The cash came from a new investment by technology private-equity firm Silver Lake, through its Waterman growth debt fund, as well as existing investors Andreessen Horowitz, O’Reilly AlphaTech Ventures, Spark Capital, and Union Square Ventures, Foursquare founder Dennis Crowley wrote in a blog.

The Silver Lake money is a loan that has to be repaid over several years. Existing investors bought the convertible debt, according to Fred Wilson, principal of Union Square.

Debt financing is unusual for startups, which typically rely on selling equity to early investors. Resorting to debt is typically considered a sign of stress in the venture capital community. It mounts pressure on young companies, which may not have a lot of revenue or earnings to repay such obligations.

LivingSocial, a struggling daily deal start-up that competes with Groupon Inc, had to issue new equity with debt-like aspects, such as an annual dividend, in its latest financing round earlier this year.

“I haven’t seen anything this bad in a while, and certainly not something so high profile,” said Rocky Agrawal, a Silicon Valley-based analyst who focuses on mobile technology and payments. “It’s not very far from this LivingSocial — just structured differently.”

Foursquare launched to much fanfare in 2009, but has since struggled to generate revenue from its business. The company is now focusing more on its search capabilities, which allow users to track down stores and other physical locations through smartphone apps.

Foursquare has just started building revenue-generating businesses such as services that help local businesses find new customers and market to them. This will be “much more developed” in the next year, Wilson said.

Foursquare generated $2 million in 2012 revenue, according to Bloomberg Businessweek, which reported the Foursquare financing earlier on Thursday.

Crowley declined to comment on Foursquare’s revenue, however he said that the company did not begin to focus on revenue generation until last year.

Crowley also said that investors “had a hard time” valuing Foursquare because the company is changing so quickly.

In June 2011, Foursquare raised $50 million at a $600 million valuation from Andreessen Horowitz, Union Square, Spark Capital, O’Reilly AlphaTech and CrunchFund.

The latest $41 million financing was structured to avoid investors having to come up with a valuation for Foursquare right now, according to Crowley and others.

Foursquare will have to pay interest on the new debt it issued to Silver Lake. Interest is also typically paid on convertible debt. Later on, this type of security can convert to equity in certain agreed-upon circumstances, potentially diluting existing shareholders’ investments.

“My general take on convertible debt is that it’s very good for the founders and not very good for the investors in seed and early stage investments and a much better solution in late-stage financings,” Union Square’s Wilson wrote in a blog on Thursday.

For Foursquare, convertible debt is the “optimal solution for everyone,” Wilson added.

“This round is not dilutive to the Foursquare management at this time,” Wilson said. “But it will be dilutive when the debt converts into equity, most likely at the next equity issuance.”

If the strategy works out, and revenue increases, that will make the company easier to value. At that point, it could issue new equity and the convertible debt would be exchanged for new stock.

“We get the comfort of knowing that eventually our investment will become equity,” Wilson said. “In situations where a valuation inflection point is on the horizon, convertible debt can be an excellent structure.”

By Alistair Barr and Sarah McBride, Reuters

Photo credit: Foursquare co-founder Naveen Selvadurai accepts an award for Best Mobile Social Networking at the Webby Awards in New York June 14, 2010. REUTERS/Lucas Jackson

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The key to this, of course, is that PayPal had over 200 employees when it was acquired. As Shai points out, if you sell for a billion dollars and have 13 employees like Instagram, you’re really not going to do much for the ecosystem.

To foster the ecosystem in New York City, it seems that the community, investors, and the government have taken an approach that focuses on letting a thousand startups bloom. We now have incubators, accelorators, business plan competitions, and government backed seed programs, but it’s not clear to me that this is where the pain is or where the impact is. Just because you help more people start doesn’t mean you automatically get more success stories. I could double the number of people who get into the NYC marathon (which I’m running and raising money for, btw…), but that doesn’t mean I’d double the number of people who run it in under three hours.

One could argue that the most successful entrepreneurs would always be successful, no matter how big the obstacles–and supporting them after they prove themselves is critical. How do you get more people like Paul and Rony from Indeed.com undoubtedly spurning acquisition offers for seven years while they build a 550 person company with tens of millions of dollars in profit that sells for a billion dollars?

The answer is top level management talent.

