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How to Get Venture Capital to Places Left Behind

steve-case

This Wall Street Journal article dovetails with my previous post Mentorship goes national How to Get Venture Capital to Places Left Behind – Steve Case says people outside Silicon Valley feel left out. He has a plan to change that by Deborah Gage is an interview with Steve Case about how entrepreneurship needs to go beyond the social media startups so favored by Silicon Valley to deeper more important issues such as the food we eat, the way we get around, how we consume energy and how we think about water and how we stay healthy and how our children get educated, those are more important things. 

Case makes the best argument I have heard for why entrepreneurship needs to spread beyond the comfortable bounds of Silicon Valley, New York, and Boston:

I think many of the answers will be in the middle of the country, because for many of the perspectives that are needed—for instance, to reimagine agriculture—it’s helpful to be working with farmers and be close to farmers. If you really want to rethink health care, spending time in Cleveland at the Cleveland Clinic or in Rochester at the Mayo Clinic or in Texas at MD Anderson or in Baltimore at Johns Hopkins is important.

On the the issues with local entrepreneurs is getting local investment.

It’s really important that local entrepreneurs get their initial support from local investors—I think that is a signal to people in other places. If the people in Nebraska or Minnesota or Iowa or what have you aren’t investing in entrepreneurs, why should the folks in California or New York or Massachusetts pay attention?

But Steve Case is just talking about “distributed entrepreneurship” he’s doing something to make it happen with his Rise of the Rest Roadtrip to promote entrepreneurship.

Revolution’s “Rise of the Rest” with Steve Case is a nationwide effort to work closely with entrepreneurs in emerging startup ecosystems. Our view is that this is the beginning of a new era for entrepreneurship across the U.S. — high-growth companies can now start and scale anywhere, not just in a few coastal cities.

I encourage you to read the full interview with Steve Case and to checkout his Rise of the Rest tour.

 

Mentorship goes national

charlottesville

What began in the hotbeds of venture capital investment, Silicon Valley, New York City and Boston, has now spread nationally as more and more cities both large and small see entrepreneurship as a driver of economic development. And they see the best way to drive entrepreneurship as enabling accelerators and incubators. Coupled with this is efforts by investors who have lead the movement to try to mass produce startups: Y-Combinator and TechStars.

There’s no better indicator of how cities one would never have associated with the concept of accelerators or mentorship than this article from Charlottesville Tomorrow by Aaron Richardson Startup accelerator looks to combine space, mentorship, investment to retain local talent.

Lawrence Levine, a serial entrepreneur has founded Cville Machine. His intention is to prepare local software companies to secure a Series A round of investment:

The Cville Machine team said they expect to host between four and eight companies a year, using their successes to build a local ecosystem of entrepreneurs and workers. The challenge, Levine said, is not necessarily attracting talented people to Charlottesville, but keeping them here.

“We already have a flow of good people in town; I am interested in how we keep them here,” he said.

The idea is that once a few companies are able to raise money and grow in Charlottesville, others will follow suit.

“If we do this right, we will be attracting people to town,” Levine said. “Trying to attract the best talent means you need an ecosystem to keep them here.”

Note how Levine states not once but twice the need to keep talented people in Charlottesville. This is the major challenge faced by local and regional incubators. Even an entrepreneurial hotbed like Boston faces the challenge of losing it’s founders to Silicon Valley. Silicon Valley succeeds because of the network effect: the more successful companies it breeds the more founders have capital to invest in startups, the more startups the more VC investment, the more successful companies, and so on.

It is interesting to note that founders of accelerators are realizing they have to provide more than just office space and mentorship is a key added value:

Goodman and Levine classify Cville Machine as an accelerator — not just a space, but a source of mentorship and legal and accounting work that would otherwise be an expensive distraction.

