Stanford's Technology Ventures Program (STVP) released a collection of online entrepreneurship education resources, which can be found here.
The Stanford Technology Ventures Program (STVP) is the entrepreneurship center at Stanford University within the School of Engineering. STVP is dedicated to accelerating high-technology entrepreneurship research and education for engineers and scientists worldwide.
The site offers free videos and other resources for aspiring entrepreneurs.
Wednesday, August 30, 2006
Saturday, August 26, 2006
Carbon Footprint
Update:
Andrew Fife sent me a link to TerraPass, a cool service that allows you to offset your car's carbon emissions for less than $80 a year. Very cool idea.
The VC industry recently added a new sector of investment: clean energy. New funds are being raised and new opportunities explored in generating clean energy. As individuals, moreover, Americans are beginning to explore their contributions to carbon dioxide emissions.
I expect that within a few years one's carbon footprint will become common knowledge and carbon diets, attempts to lower carbon emissions, will become sources of pride and conversation.
This month's Sierra Club magazine features a great article, My Low-Carbon Diet, that explores carbon footprints and the ways in which modern lifestyles generate carbon. The site also features a link to a carbon-calculator, hosted at on the web site for Al Gore's movie - An Inconvenient Truth.
The article includes a carbon index with the following statistics:
Take the carbon calculator test. Thanks to the Sierra Club for a great article.
Andrew Fife sent me a link to TerraPass, a cool service that allows you to offset your car's carbon emissions for less than $80 a year. Very cool idea.
The VC industry recently added a new sector of investment: clean energy. New funds are being raised and new opportunities explored in generating clean energy. As individuals, moreover, Americans are beginning to explore their contributions to carbon dioxide emissions.
I expect that within a few years one's carbon footprint will become common knowledge and carbon diets, attempts to lower carbon emissions, will become sources of pride and conversation.
This month's Sierra Club magazine features a great article, My Low-Carbon Diet, that explores carbon footprints and the ways in which modern lifestyles generate carbon. The site also features a link to a carbon-calculator, hosted at on the web site for Al Gore's movie - An Inconvenient Truth.
The article includes a carbon index with the following statistics:
- Average daily US carbon dioxide emissions per person: 122 pounds
- Average worldwide: 24 pounds
- Amount that could be emitted without raising carbon dioxide levels in the atmosphere: 9 pounds
- Average pounds of carbon dioxide emitted each day by:
- driving in the US, per person: 2.2 pounds
- flying in the US, per person: 3.3 pounds
- cooling the 76 % of US households with AC: 3.9 pounds
- a typical refrigerator: 3.6 pounds
- the best current 21-cubic foot fridge: 1.6 pounds
- an electric clothes dryer: 3.9 pounds
- average per kilotwatthour: 1.5 pounds
- coal-fired kwh: 2.0 pounds
- hydro kwh: 0.5 pounds
Take the carbon calculator test. Thanks to the Sierra Club for a great article.
Friday, August 25, 2006
The High Cost of Optimism
The Standish Group, which analyzes IT projects, reported that in 2004 only 29% of IT projects succeeded, down from 34% in 2002. Cost over-runs from original budgets averaged 56%, and projects on average took 84% more time than originally anticipated.
Put another way, 71% of projects did not succeed, 44% came in on budget, and only 16% came in on time. Wow!
Today's papers are rife with horror stories of projects failing - from the FBI's abandoned $170m internal IT project, to EDS' failing Navy contract, to incredible cost overruns and delays in the Pentagon's weapons development programs.
What does all this mean for venture capital and for executive teams?
Why do such smart people, across so many industries, fail to adequately account for two crucial variables in planning - cost and time?
Think about the LBO business. Most deals are auctions, and the winning bid is often simply the highest bid. In some sense, the only way to win is to forecast the rosiest outlook and forecasts.
Along those lines, I once sat through a McKinsey pitch on private equity firm performance in which McKinsey found that the winning bidder/firm overestimated the target company's first year EBITDA 66% of the time. By overestimating profit performance, the winner bidder justified a very aggressive bid.
This is not good for investors, nor for companies who set overly aggressive goal, fail to realize them, and then have to retrench, rationalize, and regroup.
