As you have read this week about the financial details of Facebook’s IPO filing, you have no doubt stopped to think about—or daydream about—what your own company might be worth.  While going public might be a distant or inappropriate goal for your own venture, Facebook’s IPO serves as a timely reminder that you should be calibrating your business and growth strategies to make your company attractive to investors or strategic partners.  After all, for most startup entrepreneurs, the eventual reward comes in the form of a merger or acquisition, rather than an IPO.

The good news is that the vast majority of technology CFOs (75 percent) expect M&A activity in the sector to rise in 2012, according to the fifth annual BDO Technology Outlook Survey, released this month by BDO USA, LLP, where I am a partner and national director of the Technology and Life Sciences Practice.  However, a word of warning: I’ve seen many deals derailed—with significant delays or value erosion—because of the management team’s undisciplined approach to presenting financial information.

Therefore, whether your own organization is in the market to acquire another business for strategic growth purposes, or you are working to position your company as an attractive acquisition target, there are two issues that are crucial to generating or maintaining shareholder value: Having an acute awareness of the motivating factors behind an M&A transaction, and providing an orderly financial snapshot that will answer the mostly likely questions from potential partners.

Motivating Factors Spurring M&A Transactions

In our survey, respondents predicted that the top three motivations behind M&A deals in 2012 will be revenue growth, enhanced market share, and the acquisition of new technology and intellectual property. In other words, a significant majority of CFOs believe that M&A transactions will mostly be offensive in nature. A company waging an offensive strategy isn’t necessarily engaged in hostile takeovers; rather, it means the focus is more on growth than cost-cutting. Therefore, companies are looking for acquisition targets that will fill in holes in product or technology portfolios, and are not necessarily angling to take a competitor’s product out of the market.

Financial Rigor

Understanding the motivations of other parties in a deal can put you in a more powerful position, either as an acquirer or a target. Equally important is meeting the due diligence requirements of an acquirer in an efficient and confident manner. By ensuring that reliable and accurate financial and operational information is available, companies can avoid roadblocks to the M&A process—roadblocks that can significantly erode shareholder value, if not derail the entire process.  For example, although the survey indicates a positive outlook for the industry this year, respondents foresee overall revenue increases of just 2.6 percent – significantly lower than the forecasted growth in last year’s survey (10.4 percent).  If you are experiencing a lower revenue forecast this year, be prepared to address how you intend to get your company back on track.

Beyond M&A Transactions

Even if M&As are not currently a part of your growth strategy, accessing capital remains a top of mind issue for technology companies. The good news is that—according to our survey—over three-quarters (76 percent) of respondents say they feel better about the ability to access capital in 2012. The hurdles to arranging debt financing remain high, but businesses with strong fundamentals and fiscal discipline are once again able to obtain credit. In fact, the majority of respondents who plan to raise additional capital this year intend to use debt financing. The key to making debt work for your company is to manage the process proactively, and avoid being forced into reactive mode.

Whether your business is planning to undertake a strategic transaction or simply needs to access capital through financing, careful planning is critical. A blend of fiscal responsibility, corporate discipline and the willingness to take measured risk are the keys to powering growth.

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The explosion in incubators for early stage tech companies has spawned a familiar startup storyline: A team of bright founders hits on a promising idea, builds a prototype, and applies to one of the big-name programs. After they get accepted (or sometimes even if they don’t), it’s off to the races for a few intense months of coding, meetings, demos, late nights, long weekends, and camaraderie.

And when it’s over, a big demo day where everyone shows off their hard work—and hopefully lands some investment to really get things going. Not as much ink is spilled about that day-after reality, when the wunderkind founders get to work actually building a business.

That brings us to Seattle-based FutureAdvisor, a startup that graduated from the summer 2010 batch of Y Combinator—biggest of the big-name startup incubator programs. Among the other companies produced in that group are Hipmunk, the travel-booking site, and Contagion Health, which has since merged with another company to form Habit Labs, also based in Seattle.

FutureAdvisor is a Web-based software service for individual investors who want help maximizing their retirement savings, but don’t have enough money to get the attention of a traditional financial advisor who typically focuses on bigger fish—all the better to earn fees.

FutureAdvisor focuses on index investing, a growing trend that eschews professional mutual fund managers in favor of pegging investments to stock market indexes compiled by financial firms, like the S&P 500 or the Russell 1000. FutureAdvisor is still in a beta phase, but says it’s now able to offer services to employees at the 15 biggest companies in the greater Seattle area, with many more in the pipeline.

The company was founded by Bo Lu, 28, and Jon Xu, 32, who met while working at Microsoft on a “skunkworks” project called Catalyst, which eventually became part of the new Windows Phone system—Lu worked on the technology that would become the all-in-one social networking feature on Windows Phone 7, and Xu helped build the system that tied together instant messaging and text messaging.

Once they knew they worked well together, and felt they’d been bitten by the entrepreneurial bug after working on a 40-person team inside the behemoth of Microsoft, Xu and Lu ran through some side projects until hitting upon the idea that would become FutureAdvisor. It’s actually based on a problem that Lu, an active investor since the age of 16, had seen with friends: People wanted his advice on how to allocate their money, but didn’t have the time, patience, or acumen to keep up with the homemade spreadsheet he’d been using since he was a teen.

“Immediately, Jon and I were like, ‘That looks like a software problem,’” Lu says. “So we made something, and we applied to Y Combinator with a super-ghetto prototype that, at the time, had my Fidelity credentials in the code base.”

“But at least it was fast,” Xu says with a smile.

That was the spring of 2010, and the idea that would become FutureAdvisor was just taking off on its wild ride. Fast forward to today, with a team of eight people pretty evenly split between financial and technical expertise, working out of a historic building in Seattle’s Pioneer Square.

They’ve landed financial backing from Silicon Valley venture capitalists, although the amount and investors haven’t been publicly announced yet, and are advertising on social and professional networking sites to recruit more customers.

