Any entrepreneur considering angel funding should read today’s NY Times article “Angel’s Flee From Tech Startups“, and some of the followup commentary.

Angel investors, unlike most professional investors, control most of their investment portfolio.  If their equity investments drop (say) 35%, then they can immediately say “whoa!” and dial down their startup investments.

Professionals (e.g. VCs), on the other hand, are investing committed funds from limited partners.  The stock market can drop, but they’ll still have the $300m fund to “put to work” (otherwise, the LPs will ask why they’re paying management fees).  It will take a VC fundraising cycle for the rebalancing to work through the system.

Because of this, I think angel funding for new projects contracts much more quickly in market downturns.  It will be interesting to see if the professionals take up the slack.

I just read a blog post about a developer with a #1 iPhone app that quit his day job.

The “indie developer” market seems alive and well (and not just for iPhone apps).  If you have talent and an SDK, you can give it a shot.  If you’re lucky, you can make a good living.  Software applications have become an expressive art like novels, paintings, music, and screen plays.

The downside is it’s getting very crowded because there aren’t barriers:   the only capital required is time.  There’s the joke about every waiter in LA being an asipiring actor; I feel like every developer I know is writing an iPhone/Android app.

Finally, a hit app does not make a sustainable business.  Very few writers are able to break out and build a sustainable franchise (e.g. Tom Clancy, JK Rowling).

I think the same will be true for indie developers.

This morning, a friend reported that Stowe, VT real estate is doing OK, in part because if you’re on the East coast, and you downgrade your Aspen aspirations a notch — you end up at Stowe.  (I also learned that Stowe is a big AIG project, which was interesting).

Similarly, McDonald’s is doing OK while Starbucks gets creamed.

In tough & uncertain economic times, we all tend to downgrade in a sort of musical chairs:  “A class” buyers downgrade to “B”, “B” to “C”, etc.  (Recession or not, I still don’t understand people paying $4 for coffee.)  It’s gotten so bad, we’ve got hedge fund guys flying first class instead of charter.  OMG!

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New ventures can look for existing premium products and services where you can be the more efficient, cost-effective downgrade offering.  The premium incumbent has already “taught” the market — can you find a better/cheaper way?

Existing ventures should ask:  “What are we the downgrade for?” and “What do our customers want to downgrade to?”

Recessions:  never boring.

Jeff Bussgang wrote a great post about how VCs manage reserves.  When a VC invests, they allocate (reserve) some additional amount for follow-on financing.  For example, a company may raise $5m for Series A, but the fund will reserve $10m for Series B, C, etc.

In the current climate, many reserve models are at risk of blowing up:   VCs that assumed additional investors for later rounds may find themselves doing all the funding themselves (the “inside round”).  Jeff makes a good suggestion for every venture-funded entrepreneur:   understand what your investor is carrying for reserves for your company.

For entrepreneurs raising new funding now (tough, but certainly possible), a closely related issue is the age (vintage) of the VC’s fund.  Older funds are full of “reserve challenges”:  companies readjusting their funding strategies, and becoming more dependent on inside rounds.  In a newer funds, the bulk of the money is yet to be invested, and later investments from the fund will factor in current conditions and the realities of follow-on investors into the reserve model.

For entrepreneurs today fortunate enough to have multple funding options, fund vintage is a major factor to consider.  Newer is much better.

I frequently get asked:  what should my investor presentation look like?  There’s no unilateral answer, because every situation is different.

In his recent blog post,  “A hierarchy of pitches“, Eric Ries points out each situation warrants a different presentation emphasis, and he neatly categorizes the different types.  For example, a company that’s “printing money” needs to show the growth will continue, the market is big enough, and the numbers are real.  A breakthrough technology project needs to show clear IP ownership, and ideas for making products out of the technology.

Good reading if you are pitching a project.

Apple’s rejection of the Podcaster app from the iPhone App Store has been widely blogged. Apple rejected the functionality because it “duplicated” functionality in iTunes.

This is just the tip of the iceberg for a bunch of messy policy decisions facing Apple. Let’s say a third-party $9.99 WidgetExpress app is making $50k day, with 30% to Apple. What happens when a developer submits a $0.99 (or free) competitor?

Will Apple start to reject apps that threaten an existing app’s revenue stream?

It’s still unbelievable how powerful Google continues to be.  If you need to turn on meaningful traffic volume for a Web site, they’re the only game.  And properties that depend on Google for a majority of traffic have a number of risk exposures.

For SEO (organic) traffic, there’s always a chance Google changes the search ranking rules.  Stories abound about companies ranked #3 (for some keyword) waking up some morning to find themselves ranked #11 and traffic down 80%.  Google is continually battling search engine spam, and even if you have quality content, you could easily be collateral damage in an algorithm change. 

I always think of SEO traffic as “bonus icing” — great if you can get it, but don’t depend on it.

For SEM (paid keyword) traffic, there are so many ways Google can (and does) manipulate the system to their advantage.  AdWords is like playing poker, but with the house as one of the players, and with some of the rules marked “secret”.   If you don’t believe me, read about Google’s infamous “quality score“, and then read this story about a company that hit the wall when Google changed the rules.

For SEM, I always assume:  (a) you can’t afford to build your site entirely with paid traffic — you have to find other sources, (b) CPC prices trend up over time, not down, and (c) prices can change quickly.  

Every entrepreneur should read Fred Wilson’s recent post on the economics of venture funds.

Understanding how VCs make money goes a long way to explaining VC behavior.  Fred’s post clearly shows the two mechanisms (management fees and carried interest) in the context of showing the gap between gross and net venture fund returns.

Also see my related post:  How Venture Capitalists Make Money

If you like technology entrepreneurship stories, you’ll love Copies in Seconds by David Owen.  I just finished it and almost literally, could not put it down.

It’s about Chester Carlson, the inventor of the copy machine.  It’s easy to read, and is full if interesting technology and business details without being boring.  The introduction of the legendary 914 copier, and the story of rapid, out-of-control growth (in the early 60s) should sound familiar to any Internet entrepreneur.

It’s full of hilarious and quirky details, like the time an FTC official complained about over-representing the product’s capabilities (specficially, the ability to copy onto plain paper) and they responded by sending him back his letter copied onto a brown paper bag.  Or how the salesmen would show the copy speed by copying a stopwatch.

Great book, highly recommended.

Daniel Cozza and I have been working for the past few months on number of iPhone app ideas.  We’ve got a some prototypes and working code.  But honestly, it’s been very hard to find interesting angles:  the iPhone app space is off-the-charts on the hype curve and is extremely crowded.

This app “gold rush” is great for Apple and for consumers (once the App Store is open).  The availability of third party applications will further distance the iPhone from other mobile devices.   However, entrepreneurship is fundamentally about discovering and developing unnoticed opportunities.  The iPhone market app has clearly been “noticed”!

(Worse, the real Gold Rush was open-ended:  there was always a chance that there was enough gold for everyone.  The iPhone app rush is finite:  there’s a large batch of developers competing for a finite (but growing) set of devices and user attention.)

What to do?  Options:  (a) dive into the rush anyway, (b) sell tools to the miners, or (c) look elsewhere?  It’s your typical non-obvious entrepreneurial judgment call.