The Venture Company

13 rebuts on Romney and jobs

Fri, 10 Feb 2012 02:57 GMT

I am getting tons of questions by readers on my syndicated article “Why Romney is wrong on jobs” and I am pulling questions from behind the branded subscription based firewalls to serve a greater audience. This blog article will be updated live as more (sincerely inquisitive) questions come in.

Did Venture Capital promote economic growth?

Tue, 24 Jan 2012 08:13 GMT

An article in the Tenessean plays out a very naive summary of the role of Venture Capital with regard to economic growth. Naive because not only does it demonstrate a lack of real world experience with the demi-cartel deployed by an old-boys network in the epicenter of Venture located Silicon Valley, it is factually wrong in how it works, what it has produced and what it has done to the economy.

So, here is my response to their tantalizing statement:

No, Venture Capital is supposed to promote economic growth. But subprime VC is just like subprime real estate. It makes for great press when you secure deals, and then someone else (the economy) gets left cleaning up the debris.With 20 years of subprime VC behind our belt and negative performance to boot, the false positives create a hole twice the size of false negatives that could have delivered sustainable economic growth.

It must not have sunken in to the writers of this article that the most important asset holders in the marketplace of innovation (limited partners with money, and entrepreneurs with ideas) are leaving the asset class, because either they are not getting the returns they were promised or their vision is dumbed down to subprime. For a comprehensive overview of the real risk deployed by Venture, study The State of Venture Capital.

Find the original article (not open for discussion on the site) here.

Why Romney is wrong on jobs

Mon, 23 Jan 2012 00:07 GMT

Republican presidential candidate Mitt Romney boasts about the creation of many jobs in his role as a venture capitalist. Let’s tell people the truth.

World Bank warns of deepening crisis

Thu, 19 Jan 2012 04:24 GMT

The World Bank warned of a deepening economic crisis where developed and developing country growth rates could fall by as much or more than in 2008 and 2009. My prediction exactly when I described the lack of structural changes and further doom and gloom last November as a result. Yet, I don’t always take pleasure in being right.

Nothing will improve in the economic outlook of our country until we improve the systemic economic imbalance between finance and production.

So, let’s get to work on fixing our economy from the top (instead of from the bottom).

Clueless San Francisco

Wed, 18 Jan 2012 23:48 GMT

I was about to sing the San Francisco pension fund praise about their decision to deploy renewed focus on their commitment to Venture Capital. That is until I discovered the signs of the good ole’ pancake economics combined with the musical chairs of asset management. Instead, San Francisco’s pension fund should not even bother participating in Venture and here is why:

SOPA spawns the need for economic reform

Tue, 17 Jan 2012 06:18 GMT

I am responding to another article with regards to the Stop Online Piracy Act (SOPA) and the Protect IP Act (PIPA) with more or less the same commentary I posted on the European Commissions’ web site yesterday. It is an important topic worth repeating.

This time my response was to an article on Reuters PEHUB titled “SOPA Headed for a makeover”. It clarifies my stance on SOPA, and that we should not rush to regulate before we understand how it ties to our core economic principles. And given that we violate economic freedom all too often, to apply regulations today that depend on such flawed implementation of freedom is bound to do more harm than good.

Here is my response:

Most of us look at this as an Internet problem but it is not. The root problem we need to solve (before we apply lucid regulations) is that we define what economic freedom really means (with or without the internet).It is a myth that free-markets do not require regulations. The implementation of a free-market requires regulations so every participant enjoys the same definition of freedom, and protects other participants using that same definition. Free-markets are not a free-for-all, meaning you are allowed to just do what you want. The way financial systems in violation(!) of free-market principles have been able to run amuck with our economic systems.The implementation of a true free-market system is now, really for the first time, being challenged by the internet as its distribution. And the time has come to shore up our economic definition before we apply it to the internet.I applaud meaningful regulation that secures everyones definition of freedom. But I would suggest to tread very carefully, for I see those who do not understand the basic fundamentals of a free-market implement regulations that throw the economic baby out with the bath water all to frequently.

The full article, including my comment can be found on Reuters’ web site here.

Internet reform is economic reform

Mon, 16 Jan 2012 05:08 GMT

Vice President of the European Commission Neelie Kroes writes a blog about Cloud computing and Data protection reform, a subject challenged by many who also challenge SOPA. I am for the perpetuation of a free-market on the internet, but not if that purported compliance creates a free-for-all that violates free-market principles. It is a myth that free-markets do not require regulations, but those regulations need to be deployed with the proper recognition of what those free-market principles are. The latter is where most regulations fall apart and in turn do more harm than good.

Here is my commentary to Neelie’s blog posted on the European Commission’s website:

The internet for the first time forces countries to adopt a singular economic system across its distribution and that puts enormous pressure on the agreements needed between countries.While on the surface the U.S. proclaims to be in support of free-markets (and I am, living and working there), the implementation of a free-market requires regulations so every participant enjoys the same definition of freedom, and protects other participants using that same definition. Free-markets are not a free-for-all, meaning you are allowed to just do what you want. The way financial systems in violation of free-market principles have been able to run amuck with our economic systems.The implementation of a true free-market system is now, really for the first time, being implemented globally with the internet as its distribution. I applaud Neelie's work to balance the defunct free-for-all with meaningful regulation that secures everyones definition of freedom. But I would suggest to tread carefully, for I see those who do not understand the basic fundamentals of a free-market implement regulations that throw the economic baby out with the bath water all to frequently.

The original article can be found here.

