Entrepreneurship Remains Strong
Bill Warner Thursday, April 23, 2009
The first full day of CED’s Venture Conference was well attended by enthusiastic entrepreneurs and investors seriously looking for good companies. We had a full plate of great companies who made their presentations to packed rooms.
Wells Fargo introduced to North Carolina
The day was started by John Stumph, President & CEO of Wells Fargo, who gave a sincere presentation about how much he is impressed with North Carolina. Believe it or not, this was his first trip here. He has met with many community leaders, including current and past governors as well as senators and congressmen.
He assured everyone that their Wachovia accounts are safe and that the transition will be carefully done to protect its Wachovia customers. Stumph gave a compelling history of Wells Fargo and related the strong culture of his organization that truly cares about its people, customers and communities in which it resides.
As for the financial crisis, he quite precisely described the fundamental causes for the crisis, but quite frankly had no crystal ball telling him when the recovery will occur. He was bullish about the fact that Wells is lending money now and is actively looking for new loans to make. The company is in a very strong cash position.
All in all, Stumph said that he would not “bet against America.” We have been through difficult times in the last few decades. He is confident that we will pull through this one too, explaining that this is what Americans are good at.
Entrepreneurs are at the heart of the recovery
Erskine Bowles, President of the University of North Carolina, started his presentation with a humorous discussion about what a lousy politician he is and now how happy he is taking on the challenges at UNC.
He too gave us a dose of reality concerning the challenges that face the education system today. Last year’s $50M budget cut is near trivial compared to this year’s $175M cut with a potential cut of another $200M next year. This will cut to the bone of classes, people and potentially education quality.
Bowles noted that we are in a rapidly changing world. What we prepare our students for today will probably be obsolete in 10 years or less. He knows that the “old NC manufacturing jobs” will never come back as we move more and more to a knowledge-based economy. He said that we have to accept that we will continue to lose jobs to foreign countries that can provide many of them at much lower costs.
He pointed to the entrepreneur as being one of the major contributors to our return to a strong economy. He cited the need for increasing innovation and the support infrastructure that fosters it as being essential to our ultimate recovery.
North Carolina University is making substantial changes in its culture, technology transfer practices and accountability for academic results. Bowles stated that we have to focus on producing students that can think, communicate, be innovative and get things done in this new economy.
GreenTech – The next industrial revolution
To close out the day, John Denniston, Partner at Kleiner Perkins Caufield & Byers, made the proposition that we are on the verge of the next industrial revolution driven by the energy crisis. The revolution will be based on new energy sources driven by green technology.
Although an exciting premise, it was a disappointing presentation void of specific descriptions of innovations and technologies that would drive this kind of change. Quite frankly, this slow moving and elementary presentation addressed the audience as if we were eighth graders and couldn’t possibly have understood the basis for the industrial revolution of the early 1800’s or even understand who Thomas Edison and Henry Ford were. Nobody likes being talked down to.
Denniston cited the crisis as first being driven by man-made climate change as unanimously verified by United Nations organized scientists. Boy that sure isn’t very biased at all, from an organization that wants to transfer our wealth throughout the world through green house gas taxation. Secondly, and more compelling was his concern about energy security in that we are far too dependent on foreign sources of energy from countries that hate us. And finally he explained the alarming advances that are being made in innovation in other countries like China, asserting that America is losing competitiveness to them.
He then made sweeping analogies based on Moore’s law, claiming that similar improvements will be made in alternate energy source technologies using 1995 data to illustrate his point. He compared the sum total of all of earth’s natural energy sources to those of the sun, concluding that we need to tap into solar energy for that reason. The presentation continued to a merciful end without much substance about today’s green technology innovation.
Kleiner Perkins is the world’s leading venture capital firm, but this presentation feel far short of showing their expertise in green technology innovation and what it will mean to the future of our economy.
Entrepreneurs and investors enthusiastic
The entire conference was buzzing with enthusiasm and positive attitudes about what we need to do to recover from this economic downturn. New innovations are abundant. Investors are interested and engaged. Just rubbing shoulders with them all was a major pickup for me.
