CEOs, investors, and board members frequently complain about ineffective board meetings. Steve Blank, Jeff Bussgang, Brad Feld, and Fred Wilson each have suggested board meetings could be improved by changing the format, process, or content.

Having good meetings starts by having the right people in the room (as discussed in the first installment of this series) and in having a good chair or facilitator for the discussion (as highlighted in the second). The board then can create the right agenda with a relatively simple, three-step process.

First, the chair and CEO should circulate the key questions and proposed agenda a week prior to the meeting, or even start collecting agenda items at the end of the prior board meeting. Most importantly, this helps everyone avoid wasting time creating dozens of slides that the board doesn’t value. It also allows time for reflection and input from other board members.

Some of the most effective CEOs and chairs I’ve seen call each board member in advance to get their input. Doing so also helps them build and maintain political clout with the board by encouraging board members to be heard, seeking their input, and avoiding nasty surprises at the meeting.

Second, in creating the agenda, the chair and CEO must reflect on what key questions are vital to the company’s success, as opposed to what are the most obvious. In the dozen years I have been on boards, I have seen too many stuck in the same routine. It’s easy—and a bit too comfortable—to review how sales were since the last board meeting, how many leads marketing generated, how the product has developed, and when the company might need more money.

All but the last question are like driving by looking in the rear-view mirror. Looking ahead to the next quarter’s sales or to the next release of the product at least focuses on the future, but only in the low-visibility fog of short-term goals. These are good questions, but more tactical than strategic. Of course companies need to address tactical questions, but too much attention there can lead to greatly missed opportunities.

Strategic discussions always start with tough questions that aren’t being asked. There are five areas for the board to have on its strategic checklist, with an optional sixth that should be reviewed at least twice per year (sometimes more frequently).

• Team. Does the company have the right people in the right roles? Are they the right ones for where it wants to be in six months or a year? Veteran entrepreneur and venture capitalist Bob Metcalfe once said that in big … Next Page »

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Technology companies’ boards of directors need better leadership. I made a case last month about reinventing the board of directors by treating the board as a team and doing annual assessments against company needs. Boards that are structurally more aligned with their company’s operations are better able to help them achieve success-or at least reduce the board’s contribution to company failure. That said, it’s hard for a CEO to do this alone. Even with a well-organized board, a lot of board meetings also are under-effective, ineffective, or worse, really stink.

Enter the effective chairperson.

The non-executive chair of the board has three responsibilities:

1. Set the board agenda for each meeting;

2. Run the board meeting; and

3. Manage board terms and help recruit new members.

Executive chairs take on additional functions and play an active management role, often including being an outward face with external stakeholders such as government entities, investors, and strategic partners. Those are important roles, but different from the role played by a non-executive chair. It’s also rare to have an executive chair in an early stage company. Non-executive chairs are very different; they talk less, listen more, and as one lawyer put it to me, “their job is to bang the gavel.”

Setting the Agenda: A big reason a lot of board meetings stink is they focus on the wrong things. If left to their own devices, management typically will set an agenda about what they want to talk about—or at least what will make them look good—rather than what is vital to the company’s long-term success. Alternatively, the board can operate on a rote formula, often covering activities such as sales, marketing, and engineering since the last board meeting rather than looking ahead to the future.

Even well-intentioned CEOs will have blind spots or resistance about what should be on the agenda, because they live inside their own tactical world and suffer from day-to-day stress. They may be unaware of or underappreciate strategic changes in the market. They also may want to postpone discussion of an important topic until they have what they perceive as enough time to address it sufficiently to look good in front of the board.

(Above, a short video with additional thoughts about what makes a good board chair.)

Instead, the chair should reflect on what tough questions should be addressed and which ones aren’t being asked. He or she may want to consult with fellow board members, management, and other informed parties in the market. These questions and an outline of the agenda should be circulated a week in advance of a board meeting. Early distribution of the outline can create constructive conflict about items of importance and ensure that management does not waste their time preparing elegant, but not very effective materials.

Unfortunately, what is typically considered best practice today is management preparing lengthy PowerPoint slides and distributing them one to two days in advance of the board meeting. Board members may or may not have time to review them and are often playing catch up when they walk in the door for the meeting. As a result, management often becomes frustrated—either when the conversation quickly derails from their agenda or, at the other extreme, board members sit passively listing to a parade of data, seemingly unappreciative of all the hard work that went into them and not adding any value.

Running the Board Meeting: Good chairs are facilitators. While many CEOs also are good facilitators, even some of the best ones I’ve seen have lost control of board meetings for one … Next Page »

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Imagine a world where technology companies are more successful and grow faster because of the strategic help and guidance from their boards of directors. Or, at least imagine a world where they don’t suffer from unhelpful, or worse, problematic boards that consume management’s precious time. Some commentators like Steve Blank, Jeff Bussgang, Brad Feld, and Fred Wilson have suggested board meetings could be better by changing the format, process, or content.

Here’s a more fundamental recommendation: change the board.

Operational changes such as rethinking the meetings might create some temporary benefit. The company and shareholders, however, are still working with the same components. Further, in nearly any technology company, the board not only has an opportunity to change, it’s necessary.

Why take the time to address a potentially painful subject like the composition of the board of directors? Because only a small percentage of companies backed by angel investors and venture capitalists achieve success through a profitable acquisition or initial public offering. About half end in failure; others underperform initial expectations. If the board can at least not contribute to failure, or better yet, be neutral or even beneficial, we not only increase the likelihood of success for a few companies but also create a disproportionate effect on GDP because of the high economic value these companies create.

Boards not only are part of the company, but ostensibly, leadership starts at the top. The companies themselves evolve-or at least they should-and so should the board. We want technology companies that make new and innovative products and services to grow quickly, take over the world. If they aren’t achieving high growth, something is usually wrong. Whether they are growing rapidly, stagnating, or struggling, the company’s strategy, division of labor, operations, and team members change or need to change. The board should change, too, evolving in structure and skills to match the company’s situation and needs.

I was discussing this subject recently with a CEO friend, who responded, “The problem with your argument is you presume boards add any value at all. I see why investors need to look after their investments…but they shouldn’t try to do management’s job for them.” I told him I thought we were in agreement: Too many boards don’t actually add value, and their job shouldn’t be to micromanage the CEO.

(Above, a short video with additional information about building good boards.)

Good boards can help capitalize on opportunities and provide strategic perspective, complementary business development connections for management, and stability through transitions-good and bad-and have positive signaling value for other stakeholders. Further, they perform roles requiring independence from management such as serving on audit and compensation committees. But how does a company achieve a good board? First, let’s take a look at how things go wrong.

Creating and Evolving the Board: What Often Happens in Practice. When founders, CEOs, and investors create boards, they at least want an amicable board if not one that really creates benefits. Nobody starts out wanting to have a bad board, and like a lot of relationships, they tend to start out well. There’s an initial honeymoon period when the company is founded or gets its first investment. Alternatively, if boards are formed out of obligation to external stakeholders, usually investors, the selection process usually happens through the capital matchmaking process. Getting a “yes” from an investor and accepting the investment tends to be a mutual qualification process, albeit with some compromise on both sides.

Management and investors typically draw from their respective social networks to recruit board members. Doing so may create a relatively good fit, and may be necessary to persuade highly skilled and experienced people to join the board of an unproven company. However, this often creates … Next Page »

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Far too much has been written about Boston versus New York City. Sports rivalries and cultural differences have a way of coloring our world view to include startup companies and venture capital. However, the past few years tell about a much closer relationship. The real story is Boston and New York City, particularly versus Silicon Valley.

This week, we welcome Xconomy’s most recent addition to its coverage, New York City! While having started in Boston and expanded across the country, Xconomy’s newest addition reflects the growing ties and teamwork between New York and Boston.

Let’s start with a few data points. It’s always been easy to think about Boston and New York as separate worlds. After all, it’s 225 miles between downtown Boston and Manhattan—a journey that takes typically takes 3 ½ hours. In contrast, the trip from San Francisco to San Jose is only 48 miles along the 101, which in the middle of the night is under an hour. With traffic, well, that depends and can take as long as the Boston-NYC trip.

Somewhat ironically, the technology created by entrepreneurs and the VCs that back them have been shortening these distances. Wi-Fi on the Acela and 3G mobile networks let entrepreneurs and venture investors stay productive on the Boston-NYC journey, making the trip seem a lot shorter. Personally, I love working on the Acela. It’s some of my most productive time, and I feel like I’m in the office. I can even have meetings, particularly if I secure the seats facing each other with the table between them. Web networking and collaboration tools make sharing information and coordination much more effective as well, not only between these two cities but across the world.

