Cramer took a number of swipes at the internet and technology landscape today specifically calling out the me-too companies in the media space. Here is one quote that stuck out in my mind (via PaidContent.org):

Guitar Hero is “amazing… but when you look at the companies that are innovating, they’re in the Cleveland Valley, not the Silicon Valley.”

As pointed out by PaidContent.org when Cramer uses the term Cleveland Valley he is referring to the industrial firms here in the Midwest who are asking themselves: “What are the big problems of mankind and how can we solve them?”

So Cramer is not quite endorsing the Midwest as a high tech hub per see but I think he gets at the heart of what we’re all about out here and that is creating sustainable businesses and innovation by solving real problems. It is good to see more and more people looking to the Midwest for innovation. We’re at an inflection point in this region. No doubt about it.

What I was surprised and delighted to find when I opened the cover and dove into the book was that the birth of venture capital happened right in my own backyard in Massachusetts with a firm called American Research and Development (ARD) and a Harvard Professor/Businessman/WWII General named Georges Doriot (oh, and Digital Equipment Corp founded right in Massachusetts was the first big hit for institutional VCs and for ARD).

While the book does give all of the requisite history of venture capital from Doriot’s founding of ARD after WWII, to the spinouts of ARD which included Greylock, to the rise of the valley with Kleiner Perkins and Sequoia what really kept me engaged was the biological information on Doriot and specifically his business philosophies and sayings.

Here are a handful of Doriot’s famous sayings:

A team made up of the younger generation, with courage and inventiveness, together with older men of wisdom and experience, should bring success.

One should not only be able to criticize but should always have a suggestion to make.

Don’t challenge others’ statements, have them repeat them over again.

Conditions which are best for workers will give best production!

Ask about prospects who didn’t buy product.

Always challenge the statement that nothing can be done about a certain condition.

Those are some great quotes from a very wise man and there are many more (in fact, Fred Wilson is posting one per day on his blog until he runs out).

I have to say that I subscribe to most if not all of Doriot’s philosophies and it is interesting to me that there are a lot of folks uttering the same philosophies today as if they were new even though they were developed by a man over 50 years ago (and there was someone who probably figured them out before him as well).

One particular section of the book hit me hard since it touched on the relationship between entrepreneurs and VCs (something I have thought a lot about and also have written a lot about over the years). I will quote the paragraph from the book in full here:

ARD’s biggest hurdle was usually convincing these small, yet proud companies that they needed outside help. But Doriot didn’t hold that against them. He knew that if entrepreneurs weren’t self-driven and a bit egotistical they’d be punching the clock for IBM or General Electric. [Doriot] then closed his lecture by stressing the importance of management assistance in the venture business. “There is always a critical job to be done,” said Doriot. “There is a sales door to be opened, a credit line to be established, a new employee to be found, or a business technique to be learned. The venture investor must always be on call to advise, to persuade, to dissuade, to encourage, but always help to build. Then venture capital becomes true creative capital - creating growth for the company and financial success for the investing organizations.”

That’s a mouthful and a half but what Doriot says in that small amount of words is very important. It seems as if there will always be a struggle between entrepreneurs and VCs in that entrepreneurs by nature will never think they need a VC or that VCs will add value to their company. In reality entrepreneurs need VCs and VCs need entrepreneurs in order to change the world which is what we’re all in it for in the first place. (Of course that statement doesn’t apply to all businesses as some can be bootstrapped and/or don’t take a lot of up front capital.)

I can’t do this book justice in a short blog post so I will stop here and say that I highly recommend this book to any VCs or aspiring VCs out there. Doriot’s words of wisdom can’t be beat when it comes to venture and to business. I would also recommend this book to entrepreneurs who are interested in the history of VC. History always provides context and this book certainly gives that much needed context to the entrepreneurial climate in the U.S. and abroad. Lastly, I recommend this book to any person interested in or currently practicing the art of business. This book will show you how America’s entrepreneurial scene came into being and why we still look to entrepreneurs and VCs to drive the next wave of technological innovation that will propel us even further into the future.

As someone who has recently entered the world of venture capital I was interested to see what Rivlin had to say and luckily Matt had pulled all the salient points together in his post (The guy is working me pretty hard so reading a whole article is tough these days… I thought VC was supposed to be a cushy job!).

Turns out that there is a lot of turnover at VC firms (70%+ at some of the top firms over an 8 year period from 1997 - 2005) for various reasons but it seems that a lot of times it is due to lackluster performance. Looks like VC is a true meritocracy - just like entrepreneurship - as it should be.

It also takes a while to see a new VC through to the “go/no go” stage.

