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Thoughts on Venture Capital

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					C LEARSTONE
    V E N T U R E       P A R T N E R S®


         Some Thoughts on
          Venture Capital


              August 2007
0                   Confidential   CLEARSTONE
                                   V E N T U R E   P A R T N E R S
        Are Times Ever Bad?…
      When climate is bad…there is opportunity
      When climate is good, there is momentum
      So when it is ever a bad time to invest?


    Fact: A firm can make it thru a multi-year
    long bad cycle…so why jump around?


                                      CLEARSTONE
1                      Confidential   V E N T U R E   P A R T N E R S
     No One Knows Anything…
       Industry                Five-Year Return




    5. Hospitality             +22.2%

                                         CLEARSTONE
2                    Confidential        V E N T U R E   P A R T N E R S
     No One Knows Anything…
       Industry                Five-Year Return




    4. Real Estate             +23.7%

    5. Hospitality             +22.2%

                                         CLEARSTONE
3                    Confidential        V E N T U R E   P A R T N E R S
     No One Knows Anything…
       Industry                Five-Year Return




    3. Internet                +25.7%

    4. Real Estate             +23.7%

    5. Hospitality             +22.2%

                                         CLEARSTONE
4                    Confidential        V E N T U R E   P A R T N E R S
     No One Knows Anything…
       Industry                Five-Year Return



    2. Gaming                  +27.3%

    3. Internet                +25.7%

    4. Real Estate             +23.7%

    5. Hospitality             +22.2%

                                         CLEARSTONE
5                    Confidential        V E N T U R E   P A R T N E R S
     No One Knows Anything…
         Industry                Five-Year Return

    1.   Coal                    +29.8%

    2.   Gaming                  +27.3%

    3.   Internet                +25.7%

    4.   Real Estate             +23.7%

    5.   Hospitality             +22.2%

                                           CLEARSTONE
6                      Confidential        V E N T U R E   P A R T N E R S
         Forces Driving VC
            Economics


    Staying Up To Date on What
           Shapes Returns



                              CLEARSTONE
7              Confidential   V E N T U R E   P A R T N E R S
10 Forces Shaping Our World
1.   Money follows vision
2.   The best ideas are still venture funded
3.   ―Buzz‖ drives follow on financings
4.   More experimentation...again
5.   Bay Area centric but……




                                    CLEARSTONE
8                    Confidential   V E N T U R E   P A R T N E R S
10 Forces Shaping Our World
6.  Standing out by specializing has
    returned
7. Harder & harder to find original ideas
8. Outsourcing R&D
9. The end of learning
10. Enormous capital availability



                                  CLEARSTONE
9                  Confidential   V E N T U R E   P A R T N E R S
     Who’s Going To Do the R&D?

       Only a few companies in the world
       doing real research
       Everyone else buying it
       Green light for big projects rare

          Know what incumbents will
               make vs. buy
                                    CLEARSTONE
10                   Confidential   V E N T U R E   P A R T N E R S
     Who Has Time to Learn?
                   Venture 2.0
     Old Model:
        Study the industry
        Learn about the business
        Invest
     New Model:
        Perceive potential in the business
        Invest


                                             CLEARSTONE
11                       Confidential        V E N T U R E   P A R T N E R S
            Money Everywhere
            No idea is to big to fund
                                                 Private
Company               Concept                    Funding

Clearwire         National WiMAX carrier            $900M
Vonage            National VoIP carrier             $400M
Amp’d Mobile      MNVO                              $250M
Demand Media      Lead Gen                          $200M
n2nCommerce       E-commerce outsourcer             $45M
                  (Series A)
                                           CLEARSTONE
12                     Confidential        V E N T U R E   P A R T N E R S
     What We’ve Learned as a Firm



 9 Years of Clearstone History
 Perspectives on Markets, Companies,
       Staff and Brand Building

                               CLEARSTONE
13              Confidential   V E N T U R E   P A R T N E R S
             On Markets
     Giant markets forgive poor execution
     Seek out the counter intuitive insight
     Well invested areas are dangerous
     during the hype period
     The industry pace of change matters
     It doesn’t matter what the rest of the
     VC world is doing…..today

