Release Notes

Hey everybody, this is where we will store release notes for the time being! We chose not to put the perpetual beta sign on our logo, not because we think that we aren't in beta nor because we feel better than other web 2.0 companies but because we hope that we won't be in _perpetual_ beta. That said we are definitely in beta (or even late alpha in some areas) now. Please bear with us. For example, we understand that coming up with the valuation of a private company involves a heavy degree of art. We think our estimates will get better and better, but in meantime we are really emphasizing our "comparables" finder tool. While our estimates may need refining, we are confident that you can find up to date highly accurate valuation ratios for comparable companies. You will see some UI changes that reflect this soon.

Known Bugs

• Our site isn't kind to Safari. While we wish we could afford them, we don't have Macs yet. We hope to fix this soon (bot the bugs and the fact that we can't afford Macs).
• Our site doesn't work well with Firefox on a Mac
• The "Valuation" service really only works well with Internet Explorer right now
• The "Valuation" service is unstable especially when there are simultaneous users

May 3rd, 2008 Release Notes

• Released a new version of the valuation service with an improved layout so that it is easier to see on monitors with different resolutions
• Also added several improvements to the ability to create, edit, and save your own list of comparables
• Added the ability to click through to deal profiles and company profiles right from the valuation service
• Released a new home page that doesn' require horizontal scrolling for monitors with 1028x763 or higher resolution
• Added links to deal profile pages directly from the home page

April 28, 2008 Release Notes

• We took a vacation from release notes for a while, so our apologies
• We have released a new version of the valuation service
• We have published thousands of company profiles--these show details about the company including user-generated content merged with our own research including all M&A data
• We have published thousands of deal profiles--these show details about deals between companies. You can see an example here
• We have released a new version of the services page where, eventually, you will be able to solicit bids on just about any kind of work
• We have included IRR data on thousands of venture capital firms. Here is an example for Matrix Partners
• We have increased the search results speed on the investor search page by over 10x
• We have resolved numerous bugs on the site
• We have implemented many additional security and data integrity features on the site

December 7th Release Notes

• Pushed live a new search page (http://www.venturereturns.com/search.php?pType=3) and advanced search page (http://www.venturereturns.com/advancedsearch.php)
• Fixed a variety of bugs
• Added administrative features for site administration

November 29th Release Notes

• Released the community tagline builder--really cool feature on the home page where registered users can submit taglines that show up beneath the VR logo. Kind of gimmicky but I like it... (it's only rock and roll but I like it)
• Busy at work on a bunch of new features

November 27th Release Notes

• Some pretty big feature releases
• Fixed a lot of bugs

November 20th Release Notes

• Plugged a security hole. Users can now only rate a fund 1 time. They can't "camp out" and rate a fund multiple times--not that we really had anybody doing that but we just wanted to prevent it.

November 12th Release Notes

• Fixed the "Top Rated" funds on the home page so that it only shows funds that have received at least 5 reviews. Other fund ratings are considered statistically insignificant.
• Fixed other bugs

November 7th Release Notes

• Eliminated lots of bugs
• Improved home page layout

November 6th Release Notes

• Eliminated lots of bugs

November 4th Release Notes

• Released a first pass advertising system--links, tracking, etc.
• Eliminated several bugs
• Eliminated "quartile" ranking system until it becomes more reliable from detailed fund survey data

October 30th Release Notes

• Fixed several bugs on the valuation tool--AJAX search wasn't working in Firefox, search wouldn't work if a user hit "Enter"
• Redirect survey users to Register / Log-In screen if they aren't already registered
• Incorrect ratings showing up on the home page for some funds
• Integrated Snap.com previews on some pages

Measuring Uniqueness

For entrepreneurs looking to start or run a growing business in the consumer space, or even the small end of the business market, it is really hard to get customer "mindshare" without offering a pretty unique product. This raises the specter of one of the perennial entrepreneurial trade-offs: do I start a totally unique business which often necessitates _creating a market_ or do I start a well-understood business which often necessitates competing against established competitors. The matrix looks something like the one I have included here. Basically, the blue areas indicate what is generally possible and likely. The white areas represent what generally takes quite a bit more effort to achieve or may even be impossible in some cases.

