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Yearly Archives: 2010
Next Wednesday – October 13 – Matt Rice will represent the venture industry in a panel discussion on company valuations. The panel, hosted by the Florida Venture Forum and the Gulf Coast Venture Forum, will be held from 5:30-8:30 at the Hyatt Regency in Sarasota. Details can be found here.
If you are in the area, please drop by and join the discussion.
In this brief MarketWatch interview S.P. Kothari, deputy dean of MIT’s Sloan School of Management, offers advice on how boards can “tease out” better information from their management teams. Although Mr. Kothari is speaking about publicly traded companies, we do see some similarities that apply to private company boards as well.
Management teams often feel implicit pressure to sugarcoat negative events or downplay bad news. As a result, Mr. Kothari argues, board members should direct their questioning to areas which management covers more quickly or in a more perfunctory manner. Look for omissions and do not assume things discussed briefly (or not at all) are fine.
In our experience, the relationship between entrepreneur and venture partner in private companies is more cooperative, longer-term, and (mercifully) not subject to the quarterly reporting pressures of public companies. Moreover, venture investors have real “skin in the game” and have the same incentive as the entrepreneur to understand the nuances of the business and focus on long term value creation. As a result, the communication of good news and bad tends to be more forthright and in real-time, enabling partners (assuming they are good partners!) to understand intuitively the right kind of counsel and support to offer during both the good times and during the inevitable challenges of building a business.
Still, even in private companies with strong, motivated board members, there is sometimes a reluctance on the part of entrepreneurs to lay all the cards on the table. Board members should strive both to do their homework and understand the right questions to ask and make sure they have built the kind of relationship with their entrepreneur partners that will facilitate open and honest communication.
Our recently-added portfolio company – WaterMark Medical – was featured in a New York Times piece on emerging trends in health care.
We’ve enjoyed a long term relationship with Sean and Charlie, and backed their previous company – PDS Heart – which successfully capitalized on the same trends in health care.
By STEVE LOHR
MENTION health care reform and the image that instantly comes to mind is a big government program. But there is another broad transformation in health care under way, a powerful force for decentralized innovation. It is fueled in good part by technology — low-cost computing devices, digital sensors and the Web.
The trend promises to shift a lot of the diagnosis, monitoring and treatment of disease from hospitals and specialized clinics, where treatment is expensive, to primary care physicians and patients themselves — at far less cost.
The new models emphasize early detection of health problems, prevention and management of chronic disease. The approaches have adopted a range of labels including “wellness,” “consumer-directed health care” and the “medical home.”
The potential transformation faces formidable obstacles, to be sure. Some of those hurdles include getting patients to embrace healthier lifestyles and persuading the government and insurers to reimburse at-home testing and monitoring devices.
Yet the promise, according to Dr. David M. Lawrence, the former chief executive of Kaiser Permanente, the nation’s largest private health care provider, is “an array of technology-enabled, consumer-based services that constitute a new form of primary health care.”
To glimpse the business opportunity — and the challenge — at the forefront of this emerging, decentralized health care market, let’s look at a start-up in the field of sleep medicine.
The start-up, Watermark Medical, offers an at-home device and a Web-based service for diagnosing sleep apnea. Characterized by snoring and pauses in breathing, sleep apnea is a serious health problem that often goes undiagnosed.
The Austin Business Journal reports (subscription required) on proposed federal legislation to provide small tax credits for equity investments made in companies which have already qualified for federal grants.
In July we blogged about Rhys Williams’ testimony before the U.S. Senate Committee – Subcommittee on Competitiveness, Innovation, and Export Promotion, during which he made several excellent recommendations. The proposed tax credit sounds like a close cousin to two of Rhys’ ideas: tax credits for angel investors and matching local grants to qualified SBIR/STTR grant recipients.
The ABJ also reports that the Austin Chamber of Commerce supports…
“loosening rules that prohibit businesses owned 50 percent or more by a VC firm from applying for SBIR grants because such changes would improve the quality of applications.”
These measures would represent a modest start, but we are pleased to see the growing awareness and encourage everyone involved in the early stage entrepreneurial culture throughout the Southeast and Texas to echo these points to our state and national legislators and regulators as often as possible as we debate how to ignite renewed economic growth in America.
On October 13 Matt Rice will represent the venture industry in a panel discussion on company valuations. The panel, hosted by the Florida Venture Forum and the Gulf Coast Venture Forum, will be held from 5:30-8:30 at the Hyatt Regency in Sarasota. Details can be found here.
Vivek Wadhwa reports that a new study from The Kauffman Foundation demonstrates that not only are new businesses the engine of job growth (while existing firms shed jobs), but the cumulative job creation is remarkably sustainable despite the high failure rate of new firms. Those that do succeed dwarf, in job creation, the many that fail.
When a given cohort of startups reaches age five, its employment level is 80 percent of what it was when it began. In 2000, for example, startups created 3,099,639 jobs. By 2005, the surviving firms had a total employment of 2,412,410, or about 78 percent of the number of jobs that existed when these firms were born.
Fred Schwarz, in The Uncertainty Principle, argues that an economy’s ability to generate innovative companies results not only from the availability of seed capital, but the structure of the early-stage investing ecosystem:
While scientific research in other industrialized nations is centralized, hierarchical, and bureaucratic, in America it is competitive and entrepreneurial. This is not to say that politics plays no role in deciding how American science is funded; far from it. But in America, governmental sources of funding are much more diffuse (half a dozen federal agencies and departments spend at least $1 billion a year on basic research), and private sources are much more numerous, than in most European or East Asian nations. It all adds up to strength through pluralism.
