High Tech History

Jeffrey Bussgang confesses at the onset of his new book, Mastering the VC Game, that venture capital was “never in my life plan,” and that “VC” as a business has traditionally not been as attractive for the entrepreneur because after all, “What budding entrepreneur would volunteer to play Robin instead of Batman?” Nevertheless, Bussgang, a founding partner of Boston’s Flybridge Capital Partners, makes a convincing case that even in its supporting role, venture capital can be an exciting business and a force for positive change.

Harry Hoagland, officer at the first publicly owned venture capital corporation, American Research & Development Corp., once said, “If I rejected 100% of the projects that came across my desk, I’d be 95% right.” It’s a sobering reminder that venture capital, though an important engine for the American economy, is a business frought with many of the same risks as investing in the stock market, or, in a more extreme sense, a gambling casino. Though due-diligence is emphasized in selecting investments, intangibles still play a significant part in if and when an investment is made.

Jeff Bussgang, armed with both a hyperactive BlackBerry and a fat Rolodex, has drawn extensively on each as he chronicles his own experiences and those of his colleagues – entrepreneurs and VCs – to produce an authentic insider’s perspective of what it’s like to be on the forefront of new and exciting businesses. Being in it for the money, Bussgang asserts, is not the primary goal; rather it’s the thrill of discovery: for example, a business that may detect some forms of cancer sooner, or one that makes dentistry much easier and less invasive.

Bussgang’s credibility is enhanced from having been in both the entrepreneurial and VC camps. He is the founder of UPromise, an organization that “partners” with businesses to help those who purchase through those partners to save money for college, as well as an original executive of Open Market, a firm started to make the Internet a safer business environment.

Bussgang conducted numerous interviews with notable VCs and entrepreneurs: the former including Tim Draper of Draper, Fisher, Juvetson; David Hornik of August Capital, and Patricia Nakache of Trinity Ventures. LinkedIn’s Reid Hoffman, Twitter’s Jack Dorsey and Sirtris Pharmaceuticals’ Christoph Westphal add significant ballast to the entrepreneur’s arguments. And what’s refreshing is that Bussgang doesn’t shy away from shining the spotlight on himself to give a “warts and all” account of his own dealings – often successful, but with the occasional embarrassing moment.

Venture capital firms, Bussgang maintains, “have invested more than $441 billion in some 57,000 companies in the United States,” where more than 12 million people (or 12% of the U.S. workforce) hold jobs in venture-backed companies. Additionally, through his profiles of VCs like China’s Quan Zhou and Vietnam’s Henry Nguyen, Bussgang shows how venture capital has become one of America’s greatest exports – helping to develop the developing world.

Even with the aforementioned statistics, the venture capital “industry” consists of “fewer than seven thousand people working for less than a thousand firms,” according to Bussgang. And from these firms, featuring a disproportionate number of graduates of Harvard, M.I.T. and Stanford business schools, decisions leading to the funding/aiding of companies are made by a relatively small number of people. By Bussgang’s estimation, decisions to back businesses that account for 20% of the American Gross Domestic Product are made by fewer than one thousand individuals shuttling back-and-forth between Boston, New York and Silicon Valley.

Although the number of female entrepreneurs is relatively small, Bussgang notes that they are relatively non-existent in venture capital. Numerous reasons for this have been suggested, but regardless, Bussgang has made concerted efforts to both interview and discuss the achievements of several influential women in both fields. They are obviously possessed by the same hyperactive drive to succeed in business as their male counterparts, and Bussgang treats them with the due respect they have earned.

Mastering the VC Game proceeds methodically through all stages of the VC process: from selecting the appropriate firms to approach, to making “The Pitch,” to strategies the entrepreneur might employ once VC funding is achieved, to the potential “soap opera” that can develop among the entrepreneur(s), Board of Directors, and the VC firms, to exit strategies in which one ”cashes out” of investments.

Though the relationship between the VC and the entrepreneur may often be a tense one, complicated by numerous financial and interpersonal challenges, Jeffrey Bussgang remains an irrepressible evangelist for the potential of venture capital to “change the world” in meaningful and progressive ways.

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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.

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Last night, Wednesday, Jan. 14, I and over fifty other people braved a bitter-cold evening to attend the annual Venture Capital panel discussion at the historic Vilna Shul synagogue on Boston’s Beacon Hill. The panel topic was: “Boston-area Venture Capital: Looking Back on 2008 and Looking Forward to 2009” with Larry Bohn, Managing Director, General Catalyst Partners, Jonathan Seelig, Managing Director, Globespan Capital Partners and David Aronoff, General Partner, Flybridge Capital Partners.

The discussion was moderated by Galen Moore, Staff Writer for Mass High Tech, a journal which, among other topics, follows Boston-area venture capital trends in the high tech industry.

In the years since I wrote about Harry Hoagland and his experiences in the formative years of Boston venture capital, I wanted to learn more about the field, including the mindset of today’s “gunslingers” – the investors who are taking substantial risks in prospecting this vast frontier for new companies. Before the program started, I was heartened to meet a few attendees who were similarly minded and curious about the general environment for private equity investment. I was impressed by the seriousness with which these individuals approached the topic. Certainly, there was a good deal of networking going on as well …

The discussion generally focused around the belief that the venture capital business going into 2009 is strong; but that investors (otherwise known as Limited Partners) in venture funds are realists about the present weakness of the consumer sector, the tightness of credit, and other economic uncertainties. David Aronoff said that he felt this “correction” was more pronounced than the one we experienced going into 2002, but just as the economy has been enduring these signifcant and wide-ranging challenges, the proposals for interesting new companies are still coming in at a heartening pace.

Larry Bohn and Aronoff in particular were optimistic about the incoming Obama administration, citing its willingness to employ high tech so effectively in the recent presidential campaign. Bohn said it was great to see someone who “gets it” in terms of technology’s potential in all sectors of American life - including the environment and alternative sources of energy.

There was agreement amongst the panel members that the venture capital industry is the true engine of the economy – unlike commercial banks, which customarily are more conservative and don’t take risks on new businesses; that is, ones without accumulated assets or any “track record” to speak of. David Aronoff commented that in terms of how his company focuses its efforts, 25% is devoted to “prospecting” for new investments and 75% “reacting” to the needs of existing ones. That brought to mind Harry Hoagland’s great quote “If I turned down 100% of all proposals, I’d be 95% right.” Investors understand the risks are greater, but the rewards are potentially much more substantial than with most other investments.

On the heels of this line of discussion, Galen Moore asked about issues of “transparency” and cited as an example the recent legal actions undertaken by the San Jose Mercury News against CalPERS, California’s largest pension fund investor, to gain greater access to the company’s records. Understandably, the three panelists defended the right of private equity firms to shield themselves from a certain degree of public scrutiny – largely on the grounds of the delicacy of their investments and other proprietary information in the face of their competition. They acknowledged that public companies are subject to much greater regulation and transparency, and that individuals are welcome to invest in those if they wish; but that private equity firms are private for compelling reasons.

The meeting concluded with a brief discussion of the role of women in private equity and venture capital companies – as it was pointed out by Galen Moore that none of the limited partners of the three panelists’ companies was a woman. The consensus from the panel was that this is basically an evolutionary process where women are increasingly entering the ranks of senior finance executives – and that in due course, they will be represented in the ranks of limited partners.

Overall, the fellowship of those in attendance and the Vilna Shul hosts, as well as the information I took from the discussion, made for a very productive and enjoyable evening.

– Christopher Hartman

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