Diary of a Geek VC

Enough Already.

Fri, 29 May 2009 14:08:42 -0400

In September 2007 I posted (see it here) a suggestion that the locals stop whining about how bad the startup economy in Boston is relative to Silicon Valley.

This inferiority complex continues to be fueled by all the whining whirling around - about which company has moved to CA or shutdown, and which VC firm has shut down or moved or not invested in months. Phooey! These are such non-events in the grand scheme of things, we should all just be green-conscious and stop wasting any more bits on advancing the neurosis.

Consider the following facts in contemplation of a technology 12-step program for Boston:

1. Silicon Valley dominates venture capital dollars for enterprise software, networking equipment, consumer Internet and semiconductors - and has done so for quite a while and is unlikely to change anytime soon.
2. Thus, there are more enterprise software, networking equipment, consumer Internet and semiconductor companies started and funded in Silicon Valley.
3. So, the clusters of the most important companies in enterprise software, networking equipment, consumer Internet and semiconductors are found in Silicon Valley.
4. And, these important companies routinely buy Boston-based startups in enterprise software, networking equipment, consumer Internet and semiconductors sectors - to help them enter new or adjacent sectors, creating value for our employees and investors,
5. Then, engineers and marketing executives in the Silicon Valley companies routinely leave to cultivate new ideas in enterprise software, networking equipment, consumer Internet and semiconductors - as do their counterparts in Boston.
6. See step #1.

So what? We’ve become an outsourced R&D center for Microsoft, Oracle, Cisco, Google, Intel, et al, in enterprise software, networking equipment, consumer Internet and semiconductors. You can complain that VCs don’t go for the long ball enough and sell too quickly. Or that there aren’t enough strong product and customer marketing executives in Boston. Or that entrepreneurs just aren’t creating and VCs are just not funding the “big ideas” in these sectors. And you would be entirely correct. So what?

Enterprise software, networking equipment, consumer Internet and semiconductor sectors have reached a level of maturity with consolidation of vendors and market share. Will the leaders of these sectors be toppled at some point; sure - no empire lasts forever. But there needs to be some inflection point in order for this to take place. There are certainly some candidates for the sea change - virtualization and the cloud, true mobile broadband and others. In the mean time, we should expect to continue to see big tech companies - based in the Valley - buy little companies - to fill tactical and strategic needs. Particularly in a recession economy where R&D spending on anything that isn’t revenue positive or critically strategic is nil. And since still we’re one of the top spots for investing in these sectors, no big surprise that we get our fair share of M&A.

This doesn’t mean Boston is second rate; it means we’re not tops in these sectors. Who cares. Rather than bitch and whine, I prefer to acknowledge the situation (part of our 12 step program) and look for investment opportunities that either leverage this structure or focus on spaces whose leadership is up for grabs and where we Bostonians have comparative advantage - like robotics, MEMs, analog, video, med-tech, green-tech, and others.

How do we keep the great brains (from MIT and elsewhere) in Boston? As VCs, we need to fund them early and often. We need to find and cultivate talented marketing people in addition to great engineers. (easier said than done) And we need to be bold.

Great companies are bold; take advantage of the opportunities in front of them, build teams that exude optimism and commitment and don’t stop moving forward regardless of the obstacles before them. Silicon Valley doesn’t own the patent on boldness. Let’s stop acting like they do. It’s enough already.

CDN Summit at Streaming Media East 2009

Tue, 19 May 2009 16:12:14 -0400

I was a panelist at the CDN Summit at Streaming Media East in NYC May 11. My pal Jonathan Seelig was on the panel as well.

Rome or Phoenix?

Sun, 19 Apr 2009 21:51:28 -0400

My little world of venture capital is under siege - not asking for your sympathy at all - I am simply acknowledging the situation.

The data is not encouraging:

1. VC investments are WAY down (50% down yr-over-yr, according to the most recent Price Waterhouse survey). This means that there is a substantial overhang of capital sitting on the sidelines at firms world-wide

1. There is NO liquidity. IPOs are shut down, and M&A’s are only for fire-sales and mercy killings.

1. Lots of in-fighting at VC firms. Bad times bring out the best but mostly the worst in people, and with much bad news in their portfolios, issues and resentment abound - particularly at firms needing to raise their next fund and where there are succession issues (we have none of this at Flybridge)

1. Many firms that are fund-raising for the next funds and finding the reception by limited partner investors frigid, in part due to #1-3 above, but also due to their own pressure for allocation and performance.

1. The Obama administration seems to be picking up where Bush left off and Geitner is aggressively going after the private equity sector (VC included in the definition unfortunately) to revise the IRS code and tax the carried-interest (our cut for overseeing investments) as ordinary income, rather than capital gains, as it has always been treated.

Other than that, Mrs. Lincoln, how was the play?

I remain in awe that we still get many calls/emails each week from very capable people seeking jobs in venture capital. My stock response is to encourage applicants to have their heads examined. The venture business has been a great way to make a living and will be again someday - just not for a while. Again, not looking for a pity party.

I agree with Sarah Lacy’s recent post at TechCrunch. The situation with the VC industry is not a “recession-thing”; it’s a “correction-thing.” We never really retracted after the bubble-burst of 2000. The slow-down in VC that ensued then was more like a brief intermission; this seems more tectonic in scale. And it’s overdue

A well-known veteran VC in Boston was quoted to me recently as saying there would be 3 or so firms left in Boston after the dust settles. (Down from 30+ depending upon how one counts). I don’t know that his projection is the right number, but I know the number of firms has to be dramatically lower than today, because VC isn’t working right now and in order for it to be fixed, the balance among LPs/GPs/Companies has to be restored.

