Late in 2008, after the rest of the economy crashed and burned due to the housing crisis, the tech sector seemed to be fairly resilient. Maybe it’s the nature of the industry… less money at stake, generally, in tech VC deals than other industries. For instance, Biotech.

That all went out the window when Valley-based VC behemoth, Sequoia Capital, gathered a now-infamous meeting of all its portfolio companies and gave them what can only be described as a “the sky is falling” lecture.

In that lecture (that presentation is shown below), they advised their companies to buckle their seatbelts, lay off employees, and get rid of non-essential expenditures. They said it would be a dangerous ride ahead and that only the companies that had enough forward-thinking prowess to survive, would do so.

The presentation opened with an ominous title slide with the words: “RIP Good Times”. The presentation instructed CEOs to look for M&A deals as quickly as possible, raise new cash now (i.e. late 2008) if they were looking to raise a new round, and have at least a year of cash in the bank.

Pretty ballsy move that, frankly, spelled the beginning of the tech sector decline. If Sequoia was instructing their companies in this way, then something must be severe, thought many other VCs who followed suit with their respective companies.

In some ways, Sequoia was correct. It would be a long road to recovery. In other sectors of the economy, the recovery is ongoing or is just beginning.

The tech sector is not that way, however. In the past year, we’ve seen huge investments in 2010. Twitter raised $200M+ on a $3.7B valuation. Zynga, the social gaming company, raised $147M on an estimated $5B valuation. Tumblr raised $30M.

The bubble has been gaining full steam. And then there was yesterday.

Yesterday, you might ask? Yes… yesterday. Yesterday it was announced that Sequoia Capital led a $41M Series A round (Yes, you heard that right… Series A!) for new mobile social photo sharing company, Color.

I’ll let you read about what Color is because, though it’s a bright, shiny object that is interesting in some ways, it’s not, to me, a $41M play.

Sequoia seems to be taking the approach that many smart VCs these days, including Mark Suster from GRP Partners, said last week when describing investment strategy relating to teams and not products.

Whatever you’re working on now, the half-life of innovation is so rapid now that your product will soon be out-of-date. Your existence is irrelevant unless you continue rapid innovation. Your ability to keep up is dependent on having a great team of differing skills. Individuals don’t build great companies, teams do.

And while I fully agree with Mark, I do have to question Sequoia making a $41M play less than three years after they virtually single-handedly drove the nail into the coffin of the tech sector. To me, it seems Sequoia made an opportunistic opportunity to drive the market rates down on valuations, to eventually make a big play like this at lower valuations (Disclaimer: I don’t actually know the terms of the Color deal). With a lower valuation, they can throw more cash and own the lion share of the available stock ownership. You know… waiting for a slam dunk, as it were. Mission Accomplished!

However, it’s notable that the Color team is truly a notable team. The former Chief Scientist at LinkedIn. The guy who sold Lala to Apple in 2009. Five other notable experienced entrepreneurs and successful startup people.

I’m sure Sequoia knows what it’s doing. It’s certainly interesting to watch investors defend them. There’s just very practical questions about how the company that started the tech recession could come out guns blazing on this one.

If you’re a coder, there are solid technical workshops. But even though I’ve started up several companies, today I made a beeline for the startup and financing workshops. Why? Mainly because the scene/climate is constantly changing. But also because, just as with a pitch meeting, you always come away with some useful nuggets.

At the Web 2.0 Expo in San Francisco in April, it was ‘Starting Up: Strategies for Financing & Growing Your Web 2.0 Startup,’put on by Rob Hayes of First Round Capital and Jeff Clavier of Softtech VC. Today, it was ‘Casing the Startup Joint: Real Life Examples of Startup Opportunities, Issues, and Strategic Decision Making,’presented by Albert Wenger of Union Square Ventures, along with Charlie O’Donnell of Path 101 (Charlie was formerly an analyst with USV).

