Joi Ito's conversation with the living web.

Most recently in the Venture Capital Category

I recently visited and had a conversation with Limor "Lady Ada" Fried and Phil Torrone of Adafruit. I first met them about ten years ago at SxSW.

Limor is an MIT grad that we're super-proud of and Phil is an amazing pioneer in communications, hacking and many other things. Phil and Limor are two of my most favorite people and I aways get giddy just getting a chance to hang out with them. We discussed making, electronics, business, manufacturing, hacking, live video and more.

They've been doing live video daily for the last 10 years or so and are real pioneers in this medium as well. We used their setup to stream the video to Facebook Live and Periscope and posted the recordings on YouTube and the audio on SoundCloud and iTunes.

I Twittered this but forgot to blog it. :-P

From the Twitter Blog:

Despite the fact that Twitter is in English, we continue to see exciting growth from all over the world. Japan, in particular shows a very strong and growing demand for Twitter services. Movatwitter and Twitterpod are great examples.

To support continued growth in Japan, Twitter has formed a partnership with Digital Garage to create the official Twitter Japan service. As part of this arrangement, Digital Garage has made an investment in Twitter, Inc and will commit engineering and other development resources to help us bring Twitter to Japan.

We're really excited about Twitter Japan because it's a big step towards our goal of becoming a worldwide communication network. We'll have more news for you about Twitter Japan and Twitter in other parts of the world as we make progress.

Gratz Rocky, Minami and the team who worked on the deal.

I am a co-founder of Digital Garage and I am on the board. Digital Garage is a strong supporter of CC and the main sponsor of my lab. While I continue to do some deals personally, most deals that involve active support in Japan involve my team at Digital Garage.

BTW, I'm Joi on Twitter.

Märt Saarepera Mart explaining architecture

I just returned from a trip to Tallinn where I completed the paperwork to invest in GuardTime, an electronic archive and log authentication system using cryptographic time stamps.

The idea was developed by the founder of the company, Märt Saarepera and his collegues in Estonia when Mart was in Japan. Mart started out as an academic and a researcher, but became an entrepreneur in residence at my company Neoteny back when we were still incubating businesses. At the time, our team thought that the business was too early and passed on the investment and Mart set off on his own with support of his friends and family and some minimal support from myself.

Years later, it looks like the market is finally ready for Mart and his product. His idea has also developed from a rather theoretical idea to something they can show and ship.

Mart has raised money from a group of investors including the Ambient Sound Investments (ASI) founded and run by some of the Skype founding technical members.

Because of securities laws in Estonia, I needed to visit Estonia personally to open an account at a bank there. The banking in Estonia is really advanced, having been built from scratch after the Internet existed already. They use hardware password generators for their online banking and offer more services through the Internet than any other bank I’ve ever seen. Also, because they don’t have a lot of legacy crap like banks in Japan, they are very profitable and lean.

Tallinn was a very cool city. It is the capital of Estonia with a population of about 400,000. In many ways it reminds me of Helsinki except smaller and with Skype as the anchor IT global brand instead of Nokia.

The old town where I stayed was a beautiful district with the old architecture preserved and the random Russian government buildings scattered around typical of this former USSR region. Embedded in this old-architecture are very nice restaurants, shops and hotels built in the cool super-minimalist style of Nordic Europe that I love so much. I stayed at a hotel called Three Sisters and it was the best small hotel I’ve stayed in recently.

Another cool thing about Tallinn was that there was free wifi everywhere. The hotel, railway station, offices and airport all had free wifi. The Internet was faster than in Frankfurt airport, the Frankfurt Sheraton, in fact faster than just about anywhere that I’ve been recently other than my office in Tokyo.

I don’t know if it is the Estonian culture or Mart’s community, but everyone I met at GuardTime and Skype seemed happy and smart. There was a buzz of a strong culture and good work being done. I miss think sort of feeling “pure” feeling these days.

I’ve uploaded my photos in a Flickr set.

