A recently developed site called TheFunded has created quite a stir in the VC community. The site is for entrepreneurs — and only entrepreneurs — seeking information on possible VC investors. Entrepreneurs share their experiences with various VC firms they encounter on their journey for funding. From the web site:

The Founding Member experienced a bad funding situation and wanted to help others avoid a similar fate. As the idea grew, the Original Members saw real potential for TheFunded to bring some transparency to the venture funding world, which is largely governed by secrecy.

In a post on TheFunded, TechCrunch reports that the site now lets VCs “set the record straight” by posting their profile. But, this is a separate part of the site and does not allow VCs to directly respond.
This type of site gives me some concern. While I am not always a fan of how VCs do their business, this type of forum may easily stray from its objective of providing information about VCs, and instead, also spread misinformation with no chance for direct rebuttal.

Small business lending may not be such a bad deal for banks after all. A new study released by the SBA Office of Advocacy investigates the contribution of relationship lending to the value of banks by estimating the market premium placed on the small business loan portfolios of banks. Small business lending was found to be a profitable market niche, especially, for small publicly traded banking organizations in the United States. This evidence suggests that at least for small banks, the added revenue associated with relationship lending exceeds the added information costs associated with evaluating and monitoring small business commercial and industrial loans.

I wrote a post earlier this month about a VC firm in Raleigh, NC that opened their doors to all comers. I took a somewhat cynical take on the whole thing saying:

I knew that VCs had a lot of extra cash these days, but this sounds like it is either desperation or an unprecedented PR stunt for a VC firm. Either way it seems to indicate what many of us have suspected — VCs have over-sold their funds.

Jason Caplain of Southern Capitol Ventures, the VC firm that had the open house, called me to tell me how it went and why they did it.
Southern Capitol Ventures is a fairly new fund started by a couple of young guys. They want to try new ways to reach entrepreneurs that might not currently see a VC firm as an option for their business.
As measured by the response to their “Calling all Entrepreneurs”, the event seems to have worked. They were able to listen to 49 deals from 10 states that they probably would not have seen otherwise. A few deals were outside their areas of expertise, but overall they believe that they got to see some interesting deals and that the entrepreneurs got some valuable feedback. No deals have been funded from this group as of today, but a handful are still being evaluated.
They are now planning to do the same thing again in Atlanta on May 17.
OK, so maybe I was a little rough on these guys in my earlier post. If their goal is to shake up the VC industry a little bit, more power to them.

Often would-be entrepreneurs need to find a “partner” who can supply the cash they need for their business idea. The trick comes in how you value the cash of the investor compared to the sweat equity of the entrepreneur. StartupJournal has a good discussion on this topic:

What frequently happens is the working partner gets paid a regular annual salary, says Billy Ellyson, a small-business attorney in Richmond, Va. On top of that, he or she also gets a prenegotiated share of the ownership that usually hinges on how crucial the capital partner feels that person is to the business’s chances of success. It could be anywhere from a 5% slice of profits to 30% or more for those partners deemed as irreplaceable.

Notice that he does not say a 50-50 deal is likely! As a start-up, you need to be ready to give up a significant share of your business if you need a significant amount of cash. The negotiations are different if you are looking at expansion capital. Having an operating business and a proven concept allows you to bring more value to the deal in the form of a successful company and hopefully positive cash flow. It also puts you in a stronger bargaining position.

A new report from the Angel Capital Association finds that angel investors are optimistic about the general climate for early stage investments.

In the Angel Group Confidence Report of North American angel group leaders, ACA found that angel groups forecast that the quantity and quality of entrepreneurial investment proposals will increase in 2007, that more than 80 percent of groups will continue investing in seed and early stage companies, that there is a strengthened opportunity for more positive exits, and more plans to co-invest with other sources of capital.

This follows a strong job report last week that included a big jump in self-employment. The entrepreneurial economy seems to be picking up steam….

Angels also have a lot of idle cash (see earlier post today on VCs) and their deal flow seems to reflect this. From the Center for Venture Research:

The angel investor market experienced steady growth in 2006, with total investments of $25.6 billion, an increase of 10.8 percent over 2005, according to the 2006 Angel Market Analysis released today by the Center for Venture Research at the University of New Hampshire.

Dr. Jim Stefansic of Pathfinder Therapeutic sent me something I never thought I would ever see:

On Friday, April 20, I would like to invite ANY person that wants to meet to come by our office in Raleigh, NC. You can have just an idea all the way to a well run business doing millions in revenue. It doesn’t matter. And all the typical venture capital BS that you may hear is removed – you won’t be screened out in advance, you don’t need to know someone to “get in” and there are no secret handshakes required. Everyone is welcome and I’ll plan to be in the office all day.

This was posted by Jason Caplain of Southern Capitol Ventures at the blog site TechJournal South.
I knew that VCs had a lot of extra cash these days, but this sounds like it is either desperation or an unprecedented PR stunt for a VC firm. Either way it seems to indicate what many of us have suspected — VCs have over-sold their funds.

We have seen it before. Too much money chasing one particular market segment creates unsustainable valuations that eventually come crashing down — the medical services roll-up boom and bust of the early 1990s and the dot.com era of the late 1990s.
Medical Design Magazine posted an article earlier this month that points to another possible segment that may be suffering from overvaluation. The story says that as of 2004, 85% of market capitalization in medical device companies was supported by intangible assets. These intangible assets are the speculative part of any business valuation. It is that part of the valuation that predicts what the future might hold.
If speculation proves correct, vast fortunes can be created.
If speculation proves to be unrealistic or just plain wrong, these values can come crashing down. Physicians who sold their practices for stock in the roll-up companies of the early 1990s experienced first-hand what happens when billions of dollars in market cap vanish. So did the millions of people who bought into the intangible assets of the dot.com’s. Wealth that was only on paper disappears.
We do not know if this is an overvalued market, or one that has incredible up-side, but it certainly bears watching.
(Thanks to Dr. Jim Stefansic for passing this along).

The National Venture Capital Association reports that venture capital fundraising was at its highest since 2001. So what does this mean?
First, it tells us that there is a lot of idle cash in the economy. And this cash is available in part because other forms of investment are not creating adequate returns. Institutional investors and very wealthy individuals, the most common source of venture capital funding, are no longer seeing high yields in real estate. So more of this money is flowing into venture capital funds.
Second, it tells us that venture capitalists will not be able to be as selective in their investments. Over the past few years VCs have taken much of their funding into later stage deals. Now we will likely see them invest more in earlier stage ventures, and may even see them become less selective in the industries that they are willing to look investing in.
Finally, solid high-potential companies will have a slightly stronger hand during negotiations with VCs. Simple supply and demand tells us that when demand is high (excess money in VC funds), demand will be strong (for good deals). It may now become more of a sellers’ market when it comes to entrepreneurial deals being peddled to the VC “road show” market.

One of the best ways to bootstrap your marketing efforts is to utilize public relations (PR) for your business. In effect, PR gets the media to tell the world about your business.
There are a couple of myths about PR. First, although it is often called “free advertising,” it is not exactly free. It takes time and often a little bit of money to make PR efforts effective. Although you do not always have to hire a PR firm, it can be money well spent due to their experience and media contacts. So although not free, it is still a very cost effective way to get the word out about a business.
The second myth is that PR “just happens.” If you do great things the media will find you. Although that does happen on occasion, most often PR works best when it is an intentional tactic as part of your bootstrap marketing plan. PR works best when you are proactive with any media contacts.
Kauffman’s eVenturing has just published a new collection on PR that offers a great array of articles, stories and how-to’s.