It is a mentoring business with a long gestation period…”probably 6-8 years and you should be prepared for losses of about $20 million (per person)”.

I had heard these numbers before so this wasn’t shocking to me. That said, I did make sure that I joined a firm where I was going to be able to obtain a lot of mentoring. If you are looking to join a firm ask them if they will be able to spare time for mentoring. If they can’t you should consider learning elsewhere. VC is an apprenticeship business, no question.

Success in VC, as most people probably know/guess, is mainly due to VCs ability to judge people and their keen sense for market inflection points. This quote from NEA founder Dick Kramlich sums that point up nicely:

…it’s more about people skills and the ability to assess whether there’s a market for something.

This is perhaps why the transition from entrepreneur to VC can be a tough one. After all when you invest in a company you aren’t going to operate it since that is what the operators/founders are there for. Operational experience will no doubt allow you to give the portfolio company solid and informed guidance but in the end you aren’t the one jumping into the day to day management.

As a VC you need to be able to asses the people, the technology and the market as well as recognize patterns. I would also argue that the people part is very important. A lot of top VCs agree with that sentiment including the founder of the very first institutional VC fund, Georges Doriot, who always said that a Grade A person with a Grade B idea will win over the Grade B person with the Grade A idea any day of the week. I subscribe to that completely. As with most things it always comes down to the people.

I would love to get my hands on some data in 5 - 10 years to see how well the “entrepreneur VCs” did compared to the folks who haven’t operated. With the current trend being to turn successful entrepreneurs into VC I think there will be some interesting data to look at (Noam - how about this for a subject matter on the next paper we team up to write?). It would be nice to have some hard numbers to back-up the anecdotal evidence Rivlin brings up in his article like this snippet:

“Most of us learned the hard way that venture investing is best left to the professionals,” said Marc Andreessen, the co-founder of Netscape Communications.

Shortly after America Online paid $4 billion to buy Netscape, Mr. Andreessen helped bankroll a venture firm called 12 Entrepreneuring, a short-lived partnership forged in early 2000 by Benchmark and a pair of successful Internet entrepreneurs, Halsey M. Minor and Eric Greenberg. But 12 Entrepreneuring ceased operations only 18 months after it started, and the partners, including Mr. Andreessen, lost nearly two-thirds of the money they had invested.

Of course that is only one case and I should point out that there are a number of great entrepreneur-cum-VCs around like Brad Feld. The point I am making is simply that success any given related thing - whether it be entrepreneurship or something else - doesn’t mean you will be a great VC.

“I think what a lot of these guys [i.e. people who jumped into VC in the late 90s] learned, some the hard way, is that you’re a natural athlete or you’re not,” said Sanford Robertson, the co-founder and former chairman of the investment bank Robertson, Stephens & Company, who has been investing in venture funds for more than 20 years. “Some can do it, and some can’t, and like with athletes there’s no way of telling until they take the field.”

It looks like you either get it or you don’t. It is a natural ability to asses people and their technology/business. Wow, for someone new to the business that’s a pretty interesting - and heavy - tidbit. I’d like to think I have a good (albeit naive at this point) sense for this business but time will tell.

I will leave you with a tidbit about the background of one of the most famous VCs in the world, Mike Moritz. Moritz proves there is no obvious background for a great VC. He was a business journalist and writer for Time before he joined Sequoia in 1986 (although he did hold an M.B.A.).

Side note: I have been meaning to put up my personal reflections on my first few months in VC. Those are coming soon. Stay tuned.

Enter the iVentures10 program. iVentures10 is a program created by Illinois VENTURES initially as a “new kind of internship” for U of I computer science students. However, they recently announced a partnership with Mozilla along with their intention to take applications from around the world.

I think this is a fantastic thing for tech entrepreneurs based here in Illinois and a great way to get others that aren’t based here to spend a summer here in Illinois building their companies. Hopefully we can all show them such a good time they won’t want to leave! Keeping our tech talent here in the state is crucial to Illinois becoming the tech center it deserves to be and this program will clearly help with that effort.

You can learn more about the iVentures10 program on their site and if you think you want to submit an application make sure to get it together soon. The final day to submit applications is May 15th.

Side note: You can also learn more about the iVentures10 program at the next TECH cocktail mixer on May 29th. The team will be at the event along with some of the folks who have been accepted into the program.

If you start from successful startups, you find they often behaved like nonprofits. And if you start from ideas for nonprofits, you find they’d often make good startups.