And they’re still working to add more companies to their database—a painstaking task that requires importing all of the retirement account options available to any given company’s employees, so that when new customers log in, their options show up automatically. (As they note below, FutureAdvisor recently added a big fish to the collection in their old employer, Microsoft.)

Here are Xu and Lu’s lessons from the first few months of living out in the wild.

BUILDING A BUSINESS
BO LU: ”You spend a lot of time in the incubator building a product … once you’re out of the incubator, you spend a lot of time on scalable economics. Which is not something that we as hackers ever did. So rather than staring at code all day, we felt like we stared a lot more at spreadsheets. How much it costs to acquire a customer, how would this channel do, and all of those things.”

HELP WANTED
JON XU: “Shortly after Y Combinator … we were faced with, ‘Well, do we come back here? What do we do? And I think we’d always thought that this was a good area to start a company, but also, more importantly, we knew our technical networks were pretty deep up here, having been from Microsoft.”

BO LU: “This is a unique vein of talent. And we found … after comparing notes with our batch-mates who stayed in the Bay, that it was easier for us to recruit here. We had a much higher accept rate of offers, and it just wasn’t as nuts. So over PG’s [Y Combinator founder Paul Graham] strident objections, we moved.”

JON XU: “Really, you’ve got to get down to actually building a team. Building a machine that generates the actual products.”

BO LU: “No one learns how to hire during the incubator. They all learn how to hire afterward. And they all learn it on their own. … And when you compare notes, some teams do really well and some teams do really, really poorly.”

HAND-TO-HAND COMBAT
JON XU: “A lot of times to get your business started, you need to do some hand-cranking. It’s not going to be a skyrocket all the way, but there’s definitely this grind of hand-cranking the engine to get it started.”

“Because we deal with retirement products, quite often it’s knowing what investment options are in people’s 401(k) plans. … So we’re hand-cranking, essentially company by company in the Seattle area, and we actually launched Microsoft—that was a big milestone for us.”

BO LU: “Every day’s just like every other day. You make your own progress, and you make your own headway. So there are great days, like when you launch to a new company, and there are not-so-great days, like when you launch to a new company and a bunch of bugs are discovered. So that’s where we are.”

STAYING CONNECTED
JON XU: “The way I’ve heard it put, from one of our friends who founded Posterous, was that quite often after the Y Combinator experience where you have such a deep network of like-minded entrepreneurs that you’re dealing with, you kind of go your separate ways to build your own teams, and you kind of have to establish a culture for your own team. So very much by design, you have to spend a lot of time building that up rather than being interconnected with various other companies.”

COMPETITION (OR NOT)
BO LU: “People are always like, ‘Oh, what’s it like competing against financial advisors?’ And the answer is, we don’t compete with financial advisors—financial advisors love us. Which I never thought—that was super-surprising.”

“We meet with a financial advisor, and they’re like ‘Oh my God, I wish that I could give some service to the people who come to me who don’t have enough money for decades. But I can’t do it, my friends won’t do it, no one will help these people, and so I end up doing pro bono work just to be nice and be part of the community.’ But he’s like, ‘Man, if somebody could help these guys cost-effectively, that would be awesome, because I don’t have a business model to do that with.’”

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“It is the ‘silver’ age of VC/entrepreneurship. It would be the ‘golden’ age if we could fix the liquidity issues.”

Those are the words of Michael Greeley, general partner of Flybridge Capital Partners in Boston and treasurer of the National Venture Capital Association, referring to the very tight IPO market that is limiting capital-raising options for emerging growth companies. It is also an issue Greeley intends to explore this Wednesday afternoon, at Xconomy’s conference: New York’s Venture Emergence.

That’s because Greeley will be the moderator of a keynote chat with Barry Silbert, CEO and founder of SecondMarket, the hot New York broker-dealer that is doing its share to fix the aforementioned liquidity issue, in large part by creating ways to trade shares of privately held companies.

The chat between Silbert and Greeley is just one part of a fantastic afternoon of discussion and stories from some of New York’s—and the country’s—leading venture capitalists and entrepreneurs, including Union Square Ventures’ Fred Wilson, the Gilt Groupe founding team, 1stdibs CEO David Rosenblatt, RRE Ventures’ Eric Wiesen, Internet advertising pioneer Dave Morgan (now CEO of startup Simulmedia), Todd Dagres of Spark Capital in Boston—and a whole lot more.

If you don’t have your tickets already, get them fast—time is running out, and space is limited.

Greeley says he is really looking forward to his chat. Some questions he intends to ask Silbert include:

—What is the future of stock exchanges, and how companies raise capital and generate shareholder liquidity?

—What does Second Market look like in five years?

—What are the greatest risks to the business going forward?

—What regulatory issues do companies like Second Market face, and what should the government do?

And last but not least, says Greeley (who remember is from Boston): Who will win the Super Bowl? (I personally feel it will be the Patriots’ revenge).

There will also be time for you to ask Silbert a few questions of your own. We look forward to seeing you on Wednesday afternoon. Register here.

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Fifteen years ago, the expansion model of a startup was fairly linear: The first three years were dedicated to building the business domestically. Year four generally saw European expansion. And by year five, the company was starting to explore the Asian markets.

The emergence of the Web as a viable commerce vehicle, though, brought about a paradigm shift in the startup world that obliterated that model—and forced entrepreneurs to change their plans. Rather than ignoring the global marketplace, today’s smart startups need to think with an international perspective from Day One—and work quickly to expand their footprint.

Of course, becoming part of the global network during a company’s formative days (when budgets are tight and research and development is crucial) isn’t easy, even with the advances and inroads the Web has introduced. At Allegis Capital, where I am managing director, many of our portfolio companies have found that the surest path to becoming an international company is by partnering with large, multinational corporations.

It’s a strategy that might sound curious at first. Big business works at a different speed and with different priorities than the startup world. But the backing of a large corporation can not only supplement a startup’s bottom line; it can also open doors that might otherwise remain firmly shut.

