Start-Up: the book

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…

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

The WEF report I mentioned last week for its interesting entrepreneurs interviews includes also an analysis of venture capital which I found of similar interest. (There are tons of study on venture capital and they are all quite consistent). Here are a couple of figures from the WEF report:

- Exibit 6-1 shows that there is money worldwide even in Europe (between $30B and $50B globally and about $5-10B invested per year in Europe.) However India and China remain relatively small, which was a surprise for me (there is indeed a mistake in the bars where India and China are inverted!).

- Secondly , it is amazing to notice that SV still represents 40% of the total of the hotbeds areas. In Europe, not surprisingly UK is 1st and France 2nd. However I found more surprising to have Switerland 3rd and even Germany 4th, only.

- The other major difference between the US and Europe is at which stage we invest in Europe. Whereas 60% of the funded companies are pre-revenue, it is only 40% for Europe.

It’s the title of a contribution in the Telegraph by Richard Titus. You can read the full article in Start-Up 100: What’s wrong with European venture capital?

I do not agree with 100% of the arguments, but probably 90%, which is good enough. Feel free to react by commenting! (And by the way, there is a French translation in the other side of the blog).

Pemo Theodore is doing great interviews of people in high-tech, and she has a specific focus on women & entrepreneurship, on venture capital too, her blog is ezebis. She was interested in my views on the topic, I am not sure why as I am neither an entrepreneur, nor a VC anymore. If you are not afraid of French accents… here it is and the text is on Hervé Lebret, EPFL Swiss Tech Institute, Difference in European & US Venture Capitalists. Thanks, Pemo!

A colleague of mine (thanks Jean-Jacques) recently mentioned to me this book by Josh Lerner, which full title is Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed–and What to Do About It. I was all the more interested that Lerner is the author of many academic papers on high-tech entrepreneurship, and particularly of one about serial entrepreneurs: “Performance Persistence in Entrepreneurship” [pdf format here] with Paul Gompers, Anna Kovner, and David Scharfstein, Journal of Financial Economics, 62 (2007), 731-764. I will come back in the future on this topic which I am currently studying.

So what should we do about the public efforts is what Lerner is trying to help us with and his answer shows how challenging the topic is. What is beautiful about the author (my personal point of view) is that he likes history (just like me). Just like Steve Jobs! Just read again what I posted about Jobs on mentors; “You can’t really understand what is going on now unless you understand what came before”.

Lerner’s initial chapter is “A Look Backwards” He shows how entrepreneurs and investors benefited and suffered from each other in the 70s and 80s, including the excess of speculative bubbles, the PC burst of the 80s for example. He also shows how important public support was in the very early days through the funding of research (mostly the cold war militaries) and the legal actions to ease venture capital (SBIRs, Erisa Acts) so that he does not really agree with Rodgers (founder of Cypress) who wanted government out of Silicon Valley (page 32) so that he claims that “The Public sector did play a key role in shaping the evolution of Silicon Valley” (page 35).

Then, in the following chapters he shows how complex it is to find facts: “consistent information on venture-backed firms that were acquired or went ou of business doesn’t exist” (page 59) which means that quantitative analysis is rare. And remember he is a respected academic, so he knows! What he tried to do then, is to show some of the obvious mistakes: incompetence in allocating public resources (page 73), capture, that is use of subsidies by the wrong groups (page 80), by “organizations that are mandated to help entrepreneurs” (page 83). “seven of the incubators gave less than 50% of funding in cash to incubated firms” (just one example from Australia, page 84) or the SBIR program which has exhausted its usefulness (page 85).

So his advice is:
- enhancing the entrepreneurial culture (page 90) [through the right laws, the access to technologies, tax incentives and training],
- increasing the venture market’s attractiveness (page 100) [through allowing partnerships, creating local markets, accessing human capital abroad],
- avoiding common mistakes: timing [be patient], sizing [not too small, not too large], flexibility [learn by doing], create the right incentives [and here it is a complex situation as perverse effects from good ideas often occur] and evaluate [which does not happen often enough].

