Silicon Valley Startup Investing & Trends 2011

3 12 2010

Last night I attended a panel discussion on “Technology, Startup, Investing Trends & Forecasts for 2011 – Where Are We Headed?” put on by the Silicon  Valley Association of Startup Entrepreneurs (SVASE). There were well over 100 people in attendance, showing that there is a good deal of startup activity going on.

Venture Capital investment is increasing as are the overall levels of optimism and innovation.  At the same time, there is a degree of caution about the world economy in general.  Funding is available for good startup ideas, but the most likely exit plan will be by acquisition.  Here are some of the highlights of the discussion as it relates to Internet and Software startups.

The General State of VC Funding

  • “2008 was the scariest economic event most of us will witness in our lifetimes”
  • We are seeing slow, steady improvement in VC funding since then.  2011 will continue this steady improvement.
  • All on the panel were cautiously optimistic about 2011
  • Interesting Observation: The top 20% of VCs are so busy doing deals that “it is hard to even get them on the phone.”  The other 80% of VCs are doing virtually nothing.  (How much longer will these funds be around?)

The State of Silicon Valley for Entrepreneurs

  • The level of innovation continues to be high
  • There is increasing optimism among investors and entrepreneurs
  • California remains the best area for VC funding
    • $18 billion in funding in 2009.  (-35%)
    • $16 billion in funding ytd 2010.  Should be a modest up year.
  • Corporate funding of startups may be exceeding VC funding.  A lot of money is coming from “Big Oil” and “Big Pharma”
  • The public markets are less rosy.  The IPO market is all but dead.  Most startups are targeting a buyout as their end game.  Very few companies are thinking of IPOs.
    • NASDAQ is at a three year high.  Can it last?
    • S&P is at a two year high.
    • But, very few companies are going public
  • The startups that will be able to do IPOs will have “Great Stories” and powerful strategic partners.  Examples:
    • Tesla
    • DNA Resequencing startups
    • “Swing for the Fence” Ideas: Continuous glucose monitoring, artificial organs, anti-ageing.
  • We are seeing faster time to “Big Companies.”  Example:
    • HP                          Decades
    • Google                 10 years
    • Twitter                 4 years
    • Groupon              1 year

The Best Cities in the US to Find a Job

  • #1 is Washington DC   (much laughter about this one)
  • #2 is San Jose

Angel Funding Observations

  • Angel funding is increasingly important.  There are examples of companies going straight from Angel funds to sale of the company without a stop at “traditional” VC funding.
  • The cost of startups is declining.  They can do more with less funding: Capital efficiency.
  • Startups are able to get significantly more market traction before VC funding (and VCs are requiring this to get funding)
  • Two types of Angels:
    • Individual Angels.  Potentially the most helpful if they get directly and passionately involved in the startup.
    • Institutional Angels.
  • Suggestion for finding Angel investors: Go the cocktail events held by PR firms.

Comments on Internet and Software Startups

  • Most of the funding action is in Consumer Internet.  The panel saw social media as fundamentally changing the way consumers buy things.  This makes a lot of current software applications and site ripe for disruption.
  • Most of what can be done with operating systems, networking and enterprise software has been done.  (Doesn’t this sound a bit like proposing to close the Patent Office because everything that could be invented has already been invented?)

What VCs Are Looking For When Making Funding Decisions

This is a collection of responses from multiple panel members.

  • 10x value differentiation
  • A startup that is leveraging a technology shift to disrupt a Big market
  • Innovation
  • The chance to disrupt really big markets
  • People.  The team really matters.
  • Sustained community engagement with the service and ability to go viral
  • Quick time-to-value for users
  • The service must fulfill users emotional needs of their users
  • Cool technology and compelling content will not cut it.

The Panel

  • Matt Hemington, Cooley LLP, Moderator
  • James Cham, Trinity Ventures
  • Ari Levy, Bloomberg News
  • Todd Kimmell, Mayfield Fund
  • Bipul Sinha, Lightspeed Ventures
  • John Steuart, Claremont Creek Ventures

Note: My notes are focused on software and the Internet.  There was also considerable discussion of biotech, green tech and energy that I have not covered in this blog.

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