By: Forbes/ Kevin Woo

In 2003, three Brown University undergraduates, Eric Shashoua, Ben Rubin and Jason Donahue, sat in a school cafeteria and mused about their grogginess after an all-night study session. They knew that the stress of exams played a role, but they started wondering about the science of their exhaustion.

Little did they imagine that their discussion would eventually lead to the founding of Zeo, maker of the first direct-to-consumer sleep device that analyzes nighttime sleep patterns. Zeo’s product, the Personal Sleep Coach, uses a soft headband loaded with sensors to monitor brain waves. The data are sent wirelessly to a small device on a nightstand; from there they can be uploaded to the MyZeo.com Web site. MyZeo.com then analyzes the data and e-mails back a strategy and suggestions for improving the next night’s sleep.

However, once these three would-be entrepreneurs decided to create a science-based aid for the estimated 70 million Americans suffering from chronic sleep disorders, they realized they were lacking a key ingredient: an investor–or several–to fund their research and development.

Initial fundraising began in the cafeterias at Brown. “We literally went table-to-table to talk about our innovation and get people interested in contributing,” Shashoua recalls. Those discussions led to introductions to wealthy Brown alumni, experts in sleep research and so-called “angel investors.”

Angel investors are individual entrepreneurs who provide start-up capital to other entrepreneurs to get businesses off the ground. Their investments are often the bridge between self-funding and venture capital investment. The term comes from Broadway, where producers have long sought investors to help cover theater production costs. Today, angels support a wide variety of industries, including high-tech, biotech, movies and restaurants. Their levels of investment typically range from $150,000 to $1.5 million, and they commonly expect a five-year return rate of at least 30%. About a third of all angel investments result in a capital loss.

A growing body of angel investors pool their capital and share research information to make their investment decisions. They form what are known as “angel networks.” Members of an angel network can invest as a group or as individuals. The highest concentration of them can be found in Silicon Valley and Boston. Their funding levels are similar to those of individuals, multiplied by the number of people involved.

In the first three years, Zeo’s founders met with more than 400 potential angel investors and got money from 50 of them. But identifying those potential investors proved to be a lot easier than getting meetings with them.

“I called a director of one major company in sleep technology every other month for more than a year,” Shashoua recalls. “He wouldn’t return calls, and his secretary turned me down each time, but I would call back when I had news to share. Eventually he agreed to talk to me and became one of our most valued investors.”

There are more than 260,000 angel investors in the U.S. According to the Center for Venture Research at the University of New Hampshire, these helpers invested $19.2 billion in 55,480 companies in 2008, down 26% from the year before. Venture capitalists, by comparison, invested $28.1 billion in 3,630 companies, down just 10% from 2007.

Budding companies shouldn’t always take angel money, Shashoua warns. He says if your company has a vision that doesn’t fit with a potential investor, it’s better to not accept the dollars.

Benjamin Wayne, chief executive officer of Fliqz, a provider of video solutions for Web sites, agrees. Wayne, who has founded four companies since 1995, divides potential angel investors into two categories, amateurs and professionals. Wayne says the amateurs tend to invest based on what feeds their egos and become mercurial about their investments. “Angels often make emotional decisions based on very little data,” he says, “which would be almost funny if they didn’t have the ability to wield enormous influence over the management teams of their start-ups. It can truly be a case of the inmates running the asylum.”

Professional angels, on the other hand, are often people with serious operating experience. They can be very good at guiding early-stage companies through their initial growing pains, providing management experience, brokering early partnerships and mentoring first-time executive teams.

When you work with an angel network, you can worry much less about individual idiosyncrasies, says Stephen Viscusi, CEO of the Viscusi Group, an executive search firm. “Individual angels romanticize why they are making the investment. They have a passion for an industry they never had the guts to go into themselves; now they’re rich and can dabble in it. I always think people should call angel investments ‘devil money.’ In most cases, when angels don’t see a fast return on their investment, they turn into devils. They want the soul of the CEO.”

To avoid fracturing relations between entrepreneur and investor, you need to make sure your backers have realistic expectations. Explain all the risks, and undersell the likely return on investment. “Not all ventures go the way you want them to. That is the nature of the beast,” says Jon Black, CEO of the medical Web site CheckMD.com. “If you see red flags with a potential investor early on, pull the plug and move on to the next opportunity. If a current investor is unreasonable or is otherwise draining energy from the company after you’ve done everything you can to resolve his concerns, seek a way to end the relationship.”

Having the courage to walk away from a potential investor isn’t always easy, but Dewey Gaedcke, CEO of Minggl.com, agrees that some angel money is best left on the table. “We’ve avoided and refused money from all moral-agenda based groups such as right-wing Christians and pro-life enthusiasts, anyone who might want to control rather than empower users of the social Web,” he says

Minggl (pronounced “mingle”) enables social Web site users to manage multiple accounts through a single sign-on. When potential angel investors aren’t familiar with new technologies, or in Minggl’s case with Facebook and Twitter and the like, Gaedcke advises them to bring along technology experts when they come to meetings. Those experts can help them evaluate market opportunities, explain the space and impartially observe progress.

Such technology experts often end up serving on the board and acting as interpreters between the founders, who might be very technically minded, and investors, who might not. Vinit Nijhawan, executive-in-residence at Boston University, observes, “Many of the strategic decisions made during board meetings require an understanding of the market. The investors on a board can have a healthy skepticism of the CEO’s position but be likely to accept an independent-industry expert board member’s views.”

Independent expertise is critical in the early stages, when strategy and market focus can gyrate wildly. Seymour Duncker, CEO of iCharts, recommends that as soon as you’ve got your money you focus on building up your investors’ trust in you. “You earn it by delivering on their expectation that you will take things to the next level and that you will earn them a decent return on their investment. The scenario that all angel investors dread is that the first time they hear from you after investing, you show up, hat in hand, telling them you need more or your company will go under.”

In the six years since those first table-to-table chats with Brown University classmates, Shashoua, Rubin and Donahue have raised $3.5 million from angels and an additional $10.5 million from venture capitalists. The Zeo Sleep Coach debuted on June 18, 2009. It sells for $400. An early review in The New York Times says, “The Zeo does make you a better sleeper.”

Stay tuned to see if it repays its angel investors.

Kevin Woo is a freelance writer in San Francisco.

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Fortune Small Business STARTUP SHOWDOWN 2009

42 startups duked it out in the world’s most lucrative business plan competition. We trailed one team to the bitter end. Here is their story.