It will be interesting to see if in this era of distributed entrepreneurship these local accelerators will effect Silicon Valley or act as farm teams, sending their best players to the major leagues in Silicon Valley or if they can retain their talent and create a thriving entrepreneurial hub as Brad Feld and TechStars have done in Boulder Colorado.

MIT’s Engine – too many people in the engine room?

kreiter_rae1_biz

As a mentor with MIT’s Venture Mentoring Service I’ve been hearing about The Engine for many months and eagerly awaiting news about it.

Scott Kirsner of The Boston Globe has an excellent article entitled The big Engine that very well might.

What I find laudable about The Engine is that it is aimed a funding and supporting technology that may take several years to develop.

Last October, the Massachusetts Institute of Technology unveiled a new initiative to provide money, mentorship, and workspace to entrepreneurs developing world-changing ideas that might have difficulty attracting backing from investors focused on a near-term payback.

The big news about the Engine is that Katie Rae of TechStars Boston fame has been hired to lead the Engine. While I don’t know her personally she has a sterling reputation and seems genetically engineered to run The Engine.

But I share Scott Kirsner’s concern about how political this post may become:

But it could also be one of the more political posts in Boston, with the need to serve lots of different constituencies, from MIT president Rafael Reif and treasurer Israel Ruiz, to the outside investors who put money into The Engine’s new fund, to a board of directors, advisory committee, and numerous other committees formed to have a voice into how The Engine operates. Some committees are made up of professors; others include businesspeople like Robert and Jonathan Kraft of The Kraft Group, Google executive Jeremy Wertheimer, GE Ventures chief executive Sue Siegel, and Linda Pizzuti Henry, managing director of Boston Globe Media Partners.

This concern is based on first-hand experience, that while very dated, may well be relevant. Way back in the last century when I was Director of Information Services at MIT, one of my directives was to build a campus computer store. I was told by my boss, Jim Bruce, VP of Information Systems, that I should run the store like a business, which is what we did.

And the computer store was very successful and quite popular with the students. What wasn’t popular with them was that the PC choices were limited to IBM PCs, period. It quickly became apparent to me and to my staff who ran the store that we needed to offer students a lower cost alternative. It didn’t take an MIT degree to figure out that this meant Dell computers. This decision seemed like a no-brainer; keep the IBM PCs for faculty and staff who might prefer the “name brand” and provide a reliable and low cost alternative to the students. But when I ran this decision by Jim Bruce I hit a stone wall. “Steve, don’t you know that IBM just gave Sloan (the B-School) $700 million?” There is no way we can put Dell in the computer store, that’s that.”

So my concern for The Engine is that while it’s founding premise is laudable, making it a VC firm rather than a campus incubator means that the pressure for financial performance will be at odds with it’s mission to fund tech startups that require more time (and perhaps more capital) to develop. As Kirsner writes:

At a university forum in December, (Israel) Ruiz (MIT treasurer)said he could imagine The Engine investing in “low-cost diagnostic technologies for developing countries that don’t generate much profit,” as one example. How will community good weigh against the potential financial return as companies are selected to be part of The Engine?

Also concerning is the number and makeup of the board of directors and investment advisory committee. While Google exec Jeremey Wherheimer and GE Ventures CEO Sue Siegel look like great fits, I question the added value of two Krafts – Robert AND Jonathan, and Linda Pizzuti Henry  of Boston Globe Media Partners. These business people totally lack the deep technical and startup company building experience typically found in top notch VCs firms. And it probably goes without saying but VCs don’t have investment advisory committees – they are the investors!

So while I’m rooting for the engine – especially to fund some of the many post-docs who have great research that can be turned into viable companies – I’m very concerned that like the NeXT computer, which was also sold at MIT’s campus computer store, it’s a tweener. The NeXT was not nearly as powerful as the Sun and other workstations needed by researchers, but far more expensive than the PCs and Macs used by students and others who required ease of use rather than Unix and raw MIPs. Like the NeXT, The Engine seems to try to straddle the distance between being a VC firm and being an extension of the many other MIT organizations that foster entrepreneurship on campus.

