit for the Grouply team and a great place for us to continue our mission of allowing people to build groups that share specific interests,” said Mark Robins, Grouply founder and CEO. “We look forward to working with our partners at Oodle to introduce some exciting new products.”

 

Oodle’s Marketplace lets users easily buy, sell, lend and give with other friends, friends-of-friends, and other real people in their local community. It is available on Oodle, Facebook and the iPhone. Financial terms of the transaction were not disclosed.

About Oodle

 

Oodle is a pioneer in social commerce and brings a social experience to the local online marketplace. Users can easily buy, sell, lend and give with friends, friends-of-friends, and other people in their local community. Oodle’s Marketplace, which has over 14M unique monthly users, is available on Oodle (www.oodle.com), Facebook (apps.facebook.com/marketplace), iPhone & Android phones (www.oodle.com/mobile) as well as dozens of other local partner marketplaces. Oodle is available in the United States (www.oodle.com), Canada (canada.oodle.com) & UK (www.oodle.co.uk).

About Grouply

Grouply is pioneering the “social group” – a new type of online community that combines the best features of social networks and online groups. Social groups offer the social interactivity, media sharing, and modern design of social networking sites like Facebook; and the rich discussions, popular email interface, and people-discovery opportunities found in traditional online group systems like Yahoo! Groups. Grouply gives existing Google (NSDQ: GOOG) and Yahoo! (NSDQ: YHOO) Groups an “extreme makeover” including a fully customizable website, and active Google and Yahoo! Groups users can access all their groups in one place on Grouply.

Panel on Super-Seed Funds at Harvard Business School Club of NY

 

I took some notes on last week’s Harvard Business School Club of New York panel on "Super-Seed Funds — Back to the Future." Eugene Radin of Concept Clinic edited the notes and merged in his own.  Incidentally, congratulations to Doug Atkin, Tony Berkman, Steve Miller and the rest of the Majestic Research team on their sale (announced today) to ITG!

 

Moderator:

Steve Brotman – Managing Director, SAVP

 

Panelists:

Chris Dixon – HBS, Founder Collective/Hunch.com

Doug AtkinGuggenheim Partners, former CEO Instinet

Jeff Stewart – founder, UrgentCareer; Mimeo; Monitor110

John Frankelff Asset Management

Select Biographies

 

Doug Atkin

After graduating Tufts, became first employee of Instinet in 1984, spent 20 years there.

Did a lot of investing in financial firms through his work at Instinet.

Ran a few companies, most recently Majestic Research.

 

Steve Brotman

Raised $1m, mostly his own money, in late 90s. His first investment was in LivePerson, which went public in 18 months. Money started pouring in ’99. Collected a return of 3.5x investment, which put him in the top 1%.

In ’04-’05, partnered with Greenhill Ventures and raised $100m. Greenhill raised $2b. Currently spinning off from Greenhill, due to recent regulatory changes. We’re very pleased about the spinoff, because the move will provide more freedom.

 

Chris Dixon

Co-founder of Hunch.

Personal investor in early-stage technology companies, including Skype, Foursquare, Stack Overflow, TrialPay, DocVerse (acquired by GOOG), Invite Media (acquired by GOOG), Gerson Lehrman Group, ScanScout, OMGPOP, BillShrink, Panjiva, Knewton, and a handful of other startups that are still in stealth mode.

Co-founder of Founder Collective.

 

John Frankel

Back in 2007, VC’s invested in 3,500 companies, with $26-30b. Angels put in $26b in more companies (excluding friends and family). Roll to 2008: amount of money invested by VC’s dropped to about $16b, but angels are at about the same level.

Recently spoke with one of the largest VC funds: they did an analysis of all the super-angels, which determined that over 1,000 companies had received capital from this population. They said that’s terrible for their business. He countered: I don’t know if those 1,000 investments came from the pool that gets money from VC’s or the pool that gets money from angels.

Panel Discussion

 

Steve Brotman

What are your thoughts on the recent popularity of early stage investing?

 

The panel unanimously agreed that this method of raising money has gained much more attention lately, and is growing as a viable source of seed investment for entrepreneurs.

 

Chris Dixon

Two contradictory forces: funds are getting bigger, but the amount of money needed to start a tech company has dropped.

Funds like his earn money only if they get returns for their investors, just like the entrepreneurs. Average top-tier VC investor at Greylock makes a few million/year just for showing up (referring to management fees).

Seed funds offer more flexibility than VC’s.

 

John Frankel

Angels invest in far more companies and spend approximately the same amount of money as VCs.

Angels may be threatening to traditional VC’s.

More people are interested in starting companies, especially young people, who view entrepreneurship as a viable direction for their lives.

Very low burn rate for many companies which they invest in.

Economic recession has created more companies, and larger, established companies are more interested in unique/new ideas, which offer more opportunities for exits.

It has become more difficult to pick winners in the large field of opportunities.

 

Steve Brotman

Have prices gone up? That’s the measure of a bubble.

 

Jeff Stewart

Study of six angels: returns were in the range of 18-30% across all the different pools of angels (average returns 30%; lowest 18%.), but 60% of the investments went to zero, So you’re getting all the returns from ~5% of the funded companies.

