Big Data to Make Boston StreetSafe…

This is not just another Big Data story. Or just another post on innovation. Or another good read on entrepreneurship. But it does touch on all of those things. And it shows the very real impact innovation and big data can have on our lives.

A few nights ago I walked some of the toughest Boston neighborhoods with Ed Powell, the Executive Director of StreetSafe Boston, meeting former gang leaders. StreetSafe is an organization which puts young caseworkers on the most violent streets in Boston to intervene in gang activity – literally standing in the line of fire. Ed is a real inspiration himself, having grown up in these same neighborhoods.  The brilliance of this start-up is to focus resources directly at one of the most disturbing problems facing our cities today – kids killing kids. You see, Ed has recruited his own gang – a team of counselors, some of whom are former gang leaders (whom he calls “street workers”), to connect with current gang members to re-direct them toward job training and other social services. After a shooting in these neighborhoods, Ed’s “gang” is up most of the night literally preventing further retribution violence.

That night I learned a number of troublesome and distressing facts about Boston’s gang situation.

• 70% of shootings in Boston happen on only 5% of the city’s blocks so the problem is readily identifiable.
• One in 100 of Boston’s youth belong to gangs; those kids account for nearly 75% of the city’s gun violence.
• There are estimated to be 120 gangs in Boston, but few if any national gangs. Our gangs tend to be smaller and organized on a hyper-local basis, literally a gang on each street – which makes for dramatic scenes of urban warfare given the proximity of these gangs. Watch a gang member on the street and see how his head is constantly swiveling.
• A 1.5 square mile area accounts for nearly 80% of our shootings and murders – that is a really small area. It is effectively a one mile stretch down Blue Hill Avenue, which is monitored by only four of Boston police districts.
• Not surprisingly these gangs are highly organized and are run like small start-up’s. Unlike years ago, drugs today are not the major contributor to gang violence in Boston, but rather historic grievances passed from one generation to the next. Coincidentally, my firm (Flybridge) met with a very interesting start-up out of Harvard today called Nucleik, which has developed software to map gang hierarchy (they were also featured on 60 Minutes this past weekend).
• Recently enacted local legislation, which instituted 10-15 year mandatory prison sentences for gun shootings, has led directly to a significant spike in stabbings. For some reason, not yet understood, stabbings in the South End have increased even more dramatically this year.
• Nearly 25% of gang shootings result in death.
• The Big Data angle: Ed is aggressively capturing a number of variables to better characterize gang profiles – ethnicity, number of conflicts, age and race of participants, addresses, social connections, etc.

With better data capture, Ed believes he can more precisely segment gang populations and therefore develop more tailored, more appropriate solutions to reduce gang violence. Ed has the “street workers” carry diaries to log dozens upon dozens of data points when they are out on their shifts. Impressively, in StreetSafe’s third year of operation, his 20 “street workers” are engaged with 332 active gang members and have spent, on average, 52 hours with each youth – a highly leveraged business model. His four Case Managers, who manage transitions for these gang members into job training, remedial education or other social service programs work with 171 youths and have placed 67 of them in jobs.

And the initial data support his thesis of the power of this type of intensive intervention. The gangs which work with StreetSafe exhibited a 32% reduction in shootings over the first three years of engagement. Many of the neighborhoods studied showed even more dramatic reductions (Grove Hall down 46%, Bowdoin/Geneva down 54%, Morton/Norfolk down 47%), while some neighborhoods were only modestly down, and for some yet unknown reasons, Dudley was up 43%. Better analytics should bring more clarity to why that is. I hope to have one of our Big Data analytics portfolio companies look at this problem as well.

As StreetSafe expands, and more data are collected, it should be even more evident that this level of outreach will lead to far fewer fatalities. On behalf of the Boston Foundation, StreetSafe’s most significant benefactor, Harvard University is conducting a multi-year, multi-million dollar Big Data study to better understand the complexities of inner city youth violence, so there is an expectation of greater insights shortly.

But how do we calculate the ROI on fewer shootings? When you meet these kids, you conclude it is immeasurable.

Is that the Fat Lady?

One of the more interesting press releases from the National Venture Capital Association (NVCA) is the VC Quarterly Fundraising announcement which came out yesterday for 4Q12. The data serve as a weathervane for the industry, indicating how much capital was raised – by firm, by geography, by investment strategy.