[Fellow East Coast startups take note: Both USV (New York) and First Round (just outside Philadelphia) are early-early stage VCs. Both are on my radar for CHALLENJ -- but despite what First Round says about investing on Powerpoints, I don't plan to approach either until our app is built; USV makes it clear they want something working.]

Here are a few random nuggets from today:

- Shift from hard-coded documents to live ones Although crafting a clear (if not pretty) business plan is still advised (if for nothing else, it gets everyone in the company on the same page, so to speak), VCs would rather see your competitive analysis in a wiki. “It also tells us that you have an ongoing process for tracking competitors,” according to USV’s Wenger. And if your .ppt deck doesn’t change nearly every time you deliver it, by definition it’s stale.

- Reduce your risks before applying Be mindful of the four buckets of risk before you approach any investor: 1) Team, 2) Technology; 3) Market; and 4) Capital Requirements. Says Wenger: “We can handle one — maybe two — but that’s it. (I’m working on my team — any killer PHP coders out there?)

- Rejection by one VC firm has no reflection on your business Suck it up. Firms like USV do fewer than 20 investments a year (and some of them are later stage). If they pass — presuming you’ve been sufficiently persistent — move on. (The corollary to this of course is, if 40 firms pass on your deal . . . it’s time to retool.)

- State of angel investment The thin g to remember — and it’s good news — is that the number of angel investors is 10x the number of VCs. But you have to work a lot of venues to find them, since most don’t hang out a shingle with wings on it — uncles, friends of the family, doctors, they all count. The bad news? When Wall Street flails (as it’s doing right now), even the wealthy get skittish. As O’Donnell puts it, “The rich tend to write fewer checks when they feel less rich.”

Lastly, it’s always interesting to hear the war stories from other startup CEOs. To be honest, I’ve made enough mistakes that I don’t learn all that much in these ‘true-confession’sessions . . . but there’s something comforting in knowing that really smart people also did some dumb things.

The origins of this post were motivated by Seth Levine’s post today How to get a job in Venture Capital revisited his earlier post, How to become a VC and it seems to hit on the same advice that I got from my VC friends in the business.

The gist of it seems to revolve around either going to a top B-school, being a banker or consultant, working in a startup or starting one of your own.

So instead of telling you how to become a VC, let me take a different angle and tell you why you don’t want to be one.

Everyone acts like they want to be your friend but all they really want is your money

When you are an entrepreneur you go to networking events in the hope of meeting investors, you leverage VC networked lawyers and accounting firms to get you introductions. What are you there for? To get money. As a VC you are just on the other side of the table and now when you go to dinner parties you are faced with the “Doctor’s dilemma”. That is when they find out you are a doctor and then they tell you something hurts them and expect a free diagnosis and prescription write up. As a VC you might suffer through people with “hey, I have this business looking funding” or “I have a really great idea, would you fund it?” crap. Just tell them you sell insurance and they will stay away from you.

You get stuck in board meeting hell

As a VC you will sit on boards to meet with the company on a regular basis to see if they are meeting their milestones and vote on critical issues (i.e. stock options, new key hires). The only problem is that this most of your interaction with a company and as a former entrepreneur you will have a tendency to want to be more involved. You can’t. You must keep the deal flow coming through for the firm to make the investments that will create good exits for great payoff to the fund’s limited partners. Yeah, I think that kinda sucks too.

You only really work day-to-day with a startup when it is having trouble

As I mentioned above, you are really only working with them in a board capacity when things are going well. When things start to go bad you have to spend more time and usually have to be the bad guy. You might have to kick out the founder, recommend budget cutting strategies, etc. Yep, that sucks too.

You have to read the most insane business plans

The average VC firm sees about 2000, that’s right 2000 business plans a year. Do the math. If you are an associate you have read around 50-100 per week depending on the size of your firm as an associate. You have to filter the crap from the interesting and then further find the fundable in the interesting ones. Many people blindly send plans that don’t fit the investment size or focus of the firm so they are immediately tossed. Still, you have to find the ones that are good and then have a phone conversation with them. If the chat goes well, they will come and pitch you so can report to the partners about the ones that they should really sit in on. If they end up sucking it reflects badly on you.

