As a Vermont based VC, heading into the city for a conference usually means a trip south to Boston or NYC, but last week Montreal held its (First Annual?) International Startup Festival at the Alexandra Pier in the Old Port.  The agenda of speakers lined up fast and furiously, with rapid fire 10 – 30 minute slots and 2 stages going at most times.  There was a distinct focus on software & internet lean startups, but the conference also included some compelling VCs and VC-backed companies. There were a number of great speakers in attendance, and below are just a few of my favorites:  

Chris Shipley from the Guidewire Group gave the crowd an overview on Super Angels and Startups, noting that SagePoint Advisors data shows that most internet & IT exits are valued at $10 - $12MM, so entrepreneurs and investors need to be conscious about capital efficiency.  She noted that Google was by far the most active Acquirer last year with 65 completed transactions, while 2^nd most active EMC (25) and 3^rd AOL (24) came in significantly lower than that.  Meanwihle, Charles Rim, who recently left Google, noted that 90% of the company’s acquisitions are less than 20 person teams, are for less than $20MM and they prefer acquiring pre-revenue companies.   That is, the DoubleClick-type acquisitions are few and far between.

Jason Bailey, founder of SuperRewards also told a great story about taking the early money, and that call being the right decision in the long run.  SuperRewards was the early leader in the virtual currency space, essentially creating the category and working with Zynga and Facebook to launch this relatively new at the time, but now prominent, piece of the online gaming world.  After 1 year, the company was on a $100MM revenue run rate, and Jason had VCs offering him a $20MM investment on a $100MM pre, while he also garnered a $20MM offer to acquire the company outright.  Jason’s choice was to take the cash and an early exit.  He had a lot of doubters at the time, given that his company seemed to have such rapid growth and amazing potential ahead.  In Jason’s mind, he had a lot of risks associated with that potential though, including (1) doubts in his mind about whether he could lead and manage a $100MM company, (2) key customer concentration risk with one customer commanding 50% of his revenues and threatening to move their business, and (3) a key strategic partner that controlled most of the distribution of their product: Facebook.   And so, Jason took the early exit. Fast forward to today, and Facebook has since required as of July 1^st 2011 that all services on their platform use Facebook Credits as the virtual currency of (no) choice.  In an amazing stroke of good luck, Jason’s earn out also matured as of July 1^st, so the early exit looks like a very wise decision today.  Jason’s advice for all the founders in the crowd was “Don’t be scared to take the quick money”.

One panel featured 3 prominent incubator/accelerator directors who were asked to compare and contrast their different business models and positioning: TechStars, Year One Labs and 500 Startups.  Katie Rae from TechStars touted the collegial atmosphere of TechStars while Dave McClure noted that he believes the companies in 500 Startups benefit from the web design & UX resources they have on staff.  When asked about other models for incubators, Katie suggested that entrepreneurs beware sponsorship-driven or government funded incubators, as entrepreneurs want to make sure that the directors of these programs are on your side, and that incentives are aligned.  Dave McClure, as he is well known to do, put it more bluntly, saying “government sponsored incubators is money flushed down the toilet”.  When asked about the benefits of AngelList, the panel agreed on the potential upside, but noted that to use the platform best, entrepreneurs should create some scarcity, have a lead investor, and ideally 50% of the round circled before trying to close out the financing using AngelList.

Jeff Clavier of SoftTech VCwas featured prominently at the conference, participating both in the VC panel and as a keynote speaker.  Clavier noted that last year he saw companies emerging from incubator/accelerator programs commanding $5-$6MM Pre, whereas the most recent batch of companies are now commanding $8 - $10MM.   Clavier posited that there “are not enough Series A transactions that will take place to fund the backlog of Seed deals that are currently getting done”.  Regarding the terms commonly used for seed stage deals, Jeff noted that he only invests in capped notes and isn’t willing to negotiate that point with entrepreneurs, to which his panel-mate Charlie O’Donnell of First Round Capital gave some advice to all those entrepreneurs stuck on this negotiating point, suggesting, ”You are better off getting Jeff in your deal than you are getting an uncapped note.”  Clavier also saw the benefit of AngelList to fill out a round, or to get discovered by Silicon Valley investors if your startup is outside of the SF ecosystem.   The VC panel also noted the recent prevalence of $1Bn valuation rounds, which didn’t sit right with them, noting Spotify, AirBnB, Evernote and DropBox as high profile deals commanding what seem like otherworldly valuations.   The panel agreed that 7 years is the average exit time frame for VC-backed deals these days, so that should drive entrepreneurs, VCs and LPs thinking in the months and years to come.

Paul Kedrosky, noted Bloomberg commentator, suggested that the startup community can agree that things are heating up because (1) Investment banks are starting to aggressively recruit young people again, and that (2) when LinkedIn went public, all the other bankers looked at each other and asked, “Why don’t we have one of those?”, that is, why don’t we have a pipeline of companies ready for us to IPO?  Kedrosky noted that the banker mentality of “Conquest, Fee & Repeat” is back and that the startup community should likewise cease its window of opportunity.  Meanwhile, Kedrosky also sees a pattern of VC behavior that is bidding up later stage VC rounds because firms really want to be part of an IPO, including Kleiner Perkins’ purchase of Facebook and Spotify stock.  Now we are seeing the selling of founder shares and short earn outs, which was unheard of 8 years ago.  The uptake in Kedrosky’s mind?  There’s probably at least another 4 years of this heated activity, if not more, so “screw the cynics” and take advantage of the market dynamics while the window is open.  Meanwhile, there is another interesting dynamic going on in the market, which is that institutional LPs are paring back their new investments in VC funds, which in Kedrosky’s mind is “exiting at the absolute trough of the market”.  In his mind, now is the time for LPs to heavy up their allocations in the VC space.