Another cliche in venture is that execution separates great start-ups from losers. These numbers illustrate why that is the case. If you are great at the initiation phase - idea articulation and business plan creation - and suffer the ability to execute and control the project...then not good.
Helping young companies develop the best practices associated not just with coming up with great ideas or products, but also on executing on a budgeted plan that ensures the company comes in on time and on budget with the deliverables in hand will be of immense value.
Thursday, August 24, 2006
Company Culture and Politics
Business school alums often come back to campus and tell students that Organizational behavior proved to be the most valuable course(s) they took. When I studied at Kellogg, I never understood why.
I often meet with people who ruefully state, "my company is too political;" "there is no transparency where I work, things happen, people come and go, and no one knows why;" "I don't understand how decisions get made, things seem so random."
Politics, as we all know, is not something that just happens in Washington DC. All companies, be they start-ups or GM, are political. Politics are informal, unofficial, and sometimes behind-the-scenes efforts to sell ideas, influence an organization, increase power, and achieve other targeted objectives. Politics have a truly pejorative connotation and being accused of being a political animal is most often meant to be an insult.
Since I left business school in 1999, however, I have come to appreciate the fact that to ignore the realities of organizational life and decision making is certain to reduce your effectiveness and influence at work. I believe people often join start-ups to escape the crushing politics of large companies. The reality is that organizational polictics are a constant, while start-ups may be lower on the political spectrum/continuum than larger companies, they remain organizations populated by people. I recently read a book that provided a model with respect to understanding the organizational political continuum. The book argues there are two contrasting styles and hence models of people and companies.
The first model is idea-centric. Idea-centric people and companies are driven by the power of an idea. They view power as residing in facts, logic, analysis, and innovation. These companies are often flat, meritocracies where the best ideas win and the way to win is to make the most cogent, objectively correct arguments. These people believe in substance, in doing the right (logically speaking) thing, open agendas and transparency, and the belief that ideas speak for themselves. Ie, if the ideas are well stated, why wouldn't someone agree? I fall into this camp and often believe that if I make a logically consistent argument (ie axiomatic) then it should be clear what to do.
The second model is person-centric. Person-centric people and companies are driven by the power of hierarchy. The merit of an idea is not driven by the cogency of the logic but by the power, position, and political support for the speaker. In this world, ideas definitely do not speak for themselves, but rather image and the perception of support (who supports this, what does the VP/CEO, etc think about it). In these companies, people often don't do what's right but rather what works. Decisions, given they are not based on logic, are far from transparent and meetings are fait accomplis rather than opportunities for genuine discussion and feedback. Relationships drive support, not ideas and merit appears to lose out to coalitions and sponsorship. Loyalty, alliances, and working the system outweigh doing whats right and trusting the system to pick the "best" outcome.
In my experience, companies land somewhere along a continuum of the two models. The challenge for all of us is to understand the type of company we work in and what style we will need to adopt to be successful, or rather to quit and leave. Often the most frustrated people are idea-centric people working in people-centric companies who simply don't realize it and cannot understand why their brilliant ideas find no support or traction.
We owe it to ourselves to be self-aware. I believe this is the message the alums were bringing to students - don't be naive, calibrate your company's culture and style, and recognize that merit alone, unfortunately, is often not enough to get things done. The key is to always maintain integrity, avoid ugly ethical compromises, while working within the political constraints of your employer.
I often meet with people who ruefully state, "my company is too political;" "there is no transparency where I work, things happen, people come and go, and no one knows why;" "I don't understand how decisions get made, things seem so random."
Politics, as we all know, is not something that just happens in Washington DC. All companies, be they start-ups or GM, are political. Politics are informal, unofficial, and sometimes behind-the-scenes efforts to sell ideas, influence an organization, increase power, and achieve other targeted objectives. Politics have a truly pejorative connotation and being accused of being a political animal is most often meant to be an insult.
Since I left business school in 1999, however, I have come to appreciate the fact that to ignore the realities of organizational life and decision making is certain to reduce your effectiveness and influence at work. I believe people often join start-ups to escape the crushing politics of large companies. The reality is that organizational polictics are a constant, while start-ups may be lower on the political spectrum/continuum than larger companies, they remain organizations populated by people. I recently read a book that provided a model with respect to understanding the organizational political continuum. The book argues there are two contrasting styles and hence models of people and companies.
