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April 30, 2009

Support the March For Babies

If you are like me, you get hit up a lot with various charitable pitches from friends and family.  I've made a few appeals here, too.

But, a couple of days ago, I got an email from an old friend that really struck me.  I knew she had been pregnant, but didn't realize what she had been through with the birth of her second child.  It turns out that Tracy Burman's second child was born 3 1/2 months early and only weighed 2 lbs.  No one knew why this happened, but now they needed significant care for their baby, Millie.  That's where the March of Dimes came in.

I'd always heard of the March of Dimes, but didn't really know what they focused on these days.  Well, this is it.  They fund research on premature birth and birth defects, and provide care for those who go through this.  And, they March for Babies is a fund raising event for this organization.

You can watch a video of Tracy's family, including Millie, from their local TV station in Seattle.

I met Tracy Burman when she was an entrepreneur right out of Harvard.  She co-founded a company and we learned a lot together through the process.  She's moved away, and her situation took me by surprise.  You never know when you, or a friend or family member, will go through this difficult situation.  Please give to the March for Babies to help this worthy cause.

April 29, 2009

Macro VC Math

Fred Wilson wrote a great post today that summarizes, at a macro level, the VC Math Problem.  If you are interested in the math behind venture returns, read this whole post, including the slew of comments.  Great stuff.

I could quibble with some of Fred's assumptions, but the fundamental message is right on.  He describes the likely distribution of exits of technology companies (Fred says that this is about $100B of exit value in a year).  If you crunch through the numbers through how much of this VCs end up with, net out their fees and carried interest, it shows that this is sufficient to justify something like $16B of venture investment in a year.  That's about 60% of what is raised in recently times, providing more evidence that the venture business must shrink.  More money doesn't create more exits.

One of the comments to Fred's post ask if there was a limit on entrepreneurship in the same way that Fred argues there is a limit on venture math.  I think that the venture limit derives from our economy's ability to absorb new technology offerings.  As the economy grows (or returns to growing some day soon!), we can absorb slightly more new technology.  I think that this does impose a limit on the technology entrepreneurship we can justify in this country, at least the type of entrepreneurship that is aimed at getting some sort of venture return.  But, there are many types of entrepreneurship that are really aimed at having a business throw off enough cash to pay all the employees a healthy wage.  Those are sustainable businesses that may never exit.  And, they are great.  I don't see a similar limit on these, many of which are service businesses.

All of these macro approaches are somewhat flawed.  I think that it is mostly important to look at them as directional, rather than precise.  Whether you think we can justify $15B or $20B of VC investment, it's hard to look at the NVCA returns and think that investors will feel that these are strong enough to justify the risk.  And, eventually, those investors will move away from VC, hopefully rightsizing the amount of capital available.

April 28, 2009

New records don't last long

Last week, I wrote about ZimmZamm who had broken the record for a Phoenix video game I helped design 27 years ago.  Well, he's done it again.  I learned today that his new record is 3,507,697 points, about 50% higher than his previous record!  According to ZimmZamm, it took him 3 hours and 40 minutes to set that record, which is incredible video game stamina.

ZimmZamm tells me that he'll soon be interviewed in Retro Gaming Times.  Keep an eye on that if you've enjoyed following ZimmZamm so far.

April 24, 2009

What's Next In Tech

I want to highlight an upcoming event that looks like it could be a great networking opportunity as well as a great chance to hear about what the big trends are in technology, particularly in Massachusetts.

What's Next in Tech will be held June 25, 2009 at Boston University's School of Management Auditorium (595 Comm Ave, Boston).  Here's the description:

Whether you're starting a business, investing, or looking for your next career opportunity, you won't want to miss this jam-packed evening of networking and conversation. Led by a stellar group of entrepreneurs and venture capitalists, we'll separate hype from reality -- and explore which technology areas are actually growing and creating big opportunities for the future. The evening will begin with an hour-long networking reception, continue with two high-energy discussion segments (one with venture capitalists, one with entrepreneurs), and conclude with plenty of time for Q&A from the audience. We'll talk about specific companies that are becoming leaders in our area, how hiring is happening in 2009, and what's shaking in mobile software, videogames, robotics, social media, cleantech, and other fast-growing sectors. We'll also ask you for your take on what the most promising new areas are.