Beyond that, this sort of strategic partnership can provide market analysis that is impossible for startups to gather on their own, acting—essentially—as the ultimate focus group.

Navigating Hurdles

Naturally, there are some challenges that accompany these relationships. A successful pairing takes plenty of foresight and planning. You’ll need to not only find the company that best suits your startup’s philosophies, but also determine how best to take advantage of it (and navigate the hierarchy of that company) once the deal is finalized.

Allegis portfolio company Axcient has been particularly adept at learning to make things run smoothly with its strategic partner. After striking a non-equity partnership with Hewlett Packard in July of 2010, Axcient CEO Justin Moore quickly noticed the differences in how the two companies ran their operations. To ensure that his company saw the greatest possible benefits from the relationship, Moore developed four strategies to ensure things ran smoothly on a consistent basis.

These have not only helped Axcient grow, they’ve carved a path for other startups that might be unsure of how to get the most from a big business partner. Here are summaries of the techniques Moore has shared with us while growing his company:

Triangulate—Larger organizations tend to have an overlap in reporting. They also tend to have management shuffles with relative frequency. As such, there are often multiple people whose responsibilities for different areas of the business overlap.

Rather than maintaining a single point of contact, it’s important to develop several relationships in the organization, as this allows small business owners to have multiple allies to help accomplish a specific goal. When your company works with a single individual and that person leaves the company or their position, it’s a blow to momentum, which can be deadly.

Be Adamant—No matter how solid a startup’s partnership with a larger company may be, the people running that startup are going to have to occasionally break down walls. The best way to do this is with dogged persistence.

The ugly truth is: Partnering with a startup is not going to be the biggest priority for the big corporation, but it’s certainly the biggest priority of the entrepreneur. Therefore, it’s the startup’s duty to … Next Page »

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[Editor’s note: As a New Year's exercise, we asked a select group of Xconomists to answer this question: “What’s the craziest idea out there that just might succeed?” ]

After nearly twenty years of failed attempts, I’m still a believer in the potential transformative power of the “crazy idea” of alternative Internet payment systems, particularly micropayment engines and alternate currencies.

Payment systems are simply mechanisms to streamline and calibrate the exchange of value. It’s easier to assess the relative worth of cloth from India and tobacco from America if you can translate both into standardized European coinage. Modern payment systems also provide simplicity and security through the use of trusted third-party settlement agents such as banks and credit card associations. But none of these mechanisms are built into our DNA, and there’s no reason to think that today’s systems are the final word.

In fact, the Internet brings with it the potential for so many innovative payment mechanisms as to threaten chaos. This chaotic prospect, combined with the inherent conservatism of payment system users and the understandable desire of payment providers to protect their turf, has so far doomed nearly every new payment system enabled by the Internet. The few exceptions—most notably PayPal—have survived in large part through a strong alliance with the existing players in credit cards and banking. PayPal is (like First Virtual before it) largely a security-conscious overlay on the existing credit card and banking systems.

That kind of limited innovation is more than enough for the powers that be—the large financial players who are more interested in maintaining their near-monopolies than in enabling new kinds of economic activity. Not surprisingly, however, the interests of the banks and card associations are not necessarily in sync with those of the rest of us.

From Digicash to Cybercash to BitCoin, there have been plenty of demonstrations of the technical feasability of alternative Internet payment mechanisms. And in the physical world, alternative currencies such as Ithaca Hours have hinted at the potential for a community to revitalize itself by taking control of its own money supply. In times of economic hardship like today, the poor and unemployed have traditionally reverted to barter to exchange goods in the absence of currency, but those transactions have been limited by geography and personal circles of trust. With Internet-based alternative currencies, however, … Next Page »

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In the fading months of 2011, we find ourselves in an uncertain world.

On the one hand, America is still reeling from the 2008 financial crisis, and the nation’s faith in free-market capitalism as its guiding principle has been shaken to the core.

On the other hand, Europe is reeling under the burdens of socialism and welfare economics, and the economies of entire countries no longer seem viable.

The emerging markets are growing, but the methods used are complex. China is practicing state-run centralized capitalism that is heavily controlled by policies and bolstered by subsidies, by no means a free market. India, a chaotic democracy, is caught somewhere in between.

The time has come for us to ask the question: Is capitalism still the right answer for the future of our world?

One of the fundamental flaws of capitalism that has collapsed the system is unbridled speculation. If you believe that capital is at the heart of capitalism, then speculators are at the heart of capitalism.

As it happens, the speculators have hijacked the system.

In the process, capitalism has degenerated into an unjust, unpalatable mess with speculators enjoying the lavish benefits of privatized profits and socialized losses while jeopardizing society at large with irresponsible risk-taking. These speculators add little value; move money from here to there; continue to garner multi-million dollar bonuses, unperturbed at the coming Armageddon; and are financed by government handouts. It is no wonder that Wall Street is facing the wrath of the people.

But for some of us, this was the system we believed in as the guiding principle of our lives. By “us” I mean entrepreneurs-the other constituency in the capitalistic pyramid, the one that actually creates value and reaps its rewards. This is the group that holds Steve Jobs, Jeff Bezos, Bill Gates, Reed Hastings, Larry Page, Sergei Brin, and Mark Zuckerberg, among others, as its role models. The group the speculators ride on. The group the people are not angry with, as shown by the outpouring of affection for Steve Jobs following his recent death.

The system needs to be re-engineered. In effect, the entrepreneurs need to hijack it back from the speculators and marginalize their ability to create destruction.

How do we do it? What is a reasonable framework for capitalism 2.0?

For me, the most logical next step would be to democratize capitalism in the same way that Henry Ford democratized the personal automobile and Steve Jobs and Bill Gates democratized personal computing. But we need to focus on democratizing entrepreneurship, not speculation. Speculation has already been democratized to disastrous ends, as we saw in the dotcom crash at the beginning of the millennium.

