VCball

Revel in your Defects

2011-10-05T08:22:00-04:00

I love the analogy of the pearl and the oyster when thinking about startups.

I am not sure whom to credit for this concept, and I am no biologist, but I understand that pearls come from oysters; the process of an oyster creating a pearl is actually the result of a defect. Oftentimes that defect is because a foreign substance, like sand, that gets into the oysters body and causes a rare reaction: the creation of a pearl. No defect, no pearl.

If you think about the truly great companies, they begin with a startup idea, and oftentimes founders and managers, that almost everyone thinks is fatally flawed. A lot of VCs and end users and competitors laughed and laughed at Microsoft, Google, LinkedIn, Twitter, Facebook and Foursquare; they didn't have a business model, they would personally never use it, the opportunity is a fad that will come and go, the founder is inexperienced or had a big ego or is goofy, etc etc etc. The reality is that, sometimes, the bigger the defect or laugh, the bigger the opportunity. I would venture to say that if not for the defect, the opportunity wouldn't be there.

This is something I think about anytime I hear a pitch or talk about an opportunity: where is the flaw? It's not a game of "gotcha", but smart investors know that, just like the flawed oyster that produces the pearl, the bigger the flaw, the bigger the potential opportunity.

For instance, it could be a group of highly experienced founder that for 7 years straight never never gave up on an opportunity. Some investors might look at that and say: my god, it's been 7 years, give it up already. A savvier one might ask: why is it different now than it was 2 or 4 or 7 years ago, that you will now be successful? The answer might be technology or market acceptance that heretofore didn't exist--until now. So that flaw of taking so long then becomes an advantage of expertise in a sector that no one has focused on, hence a huge opportunity for the right entrepreneurs.

That describes the Truveris investment I led last year with New Atlantic Ventures and First Round Capital. The company after 7 years of hard work figuring out how to save significant pharmaceutical costs, finally was able to automate that process through cloud computing; in the past it had been a highly manual process that yeilded only very partial and small cost savings, taking months and months of work. The new technology tools enabled the opportunity which was difficult to address with prior technologies at a reasonable cost. And in the meantime, the problem grew from a low level crisis of a $50B corporate problem to a $400B society threatening problem.

So revel in your flaws--just don't let it kill you or your startup--and be sure to point out the benefits that flaw creates for you and your business to potential investors, strategic partners and recruits. Don't hide your flaws, show them off!

Move On

2011-10-04T13:16:23-04:00

Earlier this year I sat down with Bob Niehaus. He’s my former boss at GCP Capital, a $1B+ private equity firm spinout from Greenhill & Co., and the parent company for the VC fund I co-managed, GSA Ventures. Over lunch, I discussed the opportunities ahead, as I was planning to leave GSA. He was excited for me.

I was a bit nervous talking to Bob about this, as I knew what obstacles there are in starting a new thing, but he pointed out that his leaving Morgan Stanley and joining Greenhill and starting a new private equity group was the best thing that ever happened to him. And, he continued: Bob Greenhill, Neihaus' boss at Greenhill, himself, left Morgan Stanley then moved on from Smith Barney; he founded Greenhill & Co. with his dog, his assistant, and a million dollars which he never touched (according to the lore). And that was the best thing that ever happened to him.

Moving on from what they were doing before is probably the hardest thing that an entrepreneur does. Most of the time, it’s a crazy compulsion that an entrepreneur gets, and they can’t let go. Starting the business is just what they have to do. I love hearing those stories, as I felt that same feeling of exhilaration when I started my first tech company in the mid-90s during the first Internet boom.

History suggests that every tech boom is bigger than the one before it. This current wave powered by smart mobile devices, wireless broadband infrastructure, social media and cloud computing (some call the Second Internet) will make the First Internet of the late 90s seem quaint. As venture capital and entrepreneurship continues to democratize at a societal level, in the region, the country, and the world, I am more excited than ever about the opportunities ahead.

Hence, I look forward to continue hearing those stories... in a new opportunity that is currently in formation that I am exceedingly excited about. At the moment, I cannot announce the details. As to my fund obligations I’ve transitioned my day to day fund administration duties, but will stay on a few boards from GSAV and SAVP as appropriate.