That statement doesn’t seem too interesting off hand but it truly is. Basically, Graham suggests that if you simply work on an idea that legitimately helps people you could find yourself with a very interesting business over time even if the current encarnation of the “business” looks more like a nonprofit (i.e. helping a lot of people without making any money).

Graham lays out some interesting examples of this type of thinking (Google and Craigslist among them) and he also covers the reasons why he believes being good can help you do well. His reasons are:

Power -Being good helps you gain power in the marketplace since you legitimately care about your customers and stakeholders and they, in turn, want to help you (I saw this first hand at FeedBurner). This is related to the concept of Karma.

Morale - Morale remains high even during the inevitable tough times during the life of a start-up.

Help - Other people want to help you and you’ll be able to recruit the best of the best.

Compass - Having a solid mission oriented around doing good acts as a compass for the company.

I think Graham is right on with this essay. I firmly believe that doing good will help you do well in life (and business) and have seen it to be true in my own life.

That said, you have to genuinely do good. You can’t pretend to do good because people will figure you out and then you’ll be in trouble.

Following this topic a bit further I would like to point out that running what may be a traditional nonprofit business as a for-profit from day one may actually help more people and create sustainable change rather than simply providing a bandaid.

Case and point for that line of thinking is microfinance. What does microfinance do? It helps the poor pull themselves out of poverty by giving them loans to start small businesses. Off hand you could say that microfinance institutions should be not-for-profit but in fact most of them (if not all) are for-profit banks.

Being that these entities are for-profits they continually find efficiencies to improve their businesses which in turn allow them to help more people. It seems to me that more “nonprofit” ideas should run themselves as for-profit ventures to increase their sustainability.

Graham has this to say about the topic:

The idea of starting a company with benevolent aims is currently undervalued, because the kind of people who currently make that their explicit goal don’t usually do a very good job.

I think he has a point there but Graham links the issue to what he calls the trustafarians (trust fund folks) who simply want to attempt to do something good but never follow through. I think there is more to it than that.

I believe these folks in nonprofits may not be doing a good job because the organizations, being not-for-profit businesses, have no incentive to lower burn rates, be more efficient, etc. They also can’t afford to pay their employees as well as their for-profit counterparts which means that the top minds don’t go work at non-profits (not true in all cases of course).

Imagine if the nonprofits ran themselves as a for-profit businesses. Then they could afford to hire better people and would be more concerned with conserving cash and helping more and more people through their own growth and increased efficiency (assuming they ran the business well of course).

The bottom line is that you can do very well by doing good so follow your idea through even though it may not seem like a business right now. If you are truly solving a pain the business part of the business will most likely follow.

David makes some great points in this article. He discusses what the Bay Area is good at in terms of startups and what it isn’t so good at. He also urges us to think outside the Valley in terms of starting a company. Good stuff and I couldn’t have said it better myself (which is why I didn’t and am just linking to his post).

Quit your job!

Easier said than done right? Sure, but Sarah has penned an inspirational article with some great entrepreneurial examples that will get anyone off their butts and starting up a business. She also notes that you don’t have to try to be the next Google. She suggests that if you do what you love you will be happier and more successful and that success could translate into millions even if you never thought it would (and if it doesn’t but you have a nice business and are happy - so what?). I know I have always stuck to doing what I love to do and everything else has seemed to follow.

After consulting a number of restaurants Chuck then started working with the IIT Institute of Design’s Social Entrepreneurship program on a project designed to come up with ideas on how restaurants can localize their food supply and green themselves.

You can actually go check out the results of this project on May 7th from 6:30pm - 9:3pm at 350 N LaSalle Street, room 202.

Just make sure to register so that Chuck can get a head count.  I’ll be there and am looking forward to it.

I’ll leave you with a little blurb on the event from Chuck:

Join some of tomorrow’s leading designers as they present their recommendations in strengthening the local economy between farmers, restaurants, jobs and the community. Food is obviously important to our well being, but food production has some of the biggest impacts on the environment.

The world renowned IIT Institute of Design launched a Social Entrepreneurship program and graduate students will be presenting the results of their research to increase the vitality of the local farming community (increasing the diversity in our food supply system), helping local restaurants localize their supplier base (less food miles and more money staying in the community), increase the number of local jobs and helping the community become more sustainable. The project includes carbon off-sets, renewable energy, composting and recycling, bio-fuels, energy conservation and many other aspects that are important in building a sustainable future.

The recommendations are an important step at creating a local food system that is sustainable and environmentally friendly. The project uses one of Chicago’s leading restaurant groups is the test case.

Aziz is a very smart guy especially when it comes to enterprise software. What I loved about our conversation was that we were able to teach each other a lot due to our complimentary skill sets (my main competency being consumer web and his being enterprise software). I hope to continue learning from Aziz over time and I hope I can help him learn a bit more about the consumer web as well.

