Tech Diversity, Yes Let’s Look at the Real Issue

Mitch Kapor says we should looks beyond the kerfuffle between Arrington and CNN, and yes let’s do that.

I wrote this 2 years ago and nothing has changed:

Why does this matter, especially coming from someone like me who has a gag reflex about the words “affirmative action” and repulsion at the idea that we, as a society, condone hiring or admittance, and promotion based on anything other than merit? It matters because we are not an economy that searches out natural resources like iron ore, timber, coal or natural ports and waterways to determine where we expand; we are an economy that depends upon businesses identifying clusters of talented human resources to solve problems that have economic value. If our solution is that a bunch of white men, young and middle aged predominately, are going to solve the bulk of problems from here on out, then we will neither be very good at it on a global scale nor efficient as a society in lifting earning power and real economic growth across the board.

Silicon Valley is good at a lot of things but one thing we are terrible at is being self-critical about the culture we have created. Zuckerberg was getting to this with his much quoted comments about Silicon Valley being too short term focused (I wrote about that in 2009 as well, ironically the post also centered on TechCrunch).

More on this topic (What's this?)
The Great Escape, Part 2: New Update
Chaos in the Land of Oz, Part 2
The Great Escape, Part 2: New Update
Read more on CLP HLDGS at Wikinvest

A Well Intentioned Bad Idea That Should Not be Stopped

Like everyone who has looked at the issue of immigration, I came to the conclusion long ago that it is a broken and outdated system. Just consider that every H1-B visa is snapped up within 12 hours of becoming available and you see how not only demand outstrips supply but an industry has grown up around a flawed system for the sole intention of gaming it for profit.

Pascal-Emmanuel Gobry wrote a piece in Business Insider today that highlights a move by some influential VCs (who also have political clout) to enact a Startup Visa Act that would provide foreign entrepreneurs who receive a minimum amount of funding and hire a minimum number of employees a visa that would convert to a “green card” in two years.

Before I get to Pascal-Emmanuel’s article, let’s cover the basics.

The visa that this act would empower isn’t new, it is the EB-5 visa for foreign investors who commit at least $500k of capital and create 10 jobs according to a complex matrix of “allowed activities” dependent on whatever regional center the investment is located in. Presumably the Startup Visa Act would create a new EB-6 visa that mimics the EB-5 (even takes the allocation) and reduces the required initial investment to $250k and number of full time jobs to 5. Over a 2 year period beginning with the date of visa issuance the entrepreneur has to create 5 full time jobs, raise an additional $1m in investment capital or generate $1m in revenue.

Reading the text of the bill it is clear that this bill:

  • takes existing visa and allocates them for the startup visa program
  • defines “super angels” as an accredited investors (yes this is a defined category of investor, look it up on the SEC site), who makes at least 2 minimum $50k investments every 3 years and is a U.S. citizen. Venture capital operating companies are also defined according to existing standards but in order to qualify the fund must be based in the U.S. and be comprised of a majority of partners who are U.S. citizens, have capital commitments of $10m and have been operating for 2 years with actual investments in that period.
  • After 3 years if the conditions of the program are not met the visa, called “conditional permanent resident status”, will be revoked. BTW, it seems like a contradiction in terms to have a conditional permanent resident status… why not just call it what it is, a visa. It’s supposed to be a 2 year time period but the text of the bill explicitly says after 3 year the visa will be revoked if the requirements are not met.
  • It is not clear if the 5 required full time jobs also includes the founding entrepreneur(s).

The bill is a welcome 7 pages long but the brevity, while making for easy reading, also opens it up for potential abuses and Gobry actually has some very good points here. I will also take a moment to submit that the whole exercise of legislative sausage making is incremental and there’s no way this bill would proceed through committee, get voted on and signed into law with 7 pages of text… so let’s assume that I’m not breaking any new ground or discovery here.

Gobry’s primary criticism is that the bill makes entrepreneurs a servant of the investor and on that point I agree. I can’t imagine a situation primed for more potential abuse than one where the entrepreneur is dependent not only for funding from a VC but also residency in this country, a dream of many foreign entrepreneurs despite the state of our economy. While $1.25m dollars is a modest amount of capital, for a seed stage company it is a good sized amount of capital and likely to be allocated not at once but over time as the entrepreneur progresses in planning and execution.

Under this legislation, as the entrepreneur burns his timeline not only is he/she dealing with the pressures of business survival but the threat of deportation that depends solely on whether or not their investors will release more capital when needed. Can you imagine how those discussions would transpire if the investor in question possessed less than altruistic motives?

Another potential problem with this is what happens if the venture firm ceases to exist (it happens all the time to $10m’ish sized funds) over that 3 year period and in the process of disappearing fails to meet the funding requirements of the business? What happens is deportation.