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Dopplr announced the closing of their seed round which I participated in.

Dopplr is social network for travelers. While it is possible to sync your travel schedules with people using other applications, no application that I know of has focused on and delivered the answer to the "when are we in the same city next?" question so well. The upside of Dopplr is that it does this VERY well and is perfect for people like me who usually meet my friends while traveling. The downside is that it's not that useful for people who don't travel or don't have any friends who travel.

The other great thing about Dopplr is that it was founded by, funded by and is being developed by some of my best friends..

View from Shanghai JW Marriott

Just returned from a trip to China with Reid, Michelle, Ellen and Kazuya organized by Leonard Liu and his team.

We met with VCs, entrepreneurs and a few of my old friends.

I was in Shanghai a few years ago just as the US VCs were starting to set up offices in Shanghai. Things have clearly moved forward a notch. The first wave of entrepreneurs have exited their successful ventures and are now on their second or third venture. The VCs seem to have a community. More and more US educated Chinese seem to be returning.

There are many things about the Chinese venture scene that remind me of the Japanese venture scene. There are clearly fewer experienced VCs and entrepreneurs compared to Silicon Valley. Many of the people are copying US models - some with a great deal of success.

The Chinese market in general reminds me of Japan during the bubble. Everyone hugely optimistic, explosion of spending, explosion of brands and luxury goods, investors from all over the place flocking to participate. While the dynamics are quite different and the market much larger in many ways, I see some of the similar indicators of irrational exuberance as well.

When we launched a lot of our ventures in Japan like Internet advertising, ecommerce and other things that were going strong in the US, we typically overestimated the short term growth for Japan. I have to give Reid credit for triggering this thought, but I now think that it is possible that many entrepreneurs may be overestimating how easy it is going to be to get Internet ads and ecommerce going in China. On the other hand, even very narrow nitchy markets in China are HUGE so it's possible to build pretty big business with a narrow focus compared to what you can do in the US or Japan.

I'm still not sure what we're going to end up doing in China if anything, but I'll keep you posted. Thanks for everyone who took time in their busy schedules to meet with us and share thoughts. Thanks especially to Leonard, John, Vivian and Stefanie for organizing such a great trip!

I organized my photos into the Shanghai part and the Beijing part.

Reflecting on All Things Digital, I got the feeling that I've missed thinking deeply about something that is probably obvious to a lot of people. Big media companies are leading the charge (fueling the bubble?) into Web 2.0 probably even more than VCs and startups. I definitely felt a kind of bubble-like feeling at the last O'Reilly Web 2.0 Expo, but after D I realized that it wasn't really a bubble so much as a charge after hearing the heads of companies like CBS, News Corp., Time, Viacom, etc. talk about how they were basically just getting started. It seemed like they all had almost weekly pipelines of multi-hundred-million-dollar acquisitions planned. They talked jealously about how after the $900M Google deal to buy the MySpace ads, it was clear that the $580M MySpace acquisition by News Corp. was a steal.

John Markoff also mentioned to me that if you had bought Apple stock at the Google IPO, you would have done better than if you had bought Google stock.

Watching and listening to these big companies talking about "the space" it felt like, in their eyes, and possibly in reality, these guys were "running the show". If nothing else, they were providing the exit scenarios for most of the investors in Silicon Valley now. Chatting to various friends at Google and Yahoo, it was clear that neither of the two would pay the kinds of valuations that the media companies were paying for their acquisitions.

I had mused about this and had even talked about this trend, but listening to MediaCo-to-MediaCo chatter, really made a deep impression on me and makes me feel that maybe this exuberance will continue longer than I had thought... at least unless there is some larger market catastrophe... Which is good I guess. ;-)

Congrats and "Good job!" to CBS and the team! CBS and announced that CBS will be acquiring for $280 million. I think it's a good fit and the team seems happy with the deal. have blogged about it and CBS has an announcement.