There is a world of opportunity in the tech world that awaits-- that despite to doom and gloom in the news today, will be bigger than it's ever been, and beyond anyone's expectation. At 43, with half of my business life over, that day has finally come for me to move on and I look forward to sharing that adventure with you.

And to all those entrepreneurs and would be entrepreneurs that read my blog: seize the day--and start that business. America needs the growth and the real sustainable jobs that only we entrepreneurs provide. I'm excited to have been a part of that so far, and look forward to the future with you. If I can be helpful, please do reach out to me, and I'll do what I can, especially if it's in my wheelhouse of expertise and interest.

Win the Talent War

2011-03-17T11:16:58-04:00

Last night I attended a dinner hosted by the New York City Economic Development Corporation (aka NYCEDC) hosted by Deputy Mayor Robert Steel and Head of the Center for Economic Transformation Steven Strauss. In attendance were representative from virtually the entire New York venture capital community, as well as an equal number of prominent local entrepreneurs.

Steel and Strauss reviewed what NYCEDC was doing to support the entrepreneurial tech community, including incubators, seed capital, group meetings, and mentor programs. Then they opened up the tables to talk about 4 potential questions but the overarching question was: what’s the biggest problem the community faces and what can we do about it?

On their own, 4 of the 5 tables arrived at the same issue. This might come as a shock during the worst recession since the great depression but the big question was: what can we do to bring or convince more skilled engineering technical talent to choose a New York City startup over other opportunities around the country and the world?

While capital is an issue, and real estate can be difficult to find, the most rare and hardest thing to find is engineering talent. This is the biggest limiting factor for future growth of NYC companies.

I have seen companies rise on the backs of great technical talent alone; capital and marketing spin are no match to great engineering talent. We are getting to that point in time where we have gone through our technical employee unemployed reserves; it’s time to man the barricades and recruit talent that can power our companies success for the future. Talent begets talent, at the city, state and national level as well as at the company level. Immigrants bring other talented immigrants; great engineering students tell other great students to come as well.

I was asked by my table to present some thoughts on this issue. From my own VC perspective, I noted that our tech startup companies tend to start out with mostly engineers, perhaps 50 to 80% at first. And then, as the companies get bigger, than percentage drops to 10%, as the company naturally matures. Those more mature companies account for the majority of the 2000+ jobs our portfolio companies have created. So if you think about it, for every engineer we can recruit, that will create 10 new jobs ultimately. That might sound far fetched, but it’s something the Valley has known since its inception about engineers. NYC’s business DNA has known this about business in general but not about engineers and the impact on tech companies. Ultimately, engineers drive job creation, and that's why this issue is so critical from a policy perspective.

There are three key ways the groups came to attempting to solve this engineering shortage problem: 1/ create, build and grow new or existing engineering programs, 2/ recruit more engineering talent to NYC and 3/ open up immigration further along the lines of the Startup Visa program to allow entrepreneurs, investors and technical talent to more easily come to build startups in the country.

The first item, is admirable goal, and the city is taking steps in that direction, with the establishment an RFP by the NYCEDC to get proposals from a variety of engineering institutions. Even Stanford has thrown their hat into the ring. Kudos to Bloomberg for this effort as it’s well worth it for the long term, and a critical difficult step that would be not be taken by more short term focused politicians.

However, the second, recruiting talent, and third item, immigration, needs attention in the near term.

Indeed, on this second issue, HackNY and the Turing Fellowship Program have made great headway in starting that process to recruit engineers still in school to consider a summer internship at an NYC startup. Warren Lee, of Canaan Partners, and one of the founders of Turing, reported at the dinner that 30 companies recruited 30 engineers to the city for the summer. We need to support that program and programs like it and bring 3000 engineers to the city. (full disclosure: my partner, Brian Hirsch, has been involved with Turing as well.)

And the third item is how to get more talented immigrants to our country and our city. One NYC entrepreneur told me the story of how he outsources his technical work to a team of immigrants—in Vancouver— because they can’t get visas to the U.S.