The first model is idea-centric. Idea-centric people and companies are driven by the power of an idea. They view power as residing in facts, logic, analysis, and innovation. These companies are often flat, meritocracies where the best ideas win and the way to win is to make the most cogent, objectively correct arguments. These people believe in substance, in doing the right (logically speaking) thing, open agendas and transparency, and the belief that ideas speak for themselves. Ie, if the ideas are well stated, why wouldn't someone agree? I fall into this camp and often believe that if I make a logically consistent argument (ie axiomatic) then it should be clear what to do.
The second model is person-centric. Person-centric people and companies are driven by the power of hierarchy. The merit of an idea is not driven by the cogency of the logic but by the power, position, and political support for the speaker. In this world, ideas definitely do not speak for themselves, but rather image and the perception of support (who supports this, what does the VP/CEO, etc think about it). In these companies, people often don't do what's right but rather what works. Decisions, given they are not based on logic, are far from transparent and meetings are fait accomplis rather than opportunities for genuine discussion and feedback. Relationships drive support, not ideas and merit appears to lose out to coalitions and sponsorship. Loyalty, alliances, and working the system outweigh doing whats right and trusting the system to pick the "best" outcome.
In my experience, companies land somewhere along a continuum of the two models. The challenge for all of us is to understand the type of company we work in and what style we will need to adopt to be successful, or rather to quit and leave. Often the most frustrated people are idea-centric people working in people-centric companies who simply don't realize it and cannot understand why their brilliant ideas find no support or traction.
We owe it to ourselves to be self-aware. I believe this is the message the alums were bringing to students - don't be naive, calibrate your company's culture and style, and recognize that merit alone, unfortunately, is often not enough to get things done. The key is to always maintain integrity, avoid ugly ethical compromises, while working within the political constraints of your employer.
Wednesday, August 23, 2006
Pat Your Head and Rub Your Tummy
Young start-ups need two things to survive: customer orders and funding.
The challenge, however, is that customers and venture investors often decide to "buy" based on very different messages.
To succeed with customers, start-ups need to articulate clear, focused value propositions. Often the nature of early stage product development is such that the product is of limited functionality and can best be sold by "narrowing the focus to broaden the appeal;" clear use cases, incremental value wrt products already in production, easy to install, and quick to show value.
Focus is often the key to early sales traction.
Investors on the other hand can often have a pejorative view of focus - VCs question nichey looking business plans ("is this a feature or a company?") and the proverbial "what is the TAM" and "can this thing scale" are often orthogonal to the product marketing challenges of selling version 1.0 products to skeptical customers.
In my experience as a VC and ex-startup CEO, young companies need to remember to develop and tell two stories. The first targets customers and explains specific, tangible, and focused value made possible via the currently available product. The second story targets the VCs and addresses the real concern with respect to scale, TAM, and a road map that supports the emergence of the company from a niche-product to a real company.
This challenge of orthogonal messages and the need to develop them simultaneously is similar to the age-old, "pat your head and rub your tummy" trick.
Some companies tell great customer stories and never get funding. Others are great at raising money, yet never seem to be able to sell the customer. It is the rare, and significant, early-stage company that can tell a story of relevancy that resonates with the buyer, while also painting a longer-term vision to VCs wrt how to build a large company that will make VCs a healthy return.
The challenge, however, is that customers and venture investors often decide to "buy" based on very different messages.
To succeed with customers, start-ups need to articulate clear, focused value propositions. Often the nature of early stage product development is such that the product is of limited functionality and can best be sold by "narrowing the focus to broaden the appeal;" clear use cases, incremental value wrt products already in production, easy to install, and quick to show value.
Focus is often the key to early sales traction.
Investors on the other hand can often have a pejorative view of focus - VCs question nichey looking business plans ("is this a feature or a company?") and the proverbial "what is the TAM" and "can this thing scale" are often orthogonal to the product marketing challenges of selling version 1.0 products to skeptical customers.