I was an angel investor and a series A investor in

UPDATE: BBC has a good article - Social music site has been bought by US media giant CBS Corporation for $280m (£140m), the largest-ever UK Web 2.0 acquisition.

CC Weblog
CC Business Mixer: Calling for Creative Commons Entrepreneurs

Creative Commons and CC board member John Buckman will be hosting a CC Business Mixer on Thursday, Jan. 18th from 6pm-8pm at the Creative Commons offices in San Francisco. If you have an idea for a Creative Commons related business, this is your chance to present your idea to other like minded entrepreneurs and network with VCs. Have an idea you would like to present? Email John Buckman at

Details: Creative Commons Business Mixer for CC Entrepreneurs
6pm-8pm, Thursday January 18th
Creative Commons
543 Howard Street, 5th Floor
San Francisco

It looks like I'l be able to make it to this event. If you're in SF and have a startup that involves CC or are a VC interested in this space, email John Buckman and see you there. ;-)

Lawrence Lessig has a thoughtful post about something that I've been mentioning in recent talks I've given, but haven't blogged much about.

I'm often asked to speak about "Web 2.0". I personally think that people are trying to build Bubble 2.0 on top of Web 2.0. Instead of becoming a platform for the future of the Web, it's possible that Web 2.0 is becoming the platform for the short-term future of greedy people. However, I do think that it is important to understand that the recent success and surge in innovation on the Web is due to a semi-new set of principles. Part of the principles are a return to fundamental principles. The innovation on the Web and the Internet is driven by what David Weinberger has called "Small Pieces Loosely Joined" - a network created by small groups working together around open standards. It is and was a community of people and projects trying to connect to each other.

Bubble 1.0 brought the "customer acquisition and barrier to entry" phase with players such as AOL and Yahoo gobbling up companies and focusing on barriers instead of connectivity. A good example of a technology that happened to emerge during these days is instant messenger. Even today this spoiled brat doesn't interoperate properly leaving its users on their little Bubble 1.0 branded islands.

I think Tim O'Reilly's description of Web 2.0 is the best one I've ever seen. (Read it if you haven't.) My own view is that after Bubble 1.0 collapsed many of the unemployed or the recently happily "exited" entrepreneurs and developers started building tools in the spirit of Web 1.0 - in communities of people collaborating around open standards. The big difference was that many of the dreams we had during the Web 1.0 era were now more feasible with broadband, wireless, higher penetration, stabilization of various standards, faster computers and some lesson learning from the bubble.

I still remember when we were building Infoseek Japan I kept talking about how the web was going to be an incredible place for user publishing and that Infoseek would be an engine that would democratize media and voice. I was ranting about something that sounded like blogs and the long tail. Unfortunately, it was too hard to keep your web page updated and search engines and methods were not yet smart enough to filter the noise and sort out the context. We ended up with most of the traffic going to the mega sites like CNN and Yahoo.

To me, Web 2.0 is about trying to get right those layers of the stack that we weren't able to get right the last time around.

One of the central themes of Web 2.0 is the ability for users to control their own data and the ability for people to share and remix. In this context, many, if not most good Web 2.0 services allow users to download, link and reuse all if not a substantial part of the content they work on.

While it is not easy to extract data from Second Life, the content of what you build in Second Life and videos that you make in Second Life are owned by the user.

As Larry points out:

# Flickr, for example, makes it simple to download Flickr images. (See, e.g., here.)
# explicitly offers links to download various formats of the videos it shares. (See, e.g., here.)
# EyeSpot (a fantastic new site to enable web based remixing of video and audio) permits the download of the source and product files. (See, e.g., here.)
# Revver (the site that enables an ad-bug to be added to a video so the creator gets paid when each video is played) builds its whole business model on the idea that content can flow freely on the Net. (See, e.g., here.)

In this context, YouTube is a "cool" poster-child of the Web 2.0 trend, but doesn't meet the basic requirement of allowing the user to download videos from the site. While it is "sharing", it is what Larry is calling a "fake sharing site". I think Japanese sites such as Mixi are as well. (Mixi is a social network site that doesn't syndicate or allow remixing or including of content in the site but encourages users to create and upload content.)