It’s good that Rae seems well aware of this:

Rae calls The Engine “a very hopeful project in my mind — investing in important ideas over the long term.” But she acknowledges that it will be a balancing act between independence and collaboration with many different parties.

Let’s hope that she can keep her hands firmly on the wheel despite the crowd in her Engine room.

 

 

Exit strategies

 

exit

One of the signs I’m becoming an old timer and curmudgeon is my lack of patience with the focus on exit strategies by entrepreneurs who have yet to garner a dime of revenue.

This probably stems from my first experience with venture capitalists. When my co-founder and I had a meeting with Greylock’s partners, the penultimate step to receiving an investment from the venerable firm, we got our lesson on “exit strategies.”

After getting grilled by all of the partners finally at long last, Managing Partner Dan Gregory asked my CEO and co-founder, “Well do you have any questions for us?”

And we did have one. We had both read a few books on venture capital and they all insisted on the importance of having an exit strategy. But not one of the Greylock Partners had asked us what our exit strategy was!

So that was our question, “Don’t you want to know what our exit strategy is?”

Dan Gregory answered the question quite memorably, “No, your job is to build a great company. If you do that, the exit strategy will take care of itself. And if you don’t … the exit strategy will also take care of itself.”

And that was the last time in several years of working with Greylock I ever head the term exit strategy.

This is a story I’ve told many times, mainly when early stage entrepreneurs start expounding on their  exit strategies or worrying about what their’s should be.

Now, I should say I have never succeeded in raising any angel money, despite having pitched several angel groups on behalf of a company where I was acting CEO. And as I understand it, angels are far more focused on exit strategies than VCs. Why? Because angels have shallow pockets. They can’t afford to invest in multiple rounds – Series A, B, C and beyond – the way a VC fund of $100 million or more can. So they have very short time horizons compared to VCs. They need to be able to tell their wives or husbands that they’ll be getting their investment back quickly, before they get so diluted by the VCs that their ownership is negligible.

That being said, the goal of a startup shouldn’t be gaining an angel investment. In fact it shouldn’t even be gaining any kind of investment at all – the goal should be building a great business. And if that proves to require an outside capital infusion then so be it. It may be necessary to provide angel investors with some possible acquirers – as an IPO or acquisition are really the only two exits worth talking about and an IPO is self-explanatory. You may even need to find some “comps” – companies similar to yours that have been acquired recently.

But the key takeaway is don’t build your company to be acquired – markets and acquirers change and you may totally distort your company and fail to build a great one by taking your eye off the ball and putting it on an angel’s.

The state of mentorship in India

mentors.pngThere are more companies starting up in India than there are mentors to advise them according to this fascinating article about the state of mentorship in India today. Wherefore Art Thou, Mentors? – Turning Mentors into Startup Coaches on the Unitus See Fund site.

During the Speed2Seed Summit, our panel of acceleration experts (representing Microsoft Ventures, 500 Startups, TLabs Accelerator, and Idea2Value) tackled some of the problems incubators in the ecosystem are facing. Mentorship, unsurprisingly, sprung up as a heated topic. The vivacious dialogue, complete with couch-leaping efforts to grab for the microphone went as follows:

“India does not have strong mentors as compared to places like the Bay Area.”
“Not true. India does not have enough strong mentors as compared to places like Silicon Valley. There are good mentors in India.”

“Okay, maybe. But there are far too many entrepreneurs and startups for our pool of quality mentors to support.”
“Yes, well it doesn’t help that nearly all of the quality mentors are primarily based in metro areas rather than out where these incubators are popping up.”

“No less, even in a metro, you have to be able to tap into that network of top notch mentors, which isn’t easy for outsiders as it is.”

For anyone interested in mentoring or being mentored, regardless of geographic location, this article is must reading as it goes into real depth about the role of mentoring in the startup ecosystem. The authors are very strong supporters of mentoring, but detail some of the issues involved.