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Venture Capital Has Focused Optimism
Bill Warner Tuesday, April 21, 2009
CED’s Venture Conference is getting off to an optimistic but also sobering start with Tuesday night’s investor-only dinner in Pinehurst.
CED showing leadership
Joan Rose, President of CED, highlighted the evening with good news about the expected attendance at over 500 people, citing that this is extraordinary given the impact the economy has had on the companies and firms that are sending people to the conference. Actually, more individual companies will be attending this year than last year even though the overall attendance is down somewhat. In addition, CED membership is up considerably over last year, indicating that entrepreneurship is alive and well and that more and more companies want to learn about building successful businesses.
The venture capital world speaks up
The featured speaker was Mark Heesen, President of the National Venture Capital Association. He gave a very balanced update of the state of venture capital in the US. He didn’t try to sugarcoat the situation, but gave a very fair accounting of what is strong, what is weak and what we can expect in the near term.
Investing is down but still huge
With respect to the limited partners, over $4.3B was raised in the last quarter. The highlight though is that a substantial amount of the money came from Europe, Asia and the Middle East. Venture investing is down the last quarter, falling to $3.0B from $4.3B the previous quarter. He explained that most venture firms will not be raising further money this year and that we will continue to see fallout of venture firms throughout the year. He basically confirmed what we already know about the reduced chances companies have in raising venture capital money for the foreseeable future.
IPO’s may see a new dawn
On the IPO front, there has been one IPO since last August and only 26 companies are registered with the SEC. It will be unlikely that the IPO market will see much progress this year. However, Mr. Heesen cited some potential progress through new partnerships between the venture capital world and the boutique investment banking world that might open up a new avenue for IPO’s. Stay tuned.
Clean tech may save them all
Mr Heesen was bullish on “clean tech.” In his view, clean tech will be emerging as the darling of the venture capital world. He is not talking about the ill-conceived wind farms, biofuel plants and vast solar grids. He cited technological innovations in all walks of life, including building architecture, lighting, efficient air handling, fuel usage efficiency and many more. He was very excited about the innovation he is seeing and that there is increasing momentum in both the private and public sector to move this kind of innovation forward. He wasn’t talking about the near religious zealotry of sustainability gurus, but solid technology companies that bring demonstrable and profitable value to the market that improves our environment. The good news is that the venture capital world is seeing a business in clean technology innovation.
Entrepreneurship is strong
Mrs. Rose brought the evening to a close by reminding us all that more companies made applications to present at the conference this year than ever before. This again shows that although the economy is stifling, it hasn’t stifled entrepreneurship in the southeast.
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Inflation Proof Your Business
Bill Warner Tuesday, April 21, 2009
I am certainly no economist or master of the US financial system, but when I see how much money is being poured into the economy by the Treasury, red flags of inflation flash in my face.
Take a look at the trends. What I think this data says is that by early 2008, the money supply had reached $4 trillion, by the 4th quarter of 2008, it had reached $5 trillion and it is being reported as over $8 trillion. Recent news reports add another trillion in March. By the beginning of 2008, the money supply had doubled since 2002. In one year, it has more than doubled again, with $4 trillion being added in the last few months. I don’t know about you, but that is frightening to me. Yes, we are in a recession, but I am worried that in short order the devalued dollar is going to leap into the forefront as an issue causing price increases and higher interest rates, the key elements of inflation. This recession might snap like a rubber band into a period of rapid inflation.
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Creating an Attractive Business Model
Bill Warner Wednesday, March 11, 2009
Now, more than ever, investors need to see a business model that both provides an attractive return but is easy to understand and implement.
*It starts with a solid value proposition and customer traction*
Tom Taulli talks about some of the important elements of an attractive business model. Certainly having a compelling value proposition is necessary. Its key elements are:
- Solving a compelling and important customer problem
- Offering an innovative solution to the customer’s need
- Clearly fitting into the customer’s purchasing priorities
- Having a solution that is a winner over all competitors
- Providing an attractive return on the customers investment
The more you can bring this value proposition to life by citing real customer traction will make the value proposition much more believable. Reflecting potential customer reaction resulting from your market research, describing customer satisfaction from early use of your product or service, and certainly early sales results all tell investors that you have something that buyers really want.