By Adriana Gardella

HOUSTON (Fortune Small Business) — THURSDAY 3 p.m. Kristine Wexler can’t remember what comes next. Wearing a pair of four-inch stilettos that are killing her feet, the CFO of In Context Solutions, a market research startup, stands mutely in front of a classroom at Rice University in Houston. Eleven judges — investors and industry experts from around the country who have gathered to select the winners in Rice’s annual business plan competition — stare at her expectantly. Wexler’s three teammates hover nearby, willing her to speak. She knows ICS’s financials inside and out, but Wexler is at a loss.

Awkward seconds pass like hours. Wexler, 33, flushes deep purple, mutters, “Shoot,” then somehow regains her train of thought and resumes her presentation. She finishes with a smile and a sigh.

Why would anyone endure such a trial? For the 42 teams of M.B.A. student startups that submit plans chosen for Rice’s competition — the largest and richest of its kind — the stakes include a share of $800,000 in cash and prizes. But the prize money is almost incidental. Judges at Rice offer invaluable contacts and feedback, even contact numbers and possible financing. Competitors are evaluated on the potential of their businesses, not the academic merit of their plans.

“There are no toy businesses here,” says judge Steve Sheafor, a Boulder-based technology entrepreneur.

Business plan competitions are gaining popularity nationwide. “Students who would have gone into high-paying jobs are now willing to take a chance on an entrepreneurial venture,” says Philippe Sommer, director of entrepreneurship programs at the University of Virginia’s Darden School of Business. Darden sponsors a competition that drew 91 submissions this year, up from 42 in 2008. “You could argue that this is a bad time to start a business,” he says. “But good ideas are always likely to get funded, and in a down economy there’s less money chasing marginal ones.”

ICS creates customized virtual stores designed to help retailers and consumer-packaged-goods manufacturers understand customer behavior. As research subjects roam the aisles of a vividly rendered supermarket, ICS clients collect data on all their shopping decisions. The data provide them with guidance on details such as package design, product placement and store layout.

Solving a problem that has long vexed its competitors in the virtual consumer research space, ICS has figured out how to send interactive 3-D simulations over the Internet. Some rivals can deliver only flat images through the Web; others use 3-D technology but have to bring consumer research subjects to their facilities because their imagery can’t be transmitted through the Internet.

Four members of the ICS team, all M.B.A. students at the University of Chicago’s Booth School of Business, have traveled to Houston with hopes of raising at least part of the $1.7 million the company needs to maintain its momentum. They are led by CEO Bob Gillespie, 41, a former technology executive who enrolled in the M.B.A. program to kick-start his entrepreneurial ambitions.

“Bob is so passionate about this — it’s his life,” Wexler says of her good friend. Gillespie’s enthusiastic pleas persuaded her to join the ICS team, even though between her business school classes and her day job as a senior vice president at Bessemer Trust, a private wealth-management firm in Chicago, helping to launch a startup was the last thing she had time for.

Gillespie also impressed marketing director Kanika Agarwal, 28, the team’s only full-time student. “We met at [Booth's] orientation and ended up talking for three hours,” she recalls. Last to join the team was sales director Jeb Ory, a 28-year-old who is pursuing his M.B.A. at Booth while holding down a sales job at DCI Marketing in Chicago.

Going into the competition, Gillespie is sure of one thing: “I guarantee we’ll have the most fun of any team.”

Fortunately, the 15-minute practice presentation that Wexler and her teammates just gave doesn’t count. The team improves during the second phase of this feedback round, a question-and-answer session. ICS handily tackles the judges’ queries regarding the cost of its services relative to the competition’s, scalability and, perhaps most significant, the technology that distinguishes the startup from its rivals.

ICS has explored the possibility of seeking a provisional patent for its delivery method, but the technology is developing quickly, and patents take a long time to acquire. If the technology is moving so fast, one judge asks, won’t competitors simply build their own virtual stores and destroy ICS’s competitive advantage? Gillespie has answers: The virtual-store technology is complicated, switching costs are daunting, and the demand is so high that even if someone else did crack the code, there would be plenty of work for ICS.

Ory lays out the company’s two-pronged marketing strategy: direct sales of the company’s services to packaged-goods manufacturers such as Ocean Spray, and indirect sales to the firms those companies hire to handle consumer marketing and research. Rice judge and Compaq co-founder Rod Canion sees a potential conflict of interest if ICS pursues both sales channels simultaneously. For example, a cereal brand might retain ICS to build virtual stores to test its product while a competing brand hires ICS through its market-research firm. Compaq resolved this problem — and thrived — by selling exclusively through dealers, he explains.

After ICS wraps up, Houston business consultant Linda Spain homes in on the team’s spotty presentation skills. “Three of you don’t present strong enough,” Spain says. She’s talking to Agarwal, Ory and Wexler, who came across as nervous and wooden. (Gillespie did stand-up comedy for 11 years and knows how to work a crowd.) “You need to appear confident,” she continues. “If you can’t memorize it, just get up there and talk to us. We won’t know you missed something.”

The ICS team repairs to their assigned break room to critique their performance. Despite the delivery glitches — Wexler’s long pause, Agarwal’s tendency to say “um” and Ory’s failure to articulate the marketing plan — the judges seemed impressed by ICS. But the team isn’t happy.

“We looked nervous,” Agarwal frets. Gillespie agrees. “Kanika, be you!” he says. “Don’t be ‘business lady.’ ”

Wexler is equally unhappy. Like Agarwal, she wrote out her presentation and tried to recite it verbatim while clicking through PowerPoint slides. Wexler’s slides, which display financial projections, revenues and expenses, and other data, are particularly dense. She vows to toss her script and just talk to the judges. “If we miss something, we can answer it in Q&A,” Agarwal reminds her.

Agarwal will represent ICS in tonight’s elevator pitch competition. Her task will be to sell ICS, in one minute or less, to a crowd of 500 that includes judges and student competitors. She’s anxious but has decided she’ll calm her jitters by focusing on Wexler. “You always give me a nice smile,” she says before the pair head off to practice.

About an hour later Rice’s Shell Auditorium is packed. One by one students approach the mike and present elevator pitches about their companies. Introducing Agarwal, the announcer gets her first name wrong — twice. Thrown off by the gaffe and the photographers’ camera flashes, which explode every few seconds, she stumbles through much of her presentation.

Afterward, Agarwal is in no mood to talk. The team is discouraged after reading the judges’ practice-round evaluations, which were made available before the elevator pitches began. Gillespie tries to lighten the mood by noting that judge Rod Canion gave them an excellent review.

“Maybe he gave really good reviews to everyone,” Ory says drily. “What did the other judges say?”

“You don’t want to know,” Gillespie replies.

