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Following the closing of our seed fund last summer, we have been hard at work on our priority number one: serving our entrepreneurs. In this one area, we aspire to constantly push the bar higher, striving to excel in the “venture concierge” aspect of the venture business (to paraphrase Vinod Khosla).

We organized our first Felicis Community event in May where we assembled nearly 80 of our founders and brought in industry luminaries to discuss top of mind issues around the start-up funding landscape, whether to pursue an exit or raise more capital and how to recruit and retain great talent. One of the insights from the event was that the incredible accomplishments and sheer diversity of our founders had never been showcased. To that extent, we’re proud to be featuring all our CEOs and Founders in our new Community Page. We will be adding an internal email list for them shortly as well, with the hopes of fostering dialogue and sharing of experiences.

We hope to connect multiple worlds and backgrounds: our Founders started companies in 6 countries (US, Canada, Israel, Brazil, Estonia and Finland) on 4 continents. We have over 175 Founders in our Community, whose companies have created close to 3,000 jobs [estimated from LinkedIn employee counts] – please note that this figure does not count the 20 companies that have been acquired and our investment in LinkedIn, which was made at a later stage. We could not be prouder.

While we are excited about the tremendous business success of our companies including some that have become household brands world-wide like Rovio, we’re even more enthusiastic about how they have been quietly making the world a better place in key areas like Education (Inkling, Piazza, Mindsnacks), Healthcare (Practice Fusion, Fitbit, Azumio and DNANexus) and Energy Conservation (Plotwatt). Great inspiration for us, to work even harder to contribute to their awesome performance.

Felicis Ventures came a long way since its inception late 2005 and our first investment in January of 2006. We are really excited to announce our first Institutional Fund in the amount of $40 million along with our newly re-designed website. During a time when most venture funds are facing headwinds in an increasingly dire fund-raising environment, we were oversubscribed by 33 percent over our initial target with an investor syndicate that’s more than 90 percent institutional.

We will continue to invest in groundbreaking start-ups in the consumer Internet and mobile sectors where there is room for tremendous growth. In the past we have correctly identified big winners in key markets ahead of most other players – great examples include Mint in online finance, Brightroll in video monetization, Powerset and Aardvark in search and Meraki in infrastructure. With this new fund, we plan to expand our reach in two ways: fast growing horizontal markets such as mobile applications and e-commerce, in addition to Internet and mobile companies in four verticals – education, healthcare, personalized medicine and energy conservation. In those four sectors, the market potential is in the tens, if not hundreds, of billions of dollars.

Felicis Ventures has made over 60 investments in seed stage consumer Internet and mobile companies to date, and within the last 12 months, more than a dozen have been sold. In total, over 15 Felicis Ventures start-ups have been acquired by companies like Google, Microsoft, Disney, Intuit, AT&T, Twitter and IAC. The speed of these exits is notable – all happened within four to 44 months of Felicis Ventures’ original investment. To put it in perspective, Dow Jones, Venture Source & Campton Capital report that most venture funds took, on average, six to nine years to bring exits to their investors in the last five years.

We are honored and humbled at the same by recent press coverage of our fund including twice (here and here) in Businessweek earlier this year, and today in Wall Street Journal. One thing is sure to stay the same: we are committed more than ever to the success of our founders. It’s an incredible privilege to witness our founders realize their dreams of creating world-class businesses. As an institutional fund, we can now play a bigger, more significant role in their development.

The alignment of interest with our founders is top priority for us. In that vein, we have created a Founders Advisory Board, with Paul Buchheit and Joshua Schachter as two of its first members. I’m confident that their insights and guidance will add tremendous value to our approach and our portfolio companies.

Moving forward our core objective remains the same: we aim to be an important resource to our portfolio companies and continue to help them in concrete, pragmatics ways. Now we can deploy a small team as well as more meaningful funds to do so, and be more responsive in our approach through our core tenets: leveraging the art of connections, alignment of incentives with our founders, utilizing a “prepared mind” approach to pursue our core markets, and building a strong brand through word of mouth.