New York City has been, and always will be the #1 business center of the world because it’s the center of so many vibrant knowledge industries ranging from finance to media to publishing to construction and healthcare, but more importantly in some ways it’s the vibrancy of our immigrant community that has grown our local economy by starting new business that eventually became world beaters. In the tech community, my estimate is that half of the early stage startups are immigrant founded, and probably half the staff initially are immigrants.

The recent proposed Startup Visa legislation (do click here and txt support!) is a step in the right direction. Mayor Bloomberg has always been vocal on this issue in support of the diversity of NYC and immigrant community. Now is a great time to raise the volume on that issue on the national level. NYC has the most to gain, and the most to lose from this federally controlled legislative initiative.

My understanding is that both Republicans and Democrats in the capital get that this issue must be addressed, as it's an economic jobs issue, not an immigration issue per se, so now might be a great time to press this Startup Visa initiative. It's worked well to recruit doctors to doctor starved rural areas of the country; as many as half the doctors in this country are now immigrants. A similar effort to recruit technical talent, as I mentioned above, would, I believe have a 10X impact on our economy in terms of jobs.

The real war in the 21^st Century will be the war for talent, at all levels, beginning at the country level, then the state and city level and company level. For NYC’s sake, and the countries sake, and our portfolio’s sake, I hope that this discussion continues, and our community and country continues to act.

Eat Failure for Breakfast

2010-06-15T08:00:00-04:00

My hero, in many ways, is Steve Jobs.

If you look at his trajectory, his life has the classic ancient greek hero trajectory. He was adopted. He dropped out of college. When he co-founded Apple in the late 70s, he was the toast of the tech world, but ultimately Bill Gates ate Jobs' lunch with the MS DOS. Then Jobs started Macintosh, the most modern computer to date. You can see Job's passion in Apple's famous ad in 1983 on the Macintosh launch. But, once again, Gates did Windows for PC and, yet again, ate Jobs' lunch.

Jobs was then let go from Apple, and sent into the wilderness. You would think that he would hang it up at that point. Two big failures in 10 years against the same nemesis?

Instead, Jobs then started Next Computers, a next generation computer and operating system ("OS"). But that wasn't enough, so he started a digital animation company, Pixar. Then Jobs came back to Apple when it was in shambles, and Next was merged with Apple; the Next OS became the predecessor OS to the new Mac OS, under Jobs leadership. On the brink, Jobs negotiated a $250M investment from, of all companies, Microsoft; reportedly, Gates needed to be able to point to some competition to fend off anti-trust claims. Meanwhile Jobs still ran Pixar, which ultimately was sold to Disney for billions, and he refocused on Apple.

Jobs had a few misfires at Apple, but he always came back, with innovations including the ipod, iphone, the iPad; he's out innovated even Microsoft. Apple is now the most valuable tech company in the world, higher than Microsoft, which arguably hasn't innovated in a decade. Jobs is like the Terminator of entrepreneurial struggle. As he battled illness, it's obvious he went to greater lengths than most do, to not to fail there as well.

While Jobs is often known for his product savvy and his managerial style, I think about him as the entrepreneur that bounces back, bigger and badder than ever. It's not just about "getting back up when you are knocked down"; its feeding on the failure and turning a negative experience into a positive.

That's why SteveJ is my hero.

----------------

For more on SteveJ, watch the 1999 Pirates of Silicon Valley and the transcript or video of his commencement speech at Stanford in 2005. Very inspiring!

Take a moment

2010-03-01T10:42:41-05:00

The other day at a Founders Round Table event I was approached by an aspiring startup entrepreneur.

We exchanged some tidbits about his business. And I gave him some advise about not worrying too much about burning out his servers from too much traffic and not having capital to scale with it. That problem takes care of itself-- as an investor I wish all the startups I invested in and see everyday had that problem!

The entrepreneur then told me a story about two lumberjack brothers.

The brothers were out one day chopping down trees, and to spice things up made a small wager between themselves on who could chop down a similarly sized tree faster.

