The only thing that can save us now is the passing of time.

Georgia is the last state in the Union that does not allow private equity investments out of the state’s pension funds.  “Last.”  Wow.  Now there’s a word that simply emanates innovation.  Nothing says “cutting edge” like being listed as “last”.

“Last.”  That means that North Dakota is ahead of us in terms of allowing private equity investments from state pension funds.  WTF? Pinch me.

For all the hemming and hawing we hear from the state government about how great Georgia is for innovation, we’re really doing a pretty lame job of walking the walk, and leading by example.  We can pass a bill that invites the 2009 Georgia Peach Queen to appear before the House of Representatives, and slash the budget of the ATDC, but we can’t drive through a key piece of legislation to propel the Georgia economy into the 21st century.

“Last”.   You may also recall that Georgia is also “last” (or at least close to being “last”) in another category as well – public education for our children.  It is no coincidence.  We clearly have a remarkably uneducated group of people keeping us from joining the rest of the country in diversifying the state’s investments in the private sector.  Guess that lack of education has already caught up to us.

Does our state government really take these issues seriously?  Certainly there are some – many of whom I’ve met and had great conversations with.  But as a whole, no.  There are those that are hell bent on laying down in the middle of the street and preventing progress.

The most common arguments that I hear from opponents of such legislation is that it is “too risky” and “wouldn’t provide much in the way of economic development for anyone but Altanta.”  Humor me for a moment.

The Georgia Public Policy Foundation, which is a non-profit, independent, public policy think tank, recently published a very interesting article.  In the article, they cite the “lack of diversity” within the investments of the state’s pension funds.   Every investment has risk, but obviously the only defense against market risk is diversification of investments.  “Diversify or die”, as I like to say.  Not diversifying is even riskier. They lay out a pretty compelling case across the board. Read the article – it’s short and worth it.

With respect to the whole notion that Atlanta would be the sole beneficiary of such investments – that is simply ludicrous.  What these pundits fail to realize is that this is an ecosystem, not a one-way street.  All boats rise with the rising tide.  Would those dollars necessarily create direct jobs in rural areas?  Probably not, or certainly not that many.  Companies that attract venture capital and private equity investment tend to be fast-growth and/or high-tech companies, and those require infrastructure and a large labor force.  And those things exist in abundance in Atlanta, but few other places within the state.  But, what those investment dollars would do is create an economic return for the state.  And those additional dollars eventually make their way into port projects in Savannah, highways, schools, agricultural programs, and other projects around the state. Viewing this issue through any other prism is negligent in my view.

Normally, I would tell everyone reading this to contact your local state representative or senator, and tell them why you think passing legislation to allow the state to invest in private equity funds would be a good thing.  But we’ve all done that already.  Several times (SB80, HR249, etc).  I tire of the whole thing.

The only thing that can save us now is the passing of time, and the hope that at some point, enough rational people are voted into office to get us back on the right track.

“Last”.  I hate being last, don’t you?

Cheers.

You can read more about it on their web site, but basically it is a clone (or close fascimile) of Y-Combinator.   They will invest $5K per team and $5K per founder into an idea, then provide you with additional resources and coaching to help bring your idea to fruition.

There has been some debate as to whether or not this investment model makes sense here in Georgia.  Personally, I think that it does, with some caveats.

Who it is good for: Young, aspiring technology entrepreneurs that can quickly prototype an idea into a tangible product or service.

Who Isn’t a Good Fit (IMHO): This list is a bit longer …

• Entrepreneurs that aren’t really entrepreneurs but are looking for a “job”, or individuals that think $250K (or even $100K) is a valid salary for a startup founder here.
• Entrepreneurs that are still trying to apply antiquated business school methods to startups (i.e. those who think pre-money valuations on pre-product, pre-revenue companies is anything over $250-500K)
• Entrepreneurs who still think that it takes $2-5M to get an idea off the ground (see above)
• Entrepreneurs in non-technology or capital intensive industries (manufacturing, nano-tech, bio-tech, and many/most consumer product plays)

Given that Atlanta has a nice cluster of (younger) idea-oriented technology/software-minded innovators, I think this model has a lot of applicability here.  The metrics make sense to me.  Short time-to-market, quick iterations, fail fast, and move on.  Time will tell, of course, but I’d bet on success.

