Bulldog Financial’s Bullblog

Houston Chronicle Moneymakers

I was interviewed by our local paper and it came out mostly accurate. I am not a “Venture Capitalist” in the strictest sense, but I am an Angel investor - otherwise the article was all me. I don’t think that I came across as too arrogant or too flippant but you be the judge:

Business
“I’ve come to learn that it’s much better to be really smart in one small niche, rather than be kind of smart in a lot.”
KEVIN FUJII: CHRONICLE

June 26, 2007, 8:16PM
Moneymakers
Five questions with Marc Nathan
Failures help this venture capitalist
By BRAD HEM
Copyright 2007 Houston Chronicle

In an era when technology startups are constantly trying to convince the masses that their new Web site, gadget or software is the next big thing, the first person they need to convince is often someone with money, someone who can invest a few hundred thousand or a few million to get them to the next step.

Someone like Marc Nathan.

After college Nathan went to work for Houston-based ClearWorks.net, providing high-speed Internet connectivity and on-demand video rental for neighborhoods and businesses.
When League City-based Eagle Broadband purchased ClearWorks in 2000 for $137.5 million in stock, Nathan got a “decent payday.”

Since then, he has become a venture capitalist, using his money and that of his friends to help make the dreams of inventors and innovators come true — and make more money.
Although some venture capitalists do only multimillion-dollar deals, Nathan’s firm is still growing, and he focuses on investing up to $500,000 in startups.

Nathan spoke with Houston Chronicle technology reporter Brad Hem about what gets his attention and what new CEOs should never say when they’re hitting up potential investors.
Q: How does someone become a venture capitalist?

A: The very best way to make a small fortune in the venture business is to start with a large fortune. I wasn’t that lucky. I don’t have a rich uncle. I really cut my teeth on doing small investments with many different investors into dot-com deals. I wasn’t particularly a dot-com player, but everything back then was a dot-com deal. I had been there and done that at such a young age. One of the investors on that deal who we were lucky enough to make a ton of money for asked me to look at another deal, and it cascaded from there. What I do is find businesses that need help, and I help them by finding investors that want to help them. I get intimately involved with the companies themselves and grow either their sales, their marketing, their PR, their investment profile, and then manage my personal friends who are the investors, making sure that what they bought is what they get.

Q: What’s hot now? What’s getting your attention, and on the flip side, what won’t you touch?

A: There’s a great deal of biotech in this town. That’s not for me. I’ve done a few biotech and life science deals, but they’ve never turned out all that great. I’ve come to learn that it’s much better to be really smart in one small niche, rather than be kind of smart in a lot. I’ve got one company here in Houston that I love called Podcast Ready. It’s obviously a podcast-oriented company in new media. I tend to focus on what’s called Web 2.0 and new media. Web 2.0 is a conglomeration of a lot of ideas. Essentially to me it means user-generated content on the Internet. I’ve sort of established myself here in Houston through pure dumb luck as sort of the expert to do those sorts of deals.

Q: You must get a lot of cold pitches. Do those turn into deals or are you more likely to seek a company out yourself?

A: I do both. Just today alone I had three separate pitches. I tend not to do deals with companies that pitch me cold. Most investors don’t for obvious reasons. What I tend to do is get pitches from trusted sources.

Q: How do you decide what’s worth investing in, what’s going to stick?
A: A lot of it is based on very extensive experience. Writing checks and having them lose — that’s what tells you what’s right and wrong. Those failures actually give you the experience to know what’s right and wrong. Listening to the same story this month of the same guy who gave you the same story last year that didn’t work makes you understand a little more about the world.
You never know if something’s going to be a true success until you get the checks written. All of them have potential to become tremendous successes. The other side is you never know which ones are failures until they declare bankruptcy. Out of 100 deals that you look at, you’re looking at getting involved with maybe 10 of them. If you get involved with 10 of them, you know that maybe one is going to be a home run that’s going to make up with nine either total losers or deals where you get your money back. We are looking for blockbuster deals.

Q: Are there red-flag words that companies say when they’re pitching you? What should pitchers never say?

A: No. 1 is ‘I don’t have any competition.’ When I hear that, my shutters go up. I put the note on the door that says closed for business. When somebody says that, it means two things: They don’t know who the competition truly is, or they don’t have any competition because nobody wants what they’ve got.

No. 2 red flag is you tell me your numbers are conservative. I automatically cut them in half anyway, so we could go around in circles. At the end of the day, don’t tell me anything. Just show me what you’ve got.

And No. 3 — and there are so many of them — but No. 3 is probably saying that you as a management team or CEO are going to be with the company for the life of the company. The opposite of that is telling me that your CEO is going to step aside when more talent comes on board.

brad.hem@chron.com

I’m going to send this link to entrepreneurs that risk falling into these investor pitch traps.

Top 10 Investor Pitch No-No’s

I love this post since it seems so obvious to me, but that’s because I’ve dealt with these situations dozens of times.

Also I’ll add “We’re going to capture 1% of the market”.

We’re going for the second round of OpenCoffee Club at a new time & place:

OpenCoffee Club encourages informal networking among entrepreneurs and investors to help grow startup companies in the Houston area.