So they got to chopping. After 5 minutes, the second brother took a brief break, and stepped away from chopping and went into a woodshed. The first brother continued chopping. Then second brother came back and began chopping again. Then another 5 minutes later the second brother did it again.

The first brother was about half way through his tree when the second brother felled his tree.

The first brother was amazed. He asked the second brother how he did it. The second brother responded: "When I took those breaks, I was sharpening my ax as well as getting some rest to hit the tree harder."

After 15 years as an entrepreneur and VC I am still making this simple mistake. As I look back on the companies that really crushed it vs the companies that simply did "ok", it's the ones that thought about how to have an exponential impact on their business. Coming in and working hard is an element to success, and often will set you up for the big breakout effort; but too often we mistake pure perspiration for success. That's how the "David" startups beat their "Goliath" incumbent competitors; you have to do the same. You don't want to play on the same field as your competitive set.

Here's one other take away. In the tale above, there were no group dynamics--there was only one brother who changed course and he could decide for himself what to do and then execute; changing how your whole group works and rethinking your business, as a group, is a lot harder. It requires courage to challenge the conventional wisdom, trust, intelligence and experience; it's even hard to put away all the egos for a moment, including your own.

One route to take is to do an off-site meeting; this is often the way to get a conversation started. Doing so periodically, regardless of whether you see the need, is often a good idea to tap into everyones perspective, including your investors and management team and staff. Everyone has to buy in to make it work. It's risky to bare your soul, or admit that perhaps you can do some things better, and that you don't have all the answers. It could get you fired, or your friends fired or make you realize that you've wasted millions or years of effort. As a group, during this meeting, I strongly suggest that you constructively focus on problems and potential strategic and tactical solutions versus personal blame. If you fail, no one, including yourself, will care or remember 5 or 10 years from now the "who" of the issue if you don't nail and focus exclusively for purposes of this meeting on the "how".

From my own 15 year experience as an entrepreneur and as an investor, if things aren't moving fast enough, or you've experienced some setbacks, and regardless of if you want to do an off-site, it's better to bite the bullet *now* and make some changes to speed up execution (linearly or exponentially) versus waiting. The alternative is to fail and muse about what could have been years from now, if you had only taken a moment to sharpen that blade.

Don't call me "Dude", dude

2009-09-03T09:00:00-04:00

A month or two ago, I tweeted about going to an English Beat concert. Instantly I got two responses back: one from @theenglishbeat saying on twitter to me publicly that they look forward to seeing me. The second was an equally public twitter from my 39 year old brother: "You are old, dude".

Me.... old? Hey I... twitter!

So recently, when I came across my sister-in-law's neighbor's book, "How To Not Act Old", based on her blog, howtonotactold.com, I was intrigued. I have never really thought of myself as old; but maybe just maybe my brother was right, and I was starting to act old.

Here are a couple rules for not acting old that the author identified:

Don't say "Dude"... maybe "Cool". Slang immediately identifies your generational age if you think about it.
Don't wear matching clothes or "tighty whities" (that's white mens 'briefs' for you oldsters)
Be optimistic. Negativity is a downer. That includes talking about death or health problems.
Don't rave about Bruce Springsteen. Enough said.
Don't wear an expensive watch. Don't wear any watch. If you want to check the time, check your cellphone.

And there were about 180+ other rules (more are coming I am sure).

Needless to say I was struck by these "rules", as many I've unknowingly broken myself --making my brother's point I guess.

One old venture capital dude, Michael Moritz of Sequoia Capital, got into some trouble earlier this year, asserting that only people under 30 built big transformative businesses. Getting into an age war argument isn't my cup of tea.

For the startups I back, which tend to be more business to business technology companies, I prefer a mix of both younger as well as more mature managers; the trick is getting that mix right where one age group is not more dominant than the other in a deleterious way. Having an old hand that has "seen this movie before" is a great way for a young founder to see around corners they haven't experienced; and having a young hand around with energy reminds us that sometimes the impossible is possible, and freshly challenge our long cherished beliefs that need updating. My experience suggests that older and young entrepreneurs do best when they work together collaboratively.

