VCs and their pitiful life

Here's a post to a good piece on VCs from Tech Crunch

Paul Kedrosky: Why I Love Venture Capitalists

October 8, 2009
I (Michael Arrington) recently had a conversation with venture capitalist and tech pundit Paul Kedrosky about all the criticism being heaped on venture capitalists these days (much of it here on TechCrunch). He has a slightly different view than some others on what VCs are supposed to be doing, and how well they’re doing it. And frankly I tend to agree with him. VCs supply much of the capital that drives the entire startup ecosystem. The world would be a much less interesting place without them.
You can follow Kedrosky on his Infectious Greed blog, or get the cliff notes version on twitter at @pkedrosky.
Hating venture capitalists is profoundly satisfying. After all, they are slack-jawed, monied, oily, know-nothings who carom off innovation, fire capable founders, squash angel investors, and exist mostly to make commercial bankers look smart and interesting.
Or at least that’s the story we like to tell. By “we,” of course, I mean all of us who lovingly poke venture capitalists in the eye with sticks now and then. They are such easy targets, what with making up numbers about how many jobs they create, missing great investments, delivering awful ten-year returns to investors, having higher failure rates among companies they fund than among the ones they don’t, and generally being so self-important and irony-unaware.
But that doesn’t mean VCs are quacks. Or that what they do isn’t hard. Or that it’s unimportant. Because it is important, and the good ones are smart, and what they do is very, very hard.
Creating a successful startup is among the hardest things you can do in a capitalist economy. Entrepreneurs must successfully navigate a sea of multi-dimensional uncertainty, from technology (will it work?), to people (do I have the right employees?), to market (will anyone care?), to financial (can I finance doing this, and can I then sell the product or service for more than it costs?) At big companies you can fail at launching a product, fail at hiring people, fail at making money on a product, and fail at figuring out whether something will work. Your big company will probably be unaffected, and you may even get promoted. Do any of those things wrong at a startup and, in all likelihood, you’re dead. You are wandering a maze of dark and twisty passages — most of which are paved with trapdoors to hell.
The idea that anyone at all would build a business around funding startups is the remarkable thing. No revenues, no sure market ahead, no collateral, no liquidity, and doe-eyed founders who were in high school when Enron blew up. It all adds up to more ways to break down than an old Winnebago. Far from wondering why so few companies get venture capital, we should perhaps wonder why any do, and how venture capitalists remain so damn optimistic. To borrow an industry adage, the best venture capitalists retain the capacity to fall in love despite having had their heart broken over and over again.
And the opportunities for heartbreak are legion. Even if the mortality numbers you usually hear are wrong, failures rates are high for startups. Across all sectors, about one-quarter of startups die off in the first year, while half-ish make it to the five-year mark. The numbers are different, however, for venture capital-backed companies. Failure rates among venture-backed firms are lower in the first few years, but higher later on.
Does that sound nasty and mean-spirited? I don’t think so. Matter of fact, it sounds like VCs are being precisely the sorts of patient investors that people say they aren’t. They are giving risky companies a chance to experiment and find something that works, which is crucial, given that most successful startups don’t end up doing what they started out trying. It is a luxury that markets don’t afford other companies.
Another favorite club with which to whack venture capitalists is their supposed inability to create innovative new companies. Just look at Bessemer’s well-known anti-portfolio, with them turning down Google and Apple and Federal Express (seven frickin’ times!).Imagine if those innovative companies had actually been funded and…oh wait, they were. The companies still happened, and succeeded, even if some venture capitalists said no. Given how often the average VC must say no in a given year – a bazillion times, give or take – it should come as no surprise that they sometimes say no when it turns out they should have said yes (and vice-versa).
The “VCs as innovators” problem wouldn’t be so bad, of course, were it not for the scene-stealing entrepreneurs. Those bastards keep creating risky startups and getting all the glory. Damn you Sergey Brin and Jeff Bezos and Steve Jobs. Just in case you needed a reminder, it’s not VCs who create companies, it’s entrepreneurs. Blaming venture capitalists for their capital not changing the world is like blaming Pfizer’s treasury department for Viagra not saving your marriage. Yo, you have bigger problems, so to speak.
Wouldn’t it be nice if venture capitalist drove more innovation? Of course it would. But that’s like saying “Wouldn’t it be nice if supermodels followed you home?” Of course it would, but it’s fanciful. Innovation is one input into the startup business, not its main output. For startups or VCs to pretend otherwise is a speedy path to going bust. Venture capital investing is hard enough without turning it into a Disney-style dream factory for self-styled social engineers.
Here is what we should want from venture capitalists. They should be trying to find and help early-stage companies at rising above the muck and dirt and crushing difficulties of being a startup. At the same time they must produce hefty profits in a timely way for their own impatient investors. That VCs can’t do the preceding, while simultaneously satisfying their critics by making no funding mistakes and changing the world with every deal, is a feature, not a bug.

