Breakfast with Steve…

Today I had breakfast with Steve Ballmer. Very cool.  He is a great guy and was incredibly thoughtful – as you might expect – across a wide range of topics. He was in Boston for a series of important initiatives and was gracious to sit with a few of us for breakfast.

There were a couple of items from our discussion which I thought were particularly notable:

• Steve was very excited about the future of scientific computing which he thought was particularly strong in New England
• Natural language interfaces and entertainment/gaming are very big near-term initiatives for Microsoft
• One of his overarching themes is the transformation from a “one screen, one server” paradigm to “three screens and the cloud”
• Steve warned us not to overlook the enterprise space
• He thought hospitals in Southeast Asia were particularly efficient given the prevalence of the “medical tourist” industry
• Steve was excited about personal health devices as the approach to populate all of the medical data required to drive a connected health model

Microsoft has done great things recently for the innovation eco-system in Boston – I kid you not. The Microsoft New England Research and Development (NERD) center in Kendall Square has been a great contributor to the resurgence of vitality in the local market. If you have not seen the space, make a point of stopping by and hanging out.

The conversation over breakfast was so compelling I am not even sure what we ate.

Aussie Rules

Right now I am at 38,907 feet and 6,297 kilometers southwest of LAX flying in from Australia where I was one of the keynote speakers at the Australian VC Association annual meeting (AVCAL). They put on a great show. I was there to share a US perspective – ironically it was exactly one year ago when the Dow declined 777 points – the date the broader public was introduced to how significant the economic issues were. In fact most everyone Down Under casually referred to the “GFC” which took me a few days to figure out was the global financial crisis.

In addition to the VC conference, which was on the Gold Coast, I managed to travel to a few of the major economic centers in Australia to meet VC’s as well as limited partners. Australia has a great deal of LP capital available to invest given that a mandatory portion of every paycheck is contributed to massive pools to be managed for future benefits (upwards of 15%). A couple of my observations:

• The LP community in Australia is very sophisticated, well-managed and very large
• Notwithstanding the challenges of covering both the US and Europe, most of the LP’s I met were committed to investing in a number of VC jurisdictions on a direct basis
• This is because the local VC market is reasonably small
• So there was a lot of conversation about global VC allocation models (“when will the US VC marketplace be more compelling than the Chinese market?”)
• Yet in spite of the size of the Australian market (approximately $300 to $500 million is invested annually) there is considerable evidence of exciting sources of innovation particularly in the life sciences, agricultural sciences, natural resources and cleantech sectors

Long term returns in the Australian VC market have been frankly mixed. According to the LP presenters at the event the one-year, 3-year, 5-year, and 10-year data are -37%, -7%, -1% and -5%, respectively. My suspicion is that the market suffers from the perception of not being large enough to support billion outcomes. There was much discussion on how to solve this dilemma: do all successful Australian entrepreneurs ultimately need to relocate to larger markets? How relevant is the successful VC industry in Israel?

“Immunity Bracelets” – at least the local LP’s appear to have a great sense of humor – at an LP event I attended the presenters said that local GP’s would not get voted off the island because they had earned “Immunity Bracelets” which I thought was very funny. There clearly was a strong undertone of support for the local VC community amongst the LP’s I met.

My speech centered largely on the US venture marketplace and how it is weathering the GFC (it is now part of my lexicon) but I also spent some time highlighting initiatives in the US which have strengthened the entrepreneurial ecosystem. I stressed that there needed to be a business culture which embraces risk and applauds success stories while not shunning failure. 

One final observation: there has been a lot of discussion about the “de-coupling effect” during the GFC, that is will the developing world be unhooked from the developed world in this period of economic turmoil? Interestingly Australia has not had negative GDP growth in any quarter during the crisis. Earlier this year China increased its bank loan activity to 50% when measured against GDP; it had been at 20% over much of the past five years. This increase in liquidity rolled right through the Australian market and has largely insulted the country from the dreaded GFC.

I plan to spend much more time Down Under based on what I learned this week.

China is on Fire…

I was in Hong Kong late last week (I was on my way to Australia where I am currently). For those of you playing along at home I spent much of my childhood living in Hong Kong – it was great to be back again. In addition to seeing many childhood friends, I was able to meet a handful of Asian limited partners and was excited to hear how bullish they were about the local investment climate.

 Last week – with great fanfare – A123 Systems went public, one of the few successful venture-backed IPO’s in 2009 (my firm, Flybridge Capital Partners, has backed A123’s founder, Yet-Ming Chiang, in his new company, Entra Pharmaceuticals). The stock closed up 50% on the first trading day having raised $380 million; the company is now valued at $2 billion. A great story by any account – although given the capital requirements of the company, analysts suggest that the venture investors made only 4 – 5x their money given the company had raised $240 million of venture capital across 11 rounds prior to the IPO.

