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Yearly Archives: 2011
A recent Wall Street Journal summarized a new set of ideas (from The Kauffman Foundation) to assist job-creating companies: easier access to early-stage capital, lower taxes for long-term capital gains, regulatory reform, and more. There is a slight misconception embedded in the conventional wisdom about those “job-creating companies:” jobs are created mostly by new businesses, which start out small, as opposed to the more common short-hand of “small businesses.”
With early-stage activity at its lowest level since 1977, it’d be a good time for ideas like the aforementioned to help restore a favorable and predictable business environment that provides the right incentives for new business formation – for entrepreneurs and their sources of capital.
One more reason to spur entrepreneurial activity during a downturn: over half the companies on the F500 were started during a recession or bear market.
A frequent theme of our writing here, and our conversations with our entrepreneur partners, is board performance: there is more to strong board performance than best practices. The critical factor is a ‘robust social system’ in which members’ informal modi operandi ensure that all the well-designed board processes function properly.
McKinsey also often writes on the topic of boards, and recently seems to have borrowed a page from our song book.
Just under two years ago we wrote:
The end of every boom-bust cycle during my lifetime has included a fin de siècle scandal: insider trading punctuated the ’87 crash, accounting irregularities (think Enron and Worldcom) helped pop the tech bubble of the ’90s, and our most recent bust was characterized by lax governance at Fannie & Freddie and more than a few banks.
We all understand the business cycle, and we all understand human nature… but what about all those good governance measures that get implemented in the wake of each meltdown? Why do they inevitably fail to prevent the *next* crisis?
Presumably, those companies and regulatory bodies have boards comprised of accomplished and highly intelligent members, with personal wealth at stake… (I)t’s likely that they were following the current and best practices for strong and effective board oversight.
Simon C. Y. Wong, a partner at London-based investment firm Governance for Owners and adjunct professor of law at Northwestern University School of Law, hits many of the same notes in this past June’s McKinsey Quarterly:
Why is it that despite all the corporate-governance reforms undertaken over the past two decades, many boards failed the test of the financial crisis so badly? … (I)t’s a sure bet that most of these boards would argue—and demonstrate—that they had best-practice structures and processes in place.
The answer, I believe, after years of examining and advising scores of boards, is that such best practice isn’t good enough, even if your board is stacked with highly qualified members. Without the right human dynamics—a collaborative CEO and directors who think like owners and guard their authority—there will be little constructive challenge between independent directors and management, no matter how good a board’s processes are.
Here Mr. Wong later uses the formulation that serves as the title of this post:
[B]oards that operate to their potential are characterized by constant tensions, coupled with mutual esteem between management and outside directors. Rather than leading to endless bickering, this virtuous combination helps to facilitate healthy and constructive debate and improves decision making.
And here he makes an excellent point about ownership that is especially true in the venture capital industry:
Directors with an ownership mind-set—whether from the family or outside—have passion for the company, look long term, and take personal (as distinguished from legal) responsibility for the firm. They will spend time to understand things they don’t know and not pass the buck to others. They will stand their ground when it is called for. Ultimately, the success of the company over the long term matters to them at a deep, personal level.
In the venture world our long term reward depends heavily on whether or not the value of our portfolio company appreciates. Furthermore, there are far fewer investors (than in a publicly traded company) so owners are more “meaningfully engaged.” Owners of private companies get to pick both their investors and their board members. If entrepreneurs pick great partners (broadly defined) to fund their business and make sure both financial incentives and long term goals are aligned, they will have achieved “high performance” corporate governance that will contribute substantially to their eventual success.
The Wall Street Journal has recently devoted some coverage to dramatic advances in the field of personalized oncology, in which genomic responses to therapies are leading to breakthroughs in cancer treatment. One of our Florida-based portfolio companies, MolecularMD, provides highly validated, standardized pharmacogenomic tests that support regulatory approval and clinical adoption of such targeted cancer treatments.
MolecularMD is a vital part of the growing prominence and promise of the biotech industry in Florida, and is led by CEO Sheridan Snyder and Chief Scientific Officer Dr. Brian Druker. Mr. Snyder is a renowned leader in the biotechnology industry and behind several previous successful start-ups in the field, including Genzyme (NASDAQ: GENZ) where he served as Chairman, CEO, and President. Dr. Druker is a recipient of the Lasker-DeBakey Clinical Medical Research Award for his critical role in the development of Gleevec, a drug featured on the cover of Time magazine and described as a “magic bullet” that “convert(ed) a fatal cancer into a manageable chronic condition.”