Why New England should co-optiate

In an ongoing theme in pieces I author, here's my most recent quarterly installment for Mass High Tech on why New England's states would benefit to cooperate on innovation as well as compete with one another.

Here's an excerpt

Where there are plenty of examples of inside-the-borders innovation, there are far fewer initiatives that present a multistate or New England-wide scope, as the public policy group the New England Council, or the trade organization the New England Clean Energy Council does. NECEC ties in the private sector (investors, small and large businesses), the public sector, nongovernment organizations (related technology and energy councils) and education. Linking common interests across state borders for the benefit of each state and collectively for the New England region is essential in today’s capital-constrained environment.

Why venture capital is like race car driving

A new piece I wrote just issued

Here's the opening paragraphs

I’ve sometimes described the process of funding high-growth ventures as akin to race car driving. So buckle up — I’m about to wear out the tires on this comparison.
A founder creates a concept car, fuels it with capital and sweat and races for market leadership. If the founder is also the car’s driver, then the investor is both a fueling station and a co-navigator — sitting, like all navigators, just to the right of the driver, on the company’s board of directors, for example. Growth companies consume capital at a rate that requires refilling the tank every 12-18 months over a five- to seven-year period.

more at the link above....

EDA's Department of Commerce gets into Innovation and Entrepreneurship

The Department of Commerce, through its Economic Development Adminstration (EDA) has long supported entrepreneurship through EDA programs that foster incubator and industry clusters. This newly announced initiative is interesting in that it attempts to ensure cross agency collaboration, something Karen Mills (Director of SBA and affiliated for two years with one of the funds I manage) argued for in her Brookings Institute report.

The Initiative (Summary)

Office of Innovation and EntrepreneurshipThe mission of the Office of Innovation and Entrepreneurship is to unleash and maximize the economic potential of new ideas by removing barriers to entrepreneurship and the development of high-growth and innovation-based businesses. The office will report directly to (DoC Director Gary) Locke and focus specifically on identifying issues and programs most important to entrepreneurs. Working closely with the White House and other federal agencies, this new office will drive policies that help entrepreneurs translate new ideas, products and services into economic growth. The office will focus on the following areas:

• Encouraging Entrepreneurs through Education, Training, and Mentoring
• Improving Access to Capital
• Accelerating Technology Commercialization of Federal R&D
• Strengthening Interagency Collaboration and Coordination
• Providing Data, Research, and Technical Resources for Entrepreneurs
• Exploring Policy Incentives to Support Entrepreneurs and Investors
  

National Advisory Council on Innovation and Entrepreneurship

The National Advisory Council on Innovation and Entrepreneurship will advise Locke and the administration on key issues relating to innovation and entrepreneurship. The council will include successful entrepreneurs, innovators, angel investors, venture capitalists, non-profit leaders and other experts who will identify and recommend solutions to issues critical to the creation and development of entrepreneurship ecosystems that will generate new businesses and jobs. It will also serve as a vehicle for ongoing dialogue with the entrepreneurship community and other stakeholders.

Nanocomp recognized again, plus an article on failure

Nanocomp Technologies, a portfolio company of CEI Community Ventures (a fund I manage), won Mass High Tech's New England Innovation All Star Award (for the nanotechnology category--there were fourteen other winners in other categories like social media, web, mobile, etc). Another feather in the cap of this company, that has been catching a lot of attention both locally (NH High Tech Council's Product of the Year) and nationally (Wall Street Journal's 2008 Technology Innovation Award for Materials category, NASA's Nano 50 Award in 2007). The company just yesterday completed a fully-subscribed $3M Series B financing.

The piece I wrote for Mainebiz on failure appears in this week's Providence Business News and, likely in a couple weeks, in New Hampshire Business Review; it was a cathartic piece for me as I talk about both sides of the experience of failure--that of the entrepreneur and that of the investor. Next month's "syndicated" column will be on how high growth entrepreneurship is like race car driving--hint..the VCs provide the gas and get the passenger seat next to the CEO driver. Should be out within the week in Mainebiz and a few weeks later in the other two papers.

disappointed

I got the call today from VEDA, the Vermont agency that ran the RFP process to allocate $2.15M seed capital to a fund or manager. There were three candidates, including me, bidding for the right to manage that capital. One (Vermont Center for Emerging Technologies or VCET) had the strongest political base--Senator Leahy had awarded a $1M earmark to VCET for a seed fund just after the Vermont legislature voted the bill (that funded the $2.15M award into life.) The other candidate, Ken Merritt, is a lawyer, seed investor and active venture activator in VT.

