Introduction (via Tech Review)
Innovation is critical to economic growth and progress, and yet it seems so random. But if we step back, a pattern emerges. The pace of innovation is accelerating and is exogenous to the economy. At Draper Fisher Jurvetson, we see that pattern in the diversity and quality of the entrepreneurial ideas coming into our offices. Scientists do not think more slowly during recessions. Startup proposals seem better during downturns.
For a model of the pace of innovation, consider Moore’s Law–the annual doubling of computer power or data storage capacity. As Ray Kurzweil has plotted, these increased exponentially from 1890 (with punch-card computing) to 2010, across countless technologies and human dramas. Most recently, we have seen Moore’s Law revolutionize the life sciences, from genomics to medical imaging, and work its magic in ever bigger and more diverse industries.
Technology’s nonlinear pace of progress has created a juggernaut of perpetual market disruption, spawning wave after wave of opportunities for new companies. Without disruption, entrepreneurs, and VCs like me, would not exist.
During previous recessions, false oracles declared innovation dead because they did not see any in mature industries like enterprise software. Predictable and stable industries resist new entrants. Entrepreneurs and VCs have to follow disruption across markets. Many of the TR50 will no doubt lead the way.
Brad Smart & Geoff Smart each have interesting perspectives on hiring and identifying talent (be it entrepreneurial or more managerial). Brad Smart in particular wrote a book Top Grading that I read years ago (and was recommended to me by a serious serial entrepreneur).
In 1998-1999, 145 venture capital investors participated in a survey designed to illuminate the circumstances and personal characteristics that contribute to the success of a venture capitalist. Not only did the survey ask how and why these professionals entered the field, but it probed for the skill sets and experiences considered most critical to thriving in this cutting-edge business, a business that is intensely dependent on interpersonal relationships. Additionally, the article results reveal some surprises about what is not necessarily an integral part of the VC profile.
I’ve been following the Acumen fund for sometime and I’m fortunate to have the Acumen team as followers of our twitter stream. For those unfamiliar with Acumen its a nonprofit vc fund dedicated to tackling global poverty.
Summary (Via Fora.Tv)
Acumen Fund Director of Business Development Sasha Dichter and Acumen Fund Ambassador Malik Sarwar speak at the 2009 Investor Gathering in NYC.
Acumen Fund, a non-profit global venture fund, uses entrepreneurial approaches to tackle problems associated with poverty. Established in 2001 by Jacqueline Novogratz, Acumen Fund has pioneered the use of market-based approaches to bringing critical goods and services to low-income people. Working with innovative entrepreneurs in impoverished regions throughout the world, the businesses that Acumen supports focus on water, health, housing, energy, and agriculture.
Through its work Acumen Fund seeks to prove that small amounts of philanthropic capital, invested with large doses of business savvy, can establish sustainable and thriving enterprises. Acumen believes that poor people seek dignity, not dependence, and their global team — with offices in four countries — work to enable people to solve their own problems instead of providing them with aid. The key is patient capital. Acumen Fund uses philanthropic capital to make disciplined investments — loans not grants — that yield both financial and social returns.
With over twenty-five investments throughout Pakistan, India, and East Africa, and many more in the pipeline, Acumen believes that using entrepreneurial and market-based approaches to poverty, they will work to finally solve the problem of poverty.
Below is the summary of all the answers I received to my recent post entitled “tell me why VCs are disliked by entrepreneurs”. There is a shorter and easier to stomach version on Xconomy if you prefer, here. I have tried to keep my role as editor limited to re-organising, so this remains true to the commentary. I would add that most or all of these entrepreneurs had real, hands-on experience with (often prominent) VC’s, sometimes through multiples companies and fundraising. And yes, I also plan on writing a feature about the “good side” soon…
The VC – Entrepeneur relationship seems damaged. Whilst business partnerships gone bad and company failure can lead to fallout, this is different. I wanted to find out why that was and used the blog to ping the entrepreneur community to try and understand this better, listen to my audience as it were, and share the feedback.
As with all articles of this kind, it is plagued by generalisations and simplifications. In trying to do justice to the sixty detailed and mostly confidential responses that I got, I probably lost some of the colour and detail. But for anyone interested in rebuilding the social contract with entrepreneurs and getting our VC mojo back, however, the scale of the problem should be apparent. Clearly as VC’s our job is not be loved but to contribute in building great business and return money to our shareholders. Read on regardless; as you will see, status quo is not an option.
Why VC Relationships Can Be Hellish (Excerpts below via Fred Destin)
1. Getting strung along or left at the altar
“Raising capital depletes far more energy than investors realize”, says one entrepreneur. “Getting a “no” is actually fine from an entrepreneur point of view (one has to be rejection-proof anyway), but to preserve their opportunities many VC’s tend to string along entrepreneurs forever, blatantly lying about deal status only to let it fall apart at the last minute , wasting an entrepreneur’s time and energy”
2. Getting a raw deal
“Taking capital does feel a bit like making a deal with the devil after all”. Entrepreneurs fundamentally want to change the world and dealing with the Money Men is often a compromise they would rather do without.
3. Great (but misguided) Expectations
“Many entrepreneurs want an investor to fund the idea (equivalent to a tv production house looking for funds from a commissioning editor to make a show, and generate a profit from it). It often takes them a long time to realise that such VCs don’t exist. By which time they are bitter and tired and blame the VCs, rather than their own lack of understanding” of what it takes to get VC funding.
4. Unwanted advice, poor communication and lack of operational sense
“While VCs are always happy to dish out advice, this feels disingenuous from people who have never actually built a company or had a knockout success as an investor. Learning from mistakes is far less useful than emulating success”. One entrepreneur goes further in accusing VC’s of seeing everything through the lens of money: “often time they have zero operational experience (how to launch a company/product or manage customers), don’t understand marketing beyond just building their own brand, and see money as their ticket for everything.”
5. Different objectives and timeframes
“It takes patience and time to build a great business, and target returns and timeframes (e.g. five times in five years) can get in the way. On the other side, entrepreneurs burn out and blow up all the time, so it’s tough to keep both sides aligned and together for a long time.”
6. Arrogance and lack of empathy
At the end of the day, most entrepreneurs completely understand that objectives are not always to be aligned, and that VC’s work for funds that need to return capital. What they have trouble with regardless, are “double standards“. One entrepreneur who has raised money multiple times says: “a lot of VCs do things no regular employee would dare to do but are largely unaccountable for those behaviours: forgetting about board meetings, showing up 20 minutes late, bullying the team or CEO, being generally unavailable, paying no attention in meetings because they are arranging a golf game on their blackberry, failing to read the board pack before the meeting, so the actual meeting is remedial in nature.” the message seems to be: “don’t treat me the way I see fit to treat you“.
7. Dark Side of the Force
Finally, some ugly business behaviour. A fairly common practice seems to be what you might call “slow strangulation”, whether by design or not. “An equity investor will knowingly under-capitalize your startup only to gain control of it once the opportunity manifests itself by use of a wash-out round; milestone financing and abusive board control are used for similar tactics. As a consequence, myself and others now prefer to bootstrap/self-fund rather than taking any amount of early-stage capital that will not *clearly* take the company to the next level.”
he U.S. government has spent billions of dollars bailing out troubled companies. Is it time for Uncle Sam to invest in new entrepreneurial firms as well? Professor Josh Lerner makes the case for limited government involvement in his book Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed—and What to Do about It. Key concepts include:
Government support for entrepreneurial ventures could spur economic growth and support the struggling venture capital industry.
For every successful public intervention there are many failed efforts, wasting billions in taxpayer dollars.
The Obama administration’s track record on these matters is mixed.
Academic literature in this area is comparatively sparse.
Government can help in two ways: ensure that the economic environment is conducive to entrepreneurial activity, and provide direct investments.
Favorite Questions / Excerpts (Via Harvard)
Q. Sean Silverthorne: Why is this book right for the times?
Josh Lerner: There are two sets of events that make this book particularly timely.
First, there is a keen awareness on the part of many governments of the need for “green shoots,” high-potential firms that will lead to growth after the recession.
The financial crisis opened the door to massive public interventions in the world’s economies, in which the government served as venture capitalist. But these efforts focused on the most troubled and poorly managed firms in the economy, some of which may be beyond salvation. Since many nations believe that these extraordinary times call for massive public funds to be used for economic interventions, shouldn’t these efforts be at least partially designed to promote new enterprises?
Second, in many nations the venture industry is on life support, fighting for survival. The industry has struggled to realize good returns from investments since the year 2000. Many traditional investors are questioning whether they should continue to provide capital to these funds. But given the important role that venture capital has had in spurring innovation, it is natural to wonder whether there is a public role in ensuring the industry’s survival. Indeed, governments from London to New Delhi have announced venture initiatives in the past few months.
Q. Specifically, what can government add to the potting soil that encourages entrepreneurial growth? Tax breaks? Research? Access? Protection?
A: Policies that governments employ to encourage venture capital and entrepreneurial activity take two broad forms: those that ensure that the economic environment is conducive to entrepreneurial activity and venture capital investments, and those that directly invest in companies and funds.
Q: Let’s put you on the spot. How is the Obama administration doing in boosting entrepreneurship?
A: The administration appears to have a keen understanding of the importance of research and innovation. To the extent that it follows through on the promise to create a more favorable environment for entrepreneurship—by using steps such as increased public funding for basic research, eased restrictions on immigration by high-skilled scientists and engineers, and a streamlined patent system—it is likely to translate into a better environment for high-potential entrepreneurs.
In other respects, the track record is not so good. As we’ve discussed, one of the most common fates of programs to stimulate high-technology ventures is capture. Funds end up getting distributed in ways that have little to do with the needs of high-potential ventures or society more generally, but rather by the whims of the powerful and well-connected. From the empty BioValley complex in Malaysia to the repeated U.S. Small Business Innovation Research grants to Beltway “mills” that produce few real innovations, this pattern is depressingly familiar.
Successful programs, by way of contrast, have clear, well-defined investment processes.
Paul Graham is the dean of “micro” startups. He runs Y Combinator and his articles on entrepreneurship are always insightful. This one is particularly worthy of your attention…
Background (Via Paul Graham)
Paul Graham is an essayist, programmer, and programming language designer. In 1995 he developed with Robert Morris the first web-based application, Viaweb, which was acquired by Yahoo in 1998. In 2002 he described a simple statistical spam filter that inspired a new generation of filters. He’s currently working on a new programming language called Arc, a new book on startups, and is one of the partners in Y Combinator.
Paul is the author of On Lisp (Prentice Hall, 1993), ANSI Common Lisp (Prentice Hall, 1995), and Hackers & Painters (O’Reilly, 2004). He has an AB from Cornell and a PhD in Computer Science from Harvard, and studied painting at RISD and the Accademia di Belle Arti in Florence.
I wasn’t sure what to talk about at Startup School, so I decided to ask the founders of the startups we’d funded. What hadn’t I written about yet?
I’m in the unusual position of being able to test the essays I write about startups. I hope the ones on other topics are right, but I have no way to test them. The ones on startups get tested by about 70 people every 6 months.
So I sent all the founders an email asking what surprised them about starting a startup. This amounts to asking what I got wrong, because if I’d explained things well enough, nothing should have surprised them.
I’m proud to report I got one response saying:
What surprised me the most is that everything was actually fairly predictable!
The bad news is that I got over 100 other responses listing the surprises they encountered.
There were very clear patterns in the responses; it was remarkable how often several people had been surprised by exactly the same thing. These were the biggest:
Guiding Principles (Via Paul Graham)
1. Be Careful with Cofounders
2. Startups Take Over Your Life
3. It’s an Emotional Roller-coaster
4. It Can Be Fun
5. Persistence Is the Key
6. Think Long-Term
7. Lots of Little Things
8. Start with Something Minimal
9. Engage Users
10. Change Your Idea
11. Don’t Worry about Competitors
12. It’s Hard to Get Users
13. Expect the Worst with Deals
14. Investors Are Clueless
15. You May Have to Play Games
16. Luck Is a Big Factor
17. The Value Of Community
18. You Get No Respect
19. Things Change As You Grow
“Unconsciously, everyone expects a startup to be like a job, and that explains most of the surprises. It explains why people are surprised how carefully you have to choose cofounders and how hard you have to work to maintain your relationship. You don’t have to do that with coworkers. It explains why the ups and downs are surprisingly extreme. In a job there is much more damping. But it also explains why the good times are surprisingly good: most people can’t imagine such freedom. As you go down the list, almost all the surprises are surprising in how much a startup differs from a job.”
Great investors know how to give strategic advice without being in the operating weeds of a company
Great investors get to know whole management teams, not just CEOs — in fact, great investors become part of the extended management team of their portfolio companies
Great investors invite you to do diligence on them by giving you a list of every CEO they’ve ever worked with and asking you to pick the ones you want to talk to
Great investors ask great questions
Great investors don’t publicly take credit for the success of their investments, even if they were major drivers of that success
The most precious resource in the world economy is human genius, which we may define as the ability to devise significant inventions that enhance survival and prosperity. At any one time, genius is embodied in just a few score thousand people, a creative minority that accounts for most human accomplishment and wealth. Cities and nations rise and thrive when they welcome entrepreneurial and technical genius; when they overtax, criminalize, or ostracize it, they wither.
During the twentieth century, an astounding proportion of geniuses have been Jewish, and the fate of nations from Russia westward has largely reflected how they have treated their Jews. When Jews lived in Vienna and Budapest early in the century, these cities of the Hapsburg Empire were world centers of intellectual activity and economic growth; then the Nazis came to power, the Jews fled or were killed, and growth and culture disappeared with them. When Jews came to New York and Los Angeles, those cities towered over the global economy and culture. When Jews escaped Europe for Los Alamos and, more recently, for Silicon Valley, the world’s economy and military balance shifted decisively. Thus many nations have faced a crucial moral test: Will they admire, reward, and emulate a minority that has achieved towering accomplishments? Or will they writhe in resentment and plot its destruction?
The test has assumed a global face today, when a large proportion of the world’s genius resides in Israel. Israel has very recently become a center of innovation, second in absolute achievement only to the United States, and on a per-capita basis dwarfing the contributions of all other nations, America included. How Israel is treated by the rest of the world thus represents a crucial test for civilization. Will we pass it?
Excerpt (Via City Journal)
But what I learned in Jerusalem was that Israel was not only a site for research and outsourcing and the occasional conceptual coup, but the emerging world leader, outside the United States, in launching new companies and technologies. This tiny embattled country, smaller than most American states, is outperforming European and Asian Goliaths ten to 100 times larger. In a watershed moment for the country, Israel in 2007 passed Canada as the home of the most foreign companies on the technology-heavy NASDAQ index; it is now launching far more high-tech companies per year than any country in Europe.
Anderson’s book points out that the cost of providing web services is declining as a result of open source software, commodity hardware, and cheap bandwidth. Gladwell agrees with the trend but notes that it is very expensive for YouTube to host video. Gladwell and Anderson also traded visions of the future of the media business, with Anderson arguing that content was becoming commoditized and Gladwell holding up the Wall Street Journal’s paid web subscription as an example of paid for premium content. Ultimately the debate veered into a discussion of the economics of abundance, pitting overly enthusiastic cyber utopians against cynical and perhaps self interested, defenders of current media business models.
Additional Excerpts (Via UnionSquare)
The debate was entertaining but not very satisfying. Malcolm’s examples were too narrow and not compelling. The WSJ gets away with a subscription, for the moment, because their users bill it to their corporate credit card. YouTube has real costs because of its enormous scale, and the structure of the pharmaceutical industry has little to do with purely digital products on the web.
Chris, on the other hand, drifts too easily into an imagined world of abundance where economics (for lack of scarcity) will no longer be able to describe human behavior. I agree with Chris that the economics of the web are fundamentally different, but I agree with Malcolm that the basic laws of economics still apply.
My frustration with the debate about Free is that it seems like a last ditch effort to fit the internet economy into the familiar framework of the industrial economy. That isn’t going to work. Free is not a pricing strategy, a marketing strategy, or the inevitable consequence of a market with low variable costs. It’s a symptom of a much more fundamental economic shift.
Final Thoughts (Via Union Square)
Since Craigslist collapsed a multibillion dollar classified advertising business into a fabulously profitable $100,000,000 business, perhaps we should be talking about the potential deflationary impact of more “zero billion dollar” businesses. As the radical efficiencies of the web seep into more sectors of the economy, and participants in social networks exchange attention instead of dollars, will governments at all levels need to make do with less tax revenue? That’s a scary thought in an era of high deficits unless traditional governments can learn from the efficent governance systems of social networks and provide more for less.
According to this paper “Venture capital firms based in locales that are venture capital centers outperform, regardless of the stage of the investment.” So much for starting my own venture capital fund in a remote area…. If you look at the development of the venture capital industry within the context of economic geography then this outcome becomes a little more self evident.
We document geographic concentration by both venture capital firms and venture capital-financed companies in three cities – San Francisco, Boston, and New York. We find that firms open new satellite offices based on the success rate of venture capital-backed investments in an area. Geography is also significantly related to outcomes. Venture capital firms based in locales that are venture capital centers outperform, regardless of the stage of the investment. Ironically, this outperformance arises from outsized performance outside of the venture capital firms’ office locations, including in peripheral locations. Outperformance of non-local investments suggests that policy makers in regions without local venture capitalists might want to mitigate costs associated with established venture capitalists investing in their geographies rather than encouraging the establishment of new venture capital firms.
