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The real risktakers - VCs, Founders or CEOs?

Recently, we had a historian as a keynote speaker at our annual Friends of Borealis Dinner.  Dennis Robinson did an amazing job telling the story of the almost 400 years of history that defines Portsmouth.  In tailoring the presentation to the audience he highlighted the role of entrepreneurship and even venture capitalists in driving the various phases of history … At one point he reviewed the whaling era and showed this image below while sharing “that you can see the VC here taking a chance again …” - the crowd burst into laughter. Why do you think that was? Clearly this is an image of Ahab from Moby Dick, but that is not why people laughed.  Why do you think they laughed? Was it because they can’t see VCs taking that kind of risk?  Did they think that was more likely a Founder or a CEO?

Who is more likely to have a peg leg and still go back for more?!

…you make the call! IS this a VC, Founder or CEO on this “puppy”?!

Valley VCs Gone Crazy?

Nah, not really - athough there was a time early in the last couple of weeks when people thought the Sequoia Team was auditioning for that movie!  In reality, they provided some great advice to their portfolio company CEOs but as it leaked out in the midst of the general craziness in financial circles it came out lacking context and probably created some unintended consequences.

While I was reading all the coverage of that now infamous Sequoia CEO meeting I wondered aloud when the voices of reason would emerge - then came this letter from Alan Patricof!  It has been a pleasure to work with Alan on the Handmark Board (the team there is just killing it right now) and his letter reinforced many of the things I have learned from Alan, and now I will let excerpts from his letter do the talking.

By Alan J. Patricof  Managing Director, Greycroft Partners

The comments made by the partners of Sequoia Capital at their recently held “CEO Summit” have been widely covered by leaks to numerous bloggers.  These bloggers have disseminated the details and spread the contagion of the sentiments to the public at large, unfortunately running the risk that the words become a self-fulfilling prophesy.  Without challenging the comments, which expressed a heightened degree of doom and gloom for the economic prospects of young start-up companies particularly, I do think it calls for a somewhat more restrained response on the outlook and required action before throwing the baby out with the bath water…

Nevertheless, aside from an over inflated housing boom that had to collapse sooner or later and a complicated financial system that arose in part to fuel this engine, the basic economy was in reasonable shape with GNP growth and productivity gains supporting a solid, if not vibrant outlook.  (I know the automotive industry is also going through bad times but it no longer pervades the economy as once conveyed in the expression “As GM goes, so goes the nation.”)

Advances in technology are allowing companies to make goods and provide services faster and cheaper.  The wireless revolution and the Internet have made the dissemination of information easier and more pervasive for the entire world and brought significant benefits to every phase of our economy.  That is not going to stop although it may temporarily slow down.  In these difficult times, there will be winners as well as losers (and the former may be fewer in number for a while).

The point is, the financial problems are being addressed, if not a bit belatedly, and some international mechanism will be found in short order for some coordinated policy that will restore order and confidence to the system.

Most young companies, with which we are specifically concerned, are financed with equity capital.  That has its positives and negatives; on the one hand, debt is a very small factor in the capital structure of most small companies so loan foreclosures and the interest rate burden are not of prime concern. On the other hand, equity capital, which is provided by private investors, requires confidence in future prospects for reaching profitability and creating a strong market value.  Certainly under current conditions it is hard to engender such confidence although history has demonstrated that it is in times like these that great opportunities are created.  I have always said, “The best time to invest is when the drums are beating, not when the trumpets are blaring!”

This is surely a time for companies to pay meticulous attention to detail, particularly their cost structure. It is a time to be realistic in their near term assumptions for revenue growth and take nothing for granted.  Raising additional capital to support operations is of course critical, as it is at any time, but this is particularly a time for young companies to be extra cautious in developing pragmatic assumptions of their needs and in focusing on the amount and not necessarily the cost of that capital. 

This is not a time to panic, cut off all investment in the future, and burrow into a dark hole.  Take a page from the packaged goods industry that the time to gain market share is during tough times when your competitors are weaker in responding.  And while this may feel more directly related to portfolio companies, we as a venture industry should not retreat either.  It is our strong belief that we can and will continue to make sound investments in excellent opportunities.  It is as good a time as ever to start a company with sound fundamentals. 