Friday, June 8, 2007
2:00 PM
Starbucks Uptown
1151 Uptown Park #12
Houston, Texas 77056

Optional RSVP:
Upcoming: http://upcoming.yahoo.com/event/195457/?ps=6
Meetup: http://smallbiz.meetup.com/57/calendar/5818119/

Homepage
http://houstonopencoffeeclub.ning.com/

I’m changing the venue to accommodate new and different attendees which I plan on doing each month until we collectively decide on the optimal time and place for most people. Email me or leave a comment to get on the email list.

I’ve already seen a few new faces that have RSVP’ed so I think that it will be another strong event for the Houston area startup community.

It’s been ten days since our first OpenCoffee Club and I’ve already had several follow up meetings with some of the attendees and one in particular - Tory Gattis (www.houstonstrategies.com) who earlier this month launched www.openteams.com that builds structured wiki’s for corporations. OpenCoffee Club once again proved to me that the Houston technology startup scene is very vibrant. Two other companies that I know, www.berggi.com and www.opmom.com have made their public launches within the last week or so. I’m also eagerly awaiting Richard Yoo’s (www.richardyoo.com/blog/) new company codenamed www.hushlabs.com coming out of stealth mode soon. My belief is that for every startup I know or hear about, there are three that are being worked on in complete isolation. I’m hoping that I can foster a relationship with Kurt Stoll at www.startuphouston.com to help get some of those companies out into the open where they can grow.

Thanks to the over 40 people that showed up, the inaugural Houston OpenCoffee Club was a resounding success. We had several Angel Investors, bona fide Venture Capitalists, business consultants and most importantly - entrepreneurs discussing various aspects of the startup life cycle. With no formal agenda, the conversations that I overheard ranged from “we’re looking for $X equity capital” to “We need a lawyer” to “I have this idea” - all met with enthusiastic repsonses and an exchange of business cards with the promise of further follow up. This was precisely the goal of OpenCoffee Club and to that end I think that there is demand for a second edition.

One thing that I was particularly pleased about the attendees were the handful of people there that I did not know who learned about the event second or third hand from the original emails I sent out two weeks prior. The fact that the idea became viral so quickly demonstrates that there is a pent up need for this kind of organization. I am very happy that I could help facilitate the event, although I can not take the credit for making it as big a hit as it was.

Special Thanks go to Saul Klein in London for coming up and executing the original idea, Jason Mendelson in Boulder for walking me through what to expect (he was remarkably accurate after his first two in Colorado), Robert Brackenridge of the Houston Technology Center for promoting it to the people he thought would get the most out of it and of course to business leaders and my personal friends and associates: Paul Campbell, Andrew Clark, Richard Scruggs, Jeff Williams, Leo Womack.

About mid-way through the event, roughly 30 people still going strong

Another shot of the crowd

Tony Huang, founder of www.techxans.com Speaking with Robert Brackenridge

Reid Pennebaker of RPVentures

Billy Buchsbaum of 1790 Capital

Russell Holliman, Founder of www.podcastready.com and Robert Brackenridge

Jeff Willams of Mainspring Capital Partners speaking with Co-Founders of MindOH.com

I’ve come to realize that I haven’t posted in months, but leave it to the always brilliant Paul Graham to pull me out of semi-retirement. Not that I always agree with him. His latest post is about how angel investors are the seeds that create startup hubs is absolutely spot on. The fact that entrepreneurs are the likeliest sources of angel funding for new ventures, proves the old addage, “Success breeds Success”. The real issue that most budding start up companies have in terms of funding is where to find these sources.

I’ve spent a significant amount of my time getting involved with various organizations around Houston that helped foster the local start up community. In my recent internet travels (e.g. blog reading), I discovered an idea that I think has the best chance of putting entrepreneurs with early stage investors in a casual setting called OpenCoffeeClub. In a word, it’s a meetup - an informal time and location for like-minded people to get together. It was founded in London by Saul Klein and recently brought to our shores by Jason Mendelson and Brad Feld in Boulder who run an outstanding blog called AsktheVC among other things like running an early stage VC firm. These guys clearly “get it”. They have realized that social aspects of finding and funding companies (especially Web 2.0 companies) are an important factor in the new landscape of internet companies.

Based on their good example, I’m initiating OpenCoffee Club Houston at 8am on Friday May 4 2007 at CoCo’s Crepes and Coffee near the Houston Technology Center. I think that we’ll have a decent turnout and I’m very curious about the crowd that it attracts. I hope to make this a recurring event as I think that it will increase both investor education for startups and dealflow for investors over time. This will be sort of a standing mini-unconference in that the agenda will be set by the attendees at that time.

Wish us luck and pictures and a debrief to follow.

Any one in the Web 2.0 space knows that MySpace is the bewilderingly ugly site that gets more traffic and press coverage than any other site out there with the exception of YouTube, though they are often mentioned in the same sentence. 100 million pages and $580m purchase by a second-tier internet (and first-tier media conglomerate) player set the tone for every other Web 2.0 company out there.

