Founder’s Co-op, the Seattle-based early stage investment group headed by Andy Sack and Chris DeVore, has closed its second fund at just under $8 million. That’s a significant step up from the first Founder’s Co-op fund, which DeVore says was about $2.5 million—a shift that reflects both the growth of Seattle’s startup scene, and a decision have more reserve capital on hand for follow-on investments.

Founder’s Co-op operates on an interesting model, one that Sack has described as a “peer-to-peer, seed-stage fund” drawing from a wide pool of investors and entrepreneurs. As the name reflects, Founder’s Co-op touts its ties to experienced startup hands around the region—just about anyone you can think of in the Seattle area, and a few from beyond the region, are listed among the nearly 60 “mentors” on the website. The number of limited partners involved in the new fund is big, with 66 investors listed on the regulatory filing.

“We think of Founder’s Co-op as a platform—not just for me and Andy to do stuff, but for a whole community of folks who have a track record in the startup community,” DeVore says.

Founder’s also is connected to the Seattle TechStars program, which Sack directs, and the fund has stocked an office building in the bustling South Lake Union neighborhood with portfolio companies. Typical early investments are in the $100,000-$200,000 range, which leads to between $500,000-$750,000 over the long run, DeVore says.

Notable investments so far include Sparkbuy, the comparison-shopping startup acquired last year by Google; healthcare marketing startup Appature; gamification startup BigDoor Media; and Urban Airship, the Portland, OR-based app services startup.

The fresh SEC filing for the new fund indicates the new pool could grow to $10 million, but DeVore says this will likely be the final fundraising for fund No. 2. Nearly $3 million was originally raised in late 2010 as an inside round from the limited partners in the first fund, and some of that money has been committed. The balance of $5 million was added more recently, reflecting an expanded pool of investors, DeVore says. Founder’s Co-op probably won’t raise another fund until 2013 or so, he says.

Comments | Reprints | Share:          

One day, Rosemary Bayer came to her friend Kathleen Norton-Schock with an idea sparked by her experience as a volunteer for the Michigan Council of Women in Technology (MCWT): How could a nonprofit better manage volunteers and resources while improving communication with grantees? Though they didn’t realize it at that moment, Bayer’s idea became the impetus behind ardentCause, a Ferndale, MI-based tech startup that was recently selected as a recipient of Detroit’s First Step Fund financing. ArdentCause is also one of Michigan’s first LC3 hybrid enterprises, an IRS designation created to bridge the gap between nonprofit and for-profit investing by providing a structure that facilitates investments in socially beneficial, for-profit ventures.

Bayer and Norton-Schock seem like the perfect pair to go into business together. They both are encore entrepreneurs with long, successful tech careers behind them. They both have a passion for “doing good”—in fact, they met as volunteers for the MCWT, an organization that helps guide women toward careers in math and science. Bayer, who before ardentCause invented NetBackup (now a product of Veritas) and was an executive at Sun Microsystems, possesses a voracious mind, while Norton-Schock crackles with energy. Both Bayer and Norton-Schock embody an emerging category of entrepreneurs—seasoned professional women looking for a second act that reflects their true calling. ArdentCause also reflects the challenges that female entrepreneurs can face when they’re seeking capital in the male-dominated investor circuit.

Bayer says ardentCause came to be mainly because she had plenty of time on her hands once her daughter moved out of the house to attend college.

“I started working longer hours until finally one day someone said to me, ‘What are you doing?’” Bayer says. Bayer realized she had gone as far as she could go at Sun Microsystems and was ready for a change, so she proposed her idea to Norton-Schock.

“We had heard horror stories about foundations giving X money for decades but not knowing how to measure the real impact,” Norton-Schock says. “Nonprofits themselves want to know they’re making a difference.”

Bayer set out to invent software that would allow nonprofits to track, on a daily basis, their results. Called CauseEffectz, the cloud-based software enables funding foundations and the nonprofits they support to accurately measure activity and resulting outcomes, graphically communicate those outcomes, and better chart progress and successes.

“We facilitate communication with funders and donors,” Bayer says. “Nonprofits can choose which pieces of data to share so that it has a collective impact. We’ve started at the front edge of the movement for accountability. We believe we’ll see other products in this space, but we’re ahead of the pack.”

While the current economic climate has certainly had an impact on the nonprofit sector, it’s still big business. Comprising nearly 1.7 million organizations nationwide, the industry accounts for … Next Page »

Comments (1) | Reprints | Share:          

It’s an exciting time to be an entrepreneur. There are no shortage of problems to solve, ever-lowering barriers to entry, and near-ubiquitous access to low/no-cost technologies, which makes damn near anything possible. I adore working side-by-side with those who also see the world as an experience in which to participate rather than just consume. I am constantly energized and inspired by their works. These are my people, ambitious and proud.

