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.