Just got the word that they gave it to VCET. Can't say I'm surprised but won't say I'm not disappointed. I'd known all along that this was something of an uphill climb for me--not so much on the merit of my experience and plan but rather on factors other than fund investment and management experience.

To this point, here's a summary I presented to the VEDA board comparing my venture experience with that of the other two candidates; the full presentation is on the Clear web site.

I'm sure that the VEDA board found it hard to overlook the Leahy award, VCET's relationship to UVM and VCET's connected, Vermont-based manager David Bradbury. I can see how they could justify picking a manager with less experience given other considerations.

I wish them well. In a market that is starved for capital, seed capital--the hardest to find--will be a welcome sight for Vermonters.

a piece on failure

I wrote a piece on failure for my monthly Mainebiz articles. It tackles the issue from perspectives of the entrepreneur, me as an investor and me as a human (if I can classify myself that way). Here's a piece of that piece

It is said that a venture capitalist spends more time bemoaning his failures than celebrating his wins. In part, I suspect, it’s because there are statistically more of the former. But it’s not really the loss of capital that is so agonizing to an investor — it’s the human drama. Watching an entrepreneur wind down her company and seeing the look in her eye as she fights and claws only to watch it all go. It’s tough to watch.
It’s tough to experience, as well. After all, a company’s failure is my failure. Whether it’s an entrepreneur I overestimated, a plan I signed off on, a technology that didn’t pan out, I own it. I’m the one who believed and put my chips down. I’m the one who watched and advised from the board, who worked outside the board to co-develop teams and plans. And like entrepreneurs, I have backers who depend on me to be a good ballplayer, to make my wins large enough to make up for my losses. I take my responsibility seriously and spend most of my waking hours thinking about what I could have done differently and what I can do better. Managing 10 or more company investments feels, sometimes, like I can never really do enough.
For the most part, I’ve learned to live with failure. You can do a great job as an investor — pick a winning concept, assemble a competent team and board, pull together enough capital to take a run at it — and, well, nothing. Too late, too early, product glitches, management glitches, acts of God, it’s all there as the great teacher.

Capital and Clusters

I submitted on Friday my application to manage a small pool of seed capital authorized by the state of Vermont earlier this summer. As there are not a lot of professionally managed funds playing in small money northern New England VC deals, my hopes are high. Having put that RFP to bed, I'm turning my sites on some VC funding (Venture Capital Revolving Investment Program or VRIP) that the State of Maine is offering up as well. These two states are one of the few that is actively seeking to support early stage VC funding in New England.

An article I authored on Regional Clusters for Federal Reserve Bank of Boston's Communities & Banking Magazine published today (made the cover!) Clusters are something I've written some ten articles about--see Regional Perspectives: Economic Development, Industry Clusters and Small Business Policy section of my articles archive.

A piece I wrote for Mainebiz last month contrasts "domain experience" that one finds in early stage companies--those of entrepreneurs, of operating board directors and of VC board directors. My next Mainebiz piece (out next week) talks about the agony of defeat--failure in the small company and VC world.

SBIC program, Vermont seed capital, and more writing

Steve Swartzman (an SBIC fund manager and on NASBIC's Board of Governors) made his case to congress for reauthorization and funding of the SBIC program. His piece echoes my article--posted by NASBIC on their news page--written for Mass High Tech. Speaking of articles, my Providence Business News piece just published on the recession's impact on the venture capital industry.