This is not a bubble, but a non-correlated asset class, with great returns!

Need to invest in many companies given the expectation of most investments returning 0%.

 

John Frankel

There are natural barriers to more money going into this asset class.

You need to start putting together a larger portfolio, which is hard for angels.

It is also difficult for VC’s to reach "down."

Only a small group of people will be able to dedicate next 10 years to managing this type of fund. They have to be financially self-sufficient.

People who’ve launched companies, and are investing in their own domains have higher returns.

More due diligence correlates with higher returns. They don’t simply write checks: active involvement also raises returns. Only a small (but noisy) group are doing this type of investing.

Smaller funds outperform larger funds.

Smaller teams launch/run successful companies.

Entrepreneurs get the difference between "smart" and "dumb" money.

 

Jeff Stewart

Entrepreneurs do better running these funds.

 

Chris Dixon

New hot thing: convertible notes which change in valuation over time.

Most seed valuations are at the $5m level.

 

Steve Brotman

Do most investors care about valuation and dilution or the quality of investments coming in? Study says yes.

 

John Frankel

Most of these companies have binary outcomes, so arguing over valuation with a value-added investor is irrelevant.

 

Doug Atkin

15 years ago, getting money from a name-brand VC would add a lot of credibility to your business. It was like getting backing from a top investment bank. This is changing now.

 

Chris Dixon

Disagrees: our core argument is that an entrepreneur will take less dilution over time by getting the initial investment from angels.

We’ve sold two companies to Google in last three months.

Suggestion: find funds which will help you build your business, not give you the most money.

Seed funds may value companies higher than VC’s, since VC’s spend most money in later rounds and it benefits them to value companies lower in the beginning.

 

Jeff Stewart

It’s important to remember that many seed funds are largely based on owners’ own money, not outside investors.

 

Chris Dixon:

Disagrees: investors’ money just as motivating as personal.

They get rich off of returns, not management fees, so goals are aligned, because they only make money if their companies do.

This works as long as fund managers make most of their money from success of the companies they invest in.

Should take attitude of hedge funds, and invest more, not less. Do so because they don’t believe in most companies, expect failures.

 

John Frankel

Goal alignment is key – better for entrepreneurs to work with peopl
e who are committed to managing their seed fund for the usual ten-year lifespan.

 

Steve Brotman

What are the differences between these classes of investors?

VC’s are so big that they are more like asset managers. Why hasn’t there been a market correction?

 

Chris Dixon:

This is being corrected, but it takes time.

 

Jeff Stewart

Ask if the VC is getting paid to put money to work or just to manage it.

We don’t believe in putting in too much money, e.g., in a capital-intensive industry like nano tech.

Also, entrepreneurs don’t really need VC’s to start companies, since less money is needed, and scaling technology is much easier now.

 

John Frankel

You should also ask: is the VC going to be there? An angel can move around, take new roles. A VC is institutional; the individuals move around.

 

Chris Dixon

We have a $50m fund with a 2 and 20 structure.

A lot of this discussion comes down to fund size.

1/3 of our fund is the principals’ money.

 

John Frankel

The collapse of asset prices elsewhere is making VC overweight.

 

Jeff Stewart

I’m not sure there’s too much money; I think there’s too much money pursuing information technology deals.

 

John Frankel

Google only ever raised $25m.

Google’s of the next generation may only need to raise $3m and won’t need to do it through VC’s.

 

Chris Dixon

Facebook has raised $700m, but $650m of that are secondary sales by friends and family.

 

Steve Brotman

How do you feel about collaborating with other angels, seed funds, and VC firms?

 

Doug Atkin

Won’t invest into companies without other investors with industry specific expertise.

You have a much higher chance of succeeding with more smart people around the table.

Expertise grows revenue rapidly.

Average revenues $1-5m in the companies he invests in.

 

Jeff Stewart

My investments are usually in the $25k-$100k range. I don’t have time to support a company at that level.

Needs other investors to feel comfortable, help with due diligence. Angel investing is a team activity.

 

John Frankel

No collusion when negotiating terms, however someone has to take a leadership role in an investment.

I’ve had two deals in the last two months with documents that didn’t make sense, because everyone relied on everyone else.

You can find a great group of investors who can help you.

There’s an idea of social proof: if A and B invest, I should too. That can lead to very lazy thinking. I believe that I shouldn’t do a deal that’s hot; I like the road less traveled.

Strategically find a group of investors who can help you. A fund is an expertise network.

 

Steve Brotman

What is your investment style? Which sectors are you most interested in?

 

Jeff Stewart

I like really early investments, especially in B2B and ad tech.

 

John Frankel

I will consider anything that will provide good returns. Really intrigued by how people leave footprints online though social media. Klout is people-ranking the web in the way that Google does page-ranking.

 

Chris Dixon

I am primarily interested in information and advertising technology. However, I just did two deals in the robotics space.

Often invests pre-product.

Stays away from theme investing.

Companies are expected to change direction; he ultimately invests in people.