Why documents don't protect LPs

Sun, 15 Jan 2012 10:35 GMT

In response to my article “As a Limited Partner I feel uninformed” a representative from a valuation firm makes the same mistake as many Limited Partners have made. And that is to trust the content of documents to represent the actual risk deployed in Venture Capital. Here is my response to such a suggestion:

Even then. The actual deployment of risk can be and has been shoved under the rug of these generic and non-specific documents. These documents are not only lacking in the definition of risk, but severely lack controls to allow you as an LP to measure their compliance. And that is exactly why risk has deflated to uniformity and thus subprime Venture Capital.

Our reply above is a response to the representative’s reply (posted in full below) based on the aforementioned article:

“You should be able to be informed with:
1. Copies of the Limited Partnership tax returns.
2. Copies of Financial Statements with assets Marked-to-Market.
3. Copies of Minutes of General Partner meetings.
I am not an attorney, but usually General Partners have a fiduciary duty to provide at least these 3 items to Limited Partners. A review the Operating Agreement should provide information with the protocols for obtaining such info. Check how often you will receive these BEFORE making such an investment.”

The full article is available on the iCFO group on LinkedIn here .

Debt financing in startups

Fri, 13 Jan 2012 03:10 GMT

It is good to know that there are still smart, rather than simply cunning, people in the finance world.

And Gene Lee, Managing Director of Cove Point Holdings, a Family Office describes my views exactly in an interesting article published by Axial Market. Specifically he emphasizes how financial debt in a smaller middle market business can be very risky and limit the operating flexibility and growth prospects of a business.

We don’t believe that it makes sense to compound the operating risk of growing a smaller company and the risk from an ownership transition with the risk of a leveraged capital structure that could have bad consequences for a company if it misses a beat.

Primarily startups that work with subprime Venture Capitalists that have fragmented their investment risk and from the beginning do not have the ability to support the runway to upside completely are subject to the “blessings” of debt financing. The life-line of debt financing entering the startup world is an indicator of how subprime Venture Capital, downside investing, and the fragmentation and deflation of risk erodes the opportunity for groundbreaking innovation.

Now, If we could only design an economic system that translates the sanity from these kinds of Family Offices into a Venture Capital playbook. Perhaps that is why this Family Office is going direct.

Read the full article here .

ILPA measures

Thu, 12 Jan 2012 05:34 GMT

A Limited Partner responded to my article posted on LinkedIn named “As a limited partner I feel uninformed” with some supportive references to the work the Institutional Limited Partner Association (ILPA ) has done to structure the relationship between Limited Partners and General Partners. I have read their referendum and am not against the work of the ILPA, but feel the work of the ILPA so far offers little suggestions as to how to solve the systemic issues within the asset management realm (see “The musical chairs of asset management”).

Yes, I do commend the ILPA for establishing "dining" etiquette, but it does not change the fact that the food being served is subprime. The way we construct financial systems (in violation of the free-market principles we boast about), by economic principle turns the discovery and arbitrage of the underlying asset subprime (sooner or later). Already in VC 10 levels of bottom-heavy diversification proliferate lies about the real risk deployed in Venture. And the results show it. VC fails to make a dent in the 80% greenfield of technology adoption, nor produce returns for LPs in line with that gap. So, while there are pragmatic things we can do with LPs to start to eradicate those economic lies (as described in my article), a much more fundamental change to the relationship and structure between GPs and LPs can turn their subprime alignment from subprime to prime. Transparency is just a (small) part of the economic framework, and even then the kind of transparency is paramount in establishing a different economic outcome of risk.

And below is the original comment from a Limited Partner (in hotel real estate) on LinkedIn (members only) to which the above was my response:

The Institutional Limited Partners Association has established a set of "best practices" that center around three guiding principles: 1) alignment of interests; 2) Governance; and 3) Transparency. Logically, if the GP has significant skin in the game by investing along side of the LP there is a higher likelihood they will be more selective in choosing where to deploy capital. The tenets of corporate governance can require a solution for many of the problems Georges discusses. These procedures can mitigate or eliminate conflicts of interest and related party transactions. And finally, if all the cards are on the table, readily seen by all parties, the dialogue becomes real and meaningful. The level of trust goes up and everyone benefits from an open, honest assessment. I am in the hotel real estate sector and we have adhered to similar principles for years. While not in total agreement with the ILPA, their efforts are to be commended as an attempt to bring some measure of standards to the industry.

Scaling is hard

Thu, 12 Jan 2012 04:41 GMT

CNN Money yesterday published an article from Jeff Bussgang, general partner at venture capital firm Flybridge Capital Partners, about how hard it is to scale a company. I need to respond to these types of articles because it deflects from the real problem with innovation in our country. And that is that under the cover of the purported voodoo of innovation we refuse to hold the financial system responsible for the subprime mediocrity it perpetuates. We have plenty of leadership capacity that allows companies to scale (Facebook, Twitter, Salesforce.com, Oracle, Apple etc.) and at the ready when Venture Capitalists come off their subprime pedestal.

So, here is my response to the article to set Jeff straight:

Yawn, another article from a VC hoping to educate people to become entrepreneurs. Venture is just like American Idol, you find quality - you don't teach singing. People either have the talent or they do not. And Jeff's article(s) reminds me of the desperate Moms who keeps pushing their child to sing, even though when they open their mouth, we all recognize they can't. Not everybody can be an entrepreneur, but an entrepreneur can come from anywhere. The quest is to find prime, not teach subprime. But the real issue in Venture is that Venture Capitalists have not found a way to scale themselves in line with an 80% adoption greenfield and more quality entrepreneurial capacity than ever before. VCs are being beaten and disproven in their assessment of best practices by corporates more and more often. With negative returns on the whole for Limited Partners and perhaps a handful of VCs (out of the 790 post 911 dead weights) making any money monolithically and systemically for LPs, not the quality of entrepreneurial capacity is in question, but the arbitrage of that innovation deployed by VC.So, if Jeff was a wise man he would write an article that describes how Venture Capitalists can scale to detect and entice the entrepreneurial capacity they currently discard as false negatives. And explain why Venture Capitalists with many diversifications built in a period when corporate innovation proves their excuses wrong, really deserve to make any suggestions to budding entrepreneurs.