Although we can't really expect users to initially understand the distinction, I think in the long run, users will understand that stand-alone or closed services do not allow them the freedoms that are becoming exceedingly more common in the Web 2.0 area. I do hope that the rush to Bubble 2.0 doesn't allow companies to trample over the core principles of the Web in their drive for more ARPU (Average Revenue per User). I think it is important to keep our eyes on the ball and not lose our focus on what is driving the innovation and the increasingly rich user experience.

UPDATE: Nick Carr responds to Lessig and mentions this post and Lessig responds.

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A belated "gratz" to my friend and co-investor/partner in most of my angel investments, Reid Hoffman for become a Rank 22 important person.

Business 2.0
The 50 people who matter now

Rank: 22
Reid Hoffman
Angel investor and CEO, LinkedIn

Why He Matters: Want to launch a Web 2.0 startup? Be prepared to kiss Hoffman's ring. In his day job, Hoffman is the co-founder of LinkedIn, the online haven for business networkers. But on the side, he's also an angel investor with a knack for spotting young companies with big potential. Thus far, he's supplied insight and investment money to a remarkable number of successful startups, including Digg, Facebook, Flickr,, Six Apart, Technorati, and Wink. And while the cash is nice, Hoffman's imprimatur has become even more important if you want to be seen as a player in today's Internet game. If he likes your idea, good fortune is likely to follow. If he doesn't, it may be time to rethink your business plan.

Google's S-1 is online. (Warning. Big file.)

via CNET

Although I had some problems with the Plaxo model, I hate hearing stories like this. Sean Parker, the founder and visionary behind Plaxo was kicked out rather rudely by the VCs. I don't know the details, but it sounds bad.

The company sent out an anonymous, terse statement that Parker is ``no longer with Plaxo,'' but called him a ``visionary, creative entrepreneur'' and ended with: ``We thank him for his hard work and wish him well.''

In reality, though, a source said Parker has been locked out, and everyone at the company has been instructed not to talk with Parker, except by way of the company's lawyer, Ray Hickson.

When contacted and asked whether this arrangement is ``normal,'' Hickson said: ``I can't discuss a client personnel matter with newspaper reporters.''

Parker himself issued a terse statement: ``While the company is moving to a new stage of its growth, the management team remains committed to executing my original vision,'' he said. ``The company remains in capable hands.''

I've founded several companies and as companies grow, the skills required to be the chief executive change. When I've founded (or helped found) companies in the past, I've usually stepped aside to allow someone with better administrative and sales skills to lead the company after it's up and running. This was the case with Digital Garage and PSINet Japan and to a certain extent Infoseek Japan. I seem to be the most useful getting things going, not running them.

As a VC/investor, I've seen my share of visionary CEOs who can't run the company, but we usually try to keep them involved in some way and stay on good terms so we can invest in their next good company. I don't see how you can continue being a VC in the valley being cruel to serial entrepreneurs.

Pierre Omidyar of eBay is probably one of the best examples of knowing when to bring on a real CEO, but staying involved as the founder. I think he and his investors were smart about this.

Jason Calacanis blogs about this on thesocialsoftwareweblog

I feel like a proud dad. Six Apart's Movable Type got 5 stars, TypePad got 4 stars and an Editors' Choice and Socialtext Workspace got an 4 stars and an Editors' Choice in the recent PC Magazine's Editors' Choice Awards.

Good work folks!

Spent part of the day at Disney Sea with Mizuka for her birthday. There were lots of lines and lots of crowds. When we encountered crowds I realized that my behavior was a bit different than most of the people, but obviously not unique. I would avoid crowds and try to go in the opposite direction of crowds. If I noticed I was near the front of a crowd or ahead of a crowd, I would accelerate and try to stay ahead. Otherwise I would change course or go the other direction. If there were lines, I would choose the shortest one.