 Also last week Shanda Gaming, one of China’s leading online gaming companies, went public but this company raised over $1 billion in its IPO which was ten times over subscribed – leaving the company with a market cap of $3.4 billion. My guess is the early investors in Shanda have made huge multiples of their initial investments. Year-to-date US companies have raised $6.5 billion through public equity offerings (not all were VC-backed companies) while companies in China have raised $24.6 billion in the same period. That is a staggering difference.

 China’s stock market is now enormous – there are 1,600 companies with an aggregate $3 trillion in market capitalization. With great fanfare China recently has announced the new Growth Enterprises Market section of the Shenzhen Stock Exchange which has been created for smaller technology companies to go public. In fact the first ten companies to be listed are expected to raise nearly $980 million of public equity shortly.

 While I was in Hong Kong I made it a point to meet with a number of large limited partners who are very active in both the Asian and US venture markets. The juxtaposition of A123 and Shanda made for very interesting comparisons. I was doing cartwheels to see the US IPO market finally starting to embrace compelling new companies and yet here was a gaming company in China which had raised nearly 3x as much capital and is almost twice as valuable – as the limited partners I met on Friday reminded me.

Is it any wonder that some Asian investors are still cynical about US investment prospects, particularly VC? As much as I believe the US venture market is very compelling now, we can not ignore that our limited partners have many competitive investment opportunities from which to choose.

 Do you think I am seeing this incorrectly?

Mr. Greeley Goes to Washington…

Late last week I was in DC for the National Venture Capital Association board meeting. We reviewed a number of very important industry issues (possible regulation, policy initiatives around innovation, tax issues) – it was a very productive session. Later in the day a few of us from the NVCA board met with a number of Congressmen on Capitol Hill.

The initial meeting was with members of the “New Dems” coalition which is group of nearly 70 Congressmen who have come together to drive a moderate pro-growth agenda to strengthen the innovation economy. This was a highly engaged, well-informed group of legislators who are clearly focused on very important initiatives which will address many structural issues standing in the way of growth. It was music to my ears.

As just an ordinary citizen I often find the notion of productive government oxymoronic, and frankly, at times, laughable. But this meeting very much opened my eyes – that there is such a large block of legislators all pulling in the same direction to drive a number of initiatives to help small businesses was very gratifying. In fact a few of the key players in this group, particularly Rep. Scott Murphy, are either former successful business executives or VC’s who clearly understand the issues confronting small businesses.

We discussed at some length the specter of VC industry regulation which is contemplated in the financial services overhaul regulatory proposals now being debated in DC. Don’t get me started – the notion that somehow the VC industry creates “systemic risk” is laughable. Let me count the ways:

• Our investors (LP’s) are committed to our funds for 10+ years – that is they are locked up

• We invest in private stock, often creating new companies (FYI – I would guess that 75% of our investment dollars go to salaries)

• We do not use leverage

• We do not use derivatives

VC’s are not hedge fund managers. I worry that regulating the VC industry as if we were hedge funds or large investment firms will meaningfully impair a source of capital which is uniquely positioned to fund early stage companies – and that will be bad for all of us.

SBIR Debate Rages On…

Last week I gave a talk to the New England Innovation Alliance (NEIA), a passionate group of CEO’s and other senior executives from a number of small companies throughout New England. These companies represented important sectors in homeland defense, alternative energy, medical technologies and education. It was a very impressive group of executives – so imagine my disappointment to learn that very few of them needed VC’s.

You see the discussion was around non-dilutive funding and the important role of Small Business Innovation Research (SBIR) grants – and that for many of these small businesses, being able to access these grants is the lifeblood of their companies. There was much common ground in the discussion: preserving the SBIR programs are essential to ensuring continued funding for many innovative companies. But there also was much debate around how much of these grants VC-backed companies should be able to access.

There are somewhat conflicting bills meandering through the House and Senate right now – although observers believe that a compromise will be finally forthcoming this fall. Staggeringly this debate has been going on for over three years – which is both irresponsible of our regulators and has caused considerable uncertainty for hundreds of companies.

The debate is a complex one and revolves around who is eligible for the grants, the size of the grants, and how long these programs should last – all very important issues. At the core many executives feel VC-backed companies enjoy certain advantages which create an unlevel playing field, and therefore, VC-backed companies should be limited or precluded from receiving these grants. Naturally I struggled to see how an entrepreneur decides to fund his/her business should impact that persons ability to receive SBIR grants – but we were careful to keep the debate civil! I also was clear with the NEIA members that VC’s don’t spend meaningful time obsessing about how our portfolio companies should be securing these grants; it is far more productive to focus on hitting milestones which will allow the company to raise far more venture capital than SBIR grants.