 

Doug Atkin

I invest almost exclusively in financial technology. Anything with an exchange.

He won’t invest in businesses outside of his sphere of influence (experience).

Financial services industry has been slow, difficult to change in the past. The last couple of years have changed things.

 

Question from the audience

When should an entrepreneur approach them?

 

John Frankel

I prefer to give a NO early.

Core of this country is the entrepreneurial spirit.

Everything begins with a conversation.

 

David Teten

Why should entrepreneurs choose you?

 

Chris Dixon

You have to prove you’re helpful. I don’t bother with a speech, I just give a list of references.

He invests in people. Looks for people who have created something (ex: products).

Suggestion to entrepreneurs: call companies in which I invested, ask them about the experience.

When I hire people, I do the same thing: I say call people who worked for me in the past.

The only way to be successful is to be consistently helpful.

 

Jeff Stewart

Only you can make it happen, angels (investors) won’t. Use a group of angels. Don’t depend on them too much.

He has said "no" to deals he liked due to lack of time.

 

Doug Atkin

Set expectations, tell people what you’re good at.

He’s best at dealing with banks/finance: it’s his expertise.

 

Chris Dixon

In our fund, we focus on team-building and follow-on financing.

60 investments give us a lot of insight into who’s doing the next round and at what price.

At about a third of the companies we’re invested in, we’ve introduced founders to one another.

We rarely take board seats.

Generally uninvolved in product building. Won’t micromanage the product.

 

John Frankel

This is a relationship business. You’re going to be working together for longer than the average marriage lasts in this country.

Work with people you like.

Larger VC’s have a reputation for being arrogant — and it’s probably justified.

Suggestion: don’t lose control of your company.

 

Steve Brotman

It’s incumbent on entrepreneurs to find the right fitting VC.

 

Question from the audience

Comment on recent phenomenon of funds established to invest in late-stage tech deals, ex: Facebook/Felix Investments.

 

Chris Dixon

Known as "DST" deals. DST is about to go public on the NYSE.

 

John Frankel

There’s a big movement in New York to build up entrepreneurial culture — a sense of coming from behind Silicon Valley. Unlike Silicon Valley, we have finance, fashion, media, etc., which are all being disrupted.

Our model is that we put in more capital into our winners. Maybe 50% of the companies fail, but they don’t burn up 50% of our capital.

 

Chris Dixon

Rounds which we participate in are typically $300k-$1m. We typically put in $100-$500k.

We usually don’t invest in the second round, but will get involved in helping the company raise money.

 

Question from the audience

What are the characteristics of a team that gets a yes?

 

John Frankel

We want people who are honest with themselves, even if they are somewhat delusional. Have been successful in the past, can form a team.

We invested in ClearPath Immigration, which wants to be TurboTax for immigration. The founder ran immigration for Department of Homeland Security. He has big domain expertise.

Will the person grow up as the company grows?

When you give money to a money manager, you want that person to navigate the financial markets. That’s what I want in the entrepreneur.

 

Graphic: http://www.flickr.com/photos/aunto/110997305/sizes/s/

How Private Equity and Venture Capital Funds Grow the Value of Portfolio Companies

One of the major themes of the evolution of the private equity industry for the past decade has been the growth of internal groups focused on enhancing the value of portfolio companies. Twenty years ago, the great majority of the people working in private equity came out of investment banking, i.e., a deal background. Today, it is far more common for a private equity fund to employ people with an operational/consulting skill set, e.g., Bob Nardelli at Cerberus. I predict we’ll see the same phenomenon among venture capital funds. The latest example: Union Square Ventures announced that they are hiring for a newly created position as General Manager of the Union Square Ventures Network.

 

Within private equity, these groups are often called "portfolio operations", sometimes "portfolio resources groups", or what Riverside Company calls its Toolkit. At larger funds, "operations" may be distinguished from governance, talent selection, pre-investment involvement, or even strategy, partly because "operations" is a term that management may infer to mean backseat driving.

 

By definition, these groups focus on improving the operations of the existing portfolio, not on diligencing potential deals or on deal structuring. Just a few of the many major private equity funds that have well-developed private equity operations groups: 3i (Business Leaders Network); Cerberus; Irving Place Capital; Bain Capital; TPG; General Atlantic; and Welsh, Carson, Anderson & Stowe.

 

A Bain study found that "as much as 80% of private equity returns [going forward] will come from real performance improvement, rather than [ ] financial structuring." According to a 2006 KPMG study of 100 private equity exits (below), 48% of the value-add during private equity ownership came through organic revenue growth, as opposed to capital structure changes and multiple arbitrage.

 

Source of Gains in Private Equity-Backed Companies

 

image

 

I see six major reasons why limited partners now expect that private equity funds will have a formal operating strategy, minimally an operating partner and/or a formal portfolio resources group. I should mention my thinking throughout this blog post and especially in the list of factors below is shaped by a number of presentations I’ve seen by Jon Weber, who has run portfolio resources groups at three major private equity funds.

 

1) Global economic crisis. Particularly in 2008-09, most portfolio companies required operating changes to survive. In most cases, the existing management teams were hired for their ability to grow revenues, not their ability to restructure. The funds had to supplement and/or replace the existing teams.