*More is needed to round out a business model*
Investors have to see even more than a strong value proposition. Some of the additional things they consider are:
- Is the marketing and sales approach easy to implement and can it be scaled up quickly, looking for sales cycles that are well understood and easy to navigate
- As a result, will the company be able to achieve attractive revenue growth quickly, looking for revenue streams that are easy to accomplish and also easily renewed
- Is the barrier to entry to competitors high and is their good protection of the intellectual property and know-how of the company
- Will the company achieve financial results that have the potential of providing the investors good returns in a relatively short period of time
Of course, investors always look at the management team to ultimately decide, but their story about their business model has to be compelling and convincing, and the management team has to show that they can really pull it off.
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Higher Gas Prices Will Stifle Businesses
Bill Warner Sunday, February 22, 2009
I have seen so much evidence that the proponents of global warming and the subsidization of alternate energy businesses actually want to drive up the price of gasoline and electricity. They cite the prices in other countries, asserting that we should be equivalent. the problem is that without higher prices for gas and electricity, these alternate sources of energy make no sense economically, especially solar energy, when compared to traditional sources of energy.
Expect to pay
Just look at the records of who is running our energy policies and the Department of the Interior. These people intend to make our worst fears come true.
- Eliminate off shore drilling
- Reduce or eliminate the coal shale exploitation
- Adopt cap and trade so that we can redistribute our wealth to other countries
- No nuclear plants will be built
- Regulation will further drive up the cost of traditional energy
- Further taxation to pay for subsidizes to otherwise non-economic energy sources.
The stimulus bill could have helped
We could have invested in the creation of proven energy sources like oil production, new nuclear plants, oil shale production and others, that would create lots of high value jobs. Instead, we are going into further debt to pay for energy sources that are not competitive. Sure, let’s invest in high potential technologies that hold promise, but not at the expense of eliminating our chances for rapid energy independence.
Business will feel the pain
This will be another right hook to the jaw of US businesses. High energy costs will likewise drive up the cost of goods. Some industries will be driven to their knees, like transportation and others that have a heavy dependence on energy. Higher energy costs will just put another big hurdle in the path of entrepreneurs who need to reach a positive cash flow position, and to existing businesses that need to grow their profits so they can finance further economic growth.
Do you remember what happened when the price of gas was almost $5 per gallon? Do you remember what happened to our grocery prices when corn was diverted to ethanol production, a knee jerk reaction to a false economic proposition? Well, if these new folks in the administration have their way, those remembrances will seem like a picnic.
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Stimulus Equals Zero Taxes
Bill Warner Sunday, February 22, 2009
I really don’t understand why it is so hard to understand why US business is not competitive and we are losing jobs to foreign countries. It’s because the profits on US business is taxed at the rate of 35%. It’s the second highest tax rate in the world just behind Japan. Think about it. US business has to compete with an anchor tied to its leg. Other countries can therefore produce goods resulting in lower prices because they don’t have to pay as much of their profit to their governments.
There are other anchors too, like unions that drive up wages and pension fund requirements. Government regulations also result in tremendous operating expense demands for compliance, like Sarbanes Oxley. Some of these regulations are necessary in order to assure that our goods are safe and not otherwise detrimental to the public, but many are an unnecessary burden on businesses. The reason we lose jobs to foreign countries is that we drive many industries out of the US with our tax and regulatory structures.
What if tax was zero?
What if the stimulus bill had done one simple thing; reduce the corporate tax rate to zero, and then brought it back in several years at a rate that is below the rate of the world’s leading economies? Businesses would not have to move offshore to be competitive, and instead hire Americans to do the work. We would see an almost immediate stimulus to the economy that represents lasting growth:
- US businesses would immediately become more profitable, making funds available for investing in new growth.
- Companies would invest in new products and services, reducing or eliminating the need for layoffs.
- Investing in the training of employees will increase because they are more likely to stay in companies that have a strong US presence.
- Worldwide prices for US products could be reduced to be more competitive with other countries, increasing sales for US companies.
- New businesses that supply US industries would be started; offering new jobs to build components and parts at competitive prices.
- Foreign companies will be more likely to open new companies in the US thus increasing the number of US jobs.