We did agree that these grants were meant to be translational in nature – that is, to support small businesses and entrepreneurs to take the first step in getting technology out of the lab and into the marketplace. These grants were not designed for the large multi-national corporations to enjoy. The strength of the SBIR program frankly creates a pipeline of compelling investment opportunities for VC’s.

Stay tuned for the final legislation. Many companies will be impacted in profound ways.

What I Learned About the Massachusetts Venture Capital Scene Today…

This morning I read through some materials prepared by the National Venture Capital Association (which I am on the board of) which I thought were interesting:

• Massachusetts ranked second among all states with $3.0 billion invested in 2008; California was a clear number one at $14.1 billion while New York was comfortably third with $1.3 billion invested…no other New England state was in the top 12.

• Since 1970 VC’s have invested $50.4 billion in 2,764 companies in Massachusetts.

• One job was created for every $77,390 VC dollars invested.

• There are 651,239 jobs at Massachusetts companies which were once venture-backed; these companies generated $146 billion of revenues in 2008 – that is a lot.

• Since 2002 approximately 350 companies in this state raised venture capital each year.

• The top three industries in 2008 which attracted venture capital are: biotech (36% of total dollars invested); energy (17%);and, software (11%).

• 75% of all venture capital invested in Massachusetts companies came from out of state last year, but…

• Nearly 20% of all venture capital in this country is managed by firms based in Massachusetts.

 What do you think about these numbers? Do you think the local VC industry is healthy?

Mentorship brought to you by MassChallenge…

I recently wrote a piece for MassChallenge, a new effort in town designed to foster greater collaboration and support for entrepreneurs through a very creative venture funds competition. I am a big fan of the effort and of the three guys who are making it all happen – John Harthorne, Akhil Nigam, David Constantine.

http://www.masschallenge.org/blog/

Check it out and get involved…

What Tweaks Me…

So I am just sitting here in the rain – actually I am in our house and it is raining outside – just thinking about a couple of things that really tweak me. Here is my current Top Five list…

Number 5: “These projections are conservative.” Sure. How many times have I heard that one? You are raising capital; why would you share projections which are below what you think you can do, Mr./Mrs. Entrepreneur? Of course in year 3 your start-up will have 33% market share in a multi-billion market.

My suggestion is that CEO’s simply put forth a sensible set of projections with easily understood assumptions that are consistent with how other comparable products were released and at price points which are defensible. Believable projections will not be discounted as heavily as projections which are deemed “conservative.” When someone tells me these projections are conservative I know they are not.

Number 4: “Can I just get a few minutes of your time?” Really? This happens all the time between vendors and clients, VC’s and LP’s, entrepreneurs and VC’s, service providers and anyone who will listen to them. Nothing ever takes a few minutes. Ask me for 30 minutes of my time and I will happily give it, but don’t ask for 5 minutes and make me late for my next appointment 20 minutes later.

Most VC’s are happy to track an entrepreneur’s idea as it takes shape. In fact I met two of my portfolio companies almost three years before we funded them (Taris Biomedical and PolyRemedy). I welcome the chance to track someone’s progress which is a great way to see if the opportunity hangs together and whether the entrepreneur can deliver on what is promised. In fact my personal goal is to meet two new companies and one new entrepreneur not raising money – every day.

Number 3: Great company/market/technology, wrong team. This is always disheartening. On a very regular basis I meet with great investment opportunities, often led by a very talented young technical founder, which is being shepherded by someone who has inserted themselves into the senior ranks of the management team. Founders and entrepreneurs should be very selective as to whom they let into the party, particularly in the CEO slot. Investors are often deciding whether the CEO is someone they can work with for many years; take great care who you bring in to represent you when raising capital. It is very hard to unhook a bad CEO hire.

Number 2: “Shutting down venture firms is a good thing.” Are you kidding? For entrepreneurs this can only be bad news. Fewer choices from which to raise money can not be good, and frankly can not be good for innovation overall. As a venture capitalist less competition may make my job easier but it is not a good thing if you happen to be with one of the firms which are shut down. In fact the venture model is predicated on other investors investing in my portfolio companies’ later rounds so I need there to be a strong VC marketplace with many players.

As Chairman of the New England Venture Capital Association, which has nearly 140 member firms, I was struck when I went through the membership list recently and counted only about 45 active firms. My guess is that over the next two years the number of active firms in New England may be closer to 25 firms.

And lastly, Number 1: “It is a great time to start a company.” No its not. It never is a great time. If it were everyone would be doing it. Starting a company is hard and a labor of love and devotion. Only a few people are good at it. Entrepreneurs need everything to go right – great people need to be recruited, products need to be designed and built, customers need to be found, capital needs to be raised. When economic times are good, there are plenty of “me too” companies being formed. When times are tough (like now), nothing seems to go right.