One issue that arises with top mentors is what we call “mentor burnout”, where they often get bombarded with the same questions over and over again. This causes mentors to lose interest in engaging with early-stage startups. While we know that depth of mentor engagement is key to a startup’s success, our goal was to get an entrepreneur to tackle what a mentor might see as more mundane. In doing so, mentors and startups can really dig into the juicy problems to solve together. And maybe once that startup leaves the incubator, they’ll be able to build more meaningful relationships with mentors, investors and accelerators when the opportunity arises.

However, unfortunately they add to the confusion between coaches and mentors:

These mentors, though accessible, need to step up their game and become not just ‘startup mentors’, but ‘startup coaches’. Startup coaches are more self-aware of what they can help startups with, and are able to work with the entrepreneur in a more productive engaging way

….startup coaches guide entrepreneurs to the right answers versus doing the work themselves.

This seems like the definition of mentoring! Be that as it may, incubators and mentoring are on the rise as entrepreneurship spreads far beyond Silicon Valley and with it the need and demand for engaged mentors.

Success of tech companies

 

zenstrom

Buried in The New York Times article Europe’s Tech Sector Shrugs Off Regional Uncertainty by Mark Scott is a great quote from Niklas Zenstrom, a founder of Skype who now runs Atomico, a venture capital firm.

“Success of tech companies is very binary: They will work or they will not,” he added. “Some macroeconomic ups-and-downs are not going to make a big difference.”

This makes tech companies very unlike other businesses, which may be sole proprietorships, partnerships, life style companies, boutique companies, low or slow growth companies. And other businesses are often affected by macroeconomic factors, like the cost of capital. The corollary to immunity from macroeconomic ups and downs means there is no bad time to start a company.

Niklas Zenstrom’s quote reminds of the corporate saying “up or out” – meaning you get promoted or you get fired, but you don’t just hang around.

Perhaps the binary nature of tech companies makes starting them so alluring, they are much more like games of sports, where you either win or lose the game (everyone hates ties!). The clarity is stimulating – it’s easy to keep score.

The  question then becomes, how long does it take to make a tech company work? It will be interesting to see exactly how patient Zenstrom and his partners are with their new $765 million fund.

The VCs I worked with hated what they called “zombie companies” – those that were neither growing nor failing, but hanging on, sucking up resources and hurting the firm’s reputation. For portfolio companies it’s up or out!

 

Find a mentor, be a mentor

dickerson

Linda Dickerson is executive director of Blackstone LaunchPad at Syracuse University Libraries, which supports and mentors entrepreneurs at Syracuse University Libraries.

SU is one of 20 universities around the world with a Launchpad financed by the Blackstone Charitable Foundation to support and mentor entrepreneurs.

In the article Linda Dickerson Hartsock on leadership: Find a mentor, be a mentor, think like a startup is interviewed by Stan Linhorst. She has five tips for entrepreneurs, with my comments following, read the article for details on each tip:

  1. Have a plan – true, if you don’t know where you are going all roads will take you there
  2. Be flexible – but not so flexible you flipflop! Survival in the startup ecosystem goes to the fittest, adapt rapidly or die!
  3. Understand risk – I think it’s the entrepreneurs job to minimize risks, not take them, contrary to what many people seem to think
  4. Be optimistic – definitely!
  5. Stay with it – I totally agree with Linda Dickerson that persistence and perseverance may be the most important of all.

She also addresses mentoring:

What would you want the local civic, business and political leadership to do to encourage startups and entrepreneurship?

It comes down to partnerships and collaboration. We’re stronger together.

Again, go back to that notion of being the mentor as we see this generational change in the community. Encourage and nurture young leaders, both business and civic leaders. Pass on wisdom and advice, but at the same time be open minded and learn from them, because they have a lot to teach us.

The article concludes with a truism that all entrepreneurs need to heed: Change is hard!