First, a matrix is only as good as its definitions, so what do I mean by some of these things? A unique product is a product that few, if any, other companies are producing. This may be simply because they don't know how, they haven't heard the market need, or they are slow moving, or it could be because nobody really wants the product. Unfortunately, many entrepreneurs launch without knowing into which category their product falls. A common product is something that the target customer is used to buying. The simplest example is food--more specifically hamburgers. Restaurant startups offering hamburgers know that they won't have to educate the market about the benefits of hamburgers. Their biggest problem is competing for mindshare against hundreds of other options--i.e., being perceived as better somehow than lots of competing options. They don't get the benefit of inherent uniqueness. Inherent uniqueness does confer some benefit on startups. Really unique startups may get mocked and ridiculed but they often benefit from some press simply because they are doing something different. Difference is kind of inherently controversial--because it offers a subtle (or sometimes explicit) challenge to the status quo.

The phrase "established use" refers to selling the product to a market where the product has an established use. People are used to using that product to solve a particular problem. New use refers to selling the product to a market or segment where it hasn't been traditionally used.

Now, is it possible to sell a unique product to a market where those types of products have an established use? Absolutely, consider Coca-Cola, General Mills--some of the legendary brand power houses. These companies are so good at making "unique" products in established markets that they can do things like sell bottled water (bottled from the same source that supplies your tap) for a significant mark up. The products may not be functionally unique but they are psychologically unique--this is the power of branding. In some cases, the products may be somewhat functionally unique but they are usually not totally functionally unique because products that have established markets also generally have competitors. Creating a psychological "uniqueness" is often very difficult and requires lots of cash. So this is often a harder route for rapid growth companies. Private equity backed companies often do have more of an established brand.

Is it possible to have a common product with a new use? Yes, but again this is less likely. Most of the time the market of consumers has figured out the best uses of products and identifying a new use for an existing product generally doesn't yield venture returns to entrepreneurs. This is often because even if you discover a new use for an existing product, you can't protect that use and secure some form of IP on it--since you are using a common product to do it.

All of this leads us to the 'educate vs. compete' trade-off. Basically, what I mean is that the typical startup entrepreneur has the choice between offering a really unique product to a market that has no idea how to use the product (yet) or offering some more common product where she is likely to face a lot more competition. In my startup efforts I have always opted to try to do something unique--but sometimes I think I am stupid to do so. One of my friends told me that he "wasn't smart enough to do something unique, so he preferred to do startups in markets where people are paying for his service every day." It sounded like a nice compliment but the more I mull on it, I think it could have been a pretty big insult. "Hey dummy, stop trying to do something crazy. Do something normal and just try to innovate / differentiate around the edges." All of this said, I do think that there is at least one inherent advantage to doing something really unique. You can often get noticed and can get more marketing leverage than would otherwise be possible.

This leads me to thinking about what makes up "uniqueness." I wish that there were a more scientific way of measuring uniqueness. I will throw out some thoughts here but perhaps you can think of some more:

• How many competitors would claim that they compete with you (it doesn't matter what you think, how many of them would claim to compete with you) if they understood your product?


• How much "buzz" has your product generated? How many blogs have mentioned it? Or, does your product have an existing, strong brand?


• Is it patented or patentable?


• Do many people think your idea is crazy? [You have to be careful on this one because your idea really could be crazy. This is probably why it takes the typical entrepreneur 6 tries before they have a successful exit.]
  

Guy's Maxim: Launch Early, then Churn Baby Churn

I think that the maxim "Launch early, then churn baby churn" was originally coined by Guy Kawasaki. The only problem I have with this is that there is definitely such a thing as "launching too early." As is the case with many difficult things, entrepreneurship can sometimes feel lonely. This is because the entrepreneur is often the only one at first who can see a beautiful vision of what it is that she is going to create. Because the entrepreneur is always reflecting on how beautiful her vision is and how likely it is that somebody could copy what she is doing, she feels a crushing need to launch as soon as possible.