Venture capitalists and angel groups are expanding and coordinating financing activities between Boston and New York City. “New York is clearly on a roll here. If anything we’ve seen the presence of several Boston firms either opening offices or having affiliations,” said long-time New York venture capitalist and founder of Greycroft Partners, Alan Patricof. Matrix Partners recently opened an office, headed by Nick Beim. New firms like Founder Collective operate fairly seamlessly between the two cities. TechStars’ recent expansion to New York has been a great success. The Golden Seeds angel group several years ago opened chapters in New York City, Boston, and Philadelphia that systematically collaborate. Syndication among angel groups more broadly in New England and New York got started around 2005 and has been going through various iterations and improvements.

How does this then play out in the numbers? Silicon Valley may have had the lead for many years, but looking at emerging companies, the Boston-New York team looks like it’s been running a fast break. According to the most recent PwC MoneyTree data, the gap between New York/Boston and Silicon Valley for seed and early-stage companies has closed, whether looking by total deals or by dollars.

Five years ago, Silicon Valley did nearly twice the number of seed and early-stage venture deals compared to Boston and New York combined, 338 versus 178 in 2005. For 2010 the two regions are essentially tied with 400 for Silicon Valley and 392 for New York/Boston. Dollars tell a similar story. For 2005, the ratio was 1.3:1 in favor of Silicon Valley, growing to 2.2:1 by 2007. By last year, that gap had closed to 1:1 with $2.16B invested in Silicon Valley seed and early-stage companies and $2.05B invested in those in New York/Boston (see charts above.) “The startup and entrepreneurial environment in New York is the strongest I’ve seen in the past 40 years,” says Patricof.

But it’s not just adding numbers. The rapid growth of consumer-oriented, ad-tech, and fin-tech ventures makes Boston and New York City highly complementary and drives increasing … Next Page »

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Like an entrepreneur listening to market feedback while designing a product, Senator Christopher Dodd (D-Conn) has made some improvements to features of his pending legislation that we described last month. Originally designed to fight the “too big to fail” problem in the financial markets, many constituents—including the Angel Capital Association and the National Venture Capital Association—have highlighted that it could inadvertently render startups “too small to succeed.” These new enhancements are steps in the right direction. The legislation is still pending, however, and other voices—particularly state regulators seeking more power—could oppose the amendments and hinder entrepreneurs.

Senator Dodd has proposed two amendments to his own legislation based on feedback from the entrepreneurial community. One would leave the current standard for accredited investor at a net worth of $1 million (as previously proposed, the bill would have more than doubled this figure) but would add a new provision that the calculation would exclude the value of the investor’s primary residence. It also would allow the Securities and Exchange Commission to revisit the definition periodically. The other amendment would maintain regulatory consistency across states for entrepreneurs raising money while disqualifying parties who have been identified as “bad actors” by state or federal regulators.

While no change to the accreditation standard would have been preferable, Dodd’s new approach is a reasonable compromise. The change to the regulatory environment provides uniformity for entrepreneurs while increasing investor protections for all types of private fund raising.

Many state regulators reportedly are still continuing to seek to expand their control over private fund raising and might oppose these positive steps for entrepreneurs. We hope Senator Dodd and his colleagues continue their support of entrepreneurship, job creation, and economic growth and pass the legislation and these amendments.

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Senator Christopher Dodd (D-Conn) recently introduced sweeping legislation that aims to rein in the excesses that led large financial institutions to become “too big to fail.” Somewhat ironically, it also has the potential, as one commentator put it, to make startups “too small to succeed.” In the rush to prevent future problems, we risk taking resources away from our entrepreneurs who are the economic engines that create jobs and help grow GDP.

Two Problems for Entrepreneurs

There are two small and seemingly innocuous provisions buried in the over 1,300 pages of this bill that almost certainly will hurt startups, particularly those at the earliest stages. Both have been opposed by the Angel Capital Association and the National Venture Capital Association. The first (sections 412 and 413) would change the definition of “accredited investor.” The second (section 926) would delegate at least part of the oversight for private placement filings—known as Regulation D—from the federal level to states.