The next morning the team members gather in their hotel lobby before leaving for Rice. Agarwal says she spent the evening practicing her presentation, pausing for a morale-boosting phone call from her boyfriend back in Chicago. “He reminded me that it’s an accomplishment just to be at this competition,” she adds. Gritting his teeth, Ory vows to “sell the sh** out of this thing today.”

In the break room, Agarwal continues to practice. Gillespie interrupts. “You’re still memorizing,” he says. “If you stumble, go forward. If you say, ‘Our CSO enjoys satanic rituals,’ don’t go back!” Agarwal thanks Gillespie for his advice. “I’m getting more comfortable,” she says. “I just need to work on eradicating ‘ums.’ ”

Ory and Wexler run through their presentations. Unlike yesterday, both seem in full command of their material. “It’s palpable,” says Gillespie. “I can feel how much more relaxed you are.” He jumps up and down in the tiny room. Before they head to the auditorium, Gillespie blasts Snow Patrol’s “Disaster Button” on his laptop, which displays a photo of his three-year-old son. “He plays that right before we go on?” Agarwal says with a laugh.

Today ICS is presenting to 15 judges and additional spectators, including student volunteers and members of other teams in the competition. Although the substance of the presentation is unchanged, the team’s performance is so much better that the material seems brand-new. Gillespie’s presentation is fluent, Agarwal’s delivery is more natural, Ory hits all his points, and Wexler is confident, speaking conversationally and passionately.

During the Q&A, a judge asks how packaged-goods manufacturers are adjusting consumer research budgets in response to the recession. “They’re spending more,” Gillespie answers. “They still have to test their products.”

The judges are impressed. “That was pretty good,” one whispers as the session ends. “That was really good,” another replies.

“I could kiss all three of you guys,” Gillespie announces in the break room. So he does. Gillespie calls his wife to share the good news. Then he dials chief technology officer Tracey Wiedmeyer, who built the ICS Web platform. “We killed it, we crushed it, we could not have done any more!” he crows. Ory produces four Cuban cigars, but the team decides not to light up just yet.

After lunch Gillespie sits alone in the break room. His teammates are watching the presentations of other competitors, including Dynamics, a buzz-generating startup that is developing a credit card with a reprogrammable magnetic strip.

Gillespie reports that judge Terry Hunt is interested in investing $100,000 in ICS (the company raised $200,000 from family and friends before coming to Rice). And judge Bill Arend, regional manager for Oracle (ORCL, Fortune 500) in Houston, told Gillespie to call him. Oracle customers like Target (TGT, Fortune 500) and Whole Foods (WFMI, Fortune 500) would “eat up” ICS’s market research technology, Arend said.

“I’m so overwhelmed, I can’t even think about it,” Gillespie says.

The team returns to hear the judges’ feedback. Tim Berry of Palo Alto Software raves about the software demo. Another judge praises ICS’s financials. Wexler looks thrilled, if a bit stunned. Later, Ory reminds her that the appropriate response would have been a confident “Thank you.”

The conversation turns to valuation. Based in part on projected 2011 revenues of $12.4 million and news that ICS competitor Red Dot Square, which had third-year revenues of $10 million, was purchased for more than $30 million, Gillespie argues that ICS could be worth $30 million. But the venture capitalists in the room urge him to think bigger. One VC suggests that $500 million is a realistic goal.

“Your plan and your presentation don’t make you look like a big business,” notes John Adler of Dallas-based Silver Creek Ventures. Former VC Matt Cohen, who now runs online content aggregator OneSpot in Austin, says ICS should raise its profile. “We’re not saying lose what you have but that what you have needs to be step one in taking over the world,” he adds.

In the break room, the team entertains visions of world domination. Agarwal points out that small business owners could use the ICS platform to build virtual stores instead of flat Web sites — or instead of stores. “We can grow the market to include the 90% who can’t afford us now,” she says excitedly.

Ory goes even further. “We can completely replace traditional shopping or at least make online shopping more fun,” he muses. “Live shopping with real-time, continuous data. E-commerce partnerships with Amazon (AMZN, Fortune 500) and Peapod. We can become the Amazon of grocery shopping. Then we can become the Amazon of Amazon. We can turn Amazon into a back-end fulfillment house!”

“You guys are trying to make me cry,” says Gillespie. “You just took my little $30 million company and turned it into a $500 million company. I’m freaking out.”

A few hours later, the judges report that ICS came in second out of six teams in the information technology flight, securing a spot in tomorrow’s wild-card round and a shot at winning the competition. They were beaten by Dynamics.

Overnight the team changes its presentation to emphasize the broader market potential that appealed to many judges. Ory and Wexler tinker with the PowerPoint slides. “Envision being able to apply this technology to every single online shopping experience, all the while collecting data points on the consumer,” says Ory. Then he repeats the new ICS mantra: “We can become the Amazon of Amazon.” The line makes it into the presentation.

“If we win, I’ll radiate heat,” says Gillespie.

Dynamics remains a formidable competitor. Both startups feature experienced management teams and game-changing technologies. But Dynamics has something ICS lacks: an $800 million market. “Why did the credit-card company have to be in our flight?” Gillespie grumbles.

In the auditorium 52 poker-faced judges occupy the first few rows. They stare straight ahead as Gillespie begins his pitch. Wary of going long, he rushes through the pitch and seems less convincing than he did yesterday. Agarwal follows, but she can’t drop the “ums.” Ory fails to coherently explain how ICS will “become the Amazon of Amazon.” Wexler tries to rally the crowd. “Clearly, we’re fired up,” she says brightly. But it sounds more like wishful thinking. ICS finishes two minutes early to perfunctory applause.

Despondent, the team slinks from the auditorium. “Can I give some criticism?” Gillespie asks in the break room. Lost in private postmortems, no one replies. “Kanika, you said ‘um’ about 38 times. Jeb, you were scattered, and you looked back at the slide a million times,” Gillespie continues. “I sucked,” Ory agrees.

“I missed a whole section because I looked at Mean Woman and lost it,” says Wexler, describing a judge who sat shaking her head during the presentation. Another judge barely glanced up from his Wall Street Journal. Gillespie exhales. “When you do stand-up, you learn to look at the back wall,” he says. “Don’t look at individual people. I guess I should have told you that 20 minutes ago.”

Nobody on the team is happy. “I’m still waiting for the crushing disappointment of not hearing our name when the finalists are announced – then I’ll get over it,” Gillespie says grimly. “On the other hand, no one’s come to my office to pack up my sh**. I still have my company.”