Another problem is that entrepreneurship remains the province of the elite. There is tremendously high “infant entrepreneur mortality” owing to a lack of education, guidance, and resources. Every year, 600,000 companies go out of business in America. Again and again, entrepreneurs make the same avoidable errors and end up in the dead pool.

One of these fundamental errors is chasing capital straight out of the gate. The media, business schools, and of course, the capitalists themselves have fostered a myth that entrepreneurship equals financing. This is why each young entrepreneur chases investors before doing any business validation.

In consequence, more than 99 percent of the entrepreneurs looking for financing are rejected—some because they are too early and unprepared and some because … Next Page »

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Calcbench, a new startup working out of Cambridge, MA and New York, came to being from an app design challenge put on by the people behind XBRL, a technology standard the SEC requires public companies to use in reporting financial data.

Yes, the terms app challenge and SEC did in fact appear in the same sentence. XBRL, which stands for extensible business reporting language, was developed by the SEC and the Financial Accounting Standards Board (FASB) as one of many measures to improve financial transparency among publicly traded companies. But there’s even more that can come of the XBRL use, says Calcbench co-founder Pranav Ghai, who’s based in New York.

“Nobody seems to be using the data once it’s there,” says Ghai.

So the small team at XBRL put out the call to app developers to build tools that analyze the data companies are required to report. “People are reporting the information because they have to, not because they want to,” and this contest is out to bring some more life to the system, says Calcbench co-founder Alex Rapp.

Rapp, who works out of Cambridge’s Dogpatch Labs, had been working on his own startup, Collaborative Reasoning, when he reunited with former college roommate Ghai. Both have backgrounds in the finance world, and decided to take a shot at the XBRL Challenge in August.

The Calcbench app, released Friday, plugs into the XBRL data to access quarterly documents such as earnings statements, cash flow statements, and company balance sheets. Users enter a ticker to access that information for a particular company, and Calcbench’s engine pulls all the information into a more readable, interactive format. (The SEC’s EDGAR system has also begun to display this data more interactively.)

Calcbench also plugs in its own custom calculations such as debt to equity ratios and operating margins to go beyond the information reported in the filing. Users can compare the data to past quarters or past years, and can also compare it to other companies. They can also leave notes on the documents to share with others, a collaboration artifact of Rapp’s previous project, Collaborative Reasoning, which was developing plug-ins for group collaboration on Microsoft Outlook. (That hasn’t yet captured an audience and is on the back burner for now, says Rapp.)

The financial information is already accessible through existing but … Next Page »

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David Cohen has seen this movie before. As the founder and CEO of TechStars, he knows that the first year in any city is about building community, making impressions, and proving the model. Then things get turned up a notch.

“Year one is a lot of excitement, the town really supports it,” Cohen said. “People come out to the first Demo Day and they see it for the first time as a finished product, and people talk about it. Year two, you get a much bigger audience. I’ve seen that pattern everywhere.”

Seattle is no exception. The second-ever TechStars Seattle Demo Day, held Thursday afternoon, saw attendance way up, with 350 or more investors, entrepreneurs, and insiders flocking to the SoDo neighborhood to see some of the hottest startups in town. The competition was fiercer, with 700 applicants for just 10 spots, compared with 400 a year ago.

And the money was flowing faster—as of Thursday’s demos, nine of the 10 proto-companies already started raising financing rounds, TechStars Seattle director Andy Sack said.

“Last year, the companies coming out of TechStars 90 days after Demo Day had successfully raised over $2.5 million,” Sack said. “This year, coming into Demo Day, the companies have already raised over $3.5 million.”

Here’s a rundown of the 10 companies that showed themselves off Thursday evening, with some key notes from the presentations. We’ll have more from Cohen later, as he looks at the trends in companies and incubators overall, and some more thoughts from Sack on year two of the Seattle TechStars experience.

Beamit Mobile
Tagline: Enables convenient international money transfers from the U.S. to a mobile phone abroad
Beamit is targeting the huge market of international remissions—the money that immigrants send back to friends and relatives in their home countries once they get to America and start earning cash. That amounts to $325 billion globally each year, CEO Matt Oppenheimer said, with 80 percent handled outside the traditional banking system.

Beamit seeks to make those transfers easier and cheaper by using mobile devices and the Internet as a platofrm. People in the U.S. will be able to send money to a virtual wallet in another country online or through a mobile app, which the recipient could either spend from their device or cash out at a traditional transfer office.

The first test market is the Philippines. Beamit can make transfers free for its most loyal customers, Oppenheimer said, which implies that Beamit makes money on fees of some kind. The startup already has closed a $750,000 convertible note, and is raising a Series A round.

Bluebox Now
Tagline: Turning brand advertising into daily viral campaigns.
The former employees of Pelago, which was acquired by Groupon, have a platform that allows retailers and other brands that offer loyalty or rewards programs to increase consumer spending by offering casual games as a hook, rather than dry, boring email campaigns.

The loyalty market has more than 2 billion memberships, but two-thirds of them (66 percent) are inactive, co-founder Chad Reed said. Early tests show the concept has shown a ten-fold increase in the use of loyalty programs, Reed said.

Customers include Murphy USA, which operates gas stations like those seen at Wal-Mart locations, and Caesar’s Entertainment, the casino company. Bluebox Now is raising a $500,000 round, with $100,000 already committed as of the presentation.

EveryMove
Tagline: Rewarding and inspiring people to a healthier lifestyle.
One of the health-minded startups on stage Thursday, EveryMove seeks to connect consumers with rewards from their employers, health insurers, and other brands by collecting, tracking, and visualizing health-related data. So, if a user checks into their gym via Foursquare and completes a series of runs via Runkeeper, they could qualify for a discount from their insurance company.

In one of the most energetic presentations of the day, co-founder Russell Benaroya pitched this as a social movement, a huge business opportunity, and a no-lose proposition for everyone involved. Advertisers get targeted access to health-conscious people, employers and insurers and … Next Page »

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Startups usually relish disruption. For a Silicon Valley entrepreneur, there’s no brighter badge of honor than being able to say that your company reinvented a product category, sweeping away older competitors’ business models in the process.

