I've been in some negotiations like this:
I've been going through my track record as we put our diligence materials together for our new fund.
One stark fact is how the venture business has changed. My last two operating jobs were at Shiva and New Oak Communications. Shiva raised a bit more than $8M in four rounds of financing from 1989 through 1994. That small amount of money came from two blue-chip investors -- Greylock and Kleiner Perkins. In those days, you dripped the money into the companies (the biggest round was $4M). Shiva went public in late 1994 with a $200M+ market cap and had a $2.4B market cap at it's peak in June 1996.
New Oak raised just under $12M in two rounds (including seed capital) in 1996 and 1997. When we sold the company in January 1998 for $156M, we still had $6M in the bank. So, in about 15 months we spent almost as much capital as Shiva spent in 5 years. Things were already accelerating, but no one complained about the outcome.
In looking at the venture deals I have been involved with since 1999 (14 deals), they have averaged $52M+ per deal! Unfortunately, not all of these companies had a successful outcome, and some of them may require additional capital. So, significantly more capital has gone into deals since 1999. Now, that is not a big surprise, but it is still stark to see the contrast.
Of course, the problem is that with $12M of capital per deal, a $75-100M outcome is a very significant win. With $50M of capital per deal, you need a $300-400M outcome to achieve the same multiple. I think that there were proportionally many more $75-100M exits in the early to mid 90s than there are $300-400M exits today. So, it's much tougher for VCs to make the same type of returns now than it was before. And, that's a good reason why my new firm will be doing something different!
PS - Inflation is a small factor here. According to my quick check, there has been about 31% inflation in the past 10 years. So, it does make a difference on capital per deal, but not that big of a difference.
For a variety of personal reasons, I was feeling blue today. Just one of those days.
But, while sitting in my office in the Foley Hoag Emerging Enterprise Center, an entrepreneur I know happened to walk in. He and one other business partner are considering starting up a new business. Foley Hoag is hosting them while they do their initial diligence on the idea. Although not something that Sempre would invest in (we are focused on later stage opportunities), it was great to discuss the market opportunity with him. His enthusiasm was infectious. There is nothing like the motivation of a great entrepreneur.
And, it snapped me out of my glum mood!
If you are reading this, you probably read other blogs, too. If not, I'm very honored. But, you probably also read these blogs via RSS feeds and a feed reader. I use Newsgator. It's how I read the 100+ blogs I keep an eye on. And, it is available for free on the Web, on your mobile phone, and in Outlook.
One of the blogs I read has had its RSS feed go haywire more than once. There are re-postings of old entries. The latest problem is the worst -- every post on the blog gets re-fed every few hours. I finally dropped the author an email to let him know. But, he shouldn't have had to hear from me before he knew about this.
I subscribe to my own RSS feed. Not so I can read my own pearls of wisdom (which are very few). But, so I can make sure that my reader experience is good. I get a sense of how the graphics come through on the feed. I see that embedded videos do not (so I always provide a plain link to anything I embed). And, if it goes berzerk, I'll be one of the first to know. By the way, my RSS feed is hosted by Feedburner (now owned by Google). I've been very happy with them, too.
Facts are facts. I haven't posted in six days. I've been very busy, and traveling as well. Will rectify this today!
Although the story has hardly gone away, I have held back on commenting on Roger Clemens's testimony in front of Congress about alleged steroid use. Although I think that it is a gigantic waste of our tax dollars for Congress to spend any time on this, it has been great theater.
As a long time baseball fan, I really want Roger Clemens to be innocent. Whether Clemens was a Red Sox, Blue Jay, Yankee, Astro, or Yankee again, I have always admired his abilities and competitiveness. He's put up great numbers over a long career.
However, I have a hard time believing that Roger is innocent. Although Brian MacNamee is hardly the world's most credible witness, he has told the truth about the other players' performance enhancing drug use. Why would he only lie about Clemens? Although I think that keeping old syringes and bloody gauze is disgusting, and probably could be easily discredited in a court case, this case is playing out in the court of public opinion. In that court, Clemens is losing.
Why is Clemens stridently maintaining his innocence? He must be very confident that more physical evidence won't come out. So far, no one has been able to show how Clemens obtained steroids or HGH (even MacNamee said he didn't know where it came from). And, if there is a confirmed source of HGH, Roger has admitted that his wife took that. Absent that source, Clemens has plausible deniability. But, I don't think that he has saved his reputation.
Look at Andy Pettitte. He admitted HGH use and comes out of this looking like the good guy. I think that right after the Mitchell Report came out, Clemens had a chance to admit very limited use of performance enhancing drugs without jeopardizing his chance for the Hall of Fame. That time has now past. If he admits it now, he lied to Congress. I think that Roger is hoping that the big lie will hold up.
