Monthly Archives: June 2011

Atlantic Drift – Venture capital performance in the UK and the US

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A new report on venture capital brings interesting conclusions and updates. Here is the summary that you can also fidn on the Nesta web site:

1. The returns performance of UK and US VC funds in recent years has been very similar. UK funds have historically underperformed US funds, but this gap has significantly narrowed. The gap in fund returns (net IRR) between the average US and UK fund has fallen from over 20 percentage points before the dotcom bubble (funds raised in 1990-1997) to one percentage point afterwards (funds raised in 1998-2005). However, this convergence has been driven by declining returns in the US after the burst of the dotcom bubble, rather than by increasing returns in the UK. Average returns for funds raised after the bubble in both the UK and the US have been relatively poor, but VC performance is likely to move upwards as VC funds start to cash out their investments in social networks (particularly in the US).

2. The wider environment in which UK funds and the companies they finance operate was a major contributor to the historical gap in VC returns. While there are some large differences in the observable characteristics of VC funds between both countries, they cannot account for the historical returns gap.

3. Average returns obscure the large variability in returns within countries. The dispersion in returns across funds was highest during the pre-bubble years, and has fallen significantly since then. But in both periods the gap in returns between good and bad performing funds within a country was much larger than the gap in the average returns across countries. Thirteen per cent of UK funds established since 1990, would have got into the top quartile of US funds by returns (this has increased to 22 per cent for funds established in the post bubble period), while 45 per cent of UK funds outperformed the median US fund. Selecting the right fund manager is thus more important than choosing a particular country.

4. The strongest quantifiable predictors of VC returns performance are

(a) whether the fund managers’ prior funds outperform the market benchmark;

(b) whether the fund invests in early rounds;

(c) whether the fund managers have prior experience; and

(d) whether the fund is optimally sized (neither too big nor too small).

Moreover, historical performance has been higher for funds located in one of the four largest investor hubs (Silicon Valley, New York, Massachusetts and London) and for investments in information and communication technology.

5. UK government-backed funds have historically underperformed their private counterparts, but the gap between public and private returns has narrowed in recent periods. This suggests that in later years governments have become savvier when designing new VC schemes.

Most US funds have traditionally only invested locally, with less than a third of US funds raised between 1990 and 2005 having invested in one or more companies outside the US. In contrast, the majority of European funds have invested outside of their home market.

The situation has changed somewhat in recent times. A higher proportion of European funds raised in 2006-2009 have chosen to invest locally while US-based funds are becoming more global. As a result, the proportion of European VC capital being invested in the US has halved, falling to 10 per cent, and a slightly larger share of US VC capital is coming to Europe.

Overall, this analysis suggests that Europe does not offer an attractive proposition to US VC funds. Europe has a less developed VC market than the US, so attracting US funds (their money but also, crucially, their expertise) ought to benefit European economies. Instead, the opposite is happening. A much larger share of European VC funds invest in the US than the other way around. While Europe is likely to benefit from its funds investing in the US (for the returns it provides, the network it builds and the experience it generates), the small flow in the opposite direction is a cause for concern.

In conclusion

– The global venture capital industry is concentrated in very few hubs (and does not exist in a vacuum)

– The convergence in returns is not the result of changes in the characteristics of UK funds

– Small funds underperform medium sized funds, but larger is not always better

– More experienced fund managers achieved higher returns

– Past performance predicts future performance

– Funds in investor hubs had better returns

Investing in earlier rounds leads to better performance

– But much of the variability in returns is not explained by these factors

Finally some advice on Policy:

Remember venture capital activity does not exist in a vacuum.

Resist the temptation to overengineer public support schemes

Avoid initiatives that are too small.

I also found interesting two figures:

Why companies fail

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Again, I found an interesting article in an old Red Herring, dated October 1999. It is entitled the Anatomy of Failure and more importantly, it was written by Geoffrey Moore.


There is not much to say about Moore (if you know him) but he is an absolute much read. In the innovation landscape, he can be placed between Bill Davidow’s concept of Whole Product (pdf) (Moore worked at MDV as a venture partner) and Steve Blank’s concept of Customer Developement. (I will come back soon on Blank and his book The Four Steps to the Epiphany).

In 1999, Moore used his concepts of Chasm and Tornado to explain why companies failed and here are his four main reasons:

1- The Slow Fail: Traditional management (accountability to the plan) does not work. Early markets are unpredictable and require a lot of flexibility.

2- The Chasm Trap: If early enthusiats may buy your initial product, you will need a much more complete product (The Whole Product) to satisfy the early majority. If not, you will be trapped in the chasm.