Whether the founder is young or old, their capacity to recruit and balance the right mix is extremely important to startup success. Yahoo, Google and Netscape are classic examples of teaming up a young founding teams with more seasoned managers as well as younger managers. Even Michael Dell and Bill Gates were smart enough to recruit senior as well as younger managers relatively early in their companies existence. A bootstrapped way to do this early on is to recruit these people to a board of advisors or board of directors, and use as a sounding board.

In any case, if you still have a capacity for summer reading, picking up the HTNAO blog or the book is a fun, light and short read, and I'm sure will make you think twice before you Facebook old.

Don't wear an avocado costume

2009-07-14T00:17:36-04:00

Today, the Wall Street Journal ran a story called "Perfecting the Pitch", consisting of tips from VCs on creating the perfect pitch.

Ty McMahan kindly included an account about a meeting I had an entrepreneur I had met early in my career that taught me a great deal about pitching.

Not to be redundant, but I felt it was important to give this story a bit more flesh: it was the height of the dotcom era. People were getting a bit crazy about this thing called the Internet. One day, a strange lady came in, unannounced, into my 13'x10' office in Hell's Kitchen, a fairly dangerous part of New York City at the time.

She was dressed in a bulbus green outfit. I didn't recognize what it was, and I hadn't met her previously. Before even saying hello, she reached into her bag and pulled out...

a business plan.

I almost fainted, my life flashed before me: I thought she was going to pull out a gun and I was going to get shot. Instead she offered me a pitchbook.

While, yes, I probably would be a little put off by the outfit, and not knowing who she was; but for the record, it really was more my fear of getting shot at. That's the full story. So the moral of this story is: don't come in to pitch an investor, unannounced, and look like you are packing heat.

Ok, let me rephrase: raising money is about trust.

Indeed, if you think about money itself, at it's core, it's about trust in a government and other people that they will exchange goods and services in exchange for a piece of paper with green and black ink on it. That is kind of crazy if you think hard about it.

The dollar bill itself says "In God We Trust", and has odd Latin phrases like "E Pluribus Unum". It has pictures of George Washington, and has big capital letters: FEDERAL RESERVE NOTE and THE UNITED STATES OF AMERICA a couple times. And pictures of a weird pyramid, with a magic eye, and an eagle holding wheat and arrows. It has dates of issuance, serial numbers, and signatures of important government offices. All this green and black ink, plus some threads that glow purple under the right light to signal that a lousy buck is really a buck, and not a fake.

There is something to learn from what gyrations the U.S. government goes through to engender trust in it's currency, phyically, and by word and deed. Similarly, startup investors are looking for trust worthy investments and are looking for symbols, words and deeds. In the rush to raise capital, it's easy to forget that in the end trust is really what it's about. It might sound a little silly, just like all that stuff that the U.S. government puts on it's legal tender, but that's how it works, raising money. It's not sexy, it's just the way it is. One might think that a pitch is an elaborate come on, a voodoo dance to woo investors... but investors often see through the artifice. They want the coldhard facts about the opportunity, the product and who you and your team are. That doesn't mean you can't have fun-- indeed, humor can be a great part of a pitch if done right-- it's just that one needs to temper the fun to serve the greater goal of engendering trust.

While there is a lot of stuff about pitching out there, later in the summer I will try to blog further about what I think a good pitch and process needs to create that investor trust. In the meantime, do whatever you can do to increase and enhance that trust; eventually, some one might just take you up on your offer, trading their paper for your paper, the ultimate trust based exchange.

Bookend Your Dream

2009-06-26T00:02:40-04:00

As my friends and colleagues know, there are few times I am truly speechless. One is when the SEC orders it to be so during a "quiet period". The other is when I remember why I got into this entrepreneur backing VC business in the first place in 1998, after starting and selling my own tech business. Both are in full force today and the last few months due to the Medidata IPO which occurred today, so I will be brief.

Medidata is a New York based startup pharma software company that I led the first institutional round on for my fund, Silicon Alley Venture Partners (now Greenhill SAVP) and Stonehenge Capital in 2002.