Speakers will include:


- Michael Greeley, General Partner, Flybridge Capital Partners

- Mike Dornbrook, COO, Harmonix Music Systems (makers of "Rock Band")

- Helen Greiner, co-founder of iRobot Corp. and founder of The Droid Works

- Brian Halligan, social media expert and CEO of HubSpot

- Tim Healy, CEO of EnerNOC

- Ellen Rubin, CEO of CloudSwitch

- Bijan Sabet, General Partner, Spark Capital

- John Simon, Managing Director, General Catalyst Partners


The conversation will be moderated by Scott Kirsner, Innovation Economy columnist at The Boston Globe.

These are great conferences because you get a chance to network with some of the top VCs and entrepreneurs in Boston as well as participate in the discussion of the tech direction in Massachusetts.  Definitely recommended!

April 23, 2009

Sweeping Generalizations

One of the things I hate about politicians is that they almost always make a sweeping generalization when faced with an issue.  They'll take bold swift action and miss out on the nuance.  Here's the latest example:

There seems to be some corruption involved with placement agents who grant access to the NY State Pension Funds.  Bloomberg writes about it here.  The NY Attorney General has banned the use of placement agents that help funds get access to the states $121.9B pension fund.  It sounds like a good idea -- get rid of the intermediaries and remove a source of possible kick-backs.  But, it will actually constrict the access to those funds.  Most fund managers don't have direct contacts with the NY State pension funds.  They need to hire intermediaries who have those relationships.  That's not a problem.  The problem is if those relationships are misused.

So, rather than banning all placement agents, the government should require transparency when it's money is placed through placement agents.  I would name both the placement agent firm and the principals of that firm.  Then, political connections and donations would be apparent.  As I have mentioned before, I am not a fan of regulation that restricts activity.  Instead, I think that regulation should be focused on reporting and transparency.  If the information is available, the public can decide if there is a problem, or it can be checked by some oversight board.

By the way, avoiding sweeping solutions is important for entrepreneurs.  Too many times an executive will make a sweeping decision without understanding the nuance.  While appearcing decisive and strong due to the broad action, they may be making critical errors if they miss out on the nuance of the situation and how they should be taking advantage of it.

April 21, 2009

27 years old, but still lots of fun

The best part of designing a product is if people can get lots of use/enjoyment/benefit from it.  And, it's very rare that technology products last for 5 or 10 years, let alone 27.

In 1982, John Mracek and I finished the first video game we designed while working at GCC, Phoenix.  It was based on the arcade game and worked on the Atari 2600 Video Game System.

Out of the blue today, I was contacted by someone who just set the world record on Phoenix, 2,344,018 points.  That's an awful lot for a game where you score 100 or 200 points at a time.  Much better than I ever did!

Here's a video of the record holder, ZimmZamm, rolling the score over (scoring more points than the game was designed for and rolling it back to zero again).  What could be better than building something that gives people so much fun?  It's amazing that people still love playing this simple game from so many years ago.


April 20, 2009

Making money at 35,000 feet

Today is the first time I have flown Virgin America from Boston to San Francisco.  In fact, I am flying right now as I post this.  Virgin offers Wifi on their flight for $12.95.  It's not cheap, but it's worth it if you really want to surf the web for the 5+ hours on the plane.  And, it's good incremental revenue for the airlines.

With the airlines and so many other industries, struggling now for revenue, Virgin has the right model that others should follow.  Instead of racing to the bottom by cutting prices and services, they offer a nice experience at a reasonable price.  My ticket cost $380 round trip  (booked pretty far in advance).  That's a good value for a cross-country flight.

And, the plane's entertainment system is pretty nice -- TV, music, movies, seat-to-seat chat, and food ordering whenever you want.  And, I had to test the wifi service.  It's a little slow (you won't want to do any big downloads).  But, it works pretty well.  For web surfing and email, it's great.

Virgin has a mix of free services and things you have to pay for.  But, when they deliver it well, I am sure that they sell quite a bit.  As my traveling companion pointed out, they need to figure out a way to sell things to people while they are waiting to board the plane.  But, whatever they sell incrementally is probably pretty high margin.  That should help their profitability.  And, the plane was totally full, which is always good for the bottom line.

I'm glad to see some companies try to make money by deliverying more at a good value rather than cutting everything and somehow hoping they can make it up in volume.  There is a place for the cheapest option, but I bet that a lot of people will pay more for a good experience.

Virgin is my new favorite way to go across the country.

April 16, 2009

Understanding the Financial Mess

If you are like most people, you don't really understand the financial mess that we are all in.  If you have been trying to understand it, chances are you've heard an interview with Simon Johnson.  Simon is really smart, but is able to explain things in very clear terms.