My business being invention and intervention during a company’s earliest stage, I spend a good deal of time in different American cities working with entrepreneurs and those who advocate on their behalf. Having the opportunity to serve these folks while experiencing their local entrepreneurial networks firsthand, I have observed a number of too-disparate, closed-loop entities along the way that are effectively guiding startup community members towards market viability. Historically, entrepreneurs have existed at one end of the ecosystem with investors at the other. A startup has to leap the chasm of proving their business scalable and, as such, investment worthy. The accelerator model pioneered by Paul Graham with Y Combinator disrupted that century-old model, moving down the chain halfway closer to budding entrepreneurs and providing them with sustenance in the form of small investments, as well as mentorship and a community of fellow entrepreneurs off which to bounce ideas.

It is my contention that the proliferation of startup accelerators and the subsequent realignment of early-stage capital behind the best of them to serve as a pipeline and viability filter has revealed a kink in the overall process of starting up for an overwhelming majority of entrepreneurs. As a result, thousands of would-be founders are currently mired in the “dead zone” that exists between ambition and minimum viability. The accelerator model, while certainly a net-positive for entrepreneurship, only serves the small minority of today’s entrepreneurs—those with technical expertise or a co-founder with the same who can clearly and concisely convey an idea. In aggressively cultivating the large majority, you direct the flood of ambitious folks waiting to be guided toward viability to existing early-stage market filters, fundamentally changing the landscape of entrepreneurship while simultaneously realigning the existing network of capital behind filters even further down the chain and closer to entrepreneurs.

Most every market—be it thriving, dormant, or beginning to burgeon—has more than enough resources to catalyze and drive a fertile startup community, including Detroit. You all have the raw ingredients: advocates, entrepreneurs, and investors. It’s not a question of resources, but how they are directed or, in this case, misdirected. Who you consider to be an entrepreneur or, more specifically, what your allocation of attention and resources would suggest, is fundamentally flawed. After engaging with hundreds of entrepreneurs on the subject, I find that for a city and its investment community, there are actually five types of entrepreneurs, and that acting passively … Next Page »

Comments (3) | Reprints | Share:          

In San Diego, Connect is the non-profit organization that reaches into most corners of the local innovation community. Connect likes to say that it has assisted in the formation of more than 3,000 technology and life sciences companies in the area, and more than 50 cities around the world have emulated its programs for mentoring entrepreneurs and supporting startups.

Under CEO (and San Diego Xconomist) Duane Roth, Connect began issuing a quarterly report in 2009 to provide a more comprehensive measure of the relative health and wealth of San Diego’s innovation economy. Connect also hired a full-time lobbyist early last year to represent the interests of San Diego’s innovation community before legislators in both Sacramento and Washington, D.C.

These two things have come together in the latest innovation report, under a section in the full report that outlines “Seven Innovation Policy Ideas to Spark an American Recovery.” Roth tells me they encompass recommendations that San Diego’s life sciences and high-tech leaders have pulled together over the past two months as legislative priorities to be pursued over the next year.

Yet as Jessie Womble, Connect’s associate director for public policy, puts it, “We can’t expect to get anything passed that’s just for San Diego, so this is part of a national agenda.” In other words, these ideas should also be good medicine for the health of other U.S. regions with innovation clusters.

I’ve distilled the seven ideas with some background information from Connect below:

—Increase the monetary cap on direct public offerings by small companies to allow new opportunities for emerging companies to raise capital.
The SEC adopted “Regulation A” to provide smaller companies a less burdensome process to raise capital through direct public offerings. The cost of compliance with regulatory burdens, however, makes the $5 million cap unworkable and little-used. Proposed legislation would increase the outdated cap under Regulation A from $5 million to $50 million, allowing emerging companies to raise new capital through “mini-offerings.”

—Create an incentive for U.S. corporations to “repatriate” their foreign earnings from overseas and direct the capital flow into emerging technology research and commercialization.
H.R. 1036—the Job Creation and Innovation Investment Act of 2011—accomplishes this by setting a zero percent tax rate for global companies that return their … Next Page »

Comments (1) | Reprints | Share:          

Bizdom U, the Detroit incubator backed by Dan Gilbert, will now be nurturing even more local entrepreneurs thanks to a change in its business model.