I have learned the hard way that while I generally believe in Guy's maxim, I think we need a bit more clarification. Here are some things to consider doing:

• Ask a fellow entrepreneur (known for brutal honesty) if he would look at the state of your pre-live product and tell you if he would go live in that state
• Get the opinion of some relevant industry bloggers
• If another competitor has already gone live with a similar product, I think this actually increases the need to get it right before launching. Slow down, take a deep breath, and focus on beating the competitor over time. Most often, we feel a desperate need to go live right after a competitor has launched.
• What is the probability of a preponderance of poor reviews if you go live in your current state?
• First impressions last a very long time, especially if you won't be able to update your product or service very rapidly after the initial launch

The Primary Learning Curve for Growth Companies: Sales Cycle

In the 1960s, a then much lesser known management consulting firm called Boston Consulting Group made a name for itself on a relatively small set of powerful business ideas. Perhaps the shining example is the BCG Growth Share Matrix. However, BCG also received notoriety for the popularization of the strategic impact of the "learning curve" or the "experience curve." You can learn more here. While the notion of economies of scale has been around for a long time, BCG did a great job of giving an explanation for one major cause of economies of scale--learning or experience.

Typically BCG related their thinking to manufacturing or product creation processes. Their basic hypothesis was that the more product you make, the better you get at making it efficiently. This means that the production cost for each unit of product goes down as the company sells more product.

I have been thinking about tweaking this model to relate it to the major area of learning for most startups: sales. I have seen in my own entrepreneurial endeavours that there is a striking similarity between the learning curve effect on production to a similar effect for many growth companies on sales cycles. Specifically, that the more product you sell, the quicker your sales cycle. I bet that you could actually track this for a startup. The y-axis of the graph would be sales cycle (measured in units of time) and the x-axis would be cumulative units sold. I would be that for most startups the curve would slope down according to the familiar BCG experience curve.

What are the implications of this. Not totally sure at this point. I sometimes wonder if there is a chicken-egg issue with this whole line of thinking. Put another way, does the sales cycle start to fall because the management team manages it down (by removing bottlenecks, figuring out efficiencies, etc.) or does the fact that a company is selling more cause the sales cycle to fall, or some combination of both.

On a practical note, it does seem like getting the sales cycle down is one of the central challenges of growing a company. Obviously there are lots of things you can do to try to manage the cycle down including:

• Getting more leads so that your sales team can focus only on higher quality leads
• Qualifying your leads better so that you focus only on higher quality leads
• Hiring more sales people
• Etc.

Early-Stage Valuation 101: The Venture Capital Method

Ok. I hope to make one thing clear. Almost all of us here at VR have significant valuation experience. That said, there is nothing about valuing an early-stage venture that is easy. Anybody who tells you otherwise is not telling the truth. Valuation at its root is ultimately an exercise in extrapolation. The appraiser must project financial results forward and make assumptions about future results. Despite what the mutual fund prospectus claims "Past performance may not be an indicator of future results," most of business planning and certainly most of valuation depends on past results as the primary input. If one thing is clear about early-stage valuation, there is almost no past performance upon which to base an extrapolation.
This is where early stage VCs really envy their later-stage brethren and sistren. Later-stagers go to work with reams of historical data. More importantly, they can actually model valuation on profitability data--most notably EBITDA! Early-stage VCs have to make use of revenue. Revenue is notoriously uncorrelated with cash flow and ultimately a business is as valuable as the present value of all future cash flows.

Let's look at the 3 basic kinds of business valuation:

1. The “Cost,” or “Underlying Asset” Method. This method examines all of the assets and the liabilities of the companies and adjusts their book value to market value. The value of the equity of the company is equal to the market value of the company’s assets less the market value of the company’s debts. For most startup or rapid growth private companies, this method is not accurate. The method inherently assumes that a company is only worth the market value of its assets less its liabilities. However, most investors invest in startups and rapid-growth private companies precisely because they believe that the value of the company far exceeds the value of the assets less the liabilities
2. The Discounted Cash Flow (or “DCF”) Method. This is one of the most widely used valuation methodologies. Essentially, the method starts by projecting future cash flows of a business for a defined period (the forecast period) and discounts the value of these cash flows to the present. The method then requires estimating the value of all future cash flows after the forecast period. This value is called the terminal value. The appraiser does this by dividing a terminal year cash flow by a terminal value discount rate. The sum of the discounted forecast period values plus the discounted terminal value equals the value of the company. While this method is probably one of the best methods for companies with predictable cash flows, it breaks down when the appraiser cannot accurately predict cash flows for a forecast period. Because many early-stage startup companies do not have stable or reliable cash flows, this method is often not effective or requires significant adaptation.
3. The Multiples Method. The multiples method actually describes a range of related valuation methodologies. Essentially, the multiples method entails multiplying a specific ratio to the target company’s revenue or income to estimate an overall company value. The appraiser derives the appropriate ratio by considering ratios of comparable companies. The multiples method and DCF methods are highly related in that multiples applied to revenue, earnings, income, EBITDA and other cash flow metrics are simply inversions of the “discount rates” which form the basis of the DCF method. In this sense, the multiples method is actually just a simplification of the DCF method. The multiples method is often useful to help the appraiser quickly get a valuation estimate. Further, the multiples method does not rely on a detailed forecasting of cash flows.
4. The Option Method. The option method is a sum-of-parts valuation methodology that models the components of the company’s capital structure as call options and sums the result. Essentially, this method treats all debt and equity securities of the company as call options on the Indicated Value of the company at some future date. This future-date Indicated Value is the expected value of the company in a future liquidity event like a sale, merger or IPO. The exercise prices of these call options are staggered based on the priority of returns for different securities. There are several methodologies for applying option valuation to company valuation but most appraisers favor the Black-Sholes methodology. Appraisers often use this same methodology to allocate the value of the company to a target security. However, this method does not help us to estimate the future Indicated Value of the company, so most early-stage appraisers use the venture capital method for that.

Venture capitalists, appraisers, and other industry experts almost universally use a hybrid method, the “First Chicago” method or “Venture Capital Method,” to value startup companies. Practitioners of this method point to the method’s simplicity, its focus on a small set of data-driven assumptions, and its widespread adoption in the venture capital industry as positives. The Venture Capital Method relies on several fundamental assumptions:

1. That the appraiser can accurately forecast projected revenues
2. That the appraiser can accurately identify an exit value, or the value at which the company will be sold in the future
3. That the appraiser can accurate discount the projected future returns to the present

The Venture Capital Method

The Venture Capital Method basically applies valuation multiples (derived as described above in the Multiples Method) to a future cash flow period. This is often referred to as the “exit value” or the assumed valuation placed on the startup or growth company by an acquiring entity or the public markets in an initial public offering. To arrive at the current value of the company, this value is discounted back to the current time period using discount rates. We use different discount rates at the following stages. These discount rates are based on years of academic research.

• Seed or Startup stage. These companies are typically actively engaged in product design and development. They are not generating revenues and may not even have a prototype product developed.
• Pre-Revenue with early product prototypes. As the title indicates, these companies do not have revenue or significant revenue but have developed a prototype product or have a functional product but have not shipped the product yet.
• Shipping product. These companies are shipping product and have some revenue but the revenue may still be small and growing. These companies often still require significant investment to scale the business.
• Expansion stage. These companies are growing rapidly. Sometimes these companies have positive income but many choose to reinvest cash flow into growing the business which limits income.
• Profitable and growing. These companies are typically solidly profitable. If they are not profitable it is simply because they are clearly reinvesting a healthy cash flow into growth opportunities. They may still desire to raise capital for growth.
• Bridge or Mezzanine stage. These companies are performing well enough that they are considered likely IPO candidates. They need funding only to get them to their IPO which will likely occur within 6 months.

The Dream of the "Lifestyle" Business

I wonder how many entrepreneurs started their companies with the hopes that they were starting their ultimate "lifestyle" business. For those who may not have heard the term, a "lifestyle" business is one that doesn't require significant work (at least after you have got it up and running) and generates enough cash flow that the owner can have a great lifestyle. The owner can go on vacation whenever she wants, not have a "day job," and still enjoy running a profitable enterprise.

Now I wonder how many of these entrepreneurs' lifestyle dreams foundered on the rocky shores of reality. We are kind of going through a crash course in this right now. While we at VR definitely started VR with the intention of creating a profitable entity, when we first started we had no real competition. We were doing something very unique--in fact, so unique that few saw it as a legitimate business opportunity. Inevitably, as we struggled to change the business model, keep up with competitors, and get revenue we found that our aspirations of a lifestyle business were ill conceived. It required a lot more work than we thought. There was a lot more stress.

