From TechCrunch. This pretty much speaks for itself. The important note is that all of this happened before the last 3 weeks during which the dow has fallen ~ 3000 points.

This is not about doom and gloom for startups – it is about understanding the environment you are operating in.

The third quarter saw the number of U.S. venture funds raising new cash decline by 29 percent to 55 funds, according to data from the National Venture Capital Association and Thomson Reuters. That compares to 78 new funds a year ago and 76 new funds in the second quarter of 2008. And 45 of that 55 were follow-on funds rather than new funds.

Each of those funds, though, raised a lot more money on average. The total raised for the third quarter was $8.1 billion, down only 6 percent from the third quarter of 2007 (but down 12 percent from the $9.2 billion raised in the previous quarter of this year).

And remember, all of this was before the financial meltdown of the past two weeks that had alarm bells ringing at every VC firm.

The three largest funds in the quarter were Sequoia Capital’s $930 million late-stage fund, Austin Ventures’ $900 million balanced-stage fund, and InterWest Partners’ $650 million early-stage fund. In general, more money is going towards later stage, proven businesses than early stage financings. (More at VentureBeat).

Crunch Network: CrunchBoard because it’s time for you to find a new Job2.0

[From Only 55 VC Funds Raised Money In The Third Quarter (Down 29 Percent).]

Invest Southwest announced the presenting companies for the 2008 Invest Southwest Conference.

Congratulations to these firms.

Thirteen firms made the cut for December’s Invest Southwest conference.

Organizers for the annual event, which aims to pair promising new technology firms with investors who can help finance future growth, have announced which companies will be presenting.

The finalists were selected from about 80 applicants.

Most of the companies are Arizona-based. Nearly all of them focus on software development or biotechnology.

Here’s the list:

* Captivemotion LLC – The Tempe-based firm uses technology to study facial motions for video games and movies.

* CellTrust Corp. – The Scottsdale-based company provides security software to protect data that is transmitted mobilely.

* Clareity Security – The Scottsdale firm provides identity fraud protection services for the real estate and financial services industries.

* Consolidated Energy Systems LLC – The company in Salt Lake City, Utah is developing a patent-pending process to convert pretroleum coke into fuel for modified diesel engines.

* Grip (R) – The Glendale-based firm provides software systems for businesses in the audiovisual industry.

* iMemories – Based in Scottsdale, the company convers home movies and photos to DVD and hosts consumers’ content online for sharing.

* Medipacs – The Tucson biotech firm has developed programmable infusion pumps for medical use.

* MedTrust Online LLC – The Scottsdale company operates an online community for doctors.

* nanoMR Inc. – The Albuquerque, N.M. firm is developing a replacement for traditional blood cultures that takes less time to develop.

* Octopi LLC – The Tucson company business develops online video games.

* Protein Genomics – Based in Sedona, the company says it has developed the first commercially viable human elastin protein for wound care and regenerative medicine.

* Solar-Breeze LLC – The Phoenix-based firm says it has developed the first solar-powered robotic pool-skimmer.

* Unima Integral Biosecurity – The Jalisco, Mexico-based firm is developing products to control food-borne illnesses in the food-production industry.

To qualify, companies must be seeking between $250,000 and $5 million in financing.

The company’s officers will spend the next several weeks honing their business plans and crafting their investor pitches.

The conference will take place Dec. 11-12 at the Four Seasons Scottsdale at Troon North.

[From Invest Southwest names presenters for VC conference]

I feel like the grim reaper here… really I’m not throwing myself out a window.

So why am I posting these? it is important for entrepreneurs to NOT bury their heads in the sand.

I would also take a moment to point out that the majority of this news is coming from Silicon Valley – by far the easiest place to raise capital. If you are not based in Silicon Valley the news is probably worse.

The important thing is not to panic and plot a course of action TODAY – What should you do – you can start by reading Ron Conway’s letter to the companies he has invested in. I’m following this advice – and you should too.

Sorry, Startups: Party’s Over – Silicon Alley Insider

Sequoia Capital, best known during this bubble as the guys who backed YouTube, gathered some of their startups Tuesday for an emergency meeting. “The attendees were greeted by a cute image of a Grave Stone, with a message: R.I.P.: Good Times,” Om Malik reports.