 

2) Commoditization of financial engineering. The classic question Michael Jensen asked is: if leveraging is so wonderful, why don’t companies do it themselves instead of waiting for an LBO fund to buy them out? Since Jensen first began researching this area, larger companies increasingly chose to lever themselves, and there has been a massive boom in the private equity industry—thousands of funds all of whom can offer leverage. It has become much harder for a private equity fund to make high returns simply by borrowing some money and taking advantage of the interest tax shield.

 

3) Investors seek differentiation. Building a formal portfolio resources group has been a way that private equity investors can differentiate themselves and ease the capital-raising process.


4) Maturing private equity industry.
According to the Parthenon Group, the larger size and greater complexity of funds has led to greater role specialization. As one investor said to me, "We’ve moved from the ‘great man’ to the ‘great team’ model."

 

5) Risk mitigation. The deal team tends to have a strong incentive to do a deal, and then move on to the next deal. An operational perspective adds a counter-balance to the deal team.


6) Strategy driven.
Certain strategies — deep value investing, turnarounds, mid-market focus, and industry-specialized funds — require a hands-on approach.

 

I remember speaking at a Capital Roundtable Private Equity Portfolio Operations conference back in June 2008, and I was struck at the number of attendees who commented publicly on how they felt like "second-class citizens" at their funds, both in status and in compensation. However, when I spoke at the IIR PE Ops conference in October 2009, in the midst of cleanup from the economic crisis, the mood of the operating professionals was much more buoyant (despite the challenges they faced in their portfolio.) On a relative basis, they knew that their professional contribution had become much more apparent at their firms.

 

We have not yet seen a similar boom in portfolio resources teams in the venture capital industry, but it’s coming. I recently had a conversation with Chris Farmer about this, which sharpened my thinking considerably (he is the coauthor of my forthcoming study on "Best Practices in PE/VC Deal Origination"). According to the NVCA and PWC Moneytree, the average VC round has doubled in the last 12 years with the growth of the industry (from $4m to $8m). At the same time, the cost of starting a company and proving concept with a new product has declined dramatically in many sectors.

 

Some such as Marc Andreessen argue that costs have dropped as much as 100x over the last couple of decades since the current venture capital model was created. As a result, many innovative venture capitalists and entrepreneurs are creating new fund models from Andreessen-Horowitz to Betaworks to Founders Collective and Floodgate. Fred Wilson wrote, "The venture capital asset class does not scale . . . . I think ‘back to the future’ is the answer to most of the venture capital asset class problems. Less capital in the asset class, smaller fund sizes, smaller partnerships, smaller deals, and smaller exits. The math works as long as you don’t put too many zeros on the end of the numbers you are working with."

 

A corollary of Fred’s point is that the small number of portfolio companies which do hit hypergrowth need more support. Chris and I think that one logical new model is: seed a large number of companies with quite modest amounts of capital. Then, double down with follow-on rounds on those concepts that do take off. For those companies that experience rapid growth, it makes sense for a fund to bring extra support, since those companies can’t hire good people fast enough to do everything they need to do. In addition, a portfolio resources group can share learnings across the portfolio. This is much easier in venture than in private equity, because VC funds are much more likely to specialize in tightly defined industries. In addition, the portfolio companies are smaller and so it’s easier for a VC to shape their growth according to the fund’s beliefs in best practices.

 

In the case of companies that do not reach hyper growth, the companies will have raised modest amounts of capital and can be sold for much smaller amounts while still resulting in a win for entrepreneur and VC alike. Of course, failing to provide a follow-on investment is a signal that can hurt the company, but that has always been a part of the business and we are confident that models will evolve to minimize the negative effects.

 

Here are some models of VCs Chris and I identified which are building out portfolio resources groups:

 

Andreesen Horowitz has said very explicitly that their model is to be able to invest at a wide range of capital levels in the 10-20 companies per year which have true potential to scale. They have built out a small value augmentation group: Ronny Conway (point person on business development for the portfolio) and several recruiters (1 for college-level talent, and 1 for experienced talent).

 

– Insight has the "Insight Onsite team" which is particularly focused on sales, SEO, and SEM.

 

– Accel has a Venture Development group and firms like Oak Investment Partners and Bessemer have Operating Partners to lend added support to companies. Charles River Ventures had a similar approach during the bubble.

 

– Bessemer also has a Designer in residence (showing the increasing importance of design for internet companies, e.g., Mint.com).

 

– Highland Capital Partners, Union Square, and numerous others have "Thought Summits" with noteable guest speakers. These events usually are organized by portfolio functional role, e.g., a portfolio CTO summit, portfolio CEO summit, etc.

 

– As I mentioned above, Union Square Ventures announced that they are hiring a General Manager of their portfolio.