Now we are kind of at a point where we again have to decide: do we want this to be a lifestyle business, is that really even an option, or is that nature of most technology startups such that there is no rest until the exit. I assume that we could work toward creating a lifestyle business but I think that option is not realistic given the pressure we feel to succeed.

The Economics of Innovation

There is a theory of innovation that focuses on supply and demand. This kind of thinking implies that there is a market for innovation. I am not sure if this is totally true because it isn't clear that the market has a clearing price or that people are actually trading regularly in innovation capacity. It also isn't totally clear because innovation is not a typical product. You can never be sure when you will have it, you can't strictly control its creation, and you are never sure how much it will cost. This is because ultimately innovation is linked to some gal or guy's creativity and creativity is tough to manufacture.

That said, I think it can be instructive to think of innovation as a market with supply and demand factors. There are certain things that can really increase demand for innovation. It seems to be at least somewhat true that "necessity is the mother of invention." That is why so much innovation has been driven from military / war spending. I think that the clean tech revolution is being largely driven by the necessities imposed as we finally recognize global warming. Further, the increased cost of using traditional fossil fuels also seems to be leading to an increase in the demand for innovation in this area just like it did in the 1970s.

Similarly, I think that there are supply side changes that influence innovation. Funding of basic research programs, increases in entrepreneurship rates, and venture capital all influence the "supply" of innovation. Despite all of this I still think that supply side of innovation, while driven by a bunch of researchers in white coats all over the world, is really more similar to inspiration in art. Artists have to find a muse to get their creative power. The process sometimes seems almost random and sporadic.

Funding Matrix

So I have been thinking a lot about what it takes to raise money lately. It seems like there are a number of ways to create a fundable opportunity but at the most basic level there are only a few things that matter:

• Vision


• Results


• IP


• Other forms of differentiation

The vision is the business case and articulation of why the opportunity (regardless of any actual execution) is exciting. More importantly, the vision shows how big, important, or exciting a business opportunity is. For most venture capitalists and private equity professionals, this means that the opportunity has to be pretty big. I put this before results because for most entrepreneurs a vision must precede results. Ultimately, results are the most important but usually results are the natural product of some kind of vision.

Results are the tangible rewards for executing against a good vision--generally speaking these are profits / cash flow. Some companies seem to be able to generate significant results without a great vision. Other companies generate great results and have a good vision but the vision isn't big enough to appeal to private equity / venture capital investors.

IP is "economic rents." These are assets that only you have and others cannot have, by law.

Other forms of differentiation refer to other assets that only you have and that others cannot have, but this situation is not protected by law.

Most venture capital professionals evaluate deals based on the management team, market, product or service, business model, and deal terms. So is this method at odds with a method that focuses on vision, results, IP, and other forms of differentiation? I don't think so. I think that the two overlap but ultimately serve slightly different purposes. Investors will find out about the vision, results, IP and business model of the company as they look at management, market, business model, product, financial results, etc. The purpose of this other way of looking at a deal is really to highlight the trade-offs that arise when a company either is generating significant results or not and the trade-offs that arise when a company chooses to grow a startup with protectable IP, a differentiated business model or no differentiation.

So, let me channel my inner consultant here and put up a matrix that I think exposes a relationship between these ideas and the fundability of a company.

As you can see in the matrix, I think that companies with both a great vision and great results can almost always get funded quite easily. Companies with a great vision but no significant results yet (roughly 80% of all venture-backed companies) almost always need some form of differentiation to appeal to venture capitalists, or angel investors.

Companies that lack vision and results are in a tough spot. Typically, the only chance these companies have of getting funding is by having some form of protectable IP (e.g., patents). There are some investors who will invest in protectable IP with the intention of selling it to a company that will be able to create a vision and results for it -or- sometimes they have a vision of the IP themselves -or- they hire somebody to develop a vision. I would consider this a rare case though.

The takeaway is this. Results are inherently good and put companies in a great spot for fundraising. If you don't have results you better have a great vision and you better have some form of differentiation.

Pace of Posts and Biological Metaphors for Startups

I just kind of want to apologize for the pace of posts. It isn't that we don't enjoy the blog or that we don't think it is important, it is just that we are on kind of a slower pace than most other blogs.

What is it about starting a blog that requires frequent posting? Why is that I feel guilty if I don't post relatively frequently?

Anyway, we will keep you posted though perhaps at a slower rate than some others.