The only “out” for foreign entrepreneurs to get out from under the thumb of investors when operating with conditional permanent resident status is to race to $1m in revenue over the 3 year period (the bill does NOT say annual revenue), in which case they have satisfied the requirements of the program assuming they have also employed 5 people who are not relatives.

The single minded focus on revenue rather than sustainability is another area ripe for abuse and fraud, only in this case it’s not just the integrity of the visa program at stake but also investors. While it is arguable that the incentives are overwhelming for investors to keep things honest, the fact remains that what qualifies as disclosure in private companies is subject to a lot of interpretation.

Lastly, as Goby points out, there is nothing in this bill that requires the entrepreneurs and investors to be focused on technology sectors… as opposed to real estate or automotive painting or whatever. I could foresee a scenario where this program is used by U.S. investors to establish companies onshore with cheap offshore entrepreneurs in exchange for green cards… again it empowers investors to turn foreign nationals into indentured servants.

So where do I stand on this? Well from my reading the initial bill is pretty weak and has few guarantees that the aspirations of professional and reputable investors like Fred WIlson, Paul Graham, and Brad Feld will be met. The weakness is not only in the provisions of the act but in the fact that is will draw on a limited allocation of visas which all but ensures that a legal specialty industry will attach itself to it like a parasite for the sole purpose of selling off access to the visa program. Basically we’ll end up right back where we started.

All of the weakness that I, and others, have identified are not reasons to kill the bill; what they should do is go back and address these weaknesses with draft language that passes muster and puts reasonable checks and balances in place that ensures the intentions of lawmakers and investors are being met.

Why do I call this a “well intentioned bad idea”? I know the investors who are pushing this and I know their intentions are honest, they want to fix a problem that impacts foreign entrepreneurs who would otherwise be welcome in the U.S. and available for U.S. venture capital. It’s a bad idea because it doubles down on the existing visa system that is plagued with so many problems… and because it operates under the constraints of a limited supply visa allocation it is going to be gamed by lawyers and that will increase the costs and lock out smaller funds who would otherwise be ideal participants in such a program. As it is written now, the big VC funds would have all of these visas locked up within hours of the allocations being made.

The Limits of Venture Capital and Cleantech

I just watched a segment on one of the financial channels featuring venture capital investment in cleantech. I have mixed feelings on this, which is to say that I see this as a rich investment category but one that has many unfamiliar obstacles for Silicon Valley investors.

Cleantech investing is a major next wave for investors, one that is well underway and probably finds more in common with the biotech investing than anything else.

The similarity with biotech underscores some of the potential problems that investors will have to grapple with. These investment cycles are long and cannot be predicated on any opening in the IPO market… if you are investing here you have to do it on the basis that eventually there will be an exit opportunity but it’s so far out that you can’t preoccupy yourself with exits.

Cleantech is also highly dependent upon the laws of physics and in many cases we are pushing these limits out to new boundaries, which means for every success there will be many failures. Academic research labs are choked full of prototypes and projects that will never the see the light of day as a commercial project because they can’t scale for commercial manufacturing, have stability problems, or simply a cost equation that cannot be overcome for commercial use.

The involvement of Federal, state and local governments in energy marketplaces as regulator and funding source also represents an area that most VCs have little, if any experience in. Hardware and software companies rarely, if ever, have to deal with government agencies therefore investors simply don’t think about this or staff a function to analyze it in the due diligence process or assist portfolio companies after the investment is made. The very large funds do, but that actually segues nicely to the next topic, capitalization.

Many of the investment sectors in cleantech require eye popping capitalization in order to get to dollar one of revenue. This is truly anathema to VCs who are look at the long track record of failures borne from $100 million investments, but for large scale fuel production, whether ethanol or biofuels, distribution technology, and PV farms, this is exactly the kind of money we are talking about.

Lastly, the combination of governmental involvement, capital requirements, and access to markets practically demand that clean tech companies partner with entrenched old school market players like utility companies, and most startups simply won’t have the goods to pass the grade or sustain the long working cycles that these partners will impose.

I still love this area and think that if you are a big investor you simply have to have presence here, but like all things in investing success requires self-awareness and good guidance about the marketplace.

More on this topic (What's this?)
Labor Day Investment Readings
3 Great Ways to Play Publicly Traded Startups
Twitter Digest: 2012-12-24
Read more on Venture Capital (VC), How To Invest at Wikinvest

The Venture Capital Math Problem

I wish I could add something insightful to this post from Fred but when combined with the extensive comments (must read) I don’t think many people could contribute an insight not already covered. In fact, this entire post plus the comment thread is so deep that it could be the basis for a 2nd year MBA class.