Starting with the fall session, which began on October 17, Bizdom switched to a model similar to that of TechStars or Y Combinator: After undergoing a rigorous screening, 30 startups will each receive $10,000 in seed money, plus $4,500 per founder, in exchange for an 8 percent equity stake and a promise to locate their business in Detroit. While at Bizdom, the entrepreneurs will spend three months in the collaborative Launch Lab, where they’ll receive training in marketing, sales, and business, as well as intenstive coaching and feedback from serial entrepreneurs and other business experts. At the end of the Launch Labs program, entrepreneurs will be put in a room with multiple investors, where they will have the opportunity to pitch for the necessary funding to take their business to the next level.

With its previous business model, Bizdom U invested more seed money, but took a 60 percent share of the startup. Ross Sanders, Bizdom’s CEO, says they made the switch to “open up the funnel.”

“We realized we were missing a lot of great startups who didn’t feel comfortable giving up majority ownership right off the bat,” Sanders says. “We decided we’d offer less money in order to get more applicants.”

Bizdom U offers a separate program called the Idea Generator for those who have a business idea they want to explore, but who aren’t ready to devote their lives to pursuing it yet. The Idea Generator is an eight-week, part-time program held at night designed to show aspiring entrepreneurs how to break down their idea, research it, and turn it into a business.

“With the Idea Generator, you don’t have to quit your day job,” Sanders says. “It allows people to play with their idea before making the full-time leap.”

Bizdom U was established in 2007, when the atmosphere in Detroit was pretty bleak. Comerica Bank had just packed up and left town, and some once-thriving auto factories were vacant buildings.

“Dan was one of the first to say that Detroit needs to transform from a muscle economy to brain economy,” Sanders says. “He wanted to take empty buildings and fill them with work spaces for entrepreneurs.”

The challenge back then was that there wasn’t a one-stop shop where entrepreneurs could go for training, coaching, funding, mentorship, and access to clients and investors. Gilbert founded Bizdom U as a sort of factory to meet those needs.

“But instead of building cars, he wanted to create successful entrepreneurs,” Sanders says.

Today, Bizdom U sustains operations through proceeds received from its share of ownership in the businesses it incubates. Its goal is to be self-sustaining while creating waves of entrepreneurs and new businesses, all while adding to the general buzz in Detroit.

“Dan Gilbert is passionate about the role of entrepreneurs in urban revitalization,” Sanders says. “He’s a man on a mission.”

Comments | Reprints | Share:          

The biggest news out of Xconomy Seattle this past week is the announcement of Mobile Madness NW, our December 6 half-day forum presented with the Washington Technology Industry Association and hosted by F5 Networks.

We’ve got a stellar lineup of speakers, including Wesley Chan from Google Ventures, Tom Alberg from Madrona Venture Group, Bernie Yee from Bungie Aerospace, Giordano Contestabile from PopCap Games, and Mike McSherry from Swype.

There’s tons more to come—we have some killer startup demos lined up, and a few more special things to spice up the program. But the main point is that you have to get your tickets now to get the best rate. Don’t miss the special discounts on offer for startups and students.

Even though event planning is a monster load of work, I still managed to cover some pretty interesting ground in the past week. And just to keep me honest, I’ll even throw in a few things I couldn’t get to.

—I chatted with Kabir Shahani of Appature for the latest Xconomist of the Week, a regular feature where we profile one of our star guest authors. Kabir talked about the challenges of growing a startup beyond its home base for the first time, which Appature’s done recently by adding remote sales and marketing offices near major clients across the country.

—Research firm CB Insights crunched the numbers on third-quarter venture capital financing and found another up quarter, which could point to the biggest year for VC in a decade, if the investors keep the trend going. Washington state companies, of course, still lag way behind the pack leaders—the real action was the New York-Massachusetts dogfight for second place, after California.

—Speaking of Evergreen State fundraising, we caught up with the end-of-summer numbers for companies based here and found, not surprisingly, that Zulily‘s $43 million round was the easy leader for all financings in August. Zulily’s a fast-growing flash-sales service specializing in products for moms and kids—why someone hadn’t jumped all over that vertical before is a mystery to me.

—Luke checked in with Mobisante, a Redmond, WA-based company developing portable ultrasound systems that can be read over smartphones or tablets. No, it’s not ultrasound on an iPhone (yet), since the hardware requires a beefy USB connection to work properly. But this innovation stands to make things a lot easier and cheaper for doctors working in the developing world or budget-strapped clinics.

—Microsoft Research and Carnegie Mellon showed off the OmniTouch system, a prototype projector-sensor device that can recognize “touchscreen” movements and turn all kinds of surfaces, from forearms to walls, into a user interface.