Do you like Excel?

When you join a firm as an associate you are analyzing deals from every perspective tearing apart an entrepreneur’s business model to see if it is actually not full of shit. You are also looking at it from various bad-to-great scenarios to understand the risk exposure the firm would be taking in the deal. I hate excel and the thought of living in it just makes me shudder.

You have to work insane hours to close a deal

You work insane hours as an entrepreneur but there is a long term payoff that can be huge. To get a deal done especially if it is syndicated or there is competition from other firms means you have to work insane hours to get it closed. If you don’t you risk losing the opportunity and looking like a lazy idiot to the partners. What is the upside? Maybe a bonus when the fund exits? Maybe. At least as an entrepreneur you can have a little more control over getting a big pay day.

Limited Partners are worse than investors

Investors in a startup expect risk and are betting on you to succeed. They hedge their bets and usually 7 out of 10 deals funded crash and burn. The remaining 2 get a good exit and the remaining one you hope will be the next google. Limited Partners have a long term outlook (7-10 years) for a fund to complete. But boy do they expect results. You might return a solid 20-30% return which is fantastic for any other investments but they might just bitch. Especially if the previous fund had better returns. Yeah…I would love to have that to deal with.

Are there any VC’s in the house?

Many people read the blog and hopefully there are some who are VC’s and could comment. It would be especially great if there are a few out there that have been in the business and left it.

After the bubble burst most people were just trying to hold on and all that you had a choice between in the DC area were NVTC (Northern VA Tech Council) and Potomac Officer Club events. NVTC was very government focused and who mostly showed up were service providers (I have the 100′s of insurance and lawyer business cards to prove it). POC events were big events with well known people but not alot of good networking.

One good networking event I liked was the Tech Prayer breakfast but that was only once a year. What most of us were left with was going to conferences, usually not here, to get our networking on and find fellow entrepreneurs and real innovative thinkers.

Lately, there has been a change in the winds here in the DC area. With events like PodCampDC and Social Media Club’s events we are starting to see our cutting edge tech scene finally re-emerge. Last Thursday night it was totally confirmed with the TECH Cocktail DC event. It was held at MCCXXIII (1223) in DC. A swanky place that is over-priced for my usual weekend partying but this event had cheap drinks (thank you drink tickets) and about 300 people.

Below is a picture of the scene at the height of the evening.

While there have been many events that have drawn 400 people, this was different. Almost everyone was doing something startup related that was really cutting edge. There were social media people there (Technosailor and me included), innovative startups and actual investors looking to network.

There were also a great group of sponsors with great products to demo. Here is a great list from Jimmy over at EastCoastBlogging:

AwayFind – a product aimed at helping combat the email problem by letting your contacts get in touch with you via an online form.

iGala – a digital photo frame with a touchscreen interface that connects directly to Flickr and Gmail to stream photos to the frame like a slideshow.

Loladex – offers local recommendations from your trusted network of Facebook friends.

Odeo – launched a new beta verision which offers both search and personalized content (audio and video) recommendations.

Voxant – a free licensed content offering for publishers which offers a pageview based revenue share to anyone that embeds the content on a their site.

WhyGoSolo – a new social networking site aimed at helping you to create spontaneous new connections so, as its name implies, you won’t go solo any longer.

A huge amount of thanks go out to Frank Gruber and Eric Olson who do the TECH Cocktails around the country and they need to do it more than once a year here.

The vibe around this region is changing and since we will never will be Silicon Valley and never want to be, it is fantastic to see that there is a refreshed ecosystem of entrepreneurship here in the region.

Photo courtesy of jgarber

Editor’s Note: Some comments don’t seem to apply to this post as viewers of a show I was on were instructed to leave comments on this blog to get an invite to BrightKite. These comments will be approved but do not necessarily go with this post. Sorry!