The original article with my comment can be found here .

As a limited partner I feel uninformed

Wed, 11 Jan 2012 00:54 GMT

The title of this article was the exact Internet search query that led a Limited Partner directly to our web site recently. We offer ways for Limited Partners to exercise their right to become informed, and transition to a more renewable investment climate for innovation.

Innovation in … pants

Mon, 09 Jan 2012 03:25 GMT

When you think something as mainstream as pants have been around for hundreds of years and its innovation has come to a halt, you need to check out relative newcomer Kühl. An american company “born in the mountains” puts a new spin on a product we wear everyday, with an innovative philosophy:

Born from our rebellious philosophy to question everything, break the rules and reject the status quo.

For that statement alone I was attracted to buying their pants.

Kühl completely redesigned the comfort of pants with stitchings and fit unmatched by the standard mold its predecessors are based upon. While their fabric is rugged and should really be used as outerwear, its unique comfort and fit is makes these pants ideal for daily use wherever you are. Every aspect of these pants has been redesigned to produce a better fit and I wholeheartedly recommend them. The company has expanded to a complete range of outerwear, and after having worn their innovative pants for a while I may just explore the wider offering soon.

Full disclosure: I have no equity in products or companies I evaluate except that they - according to my review - adhere to the promises they make. I pay for the products I want myself and receive no promotional fees of any kind. If you agree with the discretionary role technology should play in our lives I describe in my blogs so frequently, you will find my observations of the implementation of innovation useful in determining whether or when you should buy them.

Regulating Private Equity

Thu, 05 Jan 2012 10:31 GMT

China has made its first move to regulate Private Equity , according to Coco Kee, Managing Partner of Kee Global Advisors LLC, a New York-based boutique advisory firm. Not a bad move at first glance, as we wrote about the need for regulation in an article that was covered by The Wallstreet Journal more than two years ago.

The problem with most regulations is not that they are not needed, but they are implemented without a clear reference, rationale or script to the goal they aim to achieve. Put differently, many are bandaids to cover the cancer sores that may make the audience feel better, but in no way delivers a cure for the patient.

Private Equity and Venture Capital have been allowed to deploy a financial arbitrage that is in flagrant violation of free-market principles, and without an enforcement of anti-collusion, anti fragmentation of risk, marketplace transparency to all participants and other strict free-market principles, can never avoid the creation of investment bubbles that destroy the opportunity and faith in the underlying assets.

For China the implementation of free-market principles are farther afloat from their economic foundation than it is to us in the U.S., but if we keep messing up our economic freedom China may just get there before we do.

From despite to because

Thu, 05 Jan 2012 10:14 GMT

Quite a few events in life happen in which their success is claimed by many fathers. But when you look closer and understand the facts, underlying that success are often people who succeed not because but despite the indoctrination of their forefathers. Now is the time for us to develop a new economic framework so our capacity to innovate can excel, not despite but because of it.

The future of photo editing

Tue, 03 Jan 2012 05:45 GMT

Three-hundred years of photography innovation have left us with dramatically improved distribution of marginally improved content quality. Photo editing, intrinsic to the camera, pre or post image capture is currently the only way to mimic more closely the vision of what our eyes and brain detect. Every cameras applies it, every photograph needs it yet few technologies do it well. A great investment opportunity that would drive differentiation for pretty much any technology vendor. The future I see and the lessons I learned when driving this gigantic opportunity through a startup innovation process.

KLM social seating

Wed, 07 Dec 2011 02:24 GMT

Dutch airline KLM, part of the Air France conglomerate yesterday introduced social seating, as reported by the Huffington Post. A great idea and service for those interested in socializing because they cannot sleep on long transatlantic flights. The service will allow Facebook and LinkedIn users that opted in to select who they want to sit next to (or not). Curious to see if other airlines will follow. Now if we could only find out from social networks who snores the most…

The musical chairs of asset management

Fri, 02 Dec 2011 09:08 GMT

My deepening interaction with the worlds top investment managers makes me think of and compare its performance with the musical chairs game we all played at least once when we were young. It is no surprise how Limited Partners and Venture Capitalists are perfectly aligned in the deployment of uniform and therefor subprime risk and are encouraged to keep hopping around quickly.

Google does not care

Tue, 29 Nov 2011 02:52 GMT

We recently received an e-mail from the company Apture, the online service we used to automatically make live references to Wikipedia and to enable on the fly deep dives into certain terms we use on our site, stating they have been acquired by Google and will be terminating the service in about one month.

More than a disappointment that the service will disappear, it demonstrates how both the employees at Apture and Google think about customers. Terminating a service without a respectable forwarning to “thousands of publishers” demonstrates how many technologists are merely opportunists, trolling from one financial reward to another while trampling its hard earned early adopter customers in the process.

Here is the gist of the e-mail Apture sent on November the 11th, 2011:

On December 20 we will discontinue Apture's product and services. When this happens, users will no longer be able to highlight and search terms with Apture on your web pages.

I will easily forget about Apture, but I will never forget about the real reputation of Google as witnessed by the actions of the company it acquired. It is not smart to bite the public hand that feeds you, and it hurts those trying to make an earnest living in the innovation’s business.

Eat to scale

Wed, 23 Nov 2011 03:13 GMT

If you are tempted to eat too much during the holiday season, check out the Withings (awful company name) digital scale that sends your measurements including those of 7 other family members to the cloud where you can keep track of weight, lean mass, body fat and BMI on a constant basis.