He has a website (Baseline Scenario) dedicated to the financial crisis that explains it all in as much or little detail as you'd like.  And, yesterday Simon was on Fresh Air with Terry Gross again, talking about what to do about banks that are too big to fail.  Here's a quote:

"We face at least two major, interrelated problems," Johnson writes. "The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support."

Johnson talks about how Goldman Sachs, now that it is doing better financially, can really challenge the Fed and Treasury.  If a bank like Goldman gets healthy in advance of others, they can operate independently and take advantage of weaker competitors.  That sounds like good ol' capitalism, but Johnson describes why that may not be good for us all until the whole sector gets stronger.  I don't know if I agree with his call to nationalize all the banks for the short-term, but his description of Goldman standing up to the Fed and Treasury is a little scary in light of how fragile our situation is.

April 15, 2009

You Just Have to Follow

I've met a lot of entrepreneurs in my 27 years of working at and with start-ups.  Good entrepreneurs have natural leadership capabilities and are often visionaries.  They have high energy and can attract and build strong, effective teams.  Most of them are great at selling their idea to investors, employees, partners, etc.  Even with all the strong entrepreneurs, there are a select few who you meet and just are compelled to follow.  They excel in the areas mentioned above and then have an intangible quality that makes them someone that people are compelled to follow.

These types of people can be in other careers besides high-tech.  The most recent person I met with these qualities is Diane Paulus, the new Artistic Director at the American Repertory Theater.  (Disclaimer: I am on the Advisory Board of the ART and have been a subscriber since 1982).  Diane is like a force of nature.  Anyone who meets her is compelled to follow.  And, as befits her position, she is innovative and creative.  Although not a salesperson per se, she has no problem selling her vision.

Today, the ART unveiled their 2009-2010 season.  The vision is big and bold -- multi-performance festivals that expand the ART into the community and linking to other arts organizations around the Boston area.  At the press conference today that showcased the new season, there was real excitement in the air.  I can't wait for these productions to come alive, starting in the fall.  There is nothing like a great live theater performance, and Diane is known for getting the audience involved, as she describes in this video from the ART web site.

See you at the theater!

April 14, 2009

Doing Well at Doing Good

I've written about good2gether before, but they have some big news today.  But first, some background on the company.  Here are some problems worth solving:

Suppose you are a non-profit organization that is struggling to connect with users over the Web because you don't have a media budget.

Suppose you are a local destination site (often associated with the local newspaper) that is looking for unique, sticky content that you can monetize

Suppose you are a consumer brand that wants to associate yourself with good causes to create a positive impression with your customers.

Good2gether solves all these problems.  They provide an online presence for non-profits who can post information about their organizations, events, and volunteering opportunities at no charge.  Good2gether arranges distribution of this content through high-traffic local destinations sites (such as dogood.boston.com).  These sites are happy to give this content premium placement because they can sell sponsorships to this content.  Leading brands buy these sponsorships to improve their brand image.  And, this sponsorship revenue is split between the destination site and good2gether.  Eveyrone wins, and no one loses.

On the good2gether blog today, they announced that they have now partnered with USA Today to create dogood.usatoday.com.  This gives good2gether and their non-profit partners nationwide reach to complement their list of local partners.  The company has done a great job with a very modest amount of capital.

Congratulations to Greg and team on the progress so far.  Keep an eye out for more big news in the future.

April 13, 2009

Keep Wringing

My friend (and lawyer for Foley Hoag), Dave Broadwin, wrote today that he is optimistic, and we shouldn't be wringing our hands about how bad things are for startups.  He's got some evidence, some of which he got from me, that the pendulum has swung too far in lamenting how bad things are, particularly for venture capital-backed startups.

Well, the numbers that Dave cites from me are correct (9000+ venture backed startups in the US today and only 30 M&A exits in 2008 at prices of $150M or more).  I got these numbers from VentureSource.  They may not be perfect, but they should be pretty close.  There are many, many VC-backed companies in all different industries.  And, no surprise, the exit envionment is weak.

But, I'm not ready to stop wringing my hands.  Slowly but surely, the number of VC-backed companies will drop.  There are a small number of new companies being funded, and there is a greater number, I believe, in companies being sold or shutting down.  Only a small number of exits are 'successful' -- the investors make some decent money.  What's that, 2x or greater?  That's probably not enough to make the VCs or their investors happy.  But, doubling your money is a good starting point for successful investments.  There are also successful investments that sell for less than $150M if they haven't raised too much capital.