These may be small provisions, but they will have no small effect. According to a study last year by the Kauffman Foundation, so-called “gazelle” firms (ages three to five years) comprise less than 1 percent of all companies, yet generate roughly 10 percent of new jobs in any given year. Even more to the point, remove startups from the job creation totals, and only six years from 1977-2005 saw net positive job creation. In the other 28 years of this span, without startups there would have been net job losses. The jobs attributed to startups reflect both the innovation entrepreneurs bring and the net growth to GDP that’s been heavily documented by both the Kauffman Foundation and NVCA.

“Accredited Investors:” Does the SEC Really Need to Protect Millionaires? Dodd’s bill recommends changing the definition of “accredited investor,”which was set roughly 30 years ago at $1 million in net worth or $200,000 per year in salary for individuals. The idea then was that people who were millionaires had sufficient resources to evaluate investment opportunities and did not need the Securities and Exchange Commission to look out for them. While wealth is not necessarily a proxy for sophistication, at least those prospective investors had the resources to hire lawyers, accountants, and other service providers to help them in their assessment.

The argument behind changing the definition is that, thanks to inflation, $1 million is no longer what it used to be. The mistake in that argument is that the world is not what it used to be, either. Back in the 1980s, there were no on-line resources for investors, few entrepreneurial events, and most people, including myself, didn’t know how to spell “VC.” Today, anyone with a computer can learn more than they can imagine about term sheets, growing entrepreneurial businesses, and venture capital. Checking references: use LinkedIn. Need details on an esoteric technology: you’ll likely find a blog, Wikipedia articles, and links to experts across the globe. In most major cities of the United States, there are a variety of entrepreneurial organizations, and the majority of states have at least one angel group that is a member of the Angel Capital Association. So, $1 million might not be what it used to be for buying a house, but it sure goes a lot farther in making sophisticated investments. The question should be: At what income or net worth level should we as taxpayers be paying regulators to look out for those with fewer resources? It’s probably not millionaires at any level. But while what we have now is not a great solution, if it ain’t broke, don’t fix it.

Adjusting for inflation, the new level would be $2.3M. The legislation would leave the exact figure to the SEC to determine, and worse, allow it to change periodically. A moving target could create legal confusion and make the lawyers guiding these companies even more cautious. What happens if the level increases two years after a financing? Could the company be in trouble because prior investors are no longer “accredited?” Even if they were grandfathered, would they be excluded from participating in new rounds of financing, which often are critical for protecting an investment and generating a return?

The net effect would be to eliminate vast pools of capital from being available to invest in startups. While the exact amount of this reduction is unclear, various studies over the past decade, including the Kauffman Foundation’s Global Entrepreneurship Monitor and a study commissioned by the Small Business Administration, have suggested that a significant amount, and perhaps the majority of “angel” or “informal” investment in startup companies, comes from lower-net-worth individuals who might well fall under the new threshold. Worse, areas other than Silicon Valley, Boston, and New York are most likely to be hit hardest because they have a lower proportion of higher net worth individuals.

Passing the Buck to State Regulators. The second section noted above would delegate regulation of smaller private placements to the states. Imagine the resulting diverse regulatory landscape, with some states being more “friendly” and others more “onerous” to investors. Since regulators rarely see a regulation they don’t like, it is almost a guarantee that not only will the costs of compliance increase, the cost of any financing that crosses state lines will become even more expensive. This might not be a big issue when a company is raising millions of dollars, but it would be particularly expensive and painful for small rounds. There needs to be legal clarity about who is really in charge, and the SEC cannot just pass the buck when it does not want to be involved.

Companies raise money from many locales all the time. Angel groups in New England-including ours-and across the country actively syndicate deals across state lines. Rhode Island, New Hampshire, Vermont, and Maine are within a two-hour drive of my office and our portfolio companies, and many of them have investors from around New England, the country, and even the globe. Investment, simply put, is a matter of interstate commerce and is the jurisdiction of the Federal Government even more so than it ever has been.

Moving Ahead

Given the economic crisis of the past two years, we clearly need changes to our financial regulations to expose unknown risks and avoid undue ones in the public markets. We also need to be careful that those changes don’t have unintended consequences that cause more harm than good. Dodd’s bill has some bright ideas, but needs revisions to remove these sections and protect the entrepreneurs who will help create the jobs and fuel the growth that will get us out of today’s economic mess.