With WiFi built-in, the scale is easy to use and will automatically send new measurements to your account after you step off. That is, if you manage to get passed the outright cumbersome installation process ill-suited for non-technologists, with incorrect installation requirements and no installation documentation to speak of.

The scale functions perfectly as a regular digital scale, yet with its automatic connection to the cloud combined with a beautiful iPhone and iPad app to chart out your weight objectives turns the Withings scale into an effective weight management tool.

Price $160, available from the Apple Store (and other places) now.

Full disclosure: I have no equity in products or companies I evaluate except that they - according to my review - adhere to the promises they make. I pay for the products I want by myself and receive no promotional fees of any kind. If you agree with the discretionary role technology should play in our lives I describe in my blogs so frequently, you will find my observations of the implementation of innovation useful in determining whether or when you should buy them.

Are small company IPOs just fine?

Thu, 10 Nov 2011 04:03 GMT

Dan Primack of Fortune concludes in this morning’s e-mail that just because there are a few large IPOs, all must be fine in Venture land. An argument I have heard many times before and a dangerous conclusion that has had its precedent:

I think you assessment that just because there are IPOs all is fine in Venture land is overly simplistic. It may demonstrate simply that the public is still easily swayed to buy into the magic of technology, even though many do not produce sustainable social economic value. And with the stock market violating free-market principles, I would not surmise that merely because you can raise another round (this time from the public) the returns will await its investors in the long run. We have seen many IPO's in the late 90s, and where are they now?

Many IPOs have been pushed through the funnel in the past that have produced miserable returns for the public. And each time we push a company through that funnel without the tangible social economic value to produce returns for the public, we erode the trust of the public to invest in the sector again. That is the reasons why IPO “windows” for technology do not open all the way anymore and permeate a distrust that is counter to our ability to produce social economic value in the future.

Turnaround U.S.A.

Thu, 10 Nov 2011 03:01 GMT

The best way to resolve the financial malaise in our country is to pretend our country is a company, in dire need of a turnaround. That turnaround could only come from a place where innovation and the ability to think of this world anew is a constant, and formulates a deliberate choice for a new well guarded meritocracy that serves us all.

Pancake Economics

Thu, 03 Nov 2011 03:32 GMT

A giant financial bubble, bigger than we have ever seen before, is starting to deflate. We gained self-induced economic instability as a result of valuing the ballooning gamble on production (with its many derivatives) higher than the creation of production that produces social economic value.

My discovery of the flaws in the fundamental deployment of risk in our economy means that its performance can be made highly predictable again and can be deployed by change everyone can understand, and believe in.

Lead or get the f*k out

Mon, 24 Oct 2011 02:35 GMT

Mark Suster at Venture Capital firm GRP Partners wrote an article titled “Lead, Follow or Get the Fuck Out of the Way ” in which he laments in a self described Dave McClure way how a founding CEOs should know when it is time to stay or go. It is a topic that has been covered in much detail before. As an early stage investor you pick the right team in addition to the right technology (that has tangible social economic upside), and when you as investor have made a mistake in that assessment the equity and voting power can be used to induce a change of leadership. Yawn…

The problem with the scenario described in the article is that the merit of the investor making the judgement of a change of leadership is often unquestioned. Hence we respond:

Sounds good to me. I wish however the 97% of VCs that don't make any money for LPs would do the same and get the f*k out too. If we all worked on the basis of a meritocracy our world would be a much better and healthier place.

For when we have more investors with transparent and verifiable merit, the likelihood of funding companies without the proper composition will make Mark’s blog moot. Entrepreneurs are held to high standards (as they should), yet investors are not. That is the real reason why Venture Capital as the arbitrage of innovation performs so poorly.

The meager role of Meeker

Fri, 21 Oct 2011 06:25 GMT

The hiring, role and presentation (at the recent Web 2.0 summit) of Mary Meeker from Kleiner Perkins Caufield & Byers is one of the many odd lateral moves the venerable Venture Capital firm has made over the years that make me question their current merit in the innovation’s business. The initial role of KPCB in building the traction for the financial support of groundbreaking innovation in Silicon Valley is undeniable, but just like the asset class as a whole I have sincere doubts that the economic model under which the firm operates and protects so staunchly will allow it to grow up healthy, and remain the unquestionable catalyst of innovation it could and should be.

Bye bye Time Warner OnDemand

Thu, 20 Oct 2011 03:52 GMT

In an age when time shifting of media is crucial in achieving mass consumption, Time Warner has regressed to bow down to its advertisers by disabling fast-forward in its OnDemand recorded TV programming. I refuse to spend 20 minutes of one hour of TV programming wasted to advertisements. So long On Demand.

Setting Menlo Ventures straight on Siri

Fri, 14 Oct 2011 06:23 GMT

Shawn Carolan, Board Member at Siri and Partner at Menlo Ventures wrote an article on PEHub related to the personal assistant software (in beta) on the new Apple iPhone 4GS on Siri, called “The Prettiest Girl at the Ball” which I need to correct.

Without using any proprietary information I had on this company, the overreaching description of the role of Venture Capital (VC) in this article is what percolates the Venture business and creates the fog around the real merit of Venture Capital in the process of producing returns for their investors. The integrity of the Venture Capital process matters, because only real VC merit can produce sustainable returns and therefor be the investment thesis that can instill new confidence with Limited Partners, especially with Venture’s deplorable ten year performance.

Specifically I take issue with the following statement:

...the decision to sell was a tough call and there was lot of hand-wringing at the Board level. Siri had just raised a new round from Horizons and had close to $20 million the bank.