For a reasonably extended period of time – over the past four years – the VC industry has been investing more capital than it has been able to raise in new funds. I have been worried that this dynamic will end abruptly (i.e., badly) as one would logically conclude the investment pace needs to dramatically slow as firms invest the balance of their funds. Or fundraising would increase materially (but that has not happened). This imbalance is not sustainable.

The headline for this past quarter was quite positive; 42 funds raised an aggregate of $3.3 billion, which meant for all of 2012 $20.6 billion was raised by 182 funds, which compares favorably to 187 funds and $18.7 billion in 2011. Notwithstanding the more modest 4Q12 activity ($5.1 billion was raised by 56 firms in 3Q12, $6.2 billion by 54 firms in 4Q11), that felt understandable given the concerns and distractions surrounding the election and fiscal cliff, and frankly, the continued lack of meaningful and consistent liquidity. But some of the details buried in the data provide a more nuanced picture of 4Q12 fundraising activity.

• The largest fund in 4Q12 was Sequoia’s $700 million Growth fund, which interestingly is only the ninth largest fund raised in all of 2012. The second largest fund in the quarter is only the 16^th largest fund for the year. Clearly funds continue to trend smaller in size.
• The top 5 funds accounted for 56% of all capital raised; the top 10 accounted for 75%. Clearly continued concentration of managers.
• 17 funds were classified as “new” while 25 were “follow-on.”
• Of the top 10 funds, one is in New York, none are based in Boston, two are healthcare, and two are deemed “new” – which is perhaps somewhat misleading – NovaQuest Capital (~$250 million) is the investment team from Quintiles which had been investing together since 2000 (in fact the fund is labeled “III”) and Costanoa Venture Capital ($112 million) is reported to be constructed with a number of existing positions spun out from Sutter Hill Ventures.
• The average size across all 42 funds is $78 million but the median is $24 million.
• The average size of “new” funds (including NovaQuest and Costanoa) is $34 million; excluding them the average drops to $14 million.
• Of the 42 funds, 13 are less than $5 million in size while 5 are less than $1 million!
• Many of the funds raised this past quarter appear to be “side car” funds of existing, longstanding venture firms.

Consistent returns and liquidity should reverse the fundraising trends driving the VC industry to be smaller and more consolidated. Given the strength of the public markets over the past year the overhang of the “denominator effect” should also be less of a concern in the near to medium term. Unfortunately it may take time for many LP’s to adjust their portfolio allocation models to increase exposure to VC. But that will happen. Hopefully the news in 90 days will hint at that.

3Q12 Fundraising Data – Drum Roll Please…

The National Venture Capital Association (NVCA) and Thomson Reuters released today the 3Q12 VC fundraising data, which is a report I eagerly await as it is a barometer of the health of the VC industry. And while 53 funds were raised – the largest number since 3Q11 – only $5.0BN was raised which continues the quarterly trend downwards since mid-2011; there was $6BN raised in 2Q12. Year-to-date VC’s have raised $16.2BN which suggests that for the full year VC’s will raise between $21-$23BN – not too shabby given the Great Recession and the generally uninspiring returns for the past decade across the industry. In all of 2011 VC’s raised $18.6BN. But it is what is beneath the headlines that I always find fascinating…

• No doubt the industry is shrinking (which over time will be very healthy for those firms that remain active) – year-to-date there was a 13% decline in the number of funds raised when compared to the same period in 2011
• But over that same year-to-date period the amount of capital in 2012 was up 31% when compared to the first nine months of 2011 – which included arguably the worst two quarters in recent memory (2Q11 and 3Q11) for VC fundraising
• Interestingly, of the 53 funds raised, only 16 were new funds (more on that later)
• If one considers NEA a Silicon Valley firm (I know they are headquartered in Baltimore but they have a very large and successful west coast practice), the top five funds raised are in San Francisco and represented 55% of the capital raised
• Nine of the top ten funds are in California; #10 (Pharos Capital) calls Dallas and Nashville home
• The average size of fund raised in 3Q12 was $94M, although the median was $160M
• This is more troubling – the average size of new first-time fund raised was $9M while the median was $2.5M (that is not a typo). In fact 19 of the 53 funds raised this past quarter were less than $5M in size
• The largest new first-time fund raised was by Forerunner Ventures ($42M) which ranked #22 of the 53 funds raised
• The largest fund raised in 3Q12 was the $950M growth fund raised by Sequoia Capital – the rich get richer!