In a report this week released by Forrester, global internet population is expected to hit 2.2 billion people by 2013. What’s most interesting about the report is where that growth is likely to come from:

• Asia is to account about 43% of that jumping from just over half a billion users to nearly a billion users
• China alone will have almost 1/5 of the users by then
• Growth in the US and Europe is expected to hover around 1-3%
• Russia and Turkey expected to grow at an annual rate of 8%
• Africa / Middle East will have about 1 in every 8 global internet user by then almost on par with Latin America / the Caribbean (225 and 239 million users respectively)
• Here’s the detailed chart from Forrester Research depicting the change patterns visually:

Congrats to Max Ventilla from Aardvark along with Nik Bauman, Emily Olson and Rob LaFave from Foodzie for being among Businessweek’s 2009 Best Young Tech Entrepreneurs. I’m delighted to be an angel investor in those two companies.

Both of them are going after important market segments in their own right. Aardvark offers a great solution for searches or questions that are best answered by real people, preferably among your circle of friends via their proprietary routing technologies using instant messaging. Foodzie is out to demonstrate that food category has huge marketplace appeal on the internet given the strong trends towards local, organic and artisan food items. It also happens that the food segment has the lowest penetration (1% according to Morgan Stanley) in e-commerce which significantly increases its growth potential.

There is a plethora of ideas on how to revive the economy. To me it boils down to one simple strategy: Support the entrepreneurs, especially the immigrant ones. The stimulus grants the government is handing out to different industries remains a band-aid solution and basically just re-allocates existing resources. Supporting the entrepreneurs, on the other hand, is likely to result in new jobs, create *new* capital (ie new resources). Google is a phenomenal example with nearly $100 Billion in market capitalization created in about 7 years along with 20,000 employees. According to Economist,US is the only country in the world, where start-ups generated net employment gains after 2/4/7 years from their foundation. Again, the same report highlights that 10-35% of all US companies were founded by immigrant entrepreneurs.

Immigrant founded companies in the US created $500 Billion in market capitalization while companies started by foreign-born entrepreneurs generated nearly $ 17 Billion in sales and employ 220 thousand people in the US. That’s just the immigrant entrepreneurs.

There’s increasing sentiment in our community that supporting entrepreneurship is a much more preferable way to reviving the economy than bailing out large dinosaurs like GM which need to go into bankruptcy to reorganize so they can become viable companies again. Thomas Friedman certainly defends this perspective in this post – arguing for funds to be directed to venture capital. Don Dodge, goes a step further, and posits that just spending $1B in incubators like Y Combinator or TechStars would yield not only immediate employment but probably even more potential upside in terms of wealth to be created. He also lists several government programs like R&D or seed capital tax credits that, if applied with less strings attached and more uniformly across states, could turn into great solutions.

There’s no doubt in my mind that the writing is on the wall and the numbers tell a story. This is a country built by entrepreneurs, in fact, mostly immigrant ones. There’s no doubt that the same group is key to reviving our economy.

It’s very hard to distill insights gained on angel investing over a period of 3 years into a talk of just 7 minutes. So I thought it would help to re-summarize those lessons in writing. Here’s a pretty comprehensive list (though not exhaustive) of what I think is key to be a good angel investor:

• Pick a Goal – Picking a goal as an angel investor is important: decide if this activity is a hobby, philanthropy or the next professional step in your career. Maybe it’s one or all of those, but it affects the outcome and your investment style.
• Pick a Focus – Everything else being equal, investing in an area of expertise, based on a field of experience or knowledge is key in reducing the risk while increasing the chances of success. It also allows you to know your segment and your companies better than others.
• Be Social – Woody Allen once said that “90% of success is showing up”; the best foundation of angel investing is a solid personal network, which is ideally built one connection at a time. It’s also important to always be nice & helpful to the entrepreneurs as well as your co-investors, referrals produce often the best investments
• Be Transparent – It’s OK to pass on deals, in fact, it’s necessary to decline a lot more investments than proceeding with them. But doing so in a transparent, timely, helpful and polite way is very important.
• Be Different / Build a Brand – There is no shortage of capital, even in this economically challenged times we’re in. Putting in the extra effort and paying attention to details will pay off big over time. Building a strong personal brand is key to attract the best entrepreneurs and have them choose to work with you. It’s also key to creating a “proprietary deal-flow” which is the most important success factor in angel investing
• Understand and Pay Attention to Terms – At times this could be the difference between losing your investment and generating a positive outcome. While lawyers can help here, so can being part of a reputable, professional and good investment syndicate
• Use numbers to your advantage – having a portfolio of a reasonable size (larger than 10) is pretty essential in several ways:
  • it helps spread the risk
  • if you are helpful to your portfolio companies, their teams become your champions. The more companies and people speak positively on your behalf, the higher are your chances of discovering extraordinary founders and start-ups
• Have fun – Enjoying what you’re doing will reflect positively in your attitude. Working with founders you like on ideas that make a difference and seeing those companies grow can be extremely rewarding. Enthusiasm is contagious.
• Know that it’s not a picnic – A great portion (1/3 according to Ron Conway) of the companies in your portfolio is likely to fail; in fact it’s expected. Remember this is about making bold bets, and with those come often losses, and the pain of seeing companies close their doors. Tolerance for losses is a necessity not an option.
• Pattern recognition / Supply and Demand – Seeing a very high number of deals and having a portfolio is key in training your pattern recognition. Angel investing is not an exact science, it’s an art. The best way to perfect that art is exposure to as many data points as possible. Equally important is understanding that with most early stage investments, data is scarce and information is opaque. So valuation is often determined by the supply and demand. However, popularity of a deal is rarely correlated if an outcome is positive or not.
• Structure – If you’re doing angel investments professionally, structure might be important. Make sure to look into decent legal help regarding forming a legal entity to make the investments through (for liability reasons), or putting the investments in a retirement plan for future tax benefits. These details might not be obvious at the onset, but might become critical later on.

2008′s year of the rat will remain a memorable one for many reasons including the surprising and disturbing changes in the markets and economies around the world. As for Felicis Ventures, it was the best year so far in its brief three year history: 2008 brought no less than 3 exits: Powerset (sold to Microsoft), Social.im (sold to iSkoot) and Sendori (sold to IAC) which was just recently announced.

2008 was also a year where the firm’s investment pace remained strong with about a dozen deals and major milestones including following highlights:

• Mint.com was selected as the “2009 Technology Pioneer” by the World Economic Forum
• Tapulous’ Tap Tap Revenge exceeded 250K downloads in less than 4 days and 5M downloads in just 6 months (it then went on to win a Crunchie in early 2009)
• Social Gaming Network reached over 50M installed users and 1M daily players
• Mochi Media’s MochiAds now reach more than 70 million unique users a month through Web-based Flash games that use Mochi Media’s ad-serving technology
• Disqus was able to grow its reach more than 15-fold to around 1.7M unique users
• Following the launch of its interface in many languages, Justin.tv experienced a more than 9-fold increase in monthly visits to the site
• Venturebeat was syndicated by New York Times
• Meraki went “green” with its first solar powered Wi-Fi gear and
• Weebly reached 1M users and profitability

Some of Felicis Venture’s most recent investments like Posterous have more than doubled users in December of 2008 and closed a seed financing round despite one of the worst downturns.

Rapidly deteriorating venture investment and exit numbers point to tough times ahead: according two recent reports by NVCA (on VC fundraising and Exits), Venture Investment fell 60% in Q4 of 2008 from the previous quarter, while proceeds from disclosed M&A transactions fell by 55% and IPO proceeds fell about 95% (!) in 2008 compared to the previous year. In my opinion, the trend is likely to continue in 2009 where the surplus of venture capital raised in the last 5 years is still sustaining a lag in valuations (and valuation expectations) while potential corporate acquirers are likely to stand by in the sidelines – at least for larger deals, in anticipation of even lower valuations towards the end of the year.