There have been several successful exits from Y-Combinator companies.  They have proven the model that small investments can create large returns, especially in the web/software space.

I’m sure the founders might have some other thoughts, but these are mine.  Back to work now …

Cheers.

Our next Capital Lounge event is next Wednesday, 8/27, and man is it shaping up to be a good one.

As it stands right now, this will be the best investor turn out to date (due I think in large part to the success we’ve had with our Angel Lounge initiative). Right now we have over 40 investors signed up, and that number will probably drive closer to 50 in the next few days. There is a slight edge in the number of angel investors, but it is pretty evenly split between angels and traditional venture capital firms.

Over 150 entrepreneurs have signed up as well, and about half of them are new deals. Very cool to see that trend continue.

Of course, we try very diligently to weed out service providers, job seekers, etc. in order to create an environment conducive to having substantive discussions between innovators and capital providers.

if you want to meet the movers and shakers in the startup community (ATDC, VentureLab, regional VCs, local angels, and a veritable army of fellow entrepreneurs), you need to be there. And why not? It’s free.

We’re going to be making some cool announcements there as well. ;)

As a reminder, we are capping attendance (for entrepreneurs, at least). So if you haven’t applied, and you want to attend, you should probably apply sooner rather than later.

Cheers.

The crossroads — a place where two roads cross at or about at right angles, otherwise known as “the forks of the road” — is a metaphor used in religious and folkloric belief all around the world. From the legend of the delta blues guitarist Tommy Johnson (no, not Robert Johnson, as some believe), who sold his soul to the devil at the crossroads, in exchange for other-worldly guitar playing skills, to the ancient Mayans to Robert Frost’s “The Road Not Taken”, the concept of the crossroads has been used to depict a “deciding moment” or “turning point” in life.

I think we’ve arrived at the crossroads in Atlanta, as it pertains to the early-stage venture scene. This is probably going to be a long post, so be forewarned.

The Appcelerator “Thing”

Unless you have been under a rock for the past few weeks, you are no doubt aware of the whole Appcelerator “thing”. Short version: Jeff Haynie founded the company, reached the $1M revenue mark, and poked around for venture capital funding here. He ended up heading west to Silicon Valley, pitched his deal there, and accepted a term sheet from some Valley VCs. Of course, as most VCs like to have the founders within “strangling distance”, the company is relocating corporate operations to Mountain View as part of the deal.

If you don’t know Jeff Haynie, or know of him, he has been one of the “voices” of this new emerging wave of entrepreneurs in Atlanta. Jeff has been very involved in everything from SoCon to StartupLounge to Startup Riot, and everything in between. There is no doubt that he will be missed.

Yesterday afternoon, Jeff came over to our office and hung out for a while. We talked some geek speak for a while, then went next door to the pub to snag a few beers. I figured the least I owed the guy was a farewell beer or two, especially given all that Jeff has done here in the Atlanta community over the past few years. Of course, invariably, we talked about Appcelerator, Atlanta, funding, et al. It was a brief moment of quiet fun — an oasis surrounded by the sad reality that Atlanta is losing one of its best and brightest problem solvers.

But as I have learned the hard way (mostly by occasionally opening my mouth just wide enough to insert my size 10 and a half shoes), there are always multiple facets to every story – to every problem. It is easy to fall into the trap of “blame the VCs” or “blame the culture here”.  But that is a slippery slope that doesn’t even begin to explain “why” things like this happen.

Appcelerator tried to raise money here in Atlanta. In fact, it is my understanding that they had one initial commitment for a couple of million, and another Atlanta VC interested. But when the west coast guys got into the deal, things got interesting. Why? Because there is a marked difference in operating models with west coast VCs (as compared to here).

Sanjay Parekh blogged about this today (“Why I hate Spreadsheet Jockeys”) – it is a good read – brutally honest, but there are some truths in it. Lance followed up as well, and posed an interesting question.