At the awards dinner that night, Dynamics takes first place. ICS comes in 12th out of 12 wild-card teams. The news stings, but by now the team is more philosophical. “We came in 12th out of 300-plus teams that submitted plans,” Wexler reminds her colleagues.

The team is eager to apply their hard-won knowledge at the forthcoming Booth New Venture Challenge (their own school’s competition) and, more important, with investors.

“We tried to be something we’re not,” Gillespie reflects. “Right now I’m just trying to become a $50 million company.”

He says that ICS erred by listening to the venture capitalists on the panel, because VCs are biased toward companies that they can grow quickly and sell or take public for a huge return. “That’s not our audience,” he says, arguing that ICS would be better off working with more patient angel investors.

But ICS did impress some of the judges. “I voted ICS No. 1, over Dynamics,” says Tim Berry of Palo Alto Software. “I think they’re at least as likely to succeed as any startup I’ve seen. They just need to get past these venture competitions and into the real world.”

Gillespie has stayed in touch with judge Jerald Broussard, a business development consultant in Houston who said he was impressed by the team’s character, technology and enthusiasm. Bill Arend of Oracle plans to arrange meetings for ICS with some of Oracle’s clients. ICS and judge Terry Hunt continue to discuss investment terms. Meanwhile, the startup has raised another $255,000 from family and friends.

Gillespie even reached out to Rice and offered to sponsor a prize in next year’s competition if ICS is profitable by then. “We had a great time,” he reflects. “Except for those 15 minutes on Saturday.”  

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http://money.cnn.com/2009/06/04/smallbusiness/incontext_biz_plan_comp.fsb/index.htm

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By Matt Marshall for Venture Beat

Chris Shipley and I hosted a breakfast last week with 16 leading Silicon Valley investors about the state of the start-up community.

It was frank and engaging.

Some participants requested their comments remain off the record. Below are summaries of some of the remarks of participants who agreed to be referenced.

Here are the two main trends I picked up from the conversation:

1) The art of VC dealmaking is changing — Investors are no longer just investing in the two guys just of out Stanford with a new idea. They’re doing things like joining with boutique investment banks to craft new sorts of financings, or hooking up with entrepreneurs to buy portions of companies and spinning them out. (Examples: Real estate company HomeAway raised $250 million to conduct a rollup strategy. Another group of investors bought StumbleUpon, spinning it out from eBay a year and a half after eBay bought it.)

2) VCs are in serious danger of strangling companies by depriving them of cash in their early years — There was significant disagreement between investors about how much companies should be allowed to go into the red while building their businesses. Some investors said they prefer to invest in businesses that can be profitable quickly. Others feel this is short-sighted, and runs the risk of forcing them away from building bold new platforms. Companies with big ideas (Facebook, for example) should focus on growing those ideas and not worry about being profitable from day one or two. See bold below for highlights on this theme.

The breakfast was part of our preparation for the DEMO conference in September. Chris and I are looking for the very best companies to launch on a stage before the world. Here are some notes I took from some of the participants (not direct quotes).

Asheem Chandna of Greylock — He agrees that the nature of deals is changing. His firm bought public stock in a company (Aruba networks) for the first time ever. Public tech companies are cheap. His firm also has a couple of companies with large revenue increases in the first quarter, suggesting there’s opportunity even in the downturn. The online security sector, for example, is robust because of the continuous rise of new threats. Virtualization remains a key macro trend.

Rob Theis of Scale Venture Partners — Contrary to what we’ve seen in past downturns, there’s still a robust angel investor network willing to invest. However, these angels have gotten smarter. They’re getting close to actually resembling VCs in that they’re actually raising small funds. As for trends, there’s an increased awareness among the younger population for new technology. Kids are carrying RIM BlackBerrys very early, and they’re learning about computing much earlier, skipping the whole desktop learning process of the previous generation. He agreed with others about the trend towards new types of deals, including more spinouts, as companies focus on core competencies (Symantec focusing purely on security, for example). He’s concerned about clean-tech, because companies in the energy sector generally have higher capital investment requirements. A lot just won’t make it.

John Lee of Silicon Valley Bank — Big questions also surround the hardware sector, which requires large capital expenditures. Prospects of raising capital are not very good right now. Semiconductor companies, in particular, are facing a challenge. Later stage companies are increasingly seeking to work with groups like Inside Ventures (which is a new company trying to hook up mature private companies with institutional investors for investment in those companies while they’re still private, even though institutional investors have typically preferred to wait to invest in public companies).

David Chao of Doll Capital Management — A lot of what we’re seeing now is deja-vu from 2001, 2002 and 2003. The difference is that the value chain of capital has been restricted, which is making investors more panicky. The problems we’re having are caused by the subprime crisis, not tech. If you look around the corner, there are some interesting shifts going on, and he’s optimistic. One is that kids these days are playing on Facebook, and Facebook apps. They’re doing it on MySpace. These companies have become open platforms and are thriving. His guess is that Apple is going to fall flat on its face again for being too closed. Another trend: a lot of cleantech companies are going to die. However, in Europe and Japan, anything green sells. Finally, the globalization of technology is exciting.

Phil Sanderson of IDG Ventures — He’s going to do deals locally (responding to some VCs who said they were increasingly investing globally). He said there’s a migration of Silicon Valley companies to San Francisco over time. The original chip and computer wave decades ago saw most companies located in San Jose or Cupertino. Then the software boom was headquartered in Mountain View and Palo Alto. Now new media companies are locating in San Francisco. More than half the returns from his last fund were from companies within San Francisco, even though fewer than half of the companies he backed are actually located there. You’re seeing other SF firms emerge, such as Alsop-Louie and True Ventures. The amount of money a company needs to raise before getting to liquidity is about $10M, compared to $50 million during the bubble era a decade ago, and $20M before the bubble. The reduced costs today stem from things like open source, viral marketing, cheaper Web infrastructure. He gets scared if an early stage companies needs to raise more than $10M and agrees with others that new dealmaking is on the rise. More public companies should consider doing PIPEs (private investments in public entities).

Sergio Monsalve of Norwest Venture Partners — The venture industry, like its other financial industry brethren (hedge funds, ibanks, etc) are woven into the global economy. His view is that the VC industry will have be more globalized than today and will include more action in Asia. It will resemble later-stage investing. His firm has made as many early as late stage deals in the last six months. He hasn’t seen a tectonic shift in the industry that resembles the client-server or web movements that happened in previous decades. He doesn’t see the same sort of multiple returns on investments. He sees mobility and telepresence as interesting areas (his firm invested in LifeSize for conferencing, seeing it as a way to help people needing to travel).