So what is there to make of all this? While I expected more rapid contraction of the industry, the amount of consolidation at the top of the pyramid is dramatic. Arguably this implies a more challenging time for entrepreneurs as there continues to be fewer robust VC franchises available to them, and those that are active, will tend to be centered around San Francisco. On a more hopeful note though, VC returns have meaningfully improved in recent times so perhaps we may start to see over the next few quarters a greater fundraising pace across more firms – a trend well worth monitoring.

Funky Times…

I spent some time this weekend looking at the recent VC funding data for this past quarter to see if any trends jumped off the page. While much of what I could discern in the data felt consistent with what I experienced in the market, there were some surprising themes buried in the details.

In general investment activity this past quarter continued to show some resilience: $7.0 billion was invested in 898 deals, which was an increase of 17% in dollar terms and 11% in number of deals from 1Q12 but importantly was down 12% in dollar terms and 15% in number of deals from 2Q11 (arguably a more relevant comparison). This past quarter, when annualized, was tracking to an investment pace below 2011’s aggregate amount of $29.5 billion but ahead of 2010’s level of $23.4 billion – so evidence of continued recovery from the depths of 2008/2009 recession.

Some other interesting high (and low) lights from the 2Q12 data:

• A major storyline was the strength of the Early stage market. In terms of number of deals, the 410 deals ($2.4 billion) was the highest quarterly level since 1Q01 – over ten years ago. Average deal size was $5.2 million.
• When Seed and Early were lumped together they represented 53% of all deals in the past quarter; in 1Q12 they were 46% of total deals and 48% in 2Q11. Maybe funds are investing earlier to extend the investment runway of their existing funds? It also reflects the continued robustness of the “micro-VC” model which has come of age.
• Average size of Seed deals was $3.2 million, which frankly does not sound like a seed deal to me.
• $2.1 billion was invested in 193 Later stage deals for an average size of $10.8 million. Later stage declined 10% on a dollars basis and 11% on number of deals basis over the past two quarters – which is not what I would have expected as VC’s look to invest closer to the liquidity event.
• “First time investing” – that is the number of companies raising VC dollars for the first time was up 27% from the prior quarter and represented nearly 15% of dollars invested and 31% of all companies which raised capital this past quarter.
• As a reflection of the broad rotation away from industries that are capital intensive with long product development cycles, life sciences was really hurt this past quarter, attracting only $1.5 billion of the total $7.0 billion invested (or 21% of the total). In 2Q11, the life sciences attracted 29% of all VC dollars. Notably biotech declined from $1.4 billion to $0.7 billion across those two quarters.
• Software category strengthened this past quarter increasing to $2.3 billion across 290 companies which ironically was the same number of companies although only $1.7 billion in 2Q11.
• Another fascinating storyline involved cleantech – which many analysts had written off for dead. On a dollars basis cleantech investing increased 8% from prior quarter but the number of companies was down 28%. The average deal size for cleantech was $18.9 million, and in fact, the top three deals in the quarter were all cleantech investments (Fisker Automotive, Harvest Power, Bloom Energy – together those three companies raised $360 million or 5% of all VC dollars invested last quarter).
• The top ten deals in 2Q12 raised $876 million or 12% of all VC dollars. Interestingly, as the VC industry consolidates, are we also going to see more consolidation around which companies attract VC dollars? Worth watching.
• Nothing terribly interesting when one looks at the region data. Silicon Valley still dominates having attracted $3.2 billion of the $7.0 billion invested (46%) which is up strongly from 39% in 1Q11. New England, which remains comfortably in the Silver Medal position at $843 million invested, was only 26% of the amount for Silicon Valley. The New York Metro region attracted $567 million, which is a 52% increase from the prior quarter but down 15% from the prior year’s second quarter.
• And one of my favorites: there were 10 states which had zero venture deals and 27 which had three or less – another sign of VC consolidation – many states are at risk of being left behind as the VC industry consolidates.

Obviously the venture industry is now comfortably a global phenomenon so I also looked at some headlines from overseas…  

• Interestingly, and quite surprisingly, Europe VC investing activity increased by 37% to 1.26 billion Euros in 273 deals this past quarter.
• China, though, decreased by 45% to $1.9 billion in the first half of 2012 when compared to first half 2011 (which compares to $13.1 billion in the US) across 103 deals, which was down 38% year-over-year (as compared to 1,707 deals in the US in first half 2012).