In my experience as a VC and ex-startup CEO, young companies need to remember to develop and tell two stories. The first targets customers and explains specific, tangible, and focused value made possible via the currently available product. The second story targets the VCs and addresses the real concern with respect to scale, TAM, and a road map that supports the emergence of the company from a niche-product to a real company.
This challenge of orthogonal messages and the need to develop them simultaneously is similar to the age-old, "pat your head and rub your tummy" trick.
Some companies tell great customer stories and never get funding. Others are great at raising money, yet never seem to be able to sell the customer. It is the rare, and significant, early-stage company that can tell a story of relevancy that resonates with the buyer, while also painting a longer-term vision to VCs wrt how to build a large company that will make VCs a healthy return.
Tuesday, August 22, 2006
Happy Birthday Disk Drive
Today's WSJ's Technology section ran a fascinating overview of the disk drive. The disk drive was invented fifty years ago by IBM. The first drive, called the RAMAC (random access method of accounting and control) weighed in at one ton, the disks were 24 inches in diameter, and had 5 megabytes of storage capacity.
According to the article, the capacity limit related more to the marketing department's view that no one could use more than 5 MBs than to a purely technical limit. In the last 50 years, the capacity, measured by bits per square inch, has gone from 2,000 to 135 million bits. This improvement represents an incredible 70 million times improvement.
Annual capacity increases run at 30-40% per year and the expert interviewed, Currie Mance (VP with HDS), expects storage to move from 10 GBs/one-inch drive to 100 GBs/one-inch drive over the next seven years.
While much is made of Moore's law, the related improvement in disk drive capacity is simply amazing and a true enabler of the explosion of digital media and content that is fueling the current web phenomena.
According to the article, the capacity limit related more to the marketing department's view that no one could use more than 5 MBs than to a purely technical limit. In the last 50 years, the capacity, measured by bits per square inch, has gone from 2,000 to 135 million bits. This improvement represents an incredible 70 million times improvement.
Annual capacity increases run at 30-40% per year and the expert interviewed, Currie Mance (VP with HDS), expects storage to move from 10 GBs/one-inch drive to 100 GBs/one-inch drive over the next seven years.
While much is made of Moore's law, the related improvement in disk drive capacity is simply amazing and a true enabler of the explosion of digital media and content that is fueling the current web phenomena.
Monday, August 21, 2006
Employease Sold to ADP
In November 2005, JMP Securities released a great report titled Flipping the Switch about the benefits and power of Software-as-a-Service.
The report detailed the customer benefits - independence from IT, more timely software upgrades, financial risk mitigation, lower IT costs, high service levels, and funding from operating rather than capital budgets; as well as the vendor benefits - lower R&D costs, lower support costs, visibility into customer activities, and inherent piracy controls.
While Salesforce.com is a well-deserved pioneer of the model, seven years ago Hummer Winblad invested in Employease, a SaaS provider of human resource management software. Last week, ADP acquired the company and the event serves as real validation of the management's teams foresight in building a true multi-tenant application based on a recurring revenue model. At the time of exit, the company had over 1,500 customers and tremendous visibility into future growth and revenue. ADP, a major reseller and partner, lived with the company for some time as a partner and acquired the business as part of the company's Employer Services Division.
Congratulations to Phil Fauver (CEO), the management team, and to John Hummer for the foresight to help pioneer a new business and delivery model seven years before the analyst report was published!
The report detailed the customer benefits - independence from IT, more timely software upgrades, financial risk mitigation, lower IT costs, high service levels, and funding from operating rather than capital budgets; as well as the vendor benefits - lower R&D costs, lower support costs, visibility into customer activities, and inherent piracy controls.
While Salesforce.com is a well-deserved pioneer of the model, seven years ago Hummer Winblad invested in Employease, a SaaS provider of human resource management software. Last week, ADP acquired the company and the event serves as real validation of the management's teams foresight in building a true multi-tenant application based on a recurring revenue model. At the time of exit, the company had over 1,500 customers and tremendous visibility into future growth and revenue. ADP, a major reseller and partner, lived with the company for some time as a partner and acquired the business as part of the company's Employer Services Division.
Congratulations to Phil Fauver (CEO), the management team, and to John Hummer for the foresight to help pioneer a new business and delivery model seven years before the analyst report was published!