                                   CLEARSTONE
14                  Confidential   V E N T U R E   P A R T N E R S
              On Markets
     Beware of ―industry trends‖
          Where the puck is today, not where its going
     Know the lagging indicators
     Winner takes most
     Ignore a popular phenomenon at your
     peril
     Heresy sometimes becomes orthodoxy

                                         CLEARSTONE
15                    Confidential       V E N T U R E   P A R T N E R S
When Heresy Becomes Orthodoxy
        A Brief History of Consumer Internet

      1995-1998   = Free is silly, but fun!
      1999-2000   = Free is smart!
      2001-2004   = Free is stupid! Paid is smart
      2005        = Free is brilliant! Paid is dumb!
      Present     = Free is the way things
                   work…paid is passé
                                      CLEARSTONE
 16                   Confidential    V E N T U R E   P A R T N E R S
         On Companies

     Culture is the distinguishing
     factor for success




                               CLEARSTONE
17              Confidential   V E N T U R E   P A R T N E R S
     Can You Help Me?




                          CLEARSTONE
18         Confidential   V E N T U R E   P A R T N E R S
         On Companies
     Core founding team must be
     exceptional (#1 or #2)




     The consolation prize sucks!
                              CLEARSTONE
19             Confidential   V E N T U R E   P A R T N E R S
           On Companies
     Company ―aura‖ is a key success
     factor
     Role of outside investor as deal filter
     Exogenous risks are overstated
     Hired guns rarely inspire



                                  CLEARSTONE
20                 Confidential   V E N T U R E   P A R T N E R S
        The Right CEO at the Right
                   Time
                           e.g. Enterprise
 Accomplished                equipment



Desired
 CEO
Profile
                                                           e.g. Web 3.0

      Bright Eyed
       & Super
         Smart
                       Well                                 Still
                    Established                         Experimenting
                              State of Business Model
                                                           CLEARSTONE
 21                                Confidential           V E N T U R E   P A R T N E R S
           On Companies

     Only two effective levers for creating
     value post investment
     3 years is enough time to figure it out!
     Act early
     What looks like demand is often tire
     kicking
     Understand the way incumbents are
     looking (or not!) at the problem
                                   CLEARSTONE
22                  Confidential   V E N T U R E   P A R T N E R S
        On Firm Branding


     What happens in SoCal…stays in
     SoCal….too often unfortunately




                               CLEARSTONE
23              Confidential   V E N T U R E   P A R T N E R S
           SoCal Giants….
Like redwoods crashing in an empty forest
- Qualcomm – VC?
     - Broadcom – VC?
        - Amgen – VC?
           - CSC – VC?
             - Myspace – VC?
                 - Linksys – VC?
                       - Cogent - VC
                            - Wellpoint - VC?
                                   -Geocities – VC?
                                      CLEARSTONE
24                    Confidential    V E N T U R E   P A R T N E R S
       New media impact on VC




     Why New Media Matters….Even
           to Staid Old VC’s


                               CLEARSTONE
25              Confidential   V E N T U R E   P A R T N E R S
The Short History of FilmLoop….
     Situation
       Funded in 2005 by GlobeSpan at $20M
      pre-money (a PowerPoint at the time)
       Secured Series B in 2006 (ComVentures)
       Shut down in early 2007

     Nothing unusual here – just another
     bad VC deal.…except for the
     bloggers…..

                                  CLEARSTONE
26                 Confidential   V E N T U R E   P A R T N E R S
     A Blogger From TechCrunch
          Started Digging….

     ―When I added FilmLoop to the
      TechCrunch DeadPool last month based
      on rumors of mass layoffs, it was clear
      there was more to the story…..