—Name-your-price crowd auction startup Zaarly got on a research kick and came up with this funny infographic tour through Seattleite cliches—which apparently have some grounding in reality. It behooves the fledgling company to do some market research, of course, since they have users and employees here. Plus people like me might re-post it.

And here’s a couple of important things I didn’t have time to fully chase down:

—Clearwire (NASDAQ: CLWR) released some preliminary third-quarter financial results that helped prop up the struggling wireless provider’s stock price. Clearwire had taken a massive hit after majority shareholder Sprint left it out of next-generation network plans, and questions about Clearwire’s future were getting very loud.

—John Cook at GeekWire had a scoop about Brian Bershad, Google‘s Seattle-area head honcho, apparently taking a new assignment for the company somewhere in Russia. Bershad, who is also a University of Washington professor, declined to comment when I reached him asking to follow up on the report. Last I heard (from Brian himself at a UW event), Google was on pace to have about 1,000 people here in the greater Seattle area by year’s end.

Comments | Reprints | Share:          

Market meltdowns, international turmoil, stubborn unemployment—none of the lingering macro-economic troubles seem to be holding back the momentum for venture investing in 2011, according to a report on third-quarter investments from research firm CB Insights.

The latest tally from the firm’s venture capital database shows venture investments reaching $7.9 billion in the quarter across 790 individual deals, setting a pace to possibly register the biggest year for VC in a decade.

That holds true even with a pretty major correction: CB Insights’ researchers didn’t count half of Twitter’s enormous $800 million financing round, reasoning that a reported half of the money went to cashing out stockholders.

Of course, the pace might not hold up in the last quarter of the year, particularly since VCs are reporting some difficulty raising funds from limited partners. But if the current momentum holds, “we are looking at a $30 billion+ year for VCs,” the report says.

Check out the full report for even more numbers. Two more methodological notes: CB Insights only counts investment rounds where a VC participated, so any rounds made up solely by mutual funds, hedge funds, or other non-venture investors also aren’t added to the tally. And state-level activity is determined by the headquarters of companies getting investments, not the home base of the VC firms involved.

BIGGER APPLE
California companies continue to lead the way in venture investments, accounting for about half (48 percent) of the national third-quarter VC dollars in CB Insights’ report.

The notable change is the rise of investments in New York companies, which accounted for 10 percent of venture dollars—doubling their position from a year earlier and virtually tying with Massachusetts, which had 9 percent of the total in the third quarter.

Taking the head-to-head a little further, CB Insights says New York pulled ahead of Massachusetts in both the number of deals and dollars invested “for the first time ever,” with New York registering $831 million on 86 deals for the quarter, compared with Massachusetts’ $710 million on 83 deals.

Washington state companies, meanwhile, maintained their small share of VC financing overall with just 2 percent of the national take—half of Texas’ 4 percent share.

UPS AND DOWNS
Healthcare-related VC investments continued to contract, showing year-over-year declines in both dollars invested and the number of deals, with $1.67 billion spread over 143 deals. CB Insights noted uncertainty around exit opportunities and the regulatory landscape for this sector—public policy for healthcare in particular will continue to look uncertain until the 2012 national elections are decided.

The number of individual mobile investments hit a high point at 13 percent of the total deals tracked, up from 7 percent a year earlier—although in terms of dollars, the share of mobile investments was only two percentage points higher than the third quarter of 2010.

Cleantech saw notable improvement, with funding levels topping $1.2 billion nationally—up from $790 million a year ago and $781 million in the second quarter of 2011.

PLANTING SEEDS
CB Insights’ report also sees an ongoing increase in the number of seed-stage deals by VCs over the past year, rising from 11 percent of all deals in the third quarter of 2010 to 15 percent of deals in this year’s third quarter. “While primarily a tech VC tool, healthcare investors increasingly used seed VC investments in Q3 2011 as well,” CB Insights noted.

Comments | Reprints | Share:          

Norwood, MA-based Advancit Capital, an early stage investment firm founded by Shari Redstone (daughter of CBS and Viacom director and National Amusements president Sumner Redstone), has inked a $3.2 million investment, an SEC filing shows. The firm, co-founded by Jason Ostheimer, will invest in media, entertainment, and tech startups, according to an e-mail sent to the Wall Street Journal‘s All Things Digital blog.

Comments | Reprints | Share:          

Premium goat-milk ice cream. Bouncy-house rentals for kids’ parties. Electronic medical records for psychiatrists. None of these sound like your textbook target for early stage investors, who are often found hunting consumer tech startups that can turn into billion-dollar home runs.

