Francis Yeung reported on Touchmedia in today’s South China Morning Post:

Mainland digital outdoor media specialist Touchmedia has completed a new round of financing, raising about 100 million yuan (HK$113.59 million) to expand its business, sources said. The financing was led by CDIB Capital, with investors from previous rounds - TLC Capital, Qiming Ventures, and Mustang Ventures - and founder Micky Fung and his affiliate companies.

To read the complete SCMP article click here 

Ty McMahan from Venture Capital Dispatch asks “What is an acceptable start-up term sheet these days?” and provides the following sample term sheet:

•  Seeking US$4M on a US$12M pre-money valuation
• Multiple closes but no warrant coverage for early investors
• 1x liquidation preference (not participating)
• Series A gets one board seat and common stock elects the other two
• No covenants to restrict how money is spent
• No vesting
• Founder and CEO immediately starts paying himself a US$225K annual cash salary
• Founder and CEO will reimburse himself for US$37.5K for legal expenses
• Option pool is 8.3% of the common stock

For a pre-revenue business, even if the management team is experienced, these are aggressive terms and difficult to digest for any investor - especially, in this environment. The key issue for us with this term sheet is that it provides little downside protection for the investor while ensuring management can operate the business sans investor oversight. This gets us very nervous and, very often, is a recipe for disaster.

Here is how we’d counter the above term sheet:

• Seeking US$3M on a US$12M US$6M pre-money valuation, of which funding will be distributed in two tranches pegged to performance (i.e. revenue and EBITDA) milestones over a 18-month period (or as business needs require)
• Qualified Series A preferred funding round of at least US$2M, prior to achieving this mark the Company issues convertible notes paying 8% pa which convert into Series A preferred at a 15% discount to closing share price (this assumes we do not invest the full US$3M)
• Multiple closes but no 20% warrant coverage for Series A preferred priced at a 10% discount to closing share price
• 1x liquidation preference (not participating)
• Series A gets two board seats, and common stock elects the other two CEO gets one board seat, Founder gets one board seat, and one board seat for an independent director
• No Normal covenants and protective provision to restrict how money is spent, in addition to the right to remove and replace CFO and/or financial controller should business track 10% below BoD approved annual budget for more than two consecutive quarters
• Common equity held by Founder and management vested over four years 
• Founder and CEO immediately starts paying himself a US$225K US$75k annual cash salary
• Founder and CEO will reimburse himself for US$37.5K for legal expenses
• Option pool is 8.3% 10% of the common stock which is allocated prior to Series A Preferred funding and vested over four years
• Redemption right after four years if there is no qualified liquidity event with approval from 2/3 of Series A Preferred holders
• Monthly financial reporting blotters (MIS) including Balance Sheet, Cash Flow, Income Statement, and all company bank statements

The idea behind our term sheet is to ensure our interests our aligned with management and that they are locked in for a reasonable amount of time. Furthermore, controlling cash outflow is a major concern given the Company’s early stage, and thus we’ve structured funding to reflect this concern. For example, tranching our cash across milestones keeps the Company focused on forward progress while protecting the investors from management’s pet projects and free spending ways. Also, our right to remove and replace the financial controller if the business underperforms is critical for two reasons: (1) if the ships is sinking we can insert our own guy to manage cash controls, and (2) it puts management on notice from day one that we’re not going to stand for leakage. 

Though, perhaps the biggest difference between our term sheet and the original term sheet is that we’ve completely discounted and filtered out best case business scenario. Indeed, if we didn’t anticipate upside we wouldn’t be doing this deal, but in our opinion a term sheet outlines under what conditions we’re willing to put our capital at risk for a measured amount of return.  

I guess I’m being lazy these days and just borrowing content from other sites but so be it. This morning, I was reading the New York Times and came across an article titled “Investors Pay Business Plans Little Heed, Study Finds” by Brent Bowers. The article reads:

Researchers found that venture capitalists, who screen hundreds or thousands of solicitations each year, pay little or no heed to the content of business plans. Instead, the study said, because they make decisions “under conditions of high uncertainty,” venture capitalists rely on instinct and their expertise in ferreting out information by other means to evaluate the prospects of a business.