So my point is to heed the caution of the Sequoia comments but to use them only as a strong message to reexamine all cost elements and growth plans and use this opportunity to assure that you are a survivor.  Find a way to use this moment to gain your greater share of the market by providing a solution that is needed by others to improve their prospects in the difficult environment ahead.  Tighten your belt and live within your means.  Although the timing makes this message seem more prescient, it is a philosophy that works for successful companies at all times and at all stages; it is simply put, good business.  This is not a time for heroes!

State of the NH High Tech Economy

Recently Ross Gittell and his team at UNH released the latest report on the Granite State’s High Tech Economy.  We will share more on this report in the future, but the most immediate thing to know is that we need polticians elected on Nov 4th that understand both the importance of the high tech industry to our state and the policies required to keep it fueled and growing!

Profile of the High Technology Industry in New Hampshire

ØNew Hampshire’s high tech industry accounts for 9 percent of total private sector employment in the state (about 49,000 jobs) and for approximately one-quarter of the state’s economic output.

ØIn 2006 in New Hampshire high tech average annual earning was just under $75,200, which is 75 percent higher than average (all industries) wage.

ØIn 2007 New Hampshire exported $1.1 billion in high tech goods, which accounts for 36 percent of total exports from New Hampshire.

ØDuring the “tech bust” of the early 2000’s New Hampshire had a higher percentage decline in high tech employment than any other state.  Between 2000 and 2003 high tech employment fell over 22 percent in New Hampshire, compared to a decrease of 12 percent in the nation.

ØThe current level of high technology employment in the state is lower than in the early 1990s and New Hampshire has dropped in the high tech concentration rank, from 4th in 1995 to 8th in 2006.  

ØThe most significant employment decline has been in high tech manufacturing industries. 

ØThere are opportunities to expand the base of high technology employment in the state. This includes opportunity to grow sectors of the high technology industry that are already strong — including defense-related industries — and to grow in sectors that are emerging in importance — including in the so-called “green economy.”

ØThe next couple of years will be challenging ones for firms in the high tech industry (and all industries). But in high technology with challenges, come opportunities to innovate, to develop new products and services, and to serve and create new markets and these opportunities are all available for high technology companies in New Hampshire. 

Angel Investors Hanging In.

ANGEL INVESTORS STEADY BUT

MORE CAUTIOUS IN FIRST HALF OF 2008

That’s the headline in the latest report from NH’s own Center for Venture Research.

Founded in 1984 and run by Professor Jeff Sohl for many years now, this group cranks out great data around nationwide Angel investment activity - as can you see below this is great info for entrepreneurs, investors and policymakers alike.  At some point we will spend time with Jeff and learn what he thinks can drive an even higher level of angel investment, in the meantime here are the numbers:

 Angels continue to be the largest source of seed and start-up capital, with 46 percent of first and second quarter angel investments in the seed and start-up stage, on par with the like period last year (42 percent). 

They are now trying to reduce their risk exposure by including more angels in each deal, according to the Angel Market Analysis for the first and second quarters of 2008 released by the Center for Venture Research at the University of New Hampshire. 

According to the analysis, “Angel Investors Steady But More Cautious in First Half of 2008,” total investments in the first and second quarters of 2008 were $12.4 billion, an increase of 4.2 percent over the same period last year. A total of 23,100 entrepreneurial ventures received angel funding in the first half of 2008, a slight decrease of 3.8 percent from the same period last year, and the number of active investors was 143,000 individuals, an increase of 2.1 percent over the same period in 2007. 

Software accounted for the largest share of investments, with 18% of total angel investments in Q1,2 2008, followed by Healthcare Services/Medical Devices and Equipment (17%) and Industrial/energy (10%), potentially reflecting an increasing appetite for green technologies.  Biotech has dropped from the top three sectors for the first time in several years while Retail and Media have solidified their previous presence in the top six preferred sectors. 

