Not exciting

But not static.

Even in Venture capital, there are attempts to make new investment vehicles. Usually started by people who want to break into the industry, and set up a new fund. There are inherent risks in doing so, no one really understands all the problems until it's done for the first time.

But the opportunities exist, if everyone can make money. It's still better to ponder over how to cut a really big pie, instead of fighting over how the pie vanished.

It was pointed out that several foundations that exist in the US, have certain goals they want to achieve. Their endowments, however, must make enough money, to allow the grants giving arm to keep giving grants.

This can lead to some situations where the most financially profitable action may not be the same as the most beneficial action. This is the fundamental debate in socially responsible investing. Is there a "tax" to being socially responsible?

People WANT to say yes, because that tax then represent the amount of social good they're doing. I'll avoid that debate for now.

What I want to introduce is the concept of blended value. This is the monetary value, and the "feel good" benefit effect of making money in a way that makes you happy. Instead of using financial return as a proxy for all benefit (this is the easy model we learned in school), trying to measure and quantify happiness allows for a more complete model of consumption.

Why do people go pennywise/pound foolish? Or make short-term decisions with long term consequences? It always seems like a good idea, but may or may not turn out to be so.

Is this the time to create a fund structure that does the hard work of providing a blended return? Benefits in addition to a financial return?

The environment doesn't seem to favor it, but that's the time the pioneers always strike. The concern is can you survive and emerge without being destroyed?

What if we made an AIDS vaccine?

At the Global Health Ventures workshop I attended, an interesting scenario was brought up. What if an AIDS vaccine existed? Right now, I don't know if there is one, but follow this thinking, and understand why companies may not want to find one at all.

If such a vaccine existed, then there would be demand for the AIDS vaccine in both the developed and developing countries. Odds are, this vaccine would affect the immune system in some way. What does this mean? Probably that after 60 years, the patient's immune system would be affected, maybe. Thus this is a huge liability for the company.

And what if they don't let an AIDS vaccine go into the developed world? Then they're
facing the argument that something is good enough for poor people and not for the right people. Or it's going to be good for one group and not for the other.

Afterwards, the drug will be spread to all people, and cause future cases of autoimmune disease, but only the people who have survived past their 60's will have it. And this will be in countries that have a longer life expectancy. Thus it will appear in developed countries, but rarely in under developed countries.

Again, the company loses.

Thus, in a lose-lose-lose scenario.
They lose if they develop it
They lose if they distribute it
They lose if people survive long enough to get side effects.

Follow the money

Take a look at the full scope of investors. From the entrepreneur, to the Venture Capitalist, and the institutional investor. Understand the needs, skills, desires of each of the players. Despite the common theme of trying to invest their time and money and getting a good reward, there are differences. There are differences in how they are judged. In understanding the differences, you can begin to see the money trail.

You need to do this for your industry. Know your customers, their customers. Know your suppliers and their suppliers. But you should know this for your investors as well. This will help you understand the motivations of the people sitting in the board room, and the responsibilities of those at the table.

In being in a room full of institutional investors, and entrepreneurs, I realized how few understood all the connections, and the tasks required in each parties. I'm fortunate, in having been at the table as a limited partner, a direct investor, and entrepreneur. Each of these has a different point of view. The better you understand them, the better you position at the negotiation table, and the better you'll work with them.

Perfect markets

Market adjusted rate of returns only happen in a fully liquid, “perfect” market.

Fortunately for me, such markets don't exist in venture capital.

I can find opportunities, but it takes more work. However, by doing this, I am essentially making the market more efficient, more “perfect” and harder for the next guy who comes along. This is Adam Smith's invisible hand.

But along with moves that make the market more efficient, there are moves that increase variance in the market place. The BLENDED result is the 'open efficient' market. But the process to get there is choppy and rough.

It's in those missteps that profit and peril exist.

Global Health Workshop

Sunday through Tuesday was a global health workshop.

One trying to bring together: Foundations, VC investors, and entrepreneurs. The biggest lesson learned? We all speak different languages, have different expectations, and are rewarded with different criteria.

So how can all these groups work together? Well, there are some criteria that can not be sacrificed.

Investors need to have a financial return. Sacrificing some financial return for a "social return" is not acceptable. Until the Limited Partners, the foundations, the retirement funds, etc. demand a social return on their money, General Partners will only be measured by financial returns.

Without the demand from the VC customers, the industry won't change. Once Limited Partners stop putting money away looking for only a financial return, then the industry will accomodate their needs.

But then the Limited Partners must be rewarded for a social return, and not just financial returns. So the chain continues until you reach the final decision group. We all dance to the tune of a different piper.

Finding the right team

Who you work with is a huge factor in the success or failure of your business. Don't just work with someone because you know them, don't work with someone because they will fill a gap. It's important to be able to team together, and trust eachother.

Partners help, a lot. But knowing that you'll be spending hours per week working with them changes how you select them. Being able to live with them without driving each other crazy is important.

There's no special formula for finding good partners, no special place to pick them out of a lineup. However, if you're going to find them, the best place to look is where they are. If you need someone with technical skills, go to the places where the technologists are. If you need sales people, look to where sales folks are. Same with contact/connections in the industry. If you don't know, ask. Find out, because if you don't go, then you won't find any help.

Doing the perfect Pitch

Had a breakfast event run by the CIT at Teqcorner. It was on a Perfect Pitch. Presented by the CEO of Buysafe.com

The main purpose of the event was to help entrepreneurs, and folks who were thinking about starting businesses how to give a good pitch. The benefit of having a CEO who recently was raising money, using the same pitch he used earlier this year was good. It helped the panelists give their reaction, and why they would have made the decisions they did. It also gave a straw man example for the entrepreneurs to see and understand.

If you get the chance to see such a presentation, do so. The panelists gave away a lot more than they probably intended with their comments and thinking process. Insight and contact into the people who are making financing decisions is difficult. Catching them during some unguarded moments, and seeing how they really evaluate a company is valuable.

Check and find out what opportunities exist in your neighborhood. You'll be surprised at what you'll find.

Fewer funds still

This article from red herring stating there are fewer smaller funds.

I've been on record as saying most vintage 1999 funds, started during the party, won't survive and have a successor fund. It looks like this prediction is coming true.

What's also happening is a shift in the early stage investment arena. A larger 700 mil fund has trouble efficiently putting money to work in 1 mil increments. Even if total investment ends up being $10 mil per company, that's 70 companies to monitor over 7 years. The numbers don't work out easily, and while variance is supposed to decrease with more and more investments, everyone is still promising big IRR's in order to attract limited partners.

Powershift

Redherring's article on the new IPO lockup contracts.

Ibankers are forcing private equity investors and VC's to lock up more of their investments after the IPO. Management was almost always locked up for the 180 days. And with VC's also being forced to hold on, they can't claim the distribution during the initial days after the IPO, meaning their numbers won't look as pretty.

Remember, a lot of the IRR comes from when a VC distributes a big success. Knocking that success down by 50% affects how the numbers and the returns look. This may be a situation where the bankers might blink first. They already get their 7%, so if the fees are equal all the way around, then the terms will decide which bankers are most favorable to the investors. Or a dutch auction can be flotated ,there won't be as big a pop, but the investors can get liquid faster.

The allure of the traditional way was always the first day pop. A spike in valuation for the company that VC's could then distribute and claim on top of the growth in valuation while the company was public.

Now, that part disappears, and along with it, some of the allure of a traditional IPO.

When the analysts and ibankers were closely tied, then it made sense to pay off the ibanker in order to get good coverage. If you can get covereage without having to pay that particular ibanker, the traditional IPO looks less powerful. This is a big IF, and requires oversight in order to make sure everyone is playing by the same rules.

I know you're lying

I've read many business plans over the years. Some good, many bad. Sat through many powerpoint presentations, few good, mostly bad. And read many financial projections, All were wrong, all were off.

A real entrepreneur knows everything about what's going on in his company, his industry, and his world.
He knows what is happening with his customers, and their customers, his suppliers and their suppliers.

The financial projections he makes are reflections of what he believes will happen. Neither good nor bad, they are educated guesses made in order to help guide decisions of the company.

Few financial projections I see have that quality of honesty. Many are written by the entrepreneur "in order to get funding". There is a short-sighted belief that each step or stage represents a stopping point, and then a new stage must be started. Running a company is a continuous process. There are no landings or chances to take a break.

Financing should not be seen as a stopping point or resting point in the development of the company. Looking to gain financing should not pause or detract too much from the operations of your company. Your business should be robust enough to continue, with or without the financing round, or a delay in the financing round.

If you're going to make a useful and accurate bplan, you'll find investors who can use those numbers to make an accurate judgment. Starting off with misaligned expectations will only make things worse.

Planning and change

here's a simple read from CNNfn

It's about the airlines, and how historical decisions affect current situations. Thinking that things won't ever change is ALWAYS wrong.

Don't be lulled into thinking there's a great benefactor looking over your shoulder (like santa claus), and go do anything/everything you want without planning. Nor should you believe that the current technology and resources are everything we will ever have, so stop innovation, and divide up the spoils right now.

Change is too fluid to allow either thought base to be correct. You might be right in that there is a limited supply of crude oil under the ground. However, the belief that you can't get transportation fuel from anything other than crude is wrong. There are the oil sands, shale oil, fisher tropschs, etc. There are subsitute products out there, and being developed. It was simply not economically viable to introduce them.

Understanding WHY customers care, instead of what you're selling is important. What they buy, what they need, and what they want are different things. Hopefully it's found in your product/service. But if it comes around in a different form, even if you refuse to recognize it, your customers will see it. And they will change, leaving you with no customers, lots of inventory, and wondering what happened.

Every transaction is a day-to-day event, but it requires some forethought in planning. This is your responsibility as the CEO/entrepreneur. When you are unable to continue doing so, step aside and put someone who is able to do so at the helm. Otherwise ego/stubbornness will destroy all you've worked so hard to create.

Settle in for a long wait

Redherring's article on how valuations are rising, and exits are taking longer.

The final paragraph shows something intrinsic in the VC industry. Exits are taking longer to achieve. Well, profitable exits are taking longer to achieve. Companies can still go bankrupt in the blink of an eye. 5.3 years is a pretty long average time, but not unexpected given the Sarb-Ox requirements now. Many IPO's have been delayed or shelved because of higher regulatory concerns. Also, M&A events are requiring similar compliance requirements. Which delays things, as private companies go over their books to look like publicly traded companies.

What does this mean for funds that have been investing since 2003? They will monitor and sit on their investments until around 2007 or so. People are hoping by that time, the public markets will be more accommodating, the currencies of public companies will be more available, and we will have recovered from the exogenous economic shocks that are currently pushing the markets around.

We'll have new and exciting shocks then, but by that point in time, the seeds have been planted, and it's time to harvest the investments.

More nuclear power

This article from the NY Times on how hard it is to replace a nuclear power plant.

Here is the problem with electricity in the United States. There are a lot of 1st generation nuclear plants, and they will be coming up for lease renewals. Now, the first generation plants are like Three Mile Island, Chernobyl, etc. These are using old technologies and are relatively safe, but not the best available models.

So what happens when the plants mentioned in the article go out? Extending the lease is unlikely. Building a new nuclear plant to take over the load bearing capacity of these plants should be done, but local communities are crying "not in my backyard." And site a coal plant, while cheaper, will create more CO2, and other gases in the air. Going to a natural gas solution won't be much better, because the cost of natural gas seems to be going up. And it will continue to rise until a pipeline to the US is fully utilized.

But there's no silver bullet out there, yet. Some places are looking towards ocean power. Solar/wind are intermittent and won't really solve the energy situation. And Wind brings up the same cry of "Not in my backyard!"

So, what's the answer? Can it be solved with today's technology? Or do we have to hope that someone else can come up with the solution in time?

Holy grail of water

This AP article sums it up nicely.

Put brackish/seawater into a box, get clean water, dispose of salts. Done.

If we have that, then a lot of troubles go away. Not all of them, but with fresh water, desert reclamation can actually happen. It also means that the future water wars can be avoided.

The 99% of undrinkable water becomes available for usage.

This is still one of the few global crises that actually affect the United States. The article points out that it is in New Mexico (US West) where the water problem exists. But this same water problem exists in the sub continent, China, Africa, even in Louisiana right now.

The ability for ships to be off shore and provide clean water is tremendous.

Something better than the current desalination technology would be fantastic.

Style Drift

Here is Brad Feld's comment on Style drift.

When VC investors start putting money outside their "sweet spot". Or when greed takes over and experience and judgement are ignored.

The important element for the entrepreneur? Look to see if the VC investor is using your company to explore a new area. If they are, then this will be a very expensive investor to the company. The amount of time and effort you will spend to educate inexperienced investors will be a drag on the company. Explaining and defending fundamental decisions to an inexperienced board is a waste of time. Good oversight means you should have a good reason for your decisions. Intelligent oversight means knowing the fundamentals of the industry, and not trying to make software companies look like metal bending shops.

The danger for entrepreneurs is believing that having one success in an industry means you will be successful again in a different industry.

Water running out

CNN's Article on how we are losing the small % of drinkable water we have.

This is why it's so important to find a solution for large amounts of clean water. Katrina is the latest example of how important clean water is. But solving this problem will provide a lot of solution to most of the worlds problem.

Once those glaciers are gone, they're gone. We see the snow-pack going away, we see the glaciers go away, and until another iceage hits, they won't be back for a while.

Flash kiosks

Red herring article on movies for mobile devices.

I think this is the next stage of digital media. I like the distribution method. And it bypasses the idea of bringing in a hard drive (Mark Cuban's current idea) to be loaded. The fewer moving parts, the better.

Content on the kiosks can be updated continuously. Bringing in the latest movies for rental, and if the DRM guys have something to say about it, allow only a few usages per payment before locking up, or requiring a full purchase. These kiosks could be updated by wireless systems, meaning all they'll need is power. No need for a T-1 connection to the hosting business.

This avoids the onetime DVDs that got environmentalists up in arms. And if the price comes down far enough, the pirate markets might be affected as well.

We see how McDonalds in the US has become a spot for DVD rentals. The key trick will be getting users to buy "flash VCR's"

Networking

I'm not a partner in my own fund yet. So a good portion of my time, when I'm not working with companies or scanning business plans, is networking. Tonight, Steve Walker was kind enough to host a MAVA (Mid Atlantic Venture Association) event to celebrate the end of summer, and allow everyone in the neighborhood to catch up with eachother.

I was talking with John May, and he remarked that the challenge was how to handle this type of event. Do you meet new folks, or catch up with old friends. The balance is to do both. The better you know someone, the more lattitude you can take. Making and reinforcing contacts, talking with other investors is part of these events. Seeing those who started investing recently, and trying to pick up on their energy. Understanding from the old guard what has changed and what hasn't.

It's a nice opportunity to mingle and enjoy. The danger, as always, is the relaxed atmosphere. One element every analyst and associate needs to remember, is that we are “on stage.” We represent our funds, and ourselves at all times. This means we can't act the way we do with college buddies. It's all for fun, but this is still work, and it is still a work environment. Some folks do not survive because they can't tell the difference.

Network well, and remember who you represent.

Back to work

Summer is over and it's time to get back to work. Today was one of the capital calls (company presentations) here in Reston VA. It was good to see some entrepreneurs survive the past few months, and have a company set up for financing.

Part of the joy in working with young comapanies is seeing how they evolve and change in the early months. Seeing what ideas survive contact with reality, and how flexible the ideas and teams are.

Seeing entrepreneurs refine their ideas, and hear how the customers have been requesting the services gives me the opportunity to cheer their success. I had nothing to do with it. And every so often, you can see the germ of a successful company at these events.

Forcing a market

I was reading the article from the economist, when this quote jumped out at me.

"When you ask customers what they want, they will never tell you. You have to show them first," says Microsoft's Mr Mundie.

I agree that customers won't tell you what they want. I disagree that you have to show them first. Customers won't tell you on suggestion cards, nor will they tell you in surveys or marketing tests. Nor will seeing "something" strike their fancy and give you insight into their purchase habits.

Customers tell you with their wallets. Look at the needs they are satisfying with the products they are currently buying. Competative goods that satisfy the same needs have a chance. Goods that have no need are solutions looking for an answer.

I would say communication is a need. People have been paying for communication for years. From letters, to telephone lines, payphones to cellphones, people want to communicate.

Look at what people buy when they go to a burger restaurant: burgers! They want tasty food, easy food, convenient food, and the customer will pay money for that type of food. The customer will also pay for the environment and experience of eating that food.

Any company that feels they can bully the markets into buying what the company wants the public to buy is either suicidal, or a monopoly. If the public actually buys the product, then the company was either lucky, or a monopoly. Companies that are able to listen to customers, understand the reasons behind purchases, and then create products to satisfy the need, while meeting expectations continue to be successful. The landscape is littered with businesses that failed.

Optics

How things appear and how things are can be very different.

Ideally, everyone steps up in the next round, and everyone wants more. But if an investor is not going to step up, then an explanation is needed. Sometimes there are valid reasons that won't raise alarm. Getting the truth out to other potential investors is important. Some investors might find the reasons acceptable, and not get spooked.

Othertimes, not stepping up is a bright red flag to other investors and can sink a deal. When it can't be helped, take a close look at the company and understand the hesitency. Performance, expectations, team mechanics, etc. can all affect the desire of current investors to step up.

Trying to hide the problems will only damage the company's reputation when the facts are found out. If the business is going to fail, it is better off for all involved that it fails fast. And the entrepreneur can get started on the successful business sooner.

Give an inch

I hope this isn't true.
If all goes well, in a few years I'll look at this statement and see how naive I currently am.

There doesn't seem to be a management ownership level between 30% and 100%.

Most of the time, when companies are purchased, or go public, either the management held on to all the ownership of the company, or were diluted down to 30% or less of the company. There are examples where the founders kept 20% each, and other members of the management team added up to 60% of the company.

But not that I've seen recently.

It should be part of the expectation when taking outside capital that you will get diluted. But most entrepreneurs do not see or understand how much investment capital will cost them.

North American Atlantis

New Orleans may be a lost city.

I don't know where the restoration money will be spent. Nor do I know what incentive people will have to go into a the city again. Some folks will try and reclaim or scavenge what is there. But in the end, will it be razed to the ground? Allowed to join the marsh and stop being a bowled city?

Optimistic plans have the city pumped and cleared in months. Then what? Is this a long term recovery? What happens afterwards? It won't be the same city was was a month ago.

We are still trying to do what's right. Lives will be saved, and a huge influx of people, misery, fortune and chaos is going to be shifted.

It might be better to bulldoze the city, give it back to the marshes. And only have the industrial complexes remain.

This seems to be something where every decision that's made will turn out to be wrong. Starting something, stopping it again. No one will be pleased, all we can do is accept.