In this post, I want comment on what this IPO means to me, and our local tech community, and to publicly thanks and congratulate the Medidata founders, Tarek Sherif, Glen de Vries, and Ed Ikeguchi and the entire 700+ member Medidata team. In addition, I want to thank Milestone Venture Partners, Insight Capital and Stonehenge Capital, our co-investors, for the work and effort they have put in as well.

At an event tonight that Sonnensheim, PWC and Silicon Valley Bank had at Remi's in midtown, I got several high fives, and virtually all day I received a stream of emails and twitters from my entrepreneurial friends all over the city and the country. They all had great things to say, but a good number of people expressed that Medidata has shown that: 1/ the technology IPO is not dead yet, thank god, and 2/ New York based technology companies can compete with the best technology companies in the world.

What scares Silicon Valley more than anything, is that, with the commodization of core information technology, under-served regions of the country can compete and be in forefront of the next wave of technology innovation, technology enabled internet services. My charts, graphs, tweets, and blogs demonstrating this thesis can never really be as convincing without a fistful of public offerings like MDSO, showing public proof that the future is coming.

We are not quite there yet.

But, uultimately, I believe the technology enabled services boom is going to be a long and great boom, longer than the PC boom, and will be uultimately heard not just in New York, but around the country and the world. I believe the New York area has a unique leg up given it's proximity to entrepreneurial talent, capital and customers in the finance services, telecom, advertising and publishing sectors; and that each part of the country has it's own local industry domain expertise and brand of entrepreneurial ism. A public offering is the exclamation point that quiets the naysayers, and puts credence to this sector and under-served region thesis. This argument is far from over, but this is the first crack in the tired paradigm that tech entrepreneurs can't thrive outside Silicon Valley. Fortunately, many people still believe that, so, as contrarians are the ones who often make money over time, there is a lot more money to be made for savvy entrepreneurs and their backers who invest outside of Silicon Valley.

Lastly, and perhaps, most importantly, I caught this article on CNBC called: "Medidata IPO Bookends CEO's 'American Dream'". CEO Tarek Sherif pointed out that "his success has everything to do with the American experience." "This is the opportunity afforded to you in this country," he said. "I can build a company that really helps people." Turns out, coincidentally, Medidata IPO'd on the same day Tarek arrived in this country in this country with his family by boat passing the Statute of Liberty, 41 years ago, to the date.

How cool is that?

Congrats again to the whole MDSO team, for showing us all how its done, and reminding us about what makes this country great.

Begin Right with a Prologue

2009-05-10T21:41:24-04:00

Earlier last week, I got back from a late company board call, and unwound by watching a dvr of Charlie Rose's interview of J.J. Abrams, the director of the new Star Trek movie, released Friday. The movie is a successful attempt to restart the Star Trek brand, by retelling the past; it's a prequel or prologue to the original Star Trek series. It's something VCs and entrepreneurs know all about as a source for inspiration. (I think Tim Draper is still hunting for a Holodeck to back.)

Interestingly, JJ's core interview message was that in movies today, while technology driven special effects are cool, they don't automatically move audiences anymore to adulation as they had in decades past. The cool special effects are now expected. Audiences don't care about blowing up a spaceship in a movie; they only care if they care about the people in the spaceship. What moves audiences is *caring* about the characters. Once an audience cares about your characters, the tech has far bigger impact.

Now what gets audiences to care? J.J. says that its understanding the personal history of that character that drives real engagement. Once one understands the character's background from their own telling, the audience can begin to relate and will engage.

The same is true when pitching a vision. Both entrepreneurs and investors often mistakenly ask for, or start with, pyrotechnic demos, and cool market facts and explosive company figures about an opportunity. When in fact, we should start with the very personal and professional history of ourselves, as the founders, investors and managers; that back story is actually the most compelling part of any conversation. This introduction is often skipped or rushed through, even by seasoned executives. Its the number one thing VCs, entrepreneurs and managers often fail to communicate or request upfront in the beginning of a pitch to their mutual severe detriment.