But these days, many of the disruptors are being disrupted, as the traditional system of incentive-based stock options for startup employees comes under strain. Part of the turmoil is coming from within, in the form of employees and former employees who own options or stock and are itching to see some financial rewards, even if their companies haven’t yet achieved a traditional “exit” in the form of an acquisition or public offering. And part is coming from outside, in the form of businesses building new marketplaces where employees can turn their shares into cash.

The emergence of a so-called secondary market for employee shares is an increasingly vexing issue for many startup CEOs, who say it’s interfering with their ability to attract and retain talent. But by the time this is all over, these executives and their boards may well be forced to rethink the way they keep employees loyal, the way they govern stock ownership, or both. Today we’ll take a close look at one of the companies behind this change, New York-based broker-dealer SecondMarket.

The story starts with options, which are traditionally doled out to employees of early-stage companies as a form of deferred compensation. These options, which typically vest over the course of four years, are supposed to incentivize employees to stick around and work harder by dangling the prospect of a big payoff if the company eventually gets acquired or goes public. When options vest, it means employees have the right to buy a specified amount of stock, typically at a low price called the exercise price. The presumption is that they can make money once a company is sold or goes public by buying shares at the exercise price and immediately selling them at a higher market price. Employees who leave a company typically must exercise their vested options within 90 days or lose them.

Plenty of Microsofties, Googlers, Yahoos, and alums of other public technology companies have grown rich on their options—and the investments they pour back into the startup ecosystem are part of what makes Silicon Valley go around. But for companies that are still privately held, there’s a growing flaw in the system. Back in the 1990s, when incentive-based stock option packages became common, it was reasonable to expect that a company would achieve some kind of an exit—either an acquisition or IPO—within the four-year time frame, making the notional value of employees’ options very real. But over the last decade, that timeline has been stretched out dramatically, thanks to a myriad of factors that make going public far less attractive. So employees and alums of even extremely successful pre-IPO companies like Facebook, Twitter, Zynga, and Yelp are being asked to sit on their stock for much longer.

In classic entrepreneurial style, a few financial firms are now trying to relieve some of the pressure by connecting startup employees and alums with outsiders who’d like to buy their shares. Secondary markets are hardly a new invention: firms like San Francisco-based Industry Ventures have spent at least a decade in the business, typically offering limited partners in venture capital funds a way to cash out before the funds mature. But the idea that startup employees should also be able to sell their shares on the secondary markets is entirely a product of the Facebook era—and the two companies pushing the concept hardest are SecondMarket and its main competitor, San Bruno, CA-based SharesPost.

I’ve spent some time recently speaking with executives at SecondMarket and learning how their business works. There’s been a lot of fuss around the company in the tech and business media; it’s often been cast as a bull in a china shop, upsetting the mechanisms startups use to … Next Page »

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There’s no doubt that managing a biotech company is an enduring challenge, even during less tumultuous economic times. Now, entrepreneurs are contending with resources that are incredibly tight, an economy that is unsettled, a stock market on a roller-coaster ride, and research and development budgets that are being slashed. The stewardship role entrusted to the management teams of biotech companies has become especially tricky as they are required to make tough choices that balance the needs of investors and the pursuit of scientific discovery. They must also manage the chaotic world of innovation within the regulatory boundaries of FDA approval process, and give freedom to creative scientists without letting go of the fiscal discipline.

So how are biotech companies handling the pressure? At BDO USA, our analysis of the 10-K SEC filings of publicly traded companies listed on the NASDAQ Biotechnology Index (NBI) over the last four years provides a window into the impact of the economic turmoil on biotech’s operations, and strategies that management teams are using to remain financially viable. For the purpose of the analysis, biotech companies were classified as “large” (between $50 million and $300 million in revenue) and “small” (less than $50 million in revenue).

Here are the major findings:

Cash is King

An assertion perhaps no more critical than in the biotech industry, where cash and liquidity are really strategic assets. No matter how talented and innovative a company’s research team is, or how promising the technology they are developing, all comes to naught if there is no ability to continue to fund such efforts and the company runs out of cash. According to our analysis, NBI constituents—despite the turbulent markets and global recession—managed to maintain a very stable level of cash: the equivalent, on average, of over 2.5 years of R&D spending. However, maintaining liquidity has come at the expense of spending on R&D, a trend also seen at big pharmaceutica companies. The good news is that despite two consecutive years of R&D cutbacks in 2009 and 2010, biotech companies still managed to achieve double-digit growth in average revenue.

Selective Innovation

But if R&D spending is dropping, it’s logical to ask whether the biotech sector is suffering a decline in its desire to pursue new drugs, and what this will mean for product development. Are biotech companies becoming less innovative? From our perspective, the answer appears to be no, at least not in the near future. Biotech companies appear to be maintaining their average headcount, which is encouraging, but the spending per employee has gone down. What appears to be happening is that management teams are being more selective—sometimes strategically and at other times due to necessity—by funding certain programs ahead of others.

In addition, the frequency and significance of strategic partnerships and collaborative arrangements between biotech companies and pharmaceutical companies have been increasing over the past years. This has enabled biotechs to fund some R&D activities from payments under such collaboration deals at times when they don’t have products that are being sold commercially. As such, collaborative arrangements have become an essential financial lifeline for biotechs.

However, a word of warning. As big pharma cuts back on their R&D spending due to significant pressure to show a return on their R&D spending, management teams of biotech companies should expect to see a higher level of diligence and scrutiny from pharma companies before they fund collaboration deals. Under such a scenario, a careful and objective analysis will be critical in determining which projects and R&D efforts have the best chances of success in getting through all stages of the multi-year product development cycle. The dilemma for management teams will be whether it is better to delay certain R&D projects to conserve cash for projects that may have a better chance of commercial success.

The Role of Capital Markets

When it comes to accessing capital markets for product development, equity remains the top source of financing, according to the 10-K analysis. In 2010, 51 percent of smaller companies were able to raise an average of $64 million equity financing. This shows a promising rebound as companies are approaching pre-recessionary levels—61 percent of smaller companies raised financing in 2007 and the average value was also $64 million. Therefore, investors continue to have an appetite for investments in the biotech sector, but have become more selective.

Backers of biotech companies make huge investments and clearly want to maximize returns on their investment. Maintaining a fine balance between innovative curiosity and creating meaningful opportunities to generate shareholder returns promises to become more and more challenging. Companies will need to remain flexible to innovate not only in core scientific areas but also in their business models and operational structure in order to thrive in changing market dynamics, and fulfill the critical mission of making a difference in the lives of people globally.

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Lighter Capital, Seattle’s newly rebranded revenue-based financing startup, is trying to drum up more applications from “weird stuff that makes money” by promising it will lend up to $500,000 to at least one company that applies in August. The winner has to fit Lighter Capital’s requirements—generally speaking, companies that have “a proven revenue model and healthy gross margins.” Lighter Capital is led by CEO Andy Sack and VP Randall Lucas, who says the startup has invested more than $1.1 million in the past six months, and is on track to nearly double that pace.

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I recently had the pleasure of taking a two week academic trip to China with Babson’s MBA program, where several dozen of my classmates and I were led through Beijing, Dalian, and Shanghai by the inimitable Robert Eng. During the course of the journey, our group visited with government officials, leaders from state-owned enterprises, and a number of businesses operated by domestic and foreign owners. While there are many interesting and non-trivial idiosyncrasies of doing business in China, such as the need for government contacts, I thought it would be more informative to share some of the broader business trends that became clear during the course of our visit.

First, China is beginning to capture more of the value chain. As the world’s third largest manufacturer, China has developed a solid reputation as a nation that builds products for Western companies to attach their brands. Apple is one of the most famous examples of this. Perhaps more surprisingly, Nike and Reebok both have their shoes manufactured in the same facility. Li Ning, China’s leading sports apparel maker and the number four sports apparel company in the world, also has its shoes made there. If you’ve heard of Li Ning, you’re ahead of the curve. If not, you probably will soon. Li Ning has begun opening stores in the United States and other countries overseas. In the U.S., it decided to launch its pilot store in Portland, OR, which seems like an odd choice until you realize that it’s right in Nike’s backyard. It’s a bold statement from a bold company and serves an appropriate example for the changing mentality of Chinese business; no longer content with the margins available to them making things for others to sell, the Chinese are now looking for ways to move up the value chain and capture the margins commanded by being a globally recognized brand.

Second, China is starting to look inward for markets. While the rest of the world is still staggering from financial crisis to financial crisis, China’s chugging along at a brisk 9 percent annual growth rate. Shanghai has joined the list of top tier metropolises, on par with London and Moscow, complete with a Starbucks and a McDonald’s around every corner. Shopping malls are awash in luxury brands. With that kind of affluence at home comes increased spending power, and Chinese companies are beginning to recognize the potential of the domestic market. (By Chinese companies, I also mean the Chinese government. State-owned enterprises still command roughly half of the country’s industrial assets, and the government has tentacles in just about every successful business in the country, private ownership or no.) As evidence of this, the 12th Five Year Plan explicitly discusses the yawning trade imbalance that China has created with the U.S. and other nations, and proposes to address this dependence on foreign consumption by directing more goods to the domestic market. It’s uncertain what the government will do about Chinese households’ astronomical savings rate.

Third, national stability is not a guarantee. Incidents of social unrest have been growing more frequent in the past couple years. Chaffed by a widening wealth disparity and the trampling approach to development, Chinese citizens are expressing their dissatisfaction in a way that makes government officials and many members of the business community nervous. Restrictions on freedom of speech and the flow of capital have done a great deal to boost the Communist Party agenda of security and growth, but they’ve also created an economic and social pressure cooker. The 12th Five Year Plan seeks to address these concerns by explaining how the government plans to handle rising inflation and housing costs (regulatory controls), the income gap (higher taxes for the rich), and the blistering pace of development (cleaner environmental standards and lower growth targets). Perhaps more revealing, social stability was a concern voiced by several businessmen we visited during the trip. One Chinese business leader who spoke to our delegation put it especially elegantly: “China will continue to grow as long as the Communist Party is in power. The Communist Party will stay in power as long as China continues to grow.”

The state of Chinese development offers an interesting puzzle: free market incentives bounded by strict financial and political controls. The tremendous opportunities of doing business there are matched by equally tremendous challenges. From this point in history, it almost seems possible that Communist China will continue growing in perpetuity, achieving global dominance in our lifetimes. Or the entire system could collapse spectacularly, and we will ask each other why we didn’t see it coming. 

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FaceCash, a mobile payment system launched by Palo Alto, CA-based Think Computer Corporation and profiled by Xconomy in February, said today that it has shut down operations in California and is refunding deposits made by California residents. The company says it determined that it would was unlikely to receive a license from the state to conduct money transmissions, thanks to provisions of a 2010 California law that imposes higher financial stability requirements on companies that move money within the United States. FaceCash said in a statement it can meet the law’s minimum $500,000 net worth requirement and the $750,000 aggregate surety bond requirement, but added that “the unfortunate reality is that the California Department of Financial Institutions (DFI) requires licensees to have far more than the dollar figures specified by the statute.” The company added, “We are incredibly sorry for the inconvenience and hope that we can remedy the situation soon.”

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You might call it the perfect up-and-coming Boston tech startup. A mix of higher education, financial services, and a global market. The brainchild of an MIT student entrepreneur. A company with the support of a young, well-connected Boston venture capitalist and many notable angel investors.

