Posts from June 2008

If you look at this picture of my son Josh catching up on his favorite TV shows this morning before breakfast, you’ll see a flat panel display in the upper right of the picture. And yet Josh is watching on his laptop. That’s largely because we are in europe right now, where the shows he likes are not available on the local cable channel but are available "on demand" on the Internet.

Yes it’s true that Hulu and ABC.com and other web video services block IP addresses outside of the US, but we were able to hack around that pretty easily. Yet another form of DRM that won’t work, can’t work, and will eventually be removed by content owners.

But I digress.

We don’t spend a ton of time watching TV in our house, but early in the mornings when others are still sleeping, or late at night before bedtime are popular times to sit back and catch up with a favorite show or to watch a movie.

And when we travel these days, our laptops have become the perfect way to do that. Take last night. After dinner, the kids rented a movie on iTunes, which downloaded in about 15 minutes, then put the laptop on the floor, put three sofa cushions on the floor, laid down and watched the movie together. Total cost was $3.99.

Compare that to the other night when they went to a local theater that was playing and english language movie at 10pm. That evening cost the three of them around 50 euros.

I think there are benefits to watching the local TV and checking out the local movie theaters. You start to learn the language and soak up the culture.

But when we travel, as I suspect is the case with all families, you need some downtime. You can’t sightsee and eat out every night. And as we’ve learned in the past year or two, the laptop with a good internet connection is the perfect entertainment device when you are on the road.

The National Venture Capital Association is about to roll out a media effort aimed at getting the word out about the great IPO drought of 2008. The first stop in this campaign was the NY Times: Matt Richtel wrote about it yesterday:

In the second quarter of this year not a single company backed by
venture capitalists has gone public. It is the first time that has
happened since 1978, according to a venture capital industry group.

There’s a lot to this story. IPOs, which made everyone in the venture business a killing from 1996 to early 2000 have been few and far between for most of this decade. As most everyone knows, the IPO boom was way overdone, many companies that should not have been publicly traded were brought public, and many an investor lost money on them.

Of course, once burned twice shy and wall street has not been particularly enamored with venture backed IPOs ever since.

But there is more to the story. VCs themselves, at least this VC, have learned that a sure payday via a M&A transaction is often a better way to generate returns than the hope of a big public market payday.

And then, of course, there is the regulatory environment. In Fareed Zakaria’s book, The Post American Word, he explains that:

In 2001, 57 percent of high-value IPOs occurred on American stock exchanges; in 2005, just 16 percent did. In 2006, the United States hosted barely a  third of the number  of total IPOs it did in 2001, while European exchanges expanded their IPO volume by 30 percent, and in Asia (minus Japan) volume doubled.

Sarbanes-Oxley and other post bubble, post Enron regulations have certainly made it harder to be a public company here in the US. I know every time I sign a 10K or 10Q, my hand shakes a little. Honestly, it takes a very big opportunity to make me want to be a significant shareholder or a director of a public company. The risks and hassles are just so big.

Paul Kedrosky was quoted at the end of the NYT article as saying:

There is no venture industry if there is no I.P.O. market.

I sent Paul a message on twitter saying that I think the venture business can exist without a vibrant IPO market. We’ve had three exits to date in our first USV fund and none have been IPOs. I think we can generate the returns we need to produce to satisfy our investors without a single public offering in our fund.

But the VC business without an IPO market would be a different business. It would be smaller, with fewer funds, and smaller fund sizes. And it would struggle with big bets like biotech and cleantech, and the kind of hardware oriented IT investments that generated such great returns in the 90s.

And that’s not a good thing. Biotech and cleantech are two industries of the future where the US is at the forefront. We need capital markets in this country that can support the development of these industries. And the overly regulated and cautious public market environment we have right now is clearly problematic.

So it would be nice to see a reduction in the regulatory environment. We need to let markets work and not worry so much that some people will lose money on their investments. And most of all, we need some big successes. What will be the "Genentech of cleantech"? It can’t come soon enough.

the American system … proved to be flexible, resourceful, and resilient, able to correct mistakes and shift its attention. A focus on American economic decline prevented it. The problem today is that the American political system seems to have lost its ability to create broad coalitions that solve complex issues.

This struck me as eerily similar to Thomas Friedman’s quote of Goldman’s Robert Hormats in his excellent op-ed in today’s NY TImes:

We used to try harder and do better. After Sputnik, we came together
as a nation and responded with a technology, infrastructure and
education surge, notes Robert Hormats, vice chairman of Goldman Sachs
International. After the 1973 oil crisis, we came together and made
dramatic improvements in energy efficiency. After Social Security
became imperiled in the early 1980s, we came together and fixed it for
that moment. “But today,” added Hormats, “the political system seems
incapable of producing a critical mass to support any kind of serious
long-term reform.”

The optimist in me sees the emergence of consensus on at least one issue – our political system is messed up and needs a sharp kick in the butt.

Vruz sent me a copy of this CIBC research report called "Heading For The Exit Lane." I read it this morning and I’ve been thinking about it for most of today. So I uploaded it to Scribd and reblogged my favorite line in the report on my tumblog. But that didn’t get the report out of my head.

This oil thing sure has legs. Even if we aren’t in a "peak oil" situation (and even the Saudis can’t agree about that), we’ve gotten to a price point where consumer behavior is going to change significantly over the next few years. Over the long term, that’s a good thing. The world economy is addicted to oil, largely because it’s been so cheap for so long. But it’s not cheap anymore and given the pace at which the rest of the world is developing these days, it’s not going to be cheap ever again. Unless we find another source of energy that is a lot cheaper than oil and I am not aware of any developments that will get us there soon.