I saw some people doing exactly the opposite. Even though there were ticket windows open, they would go to where people were lined up. If there was a crowd, it often attracted more people. Even if people were ahead of the pack, they walked slowly and were engulfed by the crowd.

I think investing and business development is a bit like a theme park where new rides are opening and various things changing, with the crowds rushing from one area to another. I think you should focus on trying to find cool things to do in less crowded spaces. Don't be worried because there's no one there yet. You should try to stay ahead of the crowd if the crowd is headed in the same direction. If you see the crowd coming your way, get your business done quickly.

The social software space is starting to feel a bit crowded. ;-) I think we're still near the head of the crowd, but pretty soon it's going to feel like a crowded Disneyland ride I think... This doesn't mean I'm going to start running in the opposite direction, but there are lots of things we need to do before the follow-the-pack'ers all arrive.

The Financial Times
Google considers online IPO auction

By Richard Waters in San Francisco

Google is considering holding a massive online auction of shares early next year in an initial public offering that investment bankers predict could value the internet search-engine company at more than $15bn.

Holy cow. Does anyone have any more information on this?

I wonder if it's going to be a Dutch Auction IPO?

Ross just announced an angel round raise for Socialtext which I participated in. Ross and his crew are working on wikis in the workplace and other social software solutions and represent the cutting edge on a variety fronts.

A few people have questioned my assertion that no-shop agreements make sense. I'd like to clarify my position. I do agree that in some cases, they don't make sense, but here's where they make sense.

Basically, my point is that if you decide that you like each other and REALLY want to work together but that it will take a lot of work before the actual transaction happens, a no-shop allows both parties to focus on building the business. It's like an agreement that after two people are engaged, you both don't date anymore. Obviously, if you're not sure you have the right partner, you shouldn't sign a no-shop. As a VC, if we have a no-shop we feel much more comfortable putting a lot of work on helping the formation of the business plan, introducing the company to partners, other investors, advisors, possible employees, paying for their legal fees, etc.

Another situation where I have found no-shops to make sense are in cases where you can just SEE how an auction could end up taking A LONG TIME. I am not at liberty to disclose the actual transaction, but I once had a buyer for a company where I had a no-shop. The investment banker broke my no-shop and shopped the company around after I made my offer. I didn't want to deal with the auction so I dropped out. The auction took months and they ended up getting LESS money for the company because they didn't find a better buyer and I didn't want the company any more because the value of the company degraded during the process because everyone was spending all of their time "being shopped around."

I've also signed a no-shop as an entrepreneur. I was talking to a variety of VC's. They were all pitching me on why I should work with them. I ended up choosing one VC, signed a no-shop and we were able to close and fund in 1 month. Without the no-shop I think it would have taken much longer.

I think that in the "clubby" Silicon Valley VC community where everyone's friendly with everyone else, maybe no-shops are not very common. Also, where you are quite confident about your business and don't need much help, just money, maybe shopping it around and raising money from the highest bidder makes sense.

A no-shop doesn't mean that other investors can't come in. It just means that other investors should talk to the lead investor. It just means you stop taking cold-calls from random investors who hear that a deal is happening. It also means that you don't go looking for another investor for the sake of negotiation.

A no shop is sometimes called an exploding term sheet. It means that the company must either accept the deal on the spot or it won't get funded at all. The theory is, we don't want you going around to other VCs trying to get a better deal. It's common among the second-tier VCs, but the best VCs are usually willing to stand on their own merits.
Our no-shops are not about forcing people to take the deal on the spot. It's so that we can invest a lot of time adding value before we finalize the deal. I guess the best VC's say, "Come back when you have a real business. Don't look to us for help." ;-) (Half kidding here. Many top tier VC's have Entrepreneur in Residence systems and other ways to help entrpreneurs before they invest, but you definitely have to be in the club before they'll lift a finger for you.)

Andrew over at VentureBlog also disagrees with my position on no-shops.