Wednesday, August 09, 2006
Fit versus Proven Performance
Update: Brad Feld sent me a link to Will Herman's blog that provides great detail and insight to the thoughts below.
Today, I sat through a classic early stage start-up discussion. The company, an unannounced early stage software company, is in the process of bringing on the first key hires post-funding.
Work is piling up, the opportunity awaits, time is of the essence...but, there remains an underlying tension with respect to the profile and capabilities of the first key hires.
Two profiles emerged in the discussion
- a proven performer with deep domain expertise and a track record of achievement in the given function versus
-a high-caliber athlete with incredible drive and passion that can be shaped into a high-achiever but without the defacto track record and resume.
Whom to hire - the proven performer or the eager, malleable beaver?
During the debate, one of the Hummer Winblad partners reminded the group of a mental framework Jack Welch employed at GE to help structure and clarify the issues.
He used a two-by-two diagram that plots cultural fit on the x-axis and proven performance on the y-axis. There then fall out four types of people:
Jack Welch concluded that type D trumps type A all day long. Type A hires are disruptive, wreck culture, and the short-term productivity gains do not justify the long term damage to the company's psyche. Type D hires, with the correct investment in mentoring, training, and coaching become, over time, the jewels of the company.
The risk for a start-up is do you have the time, competence, and resources to develop talent?
We will look for Type C employees all day long, however, reality and time pressures often dictate a choice between fit/potential and performance. Management wisdom suggests that fit and culture can become competitive weapons in building great companies.
Do the CEO and board of early stage companies benefit from hiring unbridled passion/malleable natures over mercenaries who get sh*t done but queer culture?
I certainly know whom I would rather work with.
Today, I sat through a classic early stage start-up discussion. The company, an unannounced early stage software company, is in the process of bringing on the first key hires post-funding.
Work is piling up, the opportunity awaits, time is of the essence...but, there remains an underlying tension with respect to the profile and capabilities of the first key hires.
Two profiles emerged in the discussion
- a proven performer with deep domain expertise and a track record of achievement in the given function versus
-a high-caliber athlete with incredible drive and passion that can be shaped into a high-achiever but without the defacto track record and resume.
Whom to hire - the proven performer or the eager, malleable beaver?
During the debate, one of the Hummer Winblad partners reminded the group of a mental framework Jack Welch employed at GE to help structure and clarify the issues.
He used a two-by-two diagram that plots cultural fit on the x-axis and proven performance on the y-axis. There then fall out four types of people:
- proven performers who are lousy fits = type A
- unproven performers who are lousy fits = type B
- proven performers who are great fits = type C
- unproven performers who are great fits = type D
Jack Welch concluded that type D trumps type A all day long. Type A hires are disruptive, wreck culture, and the short-term productivity gains do not justify the long term damage to the company's psyche. Type D hires, with the correct investment in mentoring, training, and coaching become, over time, the jewels of the company.
The risk for a start-up is do you have the time, competence, and resources to develop talent?
We will look for Type C employees all day long, however, reality and time pressures often dictate a choice between fit/potential and performance. Management wisdom suggests that fit and culture can become competitive weapons in building great companies.
Do the CEO and board of early stage companies benefit from hiring unbridled passion/malleable natures over mercenaries who get sh*t done but queer culture?
I certainly know whom I would rather work with.
Saturday, August 05, 2006
Hubpages Launches
Hubpages, Hummer Winblad's latest portfolio company, launched today. I profiled the company in a prior post and TechCrunch kindly wrote on the company and service today.
Enjoy the site and good luck beating my Hubscore.
Enjoy the site and good luck beating my Hubscore.
Feedburner
Feedburner is beta testing Feedburner Networks. A Feedburner Network is a collection of blogs clustered around a particular topic.
Brad Feld details the new service on his blog and he has set up a Feedburner Network on the Venture Capital industry that you can subscribe to by clicking here.
I am pleased to be a member of the Network and congratulate Feedburner on creating a useful new service around "channels" of content.
Brad Feld details the new service on his blog and he has set up a Feedburner Network on the Venture Capital industry that you can subscribe to by clicking here.
I am pleased to be a member of the Network and congratulate Feedburner on creating a useful new service around "channels" of content.