The original document on PEHub appears here, to which I add:

Oh please. You are bending the truth quite a bit. Siri was great technology due to its inheritance from Calo developed at SRI but hardly a business success you seem to suggest that would prevent it from selling (everyone could see that from the App Store ranking). And $20M in the bank does not erase the fact that the business model as an independent iPhone app was flawed and underperforming. So, the value of Siri was primarily related to the value of the intrinsic IP, not the business execution or the role of Venture Capital in that process.I hate it when VC takes credit for what it didn’t achieve and doesn’t take blame for the things they (not entrepreneurs) did. Hence my need to set you straight. And the future of adoption of Siri in the real world remains to be seen (voice recognition is still fraught with many false positives and false negative that will feed Siri incorrect input, and lack of foreign language support that will minimize its global practicality), but if anyone can turn it into a business success in the long haul it will be Apple.Today it is a great marketing tool, a lot of water needs to go under the bridge before it can deliver incremental market access.You got lucky on this one, let’s leave it at that. Just don’t confuse luck with strategy.

Much of the success of Siri was derived from the ability of SRI to harvest the knowledge from a government project into a commercial project. I would recommend SRI to raise its own funds so it does not need to lose future equity in other projects to the external guidance that has proven to deliver only nominal value.

LightZone is dead

Thu, 13 Oct 2011 16:23 GMT

From a well informed and trusted source I hear LightCrafts, the maker of LightZone photo editing software is shutting down. Already the website has become unresponsive and inaccessible over the last few weeks, with customer inquiries arriving in my mailbox.

I was the CEO of Light Crafts for a while (in 2007) during which time I raised more money to elevate the product to a more differentiated level and more than doubled revenues in less than 6 months. I laid out a new product roadmap that included a new UI, style based and touch based editing, even before iPads were around.

What went wrong I cannot really talk about (I signed a severance agreement) except perhaps to say that the opinion between me and the original founder (and still largest shareholder) of where to take LightZone diverged drastically. Mine included an aggressive leadership position in the photo editing market (ready for new devices) of which the first steps paid of already handsomely. We agreed to disagree, and I left.

I learned a bunch of lessons from this worth sharing:

There is a minimal investment needed to create a viable product (of this highly technical nature), and trickle funding does not work in many scenarios (you can't build solid R&D teams that way)
A product is not a product when conversion rates (from prospect to customer) are less than 50%. Operational excellence can at best deliver temporal value with an immature product. Hence I did not deploy pre-mature marketing expenditures that would emphasize a hampered conversion, and focused instead on a differentiated roadmap.
A smart scientist does not by default make a great engineer, nor a great programmer, nor a great entrepreneur, nor a great salesman. Nor can you teach a scientist to think fundamentally differently. The emphasis and importance of an ultimate computing experiences is difficult for them to comprehend.
Can startups be fixed? When a startup company is stagnant or in trouble, a turnaround startup CEO needs to obtain enough power (voting, equity or otherwise) to become empowered and yield the full buy-in from the founders. In many cases that means the pain needs to be big enough for the founders to realize they are not as bright as they think (on the business side). A come to Jezus event needs to take place to affect real change.
A board with a single (voting) investor is a tricky one, especially when that investor is a deep technologist just like the founder. A balanced board or at least one board member with a business background would have helped balance out the company.

LightZone was a great concept that in a short time I helped make a lot better, winning new awards and new business. And it saddens but not surprises me that the company's own direction after me leaving was proven wrong.

Technology is only innovation when it sells, and giving technologists money does not make them entrepreneurs.

The sad part is that I will miss LightZone (when it stops working), a product I still use almost every day to make my photographs look the way I envisioned them.

Hopefully Apple can come up with a viable alternative soon, because the marketplace is highly fragmented with mediocre tools, including Adobe Photoshop (in its photo editing capacity).

Against cutting out VC

Sat, 08 Oct 2011 03:10 GMT

I commented today on an article on Reuters PEHub called “A Pension Fund Does Away with the Middleman: the VC”, because I want people to understand my views on Venture Capital are balanced and sincere. I have no axe to grind with Venture Capital but for a single reason: the economic incompatibility to detect and arbitrate groundbreaking innovation.

So, it may surprise some of you that I am not in favor of removing VC as the middle-man in the Venture asset class. Here is my response:

It is the right concept to reduce the 10 levels of bottom-heavy diversification in the deployment of risk in Venture Capital that prevents it from producing viable returns moving forward. And with mostly subprime VCs populating the ecosystem today, the temporal opportunity to remove them may help certain LPs cross the time bridge of change. But Venture Capital arbitrage is needed to produce viable returns, as long as you don't populate it with subprime arbitrage. So, what pensions should focus on is an economic framework that deploys the proper (non-uniform) risk with people who have the merit to spot it. And then force the deployment of non-uniform risk that made Venture Capital so valuable in its inception. The concept of Venture Capital arbitrage is not broken, the execution is. And I wonder if a soccer game without a (highly merited) referee is actually better than one with a bad referee. Especially when we've been living with 20-years of bad VC referees.

The disease that plagues Venture Capital requires a doctor that prevents it from becoming terminal. The improper diagnosis will yield the same outcome as doing nothing, a further dumbing down of the massive opportunity that awaits innovation.

So, the diagnosis of the Ontario Municipal Employees Retirement System (OMERS) with $53 Billion in assets under management is a dangerous one, especially when they conclude that if their gutsy move does not work “we won’t be doing [VC] for very long”. Aspirin is not a cure for cancer.

How Steve Jobs proved Venture Capital wrong

Wed, 05 Oct 2011 14:41 GMT

With great sadness did we receive the news that Steve Jobs has died today. He demonstrated that in an industry built to engineer groundbreaking technology innovation, Venture Capital as its financial arbitrage was wrong. Dead wrong. We will miss Steve Jobs greatly as he was many years ahead of his time. And it will take many of us a long time to catch up with him. May he rest in peace.