Indeed, his introduction (pages 12 and following ones) summarized it all: you need rules, experience, time, incentives and assessment. But with all his experience and knowledge about high-tech entrepreneurship, Lerner is very humble with the lessons: the topic is really complicated, all these advice have to be implemented together and it is really their careful interconnections which will make an ecosystem lively or not. Then it is my personal conclusion that such favorable conditions will be useful if entrepreneurs use them intelligently. So the reason why all this fails has many roots…

I cannot finish this post without comparing it to my book. It is indeed very similar in its conclusions with slightly different facts and figures. So you would learn complementary and consistent things by reading both! My thesis is we need an entrepreneurial culture and access to people from Silicon Valley who have the experience. Everything else is necessary but not sufficient.

I just come back from vacation and all of a sudden I discover that the world has changed! Before my break you had the business angels investing in the early rounds (up to $1M) and the VCs who would seldom invest in rounds smaller than $1-2M. Now the frontier is blurred: you have the seed VCs (Index seed being a recent one) and the Super Angels fighting for the same deals.

If you want to know more, you will find plenty of posts and news such as:

VCs And Super Angels: The War For The Entrepreneur from Techcrunch.

Why Micro-VCs Are So Damn Friendly from Xconomy.

‘Super Angels’ Alight from the WSJ.

Micro VCs Are all BFFs… Forever? by David Beisel.

All this is not so new as Business Week mentioned the phenomenon in May 2009: ‘Super Angels’ Shake Up Venture Capital.

And I should not forget Fred Destin’s blog where i first read about all this: Super Angels, Lean VCs, Proto-Incubators, whatever. Focus on social contract. He also published an article about European SuperAngels.

So what is new here? Well I am not sure, I may just be so much remote that I have missed a big trend. Or is it just that the VC and high-tech world is such in a crisis that it is looking for new models. They were always big angels. Arthur Rock for Intel and Apple, Andy Bechtolsheim for Google or Magma, and Sequoia did the seed round for Yahoo, so what?

Well the VCs have really big funds up to a billion so investing in small rounds is tough but they have understood and move back to seed. Entrepreneurs think angels are nicer, but check again my posts on the Tesla story and Elon Musk.

Finally there is a strong argument that Internet and software companies may not need as much capital as start-ups in the past and another argument that entrepreneurs just look to sell their company to Google for $25M which is not so bad, so they might not need VCs anymore. But then, Silicon Valley faces the risk of not creating new Apples or Googles… So it is probably just “back to the future”…

An interesting presentation, both content and format, on how to pitch VCs was given by Fred Destin at LIFT. Fred is a VC with Atlas whom I met a few months ago and I like his style. You can check his post directly or look at his documents below.

On the format, I was seduced by the Prezi tool.

I just met this morning Fred Destin in the beautiful Rolex Learning Center at EPFL. We both have a passion for entrepreneurs and architecture!

Fred told me he liked my equity tables and pies (check skype, mysql, Kelkoo, Synopsys, Genentech, Adobe, or the general one.

So as a small gift to Fred who is moving to the Atlas office in Boston this summer, here is the equity case of A123 Systems, an MIT spin-off which went public last September.

I am aware the pictures are not very nice but you can enlarge them and ask me for the excel file…

Two pieces of news caught recently my attention. One is entitled Frank Quattrone, Star Banker of Technology Ventures, Talks Wistfully of the Good Old Days—Before Netscape’s IPO.

The other one is less nostalgic because of the web site name, which I quite like: You’re in Deep Chip Now.

Here is the full text captured from the site:

I will not comment this but let me come back on Quattrone. Quattrone was a star of the IPO world as you may read from this Xconomy blog. What is striking is that in the last 8 years, following the Internet bubble, there has been less venture capital, fewer IPOs. The reasons are many. But the key question remains: are we facing a major innovation crisis? After the transistor in the 60’s, the computer in the 70’s and the PC in the 80’s, the Internet and mobile communications in the 90’s, what have the 00’s given us? And what about the 10’s… I do not have any answer. What about you?