This would be great for all businesses and great for entrepreneurs who will not have to climb such a steep hill to create new businesses. Read more about taking the business tax rate to zero.
Just a dream
Unfortunately, we are not doing this, and doing things that will further stifle US business. Instead, we are going to borrow from foreign countries and print more money, increasing our debt and leading us to rampant inflation in a year or two. When the economy continues to drop and the jobs don’t appear as promised, remember that we elected these people that brought us the stimulus package. We will have another chance to get this right in 2010.
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When Wind Is Not Green
Bill Warner Friday, February 20, 2009
Although wind generated power technology has made great progress over the last decade, and comes the closest to being a cost competitive alternative to fossil fuel generated power, it is still basically a subsidized business that is inherently not profitable. This is because of the capital expense for the equipment that has only a 20 year life, construction expense to install turbines and power lines, and low utilization because the wind doesn’t always blow.
Investors are cautious
Investors are very cautious about investing in technologies that require government regulation and incentives to make them worthwhile, knowing that those regulations and incentives can be terminated at the change of an administration. I have yet to find an investor or proponent of wind power that can explain how wind generated power would ever be profitable without taxpayer money paying for it.
Investors also realize that wind generated power is a nit in the overall landscape of power generation alternatives, representing a potential of 1-2% of the overall supply of electrical power in the US. This is mainly caused by the massive amounts of land that is required to deploy wind turbines and the fact that wind doesn’t blow that much in major portions of the US. Even in areas that do have substantial wind, it doesn’t blow all the time, leaving huge gaps in turbine utilization. The killer is that another power generation facility is needed to handle peak periods when the wind is not blowing, making the investment in wind generated power a net add to the overall power generating complex of a community. Most proponents of this idea don’t like to admit that and don’t count it in their economic analysis. Wind is really not an alternate power source. It is an additional power source that provides intermittent power as the wind blows. I suggest you Google on “wind power cost” and read what people think about this. Start with Ernest Istook’s article on Hot Air About Wind Power.
Entrepreneur attitude is important
Considering other sources of power, investors shy away from solar because it is so wildly not profitable. The cost efficiency barrier has yet to be broken by technological advancements. Yet, hundreds of entrepreneurs are pursuing wind and solar power businesses. I went to an Ignite Clean Energy (ICE) meeting a few weeks ago to see what new news they had. I was floored when they presented a slide that led by saying that the wind in their face was low oil prices. These people have to cheer for high oil prices in order for their ideas to make sense. They said it with a straight and serious face. I was stunned by the unbelievable position taken by smart people in that they are in favor of high oil costs which has shown to be so detrimental to our economy. Yet, this is what the cap and trade movement is all about, so I shouldn’t be too surprised.
Investors don’t appreciate unrealistic zealots
This is the kind of attitude that makes investors nervous. Entrepreneurs that do not have a realistic view of their business and are not forthright and honest about the economic underpinnings of their business cause investors to shy away and find lower risk investments.
In this economic climate and the current state of private equity, businesses that are built on voodoo economics are going to be ignored. Businesses that have solid market need and strong value propositions, and are easy to get into and rapidly reach profitability are the ones that will get investment dollars.
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Wanted - New Angels
Bill Warner Saturday, February 14, 2009
Yes, in the face of this perfect economic storm, private individuals should consider making investments in start-up companies. You probably remember the old adage of “buy low, sell high.” Well, we are definitely at a low when it comes to valuations of early stage companies, while at the same time more in need of successful entrepreneurial companies than ever before. Small but impactful businesses are the life blood of our economy.
How to become an angel
To become an angel investor, you have to have done good deeds but you don’t have to die and grow wings. Your deeds have to have put you in a position of being an accredited investor according to SEC guidelines. If your net worth is over $1 million, you are probably accredited.
But, that is not enough. If you have never done this before, you should learn the ropes from experienced investors. Believe it or not, even Silicon Valley is struggling with this issue. See this article in TechCrunch about how they are educating new angels.
One of the best ways to do this is to join an investor organization in your area. Get involved in the process of evaluating companies and performing due diligence. Join in the selection process and learn from people who have done it before. Go to the Angel Capital Association website’s directory to find one in your area, including the one in Research Triangle Park called the Triangle Accredited Capital Forum.