Caution in the cloud

Sun, 25 Sep 2011 15:42 GMT

The Internet Service Provider (ISP) where The Venture Company website is hosted was hacked today, along with many other corporate websites the ISP hosts. Our index files representing our main website pages were defaced and replaced with the web page above, and access to our content was significantly restricted.

Apart from a public embarrassment the inconvenience of having to fix it, the event made me think about the implications of offloading and trusting more pertinent data to the cloud:

Most ISPs have no disaster recovery plan in place to deal with security breaches. They simply lack the instant resources to help every customer regain access to their data quickly. Our ISP blocked access to the websites to deter further vulnerabilities which kept our website in an unstable state for more than six hours.
Most ISPs have backup mechanisms, but lack the knowledge (and resources) to reload and restore a consistent state specific to each client. As a result clients should always rely on their own local data store, to restore quickly and with the most recent and consistent state. We made a conscious decision years back not to host our blogs in the cloud but to use desktop software (that we can back up ourselves), for exactly those reasons. We could not imagine waiting in line with hundreds of other distraught customers to retrieve a consistent state of information from the last generic backup.
Security vulnerabilities remain rampant, and the technology provided to fix these are highly fragmented and far from waterproof. Physical, perimeter, viruses, logical and application security technology desperately keep trailing the latest tricks deployed by hackers, with concentrated cloud attacks providing a larger destructive impact than the simple defacement of a few web pages. The fragmented technology security industry is poorly aligned with the encompassing security needs of the emerging cloud.
Few companies have a well defined security strategy, and little transparency in the breadth of their security capabilities. Very few ISPs have addressed logical application vulnerabilities, which is equal to securing the front door of your house while leaving the windows open. And the number of applications, protocols and services that will exhibit vulnerabilities will increase dramatically.

There are great advantages to entrusting your data to the cloud (for one a single point of truth), but with many underfunded (or capital efficient) companies struggling to escape commoditization making wonderful promises, the chance of someone else gaining access or destroying years of valuable work is extremely high.

So before you entrust you data and applications to the cloud, ensure you have the backups to switch at a moments notice and stay in control of your own mission critical processes and information. We did, and in less than 5 minutes after a six hour irritating wait for the ISP we were back online.

What is wrong with yet another $500M Venture Capital FoF?

Thu, 22 Sep 2011 10:04 GMT

What is wrong the with the positive news of a new $500M Fund-of-funds dedicated to Venture Capital reported by Reuters PEHub, you say dear Debbie Downer?

Nothing except for one crucial thing says Debbie; the deployment of risk in Venture Capital. If you have been living under a rock and have not been studying my 2010: The State of Venture Capital you will not realize that Venture Capital, the way it is constructed today can by economic principle never produce outlier returns. And thus Wisconsin’s very gutsy initiative will not yield more than the false positivity we have become so accustomed to.

The problem with the support for innovation is clearly not the lack of capital, but the type of arbitrage and risk that is deployed through that capital. I say that having just come off a 2-hour phone conversation with a Fund-of-funds manager who deploys $700M in Venture Capital per year and empathically stated everything, no everything I warned him for in my blog has happened to him (including the script of my VC roast).

Deploying capital is the least of the problems we have, the Private Equity overhang is still aplenty. The problem is that many Fund-of-funds simply do not know how to deploy the proper arbitrage to make that investment produce viable returns. And now Wisconsin government thinks it can outperform the public sector in producing viable Venture returns? It is sad to see how ill-informed constituents can be sold on the easy promise of false economic positivity.

Spending money is easy, having it produce a return is a whole other ball game. I hope they have the guts to give me a call soon.

Missing Steve Jobs already

Tue, 20 Sep 2011 02:19 GMT

It does not take a genius to make the prediction that after the incredible high Steve Jobs has given Apple a slow glide downwards in the company’s future performance is expected. Nothing against Tim Cook, I don’t know him - so I can only judge by what I see. And I see a few dark clouds brewing.

The challenge in building successful innovation is to marry macro-economic behavior with support from modern information technology to create tangible social economic value. Apple like no other company has succeeded beautifully, yet not perfectly in that objective.

The danger to Apple is that it can be beat only where it just beat other technology companies; macro-economically. And content will topple distribution. Apple is very vulnerable with the staunch implementation of media sales - it does not own - through iTunes, and unchanged it will only take a smarter technology company to support the labels with the freedom they previously enjoyed. Winner-takes-all marketplaces, by economic principle, cannot be achieved through marketplaces that are not economically free. And iTunes violates free-market principles. Proprietary marketplaces such as iTunes can become free (not the other way around), but the timing has to be just right. So far few technology companies have the smarts to challenge Apple macro-economically and thus it continues to gain momentum successfully.

The first sign of trouble for me is to find the mention of a restart option (depicted above) if the computer freezes in the energy panel of Apple’s new operating system (Lion). That small detail, an admission of guilt if you will, is something Steve Jobs with his presence of mind would have never allowed to enter. For Steve Jobs would rather have delayed the OS to figure out why their computers freeze than let this pass by quality control. And since Macs already rarely freeze, providing an option for restart in that extreme scenario communicates how people without the rigor and tenacity of Steve Jobs are now suddenly allowed to think and act for themselves.

It is a small but important signal of how Tim Cook’s management style (to defer) and Steve Jobs’ (trust but verify) are already deviating. Steve Jobs is a product guy, realizing that product capability, perfection and ultimate-user-experience beat operational excellence - Tim’s forte - on any day. For me that single option in the energy panel demonstrates that the slide of Apple has begun, even though in the land of the blind its future will remain brighter than many other technology companies for quite some time.