For ubiquitous Seattle investor and entrepreneur Andy Sack, that’s precisely the point. Those three very different businesses are companies supported by RevenueLoan, the alternative financing startup that Sack unveiled about a year ago in his mission to disrupt the traditional investment market. These days, Sack is repositioning RevenueLoan as Lighter Capital—a name change that he says reflects a broader focus and an overall attitude that’s much less buttoned-down than your average bank or venture capitalist.

I stopped by Sack’s Founder’s Co-op/Seattle TechStars office recently to get a better idea of what the changes will entail, and what the first year has been like for one of the more prominent experiments with an emerging investment model known as revenue-based financing.

Check out Xconomy’s story from last year for a more exhaustive rundown of how it all works, but here’s the short version: Revenue-based financing is a loan that’s repaid by sending investors a slice of top-line revenue, typically in the 1-10 percent range, up to a hard cap of three-to-fivefold return on investment. So, in exchange for taking no equity stake in the startup, an investor can make money without an IPO or acquisition. For Seattle-based Lighter Capital, loans typically top out at $500,000. The company was started with $6 million from Voyager Capital, Summit Capital, and Founder’s Co-op, and Sack says Lighter Capital might look to raise more money in a year or so.

The first year has seen 10 deals on a range of companies. About half of them have some kind of technology focus, such as lead generation or software-as-a-service—”stuff that is just never going to be a huge company, but solves a real problem for a set of customers,” Sack says.

One early investment was in Valant Medical Solutions, which helps psychiatrists and other mental health professionals streamline their administrative burden by shifting things like patient records, prescribing, and billing to Web-based software. The Seattle-based company was started by a pair of brothers: psychiatrist David Lischner and software developer Ben Lischner.

“It’s a niche,” Sack says. “They might get huge, but it’s more likely they end up at a $5 million-a-year, $10 million-a-year business.”

Other investments include Mimja, which operates a Web-based lead generation and rental company for those big bouncy houses that kids (and adults) like to hop around in; and Laloo’s, whose … Next Page »

Comments | Reprints | Share:          

Social GPS startup Glympse has raised $7.5 million in a Series B round led by Menlo Ventures and Ignition Partners. The Redmond, WA-based company’s application allows users to show other people where they are in real time, showing up as an icon tracing its path around city streets, for instance. Glympse says it’s useful for things like alerting colleagues where you are if you’re late to a meeting, or finding friends for social meetups. Pravin Vazirani from Menlo Ventures and Michelle Goldberg from Ignition Partners are joining the startup’s board as part of the financing deal announced Wednesday. Existing board members include Seattle’s Tom Huseby, of SeaPoint Ventures, and Greg Tarr of the Bay Area’s Rogers Ventures. The company’s co-founders are former Microsofties: CEO Bryan Trussel and Chief Architect Steve Miller.

Comments | Reprints | Share:          

Companies working on IT management, drug development, and software of all kinds led the way to about $70 million worth of equity deals in Washington state during May, according to data compiled by CB Insights.

The top investment went to ExtraHop Networks, which reeled in $14 million in an over-subscribed round led by Meritech Capital Partners, along with Madrona Venture Group and other investors. The company was founded in 2007 by Jesse Rothstein and Raja Mukerji, formerly of Seattle’s F5 Networks. Executives and investors said the money would help take ExtraHop to “the next level.”

Next was Profibrix, a drug company based in Seattle and the Netherlands. Profibrix’s follow-on Series B investment last month was worth $10.6 million, according to CB Insights. The company, which focuses on drugs that help stop bleeding after surgery, said the money would be used primarily to move its lead product, Fibrocaps, into late-stage clinical development.

Coming in third was Avalara, a Bainbridge Island-based maker of software that helps merchants collect and distribute taxes. The company raised $10 million of a round that could be worth as much as $21 million, according to the SEC filing.

Fourth place went to Billing Revolution, a mobile payments startup that raised $6.6 million in a Series B financing round led by DCM and SK Telecom Ventures. The company was founded by CEO Andy Kleitsch, an AT&T Wireless alum who founded WeddingChannel.com and sold it to The Knot for about $80 million.

Rounding out the top five for May was Adapx, which makes software that lets field workers digitally record their physical penstrokes, cutting down on bulky and time-consuming paperwork. Adapx’s $5 million round included its previous venture capital investors: Kirkland, WA-based OVP Venture Partners, Washington, D.C.-based Paladin Capital Group, and Salt Lake City-based Pelion Venture Partners. Adapx started out life working with the military, as a supplier to DARPA.