Read about angel investing from such books as Cutting-Edge Practices in American Angel Investing, edited by John May and Elizabeth O’Halloran, Fool’s Gold by Scott Shane, and How To Be an Angel Investor by David Arnis and Howard Stevenson, or just Google on “angel investing” to find a wide range of resources on the subject.
Meet entrepreneurs
Take the opportunity to meet entrepreneurs in your area by going to networking events put on by such organizations as LocalTechWire, The Council for Entrepreneurial Development and many other organizations in your area.
Take the time to ask them about how they have started their companies. Learn about their financing needs and how they use investor money. Discover their perspective of angel investors and how they help get companies launched. Get a perspective of how angel money complements the many other sources of financing available from grants and loans.
Meet an angel
Take the time to meet some angel investors and simply ask them what it’s all about over a cup of coffee or lunch. You will learn about a world of very dedicated people who believe in capitalism and are not only investing for the right reasons but also are giving back to their communities some of the wisdom and knowledge they have gained over years and years of business experience.
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The Stress in Venture Capital Firms
Bill Warner Wednesday, January 07, 2009
I have brought in a blog post from The Funded website entitled The Limited Partner Shuffle: It Affects You. This is one of the most enlightening and easily understood explanations I have seen about what is happening to venture capital. You can see how this will effect any venture backed company and any company that is hoping to get venture money. For the start-up entrepreneur, you have to also realize that this puts a lot of pressure on angel investor organizations too. Private angels have been affected the same way as institutions have by the market downturn. Since the availability of venture money is drying up fast, angel groups need to reserve more money for their portfolio companies, resulting in less money being available for investments in new companies.
Investors in venture funds, called limited partners, are pulling out or selling their commitments to provide essential capital to the venture model, causing the “Limited Partner Shuffle.” Some experts are quoted as saying as much as 10% of all private equity positions will change hands this year in hasty transactions to generate liquidity, including premium positions by top-tier institutions like Harvard. What does this mean and why is it relevant to entrepreneurs? A quick overview of venture capital will help to answer these questions.
Venture firms raise money to invest from limited partners (LPs), who are normally endowments, pension funds, insurance companies, and other institutions that manage large amounts of capital. An investment in venture capital is considered a high risk asset class with the potential for high returns. The professional consulting firms that publish guidelines for how limited partners should allocate money across asset classes generally recommend that a small portion go into venture capital, sometimes less than 1%. This small percentage still amounts to many billions of dollars per year being entrusted to venture firms by limited partners, who control trillions of dollars.
Generally speaking, a commitment to invest in a venture fund does not require the limited partner to transfer money until the venture firm makes an investment in a portfolio company. So, a $100 MM venture fund does not have $100 MM sitting in the bank. Instead, as venture firms make successive investments, they collect money from their limited partners and distribute that money to portfolio companies in rounds. To cover operating expenses, the venture firms separately collect approximately 2% of the invested capital as a management fee.
In order to ensure that each limited partner honors their obligation to provide money when needed, which is referred to as a capital call, venture funds implement onerous terms for forfeit or default. The most common default protection is to wipe out any returns from all previous invested capital. This encourages an active secondary market for limited partner positions, since it makes more sense to sell a commitment than to lose the value of the money invested to date.
Fast forward to Q4 2008, and you have the perfect storm of venture capital destruction. First, a relatively large number of limited partners, such as AIG and Lehman Brothers, are facing solvency issues, and they can no longer honor any capital calls to venture capital funds. The large scale dissolution of limited partners is something new.
Second, as the equity and debt markets have collapsed, the allocation of limited partners to venture capital has increased as a percentage. If an LP has $1 billion under management and 1%, or $10 MM, committed to venture capital and if that $1 billion suddenly becomes $500 MM, the allocation schedule of 1% stipulates that the LP now only invest $5 MM into venture capital. Many LPs have charters that strictly govern these percentages, forcing the LP to sell commitments in the secondary market to comply.