Jeff Clavier, angel investor — He says things have changed significantly over the last last year in angel investing. Beginning in 2004 with the emergence of cheaper Web 2.0 technologies, angels backed a company with an initial check of $20,000 to $100,000 each, for a total angel round of about $250,000. It would then take another $500,000 or $1 million to get to market. Now that capital is scarce, he’s backing companies with slightly more money — $750,000 to $1.5 million –because they need to be able to get enough traction to be either attractive to venture capitalists or already profitable. Also, while before, a company needed about 500,000 users to prove it had traction, it now needs to have 1 million. So he’s funding a company to last it 24 months, enough for about 18 months of execution and then six months to look for capital. This is what keeps him awake at night: Are the new realities forcing him to build a company so cheaply that the company isn’t being given a chance to build a real business? By focusing on getting a company to profitability too early, investors may be stunting their ability to build real platforms. Prices are down 50 percent. A company raising a first round a year ago at a $4M pre, would today raise at a $2M pre. (He’s got a $15 million fund, raised in mid 2007. He’s done 37 deals from that fund so far, and his goal is to have done 50 total by next year. He’s done five deals this year.)

Reid Hoffman, angel investor, Chairman of LinkedIn — Typically, angel investors have used their “house money” to make investments. When the market dries up, they stop investing. Many have been uncertain about how to move to become more of a VC (by raising a fund that is not based on house money). The good news is that many angels are now making that transition.  He started LinkedIn in 2002 because he thought social networking was going to change the way people do business. Now, in addition to that, there’s been a knock-off effect: People are using tools in the cloud, applying more data and analytics to their businesses, making them more efficient. With the emergence of Facebook’s platform, he decided to invest in social games. He backed Zynga. Much of the transformation in this area is still being played out.

Gus Tai of Trinity Ventures — One big problem has been the over-capitalization of the VC sector. He points to respected venture firm Sequoia Capital as an example of how firms have become larger. Its fund in 1990 was merely $31M. By 2000, during the bubble, it became $1 billion. Now, in 2009, it’s $450 million — down from the excess of the bubble, but still significantly higher than the early years. The shakeout will continue. A few years ago, Harvard professor Josh Lerner chose 40 VCs firms to put in a database he used to analyze the VC sector. However, of those 40 firms, 10 are no longer in business and five have changed their business model. Tai says he thinks another 15 will disappear over the next three years. That means entrepreneurs may be wasting more time raising money, because VC firms will be less decisive as they change their model, or back off from investing.

Josh Hannah of Matrix Partners — He’s brand new to investing, having only recently joined the firm. He says he’s been talking with his new colleagues in the industry and finds that they are enamored with investing in capital efficient businesses. He said entrepreneurs are thus trying to be more capital efficient in order to get that funding. However, he suggested they may be putting the cart before horse. He said that successful entrepreneurs have always sought to be capital efficient. He spent $100,000 at eHow, and returned capital to investors within 1.5 months. Survey Monkey was boostrapped: Nine guys built a business that had $40M in revenue and $30M Ebita and took it to an investor who paid a nine-figure valuation to invest.

David Hornick of August Capital — He vehemently disagreed with Hannah, saying he doesn’t think there are a lot of interesting companies in that category. Maybe three? When companies get interesting, they often require an enormous amount of capital. He did say the model of VC investing has to change. He agreed with Clavier that the “just-in-time” VC backing of companies that had previously been supported by angels has disappeared. He fears that the 18 to 24 month “runway” set up by Clavier and other angels for a company to find backing from VCs may really be a proxy for “forever.” In other words, startups are being forced to recognize they won’t get funding and are curtailing their ambitions. Fewer real businesses get built. When you focus on getting cash-flow positive on $100,000, you’re under-optimizing.

Justin Fishner-Wolfson of The Founders Fund — Uncertainty has clouded the fortunes of every player in the cycle. If a venture firm doesn’t know where its money is going to come from, even if it’s a good venture firm, then the angel is going to feel the same uncertainly, and then the entrepreneurs are too. He’s worried that many entrepreneurs are getting sidetracked by going after dollars from the U.S. stimulus package in areas such as cleantech, healthcare or genomics, for example, creating businesses where they get tax rebates if people buy more of their service. Washington’s spending may be creating a massive dislocation. He also says the tools for building a company have never been easier to get. Before, you needed to rely on an IT guy. Now you can just call on services provided by companies like Amazon, and you don’t have to do any work.

Michael Goldberg of Mohr Davidow Ventures — He’s investing in healthcare companies. He’s looking for capital efficient companies that have no risk from FDA regulation, especially those using measurement, computation, information technology and material science in new ways. He’s looking at personalized medicine. He’s looking at companies building wearable devices, such as those that use wireless and bluetooth technology to message vital sign information straight to the cloud.

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Venture-Capital Group Outsources Funding Decisions; $25,000 and a Dream

By JESSICA E. VASCELLARO

In the latest example of investors trying new approaches during the downturn, a venture-capital firm that was an early backer of Facebook Inc. is devising a plan to outsource early investing decisions to hand-picked entrepreneurs and technology executives.

The Silicon Valley firm Founders Fund plans to give at least 12 “fellows” $25,000 to invest in an early-stage company of their choosing. Founders Fund will invest $25,000 alongside those initial investments and request the right to invest an additional $250,000 when the companies raise their next round, according to Sean Parker, managing partner at Founders Fund, which announced it raised a $220 million fund in late 2007. The firm expects to devote roughly $3.6 million to the new program.

Mr. Parker hopes the program is a more efficient way to get in early with small start-ups, by tapping the connections of those working in the industry. “Early-stage ventures are about betting on people,” said Mr. Parker, 29, who has co-founded such Internet ventures as Napster, Plaxo and Causes, which helps nonprofits raise money on social-networking sites. “There isn’t really a shortcut,” he said.

To select the recipients, the fund has assembled a brain trust of Silicon Valley heavyweights, including former Yahoo chief executive Terry Semel, LinkedIn co-founder Reid Hoffman, Facebook Chief Executive Mark Zuckerberg, and Michael Arrington, founder of industry Web site TechCrunch, who helped shape the program.

The 22-person team will help Founders Fund select winners from four categories: engineering leadership, product design and marketing, general management and disruptive innovation. They will consider nominations submitted through TechCrunch.

The effort, being called the TechFellow Awards, will likely confront the same issues that have plagued other early-stage investing programs, including young entrepreneurs’ reluctance to accept money perceived to come with strings attached.

Despite the downturn, which is deepening a slump afflicting the venture-capital industry, other programs have been sprouting up to help start-ups in their infancy. In March, venture-capital giant Sequoia Capital backed a new fund being managed by Y Combinator, which specializes in funding early-stage start-ups, while Boston-based Spark Capital last month launched a new seed program, Start@Spark.