What Happened in 2Q12…

An interesting report from the law firm Cooley crossed my desk this week titled “Cooley Venture Financing Report” – ok, maybe not that interesting – but the report looked at their 2Q12 venture deals (n=82), so presumably a representative perspective on what is going on with valuations and, nearly as important, terms.

The two headline trends surprised me: valuations tended to be up and terms were balanced between company and investor. So now some of the data:

• Valuations: Pre-money valuations for Series A, B, C and D+ rounds were $11, $40, $54 and $140 million, respectively. I am surprised at how high the Series A and B rounds were priced and at how low the Series C rounds were valued (and who knows what are in the Series D+ data so I will ignore those deals). Let me explain. Series A round sizes have been coming down over the last few years as companies can get by with raising less capital and given the crummy general economic conditions; therefore I expected valuations for Series A to be a fraction of the $11 million witnessed. If companies are raising ~$5 million in typical Series A rounds, this means that early investors are getting a 2+x mark-up’s in the Series B rounds and management is not suffering as much dilution (remember it is not how much you raise, but how much you own). Now Series B rounds tend to be $10 to $15 million in size, which implies that the C round valuations are basically flat to the B round. Arguably the risk profile of many Series A companies is not meaningfully different than that of a Series B company (lack of repeatable sustainable commercial proof points, maybe incomplete team, product development still work in progress, etc) – thus my surprise. Similar risk at very different valuations.
•  Terms: I expected the pendulum to swing very much in the favor of investors for two reasons – capital is so scarce and with the bifurcation of the venture capital industry (large vs small firms), I expected to see more punitive terms come to the fore to drive syndicate alignment and good investor behavior as smaller, weaker VC’s run out of capacity (entrepreneurs – be very thoughtful about how you construct your investor syndicate). I had also expected to see more “financial engineering” introduced into term sheets so that VC’s could convince themselves of generating a reasonable return even in a modest outcome. I will highlight a couple of the more controversial terms and what Cooley saw in the 2Q12 data.

1.  Liquidation Preference – Across all 82 deals in this cohort, 100% had <=1.0x liquidation preference which was very surprising to me. In a typical quarter we see 10-15% of all deals with preference greater than 1.0x, so while not a significant percent, it is always present.
2. Participation – Appeared to be more prevalent across all Series of rounds; in early rounds participation was present nearly 75% of the time and in later rounds, it was there around 55% of the time.
3. Recapitalizations – I had expected this phenomenon to be quite evident but in fact it was only in 12% of the Cooley deals (it had been between 6-8% for the previous five quarters. With the explosion of new company creation over the past few years, I thought we would see many tired syndicates looking for a fresh start.
4. Tranched Deals – For many of the same reasons as with recaps, I expected to see this be a very big number but it was only 15% of the time, and actually down from the typical 20-25% from prior quarters.
5. Pay-to-Play – This was probably the most surprising one for me. Only 18% of deals (and only with Series C) was this term present.  This speaks directly to ensuring a strong supportive syndicate; if some investors stop supporting the company, there would be punitive ramifications. I had expected this to be closer to historic norms of 25 to 30% of deals.

The Slog Continues (cont’d)…

So one final thought…something I have been wrestling with for some time now is how many venture firms can reliably, predictably and on their terms raise a new fund in this environment? Tough question to answer but the data may shed some light.

According to the NVCA Yearbook 2012 there were 842 VC firms in the US at the end of 2011 which have raised capital in the past eight years; of that cohort, 526 firms were deemed “active” – which means they made investments totaling $5 million that year (frankly, a pretty low bar). Interestingly, at the end of 2011, there was approximately $197 billion under management in the US venture industry. Also of note there were 1,012 firms in 2006 so the industry lost 170 firms (or 17%) over the past five years; that same year there was $288 billion under management, which means from a capital managed perspective the industry shrunk by 32% over that same five-year period.

So this is what is so potentially daunting. This past quarter there were 10 firms which raised funds larger than $100 million, which I would deem as a threshold to be material to the overall industry. If this past quarter is representative of the new reality then, and firms raise new funds every four to five years, might one conclude that there is only room for only 160 – 200 firms? Are we looking at an industry that may contract by another 50% – 75% in terms of number of firms?

