Last Thursday, November 19th, investor, writer, entrepreneur Paul Kedrosky was in Vancouver as part of Global Entrepreneurship Week. Paul is a regular financial pundit on CNBC frequently quoted in major publications around the world; he is a former partner at local venture capital (VC) firm, Ventures West, and a current Senior Fellow at the Kauffman Foundation. Remember to thank our friends at Bootup Labs for making it happen.
The evening kicked off with an announcement from Dean Prelazzi of British Columbia Innovation Council (BCIC) of a partnership between BCIC and Bootup Labs. This news, in and of itself, was worth the trip. I think this partnership really validates the efforts of Boris, Danny, and Maura over at Bootup, and continues to improve the local start-up ecosystem. I think Maura and Rob Lewis have a running joke about 'the ecosystem' but I can't recall the details; topic for another time.
During the introduction, Boris (the emcee) artfully opened to door to the topic of GROKSOUP, one of Paul's previous companies. Groksoup is widely recognized as one of the first hosted blogging services. Think about this; at the time it folded, Blogger.com wasn't even called Blogger.com yet. We all had a good laugh when Paul explained (a bit sheepishly) his reasons for exiting, "it was the year 2000, and I thought blogging had peaked". Awesome. -- Reminds me of the truthful candor you'll find on Bessemer Venture Partners' "Anti-Portfolio" page on their website (I highly recommend this link - very enlightening - companies they took a pass on). --
The presentation that followed was kind of a 'short history of the world' with respect to:
- the current economy
- the current state of Venture Capital
- and a historical view of economic cycles
As a reader of Paul's blog (Infectious Greed), I am familiar with his views. I find his insight extremely useful for helping to inform my own opinions about this stuff (disclosure). Again, very much recommend having a look.
For a better idea of what you might expect, here are some highlights from the talk:
- The prediction that the Venture Capital industry should shrink by half in the next few years. There are actually a chorus of influential industry players singing this tune.
- The surprising revelation that the centre of power for innovation seems to be migrating to NYC. It appears that New York has begun to really attract capital, both monetary and intellectual, recently. I suppose an example of this migration could be Google's New York campus. Word on the street is that it's way more fun than Mountain View.
- And, that in the history of economic cycles, a great economic bust is always followed by a sorting out of misallocated resources into more practical and useful configurations. In other words, the circle of life. Something healthy ecosystems need in order to survive.
"Same as it ever was" - David Bryne and Brian Eno
Paul Kedrosky on Pitching for Funds
An investor can save everyone a lot of time and energy by boiling down a presentation to three slides that simply state:
- Why this?
- Why you?
- Why now?
Funny, during this bit, I felt the urge to channel Barry Nalebuff (Yale Professor and author of the book "Why Not?") as a kneejerk response to all of these questions. Of course, "why not?" may not be the best response to give a guy when you're asking for his money. Best to keep the "why not" safely within the walls of academia for now. On question #3, I think that might be a subtle homage to Paul's Groksoup days. Timing is important.
I think one of the greatest benefits for our community that results from hosting someone like Paul is the insights he brings straight from the horse's mouth, or, straight from the belly of the beast - depending on how you look at it. If silicon valley VCs have a preference toward viewing investment returns over a 25 year period, that's information that may or may not filter up to Vancouver and is useful for us to know about when we're speaking to these guys. If VCs want Lifetime Plausible Deniability on their investment returns, maybe that speaks toward their state of mind.
The topic of VC investment returns has gotten a fair bit of press so I won't hash out all the gory details here. Suffice to say, it's seen better days from a total returns perspective.
How deals are funded was an important part of Paul's message on Thursday. There are two main groups available to fund start-ups, Angels (groups of high net worth individuals who invest mostly in early stage companies to the tune of less than $1M aggregate) and then there's VCs. Over the past ten years, the size of VC funds have been growing like mad. Where a typical fund may have been $10M total in the past, today that same fund is more likely going to be $100M. This growth in fund size has precipitated a change in the types of deal size your typical VC might be interested in - the preference for larger deals has followed the growth in funds.
If VCs only want to do these larger deals and the investment disposition of Angels hasn't changed, this produces a funding gap that is problematic for entrepreneurs and thus a problem for propagating innovation. For example, a firm with 4 general partners and $100M under management needs to effectively manage, preform due diligence, take BOD seats, etc for each investment. Now imagine this firm with 100 investments of $1M a piece. It's possible to bring money into a firm "in scale" but it's much more difficult to scale the resources with which to manage that money. The impression I get is that Paul believes some of these mega-VCs have lost the plot and are simply living for their compensation structure (2% of Assets under management).
Paul is advocating for the creation of funds that will fill this gap; he calls this new class of investor the "Super Angel". Larger and more structured than your average Angel, but smaller than your typical VC.
My question to Paul was something to the effect of:
"... well, these mega funds do exist and the pools of money are there. So, what happens to them? They aren't going to give the money back, are they?"
My view is, I think the Super Angel is a great idea, but I also think the pools of mega-fund money already created should not be ignored. Maybe we, as entrepreneurs, just need to think a bit bigger. If these guys can only fund $10M deals maybe, as entrepreneurs, we bear at least some responsibility to conceive of investment opportunities to fit that mold. Paul agreed that the money in these funds has to be deployed.
That said, the Super Angel concept seems like an idea whose time has come. It also seems like an idea well suited for Vancouver. Having the conversations about the concept and getting involved NOW will help shape and define the thing so that the next time people are looking at raising a fund, Super Angel is an option.
The questions I wasn't able to ask are:
- If most VCs invest by gut, why the preoccupation with having financial models showing $100M in revenues within 5 years from entrepreneurs who pitch them?
- Is the $100M pipedream just a byproduct of their over-reliance on the First Chicago Method of valuation as a CYA strategy?
Thanks again to Paul for traveling north to share his experience and to Bootup Labs and everyone involved for a great night.