The investors say the new programs are less about reducing risk during the downturn than about adapting to new realities of the venture-capital business. New technologies make it easier for small tech companies to get off the ground with relatively little investment, broadening the pool of potential companies that could become big businesses. The trend is forcing venture capitalists — which stand to reap bigger rewards if they invest at an early stage — to come up with new ways to cast a wider net.

But there is no debate that a dramatic pullback in venture capital is affecting all phases of investing activity, including the very early phase of several hundred thousand dollars or less. Venture capitalists invested $5.5 billion in U.S. start-ups in the fourth quarter, 26% less than in the third quarter, according to data compiled by VentureSource, which is owned by Wall Street Journal publisher Dow Jones & Co.

Write to Jessica E. Vascellaro at jessica.vascellaro@wsj.com

Printed in The Wall Street Journal, page C3

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At NPR

Michigan residents are waking up to news that General Motors may take the summer off.

People familiar with the plan say most factories will shut for up to nine weeks.

The cars just aren’t selling.

The expected GM shutdown serves as one more reminder that southeastern Michigan is looking for a job. As Detroit’s “Big Three” keep getting smaller, the challenge is to somehow create jobs as fast as the auto industry loses them. To do that, Michigan is making a series of bets on smaller companies like defense contractors and biotech firms.

Asterand is just such a company. Victoria Blanc snaps on a pair of surgical gloves and enters a storage room full of silver tanks. Each stands roughly 5 feet tall and is cooled to 190 degrees below zero.

“They’re basically giant thermoses that are very, very, very, very cold,” Blanc says. They have to be, because they hold small pieces of human tissue — samples of liver and pancreas, breast cancer and lung cancer.

These are leftovers from surgery or autopsies. Medical researchers buy them and use them to study the DNA of diseased tissue.

This rapidly growing firm keeps the storage tanks in a former General Motors building. And it turns out that many Michigan companies want to gain from the DNA of the state’s largest and most troubled industry.

That includes businesses that don’t manufacture — businesses like Netlink, an IT company whose key employees had a conference call this week.

They talked about business opportunities, including a sale they’d like to make to GM. That deal has been put on hold, but the company is going after defense and government work.

Netlink manages information. For example, it can rework the way a factory buys raw materials. And the firm, co-founded by Dilip Dubey, an Indian immigrant, is expanding.

Rather than let flat be the new growth, as some have told Dubey to do, Netlink is seeking more business with its work force of 1,200 employees.

As with many high-tech firms, Netlink hired hundreds of workers offshore, in Bhopal, India. Dubey has also added jobs in Michigan, where salaries are several times higher.

So why isn’t his whole work force in India?

“The majority of our workforce is in the U.S.,” Dubey says. “When I go to financial investors, they ask, this makes no sense, what is wrong with you? And the answer there is the Michigan workforce, which has significant experience in automotive and manufacturing industry, understands how things work.”

Former auto employees know the American industries that Dubey wants to serve.

That same auto-industry DNA attracted venture capital to Detroit. Investors were drawn to minority-owned firms, knowing that the Big Three had given many minorities in the area business experience.

One of those firms is a startup, run by former auto subcontractor Larry Smith, selling a very different product.

“Let’s talk about a fast-food franchise owner who owns several stores,” Smith says. That franchise owner can’t see all of his stores at once. But Smith wants to sell a system that lets him watch the view from all of his security cameras.

The pictures come up on a device like a BlackBerry that works anywhere that there’s a cell phone signal. This product was the idea of a first-time Detroit entrepreneur.

“Ah, you know, dreams are recession proof,” laughs Marquis Coleman, who mortgaged his home to finance the business. “You’ve got to pursue your dream.”

But what if the business fails? “That’s just the chance you take,” Coleman says. “Most people don’t think they’ll fail, though.”

Coleman’s product launch comes in a few weeks. His success or failure may depend on the skills that the Big Three automakers once grew.

http://www.npr.org/templates/story/story.php?storyId=103374643&ft=1&f=1006

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By A VC

We did a call today with our investors and one of the questions was about how the macroeconomic environment is impacting our portfolio companies. We explained that for most of our companies, there has not been much of an impact, but we are seeing several companies bring down aggressive numbers for 2009 to more realistic growth projections. It got me thinking about how those changes are communicated from the CEO to the board and investors.

Our portfolio companies experience both positive and negative changes to expectations on a regular basis. There’s not a lot of art in communicating positive changes to expectations. Everyone loves good news and most people are happy to share it the first chance they get.

But there is an art to communicating negative news. Investors and board members can be spooked by negative changes to expectations if they are not handled correctly.

My first piece of advice is to share the news as soon as you have it. There is never a good reason to have information about your business that your board and major investors would want to know and not share it. You could argue that it’s time consuming to communicate with investors and that it’s more efficient to wait for the regular board meetings to do that. But whatever you gain in efficiency with that approach, you lose in trust and confidence building with an important group of stakeholders in the business. It’s not worth it. There are efficient ways to communicate with the board and major investors. A quick email will normally do the trick.

My second piece of advice is to communicate frequently enough that you can gradually lower expectations. Let’s say that you are now three and half months into the year and you now know that you aren’t going to make your plan for 2009. Well that’s not going to be a huge surprise to anyone given that we are in a very difficult economic environment. But if you ended the March board meeting on a high note and you start the April board meeting with “we have to take down our numbers”, then you are giving your investors the feeling of being on a roller coaster and that’s not what investors want to feel.

The better approach in this situation is to say in the February board meeting something like “it’s too early to know how things are going in the first quarter but given the economy, we are on full alert for any negative surprises.” Then in the March board meeting say something like “we are starting to see signals that we may not be able to grow as much as we’d like this year, we’ll have a recommendation in the April board meeting”. Then when you show up with the recommendation in April to take down the numbers, everyone will be expecting it.

My third and final suggestion is when you make a substantial change to expectations, make sure to get that change right. There’s nothing that is more of a confidence killer than “death by a thousand cuts.” There are some companies where you don’t have much visibility. I don’t like investing in those kinds of companies and I imagine that most CEOs don’t like running them. The truth is most companies have a decent degree of visibility and by the time you are into the second quarter of a year, you should be able to figure out where the year is headed. So if you choose to take down your numbers between now and June, take them down to where you know you can meet them. To do otherwise is just asking for problems.