Third, many potential buyers in the secondary market have liquidity issues of their own. The purchase of a commitment requires resources to buy the asset, resources to pay for future capital calls, and resources to cover management fees at a time where the future is uncertain. The lack of liquidity and uncertainty has caused a collapse in the secondary market values, with many commitments selling for $.50 on the invested dollar or less. This in turn has encouraged limited partners that might otherwise commit to new positions in venture funds to consider purchasing discounted positions in existing funds.
Lastly, venture capital returns have been hard hit by the downturn, reducing or eliminating the ability of certain funds to get back any of the original invested capital. Portfolio company acquisitions are on hold, and the IPO market is frozen. For many limited partners, investing more money into certain venture firms is literally throwing good money after bad when cash is king.
Most venture firms worldwide are facing problems as a result of this “Limited Partner Shuffle.” The best firms are distracted by helping limited partners transfer commitments. Other firms will cease making investments for some period of time, possibly forever. Still other firms will not be able to collect their management fees and go under in the next fews months. Nearly everyone will be fundraising and spending a lot less time with their portfolio companies.
Many entrepreneurs are now pitching firms without a future, wasting invaluable time. These “Walking Dead Funds” are going through the motions until the other shoe drops, forcing them out of business. Other entrepreneurs are counting on investments or participation from funds that have no ability to deliver any capital. Lastly, there are entrepreneurs with soon-to-be-insolvent firms that hold controlling preferred equity positions and Board seats, leaving a potentially deadly vacancy in governance and voting control. How do you sell when your primary shareholder is no longer around to grant approval?
As an entrepreneur in today’s market, you need to understand the relative health of the investors that you deal with. Start by asking them directly about their financial resources and the state of their limited partners. Don’t hesitate to ask other entrepreneurs and other funds as well. You future may depend on having good information about the solvency of investors that you deal with.
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Stifling Entrepreneurship
Bill Warner Tuesday, December 23, 2008
Wow, if you are interested in several paragraphs of straight talk about what is happening to entrepreneurship in the United States, read Michael Malone’s December 22nd Wall Street Journal article entitled “Washington is Killing Silicon Valley.”
A New Decade of Stifling Regulation
Malone paints the ugly picture of what our government has done since the beginning of the century and succinctly adds it all up for the reader.
- Sarbanes-Oxley has stifled the possibilities of IPOs for emerging companies with its heavy handed and expensive reporting requirements. The IPO was the major reward for investors and companies until the Congress crushed public companies with regulation, all in the name of preventing future Enrons, forcing the companies to find other forms of exits that were less lucrative. This has been a major contributor the downfall of the venture capital industry as well. Has anyone seen a company saved or a shareholder protected by Sarbanes-Oxley? Probably not, but we sure have seen IPOs go to near zero and billions of wasted dollars in conformance spent since this legislation came to be.
- You can also thank Sarbanes-Oxley’s accounting requirements for the downfall of major financial institutions that were otherwise profitable and cash flow positive. Go find out what mark-to-market means and you will get a headache and fall ill. Our own Wachovia fell victim to this as their balance sheet was shown to be too weak to be a viable lender. Hopefully the SEC will put this practice back in the cooler.
- FASB changed the accounting principles for how stock options are handled, by requiring them to be expensed, essentially removing stock options as a significant incentive for management and employees to participate in the upside potential of a company.
The Unknown Obama Effect
The unanswered question is what more is going to happen in the Obama administration. Throughout the primaries and during the election, Obama campaigned on raising taxes on businesses, increasing the capital gains tax, and taxing the rich. He portrayed successful companies and their management as the bad guys who need to be brought down. All easily said by someone who has never run a business and has no feel for what the contribution of entrepreneurship is to our economy.
These potential actions, along with borrowing more money from foreign countries, taken together have the potential of ending entrepreneurship and capitalism as we have known it, and as a result assure a path to socialism that will drive our economy into depression. We can all look forward to having government jobs building roads and bridges under the guise of stimulating the economy.
We Can Hope It Won’t Be So
The entrepreneur provides the very life blood of our economy. This is where new businesses and wealth creation start. On current course and speed, entrepreneurs will be silenced by having all incentives to achieve success taken away before they even start. We can only hope that Obama will take a much more moderate approach to the economy and listen to people who know what the implications of his actions will be.