Schwarz cites a few specific American strengths:
- The profusion of funding sources makes it easier for researchers with good ideas to shop around and find a willing partner.
- Independent state universities compete for the best and brightest research. “Americans can consider themselves fortunate that except for the service academies, there is no system of national universities.“
- All our competitive factors – within and between institutions, funding sources, states, federal agencies, and military branches – benefit from “…the absence of any federal Department of Science and Technology – despite the assumption in many quarters that if something is important, it must have its own cabinet secretary.”
Schwarz adds a counterpoint: Europe and China may have an advantage for funding big-ticket items like the Superconducting Super Collider, because they’re “good at spending lots of money with little squawking from the citizens.” However he then favorably quotes Professor William Happer of Princeton who called the SSC’s demise “a tragedy for science” but also cautioned: “I would rather accept mistakes made by the people or their elected representatives than live with mistakes made by scientific bureaucrats.”
Schwarz’s conclusion sums it up nicely:
America’s hodge-podge of scientists, institutions, and funding agencies – imperfect though it may be – is the closest thing the world has to a free market in science, and the results can be seen in Nobel Prizes, citations, and the steady influx of researchers from abroad who know that the United States is the land of scientific opportunity.
The economic future just happened. This study from the Kauffman Foundation finds that well over half of the companies on the 2009 Fortune 500 list, and just under half of the 2008 Inc. list, began during a recession or bear market.
The patents for the Television, Jukebox, and Nylon were granted during The Great Depression. Although we can’t confirm any patent information on the chocolate chip cookie, it too was invented at the same time (1930 to be precise).
Joseph Schmupeter argued that this was an essential strength of the American economy: economic destruction breeds creative success. From The Library of Economics and Liberty:
Schumpeter was among the first to lay out a clear concept of entrepreneurship. He distinguished inventions from the entrepreneur’s innovations. Schumpeter pointed out that entrepreneurs innovate not just by figuring out how to use inventions, but also by introducing new means of production, new products, and new forms of organization. These innovations, he argued, take just as much skill and daring as does the process of invention.
Innovation by the entrepreneur, argued Schumpeter, leads to gales of “creative destruction” as innovations cause old inventories, ideas, technologies, skills, and equipment to become obsolete. The question is not “how capitalism administers existing structures, … [but] how it creates and destroys them.” This creative destruction, he believed, causes continuous progress and improves the standards of living for everyone.
To cite additional evidence in support of our position might have us justifiably accused of “selling past the close,” but this one we like because we found it off the beaten path, in The Weekly Standard.
In Lone Economic Star, Eli Lehrer reports that “in a nation looking for good economic news, Texas stands out as a bright spot.” Although the success “defies easy explanation,” Lehrer maintains that it’s a mix of good land/city planning, investing in research and the arts, and avoiding two mistakes that have an all-too-familiar ring to them: excessive government spending and poorly conceived private lending.
In May alone, Texas, America’s second most populous state, added over 75,000 jobs—more than California (the biggest), New York (third biggest), and Florida (fourth biggest) combined. Texas has shown consistent gains in 10 of the 11 categories of private employment that the Bureau of Labor Statistics measures. The state is far more than cowboys and oil: It has several of the nation’s leading medical research centers (Baylor and UT hospitals among them), one of the biggest computer makers (Dell), and a financial industry that never took a turn for the worse. And, even though unemployment remains a tick over 8 percent (about a point and a half lower than the national average), the rapid growth is bringing this down quickly. During the last week in June, the job-hunt website Monster.com offered more new job openings in Texas than in California even though the Golden State has over 10 million more people.
We focus our efforts at Ballast Point Ventures on growth equity or “expansion capital” financing, meaning we tend to invest once a company has generated at least a few million dollars in revenue and has proven the viability of the business model. Of course, from a 20,000 foot perspective of the private equity spectrum, these still qualify as “early stage” companies, and on occasion we will invest in a very early stage company if we have partnered with the entrepreneur previously.
But we don’t make “seed investments” which are at very earliest stage of the venture capital spectrum. While seed investing isn’t a part of our investment strategy, we know that such investments are a key piece of the venture capital ecosystem and need to be encouraged. Most of these investments are done by “angel investors”, and as we have discussed previously, there are a number of important initiatives that would help encourage seed investing. However, while seed investing by institutional investors is rare, there are a small handful of firms that make such investments in the Southeast as part of their broader investment strategy.
One such firm that we respect and admire – we have known the principals there for a number of years dating back to their previous firms – is Valhalla Partners in Northern Virginia. We recently received a newsletter from Valhalla with an interesting essay by Co-Founding Partner Hooks Johnston on seed investing. We think it offers some valuable insight and wisdom on how to think about seed investing that should prove useful to angel investors and other firms throughout the Southeast that are considering investments at the earliest point in a company’s life cycle.
Partners’ Viewpoint: Hooks Johnston on Seed Investing
Valhalla Partners has now done a number of seed investments, and I would like to pass on some of the things we’ve learned about investing at this stage.
The two central facts of seed investments are 1) the opportunity to participate in a high-growth investment at the earliest possible stage and 2) a daunting set of risks. Investing wisely in seed-stage opportunities means understanding both sides of the equation.