In full disclosure: I have been a staunch Apple user for more than 20 years and have been “forced” to use a PC on occasion but always bought Apple, way before the fair-weather supporters of Apple entered the fray. I believe in Apple because it feeds a more pressing and more profitable computing need that serves the world, rather than the technocrats. And I have converted many a neighbor PC user to Mac.

The Venture Confession

Mon, 19 Sep 2011 01:21 GMT

Vinod Khosla, who raised about $2B in Venture Capital funds recently, expresses in an article on PEHub that he does not like the Venture profession much. To which purportedly Jim Breyer, partner at Accel responds:

Total BS from this snake oil salesman. At 70+ years old with no friends left, he wants us to like him now. Oh puuuhhhlease! This guys is a jerk, dont take money from him, stay away as far as you can. Khosla is always about Khosla, super arrogant punk. He will destroy your company.

To which I need to respond:

Well Jim, as the former Chairman of the NVCA you should be ashamed of the “best practices” of Venture Capital as well. Negative 10 year IRRs, a handful of companies with any social economic value produced by VC as the arbitrage in an 80% greenfield and Venture Capital performing under the adoption rate of technology in the worst of economic circumstances, and a loss of trust by the public in that arbitrage is the despicable outcome of the mediocrity that holds our most precious asset (innovation) in a headlock.Perhaps what Vinod is eluding to is that Venture Capital is a mediocre asset class and arbitrage despite the enormous capacity and adoption greenfield to innovate. With less than 35 out of 790 (original) VCs making any(!) money and around ten doing so with Venture Capital as the monolithic thesis, Venture Capital has proven to be the improper economic construct to drive innovation.And I can fully understand why few smart people want to be associated with that performance or its “best practices”.

Venture Capital is a dumb economic construct to capture and arbitrate our capacity to innovate. For reasons why visit 2010: The State of Venture Capital.

Not so bad economy

Thu, 08 Sep 2011 05:39 GMT

Kara Swisher at All Things Digital correlates the false positivity of Venture Capital fundraising with a not so bad economy. Wishful thinking perhaps, here is our response:

Well, average returns of VC funds over the last 10+ years are still in line with the economy, both are negative. More money-in using the current flawed VC economics, in violation of free-markets, only subscribes to how clueless Limited Partners are or how large the size of the Private Equity overhang still is.

Read the online article with our response at All Things Digital.

Idiotic Government

Tue, 06 Sep 2011 01:11 GMT

The justice department moved to block the $39B merger of AT&T with T-Mobile on the grounds that it would harm competition.

An idiotic standpoint to take considering government previously allowed each digital mobile phone network provider to lock out the otherwise open GSM standard (designed to provide roaming across competitors) through SIM card locking to being used only by its own handsets (I stated my case before). Kind of like allowing Apple computers to only connect with other Apple users over the Internet, and Windows users only with other Windows users. The free-market principles of the mobile phone business have been violated from the start, with the government standing by idle and consumers having suffered the consequence of proprietary and dim cell phone coverage for many years.

What idiotic government does not understand is that SIM card locking, a seemingly small tactical implementation had a detrimental effect on the creation of free-market competition that would have allowed many more smaller GSM mobile phone providers to give the wealthy incumbent a run for its money, and have allowed for better consumer value some twenty years ago.

Rather than blocking the merger between AT&T and T-mobile, government should have moved to block the locking of SIM cards so before or after the merger with AT&T any new GSM provider has a fair chance of competing on core competency: providing sublime network access to anybody who needs it.

We need smarter government if we want our country to prosper again.

About Venture Capital Trusts

Fri, 26 Aug 2011 03:18 GMT

Charles Rothstein, senior managing director and co-founder of Detroit-based Beringea, published an article in Reuters' PEHub about the need for Washington to engage, just like the United Kingdom, in a new concept referred to as Venture Capital Trusts. Here is my response:

No Charles, you are wrong. Venture Capital (no matter who feeds it) is the improper economic construct to support its underlying asset (innovation). Multiple facets are highlighted on my website, but the short of it is that you can’t expect to generate outlier returns from a uniform deployment of investment risk (I coined subprime VC).And the last thing government should do is meddle in the business of innovation. The role of government is to ensure markets operate and obey according to strict free-market principles. And we lack the most fundamental free-market principles that our forefathers instilled upon us. That is why we fail to detect the groundbreaking innovation that fantastic entrepreneurs in this country can create, and we instead have amassed the messy noise of false negatives that turns Limited Partners and the public off.The answer to improving the success of innovation is not to deploy the same deflated risk through new distributions, but to deploy the appropriate risk to the outlier entrepreneurs that deserve it.

Find the original article and my response to it online here.

iChat does not (yet) quack like a duck

Tue, 23 Aug 2011 13:12 GMT

Apple's iChat does not quite quack like the Adium duck just yet. Expanded with Yahoo! chat in the recent Lion release, iChat has difficulty reconnecting with many of its chat services (AOL, Yahoo!, Google and Facebook through Jabber) and fails to reconnect to Facebook's chat. Adium, with its open source code also offers connectivity to Skype's chat capability through a free extension. [Links: Adium]

Fake tits and money

Tue, 23 Aug 2011 03:04 GMT

Early stage Venture Capital investors who invest less than $500K in entrepreneurs to find the innovation that will bring them extraordinary riches are like women who put down $5K for breast augmentation with the hope it will yield them the confidence and attention to set them up with a well-to-do husband for life.

Should we really be surprised those marriages produce even more dysfunctional "children", responsible for negative Limited Partner returns and a plethora of IPO bubbles?

Bose Videowave impression

Mon, 15 Aug 2011 08:09 GMT

The Bose VideoWave system incorporates some impressive audio engineering that lacks the proper positioning to meet the needs of modern and informed home theater users, or for that matter my daughters bedroom.

