34

Venture Company

• Treo650: In the land of the blind, the one-eyed is king 26 May, 2005, 6:01 am
  By Georges van HoegaerdenAs a fervent Macintosh user (I have never bought a Windows PC in my life, but been "forced" to use one), the Treo650 is about the only game in town to get your office with you on the road. The success of the Palm in 1997 started with a simple concept, provide business users with four simple buttons that gives them access to everything they need. No more, no less. Since then the Palm platform has grown in all directions, except the one I need; better support for the business user. I like access to e-mail and a decent browser, I don't like the fact that many of the phone software capabilities are not truly integrated with the original Palm software capabilities. Bluetooth performance of the Treo is below par, calls sometimes do not get sent to the Treo headset, regardless of the button you press (the headset works fine with my Powerbook and Skype). Categories don't work with the Mac. Call log can't be scrolled through using navigation keys. No keystroke consistency between applications. No global hot button consistency. Inconsistent user interface behavior between applications. Should I go on?Opinion: I wish Apple made a phone, using a proprietary device that serves the needs of a business user very well (a key target considering its $500 price point) , instead of trying to appeal to a broad software market. In the same way the iPod did that for music players. Proprietary platforms competing with "open-source" will yield better customer value, Apple please bring it on.
• Getty Images; the image demi-cartel 28 March, 2005, 4:44 pm
  By Georges van HoegaerdenGetty Images, the self proclaimed market leader in the $7B stock photography market, recently posted an impressive $622M in 2004 revenues. Our in-depth analysis of the market actually shows a 2004 decline in Royalty Free and Rights Managed images sold compared to 2003 and Getty making it up by increasing ASPs significantly and a small increase in editorial sales. Royalty free images were sold at an ASP of $210 compared to $150, Rights Managed images moved up to $585 from $560 in 2003. While the company boasts an impressive 70M images on file, our analysis shows Getty Images sold no more than 1.5M images in 2003, a 3.5% market share of 43M images sold each year in the stock imagery market. Hardly a gorilla, want to know what are they are really selling?Our opinion: Agency & distribution model are in conflict, restricting organic growth.
• Oracle Collaboration "sweet" 8 July, 2005, 11:51 pm
  By Georges van HoegaerdenWhile attending Tony Perkins' Media 100 beer-and-burger bash at the Alpine Inn, I was confronted by another opinionist that questioned Oracle's foray in the Enterprise Collaboration business. Indeed, it has been a long road; Oracle*Mail, Oracle Office, Oracle Library, Oracle Documents, Oracle Workflow, Oracle InterOffice Suite, Oracle InterOffice, Oracle Collaboration Suite is the reincarnation Oracle's installed base has been hit up with since 1990. As the lead salesman (or should I say Director of Worldwide Marketing), more than 7 years ago for Oracle Office and InterOffice I learned a few important lessons that stuck with me forever.For one, technology does not sell. Oracle's collaboration tools were then, and are now some of the best in the business. Two, deliver a proposition to sales people that matches the vendor's existing business model. Incompatibility of business models is why 800-pound Gorillas can't buy themselves into new categories. Three, commission sales people competitively to other proven product offerings. Don't let your weakest sales people hide behind selling the "impossible". Again, Oracle's technology is not the problem, incompatible business models is the real issue. I see a bright future for Oracle's Collaboration Suite as the software-as-a-service solution for customers who have bought into Salesforce.com's business model. Now, Digital Asset Management, often erroneously merged into the Collaboration substrate, is a market category that Oracle needs to own and quickly. "Unstructured" data and corporate media management markets are currently growing at a clip of 45% a year, faster than RDBMS or ERP growth. If Oracle wants to be the database for all corporate data, digital asset management is the real opportunity, not only because it works best with Oracle's organic business model. I've got suggestions for Chuck (Rozwat and Phillips) of who to buy to get in quick.
• Re-investing in Venture unchanged, is the definition of insanity 23 March, 2010, 10:48 am
  By Georges van HoegaerdenI have the utmost respect for groundbreaking entrepreneurs, or better yet all the people who produce great products (or unique services). I love technology and believe we have not even scratched the surface of its macro-economic impact. And it is those entrepreneurs, with the simple power of their dreams and perseverance, who collectively and unwaveringly hold up the massive weight of an outdated and incompatible financial system eleven times the size of production that keeps this country afloat. It is for them that I fight to make our financial system more modern and nimble to withstand the test of time. The writing is on the wallUnless you have been living under a rock, you should by now be aware that the performance in Venture for the last twenty years has been deplorable. After a fantastic start by people like Bill Draper, and point successes from next generation icons like Vinod Khosla in the nineties, Venture quickly became the stomping ground for anybody with money, not necessarily combined with merit. Growing numbers of Venture Capital (VC) firms arguably over-invested in their interpretation of innovation that had the majority of even the 90s funds (with vintages in the 2000s) generating no more than 10% IRR on average. Just the last 10 years VCs have generated no more than 3% public value out of all investments made, or specifically lost about $1.7 Trillion in, mostly public, money from their Limited Partners (LPs). And the performance of the current funds does not look much brighter as witnessed by incoming reports from early 2000 funds and the discontent of many LPs I speak with. And on the mirrorBut even if you are not a fan of numbers, which often become the subject of endless debate and can be excused away since they are lagging, not leading indicators, Venture has produced only a handful of viable companies that ultimately created some sustainable value public markets have faith in. Seven-hundred-and-ninety (790) VC firms in the U.S. chomping at the bit producing no more than a handful successes is the billowing smoke that indicates a raging fire. More specifically it indicates "the system" or "the compass" by which Venture is deployed does not work, its systemic approach is broken and only a few outliers in Venture produce the returns that make the headlines for all. When doing you best just isn't good enoughVCs now hold on for dear life, blaming their lack of performance on esoteric macro "windows" of opportunity (irrelevant to startups), and they feverishly add up portfolio revenues to claim they are still producing value and are doing "their best", all while big corporations frequently beat them to the punch with real innovation that outpaces the market. VCs attempt to hang on to comparing Venture to 100-year old asset-classes, sectors or segment indices, padding themselves on the back with a relativity theory that is as flawed as comparing apples and oranges. Unlike these old indices that have become somewhat stale because of their age, Venture continues to ride on the information technology platform that continues to grow aggressively (despite the economy) and still leaves a massive greenfield (5/6 of the world's population) underserved. VCs have not succeeded in tapping into that upswing and their best is clearly not good enough to make us proud. Venture Capital morphed into Micro-PEVenture Capital, after the irrational exuberance of the early 90s, has quickly and predominantly turned subprime - or - into micro-Private Equity, with most risks deflated and/or deferred to the entrepreneurs. LPs who thought they invested in Venture Capital, by virtue of how they deployed money, instead invested in a more risk averse Private Equity segment, a different thesis with different risk/rewards associated with it. But we ended up getting what we invested in; micro-PE returns. Nothing Ventured, nothing gained.Looking good spending moneyNow, I see some LPs "blindly" renewing their commitment to Venture, which for LPs that have access to prime VC firms that have still produced healthy returns in the last two decenniums makes only nominal sense. If an LP does not have the wherewithal to understand the dysfunction in Venture, it may as well bet on the best horse in the race, even if the race ends up being a Private Equity race instead. Those LPs may make a buck (with a minor part, 10-15% of their total allocation), maybe even outpace other asset classes and care less.But the wide-open greenfield in technology and the culmination of a fantastic real-time distribution mechanism (the Internet) of technology should have made technology Venture the best performing asset-class, bar none. That is of-course, if one understand the requirements of the sector and deploys the appropriate risk, discipline and market model. Social Economic ValueMost of the money invested in Venture is (indirectly) public money, such as the endowments and pension funds (CalPERS, ~$17B) which beyond a sheer money making objective also has a strong social economic value attached to it. CalPERS needs the money, but also needs Silicon Valley to be at the top of its game to produce healthy economic spin-out (driving other asset classes as well). The new funds just deployed by the North Carolina and Florida (coming) treasurers also promise to carry the good karma spawned to aid the most important driver of the economy; innovation.Yet most meaningful innovation, that has the potential to scale big fast, does not start with or in Private Equity, it starts with the unique risks deployed by Venture Capital. And so the importance of what you as an LP are betting on, with the specific knowledge of what is Venture and what is not, is crucial in establishing a healthy conversion from technology to large social economic value, and subsequently public support and trust.The Insanity in VentureThe systemic failure in Venture to produce returns in line with the wide-open opportunities in technology is the result of the composition of its incompatible financial system. Venture today is an artificially restricted marketplace to which not the outliers of innovation are attracted, but those who are attracted to the commoditized investment thesis of the predominantly subprime VCs. But even if one knows nothing about Venture, insanity is the descriptor that belongs to the person who believes in a marketplace where the following attributes can consistently produce outlier returns:A marketplace that marries the assets of supply and demand, with the arbiter not having - or earning - verifiable meritA marketplace that marries the assets of supply and demand, using a single commoditized investment thesisA marketplace that hides behind the performance of hybrid asset classes, sectors, segments and stagesA marketplace that hides behind ten levels of diversification of riskA marketplace in which the arbiters do not compete (but syndicate)A marketplace which openly engages in price-setting and operates as an innovation demi-cartelAn in-transparent marketplace that functions like a black-box to most marketplace participantsA marketplace that appears extremely sensitive to economic aberrationsA marketplace that has not produced healthy returns in twenty yearsNo tinkering with micro-economics in the marketplace such as management fees, carries or other micro-incentives can turn a subprime VC, prime. Just like entrepreneurs are born, not created, so are venture investors with their unique intuition for taking risk born, not created. The marketplace needs to be rebuilt from scratch and embed free-market principles that allows for healthy competition between all participants in the marketplace. Any LP with $1 Billion committed to Venture can do so independently today, and reap the rewards that lies at the untapped and phenomenal foundation of the growth in technology. We owe change in Venture to those that produceWe owe it to the producers of groundbreaking products and value, to support them with a financial system that is lean and mean, nimble and modern, competitive and transparent, that dynamically establishes, monitors and corrects the merit associated with all marketplace participants. We will dramatically flatten and simplify the marketplace, remove excessive diversification and fragmentation of risk. We, the marketplace, will establish and expose the authentic merit of every participant.Venture investors with merit and foresight will thrive by ignoring subprime propositions that cannot re-establish their individual supremacy, and instead focus on those innovations that match their authentic competency and skills. Groundbreaking entrepreneurs will come out of the woodworks again once they see the development of a better custodian than their corporate overlords flourish. Limited Partners will be happy because they reap rewards that outperforms their ancient asset classes by a long shot. Groundbreaking entrepreneurs are the life-blood of this country and we better start treating them with the care and attention they deserve. We need to lift the weight of this incompatible financial system off their shoulders if we want to remain on the leading edge of innovation. We still can.
• Why VC is such a bad date 25 February, 2010, 6:48 am
  By Georges van HoegaerdenToday's Venture Capitalists (VCs) have often qualified innovation as a buyer's or a seller's market (in publicly discussing valuation trends) and that communicates so well how they view innovation; as a commodity. No wonder they fail miserably in generating meaningful alpha (portfolio returns for Limited Partners, or LPs). It is impossible to find and attract outliers of innovation by comparing and compressing valuations. And commodities never outgrow their peers.Disruptive innovation is never a commodity and is always a seller's market (with the company selling its stock to investors). So, the minute innovation becomes a buyer's market, that innovation has just been "crowned" a sub-prime entity and so have both buyer and seller. Finding the perfect dateAs a VC, finding the right type of innovation to monetize is like finding the perfect date, they are few and far between. And to a founder of a startup finding the right General Partner (at a VC firm) is similarly daunting. A unique match between two people (the General Partner and the CEO) is something that takes more than glowing at the prospect of having a baby together (i.e. build a new prosperous company) and discussing the financial projections and terms of the deal. Most of us can dream, but can we make it happen together is the real question.Higher standardsThe reason why many people are such bad daters is because they do not hold on to their own standards, those that make them happy and those that make them strong. They confuse money, power and perks with merit and hope sheer proximity will someday rub some off to them. But it never does, you need to do the hard work yourself to reap its precious reward. You get what you put in.I do not consider myself a pretty boy, yet never had a problem dating because I know what I want and especially stand firm on what I do not. Standing firm allows you to stay true to yourself and often has the additional benefit of weeding out sub-prime parties quickly and thus avoid unmanageable disaster further down the road. (That is my happy date-turned-wife in the picture.)Stay authenticI cannot tell you how many times I have spoken to entrepreneurs that have banged their heads against the doors of VCs, and selectively served as their dutiful psychologist to help them not to bow down to sub-prime standards. Most entrepreneurs become nervous and afraid to negotiate, because this VC may just be the only interested party they have, and if you are a tough negotiator those investors may frighten others that you are "hard to work with". But a choice of one investor is not a choice. Even before any commitment to invest is reached, entrepreneurs frequently let VC change their business model, use-of-proceeds, valuation and everything else, in the hopes of landing a round of funding. Not realizing that this VC can have whatever opinions it wants, but as an entrepreneur you are the only one responsible for making it happen. Do not accept an infinite monkey theorem, that you then need to turn into a work of Shakespeare in your startup. So, don't be afraid to lose. Because losing from a sub-prime VC really is a win.Marriage does not make a personGetting laid is not a recipe to produce a happy child, a healthy marriage is. So, even if an entrepreneur lands an investment, raising Venture Capital alone does not make a successful company. With so many sub-prime VCs, statistically and empirically the odds are still not in your favor.Success, in the latter case, is defined by the company's ability to produce public value, either by serving the public directly or indirectly by getting them to invest by way of IPO (or acquisition). So, both parties need to demonstrate that they are experienced, skilled, agree and contribute to achieving that (early) public value for the company. In other words, a marriage needs to be consummated in which the assets, principles and goals of raising a happy child (the company) is shared. And that means that while both parties supply different assets, one cannot overpower the other (like Pimps and Hoes) and force its agenda. A priori, an equilibrium needs to be established that is healthy and promises minimal friction down the road.Bad starts make for bad endingsWithout an organic fit and chemistry, a venture deal that starts off wrong usually ends wrong. For the VC that damage is diversified, for the entrepreneur it is often crushing. So, the dating process is not just a way for the VC to check the entrepreneur out, but for the entrepreneur to gauge if the proposed equilibrium (mentality, experience, skills, term-sheet, vision) is authentic, attainable and healthy.Here is how many VCs set themselves up wrong for the dating game and why entrepreneurs deserve better (in this context "the date" is the VC, and "you" is the entrepreneur):The date wants to know everything about you but won't tell much about himself.VCs demand to know a lot about the entrepreneur, but what does an entrepreneur really know about the VC's merit? GP merit hides behind ten levels of diversification and a fuzzy Private Placement Memorandum (PPM, the business plan for LPs) that leaves plenty of room for "creative" post close re-interpretation. Whether the GP is a great gambler or skillful is impossible to assert. What we do know is that many GPs have never themselves crossed the chasm, a trait that makes them almost certain a bad dating partner.The date wants to date other people at the same time.VCs diversify their risk by investing in other (hopefully not competitive) companies at the same time and hedge their bets, they do not often hedge their often ill-informed opinions upon the entrepreneur. Expect many to do a John Edwards on you when your future suddenly looks like cancer.The date does not want you to date someone else too.VCs diversify their risk, but watch their reaction when you do the same. They'll get mad, because you have just told them that VC money is a commodity (and disruptive innovation is not) and now they need to step it up and prove their value-add. Right where you want them.The date wants to have a threesome, and takes his pick.VCs are more worried about downside risk than upside risk and try to find an accomplice, and syndicate early to avoid risk. They often finagle a sweet syndication deal with a partner under the table that is unlikely to be in your advantage. VC is a demi-cartel.The date thinks that his money compensates for lack of empathy.Many VCs lack entrepreneurial experience, which according to a Dutch saying means "they've heard the church bell ring, but they don't know where the sound came from". Money does not make up for in-experience and lack of skills, especially not in the boardroom of an early stage company.The date wants you to tell him exactly what you are bringing to the table, without him doing the same.Entrepreneurs are asked to make elaborate predictions about growth trajectories, and stick to them. But have you asked the VC to provide full runway support in return?The date discusses divorce before you even start dating.You want to change the world, the VC wants to target exits. Foolishly the sub-prime VC does not realize that changing the world creates a much more reliable exit than an early "delivery" could ever promise. The date wants to know whether you want children, but withholds his wishes.Real entrepreneurs want to change the world, not just to exit. VCs however will change their mind depending on how the rest of their portfolio is doing and whether at that time they can get themselves in the top-quartile. I know many companies that have been pushed to early "delivery", to the chagrin of their founders. The date never really commits and keep all options open.Entrepreneurs are forced to submit to funding rounds that are designed purely to minimize downside risk for VCs. While you commit to the marriage all the way, a VC can decide to bail out at any time, leaving you hanging (with a strategy that may not be yours, a cap-table that is destroyed and a runway that may no longer be viable).The date needs the approval of all his cousins before he can get married.Seldom can the opinion of one GP secure the deal. He has to push an outlier proposition through an elaborate socialist process with other GPs in the firm to close. Simply an incompatible process that should be banned. The date requires a prenuptial to engage.VCs structure elaborate ownership agreements, by way of voting rights, valuations, bylaws - you name it. Forgetting that rudimentary control plus the ability for the company to develop itself gives it the highest probability of succeeding. If as a VC you don't believe that, you should not engage in the deal to begin with. Elaborate downside protection means you simply do not believe in the upside. The date wants full control over your purse.Excessive controls on money means there is no trust between VC and entrepreneur. It is necessary to verify trust, but not giving it in advance means the entrepreneur is not giving the VC his trust either. A CEO needs to be able to run the company and not be bogged down by distracting and bureaucratic spending rules as long as he stays within the use-of-proceeds.The VC institution needs to be fixed firstNow, I can make a similar list about people that chase sub-prime investments. More than 10 years of sub-prime investments has attracted a lot of people to that sub-prime thesis, the majority without the attributes needed to become a successful entrepreneur. With a still growing number of sub-prime VCs at play, certain corporations have become better custodians of disruptive innovation, able to stimulate entrepreneurs more effectively.The only way, in my view, we can fix Venture is to change the model by which we deploy the matchmaking services between the assets of the LPs (money) and the assets of the entrepreneurs (ideas). With a more discretionary VC intermediary we will automatically attract more disruptive ideas (by stimulating entrepreneurs to look at Venture as a prime venue for innovation again) and create more meaningful value.By the way, I do not dislike many VCs personally, I just despise the institution they represent - because it performs so poorly. That hurts LPs and their dissatisfaction will have a devastating effect to the innovation in this country. I am working feverishly on getting VC fixed by changing the economic model that allows LPs to be taken for a ride. Disruptive innovation can wait until they start implementing my economic system. And in the meantime, dear entrepreneur, if you think you have what it takes now, keep your foot down and your head up and keep looking for that discretionary VC in the haystack. Happy dating! Je maintiendrai!
• My message to LPs in Venture; more discipline please 15 March, 2010, 12:18 pm
  By Georges van HoegaerdenThe more I look into the complete value-chain that makes up Venture (from Limited Partner all the way to Entrepreneur), the more I see the origination of its gaping dysfunction. My conversations with a $3 Trillion, a $20 Billion and a $1 Billion Limited Partner (LP) with some of its asset-under-management (generally between 10-15%) committed to Venture, yields the same fundamental conclusion. Lack of general investment disciplineIt appears that many of these LPs in Venture deployed money frankly too lazily and too hastily to a sector that was once booming, as they rushed to get in to reap similarly projected upside. Without any specific Venture expertise, they quickly deployed a me-too investment model to Venture (copied from its elderly Private Equity PE brother) that was supposed to significantly outperform its other asset classes, but it didn't. And those LPs now wonder in disappointment whether Venture scales, to which of course my answer is: No investment strategy without discipline scales. Most surprising in my conversations with LPs who are eager to improve Venture performance is that almost all of them seem to expect me to roll out a more dark and deep "Voodoo plan of Venture investing", with more complex detail and nuance combined with alternative exit structures. I do quite the opposite, as I prefer to simplify things dramatically. As an "outsider"-looking-in, my role is not just to absorb the way investing works today but more importantly, identify the way a better financial system for Venture should work. As if today is the first day of Venture investing. So rather than with a submissive attitude akin to the usual money-hungry cast of characters that approach LPs, I challenge them on the basic fundamentals of the assessment of investment risk to benefit us all, and to come up with the proper investment structure to curtail superfluous risk. Because the only risk LPs should incur is the market risk of the startup companies that are invested in, not incur incremental risk because of the sizable financial system that sits on top. Au contraire, LPs have deployed superfluous risk in Venture that "by design" underperforms:- Deflation and fragmentation of riskAs one can gleam from our 2010: The State of Venture Capital presentation, LPs have allowed the deployment of no less than ten levels of diversification (and fragmentation), before the money reaches the startup it invests in. And that means the underlying instruments are deploying excessive risk aversion and downside protection, a source of comfort (perhaps) but not indicative of a great understanding of risk nor a consistent process of great performance by the supposed investment professionals. - Lack of focus and accountabilityLPs should have deployed an upside-down pyramid in the deployment of risk, meaning they get to deploy diversification of assets and below its diversification should be dramatically reduced or (ideally) zero. So, while top-heavy diversification may be meaningful, bottom-heavy diversification is destructive and leads to lack of accountability to the investment thesis. Many Fund-of-funds that deploy Venture money for LPs, themselves have their own diversification strategy, as they also invest in PE, buyouts, pipes. So do some Venture Capital firms (VCs) who also diversify in different instruments, sectors, stages, industries sometimes aided by investment networks that can "uniquely smooth out investment commitments", clouding the performance of a specific investment thesis and the merit of the people attached to them even more.- Mediocre Private Placement MemorandumsThe composition and content of many of the Private Placement Memorandums (PPM) from VC firms I have seen is an absolute joke, and many of them are a straight copy of the plan from one of the early brand-name VCs on Sand Hill Road. No business plan from an entrepreneur with such a vague description of the ability to execute would make it past a first meeting with a VC. Yet LPs even go as far as defending why no PPM commits to a target return; "the lawyers will not allow it". But without a baseline performance index, LPs who invest in multiple VC firms have no simple way of holding VC firms to their promise, except to try and assess whether the VC firm "did their best". No startup gets sued over not making its target revenue numbers, and I am sure we can find a legally acceptable way to hold VC firms accountable for their bottom-line. Lack of Venture specific disciplineBut Venture requires a few crucially different disciplines than its elderly "brother" PE. The major difference is in the nature and the risk associated with the asset LPs (indirectly) invest in. Simply put, PE relies on more hindsight (ability-to-execute) than foresight to become successful, while Venture requires more foresight than hindsight to cross a chasm (Geoffrey Moore) that is so unique to that disruptive innovation. - Lack of relevant GP experienceWe have hit on the general lack of relevant entrepreneurial experience of GPs (that passed LP scrutiny), which is important in helping plot the risk associated with an early stage investment and with the identification of how much money an investment requires to create disruptive market value and subsequent public value. Many GPs came from PE, Wallstreet or other finance positions, or came out of a late stage technology company that made money in the hay-days, and have now slid into the aforementioned unaccountable GP role with a comfortable income, plus no downside but upside for the next ten years. Very few of them actually have proven that they have what it takes to take a company from the left side of the chasm to the right side of the chasm successfully, and therefor lack the necessary foresight that is so pertinent to Venture. - Lack of expectationsMany LPs in Venture allow GPs to hide behind the notion that startup success is impossible to predict. It is indeed when GPs have only hindsight as the instrument to project foresight. But as an experienced entrepreneur who wants to change the world, and being born with such characteristics and subsequently honed and monetized those skills for 30 to 40 years, your odds as that entrepreneur are much better than you can often articulate, and certainly much better than many of the current GPs can evaluate. Every company or product line I ran became successful beyond its expectations, and I would not even engage when my next venture (which is to rebuild venture) would not have a higher success rate than 50%. So, GPs who are comfortable with two successes out of a portfolio of ten demonstrate what they are made of, they gamble instead of have their relevant experience and foresight play the crucial role of setting a higher (disruptive) bar. LPs should simply demand more than a 50% success rate from their GPs. You get what you put in: put in $x, get $x. In Venture, put in $x + foresight, get $x times foresight.Lack of discipline turned VC subprimeSmart entrepreneurs, who do not let themselves be "abused" by unfavorable terms or partnerships that do not match the authentic experience and merit of the entrepreneur, are not engaging with the predominantly subprime VCs, waiting instead patiently until conditions improve. For the last 10 (I believe 20) years VC have treated entrepreneurs like a cheap commodity, that subsequently has overwhelmingly answered subprime VC mating calls. Subprime VC now attracts hordes of subprime entrepreneurs, convening in flashy technology flea-markets where each apply their ill-advised risk analysis in a quick dating scheme to make a buck. They deserve each others company. But the lack of relevant public value (through IPO) has deflated trust not just with the public - and thus output, but now also with those LPs managing public money to fund venture - and thus input. To fix VentureSo, to fix Venture we need to implement a mechanism that marries the needs of those with money, the LPs, with the needs of those with disruptive ideas, entrepreneurs, in a more effective fashion. We need to treat Venture as a marketplace, in which not syndication perpetuates common mediocrity but real competition amongst GPs emphasizes their merit and demonstrates their unique ability to find outliers of disruptive innovation. We are blessed in this country with very smart entrepreneurs who have found refuge from the Venture malaise in as many ways as entrepreneurs can. They will come out of the woodworks again when the appropriate marketplace for disruptive innovation presents itself. All LPs need to do is treat Venture as a special sector that can create, with the right market model and incentive structure, better returns than any other asset class. Because technology and its immediate impact on the world is at the beginning of its evolution. But Venture requires a discipline and devotion many LPs do not have today. So, dear LP: stock up on experience, knowledge and discipline and let's rock-and-roll again soon.
• Getting Venture un-stuck from its subprime maelstrom 8 April, 2010, 5:37 am
  By Georges van HoegaerdenI keep hammering on the systemic dysfunction of our financial system in Venture that sits atop the massive entrepreneurial capacity of this country, that is crushing it slowly to death (having done so for some 20 years already). And frankly, I start getting a little tired of having to repeat myself, over and over again, spawned by misleading articles from VC bloggers and their cohorts and being surrounded by a halo of negativity (albeit deserved). I prefer to spend my time on fixing and building things.Fix 1 of 3: a top-down fix for Limited Partners. Check!To combat that dysfunction I took action, analyzed the Venture ecosystem from the outside-in and covered in my presentation "2010: The State of Venture Capital" how Limited Partners (LPs) with $1B in assets under management dedicated to Venture can instantly correct its malaise from here-on out. Intrigued, many of the LPs in Venture I spoke with now need to go back to their management and essentially confess how inadvertently they allowed Venture Capitalists so much slack in "playing" with the money they committed, that caused the descent to a predominantly subprime sector in the first place. Some big-boat LPs will find it hard to make the turn and simply leave the sector. In light of the massive opportunity in technology venture that will prove to be a very foolish choice, because unlike in any other committed asset class or sector, ahead in technology venture lies a massive greenfield ready for the taking. Many entrepreneurs will keep pressing forward no matter what financial system they encounter and their need to make lemonade out of lemons will force them to submit to subprime terms and conditions that are so prevalent in Silicon Valley today.Fix 2 of 3: a fix for groundbreaking entrepreneurs. Check!Yet I run into entrepreneurs all the time (or rather, they run into my philosophies on my website), who have laid the foundation of some groundbreaking innovation that does not fit the mold of subprime investors and are poised to die a sudden death if not helped along. After all, not the false positives are the biggest source of failure in Venture, but the inability to attract real outliers who refuse to be the pimp's ho.If I only had the time to dedicate more time to them:One of those companies was a company with great technology, a much better immersive gaming experience than the Nintendo Wii (available before the Wii), that would dramatically broaden the bell curve of adoption of gaming and, because of the subprime nature of Venture, is now relegated to a less optimal strategy of becoming a technology services company and a PE deal at best. Another company tapped into a lack of free-market principles in digital photography in which supply and demand transact in artificially arbitrated manners, much like music before iTunes where the Internet could provide instant disruptive value to assets sold today. That is if investors would understand that macro-economic value supersedes pure technology plays. Another company had developed a small part of a new way to find things on the internet that had the ability, with some significant elevation of its macro-economic benefit, to become a much more intelligent operating system than what is currently available on the iPhone or the iPad. Again and again, the stale investment thesis of many investors in Silicon Valley fails to recognize the potential of big ideas that has proven to yield big returns.Examples abound. But investors with a dumbed down investment thesis and limited scope will never get to see or hear from these innovations:"Whether you can observe a thing or not depends on the theory which you use. It is the theory which decides what can be observed". - Albert EinsteinSo, what I decided on is to take action again and capture, nurture and proliferate the creation of groundbreaking innovation by having entrepreneurs not foolishly follow the investor compass, but follow their own - with a little help from us - in identifying large social economic value, and help deliver that proposition to prime investors all while making Limited Partners aware of the vast opportunities that still lie ahead. It is time we treat Venture like the real marketplace we defined it in our Venture primer.Welcome to The Venture Company Network. The Venture Company Network ("The Network") will operate not under the structure we proposed in a fix for LPs just yet, but will follow the free-market principles that ignite the natural evolution of competition and meritocracy of all participants in the Venture ecosystem. That means that entrepreneurs (and subsequently investors) regardless of their descent, location or brand, and only defined by their unique and verifiable merit will be given premium attention into making investment marriages happen.We focus only on ideas that can lead to sizable returns for LPs by producing social economic value that can generate the public trust needed to re-ignite IPOs and therefor big ideas need to gravitate towards the following: • $1B single-trigger revenue opportunity • Macro-economic relevance and impact • ~$25M venture risk • $300M+ venture exit in 7 yearsRemember, capital efficiency is a loanshark's trap, especially when you consider what that popular phrase has produced in the last 10 years. The Venture Company network is like TED for technology innovation, but for Ideas worth Building. Its current incarnation is just a start where we begin to "separate the boys from the men". We completely ignore the way subprime VC works today and focus solely on the creation of large social economic value, regardless of cost (as cost is somewhat irrelevant to the size of upside). Entrepreneurs can get more information about The Network here, where they can review its terms and conditions and join. Your involvement and contribution as a groundbreaking entrepreneur will help get the best innovation in front of prime investors, improve your chances of succeeding and get the sector back on its feet. I am committed to making that happen if you are.Let's raise the bar together and provide proof to show that under a heavy (and incompatible) financial system remains a vibrant entrepreneurial capacity and inventory.
• No Long Tail without a Torso 24 June, 2005, 1:16 pm
  By Georges van HoegaerdenInvestors are getting flooded with Long Tail startups. The Long Tail is the well documented phenomenon in which Amazon.com makes more money in selling books that are not(!) in the top 10,000 and creates controversy about traditional sales principles. Hundreds of examples exist before the introduction of the internet. But the Long Tail really only exists when there is a body attached to it. You go to Amazon because you find the most well known books, then you'll explore its creative variety. The body represents the highly targeted top quality that draws in the audience in the first place. So stop pitching Long Tails, where you rely on some undefined creative variety. Focus on making your numbers in the identifiable market, then benefit from the Long Tail to expand your selection beyond the traditional and constricted marketplace. More on the Long Tail here.
• Podcasting; a new free market by Apple 28 June, 2005, 11:00 am
  By Georges van HoegaerdenRadio is about to get a major overhaul. With iTunes, record companies are losing their arbitration, no longer are we forced to buy collections (CDs) in order to enjoy that one favorite song. In the near future that power will be diminished even further. Musicians will post their music without intervention and arbitration of a record company, giving buyers the ultimate selection of music they want to enjoy. Pod-casts is the technology that allows you to pick which radio segment you'd like to listen to (instead of a whole program), and deliver it to you at whatever time is convenient. More exciting is that the creation of pod-casts is open to everyone, allowing anyone to get on the soapbox and speak their mind to the world. Independent reporting from the trenches is only minutes away. New music stations will spring up and deliver music from all corners, to all corners of the globe. Welcome to a free world.
• Why entrepreneurs should not follow an investor compass 8 April, 2010, 5:37 am
  By Georges van HoegaerdenI think it is quite hilarious to see so many Venture Capitalists (VCs) tell entrepreneurs everyday how to build a successful business, given that they have no political leg to stand on to offer such advice. The advice offered ranges from how-to-build a company (many have never) to how-to-talk to an investor (to submit to subprime?), to how-to-deal with their downside protection. The merit of the VC compassThe reality is that in the marriage between the assets of the Limited Partner (money) and the assets of the entrepreneur (idea), VC has proven to be a miserable match-maker by virtue of its empirical and statistical performance (see here). So in essence it is the VC who needs help in finding more disruptive innovation, not the entrepreneur providing it. We covered at length how few VCs actually have had the relevant personal experience of guiding an early stage company as CEO from the left side of the chasm to the right side (where massive adoption awaits) and why few of them actually have the merit to judge innovation to begin with. But even if some GPs did have the personal experience, the model by which many deployed risk is simply incompatible with finding the outliers of innovation to which none of their innovation "scripts" applies. With an overall success rate in the last 10 years by VCs of less than 3%, simply raising a first round from any investor has statistically become the entrepreneur's highway to hell. And VCs openly and proudly admit to their demi-cartel (confusing a strength with a weakness). Here is some evidence I picked up from the Twitter hemisphere recently that describes that abuse of power, the lack of investor competition and the dysfunction of the Venture market model so well:If U (that is "you" in text-speak) say to investor A that investor B wants to invest, expect A to immediately ping B. And if B says no, kiss goodbye to A. Now I have spoken with the investor in the past who said this, and know some of the portfolio companies from his first-time lower-teens "play" fund, and can imagine how he depends on the consensus from his peers to make investment decisions. He cannot invest using a truly unique thesis, as he simply cannot support the runway of any of his companies monolithically with such a tiny fund and I feel sorry for the stance he has to take. But the commoditized investment thesis (alluded to in the Tweet), stuffed with syndication makes for a cess pool of subprime deals that is so indicative and prevalent in Silicon Valley.So entrepreneurs should not get derailed by the general VC compass, as it:Generated no more than 3% public value over the last 10 years (below 1% if you take the Google IPO out of the mix)Lost about $1.7 Trillion in fundsEroded public market trust with short term gainsFor twenty years real entrepreneurs have been abused by a financial system that first threw money at anything moving and ten years later retrenched and still imposes the fear stemming from the minute social economic value those opportunities created. The entrepreneur's conundrumBut that leaves entrepreneurs with an interesting conundrum, of who to listen to. If the compass of the VC that may give the entrepreneurs their first money to start building their company cannot be trusted, where else do they go to get their idea funded? VCs exploit this problem by basking in the glory of no real deal competition (they prefer to syndicate) and no other financial instrument that can compete in providing full runway support for early stage innovation. Meanwhile entrepreneurs get more desperate and bow down to the will-power of the VC cartel, and submit to its terms.That deadlock caused the smart entrepreneurs to leave the "dating scene" altogether (and find better custodians for their intellectual brainpower) and leaves a maelstrom of subprime VCs actively telling hopeless entrepreneurs how to build greater returns using subprime deployment of risk and terms. And we still have 10-years of past subprime deals clogging up the pipes of venture firms to look out for and ready to pop soon. The answer, my friendsInstead of listening to the opinion from many VCs (whose merit is impossible to assess, but based on average sector performance generally deplorable) drawn out in the blogosphere, entrepreneurs should simply follow the compass of success. So I hear: define success. Success in early stage technology innovation is highly dependent on the creation of authentic social economic value and public trust (and attachment to existing macro-economic behavior), that creates valuable IPOs, that can be courted by M&A, that is supported by high-growth venture investments, that is spawned by the proper deployment of investment risk.Venture investors need to step up to combat the lack of trust our public market has in technology companies. Since many venture investors pissed away public trust in the 90s with their choices of new public companies that suggested massive valuations but proved to contain only nominal value, investors now need to be extra diligent in producing authentic value the public market can trust again. But entrepreneurs need to learn that the real value of the idea is not described by populist investor buy-in, but is defined by how unique and how well the company can build that social economic value. And that means instead of forward planning from a first round of funding, entrepreneurs need to set their compass to point to a social economic endpoint, get agreement with investors on the objective and then back-plan to what steps and investments are needed to achieve that public trust. Social economic value is not proven by first building technology (the least of our venture risks) and will not evaporate anytime soon, so entrepreneurs should not leave their jobs just yet, before they are adequately able to sell the viability of reaching the end-point to a prime investor. Groundbreaking entrepreneurs follow their own compassThe definition of the compass, the pin-pointing of social economic value can best be established by the entrepreneur (not investor) with the unique vision for a better world. By the groundbreaking entrepreneur who by definition does not subscribe to the populist view, who has the vision and ability to enable change, and an unwavering passion to improve the way the world works (as Craig Furgeson says "reminds you of anyone?").All Venture investors need to do is assess whether the vision and ability to execute of the company, started by the entrepreneur is plausible in generating the large social economic value that was promised. Cost is highly relevant only to those investors who have nothing to hang on to but downside protection. The opportunity for creating large social economic upside in technology remains priceless. When life gives you lemonsRaising money is just like dating, those who pretend to be someone they are not will find themselves inevitably failing, and unhappy with what they submitted to. So, they key to raising money is to keep looking for an investor who has the merit and money, and can subscribe to what the entrepreneur is selling (by virtue of its goal). If none do, and one has clearly defined the path to large social economic value, stay firm and keep at it. Only groundbreaking entrepreneurs make orange juice when life gave them lemons.