I am currently working on an application for the Vermont Entrepreneur’s Seed Capital Fund (VESCF), a recently authorized allocation of $2.15M to start an early stage fund targeting Vermont entrepreneurs. I’ve been doing seed/early stage investing for CEI Community Ventures (CCV) since 2003 and am about to launch fund raising for Clear Venture Partners, a $50-75M early/seed stage fund (wholly unaffiliated with CCV) targeting secondary New England cities, including those in Vermont. The timing would seem ideal in light of the leverage I could bring to the VESCF by supplementing it with Clear funds targeted to Vermont. I read with interest the earmark award of $1M to Vermont Center for Emerging Technologies (VCET) to start a seed capital fund identical to the one authorized by the bill signed in to law just a few weeks prior; in that announcement (featured in Vermont Business Magazine,) that organization’s manager noted his hope that VCET might win the mandate to manage VESCF, to leverage the earmark. While it would seem a significant challenge to any VESCF applicant to have to compete against an already issued seed capital earmark, I have full faith that VEDA (the agency that is responsible for choosing the VESCF fund manager) will choose the manager with the best qualifications to build and manage an early stage venture capital fund. VEDA had a similar mandate for a mezzanine fund a few years back and chose Brook Venture Partners (based in Wakefield MA) to manage the state’s money in that case. So, there’s reason for hope.

More writing and presenting

Recently published the following articles: for NHBR on the difference between entrepeneurial passion (spirit) and experience, and for Mass High Tech on getting a stimulus package for early stage VC. Interestingly, Kauffman Foundation just issued a report suggesting that the VC industry is overfunded and that it could stand to lose some weight. I would support that view for larger VC fund requiring high minimum investments ($3M+); the capital gap that I seek to address (under $2M first round funding) is, in my view, vastly underfunded and hasn't gotten better given the economy.

Did a few presentations in June--one of my fund's Financing Fast Growth seminars in Springfield MA pulled about 85 and a couple Connecticut Technology Council presentations (New Haven and Hartford.)

Writing and written

Currently writing my quarterly piece for Mass High Tech. Recently saw published an interview I wrote on (my prior fund's portfolio company) Nanocomp Technologies for my monthly column in New Hampshire Business Review. Here's the opening hyperbolic paragraph...

"Once every generation or so, mankind uncovers or invents an advanced material so superior in its properties that it not only disrupts existing industries but creates new ones as well — commercial use of aluminum, plastic and carbon fiber come to mind."

Over the top? Well, stay tuned...

boob on the tube

An interview I did with Mainebiz TV aired this past sunday http://www.wlbz2.com/video/default.aspx#/Mainebiz+Sunday+Show+14+Seg+2/47432210001

The identity I was asked to use in this segment was that of President of CEI Community Ventures, rather than Clear Venture Partners. CEI Community Ventures is an early stage fund which I've managed since 2001; Clear is a fund-in-formation, wholly unaffiliated with CEI community Ventures.

WSJ

Here's the article that came out this morning:

http://online.wsj.com/article/SB124026438486636577.html

Lest you be confused by the two funds for which I'm associated, I am President of CEI Community Ventures Inc., a for-profit venture capital subsidiary of Coastal Enterprise Inc. and I am Managing General Partner of Clear Venture Partners, a fund-in-formation that is wholly unaffiliated with CEI Community Ventures, CEI or any of its affilaites.) The WSJ piece was done with my CEI identity rather than my Clear identity as the CEI fund was the entity with which Karen Mills was associated.

Media

WSJ called to interview me last week about small business policy. A Business Week's Small Biz Magazine reported called in relation to a panel session that she was leading for a coming ICIC conference "Inner City 100 Summit/Awards Dinner." And Mainebiz TV is interviewing me tomorrow morning for a coming show. This attention is doubtless due to my history with Karen Mills, who was part of my current fund's board since 2006.

New Markets Venture Capital refunding

For the past seven years, I've led a venture capital fund that is one of only six in the US to receive the license and funding from the SBA to operate a New Markets Venture Capital (NMVC) fund. The NMVC program was a Clinton administration initiative designed to drive capital into underserved communities in this country. Six funds were licensed, with more planned, but the Bush administration took away funding (after the 2000/2001 first round) and so, at present, there are only six NMVCs in the US. What's cool about this program is that it attempts to spread the catalytic impact of venture capital to parts of the country that haven't had the benefit of this source of funding. A Federal Reserve Bank of Boston newsletter pointed out that "fully two thirds of US venture capital investment takes place in five concentrated geographic areas (Silicon Valley, New England-primarily metro Boston, metro New York, Texas, and Los Angeles/Orange County), and the economic areas of the Silicon Valley and metro Boston accountfor nearly one-half of all investment." So, this SBA program was trying to address this disparity. Based on my experience running this program, I can say that--while a challenging to uncover opportunities in these markets--I believe that there are hidden gems throughout these so-called underserved markets. On March 12th, two of the original advocates (a democratic congress woman from WI and a republican congress man from KY) for the NMVC program proposed reauthorization and refunding. Seems like the current administration's priorities in light of the current market environment suggests (to me, in any event) that this is going to get a good hearing. If so, I'll be chasing that program for my new fund-in-formation, Clear Venture Partners, which will be targeting New England growth opportunities

New Mass High Tech article

As noted in my first post for this blog, I write for a half dozen or so New England area publications including Mass High Tech. Here's my latest column entitled "Of industry clusters, venture capital and the feds."

Writing

Just finished up a couple of articles, one (which will be out in a week or so) for Mainebiz on looking a New England as a regional economic block and one (which is slated for the Spring issue in May?) for Federal Reserve Bank of Boston's Communities and Banking Magazine on a similar subject. Both tie in the notion of industry clusters, as I am unable to shut up about clusters in my writing (these would be my ninth and tenth articles written in the last 3 months for the many papers I write about clusters.)

Karen Mills' confirmation

I watched confirmation hearings for Karen Mills, the Director-elect of SBA. Karen had been part of my fund's board from 2006 prior to getting tapped for the big show. The hearing was nothing more than a gush-fest, a testament to Karen, as she got unanimous support from the committee. If you want to check out the hearing, go to http://www.sbc.senate.gov/hearings/20090401.cfm.

Watch for Karen to strut some of her industry cluster stuff, once she settled into her new office in DC.

Post-note...she was confirmed today.

Inaugural Blog

So, at long last, I'm blogging.



As you'll see from my profile, I'm a venture capital fund manager focused on secondary New England cities; a secondary cities--such as Hartford, Providence, Burlington--see far less capital, yet have real growth opportunities, as I expect to show by the performance of the fund I currently manage. Since 2001, I've been managing a venture capital fund that operates one of only six New Markets Venture Capital funds, an SBA initiative designed to drive capital into underserved communities; that fund--now fully invested--targeted early stage growth opportunities in Maine, New Hampshire and Vermont. My new fund-in-formation (Clear Venture Partners) is setting out to raise $50--75M to focus on early stage growth opportunities (initially in three sectors: clean tech, health and IT/web/new media) targeting all six New England states.



I've been remiss in not blogging earlier in large part because I spend a lot of time writing regular columns for traditional papers (Mainebiz, New Hampshire Business Review, Providence Business News, Business West, Mass High Tech) and less frequently contributing to other business newspapers and magazines (Worcester Business Journal, Vermont Business Magazine, Business New Haven and Federal Reserve Bank of Boston's Communities & Banking Magazine.) If you want to see all articles I've written, check out my web site (http://www.clearvcs.com/News/by_team.php.) where I've got the articles organized by theme. I also do a lot of live financing seminars (www.clearvcs.com/events) throughout New England.



In the interest of brevity, I'll highlight some things that interest me, both professionally and personally



- Industry clusters: As you'll see if you check out some of my more recent articles and seminars, I'm a believer in industry cluster theory as a basis for regional economic development. I was inspired to attend to this theory and practice by Karen Mills, who has been part of my fund's board for the past two years and has more recently been nominated is expected to be to confirmed by the Senate Committee on Small Business to head as Director the Small Business Administration. Karen was very active in Maine developing both cluster research and implementation throughout the state; my fund organized a specialty food cluster event, coordinating with Karen (who keynoted the event,) to catalyze a new cluster for this sector. I'm working to promote industry clusters throughout New England's secondary cities (check out the first of my cluster-financing events in Vermont this past February.)

- Mega Regions: I've recently gotten charged on the notion of looking at multi-state economic blocks that can enable many states, working cooperatively, to increase competitiveness of the region. Mega regional focus complements a state's own efforts to grow the economy within its borders.

- Early stage, value-added venture capital: As must be evident from my work, I'm a believer in the early stage venture capital, both to catalyze nascent ventures and to create opportunities for outstanding return for fund investors, not to mention the recipients and the states in which early stage companies reside. But, it's not just about the capital. Early stage venture investment, particularly in secondary cities, requires an active investor engagement. In the fund I've been managing since 2001, my partner and I have been incredibly active investors in a variety of ways: strategy development, business planning, financing strategy and syndication, board and management development, and marketing/branding and positioning for growth and capital access.

That's enough for this first post, so far as professional stuff goes.

Personally, here are a couple of things I care about:
- My family (wife and four, yes four, kids)
- Waldorf Education
- Healthy Living: natural and organic products
- Local living economies especially community supported agriculture
- Music: uptempo jazz, bluegrass, and folk
- Sports: little league baseball and basketball (my sons' interest); old guy basketball (so long as my knees hold up)