Super Angel Ron Conway To Would-Be Startups: Don’t Quit Your Day Jobs – Silicon Alley Insider

Different story, says Ron Conway, who is perhaps the most famous angel investor in tech these days. Ron is best known for making very early and very lucrative bets on Google and PayPal, but he’s also known as one of the most adventurous angels of Bubble 2.0, and has invested in 130 companies since 2005. We asked him for his advice to would-be-startups last night, and he wasn’t nearly as encouraging:

“I would tell (entrepreneurs) to keep their day job until they got one year of funding, and if they couldn’t get that, then they’re not meant to start that company right now…. My advice to (start ups that don’t have a year’s worth of money in the bank) would be to raise money by reducing your own spending. If you can’t raise more money, you have to cut costs. And that’s what I’m harping on to my companies.”

Fred Wilson: My Thoughts On ‘Startup Depression’- Silicon Alley Insider

All startups are going to have to batten down the hatches, get leaner, and work to get profitable, but the venture backed startups are going to get more time to get through this process than those that are not venture backed. Here’s why.

Venture capital firms are largely flush with capital from sources that are mostly rock solid. If you look back at the last market downturn, most venture capital firms did not lose their funding sources (we did at Flatiron but that’s a different story). If you are an entrepreneur that is backed by a well established venture capital firm, or ideally a syndicate of well established venture capital firms, then you have investors who have the capacity to support your business for at least 3-5 years (for most companies).

Today Stacey Higginbotham of GigaOm wrote an article about the deterioration in VC and Angel funding in 2008. While the picture she paints is far from rosy – I think she understates the issue in some ways. With others calling for a startup depression I think we need to be realistic.

That’s not great news, and it’s also likely that overall investment for the year will drop for the first time since 2003, Tracy Lefteroff, a managing partner at PricewaterhouseCoopers LLP, told Bloomberg this morning. Last year, venture firms put $30.69 billion into startups. During the first half of 2008, venture firms invested $14.89 billion, climbing to $20.6 billion if we add in the preliminary third-quarter numbers. It’s unlikely that venture firms are going to put more than $10.09 billion in portfolio companies between this month and Christmas. The last time that happened was in 2000.

Mark Heesen, president of the National Venture Capital Association, says that skittish investors are helping create a poor exit environment for VC-backed companies. So far this year there have been just six initial public offerings and 199 acquisitions through the third quarter — 72 fewer than this time last year.

“We have not seen a reduction in the number of first-time financings in the first two quarters, and we may see some lag on those deals decreasing,” Heesen says. “I believe it will be the fourth quarter that we’ll see the impact that the lack of an exit market has. I am certainly hearing anecdotally that venture capitalists are doing fewer deals.”

Quite honestly that isn’t the scary part. What is scary is that while VCs are doing fewer deals – and that means more deals that involve bigger investments and bigger ownership stakes – they will be demanding that the companies they invest in have cleared “seed stage”. In other words that they have revenues (and preferably profits). Why is that scary?

Venture investors aren’t the only sources of startup capital that are feeling cautious. Data out today from the Center for Venture Research at the University of New Hampshire shows that while in the first half of this year angel investments were up slightly, the number of deals getting funding was down. Total investments in the first and second quarters of 2008 were $12.4 billion, an increase of 4.2 percent over the same period last year. A total of 23,100 entrepreneurial ventures received angel funding in the first half of 2008, a slight decrease of 3.8 percent from the same period last year.

This combination results in a significant problem for the entrepreneur. The bridge – seed stage funding – to move a product or service to viability is gone. We will all have to bootstrap (self fund) to profitability.

Now for the really bad news. Even those with significant capital of their own available to bootstrap will need to seriously ask themselves if they are willing to take that risk right now. Those factors – when viewed a cycle – can lead to exactly the kind of startup depression that the country can not afford right now.

Louis Gray was kind enough to share what he heard at a MIT/Standford Venture lab panel on lifestreaming.

You can find Louis’ full entry here.

Here are the parts I found the most interesting… both in terms of FriendFeed’s strategy and the lessons they teach us about creating a startup.