I’m talking about Cambridge, MA-based peerTransfer, which has 17 employees split about half-and-half between Dogpatch Labs in Kendall Square and an office in Valencia, Spain. Founder and CEO Iker Marcaide, 28, started the company in part to address some personal pain he experienced as an international student. It all started when he had to pay his MIT tuition from a European bank, and got stuck with high transaction fees and a bad exchange rate that cost him thousands of dollars.

Inspired by that experience, his startup has zeroed in on its target market—helping international students make online payments to U.S. colleges through peerTransfer’s website. The company’s software plug-in is now being used by schools such as Suffolk University, Wellesley College, Reed College, Bryn Mawr College, and the College of Wooster. (PeerTransfer is demoing its technology at the Finovate conference in San Francisco this week.)

The first time I spoke with Marcaide was last June, almost a year ago. He was only a few hours removed from a late-night beach party in Barcelona, where peerTransfer had just won a 20,000-Euro prize at the HIT Global Entrepreneurship Competition. Marcaide, a native of Spain and the son of an astrophysicist, is an engineer by schooling who worked as a management consultant before getting his MBA at MIT’s Sloan School of Management.

Last fall, peerTransfer raised a $1.1 million seed financing round from Spark Capital, Project 11 Ventures, and angel investors including John Landry, Ken Morse, Roy Rodenstein, and Dave McClure. Spark Capital’s Alex Finkelstein, a general partner, led his firm’s investment in the startup. He recently told me about the first time he met Marcaide.

It was at a warm-up event for the MIT $100K Business Plan Contest, last spring. Finkelstein was there for a series of short meetings with entrepreneurs, and Marcaide wasn’t even on his schedule. But the young Spaniard (who comes across as quite friendly without being pushy) came in and started talking to the VC about his startup. The two hit it off, and Marcaide followed up with a phone call a few months later, after peerTransfer had hit some more milestones.

“We met on a Thursday and had a signed term sheet on Tuesday,” Finkelstein recalls.

What stands out to Finkelstein is that peerTransfer is trying to solve a problem that is “painful for the student and painful for the school,” he says. Marcaide says his service can save students on the order of $1,000 a year or more, and saves schools the time and hassle of dealing with unidentified wire payments and manual posting into student accounts. PeerTransfer says it saves students money by collecting their home currency, bundling purchases of U.S. dollars in the market, and then … Next Page »

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As examples of ultra-fast growth in the tech world, people like to talk about Groupon and Zynga. While they are phenomenal success stories, neither of those companies is publicly traded yet—nor, for that matter, are Twitter or Facebook. Well, how about a different kind of tech company that started in 2008 and held its IPO today?

That would be RPX, a San Francisco-based “defensive patent aggregation” company with Seattle roots, whose venture investors are in Boston, London, and the Bay Area. RPX filed for an initial public offering in January and says today it has raised $159.6 million in an offering underwritten by Goldman Sachs and Barclays Capital. The firm sold about 8.4 million shares at $19 per share, with trading to begin on the Nasdaq today. (Pricing above the anticipated range of $16-$18 was announced this morning.)

What’s remarkable is how fast a ride it has been for RPX (NASDAQ: RPXC) and its investors, which include Kleiner Perkins Caufield & Byers, Charles River Ventures, and Index Ventures. The patent rights firm was co-founded just under three years ago by John Amster and Geoff Barker, both former execs at Bellevue, WA-based Intellectual Ventures, the controversial invention and patent licensing company led by Nathan Myhrvold.

RPX’s approach is different from IV’s. As Amster told me last year, RPX focuses much more narrowly—on acquiring patents that its corporate customers pay for access to and can use for defensive purposes, to deter or beat back patent infringement lawsuits. Members pay a subscription fee—a fixed percentage of their operating budget, typically between tens of thousands and a few million dollars—to access the RPX portfolio. And RPX pledges not to sue anyone, unlike IV.

Here’s why RPX is so interesting financially. Its revenue tripled from about $33 million in 2009 to about $95 million in 2010. The firm has been profitable since 2009, with nearly $14 million in net income last year. What’s more, it has the potential for a billion-dollar market cap after its IPO. And its membership group has grown to 80-plus companies and now includes giants like Cisco, Google, Nokia, Samsung, Sony, Verizon, and Zynga.

It’s a simple proposition—to help companies lower their patent-litigation costs or avoid them altogether. And paying licensing or access fees seems to be getting more popular among … 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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Seattle-based Bobber Interactive, which makes a “gamified” software platform to help banks attract young people to money management, has raised about $1.1 million in Series A financing. That’s a bit more than half of the offering Bobber has in the market, according to an SEC filing today. Bobber says the round was led by PEAK6 Investments, with participation ffrom Dove Capital Partners. Bobber is led by co-founders Eric Eastman, Scott Dodson, and John Bito. As Xconomy’s Greg Huang wrote last year, the idea is to make money management fun and social for kids—hopefully landing them as customers for life, or at least a long time. The company sees its potential market as some 30 million young consumers who play games on Facebook, representing an estimated $200 billion in discretionary income each year. Bobber plans to start testing its product on Facebook in the months ahead, and also is working with partner Plastyc to roll out an associated payment card.

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Former venture capital analyst Lenny Grover left his gig at Waltham, MA-based Longworth Venture Partners to make a sustainable business out of a personal hobby: sophisticated stock trading.

No, he’s not working on yet another online trading platform, but is instead looking to the hot field of data and analytics to bring individual investors the information that big institutional investors, particularly hedge funds, have at their disposal when they make trades. It’s about bringing “Wall Street-caliber data and tools to Main Street,” Grover says.

Grover started developing the product, called Screener.co, in August while still at Longworth, left to work on Screener.co full-time in November, and late last month debuted the technology at the San Francisco entrepreneur conference Launch, put on by Mahalo CEO Jason Calacanis.