Most of this is common sense actually. The hardest part for many CEOs is executing on it. Managing a board and investor group doesn’t add value to the business on a daily basis. It doesn’t make the product better. It doesn’t generate more revenues. It doesn’t recruit an amazing team. And so on and so forth. So many CEOs blow this off in favor of the things that do move the business forward. A good board will remind the CEO that he or she has to do these things and why.

One final thought. Taking down numbers this year is not likely to get many people fired. It’s expected at some level. But mismanaging the process might. In a tough year, set reasonable expectations from the start, do your best to meet them, and be proactive in managing and changing expectations and you’ll be better off and so will your team and your company.

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Column by Michael Lechter Inc.com

Investors Invest in Management

The team you have in place will figure prominently in an investor’s decision to fund your business.

One factor that almost always figures into a savvy potential investor’s evaluation of your company is your “team” — key management and advisers. This is particularly true for a young company with no track record of its own.

Why do investors tend to base their decisions to invest on management teams? The answer is in large part because there are so many imponderables about any emerging business. Even a great business idea sometimes simply can’t succeed on its own strength alone. The idea may be too revolutionary, too unproven or otherwise lack sufficient credibility. It may involve a product or technology that is simply too complex for the potential investor to understand, or market projections that are simply too speculative. This is when you have to rely on the management team to give the business credibility. The history of the management team may be the only solid, understandable, non-speculative information available to the potential investor.

Investors tend to look closely at the experience and track record of the management team. A business must be able to succeed in the face of rapidly changing conditions. Relevant experience gives the potential investor comfort that the management can spot the issues and challenges and are flexible, skilled and objective enough to be able to deal with those conditions.

Of course, what really counts is experience that’s relevant to the specific needs of the company. For example, experience in a Fortune 100 company may not be particularly pertinent to running a start-up. In fact a common perception is that someone whose experience is entirely from big companies will tend to throw money at a problem, and may not be sufficiently flexible to deal with a small-company environment where inexpensive alternatives are necessary. It is also important that the experience be in the relevant industry. Experience in the lingerie industry may not be particularly germane to a software development company.

However, experience, skill and pedigree are not the only factors that investors look for. Integrity and commitment are also typically a must. Investors want to see a high level of work ethic on the part of management. They need to feel comfortable that all of the key players are committed to, and have enthusiasm for, the company. (For example, many investors consider it important that the key individuals involved in management have “skin in the game,” i.e., have themselves invested in the company).

The wrong management team can be deadly to potential investor interest. You can have the greatest technology in the world or the best marketing plan, but if your management team cannot execute the business plan, or if they alienate the customers, or cannot hire and manage good people, then the business likely will fail.

Charisma in a management team is good, but too much can get in the way. Savvy investors want key players to have egos that are big enough to get the job done, but not so big that the individual can’t be a team player or can’t accept advice. A sophisticated investor often looks for investments in industries in which the investor has relevant background and expertise — and expects to be able to contribute his or her expertise to the venture. If the investor perceives the management as too arrogant or egocentric to accept advice, prospects of the investment being made are minimal.

“Guerrilla” management that is perceived as likely to ignore professional advice (e.g., from attorneys and accountants) also tends to be problematic for investors. In the book OPM, I introduced a hypothetical character called Louis (Loose) Canon, whose mantra is, “I’m not going to let those attorneys and accountants run my company!” Sophisticated investors tend to run away from the Louis Canons of the world, and unless the company’s team includes (or the investor is able to place) other key individuals with sufficiently strong personalities in positions with sufficient clout to counterbalance and keep the “Loose Cannon” in check, the company’s prospects are dim.

Another pertinent factor is the “completeness” of the team. Do you have, or is there a plan to place, a strong individual in all of the important positions? But what makes an individual “strong” or a position “important”? That depends upon the nature and stage of development of your business. The definitions of “strong” and “important” positions are moving targets. The team necessary for a start-up seeking only that funding or resources necessary to establish “proof of principle” for a product might require no one other than the person that came up with the idea. However, as a business develops and grows, so do the positions that are critical to management. These can ultimately include the functions of chief executive officer (CEO), a chief financial officer (CFO), a chief technology officer (VP of Engineering, Chief Information Officer (CIO)), and a director of sales and marketing. (Of course, sometimes a single individual can fill more than one role.)

In a nutshell, potential investors want to know that they can trust you and your team with their money. They want to feel secure that you and your team will succeed in the business and will protect their interests. Your job is to put together a team that will give potential investors that confidence.

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India and China aren’t just attracting entrepreneurs who are returning from overseas, but also venture capitalists. At a recent Quality of Management panel discussion at INSEAD’s Asia campus in Singapore, Chan Tze Hoe, investment manager with CAP Vista in Singapore, said that as markets grow in both countries, people who were born there but then educated in the West are “coming back to join the scene.”

He noted that Asia is seeing a transition to venture capital-backed businesses from home-grown ones. Speaking about the regulatory framework and environment for venture capital, he said that while this is well developed in the the US and Europe, it has only emerged in the past ten years in India and China.
Understand the culture

Shanghai photo
©iStockphoto.com/Robert Churchill

Chan said that, regarding China, it’s important to understand the culture and build up a network: “A VC fund, previously based in London, was trying to set up a China office. They’ve actually set up their presence there for two years but haven’t invested in a single deal … They told me they are taking a watch-and-see attitude. When you want to start up a business in China, you really need to build up your contacts and find someone who is familiar with the environment to partner with you to achieve some sort of success.”

Chan says that most of the active investors have been in China for some time: “You probably need a lot of local knowledge (in terms of business culture, local language, deal sources, regulatory framework and government/industry networks) to source … deals that are not only right … but also where the business can grow or lead even with potentially undiscovered limitations/conditions. It is unlike Silicon Valley where the industry is well developed and structured so that information generally flows quite quickly among the few top VC shops.”

Chan told Knowledge: “China, in my opinion, is building up such a system of deal flows – not just in VC but also gradually in private equity … Having said that, I personally do not think one can force-fit Silicon Valley’s style of venture capital on the Chinese model, since investment success is very much driven by the people on the ground and when the cultures are different, rules have to be set differently.”
Taking a wait-and-see approach

Chan said that most foreign VCs are still adopting a wait-and-see attitude regarding China, although the advantage of having a local partner is that the initial deal sourcing process is generally accelerated: “The question is whether these foreign VCs can use the same business principles (investment culture/methodology, corporate governance practices) in the Chinese context.”