Check out the full list for a detailed breakdown of the rest of May’s equity deals of $500,000 or more from CB Insights, which amounted to just over $67 million. There were several more small-dollar deals, which upped the overall equity total to around $70 million for the month. We’ve also got a separate breakout on debt financings, dominated by $40 million for Microvision (NASDAQ: MVIS), a Redmond, WA-based developer of light display technologies.

Comments (1) | Reprints | Share:          

Amazon.com founder Jeff Bezos is among the investors in a new financing round for General Fusion, a British Columbia-based company working on “utility-scale fusion power.” The investment, part of General Fusion’s $19.5 million Series B round, was through Bezos Expeditions. Other investors named by General Fusion include Cenovus Energy, Chrisalix Energy Venture Capital, GrowthWorks, along with others. General Fusion said the money will help it finish the initial phase of its development and demonstration. The company is working on an approach called Magnetized Target Fusion, aiming to fuse hydrogen isotopes into helium, with seawater as the fuel. Bezos’ fellow Seattle-area tech founder, Bill Gates, also is investing in next-generation nuclear through Intellectual Ventures spinoff TerraPower.

Comments (1) | Reprints | Share:          

Anybody concerned with the future of entrepreneurship in the Seattle area would have been buoyed by the enthusiasm at the University of Washington‘s annual business plan competition last week on the waterfront. Nearly 40 teams were whittled down to a “sweet 16″ by a horde of judges, but I picked out five that caught my eye while winding through the hive of activity.

Check out my story for the debrief, which covers some interesting little startups—everything from smartphone-driven kit robots to small wind turbines that look like insect wings. Not all of the companies I highlighted moved on to the competition’s next round, but I don’t think we’ve necessarily seen the last of them.

Also making tech news in the past week or so on Xconomy:

—We dove into the venture and angel investment deals for March, and found a pretty large haul for companies: About $53 million in equity financing, spread across several sectors. I was struck by the prominence of two fairly hardcore tech plays at the top of the monthly list. Vancouver, WA-based nLight Photonics had the biggest single financing, worth $11 million. And coming in third on the list was $6.9 million for Physware, which makes software for designing computing infrastructure.

—Showing once again that big money doesn’t just flow to trendy consumer Internet startups, Seattle’s ExtraHop Networks reeled in another $14 million financing round. The company has been around since 2007, and was founded by a pair of alums from Seattle’s F5 Networks. You can read this longer piece for more detailed explanations of what the company does, but in a nutshell, ExtraHop software helps businesses manage their IT infrastructure more efficiently.

—Seattle’s PopCap Games continued its march toward an IPO with the purchase of ZipZapPlay, a San Francisco-based social gaming company. The acquisition gives PopCap, which makes “Bejeweled” and “Plants vs. Zombies,” a social-game outpost in the Bay Area. As Xconomy’s Greg Huang noted, PopCap has been making a big push toward taking its games to social platforms, particularly Facebook—an interesting move that puts it into a bit of a horserace with Zynga, the red-hot maker of “Farmville” and other Facebook-based games.

—We had a pair of strong guest op-eds, including an open letter from Sparkbuy CEO Dan Shapiro, who dug into the recent news that TechCrunch founder (and part-time Seattle resident) Michael Arrington was throwing off his previous ethical constraints and investing in tech startups again. Shapiro says that’s a bad idea—and that’s speaking as a product guy, not a tweed-jacketed media critic.

—Our other guest column, from Taft Kortus of Moss Adams, explored the landscape ahead for merger and acquisition deals, and how the possible heating up of the IPO market could affect the environment. One of Kortus’ more interesting points was that investors might be able to wring some valuable intellectual property or talent out of the large companies that have been on acquisition binges lately, since not all of the startups that get gobbled up wind up finding a fulfilling new life inside the machine.

—Finally, a bit of media news—even if it’s about a competitor. Rebecca Lovell, the well-connected executive director of the Northwest Entrepreneur Network, is leaving that gig after just over two years to take a business operations job with startup tech-news site GeekWire. It’s an interesting move for Lovell, and I noted that it’s another sign of the thriving ecosystem for online media startups in the Seattle area.

Comments (2) | Reprints | Share:          

Seattle-based ExtraHop Networks, which makes software to help businesses manage their information technology, has raised a $14 million investment round, according to this SEC filing. ExtraHop was was founded in 2007 by Jesse Rothstein and Raja Mukerji, formerly of Seattle’s F5 Networks. GeekWire reports the new round was led by Meritech Capital Partners. ExtraHop and F5 teamed up last year to work on new products, marketing and distribution. In 2009, ExtraHop announced a $5.1 million Series A round led by Madrona Venture Group and including angel investors Marc Andreessen and Ben Horowitz.