Grover says the service is hitting a customer sweet spot in several ways. For one, it’s only charging $24.95 per month— about 1/100th of the cost of existing tools that provide similar sets of data to individual investors. (Actually, it doesn’t even cost that much until April 1; Screener is free in its beta period this month). Grover licensed the stock data from Thomson Reuters on a piecemeal basis, and he builds the actual calculations and analytical engine, which is why he can put out his product for so cheap. Grover likens this new piece-by-piece distribution of stock data to how iTunes broke up albums and allowed customers to buy individual songs. Supplying sophisticated stock information to individual investors is also a new market for Thomson Reuters, he says.

Grover, who studied computer science at Cornell and worked for Louisville, KY-based Chrysalis Ventures prior to Longworth, says he first saw the need for sophisticated stock data at the individual level after the markets tumbled in 2008.

“I had this in the back of my mind since March 2009 when I saw that the whole world was on sale,” he says. “And I didn’t have the tools to analyze stocks to figure out what the best investment opportunities were. I saw this need from the individual investor perspective.”

And his venture capital background played a part. “Even if you’re doing private investing, you’re looking at companies and valuations,” he says. “It informed a lot of the ways I built this tool.”

So what else makes Screener.co different from what’s out there? The service paints a much more complete picture of the global stock market than free tools like Google Finance or Yahoo! Finance, Grover says. They offer information on roughly 6,000 to 9,000 stocks, whereas Screener.co tracks data for … Next Page »

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A friend recently complained that my tweets are often along the lines of, “Boring company raises X million dollars.” And this is a guy who works in the tech startup community.

But, au contraire mon frère, they are only boring if you don’t know the stories behind the companies and their deals. The tales of hardship, breakthroughs, betrayals, fights with investors, all that good stuff. (Unlike me, you probably saw “The Social Network.”)

OK, but without all that context most companies do sound, well, pretty boring. Not everyone can be Facebook, Amazon, or Groupon (thank goodness). Not every startup can try to create “The Matrix” for businesses, or a flying car, or cure male baldness, or make everything taste like bacon, or have a founder who, by all accounts, shouldn’t even be alive.

Yet they soldier on. And in technology and business, as in life, it’s often the boring stuff that survives and ends up killing the competition. So, point taken, I decided to make my own short list of the Boston area’s most boring-sounding tech companies that readers should actually care about. (Yes, I can throw out backhanded compliments with the best of them.)

Actually I had compiled quite a long list, so maybe this will become a regular feature. I won’t rank these companies by boredom level—how well would that go over?—but I’ll tell you what makes each company a snoozer at first, and then why it’s actually quite interesting.

I did my best to avoid old chestnuts or well-known firms. Here are 10 companies that have gotten my attention recently, in alphabetical order:

Currensee (Boston, MA)
This startup sounds pretty boring unless you’re a professional investor. Currensee, led by CEO Dave Lemont, provides automation and social-network services to help day traders invest in world currency markets. (My colleague Wade profiled the company back in April 2009.) As of last fall, the startup had signed up more than 7,000 members, and last month it passed the $2 billion mark in trading volume in its social network that lets investors follow expert traders. Lesson learned: sign up rich customers.

Cyber-Ark Software (Newton, MA)
Global information security provider. Manages privileged users, applications, and sensitive data. Improves compliance and productivity, and protects against insider threats. (Yawn.) How about being profitable with 200 new customers and 37 percent revenue growth in the past year? Cyber-Ark, founded in 1999 and led by CEO Udi Mokady, says it has some 850 corporate customers in 50-plus countries (including more than 35 of the Fortune 100). Now that’s security.

Dyn (Manchester, NH)
You might not know what DNS (domain name system) is or how it works, but I bet you’ve heard of Twitter, Groupon, and Zappos. Those are some of the big customers that use Dyn’s DNS and Web hosting services. DNS is so boring I can’t even explain what it is, but it’s crucial for Web page delivery. Here’s what you really need to know: Dyn (pronounced “dine”), led by CEO Jeremy Hitchcock, is … Next Page »

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[Editor's note: This post was co-authored by Moss Adams partners Ken Salgado (based in Southern California) and Derek Dowsett (Silicon Valley).]

It’s early in the year, and although there are a number of positive trends building, it’s hard to make overly optimistic predictions. But based on the data we currently have, 2011 could be a very strong year that marks a major milestone in the economy in general and in the technology sector in particular. The chief expectation right now is that the IPO markets will return, mergers and acquisitions will continue their upward trend, and investors and entrepreneurs will get rewarded with increased valuations.

Before we look too far ahead, though, it’s important to note that we’re in the middle of a moderate recovery that must continue for a robust forecast to play out. The momentum began to take hold in the third and fourth quarters of 2010, with increased deal flow, merger activity, and a strong transaction pipeline going into 2011. Transactions were completed at a hurried pace, and valuations are trending upward. We’re seeing increased inbound interest from strategic acquirers, oversubscribed venture rounds, and a long list of IPO hopefuls with registration dates pegged between the second and fourth quarters of 2011.

The technology sector continues to lead all industries in terms of post-IPO performance for new listings in 2010, and we expect this trend to continue and even increase, given those expected to file in 2011 and 2012.

There’s still lots of money on the sidelines, and while more of it will be put to work in 2011, it will continue to be at a cautious pace and with intensive due diligence. And it’s important to note that even a slight negative connotation in the global economic landscape could bring this to a halt.

A number of companies are in registration today. In addition to LinkedIn’s recent filing, the potential IPO pipeline includes big brand-name companies such as Groupon, Zynga, Facebook, and Twitter. If successful, these market leaders will allow the next tier of companies to enter the markets, making 2011 truly a breakout year. We’re seeing an unprecedented number of pre-IPO technology companies aligning themselves to enter the markets in 2011—but will their efforts be rewarded with an open window? It appears so. Even in the down economy of 2010, in terms of IPO activity technology was second only to the financial services industry.

Early-stage funding should continue to increase in 2011, but we’ll also see later-stage deals with large values. Many investors are passing up modest returns offered via M&A and are instead … Next Page »

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