LearnBoost raises money with AngelList 28 July, 2010, 8:34 am
Today we’re announcing that LearnBoost has raised money with AngelList. LearnBoost makes an “easy-to-use online gradebook for teachers.”
LearnBoost was referred to us by two-time Power Broker Harper Reed. They used AngelList to contact George Zachary and Jeff Fagnan who invested:
George Zachary (Investor in Twitter)
Jeff Fagnan (Investor in Songbird)
George then introduced LearnBoost to AngelList members Bill Lee, James Hong, and Othman Laraki who also invested:
Bill Lee (Investor in Tesla Motors)
James Hong (Investor in Slide)
Othman Laraki (Founder of Mixer Labs)
Finally, here’s a few of the investors who sourced LearnBoost without AngelList and invested:
RRE (Investor in Venmo)
Bessemer (Investor in Postini)
Update: Read more about LearnBoost’s fundraising experience on the LearnBoost blog.
About LearnBoost
What is LearnBoost? In their own words,
“Our Teacher Gradebook is the best gradebook software on the web.
“Beautiful design and wonderful user experience makes you wonder why you’ve been using other gradebooks. Plus we’re free. Your new found productivity means you can spend more time doing what you do best: teach.”
Update 2: Learn more about LearnBoost in this detailed Xconomy profile: LearnBoost Bets on Better Tools for Teachers.
Startups: Get intros to AngelList here.
Angels: Join AngelList here.
Everyone: Get AngelList updates via Twitter and RSS.
Thumbtack raises money with AngelList 27 July, 2010, 8:11 am
Today we’re announcing that Thumbtack has raised money with AngelList. Thumbtack is “your marketplace for local services.”
Thumbtack got their first commitments at Open Angel Forum, from Joshua Schachter, Cyan & Scott Banister, and Jason Calacanis. Then they used AngelList to contact Ariel Poler and Auren Hoffman who invested:
Ariel Poler (Investor in AdMob)
Auren Hoffman (Investor in Aardvark)
Thumbtack’s CEO, Marco Zappacosta, sent me this very nice email about his AngelList experience:
“Both Ariel Poler and Auren Hoffman came from AngelList. And Auren introduced me to Scott Fabor and Mark Britto who are also now investing. Joshua Schachter & Jason Calacanis are also on the list but I was first introduced to them through Jason’s Open Angel Forum.
“The value of AngelList goes beyond the money, though — the introductions have been killer, even when they didn’t net a check. I got to meet with Keith Rabois, Bryan Schreier, Floodgate, First Round, Jeremy Levine, and others: relationships that I would not have been able to initiate without you guys.”
Read more about Marco’s fundraising experience on the Thumbtack blog.
About Thumbtack
What is Thumbtack? In their own words,
“Why can you go online right now and buy any product you want but you can’t do the same for tutors, handymen, dog walkers, or other local services? Thumbtack is changing that.
“Thumbtack isn’t like typical local search directories that simply return business listings with ratings and reviews, leaving you no better off than the paper Yellow Pages.
“Instead, Thumbtack gives you the ability to vet, contact and book service professionals the moment you find them.”
Sounds like a service I need to try.
Startups: Get intros to AngelList here.
Angels: Join AngelList here.
Everyone: Get AngelList updates via Twitter and RSS.
Fred Wilson: “Angels love to share deals with each other” 26 July, 2010, 8:03 am
Fred Wilson reviews AngelList:
“…The old model of angel deals is alive and well. Angels love to share deals with each other. It is how angel rounds come together. But AngelList adds at least two things to the mix. First, it adds a place where the deals can come together online. And second it adds people to the mix that would not be part of the offline deal sharing networks that already exist.
“I am on AngelList. I see all the deals come together. I don’t personally invest in angel deals in the web/tech space because of potential conflict with USV down the road. But even so, I find it immensely useful to see what companies are getting traction in the angel market. It’s part of my radar/early warning system. And it is entirely possible that we will decide that USV needs to participate in an angel round that is coming together on AngelList, although that has not yet happened.
“So if you are putting together an angel round, particularly if you already have it partially raised but need to finish it off, I strongly suggest looking into AngelList. It’s a great service.”
[Emphasis added.]
Fred describes our value proposition better than we do. It’s not just great PR when your users blog and tweet about you — it’s also a form of customer development.
If you’ve run out of ideas, buy gold 8 July, 2010, 8:20 am
Angel investor Thomas McInerney:
“Take a look at all the innovation happening today — Tesla has produced a beautiful 100% electric car. The cost of mapping the human genome has gone from $3 billion ten years ago to thousands today. Moore’s Law continues unabated and the rate of innovation in smart phones is staggering. The computer has moved from the desktop to the pocket, this trend alone reminds me of the World Wide Web in 1994. Social networking is in its infancy, and Twitter and Facebook are growing explosively. IP traffic is growing so fast that it has stunned the pioneering people who helped create it.
“Ray Kurzweil maps out an optimistic view of the future with a tremendous amount of data supporting his main thesis — that the rate of innovation is increasing on a geometric scale. This means that innovation is happening faster every day. So yes, there are macro-level concerns about the economy, but there is also a staggering amount of data that supports the case for being an optimist. The data supports the fact that we’ll see more innovation in the next ten years than we’ve seen in the last one hundred years.
“If you are an investor or entrepreneur, this is the best time in history to make a fortune and create a better world… So if you’ve run out of ideas, buy gold. But I argue this is the best time to find innovators and invest in the future. Fortune favors the bold.”
[Emphasis added.]
Read the full post. You can reach Thomas via AngelList.
A conflict of interests 6 July, 2010, 10:53 pm
If you’re a passionate entrepreneur, you can often see the vast potential for your product. In your head, the possibilities of the future branch out, with infinite forks and potential. When pitching to investors, you’ve learned to define your market as broadly as possible while remaining credible. So, it’s not surprising that you’re disappointed when investors don’t disclose a conflict, and you steer clear of investors who might already have an investment in the same space — dating, social gaming, compliance, security, etc.
If you’re an experienced investor, you’ve seen it all. How every startup thinks they can take over the world, but usually has to struggle to accomplish even its one core product or task. How three copycat business plans will arrive in the same week, and how each one thinks they’re unique and protectable. How domain knowledge and therefore your ability to help a startup accrue by having multiple investments in the same space.
Both points of view are pretty extreme, and the truths about conflicts of interest are highly contextual. Here’s how to think about it.
1. The idea
Firstly, the idea — it’s no big deal. If it’s any good, someone has had it before and someone will have it again. If you’re still convinced it’s that good, go file a patent first, and then go talk about it. Keep in mind that investors outside of big tech (cleantech, biotech…) automatically have a bias against “patented” ideas, and most brilliance seems obvious in hindsight. Ask an investor to sign an NDA, and you’ve just filtered out all but the most desperate investors.
2. The space
Secondly, the space — it’s tricky, but you have to define it as realistically narrow. There was a time when having an investment in ”web” might have been considered a conflict for another “web” company. There was a time when the term “portal” was a competitive category. Unless it’s head-on competition, Foursquare v. Gowalla, Disqus v. IntenseDebate, Google v. Bing, it’s really, honestly, not competitive. If there’s room for multiple equal-sized players in the space, it’s not as competitive as you might think. Also, theories about where you might zig or zag don’t count — just compare on what you’re doing at this moment.
3. Angels vs. VCs
Thirdly, the type of investor matters — active angels have a lot more deals than active VCs and are more likely to have an investment in an adjacent space. This is not a big problem — angels invest in syndicates and usually only provide help in a contextual, on-demand way. Because VCs are likely to be on your board, have more money into the company, and have more control and information rights, it makes more sense to pay attention to conflicts VCs might have (Disclosure: I consider myself to be an angel investor).
4. Conflict checks
Fourthly, just ask the VC to disclose potential conflicts up front, but don’t be too broad-minded about what constitutes a conflict.
Lastly, beware the “entrepreneur check.” This is where the VC tells you that they like your company, want to do due-diligence, and then just have to check with the entrepreneur in one of their investments about whether this investment would be competitive or not. Since entrepreneurs tend to have an overly-broad view of what’s competitive, this check usually fails. Even in the rare case that it doesn’t, it’s used as an excuse by the investor to pass. Therefore, always insist that they run the “entrepreneur check” early in the process, before you’ve invested too much into this investor.
Your own biggest competition
Our flawed patent system aside, ideas do not have the merit that we were all raised believing. You do have to pick the right space, but after that, execution is everything. Here’s a quick confirmation test — go back to your classmates and pick out the smartest ones, and then the hardest working ones. Now look at who is successful. A certain base level of intellect and idea-formation capability is required, but beyond that are strongly diminishing or even negative returns.
Consequently, the best entrepreneurs display a lot of chutzpah. They aren’t fazed by the competition, nor do they see shadows in every corner. They are their own biggest competition.
This fortnight in Twitter 2 July, 2010, 8:04 am
Highlights from the @venturehacks Twitter feed from this fortnight. The most retweeted tweets.
“The toughest and most important decisions in technology companies are always about product strategy.” – @bhorowitz, http://vh.co/a3DO7h
“With our stock buyback… we were signaling that we didn’t see much of a future in our business.” – @fredwilson, http://vh.co/9udDmm
You have acquisition interest—now what? http://vh.co/98Yy4n by @davidcohen. The negotiation principle is “reciprocal displays of commitment”.
“You can explain your business in mind numbing detail or you can inspire an investor and let them imagine.” – @fredwilson, http://vh.co/bLdDQm
“Whenever you see a company being built for an exit, you will see short term decision making.” – @BostonVC, http://vh.co/btEkaA
P.S. Instead of showing our avatar next to each tweet, I’ve picked images that are related to the tweet.
P.P.S. It’s easy to find your most popular tweets on the Your Tweets, Retweeted page.
Where we office 1 July, 2010, 8:07 am
We’re spending the next few months officing at Kicklabs at 250 Brannan (info@kicklabs.com) and the new SOMAcentral building at 153 Townsend (ken@somacentral.com).
These spaces are good for startups, service providers, lawyers, VCs, and folks in the south bay who want an auxiliary office space in the city. Leases are short, rent is affordable, and they’re perfect for small teams under 5 people.
Kicklabs (top) is a big fun open space. SOMAcentral (bottom) is the opposite: private offices with doors that close and great views. We’re using both. If you’re looking for office space in San Francisco with Zipcar-like simplicity, check them out and tell them we sent you.
Please add your office space suggestions in the comments — keep them restricted to places with leases under 6 months that are good for small teams (~ 5 people).
At the end of the day, the reason to get an office is simple. It is so you can bring people into your office and say, this is where I office.
A tale of 3 financings 28 June, 2010, 12:34 pm
When startups raise money with AngelList, we encourage them to share their fundraising story. Here are 3 stories from BlockChalk, MightyMeeting, and Postling. I’ve excerpted the nice things they wrote about AngelList, but you should click through and read their whole posts — each startup tells their unique funding story from start to finish.
BlockChalk:
“AngelList [is] a service that sends pre-screened startup pitches to angel investors who sign up to receive them. We wrote up a version of our pitch that matched AngelList’s requested format (an exercise that in itself was very useful) and submitted it. They sent it out to the list and within a day we had received ten quality angel inquiries. In just a few days, we had our first new commitment — Tom McInerney.
“After Battery Ventures signed on to lead our round, Nivi and Naval sent BlockChalk out to AngelList once again. With this new added social proof, the response was even stronger than the first time around. We literally received dozens of new angel inquiries and things began to rapidly come together. In the span of a few days we had a commitment from the legendarily awesome Mitch Kapor. We also met Josh Stylman who signed on and also introduced us to Chris Dixon and Eric Paley of Founder Collective (who themselves signed on).
“AngelList is a remarkable experiment that is redefining the way entrepreneurs connect with angels. It’s something you want to be a part of.”
MightyMeeting:
“We’ve been fortunate to get great advice from a few good people. Let me mention some of them here.
“First, there is Adeo Ressi’s Founder Institute. I did not get a chance to attend the training program, but I did have the pleasure of pitching at the Founder Showcase.
“The outcome of the event has been tremendous, and Adeo’s advice has been invaluable, always blunt and to the point. One of his emails started with: “You are making rookie mistakes and your round will fail”. Got my attention.
“True to the style, Adeo’s thefunded.com offers an honest review of the investment community. Definitely worth a look.
“Second, there is Venture Hacks. The blog is run by Nivi and Naval. I actually discovered their book before I discovered the blog. Both are highly recommended. Good stuff that will educate you and save you tons of time.
“Venture Hacks also runs AngelList. You can apply online. If you got the goods, you will get intros to angels in the list. The intros carry Venture Hacks credibility, which is significant.
“In our case, the intros we got through the Founder Showcase and through Venture Hacks lead to great connections and, ultimately, money in the bank.
“I also had good experience with the Open Angel Forum and the DEMO conference. Both are very selective. Both are also very high quality in terms of the advice and the connections that they offer.
“The exposure and intros we got helped us build the funnel.”
Postling:
“AngelList is a collection of amazing angel investors, all waiting for your brilliant idea. You fill out an application and, if you’re awesome enough, your application will be sent out to everyone on the list. You’ll then be introduced personally over email to anyone who is interested.
“… we sent out our application once, touting our idea of “social media management for businesses”, got 8 fantastic introductions, and were ultimately funded by David Rose and Chris Yeh. The Venture Hacks guys came back to us and said, ‘We want to send your application back out onto AngelList with the added social proof of being invested.’
“To give you some context, over the last 3 months, we followed the Customer Development methodology and went outside of the building. And we found that the social media management tools space was commoditizing quickly, with everyone concentrating on selling to a small sliver at the top (media companies, PR, agency, etc). We also met with VCs, who gave us the same feedback. So it was time to pivot.
“So we pivoted (explained in the GigaOm post, but I’ll say more soon), and sent the new direction to AngelList. And this is where the craziness started.
“My first phone call was with Tom McInerney, 3 hours before I was flying out to SXSW. After about a 30 minute phone call, Tom was in. He then introduced me to his friend Paige Craig, who would also be at SXSW. I met Paige in Austin, and after meeting, he told me he was in. The next day, at a Venture Hacks meetup at the Four Seasons hotel, he pulled over Dave McClure. We went out to the balcony (he wanted a cigarette) and I pitched him. He was in. The following day, I spoke with Thomas Korte, who moved up our scheduled phone call a couple days once he heard Dave was investing, and he was in. I also got an email introduction via my friend Russ (founder of SeatGeek) about his investor Kal Vepuri, who was also at SXSW. Kal and I spoke on the balcony of the Austin Convention Center, and I was blown away by his intelligence and humility. So Kal was in. Finally, my friend Michael Galpert of Aviary connected me with Gary Vaynerchuk, who is a perfect investor for us given what he is passionate about (social media for businesses). David Cohen finished off our round not too long after that.”
Big thanks to the guys from BlockChalk, MightyMeeting, and Postling for sharing their fundraising stories for the benefit of other entrepreneurs.
The WSJ reports on AngelList 22 June, 2010, 8:03 am
It’s a pain in the ass for interesting startups to get meetings with good angels. You have to bug your friends, one-by-one, to introduce you to the angels they know.
The global community of angels on AngelList offer an alternative.
Startups apply to AngelList, we pick the ones that we think the angels will like, and we send them to the angels. The angels read these pitches, meet the startups they like, and, perhaps, invest.
We’ve announced 5 startups that have been funded through AngelList but, as Scott Austin reports in The Wall Street Journal,
“Of the 48 companies featured so far on AngelList, about half have received funding.… Marco Zappacosta, founder of Thumbtack Inc., a site that lets people book services like tutors and dog walkers, won three commitments from angels after pitching his company in March at an Open Angel Forum event in San Francisco. He then turned to AngelList and received three more commitments to close a funding round at $1.2 million in June. The service, he says, “is good at getting worthy start-ups into the inbox of investors.”
Read the full article here before it goes behind the WSJ’s pay wall.
By the way, the 5 startups that we’ve announced are Startup 0, Postling, Divvyshot, MightyMeeting, and BlockChalk. Scott “outed” Thumbtack in the WSJ — so that makes it six.
Startups: Get intros to AngelList here.
Angels: Join AngelList here.
Everyone: Get AngelList updates via Twitter and RSS.
Local startup BlockChalk raises national money with AngelList 17 June, 2010, 11:33 am
Today we’re announcing that BlockChalk has raised money with AngelList. BlockChalk is a “GPS-enabled communication system for your neighborhood.”
Update: Read BlockChalk’s story in their own words: Lessons from raising a seed round.
Update 2: Scott Austin at The Wall Street Journal reports on AngelList: Start-Ups Get Free Chance to Pitch to Angel Investors.
Joshua Schachter introduced us to BlockChalk. He was already committed to the financing and suggested they use AngelList to fill out the round. We sent BlockChalk to AngelList and the following investors asked for intros and invested:
Joshua Schachter (Our source)
Mitch Kapor (Investor in Twilio)
Thomas McInerney (Investor in Klout)
Josh Stylman (Investor in betaworks)
Josh Stylman (one of the AngelList investors above) then introduced BlockChalk to Chris Dixon and Eric Paley who also invested:
Chris Dixon
Eric Paley
So an AngelList intro to Josh Stylman turned into friend-of-a-friend intros to Chris Dixon and Eric Paley. It’s obvious in retrospect, but we didn’t anticipate these second-order intros when we started AngelList. It’s very cool to see this emergent behavior.
Satya Patel, Michael Dearing, and David Liu also invested in BlockChalk:
Satya Patel (Battery Ventures)
Michael Dearing (Investor in AdMob)
David Liu (Investor in SimpleGeo)
About BlockChalk
In their own words,
“BlockChalk is an early stage location-based service that helps people connect with their neighbors and mobilize their local communities. Using GPS-enabled smartphones, BlockChalk users can interact with people in their neighborhood to ask, answer, praise, gripe, report, prevent, borrow, trade, and much more. It’s easy and free; you don’t even have to sign up. BlockChalk is currently on iPhone and Palm, as well as on Android via HTML5.”
I think the foundation of BlockChalk’s fund-raising story is the pedigree of their team: Stephen Hood is the former head of product at del.icio.us, Dave Baggeroer is part of Stanford’s d.school faculty, and Josh Whiting is a former senior engineer at craigslist and former head of engineering for del.icio.us.
Mark Suster says that “Everything that happens is a signal.” And it’s a great signal when Joshua Schachter, who worked with two of the co-founders at del.icio.us, is investing.
Startups: Get intros to AngelList here.
Angels: Join AngelList here.
Everyone: Get AngelList updates via Twitter and RSS.
Startup Showcase 27 July, 2010, 11:42 pm
I want to let everyone know about an opportunity to showcase your startup at Web 2.0 Expo in NYC in late September. On Sept 29th in the late afternoon/early evening, the Web 2.0 conference will have 30 startups demo their products/services to the attendees and a number of investors.The way this will work is each startup will be given a demo table. And the Web 2.0 attendees and investors will move from table to table. Each demo will last about five minutes long. So if you are participating, you'll give about ten demos in less than an hour.At the end of the hour, Tim O'Reilly and I will each pick our favorite startup. And the audience will pick one. And then those three startups will each be invited up to the stage for a conversation with Tim and me.It sounds like a fun format and I am looking forward to it. Tim has one of my favorite minds in the web/tech space so I am particularly excited to be doing this with him. If you want to participate, you need to apply by August 2nd. The details are here.This is aimed at young startups that are in need of attention, not startups that are well known and heavily funded already.
Sunk Costs 26 July, 2010, 3:09 am
Today on MBA Mondays we are going to talk about another form of costs; Sunk Costs.Sunk Costs are time and money (and other resources) you have already spent on a project, investment, or some other effort. They have been sunk into the effort and most likely you cannot get them back.The important thing about sunk costs is when it comes time to make a decision about the project or investment, you should NOT factor in the sunk costs in that decision. You should treat them as gone already and make the decision based on what is in front of you in terms of costs and opportunities.Let's make this a bit more tangible. Let's say you have been funding a new product effort at your company. To date, you've spent six months of effort, the full-time costs of three software developers, one product manager, and much of your time and your senior team's time. Let's say all-in, you've spent $300,000 on this new product. Those costs are sunk. You've spent them and there is no easy way to get that cash back in your bank account.Now let's say this product effort is troubled. You aren't happy with the product in its current incarnation. You don't think it will work as currently constructed and envisioned. You think you can fix it, but that will take another six months with the same team and same effort of the senior team. In making the decision about going forward or killing this effort, you should not consider the $300,000 you have already sunk into the project. You should only consider the additional $300,000 you are thinking about spending going forward. The reason is that first $300,000 has been spent whether or not you kill the project. It is immaterial to the going forward decision.This is a hard thing to do. It is human nature to want to recover the sunk costs. We face this all the time in our business. When we have invested $500,000 or $5mm into a company, it is really easy to get into the mindset that we need to stick with the investment so we can get our money back. If we stop funding, then we write off the investment almost all of the time. If we keep putting money in, there is a chance the investment will work out and we'll get our money back or even a return on it. Even though I was taught about sunk costs in business school twenty-five years ago, I have had to learn this lesson the hard way. Most of the time that we make a follow-on investment defensively, to protect the capital we have already invested, that follow-on investment is marginal or outright bad. I have seen this again and again. And so we try really hard to look at every investment based on the return on the new money and not include the capital we have already invested in the decision.This ties back to the discussion about seed investing and treating seed investments as "options." Every investor, if they are rational, will look at the follow-on round on its own merits and not based on the capital they already have invested. But the venture capital business is a relatively small world and reputation matters as well. Those investors who make one follow-on for every ten seeds they make will get a reputation and may not see many high quality seed opportunities going forward. Our firm has followed every single seed investment we have made with another round. In most cases, those investments have been good ones. But we have made a few marginal or outright bad follow-ons. We do that for reputation value as much as anything else. We measure that value and understand that is what we are doing and we keep those reputation driven follow-ons small on purpose.When it is time to commit additional capital to an ongoing project or investment, you need to isolate the incremental investment and assess the return on that capital investment. You should not include the costs you have already sunk into the project in your math. When you do that, you make bad investment decisions.
Angel vs VC? 25 July, 2010, 2:45 am
AVC regular Charlie Crystle asked me this question yesterday in the comments:
Fred, it might be helpful to some of your readers to explain when a startup should seek angel vs seed/early stage VC. If I need $250,000 to get to 100 customers, or $1 million to get to X, and I can raise both amounts from either Angels or VCs, where do we turn? And let's say both have significant interest, and the terms are the same, which is a better choice? (I no longer have an opinion on this, having gone both directions).There are really two questions in here. The first is when you should SEEK angel vs VC and the second is if you have the option of taking money from both what you should do.On the first, I believe entrepreneurs should seek angel money when their product is not yet complete, is not in the market and thus they cannot demonstrate real market traction to investors. There are multiple reasons for this and I'll try to articulate the most important of them.A company without a product in the market is a very risky proposition. Some VC firms will invest at this stage but I am not sure its entirely appropriate for VCs to invest at this stage. Our firm will do it when we are backing a serial entrepreneur with a super strong track record that we are very familiar with. Otherwise, we stand on the sidelines and watch with interest but no capital at risk. A syndicate of angels, each with a small amount of capital at risk in the project, is a much more appropriate source of capital for a company at this stage because the risk has been well syndicated among the group.Angels are also more hands off and I believe hands off investors are better for a company where defining, building, and tuning product is the primary exercise. VCs have a responsibility to their partners, both the partners in their firm and the partners who fund their firm, to be highly engaged in the business. So like it or not, they are going to be engaged in the business. I think it is best when that engagement is applied to a product that is in the market and gaining traction, and building the business is the primary exercise.Finally, selling a VC on a concept on a whiteboard is a very hard sale. It is extremely time consuming with very little chance of success. Selling an angel on a concept is much easier. So simply in terms of where you should spend your time raising capital, angels are a better target in the "concept to product" stage.The second question, what to do if you have the option of taking money from both sources on the same terms, is more interesting in many ways.My answer is do both, if you can. When we participate in seed rounds, we most often do it by ourselves with a syndicate of high quality angels. We have done this at least a dozen times now and it works extremely well. We behave as if we are one of the angels and try to be relatively hands off. And we hope that the angels will add value just as they do in their other syndicates where there is not a VC firm involved.But when the company needs another round of financing, we are there to provide more financing. Sometimes the angels follow in the successive rounds. But mostly they do not. It really doesn't matter, because we can fund the company on our own as long as the capital requirements are modest.This is our preferred model and we have used it with great success. I think it benefits entrepreneurs the most as well. There are a number of VC firms that use this model. I first saw it practiced by Brad Feld about a decade ago in the seed deals he was doing in the Boulder area when he was at Mobius and I admired it immediately.If for some reason, you must choose between VCs and angels, then I would choose a VC firm, as long as you have a very good relationship with the firm and the specific individual who will be leading the investment from the firm. In almost every situation, you are going to need more than one round and VCs can and will do multiple rounds and angels often cannot.I will end this with a comment on the emerging seed and super seed fund models. They exist somewhere between angels and VCs and some are growing and turning into full blown VCs as I have mentioned recently in another blog post on this topic. Seed and super seed funds are "institutional angels" and as such I would mostly categorize them as angels. But many of them do have more capital at their disposal and can, at times, provide additional rounds of funding. So in some ways they are a hybrid. A syndicate of a seed fund or super seed fund and angels is a great way to go if you can put that together. A syndicate of a VC, a seed fund, and some angels might even be better.To finish this post, I think entrepreneurs should target angels and seed funds when they are pre-launch but if they have the opportunity to pair a VC firm with angels and seed funds into a single syndicate they should do that because it will provide most stable funding platform for the business going forward.
The AngelList 24 July, 2010, 2:15 am
There are a growing number of resources for entrepreneurs on the web, but certainly one of the very best is Venture Hacks. And their AngelList service is particularly useful for entrepreneurs trying to get angel rounds done. I found myself recommending it to at least a half dozen entrepreneurs this past week.I particularly like this case study of the BlockChalk angel round on the Venture Hacks blog. For those who aren't going to click thru and read the whole thing, here's a quick summary. Joshua Schachter had already committed to invest in the BlockChalk angel round and he suggested they use AngelList to fill out the round. That resulted in commitments from Mitch Kapor, Thomas McInerney, and Josh Stylman. But then Josh Stylman introduced BlockChalk to Chris Dixon and Eric Paley who joined the round. And then with the strength of that syndicate in place, AngelList added Satya Patel, Michael Dearing, and David Liu to finish off the round.What this shows is that the old model of angel deals is alive and well. Angels love to share deals with each other. It is how angel rounds come together. But AngelList adds at least two things to the mix. First, it adds a place where the deals can come together online. And second it adds people to the mix that would not be part of the offline deal sharing networks that already exist.I am on AngelList. I see all the deals come together. I don't personally invest in angel deals in the web/tech space because of potential conflict with USV down the road. But even so, I find it immensely useful to see what companies are getting traction in the angel market. It's part of my radar/early warning system. And it is entirely possible that we will decide that USV needs to participate in an angel round that is coming together on AngelList, although that has not yet happened.So if you are putting together an angel round, particularly if you already have it partially raised but need to finish it off, I strongly suggest looking into AngelList. It's a great service.
Terms, Term Sheets, and Terminal Value 22 July, 2010, 2:53 pm
Mark Suster has a great post on calculating valuation and the things that VCs can throw at you to make the deal better for them (I guess I should say us) than it actually looks. Go read it. It's complicated stuff but you should try to wrap your head around it. I've written a bunch about this as has Brad Feld and other VC bloggers have too. The VC world is changing. We are talking about this stuff, explaining it, and discussing it. That's progress.But here is the thing. Terms and term sheets are a necessary evil of the venture business but most venture returns don't come from terms. They come from terminal values. Meaning the size of the exit. One deal often returns the entire fund. The next three to four deals return it again. The rest of the portfolio might return it again and if you can do 3x gross, you'll raise another fund, and another, and another.In my talk with John Battelle yesterday at Geo Loco, where I said some controversial and partly tongue in cheek things that were widely reported, I did talk about this. And I wish it was as widely reported as the sound bites. What I said was that there are only a few things that really matter in a venture investment. The first is the amount being raised, the second is the dilution to the entrepreneur and the ownership the investors are buying (largely the same thing), and the third is the relationship between the investor and the entrepreneur. Everything else is pretty much noise.I do care about and want a plain vanilla one times liquidation preference because I think it is fair. If the company is sold for less than the valuation that we invest at, I think it is fair that the investors get their money back in that scenario. Any multiple of liquidation or participation should be avoided at all costs by both sides. VCs often use those tricks to bridge valuation gaps but I have come to believe you should resolve valuation gaps with compromise or just don't do the deal if the gap is unbridgeable.I think the VC business is changing in many ways and one good way is that more and more VCs are thinking less about terms and more about terminal values. And that is best for everyone.
Immigration Reform 20 July, 2010, 4:03 am
Last night my partners and I hosted a fundraiser for NY's senior Senator Chuck Schumer. I've written about my fondness for Chuck on this blog before and I remain a fan and supporter. Chuck told a story to a small group that had assembled before the larger event. He said that he was meeting with the CEO of Deutsche Bank and asked him "do you think the US will be the world's leading economy twenty-five years from now?" The Deutsche Bank CEO said "of course." Chuck said "not many americans feel that way right now." And the CEO said "America is the only place in the world where anyone, no matter what race, religion, background, can be accepted in business and society and realize their dreams and make it to the top. That doesn't happen anywhere else."I might disagree with the CEO just a bit. I think Australia and Canada are very similar to the US in that regard. But his point is important and worth blogging about, which is what I am doing.A welcoming society is our history and that is the special sauce that the US brings to the world economy. We welcome entrepreneurs large and small in the US and support them and celebrate their success and forgive their failures. And I am so very proud that I am a citizen of this great country.But we have turned inward in the wake of 9/11 and the "war on terrorism." And that is hurting us. The terrorists have achieved their goals if they turn the US into a country that no longer welcomes the best and brightest from anywhere with open arms.So I was thrilled to hear Senator Schumer's optimism last night that we will get "comprehensive immigration reform" in 2011, after the midterm elections. I hope and suspect that will include visas for science, technology, engineering, and medicine (STEM) grads. I hope and suspect that will include the startup visa. I hope and suspect that will include a lot more H1B visas.Immigration reform is one of the most important issues in the startup political agenda which also includes net neutrality, patent reform, and a number of other important issues. I know that many of you share my passion for this issue. Let's keep up the pressure on our elected representative to do the right thing and give us comprehensive immigration reform as soon as possible.
XX Combinator 15 July, 2010, 10:46 pm
Tereza, an AVC regular and active community member, wrote a blog post yesterday proposing that someone start XX Combinator, a Y Combinator style startup accelerator focused on women in their 40s.
Here's the basic argument:
Y Combinator participants are for the most part very young — in their early 20’s. This is not when women would be most inclined. Women who start businesses like to know what they’re doing, and be trained and experienced in it. That takes up our 20’s. We have kids in our 30’s. Our entrepreneurial sweet spot is around age 40. Conventional tech investors are not really into this group and the metrics they look for are really hard for these people to hit. Most of the (few) women’s businesses that go big were funded by friends & family or strategics, not traditional angels and VCs.
She also points out that the Y Combinator program is purposefully focused on hackers and that is not a term often attributed to women. So Tereza proposes that XX Combinator come pre-populated with hackers, kind of like Betaworks is.XX Combinator is a cute name and makes the point well. But I suspect a different model is required if this were to work. First, it is not so easy for 40 something women to move to silicon valley for three months. Second, if you have a team of hackers in-house, then you are an incubator more than an accelerator program.
But Tereza is right about a bunch of things. First, there aren't enough women entrepreneurs. There aren't enough women VCs. There aren't enough women developers. The startup ecosystem is largely a man's world and as a result, we see a lot of certain kinds of businesses and not enough of others. People are drawn to scratch an itch. If it is a 20 something developer, then they are scratching a certain kind of itch.
I know what Tereza is working on. I'm not sure if it is cool to talk about it here so I won't. But it is the kind of idea a women in her 40s would be working on. And it is not an idea a 20 something man would likely work on all by himself.
Tereza is not alone in her evangelism. The Gotham Gal, who talks to and works with a lot of 40 something women entrepreneurs tells me that this group is "breaking out." She told me about a conference in NYC this fall that she is involved in that is targeted at this group. And she told me last night that TED is working on a conference for women. Brad Feld wrote a great post yesterday about this topic. And he links to an excellent Eric Reis post that also articulates the need for more diversity (especially women) in the startup sector.
So maybe the time is right for an effort to build one or more efforts focused on helping women get started. These startup accelerators need a leader. Y Combinator has Paul Graham and his partner Jessica. Tech Stars has David Cohen and his partner Brad Feld. Seedcamp has Reshma and Saul. Betaworks was started by John Borthwick and Andy Weissman. So we need entrepreneurs to create these efforts, not committees, governments, or companies.
And we need entrepreneurs with a plan to deal with the realities that Tereza lays out. If there are entrepreneurs out there with the idea, the plan, and the passion to do this, please contact me. I'd be happy to help get something like this rolling.
Stack Does Gaming 14 July, 2010, 11:25 pm
Forums have been around for as long as I have been on the Internet. I've always found forums useful for finding out "how to" information. But its always been a hit or miss experience. And I've always used search (google mostly) to find the forum post with the info I need.Our portfolio company Stack Overflow is attempting to change that. As they have done with programming tips and techniques at StackOverflow.com, they are bring social networking and game mechanics and a number of other important changes to the forum model to create vertical communities that allow people to solve each other's problems for each other.One vertical that has literally hundreds of forums on the Internet is gaming. I'm not that much of a gamer but I watch my son. When he needs a cheat code or wants to find out how to conquer something in a game, he goes to Google and does a search, finds a forum, and finds his answer. There is a huge amount of traffic to gaming forums on the Internet for exactly this reason.So Stack has launched gaming.stackexchange.com to bring the magic that exists on StackOverflow to the gaming vertical. I'm optimistic that gaming will turn out to be a big vertical for Stack. Gamers love to earn points, badges, and status. You don't have to do anything more than spend a week with my son watching him accumulate foursquare points in europe to see what points do to a gamer. And now gamers will be able to earn status and reputation by sharing the knowledge they have with each other.If you are a gamer, check out gaming.stackexchange.com and let me know what you think. It is early, the service just launched in beta this week. So there won't be a lot of content up right now. But the mechanics are in place and you can get a feel for it.
Some Thoughts On The Seed Fund Phenomenon 13 July, 2010, 11:03 pm
There have been quite a few posts written about this meme in the past few weeks.
I think that Paul Kedrosky got the discussion started with this post. Chris Dixon wrote an interesting response. And yesterday John Boyd wrote a thoughtful post on the topic.
John makes a point in his post that I want to second and add to. He says:
While many businesses require a lot less capital to start, they don't require less capital to grow. John's comment made me think about a blog post I wrote three and a half years ago called "Web 2.0 Is A Gift, Not A Threat, To VCs." If you haven't read that post, I would urge you to go read it. I blog because it helps me think through a lot of issues we face in our business and that post was really useful to us over the past several years of investing.Here's a chart from that post:
This is an entirely theoretical chart. There is absolutely no real data behind this chart. That said, it does reflect our experience investing in about thirty "web 2.0" companies over the past seven years.What this chart says is that it still takes on average $20mm to get a web startup to sustainable positive cash flow. But the vast majority of that capital will be required after the business has "traction."What has changed in technology venture capital is not so much the total capital requirements, but when they are required. This is very good news for everyone involved. It means entrepreneurs that don't have to take expensive dilution early on in the development of their business. And it means that entrepreneurs can raise the big money later on when their business is worth more. It means that entrepreneurs should be able to keep more of the companies they start. That is good for everyone.It also means that VCs don't have to take big risks early on. They can write checks in $250k and $500k sizes. It means that when the businesses develop into winners or likely winners, they can write the bigger checks like $3mm or $5mm or even $10mm. This is good for the VC business. Less writeoffs, more capital deployed into the winners and less into the losers. Where this all gets interesting is the point at which it is clear that the business is going to be a winner. Let's look at our portfolio company Foursquare as an example. We invested in a ~$1mm seed round last summer, investing $500k. By that time, Foursquare had already launched and was growing nicely. Dennis and Naveen had built the service all by themselves and had just lured Harry onto their team. They needed no capital to do that. In fact they did not even have a bank account when we went to close our seed investment. That seed round was highly competitive and Dennis and Naveen could have raised money from dozens of investors. A year later, Foursquare is scaling quickly, adding 1mm new users in the past three months. They need a lot of capital now. And they were able to raise it, $20mm on their terms, a few weeks ago. As competitive as the seed round was, the large round was even more so. The company added one new investor, Andreessen Horowitz. And our firm and OATV got to invest a bunch more into Foursquare. Clearly Dennis and Naveen used the capital efficiency of web startups to their advantage. They did not need any money to get the service built and launched. They scaled the service to 2mm users and the employee base to close to fifteen people on just over $1mm of seed capital. And they got the capital they need to scale it to a much larger business on their terms. That's how it is done these days.And the seed investors, USV and OATV, got to put a little money into the business early on and then got to write a big check when it was clear the business was going to work. At least it is clear to me that the business is going to work. I much prefer doing it this way than putting a ton of capital into the business early on before the outcome is reasonably clear.But there are two places you don't want to be in this new world. You don't want to be the VCs who wanted to be in the "big round" and didn't get to be in it. The deals that work get very competitive when it is time to raise real money. That's a problem for VCs who don't invest at the seed stage and are betting they can get into the deal in the "first venture round."You also don't want to be a seed fund that is invested in a company that hasn't scaled yet but is out of money. Then what do you do? You can write off the investment or you can put more money in. Or you can find a VC firm to invest. But what if the company isn't far enough along to attract VC money? Very few entrepreneurs will execute as well as Dennis and Naveen did over the past year. Most will need a longer runway before their business scales. And that is an issue for the seed funds. They need to get bigger or find a "bridge" to VC for those companies that take a bit longer.I think we will see both things happen. First Round Capital, the grandaddy of the web 2.0 super seed funds, has now evolved into a firm that is twice as big as our firm in terms of investors and they have more capital under management than we do. And I've met a couple investors who are talking about creating "seed bridge funds." I think that's a great idea.Will the seed market crash? I don't think so. Will it evolve and change and look differently in a few years? Absolutely. We are still figuring out to evolve the VC business to reflect the change in financing needs of entrepreneurs and we aren't done by a long shot.Related articles by ZemantaSeed Deals Account for 26% of Early-stage Web Investments (gigaom.com)
How Micro-VCs Invest (And How They Compare To Traditional VCs) (businessinsider.com)
Is There a Super-Angel Crash Looming? (gigaom.com)
Phone Pitches 13 July, 2010, 8:53 am
I exchanged some blog comments with Tereza yesterday. She's starting a web company and is raising angel money. She said she did some phone pitches against her better judgement and they didn't work out. I advised her not to do them anymore.Here's my thing about phone pitches. They aren't very effective. I hate taking them and almost never do. I don't think they allow the entrepreneur to show themselves very well which is the most important thing of all.And it is so easy to say no over the phone. There's no real human connection. It's easy to pay half attention or less on the phone. It's easy to fake that you are listening when you are not.I admit that I am really bad on the phone. I always have been. It's not a medium that I like very much. So I am probably worse than the average investor. But even so, I think doing phone pitches is a mistake and you should avoid doing them.I do think a short phone call introducing the opportunity at a very high level and making the case for an in person pitch is an important thing to do. You can accomplish that in a few minutes or less. It's basically an elevator pitch. But don't agree to do the whole pitch on the phone. Ask the investor make time for you in person to do that. That will determine if they have sufficient interest for you to invest your time with them.And what about a video chat on skype or another similar service? I do think a video chat is sufficiently better than a phone call to make it a semi-viable alternative. If a plane ride is required to see an investor, then a skype/video chat is a decent first step. But again, you should do it with the objective of getting an in person meeting. But if you can visit the investor in person without getting on a plane, I think you should always opt for that over a conversation over the phone or skype. There really is nothing like the in person, face to face meeting when it comes to fundraising or any kind of high level sales effort.Fundraising is such a hard thing to do, particularly for first time entrepreneurs without a track record and an investor following. Don't make it harder by putting a wire between you and the investor.
Excellent Summary of Berkeley Patent Survey Results 27 July, 2010, 11:38 pm
In 2008 I was invited by Pamela Samuelson, who I met through several Silicon Flatiron events, to be on an advisory board at the Berkeley Center for Law & Technology. I attended the one meeting that we had and a subsequent symposium and wrote about it in the post Entrepreneurial Companies and the Patent System. As with most things like this, I found it fascinating, stimulating, and frustrating all at the same time and hoped that I’d contributed something useful to the discussion.
I read the paper titled High Technology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey when it came out at the end of June 2010. I thought it was a solid paper although there were some things that I struggled with which is typical for me in any academic paper, especially when I get bogged down in arguing with myself while trying to parse the footnotes. But I was optimistic that as the authors started talking about the article, some thoughtful and constructive discourse would result.
I was appalled when I started seeing soundbites emerge from at least one of the authors of the paper from weak conclusions buried in the midst of the data. My partner Jason took one of them on when he wrote his post 76% of Venture Capitalists Believe that Software Patents are Important (NOT!) In this post I think Jason does an excellent job of dissecting the data and explaining why this is not only an incorrect conclusion from the data, but a terribly misleading soundbite.
Fortunately, Pam Samuelson (one of the other co-authors) has set the record straight with her excellent summary of the Berkeley Patent Survey on her post on O’Reilly Radar titled Why software startups decide to patent … or not. Her essay is very digestible and focuses specifically on the issue of software patents and what she believes they reported in the paper. She reached the following conclusions which she states in her intro:
Two-thirds of the approximately 700 software entrepreneurs who participated in the 2008 Berkeley Patent Survey report that they neither have nor are seeking patents for innovations embodied in their products and services.
These entrepreneurs rate patents as the least important mechanism among seven options for attaining competitive advantage in the marketplace.
Even software startups that hold patents regard them as providing only a slight incentive to invest in innovation.
Pam is balanced in her intro as she concludes by saying “While the three findings highlighted above might seem to support a software patent abolitionist position, it is significant that a third of the software entrepreneurs reported having or seeking patents, and that they perceive patents to be important to persons or firms from whom they hope to obtain financing.”
The juiciest conclusion is about halfway through the essay and is “One of the most striking findings of our study is that software firms ranked patents dead last among seven strategies for attaining competitive advantage identified by the survey.” Another one was “We were surprised to discover that the software respondents reported that patents provide only weak incentives for engaging in core activities, such as invention of new products (.96) and commercialization (.93).”
I’m glad Pam took this on and put this out there. I look forward to more studies she does from this research set.
Founders 2010 #10: People Product Market 27 July, 2010, 4:00 pm
This week’s special guest are Jeff Clavier from SoftTech VC and Rob Hayes from First Round Capital. Among other things, you get to hear Jeff define the Three Asses Rule and Rob explain what happens after you finish the TechStars program. As a special bonus, there’s a cute clip of me near the end watching the incredible record tennis match between Isner and Mahut. And some funny running footage. And a glider. And Ari Newman and how sandpaper and rubbing alcohol intersect with the fundraising process.
“People Product Market” The Founders | TechStars Boulder | Episode 10 from TechStars on Vimeo.
AngelList Boulder and Some Thoughts on Seed Investing 26 July, 2010, 5:12 pm
I got a note from Nivi, the creator of AngelList, over the weekend saying that he’d put up a special page for angel investors in Boulder. He’s looking for the local Boulder angels to add their names to the list. Gang – let’s get ‘em up – if you are an angel investor and based in the Boulder area, sign up!
There’s been an enormous about of blog and news chatter about angel investors, especially seed investors and the emergence of super angel / micro VCs, in the past few months. I’m a huge fan and supporter of the super angel / micro VC phenomenon and have watched with delight as it has built momentum.
However, in the past few weeks I’ve started to see a rant start to emerge that I’ll simplify as “VCs suck as seed investors – the only path to happiness are angels or super angels or micro VCs.” This rant bugs me as I think it’s incorrect and isn’t very helpful to entrepreneurs. While I know many VCs that I would categorize as terrible seed investors, I know plenty that are excellent seed investors. And while I know many angels who are terrific seed investors, I also know some who are abysmal.
The thing that started to bug me last week wasn’t the discussions about the characteristics of what makes a VC a bad seed investor, but that the comments, including some from super angels, were becoming generalizations that all VCs were bad seed investors. As I read through them, they started feeling like statements of “hey entrepreneur, trust me, I’m just trying to save you from Mr. Evil VC and here’s the answer, the answer is me.”
As a VC who has been a very active angel investor (I’ve made over 75 angel investments), an active seed investor as a VC (I just counted and 7 of the 25 investments we’ve made out of Foundry Group since we started our fund in Q4 2007 are seed investments), a co-founder of a “mentorship-driven seed stage investment program” (TechStars), and an investor in several super angel / micro VC funds, I believe both angels and VCs can be excellent seed investors.
There is a lot more transparency than there ever has been, the structural dynamics of early stage investing are moving around a lot, and entrepreneurs have more clarity on their choices, ways to figure out who is good and who is bad, and ways to get access to great choices than ever before. Fred Wilson wrote two excellent posts on this over the weekend titled Angel vs. VC and The AngelList as well as an earlier post titled Some Thoughts On The Seed Fund Phenomenon. Until last week I didn’t feel like I had a ton to add to the discussion, but I felt like it was time to weigh in as I saw the tone shifting to “VCs are bad seed investors.”
While I completely agree with the phrase “many VCs are bad seed investors” especially around VCs simply trying to create option value for themselves or the issues around signaling risk, I felt like there wasn’t enough discussion about why and when VCs were effective seed investors. So I thought I’d take some of this on over the next few weeks. Hopefully my perspective and examples will be additive to the conversation and helpful to early stage entrepreneurs, especially first time ones.
In the mean time, if you are a Boulder angel (or seed) investor and you are still reading, sign up on AngelList already!
The PicturePhone Has Arrived 26 July, 2010, 8:11 am
While I still don’t have my jetpack, I do have my picturephone.
I was four when the AT&T PicturePhone appeared on the scene. This dude went through a lot of iterations over the year – my favorite is in this Western Digital ad.
This morning as I was drinking my coffee, waking up, and trying to get motivated to go running in the rain (I think I’ll go swim instead), my dad called on Skype. I answered and we had a nice video chat. I heard about my mom’s newly rediscovered Corvette lust (go mom!) and the hike they were going to do. I saw the study in my Keystone house where they are staying which made me smile. And then I said a quick hello to my mom.
I really hate the phone. I always have – and spend much too much time on it. But for some reason I like the videophone. Maybe it’s the novelty of it, maybe it’s a different way it grabs my attention because I really engage fully with it.
Regardless, the future is catching up with my childhood in interesting ways.
Comic Sans Fights Back 21 July, 2010, 12:10 pm
Last week there was a kerfuffle over Standing Cloud’s use of the Papyrus font for their logo. It was kind of cute and endearing and my pals at Standing Cloud reacted with appropriate contrition over offending the font police.
Today I came across a brilliant McSweeney article (thanks to @daveschappell) on Comic Sans titled I’m Comic Sans, Asshole. My wife Amy is sitting next to me as I type this laughing her ass off. As a special bonus, our friend Comic Sans makes fun of Bauhaus and then goes and parties with Papyrus.
Founders 2010 #9: Conditions of Extreme Uncertainty 21 July, 2010, 6:00 am
Eric Ries is this week’s guest star on The Founders. Eric is an incredible speaker and is traveling the world on a mission to help people stop wasting other people’s time. If you don’t follow Eric’s thoughts on Lean Startups on his blog Lessons Learned, you should.
You get a little taste of the shift Omniar is making while they wander around the Boulder Museum of Contemporary Art along with a surprise birthday party for David Cohen at The Lazy Dog on a beautiful Boulder evening. And a few special bonus visitors. And some great shots of Boulder in the summertime. I love Homer but I’m starting to miss Boulder.
“Conditions of Extreme Uncertainty” The Founders | TechStars Boulder | Episode 9 from TechStars on Vimeo.
Looking For Skype and Mac Integration Hints 20 July, 2010, 4:26 pm
Well my Mac experiment is going extremely well. I’m not sure I remember how to use a Windows PC, nor am I sure why I’d want to. I’m using a Mac that is at least a year old (2.4 Ghz Intel Core 2 Duo with 4 GB RAM) so I’m not even tuned to the max but I’m absolutely loving the overall experience. As so many people have told me, “shit just works.” And so far, whenever I’ve had a problem, I’ve been able to quickly find the answer with a Google search (e.g. “three pane mail view in Mac Mail” – two choices: WideMail or LetterBox).
As I’m starting to go well beyond the things I did with my Windows PC, I’m starting to bump into some issues. I’m using Skype constantly for video and audio calls, including regular phone calls. It’s way better than my iPhone (oh – the irony) and given how solid the audio / video on the Mac is I feel like I can just use it whenever I’m in front of my laptop.
But – there are a few things I’m struggling to figure out. I’ll lay them out here for y’all in case anyone has suggestions. I’m also interested in any Skype-related Mac happiness people have found – please leave hints in the comments.
Issue 1: I’m still using Exchange for my mail, address, and calendar store. Mac Mail, iCal, and Mac Address Book are working great – no issues at all other than sending large attachments through the Exchange server (which is a well documented issue.) But for some reason I can’t figure out how to get Skype to include all my Address Book contacts. I only seems to integrate with the contacts listed in the “On My Mac” folder, which is empty since I have all my contacts stored on the Exchange server. Any clue how to get Skype on the Mac to read the Exchange contacts?
Issue 2: I can’t find a Safari plugin for Skype. I’ve got a Firefox one – where any phone number gets highlighted. But I’d like one for Safari also.
Oh – and if you want to reach me via Skype, it’s just bradfeld.
The Blur Conference 20 July, 2010, 6:00 am
When my partners and I started Foundry Group, one of our key principles was to be “theme-based investors.” At the time the phrase “theme” wasn’t being used in VC-land so we got to make up what it meant, at least for us. We decided that a theme was a “broadly horizontal technology area that would have dramatic impact and opportunity over the next 10+ years.” (see Jason Mendelson’s post titled What Is Thematic Investing for a deeper explanation.)
At Foundry Group, our themes have become our intellectual filter to the world of what we invest in. As a result, they are always evolving, expanding, and changing as we learn more and as technological innovation continues its tireless march. We try to spend as much time as we can rolling around in our themes, playing with stuff, spending time with smart people in each theme, and just thinking and talking about stuff.
Several years ago a guy named Eric Norlin reached out to me after I wrote a blog post in 2006 titled Intelligence Amplification and suggested we start a conference around the idea, but with a better name. The Defrag Conference resulted from that discussion, as did our now four year old collaboration with Eric and his conferences. Not surprisingly, since we referred to one of our popular themes as “Glue” it made sense to start a Glue Conference several years ago.
Last year Eric and I started talking about doing a conference around our human computer interaction theme. We’ve now made a number of investments in this theme, including Oblong, Organic Motion, EmSense, and Sifteo. It took Eric about a year to get comfortable that the timing was right, but he’s now ready to do it. As a result, he’s launched his latest conference – Blur.
The Blur Conference, like our human computer interaction theme, is based on the premise that the current models of human computer interaction are undergoing a rapid change. Technologies that were until recently science fiction or university lab projects are now showing up all over the place. From the promise of the tablet computer to touch computing to motion capture to augmented reality to the “minority report” interface, the ways in which we interact with computers are moving far beyond the keyboard and mouse.
Eric’s goal with Blur is to have it be massively participatory. Everyone will get to use all tech at Blur, hack on it, explore it with their colleagues, and figure out new and inventive ways to work with it. Because the goal of Blur is so participatory, Eric is going to limit the number of attendees in year one to only 250 to make sure he nails the experience.
Blur is taking place on February 22nd and 23rd at the Omni Orlando at Championsgate. The facility looks awesome and Eric assures me Florida is a lot warmer than Colorado in February. Early bird signup is up for $995 (the full price is going to be $1495) so get a jump on things if this floats your boat. I’ll be there!
Senator Mark Udall Co-Sponsors The Startup Visa Act of 2010 19 July, 2010, 6:00 am
I’m extremely excited that Senator Mark Udall (D-CO), the senior senator for Colorado, has signed on as a co-sponsor of The Startup Visa Act of 2010 that was originally proposed by Senators Kerry (D-MA) and Lugar (R-IN). Senator Udall joins his Colorado colleague in the House, Jared Polis (D-CO), who has proposed Startup Visa legislation as part of his EB-5 reform bill.
In addition, our friends at SVB Financial (the parent of Silicon Valley Bank) have also formally endorsed the Startup Visa. My partner Jason Mendelson wrote a post about a roundtable that Silicon Valley Bank hosted for members of “the new Democrat Coalition” which included Jared Polis. Shortly after this meeting, SVB formally endorsed the Startup Visa.
I’m really proud that two of Colorado’s members of Congress are leading the charge on the Startup Visa. I have deep respect for both Mark and Jared, their understanding of the importance of entrepreneurship, and their vision for innovation in our country. I’m also grateful that SVB – which has been an integral part of the entrepreneurial activity throughout the US – for their support as well.
We are working on a few additional major announcements and endorsements in the next sixty days. I’ve received a number of requests for ways to help. At this point, if you are part of an organization that you think would be supportive of the Startup Visa, please drop me an email and let’s talk about ways to get a formal endorsement.
The Doughnuts of Emily Eveleth 18 July, 2010, 3:23 pm
Emily Eveleth, a favorite artist of mine and Amy’s, was profiled in the Boston Globe this weekend in an article titled It’s Time To Paint The Doughnuts. My long time friend Shawn Broderick (who runs TechStars Boston) knows about our Emily doughnut obsession and pointed it out to me.
Amy and I are huge collectors of Emily’s work and have tons of doughnuts, some hula hoops, and as of this month, a magic eight ball and a dinosaur which Amy bought for me as my life dinner present on July 1 this year.)
If you want a quick feel for her art, a Google Image Search on Emily Eveleth will give you several pages of doughnuts. I asked Amy how many she thought we had in our collection – she guessed 10. Yum.
Amy wrote a post in 2005 titled Emily Eveleth Paintings that has one of our hula hoops on it. She also pointed to the two galleries that we buy Eveleth’s from - Howard Yezerski Gallery in Boston and the Danese Gallery in New York. They are both awesome galleries – if you are in either city stop by and take a look.
My favorite Emily Eveleth moment was a Zippy the Pinhead cartoon from 1994 which I’ve been trying to find forever. Of course, it’s there – front and center on Emily Eveleth’s bio page!
Now I’m hungry for doughnut.
A grand new opportunity in Venture 15 July, 2010, 11:09 am
By Georges van HoegaerdenI could not leave my previous two "depressing" blog articles out there on a limb for too long without offering a solution. Even though I know that those articles are only depressing to those who cannot see the new opportunities created by the systemic Venture malaise. Let me be clear, I see a grand new opportunity for Venture investing. The current VC model can never attract disruptive ideasVenture is on fire and not in a good way. So agreed with me one of the top money-managers who I met with last week in Palo Alto, and manages over $40B in Private Equity, including Venture. Especially since the Venture asset class is so young and has such a bright future ahead, the deplorable performance of its financial instrument Venture Capital (VC) with minus 10% returns across the board has failed, and proves its governance is fundamentally flawed as its recognition of entrepreneurial ideas has not (even) outgrown the technology adoption baseline it rides on.The financial system atop of innovation has failed, not our capacity as a country to innovate. The primary reason for the systemic malfunction (described in 2010: The State of Venture Capital) is the incompatible market model created by VCs (and bought into by Limited Partners) that allows for and continues to stimulate the creation of an investment cartel, a single investment thesis that by definition can never find the outlier of innovation. According to the aforementioned money-manager only 35 of 790 venture firms in the US consistently produce some positive returns (not necessarily venture returns as a return of the deployment of venture risk). That means less than 5% of all venture firms, consistently produce a return. And we can only wonder at this time how many of those 35 actually produce a viable Venture return, as opposed to a micro-Private Equity return, especially since out of fear Venture has turned subprime more than 10 years ago.That result makes for a pretty depressing outlook for Limited Partners for Venture, with many avoiding or fleeing the asset class altogether. I too would worry about the future of cash infusions in innovation if as an innovator I did not know market fundamentals better.It takes an entrepreneur to see financial opportunity where none exists todayRegardless of what business you are in, entering a market that relies on a hungry 80% greenfield, that continues to consume rapidly despite the worst of economic fear is an interesting endeavor. Technology continues to grow rapidly, yet much of it is coming from more effective curators of innovation, including from corporations such as Apple.All rhetoric from the current intermediary Venture Capital, whilst supported over the last twenty years by truck loads of money from LPs (demand) and in which entrepreneurial capacity is larger than in the last 14 years (supply), and still cannot perform despite optimal circumstances should simply be tossed aside. Governance of innovation (between the assets of LPs and assets of entrepreneurs, see our Venture primer) is broken, not innovation itself. Deflation of risk has turned the Venture business subprime and all metrics (with numbers that cannot be counted on by Dow Jones, Thomson Reuters, PWC MoneyTree, the NVCA and the likes) of that micro Private Equity deployment is therefor not representative of the opportunities nor the projected demise of Venture Capital. I agree wholeheartedly with Michael Moritz of Sequioa that we have not deployed the Venture Capital risk profile in the last twenty years, and we rely on a handful of success stories (like Google, Facebook) who in one way or the other have managed to escape the defunct Venture Capital governance (and still got their money) to become successful. Those success stories are the ones that fell through the cracks of the Silicon Valley cartel, they were not the positive outcome of the stifling governance of the cartel, albeit success attempts to claim many fathers.The opportunity in Venture is to replace governanceLets try an analogy to cooking to clarify the opportunity in Technology Venture.It does not take much to imagine that technology is like water. And water is the substrate to which many dishes are produced. But if the only recipe a Venture Capitalist can recognize and cook up is a soup (and based on the results, very few of them are good cooks at that), the measurement of success and the taste of the soup only matters to those who care about consuming soup.Technology is at the beginning of its discovery that it can be used for much more than just the monolithic production of soup, and that it is a vital ingredient to make bread, cookies, rice dishes and almost everything else we consume. Hence the reason why the number of soup lovers or their enthusiasm is no indication - up or down - to the scale of the potential use of water.The point being that a close look at the performance of subprime Venture will not lead to a viable conclusion whether or not Technology Venture has room for growth. For that we need to look at the absolute opportunity in technology and wonder why, with all this money spent, 80% of the worlds population does not currently have access to a meaningful technology application.So the trick in Venture is how we define innovation and what risk we apply to it that reaches a broader audience with meaningful social economic value. That we build an economic model in Venture that stimulates the creation of a variety of innovations (dishes in the cooking analogy), and that can only happen once we break up the cartel that has turned Silicon Valley into a monolithic and therefor extreme risk to Limited Partners.Re-invent Venture investingThe best way to innovate is to ignore everything that has happened in the past (especially when performance dictates so) and imagine how Venture should work if you could design it from scratch today. No right minded individual would design it the way it works currently.With the Limited Partners' interest in mind we would not design Venture with ten levels deep bottom-heavy diversification, a single investment thesis deployed across most VC firms, extreme fragmentation of assets and risk, and lack of verifiable merit. To support groundbreaking entrepreneurs the financial system needs to reward the outliers in Venture Capital that have the unique capacity to find outlier ideas, and take the prudent risk that reaches massive upside, rather than to engage in risk aversion that secures (often personal) downside.The grand opportunity in Venture is that such a system is relatively easy to build (I have), with minimal burden to Limited Partners. But even if we do not have a chance to rebuild Venture completely, a single Limited Partner (or a syndicate) can turn this new system in a competitive advantage and reap the benefit of harvesting the enormous greenfield opportunity that is currently ignored. A single VC can turn the deployment of the new model into a unique investment thesis that competes with the complacent investment thesis of the cartel.Take no prisonersIt is however unlikely that the new VCs will come from the same stables as the current ones. The aforementioned money-manager also expressed his frustration with how many VCs have completely avoided risk and continue to hobble after the me-too deals, a subject we have written about often with regard to subprime VC. But that should come as no surprise given the limited relevant experience many General Partners have in entrepreneurship (you cannot learn this stuff in school), many have never been an early stage CEO, have never taken companies from the left-side of the chasm to the right-side, and lack the foresight and vision (attitude) that would separate them from pure financiers. Venture may be part of the Private Equity asset class but its demands on General Partners are completely different, given the unique qualities it takes to build successful early stage companies. And insufficient relevant experience of General Partners leads to fear and improper assessment and deployment of risk, a logical outcome of Limited Partners' commitment to the wrong people.The impending cannibalization of the new model is what gets the National Venture Capital Association (NVCA) protecting the interests of its members, all in a tizzy. It feverishly deploys every asset it has to blame deplorable Venture performance on anything but its own responsibility, steadfastly ignoring its own responsibility. It uses Limited Partner money to protect and defend their stance to politicians, who seem to accept the rhetoric from exactly those people who created the Venture malaise in the first place. Insufficiently informed, those politicians appear willing to cut them even more slack. Yet subprime VCs will never have enough resources (governmental or otherwise) to produce healthy Venture returns, and their clock keeps ticking.The simple solution to better performance in Venture is to build a financial system that stimulates the creation of new investment recipes, so its deployment can reach the popularity similar to the consumption of rice and bread, and the world will be our oyster.
Venture extinction is upon us 29 June, 2010, 2:52 am
By Georges van HoegaerdenSome days I look at people and feel pity, with as much pity as Captain Paul Watson from the Sea Shepherd felt when many years ago he looked straight into the eye of one of the whales he was trying to rescue, while a harpoon flew over head. He felt pity for humanity. The same pity I feel for people who take the innovations business for an easy ride and kill it by sucking it dry.Ways to work Silicon ValleyIn my thirty years of the emerging business of technology I have seen product marketing managers at one of the fastest growing software companies pick products that sell themselves, and turn them into "geniuses". I have seen sales people at the same company make tons of easy money for the same reason, only for them later in their career be faced with a more sober reality. I have seen people in another Silicon Valley bellwether hop from one division to another, never to be confronted with the outcome of their guidance in each. I have seen people hop from one Silicon Valley company to another, only to pick up valuable equity in each along the way. I have seen people make friends with pivotal "gatekeepers", only to become employed for long enough to get a piece of equity their merit would have never earned them. I have seen those gatekeepers provide endless references to each other, securing them cushy positions through those who get in first. Too many times have I seen investors loan-shark companies and dilute unsuspecting entrepreneurs into powerless share holders. I found out too late that an angel investor employed, travelled with and otherwise befriended the wife of the company founder, who I was going to straighten out because of his consistent underperformance, false promises and blatant lies. I should have known when I heard the angel was previously dating a friend's best friend, and allegedly forcing her to break up their relationship. I have seen entrepreneurs pitch to "living-dead" VC firms, crushing their dreams. I have seen Venture Capitalists straight out of business school force CEOs to adopt their misguided agendas or otherwise be sandwiched and squeezed out between investor and founding ownerships. I have seen VC artificially segment the industry, putting off outliers of innovation. I have seen VCs lie about the value I, not they created. I have seen VCs work the books so their investment thesis can never be held to account. I have seen Limited Partners play nice with Venture Capitalists knowing that someday they too will join the club that slides them into a much more lucrative salary.I have seen it all. The foundation of the venture business is a bigger mess than I could ever attempt to describe here, and much more systemic than temporal. Proud to be difficult and differentFor many of the people described above I am difficult work with. Because I simply refuse to erode what I stand for by playing games (that sadly have become so popular). My passion is to build social economic value that touches real people and as a results builds attractive monetization (in that order). I care a lot about money, but only when I feel my participation deserves it. I do what I say and I say what I do. And every product strategy or company I built became an outlier as a result. To do so one must challenge everything, including oneself. The hard part is to walk away from investors. I have halted an investment at the last hour from a very wealthy family I have know for more than ten years, after I just discovered a string of misconduct and violations of fiduciary obligations of previous board members. The company would have been a blowout success under my leadership. I also declined an investment from another angel and a friend of the lead investor, after I found out that his reasons for investing where not in line with the business strategy I had laid out and executed on with great success as the CEO. In both cases the original founding board could not see beyond the money, and are now suffering from significant dilution in ownership and performance, if they are to survive. I challenged my own position from the decisions I made, a clearly different strategy from the self serving and pleasing route most in our business would have taken. Technology innovation has become the Wild West who's easy days have past and where gold no longer simply washes ashore. We are now stuck with an overhang of gold diggers whose verifiable merit to locate gold hidden a little deeper has become inadequate. The actions of many in our industry have been too self serving, and therefor by default unsustainable.Doing the right thing is more important than doing what is most popular. Doing what is right conserves a unique species. Conservation of a unique speciesWhaling has been banned by most governments, but the Japanese keep hunting whales under the "research" exemption and continue to threaten the important role of an endangered species in the ecosystem. The wrong thing that will impact us all. The endangered species in the technology industry are the real entrepreneurs who with great ideas and with diligence and persistence, together with experienced business managers and visionary investors have the integrity to produce groundbreaking social economic value and thus fantastic investment returns. Many VC investors, too busy protecting their own interests and busy concocting elaborate diversification strategies, have lost their ability to recognize and attract those entrepreneurs. And a reduction of VC investors will not fix its dysfunctional investment thesis, and therefor will not cure its systemic disease. Circumvention of government regulation proves in whaling and venture capital that government regulation is not the panacea. The only way to prevent the extinction of a unique species is to provide incentive (or de-incentive) for supply and demand, which in technology innovation can be driven directly by the investment discipline of knowledgable Limited Partners. So, the conservation of groundbreaking innovation is solely in the hands of Limited Partners, who if they open their eyes and get to know their ecosystem still have time to correct course and can continue to reap generous rewards from the massive opportunity in technology innovation that lies ahead. On most days I still believe I can help Limited Partners fix venture (although some people have discouraged me), just like Paul Watson believes he can still save the whales. But we are running out of time.
Venture is no longer the best performing asset class 14 June, 2010, 11:56 am
By Georges van HoegaerdenIs the little "fun fact" that occurred at the beginning of this year which Dick Kramlich, General Partner and co-founder at New Enterprise Associates inconspicuously threw into his acceptance speech of the special achievement award from IBF's Venture Capital Investment Conference last week. I told you so... VC governance is brokenThat is a serious message which rebuts all the relativity theories from Venture Capitalists (VCs) and highlights how broken Venture as a financial instrument really is. Especially in light of the fact that entrepreneurial activity according to the Kauffman Foundation is now higher than in any of the last 14 years and VC funds have been fully loaded with commitments from supportive LPs over the last ten years. Short term, even NASDAQ performance beats 2009 performance in Venture. What it means is that in the marketplace of innovation in which supply and demand are performing well, the governor of innovation (the VC) failed to make financial sense and its arbitration fails to produce merit.The Limited Partners (LPs) who unchanged keep pumping money in a decaying financial instrument truly deserve to be called Idiot LPs. But we do not want LPs to flee as technology venture remains a highly rewarding investment sector for LPs, just not with the current market model and the current financial derivative. Just because governance is broken does not mean the marketplace is.Checks and balancesAccording to the panels at the event, the contraction of VCs has started and venture firms are down some 33% with practitioners down 30-50%. Funding rates are currently at about 900 companies per year, leaving about 3,000 companies with previous investments without extended funding runways. The risk profiles tumble further down the subprime slope with early rounds fetching about $1.5M and $70-90M exits on average. Heavy reliance on syndication is the model going forward and VCs are hoarding liquidity. Even though net returns for investors (LPs) are missing some panel members predict (or wish) no fundamental change will occur. Many LPs unjustifiably appear afraid that if they turn the screws on VC too much, those VC will not let them participate in their next fund. With a new market model we are more than happy to find them more competent replacement for each. Many LPs just stay away from VC, 2x returns on $20M investments is not a great way to deploy Venture risk for many. No v-shape recovery in venture fundraising is expected anytime soon.Better understanding of underlying assetsMany LPs appear more open to a "forensic analysis" of the Venture ecosystem (get it here), to better understand the asset class and be able to "touch" the companies to which assets are being deployed. Transparency issues are being discussed. Early stage investing requires a unique thesis and LPs are (eagerly) looking for them, with placement agencies sending many VC firms back to the drawing boards. Venture overhang is getting smaller, turnover in LPs is increasing. Empirical evidence of a recent $3B VC fund distributing only $100M back to the LPs makes the IRR's (Internal Rate of Return) calculations quickly lose their value in determining the health of the LP commitments. A stronger emphasis on money-in versus money-out is what now drives LP agendas moving forward.Making senseMy observation from discussions with pension funds, private equity firms and treasuries is that many Limited Partners are confused. On one hand they want to get out because of unsatisfactory returns and on the other hand they do not want to miss out on the massive opportunity in Venture they know still lies ahead. A conversation with an LP at the event brought home what that confusion looks like (forgive the brevity on either side, we both sat through the last panel session of a packed two day event - me lingering for a cocktail appointment with another LP). ...before the panel session...LP: What do you do Georges?Georges: I am a Venture Economist.LP: Huh, what is that?Georges: I help LPs make sense out of their venture strategies.LP: We should talk....after the panel session...LP (before we can leave the room): So tell me.Georges: Venture cannot and will not perform using the current model.LP: Well I know Venture is brokenGeorges: Yes, but it is important to know the difference between a cancer and a fever.LP: Fair enough, but I don't have a problem.Georges: Really? So, why are we talking?LP: Uh, I think it is broken too. But my returns were okay.Georges: Really? You deployed Venture risk and you've gotten micro-Private Equity returns, why is that okay?LP: Uh (blushing), you are right.Finance is easyIt amazes me how common sense has prevented to enter the minds of LPs who (in some cases) continue to be swayed by convoluted fairytale stories of a better future. A solution to the Venture malaise needs to include not just a market-model that deploys Venture risk more appropriately, but should also include the canvassing of new general partners with the confidence and capabilities to produce merit in that new system. Both are included in my systemic fix to Venture, a prelude of which (the detection of the disease) can be found in 2010: The State of Venture Capital.Obviously I will not paraphrase every discussion I have with LPs, and continue to treat them as the other asset holder (like entrepreneurs) in the Venture marketplace with the utmost respect. But LPs should not just listen to VC rhetoric and expect them to come up with fundamental improvements (or perhaps required cannibalization) in the Venture business that jeopardizes their cushy, no downside, protectionist stance. For LPs, I am the resource and the voice-of-reason for those who want to challenge "best-practices" of VCs that have not and will continue to fail to produce proper returns.But, dear LP, if you aim your frustration with Venture at me instead of the VC, I will kick you out off my process for a much better future in Venture.
Idiot LPs 2 June, 2010, 7:21 am
By Georges van HoegaerdenAlmost one year ago I wrote a wildly popular Idiot CEOs article that highlighted my affection for the crucial role of visionary CEOs at early stage companies, and how instead they are foolishly made/forced to believe that the directives from the company's board (mostly VCs) will guide them to success. That article was meant to protect CEOs from making mistakes and set things right from the start. So it is now a year later in which my understanding and affection for the role of Limited Partners (LPs, the investors in Venture Capital firms) is voiced in contrast to those LPs who continue to support the dysfunctional VC arbitrage in the Venture ecosystem (see our primer). This article is meant for those LPs who do not want to earn the adjective "idiot".Invest at "your own" riskMore important than the easy harping on "the money-men" is the serious realization that investing in venture by LPs, knowing how the VC arbitrage works today, is truly the definition of insanity. Simply put, the way VC works today cannot and will not lead to scalable performance the LPs are betting on and worse, implodes our ability as an economy to create sustainable innovation that can improve our lives, and will erode the dominant role of the United States in it.Limited Partners (and their boards) and the Public markets are lulled into a false sense of security by Venture Capitalists (VCs) who primarily blame deplorable venture performance on the malaise in the macro-economy, which we have debunked many times. And so Limited Partners should heed the warnings in this article, and if they do not take deliberate action to investigate their actual deployment of risk are going to lose much more than they already have. Change you must believe inAs many aspects of the technology sector have changed and having met as many VCs as I have over the years, you will realize they have not changed along with it. - Market access has changedAbout 30 years ago, Venture relied on a small and proprietary market model to drive insular innovations that each relied on nothing but itself to carve out a market. A lot of critical success factors have changed since then, and the Internet has all but evaporated the luxury of monolithic access to markets and a straightforward and private way of addressing it. Today's buyers of technology have many more (often jarring) options, which has dramatically increased competition and forces VCs to understand and support the complexity of hybrid market models, unique product experiences, social economic value and a clear understanding of what drives value beyond simply being there first. - The technology stack has evolvedTechnology has become more pervasive in our lives, albeit more than 80% of the worlds population still does not use the internet for meaningful applications. Usage has evolved from the office to everyday lifestyle, with more demanding user experiences as the impetus to buy. No longer is the value of Intellectual Property (IP) simply defined by the ferocity of the many lines of proprietary software code, but by how the proposed user experience uniquely crosses (and hides) the complex boundaries of code, content, distribution, relationships, marketplaces and hardware. Simply put: no longer is the value of the spark plug more important than the value of the car. Producing code is no longer the sole testament of the ability to deliver groundbreaking value. - Risk and returns have systemically deflatedAs Paul Kedrowsky (author of "Infectious Greed") alluded to at the Milken Conference panel, "old VC brands are dead". But not for the reason most people think. Counter to what VCs make their own investors believe, investing in Venture has become even more of a specialty and harder, not easier and certainly not cheaper. Fear and the inability of incumbent VCs to change, have forced many VCs to continue to invest using the old Venture model in a market and with technology that has fundamentally changed. Twenty years of VC resistance to change has already turned Venture investing into a subprime sector in which micro-PE (micro-Private Equity) risk deploys no more than micro-PE returns, regardless of the state of the macro economy. And worse, it has attracted developers who think of themselves as entrepreneurs when they feed the VC's micro-PE hunger.- The VC demi-cartel has no way to detect innovationAs technology is getting more competitive, global and evolves faster than ever before, the current demi-cartel consisting of VCs with a single (outdated) investment thesis that heavily relies on syndication (i.e. consensus) with fragmentation of dollars and deflation of risk to support innovation is counter productive to the economic indicators that are pointing the other way. With ten levels of risk diversification and deliberate price-setting, Venture has become the systemic rollover of the car business, and in need of a overhaul of standards and requirements. Real innovators do not engage with venture anymore, and leave VCs alone with their self-induced and spiraling down subprime investment malaise, patiently waiting for it to break and reset itself completely. - The grass is not greenerWhen life gets harder only mediocrity walks away in search for greener pastures. I too believe in a more responsible and greener world, just not with Venture Capital as the financial instrument to drive it. Mediocre VCs are exactly those VCs who successfully sell that the Venture model founded on the fluent economics of technology, blindly applies to every other "feel-good" growth sector, which subsequently lands more LP support and therefor a longer stay in the derivatives investment business. No other asset class than technology venture provides more immediate and effective economies of scale for creation, distribution and adoption of value, that is if as a VC you can define the compass of real value. Super PimpsTo continue the corollary from Idiot CEOs and based on the fascinating HBO documentary Pimps Up, Hoes Down referenced in the article, idiot LPs are the Super Pimps who believe that the premise of investing in venture, knowing how VCs treat and detect entrepreneurs will continue to deliver outlier returns.For intelligent LPs, who like many smart rich people continue to write their own checks and get involved in how the rubber meets the road, a wonderful future of returns still lies ahead in technology venture. LPs need to invest in understanding the whole venture ecosystem, and be able to challenge the risk models VC deploy in order to make the smart choices that come with great returns. And today's smart choices are not yesterday's. But those LPs who by virtue of the deployment of a defunct venture market model, stale VC experience, and a venture cartel treat entrepreneurs like Hoes, will get and deserve nothing more than they have for the last ten years.
Don't bite the public hand that feeds you 25 May, 2010, 10:53 am
By Georges van HoegaerdenAs I explained in "2010: The State of Venture Capital", our Venture primer and "How to fix VC once and for all", Venture Capitalists are the derivative between the assets of the Limited Partner (money) and the assets of the entrepreneurs (ideas). Venture Capitalists, because they are equipped with the keys to the kingdom by Limited Partners (LPs) therefor claim they must know what is best for the marketplace to function properly, and deploy their best practices (read regulations) to identify investable innovation. And money hungry entrepreneurs bow down to learn from VCs how to build companies, approach investors, time the market, build scale etc. In absolute terms Venture underperformsThe only problem is, very little of that has paid off. With fully loaded commitments from LPs, more highly skilled entrepreneurs than ever, an 80% technology greenfield with 7% growth in even the worst of economic developments, Venture Capitalists managed to perform below the technology sector it rides on. None of the financial relativity theories (such as IRRs, financial sector comparisons etc.) can debunk that Venture should have out performed the organic growth in technology and they should have tapped deeper into its virtually unlimited greenfield. LPs are getting more frustrated by an exploding technology sector with imploding Venture returns and one recently communicated on PEHub what I have heard many times now in private:The correlation between “well-regarded firm” and actually profitable (for its investors) firm is close to zero. I’ve spent the last five years meeting with “well-regarded” firms and it's the rare exception that has actually delivered returns.Clearly the Venture Capital arbitrage, deployed as a demi-cartel in Silicon Valley and feverishly and foolishly copied around the globe, can no longer be trusted. It is time to renew the marketplace and reset the compass of innovation. The public buys stockAs depicted on the included chart, the role of the public is crucial in establishing a healthy Venture ecosystem. If for nothing else, the most explosive Venture returns are realized in the process from turning a private company public (IPO = Initial Public Offering), and the threat of that investor independence can boost the company's merger and acquisition value. So, a solid understanding of the value of an early stage venture by the public (which we describe as Social Economic Value) is crucial in establishing authentic public stock value. The public buys productThe best way to have the public understand the value of innovation is to have them use it. Without many people understanding the intricacies of social networking, it does not take a lot of imagination that Facebook would be a valuable public investment solely based on its user growth. Facebook tapped into an existing macro-economic need to reconnect with people who were too busy or too remote to stay in touch with otherwise, and now reaps the reward of deploying new monetization schemes to a large installed based with no lead generation cost. Crucial for entrepreneurs is to realize that in building a product (product in the economic sense, so could be service) for the public, "capital efficiency" is not only a blatant lie, it is the opposite of what creates public trust. The public needs technology that offers significant attachment to large macroeconomic value, a complete offering (spanning multiple technology silos) and a robust product experience. All the ingredients that are not dished up by the strategies deployed by so many of the subprime VCs who proudly plaster the blogosphere and technology "flea-markets" (you know which technology trade-shows I am talking about) with their spoon fed investment tactics and meaningless advice. The public buys into VentureNot only does the public purchase stock from companies that turn public, it also feeds the funds of Limited Partners who deploy a portion of those funds to Venture. Pension funds, endowment, insurance companies etc. put their reserves from public cash to work to deal with fluctuations in their businesses. So, a Venture business that does not perform well, will not only put pressure on the output of Venture, but will have devastating impact on its input. LPs as the guardians of that money now increasingly are instructed (by their often public boards) to lay off on venture capital.The highly inefficient financial instrument in Venture severely erodes the potential and trust in the future of innovation.Treat the public wellThe Venture business does not and will not perform significantly better if it, or our government, does not change the market model it deploys (we have an answer for that). As an LP, investing in Venture unchanged is the definition of insanity. Marketplace transparency (to all marketplace participants), that opens up private companies for public review (not investment) is paramount to establish public trust before the company is put on the public auction block by investment bankers. Entrepreneurs should partner only with Venture investors who understand that Venture Capital is designed to protect upside, not downside. That corners cannot be cut in addressing the needs of those people who are expected to buy your public (or indirectly private) stock later on. Treat the public how you want to be treated. After all, we are the public.
How Venture Capitalists dig their own political grave 17 May, 2010, 7:54 am
By Georges van HoegaerdenThere have been many debates (to which I contributed some of my viewpoints, see for example: peHub's coverage of Barney Frank's statements) as to the systemic risk of Venture Capital that is now dutifully looked into by our government to establish the amount of risk Venture Capital (as a sub sector of Private Equity) poses to our economy, and to embed impending regulations in the Financial Reform bill. Venture Capitalists have dug their own political grave. Their disingenuous stance is formed by how on one hand they claim to be crucial to the economy (and falsely pat themselves on the back how they create thousands of jobs), and proclaim on the other hand that Venture Capital does not pose a systemic risk (because of its limited size, compared to other asset classes).Neither of the aforementioned argument is valid, as you can gleam from my previous articles. Yet they deployed their lobbying organization, the NVCA as the ultimate protector of VC downside, into action and collected 1,700 General Partner signatures in an attempt to persuade the senate not to impose on Venture Capital the impending regulations put on big daddy Private Equity. A feeble attempt. VC is the financial derivative, not the producer of innovationThankfully Barack Obama is smarter than most politicians and demonstrates his ability to separate financial derivatives from producers of value with a single statement: “We understand that start-ups and entrepreneurs are the key to leading the US out of the recession.”Notice the subtle distinction in his statement to emphasize the value of innovation versus the value of its financial derivative. The distinction Barack alludes to is that for too long this country has valued the power of financiers higher than the power of the producers of product. With our financial system eleven times the size of production, our financial system is simply too large, and our economy is too dependent on the fragile promise of gamblers. And while Barney Frank appears committed to protecting the financial derivative without really understanding the merit of that financial instrument, Barack Obama is vowing to protect the producers of value. Related to Venture, the NVCA attempts to protect the power of VCs (as the financial derivatives), while I aim to protect the future of entrepreneurs. A crucial distinction.VC has not made the point it deserves special treatmentThe biggest problem with Venture today is that it has no political leg to stand on to demand an exemption from the rules imposed on Private Equity. Contrary to the self-serving rhetoric of NVCA members, Venture - fully loaded by commitments from Limited Partners the last twenty years - should have produced absolute returns that outpaced technology adoption (7% growth in the worst of our economy) and emptied out a greenfield of 80% of the worlds population that still does not use technology to its advantage.Venture managed to produce returns below the carriage it rides on. Even by their own statistics, Venture produced less than 10% IRR, lost around $1.7 Trillion in opportunity cost, yielded fleeing numbers of Limited Partners, and embodies an in-transparent market mechanism (in-transparent to all marketplace participants) to which we can only fantasize what financial improprieties will surface when that pandora box is forced to open up.Nothing ventured, nothing gainedYet Venture Capital was created some forty years ago as a special sector. A sector that deployed significantly greater risk and rewards than Private Equity. Unlike Private Equity, Venture Capital was meant to take the early risk of a company before it has been proven to deliver market value, on the left-side of Geoffrey Moore's chasm and managed to move it miraculously to a massive deployment on the right side (see the chart at "Redefining Capital Efficiency"). That required a unique foresight only beholden to a specialized investor with relevant experience. A lot has changed since then. On the whole, Venture Capital as the financial instrument to support groundbreaking innovation is dead. Today it can best be described as micro-PE or as we describe here often, as subprime VC (explained in last year's article in support of Vinod Khosla's assessment of the sector). Unfazed, General Partners still rake in cushy management fees (plus micro-PE carry, if at all) defined using rules from the early incarnation of the sector, and blame the lack of results on anything else but themselves. Meanwhile the key stakeholders in the Venture ecosystem, entrepreneurs with groundbreaking ideas and Limited Partners with a large commitment suffer from diminished deployment and return of risk. So with Venture Capital predominantly operating in micro-PE mode, it is only natural for it to be painted with the same regulatory brush as Private Equity by politicians who do not see a significant difference in role, performance and economic relevance. Venture born againBut to assume that innovation is dead because of an underperforming financial instrument that controls it is foolish. And to suggest that innovation will suffer from regulations put on VCs is even more ridiculous, where else would their GPs go where downside is more staunchly protected than upside? And it would be easy to replace most of them with better performers. We have incredible entrepreneurial resources that once supported by a proper financial instrument will prove their value in gold again. Venture needs to prove its merit as a valuable financial instrument to support the outliers of innovation and the creation of real social economic value. The way to escape impending regulations is to offer to the President a new market model in which the merit of the sector is appropriately and authentically represented. A market model that promotes taking Venture risk and promotes upside and punishes downside. A marketplace in which the merit of investors, as individuals can be openly challenged and their rewards appropriately and dynamically adjusted. Manage our own "back yard"The approach the NVCA takes is once again that of protecting downside, but doing literally nothing to promote upside. It makes nothing more than empty promises (based on futile arguments about extrapolation or cyclicality of a glorious past) for a better future based on the changing tide of our economy that is supposed to float all boats again. Sure, IPOs will increase a little bit, but little Social Economic Value will be created which will yield disappointing post-IPO performance and a further erosion of public trust, let alone significant LP returns. The NVCA's protectionist stance therefor is actually hurtful to the investors, as the preponderance of evidence shows that Venture cannot operate in the same way it operated yesterday.We need to step in and fix our own ecosystem, unless we want our government to step in and do it for us. The NVCA needs to change its agenda if it wants to preempt government intervention. I disagree with the President's approach to financial reformMost reading the above would therefor assume I agree with the President on financial reform, and I do with a twist. I believe financial reform cannot be established by attempting to curtail all improprieties that occur in our current system that is not a free-market system.Our financial systems (including Venture) are not free-market systems as they are not transparent to all marketplace participants, are artificially arbitrated, favor the deeply entrenched and do therefor not support a meritocracy. And that means no matter how many great products we invent, even under the "watchful eye" of regulations, the economic value of those products will be severely dampened by the complacency of incumbent investors. So, the top priority of the President as the head of government (and supported by Larry Summers) is to construct the meritocracy of our financial system, so that all of its future participants can act as watchdogs (or better yet roman geese), establish investor merit and flag improprieties that need escalating and further refinement of law. Venture would be great sector to implement that new market system first. Regulating the current market system is just a waste of precious time and money.Until we see the development of such a system, I side with many VCs and even the NVCA, albeit for less altruistic reasons. Without a real free-market system implementing regulations, the industry will quickly establish workarounds and no significant improvement in the support for groundbreaking innovation can be expected. Subprime Venture Capital will not change to prime by simply adjusting the incentives or applying a plethora of regulations, it requires a market model that allows new investors with an authentic ability to spot groundbreaking innovation to join the marketplace and refresh those that have become stale. Even private markets should be transparent (just not publicly investable yet) so the merit of its inherent social economic value is established before the company transitions to a publicly investable entity (IPO).With the proper free-market construct (as defined in 2010: The State of Venture Capital for our customers), no longer can over-inflated valuations, ramped up by VCs and settled on under the cover of darkness by investment bankers, erode the trust of the public.So, dear President, stop tinkering with useless regulations and lets fix the systemic risk of our financial systems first.
Redefining Capital Efficiency 7 May, 2010, 8:26 am
By Georges van Hoegaerden[This article is a further expansion on the subject of Capital Efficiency of our article from one year ago, named "The trap of Capital Efficiency"]I cannot tell you how many times I still hear Venture Capitalists (VCs) mention how they look for and "create" capital efficient companies, and how masterfully they continue to sell that "strategy" to their Limited Partners (LPs) as a viable investment thesis. Those LPs subsequently must believe that they are now investing in a unique class of companies only they have access to (otherwise why is the mention of the specific denomination relevant), and instead of clambering to the old world of capital-inefficient companies, now have the opportunity to prance around in the formation of new, and sexy capital-efficient companies. Sounds good, doesn't it? Perhaps for those not seeing through the tactics of the spin-doctors.Let's dissect "capital efficiency" as deployed by most VCs:First, putting less money into companies, or selecting innovation that supposedly needs less money is a strategy deployed in the last 10 years that has proven not to work. 790 VC firm investors who make - say - two investments per year on average (low ball), produced no more than a handful of IPOs and no more than 10% IRR over the last ten years, is no testament that an attachment to the "capital efficiency" category carries any special value. With our economy now also in dire straits, the chances of capital efficiency bearing fruit has diminished even further. Second, with a fully loaded commitment from LPs the last ten years, VCs who look for capital efficient deals are dramatically fragmenting investment commitments by having to invest in more companies (to put the full capacity of the fund to work), and conversely increase the investment risk at a time when performance of the sector is already shaky. So the supposed capital efficiency of a startup, with uncalibrated VC fund sizing is actually capital inefficient to LPs. Third, the cost of acquiring a customer on the Internet has not dramatically changed over the years (if not increased), and so to lower the input into early stage technology companies disproportionate to the dynamics of their output does not only make no economical sense, it again increases the risk of success, opposite of what capital efficiency attempts to promise.Fourth, Internet technology companies deploy the same rudimentary economics to their customers as old-school companies, they are just using a low threshold (often immature) and a more immediate distribution channel (the Internet). But that immediacy combined with a little bit of money needed to enter into distribution significantly increases competition that in the end favors only those companies that provide relevant social economic value to its customers. And so not the lowest cost-to-entry defines the value of the company, but the quality of service it delivers to its customers. And quality of service is adversely affected by the improper implementation of capital efficiency and thus the reason why the current implementation of capital efficiency in venture capital is incompatible with building real value and public market trust (and therefor reliable IPOs). Fifth, capital efficiency as deployed by many VCs today, forces startup companies to build technology first. Yet the gating technology proposition offers no indication that the company will ever achieve macro-economic value that has the potential to outshine competition for the next seven years or more. For example, building winner-takes-all marketplaces (such as iTunes, eBay etc.) requires a minimal investment incompatible with the capital efficient VC model, and as such we have not seen any since the popularity of the flawed implementation of that model. Sixth, technology development is not the risk of a technology company, the application of the appropriate technology to a marketplace is. So, while it may have become slightly cheaper to develop a single line of code these days (I would argue that too), the amount of code needed to make a difference in a highly competitive market, forces companies to make more meaningful and robust products, which requires the deployment of a larger workforce with a cost that hasn't seen any significant reduction. So, just like in any production business, the people-cost is the most predominant factor of the success of the company, not the expense of technology it deploys. So, yes, capital efficiency the way it is deployed by the demi-cartel of VCs is a big fat lie, that has not and will not deliver. The ultimate subprime VC lieDon't get me wrong, capital efficiency is a prudent way to build any company. But the way most VCs confuse capital efficiency lies in the difference between inexpensive and cheap. The way most VCs implement capital efficiency is cheap and lowers a company's ability to grow up, and makes it more difficult for the company to move from the left side of the chasm (Geoffrey Moore) to the right side, where massive user adoption awaits. The currently popular deployment of capital efficiency spoon-feeds money to startups, which in most cases means the company cannot hire the much needed specialized expertise to turn it from a technology play into a real company early. Many startups can simply not hire a visionary CEO who protects their macro-economic agenda (and returns), and ensures the company remains owner-run (also favored by Warren Buffet) rather than investor-run. That means technology developers without sufficient business experience now run the asylum as inmates of the "investor prison", doomed to make the early mistakes that dilutes founding ownership and therefor - again - increases risk. So, capital efficiency deployed by subprime VCs is a foolish prophecy. Any VC who uses the phrase capital efficiency as a sector differentiation has no clue what he is talking about. For me, having seen all sides of the venture equation, capital efficiency is the ultimate VC bullshit detector; it communicates they understand nothing about economics, investment risk, innovation, the workings of the technology sector, and business in general.Capital efficiency today is implemented as downside protection by subprime VCs who look at venture investing as a commodity, and signals how they themselves therefor have become a commodity (and do not belong to operate in Venture Capital). Capital efficiency should drive upsideReal capital efficiency in venture capital is defined by the cost to produce upside, as opposed to the cost to protect downside. Most companies become extremely capital efficient once they establish beforehand what the operating plan of the business looks like in detail, and as such plausibly define how they need to be "lubed up" to run as efficiently as possible to achieve upside early. Contrary to popular Silicon Valley belief, technology does not create markets but has - at best - proven to support macro-economic and marketplace behavior that existed for many years. And real capital efficiency is easily achieved by identifying the behaviors that can be more efficiently supported or displaced with the help of technology as content and the internet as distribution. The selection of which marketplace (that is in timely need of efficiency) you pick as an investor determines how capital efficient an individual investment can be.Capital efficiency, therefor is not a sector strategy, but a way of picking individual companies that have the potential to create extreme and timely upside. So, from now on dear LP and entrepreneur, when you hear a VC mention capital efficiency, run the other way.
The first 48 hours, my iPad review 3 May, 2010, 12:53 pm
By Georges van HoegaerdenI read a lot of iPad reviews before I found myself waiting in line to get a shiny new 3G iPad from the Apple Store last friday. Because WiFi is simply not pervasive (albeit more pervasive where I roam on the east coast than on the west coast, surprisingly I found even gas stations in North Carolina having free WiFi), the iPad without 3G is perhaps best suited for children who need a somewhat controlled access to the internet and for many of us who use their mobile device connected to the Internet primarily from home (according to a pre-iPad market study I recall). From the many other reviews (including Walt Mossberg's valuable assessment) you can read about the early experiences with this great new device. I agree with most of Walt's assessment but wanted to offer some complimentary considerations (from a demanding early stage entrepreneur, Venture Catalyst, Venture Capitalist and Venture Economist) I did not see. The iPad is a beautiful, easy to use computer that will serve the lifestyle, internet and computing needs of most people. You should get one at your earliest opportunity. If you travel frequently, the iPad 3G is so well equipped and easy to use, you can actually peacefully leave your main computer at home. Even novice users will suddenly have the world at their fingertips.Here are my remarks to make the iPad even better:StrategicallyThe requirement to tether the iPad for the first time to a regular computer and activate it through iTunes is beyond a lawsuit waiting to happen (it does not state such requirement on the box), not the right strategy for consumer adoption of the iPad. The iPad is a device that is likely to appeal to 5/6th of greenfield of the world's population that is not using a computer capable of running iTunes, and bound to find itself limited in market penetration by the tethered activation requirement. Apple should aggressively offer in-store and cloud based activation to combat this issue.PositioningNow, Apple is often referred to as a great marketing company, in my view because they don't do any positioning at all. Most of Apple's products are described by virtue of their beauty and their capabilities and just like with finding a woman with those attributes; you know instinctively when you want to be with her. Most other technology vendors still foolishly deploy expensive marketing departments to preempt who its buyers may be, and Apple merely states what the device does (in terms of benefits), the number one thing I find myself explaining to interested onlookers is that the iPad is a (lifestyle) computer, not just an iPhone Touch with a bigger screen. The iPad, also by virtue of which software capabilities are included (see below) suffers from a bit of public confusion and identity crisis, as witnessed by the complete lack of built-in printing capabilities.HardwareThe shape of the iPad is perfect for a handheld device, yet the 3G is big enough to make you want to rest it on your lap or elsewhere and tap around with both hands. My 5-year old daughter with smaller hands juggles with the weight and requirement to move the iPad around while playing games, yet not enough to keep her hands off my iPad.- The volume buttonThe volume button on the iPhone and iPad irritates me to no end, not where it is placed but which part of the rocker is volume up or down. Given that the iPad can be used in many orientations I would make the volume up and down switch sensitive to the context of the orientation. Meaning, no matter how you hold the iPad, the volume up and down coincides in direction with the visual clues on the display.- The home buttonThe home button is visually undetectable in the dark, and can be left, right, up or down depending on the orientation of use. This button needs a slight backlit to identify itself under low-lit and dark conditions.- Back curvatureOn a completely flat surface such as a desk or kitchen counter the iPad has a tendency to spin around easily, especially when typing hands-free. A slightly less curved back, with more surface area touching the underlying surface would improve resistance and offer more stable usage. - SpeakersThe current speaker position, (on one side only) leads to frequent muffling and diminished volume and clarity of sound when holding the iPad in landscape orientation when hands are prone to cover up the speaker slots. This needs a different implementation, perhaps dual mono sound asymmetric to the orientation of the device. - DisplayThe display, even though made from a special material smudges easily which when viewed from an angle and will make the owner look like a dirty animal. I am not an expert in display technologies to offer a solution, and these fingerprints are hardly noticeable to the user with a straight-on view of the device.- The BaseThe docking base for the iPad (sold separately) only supports a portrait display of the iPad while docked, not the most natural way to view widescreen videos nor the default orientation of the majority of photographs while charging.- TouchIt is probably a software modification, but I found the iPad sometimes responding to fingers not fully out of the way of the touchpad causing some unexpected behavior. Some of those fingers do not need to touch the iPad, I found out, to cause an in-adverted detection and operation. SoftwareApple is clearly ahead of the pack in delivering a compelling lifestyle computing device we can all use and therefor will catch most of the wind in addressing the imperfections of the software provided. That does not mean I suggest you should not buy the device, but it does mean Apple has room to improve with software updates that make the iPad better. I can tell (and know) that Apple is developing the software in corporate divisions with their own disparate decision making. As the first vendor to provide truly integrated desktop, mobile and cloud computing services Apple needs to reorganize itself amongst the development of IP (Intellectual Property) that spans those boundaries. No longer is the power of one capability on one platform important, but the lowest common denominator now defines the overall experience.- Portable capabilitiesWith much of development efforts at Apple focused on newer devices such as the iPhone and iPad, the lack of development efforts on its OS X companions are affecting the (synchronized) reliability of data on the new devices. With the release of Snow Leopard (OS X 10.6) Apple has really dropped the ball on the stability of the address book, iCal, e-mail and others that affect the use of all devices in concert. With the latest release Apple changed the way it deals with address book imports, how it deals with duplicate contacts, how it syncs address book images etc, to the extent that you need to verify and make frequent backups of every part of the process to prevent unexpected behavior.- MobileMeMobileMe is a necessity to synchronize over-the-air many of the e-mail interaction, contact, calendar and notes to keep your information up-to-date at all times, and you should therefor subscribe to it (a $99 / year charge). But it took me two months to figure out how to use MobileMe for my business without showing that the e-mails I sent were coming from MobileMe (a long story). Every business owner who wants to take maximum advantage of the iPad and iPhone capabilities is in the same predicament. The cloud services provided by Google's gmail finally came to the rescue. But it does worry me that to get and send e-mail using MobileMe a la BlackBerry demands the proper workings of no less than four e-mail servers. The same with calendar sharing where Google cloud services trump those of MobileMe, and for the first time my wife and I can now share a social calendar (using CalDAV) to which we both can add, edit and delete from the same calendar whenever we wish. These everyday capabilities should be supported by MobileMe monolithically by now, but are not. Also, MobileMe's iDisk and Gallery applications are not (yet) natively available on the iPad and users need to use the iPhone derivatives to continue to use those features. I am expecting a beautiful new Remote application from Apple soon, that allows me to control the Apple TV in wonderful glory.- AppStoreThe Application Store (for the iPad) is supposed to support The Long Tail of applications plus the Torso yet it provides no intelligence (yet) to figure out what based on your interest is the best selection of apps available. That means you need to scroll tediously through thousands of apps icons only to have to start over once you installed one of them from that list (as the store does not remember your last position prior to install). That means you give up exploring the Long Tail of applications pretty fast, and the meritocracy the marketplace (and thus opportunity for app vendors) the AppStore intended to provide is severely diminished. And while iTunes bravely installs all previously installed compatible iPhone apps on the iPad, the AppStore makes no attempt to then upgrade the Apps (read upsell opportunity) to its iPad native companion. So, it takes hours perusing the AppStore to figure out which of your favorite App has a more capable iPad cousin. I found myself abandoning iPhone apps and instead bookmarking their respective webpages with an icon on the home-screen.It is also a bit of an embarrassment for AT&T not to have a iPad native iPhone account management app that also incorporates managing the 3G iPad subscription service. - DictionaryWhen entering text the iPad prefers to use capitalization in some weird places, insert spaces at other times (without "suggesting" it first) and in e-mail actually changed the from-address descriptor from "The Venture Company" to "The Company". It appears the dictionary used in the iPhone is more robust than the one used in the iPad.- iWorkAs a long-time iWork user (for most of my work) iWork on the iPad is a big disappointment. I was hoping to use my iPad as the device I could take to Limited Partners and present my now famous "2010: The State of Venture Capital", but I quickly found out that iWork on the iPad is not compatible (in many ways, it imports rather than opens OS X documents) with the version that runs on OS X. As stated before, parity of software capabilities between platforms should be of new importance to Apple as that will prevent people from re-evaluating other options. iWork (KeyNote, Pages and Numbers) are fantastically powerful apps on OS X, and in its infancy on the iPad. Novice users can still have fun with iWork on the iPad.- MailE-mail on the iPad looks and behaves stellar, yet with a few quirks. It appears impossible to change the reply-to address, notes are not synced over-the-air by default, regular IMAP e-mail is pull only and you cannot set a polling frequency. Some e-mails (such as private equity online) previewed incorrectly, the rendering engine must be different from on OS X, where it showed up correctly. Some Word documents could not be opened in Mail, not even with the version of Pages (and part of iWork on the iPad). I hate the horizontal scrolling while you reply to an e-mail, making it impossible to review what you wrote in place.- CalendarThe Calendar views are visually stunning and well laid out. But some of its functionality bothered me. One cannot change the calendar of an appointment after it has been created. I could not find an option to display the time in the week view (as on OS X), nor could I find a way to accept a Microsoft Outlook invite which it entered correctly in the Calendar. - BrowserA version of Safari runs well on the iPad, but I miss a few capabilities including a pinning of favorite pages (as available on OS X). Some documents, including v-cards (address book information from LinkedIn for example) do not load into the appropriate application (address book in this case). Some of the new social call-backs designed to integrate social capabilities by Facebook and Twitter do not work well on the iPad browser, thankfully a onetime process that can be handled on the desktop as well.- Long list navigationLong list navigation needs a new indexing approach, plowing through 4,500 contacts on the iPhone or iPad is not fun, nor is scrolling through 2,500 photos (a hobby) really practical. Some of the new indexing capabilities of iPhoto on OS X (face, date, folder, theme) would be welcome on the iPad. - Multi-user loginEven before purchase my daughter "claimed" certain usage rights to my iPad, which to keep things safe, really requires a multi-user login with separate menus. I am hoping that becomes part of the unannounced features pending for the iPhone4.0 release for the iPad slated for the fall. A new dawnI may discover more things that are not perfect on the iPad, but so far I have been inseparable from this nifty lifestyle device that manages to take on a much larger part of my business requirements as well. The continued development of the iPad will change the face of computing forever, and as a result people are no longer beholden to the lazy innovation and complacent attitude of Microsoft, joined by the mediocrity of cheap and ever commoditizing hardware partners. Apple has singlehandedly changed the computing agenda from business to lifestyle, and managed to serve its fast growing customer base with an experience that truly meets their every day needs.The iPad has become the third "woman" in my life (in the aforementioned analogy), who is bound to become more capable and more beautiful every day.
VC roast; how to take Venture for a ride 20 April, 2010, 9:08 am
By Georges van HoegaerdenIt is time for a Venture Capital (VC) roast, as I continue to see so many of its General Partners spread the rhetoric that Venture hasn’t performed all that miserably and that it will all rebound, ignoring that the opportunity-cost incurred by a systemic slide from Venture into micro-PE (or what we prefer to call subprime VC) is larger than not investing in Venture at all.The VC roastSo, let's have some fun and show you what to do when you are a Venture Capitalist and do not want anyone to get suspicious:- You graduated cum laude from one of the top Ivy League business schools in the U.S. that also invested in your firm as an LP, and discover that none of them have been able to make their endowments in Venture produce a decent return for the last ten years. Oh well, at least your parents loved you enough to give you a great start.- You copy the Private Placement Memorandum (the business plan of a VC) from a brand-name VC, enter new General Partners in the about section and voila, another VC star is born that Limited Partners (LPs) cannot possibly say no to.- You start raising new money, four years after your first, making it impossible for your LPs to establish the real merit of your initial investment thesis. You’ve just added another 12 years to your already comfortable existence and enjoy the stability of a more secure job than anyone else in government.- You are vague in the actual deployment of your investment strategy so you can balance early and later stage investments based on how the vintage of your fund should look on paper and what the marketability of your second fund is four years into your first.- You tell the world about how holistic your job really is, and how you as a member of the Venture sector are responsible for generating all these jobs, forgetting of course that you are mainly the matchmaker in the process (between the assets from LPs and Entrepreneurs) and it is not your money you put to work but the public’s money (dispersed through LPs to VCs). - You tell the world that you really need to exist because innovation is crucial to this country. Forgetting that anyone with real entrepreneurial experience and verifiable merit will gladly take your place the minute you get out of the communal hot-tub you refer to as a unique fund.- You become a member of the NVCA, whose protectionist agenda and lobbyist resources will provide you with plenty of ammunition to LPs and the government as to why your investments thesis, that is so similar to your peers in the industry should be protected at all cost for the sake of innovation.- You decline to discuss publicly any rounds of funding into portfolio companies and its valuations, because at some point that may actually lead to the discovery of your real knowledge, vision and merit of decision making in Venture, or what a fool you really are. - You build out your investment firm to a wide global network, so you can have the unique ability to smooth out investment returns and strike up generous stacked management fees in all. - You tell the LPs that you are investing in “Capital Efficient” companies, omitting that capital efficiency is defined not by how much downside you protect, but how you enable upside. - You make the world believe that the best companies to invest in start with the discoveries from white males, under thirty, only a technology proposition, twenty miles from Sand Hill Road and built in a garage where you spoon-feed them $250K tranches, minimizing investor downside risk. Ignoring comfortably that the long-tail of viable ideas should just no longer be explored.- You tell on your blogs how entrepreneurs need to get better in building companies or how to navigate venture constructs, as opposed to spending all your time on finding groundbreaking innovation with enough upside that helps them hire the best.- You tell entrepreneurs nothing about your knowledge, performance and merit (and ability to invest or not) but expect to the entrepreneur to be fully transparent. - You demand from entrepreneurs that they realize you will bring more than money, while you will not talk to them directly and provide no substantial differentiation of your investment thesis on your website. It is maybe because you are not that special to begin with?- You sit in your office searching through piles of business plans, waiting until technology walks in the door that strikes your fancy. How come the visionary in you cannot proactively induce groundbreaking innovation?- You preach at the many technology “flea-markets” about what constitutes innovation and how to find the outliers, making no one wonder what you are doing at this “flea-market” to begin with.- For ten years you pushed valuations through the IPO funnel with little value and now, after you’ve squandered public trust, and struck by the impending retribution, you now defer all early risk to entrepreneurs and wait as long as you can to see if something miraculously pops up.- You add different investment vehicles to your firm, such as PIPEs, annex funds, buyouts so as to further hide your real merit in the demanding venture sector. - You give speeches to the world about free-markets from atop a comfortable perch of the most closed, dark, unregulated, in-transparent and proprietary market mechanism in the financial industry.- You write on your blog that Venture is all about relative performance and then compare Venture indices with those of 100-year old asset classes (with nominal greenfield and growth), so Venture still looks like a “star”.- You act confident that when the economy recovers all boats in Venture will rise again, delivering the evidence that you do not understand that groundbreaking innovation is resistant to economic aberrations, and your boats should be sailing the skies by now (as other custodians of innovation have proven).- You cry on stage (like a real man) about the nobel cause of improving our climate, after you realize technology investing does not make turkeys fly anymore and you are looking for greener pastures. Giving you the out to turn your venture firm even faster into a private equity firm (compatible with making greentech investments), a perfect slow paced Venture retirement strategy that makes everyone feel warm inside.- You tell the world that the Venture business is still "the envy of this world", forgetting that the financial system does not create the value, but the unwavering drive of the groundbreaking entrepreneurs you are choking. - You tell the government that regulation will kill innovation, forgetting that - at most - regulation will kill venture capitalists who cannot stand to have their merit exposed publicly.- You convince the senate that innovation is not at risk in our country, based purely on the size of its financial system being larger than that of all other economies combined, forgetting that a financial system eleven times the size of production is a very unstable foundation to begin with and how we’ve become a nation of gamblers rather than producers. Act surprised when other nations slowly start to eat our lunch.- You tell congress that there is no systemic risk in Venture, convincing congressmen that the sum of all investments in Venture (about $2 Trillion the last ten years) should really not have yielded more than 3% ($66B) in IPO value. - You tell the world that the malaise in Venture has everything to do with the economy, while venture funds have been fully loaded and startups (at best) produce discretionary revenue that is a minute portion of the overall market and thrives on the pressures of change in economies. - You tell your LPs how you invested responsibly by chopping up available funds into ten levels of bottom-level diversification and get them to nod favorably about the elimination of risk, rather to embrace the risk that separates Venture returns from Private Equity.- You tell your LPs afterwards that investing is cyclical and that they should have factored that in their equation, especially now that venture capital has turned into micro private equity. You do not need to tell them that Venture has become more risky because the risk you created as a member of the VC demi-cartel.- You tell others, shhhh..., how LPs are really not the brightest people on the planet and that they should take part responsibility for the demise of Venture. Because you are simply executing on the same “proven” strategy as your peers in the VC business. - You tell your LPs that your performance is top-quartile, allowing you to specify who you want to be compared with. What better job than to get away with with writing your own report card.- You say goodbye to Venture based on the lack of liquidity opportunities in Venture, dumping a sector from which you have extracted a “glorious reputation” and income but do not want to be bothered with the hard work of fixing it. Causal connectionAs with all roasts, the underlying message is a serious one. I can write and speak for days about the empirical improprieties in Venture I discovered as an entrepreneur, venture catalyst, CEO and venture capitalist in Silicon Valley. But rather than to debate each one it is more important to realize that they occur because of an incompatible financial system that allows so many people to take it for a ride."Mistrust of every kind of authority grew out of this experience, a skeptical attitude toward the convictions that were alive in any specific social environment — an attitude that has never again left me, even though, later on, it has been tempered by a better insight into the causal connections" -- Albert EinsteinWe need to fix, simplify and make our financial systems more accountable, in order to erase the behavior that stifles it. Our government needs to play a role in establishing marketplace transparency and instead of trying to curtail the symptoms, fix the disease that produced it in the first place. Limited Partners need to deploy more discipline with people who know the Venture Ecosystem inside-out and better yet, how it should work.Financial systems are a systemic threat to our economyThe behavior in Venture is very similar to the many improprieties of other financial markets, and simply less overt because of its complete lack of transparency to most marketplace participants. But improper behavior in Venture is like "child abuse" of our growing economy; it cuts off the spirit, zest, fortitude, and vision of young groundbreaking entrepreneurs who have the opportunity to become the new business leaders of our world. We will never be able to recover from the Venture malaise if it persists for too long, other nations are not sitting still. The real optimist in the face of the malaise in Venture is not the one who continues to milk the dysfunction or walks away in search of greener pastures, but the one who builds a systemic fix for the failure in Venture and helps groundbreaking entrepreneurs define a new compass of innovation. I have done both.
Setting a new goal in Venture 14 April, 2010, 9:19 am
By Georges van HoegaerdenThe Venture business has got the world upside-down, is what I wrote in a recent comment to a VC and I meant it. Just as upside-down as many people who buy a house and get a mortgage confuse a liability with an asset. A great example I heard Robert Kiyosaki (from Rich Dad, Poor Dad) refer to in an infomercial in the background while I was doing work on a quiet sunday. Venture should perform much betterFrom many discussions, publications, public statements and strategies discussed in new Venture videos it is clear how a large part of the Venture community struggles and puts up relative performance metrics (such as meaningless top-quartile definitions), and pad themselves on the back that Venture is still outperforming public markets. All while technology Venture performance should have blown other asset classes and public markets away, by virtue of its massive greenfield (5/6 of the worlds consumers) and continued growth in technology adoption (even through the worst of our recent economic downturn). But Venture is looking at the wrong metric of success.Focus on upsideThe real issue in Venture is that the innovations Venture Capitalists select, barely have any Social Economic Value (SEV) and therefor by definition have severely limited upside potential. On a scale from Technology to Market, to Execution, to M&A, to IPO, to SEV (as depicted in the enclosed chart), most venture investors today look for technologies and apply their risk thesis to the lefthand-side, or downside of the scale, hoping and praying to ever reach the righthand-side.Frankly, most investors have upside and downside confused, which is the source of their deplorable performance. Technology development is not a testament to ever reaching Social Economic Value. And to demand from entrepreneurs that they build technology is a sign of how they further defer the majority of even downside investment risk to entrepreneurs ("show me what you have built") as a prerequisite to investing (as we explained in the reference to Vinod Khosla's perspective in 2010: The State of Venture Capital). What we have lost over many years of irrational exuberance in Venture is our ability to spot and target large Social Economic Value. Social Economic Value defined by the trust of the public as a customer, not to be confused with an IPO, which is defined by trust of the public as an investor (preempted by an investment bank). In the 90s venture investors pushed valuations without value through the IPO funnel, which led to a loss of faith and a retraction of IPOs post 9/11. The way to regain trust with the public is not to sell them another lie, that is based on nothing but the hope and rise of the economy that is supposed to float all boats again, but to have the public use the product as a customer, and let them make up their own mind about its value as an investor. Hence the definition of upside in Venture defined as the creation of Social Economic Value as opposed to an IPO. IPOs will flourish once that public trust from consumers is achieved.Reverse engineering upsideA fundamental difference in the investment thesis is that as a Venture Investor, instead of looking at the gating technology proposition, you assess an innovation based on the merit of its ability to change the world (where it is likely that no prior implementation exists). But you as the investor can align with the entrepreneur based on a shared vision, compass and the likelihood that the support of that Social Economic Value will feasibly occur within the next five years. And that means that both the entrepreneur and investor share the predictions of the trajectory that builds Social Economic Value, a much better equilibrium between entrepreneur and investor. One in which according to Warren Buffet, the “owner oriented attitude far outweighs the periodic downside". No longer are entrepreneurs pestered with demotivating rounds of ownership dilution based on unpredictable microeconomic aberrations and, no longer do investors waste time worrying about the minutiae that do not affect the Social Economic outcome. Rather than forward planning from a technology starting point, Social Economic Value is created by back-planning or reverse engineering upside. Meaning, in order to create large SEV a certain IPO range needs to be achieved, which can be swayed by M&A interest, which is created by great execution, which stems from understanding the behavior of marketplaces, which can be served by technology. Technology is the derivative, not the goal.The distinction between prime and subprime innovation is simple. Prime innovation is attached to existing macro-economic behavior (and usually the absence of technology previously) and relatively easy to predict (I would be happy to share examples), while subprime innovation is attached to a technology wave with a short expiration date and little macro-economic value (a main reason why many acquisitions perform so poorly) that has a minute chance of ever producing viable returns. Investing different leads to different entrepreneursUpside investing applies the proper risk to an early stage Venture, it applies it to the assessment of anything else but technology. Because, as technologists the creation of technology is the least of our risks. But it requires a VC fund that can carry most of the $25M runway needed to create the success of any disruptive Venture today (yes, "capital efficiency" is a lie). The small funds can continue to deploy their subprime risks, while the larger funds have the opportunity to separate themselves macro-economically, by spawning real innovation. The minute you as an investor set a different compass and focus on the creation of Social Economic Value, different entrepreneurs come out of the woodworks that subscribe to that investment thesis. Suddenly you will meet the entrepreneurs that through years of experiencing macro-economic deficiencies, have a vision of how to change the world for the better and as a result generate the large outlier fund returns Limited Partners need to see to stay confident. Change is inevitableWe may see a slight upswing in IPOs this year, as the economy recovers, micro-PE deals are the best game in town, and those with money to play regain some confidence. But if we as investors do not change our investor tactics and produce real Social Economic Value, it is inevitable that Venture will descent even further to micro-PE than it already has, and continues to suck the risk and returns out of performance. And that would be the kiss of death to Venture and to the wide-open opportunities in innovation that still lie ahead.