I’m not sure this is entirely true, at least within confides of our fund. Don’t get me wrong, no one wants to page through 50 pages of rambling market analysis and financials however what we are interested in is the entrepreneur’s logic and thought process. Furthermore, we want to see what the expected milestones are for success and how the company expects to spent our cash

All of the above can be mapped out in 10 to 11 PPT slides. In fact, just use the template we provide here.

More to our point, KPMG, in 2008, polled regional investment managers in Asia and asked them what were the top four causes of deal underperformance - the results: (1) misleading historical performance data, (2) over-0ptimistic market forecasts, (3) misreading the target’s existing and potential market penetration, and (4) poor business plan.

Anyhow, writing a business plan is a good exercise even if it is just an excel spread sheet that clearly maps out business assumptions.

A new article about our portfolio company Feilio (Noank Media) in today’s New York Times titled “Building the Tools to Legalize P2P Video-Sharing” by Janko Roettgers. 

Would you be willing to pay your ISP five bucks a month to be allowed to download as much as you want from torrent sites and other file-sharing hubs? The idea of legalizing P2P through such a flat-rate licensing scheme has been getting more and more traction within the music industry in recent months. Noank Media CTO Devon Copley believes his company can be an essential part of such a flat-rate model.   

Click here for entire article. 

Scratching our heads, trolling the universe, emailing friends, stopping people on the streets, yeah, that’s how we (and Neil Ducray from TouchMedia) came up with 8 characteristics that define an experimental media.

• Media is trying to prove it can reach people and reach them in significant numbers usually taken to be at least 50,000 and preferably 100,000.
• Media is trying to prove it is more than a 90 day fad – the usual length of time for media figures to start to erode.
• Media is trying to prove it works at most or all times of the year (i.e. not seasonal).
• Media is trying to prove it is effective, actually achieving awareness, recall or response.
• Media is trying to become a primary medium at least for a few clients.
• Media is trying to prove its technology (hardware and software) is stable, scalable, and cost effective.
• Media is trying to prove that it can work in more than a single market.
• Media is trying to become a regular medium for media planners (i.e. regularly recommended to clients).

Why bother, you ask? Not sure to be honest, but as investors we need to draw that line in the sand and decide how much risk we’re willing to shoulder and at what cost (valuation). There is a certain level of risk involved in backing experimental media (and technology), which needs to be backstopped by the prospect of many multiples of reward. In this environment, we’ve got to wonder - am I going to see this reward anytime soon?

In fact, our ultimate goal wasn’t necessarily to define experimental media (which we’re staying away from) but rather to understand at what point a media (i.e. business, concept) transitions from experimental to new media. Indeed, once a media moves beyond all 8 characteristics, we’re quite comfortable assuming it is new media.

In the words of Ali-G “I liikkee”.

On Monday, Stacey Higginbotham from GigaOM interviewed Facebook founder and CEO, Mark Zuckerberg. Is it just us or did Zuckerberg completely pan Stacey’s monetization question. Have a read below (and try not to laugh):

STACEY: Let’s talk about monetization. You said yesterday that you envision the social advertising landscape evolving over the next 10…15…20 years. How will those ads evolve and when will we start seeing aspects of them on Facebook? And where does Beacon, which you said wasn’t an ad effort, fall into this?

ZUCKERBERG: When it comes to social ads we really want to line up what people are trying to do on Facebook and the utility it offers with monetization. If you look at what people are trying to do on the site, it’s communicating and connecting with each other and sharing information, so the business model should be around people sharing information and staying connected.

In banner advertising, people who have developed a trust with the audience run a banner ad and the trust bleeds over to the ad so people pay attention to it.

Right…so, let me get this straight, what Zuckerberg is saying is that he understand the concept of “social advertising” but he’s just not sure if it is going to work because users have such a low tolerance for annoying banner adverts. In any case, it doesn’t really matter because (as Zuckerberg can tell you from the front lines) the industry as a whole is going to need at least a decade, if not more, to develop a sensible/sustainable business model.

Look, we’re big fans of Facebook and what Zuckerberg and his team have accomplished but we’re just not drinking the social ad revenue Kool-Aid (at least, not at this point)…and to be honest, I don’t think Zuckerberg is either (but it is not like he can come out and say “we’re screwed”).

And, this goes triple for all those ad supported streaming music sites…just thinking about the carnage sends shivers down our spines.