Comments | Reprints | Share:          

Michigan is beginning to take a more enlightened approach to economic development, with a stronger level of cooperation between academia, industry and government. It is now recognized that each of these constituencies has a vital role to play in rebuilding and sustaining a robust, knowledge-based economic model.

Mr. Lennart Johansson, the Swedish Consul General to Michigan, articulated the concept well in a recent discussion that I had with him. In Sweden this cooperative approach is called the “Triple Helix Model.” The objective is to create a systematic approach to encouraging and nurturing innovation, one that will ultimately result in economic growth. The model is based on strong interactions between Sweden’s universities, industries, and government. The idea is to move from being solely focused on the production of tangible goods to an economy that is based on the capitalization of knowledge.

I believe that there is a wealth of knowledge to build on in Michigan. Our universities and our companies have long histories of developing deep knowledge in advanced technologies and processes. We also have a very active community of innovators and entrepreneurs. What is needed now is a way to further accelerate the incubation and commercialization of these solutions. I think Michigan has taken some positive steps in a number of areas, but due to the severe negative economic impact that the automotive industry’s troubles have had on the state, much more needs to be done.

I have had the opportunity to work with a number of investor groups and startup companies in various parts of the United States, and around the world, over the past several years. Let me share some of what I have learned.

I have had numerous discussions regarding what it is like to “do business in Michigan.” We need to work hard to ensure that Michigan is perceived as a “good place to do business.” This means that we should actively promote business practices and public policy that encourage businesses to locate here, and prosper as a result. We need to ensure that the government is seen as an enabler in the process, not an impediment. And we need to understand the value that Michigan can bring to helping the companies achieve their objectives.

Some of the areas of value that are well recognized are Michigan’s strong engineering base, deep knowledge in manufacturing process technology, and highly developed logistics infrastructure. All of these qualities are in demand in with new technology startup companies. I have a number of projects with companies and universities in the Boston area, where there is a high level of new technology development, but limited ability to bring the technology to production. Maybe a Massachusetts-Michigan partnership program would be in order.

The other observation that I would share comes from my work with Michigan-based start-ups. Access to early stage funding usually requires that the companies spend a lot of time in other states to find investors. We need to actively promote venture capital interest in Michigan startup companies. It would be nice, if at least some of the time, the money were looking for the opportunity, instead of the other way around.

[Editor's note: To help launch Xconomy Detroit, we've queried our network of Xconomists and other innovation leaders around the country for their list of the most important things that entrepreneurs and innovators in Michigan can do to reinvigorate their regional economy.]

Comments | Reprints | Share:          

1. Reinforce success — Our research and development ranks second in the nation behind Delaware, in part because of the massive amount of research done by the auto industry. In spite of the current problems, this research has allowed Detroit to lead the auto industry for almost 100 years. A great deal of this research has application in non-automotive sectors. We need to access it.

2. Focus on our strengths — Detroit is on the border of another country and 20% of the world’s fresh water. By focusing on its unique location and assets, it has an opportunity to become a leader in certain business areas such as water purification and use technology, homeland security, and international trade, including logistics.

3. Develop a package of support systems for new entrepreneurs that can be scaled and replicated throughout the region — Throughout the world there is recognition that business incubators can dramatically improve the chances of new business success. We need to figure out the right combination of services—and the ways in which those services can be delivered to the maximum number of pre-qualified potential entrepreneurs.

4. Alter the culture within universities — Universities, particularly research departments, have to be recognized for the value they bring through the transfer of intellectual property to locally established companies. Tech transfer departments have to become entrepreneurial in their approach to speeding technology from the lab to the marketplace.

5. Identify early stage finance for startups — Without early-stage financing new business activity will not happen. We need dedicated funds that make bets on early-stage enterprises and move companies to the point where they can qualify for more traditional financial support from venture capitalists, angel investors, and banks.

[Editor's note: To help launch Xconomy Detroit, we've queried our network of Xconomists and other innovation leaders around the country for their list of the most important things that entrepreneurs and innovators in Michigan can do to reinvigorate their regional economy.]

Comments (1) | Reprints | Share:          

Seattle-based venture capital and private equity firm Buerk Dale Victor announced today it has changed its name to Montlake Capital. The new name recognizes the firm’s evolution from a local partnership (founded in 1999) to a regional investment team with partners in Washington, Oregon, Montana, and Idaho. Montlake Capital has $100 million under management, and says in 2010 it will invest in and seek partner companies with revenues between $2-20 million. The firm previously backed Halosource, the Bothell, WA-based water purification company that raised $10 million last week.