If somehow Roger really is innocent, I feel very badly for him. There is no way to prove a negative, and he has pretty much lost the battle for public support. The only way he can prove that he is innocent is to get MacNamee and Pettitte to admit that they were wrong and/or lying. I don't know why either one of them would do that.
Too bad, Roger. In light of the environment in baseball at the time, I don't really begrudge you for using performance enhancing drugs a few times (although I think that all sports need to work hard to eliminate these from use). But, you missed your chance for forgiveness by telling the big lie and hoping this would go away.
I wrote recently about how the money will keep flowing into venture capital, perhaps diluting good returns before they happen. If you are an entrepreneur, what should you do in this environment, particularly if you believe that an economic slowdown is coming, too?
First, resist the temptation to 'lower the bar' and pursue a sub-par opportunity because capital is available. Although it is always nice to draw a salary, most entrepreneurs really want to make a difference and start something that has the chance to be big. A 'me-too' opportunity has less of a chance of that. So, be honest with yourself during your own diligence on a new opportunity. Of course, as the entrepreneur, you have to love your new idea. But, is it defensible against inevitable competition? Can you be capital efficient? Can revenues grow faster than expenses? Does the business model fit well into the market environment?
Second, if the projected glut of capital occurs, raise money even if you don't need it. It is a very rare CEO who says after a successful exit, "I should have raised less money." Having financial reserves before a downturn is a fantastic advantage.
Third, don't mix-up raising money with spending money. If you can convince your investors to invest money without you having to spend it too quickly, you are in good shape. I think that being tight with spending gets embedded in a company's make-up. If you start off being cheap, it will be easier to stay that way. Of course, as a company gets big and profitable, it can and should spend more money. But, efficiency should always be the watchword. There is never a company size that makes it OK to waste capital.
Fourth, keep your workforce as variable as possible. These days you can buy so much as a service. Only hire the core people you need. What would your company look like if you had to cut expenses? Try not to commit to more than that as permanent staff. Beyond that, you can hire outside services, contractors, etc. If you have to cut these back in the wake of a downturn, it won't feel anywhere near as bad as a layoff does. This is a fine line to walk, but worth doing.
Fifth, if things get bad, there will be competitors and complementary companies that will fold. See if you can use your common stock to pick up some technologies and people that add on to your company. Although this is a bit dilutive for you and your investors, if you can pick up something valuable at a fraction of what it would cost you to develop it yourself, then you are investing your equity wisely. Most of the technology from companies that wind down ends up rotting on a shelf somewhere, so use your strong negotiating skills to avoid overpaying.
I'd be interested in other ideas that people have on this. Please post some comments with additional thoughts.
Here is some information from their email announcing the event:Don't wait -- start bidding on over 30 items now!
I'm glad to see the Democratic-led House of Representatives finally stand up to the Bush Administration as they continue to trample on some of our freedoms. The House has refused to send to President Bush a bill which extends a temporary electronic surveilance act that circumvents the FISA process and adds immunity for telecom companies that helped the Administration get around existing laws. If you look into the FISA process, you'd see that it is nowhere near as onerous as the administration claims for them to get a FISA warrant to wiretap a suspected terrorist. And, I am all in favor of a very flexible FISA court that aids the administration's ability to monitor terrorist communication.
But, according to people like this guy, the administration is fighting terror with a machine gun rather than a laser-guided missle. This is why the administration needs immunity for the telecom companies for past activities. According to this story, AT&T aided the administration monitor all Internet traffic from a large peering point and probably did the same elsewhere.
"That was my 'aha!' moment," Klein said. "They're sending the entire Internet to the secret room."
The diagram showed splitters, glass prisms that split signals from each network into two identical copies. One fed into the secret room, the other proceeded to its destination, he said.
"This splitter was sweeping up everything, vacuum-cleaner-style," he said. "The NSA is getting everything. These are major pipes that carry not just AT&T's customers but everybody's."
One of Klein's documents listed links to 16 entities, including Global Crossing, a large provider of voice and data services in the United States and abroad; UUNet, a large Internet provider in Northern Virginia now owned by Verizon; Level 3 Communications, which provides local, long-distance and data transmission in the United States and overseas; and more familiar names such as Sprint and Qwest. It also included data exchanges MAE-West and PAIX, or Palo Alto Internet Exchange, facilities where telecom carriers hand off Internet traffic to each other.
"I flipped out," he said. "They're copying the whole Internet. There's no selection going on here. Maybe they select out later, but at the point of handoff to the government, they get everything."
So, all of our privacy has been violated, not just that of suspected terrorists. This is clearly a violation of our rights and an example of real abuse of power.
