Last night I attended the Vilna Shul Speakers Series panel discussion on “Venture Capitalists Perspectives on 2009, 2010 and Beyond.” The moderator was Howard Anderson, Senior Lecturer of Entrepreneurship at M.I.T.’s Sloan School of Business, and featured panelists included Elliot Katzman of Commonwealth Capital Partners, Jeff Fagnan of Atlas Ventures, Jonathan Seelig of Globespan Partners, and Eric Paley of Founder Collective. Doug Levin, who coordinates these regular discussions, brought in a packed house at Beacon Hill’s historic Vilna Shul synagogue.
As the panelists generally discussed, 2009 has been a very challenging year for U.S. venture capital. According to the National Venture Capital Association, total U.S. venture capital investment totaled about $12 billion in the first nine months this year, a 45-percent decrease from $22 billion in the previous year. Additionally NVCA’s report also showed that U.S. venture capital firms raised only about $8 billion in the first three quarters of 2009, plunging from $25 billion during the same period in 2008. Investors have been in a prolonged holding pattern, hoping unemployment statistics will improve, along with other important economic indicators. This appears to still be the case as we enter 2010.
But I suppose an overarching theme for last night’s event could be “Everything Old is New Again.” In reflecting on Georges Doriot’s American Research and Development Corp. as well as his protégé William Elfers’ Greylock Partners, I’m reminded that exit strategies for so-called VC “winners” often take considerably more time than many in today’s typically crowded, highly competitive and impatient venture capital field expect, or aspire to. Moderator Howard Anderson suggested in the neighborhood of 7-8 years to bring a company along. But he also warned against seeking too many rounds of financing, which could dilute both a company’s returns on equity, and its general attractiveness as an investment. He stated that every company has a shelf-life, and that though a VC investor’s main objective is to get in and get out with a solid return on investment (20 times outlay, for example), it also should choose wisely in the business concept, and nurture its earliest possible profitability.
The panelists, Katzman chief among them, emphasized the imperative of performing a disciplined and patient analysis of a possible investment – including evaluation of the character of the company’s leadership, the integrity and viability of their business proposal, and other factors. Also, as a more senior (over 35 y.o.) member of the panel, he had a traditional take on “non-compete” agreements; that is, when one takes a salary and advances in his career due to the company’s proprietary information, he has an ethical obligation to engage in and honor such an agreement. Next, he noted that in every successful enterprise, there is a need for strong supporting casts – including marketing executives. These are indeed what I would call “old school” concepts.
Next, and perhaps inevitably, as has been the case with many venture capital discussions I’ve recently attended, an attendee asks about the West Coast – East Coast “competition” in venture capital and innovation. Bostonians with chips on their shoulders bemoan the “fact” that Boston has fallen into second place behind Silicon Valley. Last night, California-based Google and Facebook, along with venture capital powerhouses Sequoia Capital and Greylock (three of the four founded, incidentally, by New England-educated and trained entrepreneurs), once again took center stage. After the groans from the audience subsided, there were various explanations offered, including both an aversion to risk in New England, as well as more of an emphasis on bio-technology than on computers and the Internet. In siding with New England in this fight, I offer an excerpt from Spencer Ante’s Jan. 12 column from his weblog, Creative Capital:
“[Flybridge Capital Partners’ Jeff Bussgang] claims Massachusetts is the number one generator of patents on a per capita basis in the U.S.–more than California or New York. ‘Imagine a steaming mass of innovation,’ says Bussgang.
“In almost every talk I have given related to Creative Capital, I am asked why Boston has fallen behind Silicon Valley as America’s center of innovation. This talk by Bussgang provides one of the best counterweights to that argument I have ever heard.” [There is a video of Bussgang discussing this in more detail in this Creative Capital blog post].
Jeff Fagnan got into a spirited exchange with Anderson over venture investment in China, and how both the East Coast and West Coasts should stop squabbling and look over their shoulders at the real future of venture investment. But China, as some in the audience suggested, has some real challenges facing it – such as asset surpluses, that could potentially signal red flags about future investment in that economy.
Another question involved “angel” investors: those who target their or their family’s investments to startups – often advancing a concept the investor considers personally or socially important. These “family-backed” investments can also be tailored to individuals who might require a smaller infusion – think of something between your typical limited partnership firm with billions of dollars under management, and micro-lending. Jonathan Seelig suggested that many times, a venture capital investor will invest in something primarily because he believes in the socially-redeeming aspects of a project and not only for its viability as an investment.
Later in the discussion, one woman asked about mentors for women in the largely male-dominated venture capital business, One suggestion from the audience involved the Women’s CEO Breakfast Group, as well as other, similar organizations that help women cultivate contacts and counsel in the field. Eric Paley was cited by one attendee for his willingness to listen to the concerns of businesswomen in this field, and he himself expressed confidence about their future in venture capital.
Lastly, the overriding lesson I learned about the venture capital business going forward for 2010 was Anderson’s admonishment that “We shouldn’t expect the IPO (initial public offering) market to roar back.” He cheekily stated the traditional “fallback” exit strategies – such as selling to European equity firms shortly before the company goes bankrupt - won’t work now as it did in the late 1990s. Again, more patience, more considered and targeted investment, and less expectation for immediate and sizable cash-outs should be the goals. Again, important lessons from early post-war venture capital history being learned by today’s venture capital industry.