Wrote a not-so-organized entry about our investment process...

I thought it might be useful to describe the venture investing process in the context of the recent discussion about transparency. Firms have their own processes and some of the details may vary, but generally speaking, most VC's probably have a similar process. Also, I've only been doing this for three years. I've been an entrepreneur for about 10. I've learned a lot over the last three years and think I've become much better at venture investing, but still have a lot to learn...

First, the principles. Buy low/Sell high. Funds have some "life" of around 6 years where they need to "exit". The point is to buy shares of companies for a low price and be able to sell them to someone at a higher price before the end of the fund.

During the bubble, people often invested on the "greater fools theory" which was the theory that there was always someone more stupid than you and that as long as the hype continued, you could sell your shares for more money to the next more stupid guy. This is VERY dangerous way to invest and luckily doesn't make sense anymore.

Buy Low

1 - Understand the business better than anyone else so you can determine that there is less risk than others might perceive. This will allow you to buy at a higher price.

2 - Ask for a lower price because of the value that your firm will add to the business after the investment. The "smart money" story.

3 - Be first. Find the deal first, sign a "no shop" and get a letter of intent (LOI) signed quickly so an auction doesn't start jacking up the price. This is sometimes in the interest of the entrepreneur as well since the auction process is a long and tedious process that sometimes ends up burning out the business and doesn't always lead to ending up with the best investors. If the entrepreneur plans to continue to raise money, getting the highest price isn't as important as closing quickly with a good investor and building the business.

3 - Negotiate. Push to get better terms in negotiation. Negotiation always occurs at some level, but since both investors and entrepreneurs can always screw each other at any point, the relationship between the investor and entrepreneur is essential. In a buyout where there is no relationship after the transaction, it's easy to play hardball since you don't have to work together afterwards, but in venture investing hard negotiations can often lead bad blood, hurting the business and lowering value. The "tone" is often set by the entrepreneur and it's sometimes counter-productive to go in hard when it's not necessary. Having said that, some VC's are EXTREMELY tough. So, my advice here, know your opponent and don't be tougher than you have to, but be prepared to fight to protect your interests if you have to.

Sell High - The Exit

Exiting is always tough, especially if you like the company. It's important to have an "exit strategy". Is the company likely to be acquired? Is the company likely to go public? Who are the probably acquirers? Are there comparable acquisitions? What were the valuations? The exit scenario and the comparable acquisitions or IPO's and their valuations help you determine what sort of multiple on the invested money you might get out and when. This number and the probability of getting to such an exit determine the current valuation of the business. Valuation for big companies with steady cash flows is sort of mathematical, but for venture businesses where "the probability of such an exit" is such a squishy number, valuation is really more flexible and based more on comparable than on discounted cash flows.

Deal flow

Deal flow comes from many sources. My best deal flow comes from introductions. That's why I'm excited about LinkedIn. Introductions from people who value my time are generally filtered and recommended to me with information that helps me understand the "angle" quickly. I find that non-solicited pitches have a very low signal to noise ratio and I unfortunately have found very few deals this way. I find that blogging is a great way to meet people "in context" and reading the blog of a potential business partner is a great way to get to know them. This context is a great way to filter for quality, I think.

Another source of deals is other VC's. Some VC's want to hog a round and crowd out all of the other investors, but many VC's share deals for a variety of reasons. Sharing deals lets you share due diligence, management, expertise in building the business and risk. Usually there is a "lead VC" on any deal who takes responsibility for the due diligence, negotiation of the terms and most of the risk. In cases where we are brought into a deal by the lead VC, it's less likely I'm going to be blogging about it since we're probably locked up immediately by an NDA and I haven't gone through the discovery process.

It's important to note that since buy low/sell high is the key, not all deals are obvious. Great companies are often over-priced and don't make sense from an investment perspective. Sometimes really boring companies or companies doing very poorly can be great deals if there is an exit scenario where you know someone would pay a lot of money to buy your shares.