We got to talking about the venture capital asset class and it wasn’t long before we got to the “math problem”. The venture capital math problem is pretty basic, maybe something you’d do in high school calculus or even pre-calculus. Here’s how it works.

[From The Venture Capital Math Problem]

More on this topic (What's this?) Read more on Venture Capital (VC) at Wikinvest

The VC Model is Broken (Again)

I don’t disagree with Matt on the thesis in his recent post, in fact I think he is well positioned to make this observation given the intimacy by which he covers the venture business, and the fact that he covered the last bubble as well, which gives him a good historical perspective.

While I don’t disagree with him I will say that there is a permanent structural imbalance in VC that simply doesn’t change and serves to exacerbate the amplitude of the swings from good times to bad. There are maybe a dozen VC firms that generate the bulk of returns, a handful of “individualist” firms that simply chart their own path to good success, and a whole bunch of followers that get slaughtered. This was the case in 2001 and it’s the case today.

Ressi was invited to present his views to the finance and entrepreneurship faculty at Harvard Business School, a place that historically has produced a lot of venture capitalists. Ressi’s message is that the venture capital industry is fundamentally broken.

[From The VC model is broken » VentureBeat]

Given the magnitude of the meltdown in global financial markets and the very real scenario of LPs not fulfilling their capital commitments, this cycle could be different from the last with a number of well known firms simply shutting down. Whatever the outcome, it’s doubtful that the new normal will be enjoyable for many in the business.

More on this topic (What's this?)
Venture-Backed IPO Market Still Mostly Dead
3 Great Ways to Play Publicly Traded Startups
What’s behind Sarah Lacy trash talking the Israeli VC scene
Read more on Venture Capital (VC) at Wikinvest

Google M&A

David Lawee was asked yesterday while on a panel at TC50 about exit strategies what the most successful acquisitions that Google has done to date. His answer was insightful and I think quite candid, he pointed out Keyhole, Urchin, and WrightleyWritely and in each case referenced how the company was able to retain the people and then transform a part of their business with the acquisition. BTW, if you ever get a chance to meet Lawee you will find him to be one of the nicest people at Google, an attribute which no doubt helps the company tremendously when doing M&A deals.

Google has done a pretty extensive laundry list of deals over the years, I found this list on Wikipedia (found using Google, what else?). Interesting to note that Android could well prove to be a defining acquisition when the history book is written, but we’ll have to wait and see on that one.

Keyhole and Urchin are dramatic examples, WrightleyWritely to a lesser degree because Google Apps hasn’t changed the market landscape and Google Docs, being just one part of Apps, is rather poorly integrated into other services (although that is changing). However, it would be hard to argue that Google Maps and Google Analytics don’t represent seminal events in our industry, they are standard bearers and in each case they upended the existing market by going to free for what were previously expensive products, and by dramatically expanding the distribution at competitor’s expense.

Interestingly, Youtube was not talked about much and I believe this is indicative of the challenges that Google has had making this work. Youtube is fantastically successful from a traffic standpoint, not so much so from a monetization perspective nor from the perspective of impacting other Google products. Given the amount of money that Google paid for Youtube and it’s then very small team, it would be hard to argue that they didn’t set themselves up for a few very high hurdles to clear before generating a return on this investment. The fact that there are so many streaming video services available only further reinforces the view that this was not a transformative event in Google’s history, at least not so far.

Lastly, I was shocked that David didn’t bring up Applied Semantics, which could be argued is the goose that laid the golden egg at Google. But then again, I don’t think Google likes for anyone to point out that core search and contextual advertising was anything but developed by Google brains.

David Lawee image
Birthplace: Canada
Companies: Google

David Lawee was named vice president of corporate development at Google in February 2008.

Previously Lawee was vice president, Marketing, at Google. He had global responsibility for all Google marketing activities. His worldwide mandate… Learn More

The VC Puff Piece Template

I hate reading newspaper and magazine articles about venture capitalists, such as the one today on SFGate (which BTW I am not liking their site redesign) on Steve Jurvetson. As an aside, It’s too bad he essentially gave up the J Curve blog.

Almost invariably these puff pieces feature the same template:

  1. Establish the bona fides by referencing some big win from back in the day (e.g. Hotmail, 1997).
  2. Feature the human side by focusing on some quirky personality trait (e.g. “draws pictures and leaps from subject to subject”) and/or hobby (e.g. builds rockets).
  3. Closes with emphasis on how smart the person is (e.g. bio-nano and the quintessential venture risk management philosophy).