On a totally unrelated note, I have been thinking a lot about applying biological metahpors to business--natural selection, survival of the fittest, adaptation, evolution. How do these apply to startups. Particularly, does raising funding kind of necessitate the creation of a barrier from maket/environmental forces? Does this barrier or cushion actually slow down the rate of environment-induced adaptation. Does it monkey with natural selection among companies? On the other hand, it seems like some startups absolutely require this. If a new born infant were simply left to fend for itself in the world--without parents--it seems like it wouldn't have much of a chance. So is the venture funding model actually more of a natural fit with biological metaphors than a contradiction of them?

Introduction

I'm late to join the blog but wanted to make sure to jump in. My name is Anthony - I'm a founder in the company and the current President.

It is funny reading through the posts because the area that I spend most of my time thinking about lately is new vs. old. We were the first to create reviews from entrepreneurs about VCs and we are now the first to launch a company valuation tool. Our issue now is do we continue to develop and improve these tools - or push on some of the other rabbits still sitting in the hat. Internally we probably spend 3 hours a week debating just that. We do have a few things in development now and stay tuned - but know behind the scenes we continue to debate what we should be spending our time on next!

I'm sure every start up has these issues - balancing limited resources across a very large spectrum of thoughts!

Anthony

Focus vs. Flexibility

As one who has had the privilege of working with a lot of startups, I feel it would be hard to overestimate the visceral and emotional tension that occurs as startup entrepreneurs try to focus but also maintain flexibility. There is an inherent tension between focus and flexibility. Why? Because it is idealistic and naive to think that a startup can immediately, without any preparation, dramatically change course even when all the right reasons dictate such a change. If a startup could dramatically change course without advanced preparation, then there would be no tension between focus and flexibility. A startup could simply stay laser focused on solving a particular business problem and then point the laser in a different direction upon receiving new data. In reality, it is not this easy.

This leads to a problem. Startups that are not sure that they have created the product, service, or business model that will create enormous success often have to start working on multiple offerings _from the very beginning_. If they don't start working on putting multiple "irons in the fire" early on, they will be in trouble when they learn that the one "bet" that they made isn't paying out. So this creates a tension. On the one hand most seasoned startup veterans consider a lack of focus literally a cardinal sin for startups but I can't understand how you can avoid some lack of focus until you hit on a winning business model. Perhaps it is just because I haven't been smart (or lucky) enough in my career yet to identify the perfect business model from the very beginning of a start up and ride a wave of success from idea conception to glorious exit. Does anybody else out there have these feelings?

Typo Found by Major CFO

I was pretty excited today to hear that one of our members, the CFO of a major public technology company, took the time to point out a typo on one of our pages. Pretty silly, I know. It doesn't take much to excite us here at VR. That said, I am sure that there are more to find, keep letting us know. We would love to hear any feedback that any of you have on our idea, us, typos, product suggestions, improvements, etc. Thanks in advance.

Company Valuation for the Masses

One of the things that we are hoping to do is introduce an ability to extend valuation of companies (especially private companies) beyond the typical realm of sophisticated analysts at investment banks, venture capital firms, and private equity funds. Don't get us wrong, in many ways our primary user group target is the gals and guys of Wall Street, but we also view part of what we are doing as trying to become a Zillow.com-like tool for the valuation of companies instead of houses. You can see our valuation tool here. We are working on releasing a Flash demo that will show you how to use it but in the meantime you start by essentially searching for comparable companies using our free text search or by looking through a sector tree we have created. From here you simply drag and drop companies that are comparable over to the "Select Comparables" box. Once you have done that, we automatically go out to the public markets and pull in the appropriate valuation ratios. We also search our own proprietary database of M&A transactions and use those as comparables as well. Finally, we ask for very simplified view of your income statement (basically revenue and EBITDA), cash on hand, and debt on hand. Based on this information we can give you a rough estimate of what your company is worth. We can also create a stock chart for your _private_ company. Over time we hope to add a lot of features here. We are pretty excited about it. That said, you should keep in mind that this represents only a rough estimate of the valuation of a company. If you are interested in a full-blown valuation, we offer those as well. We call them 409a valuations (because these are the type of valuations we have most often been asked to perform) but essentially we can perform any kind of appraisal or valuation for you. Look here for more information.