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Capital Solutions Newsletter…                                                                                                            download pdf
September, 2010

Summer's end means we are all back to work.  In this issue: a quick overview of the state of venture capital -- super angels, future significance, entrepreneur data, and the time bombs lurking in many fund portfolios.  Information overload is a new way for geeks to get a life; a HBS professor suggests you plan your life as carefully as your career; electric cars show cleantech policy going stop go stop; and a new newsletter feature: five best blogs.

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The State of Venture Capital
 
With summer and labor day fading into memory, let's get back to business.  While it's still early to draw conclusions from Q3 data, as of late August, venture capitalists had already invested $2.44 billion into 263 companies (data from Thomson Reuters).  With a month still left in the quarter, this portends a large increase in overall funding compared to the $2.56 billion invested in Q3 last year, accompanied by a likely small rise in the number of companies funded.  Of particular interest is the increase in average deal size (over $2M) so far in Q3, which runs contrary to the seed-stage and Super Angel boom that has dominated most recent industry discussion.

Academics Josh Lerner and Steven Kaplan -- two of the foremost experts on VC -- might agree that the rallying cry of "venture is broken" is overstated.  They recently published a paper (link is pdf) that looked at venture funding as a percentage of stock market value, as well as historical industry returns (including the premium post-2000 vintages). Their conclusion is that venture capital is not a broken industry, but merely exhibiting "the natural evolution of a relatively competitive market" -- which is about a close to a full-blown raspberry as they are likely to get, 

Another study (pdf, again) looks at the human side of companies who have received funding by examining the 185 seed and Series A internet deals in the first half of 2010 . While the data on ethnicity provoked the most blogger controversy, more interesting is the contrarian findings on age: the average founding team was 35-44, with another 20% of teams average 45 and over.  The whiz kids -- 18-25 year olds -- represented just 4% of companies receiving investments.  

Lastly, the WSJ notes that there is a ticking-time bomb in many VC portfolios -- agreements with their Limited Partners to dispose of all investments within a decade, which for many funds is coming due.  The WSJ calculates over 3,900 companies who received investments seven or more years ago. While this decade deadline can be extended, it does not run forever (especially if a VC continues to pull down management fees), which portends an eventual gush of attempted exits. M&A bankers, start your engines...

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Get A Data-Driven Life

One of the most fascinating and dynamic sectors is pure information. Technological advances now enable immense databases, which in turn provide new insights on both simple and complex correlations, and the ability to spot (or debunk) trends.  A number of successful startups (most notably foursquare) are providing, slicing and dicing information as well as providing considerable analytical context, often in real-time.  However it seems like one of the most notable subjects for data is oneself.

NYT magazine did a long story on how people are using data -- both independently and enabled by mobile and online software -- to track data on themselves.  This includes a life-logging project, one person's visual map of every idea he has had since 1984, a catalog of a person's moods, and an enormous variety of health-related data, including how often you booze it up -- many of these are now recorded on a site dedicated to no less an endeavor than quantifying the self.

This onslaught of data is both captivating and exhausting, and within the white noise of data, one hopes there is a blissful ignorance waiting for its moment to return. Or else we are in for unending variations on the Database of Myself.
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Reading List: The Strategy of Your Life

On the topic of measuring one's life, Clayton Christensen (a HBS professor best known for his work on innovation) noticed, over the years, something troubling about his students. Their analytical ability to dissect industries and plot their careers was phenomenal, yet they rarely spent the same amount of time on themselves. In a remarkable essay, he writes:

Over the years I've watched the fates of my HBS classmates from 1979 unfold; I've seen
more and more of them come to reunions unhappy, divorced, and alienated from their
children. I can guarantee you that not a single one of them graduated with the deliberate
strategy of getting divorced and raising children who would become estranged from them.
And yet a shocking number of them implemented that strategy. The reason? They didn't
keep the purpose of their lives front and center as they decided how to spend their time,
talents, and energy.

Christensen goes on to suggest a specific framework to make ensure one's personal life is as intentional as one's career. The list will be familiar to anyone who has built a company: create a specific strategy, allocate your resources wisely, pay attention to culture, avoid certain mistakes, remain humble, and measure carefully. This is one of the best pieces I have read this year, and I recommend it with without reservation.

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Electric Car Policy -- Stop Go Stop

 The cleantech industry has been considered both highly promising for investors and a hopeful area of growth to counter the economic contraction of other industries.  But one of the peculiarities of cleantech is the intersection between federal dollars (both stimulus spending and grants) and private investment.  Perhaps no better example of the tangle of incentives and interests exists than the evolution of the electric car.

An series of articles in Slate captures the issues.  First was a column by Charles Lane, which noted that the new Chevy Volt will cost $41,000 - or about the same as a base model BMW 335i -- except the former comes with a $7,500 tax credit. The market for electric cars, Lane notes, is dominated by high-income individuals, and the net effect of multiple subsidies are handouts to component corporations and the wealthy.  

Perhaps on cue and in recognition of the power of many electric engines, Daniel Gross replied "not so fast." Pointing out that similar government economic stimulation was critical to railroads and air travel, public money is leveraged by private investment, and many innovations depend on scale to jump the gap from wealthy buyers to the average citizen.  Lane then beeps in with the requisite final word and a discussion about the difference between public and private goods and benefits.  All of which may make you feel better (or worse) the next time Hummer and Prius drivers glare at each other in the soft glow of a red light.

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Five Best Blogs

A new feature for this newsletter -- with a hat tip to FiveBooks -- are a quick list of five of the best blogs since, um, the last newsletter.  This round features: Paul Graham on The Top Idea In Your Mind and The Future of Startup Funding; Brad Feld on Serious Questions for Super Angels; Jeff Bussgang on Alignment Between Enterpreneurs and VCs;  Mark Suster on What a Double-Dip Recession Would Mean For Venture Capital, and as a bonus, Tyler Cowen on Social Responsibility and Pricing (last is my title).

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Capital Solutions is sent irregularly, and generally not more than once each month.  All content and any errors are mine exclusively, while the occasional sharp insight is probably borrowed.  As always, feel free to contact me at the number below if you have any questions, or just to catch up.

 Regards,

 
Alexander Ooms | Managing Partner                      

alex@clearcreekpartners.com

303.731.2960