Month: January 2010

A Better Model for Investing?

I really like the Crosslink Capital "hybrid" model and don’t understand why more funds don’t follow it.


From their website:


Our expertise is in discovering and managing growth situations, regardless of stage[emphasis added], from two-person, seed-stage private companies to public growth companies with several hundred employees.


In other words, Crosslink leverages their domain expertise to make investments across asset classes. 


This makes great sense to me.  For example, if you believe that gaming is an attractive sector, shouldn’t you be able to invest in the best game companies, regardless of whether they are early-stage or publicly-traded? 


Moreover, if the publicly-traded companies in gaming are overvalued, why not focus on private companies with more reasonable valuations?  The reverse also holds true: rather than piling on with more VC investment in an overheated but important sector, find investments in that same sector but in a later-stage asset classes.


If you have the managers with expertise in each asset class and deep domain expertise, then your long-term track record should be better than funds limited to a single asset class.


I don’t known whether Crosslink has done better than other funds but I would point to hedge funds to support the argument: one reason that most hedge funds do better than most venture funds is that hedgies, while often focused on specific sectors (e.g., financial services), can usually invest in multiple asset classes, i.e., they can go after any investment that makes sense, including private equity, small cap public companies, junk bonds, etc.


If venture capital needs to “reinvent” itself, as many have argued, one option may be funds that invest in venture capital… and other asset classes.

Proactive Investing Beats Reactive Investing

“In the long run, men only hit what they aim at.”
Henry David Thoreau

A university tech transfer executive recently had a meeting with a member of one of the largest and most successful VC funds.

At the start of the meeting, the VC pulled out a document that mapped in exact detail 1) the entire cleantech space, 2) which cleantech verticals had the highest investment potential and 3) needed technologies within those verticals. The short, efficient meeting focused on whether the university had those technologies.

That VC’s behavior contrasts with that of many other VCs, including me, who too often react to entrepreneurs and their ideas rather than proactively seeking specific innovations.

Of course, most investors use both reactive and proactive styles and all of us are open to an entrepreneur with a great idea that completely surprises us. In general, however, VCs that approach the market with a detailed roadmap of specific needs in specific verticals have an advantage over VCs that approach the market with a generalist bent.

For one thing, if you know exactly what innovation you want, you can generally find it (or have someone develop it). You also save time and money: you can give entrepreneurs “yes” or “no” answers quickly, network within targeted communities, attend only relevant events and focus on specific information sources (thus avoiding information overload).

Perhaps most importantly, a specific area of focus enables a deep domain expertise, a prerequisite for successful investing in the long term.

Fred Wilson of Union Square Ventures wrote on a similar topic: “Thematic” investing, identifying big themes and going after them, versus “Thesis-Driven” investing, picking a specific area of focus and sticking to it.

He opines that both styles can succeed but smaller firms should use the latter. I agree and would add that Thesis-Driven investing (deep, disciplined focus on a specific vertical) enables Proactive investing (affirmative search for/discovery of specific innovations in that vertical).

I have taken a look in the mirror on these issues and realize that I need to take my own advice and have more discipline in Thesis-driven, proactive investing.

Personal Responsibility and Venture Capital as Hollywood

CNBC did a fascinating interview with Steve Case and Jerry Levin on Monday. I was working at AOL when we announced our $162 billion acquisition of Time Warner in January of 2000 (contrary to conventional wisdom, it was not a merger). At the time, it was the largest corporate transaction in history.

Although the deal came to symbolize the foolishness of the dotcom bubble, Case and Levin thought it made sense from a “big picture” point of view: AOL was the Internet for most people and Time Warner was the king of content. In practice, however, and for a hundred different reasons, the combination was impossible to execute. Timing didn’t help: the deal was announced two months before the Nasdaq crashed and the stock prices of both companies collapsed.

Two things from the interview jumped out for me: Levin’s willingness to take personal responsibility for what many consider to be the worst deal of the two decades and Steve Case’s comparison of venture capital to the entertainment business.

Levin showed strength and leadership in not blaming others for Time Warner’s stupid decision to be acquired by AOL. Such leadership is hard to find among people responsible for, e.g., the current financial crisis: regulators, politicians, financiers and… us, the average debt-soaked American. Most search long and hard for reasons the junk debt (oops, I mean “sub-prime” debt) crisis was not their fault.

I suspect that Levin now feels the benefits that we all feel when we face the truth and accept and make amends for our mistakes: having cleaned his side of the street, he can move forward with peace of mind.