“Greed, I mean Green is Good”

CNN, the New York Times, Business Week, Advertising Age, “Good Morning America,” the Sundance Channel, Reuters, the Discovery Channel, Marketplace radio, and a slew of local papers. Newpapers? You kill trees to create a huge insert about Earth Day. Is that not the stupidest thing you have ever heard. And a surprising number seem to have some variation of the same two questions:

“Is all of this focus on the greening of business merely a fad? When will the bubble burst?”

Green tech and marketing means green dollar signs for companies like GE, Disney and BP. NBC has created this load of crap called “green week” for their TV shows which is a thinly veiled attempt to sell their “green” products sold by their parent company GE. Disney announced a new “green movie” division which will capitalize on people’s concern with the environment so they can get more ticket revenues and DVD’s sold. BP is all about alternative energy these days and while they have been the most progressive when it comes to solar and natural gas they are really doing it to hedge their position as oil prices rise and people are ready for an alternative that must come within the next five years. I mean have you filled your tank lately? Bought a loaf of bread? It is crazy and things definitely must change.

There are motivating factors that support the argument that “Green is Good”. Here is the bullet list from a post by Joel Makower:

1. The problems aren’t getting any better.
2. The political will is finally emerging.
3. Consumers are waking up.
4. The supply chain is gaining power.
5. The environment has become a fiduciary issue.
6. The bar keeps moving.
7. Companies are moving beyond “sustainability.”
8. More companies are telling their stories.
9. Clean technology is changing the game.
10. There’s money to be made.

The bubble is growing

I am the farthest from a bleeding heart liberal, tree-hugging, save the polar bears person you will find. Although Polar Bears are just so darn cute I am not turning my air conditioner down during a heat wave in the DC area this summer to save them. I am also not a cold-blooded oil junkie who thinks that this global warming thing is a myth. I just think that the real intentions of being concerned for our environment has caused the investment community to pop its head out of its butt and see greedy potential to fund investments in everything “green”.

Since most of us survived the tech bubble we have learned our lessons and despite the Web 2.0 wave causing a mini investment bubble, we still have kept most of our sanity because the IPO market really hasn’t returned and the M&A wave is slowing down too. Most who couldn’t get jobs when the tech bubble burst left the industry and you guessed it, become real estate agents and mortgage brokers. As some people bounce from bubble to bubble, we will probably start seeing “Environmental
Consultants” and “Green Advisors” to, and pardon this one, “advise and recommend to companies how they can become more green and offset their impact on the environment”.

With the rising price of oil we are near a tipping point where many technologies are on par with the cost of traditional fuel so it will start to make economic sense in some cases. Where it doesn’t make sense is to stop growing wheat so you can grow corn for Ethanol (which takes 2/3 of a gallon of gas to produce a gallon of ethanol) causing wheat and rice shortages around the world. Right now in developed nations people spend 10% of their income on food and in developing nations it is around 80%. We have enough food to feed the planet but we just can’t afford to get it there. If we start diverting resources in the name of “green living” to make ourselves feel better the ramifications might be worse than we could imagine.

Oh crap, the Government is getting involved

The state of the government getting involved is a mess. I think Thomas Friedman sums it up well. “Some lawmakers are pushing corn ethanol from Iowa, either because they hail from that area and are looking to give more welfare to farmers by wasting money on an alternative fuel that will never reach the scale of what is needed, or because they plan to run in the Iowa caucuses. Others are pushing huge subsidies to turn coal into gasoline, because they come from coal states. Those who don’t come from Michigan want higher mileage standards imposed on Detroit, while those who come from Michigan prefer to continue their assisted suicide of the U.S. auto industry by blocking tougher mileage requirements.”

So you ready to call me “chicken little” yet?

You really call this “Green Investing”?

In the venture community we are seeing new funds popping up dedicated to “Green Investing” which in a diversified portfolio is good for funding innovations that will only help our world. What is really scary is many funds without the proper background to invest in this sector are jumping all over anything with buzzwords like “alternative energy”, “biofuels” and “eco-friendly”. VC’s like John Doerr cry when they talk about the environment and are dumping millions into companies that do things like nano-solar and grid optimization technologies. Hedge funds like Winslow Green Growth Fund are seeing their portfolios transform with the rush of new companies and new investments.