When your employee base is over a hundred people–the situation that companies like ZocDoc and Appnexus are in–your ability to succeed as a company is directly tied to finding people who enable you to scale. I had lunch with Cyrus, the founder of ZocDoc, the other day. He told me that what he was essentially looking for was people who would otherwise be founders–the kind of person who could figure out what was needed instead of just following directions, who could hire, who could train young talent, and who could create.

These people, in an environment where over 50 companies will participate in accelerator programs in NYC every year, are out starting companies instead of joining big companies as employee 50, 75, or 200. That’s a real problem because most of these startups will fail, yet a company with a real business that sits at 50 employees has a serious chance of hiring 450 more people–people who could grow with a company over time and create way more companies than the accelorator might. How many companies can be traced back to DoubleClick, for example–even above and beyond Kevin Ryan and Dwight Merriman who went on to build several hugely successful companies like Gilt and 10Gen.

One of the many frustrations of being a Met fan as I have said time and time again is that the Yankees get other team’s closers to pitch the seventh inning. They get starting outfielders to platoon. Recent All-Stars join to sit the bench–all because they want to be part of a successful team more than they want to be the star. That’s more of the kind of talent NYC’s ecosystem needs. How do we get the kick ass iPhone dev to lead mobile for ZocDoc or lead product at Appnexus so those companies can go to 1000 employees, versus messing around with a really suspect idea that probably doesn’t have legs? Don’t get me wrong–I love when great people start great ideas–but we have way more people starting things because starting something is cool than we have actually great ideas. Starting things has gotten way too cool, and being part of a successful team is too far out of favor for this ecosystem to continue.

A particular issue is the people who transition from other industries who should probably think about joining a growth stage startup as a start, versus going straight to building MVPs in a co-working space. It may seem like an anti entrepreneurial argument, but it’s not. I firmly believe that the more 500 person billion dollar exits we see–ones helped by great senior managers–the more small startups we’ll see spin out of that, driven by experienced people with great startup backgrounds.

Charlie O’Donnell is founder of Brooklyn Bridge Ventures. Opinions expressed here are entirely his own.

Image Credit: Brooklyn Bridge Ventures

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Those were some of the findings from The Halo Report, a biannual survey of U.S. angel investments published today. The report, which covers the first half of this year, looks at details for 342 deals that drew $468 million of investment capital.

Overall, the study did not unearth any dramatic changes in the angel funding environment.  It found that median pre-money valuations for angel-backed Series A deals rose a bit – to 2.7 million – in the twelve month period ending in the second quarter. That was up from $2.5 million in a comparable period ending the prior quarter.

The median round size, by comparison, dropped some from the heights reached in 2011, dipping back to 2010 levels.  For the first half of this year, the median angel round size was $550,000 compared to $700,000 a year earlier.

Internet deals also grew in popularity, taking in just over a third of angel money invested in the first half of the year. Just over a quarter of angel investment dollars went to healthcare deals.

Deal distribution was more evenly geographically dispersed for angel deals then what one sees in the venture industry, where capital is concentrated in California and the Northeast. Angels backed an almost equal number of deals in California and the Great Plains region, for instance. (Though California still dominated in terms of dollars raised.) New England and the Southeast also captured an almost equal portion of deals.

The Halo Report is put together by the Angel Resource Institute (ARI), Silicon Valley Bank (SVB) and CB Insights.

Image courtesy of Wikimedia.

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Those were some of the findings from a report published today by CB Insights, a venture and angel data provider, which found that corporate venture investment hit a five quarter high in Q2. Overall, corporate venture groups participated in 118 deals, or 15% of total funding rounds.

They’re also taking on bigger rounds. While overall average deal size stayed flat at $10 million over the last 5 quarters, deals in which corporate venture groups participated have gotten markedly bigger, hitting an average of $17.8 million in Q2, the report found. Funding went primarily to mid- and later-stage companies, although corporate VCs did do a number of seed deals, particularly in Internet and mobile sectors.

Overall, Internet investment saw the biggest gain among corporate VCs, with funding jumping 60% quarter-over-quarter. Healthcare spending was also up, led by a $100 million round for healthcare management software provider Castlight Health. Cleantech also saw its highest  corporate funding tally in four years, driven in large part by a single $392 million round raised by electric car maker Fisker Automotive in April.