Quick VC math refresher:  If there are no recaps or wash out financings, here's how the math works.  If you assume that VCs own 75% of a company at the time it is sold, the company has to sell for 2.667x the invested capital for the investors to make 2x their money.  Now, that's a simplification as it doesn't take into account some VC terms that sweeten their outcome (dividends, participating preferred).  Also, it doesn't reflect that early investors may have a better multiple than later investors as they may have paid a lower price.  Or, later stage investors may make more than early investors if they add complicated structures to the deal.  In the end, each deal is structured differently.  But, If a company hasn't sold for at least 2.5x the invested capital, it's not successful.

There will be successful deals, and some very successful ones in this environment.  But, as a limited partner (LP) in a VC fund, you need the whole fund to be successful, after fees and carried interest paid to the general partners.  That requires a lot of successful exits, and some very successful ones.  I don't think that there are enough of those out there to keep LPs happy and to justify the fees that many GPs charge.  And, that has a lot of VCs and their LPs wringing their hands for the foreseeable future.

April 09, 2009

US Treasury: Stay away from Venture Capital!

I don't often agree with the editorial page of the Wall Street Journal, but yesterday they got it right.  There is no reason for the US Treasury to regulate the venture capital industry.  As the editorial points out, VC is too small to create systemic risk for the US economy.  If you look at the industries that have done so (banks, investment banks, insurance, perhaps), they all have the common thread that they are funded with debt.  Their actual equity capital is a small portion of their holdings.  When they have to write down their assets by more than the value of their equity capital, then the banks are insolvent.  This is explained very well on NPR's This American Life if you feel like you need a primer on why banks fail.

Venture funds, and their investments, don't have this problem.  Venture funds take on very little debt, if any.  Usually, they may take on some short term debt to pay expenses between capital calls.  It's pretty minor.  And, their portfolio companies also take on only modest amounts of debt, as described in the editorial.  The loss rates in this type of debt is very low, probably 1% or less.

So, you have investors, entrepreneurs, and bankers that are working with risky companies with their eyes wide open.  If the company fails, the investors lose their money, the employees lose the time they have put in, and, rarely, the banks lose a portion of their debt.  This sounds like good old American risk taking, with the hope of big rewards in the case where the company is successful.  There are some very poorly performing VC funds that have lost most of their investors' money.  It's too bad for them, but this doesn't lead to systemic risk.  Even if all the start-ups failed, I don't see how it can bring down the economy.

I think that the regulators don't understand the VC business and are lumping it in with hedge funds (which can employ significant leverage and can lose much more money much faster).  I don't like the idea of the government regulating either one, but a fair question for the government to ask is about leverage ratios.  It would be reasonable to ask VC funds and hedge funds how much they have borrowed against their portfolio, and the cumulative borrowing of their investments.  I don't think we should keep people from borrowing, but some level of borrowing is excessive and should be made transparent.

Venture funds would definitely be under any reasonable threshhold of risk.  So, they could check that box and be on their way.  The government shouldn't then have to worry about them.  Perhaps some major hedge funds could be big risks depending on what they invest in.  If your whole fund is in credit default swaps or other toxic assets, maybe that should be made more transparent.

All of this goes to say that if the government is going to put regulation in place, I'd like them to start with reporting and transparency, rather than restriction.  If AIG had to report the level of risk they were taking with the credit default swaps, their stock price would have taken a beating.  And, the executives wouldn't have gone down that path because they would have feared the disclosure.  That's a healthy form of regulation that doesn't try to anticipate all of the reasonable ways that people can make money.

Thanks to Jeff Bussgang for being the first person to point me to the WSJ editorial.

April 06, 2009

Never Too Late to be Too Early

I'm a bit late in writing about this, but my friend, Fred Wilson, wrote a post last week about investing in a company too early.  Certainly being way too early is a 'cardinal sin of the venture capital business', as Fred calls it.  But, early-stage VCs who are too worried about being too early will be overly cautious.  You have to take some risks as an early-stage VC, and timing the market is one of the risks.  If the market is obviously there today, then, by definition, your new startup company is too late.

How do VCs and entrepreneurs mitigate this?  There are several ways:

1) Target an existing market with something that turns it on its ear.  Maybe you can deliver a new product or service that radically changes the value proposition in a market.  Or, combines a couple of adjacent markets together.  Note that I am careful not to say 'is much cheaper than existing alternatives.'  Although it can make a market entry strategy easy, a 10x savings on a $500M market turns it into a $50M market.  The exception is if lower prices greatly expands the market.  Don't automatically assume this to be the case.