I hear a popping sound….

There are two popping scenarios:

1. Green will index within the mainstream and become ubiquitous.
It sticks. People keep pushing corporations to deeper levels of sustainability. Greenwashers fall on their face because it’s an unfulfilled promise, and then they mean it and real change happens. Green becomes ubiquitous. Smaller, plucky green companies struggle to regain any competitive advantage. When everything is green, green means nothing. (The study of green language is already there.)

2. It’s a fad and will vanish back to the margins of our society.
Green Fever goes away because it is a trend, a fad. News stories drop off, the chasing arrows shrink smaller on the back of packaging again, people stop bragging that their letterhead is 100% FCS Certified and Acid Free. Some small vestiges will still remain, and progress will have been made. New products were launched and the consumers will be more aware. But the trend died… popped.

Final thoughts…

I do believe we are economically in trouble as a country and I do believe that we are beginning to see the beginnings of a “green bubble”. However, as with bubbles like the tech bubble we saw massive innovation that benefits us to this day. So while there will be many bull**it artists and charlitans convincing investors they can solve the planets problems there will be innovation that will benefit us and the entire planet. I would just caution people on two things – don’t invest in every “Green IPO” when the fundamentals don’t work and don’t transfer your career into this field unless you are already in it or willing to passionately stay in it the rest of your life. We don’t need armies of unemployed “green consultants” trying to come back to tech in five years when the bubble bursts, because it eventually will.

Please leave your comments below, I want to hear from the evil oil people, the treehuggers and especially the Polar Bear lovers.

As part of the continuing debate surrounding venture capital, particularly here in the District, the content of Venture Files and the enthusiasm of Steve Fisher in writing it is a strong complement to the content already produced here.

As part of this integration, you can expect to see regular venture related content from Steve as he provides his own analysis on the venture ecosystem from the perspective of an entrepreneur. Previous content can be seen here and you can subscribe to the Venture Files feed as well.

I am a particularly strong fan of Steve’s 7 part series on Business Plans.

Welcome Steve and Venture Files to the Technosailor family.

Quote:

We work really hard in Silicon Valley, why? It’s not the money (only a few strike it ‘rich’) I think it’s the passion for creating new

Someone should remind Jeremiah of the 140 character limit of Twitter. ;)

I take a lot of exception to this statement because it is exceptionally wrong. Not only exceptionally wrong, but naive.

First of all, as an insider it’s easy to say everyone is just working to create and innovate. While that’s true to a certain extent, it was much more true two years ago. As the outsider to the Valley that I am, I’d say the Valley is one of four North American hotspots for money flow – Boston, New York, Canada (Toronto) and the Valley.

That places these four locations on the map as one of the four places every entrepreneur in North America wants to be. The reason why DEMO and TechCrunch 40 were so successful is because entrepreneurs want money!

Yes, they need money. This is true. But the drive for more money is beyond what it was when the interactive web was in its infancy and companies really were sprouting up because people wanted to work passionately on a project. They discovered some idea and the technology had matured enough that the idea could be pursued.

Today, we are talking about San Francisco-based Automattic valuating at numbers well in excess of $200M, Palo Alto-based Facebook (along with some fuzzy math) weighing in at some $15B. GigaOmniMedia, the parent company of GigaOm and the rest of Om Malik’s empire getting $1M+ for hardware, or something…

Everyday, new companies are being funded and it’s mostly in the Valley.

I love the Valley. I love the entrepreneurs in the Valley. I wish I was there living but no job has taken me there yet. But it’s a very introspective and naive thought to believe that the Valley is full of people who just are passionate. Yes, passionate people make the best companies. That I will not argue with. I think there is more passion to get the big exit than to build a solid product.

I could be wrong. Feel free to correct me. ;-)