As for location, California remains the top destination for corporate venture capital deals, with companies in the Golden State securing a whopping 58% of all corporate venture rounds. Massachusetts and New York were a distant second and third.

Only deals in which corporate venture groups participated were included in the report.  Minority investments made by corporations that do not have clearly demarcated corporate venture arms were not included. The full report is here.

Image courtesy of Wikipedia.

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Starting early next year, Astia Executive Director Sharon Vosmek announced  today, the San Francisco-based non-profit will launch a dedicated Astia Fund as well as an Astia Angel Network. The fund and network will invest in companies that participate in the Astia program,which focuses on startups in high-growth sectors with at least one woman in a C level leadership role or a significant position of influence.

Vosmek, in her announcement, says plans for the fund were motivated in part by a Kauffman Foundation report published this spring which found that men raised 27 times more equity from outsiders during the first year of operation. The study also found that, while women start businesses at a higher rate than men, they were less likely to seek angel funding. (Although those who did seek angel funding had an equal likelihood of receiving it.)

Astia did not say who will be providing capital for the fund or how large it will be. The organization currently has a roster of more than 2,000 advisors, including investors and executives of large technology companies, who work with its startups. Since 2003, it has worked with more than 250 women-led companies.

Image courtesy of Astia.

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That’s because I’d been focusing on big  venture-backed exits. And, looking at the aggregate data, not a lot has been going on for the last month-and-a-half.

In the first half of this month, for instance, just one U.S. venture-backed company sold to an acquirer willing to say how much it would pay. (That was SenSage, a provider of security data analysis tools, which announced last week it will sell to The KEYW Holding Corp., for $34.5 million.) August had just one disclosed deal over $100 million (Sports site Bleacher Report, acquired by Turner Networks.)

But just when the slow streak was starting to seem interminable, this week kicked in with a flurry of acquisitions. Roomba maker iRobot kicked off the action by announcing it would pay $74 million for floor cleaning robot maker Evolution Robotics (the company previously raised about $16 million from backers including CMEA Capital and Idealab.) Game developers Gree and Zynga pitched in with a deal a piece, respectively snapping up App Ant Studions Inc., a mobile game developer, and A Bit Lucky, a digital gaming studio.

That said, the venture industry has not seen a big technology exit (say one valued at $500 million or more) for quite some time.  The last noteworthy high-dollar, high-return deal, by my records, was Nicira Networks, which VMware announced it will buy in July for $1.26 billion.

Talking to industry analysts and valuation experts in recent weeks, a couple of theories for the recent slow pace of M&A have emerged:

One we will call the “Facebook Reset Theory.” This hypothesis holds that the Facebook IPO has forced a sharp downward revision in the valuation of digital media companies, particularly in the eyes of large acquirers. While this hasn’t impacted smaller “talent acquisitions” it has caused a slowdown in larger deals, as buyers and sellers attempt to meet on readjusted terms.

The other we will call the “Summer Doldrums Theory.” This is the idea that even in the tech world, people do take vacation in July and August, so there’s apt to be less dealmaking. With fall, the theory holds, the pace should pick up.

Photo courtesy of Shutterstock

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In one corner is Paul Graham or PG from YCombinator who told his companies this week to just say no to Google Ventures if taking money from them meant having to lower the cap on notes from other committed investors. In the other corner are Google Ventures and Vinod Khosla. They argue that startups are better off working with value-added investors even if that means taking a lower price. For Graham, it is a departure from his stated philosophy: “The most important thing to remember about fundraising is to get it over with and get back to working on the company.”

Like any VC, Google Ventures is offering valuations that they believe are appropriate. Others believe the prices are hyped up. One way of looking at it is that any investor is offering a major increase in valuation from what the startup accepted just 90 days prior when they entered YC. Graham invests at between a $200k-$300k valuation on entry. If Google Ventures offers $3M pre-money, that is a 10-15x step-up. Another view of this is that accelerators are not really investing in a priced round, but rather playing more of a co-founder role. Either way you interpret this, the stakes and emotions are high.