PostApp's WidgetBox Service
Rafe Needleman of Cnet wrote a wonderful overview of PostApp's WidgetBox service. The public beta will start in a few weeks and I encourage all of you to sign up.
Read Rafe's blog post to learn why PostApp will play a key role in the future of web publishing.
Read Rafe's blog post to learn why PostApp will play a key role in the future of web publishing.
Thursday, August 03, 2006
WSJ Article: Era of Diminishing VC Returns
Today's Wall Street Journal carries an article by Rebecca Buckman titled Silicon Valley's Backers Grapple with Era of Diminished Returns. The article catalogs a series of previously well documented and systematic challenges facing the industry:
As with all systemic shocks, the VC industry is adapting and learning to live within the new systemic, rather than cylical, realities of the industry. Clearly, the move to international markets (India and China), new sectors (clean energy), and niche based funds (very early), reflect an implicit realization that the battlefield of opportunity is changing and change will be required for firms to continue to justify their existence and create value.
Brad Feld's blog introduced me to an article by Howard Anderson called Good-bye to Venture Capital. The article, written by a founder of Battery Ventures, makes a familiar, yet powerful argument that the venture industry is over-funded, structurally transformed, and doomed to generate returns far lower than what limited partners expect from the asset class and the associated risk profile. As you will read, the article indicts the industry for suffering from too many investors, too much money, and paints a dire picture of the future.
As a recent entrant to the industry, I found the article is powerful food for thought. Is the industry doomed to low double-digit returns? Are there too many of us chasing too few deals funding too many companies selling to customers with finite budgets, abundance of choice, and limited differentiation between vendors? If so, Howard is spot on, returns will fall, capital will leave the industry, and the fees will be significantly lower thereby reducing the number of professional investors in the space.
As an aside, I don't believe that the VC industry is alone is suffering from too much money. The hedge fund industry is simply exploding wrt funds under management, the number of firms, and the number of people entering the space. Capital, itself, appears to be in abundance across the alternative asset management space.
Howard makes one powerful point that resonates with any reader of Fooled by Randomness. Funds invested in the 1994-19998 time frame did extremely well. The cliche rising tides float all boats comes to mind. At a recent offsite, Eric Schoenberg (HBS prof) reminded us that returns are driven by two key components, systematic returns and idiosyncratic returns (see CAPM model). Systematic returns are market returns. Idiosyncratic returns, however, are where professional investors earn their stripes - they are returns in excess of the market.
To be a decent investor, one must at least deliver systematic returns. To be a great investor, one must deliver idiosyncractic returns. In the bubble, random investments looked genius. The systematic returns (returns for the asset category at large) were simply amazing, thereby creating great weath and perhaps reputations for genius that were more due to circumstance and timing than investing prowess.
The questions for us to ponder is what will be the future systemic returns to the venture capital asset class, and has the inflow of money and people into the venture capital industry made it impossible to generate idiosynctratic returns. Are funds' returns systematic (an index of the market) or extroardinary? Will there be a Vanguard-like vc fund that is a low-fee provider of index funds for the private markets!? What is the basis for extraordinary performance over the market index? Is the succes of vc investors and funds due to serendipity or to process?
These are key questions for investors (both general and limited partners). Can one deliver quality returns in an industry full of capital and people chasing "good" ideas?
One key difference between the public equity markets and the venture capital markets is the degree to which information is transparent. The public markets are by regulation open and transparent with data available to all.
The private markets are marked by imperfect information, proprietary insights, and information asymetries. Certain private investors simply enjoy access to information, ideas, and talent that are not generally available to others. For exmaple, certain leading firms leverage the footprint of their portfolio (talent, ideas, reach) to drive insights that lead to investments that others are not in a position to make. An obvious example, is Sequoia Capital's investment in Yahoo! and Google. With a BOD seat at YHOO, Mike Moritz enjoyed acccess to information relative to GOOG's search technology simply not available to others weighing the decision to invest in GOOG, presuming they even had the chance.
The question for venture capitalists may be as simple as, "what do I know that others don't?" With the corallary, yet vital question begging, "will I be smart enough and sufficiently certain of myself to act on such information?" For as Keynes famously once said, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."