More numbers. The median fund size of those top 10 funds raised last quarter was approximately $350 million; across those same 160 – 200 firms that would be $56 – $70 billion raised over the next four to five years. Does that start to suggest where we are heading and how large the VC industry will be? The last time the VC industry was less than $100 billion was in 1998 ($91 billion managed).

Undoubtedly this is too dark a picture. We are investing in a time of unprecedented innovation which will drive superior investment performance. As returns and liquidity come back, LP’s will be drawn back to the VC asset class – but the analysis is thought provoking nonetheless.

What do you think? What percentage of firms today can raise a fund on their terms? 5%? 10% 25%?

The Slog Continues…

Last week the National Venture Capital Association (where I am on the Executive Committee) and Thomson Reuters announced the 2Q12 fundraising data for venture firms – don’t worry, you are excused if you did not see the results. Not pretty. The data has some potentially troubling implications for entrepreneurs, not just GP’s.

While the headline looked encouraging with $5.9BN raised this past quarter, which ironically compares very favorably to many of the recent quarters since the Great Recession started over four years ago, it is the details which are more disturbing. If you annualized last quarter’s pace you might conclude that the VC industry is back to raising around $25BN per year – which is about how much we as an industry invest each year. But as you can see in the chart below, the number of firms which raised capital (38) is very much a low water mark and most of the capital went to a small number of firms.

 

So why am I so disturbed by these results? Couple of high/low lights in the detailed data:

• Of the 38 firms which successfully raised new funds this past quarter, only five firms (NEA, IVP, Lightspeed, Kleiner, Mithril (Peter Thiel)) accounted for nearly 80% of the total dollars raised
• Of the top five funds raised, four were at least the ninth fund that firm had raised
• Notwithstanding that NEA is headquartered in Baltimore (with a very significant and successful Silicon Valley presence), the other firms in the top five are based in the Valley – which may raise concerns over time about the geographic diversity of how innovation is funded in this country
• 10 of the 38 funds were from new managers, which also is the lowest number of new venture managers since 2Q09 – which very much underscores that LP’s have largely turned their collective backs on new venture firms trying to get into the market
• 14 of the 38 firms raised funds which were less than $10.5MM in size each; these firms raised a total of $104MM, which is less than 5% the size of the largest fund raised by NEA ($2.1BN)
• The median fund size was $11.5MM
• Many LP’s are concluding that the optimal size venture fund in this environment is “a few hundred million dollars” but as funds size shrink, more capital intensive industries like biotech and cleantech will be increasingly out of favor
• When I stare really hard at the list of funds, many of their names suggest that they are really annex funds or small follow-on investment partnerships of existing funds which arguably overstates the number of new funds raised
• And what the data does not show is how long these funds took to be raised – that is a real barometer of the health of the VC industry

Having said that, though, the venture industry has a marvelous ability to re-invent itself in the face of poor returns and lack of liquidity, as we are seeing in real time with new creative investment models (micro-VC, super angels, etc). Notwithstanding that observation, the VC industry is characterized by both high barriers to entry and barriers to exit, that is, it can be hard to get in and for many firms that have raised multiple funds, most times it is hard to be pushed out!

But what is most disturbing for me is that the concentration of capital in fewer and fewer hands operating with very large venture funds will make it meaningfully more difficult for companies to be funded. And I am not simply referring to raising your first $500k seed round to build an initial product, which there appears to be no shortage of today, but raising more meaningful dollars to build your company (which still takes real money).

We are in an environment where too many “look-alike” companies have been seeded with quite modest amounts of capital, and when they come back to raise their first institutional round, those entrepreneurs will be surprised by the relative paucity of Series A/B/C VC firms which are actively investing.

So what is a CEO to do? Be hugely capital efficient and get out there now and start meeting as many VC firms as you can.

Does Facebook Solve VC Industry Woes?

So here is my obligatory post on Facebook…which will be the most spectacular IPO of a venture-backed company in the history of mankind…and it just priced tonight.

The shares priced at $38 giving the company a market cap of $104BN fully diluted, raising $16BN in proceeds. Of the 421MM shares being sold, 57% (or 241MM shares) are being sold by insiders; in the past few years only LinkedIn and Pandora had a higher percentage of shares coming from insiders. Assuming the “green shoe” over-allotment option is exercised, the total amount of proceeds will exceed $18.4BN. And this is where I want to focus.