For any accelerator, it may not be the best strategy to alienate active investors like Google. To be successful, YC needs investors to keep showing up to demo days and funding these companies. And more importantly, incubators need other investors to take the lead at mentoring these companies for the 8+ years after their 90 days are complete. Vinod Khosla makes this point loudly, that YC companies need “help not hype.” But Graham seems to not agree: “Maybe you’ll find enough from other sources that you can blow off GV.” Graham later clarified that he did not think GV was ‘a bad investor’ but was rather offering advice on how to handle a down-round-capped-convertible situation.

Thomas Korte who manages AngelPad accelerator , ranked #4 by Forbes as a top global incubator sees things differently. “The right amount of funding is a lot more important than the cap – we help founders to understand the long term implications of high caps. The focus should be on getting the right (funding) team in place to increase the chance of a great outcome” Korte points out.

David Cohen, who founded TechStars, which is ranked #2 by Forbes as a top global incubator, agrees. “It’s our job to make sure the founders don’t destroy their company at the first financing event. This can happen if they take money at a valuation that they can’t live up to for the next round, or if they focus exclusively on price and end up making the deal impossible to do for the most value added investors”.

Ex-Intuit product leader Brett Hellman who graduated from Angelpad and launched Hall.com turned down the highest offer from a large VC. “By turning down the highest offer, we were able to attract value-added investors wanting to participate to build a big business” says Hellman. One of the investors Hellman wanted was Tim Connors, who cut his VC teeth at Sequoia and USVP has recently launched PivotNorth Capital as a solo GP. “We heard stories from other founders about some of the larger VCs writing checks and never being heard from again, never responding to emails etc. We didn’t want that.”

Some accelerator graduates have experimented with “differential pricing” to solve the value-add gap, giving different convertible note caps to investors based on how much value they can add. Korte of Angelpad points out proudly that to date, no AngelPad company has ever raised money with “differential pricing”. He says, “The argument that some investors add more value than others, hence get favorable caps can be addressed by advisory shares instead.” Cohen of TechStars says, “We teach founders that they have to go by their own moral compass. While there’s nothing immoral about taking notes with different caps, it should be fully disclosed. Changes in value can occur due to timing or the value one investor brings but I believe in transparency. After all, investor relationships should be built on the basis of trust and not on the basis of getting the best deal for yourself in some sneaky way.”

Connors adds, “Founders should innovate in how they solve problems for customers, not on how financings are structured” commenting that equity has worked well for decades and is fast and simple to close with efforts like SeriesSeed.com. He then throws down the ultimate gauntlet, “Accelerators would do founders a real service if they had a standard deal not just on entry, but also on exit from the accelerators 90 days later. Let investors compete on their ability to help the company for the next 8-10 years not on who will agree to the craziest terms” Now, how’s that for a challenge?

Taking in just the right amount from value-add investors, without getting clever and issuing multiple notes may sound old-fashioned. Even as PG, Vinod Khosla and Google Ventures duke it out, my personal favorite amongst all this drama – Foundry Group VC Jason Mendelson. When an eight-year-old founder (and his co-founder, a dog) asked for a $20 million pre-money for a company they started last week. Foundry VCs, instead of getting upset, wore bright florescent suits and danced to this crazy-funny song video that states the obvious:

“Twenty-pre? I can’t believe? You think that’s cheap?
For a company you started with your dog last week?”

Image Credit: Shutterstock.com

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The report noted that during the first half of this year, large life sciences companies injected capital into the VC funding scene, and perhaps as a result, up rounds out-paced down rounds 53% to 19%, with 28% of fundraisings coming in flat over that timeframe.

But it looks as if a flight to quality is the best explanation for 2012’s first half. For 2012, the increase in up rounds marks a continuation of more up rounds, than down, looking at both 2011 and 2010, the report said.

The report also noted that the $2.5 billion deployed across almost 250 deals in the first half of this year represents a decline in both dollars and volume. Investors are also looking perhaps more toward the late stage, the report noted that ‘first round’ life sci venture financings were off “markedly.”

Series B financings were “noticeably higher” in the second quarter of this year, however.

A grain of salt to take along with the positive figures Fenwick & West reported is that the VC scene has been particularly frothy, with more fundraisings than any year since 2008. The M&A scene slowed—but remember, this is pre-Affordable Care Act approval by the United States Supreme Court, which looks to have kicked off a wave of deals and take-privates in the weeks following the landmark legislation’s final ratification before the nation’s high court. For the second half of 2012, it is likely that numbers the survey called “mixed” will be more like ‘major’—even today, Thoma Bravo’s take-private of Mediware will provide some stock investors with a 40% premium on the healthcare IT company.