Most people would agree that the deal was a one time phenomenon, but the same can be said of Yahoo!’s orginal IPO, before Google came on the scene. I’m seeing a trend in Web 2.0 portal companies that are targeting various vertical niches, now that the broad “teen” category has been completely conquered by MySpace.

The shorthand for this is “MySpace for X”. The best examples I’ve seen are social networking sites targeting mothers (MomSpace if you will) like www.minti.com, www.clubmom.com (a Web 1.0 rebrand), www.mommybuzz.com, www.mayasmom.com and my Houston hometown favorite, the pre-lauch www.opmom.com. They all have several features in common, but each has their own ‘voice’, much like certain department stores sell the same items, but you feel differently when you go to one over the other.

I think that the vertical niche social network is here to stay, but not strictly as a stand alone sites. Based on people’s differing interests and self-identities, coupled with RSS feeds and widgets more social networks will be portable to other aggregation-based homepages. This is not a bad thing but it means that these niche communities have to stay relevant through personal engagement, not site “bling”.

I met Chris Schultz of Voodoo Ventures at BarCampHouston back in June.  Even though I’d never knew that he existed until I met him, he was the sole reason I got involved with BarCamp in the first place. I wanted to meet bright, energetic, entrepreneurial people who “got it” in the online space. We hit it off immediately and have traded emails and blog comments for the last few weeks. As I’ve gotten to know him a bit better, I realized that my initial assessment was spot on for once - he’s proven to me to be a stand up guy. It takes someone who possesses great character “to know when to fold em”.

In light of the Kiko affair, he just sent me a personal email that explains why he is putting one of his first ventures up for sale. I am copying an excerpt from that email here with the hope that it will generate some interest in the auction. His thoughts and feelings about the decision are extremely insightful and are absolutely worth a read on his blog below.

Speaking of which, we actually have put Huckabuck.com up for sale on eBay.  We have several other projects in the works that are coming up fast this fall, and after examining our resources, opportunities and opportunity costs, we’ve made the decision to try to see if we can spin of Huckabuck to a team that can take it to the next level.   All that being said, we are pretty unsure of how this will turn out, we’re kind of taking a flyer with it.  I know eBay is not the traditional liquidity event that incubators use for their projects, but we want to test the market a little bit with it, and if nothing else it might give interesting insight into how the market values it (right now its $10.50). 

The eBay auction is here: http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&ih=008&item=180023313880
Huckabucks thoughts on the subject are here: http://www.huckabuck.com/blog/show/57
And my personal musings on the matter are here: http://blogalicio.us/2006/08/30/get-a-huckabuck-on-ebay

The word “Incubator” is a holdover concept from the dotcom bubble days and has been a four letter word to investors after Idealabs spectacular implosion, it makes sense to rethink the idea in terms of the new Web 2.0 landscape. The idea is that you collect talented people, and give them the time and resources to create businesses, while they in turn give you a percentage of the company. VC’s used to call this their “entrepreneur-in-residence” programs. A lot of these incubators looked more like executive suites in that they provided the resources like desks, phones, net access and secretarial support for a fee. Times have certainly changed.

What if instead of the classic scenario of a small group of founding programmers starting up a company, and then looking for money, the investors themselves get into the game directly? The costs of bootstrapping a web company have been drastically reduced – to the point where almost any cash strapped student can do it nowadays. This is of course based on cheap hardware and web hosting hosting, simplified programming languages and tools like Ruby on Rails and most importantly the maturing market where 55% of the US has broadband access and more and more people are figuring it out what to do with it.

Instead of waiting around for entrepreneurs to come to investors with ideas, some forward thinking investors are taking a proactive approach by creating the foundation to do projects “in-house” themselves. This is the exact opposite of what a true startup should be - discovering an existing problem and then solving it. Its more like starting up a tool factory -we build the hammers, you find the nails. Sites like elance and programmermeetdesigner along with job boards on Web 2.0 sites like alarm:clock, Techcrunch, Good Experience and 37signals makes it exceedingly easy for investors and entrepreneurs to find the talent that they’ll need.

Some groups I know personally who are doing this right now are:

http://spur.weblogswork.com/
http://www.cambrianhouse.com/
http://www.voodooventures.com/
http://www.ycombinator.com/
http://www.juntopartners.com/
http://www.creeris.com/

I have one friend of mine who after hearing me rant about how great Web 2.0 companies are, put an ad on Craigslist asking for entrepreneurial minded programmers to work on start up ideas. I wasn’t surprised when he told me he had 40 responses in a day, and 10 of them being good enough to pursue. The temptation is too strong to resist for me and I’m very seriously considering this myself.

Two friends of mine and occasional poker buddies have done extremely well with their company, IREIT and I just happened upon an feauture article about them in a major trade journal. Bob Martin and Marc Ostrofsky even mentioned that they met at a Houston Angel Network meeting, which makes me doubly proud of them.

The company buys domain names in bulk and at last count they were just shy of 500,000 that they then aggregate the traffic for Google and Yahoo. Great business model - and clearly successful, I’m just sorry I didn’t jump on board when they gave me the opportunity a few months back.