 

Sector	Software	Healthcare	Industrial/Energy	Retail	Biotech	Media
Deals	18%	17%	10%	8%	8%	8%

“Our Future In The Innovation Century”

Earllier this year a group of us - players from Technet, NH High Tech Council and the University of New Hampshire worked to create the first-ever cross-party Presidential candidate forums. The idea was to match up the community organizer Sen Barack Obama versus the venture capitalist Gov Mitt Romney or think Gov Richardson versus Gov Huckabee … We never pulled those off which was primarily due to the extraordinary  fundraising pressure on this cycle’s crop of Presidential candidates.  While NH is THE place for Presidential Politics with our First-In-The-Nation primary, it is not a place to raise money so candidates came and went so quickly and it was more challenging than ever to engage them in substantive events like this. Oh, and one more thing - the War was the hot topic then and some told us that the economy was not simply not the top topic - boy how things have changed! 

So, finally there will be a forum titled “Our Future In The Innovation Century”!   And it does engage the hardest fought election in NH this cycle - NH’s incumbent US Senator John Sununu versus Governor Jeanne Shaheen. Both of these candidates have a healthy base of support in our NH tech community so it should be a great evening - more info below.

The event will be held on Monday, October 20^th, 5:00 – 7:30 pm, in the Huddleston Ballroom on the University of New Hampshire’s Durham campus.  

CO-HOSTS: The University of New Hampshire (www.unh.edu) will host the forum.  The New Hampshire High Technology Council (NHHTC) (www.nhhtc.org), the voice of the Granite State’s technology sector, and TechNet, a national bipartisan network of more than 175 technology CEOs (www.technet.org), are organizing this event in collaboration with the University. 

BACKGROUND:  The leadership of the technology sector in innovation and new ideas has positioned the United States and the state of New Hampshire as a leader in economic growth, job creation, prosperity, and quality of life.  Information technology is responsible for nearly all of the increase in economic growth over the last decade in the nation and New Hampshire.  In the past quarter century, New Hampshire’s economy has been transformed by high technology.  The state’s economic base has changed from traditional manufacturing to a concentration in high technology and skilled professional services.  New Hampshire has improved in rank (among the 50 states) in per capita income from 25^th to 6^th.  The state consistently ranks among the top 10 in percentage of employment in high technology and over one-third of the state’s economy is related to the high technology industry. 

In advance of the event, UNH faculty and industry leaders will prepare issue briefs for the candidates on the topics to be discussed at the forum including the high tech economy, competitiveness in New Hampshire, the entrepreneurial economy, income insecurity among New Hampshire households, and the economic potential of growing the state’s green tech industry.The members of Our Future in the Innovation Century Steering Committee are: 

University of New Hampshire: Ross Gittell, Professor, Whittemore School of Business and Economics  Dante Scala, Associate Professor of Political Science, Jeffrey Sohl, Professor & Director, Center for Venture Research, Whittemore School of Business and Economics,  Andrew Smith, Director, UNH Survey Center, Associate Professor of Political Science, Tama Andrews, Political Science Graduate Program Coordinator and Lecturer.

From the Attic to $1.4Billion!$!

When Dell acquired NH Start-up EqualLogic for 1.4billion bucks that sure made my job as a judge for the NH High Tech Council’s 2008 Entrepreneur of the Year contest this past Spring pretty straightforward!  Actually, there was some real compeition - those companies will be back on another day.

While it takes many ingredients and some good fortune for something like this to happen in real life, it should be no surprise that there were unique people who were “the story behind the story”.  Matt Pierson’s interview of Paula Long who was one of those people and an EqualLogic founder is not to be missed! 

And I will just add one more footnote - the three founders REALLY did start their company in the attic of a house on Purgatory Road in Amherst NEW HAMPSHIRE - YES, it can happen here!

WHEN : Tuesday, October 7, 2008

5:20 pm - Networking, Hearty Hors d’oeuvres, & Cash Bar  6:00 - 8:30 pm - Program

WHERE: First Place  200 Bedford St.  Manchester, NH 03101  Get Directions & Details

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