Bret’s presentation stated that FriendFeed, which currently supports 43 different Web services, and is now tracking greater than 100 million individual entries is designed primarily to enable content discovery and social media consumption through a shared experience with friends and peers.
…
As he said yesterday evening, “The discussion parts of our site have been almost the sole driver of our growth. It’s been interesting to watch, and in retrospect, it was obvious. It was initially one of the underdeveloped parts of our site.”
…
“We’re not interested in selling. We wanted to forge our own culture, to create a sustainable company,” Bret said. “We have different perspectives on how to build a company of scale, and we want to build a company that scales.”
…
While Swisher coyly teased some of the panelists about their being “pre-revenue”, Bret said one of the keys to launching a successful business model in the Web 2.0 atmosphere would be to not do so too early, and when they do, to do so in a way that is both quantifiable and analytical. “It makes no sense to try and monetize when you have only 2,000 users,” Bret said. “It’s too early and the early adopter audience does not reflect the behavior of mainstream users.” He cited the early successes of Overture and Google AdWords as forging the quantifiable advertising market, but admitted they weren’t yet sure how ads on FriendFeed would work. “We want to experiment enough to not run out of money before having to raise more, or we will have a sustainable business,” he said.
…
One thing you can expect FriendFeed not to do is to immediately give in to the demands from the early adopter tech geek set, who can at times be very demanding. While Seesmic CEO Loic LeMeur said the “tech geeks and geek press would have you make products for the geeks,” Kara Swisher helpfully added that group was pretty small to begin with. “It’s 14 slightly-overweight white guys,” she offered.

I love reading Seth’s posts. He always manages to shine a light on something that is not only true… but also leads us to think beyond marketing and PR and ask some fundamental questions about why we are entrepreneurs and how we create a business.

New startups can spend hundreds of thousands of dollars racing after a dream: a giant splash on launch.

Just imagine… a big spread in Time Magazine, a feature on all the relevant blogs, a glowing review in the Book Review. Get this part right and everything else takes care of itself.

And yet.

Here are some brands that had no launch at all: Starbucks, Apple, Nike, Harry Potter, Google, William Morris, The DaVinci Code, Wikipedia, Snapple, Geico, Linux, Firefox and yes, Microsoft. (All got plenty of PR, but after the launch, sometimes a lot later).

I’m as guilty as the next entrepreneur. Great publicity is a treasured gift. But it’s hardly necessary, and the search for it is often a significant distraction.

It works for movies, in fact, it’s essentially required for movies. But for just about every product, service or company, the relentless quest for media validation doesn’t really pay. If you get it, congratulations. If you don’t, that’s just fine. But don’t break the bank or your timetable in the quest.

[From The myth of launch PR]

No question – Seth is right.

Here is the big question… Why do you WANT that big launch PR splash?

You say “because it is great for the company”:

The fact is… even if you get it, you are probably not ready for it. Point of reference – Cuil. Cuil had great launch buzz. Made a huge splash – and an ever louder thud when the reality failed to meet the buzz. Maybe the product is great, maybe not… but if you are not ready (technology, process and people) to handle the rush of interest and the glare of the spotlight it really won’t matter.

And let’s face it… that giant thud is very, very hard to come back from. So before you go off feeding the hype machine be sure you can deliver (technology, process and people) the goods… otherwise you’ll just get exposed.

So, what is your motivation? Here is the dirty little secret every entrepreneur needs to acknowledge, understand and guard against.

That PR splash – it isn’t about the company… it is about YOU.

YOU want to look like a genius… YOU want to be the new darling of the Silicon Valley echo chamber… YOU want to get invited to the Googleplex to have lunch with Sergey and Larry… YOU want Sand Hill Road to beat a path to your door…

And that is great… congratulations. But what you forgot is that building a company has nothing to do with any of that. It is about creating an offering backed by a company (again, technology, process and people) that can deliver on it. It is about delivering value to your customers. PR and Marketing are supposed to help you make the company visible and compelling to potential customers… not boost your self-image.

It isn’t about YOU.

Via Wired.

Bob Rice gives us his take on the VC landscape:

Well, the classic V.C.’s simply have too much money under management, and too expensive a talent pool, to waste time looking at investing anything less than $10 million in a project. Meantime, no entrepreneur wants to give up equity by taking in more money than he absolutely needs. So, when it only costs a few million to get a serious new company off the ground, how can the V.C.’s really play? They have to find places to make gigantic gambles, usually overpaying because the other big V.C.’s are also trying to invest in the few really big-dollar opportunities out there. It has become a system doomed to failure.

I think Bob hits the nail square on here. What it takes to start an online service today is quite small (I know, I’m doing it). It isn’t millions… really, to get started it isn’t even hundreds of thousands. Given that what start up is going to give up a huge share of the company to take a massive VC investment – and all that goes with it.