Since our next President is probably going to be a Senator (Clinton, McCain, or Obama), hopefully they'll have much more respect for the checks and balance system which makes our country great and helps preserve our freedoms. I'd rather have freedom and some more bureaucracy than give anyone in the government the broad ability to do whatever they want.
Maybe I'm biased, but I think you can make a strong case for Celtics head coach Doc Rivers as NBA Coach of the Year. Doc won the award in 2000 while coaching the Orlando Magic. At that time, the Magic were expected to be a last-place team. Doc coached them to a near playoff berth.
This year is different. There were a lot of people saying 'Fire Doc' as the Celtics languished last year. Their team was too thin in talent and too young to be successful in the NBA. Perhaps fans should have been calling for the firing of Executive Director of Basketball Operations and General Manager, Danny Ainge. And, many of those fans probably were.
But, Ainge pulled off two big trades, leaving the Celtics with Kevin Garnett and Ray Allen, in addition to their only previous star, Paul Pierce. More importantly, Ainge signed free agents James Posey and Eddie House and drafted Glen "Big Baby" Davis. He also had previously drafted Kendrick Perkins, Tony Allen, Rajon Rondo and my favorite, Leon Powe. All of these players have made big contributions to this team so far this year.
But, a lot of credit has to go to Doc Rivers for getting this team to mesh right from the start. Certainly, the veteran players, including Garnett, set the tone for the rest of the team to follow. But, Doc needs to get the players to buy-in to his approach. Since the Celtics have excelled at defense, you know that they have a selfless attitude. Defense takes consistent effort and doesn't lead to many SportsCenter highlights.
More recently, the Celtics have been beset with injuries. Keving Garnett has been out for nine games. The Celtics have gone 7-2 in this stretch, winning the last 5, including a defeat of last year's champion, the San Antonio Spurs. Perkins has also missed the last few games. Both Davis and Brian Scalabrine had to leave their last game due to injury. Luckily, the Celtics made it to the All-Star break on a winning note and have a few days to rest and heal. We'll see who is ready to come back after this weekend. At that time, the Celtics start what will be their toughest West Coast road trip so far, including stops at Denver, Phoenix, and Portland.
Doc has managed through all this, with the Celtics maintaining the best record in the league. In fact, they are on pace to match the best Celtics record ever, 68-14 in 1972-73. They have been very consistent, with only one really "off" game, when they lost at home to Charlotte on January 9 by 12 points. Not bad after 50 games.
I'm lucky enough to sit behind the Celtics bench at a lot of home games. I can see and hear Doc up close as he talks to the other coaches and the players. He continues to teach his young players through their mistakes and has the complete respect of his veterans. Although it is no surprise that the Celtics have a good team this year, no one expected them to be this good, and this deep, this fast.
If I had a vote, I'd vote for Doc Rivers as NBA Coach of the Year.
This week got away from me as we were on the road raising money for our new fund, Sempre Management. Meetings with prospective limited partners went very well, and we have many weeks and months of fund-raising ahead of us. It's very exciting, especially when we continue to get such positive feedback on our strategy.
One LP told us that he expects a lot of money to shift from buyouts to venture capital in 2008. This may be good for funds like ours that have a VC-like strategy, applied to a different market. But, it also means that there will be a lot of investors looking to raise their exposure to more typical venture capital. Although this may sound good for VCs, I think that it actually isn't.
Too much money in the VC segment means that investors will 1) overfund existing companies, 2) fund more marginal opportunities in order to put more money to work, and 3) be more content to live off of their larger fee base rather than focus solely on making strong returns for their investors. This also, in the long-term, is bad for entrepreneurs.
Entrepreneurs may have more VCs willing to fund their companies, but those companies are more likely 1) to face increased competition from more well-funded start-ups and 2) to be over-funded themselves, leaving less room on the upside for the entrepreneurs, except in the cases of the largest outcomes. Entrepreneurs don't start companies for the salary -- they start them for the equity upside which only comes from great exits.
In general, I think that over-funding the VC segment flattens out the distribution curve representing the outcomes of start-ups. With increased capital, there will be some even bigger wins that could only happen with a lot of capital available. There will be fewer mid-level outcomes and just a broader range of outcomes, including bigger, more spectacular losses. If you happen to be at a company that ends up a the high-end of the curve, this is a good thing. But, the curve probably also shifts to the left, meaning that the average return drops significantly.
I have long felt that the venture capital segment can only productively absorb a fixed amount of capital. That amount slowly grows over time, perhaps just a bit faster than GDP growth (this is my guess -- no numbers to back this up!). Like most investment segments, over-funding the segment leads to lower returns for everyone. The only saving grace for VC is that most other investment segments are over-funded, leading to lower returns across the board. This is why the big institutions are looking for more alternative investments in segments that are less well-funded, hoping for bigger returns. At least until everyone else follows them and over-funds these segments, too.