3- The Tornado Dive: if you are lucky enough to have created the “Killer App”, you may not face the chasm, but an antichasm: the inability to deliver a huge demand and manage your hypergrowth. A dream becoming a nightmare.

4- The Dead Zone: The previous grid shows an area which you may find moving from emerging market to crossing the chasm and finding the tornado. The pain and gain are decent but experience shows you will never reach mature markets, the place for the living deads.

In conclusion, Moore shows optimism and mentions the Full Circle: if you find soon that you are failing (“Fail Fast”), you can react (not follow the plan) and avoid the dead zone to either cross the chasm and/or enter the tornado. Then you may succeed. I scanned the full article, in case some of you would like it. Just email me.

PS (2021): Apparently the link with the pdf on the Whole Product is broken. Here is a video of Bill Davidow that might be the same event.

Prepare for dramatic Internet company wreckage.

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Another fo my recent reading from old Red gerring magazines. The analysis and predictions are great and provide good lessons for our days… In the same feature, October 98, I found small articles about companies we backed at Index. These three companies went public later on… so a small additional piece for nostalgia.

Prepare for dramatic Internet company wreckage.
By Anthony B. Perkins
ONE 0F THE surest reality checks in the technology business is a visit with Don Valentine of Sequoia Capital. Mr. Valentine’s seed money and sound advice have been instrumental in many of Silicon Valley’s greatest success stories, including Apple, 3Com, Cisco, and Yahoo. He, along with Netscape founder Jim Clark, was the first to proclaim in our pages, back in 1994, that Internet was indeed the information highway, and not just a “TV with a pizza box sitting on top” (see “Don Valentine’s Next Big Bet Is on C-Cube Microsystems,” May 1994 page 58). We recently prodded the curmudgeonly Mr. Valentine to tell us how he thinks the Internet market will play out. His insights are instructive.

First he notes that, like the microchip and PC markets, the Internet market grew organically rather than because it solved any obvious problem that was important to a large group of people who had a lot of money. Mr. Valentine recounts being at Fairchild Semiconductor when he and future Intel founder Bob Noyce marveled at the invention of the microchip but at the same time wondered what it was good for. The early days at Apple were much the same. “I remember wondering what people were going to do with the Apple II. There was no answer!” Mr. Valentine declares. In contrast, the networking boom was about solving big, important problems for corporations. “When Cisco came along, it was addressing an environment desperately in need of a solution,” he explains.

From a venture capital perspective, Mr. Valentine believes that it is better to invest in markets clamoring for new products than in creating new markets. “In the two previous eras—microchips and PCs—lots of companies went over a cliff,” he says. “Uniquely in the networking world, there are almost no busts.” Extending his logic, Mr. Valentine foresees what we have been predicting for a couple of years now that the Internet space will suffer dramatic company wreckage as well. Another veteran VC, Jim Breyer of Accel Partners, concurs with this analysis: “Ninety percent of the Internet companies that exist today will eventually go out of business.” And Mary Meeker of Morgan Stanley Dean Witter says that roughly 75 percent of the Internet companies that went public in the past four years are now trading below their initial public offering prices.

According to Mr. Valentine, part of the overfunding of these markets-in-creation can be attributed to the infamous herd mentality within the VC community. “We financed 6o disk drive companies because each venture firm wanted to have a disk drive investment in its portfolio,” he tells us. “The reason we have so many search engines is that Yahoo got visible. Lots of VCs didn’t have one of those. So they created an Infoseek or an Excite or whatever, and jumped on the back of the train. We are making the same mistake in the Internet era that we made in the PC era. Just think about the environment. There is no application in which the Internet solves a problem. What does the Interne do so far? It sort of reminds me of the Apple computer in 1978. It doesn’t do anything.”

Mr. Valentine feels certain about one aspect of the Internet: that it represents the most efficient marketplace for goods and services on the planet. “Never before has the consumer had all the cards dealt face up where he can make choices and decisions knowing all the facts,” he says. “In traditional marketplaces, consumers have always had to deal with confusion, arcane language, and obfuscation. Buying something is often a hassle. Insurance is a great example of this; dealing with car salesmen is another. Now consumers are being put in a position in which they have phenomenal access to whatever they want.” This may seem of obvious value to businesses—especially when you look at the revenue trajectory of an Amazon.com or contemplate the 10 million’s worth of computer equipment that Michael Dell is selling online every day— but the only thing that is really obvious is the value to the consumer. We ask the same question that the salty Mr. Valentine does: “How do you make money in this perfect marketplace?” Our problem with Arnazon.com has never been its sales potential; rather, we wonder whether it will make technology-industry-level margins.