But don’t be talked out of trying. I think I have the best job in town given the small role I play in the company creation process. When it works out, there is no better feeling.

So have your new CEO swing by my office for a few minutes to walk me through his conservative projections. Hey, I may be the only one who will listen to him.

Big (and Smart) Government

In the past few months I have had the opportunity to interact with a number of state and federal officials as the financial crisis has unfolded. And for the most part my faith in the system has been renewed.

 In my capacity as chair of the New England Venture Capital Association, I have met a number of times with Governor Deval Patrick of Massachusetts, and in fact chair his recently formed Entrepreneurship Committee for the Mass IT Collaborative. I have also worked closely with his Secretary of Economic Development, Greg Bialecki, who is working very hard on a number of important initiatives to drive local job growth and company formation. As a board member of the National Venture Capital Association I have also met with Representative Barney Frank to review possible federal regulation of the venture capital industry as part of the pending overarching regulation of the financial services industry.

 And what I found was a group of legislators very concerned and engaged in finding constructive solutions – and I appreciate better the big sticks they wield. As the crisis began to unfold last fall the meetings went along the lines of “What is going on? How bad is this going to be?” Now that we seemed to hit a point of some stability, the meetings now are much more focused on finding solutions and launching programs to bolster the innovation economy. For instance, Secretary Bialecki was instrumental in securing initial funding for MassChallenge, an exciting initiative to bring entrepreneurs and investors together.

 Admittedly my initial interest in being involved was to see how the VC industry might play a role in seeing as much of the federal stimulus moneys make their way to our portfolio companies. I had suggested to Governor Patrick that a group of VC’s advise in the allocation of stimulus dollars on a local level. Notwithstanding the enormity of the stimulus spending it turns out to be reasonably difficult to pull levers which would quickly get funds to our companies. I also would like to see Massachusetts appoint an “Entrepreneur Czar” who would drive the dialogue around innovation.

 My other interest in being involved was much more parochial. I was worried that the government would paint with too broad of a regulatory brush as it tried to “fix” the hedge fund industry and perhaps inadvertently slap around the VC industry as well. The idea that the VC industry somehow caused systemic risk to me was ridiculous – we do not use leverage, do not have public securities, ask our investors to lock up for 10 years, do not use derivatives, etc) – yet there was emerging rhetoric about the risk VC’s brought to the financial markets.

 On this score I was very pleased with what I heard from key government leaders, particularly Representative Frank. There is great understanding of the important role that the venture industry plays – most officials clearly understand that it is the new companies which create the jobs and growth – and importantly that the VC industry is fundamentally different from the hedge fund world and does not inherently pose great risk.

As I said to Governor Patrick in my office a few months ago, since we started Flybridge Capital Partners nearly 8 years ago we have helped to start almost 45 companies which at the end of 2008 employed 1,231 people.

 So maybe I am wrong – we do have a very highly leveraged model.

12 by 12…

Today I participated in a very exciting event which culminated with an announcement by Governor Deval Patrick of Massachusetts with an important funding milestone – a $1 million annual business plan competition called MassChallenge.

The essence of this announcement is to match the next generation of young aspiring entrepreneurs with numerous sources of capital, most likely local venture capitalists. The Governor has committed the State to match dollars committed by private sector investors to the top entrepreneurs who survive the MassChallenge screening process.

During the course of the events today, my good friend Andy Ory (CEO of Acme Packet) and I moderated a panel stocked with local success stories: Desh Deshpande, Paul Sagan of Akamai, Bob Hower of Advanced Technology Ventures, Scott Savitz of Shoebuy.com, and Brian Shin of Visible Measures. We explored what was and was not working in the region as we try to build great venture-backed companies.

One consistent theme which the panel identified was the lack of broad-based mentorship to help this next generation of great entrepreneurs get started. So here is the commitment that Andy and I made to the audience today: we will recruit 12 great successful CEO’s to work with 12 VC’s to mentor 12 promising young entrepreneurs to launch 12 new companies over the next 12 months. (Admittedly I stated to the audience that it would be 20 in the first year, but upon reflection the alliteration of  “12″ worked much better).

Office Hours: So what I will pursue over the next few months with Andy Ory is to see if we can establish “office hours” – that is can we get a dozen successful CEO’s in town to commit to open up their calendars and rolodexes to a dozen promising entrepreneurs. Ideally these CEO’s would serve as non-executive chairmen and possibly provide some initial capital, but more importantly, they would provide guidance and advice. VC’s get paid to see new opportunities so it should be reasonably straight forward for me to line up the investors (maybe I will lean on the board of New England Venture Capital Association, which I happen to chair). And working with organizations such as MassChallenge, and our own deal flow, we should be able to identify a dozen great opportunities which merit funding.

I will keep you posted on our progress.