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.
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Raising Venture Capital Looks Bleak
Bill Warner Friday, December 19, 2008
The National Venture Capital Association in its annual Predictions Survey paints a pretty bleak picture of what venture capital is going to look like in 2009. Some think that it is more optimistic than it should be. After all, they cannot be so negative as to further alarm their limited partners.
But, some venture capitalists are saying that this is going to be worse than the dot.com bust of 2000 and 2001. The amount of money invested will drop considerably. The only exception might be the late stage companies that are close to a viable exit, but the valuations for these companies will be considerably compressed. It may be so bad that we will lose many venture capital firms that will either shut down operations or move to other investment instruments. We are already seeing evidence of this movement.
New Investment Significantly Curtailed
At the root of the problem is the reduction of the pipeline of money that comes to venture capital firms in the form of institutional money from pension funds and foundations. We have seen clear evidence that raising money for new funds will be very difficult and commitments for capital for current funds are already being curtailed.
If you have a company that needs its first round of venture financing, you are going to have a very hard time getting it. Only the very best deals will make it as 96% of those surveyed said that it will be much harder to get an initial investment. That’s sugar coating for “forget it.” If you are an existing company that needs a follow on round, you are going to have almost as difficult a time; so says about 93% of those surveyed.
Clean Tech and BioTech are Hot; Semiconductors and Media Are Not
Clean Tech, biotech and medical devices are the only industries that might see a significant increase in investment in 2009. Semiconductors and media, along with wireless and software, will experience substantial decreases in investment. In addition, international investments will decline as well.
Not that a large amount of venture capital money ever goes towards seed round companies, seed and early stage companies will suffer as venture capital firms use more of their money to shore up their current portfolios.
No End in Sight
We are only seeing the early signs of what is happening to the private equity world. The whole venture capital industry is in turmoil and could undergo significant changes in their investment priorities and opportunity selection. This will have significant implication on angel investors who may have to carry more of the load to bring companies through their early life.
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Internet Companies - Now Grownups
Bill Warner Thursday, December 18, 2008
In reflecting on the recent Internet Summit in Research Triangle Park there were certainly an impressive group of entrepreneurs, investors and consultants presenting on a wide variety of topics. In addition to a delightful key note presentation by Bob Young, the conference covered such topics as the current state of the internet markets, as well as the future of the SaaS, email marketing, blogging, search engine, ecommerce, mobile internet, and social networking businesses. Many related topics about venture capital, internet law, internet infrastructure and internet marketing rounded out the conference with an overall comprehensive look at the state of internet-based businesses.
However, it struck me how different this group of people is from the comparable group of people who were presenting as little as eight years ago. During the dot.com era of the late 90’s and early 2000’s, there certainly was as much enthusiasm as we saw at this Internet Summit, but the business maturity of the presenters at that time was far less than today.
In the dot.com era, we would have heard about how “cool” the internet is and what the possibilities are for reaching consumers and collaboration, but not much on why any of it made business sense. Yet, these companies got millions of dollars to try out their ideas; signed on the backs of napkins over a beer at the bar.
At this Internet Summit, the discussions and presentations were distinctly different from the dot.com era:
- We heard about successful business models instead of business dreams.
- They presented where internet commerce is today in dollars and cents instead of the assertions that it will be billions someday.
- We got information on what works and what doesn’t work in internet marketing and blogging instead of claims that everything works.
- Entrepreneurs talked about how revenue traction is effectively achieved instead of boasting that the world would beat a path to their doors.
- Venture capitalists were discussing quantifiable markets and revenue models that work and had solid opinions on what makes business sense instead of clamoring to write checks.
- The black cloak was taken off of email marketing with a very real perspective as to why it makes sense today, instead of glossing over its simplicity.
- We heard about the details of what makes the SaaS model effective and the solutions to the real issues of successfully deploying the infrastructure and achieving cost effective marketing and sales programs instead of words about moving to the ASP model because it is cheaper.
- They presented solid business rationale for mobile applications and the outlook for new mobile technologies instead of explaining how cool ringtones are.
- The realities of social networking were presented including a balanced view of this delicate business model instead of projections about the wonderful world of collaboration.
- We got the down-to-earth realities about the future of search engine businesses were presented in a very candid and realistic way instead of the techno-geek talk of the dot.com era.
There was a distinct absence of the unrealistic zealots of the dot.com era. Where did they go? Heck, many of the people we saw at the Internet Summit were some of the very same people who made the outrageous claims during the dot.com era. They look older now. They sound like business people with a purpose. They make sense.
Then it dawned on me. Many of the entrepreneurs of the dot.com era have grown up and are now adults in the business world. They have learned a great deal from their experiences, regardless of success or failure. They are seasoned and thoughtful business people who absolutely know the ins and outs of their businesses. They are well connected to their industries and know exactly how their business models work, know what’s wrong with them and have innovative ideas on how to fix them.
Out of the ashes of the dot.com era has come a powerful bread of internet business professionals that know how to build successful internet-based businesses. In fact, they are teaching others as they lead their companies and mentor other entrepreneurs in the community. We are not in Kansas anymore. You can have much greater confidence that this industry is now being led by some of the brightest, energetic and insightful business professionals in America.