2) Deliver something so great that users will happily forgive the shortcomings.  I have an example of this from my background, our remote access products at Shiva in the early to mid-1990s.  We were the best company at letting users dial-in to their corporate networks to get their email.  There were plenty of issues with this (reliability and ease of use of phone connections, speed, PC client configuration issues, etc.)  But, people were so hungry for access that they were willing to overlook all of these issues just to get that email while traveling.  This seems pretty out-of-date in these times, but imagine how thrilled you'd be for any type of access when the alternative is none at all?

3) Plan on matching your service to the market's needs today while you evolve it as the leading-edge customers evolve.  This is a pretty low-risk strategy, but also will likely lead to the lowest upside.  All the other existing vendors can do this, too.  The best way to really win here is to have some insight that others don't have.  Find the leading edge customers who think the same way you do.  Then, hope that you all are right that the rest of the world will follow you in the coming few years.

No matter what, don't get too far ahead of yourself on spending.  And, set some milestones that you stick with.  If you are building a new product, try to get some sort of prototype together that you can test out on customers.  Make sure that you don't have trade-offs that are overly limiting.  Be honest with yourself in case you really are hopelessly too early.

I think that the problem Fred brought up originally wasn't being too early, but sticking with a 'too early' idea for too long.  Some companies are 'too early' but are able to hang in there with a low burn rate and some modest revenue until the market catches up with them.  Those can turn out to be big wins as they'll see it coming before others can react.

April 03, 2009

Sports Update

Right now is one of those turning points in the sports year.  NBA Basketball is heading toward the playoffs.  College basketball is at the Final Four.  Baseball is about to start.  And, the offseason in the NFL is heating up with trades, free agent signings, player releases, and the upcoming college draft.  I could write about sports every day, but I try to limit myself.  Sports is like a soap opera without the romance.  There's always something going on, but if you don't watch carefully, it seems like the plot moves at a snail's pace.

Here are some updates on the sports I follow most closely:

  • Celtics -- the Celtics are limping into the playoffs with lots of injuries, most notably Kevin Garnett.  They are expected to get most people back as they head into the playoffs, but they won't have a chance to get everyone playing together until then.  That's pretty risky.  I'd love to think that they can pull it together, and they should beat their first round opponent no matter what.  But, they'll probably face Orlando in the second round.  That will be tough if they are short staffed.  I was at the game vs. the Charlotte Bobcats on Wednesday (Celtics win in 2 OT).  Although it was an exciting win, it raised a lot of concerns for me.  From my seats, we can see and hear the players and coaches.  I've never seen the Celtics players arguing with each other so much.  Nor have I seen the coaches so upset with defensive lapses.  They weren't on the same page.  On the positive side, it's great that they got a win against a team that always plays them tough when they were clearly not in synch.  On the other hand, you'd expect them to be more in synch this late in the season, even with the injuries and new players.  They can't afford to be battling themselves when they are in the playoffs.
  • Baseball -- I love the baseball season.  Baseball is like the background music of spring and summer.  The frequency of the games and the pace of each game lend themselves to following along while you are doing something else.  So, I listen to baseball while working around the house, driving somewhere, or even hanging around the pool.  I get excited about the start of baseball season just like I can't wait for Spring to arrive.  Once again this year, the Red Sox and my Yankees appear to be the class of the major leagues.  They have the deepest pitching staffs, the key to victory.  The Red Sox are not as interesting without Manny Ramirez, but they will be more stable.  The Yankees have turned over a good portion of their roster and loaded up on the top free agents this offseason.  I think that injuries will be a big factor this year.  If one team or the other has a key injury, they'll be at a big handicap.  At full strength, the teams are pretty evenly matched.  Both teams start on Monday.  The Yankees don't open their new stadium until April 16th.  Go Yankees!
  • The NFL -- I'm very excited about the Patriots this year.  They've made some good free agent signings to beef up their secondary and to add depth on offense.  They've got a lot of draft picks that should yield some nice players.  And, with Brady coming back, there is a lot of anticipation.  It's too early to think about football too much, but my only real concern about the Patriots is that they still have a relatively old team by NFL standards.  The draft picks may help with that if they can select a bunch of guys who make the roster.

One last thought is about the use of Twitter by athletes.  Shaquille O'Neal was one of the first to really use Twitter to communicate with fans.  I noticed that Paul Pierce has used Twitter to give tickets away to adoring fans.  The funniest was the April Fool's joke from college basketballer Hasheem Thabeet who tweeted that he had failed a drug test!  Gutsy!  Imagine some UConn booster desperately calling his bookie trying to get his bet cancelled.  Luckily for the Huskies, Thabeet was kidding and will play in the Final Four.  Nevertheless, I'm picking North Carolina.

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