Comments | Reprints | Share:          

Massachusetts Governor Deval Patrick signed legislation this week that gives the Renewable Energy Trust, formerly a unit of the quasi-public Massachusetts Technology Collaborative, a new home: the Massachusetts Clean Energy Center. The Renewable Energy Trust—an investment fund that comes from surcharge on Massachusetts electrical consumers of about $6 per ratepayer per year—supports a range of alternative energy projects, while the Clean Energy Center, the energy sector’s complement to the Massachusetts Life Sciences Center, is charged with supporting R&D, entrepreneurship, and workforce training in the cleantech industries. The bill that created the center in 2008 specified that it would be funded in party by reallocating Renewable Energy Trust revenues, as Massachusetts Secretary of Energy and Environmental Affairs explained in an interview with Xconomy this week. “This legislation merges the work of two quasi-public state entities with complementary missions, consolidating staff and resources while establishing the Clean Energy Center as the primary agency responsible for growing the Massachusetts clean energy industry,” Governor Patrick said in a statement released today.

Comments (2) | Reprints | Share:          

Seattle-based DocuSign announced today it has received a strategic investment from Second Century Ventures, the VC fund of the National Association of Realtors. The amount was undisclosed, but the cash will be used to speed up and extend DocuSign’s efforts with residential and commercial real estate customers. DocuSign was founded in 2003 and makes software to automate and control the process of electronic signatures.

Comments | Reprints | Share:          

[Updated 11/18/09, see below] This post is about how to get a better deal from VCs investing in your first round of financing. It is also about how to make the deal into a win-win. The idea for the post came from an exchange with @bakespace about some of the resources for entrepreneurs on FastIgnite.

This is About Series A Deals

Seed investments can be all over the map in terms of size ($50K – $1M+), structure (convertible debt or common/preferred equity), valuation, and investor rights. It’s hard to make generalizations about seed deals.

First-money-in Series A deals, on the other hand, tend to be much more cookie-cutter. Before we talk about why this is the case, let’s put a rough definition around the types of Series A financings I’m referring to:

• Not much has been raised previously—at most a few hundred thousands and ideally nothing.

• The product has not been (fully) built.

• The size of the round is at least $3M but preferably larger.

• You are talking to professional VCs with funds > $100M.

These deals tend be cookie-cutter because they are driven more by the cap table (the list of shareholders in a startup and how many shares they own) than by what the company might be worth independently.

What is Your Startup Worth?

This is a question entrepreneurs think a lot about. They come up with all kinds of arguments for justifying their notion of value pre-funding. The trouble is, most of the arguments are bogus because they miss an important point: a company that needs several million dollars today to build a business is not worth much at all without the dollars.

Say the goal is to stick a flag on top of Everest. You are a great alpinist but you have no money for the expedition. Your friend Bob loves what you do, happens to be excited about you climbing Everest and has tons of dough. Which is more important? Your ability to climb or the financing? You ability to climb is certainly scarcer and hence commands a certain premium, but in the end it’s a partnership. Money without an alpinist can’t get to Everest. An alpinist without funding can’t get to Everest either. It is the combination of the scarce talent (climbing) and the resources to make this talent productive (the dollars) that creates the value.

The Series A Valuation Process

What this means for your Series A deal is that, to a large extent, the value of your company is going to be reverse-engineered from the cap table. Here is how this works:

1. You and your investors agree you need $X ($3M, for example)

2. The investors want to own a certain percentage post-financing (I%) (2 x 20% = 40%, for example if two VCs are syndicating the deal)

3. The post-money valuation is now $X/I% or $3M/40% = $7.5M

4. You negotiate the size of the option pool (P%) (25%, for example)

5. Your true pre-money valuation (what the founders’ stake is worth) is $X*[(1-I%-P%)/I%] or $2,625,000.

There are two things to notice about this process. First, at no point did it require justifying the value of the startup. Second, the margin for negotiation is somewhat limited as (a) the option pool size should be budget-driven and (b) most investors, rightly or wrongly, are pretty set on the percentage ownership they require. (The reasons for this have to do with the business models of venture firms—which are too complicated to cover here.)

Without meaningful deal competition, you’ll be unlikely to affect the investor(s) target ownership percentage. So if you really want to get your VCs to take a lower percentage, you’ll have to work a lot harder to generate interest from multiple firms. Either that, or you’ll have to … Next Page »

Comments (18) | Reprints | Share: