Archive for the 'Venture Capital Industry' Category
March 16th, 2011 by Drew
“Ever tried. Ever failed. No matter. Try Again. Fail again. Fail better.”
Samuel Beckett – Worstword Ho
Irish playwright and Nobel Laureate
In a recent Working Knowledge, Carmen Nobel interviews Harvard Professor Shikhar Ghosh about Why Companies Fail – and How Their Founders Can Bounce Back.
Professor Ghosh describes three categories of “failure” for start-ups, and estimates the occurrences of each:
1. Liquidate all assets, investors lose most/all money: 30-40%
2. Not realizing the projected return: 70-80%
3. Falling short of initial projections: 90-95%
With “failure” this common, he urges executives to distinguish between business failure and personal failure. It’s vital to not let the former, which can be a valuable learning experience, pressure you into the latter, which can become a career-damning ethical lapse:
A personal failure is one in which an individual does something that violates a fiduciary duty, commits a crime, or acts in a way that goes against the normal tenets of morality and fair play… Ironically, a personal failure often occurs because an entrepreneur is trying too hard to avoid an enterprise failure. Trying to keep the venture capitalists happy and the bankruptcy at bay, the founder or CEO will resort to illegal acts such as fraud, or to morally problematic acts such as blatant misrepresentation of the company’s capabilities or prospects when talking to customers or financiers. And when you do that, you’re then on the slippery slope of taking an enterprise failure and making it a personal failure.
Professor Ghosh closes with an endorsement of Schumpeter’s gales of creative destruction: “manage failure so that enterprises fail but people can still succeed…[and] build a society that can reinvent itself as the world changes.”
March 9th, 2011 by Patrick
Kent Hoover at portfolio.com helps make a critical distinction about the sources of job growth: it depends less on small businesses than it does on 
new small businesses. Hoover reports on the second annual “State of Entrepreneurship” address by Kauffman Foundation CEO Carl Schramm:
“The widely repeated claim that small businesses are the vital source of new jobs isn’t supported by the facts,” (Schramm) said. “It may sound good on the campaign stump, but here’s the reality: Companies with fewer than 500 employees—the official definition of a small business—account for roughly four out of 10 jobs. Firms of less than 100 employees—a more commonsense definition of small business—account for less than one-third of American jobs.”
The key to growing the U.S. economy is helping more new businesses become billion-dollar companies over time. Currently about 15 of the 600,000 new businesses launched every year in the U.S. grow to become billion-dollar businesses, according to Kauffman. If we could increase that number to 45 to 70 a year, “we’d permanently increase the economy’s growth rate by one full percentage point.”
Schramm’s recommendations (discussed in his address and in Kauffman’s Rules for Growth) include: enabling more high-skilled immigration, streamlining university technology licensing practices, tax reform, and patent/IP reform.
As we’ve noted before, new businesses do account for a large percentage of the NEW jobs created each year, so encouraging new business formation remains critical to putting Americans back to work. Beyond that, it’s a number games. The more new businesses, the more likely that some of them will go on to be billion dollar businesses. But you don’t get the latter without the former, so it’s critical that our tax and regulatory policy encourages new business formation.
February 23rd, 2011 by Paul
Bill Draper – industry pioneer and author of The Startup Game – recently discussed his career, entrepreneurs, and the evolution of the venture business at the Commonwealth Club in San Francisco.
The wide-ranging interview (recounted here at The Wall Street Journal Venture Capital Dispatch blog) covered several topics critical to a successful vc-entrepreneur marriage: maintaining long term relationships, communicating good news and bad, promoting honesty in business, and maximizing board effectiveness.
Draper wove several money quotes throughout his remarks; here are a few of our favorites:
“When an entrepreneur has a first board meeting, we called that the ‘Oh sh—meeting.’ That’s when the VC finds out the bad news he didn’t know when he made the investment. How the VC reacts to that defines the relationship – it either becomes more brittle or closer.”
“We often tell (entrepreneurs) they have underestimated the timeline” – toward becoming profitable or becoming an exit candidate, for example. “They’d say, ‘No, we’ve doubled the time we think it will take.’ Then we double that timeline, and very often that’s not enough.”
“When the bubble burst (around 2000), it was a very scary time. We had sold off a lot of investments when the bubble was rising, or even at the peak, and we were feeling probably less humble than we should have. We had a convertible debenture, and when the two years were up, we said, ‘We’ll take our money back.’ It later sold for a billion dollars to Amazon. If a VC looks you in the eye and says he hasn’t made mistakes, he’s lying.”
“I used to always say to the CEO, ‘Why don’t you charge $2 per reservation, instead of $1? He’d say, ‘Bill, you don’t get it, we want to own the market.’ Or I’d say, ‘Why do you lease the machines, why not make them pay you for them?’ He’d say, ‘Bill, you don’t get it, we want to own the market.’ Thank God he didn’t take my advice.”
“Make sure you have operating experience, do your homework, try to be humble at all times, think about each opportunity from the entrepreneur’s standpoint, and be gracious to all of them, because they are the future of this country.”
February 16th, 2011 by Drew
I am Patchwork V - Soraia Almeida
This outstanding article in the Sun Sentinel about the entrepreneurial ecosystem of Florida is written by Jeremy Ring, who represents District 32 in the Florida Senate and has fought tirelessly in Tallahassee for policies that encourage entrepreneurial activity in the State. (We have written on the topic ourselves here, here, here and here.)
Senator Ring argues, convincingly, that Florida has all the necessary pieces for a “21st century innovative economy [that] creates wealth and results in consumer spending and ultimately a strong work-force” and has only to interconnect those pieces and better market them to the rest of the world.
He also offers recommendations to strengthen the entire ecosystem – from primary research through to large public companies – and laments an issue we see all too often: even our state’s (and region’s) attractive overall business climate cannot ensure that our entrepreneurs will get the support they need.
In order for innovative ideas to grow to profitable and sustainable levels, there are many steps that are required — and that Florida must embrace. The initial step is to have an incubator environment. Seed funding is crucial for entrepreneurs to develop business plans, hire attorneys to ensure proper governance, apply for patents and trademarks, secure proof of sales, and to attract executives and additional engineering talent. All this must be in place before a real venture capital commitment could be considered. The next challenge is to ensure that a robust venture capital network exists. Without it, companies that do ultimately attract professional funding are often relocated to other parts of the country, where the investor can monitor or oversee their investment.
We once wrote of America’s hodge-podge of scientists, institutions, and funding; innovative companies are generated not only from the availability of seed capital but the structure of the early-stage investing ecosystem. What is true for the nation is true for Florida, perhaps more so: our widely dispersed urban centers present additional challenges to networking, collaboration, and the ongoing management of ventures. Efforts by leaders in the state government or private actors (such as the Florida Venture Forum) can thicken and strengthen the connections amongst our researchers, investors and entrepreneurs.
January 4th, 2011 by Drew
What makes a great board great are not so much its formal procedures, but whether or not its members’ informal modus operandi ensure those well-designed procedures function properly.
Robert C. Pozen makes this same point recently in The Wall Street Journal, where he argues that placing too much emphasis on procedure encourages “social loafing” – a situation where individuals don’t take responsibility for the group’s actions and instead assume others will lead. (Psychologists also believe this phenomenon worsens as group size grows.). From A New Model for Corporate Boards:
In 2002, Congress passed the Sarbanes-Oxley Act to prevent corporate governance debacles like Enron and WorldCom from happening again. But six years later, many of the largest U.S. institutions had to be rescued by massive federal assistance. All of these institutions were Sarbox-compliant: Most members of their boards were independent, and their auditors’ reports showed no material weaknesses in internal controls. So why were the reforms so ineffective?
I believe that the problem is the current structure of corporate boards. In short, they are too big, members often don’t have enough relevant experience, and they put too much emphasis on procedure.
…
Regulators, investors and directors should recognize that we do not need more procedures for corporate boards. Instead, we need more expert directors who view their board services as their primary profession—not an avocation.
We agree with Pozen, but wouldn’t call it a *new* model. As venture capital investors, we typically limit board size at 5 to7 members, include industry experts as outside board members, and spend substantial time communicating with management and working on company issues between board meetings.
Lastly and most critically, our reward depends exclusively on whether or not the value of the company appreciates. (By way of contrast, Pozen recommends directors receive annual compensation of $400,000 – with only 75% of that in company stock.)
A critical joint task for the venture investor-entrepreneur partnership is to strengthen the composition and performance of the company’s board of directors. Here is a sampling of our thinking on the subject:
December 31st, 2010 by Matt
Thank you to all our readers for joining us here for a bloggin’ 2010. We wish you all a happy and prosperous 2011!
Enjoy this potpourri of our recent twitter activity to end the year, in case you missed any of them:
December 22nd, 2010 by Patrick
Xconomy reports that Michigan has decided to offer tax credits to angel investors. We’ve written on the topic here, and also recapped Rhys William’s testimony (before Florida Senator George LeMieux’s “Innovation in America: Opportunities and Obstacles” hearing) on the subject here. Scott Shane, Professor of Entrepreneurial Studies at Case Western Reserve University, argues in BusinessWeek that such tax credits are not the most ideal way to promote entrepreneurship because they redirect the same pool of available dollars to the same universe of start-ups, but in an inefficient manner - costing the state tax revenue while not maximizing job creation. Professor Shane prefers more broad-based tax relief:
Much as I would like to see policymakers encourage more high-growth entrepreneurial activity, I don’t believe that an angel tax credit for SBIR recipients is the way to do it. A capital gains tax cut for shareholders in startups (including angel investor holders of equity) would stimulate more high-growth entrepreneurship with fewer adverse effects than the proposed angel tax credit.
While we agree that broad-based tax relief (for any economic issue) tends to be a more efficient solution than targeted credits, it’s important to support any and all politically feasible means to make early stage investing more attractive. Robert Ackerman, managing director of Allegis Capital, in a widely quoted interview, cites data from the National Science Foundation that illuminate why:
In 1981, 70.7% of industrial R&D took place at companies with 25,000 employees or more. By 2005 that had fallen to 37.6%. At the same time, companies with fewer than 5,000 employees accounted for 39.6% of industrial R&D in 2005, up from 10.5% in the early 1980s.
From the same data we learn that companies with fewer than 500 employees account for just 11% of sales (of R&D-performing firms) while employing 25% of the scientists and engineers. The large (>25,000) firms enjoy 43% of sales while employing only 29% of the scientists and engineers. Over the past three decades it has become more common for small companies to plant while large companies harvest – often by acquiring the same small companies in order to create economies of scale for the innovation. This is a good change for the economy, and fueled in no small part by the growth and success of angel investors (and venture capital firms) who allocate capital more efficiently. These activities should be encouraged with tax credits, rate reductions… or both.
December 9th, 2010 by Dick
Ballast Point Ventures is pleased to announce that it has sold its remaining interest in Fund I portfolio company, QOL Medical, LLC, in a minority recapitalization led by QOL’s largest shareholder, Cooper Capital. Under the terms of the all cash transaction, Ballast Point Ventures and the Company’s founders, Trevor Blake and Edwin Hernandez, will sell all of their interests. Edgemont Capital Partners served as the advisor to QOL on the transaction.
Additional detail can be found here.
November 22nd, 2010 by Matt
According to Dow Jones VentureSource, venture financing is up 10% in the past year – which is encouraging news for job creation. Less encouraging however (also from DJ Venture Source) is that it’s still down 27% compared to two years ago.
We’ve written previously about the slight misconception concerning job growth in the economy: jobs are created mostly by new businesses, which start out small, as opposed to the more common short-hand of “small businesses.” The Wall Street Journal reported on the subject a few days ago, with a sobering graph, in Few Businesses Sprout, With Even Fewer Jobs.
The entrepreneurs interviewed for the piece claim they’ve “never seen seed capital so low” and are “alarmed” by what is actually a one-two combination of unavailable capital and deep uncertainty about the overall business environment:
Some entrepreneurs say it’s not all about financing, though. They express concern about taxes, health-care costs and the impact that wrangling in Washington over the federal budget deficit will have on them. “I can’t determine what the cost of providing health care for employees would be,” says Kevin Berman, 47, who is starting a local-produce company in Orion Township, Mich., called Harvest Michigan. Starting a company “is harder than it was at any time I can remember.”
We are hopeful that in the months and years ahead our economy will improve at a more rapid rate. But we also know that for even an improving economy to produce high quality jobs in substantial numbers, our government will need to focus on restoring a favorable and predictable business environment that provides the right incentives for new business formation. That is the only approach that will allow for the unleashing of the entrepreneurial ”animal spirits” that fuel robust periods of economic growth and impressive job creation.
October 8th, 2010 by Drew
The October 2010 issue of Florida Trend includes an excellent feature on a critical piece of the state’s entrepreneurial ecosystem: local groups of investors providing funding to emerging companies.
These “Bands of Angels” all work with early stage companies, and therefore have a higher tolerance for risk, but tend to operate in slightly different ways. Some meet regularly, some don’t; some pool their capital, some leave the investing decision to each individual; some focus on industries or region or type of entrepreneur, and some by “what they know.”
Angels provide more than capital and expertise - their networks and reputations assist with introductions to additional sources of financing. Rhys Williams of New World Angels in Boca Raton (whose recent testimony before the United States Senate on the importance of early stage investing can be found here) explains:
For entrepreneurs, it’s the smartest money you can get. You could be getting 40 investors committed to your success who use their networks to grow the company and who will help you find the next round of capital.
Sean Christiansen of Catapult Capital in Orlando describes how local sources of this type of funding are vital to the future of Florida. Viable local capital can prevent high-growth companies from relocating to be close to their source of funding:
Historically, Florida has lost companies because they went to venture capital firms who prefer local businesses, and most of those [venture] firms were not in Florida.
The Florida Trend article also includes insights from Tim Cartwright of Tamiami Angel Fund in Naples, Barbara Boxer of Women Angels in Miami, Allan Keen of Winter Park Angels in Winter Park, and Alan Rossiter of Springboard Capital in Jacksonville.
Developing the state’s and region’s entrepreneurs and the infrastructure that supports them are favorite topics of ours. Here are convenient links to the Florida Angel Funds mentioned in “Bands of Angels”:
