In the Beginning…

If I’m going to address the evolution of venture capitalism, it will probably help to first establish a context and starting points for this ongoing evolution. Starting enterprises is arguably the “oldest profession”, since the first prostitute probably needed seed capital to dress up for marketing to her first “sale”. OK, a poor joke… But in the modern era (i.e. the last 100 years) entrepreneur seed capital begins as angel behavior. At first you probably had to have money to start something new. You self-funded your new ideas. A good example might have been Thomas Edison. He made enough early money that he could afford to personally incubate ideas from his fertile mind. And he could borrow ideas from outside, improve on them and spawn another business. It’s my relatively uninformed opinion that this is how it gets started. Wealthy industrialists fund new ideas --- think Andrew Carnegie, Henry Ford. The seed capital comes from insiders and largely from themselves.

Wikipedia has a nice article on Venture Capital. It seems to suggest a second source of seed capital that it doesn't call out explicitly, e.g. the government, especially during extraordinary times such as WWII. The military had to create industries and suppliers from scratch to meet its needs in major defense projects. Think about the creation of atomic weapons, and all of the various components and materials that had to be created from out of the blue. General Leslie Groves was effectively a venture capitalist with a bottomless Limited Partner in Washington.

Wikipedia credits General Georges Doriot as the father of modern venture capital. My guess is that he got the idea from his experience in the wartime years, where the audacity of the military meant starting things from scratch under duress. Doriot was clearly a well versed business professor, having taught at the Harvard Business School, but I’m guessing it took the audacity of war to break through to the idea that you could start a company entirely from scratch, and do this as a repeatable business.

So we begin with wealth, expansive thinking, audacity. This is an angel dominated world. Wealthy people spending their money to make them more money and expanding their legacy. But in my mind, modern venture capital begins when you have professionals investing other people’s money. This seems to first happen with Venrock Associates, which starts as a group of professionals investing the Rockefeller fortune. Laurance Rockefeller starts it off, but he quickly hires pros to manage it.

Frankly this is the beginning… a couple of senior management types helping their boss, Rockefeller, to be a better angel investor.

Sales force size as a barrier to entry

As a young venture capitalist (33), I still remember some of the lessons I was taught in VC 101 when I entered the profession as a pup 9 years ago.  Part of the venture business is pattern recognition regarding making new investments (don't invest in knowledge management software, etc.).  Part of the business involves applying past lessons from your partnership's investing or operating experience to help guide portfolio companies.  For example, venture backed entrepreneurs are much more likely to overspend on sales & marketing, or international expansion, too soon rather than too late in a market's development.  The entrepreneur, passionate by nature, believes in the real estate value of a land grab before the land has emerged from the sea, and flushes his B round, his founder's equity and his company down the toilet hiring too many sales reps chasing early adopters in the nascent stage of a market's development.  So, the young VC is cautioned by his mentors to tell all his companies to run an experiment.  First, hire 1 sales rep in NYC, then see if he sells.  If he does, hire two more in 6 months, maybe one in Boston and one in Chicago or DC.  Then, 6 months later, if 2-3 of the 3 are performing, hire another 4-6 sales reps in SF, LA, Texas, Seattle, Philly, etc.  9 times out of 10, maybe 49 times out of 50, I believe this is the right answer. But, what about the other one time?  What about the entrepreneur whose passion and confidence in the market's rapid development is an accurate read on the market's readiness for a new hot product... the new Google, the new iPhone, the new core router, the new iSCSI SAN box.  In these rare cases, which, by the way, are where the bulk of venture returns are made anyway... it is an advantage to build out a formidable sales force EARLY in the market's development.  Clay Christensen says that the first entrant in a new market with a high quality national sales force often has a large barrier and reaps much of the rewards (that was from memory... may have some of my spin on it). I have a friend named Marcus Ranum who is a world class e-security pioneer.  As a techie, he built the world's first commercial firewall Gauntlet for a company called TIS which had a successful outcome.  As an entrepreneur, he built the world's first world class IDS platform (intrusion detection) for a company called NFR.  It was loved by the security IT thought leaders at Fortune 50 companies, and deemed much superior in performance to the rival product by ISS.  But, ISS, like EMC in storage, built a world class national sales force (ultimately led by a friend of mine, Tom McNeight).  And ISS whupped poor Marcus and NFR and because a successful company worth billions (now part of IBM) Continue reading "Sales force size as a barrier to entry"

Yes, John Doerr, your recent TED talk was scary and inspiring, but…

Did you do the arithmetic on the amount of arable land that would be needed for growing the raw material for biofuels vs. the amount needed for food production? A back-of-the-envelope calculation seems to indicate that biofuels cannot be a major long-term solution to the propulsion of those two-ton steel and glass contraptions – or even of appropriately sized versions thereof – to which you so eloquently refer. By contrast, solar generated electricity, not least via photovoltaics based on silicon, the second most plentiful solid element in the earth’s crust, has essentially limitless and atmospherically benign capacity to fuel electric vehicles, pump and then purify water to be found not so far below the surface of, for example, the Sahal desert, produce hydrogen where and when the sun shines, and use that hydrogen to generate electricity wherever and whenever it’s needed. Forgive me, please, for emphasizing photovoltaics, but as one of a lonely handful of energy alarmists and inventors back in the late ‘60s and early ‘70s, I posited that solar cells, then used only for space satellite power supplies, could be brought down in cost to compete in electric power generation costs with those ghastly atmosphere-destroying power stations upon which we currently depend for our energy profligacy. Driven by a Billy-Graham-like ardor, I had the good fortune (chutzpa?) of attracting a $50+ million investment from Mobil Oil Corporation – later absorbed into Exxon – to develop low cost silicon solar cells based on a revolutionary technique for growing crystals of virtually any constant cross-section, e.g. ribbons. And $50 million back then, as an investment in an outside-the-box technology, translates, 35 years later, into a very large number, left as an exercise to the reader to calculate. May I wish you, Mr. Doerr, and those of like mind, more power to your CO2 antagonists elbow?  We all need you.

Entrepreneur Story #4: Dreams vs. Reality

The Mobile market is HOT. At a conference in the valley (silicon that is), out of every three entrepreneurs I talked to two and half had the next big mobile application. The biggest idea is the next ubiquities operating system. A system that is running all mobile phones, allow transportability of applications, improves the development process of new applications, etc. etc.

I had a conversation with one these operating system companies yesterday – the fifth or sixth company in the same space I have spoken to in the past couple of months. Naturally, each one has few strengths and some weaknesses and each one has some unique angle and approach. Without a doubt the idea is big and if one could become the standard operating system – the next DOS is conceived and the next Microsoft born – a very nice dream.

What I found as common between all of the entrepreneurs I talked to was the underestimation of the power of the big OEM’s (Samsung, Nokia, and Motorola) in controlling their own operating system and the equal power of the carries (AT&T, Verison, Spring) in being the gate keepers of innovation and user adoption.

Building an innovative technology requires hard work and very smart technologist, building a business requires getting to markets and selling and building a ubiquities operating system requires an acknowledgment of the power of the incumbent players. This is not to say that we should not dream big, but that we should address the very obvious barriers before we spend many many hours of hard work, refinance our house and expect VC’s to invest – dealing with disappointments before they occur.

The point here is simple, and some may disagree with it, find a way to get past the gatekeepers and get the OEM’s on board and you don’t need the best technology in the world – fail to deal with the barriers early and the most innovative solutions will not work – realities that kill a dream!

The broader point is whatever business you are building, figure out what the major barriers are and have a solid (real) plan to deal with it. Work on eliminating or embracing the barriers as vigorously as you are working on the building the technology or the product.

And this is one man’s opinion.

Long Term Asset Bubble and Impact on VC Biz

Here is a question for you.  How long will it take a high net worth family or small endowment to grow from $100m value to $1bn value?  If they earn 7%/year (10% historical stock market nominal return less 3% estimated inflation), then in 34 years, they will achieve $1bn.  What does this mean?  It means that as we have a somewhat high number of families and institutions with $100m to put to work today seeking higher returns from "alternative" investments such as venture capital and LBO, in a few decades, if historical returns hold up, we may have many many more billionaire families and institutions seeking the turbocharged return promise of alternative investments. What this says to me is that the absolutely staggering amount of wealth in the world today will grow many times from here, and there will not only be more yachts in the Continue reading "Long Term Asset Bubble and Impact on VC Biz"

Long Term Asset Bubble and Impact on VC Biz

Here is a question for you.  How long will it take a high net worth family or small endowment to grow from $100m value to $1bn value?  If they earn 7%/year (10% historical stock market nominal return less 3% estimated inflation), then in 34 years, they will achieve $1bn.  What does this mean?  It means that as we have a somewhat high number of families and institutions with $100m to put to work today seeking higher returns from "alternative" investments such as venture capital and LBO, in a few decades, if historical returns hold up, we may have many many more billionaire families and institutions seeking the turbocharged return promise of alternative investments. What this says to me is that the absolutely staggering amount of wealth in the world today will grow many times from here, and there will not only be more yachts in the French Riviera, but the value of VC and LBO managers with "alpha" will grow over time, as probably will the value of beach front property in Carmel and the Hamptons.  Why?  The amount of money desirous of "beating the S&P 500" by investing in alternative investment vehicles is already so great as to almost be silly (for example, $2 trillion in hedge funds which as an asset class have a way of underperforming the S&P 500 after deducting 2% for fees and 20% of profits).  Yet, it will get even sillier, and the few VCs with a proven ability to deliver true value, not just as investors but as co-entrepreneurs (think Kleiner Perkins, General Catalyst) will be in such demand by these growing trillions of dollars that it will make one's head spin. The result will probably be, as it has been in the hedge fund business and I would argue also in the VC business and the LBO business, too much money chasing performance depressing the excess returns sought by the asset class and enabling many mediocre managers to earn large salaries for not adding true value.

Of course, the VC and LBO businesses will have cycles.  VC returns peaked in 1999-2000 and perhaps LBO returns are peaking now... but the long term trend of the asset bubble funding the efforts by both asset classes seems to be well in place.  And the growing investment interest by rich people and governments in formerly underdeveloped economies will only add fuel to the fire.

A Declaration of (Energy) Independence

When in the course of human events it becomes necessary for one people to displace the hydrocarbon bonds which have fueled them (and were provided by another) and to assume from the recurring power of the earth and sun, the sustainable and independent energy which the Laws of Nature provide them, a decent respect to the opinions of the men vested in the established order requires that they should declare the causes which impel them to the separation. We (should) hold these truths to be self-evident, that all generations are created equal, that they are endowed by Creation with certain unalienable Rights, that among these are Life (through air, water and a stable climate), Liberty (from foreign powers), and the Pursuit of (sustainable) Happiness. -- That to secure these rights, Governments are instituted among Men, deriving their powers from the consent of the governed, but also owing a responsibility to the to-be-governed, -- That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter it, and to institute new Governmental Principles and Forms as to them shall seem most likely to effect the Safety and Happiness of their and future generations. Prudence, indeed, will dictate that Government Principles long established should not be changed for light and transient causes; and accordingly all experience has shown that the common good has been more disposed to be subordinated to private interests by Governmental activism. But when a long train of externalities, driven by private economic choices, and leading invariably to reduce the common good, are not being righted by an inactive Government, it is their right, it is their duty, to throw off such inactivity and to provide new Principles for their future security. Such has been the patient sufferance of these United States (since at least 1973); and such is now the necessity which constrains them to alter the Principles of their Government. The history of the present government-energy complex (culminating in the current administration) is a history of repeated denials, delays and missed opportunities, all having the direct result of mortgaging the futures of the children of this country. To prove this, let Facts be submitted to a candid world. We have based our development far too much on burning hydrocarbons, releasing global warming gases into the general atmosphere at unsustainable rates. We have imported energy sources in massive quantities from lands hostile to our goals and indifferent to our values without regard for the repercussions. We have obstructed international efforts to lead the global economy to more sustainable methods of economic growth. We have refused to make minor trade-offs even in exchange for large improvements against these problems, and we have allowed our government to remain inactive. We have allowed men at the ends of their political careers to achieve short-term personal gains by refuting that these problems even exist. We have allowed environmental symbols to over-shadow true environmentalism and to scuttle possible common-sense compromises. We have been discouraged Continue reading "A Declaration of (Energy) Independence"

So how much oil and natural gas can there possibly be in this one and only Earth of ours?

I continue to be amused, bemused and generally incredulous about the stream of – if you’ll pardon the expression – “expert opinions” about the quantity of unexploited and as yet undiscovered reserves of oil and gas buried below the surface of Planet Earth. Add in the conspiracy theorists, whose estimates are far greater than those of the experts, who clearly (sic) are out to bamboozle us all as a means of keeping prices artificially high, and away goes all the panic about running out of the stuff which we burn so profligately.

OK, let’s try a look at the issue top-down instead of from the supposedly educated bottoms-up perspective. Simple really: assume that the earth is a hollow sphere completely full of high-grade petroleum and liquefied natural gas. Can even the oil barons and the conspiracy theorists assert that there could be more of the stuff than that? Hardly! So how long would that lot last? (Possibly longer than such life on earth, including homo-not-so-sapiens that can survive a death-dealing atmospheric crown of carbon dioxide.) At our current rate of usage, and the current rate of increase in that rate of usage, how long? Not very!

But we can agree, can’t we, that the earth is not a hollow sphere, but a molten core (too hot for organic fuels), a lot of rock, and zillions of gallons of water, mostly salty? In fact, our dear old sage, Sir Isaac the Newton, correctly ‘guessed’ that the average density of the earth would probably be “...between 5 and 6 times that of water”, and water is quite a bit denser than those desirable combustibles. 5-6 times? Not a bad guess, Sir Isaac: the currently accepted figure is 5.5 times (!!!). So the “Not very” above is not nearly as “very” as the brim-full hollow sphere would give us.

Let’s face it, fellow temporary occupants of this increasingly befouled planet of ours, we’ve got it backwards: what we now call “alternative energy” is actually “there-is-no-alternative energy”; it’s the stuff to which we’ve become habituated that is the alternative – to survival.

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LinkedIn Spam

I just cleaned up my e-mail inbox on LinkedIn and was surprised by how many unsolicited LinkedIn invites I had from people whom I didn't know and who didn't know me.  Many were from recruiters spamming for more hooks into people.

Don't these people realize that LinkedIn stands for the exact opposite of what they are attempting?  LinkedIn is about extending the trust between friends to friends of friends in a seamless digital way.

The Prius Has Gone Mainstream

There have been many indications building up over the last year or so, but it is now clear to me that the Prius has gone thoroughly mainstream.

  • Toyota announced recently that they have now sold over 1,000,000 hybrid vehicles worldwide. This still represents a tiny fraction of the cars sold over the same time period -- probably less than 2% even in recent high-volume years -- but it is a significant milestone nonetheless.
  • And supply has finally caught up with demand. For years (especially in my hometown of San Francisco) interested buyers were met with long waiting lists and the prospect of paying the dealer above sticker price. But earlier this year, Toyota began introducing incentives to move inventory, as all other manufacturers must do. And we even can now see Prius televsion commercials for the first time (below).
But I am now truly convinced that the Prius has crossed the chasm (or perhaps jumped the shark.) Twice last week on my long San Francisco-to-Menlo Park commute (in my 2000 Jetta averaging just 25 mpg; more on that later) I observed aggressive lane changing and passing on the right by Prius drivers. The hybrid electric demographic is no longer limited to globally conscious and community-oriented drivers. The American Prius driver is starting to look like the rest of America. This is a good thing for the planet and the inevitable result of success. But it certainly dilutes the brand!
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Excited about a video game again

Yeah... seems like forever that I've been excited about a game coming up... Things have been pretty quiet on the video gaming side for the last 2 years at Dav's, except for a short-lived DanceDanceRevolution craze and some Katamari Damacy action, plus the occasional NHL2K5 game (still...) ...and I don't even own any of the new generation consoles. But now it looks like it's all about to change :

My favorite toys growing up. I know there's a movie coming out soon. Should be quite the CGI orgy... Hope it's good !

Pruning keeps the plant Healthy

I wrote a post on how to get things Undone. Matt just undid something with WordPress and I like the metaphor that he used relating to pruning:

“Pruning is an important and necessary step in growing roses. Pruning keeps the plant healthy. It promotes new growth, removes dead, broken or diseased canes and trains roses to a desired shape. Pruning encourages flowering, either more blooms or larger blooms, and is essential to keep modern rose varieties blooming repeatedly all summer long.”

I also thought the comments were pretty interesting, as anything that you do or undo will have mixed reactions. Keep pruning Matt and I look forward to the next blooms!

Travel pics from the Western Balkans

Hey all, just a quick word to tell anyone intersted (ie. my dad !) that I've started to upload pictures from my trip to France-Albania-Montenegro-Bosnia-Serbia on my Flickr page, with some comments and a bit of bilingual storytelling thrown in. Latest pics are from Tirana, the colourful, smelly and beautifully chaotic capital of Albania.

Loli is still backpacking in Serbia and regularly updating her own Flickr page. Latest include a quick visit to Kosovo, of all places...

Now... back to board meeting agendas, cap tables and freemium revenue models...

and, why not, a Monday AM song ! (some awesome klezmer...)
Cracow Klezmer Band - Ets Hayyim (The Tree Of Life).mp3

Amp’d & MVNO viability

According to a Business Week article on Amp'd, "By May, the number of nonpaying customers reached 80,000. That's nearly half of Amp'd's current customer base of 175,000 subscribers."  Amp'd filed for Chapter 11 bankruptcy protection this week. That is really too bad.  Amp'd, by most accounts I had heard, had a terrific service.  But, clearly, the business model didn't hold.  Amp'd had a blue chip roster of investors and some good people on its team so I think it is more likely that Amp'd's failure suggests a lack of viability of a smaller MVNO versus bad execution in a good market. Boost (owned by Sprint) and Virgin USA (IPO pending) are each closer to 5 million subs.  Will they continue to prosper?  I think and hope so.  Virgin is not profitable but those are bigger entities, $1bn in revenue and not far from profitability in Virgin's case.  But, this news, following the death of ESPN's MVNO, sounds suspiciously like a death sentence for tier-2 MNVOs with less than 1m subs.  What are the long term profit margins of a tier-1 MVNO in the USA?  Probably slim, but positive I believe.  Boost and Virgin are innovative and do deliver unique value to their subs.  Both have been on the cutting edge of mobile content for example (as was Amp'd) but spread over a larger subscriber base than Amp'd has.  Still, neither will be as profitable as a carrier that owns its own network.  That is the law of the telecom industry, at least today. 11 years ago, I was a junior telecom M&A banker on Wall Street.  Once of my jobs was to track the long distance "comps" or valuation multiples of the publicly traded long distance carriers.  Back then, there were 3 tier 1s which owned a full scale network (AT&T, MCI, Sprint), 3 or so tier-2s which owned a smaller network (Worldcom, LCI, Frontier), and 12 or so tier-3s (Midcom, ECI, etc.) which were either pure resellers or which owned a small number of Lucent switches (often one).  One by one, the tier-3s died.  And the tier-2s consolidated.  And, due to perfect competition in the long distance market, the tier-1s struggled.

Fortunately for tier-1 mobile carriers, there is not perfect competition.  It is a government protected oligopoly, with a certain number of spectrum owning carriers.  So, the tier-1 mobile carriers and tier-2s who own network and spectrum are making good money.  Unfortunately for those who don't own spectrum, like Amp'd... it is a tough business. 

Albania & Montenegro

Dobar Dan everyone !

So here I am blogging from some basement in Mostar, in Hercegovina, a few yards away from the legendary old bridge that was destroyed during the war 14 years ago... only to be beautifully rebuilt. The Sarajevsko pivo i'm holding is cold and refreshing. So far the trip has been a blast. Upon returning I will post a whole lot of pictures on my Flickr page and try to give more details on the whole trip, but I promised my mom I would give a quick update... so here goes...

After a quick week-end in Paris where I met up with Loli (who I now lovingly call Ljolja) and had a nice dinner on the Seine with our hosts Fannie and François, we caught a flight for Bari, Italy, where we had some tasty red wine and then immediately embarked on a ferry for Durres, Albania. Albania is still very much off the beaten path as far as tourism is concerned and during our time there we had the very pleasant feeling of being the only non-locals roaming the streets.

The country struggled out of a very closed-off 45 year dictatorship in the early 90s and still today is the second poorest country in Europe (Moldavia... oh dear...) and apparently the least visited. It was still relatively easy for us to travel between cities and find nice, cheap accomodation and meals. And friendly people, except for very mean barber. By the way, the LEK is one currency that trades favorably for our Canadian $, but their bankomats are confusing. After Durres we took a slow train to the capital Tirana, a dusty, smelly, noisy but very colorful and overall fascinating city.

We then took a bus to Shkoder in the North of the country, a nice, mid-size town with a great antique citadel. I will definitely give more details on our days in Albania and urge everyone to read up on the country and visit some day. Tell Afrim, at the bleak, grey, Hotel Rozafa in Shkoder that David and Loli sent you. We had to promise. He'll make sure you have electricity in your room and shower you with raki, cigarettes and, honestly, some damn excellent espresso.

From Shkoder we had our own personal furgon to Montenegro, possibly the newest country on Earth. Montenegro is small and beautiful. We spent 2 lazy days in Budva in some post-communist all-included resort called the Slovenska Plaža. Worst. Food. Ever. But the beaches were superb and the walled old town is very pretty and made a nice backdrop for us to watch the Champions League Final. The Italians got lucky. Again. After Budva we rented a trusty Fiat Punto and took the amazing, twisty moutain roads to Zabljak and the Nacionalni Park of Durmitor for one of the most amazing hikes I've ever done. After Durmitor we spent a day and night in Kotor, another ancient fortified town, this one settled on the banks of a
Continue reading "Albania & Montenegro"

Overcoming inertia: what would a new CEO do?

I read a dead tree interview recently with Richard Tedlow, the well regarded HBS historian who wrote a new book about Intel's Andy Grove.  He mentioned a critical event in the evolution of Intel and the microprocessor market in the USA.  In 1985, before grove was promoted to CEO, Intel was getting beaten in its core memory business.  The right answer was to get out of the memory business and focus on microprocessors, but this was difficult for Intel to see at the time due to the forces of inertia "Andy proposed a thought experiment to his then boss, Intel CEO Gordon Moore.  'What would happen,' he asked, 'if the board kicked us out and brought in new management?'  Moore immediately deadpanned, 'They'd get us out of memories.'  Andy looked at him and said, 'why don't we walk through the door, come back, and do it ourselves.' -Source: NewBusiness, Arthur Rock Center for Entrepreneurship, Spring 2007, Harvard Business School

It is a good lesson for those struggling to make tough choices.