                                     CLEARSTONE
27                    Confidential   V E N T U R E   P A R T N E R S
He Picked Up The Entrepreneur’s
      Version of Events…

     ―…..in effect, ComVentures forced a fire
     sale of FilmLoop to Fabrik, another
     company ComVentures invested in….‖




                                     CLEARSTONE
28                    Confidential   V E N T U R E   P A R T N E R S
TechCrunch Readers Chimed In….

      Widgets are the new black
      February 13th, 2007 at 11:39 am

      ―Anyway you slice this, it looks pretty poor
      on ComVentures and even possibly
      Globespan.

         — Long live widgets!
                                       CLEARSTONE
 29                     Confidential   V E N T U R E   P A R T N E R S
     …and started asking pointed
            questions…

     ―A few other factors to consider I guess:

     1) Who was the partner from Globespan
     that lead the investment?

     2) Which partner at Globespan currently
     sits on the board?‖
                                      CLEARSTONE
30                     Confidential   V E N T U R E   P A R T N E R S
     Then All Hell Broke Lose….
     Posting by: anentrepreneur
     February 12th, 2007 at 10:37 pm

     ―There should be a public blacklist to
     ensure that these unethical VCs will never
     have a chance to invest in another startup
     again…..‖


                                     CLEARSTONE
31                    Confidential   V E N T U R E   P A R T N E R S
     And the Pile On Started...
     Posting by: Jae
     February 13th, 2007 at 12:28 pm

     ―That is heinous. Absolutely, positively
     HEINOUS. Bad show. I’ll make sure to
     avoid Fabrik and anything else from
     ComVentures. That’s just not
     conscionable.‖

                                      CLEARSTONE
32                     Confidential   V E N T U R E   P A R T N E R S
       ….A Communist Here and
          There Joined in….
     Posting by: Tom
     February 13th, 2007 at 1:28 pm

     ―I can’t believe that it’s all about money
     these days…‖




                                       CLEARSTONE
33                      Confidential   V E N T U R E   P A R T N E R S
             …And So On…
     Posting by: ebr
     February 13th, 2007 at 1:27 pm

     ―As I bootstrap away, I am mindful of the
     misalignment between VC and founder
     objectives. This does nothing to diminish
     my paranoia.‖


                                      CLEARSTONE
34                    Confidential    V E N T U R E   P A R T N E R S
         …With A Few Balanced
               Views….
     Posting by: trevo
     February 13th, 2007 at 1:54 pm

     ―……when you engage a VC with your
     venture, you’re basically betting on your
     startup being a big hit.

     There is no consolation prize.‖
                                       CLEARSTONE
35                     Confidential    V E N T U R E   P A R T N E R S
         ...And Some Key Board
               Philosophy
     Confucius
     February 13th, 2007 at 11:05 am

     Confucius say … ―He who has a partner,
     has a master‖




                                    CLEARSTONE
36                   Confidential   V E N T U R E   P A R T N E R S
         ..Even the Rare VC
            Sympathizer…
     Posted By: Erik
     February 13th, 2007 at 5:55 am

     ―One question.

     If FilmLoop missed its revenue/growth
     projections, shouldn’t the headline be:

     ―Investors betrayed by FilmLoop‖?

     Just wondering…..‖
                                      CLEARSTONE
37                    Confidential    V E N T U R E   P A R T N E R S
             Epilogue
     Ultimately comments numbered in the
     100’s
     On a website read by 1,000’s
     GlobeSpan and ComVentures were
     trashed
     But….



                                CLEARSTONE
38               Confidential   V E N T U R E   P A R T N E R S
     …You Can Influence The
         Blogosphere
     A few VCs eventually wrote in with a
     different take on things….
     Tenor of the comments changed…
     Became more balanced….
     …and the frenzy died down….



                                  CLEARSTONE
39                 Confidential   V E N T U R E   P A R T N E R S
        Are We Noticed?


     What are bloggers saying
     about Southern California
               VCs?


                              CLEARSTONE
40             Confidential   V E N T U R E   P A R T N E R S

				
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