Case compared venture capital investing in web-based businesses to the film business: studios play the role of venture capitalists and throw money at projects that, in the vast majority of cases, fail. The few hits (hopefully) make up for the many that fail. We already knew this but I like the analogy. His comments come around minute 18 of the interview if you want to fast forward.

P.S. Thanks to Alltop news — a useful news aggregation site — I would have missed the interview if they hadn’t mentioned it.

Internet Investing in the US is Dead

…well, not completely dead but the upside is very limited, according to my old friend Brian Taptich, who has witnessed firsthand the rise and maturation of the Internet ecosystem in Silicon Valley. 

Brian worked at Red Herring from 1994-1998, co-founded a new media startup, Alarm Clock Worldwide, and held senior executive positions at Electronic Arts and Bit Torrent.  Somewhere in there, he also managed to get his MBA from Kellogg.  He now consults for the new media industry.

A couple of months ago, Brian was back in DC, where he and I attended high school together (we also went to college together) and I asked him for a download on the state of affairs in Silicon Valley.

The key takeaway from our chat was this: in the ’90s, the Internet ecosystem had deep instabilities and inefficiencies, which created a massive opportunity for startups to create value and capture market share. Now, however, the ecosystem has matured, which means that opportunities for value creation are fewer in number and smaller in size. Thus, investors and employees in startups have much less upside than they used to have. This holds important (negative) implications for Internet investors and entrepreneurs in the US.

I requested a follow up from Brian and, rather than paraphrase his response, I cut and paste the email below. If you have any interest in investing in or working at web-based businesses, read on…

When the Web was born as a truly consumer platform (thanks to the Netscape browser), THE enormous problem that needed solving was the lack of structure and stability to all the component stuff – from the network level to the UI (on one dimension), and from the enterprise to the consumer (on a second dimension). Through the late ’90s, all this unstructured stuff was both stabilized and organized, and many billions (trillions?) of dollars in market capitalization was created – by companies like Cisco/Akamai at the network level to Yahoo/AOL on the front end (on the first dimension), and Oracle/Symantec in the enterprise and Amazon/Ebay with the consumer (on the second dimension). Of course these dimensions are fairly fluid, and there is much overlap.

Today, the Internet is an entirely stable platform – all of this component stuff is now every bit as dependable as most every other utility in your life (eg electricity, gas, etc). And the vast preponderance of innovation happening right now is dependent on this stability, which has led to an entire generation of startups focused on incremental opportunities (ie most every consumer internet company not called Google) – we should expect that the aggregate market capitalization that is/will be created by this generation will be at least an order of magnitude smaller than the companies born just 15 years ago. Not only will the “huge wins” be smaller compared to the ’90s, there will be far fewer of them. Case and point: The consumer internet companies widely expected to be this year’s “huge wins” – eg Facebook, Twitter, LinkedIn, Zynga, etc – are not only a relatively short list, but also are tracking to public equity valuations (should they even get there) absolutely lower than the previous generation.

This is precisely why the early stage venture capital that led tech funding in the ’90s has been desperately expanding into areas like clean/greentech or medical technologies (in which they have little-to-no domain expertise), and/or seeking out international expansion opportunities in places like China and India and Brazil (ie self-sustaining markets that are about 10 years behind Silicon Valley in terms of localized innovation) – VCs need to find the next thing that will provide their LPs a 20% annualized return…and tech investing in the US ain’t it.

This is not an entirely novel hypothesis – everybody from Mark Cuban to hedge fund investors have made similar and widely circulated diagnoses in 2009.

However, what has not been widely discussed – even amongst those who provide the fuel that runs the Silicon Valley engine (ie the employees, not the founders or investors) – is how the compensation structure for tech startups in the US has not adjusted to fit this new world order. It used to be that top talent would take a paycut to work at a startup – trading the known compensation of a stable company (higher base salary, greater benefits, etc) for the potential upside on the equity (“sure I’m getting paid less but my 0.5% will be worth millions!”). In a universe where founders aspire to create $100 million not $1 billion in value, the potential upside for an employee is significantly lower than it used to be…and there is no economic incentive to take the chance on a startup…unless the startup pays employees significantly more cash or gives significantly more equity…and they are currently doing neither.

It may be that, for now, people are fairly content just to have jobs. However, as the job market loosens, and people have the freedom to risk-adjust their opportunities, there is the likelihood of a flight to more established companies and/or a departure from tech altogether. Which could have profound implications in the business of tech innovation in 2010 and beyond.