The problem with these profiles is that they obscure the brilliance of the person by focusing on the person. Jurvetson is alpha and a super smart guy, no question about it, but this article should have been written as a piece on the intersection of electrical engineering, organic chemistry, and biology with an emphasis on the significant footprint that Jurvetson has developed for himself in these fields rather than “Jurvetson as the seer”.

The mythical god-like personification of venture capitalists is tired, time for a new template that portrays people like Jurvetson for what they are, really smart people who see connections and trend lines that most will miss and couple that with access to capital and high comfort levels with risk.

More on this topic (What's this?)
3i in "Better Shape" for "Brave New World"
3 Great Ways to Play Publicly Traded Startups
Venture-Backed IPO Market Still Mostly Dead
Read more on Venture Capital (VC) at Wikinvest

The Real VCs of Silicon Valley?

Sramana continues to make a very valid point about the disruption in Silicon Valley is increasingly less about the technology innovations and more about how these companies are financed.

Venturebeat reports that Foundation Capital has raised a $750 Million new fund. The firm’s last fund was $525 million, closed two years ago. Goes back to my question: Who are the real VCs of Silicon Valley? How can you practice true venture capital if you have to put so much money to work?

[From The Real VCs of Silicon Valley? - Sramana Mitra on Strategy]

I moderated a panel on venture capital at Defrag last year with Jeff Clavier, Brad Feld, and Albert Wenger. Clavier, who is referred to in Sramana’s Forbes post, has been a very active angel here in the Valley, so I posed the question to him first. I asked what he was doing differently from institutional VCs to not only put a good amount of capital to work but also generate a considerable number of exits in a very short period of time. Jeff’s answer was typically understated.

My premise to the question is Brad and Jeff in particular (I don’t know Albert well) are smart investors who don’t follow trends. They invest in people and with a premise about what is happening to shift behaviors and spend, they don’t invest with any foresight about what Google or Microsoft is going to buy. This is the thing about angels that has always intrigued me, they are not lacking in imagination and have a much higher risk threshold than venture capital firms despite the fact that they are literally investing their own money.

I wrote about this a few years ago, there has been a big shift in the role and influence that angel investors have in this tech economy.

More on this topic (What's this?)
3i in "Better Shape" for "Brave New World"
3 Great Ways to Play Publicly Traded Startups
Venture-Backed IPO Market Still Mostly Dead
Read more on Venture Capital (VC) at Wikinvest

Incrementalism and The New New Thing

Sometimes my best thinking takes place in my garden where in the mindless routines of yard work I am free to meander through any range of topics and ideas. Last Saturday was just such a day.

I wrote recently about VC loss of attraction in Web 2.0 and the thing that was frightening about that thought was the inability to answer the basic question “what’s next?”. The Valley thrives on the new new thing (possibly one of the most poignantly titled books ever) and with every turn of a generation there is an awkward moment where we’re just figuring out where we’ve been but have yet to see where we are going… right now is that moment.

Despite the recriminations about the term “web 2.0″ the fact is that it has come to symbolize a set of characteristics and expectations about service-based computing. It’s also come to refer to the blurring of the line between consumer and business applications, with much of the energy around new business apps being driven by a consumer, or maybe better said “individual”, path to adoption. But these attributes are now part of the ordinary fabric that all companies attempt to embrace.

Bryan Stolle, Agile Software founder currently with Mohr Davidow, says software investing is the new black and solving business problems is where it’s at. Somewhat confusingly, he then goes on to list trends that have little to do with business processes, like SaaS as an appliance and new development environments in the cloud. He broke no new ground and even though I have a lot of respect for Bryan, his op-ed did nothing to convince me that enterprise software investing is on the verge of a renaissance. Enterprise software suffers from a self-inflicted wound as a consequence of an inherently unscalable sales model if you aren’t one of the big bracket companies.

As I survey the landscape of consumer and business focused software and service providers I am struck by how much incrementalism there is at the moment. Something like Twitter is ground breaking in terms of break out adoption, but what about the other 10,000 startups? There are few bold “ah-hah” ideas, lot’s of social this or that, and mostly a bunch of companies hoping to draft on the perceived success of a few gorillas. Will we suffer through yet another “year of the mobile web” or “the semantic web”?

The above is not a criticism, just an observation. There is a lot of capital sloshing around and venture capital will no doubt continue to flow to these companies in the hopes that a few will rise to the top and get acquired. With the melt down in non-VC private equity I am sure that institutional investors will surge back into VC with abandon and this will prop up the Valley for the foreseeable future, but I’m still left with the uncomfortable question of what’s next? When Facebook doesn’t deliver world peace, and FriendFeed fails to be better than sliced bread, what will we do?

More on this topic (What's this?) Read more on Web 2.0, Venture Capital (VC) at Wikinvest