 

– There has been a boom in accelerators: Boostphase (Atlanta, GA); Bootup Labs (Vancouver, BC); Capitalfactory.com (Austin, TX); Charles River Ventures QuickStart (Boston, MA); DreamIT Ventures (Philadelphia, PA); Iaccelerator.org (Bangalore, India); Launchboxdigital.com (Washington, DC); Nextstart.org (Greenville, SC); seedcamp (London, UK); Shotputventures.com (Atlanta, GA); SeedStart (New York); Summer @ Highland (Lexington, MA and Menlo Park, CA); Techstars.org (Boston (MA), Boulder, CO, and Seattle, WA; The Difference Engine(Sunderland, UK); Y Combinator (Mountain View, CA); and Y Europe (Vienna, Austria). For more information on how to build a replica of Y Combinator, read Jed Christiansen. For a comparative listing and more background, see Readwriteweb and Dan Veltri. TechStars recently released very positive data on the success of their incubated companies.

 

This approach differs from the incubator and acceletor trend (e.g., cmgi, antFactory) of a decade ago. That model was often criticized for selection bias: the less-competent entrepreneurs found the incubators more attractive. In addition, too much of the core competency of the company was driven by the incubator instead of in the company itself, creating ambiguity in attribution of value between the two entities. The new model looks more like the VC as consigliere instead of a bacteria splitting off new progeny.

 

I’ve had a front-row seat to this phenomenon, since I’ve done a lot of work in the past with portfolio resources groups at some of the major private equity funds. I’ve presented in the past on "Finding New Deals and Improving Portfolio Company Valuations by Working with Operating Executives," which covers some of the structural options private equity funds have in working with their portfolio.

Internet Business Models

I’ll be presenting on April 26 to the Founder Institute Singapore on "Earning Revenue and Internet Business Models".  I give a lot of credit to Munjal Shah, some of whose slides I incorporated directly into this deck. 

My draft slide deck is below; I would welcome feedback.

Invitation for angel investors: New York Founder Institute graduation ceremony, Thursday 3/25, 6pm

Image representing Founder Institute as depict...

 

The New York Founder Institute graduation ceremony and investor preview is this Thursday, March 25, at 55 Broad Street, 6:00. Up to fourteen businesses are poised to graduate, ranging from a fantasy sports company with a family focus to a business designed to cure cancer. The best business to present, according to a vote by the guests, will win a $5,000 prize on the spot.

Accredited angel investors are welcome to attend. In addition to a free dinner and some fun pitches, Adeo Ressi (founder of the program) will give a 30 minute talk about the lessons learned after aptitude and personality testing nearly 1,000 people interested in becoming an entrepreneur. You’ll be one of the first to hear some of the surprising results about age, intelligence and personality.

Recent success stories from Founder Institute: Skimble, a Founder Institute Graduate, is a finalists for the "Innovative Web Technology" category at the SXSW conference in Austin.  TechCrunch has recently profiled a number of graduates: Molo Rewards; RewardChart; Monstrous.

If you’d like to attend: RSVP.

The Finalists are:

Aaron Price of makeMania

– makeMania.com enables a community of Do-It-Yourselfers (DIYers) to connect, compete with, and learn from one another, while accessing relevant exclusive discounts.

Adam Neary of Profitably

– Profitably is a web-based business intelligence solution for small businesses with a simple proposition: Give us 10 minutes, and we will help you run your business more profitably.

Alexander Ressi of Immortalize.it

– Immortalize.it is a tracking tool that blends user-contributed milestones with social media and 3rd party data-sources to create timelines for personal intelligence.

Bryan Housel of Ditto Health

– Ditto Health allows patients to enter their medical data in one place on the web, rather than on paper at every doctor’s office that they visit.

Edward Kim of Simple.PR

– Newswire enabling businesses to reach targeted local audiences.

Jacob Howerton of Zipmark

– Zipmark enables people to make financial transactions with their smartphones.

Joshua Bernstein of Ancile Biomedical, Inc.

– Ancile Biomedical develops medical devices that accelerate wound healing, saving money for payers and providers while addressing the results of global obesity and diabetes epidemics.

Kyle Jasey and Thomas Pierce of Wepoli

– To bring citizens, elected officials and political candidates closer together, and to facilitate and enhance their interaction.

Olivier Couronne of Genomes United Inc.

– Genomes United sequences the genomes of cancer patients in order to identify novels biomarkers.

Shirley Chow of ProjectChow

– Food pictures exist in fragmented areas all over the web. ProjectChow will serve both as an organized repository for these photos by presenting these images alongside the restaurant menus allowing diners to more informed of a restaurant’s offerings.

Tobin Schwaiger-Hastanan of Plan.fm

– Plan.FM is a social utility for collecting the plans you make on other sites and organizing them into a single source that you can access from anywhere. "It’s tripit.com for your events."

Vincent DiBartolo of FanSprout.com

– FanSprout is a family-friendly fantasy sports site with educational components that allows dads and kids to connect in the context of sports.

Vincent Mota of vimota

– vimota creates the tools & intelligence which helps monetize the costs of rich media.

 

Again, RSVP at: http://nyfi-investor.eventbrite.com .  See you there!