It is my opinion that most regional VCs in the Southeast tend to be driven by more traditional finance-based approaches to investing. On the west coast, the approach is often different. Sure, they still bet on the team, the founder, the jockey, the traction, etc. – all of the standard VC investment cliches. But they are gamblers. They bet on trends. They bank on their ability to predict the future. A lot more so than here. And there is a lot more at stake there … the funds are bigger, and so are the pressures from LPs.

The result is that their vetting and due diligence process can be quite different. They don’t necessarily want to see pro forma financials – at least not right away. Per Haynie, the west coast guys didn’t even ask about financials until his 3rd or 4th meeting with them. Why? Because they know they’re going to blow through cash as they scale the company. They also realize that many of their investments exit well before any real revenues are even present (e.g. Ribbit which was just snagged by British Telecom for north of $100M).

The old venture model was simple. The founder started the company and began to execute (possibly with the help of an angel, friends/family, etc.). Traction became present at some point. An outside investor was sold on the business model, and came in with an A-round. That cash was used to ramp up sales/marketing. Another subsequent round would be used to do rollups, M&A, or go global. Eventually, the company either had an IPO or was bought by a big box player.

Every VC played by these rules – even on the west coast. Then, something happened. The Internet arrived. Technology ventures shifted from semiconductor plays to online portals, search engines, networking infrastructure, and eyeballs. The west coast venture landscape started to evolve. Most of the rest of the country didn’t (including Atlanta).

The new model is different.

You don’t necessarily bet on revenues – at least not alone. You bet on value creation. Can this team create something of intrinsic value that can be moved to someone within a logical pool of buyers? You don’t believe me? Read the headlines. The venture scene on the west coast is full of companies that get picked up well before revenue, or certainly well before substantial revenues.

But in the Southeast, we are still investing in a linear model of Xs and Os. There is nothing necessarily wrong with that, mind you.  In fact, it is a much saner approach, especially if you are looking at it purely through the lens of financial risk.  But keep in mind, that just as companies compete against one another, so do VCs – at least in a normalized market.  If you are a “methodical” or “conservative” investor in this day and age, you are almost certainly going to lose out on opportunities to investors that are making deals based upon a more aggressive set of criteria. And that, my friends, is at least partially what happened with Appcelerator.

I should also note that some west coast VCs openly say that they don’t prefer to look at deals where there is local (non-Valley) VC money in play already.  Why?  For the reason I just outlined above.  Valley investors are likely focused on creating value, while a VC in an underserved market will likely focus on the financials and metrics of the business. Apples and oranges.  Oil and water. 1.0 vs 2.0.

They say that investors are driven by one of two motivating factors: fear and greed.  With any equity investment, there is a balance between the two.  Investors in the Southeast are driven more by fear (risk averse) than greed (risk tolerant).  Obviously, out in Silicon Valley, the balance is different.

By his own admission, this decision was a difficult one for Jeff to make – he was born and raised here. I can only imagine. I know I speak for all of the Atlanta startup community when I wish him the very best success in his journey.  Jeff – go make a fortune, then come back to Atlanta and help continue to make a difference here. We’ll save a seat at the table for you. :)

The Crossroads

I started this blog post referring to a crossroads for Atlanta.  So what is it? It’s actually pretty simple.

The Atlanta community has a choice to make. We can continue to play second fiddle to communities with half of the innovation present here.  Or we can treat Atlanta as a greenfield opportunity and evolve. There are plenty of problems to tackle, and lots of work to be done – but it can, and will happen. But certain views, approaches, cultural hangups, and models will either need to evolve, or be pushed out of the way (this is already beginning to happen).

Change is afoot here. There are new funds emerging, some of which will have perhaps different investment drivers.  More and more tech ventures are getting off the ground without venture funding. Entrepreneurs and investors are increasingly coming together at places like StartupRiot, StartupLounge, and the various coffee/dinner gatherings being hosted by community advocates.  Some of our successful entrepreneurs are “getting back in” and playing the angel game (a trend that I hope continues).  New angels are being drawn out of the woodwork and funneled into the process. Middlemen are being disrupted, and bottlenecks are being removed. A shift is on.

No one wanted to see Appcelerator leave Atlanta – not even the venture community here.  This much is certain.  But I believe it could very well represent a watershed event for this community.  We will look back in the not-so-distant future and we may actually thank Jeff for leaving.  Because the whole affair will likely further the grassroots community initiatives already underway here – and push us closer to our collective goals.