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While Scott Kirsner and my fellow Xconomist Tim Rowe both recently have commented on the benefits of mixing and mingling in Kendall Square, we have a more basic problem that won’t be solved by just rubbing shoulders. Chalk it up to Yankee stoicism; our long, dark winter; or our independent sectors of software, communications, medical devices, interactive media, financial services, health care, and finance. Whatever the cause, you probably haven’t heard of “Northern Hospitality” for a reason. Simply put, we just don’t talk with each other like people do in other parts of the country, and changing will help entrepreneurs.

Starting a new company is hard. We talk a lot about entrepreneurship and innovation in the technology community, but that’s not really the entrepreneur’s chief mission. Big companies innovate and create things. Mature small companies do, too. What makes entrepreneurs unique is coupling that with creating a new organization, which means creating something out of nothing.

To do that, they need to find those rare people who are willing to take the risk with them, and who share the dream and want to solve the same types of problems. These include co-founders, employees, lawyers, distributions partners, suppliers, and most importantly, customers.

Finding all those people takes time and energy. It can be hit or miss, and it’s mostly miss. Unfortunately for entrepreneurs, the biggest expense usually is time, which also is usually in fairly short supply. With a little effort from the rest of us, we can help entrepreneurs cut these costs dramatically and help build an even more vibrant technology community here in Boston.

Last year, Bill Warner (another Xconomist) and I collaborated with the Mass Technology Leadership Council to launch Innovation 2008, an “unConference.” Unlike traditional conferences with lots of speakers and little networking, this new model of conference is mostly structured networking that delivers content based on participants’ interests rather than a pre-planned rigid agenda. The attendees create the sessions themselves, allowing people with shared interests to find each other efficiently, and then they spend an hour at a time sharing their expertise, asking questions, discussing critical issues, and getting to know each other. It was a huge hit, particularly by breaking down traditional barriers between old and young, investors and entrepreneurs, and people in different sectors because everyone had something to offer.

This year, we are turning that event, which will be held on October 1, into the kick-off for a year-long platform. We will ask particular participants to become “connectors,” and for the next 12 months, they will try to be the quick “answer man/woman” who entrepreneurs can contact with the simple question: “Who do you think would be the right person to help me with __________?” Connectors either make an introduction and get out of the way, or refer the request to another connector who might have a better answer.

A select group of entrepreneurs from the unConference also will be invited to join a … Next Page »

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Two weeks ago, I was in Atlanta for the annual Angel Capital Association (ACA) conference and, this past week, here in Boston for the annual National Venture Capital Association conference. Depending on whom you asked at both conferences, it was the best of times or the worst of times, most likely depending on whether or not they had money to invest. In fact, NVCA conference chair, Kate Mitchell, even kicked off the event with that opening line from Dickens’ book.

That said, both events were generally positive-you’ve got to be an optimist to be involved in entrepreneurship-and both had a roll-up-your-sleeves, let’s-make-things better outlook. Overall, the mood and energy was somewhat more upbeat in Atlanta than in Boston, as characterized by ACA Chairman John Huston’s welcoming remark and call to action, “Thank you for supporting capitalism!” which drew a lot of applause. Perhaps it was because individual investors don’t feel obliged to go to conferences and the pessimists just stayed home. Maybe this part of the venture investing market is still so young that that there’s a lot to be learned and done.

The hot topics among angel groups were on fund formation, increasing deal flow, deal structuring, and how to syndicate deals—while top of mind with venture capitalists was how (or whether) to invest in the current climate. Kudos in particular to NVCA President Mark Heesen for making the trip down to the ACA annual meeting for the second year in a row to build bridges. He participated in an excellent, frank discussion about how venture firms and angel groups can collaborate better and more frequently. Attendance was about the same as 2008, with around 350 people present. Certainly, a lot of angels have had their portfolios hit hard by the recession and have cut back on investing, but at least this crowd was looking forward.

The NVCA meeting had nearly twice as many people, just over 650, but that was down by maybe half from last year when the conference was in Silicon Valley. To be fair, travel logistics from the West Coast to the East Coast for a mid-week conference may have also played a role, but the mood was still different.

NVCA does a vastly superior job to ACA when it comes to inspirational messages, but a lot of them provided a sober contrast between what venture capital has achieved in the past and what might no longer be possible in the future unless there is structural change in the market. Outgoing NVCA Chairman Dixon Doll’s opening comments included a call for action to the federal government: “Unless we are willing to pull out all the stops, we’re in danger of heading down a slippery slope.” He then proceeded to unveil NVCA’s “Four-Pillar Plan to Restore Liquidity,” which you can read by clicking here.