(Image via CrunchBase)

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From Robin Wauters on TechCrunch: Belgian Tax Watchdogs Tracking Facebook, Netlog Updates:

 

"Not entirely unexpected, but still weird to see it confirmed and acknowledged: the federal tax administration in Belgium, my home country, is keeping tabs on citizens (article in Dutch) via their Facebook and Netlog profiles and their activities on eBay and other social networking sites."

 

Most people really don’t realize how much information they are leaking online.  I spoke with a VC recently who monitors which entrepreneurs other VCs are linking to on LinkedIn; he said that gives him insight into which entrepreneurs are now actively raising capital.

 

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Liveblogging The Smart Money of Crowds: Collaborative Investing Startups

I’m liveblogging notes from tonight’s MIT Enterprise Forum event on The Smart Money of Crowds: Collaborative Investing Startups.  This was not hard to organize, and I’m very happy with how the event turned out.

 

Panel Biographies

Roger Ehrenberg, Moderator, Managing Partner of IA Capital Partners, LLC

Roger Ehrenberg is Managing Partner of IA Capital Partners, LLC, his personal venture investing vehicle. IA has made 27 investments since 2004, principally in the areas of digital media and financial technology. IA`s portfolio companies include TheLadders.com, Mimeo.com, Clickable, Covestor, BlogTalkRadio, Buddy Media, Silicon Alley Insider and Stocktwits. Roger was also an original investor in Wallstrip (sold to CBS Interactive) and MyTrade (sold to Investools), sits on five Boards of Directors and advises the gaming company Genesis Interactive and the location-based messaging platform Socialight.

Prior to founding IA, Roger spent 18 years on Wall Street in Mergers & Acquisitions, Derivatives and Trading. Most recently, Roger was President and CEO of DB Advisors, the $6 billion multi-strategy hedge fund trading platform of Deutsche Bank. As head of derivatives businesses at both Citibank and Deutsche Bank, Roger`s teams twice won awards, securing Global Finance magazine`s `Interest Rate Deal of the Year` in 1998 and Institutional Investor magazine`s `Equity Derivative Deal of the Year` in 2000.

Roger has penned the popular business and technology blog Information Arbitrage since July 2006, and has had over 1 million readers since inception. He has also been interviewed broadly on topics ranging from hedge fund regulation and algorithmic trading to deep-web search and building vertical communities by The Financial Times, The Wall Street Journal, the BBC, NPR, Reuters, CNBC and many others.

Roger received his Bachelors in Business Administration from the University of Michigan/Ann Arbor, and his Masters of Business Administration from Columbia Business School. Roger is Trustee of the Little Red School House/Elisabeth Irwin High School and a Board Member of the Integrative Pediatrics Council. He lives in New York City with his wife Carin and two boys.

 

Divya Narendra, Founder and CEO, SumZero

Before founding SumZero, Divya was an Associate at Sowood Capital Management, a $3.5B multi-strategy hedge fund located in Boston, MA. At Sowood, Divya analyzed investment opportunities across the capital structure, spanning credit and equity. Prior to this, he was an analyst in the Mergers & Acquisitions Group at Credit Suisse Securities in NYC. In 2004, during his senior year at Harvard College, Divya co-founded ConnectU.com, an online social network dedicated to the university community, and predecessor of Facebook.

SumZero is the largest online community of professional investors worldwide, currently consisting of more than 1,200 analysts/PMs from nearly every well-known buyside fund. The site is free to use, but membership is by invitation-only. Each member lists 3 or more tickers for companies he/she has extensively researched. As such, an analyst can search for a company he is interested in and find the buyside analyst at another leading firm who has already spent months researching that name and initiate a dialogue. As a by-product, an analyst grows his network. SumZero also contains a fully searchable database of concise investment write-ups focussed on valuation. Though not required, only those members who contribute an idea can access the database. Please emaildivya@sumzero.com for more information and an invitation to join.

Stacy-Marie Ishmael, Writer, Financial Times Alphaville/Long Room

Stacy-Marie Ishmael is a New York-based writer and blogger for FT Alphaville, the Financial Times’ award-winning blog. Her responsibilities also include FT Alphaville`s Long Room, which is a “digital restaurant” where finance professionals are encouraged to share research and comment on the work of others. Stacy-Marie is actively involved in the development of the FT Alphaville platform and brand.

FT Alphaville is a Webby-award winning blog focused on global financial markets, with a team spanning London, Tokyo and New York. The Long Room, which was launched in October 2008, is a members-only extension of the main site, focusing on comment and analysis. Both FT Alphaville and the Long Room are free to readers (an FT subscription is not required to access content) and are supported primarily by display advertising opportunities on the site and in FT Alphaville`s email briefings. In the case of the Long Room, revenue is generated from the sponsorship of “digital tables”.

Phil Pearlman, Director, StockTwits

Phil Pearlman was a co-founder of Lumina Fund Management, a long/short equity hedge fund which focuses on behavioral and sentiment analysis to exploit under and overreactions in options markets. He is an expert in the area of market participant behavior and emotion and consults with professional investors employing strategies adapted from empirically validated psychological treatments to improve trading performance. Phil has developed a proprietary prescriptive model of investor experience which integrates empirically validated clinical models and behavioral finance. He is a contributor to Real Money, a paid service owned by TheStreet.com. He currently trades a private account in New York.

