“Will It End Very Badly?” Probably Not.

Last week at David Kirkpatrick’s Techonomyconference, Sean Parker said “Little startups are ridiculously overfunded. The market is ridiculously overcrowded with early stage investors. This results in a talent drain, where the best talent gets diffused and work for their own startups.” VC Jim Breyer added, “And it will end very badly.”
Here’s what that might sound like to many veteran ears: “Ahh! Blubble!”
Times have changed. The web and mobile startup ecosystem of Silicon Valley has fully matured. Anyone can be an entrepreneur, and almost anyone can be an investor in startups. It previously required millions of dollars to fund a tech startup, and so they were mostly (now) big names in semi-established fields–Netscape, Google, Amazon, and PayPal, for starters. But this also sparked the Internet revolution. People interested in carving out their piece of this Internet revolution didn’t have many options, and so the talent pool centered around those big, multi-faceted names.
Venture captialists holding hundreds of millions of dollars held the sole responsibility of selecting those entrepreneurs that would lead the Internet revolution, since millions of dollars were needed for the most basic web infrastructure and to build an idea and achieve a product/market fit. Exits on these companies resulted in newly minted “tech” millionaires.
As the infrastructure of the Internet revolution was built out, the capital needs of smart new web companies reached toward zero. With capital needs lowered, but VCs still focused on large-scale investments and the resulting returns, angel investors (wealthy techies) started placing small bets, from their own wealth, on entrepreneurs. VCs lost their super status as super angels (like Dave McClure and Jeff Clavier), early-stage funds (including First Round Capital), and startup accelerators (such as TechStars and Y Combinator) gave entrepreneurs more access to smaller-scale capital, and more direct mentoring and personal investment. More startups got funded and found profitable exit strategies of their own, resulting in more millionaires, and then another bump in the number of angels.Over time, that means that capital is no longer the primary competitive advantage for an investor. There are many, many more angel investors in the tech industry, writing checks to entrepreneurs they (hopefully) believe in. To Sean and Jim’s point, more people are starting their own startups instead of joining others, which is spreading out the talent pool in Silicon Valley and this flood of fresh capital is resulting in investor competition to invest in startups, resulting in higher valuations and speedierfunding cycles. Early stage “Series A” valuations have surpassed the $4 million line and are now averaging in the $6 million – $8 million range.
A lot has changed over just a few years and the market has simply corrected valuations, increasing the averages. As long as these increased valuations sustain themselves through exit, then everything still works for investors. The scary part for veteran investors is that they know there still remains a limited pool of buyers to achieve an exit — and building sustainable independent private companies doesn’t work for a VC’s business model. A VC fund’s limited partner investors are expecting a 10-year investment with a cash return, not ongoing future cash dividends. The industry needs more private market liquidity opportunities (secondary markets, private equity firms, etc).So what’s next in this cycle for Silicon Valley?We’ll continue to see entrepreneurs and investors in Silicon Valley venturing into uncharted waters, where revenue models are an after-thought. The wide access to capital for entrepreneurs isn’t going away anytime soon, especially with a slew of tech IPOs on the horizon, which will create even moreGentlemen VCs. Venture capitalists that invest full-time will begin further diversification of their funds outside of Silicon Valley and into other startup ecosystems, where capital for web and software-based startups isn’t as readily available.Today it is easier and faster for entrepreneurs to build products and create value than it was just a few years ago. Monetization platforms (advertising technologies, mobile platforms, virtual currencies, etc) are in place that allow startups to generate revenue. The entire ecosystem (mentors, talent, technology, capital) supporting entrepreneurs and startups has matured. All of these factors have reduced investor risk compared to a few years ago. Even if that risk is lessened by only a few percentage points, this has created a funding model of higher valuations that can still work for the growing ranks of angel investors.This isn’t stupid money flying around in the Valley. These new Angel investors are the product of 15 years of industry experience, and many cycles, some of them quite harsh. These new investors are bringing a wealth of experience, success, failure lessons, and connections. If they are committed to mentoring these new startups into building real businesses (and not gambling in hopes of picking the next startup homerun), then this class of internet revolutionaries will be well groomed to build the next generation of job-creating brand names.
Source: http://dailynewsreviews.blogspot.com/2011/11/will-it-end-very-badly-probably-not.html

Google’s New Algorithm Update Impacts 35% Of Searches

Today, Google announced a change to its search algorithm that the company says will impact 35% of Web searches. The change builds on top of its previous “Caffeine” update in order to deliver more up-to-date and relevant search results, specifically those in areas where freshness matters. This includes things like recent events, hot topics, current reviews and breaking news items.
Google says that the new algorithm knows that different types of searches have different freshness needs, and weighs them accordingly. For example, a search for a favorite recipe posted a few years ago may still be popular enough to rank highly, but searches for an unfolding news story or the latest review of the iPhone 4S should bring the newer, fresher content first, followed by older results.