The single most important criteria for a good early-stage deal is the quality of the CEO and the team. Investing in technologies or "market opportunities" without a good CEO is a key to disaster. Having said that, you need core skills/assets, uniqueness, a real market opportunity and a business plan that makes sense. Finally, the valuation has to make sense.


Valuation is based in part on the risk involved in the business. There are clear milestones that decrease the risk in any business. Risk usually decreases as each milestone is hit. A typical series of milestones might be: team on board, competitive analysis and due diligence of business plan done, technology developed and prototype shipped, first customer signed, cash flow break-even, evidence of geometric grown in revenues and a scalable business, buyer/IPO in sight. From the perspective of the entrepreneur, it's better to take the minimum amount of money necessary and raise money as risk starts to decrease since the entrepreneur can demand a higher valuation and be diluted less. The problem is, raising money takes time and energy away from the business so you want to minimize the number of times you have to raise money. Also, since there are fewer investors around these days, often new investors will dictate the valuation and terms and will "wash out" the earlier investors if the earlier investors are not able to participate in following round. Although the market seems to be stabilizing a bit, it's still very risky for a small fund like ours to invest in a company that might require a lot of additional money since we could be "washed out" by future investors.

Investment Committee

Most funds have some sort of investment committee. Different funds have different rules. Some require unanimous agreement by the members, some vote and require some sort of majority. Our committee consists of myself, our chairman Jun, Paul and Richard representing our investors and the deal team. We generally try to get a consensus.

The Process

Deal flow is tracked and we always have a pipeline of possible deals. Most early stages of the process involve someone taking a look at a proposal or trying to put together a deal based on a theory or a person we would like to work with. As the thesis of the business and structure of the deals start to take shape, the deal gets discussed a bit internally and we allocate resources for due diligence. We will usually try to sign some sort of "no shop" agreement with the company so that we feel comfortable spending money on due diligence without fear that someone will come in and take the deal away. The due diligence process can take a lot of time and can involve building the business together. As a deal structure starts to take shape and the investment becomes likely, we put together a "high-focus memo" for investment committee. It's basically a summary of the deal with a checklist of items. We also start working on the term sheet which is a list of negotiating points. We usually try to brief the investment committee on deals as they begin to take shape. Once the high-focus memo is done, we have an investment committee meeting. Often the group discusses additional due diligence items and possible alternative structures. Often a deal will cycle through investment committee several times until people feel comfortable with the deal. Once investment committee is comfortable with the company, valuation and structure, we sign the term sheet. The term sheet is usually a non-binding letter, but I have never signed a term sheet that we did not follow to the letter. After the term sheet is signed, the lawyers draft the agreements. There is usually another round of negotiations on legal issues that aren't covered in the term sheet. If the term sheet is done well, most of these issues are not major. Once the documents are done, we sign, fund and announce.


The terms in the term sheet usually reflect common practice in the VC community. These practices are always changing to reflect changes in the market or styles of investing.

Usually money is invested in convertible preferred shares. Convertible preferred shares are shares that get a return before the common share in the event of a liquidation or an acquisition. There is usually some sort of trigger for the preferred shares to convert into common stock such as an IPO or a valuation milestone. Convertible preferred shares allow investors to give a higher valuation to a company with no assets because it prevents the common shareholders from liquidating the company and running away with the money before building the business.

Often the legal fees for the transaction are charged to the investee with some sort of cap.

There is usually some sort of protection from dilution so that the company can't sell share for a lower price and dilute the investor easily. Having said that, if the company really needs money and the current investors aren't willing to put money in, the new investors can easily negotiate away such anti-dilution terms.


Having just written this entry, I realize that it's a kind of rambling entry. Since I'm not sure how interested people are going to be in this entry, I'm going to post it as is since I'm too lazy to edit it. If people find it interesting, I may go back and edit it and maybe put it in my wiki.

due diligence and VentureBlog are two good VC blogs.

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