I’ve always been skeptical of the “you have to be in the Valley” to be a successful startup. Well here’s some potential ammo for those of you being pressured into moving, whether from Dallas to Boston, or Rancho Cucamonga to the Valley:

Non-local investments made by venture capital firms based in the Valley, Boston, and New York outperform their local investments.

This is according to a working paper titled “Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion” just published by Henry Chen, Paul Gompers, Anna Kovener, and Josh Lerner.

The authors conjecture that local underperformance is due to venture capital firms having higher hurdle rates for non-local investments. But I’m pretty sure most of you entrepreneurs are thinking it has something to do with less visits from the VC.

Overall, the working paper attempts to demonstrate how geography affects performance of venture capital firms. It’s a somewhat long, but very interesting read.

PEHUB posted the entire working paper on Scribd here.

Popularity: 3% [?]

The liquidation preference is the amount that must be paid to the preferred stock holders before distributions may be made to common stock holders. The liquidation preference is payable on either a liquidation of the company, asset sale, merger, consolidation or any other reorganization resulting in the change of control of the startup.

It is usually expressed as a percentage of the original purchase price of the preferred, such as “2x.” Thus, if the purchase price of the preferred is $5 per share, a liquidation preference of 2x will be $10 per share.

Alternatively, the liquidation preference can expressed as a per share amount, as seen in this generic liquidation preference clause:

The holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership thereof, the amount of $10 per share (as adjusted for any stock dividends, combinations or splits with respect to such shares) plus all declared or accumulated but unpaid dividends on such share for each share of Series A Preferred Stock then held by them.

Let’s take a simple scenario to see how the math works:

(1) Series A Price = $5 per share
(2) Series A Shares = 500,000
(3) Series A Equity Stake = 33% (i.e., they are investing at a $5MM pre-money valution)
(3) Series A Liquidation Preference = 2x (i.e., $10 per Series A share) = $5,000,000
(4) Startup Company is sold for $6,000,000

While the Series A investors paid $2,500,000 total for their shares for 33% of the startup company, the 2x liquidation preference will ensure that the Series A investors receive $5,000,000 of the $6,000,00 purchase price of the startup. Thus in this scenario, the 2x liquidation preference gives the Series A investors 83.3% of the total sales price of the startup (even though the Series A equity stake is 33%) and the common stock holders will receive the remaining 16.7% pro-rata in accordance with their common stock ownership.

(This example assumes that the Series A preferred shares do not participate with the common in the remaining 16.7%. I’m also leaving out the possibility of conversion-to-common to simplify this example.)

Popularity: 23% [?]

I just found out from Altgate.com that Wilson Sonsini has launched a “Term Sheet Generator.” Here is WSGR’s description of the free tool:

This tool will generate a venture financing term sheet based on your responses to an online questionnaire. It also has an informational component, with basic tutorials and annotations on financing terms. This term sheet generator is a modified version of a tool that we use internally, which comprises one part of a suite of document automation tools that we use to generate start-up and venture financing-related documents.

Furqan Nazeeri at altgate.com seems to have the scoop on the evolution and future of the term sheet generator in his post here.

I’ve only had a few minutes to check out the term sheet generator, but like most other open sourced legal documents, I think it’s great.

Popularity: 22% [?]

I blogged about the rumors in the past, but Google made it official yesterday and announced the launch of their own venture capital fund.

Reports are that Google will commit about $100MM to the fund. According to their blog post, they plan on investing in other sectors than just Internet and software:

We’ll be focusing on early stage investments across a diverse range of industries, including consumer Internet, software, clean-tech, bio-tech, health care and, no doubt, other areas we haven’t thought of yet.

During the rumors in July 2008, Fred Wilson wrote a great piece about why Google SHOULDN’T launch a venture capital arm. It’s a great read about why venture capital returns aren’t fit for large corporations like Google.

Check out the new Google Ventures Website here.

Popularity: 31% [?]

It is bound to happen eventually, right? A venture-backed company will break the drought and find an exit via IPO. Well, OpenTable filed with the SEC and is looking to raise up to $40MM in an initial public offering. If successful, OpenTable will be the first venture-backed IPO in several months.

There were only 6 venture-backed IPOs in 2008 and the common thought is that 2009 won’t do much better. So an early 2009 venture-backed IPO could bode well…but of course registering for an IPO doesn’t always mean the IPO goes through. At least 36 venture-backed companies cancelled their IPO plans in 2008.

As for OpenTable, I remember using its online restaurant reservation system in 2000 while living in San Francisco. Who knew I was an early adopter?

Popularity: 49% [?]