For searches about recent events and news, Google may now show search results towards the top of the page that are only minutes old, the company says. For regularly occurring events, like thePresidential election, the Oscars, a football game, company earnings, etc., Google knows that you’re likely interested in the most recent event, even if you don’t specify keywords indicating that.
That means a search for “Apple earnings” won’t (in theory) require you to also type in “Q4 2011″ in order to see the latest information. It will be implied that you meant this latest quarter, without the need for the extra text. Of course, Google was already ranking news items and stock symbols at the top of the page when users performed financial-related searches or searches for current information, but this algorithm change has an impact on the organic search results, too, not those from the verticals (search, finance, images, etc.) which have been integrated into Google’s Universal search.
For items that see regular updates, like consumer electronics reviews, reviews of a particular kind of car and more, Google will also feature the most current and up-to-date information above the rest.
This “freshness update,” is an extension of what Google begin last year with Caffeine, an under-the-hood improvement that, among other things, helped Google index content quicker, so results were more realtime. This year, Google also brought out its Panda update, which was meant to decrease the rankings of so-called “content farms” – SEO-optimized entities that critics said filled Google with low-quality results.
Now, it’s clear that Google understands that the most relevant search result is more often the one that’s relevant now – the one that’s bringing you new information. The update’s impact on Google Search is fairly substantial, with Google claiming that roughly 35% of search results will be affected by the changes.
Google used to have a search vertical specifically for the most recent updates at www.google.com/realtime, where it was indexing Twitter updates. However, when the contract with Twitter expired, Google shuttered the site (it now redirects to the Google homepage). Google said at the time that it planned to re-open the site with Google+ search results alongside other realtime sources of information. But with the new Google search update, a specific vertical for realtime information feels less necessary.
Source: http://techcrunch.com/2011/11/03/googles-new-algorithm-update-impacts-35-of-searches/

100Plus Raises $500K From Founders Fund And Peter Thiel To Predict Your Health

Want to predict what your personal health will look like tomorrow, or 10 years from now? Well, look no further than 100Plus a new stealthy health startup founded by Chris Hogg, a healthcare and health data research specialist and Ryan Howard the Founder and CEO of free EMR service, Practice Fusion.

Essentially, 100Plus is a personalized health prediction platform that uses data analytics and game mechanics to show just how much small changes in one’s behavior can lead to a longer and fuller life.

And for their own financial health, the startup announced this morning that it has raised a $500,000 round of seed funding from Founders Fund via its own founder and managing partner, Peter Thiel. Thiel, for those unfamiliar, is the co-founder and former CEO of Paypal and was the first investor in Facebook.

It’s no mystery why 100Plus’ mission is appealing to investors. The healthtech space is booming, and entrepreneurs and investors are looking for smarter and more effective ways to leverage the ever-growing healthcare dataset to build smart solutions that lead to healthier lifestyles and longer lives. Unanimously, we all want to be healthier, and we also want to know how our current behaviors are going to effect us down the line.

23Me is a great example of this, as it is attempting to build the largest dataset and resource for genetic information on the planet as well as offering genetic analysis to let users see if they are at risk for a number of diseases. Obviously, the possibilities are many. Like 23Me, 100Plus is building an interactive health application that leverages large clinical datasets. Using its own algorithms to parse that data, it will then show users personalized predictions of their future health as well as allow them to compare their health those with common dimensions of health and habits.

The startup then adds a bit of game mechanics to that analysis to give users a more enjoyable way to make incremental changes in their behavior to improve their health and live longer.

As to its data, 100Plus builds on the Practice Fusion Research Division’s proprietary clinical dataset of 24 million de-identified records and public datasets from the CDC and HealthData.gov. The startup then uses this anonymized data to create predictive models of future health.