Luckily, we feel that our strategy is unique, at least for now. It seems like our prospective investors agree.
I found out yesterday that a relative of mine is very ill. So, I am still very sad today. Watching this video cheered me up for a few minutes.
I'm in the latter camp. I think that these types of big combinations are much more likely to produce opportunity than to shrink the number of buyers that start-ups can sell to.
In fact, I think that this will increase the number of buyers for start-ups in the online space. Google is already a big media company. So is Yahoo. Microsoft wiould become an even bigger media company if it is able to buy Yahoo. But, there are plenty of other media companies that are smaller players or almost non-existent players in the online world that we think of as Google and Yahoo -- IAC, News Corp., Disney, NBC-Universal, Viacom.
I think that all these media types will continue to converge, meaning that these big media companies need to bulk up their online offerings. So, there will be at least as many acquirers out there, if not more, as there are today.
Second, a big merger like Microsoft/Yahoo will take a long time to complete and optimize. Development will slow down in these two big companies as everyone worries more about their job than their product or service. After the dust settles, there will be gaps in their offering that will have to be filled in order to catch back up. Again, start-ups are likely to fulfill these needs.
Last, the convergence of all this media is bound to create more new opportunities. Start-ups are more likely to identify these and capitalize on them quickly than big companies.
If Microsoft/Yahoo created a real monopoly, that would be bad for start-ups. But, then again, everyone thought search was 'over' when Google started. In technology, things are never done, you just have to look a bit further ahead.
The Daily Show has some ideas on how to get better polling data.
A few months ago, I joined the Advisory Board of the American Repertory Theatre in Cambridge, MA. I've always enjoyed live theatre, and the ART is very innovative. They don't put on standard Broadway-type musicals, but offer a wide-ranging line-up of shows that make you think. The acting and productions are world-class. And, the thetre itself is small enough that everyone gets a great seat.
The ART is having an online auction in advance of their annual fund-raiser party. The auction is in preview from now until February 14. Bidding begins at 9 AM on February 14th and continues until 11 AM on Sunday, March 9. Items listed range from great Red Sox tickets to unique items like lunch with Boston Globe Magazine fashion writer Tina Sutton.
Check out the auction and make a bid for something that strikes your fancy. You'll buy something great, and support a great local arts institution.
Creativity starts when you drop a zero from your budget. It's even better when you drop two zeroes.
That's part of the beauty of start-ups. If you are forced to live with tight constraints, you have to come up with creative solutions.
OK, the numbness is starting to subside. I was in shock at the end of Super Bowl XLII.
I was lucky enough to go to Phoenix and had so many great experiences before attending the game. One thing that bugged me was the slogan for the Super Bowl -- Who Wants It More? I thought that was too cliche. Of course, both teams wanted to win. Even though the Patriots didn't perform well, I don't think that the giving anything less than maximum effort.
But, the Giants did 'want it more'. They made all the big plays. The Patriots had chances to do so, but never did. Even though the Patriots didn't perform at their usual high level, they didn't make a lot of big mistakes, either. But, those couple of plays that had to happen all went the Giants way. Did the Giants 'want it more'? I don't know, but they certainly did more than enough to win.
I'm going through the stages of grief. I zoomed through Denial and Anger. I don't think I ever did any Bargaining. I was stuck in Depression for a while -- I skipped the posh post-game team party so I could eat dinner at a restaurant called Rock Bottom. I think that some time yesterday I moved to Acceptance.
I know that it's just a game. But, it would have been so much better if the Patriots had held on one more time.
Today is Super Tuesday, including a Presidential Primary in Massachusetts. No matter who you support, don't forget to vote today. We shouldn't take this right for granted. Like so many things, you don't know what you've got 'til it's gone.
To find out where you can vote in Massachusetts, click here.
The Patriots checked out of our hotel to go to their super secret pre-game hotel before tomorrow's Super Bowl. I got a few pictures of some of the players. Here's a sampling.
Not really sports related, but I saw some funny signs in downtown Scottsdale, AZ today.
I arrived in Phoenix yesterday on a Patriots Super Bowl package trip. This is a great place for the Super Bowl. The city is big and spread out, with plenty of ammenities. There is a big golf tournament going on, the FBR Phoenix Open, at the same time, and Phoenix can easily accomodate both. The people are nice, and the weather is cool (for Phoenix) and pleasant. Feels warm compared to Boston!
Staying at a nice hotel, the Westin Kierland. Also, went to a party with a few of my friends last night. Here's a picture of me with my friend, Tom Burkardt. Oh yeah, my other friend is Patriots owner, Bob Kraft.