I threw Mr. Valentine’s comments out for discussion at dinner last night with Broadview CEO Paul Deninger and Red Herring editor Jason Pontin, inciting a lively debate. From Mr. Deninger’s perspective, Amazon.com may well be the exception, not the rule. “Look, Jeff Bezos at the right place at the right time with the right product,” he said. “But for every Amazon.com, there will be 20 flameouts.” His main point was that “e-commerce is a new way of conducting commerce electronically, but not necessarily a new industry.” Jason piped in with his theory that the disaggregation effect of the Internet “creates room for re-aggregation.” (By this time we had gone through our fourth bottle of wine.) And I believe Jason is quite right. Now that portals have better organized the Web, and Amazon.com has shown everyone how to conduct Internet commerce successfully, it’s time for the rest of the world to jump into the game. Instead of relying on Yahoo and the major portals to organize your experience, you will build your home page with links into the “miniportals” representing your specific interests. Eventually, all major product and service distributors will go online and fend off startups like Arnazon.com that are eyeing their lunch.

One defender of the miniportal revolution is Jim Moloshok, senior vice president of Warner Brothers Online. At our recent Herring on Hollywood conference in Santa Monica, California, Mr. Moloshok au but declared war on Sillcon Valley’s search-engine geeks. He warned Hollywood’s studio producers and new-media types that they are in danger of losing control of their online destinies if they don’t stop giving away their valuable television-, film-, and music-related content to Internet companies starved for programming, and that they should start demanding better licensing terms. “Entertainment companies are mortgaging their online future,” said Mr. Moloshok. “They’re giving away their content in exchange for exposure. But the entertainment companies are basically underwriting these Internet companies by throwing away their intellectual currency.” All this debate left me agreeing with Mr. Valentine’s basic premise: the Internet is still a market-in-creation. Although we have our arms around the idea that it represents a vast and efficient distribution channel and will provide a stream for investment news and entertainment content, its real value has yet to come into focus. And as we grope along this trail, we will continue to see fledgling companies like Broadcast.com and GeoCities go public. But we’ll have to wait a while to sec which cars stay on the road and which ones fly off the cliff.
[For Tony Perkins’s free weekly newsletter, send an email with subscribe in the suhject line to tonynet@redherring.com.]

Why most economists’ predictions are wrong

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In the continuation of my reading of old Red Herring magazines, here is a very interesting article from June 1998. It is even funny in its wise comments and surprising mistakes. But first read what he says about the difficulty in predicting. It reminds me an old post on Peter Thiel, Technology = Salvation.

Yes sometimes, “The truth is that we live in an age not of extraordinary progress but of technological disappointment. And that’s why the future is not what it used to be.”

But then what about his predictions and in particular the ones I marked in red…

Super angels: recycling of old stuff?

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In my current reading of old Red Herring and Upside magazines (see for example Google in 2000 and Funny Data in the Internet Bubble), I just discovered an interesting ar4ticle about how angels may replace venture capitalists (Upside 1999).

They take a one example sendmail which did not go with Kleiner Perkins, Accel or IVP but closed a $6M round with business angels at a $20M valuation. The article also mentions the Band of Angels, agroup of then 120 investors having invested a total of $44M with an average investment of $600k and the Angel’s Forum with 20 investors putting up to $500k per start-up.

Sendmail raised $35M in 2000 (series D), $14M in 2002, as well as debt financing (at least $7M) as recently as 2009. Sendmail is still private so difficult to say if it is/will be a success or not.

I had doubts in a recent post on Super Angels being new stuff, this shows it is clearly not that new…

The Startup Game by Bill Draper

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As I wrote in my previous post on a few Indian tech start-ups, I just read The Startup Game by Bill Draper. In general, that kind of books is of average quality, this one is much above the average, though this is just my personal feeling. I like what is written and here my summary.

Bill Draper is one of the fathers of venture capital and belongs to a interesting genealogy. His father was a grandfather of VC and his son is currenlty an active investor

More in the chapters of my book about venture capital!

Draper’s book begins with Buck’s, one of the famous meeting places of Silicon Valley (SV). SV is known as an open environment, where people meet easily, and public places such as bars and restaurants have become famous for this. There was the Wagon Wheel Bar, there is Buck’s or Il Fornaio and a few more.

He also mentions -page 5- another famous component of the SV legend, the Garage. He explains how he missed Yahoo even if he visited their famous trailer donated by Stanford when “Yahoo was space-intensive”, a place “legendarily littered with overheating terminals, pizza boxes, dirty clothing and golf clubs”.