This has bigtime ramifications for slowing growth and rising prices (inflation). And these impacts will not be limited to the US economy. They will be felt worldwide. The hypergrowth economies of China, India, Brazil, Russia, and other developing economies may not be impacted as much as the more mature economies like Japan, Europe, and most of all the US. Russia, in particular, stands to benefit greatly from the spike in oil prices.

Slower growth and rising prices (inflation) cannot be good for equities. Rising rates, which is what will have to come, will not be good for any kind of financial assets.

Which, of course, leads me to venture capital. The value of your equity in a startup company is a financial asset. It may not be publicly traded but like all other financial assets it is ultimately worth the present value of future cash flows discounted at an interest rate that takes into account market rates of interest plus a risk premium.

We’ve been operating in a world where real interest rates have been hovering around zero (at least in the US). And that has propped up the value of equities and venture capital assets have been part of that prop-up.

All we have to do is look at the 70s to see the effect of low growth and high inflation (stagflation). Here is a chart of the Dow Jones Industrial Average during the 1970s.

Yes, that’s right, the Dow Jones Industrial Average ended the 1970s right about where it started.

I wasn’t in the venture capital business in the 1970s. I was a teenager that decade. I remember Vietnam, Watergate, the oil shocks, the gas lines, Gerald Ford, whip inflation now, Jimmy Carter, the Iran hostage crisis, and Paul Volcker and Ronald Reagan.

The first venture capital firm I worked for, Euclid Partners, was formed in 1971. The two founding partners, Milton and Bliss, raised about $4.5mm in 1971. They didn’t raise another fund until 1983. They strugggled mightily during the 1970s with their portfolio and ultimately made it work when the technology market took off in the early 80s. I heard a bunch of stories from them about that time and it was not an easy time to be an entrepreneur or a VC.

Surely the next 10 years won’t be identical to the 1970s. A lot has changed, particularly the global economic environment. But it’s also clear that the economy we are in (and maybe have been in for the past 18 months) is going to be tougher for owners of financial assets than the past 20 years have been. And I don’t think the startup economy and venture capital is immune to this new reality.

So what should we do about it? Well first, we need to be careful with valuations. If financial assets are going to be subject to downward pressure then inflated valuations will not be sustainable. We need to be careful with the amount of money we invest and burn. Companies that are capital efficient and cash flow positive will fare better in this environment. And we need to be prepared to wait a long time for liquidity.

It’s ironic that the title of the CIBC report is "Heading For The Exit Lane" because I think the exit lane will take longer to find and possibly be less rewarding in the coming years.

A Final Thought: This may mostly be good news for cleantech investors. As oil gets more expensive, cleantech and alt energy technologies can become commercially viable more quickly. But it takes a lot of money, biotech-like capital investments, to get most cleantech investments to profitability. So if the capital markets are going to be more difficult, it’s not all good news for cleantech. And the web clearly has a role to play in all of this too. More on that later.

Despite a seventy-year long decline in its relative economic place, London played its weakening hand with impressive political skill. Its history offers some important lessons for the United States.

I’ve written about "social media optimization" in the past. This is the crude social media dashboard I have on the bottom of every blog post.

I wish the technorati link and the outside.in link would show how many links there are to the post and the geotags that have been applied. I wish there was a way to show how many times the post was reblogged in tumblr and commented on in friendfeed. But even as it is, it tells me a lot.

Lately, I’ve been thinking that the number of comments is the most important data point and it’s also the one that google and other web services seem to ignore the most.

About once a week, I’ll do a post that generates over 100 comments. And it’s almost always the best post of the week. I should create a page/feed called "The Best of AVC" that is limited to the posts that generate 100 comments or more. Maybe I’ll do that when I get my new domain and new design.

Today, when most people think about globalization, they still think about it mostly in terms of the huge amounts of cash – currency traders swap about $2 trillion a day – that sloshes around the globe, rewarding some countries and punishing others. It is globalization’s celestial form of discipline.

I lost my Nokia N95 this morning riding around Paris on a Velib. By the time I realized that it had fallen out, I was back in our neighborhood and there was no way I was going to retrace the ride. Plus, it most likely got crushed by a car on the streets we were riding on.

But there’s a possibility that it didn’t and that someone could have picked it up. And that’s where things get a bit interesting. Before I lost the phone I installed a twitter client on it (twibble) and shozu which is like a bulk uploader for all kinds of social media services (Facebook, Typepad, Flickr, YouTube, etc). And I had configured both to work on the N95.

So if someone picks up the phone and chooses to post to this blog, my facebook account, my Flickr account, and my YouTube account, it’s possible on that N95 without needing a password. It’s a north american phone and doesn’t work on the european carriers but it works fine over wifi.

I’ve alerted shozu and hope there’s a way to de-activate my shozu account. The twibble client is more problematic.

Anyway, this brings up an interesting point regarding social software and services on mobile devices. This problem is not limited to mobile devices. The same thing is true on a laptop computer. But I suspect that mobile devices are lost/misplaced/etc a lot more than laptops.

And so it seems to me, based on my experience this morning, that the developers of social media software and services for mobile devices ought to build some easy ways to de-authorize their services.

And it’s entirely possible that both Shozu and Twibble have done that. If so, I’d love to hear how to do it. If not, then I’ll just have to wait and see if anyone starts guest posting here or elsewhere under my name in my accounts.

Looking at dozens of countries over decades of development, from South Korea to Argentina to Turkey, one finds that the pattern is strong – a market based economy that achieves middle income status tends, over the long run, toward liberal democracy. It may be, as many scholars have noted, the single most important and well-documented generalization in political science.

In case you wondered, this was written in the chapter about China.