Both organizations had high concerns about liquidity and availability of capital. At ACA, a lot of the discussion revolved around state and federal tax credits to increase the availability of capital for individual investors. NVCA provided a lot more data and structure, as noted above in the call to action, showing that with liquidity down so much over the past 10 years, the cycling of capital already is decreasing and is at risk of slowing even more.

To me, perhaps the most important issue centers on the fact that these two meetings happened in two different cities. Overall, both organizations still have a lot to gain from each other. In addition to Mark Heesen coming to the ACA conference, about a half-dozen ACA members-including yours truly-also were present at the NVCA conference because we are members of both organizations. But there could be far more overlap and dialog as well. Roughly two-thirds of ACA-member angel groups co-invested with venture firms last year. We have a lot of the same goals and cooperate and collaborate far more than we compete. No matter if you think it’s the best of times, or the worst of times, ultimately, it’s the entrepreneurs who benefit by having the players in the capital markets work more efficiently and effectively together.

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Nobody likes to fail. No entrepreneur or venture capitalist thinks a particular venture is going to be the one to fail. As veteran venture capitalist Bob Crowley at the Massachusetts Technology Development Corporation says, “we’ve never made a bad investment; just investments that have gone bad.” If we as investors or entrepreneurs thought the odds were stacked against us at the outset, we wouldn’t pursue new ventures.

In reality, however, they are. And, rather than just accept that the risks are high and failure happens, there are many things we can do to better the odds of success.

1) Three ways to blow your precious venture capital round. Only about 1 in 100 companies that pursue venture capital money get it. Probably the worst thing you can do right after the financing is then to blow this precious resource. Yet, there is tremendous pressure to scale the company for a large market quickly. Here are the top three catastrophes I have seen first hand and heard from veteran venture capitalists time and time again over the years.

—Hiring the right CEO at the wrong time: Investors put money in the company to make money, and you do that by making a big company—fast. As soon as the round is closed, the new board of directors and the founders interview lots of candidates and hire someone who just amazes them with their vision and ability to grow a company quickly. That “professional” CEO starts hiring three to six VPs, they in turn hire three or four managers each; they then hire more staff. Headcount after a Series A grows two to five fold in a few months. That’s great if there is a rock solid foundation underneath the company, and it has equally strong ties to the market. It is a disaster otherwise, creating chaos, frustration, anger and tons of finger pointing. The new CEO takes a lot of the blame, but so should the founders and the investors. The CEO was probably the right person; the company should have spent three, six or more months refining the business model, sales process, marketing strategy, and product development process, as well as assimilating the people so they worked as a team, before hitting the gas.

—Scaling the sales force prematurely: This mistake is similar and often related to #1, but it’s enough of a stand-alone error that I put it in its own category. Venture investors look at initial sales traction and think the rest of the market buys the same way or has the same needs. It takes a lot of market research to make sure you are ready to scale. “How many times do I have to learn this lesson,” one general partner recently said to me.

—Building the product ad nauseum: If one is going for a big market, you don’t want to ship one that has bugs, right? That didn’t stop Microsoft—or many other successful software companies, for that matter. The trick is understanding what bugs will be tolerated by which portions of the market and limiting your sales to that segment until you’re ready for others. Lots of engineers absolutely hate that approach. With a lot of money in the bank, an engineering-heavy venture can be prone to come back to the board time and time again, saying, “we just need another quarter or two of development, then we will be ready for market.”

2) Three ways to blow your exit. After years of blood, sweat, and tears as well as much personal sacrifice, reward is in sight for your entrepreneurial venture. Large public companies not only want to partner and benefit from your work; they want to buy you! Suddenly, this lonely startup seems important, and pressure builds to make perhaps more of what you have than is possible. Here are three ways to grab defeat from the jaws of start-up victory.

—Get greedy: The forces of nature have formed a rare convergence around your company, and you think “well, if we’re this valuable now, we’ll be worth a LOT more in a year or two.” Lightning almost never strikes twice.

—Allow one party with a different agenda to control the deal: This mistake may have been made years earlier by bringing in an investor or strategic partner whose interests were not in alignment with the interests of others. Alternatively, one party’s interests might have changed because of some external factor. Head this off by having discussions with and among the investors about the pressures everyone is facing, as well as everyone’s goals and objectives.