Given the current climate, I feel extremely proud of being a part of the Felicis portfolio companies’ tremendous success in 2008. I look forward to strongly support the founders I work with in their quest to make the best of these turbulent times, to turn the year of the ox into a bullish one.

It’s hard to stay focused on the task on hand these days amidst the turbulence, the uncertainty and looming decisions that might be hardly palatable. There is no lack of advice or dire warnings from VCs and experts alike. Most pragmatic advice I heard so far was summed up at a recent Venturebeat panel by John Doerr from Kleiner Perkins. Biggest take-aways from his perspective was: act now, focus, cut costs, [re-]negotiate everything, preserve cash, switch compensation to equity (if possible) and other battle-proven ideas.

I was at Google during the last downturn. Our prudent financing strategy in ’99 ahead of the tech bust, and the conservative approach to managing expenses (which was relatively rare those days) certainly helped us. The company kept its razor sharp focus on being relevant to the users and on the core mission “to organize the world’s information and make it universally accessible and useful”. We were very slow in growing our headcount and kept to one of the strictest standards in expanding the team even when the workload seemed barely manageable. We were able to say no more often than not, and realized success is better achieved through doing one thing well rather than spreading resources by chasing too many deliverables.

However, that does not mean limiting options when it comes to key decisions that may determine the future of the company. When it comes to tough choices, my personal philosophy is to maximize options where possible. Worst negotiation position is not having alternatives which could potentially force an undesirable outcome. That means, pursuing multiple leads when raising money, looking for a potential exit in parallel (if that’s feasible), aggressively pursuing patents as I feel those are one of the few tangible assets a startup can literally bank on.

Every smart founder is already focusing on those for the most part. But the other thing that’s missing from the equation as far as I’m concerned is urgency and realism. Google and Apple lost about half their value in mere months, 40% of world’s market value is gone according to Doerr. None of the old assumptions hold any more; it’s irrelevant what valuations were set under what terms only months ago, no matter what anybody says, things are changing drastically by the day – unfortunately not for the better for the time being.

Myspace CEO Chris DeWolfe was quoted in TechCrunch 50 as saying that “95% of their ad revenues come from 9 countries”. Based on online ad market estimates* between mid 2007 to mid 2008, the following chart depicts the top global internet ad markets as follows:

* all estimates based on eMarketer [2007-2008], except:

• South Korea (estimate from Asia Media News Daily, Feb 2007)
• Australia (IAB Australia 2007 estimate on Feb 2008)
• Brazil (Projecto Inter-Meios Mar 2008)
• Italy & Spain (BIPE Sep 2007)
• Russia (Group M July 2007)

Please note that these estimates were derived on different dates, and sometimes across different sources, so this is not exactly a perfect comparison. But it nevertheless paints a clear picture that might help with prioritizing international ad markets:

• US is by far the largest online ad market with an estimated size of nearly $25 billion
• US online ad market is larger than all the other international online ad markets combined ($24.9 billion versus $24.2 billion)
• UK and Japan are the next biggest markets with $6.4 and 4.5 billion respectively
• The main European online ad markets are about 80% bigger than the leaders of the Asian market
• China, Canada, France, Germany, South Korea and Australia each have online ad markets which exceed $1 billion
• Russia and Brazil online ad markets are now estimated to be large enough to compare with Italy and Spain respectively

In terms of aggregate size, the European markets throw their weight right behind the US. Japan is a clear leader in Asia with the Australian, Korean and the faster growing Chinese market trailing it. After these global leaders, the other ad markets are expected to be much smaller in comparison. So outside of the US, the above 12 countries are the most significant when it comes to actual monetization potential. As for prioritization, the numbers are clearly telling the story.