Clockwise: HP, Yahoo, Google and Apple garages.

Of course, if his book was about anecdotes only, Draper would be of small interest. He gives also many lessons. For example:

– Hire managers “ambitious enough to help…. Adventurous enough to take a flyer on an almost untested vision of the future.” – Page 8.

– “Don’t invest money you can’t afford to lose.” An important lesson about venture capital (Page 12)

– Again on what is venture capital, when he planned an investment in real estate in Hawai, a Rockefeller partner had him fly in NY: “We don’t need you to put our money in real estate and then collect a fee and a carry, to add insult to injury. We became a partner in DGA because you told us you were going to invest in technology and honest-to-god entrepreneurs. It would have been far and away the best investment DGA could have made… although I cannot disagree with his main point that we should have focused on opportunities in our own neighborhood.” (Page 27)

– On what is a good venture capitalist (page 30):

  1. Good judgement
  2. Record of success in another form of business
  3. Warm and friendly personality
  4. Intuitive sense of where the world is going

– On the venture capital model (page 41), when he asked about his son’s first six investments: “dead, dying, bankrupt, probably won’t make it, and not so good”
Uh-oh I said to myself. And what about the sixth investment, Tim?” I asked, trying to sound upbeat.
He looked up and paused. “Home run!”.

And he adds later, “a young man can succeed in venture capital with a small amount of money, a willingness to sift through a lot of chaff to get to the wheat, a tolerance for risk, and a reasonably good calibration of the potential of various entrepreneurs. It is also evident that luck plays a part, but the old adage comes to mind: the harder one works, the luckier one gets.”

– On the entrepreneurs (page 54): “[Arthur] Rock feels that the most important ingredient in any company is the brains, guts and vision of the leader. If the product turns out to be wrong, the visionary leader will come up with a new one. If the market shrinks, the leader will stir the whole team toward another one.”

– Then page 55: “the entrepreneurs with the lowest risk of failure are those who know their field intimately.” Then senior managers of a successful company backed by the same VC are second in importamce, then again those with the ability to recognize their own limits and agree that they can be replaced.

– On entrepreneurs and investors (page 64) , he nearly copies Don Valentine (see below). “A fifty-fifty attitude: VCs put all the money, entrepreneurs all the blood, sweat and tears.”

– Another legend of SV (and I think it is true) “SV is the home of the handshake. Your word is your bond – or you’re in trouble.” (page 99).

– Could there be something changed in the SV culture? I mean too much finance people and financial engineering? Draper mentions investors should keep their shares in a company (chapter 7, page 173), at least if they believe in the future growth potential of the company value. But when in it comes to Skype acquisition by eBay (page 188), Draper sold his stock at $45.21 through some complex combination of puts and calls in less than a week after the closing of the deal. When Skype was bought, eBay’s share was $44.96… Six months later, eBay was trading at $33 a share.

Finally, the top 10 avoidable mistakes by entrepreneurs (page 75) :

  1. Creating overly optimistic projections
  2. Underestimating timelines.
  3. Trying to do everything yourself.
  4. Failing to master the elevator pitch.
  5. Not downsizing when necessary.
  6. Being inflexible.
  7. Not developing a clear marketing plan.
  8. Building a board that consists only of friends.
  9. Not taking action in a recession.
  10. Not knowing the right was to approach venture capitalists.

He concludes with his vision of opportunities for the future (page 224):
– The quantum computer
– Synthetic life form
– Decode and reprogram information systems of biology
– Life science in general (diagnostics, therapeutics, medical devices, healthcare IT)
– Voice and storage will be free
– Small nuclear power plants (sic)
– Changes in transportation

In a simple conclusion; a good book where you will learn some good lessons from Silicon Valley and elsewhere (i did not mention Draper spent 10 years with the UN and then created the first VC firm in India, through Draper International).

Note: Don Valentine said about entrepreneurs and investors: “When people come as a team (usually it is three or four people and typically heavyweight on engineering), it is a complex process. But I think all of us have seen it in the earlier days, times when I can remember saying, “Well, look, we’ll put up all the money, you put up all the blood, sweat and tears and we’ll split the company”, this with the founders. Then if we have to hire more people, we’ll all come down evenly, it will be kind of a 50/50 arrangement. Well, as this bubble got bigger and bigger, you know, they were coming and saying, “Well, you know, we’ll give you, for all the money, 5 percent, 10 percent of the deal.” And, you know, that it’s a supply and demand thing. It’s gone back the other way now. But, in starting with a team, it’s a typical thing to say, well, somewhere 40 to 60 percent, to divide it now. If they’ve got the best thing since sliced bread and you think they have it and they think they have it, you know, then you’ll probably lose the deal because one of these guys will grab it.” Transcript of oral panel – the Pioneers of Venture Capital – September 2002

Bubble? You said bubble. Just read about it….