—Try to save money by doing it yourself: A lot of entrepreneurs (and venture investors) bristle at paying an investment banker’s fee, citing other experiences where they or others felt they didn’t get any value. That’s a problem of hiring the wrong banker. Good ones earn every penny they make by creating an auction—or auction-like environment—that increases the value of the company substantially. It’s very hard for the CEO simultaneously to play good cop and bad cop with a potential acquirer—especially one they are likely to be an employee of in perhaps only a few days—or have a good feel for the rhythm of a deal because these are infrequent events for them.

3) Three ways to blow your company. There are better perspectives about company failure than I could provide, so here are links to three let-the-hair-down stories that tell it like it is.

—Roger Ehrenberg’s post-mortem about the demise of Monitor111. He lists more than seven major mistakes that killed the company, an information platform for institutional investors on Wall Street, and that are all too common. These include: lack of a single “buck-stops-here” leader, too much PR too early, and too much money.

—Chris Herot’s reflections on Convoq and Zing. Chris has some of the same points as Roger—particularly developing a product without enough customer input—but adds important points about the overall context and ecosystem around a company.

—Dan Weinreb’s analysis of Symbolics’ failure. Symbolics had great technology and a great team, but the complementary technologies changed. This is a great case study of the ensuing gyrations and apoplexy that many companies suffer in these situations.

If you have your own stories or know of similar posts, please feel free to comment and add them below.

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Over the past several years, and especially since this summer when CommonAngels (where I serve as managing director) became the first angel group to join the National Venture Capital Association (NVCA), I’ve frequently been asked in varying tones of voice from the curious to the cynical, “Is CommonAngels an angel group or a venture capital firm?” The definite answer is “yes,” which is less a statement about CommonAngels than it is about the substantial changes in the capital market affecting entrepreneurs.

Here’s some history and context. The Tech Bubble of 1999-2000 and subsequent Tech Wreck of 2001-2004 did a lot more than just flood the market with money and leave it dry. This boom-bust was part of a classic economic supply shock that has led to a restructuring of the capital for new ventures and changes in investment strategy that determine how that capital is deployed.

In a supply shock, the dynamic between price and availability of a good—in this case cash—changes significantly. Often, there follows a restructuring of the market as more efficient or more successful suppliers gain market share, buyers shift to more reliable or specialized suppliers, and both sides seek to alter their strategies to accommodate the changed market.

Economic treatises have been written on the general effects of supply shocks. But in the case of venture investing, what happened during the Tech Wreck was that asset allocations—meaning the amount of money available to both angel investors and venture capital firms—fell sharply, invariably in proportion to the loss in market cap of their portfolios. Whereas total commitments from limited partners surged during the Bubble to $83B in 2000, they fell during the Tech Wreck to just below $10B in 2003—and have only recently resumed their pre-Bubble levels of around $20B per year, according to figures from the NVCA/PwC/Venture Economics MoneyTree Report and Dow Jones’s VentureOne service. However, with the comeback, the distribution of those funds has changed—and so have the investment strategies.

Changes to Angel Investing
Perhaps the most visible part of this evolution has been the increasing pooling of capital and expertise by individuals into angel groups. Whether it’s because individual investors see safety in numbers, a stronger negotiating position for future rounds, better diligence through shared efforts, or just a more enjoyable process by working in teams, the basic principle is a classic division of labor. Rather than have each investor repeat the whole diligence and investment process each time, work can be divvied up to those with the most skill for a particular task—allowing a lead angel or manager to coordinate the process for both individual investors and the entrepreneur.

In 1998, there were roughly 20 formal angel groups nationwide. Six years later, 46 groups became charter members of the Angel Capital Association—a trade organization founded to support professional development among angel groups. Today, there are over 125 ACA member groups and almost as many unaffiliated angel groups.

Many of these groups also have hired staff and some have funds under management, much like a venture capital firm but with some structural differences I won’t go into here. CommonAngels itself is now a hybrid organization. We have 70 active angels who cut their own checks on individual deals, two full-time managing directors, and two co-investment funds. We’re members of the Angel Capital Association, the New England Venture Capital Association, and the NVCA. Our large network helps source deals, evaluate opportunities, and help companies; our pooled funds and professional management provide additional capital, complement our operational expertise, and provide consistency for entrepreneurs and co-investors.