The Bose VideoWave is therefor in our opinion a strategic misfit, dragging some impressive engineering with it into its demise.

Europe's PE & VC confidence, shaken not stirred

Sun, 14 Aug 2011 14:12 GMT

The European Investment Fund, operating as the specialty risk-capital arm of the European Investment Bank and the European Commission publishes the Private Equity and Venture Capital investments since inception of the Fund-of-funds in 1997, which can act as an interesting barometer for the confidence of European public institutions in the Private Equity asset class.

Quark quake

Tue, 09 Aug 2011 04:44 GMT

Quark, the leader of desktop publishing tools before Adobe took the reins has been taken over by Platinum Equity (financial terms undisclosed). Finally, because not its products lacked capability but Quark's macro approach remained unchanged to a market that has fundamentally changed in composition. It would be good for the marketplace if Adobe were to be given a run for its money. [Links: PEHub]

Ignore the Dow

Fri, 05 Aug 2011 07:15 GMT

Yesterday the Dow Jones plunged which produced excessive fear and got many in a tizzy. I was about the write a posting on it when Brad Feld beat me to the punch with an article on PEHub titled: “PSA for Entrepreneurs—Ignore the Dow!!”

I agree with Brad’s announcement but for slightly different reasons:

Agreed Brad, but for slightly different reasons. No one should correlate the Dow with the state of the economy. Simply because the stock market is not a free-market system (see my blog) and therefor is not representative of the value of the underlying asset. So get on with life and build great innovation.

Get the article here. We should instead be razor focused on diminishing our debt, or better jet improving income (rather than taxes).

The State of Debt

Fri, 05 Aug 2011 04:24 GMT

This from a New York Times article: For years, the American financial sector borrowed and borrowed. Its obligations rose even more rapidly than consumers’. Both sectors were far more aggressive borrowers than the federal government. Now that has reversed. The Federal Reserve reported this month that the outstanding debts of both the financial sector and households fell in 2010, as they had in 2009.

Now if our government would get its act together of what its role is in a free-market (not free-for-all) economy, the trending would work out just fine.

Check out the article here.

Interactive Venture Capital map

Fri, 05 Aug 2011 02:38 GMT

Following the lead of David B. Lerner at Columbia University, Scott Austin from The Wall Street Journal steps it up with an interactive map of Venture Capital deals sourced from Dow Jones VentureSource (for many reasons incomplete in capturing all Venture deals, but the margin of error may be the same across all geographies).

So, now you know where Venture Capitalists are spinning their wheels. Not to be confused with the health of the Venture ecosystem, since money-in does not equal money-out as we pointed out in yesterday’s posting on deals, deals, deals.

Check out the Venture Capital map online.

How not to refer a deal

Thu, 04 Aug 2011 13:01 GMT

This is a real world unchanged transcript of the many useless referrals I and many VCs get on an almost daily basis:

Deals, deals, deals

Thu, 04 Aug 2011 03:02 GMT

Jerry Neumann does an interesting exercise by applying some charts to Venture deals data. However, there are many reasons why you should not draw any conclusions from the majority of statistical reporting in Venture:

Past behavior is no indication of future behavior (a rule of innovation).
Deal staging says nothing about deal risk and therefore the number of deals says nothing about the viability of Venture taking more or less appropriate risk.
The number of deals should have gone up dramatically because of the subprime nature of Venture Capital and thus smaller round sizes. Subprime VCs will need to offset deal size for deal volume to reach certain fund commitments. So, the rise in deals may well be offset by its quality.
Money-in says nothing about money-out, and hence this chart at best how VCs are spinning their wheels. Just to remind you, ten year VC returns are negative 4.6% with only 35 of 790 VCs making any money for Limited Partners.
Crunchbase (the source) is a very unreliable data source, not just because it cannot accurately capture all deals that are done.
This data excludes the many angel deals that take place “under-the-table”.

Just keeping it real. Find the otherwise interesting blog of Jerrry Neumann here.

What New York needs and doesn't need

Wed, 03 Aug 2011 06:56 GMT

Chris Dixon blogs about what New York needs and doesn’t need with regard to startups. We chime in:

What NY needs (like SV) is less subprime VC. Because when subprime VC is gone and companies with substantial social economic value are produced, investors will care more about securing upside rather than downside, and the commodity squeeze in innovation will disappear. Along with many of the pain points you listed here.

Find our online comment on Chris’ blog here.

We fail because we lie

Tue, 02 Aug 2011 09:06 GMT

Many of us like to spread the belief that our destiny is in the hands of "The Economy", blissfully forgetting that we create and control said Economy.

The silly political rambling about our national debt and the raising of our debt ceiling compounds the realization that our government too has failed, along with our economy and our financial systems. Our systems fail, not our tactics.

We need to treat our country more like a company, and our country lacks a viable business plan, a binding compass. We need to stop lying to ourselves to prevent us from reaching our full economic potential.

Goodbye Secondaries

Mon, 01 Aug 2011 02:31 GMT

Another Ponzi scheme in Venture is slowly coming to an end as VCs start to clamp down on Secondaries, not only to prevent a-synchronicity between returns for entrepreneurs and VCs but more importantly between entrepreneurs and LPs. Excessive diversification of risk by way of deal staging and round fragmentation already is a sign that many VCs do not understand upside investing, and they certainly cannot afford to lose any more downside (stemming from less hungry entrepreneurs) than they already have.

Secondaries are a new way to sell an aging promise to dumb money, useful in delaying the pop of a growing Venture Capital bubble. They are a sign that Venture Capital has not recovered at all, and is still desperately licking its sore wounds. What other Venture Capital constructs can we invent, short of telling LPs that the incompatible economic construct and the improper application of risk of Venture Capital are responsible for the suffocation of innovation?

[Links: PEHub]