Below you can find excerpts from the recent coverage of personalized oncology in the WSJ. The National Comprehensive Cancer Network provides an introduction to the topic of biomarkers and targeted therapy here.
June 5, WSJ – Major Shift in War on Cancer:
New research is signaling a major shift in how cancer drugs are developed and patients are treated—offering the promise of personalized therapies that reach patients faster and are more effective than other medicines.
At the heart of the change: an emerging ability for researchers to use genetic information to match drugs to the biological drivers of tumors in individuals. Studies released at the annual meeting of the American Society of Clinical Oncology here are helping to support previous findings that personalized medicine—introduced more than a decade ago—is closer to being realized as a weapon to fight cancer.
A few weeks ago we shared this abbreviated version of the “10 Rules of Entrepreneurship” presented at a conference in Austin by a founder of LinkedIn.
We’ve come across a parallel list at Working Knowledge (from Harvard Business School): “Top Ten Legal Mistakes Made by Entrepreneurs.” We’ll excerpt it as we did with 10 Rules… while also encouraging you to read the entire piece. Here are a money graf and 2 (of the 10) most directly relevant to this audience:
“While the language of the law can be intimidating, the concepts are usually quite straightforward,” she [professor Connie Bagley] says. “Lawyers tend to be risk averse, and if you delegate to them you will usually stay out of legal trouble but can often compromise your business objectives. [The coaching] I give entrepreneurs is to give them sufficient comfort with the legal concepts to feel confident in driving the process, to understand the ways in which the law is a constraint, but also the ways in which it is a tool that can help you create and capture value.”
#6 – Negotiating venture capital financing based solely on the valuation. Valuation is not the only thing one should consider when selecting a venture capitalist or when negotiating the deal. There are many other ways for venture capitalists to get compensated if they end up paying a high price for shares. These include requiring participating preferred with a high cumulative dividend, redemption rights exercisable after only several years, and ratchet anti-dilution protection with no cap. One must ask, what’s the reputation of this firm? Do they have a history of standing by the entrepreneur if the entrepreneur stumbles? Do they have good contacts in the industry? In trying to build alliances, do they know the big players? A no-name firm offering the highest valuation is often not the best source of equity.
#8 – Hiring a lawyer not experienced in dealing with entrepreneurs and venture capitalists. Many venture capitalists say that they often rate the judgment of entrepreneurs by their choice of legal counsel. Lawyers who have no experience working with entrepreneurs and venture capitalists will most likely focus on the wrong things while failing to recognize some of the more subtle potential traps. It’s better to hire someone who has played the game, who knows what’s standard and what isn’t, and who will get the deal negotiated and closed promptly.
As with most aspects of building a business, choosing the right partners – including who represents your firm and its interests – is crucial. The same rigor that is applied to building a sales force or augmenting an executive team should be utilized in selecting legal counsel. Credible counsel will both protect your legal interests and facilitate a successful launch to the entrepreneur-venture capitalist marriage.
Our region took 9 out of the 10 top spots in Forbes’ list of The Next Big Boom Towns in the U.S. The rankings were done in conjunction with Mark Schill at the Praxis Strategy Group, and are based on job growth, attractive lifestyle, ease of starting a business, and a broad range of demographic factors.
We do love Phoenix, but these are several of the cities we and our entrepreneurs call home.
- Austin, TX
- Raleigh, NC
- Nashville, TN
- San Antonio, TX
- Houston, TX
- Washington, DC-VA-MD-WV
- Dallas-Fort Worth, TX
- Charlotte, NC-SC
- Phoenix, AZ
- Orlando, FL
Enjoy this potpourri of our twitter activity from the first half of 2011, in case you missed any of them:
- Book review of “Great Again”: Cut corporate taxes, reduce regulatory burdens, rev up the patent office.
- RIP Ray Townsend, the Thomas Edison of meat and member of inaugural HOF class w/Jimmy Dean and Frank Purdue.
- Have D.C.’s ‘Best Schools’ Been Cheating?: Who erased all those wrong answers?
- VC = 0.2% of GDP, but the revs of companies created =21% of the economy WSJ.com: Whatever Happened to IPOs?
- How Entrepreneurs Led the Way to Revolution in Egypt.
- Horizon Data Centers enabling federal govt move to cloud computing.
- Tampa area venture investing rebounds in 2010, with Tower Cloud leading the way.
- Improvements & innovation in healthcare contributed to 50% of economic growth over the past two centuries.
- TX is #1 magnet state 6th yr in a row; FL #3. From Allied Van Lines 43rd annual magnet states report.
Mark Twain famously quipped, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
Today’s consultants might describe the same phenomenon as confirmation bias in the decision-making process. It’s one type of cognitive bias, defined as “the tendency to make systematic errors in certain circumstances based on cognitive factors rather than evidence.”
Every leader has internal biases, some of them subconscious or hidden, which can create especially tricky traps that complicate sound decision making. Several books on the topic can be found in The Library in St. Pete, and we have written on various manifestations of the problem here:
- Our “Vintage Future” series (I, II, and III) takes a partially tongue-in-cheek look at the history of expert predictions in technology and investing.
- In It’s easier to rationalize than to be rational we recommend strategies for overcoming the “compulsive yes man” inside our heads.
- Inside the mind of great entrepreneurs draws a distinction between corporate managers and entrepreneurs: one believes that to the extent he can predict the future, he can control it; the other believes that to the extent he can control the future, he doesn’t need to predict it.
Duncan Watts’ new book explores the same reality Twain observed using humorous real-world stories Twain could have invented. Here we offer two brief excerpts, originally published as part of Christopher Chabris’ book review in The Wall Street Journal. One exposes common sense as “a shockingly unreliable guide to truth [that we rely on] virtually to the exclusion of other methods of reasoning,” while the other recounts the modern history of the Mona Lisa to demonstrate how common sense “is also inclined to conclude that individual successes (and failures) are determined by inherent qualities rather than by unpredictable circumstance.”
During World War II the U.S. military surveyed 600,000 soldiers for a research project. Two of its many findings were that better-educated soldiers suffered more psychological distress from their wartime experience than their less-educated comrades and that soldiers from rural areas were happier than those from urban backgrounds. These conclusions are hardly surprising: Effete intellectuals should have more trouble handling the stress of war, and farmers are more accustomed than city folk to harsh, army-like conditions. What could be more obvious? A grandstanding politician could easily denounce the entire study—or the entire enterprise of social-science research—as a massive waste of money on the basis of “discoveries” like these.
Wait, change that: The military study actually arrived at the opposite conclusions. The sociologist Paul Lazarsfeld—aiming to show how “common sense” justifications can be found for almost any conclusion—pulled the switcheroo in a 1949 review of the survey’s results. In fact, educated soldiers were less troubled than uneducated ones, and urban soldiers were happier than their rural counterparts. The real findings are just as explainable as the fake ones; perhaps education equips us to cope with stress and urbanites are more accustomed to living in close quarters.
Mr. Watts asks why the “Mona Lisa” is the most admired painting in the world today—why most people believe it to possess unique, timeless features that set it apart… Before the 20th century, the “Mona Lisa” wasn’t even the most popular painting in the Louvre. But in 1911 it was stolen, smuggled to Italy and exhibited widely before being returned to France, whereupon Marcel Duchamp defaced a reproduction of it and labeled his work with an obscene pun. The painting rocketed to fame, its pigments and brushstrokes unchanged. The “Mona Lisa” is the artistic equivalent of the investor who did nothing special until he got lucky a few years (or quarters) in a row and was fêted as a genius. Ecclesiastes told us that time and chance happeneth to all, but we easily forget.
Chabris acknowledges that it is “rarely practical to run the perfect experiment” before making a decision but insists we can be “more deliberative and reflective as we gather and analyze facts to inform our decisions.” When we over-rely on common sense alone, we risk “rejecting a more thorough effort to solve a problem and settling for an easy one.”
Our hosting service is performing some upgrades this Thursday, so there’s a chance we will be briefly off line sometime between 9:00PM and 1:00AM.
Thanks for your patience and your readership.
An episode from Honda’s “Dream the Impossible” documentary series features Danica Patrick and echoes our recent book review of Tim Harford’s “Adapt – Why Success Always Starts with Failure“. Success may not always start with failure, but the wise man expects a cameo appearance at some point in the movie.
“With all due respect” Ricky Bobby, we think Ms. Patrick and the good people of Honda have a healthier grasp of failure: “it is a by-product of pushing the envelope” and “we can only make fantastic advances (in technology) through many failures.”
The video is also available for viewing at the BPV Youtube channel.
The Top 10 looks familiar to us, as it constitutes most of the geography in which we have focused our investment efforts for over twenty years now, and adds to the growing list of evidence that some states understand job creation better than others.