Changes to Venture Capital
Venture Capital firms also have changed, but because those changes have mostly been internal to existing organizations, it has been a bit harder to notice. Each quarter, the MoneyTree figures grab headlines over the total dollars invested in startup companies and the number of deals done by venture capital firms, institutionalized angel groups, and various corporate investors. VentureOne adds to the debate by offering its (usually) slightly different figures based on a different methodology from those tracked by the other group. By either of these measures, investment levels have returned to “normal,” pre-Bubble levels. Inside those figures, however, the dynamics have changed significantly.

Since the Bubble, the average size of a venture capital fund has doubled, according to VentureOne, from roughly $100M during the Bubble years of 1999-2003 to an average $200M in both 2005 and 2006. A decade ago, the average venture fund was closer to $80 million. More importantly, however, last year saw the creation of the fewest number of funds under $100 million since VentureOne started keeping data in 1992.

Additionally, as Scott Kirsner recently noted in the Boston Globe, there are many challenges facing VCs raising new funds. As a result of the disruption in the market, the large institutions that invest in venture funds (institutional LPs) are increasingly pursuing “flight to quality” strategies—putting more money into the most successful funds, thereby increasing their strength and leadership position. Many of these large venture firms have now launched or are developing multiple financial products such as sector-specific funds, regional funds, or funds tied to particular stages of company development.

The average round size, meaning the amount invested at various stages of a company’s development—seed, Series A, Series B, and so forth—also continues to increase. But with that increase come further changes in strategy—most notably fewer seed stage deals. In 1995, according to MoneyTree, 17 percent of all venture capital dollars went to seed investing. By 2002, that figure hit a low point of 1 percent, and at the end of last year had only recovered to 4 percent. More telling, in 2006 there were only 326 “seed” deals done throughout the country, versus between 500 and 800 per year pre-Bubble.

The larger fund size has also had an effect. Even when investing small amounts of money in early-stage companies, venture firms are looking for an implicit or explicit commitment from entrepreneurs to build an enormous success (usually with an exit value of greater than $250M) in order to “move the needle” on the fund. This often means building a portfolio company to 20-50 employees much faster than in the past, creating an “instant company” effect that can actually increase risk if the firm is under prepared for that growth or if the market is not yet ready to support it.

Co-opetition between Venture Capital and Angel Investing
As both venture capitalists and angel investors evolve their practices, they increasingly need those with complementary resources to work with them. In fact, they both compete for deals and cooperate, sharing skills to evaluate and help young companies, creating what Prof. Barry Nalebuff at Yale University calls “co-opetition.” Most often, this correlates to size: large venture firms get deal flow from smaller ones; smaller venture firms from angel groups; and angel groups from individuals. Investing style also affects collaboration. The “instant company” investors tend to prefer working together, as do those who take a more conventional “organic” approach to growth by going with, not ahead, of markets. Finally, the personalities of both individual partners and investors, and the relationships and trust among them, also play big roles in how firms collaborate.

For example, at CommonAngels, our closest relationships are with the other angel groups and with venture firms that operate relatively small funds of between $50M and $300M and take more organic approach to portfolio company growth. These partners have provided $10 for every $1 that we have invested this year—a new record. We also refer opportunities to each other and seek advice. Occasionally, we compete against each other, but we tend to prefer to collaborate, for instance, by pooling our investments together to create a Series A investment of $2M-3M. Competition also comes from bootstrapping (meaning the entrepreneur funds himself or herself) or by entrepreneurs choosing strategies that require more capital than we ever could provide, leading them to work with a totally different set of players.

Looking Ahead
These changes are neither intrinsically positive or negative, they are just evolutionary changes that the industry has gone through—but it is important to know what they are and adapt to them. In the next five years, don’t be surprised to see more angel groups joining NVCA. Five years from now, perhaps as many as half the angel groups around the country will have managed funds, and at least a few will likely have funds of between $50M-100M. Similarly, larger venture firms will have more specialized product offerings, and many smaller ones will take “boutique” strategies of being best in class for a specific sector, style, or geography.

As the capital markets change, entrepreneurs should do diligence on investors before starting to look for money. Particularly if you are new to fund-raising, or have not done it in a while, you will likely find the market more segmented than in the past. Look for investors whose strategy, expectations, and personalities are more in line with your own and your company’s. This will likely leave you with a much shorter target list than in the past. But it should also be a much better one.

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…is coming soon.

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