Anyhow, I wanted to make sure all of you were aware of Aziz’ new blog titled simply Texas Venture Capitalist. I am sure he will have some great insights into new technologies, especially enterprise tech, so you should go ahead and subscribe now to ensure you don’t miss anything (no pressure Aziz!).

I am looking forward to working with Aziz and hopefully we’ll be able to put on a TECH cocktail down in the lone star state this summer.

Liquidity for VCs and entrepreneurs is a topic that continually comes up. It has resurfaced in the last week due to the fact that public markets have pretty much been closed to startups for a while now leaving M&A as the primary liquidity event for entrepreneurs and VCs. This time Fred Wilson is the one kicking off the conversation about VC/entrepreneur liquidity.

Fred is worried about liquidity for obvious reasons but he also adds a new thought into the mix. He claims that web services that are exited via M&A to larger companies can languish inside their new corporate homes. This worries him as a user of the services and has pushed him to think about newpaths to liquidity even more.

The discussion over liquidity ramped up over the past week due in part to the interesting nature of the idea but also spurred along by the TechMeme effect (Fred event spoke about the topic on Yahoo’s Tech Ticker show). It has been interesting to see everyone’s opinion on the issue all the way from VCs should stop whining to agreement with Fred that a new form a liquidity needs to emerge. After absorbing all of the opinions across the web I decided I should chime in.

In fact, I actually wrote about a related topic back in October 2007 in response to my friend Dave McClure’s post. Dave argued that a market should be developed that would allow transparency and would disintermediate the VCs by allowing lenders and other investors to invest directly in startups while allowing startups to keep most, if not all, of their equity. As a student of finance and VC I found that idea very intriguing.

A large impediment to this type of market is solid data (and metrics). With good data debt and equity markets for startups could look like mortgage markets (ouch - bad example!) or the public markets. If you can look at historical startup data and understand the numbers enough to make a solid bet and know your chances of success an interesting market emerges. (Side effect - more actuarial jobs open up.)

Let’s say we can get the data and can figure out the right metrics, then what happens? Well, here is where things get a little tough. The SEC (or a new org like them) would probably want to step in and protect the individual investor from themselves. That’ll be a big brick wall in the way of innovation and it makes this idea a little more long term (man, I hate regulation). What can we do in the meantime then? This is where Fred’s post comes into play.

Fred argues that there should be another way for VCs to liquidate their positions and it could take the form of an exchange. This exchange would not be open to the general public and it would not disintermediate VCs like the one Dave wrote about back in October. What it would do is allow qualified/accredited investors (i.e. anyone except the average joe individual investor - this exclusion eliminates the need for SEC oversight) to trade positions in private companies. This way VCs could trade their positions to others (like PE firms) rather than trying to bring a company public or sell their companies to larger companies.

It is an interesting idea and one that already happens informally as Fred mentions in his post. He simply thinks that a formal market may help. It turns out that this type of market is already springing up in various forms surprisingly enough.

Goldman Sachs launched an exhange for private companies called GS TRuE - short fo Goldman Sachs Tradeable Unregistered Equity - about a year ago (this market is open only to Institutional Investors with $100mm or more in assets). Other networks like this are also popping up (like OPUS-5) and, according to this May 2007 WSJ story, the Nasdaq is planning on launching a smaller market for unregistered equities.

These markets will probably consolidate over time and then we’ll have our main market for unregistered equities which could be game changing. This isn’t quite what Dave was arguing for but it is a step towards it in many ways.

Even without the need for VC liquidity I think this would have come to bear. The increasing regulation of public companies is becoming unbearable for many managers and directors while also adding a lot of expenses into businesses. This is why so many large companies are choosing to be bought by PE firms and brought private (CDW is a great example).

This is a very exciting time for finance/business geeks like myself. Finance can be very innovative and we’re seeing the proof of that right now. I can’t wait to see how these new markets work out.

If you have been thinking about buying a ticket but haven’t yet here is your chance to get $25 off the already low introductory rate of $225. Just use the promotional code olsonsobservations when you register and you’ll be $25 richer (or I guess you could say $200 poorer but I really think the content we put together is worth much more than $200 - the glass is half full people!).

I look forward to seeing everyone at the conference. (Oh, and I really do have some more “real” posts coming up soon. I swear… Stay tuned!)

Side note: We even have “Attending” and “Speaking @” TECH cocktail Conference badges for your site. Snag one and add it to your site when you have a chance. Attending & Speaking