C LEARSTONE

V E N T U R E P A R T N E R S®

Some Thoughts on
Venture Capital

August 2007
Confidential
CLEARSTONE
1
V E N T U R E P A R T N E R
 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
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

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

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

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

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
 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
7 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
8 Confidential V E N T U R E P A R T N E R
S
 10 Forces Shaping Our
World
 Money follows vision
 The best ideas are still venture funded
 “Buzz” drives follow on financings
 More experimentation...again
 Bay Area centric but……

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

CLEARSTONE
10 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
11 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
12 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
13 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
14 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
15 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
16 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
17 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
18 Confidential V E N T U R E P A R T N E R
S
 Can You Help Me?

CLEARSTONE
19 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
20 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
21 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
22 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
23 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
24 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
25 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
26 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
27 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
28 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
29 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
30 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
31 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
32 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
33 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
34 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
35 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
36 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
37 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
38 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
39 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
40 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
41 Confidential V E N T U R E P A R T N E R
S