If one knows nothing proprietary, has no unique relationships, access to ideas, and information, then life may be very challenging.
- too many firms (860 US VC firms)
- too much money ($25bn of 2005 LP commitments)
- anemic returns relative to S&P 500 (YTD 3/31/06 returns of 11.7%)
- lack of home run deals (4 of 31 Q2 exits saw 10x+ ROI)
- endowments cutting back VC allocation
- industry leaders, like Paul Ferri, commenting, "I thought by now investors would have figured out that our industry is not an economically viable business model."
As with all systemic shocks, the VC industry is adapting and learning to live within the new systemic, rather than cylical, realities of the industry. Clearly, the move to international markets (India and China), new sectors (clean energy), and niche based funds (very early), reflect an implicit realization that the battlefield of opportunity is changing and change will be required for firms to continue to justify their existence and create value.
Brad Feld's blog introduced me to an article by Howard Anderson called Good-bye to Venture Capital. The article, written by a founder of Battery Ventures, makes a familiar, yet powerful argument that the venture industry is over-funded, structurally transformed, and doomed to generate returns far lower than what limited partners expect from the asset class and the associated risk profile. As you will read, the article indicts the industry for suffering from too many investors, too much money, and paints a dire picture of the future.
As a recent entrant to the industry, I found the article is powerful food for thought. Is the industry doomed to low double-digit returns? Are there too many of us chasing too few deals funding too many companies selling to customers with finite budgets, abundance of choice, and limited differentiation between vendors? If so, Howard is spot on, returns will fall, capital will leave the industry, and the fees will be significantly lower thereby reducing the number of professional investors in the space.
As an aside, I don't believe that the VC industry is alone is suffering from too much money. The hedge fund industry is simply exploding wrt funds under management, the number of firms, and the number of people entering the space. Capital, itself, appears to be in abundance across the alternative asset management space.
Howard makes one powerful point that resonates with any reader of Fooled by Randomness. Funds invested in the 1994-19998 time frame did extremely well. The cliche rising tides float all boats comes to mind. At a recent offsite, Eric Schoenberg (HBS prof) reminded us that returns are driven by two key components, systematic returns and idiosyncratic returns (see CAPM model). Systematic returns are market returns. Idiosyncratic returns, however, are where professional investors earn their stripes - they are returns in excess of the market.
To be a decent investor, one must at least deliver systematic returns. To be a great investor, one must deliver idiosyncractic returns. In the bubble, random investments looked genius. The systematic returns (returns for the asset category at large) were simply amazing, thereby creating great weath and perhaps reputations for genius that were more due to circumstance and timing than investing prowess.
The questions for us to ponder is what will be the future systemic returns to the venture capital asset class, and has the inflow of money and people into the venture capital industry made it impossible to generate idiosynctratic returns. Are funds' returns systematic (an index of the market) or extroardinary? Will there be a Vanguard-like vc fund that is a low-fee provider of index funds for the private markets!? What is the basis for extraordinary performance over the market index? Is the succes of vc investors and funds due to serendipity or to process?
These are key questions for investors (both general and limited partners). Can one deliver quality returns in an industry full of capital and people chasing "good" ideas?
One key difference between the public equity markets and the venture capital markets is the degree to which information is transparent. The public markets are by regulation open and transparent with data available to all.
The private markets are marked by imperfect information, proprietary insights, and information asymetries. Certain private investors simply enjoy access to information, ideas, and talent that are not generally available to others. For exmaple, certain leading firms leverage the footprint of their portfolio (talent, ideas, reach) to drive insights that lead to investments that others are not in a position to make. An obvious example, is Sequoia Capital's investment in Yahoo! and Google. With a BOD seat at YHOO, Mike Moritz enjoyed acccess to information relative to GOOG's search technology simply not available to others weighing the decision to invest in GOOG, presuming they even had the chance.
The question for venture capitalists may be as simple as, "what do I know that others don't?" With the corallary, yet vital question begging, "will I be smart enough and sufficiently certain of myself to act on such information?" For as Keynes famously once said, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."
If one knows nothing proprietary, has no unique relationships, access to ideas, and information, then life may be very challenging.
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