“When you’re 80, will you be riding a wheelchair or a bicycle? How do your health decisions today impact your quality of life in 50 years?” said Founders Fund Partner Brian Singerman. “By generating predictions about health, based on enormous datasets and user behavior, 100Plus gives us life-changing insights.”

100Plus is currently in stealth mode, hard at work on building these models, and is planning a beta launch to the public in mid-2012. The startup also is hiring and seeking new partners looking to incorporate additional valuable health data into its model.

Source: http://techcrunch.com/2011/11/03/100plus-raises-500k-from-founders-fund-and-peter-thiel-to-predict-your-health/

More Growth Equity, Please: Average Number Of Rounds Raised By Startups Up 27% Since 2008

In today’s VC market, it’s age before beauty. This is accordingto a new study released today by Shareholder Representative Services (SRS), the company that represents shareholder interests during the post-closing process in mergers and acquisitions deals. In other words, SRS is an independent advocate for shareholders that offers communications, accounting, and dispute resolution services to an impressive list of clients, which includes the likes of Accel, Benchmark, Kleiner Perkins, Sequoia, Khosla, and more. (Basically, the list is a who’s who of venture firms.)

The study, which looks at the 196 transactions SRS was involved in between July 2010 and September 2011, identifies trends in these M&A deal terms: One of which is that startups are today raising significantly more outside financing before exit than they were three years ago.

The study found that companies are, on average, raising 3.57 rounds of preferred stock financing — the type of investment that’s the staple of venture capital and private equity firms. This represents a 27+ percent increase from 2008, when startups were averaging 2.8 rounds of financing. Essentially, buyers are favoring companies that have raised more money and are profitable. In a sluggish economy, companies are more risk averse to dumping a lot of money into M&A, so buyers are looking for safe bets.

Furthermore, thanks to market volatility and poor financial conditions, global M&A activity fell by 19 percent in the third quarter, according to Dealogic. Thus, with deals drying up and few companies looking to buy, startups have instead opted to go after further rounds of financing. This is likely the reason that we’ve been seeing “series F” pop up more and more, and may also be another result of how late-stage funding is undergoing a seachange.

As Business Insider says in depth, companies are now waiting for longer periods of time to IPO, secondary markets are on the rise, there’s a rise in late-stage private equity, and investing in maturing private companies is becoming ever-more efficient thanks to the Internet and the plethora of financing options, be they crowdfunding, accelerators, etc.

SRS also identified another trend on the rise this year: Cash transactions. According to the study, 86 percent of deals it participated in were all-cash transactions, thanks to low interest rates and brimming cash reserves. As Mark Vogel, Managing Director at SRS, told peHub, buyers today “have lots of offshore cash and don’t want to pay the repatriation taxes to the U.S. They’d rather use it”.

And this cash seems to be flowing into big deals, as 25 percent of transactions were for over $200 million — with the software and IT services industries representing over 40 percent of the businesses being sold over the last 14 months.

Thus, with more cash exchanging hands as part of this elevated rate of follow-on and late-stage financing, management teams have become more diluted and are requiring further incentives to get in-line with the milestones set by buyers during acquisitions. The study found that this has led to an increase in management carve-out plans, which were part of 33 percent of deals in 2010 and have been part of 25 percent of deals in 2011.

For startups and mid-level companies, it seems that the prevailing trend is to raise more money, hold-off on IPO, and wait for the right buyer — with cash.

Source: http://techcrunch.com/2011/11/02/more-growth-equity-please-average-number-of-rounds-raised-by-startups-up-27-since-2008/

Markets Tumble as Greece Sets Referendum on Latest Europe Aid Deal

ATHENS — In a surprise move that jolted Europe and put his political future in play, Prime Minister George A. Papandreouannounced late Monday that his government would hold a referendum on a new aid package for Greece, putting austerity measures — and potentially membership in the euro zone — to a popular vote for the first time.

The announcement sent tremors through Europe’s see-sawing markets in early trading on Tuesday, with bank stocks taking a particular hammering because of their exposure to Greek debt. French and German indexes were down by more than 3 percent while, in Britain, which is not a member of the euro zone but trades heavily with continental Europe, the FTSE 100 index was down by around 2 percent.

Mr. Papandreou’s surprise promise of a vote on the austerity package introduced a note of uncertainty in what had seemed to be a done deal, threatening a comprehensive agreement reached by European leaders last week to shore up the euro zone. A rejection by the voters would also be likely to be treated as a vote of no confidence in the government and lead to early elections.

The anxiety stirred up by those fears hammered United States financial markets on Monday, showing once again how the domestic politics of even the smallest members of the European Union can create troubles that not only threaten the currency but reverberate around the globe.

Addressing lawmakers on Monday evening, Mr. Papandreou said the decision on whether to adopt the deal, which includes fresh financial assistance, debt relief and deeply unpopular austerity measures, properly belonged to the Greek people.

“Let us allow the people to have the last word, let them decide on the country’s fate,” he said.

It was unclear how the referendum would be worded, but Mr. Papandreou said it would be a vote on whether or not Greeks supported the debt deal and the program of austerity measures in exchange for foreign aid.

The stakes are extremely high. A no vote could break the deal between Greece and its so-called troika of foreign lenders — the European Union, European Central Bank and International Monetary Fund — which have demanded structural changes and austerity measures in exchange for aid.

Without the aid, Greece would not be able to meet its expenses and would default on its debt, sending shock waves through the euro zone and the world economy.

A yes vote, on the other hand, would move the package forward, effectively shifting responsibility for the nation’s painful economic choices from Mr. Papandreou’s Socialist Party onto the public. That outcome would help Mr. Papandreou shore up his political fortunes and avoid the instability of early elections.

The center-right opposition has opposed the bulk of the austerity program, and the prime minister’s popular support has dwindled as Greeks have been hit by a seemingly endless series of tax increases and wage and pension cuts. On Sunday, the center-left newspaper To Vima reported that a majority of Greeks viewed the deal negatively.

At a time when Mr. Papandreou is under intense political and social pressure, including from members of his own Socialist Party, the move was seen as the last card he could play.

It also appeared to give the Greek government a bit more leverage in negotiations with Europe. The terms of the deal, in which banks have been asked to voluntarily take a 50 percent write-down on Greek debt, have not been finalized and must still be accepted by the banks. Putting the package up for a vote, with the distinct possibility of rejection, could induce banks to agree to the deal rather than face greater losses if Greece defaults.

“It’s not motivated by the intention of some sort of brinkmanship with Europe, but it may have this sort of positive or negative effect,” said George Pagoulatos, a professor of European politics and economy at Athens University of Economics and Business. “It raises the stakes. It’s about, ‘Will we remain in the euro with a lower public debt, or will we lose everything that we will achieve?’ ”

Mr. Papandreou also said that he would seek a parliamentary vote of confidence in his administration, just four months after winning a similar vote before pushing an earlier batch of austerity measures into law. The vote of confidence is expected to be held on Friday, and he is expected to squeak by with his narrow three-vote majority in Parliament.

The referendum will probably be held in January, government officials said, essentially buying the government time while the details of the deal are hammered out.

Addressing lawmakers on Monday evening, Finance Minister Evangelos Venizelos framed the debate as one of Greece’s staying in the euro zone, the group of 17 European Union countries that use the euro, or not. “It’s for the people to decide to stay in Europe or go back to the drachma,” he said.

While the austerity measures have proved incendiary for much of the public, setting off widespread strikes sometimes accompanied by episodes of street violence, being part of the euro zone generally meets with high approval.

Takis Michas, a political analyst with Forum for Greece, an Athens research institute, said posing the question this way was “a master stroke on behalf of Papandreou in the sense it is forcing the various parties to take a very responsible position.”

“If he succeeds in framing the issue as being one of remaining in the euro zone, obviously he is going to get a huge yes,” Mr. Michas added. “But it depends on whether he can frame the question in those terms.”

Under the Greek Constitution, the government must propose the language of the referendum, which would need to be approved by Parliament and then by the president.

Some analysts said the referendum was an invitation for instability. “When the debate is very passionate and things are tense, holding a referendum could be risky,” said Alexis Papahelas, the editor of the center-right daily Kathimerini.

If the referendum fails, he said, “we have a very big chance that the country would go into a disorderly default.”

Source: http://www.nytimes.com/2011/11/02/world/europe/markets-tumble-as-greece-plans-referendum-on-latest-europe-aid-deal.html