Jason Greene of Emergence Capital, an early backer of my first company while he was at Venrock, put it best to me over a lunch discussion, far more succinctly by quoting Shakespeare: "Past is prologue".

Now for many entrepreneurs, that past might be relatively short. That's fine. VCs and others you pitch for money or resources or employment want to hear how you can do great things with little resources. And self awareness is critical. Share that. When I was pitching my first company, I shared minor stories of high school entrepreneurship, growing up in rural south Texas, getting the gumption to go to boarding school my junior year, getting into college, getting fired, going to grad school, having an epiphany about starting a company, how I learned about recruiting a scruffy management team and fellow entrepreneurs, and digging up some cash to do it, then delivering a modicum of success. Surprisingly, even the most seasoned pros often skip this simple exercise of introducing themselves properly. Especially in this environment, humbleness and self awareness are part of the path to a successful outcome.

When done right, beginning a conversation properly by explaining one's history appropriately engages your audience, and subtly reinforces and foreshadows the pyrotechnics you will soon unleash. It builds credibility and chemistry with the audience, so when the punch line about your opportunity hits, it's not just another spaceship blowing up with people in it that you don't care about.

For further inspiration, go watch the J.J. Abrams interview, and, if you haven't already, see the new Star Trek movie. I think it will go down as a classic prequel/prologue that revitalizes a worn out brand and extends hope for the future as the Star Trek series has done in prior generations. And perhaps, this prologue might remind us all from time to time, especially in an important pitch, that not all prologues are worth skipping!

Surf's Up! Swim with your clothes ON!

2009-02-11T11:59:24-05:00

The last couple weeks I've been obsessed with Warren Buffet's recent biography, Snowball. I am about halfway done but so far, it's been very interesting read, and I highly recommend it.

One might ask: What does Warren Buffet have to do with venture capital and entreprenuerialism?

Mr. Buffet is the king of what's known as "value" investing,investing in undervalued hard assets and cashflowing assets. As his wealth outgrew the opportunties, Buffet has goten deeper into branded products as he got older, like Coca Cola, McDonalds, American Express, etc, but he's still at heart a deep value guy.

Venture capital is widely believed to be the exact opposite of value investing: more like "extreme growth" investing. It's more like investing in companies with little to no revenues, product or real brand value, where the hope 1 in 10 is a big home run. It behave more like how an option contract might behave, worthless or worth a lot. In the book, Warren is fond of pointing out how he likes investing in companies with a "margin of safety". He hates to lose money on the downside. While VCs are "supposed to take risk", what they really do is evaluate returns on a risk adjusted basis. If given the opportunity to invest $1M in a company that has a 10% chance of returning $100M, a VC would look at that opportunity and take it, as the risk adjusted expected return is $10M (10% x $100M), a 10X return. 10X is a nice margin of safety.

The other quote I've been obsessed about from Mr. Buffet was last May's oft repeated comment about the housing crisis: "You only learn who has been swimming naked when the tide goes out." Personally, as an investor, I've been waiting for that tide change since April myself, when we closed our last two investments, Pontiflex and FTRANS. But not for the same reason. VCs look for the change in tide, because you can finally spot the ones swimming with clothes *on*! Investing in this environment is a lot more like shooting fish in a barrel, not so much because you can see the weaker companies, but you can see the strong ones much more clearly. Those companies that powered through Q4 are likely to be the emerging winners as they overcame once in a generation countervailing winds.

As Warren Buffet said in 1974, during the bottoming of the last major financial crash: "[I feel] like an oversexed guy in a whorehouse." While I've never visited a whorehouse, I can relate from an investment opportunity perspective: for venture capital firms with capital, from 2009 to 2011 are going to be great years to invest in great entrepreneurs with great opportunities and excellent expected return expectations. If your company had record Q4 numbers, as many of our portfolio companies did, including the aforementioned, you are swimming with your clothes on. And we want to talk to you, as I am sure other venture firms will as well. So get out those surf boards, surf's up for those with wetsuits-- and, yes, clothes-- on.