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As I mentioned recently, a friend of mine gave me a collection of old Red Herring magazines. A funny byproduct of this gift is that I noticed that the number of pages of the Red Herring seemed to follow closely the Internet bubble. A decent number of pages before 1999, a peak in early 2000 and then a crash. I quickly did the exercise of comparing and here is the result!

Going public when you are not a US start-up – part 5/4: India

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As my stupid “part 5/4” shows, I had not planned to add two other non-US companies, this time with Indian roots (to my previous 4 posts on Europe and China). I am currently reading The Startup Game by Bill Draper. It is a very interesting book by one of the most famous Silicon Valley venture capitalists and I will write soon a post on what I liked (as soon as I am finished with reading it).

Bill Draper founded a fund specialized in Indian start-ups in the mid-90s. He was not the first VC to leave the USA (some had done it in Europe in the 60s and 70s) but he was probably the first one to be succesful with such a venture.

Rediff and Selectica went public in 2000, both were founded in 1996. They are very similar to US start-ups, indeed Selectica was founded as a California start-up. Rediff is stranger as it is an Indian company and because it was not (and is not yet) profitable, it is still private in India.

Here is Rediff Cap. Table when it went public

and here is Selectica’s:

As a short conclusion, Bill Draper certainly had higher hopes for both companies which individual revenues were less than $50M in the last 3 years. There is no doubt that being an overseas company is not optimal both for customers and perception by investors…

Going public when you are not a US start-up – part 4/4: Baidu

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Baidu ends my small series of non-US start-ups. What is interesting is that there are some anecdotal differences. At least for the European ones, it was not an easy adventure with many tough financing rounds. Alibaba was not totally clear. Now Baidu…

As a first word of conclusion, the value creation of the two Asian companies is much larger than the European ones. It might be linked to the fields (Transmode and Envivio are more in the high-tech infrastructure, where as the two Chinese companies are internet services). It might also be the perception of different dynamics in both continents…

Baidu was founded by two Chinese citizens, Robin Yanhong Li and Eric Yong Xu. Li “went to SUNY-Buffalo in the US to study computer science towards a Doctoral degree. He received his Master of Science degree in 1994 after he had decided to discontinue his PhD program work” (Wikipedia). Xu “received his Ph.D. degree from Texas A&M University, post-doctorate from University of California at Berkeley, and his B.S. and M.S. degrees in Biology from Beijing University. Dr. Xu was also a candidate of the Stanford University Sloan Masters program”. (Bio on Bioveda Fund website).

Baidu is quoted on Nasdaq. Is there a link between the background of the founders and/or the fact they have investors such as Draper, IDG and Google? (Remember that Alibaba has Yahoo as a major shareholder – even if the relationship was quite tensed recently).

PS: I may come with a fifth story soon, an Indian startup quoted on Nasdaq I read about just yesterday…

Going public when you are not a US start-up – part 3/4: Alibaba

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I leave Europe with two recent filings (Envivio, Transmode) to China. There would be much to say about China, my recent post on venture capital shows the growing role played by the country in high-tech. At the same time, I don’t know many Chinese success stories, with the exception of Alibaba and Baidu.

I should add Foxconn, the famous computer company which produces Dell and Apple machines, but I have not much about it. Alibaba was founded in 1999 and went public on the Hong Kong stock exchange in 2007, even if its major shareholders are Yahoo and Softbank.

It was tough to build the capitalization at table. There is about 30% of the company shares which I could not link to individual or institutional stockholders. It could be linked to that fact that the Chinese entitity owns these shares. I cannot avoid adding that just like in Europe, the filings of non-US companies are sometimes more cryptic than for American companies. But it might be just because I did not spend enough time on the documents. It might be also that I made a confusion between the quoted company and the mother company which is not quoted (check this 2009 newsrelease that I discovered while writing the post!)

What else? The founders have similar ownership to US start-ups. Another thing which puzzles me is the fact that Alibaba is not quoted on Nasdaq or NYSE and that in parallel, some major stockholders are from the western world… But the founding team has strong chinese roots which balances the overall picture.

Next: I will compare the situtation with Baidu, the other Chinese success story I studied.