IPO activity was more or less in line with 2011’s first half, according to the study. But, again, there were silver linings for even equities investors. The Fenwick survey notes that the Nasdaq Biotech Index and the Nasdaq Healthcare Index both whipped the Nasdaq Composite to kick off 2012.

Image Credit: Shutterstock.com

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Even after selling a portfolio company, venture investors must commonly wait years to determine the actual return from the deal, as most are structured with milestone-based payments.  Commonly, those payments don’t kick in until the acquired company wraps up late stage clinical trials or is able to commercialize its products.

Historically, it’s been difficult to track payouts for milestones, or earnouts, as they’re generally not announced. That’s why a new study from Shareholder Representative Services (SRS), a provider of merger legal and accounting services for M&A transactions, is of particular interest, as it sheds light on how milestone agreements typically play out years after an acquisition.

The finding? Not surprisingly, there’s a very broad range of outcomes, with about an equal number of achieved and missed milestone goals. Yet overall, the study’s authors say the results were somewhat better than expected.

“Most readers of this will be pleasantly surprised that earnout payments really are coming in,” says Don Morrissey, head of SRS’s life science practice. “Some people have this negative impressive that earnouts never really do come in.”

The study analyzed 47 life science acquisitions closed between the third quarter of 2008 and the second quarter of 2012, in which SRS served as the shareholder representative. Of those, 39 included milestone payments. That’s a fairly typical breakdown, Morrissey says, as in recent years it’s been increasingly common for life science acquisitions to include a sizeable earnout component.

Overall, acquirers paid $8.6 billion up front and up to $7 billion in milestone-based payments (plus an additional $700 million held in escrow). There was no typical structure for these payments from deal-to-deal, SRS found, except for a slight trend in the medical device sector towards deals with half the acquisition price paid upfront and the other half when milestones were met.

Of milestones due or projected by sellers at closing to have been achieved by now, 36%  have been achieved and 30% of dollars have been paid. Coincidentally, the same percentages have been missed and have not been paid.  The most common milestone criteria involved gaining regulatory approval and producing annual sales.

Given that many of the companies were recently acquired, and many milestones won’t kick in for years, it will take a few more years for the study’s authors to provide a more comprehensive view of returns over the long term, Morrissey says.The full report is here.

Photo courtesy of Shutterstock.

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The company, which launched early last year and has been in public beta since November 2011, operates a social video platform company. Basically, Spreecast offers users the ability to video chat with up to four participants and stream the broadcast to an unlimited number of viewers. Unlike Google+ Hangouts, which is contained solely with the G+ social network, Spreecast chats can be re-broadcast and embedded on other sites. It also integrates with Twitter and Facebook.

Fluhr, who is one of the featured speakers at our Venture Alpha conference on Oct. 18, told me that the company previously raised about $4 million from various angel investors, including Oren Zeev, founding partner of Orens Capital, who will also be on stage with Fluhr at Venture Alpha in a fireside chat. Fluhr and Spreecast raised the $7 million Series A from GGV Capital, Meakem Becker Venture Capital and MentorTech Ventures, among others. The release is posted here.

When Fluhr demoed the product to me in June at his office in San Francisco, he said the technology to capture instant face-to-face communication online and on mobile didn’t exist five years ago.

“A lot of different pieces of video technology and browser updates have emerged in recent years, where there’s no latency in viewing and in which users can have a deep, emotional connection with others they are video chatting with, face-to-face,” says Fluhr, CEO of Spreecast. Some notable use cases of Spreecast have already come to light, including an 18-year-old high school student in New York who used Spreecast to propel himself to win a seat on the local school board.

“Jeff has a big vision for Spreecast,” says Jeff Richards, a partner a GGV Capital and another featured speaker at our Venture Alpha conference. “He’s kept Spreecast under a low-profile, no marketing, and we like entrepreneurs who take their time, but we’re seeing a lot of growth in social video technology worldwide and Spreecast is poised to be a big part of that.”

Photo of a Spreecast screen image courtesy of Spreecast.

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