Putting aside the potential negative signaling of all this insider selling (and General Motor’s voting with their feet (or tires) this week), what is the impact on the VC industry with all this liquidity? First – according to Fortune – some of the numbers:

• Individual shareholders (mostly Zuckerberg) are selling $3.2BN of stock and will retain stock worth $27.7BN
• Institutional shareholders are selling $8.3BN of stock and will still hold $15.8BN
• This does not include the existing institutional investors (T. Rowe Price, Andreessen Horowitz) which hold about $1BN of stock and are not selling, nor does it include all the other employees who are now fabulously wealthy
• Of the institutional investors, $5.1BN of stock being sold is held by institutions which have traditional LP’s and/or are themselves LP’s. This same group of investors will still have $10.6BN of Facebook stock yet to be sold.

For me what is most interesting is to speculate about what is to become of all this liquidity. The venture industry has struggled mightily to raise capital; in the past few years the VC industry has raised between $12 to $15BN annually. As these proceeds are realized and distributed, do much of these dollars get recycled – that is, will underlying LP’s begin to increase their allocations to VC as they start to see Facebook distributions? The math suggests that one year’s worth of VC fundraising is now in around half dozen VC firms fortunate enough to have invested in Facebook!

Additionally, we are watching a very deep and wealthy pool of new angel investors get created and collectively they will play a powerful role in the next wave of great company formation. Much like the “PayPal Mafia” from the last decade which sponsored many of this cycle’s great companies, the Facebook Mafia should do the same over the course of the next decade. These individual investors themselves could become significant LP’s in many venture funds which, if that were to be the case, would further drive VC industry expansion.

Or is this just all wishful dreaming?

World According to HBS…

A few days ago I attended a wide-ranging set of discussions for Harvard Business School graduates regarding the state of the VC industry. The discussions covered issues from international developments in Asia to how best to structure models of innovation to LP perspectives. I furiously made notes and thought I might share some of the highlights.

VC Developments Overseas:

A decade or so ago there was enormous excitement about VC investing in Asia. We watched with great anticipation as US VC’s “exported” our industry overseas, investing aggressively in business models which had exploded on the scene here and were now being launched in India and China. This naturally led to the creation of strong local VC franchises in those markets. Arguably these markets came of age very quickly which caused some of the participants to express some words of caution.

• Many of the China investors felt that we are now in very uncertain times. The failure of a number of China IPO’s, the emerging waves of disclosure around fraud and accounting irregularities, and the every present trifecta of lack of property/human/intellectual property rights were underscored. True economic reform in China did not start until the late 1990’s – less than 15 years ago – when the banking system was reformed. Have expectations outrun realities?
• There are now over 4,000 RMB investment funds in China.
• “China is transitioning from a consumer of know-how to a producer of know-how.”
• One the largest PE investors in the world shared that returns in China have been less than expected, and at best in line with other markets – that was quite sobering to hear.
• Others observed that China is 17% of global GDP and “will become an asset class.”
• India, on the other hand, has over 500 angel networks, a national stock exchange which has been vibrant for the last 20 years, and has a proliferation of national incubation funds.
• Many of the India commentators were very complimentary of that country’s ability to aggregate numerous private sector initiatives, but worried that the bureaucrats making these allocation decisions were quite inexperienced.
• Interestingly, the largest biometric database – until recently – was the FBI’s database, estimated to number 60 to 100 million people; India launched a national effort a few years ago and now has logged 250 million people  – going to 600 million people in 18 months! As someone who is fascinated about Big Data in the healthcare space, that holds extraordinary promise. It was also pointed out the North Korea has catalogued all 26 million of its citizens – probably little VC opportunity there!

Innovation Models:

There was an interesting discussion around models to drive innovation featuring NASA’s Tournament Lab program, which is a set of crowd sourced “contests” where the community at large is asked to solve problems NASA is grappling with (I wrote about NASA last year). This approach was juxtaposed with traditional approaches which include…

• Internal Development: one defines the problem, finds the right internal workers, creates an incentive structure, monitors outcomes and then PRAYS for performance, which is opposed to…
• Contest Model: one defines the problem, establishes evaluation criteria, sets the prize (often quite modest in the case of NASA), recruits problem solvers from the community and then PAYS for performance

Limited Partner Impressions:

The final set of discussions involved the LP’s – our customers. One of the largest state pension funds, which very publicly lowered its VC allocation targets in its portfolio model, observed that VC returns have “detracted from overall performance in all time periods” – that kind of stings! On the other hand, LP’s from leading academic endowments had the exact opposite conclusion and shared that “VC has been a great performer for the endowment.” So a couple of conclusions I left with…

• As an LP, if you can get access to any manager you want, one can construct a fabulous portfolio of VC managers. Today, where access is not a meaningful issue, LP’s would be wise to lean into VC.
• Large pension funds have hundreds of VC relationships, which by definition, will drive overall performance to be median – and median VC returns have been bad. Full stop.
• There was a strong sense that there will be increased dispersion of returns from the median going forward, which for the last decade or so have been compressed.
• Even though VC returns overall have been uninspiring that in no way is to suggest that there have not been some spectacular funds.
• There are over 40 sovereign wealth funds which manage ~$4 trillion of capital; two-thirds of which were founded in last ten years. There is an expectation that they may be increasingly an active force in the VC industry.

Two other random observations:

• Everyone was focused on the fact that the amount of capital to get to point of failure or point of acceleration in most VC-backed companies is now at an all time low, and this will further cause the VC industry to shrink as fund sizes will/can be smaller
• The recently released Midas List (top 100 VC’s) has 33 people who went to a school in Boston – but only 3 on the list currently reside in Boston. That is a problem given how much of the nation’s VC dollars are managed in Boston – and we remain the second largest innovation economy behind Silicon Valley.

Big Data, Little Data…

“Big data, little data…” Sounds like a Dr. Seuss book. Hadoop…Splunk…sound like characters in one of his books. Data is everywhere. Given Big Data is all anyone can talk about today, I have spent the better part of the past year immersed in many forms of data, trying to sort out where we might consider investing.

At its core these platforms are attempting to make sense of unstructured, often times, machine generated data to provide unique actionable insights – and not just for the Head of the Analytics Department, but for all employees. The desire to re-use, share and store this unstructured data has opened up enormous market opportunities up and down the IT stack. My particular focus is around the applications which are creating “smart tools” to drive innovation in the enterprise – and it is clear that every market vertical will be impacted. My most recent investment is in the Big Data analytics space for health plans – and it is very cool – more to come.

The IT stack today involves the following hierarchy: collection > ingestion and storage > discovery and cleansing > integration > analysis > delivery. I am most focused on the right side of this equation (some of my partners have made some very compelling investments on the left side of that equation such as 10gen, Nasuni, Crashlytics, Tracelytics, InfoBright). Out of my exploration there have been a number of interesting insights and funny sound bites which inform some of our Big Data investment themes:

• Big Data will democratize the enterprise, that is, all employees will become analytics experts who will drive work flow and productivity improvements – move the battlefield to front line employees
• The “3 V’s” – velocity, variety and volume – are not going away, in fact they are only getting more severe
• Movement to real-time analytics from batch processing is very powerful particularly in industries which process transactions where insights can now be moved from post-pay to pre-pay and pre-settlement (so rather than detecting fraud after the fact, fraud can now be readily detected prior to the transaction)
• Real demand driven supply chains
• Real need to drive insights from legacy IT architectures, particularly in the small to medium end of the market, who will be reluctant to overall existing infrastructures
• Make Big Data small data or useable data through adaptive algorithms
• In early innings of hyper-targeting across every industry
• “Social sensing” will overhaul product development, stocking decisions, better forecasting and alerting, etc
• Love the comment that “we are not looking to build more dashboards, but instead, cockpits”

We will undoubtedly be more refined and precise over time in how we look at the Big Data investment opportunity set. As part of this evolution, Flybridge hosted a Big Data CEO dinner a few weeks ago in Boston to identify how best to galvanize the community and where the greatest opportunities lie. In addition to great wines, there was a lot of enthusiasm for the new tools and architectures which are coming into the market. A follow-up dinner is being planned for the near future to better frame the opportunities – I welcome any suggestions for that agenda.

For me right now I am fascinated by the Big Data opportunities across the healthcare delivery system; as the FDA has become prohibitively hostile towards therapeutics and medical device companies, healthcare analytics is an area where profound benefits will be derived. As I mentioned earlier, my most recent investment is an analytics company focused on health plans – and the insights they are already demonstrating have enormous cost and revenue impacts for every health plan. Stay tuned – more to come.