A Parting Shot

Fair warning to those that are not embracing of change and/or do not care too much for the open sharing of opinions and views:  the grassroots movement that is happening here is becoming stronger, and is becoming increasingly more organized and influential.  Big things are on the horizon. This town will be unrecognizable at some point, and those that aren’t part of the solution are going to become largely irrelevant.  Thanks in large part to the emergence of social media, the Atlanta startup community has a voice now, and you should strive to be a part of it, rather than shun it – no matter what your role is within the ecosystem.

During the American Revolution, the British didn’t worry too much when a few rabblerousers were simply printing pamphlets and talking smack about King Georgie the 3rd.  But when the pitchforks turned into muskets, and the tea crates started flying, it became a “problem”.   The rest is history.

Cheers.

I’m certainly not an economist, but I will say this: things could certainly be better. The job market sucks, the housing market is nonexistent in many places, and we’re staring $5 gasoline in the face. But how does it really affect the capital-seeking early-stage entrepreneur? It doesn’t sound like this is a particularly compelling time to start a new venture. Possibly, but not necessarily.

I founded my last company in 2000 – unless you were living on a deserted island then, you will remember how nasty the market was. Nevertheless, through persistence and self-funding, I managed to keep the thing going until I could exit (2005 – when the market was more in my favor). Timing is everything, as they say. Granted, the exit wasn’t overly lucrative, but we made money, and no one got hurt in the process.

I do want to point out one thing, though (and Mike and I are going to discuss this a bit in our podcast recording session later today). If you are an entrepreneur that is banking on someone else’s funding to help you to build, launch, and realize your dream – your expectations were probably out of line to begin with, so now it gets doubly hard for you. I see deals like this all the time (as do most investors):

Acme Software provides a world-changing solution to the way consumers shop online! Our cutting-edge, paradoxical approach to e-commerce will drive us to $1B in revenues in just 24 months. Seeking $5M to hire a team, build out the product, and start selling it.

In an underserved market like Atlanta, you are not likely to waltz in and secure a first round of capital with an idea alone (save for the occasional angel that truly gets what you are doing). Even if you have a prototype product, your chances may only marginally better. So guess what? Nothing has really changed for you. However, once people are buying what you’re selling, the opportunity will stand out like a diamond in the rough. This is your challenge.

If Acme came in with this pitch, however, things get interesting:

Acme Software’s beta product currently provides over 50,000 consumers with a very unique way to shop online. For the first 12 months after launch, the company generated revenues of $1M, and we’re now at cash-flow break-even. Seeking $2M to expand our product and to expand our sales efforts.

Good deals get funding … still. They likely always will. But proving yourself to be a “good deal” could be getting a lot harder if you are on the uber-early end of the spectrum. So adjust your expectations if you need to, then get out there, execute, and don’t worry about things you can’t control. Turn a bad market into an opportunity to move forward, while many others sit on the sidelines. If you can’t (or aren’t willing to) do this, you are most likely going to find the next 12 months to be a colossal waste of your time, energy, and precious capital.

Of course, if your venture is already off and running, Matt serves up some pretty good advice to try and insulate yourself. Good reading, for sure.

Cheers.

Cheers.

The House Retirement committee will take a vote on SB 80, the bill to allow the employee retirement system to invest in certain types of alternate investments. Please email the members of the committee encouraging them to support this bill. Most effective would be a short email stating that this bill will put Georgia in step with the 49 other states on this issue and that it will be positive for economic development and job creation in Georgia.