Phil Anderson, Professor of Entrepreneurship, who hosted the Quality of Management panel discussion, points out that many Western VCs are opening offices in China to help their portfolio companies – not to do deals as such – and these are taking time to learn about the region before raising funds to invest in mainland companies.
Geographical ‘nuances’

India flag
©iStockphoto.com/Aravind Teki

Another speaker at the Quality of Management session, Jayesh Parekh of Sony Entertainment Television and MobiApps, advises venture capitalists to spend a lot of time in India and China. He says he has VC friends who go to India twice a year but that’s “not sufficient to discover” that country. As for geographic location, “each one has a nuance.” The West and North of India, he says, are more entrepreneurial, while in the more risk averse South and East, you’ll find “a lot of loyalty and excellent skills, especially for technology, so it depends on what kind of start-up you want to do.”

However, he adds that companies are finding it difficult to attract talent with share options in places like Bangalore, as most people want to work “for a stable, major corporation that pays good salary and perks, rather than take the risk with start-ups. Hence share options do not really help in attracting good talent. Given a choice between more money or upside with share options, most professionals will chose cash.”
Private equity is ‘developing rapidly’

Parekh told Knowledge that venture capital firms in India are mostly interested in retail, real estate, information techology/business process outsourcing/call centre and services, rather than high-tech or intellectual property-related businesses. “I think the private equity (rather than VC) scene is developing rapidly in India. Both locals and foreigners are getting involved, and in some cases foreign VCs are partnering with locals as well. I think the time is excellent for VCs to go into India,” he says.

Harish Parameswar, Managing Director of financial advisory and asset management firm Lazard Asia, echoes Parekh’s views about private equity in India: “I would say you’ve seen a lot of private equity and buy-out firms come up in India but venture capital is relatively tough if you’re at an early stage, unless you have some Indian investors who are from (Silicon) Valley. It’s relatively difficult to get early stage financing.”
The Indian networking advantage

Parameswar told Knowledge that Indian venture capitalists have an edge over their Chinese counterparts in terms of networking in the United States: “If you look at the Silicon Valley Indians, they set up this organization called TiE (The Indus Entrepreneurs, also known as Talent Ideas and Enterprise). This is a very, very influential organization, which is primarily run by successful Indian entrepreneurs in Silicon Valley.” The organisation helps VCs meet prospective companies, Parameswar says. “I would say the Indians have had a bit of an advantage over Chinese companies on that front. It’s more organised, I would say.”

Silicon Valley companies have been looking at India as an outsourcing development centre, Parameswar says, with “almost every start-up in the Valley” having back-end offices in India. “So when it comes to technology development, because of language and skillsets, India seems to be the preferred option. But when it comes to manufacturing and production, China still has the edge on that front.”

He adds the biggest difference between Indian and Chinese VCs has been that many of the companies that were set up in India have been developing technologies for the global markets rather than for the domestic market. “In China the market has been pretty much geared to the domestic market and that’s been a huge, huge plus, because a lot of these companies are able to get revenue traction without having to spend as much money.”

Consequently, China has been able to attract a lot more venture capital than India, he says: “Because of the domestic market, (companies) have managed to scale much more rapidly and therefore venture capitalists exit much faster as well.”

Profiles

Chan Tze Hoe is an investment manager in Cap Vista who focuses on analysing and executing investments across various technology sectors. His professional interests include strategic investments, valuation and corporate strategy.

Prior to joining Cap Vista, he was a researcher with DSO National Laboratories and was involved in various multi-million dollar R&D projects at its Guided Systems Division.

CAP Vista, the venture investment arm of the Defence Science & Technology Agency in Singapore, aims to “identify and execute strategic investments in early-stage, high-tech companies to serve Singapore’s defence initiatives.”

Jayesh Parekh is a founder and director of MobiApps, a Singapore-based technology company and is also a founder and director of Sony Entertainment Television, a major cable & satellite television channel launched in collaboration with Sony Pictures Entertainment (Columbia/Tristar).

Prior to those ventures, he spent 13 years at IBM in various positions based out of Houston, Texas in USA and in Singapore, where he was involved in technical, sales and marketing roles. He is an angel investor, with investments in venture capital funds in Silicon Valley and India.

Harish Parameswar, Managing Director of Lazard Asia, has been overseeing the expansion of the firm’s Southeast Asia advisory business and also covers the technology and media sectors across Asia for Lazard. Before joining Lazard, he was the founder and Managing Director of Beacon Advisory, a boutique Asian advisory firm, and has also worked for Deutsche Bank and JPMorgan/Jardine Fleming in various corporate finance roles in Asia.

The views expressed in this article are the personal opinions of the individuals concerned and do not reflect those of their employers or their portfolio companies.

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By A VC (original investor in Skype before it was sold to Ebay)

I read with interest the Brad Stone piece in the NY Times this morning suggesting that Niklas and Janus might buy Skype back from eBay. I think this is a wonderful idea and I hope it happens.

Back when eBay bought Skype in 2005, I was skeptical that eBay was the right home for Skype. I also thought the price was in the right ballpark. I got the first part right but the second part wrong. In hindsight, eBay paid too much and bought a non-strategic asset.

Now eBay is rumored to be thinking of unloading Skype for $1.7bn to $2bn and the Skype founders are trying to round up as much as $1bn of cash (including their cash I assume) to combine with seller financing from eBay to get the deal done.

Brad says in the Times that Skype did $145mm in revenues in the fourth quarter. If that’s true, and I assume it is, then Skype could do as much as $700mm to $800mm in revenues in 2009 if it is growing at a reasonable rate. Is $1.7bn to $2bn a reasonable price for a business that is doing $800mm in revenues in the current year? I don’t know, it really depends on how profitable that business is.

I do know that Skpe is a great freemium business model. Most of the conversations on Skype are free because they are between Skype users. But some of them are paid and according to TeleGeography, Skype now makes up 8% of all international calling minutes. If Skype can be a $800mm revenue business this year and capture more than 10% of the international calling market, I think $1.7bn to $2bn may well be a very good price.

But the best thing about this is getting the asset back into the hands of the entrepreneurs who created it and built it. We all saw what happened at Apple when Jobs took back the reins of the company and I suspect Niklas and Janus would not be thinking about this if they didn’t have a strong strategic plan for Skype.

I’ve said this many times on this blog and I’ll say it again. Big companies mostly mess up entrepreneurial companies when they buy them and it really is best that companies like Skype stay independant and run by their founders if that is possible. And it looks like that might be possible with Skype. That makes me happy.

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I read this post in Sophisticated Finance by Bob Hacker, great signal that the economy is improving.

Venture capitalist confidence in the economy may be improving for the first time since 1st quarter 2007. As reported by Mark Cannice at the University of San Francisco:

The historic chart is below.

Perhaps another small piece of evidence to suggest an upturn in the economy.

Note:I found this information through a tweet by @briannorgard.

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