Phil is an investor in and director at StockTwits. He also makes angel investments in other social media based start ups and focuses on the relational and community aspects of online social networks. Phil earned a doctorate in clinical psychology from Argosy University in Washington DC.

Rikki Tahta, Co-Founder Covestor

Rikki Tahta has held a number of senior roles in Finance and Information Services. Previous start-ups include ARK Information (acquired by Thomson Financial), WebTrack (acquired by Jupiter Communications – later public on NASDAQ), Steelhead Systems (acquired by Merrill Lynch) and Bookpages (acquired by Amazon.com). Other positions include Chase Capital Partners (private equity) and Thomson Financial (Securities Data Corporation). Rikki lives in New York and loves fishing. Username: RikkiTahta

Covestor is a portfolio sharing service for proven self-investors and for those wishing to track them. Tens of thousands of self directed investors share their real trades and you can follow them live for free. Covestor is funded by New York based Union Square Ventures, Boston based Spark Capital and London based Amadeus Capital Partners. We also have a strategic investment from Independent News and Media Group.

 

My notes

 

Roger:

I just spoke with a major ebroker. They’re not worried about trading volume, which is fine. They’re worried about durability, because they feel that their community is not loyal.

You remember stock message boards in the first dot-com wave. Problems of anonymity. Whole Foods CEO going online and bad-mouthing other peoples’ companies.

I spent 18 years on Wall Street at Citi/Deutsche. Left in 04 after running a hedge fund business for Deutsche

Stacy-Marie Ishmael.

Officially, she’s a credits market reporter for FT.  Unofficially she’s a web geek there.

Alphaville was viewed as the ‘badly behaved little brother’ of FT: their first blog. It was a response to perceived need for real-time interaction/dialogue.

Performed two functions: a) trendy (in 2006, everyone had to have a blog), and b) increased engagement.

Alphaville has 9 person team, based mainly in London. We do combination of reporting and commenting. We’re encouraged to have an opinion on financial stories.

When we launched, traditional FT readers were slow to respond. We got 2 comments/week. FT’s historic market were C-suite.

Brits much slower to take up social media. We had a lot of readers but minimal interaction.

Shortly after, we launched MarketsLive: a real-time chat every day at 11am ET between two senior market reporters. When this launched , we were the first. It made people realize that there were real people behind the concept of Alphaville. We got to a point of 420 comments per MarketsLive event, and quality of comments went up.

In late 80s, there was a well-known restaurant known as the Long Room, which attracted all the significant traders in the City.  That’s the origin of the name.

Today we feel that our main job is to moderate and edit, not write, because there’s so much quality content.

Divya, Sumzero

Our vision was to create a Wikipedia for investing, but focused on professional investors.

We wanted to be as universal as possible.

Most writing to date is on single-name credits

We launched a year ago.

1700 analysts are members

Even if you haven’t submitted a note, you can still see who has extensively researched a given company.

You can send a message to other analysts and start a dialogue.

This is the first way that analysts can communicate with one another about trades.

We have an earnings template which is searchable so you can run a screen based on buy-side consensus. We believe that’s much more valuable than sell-side consensus.

(Teten note: this reminds me of Novus, as well as some of the other competitors I blogged about earlier.)

Phil Pearlman, Stocktwits

A community built atop Twitter

We’re getting a lot of people, including amateur investors, professional investors

There’s a high correlation between people we see subjectively as being experienced, and the number of followers they have

We have 2 semantic tags: 1) Put $ in front of a ticker, or:

2) general market comment: $$ at beginning or end of tweet.

 

Certain stocks are very popular on certain days.

Finance websites usually have huge dropoff on weekends. So in response, we’ve set up programming on weekends, where professionals do Q&A.

We also have a discussion, Macrotwits, Sunday night. Our speaker will advance a global macro thesis and debate it.

Rikki Tahta, Covestor

Our goal is to democratize fund management. We don’t care about what you do ; we care about what you invest in.

(Teten note: I like his model, but I would never be a customer.  It’s like Marketocracy; there’s so much noise in the data that I’m very uncomfortable delegating my investing decisions to someone else’s etrade account.  Investing is not a democracy; it’s a game rigged in favor of the professionals.)

Most of the tools for investing are available free on the web.

BofA has even launched a free market trading platform.

In 2000, a big change in UK investment research : Marshall Wace led a movement towards ‘Alpha Networks’: a focus on actionable ideas instead of just opinions. They then quantified who gave the best advice and allocated trading flows instead. This concept never took off in the US.

This was a complete disassociation between brand name of the institution. We said investment talent does not logically have to be inside a financial institution.

Our principals:

Treat anyone as a fund manager. But, they have to be investing real money, which we verify. We also require full transparency, so you can’t selectively share your trades. We create a Morningstar tear sheet for individuals.

Find best and invest alongside. Covestor replicates in your own account what other people are doing. Madoff is something of an inspiration: We think you should keep your money in your own account, and just take advice from others. This is like a distributed UMA. Our investors can treat their own account like a fund of funds.