House Retirement Committee Members, Addresses and E-Mail Addresses:

Chairman:

Ben Bridges
District 10
100 Sang Road
Cleveland, Georgia 30528
ben....@house.ga.gov

Vice-Chairman:
Howard Maxwell
District 17
716 Graham Road
Dallas, Georgia 30132
howa...@house.ga.gov

Secretary:
Robert Mumford
District 95
884 Green Street
Conyers, Georgia 30012
robe...@house.ga.gov
xda...@mmm-law.com

Tommy Benton
District 31
177 Martin Street
Jefferson, Georgia 30549
tomm...@house.ga.gov

Tyrone Brooks
District 63
1890 Childress Dr., SW
Atlanta, Georgia 30311
tyro...@house.ga.gov

Debbie Buckner
District 130
780 Fielders Mill Road
Junction City, Georgia 31812
debb...@house.ga.gov

Brooks Coleman
District 97
3919 Hillside Drive
Duluth, Georgia 30096
Broo...@house.ga.gov

Burke Day
District 163
P.O. Box 2627
Tybee Island, Georgia 31328
burk...@house.ga.gov

Rich Golick
District 34
2372 Simpson Farm Way
Smyrna, Georgia 30080
rich...@house.ga.gov

Craig Gordon
District 162
714 MLK Drive, Suite 100
Savannah, Georgia 31401
jcr...@statewidehealthcare.com
crai...@house.ga.gov

Lynmore James
District 135
114 Walnut Street
Montezuma. Georgia 31063
lynm...@house.ga.gov

Charles Jenkins
District 8
P.O. Box 909
Blairsville, Georgia 30514
cjx...@alltel.net
char...@house.ga.gov

John Meadows
District 5
110 Victory Court
Calhoun, Georgia 30701
john...@starrmathews.com
john...@house.ga.gov

Earnest “Coach” Williams
District 89
P.O. Box 436
Avondale Estates, Georgia 30002
earn...@house.ga.gov

Cheers.

Yesterday we held our first “Angel Lounge” meeting in Atlanta as part of our ever-expanding efforts through StartupLounge.com. I’ve been incredibly swamped today, so I’m just getting around to jotting down some of my thoughts on it.

The idea is devilishly simple.

We want to stimulate the startup ecosystem by essentially creating more active angel investors.

We need to create more good deals. And we will.

So, we invited a number of current angel investors, several high-net worth individuals who desire to get more involved as angels, and put them in a room. The goal is/was twofold:

• Provide a relatively safe, comfortable environment so that angels can network, educate each other, and occasionally share intelligence on deals.
• To provide a forum and a peer group whereby individuals desiring to become angel investors have a place to go to seek help in getting started, and eventually, some help in managing their investments.

We ended up with around 20 or so for our first meeting. Not bad considering we really only put the word out at the last minute. I expect to double or triple this number for the next meeting. Among the notables in the room were (sorry I don’t have the full list in front of me right now, or I’d thank them all):

• Sig Mosley (Imlay Investments)
• Don Addington (former CEO of Seagull Software)
• Michael McChesney (of S1 fame, now CEO of M1 Global)
• Stephen Fleming (who is probably the only guy I know who wears more hats than me at any given time)
• Sanjay Parekh (a super bright guy who just had an exit from Digital Envoy, and is on the prowl for something to tinker with)
• Knox Massey from the Atlanta Technology Angels
• Steve Nusrallah, formerly with Noro-Moseley Venture Partners

The meeting was facilitated by Charlie Paparelli of Paparelli Ventures(shown above). Charlie is a very experienced angel investor who is the latest addition to our StartupLounge.com steering committee. As I mentioned in a previous post, the whole concept of Angel Lounge was Charlie’s idea, and he has been a fantastic resource for us as we continue to evolve. Charlie’s side mission is to help Mike reign me in when my passion kicks into 3rd gear (which is often). :)

So what did we accomplish?

The first part of the meeting centered largely around a discussion about the various issues with early stage capital in Atlanta. Ironically enough, most of the comments echoed many of the sentiments shared by entrepreneurs here. For example:

• There is a marked gap from where angels invest and where the first VC comes into play – nothing is really filling that gap, and it scares angels to death, because they run into situations where their deals can’t secure the capital needed to get to the next point on the curve.
• VCs have and continue to trend to the later stages
• Many innovators are leaving Atlanta for places like Silicon Valley and Boston
• Our success stories getting gobbled up by outside entities, and the logical spinoffs that occur when companies become a dominant force have disappeared.

Sound familar? It should – we’ve been blogging and harping about this for a couple of years. Good to hear it come from the investor side, though. So for you entrepreneurs out there who lament the capital situation in Atlanta – you are clearly not alone in your thinking.