The basic premise is as follows: VCs provide a scarce resource - startup capital. We don’t have an infinite supply and the continued supply depends entirely upon our returns. This scarce supply of capital then looks at thousands of ideas annually and backs only the very best ideas. We shouldn’t back 15 competitors in the same space as some sort of cosmic cage-match. And we shouldn’t back all the ideas we see. And when companies don’t perform - after some reasonable period of time trying - they should shut down or sold, not funded til the cows come home. After many years of hard work and growth, companies go public or get bought. Occasionally, when a very early stage company creates a breakthrough solution to a tough problem, the company has an early exit. This was the way the business was when I started and when I was at Chipcom as a startup (I know this sounds like a grumpy old-man) but it hasn’t been this way for a LONG time.

What will it take to restore the health of the venture business?

Time: Rome may have been destroyed in a day, but it wasn’t built in the same time period. My best guess is that in 2-3 years we’ll see the end of the shakeout and the emergence of the “new normal.”

Change: to borrow a phrase, if we always do, what we have always done, we’ll always get what we always got.
Entrepreneurs aren’t just at startups - it’s time that VCs changed models. I believe that fund strategies, like startup strategies, demand focus. In the VC world, this translates into sizing funds to match investment strategy - smaller funds for earlier stage, larger funds for later stage. The calculus of returns in a VC fund has got to solve, and I just don’t understand the logic of a $500m early-stage focused fund. I’ll try and post the back-of-the-envelope math later.

Leadership: At all three levels of the foodchain - LPs, GPs and company executives - thoughtful, action-oriented leaders must act.

The NVCA (National Venture Capital Association) is having its annual meeting in Boston next week. It should be an interesting one.

NAB 2009

Sun, 19 Apr 2009 20:29:01 -0400

I am en route to the NAB (National Associate of Broadcasters) annual show in Las Vegas. I’ll be spending time with my portfolio company, Blackwave, as well as meeting with a couple of startups that are raising money, and also attending the show.

I am eager to see what toll the economy has had on sin city (no one can avert their eyes from a train wreck!) but more importantly, to see what new things are in the hopper. I am on a 26 hr trip to Vegas, arriving Sunday night and leaving on the redeye Monday/Tuesday.

They’re Just Not That Into You

Fri, 3 Apr 2009 19:21:07 -0400

Let’s face it, the startup ecosystem is in a general state of disarray - with rampant rumors of Limited Partner (investors in VCs) capital drying up, VC partnerships in turmoil with infighting over deals-gone-bad or compensation inequities, resulting in constipation around new deals getting done. The Q1 numbers for venture investing are not yet in, but are expected to be sharply down - no surprise.

Yet VCs continue to take meetings with you - they listen to your pitch for your Series A startup or Series B follow-on investment - and then they cite a bunch of various arguments for why they’re slow-rolling you. They tell you “your market is too small” - but your projections show a multi-billion dollar market emerging in a few years. And this isn’t the old-school BS about market sizing for such sectors as P2P video or XML acceleration. We’re talking about long-term secular trends like LED lighting or power management.

Or they cite a traditional argument, such as “I don’t believe your operating plan - you will consume much more capital than you are projecting.” Duh - EVERY startup consumes more cash than anyone imagined at inception.

It’s popular today for usually first-round only VC to look at the Series B or Series C round of a company - only to comment several weeks and meetings later, that (a) unless the valuation was priced like a Series A, they wouldn’t invest or (b) they won’t invest because there is insufficient evidence of real momentum. This is maddening to the entrepreneurs as well as their inside investors - as it’s a complete waste of time that could have been avoided if the investor had been upfront at the start.

It strikes me that most VCs are looking for sure bets right now. And that’s just not what startups provide. Startups are risky, they attack markets that either don’t yet exist or are dominated by strong incumbents with a weakness they alone believe that can exploit. They almost always take more money and time than expected to get to profitability or liquidity. These are the basic tenets of the business.

I worry that many venture capital investment professionals are currently taking meetings with companies simply to keep themselves busy. We saw this in the 2001-2003 malaise.

What can entrepreneurs do to short-circuit the experience and avoid wasting time? I suggest you take the following steps (which are probably reasonable regardless of the state of the economy):

1. Figure out how many investments the firm has made this year - do it before you meet with them. If they haven’t made any yet, you need to ask them why.

1. Has the firm recently, or ever, invested in your sector. If they haven’t ask them why not and why now.

1. Try your hardest to get in front of a general partner as soon as possible or at least determine which one you will eventually match with - and figure out how many boards they are currently sitting on. Here’s the hard part - use your best guess to determine how many of them are in trouble (business model isn’t working, out of money, team turmoil, etc). You are trying to figure out if the partner actually has any capacity to take on a new investment. If they are fully or near fully committed - ask them how they plan on managing their load.

1. Figure out how committed their current fund is and if they are currently fund-raising. If the firm is in the midst of their own fund raise, the criteria for final investments may change substantially from the front-end of their fund, as they either look for the “last home run” or more of a “sure thing.” Knowing this will also save you time.

You may decide to take the meeting, even if I am right about the predominance of time-wasting meetings in the current environment, because your company is the one-in-a-million opportunity that the VC can’t pass up. I won’t try to dissuade you - but hope you figure out quickly whether they are serious about investing in your company, or not.

These times are very difficult and the last thing you need is a rock-fetch expedition.