Benefits for investors. More choice, more control, more transparency. This is what big banks give people with $30m in assets. This is a better way to get active management

Roger

Does community matter?

Rikki

It matters less to us. Our focus is building an ability for an individual to invest with better resources than he would otherwise.

Divya

Credibility matters. We help people vet out their ideas.

Stacy

Community definitely matters.

Phil

We have people who make a lot of bold calls. 50% of the time they’re right.  We find out what they’re really like when they admit (or don’t admit) their mistakes). 

Divya

If you hold a position, you have strong incentive to publicize why you hold that position.  The guys who run their own funds are happy to discuss. The junior guys are nervous about ticking off their bosses.  The people at very large hedges (e.g., och-ziff) and large investment banks are more hesitant to talk about their positions. 

Phil

Ego

Rikki

People who are great performers but don’t communicate, don’t attract as many investors as those who can do both.  The former is a much bigger driver than the latter.  (Teten note: Jim Cramer is a far better performer than investor.)

Roger

Who gets into the community?

Stacy

We have very strict criteria for joining.  We independently verify that a person is who he says he is.  The person must be an active participant in the financial markets.  This ticks off a lot of Alphaville readers who did not qualify for entry into the Long Room.  There was a lot of angst over this among some readers.  We don’t allow people to discuss specific trades.  Most of the discussion is about sectors/macro issues.  So pumping and dumping don’t happen. 

Because people are anonymous, talent will out.  People decided whether to trust the source or not based on commentary. 

Rikki

The only hurdle is a $10,000 account.  We run rankings on 78 different criteria.  I learned this from Thomson: the more rankings the better.

Divya

Screening process is viewed positively.  They have to work at a reputable fund, or submit a quality writeup showing they fit in. 

Phil

We earlier built a vote up/vote down feature, but we found we didn’t need it.  The crowds made the picks for us.  We subjectively made picks of who we thought was most value-added.  The better people were building large followings. 

Divya

if we hit our targets, we’re very monetizable.  Our content has tremendous value.  We could charge our members for access.  Set up section on website for outsiders to access our content for a fee.  We could license our content to SeekingAlpha for a fee. 

Phil

We view ourselves as a farm system.  We’re launching next week 2 premium products with two guys who are pros, and have built significant findings: Brian Shannon (technician) and Joe Donahue (hedge fund manager) .  Next product will be options product. 

In finance vertical, people will pay for information. 

Stacy

I work for a news organization..that itself is a problem.  We’re one of the few parts of the FT which is completely free.  You dont have to be a FT subscriber to get into Long Room.  This is a constant source of friction between editorial team and ad team.  We think being free is critical to our success in getting the community where it is.  We’re a loss leader.  We do sell advertising. 

Alphaville readers are much more sticky than FT.com readers.  Our uniques and repeat visits are very high.   We have people who are constantly updating RSS feeds. 

Rikki

We haven’t launched revenue model yet.  We’ll charge investors a management fee. 

 

Gary Mueller

Which B2B communities are making money now, besides your own?

Roger

Gerson Lehrman Group.  Revenues around $300m, valued at $1b by Silver Lake.  280,000 experts. 

Stacy

Bloomberg.  They own the major messaging system used on trading floors.  They were a community before people talked about communities.

Rikki

LinkedIn

Phil

Look at ResearchEdge in New Haven. 

Teten

How can users manipulate each of these sites; how are your users doing so now; and how are you defending?

Phil

We eliminated microcaps.

We also monitor the stream very closely and remove anything that smells funny.

Divya

We think reputation is the solution.  Other users can rate content.

Stacy

We allow people to use pseudonyms.  A certain analyst at a bank kept posting “CIT looks great today.”  We emailed him at his work address, and that put a stop to him doing that. 

We’re very strict on copyright and libel issues; as a news organization our awareness of those issues is high. 

Wachtler:

What sites do you recommend for discussion of macro issues?

Roger

Use disqus to track individual comment streams, which creates a community around a comment thread.

Phil

9pm Sundays: Gregor Macdonald discussion.    We squeeze a lot of meaning into 140 characters.

Stacy

Zerohedge came out of nowhere and has really taken off.  We’re sensitive to paranoid about whom we link to, since they can be thought of as sources.  Look on our website for links to blogs we think are most worth reading. 

 

How NOT to Launch a Social Media Marketing Agency

I’m not in the practice of being overly critical, and certainly not mean or snarky. But sometimes someone does something so completely, utterly incompetent or misguided that it’s worth pointing out, for their own good as well as being an example for the general public.

That happened yesterday. Short version of the story: an established PR and marketing agency is launching a new social media marketing agency – “Buzzphoria”. They announced themselves with an advertisement on HARO (Help A Reporter Out), an email newsletter with about 50,000 media-savvy subscribers.

Only problem is, they weren’t ready – not even close. Their blog (once you find it) still has the default WordPress “Hello, world!” post. They don’t have a Twitter account. They don’t have any social media links on their site to connect with them. They didn’t do themselves any favors with that ad.

For the full story, with screenshots, see Buzzphoria Social Media Reality Check on my personal blog.