All too often what comes with the large investment is an over-emphasis on growth (specifically subscriber growth). That in and of itself isn’t a bad thing – provided you are ready for it. Often what is required is small amounts of cash to invest in determining how to tap massive growth – while ensuring that both the technology and the business (processes and people) scale. If they don’t scale what is the point of the rapid growth?

All too often this is what drives the fad/flash in the pan tech sector. Find something cool… publicize the heck out of it… grow really fast… disenchant users because the company isn’t mature enough to handle the growth. I refer to this growth stage as “chucking them off the back of the bus as fast as you can load them on the front”.

More after the jump…

The challenge – for those who want to create a business – is that you have to be careful about how you present yourself. If you tell an investor that you don’t want or need 3-4 million dollars they may hear “low valuation, low return”. When in fact what you mean is “to achieve a valuation of 25 million I believe we only need 400k” or “3 million today is a waste of your money, invest 400k today and we’ll take the 2.5 in 2 years”.

What that tells the investor is either:

1. This person has the fundamentals completely wrong
2. This opportunity has great multiple potential

The difference is how well you can tell the story.

Full Article:

Bob Rice has had many careers. He was an attorney with the U.S. Department of Justice, a partner at law firm Milbank Tweed Hadley & McCloy, C.E.O. of a tech startup, and now runs merchant bank Tangent Capital, which he founded in 2005.

In his spare time, Rice managed to write Three Moves Ahead: What Chess Can Teach You About Business, one of the more interesting business reads to come down the pike this year, in which he uses the tried-and-true strategies of chess for insight into running a business.

Today, he’s squeezing in some blogging. One day. One place: Portfolio.com.

Ah, those Sand Hill Road visionaries, the venture capital guys who finance the future and dictate the trends. It must be fun out there, getting the first glimpses of tomorrow. But suddenly there’s a wonderful irony at work: That very future is destroying their industry.

Newspapers are rife with stories about the decline of big V.C. investments, pointing to the trend as a sign of a more conservative investment environment. But I don’t think that’s really the issue.

Instead, something much more profound is going on: The basic V.C. model is broken. And new technology is driving a much more efficient system for capital allocation to startups.

In fact, technology is largely at fault both for what’s wrong with the V.C. world and for what’s replacing it. The problem with the industry is this–it’s just too cheap to start new companies these days.

Virtual offices allow talent to gather from around the country to work on a new idea without having to quit full-time jobs too early. Servers, computers, and bandwidth are essentially free, and a robust telecommunications platform can be rented for a few tens of dollars a month. Software development can be outsourced without taking on big fixed costs. There are countless programs to manage customer relations, mine contacts, handle the books, and plan and monitor projects. And of course, the internet has reduced the costs of finding customers and testing new concepts to nearly nothing.

Okay, so what? Well, the classic V.C.’s simply have too much money under management, and too expensive a talent pool, to waste time looking at investing anything less than $10 million in a project. Meantime, no entrepreneur wants to give up equity by taking in more money than he absolutely needs. So, when it only costs a few million to get a serious new company off the ground, how can the V.C.’s really play? They have to find places to make gigantic gambles, usually overpaying because the other big V.C.’s are also trying to invest in the few really big-dollar opportunities out there. It has become a system doomed to failure.

The flip side of the story is the rise of angel investor groups. These investment consortiums have always been ideally positioned to provide $500,000 to $5 million equity injections; but until recently, that wasn’t enough to get a serious effort off the ground. More fundamentally, however, they have historically not been terribly investor-friendly, largely because the individual members have other occupations.

The individual members didn’t work in the same place or even at the same times, so angels were terribly inefficient at evaluating transactions, sharing information, and negotiating and documenting deals.

Those days are over, thanks to software developed by David Rose, founder of the New York Angels (yes, I belong). Angelsoft is a wonderful collaboration platform that manages deal flow, helps match talent and expertise to projects, provides easy-to-use data rooms for potential investors, and generally drives the investment process. It combines project management and social networking in a way that, for the first time, makes the angel process efficient for both the company seeking capital and the potential investors.

The big news now is that, in a period of just a couple of years, over 400 angel groups around the globe have standardized on the platform. That means, of course, that they will also be able to share deals between themselves, vastly expanding the capital and expertise available for any given project.

And entrepreneurs can now create one submission to get access, literally, to a world of sophisticated, organized investors. It sounds like a revolution to me. Check it out at the group’s website.

And so, once again, technology is driving a paradigm shift. But this time, it’s France in 1789: The progenitors of change are becoming the victims.

[From Tech Making Traditional VCs Obsolete]