<soapbox_mode on>

There was a brief discussion about some past efforts to try and do the same thing we’re shooting for – and that those efforts were not terribly successful. I will simply say this. “We” are not “they”. Whatever happened before us is largely irrelevant to me. Granted, we want to examine the reasons as to why those efforts were not effective, and we have.  But as I tell the folks that I work with professionally, I will almost always choose to look through the windshield, and not in the rear-view mirror.

Most of the world’s problems are ultimately solved by entrepreneurs and the people that bankroll them. The accountants, attorneys, consultants and brokers of the world are probably not going to contribute much to this effort. Why? They have an external agenda. They are an integral part of the overall ecosystem – and we all need their services, but they are not in a position to tackle this type of problem head on. Mind you, I am not blaming them, but rather simply stating a fact. We (the entrepreneurial community) are attacking this problem because we know we can solve it, and it needs to be solved – not because we think we can, or because we want to get a new client. There is marked difference.

</soapbox_mode on>

We will bring Atlanta/Georgia back to where it needs to be. It will take time, but we will do it.

There is a very strong grass-roots undercurrent running through Atlanta right now. And as several folks in the room pointed out, there is a new generation of entrepreneurs and angel investors that are beginning to emerge. The existing players recognize their responsibility to give them the support that they need – which is good.

In the end, the group thought that the idea of Angel Lounge seemed to be a good one. We’ll be holding these meetings monthly, and the format will be simple. No speakers, no fees, and no distractions. Just people who want to make a difference in the community. And we’re going to learn from each other by having open discussions on salient topics (tax matters, deal structures, portfolio management, etc.) We will become ambassadors for the cause. We will create a “funnel” for those individuals who want to explore the world of early-stage, angel investing. We will bring them into the fold, and we will nurture them. We will provide a true support group for angels, and focus on education and connecting people within the larger ecosystem.

And finally, we will provide a conduit for these newer angels to feed into our efforts with our Capital Connections events – so they can get in the room with the innovators and expand their deal flow.

On a semi-related note, the new StartupLounge.com platform which we’ll be rolling out soon will be loaded with the tools to enable groups all over the community to “plug into” the larger ecosystem. We have a lot of work to do yet, but it is progressing nicely. More soon.

I want to pay a special thanks to Charlie Paparelli. He really did a great job of helping to get this thing off the ground. On my drive home I realized why I’ve grown to like him so much. I get a lot of emails from entrepreneurs and others who ask if they can help us with our efforts with StartupLounge. And I certainly appreciate the sentiment! The difference is that Charlie not only asked if he could help, but he just dove right in and started doing.

I think Charlie has a little bootstrapping entrepreneurial blood in him. I dig it.

Finally, a quick shout out to Bill Leonard of Wm Leonard & Company and David Adams of Adams Capital for their sponsorship of our efforts with Angel Lounge. We are extremely fortunate to have a group of sponsors that really, truly get what we are trying to accomplish. Without their help, this would be much more difficult, for sure.

If you are in Georgia, and are a current angel investor, we’d love to get you involved. Likewise, if you are contemplating becoming an angel investor, and want to learn more, and network with the pros, we’re happy to do our part to do everything we can to help you be successful. Feel free to reach out to me …

Cheers.

Georgia launching venture fund
January 15, 2008
ATLANTA–Georgia is launching the Georgia Research Alliance Venture Capital Fund, Gov. Sonny Purdue told a Georgia Chamber of Commerce Meeting.

The fund will partner the state with private sector dollars to give companies formed around Georgia research university IP early stage financing.

The state is investing $10 million in the fund which will be matched 3-to-1 by private dollars.

I referred a media contact of mine to the ATDC not too long ago. I completely envisioned a role whereby he could offer internal media/public relations consulting services to ATDC portfolio companies. Think about the tremendous advantage that having a free public relations expert at your disposal would bring to a typical startup. I think the ATDC folks liked the idea, but unfortunately, they are a government entity, and are thus susceptible to the normal budgetary constraints that you would expect.

Come on, Sonny. Let’s get it done.  The ATDC has some great ideas for the future, but the impact that they will inevitably have on the regional economy will be directly correlated to their operating budget and their ability to engage the private sector.

Cheers.

Cheers.