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Category Archives: Venture Capital Industry
Innovation was once a dirty word because it upset the established order; now the word is a form of high praise. It’s also, as we’ve often argued, the source of virtually all of the improvements that make our lives happier, healthier, and more convenient.
In The Great Enrichment, Deirdre Nansen McCloskey writes that “contrary to the conviction of the ‘clerisy’ of artists and intellectuals,” entrepreneurs are “pretty good” and responsible for the “gigantic improvement” in life since roughly 1848, when society as a whole underwent “a startling revaluation of the trading and betterment in which the bourgeoisie specialized.”
(T)he modern world was made not by material causes, such as coal or thrift or capital or exports or exploitation or imperialism or good property rights or even good science, all of which have been widespread in other cultures and other times… [and it] cannot be explained in any deep way by the accumulation of capital, despite what economists from the blessed Adam Smith through Karl Marx to Thomas Piketty have believed, and as the very word “capitalism” seems to imply.
The word embodies a scientific mistake. Our riches did not come from piling brick on brick, or bachelor’s degree on bachelor’s degree, or bank balance on bank balance, but from piling idea on idea. The bricks, B.A.s, and bank balances — the “capital” accumulations — were of course necessary. But so were a labor force and liquid water and the arrow of time. Oxygen is necessary for a fire, but it does not provide an illuminating explanation of the Chicago Fire. Better: a long dry spell, the city’s wooden buildings, a strong wind from the southwest, and, if you disdain Irish immigrants, Mrs. O’Leary’s cow.
The modern world similarly cannot be explained by routine brick-piling, such as the Indian Ocean trade, English banking, canals, the British savings rate, the Atlantic slave trade, coal, natural resources, the enclosure movement, the exploitation of workers in Satanic mills, or the accumulation in European cities of capital, whether physical or human. Such materialist ways and means are too common in world history and, as explanation, too feeble in quantitative oomph…
The magnitude of the improvement stuns. Economists and historians have no satisfactory explanation for it. Time to rethink our materialist explanations of economies and histories…
(W)hat mattered were two levels of ideas: the ideas for the betterments themselves (the electric motor, the airplane, the stock market), dreamed up in the heads of the new entrepreneurs drawn from the ranks of ordinary people; and the ideas in the society at large about such people and their betterments — in a word, liberalism, in all but the modern American sense. The market-tested betterment, the Great Enrichment, was itself caused by a Scottish Enlightenment version of equality, a new equality of legal rights and social dignity that made every Tom, Dick, and Harriet a potential innovator.
Precisely two years ago we blogged about a VC Dispatch article on tips for pitching a venture capitalist. The hook was that it would take not 1 but 7 cocktail napkins – Pitch, People, Pain, Product, Players, Projections, Proposition.
In December’s Inc.com Josh Linkner reminds that (in Silicon Valley) “only one in 300 pitches to a venture capitalist gets funded” before offering 11 insider tips. It’s a good, if somewhat cheeky, list with a decidedly early-stage feel: “Don’t take yourself so seriously. We sure don’t! In fact, we’ll probably make fun of you the minute you leave.” (Ouch!) Even so, it does include good advice, like #9:
Tell us the “hard part.” Picking out cool colors for your new digs will be fun, but easy. All businesses have a “hard part”. Getting customers to pay a premium or attracting top talent. We’ll have fun together with the easy stuff, but we want to understand from you what the biggest challenges will be. We can plan the holiday party later.
Yesterday at the Florida Venture Forum Boot camp event at the Citrus Club in Orlando, Josh Brown (PowerDMS CEO), Cathy McKenna (PowerDMS’s auditor for Vestal and Wiler), Jeremy Sloane (PowerDMS’s counsel from law firm Sloane and Johnson), and I had a chance to do a panel discussion moderated by Steve Castino of Vestal and Wiler on the topic of Ballast Point’s investment in PowerDMS in April of 2014 and lessons learned thereafter.
To no one’s surprise, Josh did a great job in laying out the reasons for his company’s success to date and his rationale for choosing Ballast Point as an investment partner. Josh focused on issues of team-building and empowering employees, even mentioning the famous line from the Founders’ Dilemma as he said that he had to make the decision “Do I want to be rich or king?” He made the point that he could have tried to build a lifestyle business where he could have been “king,” but he saw the market opportunity and the company’s positioning and made the conscious decision to build an exciting, high-growth company.
To do that, he needed to invest in his team in a big way and bring on a trusted investment partner who could really help him on the team-building and network side. He had to relinquish some control in order to accomplish these goals of building an exciting, venture-backed company, but he was able to get comfortable with this decision by making a conscious effort on the relationship side to hire people with the highest ethical standards and choose an investment partner that he knew would support the company in good times and in bad.
Josh has let his talented employees flourish in a way that has driven PowerDMS’s growth beyond what he could have accomplished on his own, and that growth has once again landed PowerDMS on the Inc. 5000 list of fastest-growing private companies. We at Ballast Point are thankful that Josh and the team at PowerDMS chose us as his investment partner, as we have joined them on this exciting journey to build a high-growth, SAAS company in central Florida.
For the 2nd year in a row our portfolio company PowerDMS has been named one of Florida’s best mid-sized companies by Florida Trend magazine. (They’re up to #3 this year.)
The news comes on the heels of May’s news that the company had been named one of Central Florida’s 2015 Best Places to Work by Nebraska-based Quantum Workplace, and June’s big event: the company’s relocation to the Church Street Exchange Building as an anchor tenant in the newly repurposed technology hub. The iconic building, built in 1988, was a shopping, dining, and entertainment destination for theme park tourists until the parks caught onto the idea and built their own. The rebirth of “The Exchange” took partial inspiration from how downtown Chicago’s “1871” building became a hub for start-ups.
We’re very proud of what Josh (Josh Brown, CEO) and his team have built, which is, in addition to being a great place to work, a visionary technology platform and the leader in the ECM/GRC (Enterprise Content Management/Governance Risk Compliance) space.
From Florida Trend:
To identify Florida’s best employers, Florida Trend partners with the Best Companies Group, which surveyed firms that chose to participate. Any firm with at least 15 employees in Florida, including firms based outside the state, could participate at no cost.
The first part of the survey involved a questionnaire about company policies, practices and demographics. The second part went to a randomly selected group of each firm’s employees, who responded — anonymously — to 72 statements on a five-point agreement scale.
The survey also included two open-ended questions and seven demographic questions. The questions focused on eight themes: Leadership and planning; corporate culture and communications; role satisfaction; work environment; relationship with supervisor; training and development; pay and benefits; and overall engagement.
The 2015 baseball season is demonstrating that when it comes to untangling the roles skill and luck play in sports and business, luck may play a greater role than we’d like to think.
With technology and best practices so widely and easily articulated and disseminated, the difference between the best competitors and the worst is less than in the past. So a hot stretch of cluster luck can make the difference.
Case in point: so many teams currently hover close to .500, in contention for the 10 playoff births, that the trade market has been slow to develop. Teams can think in terms of limping into the playoffs and then getting hot, and so take longer to choose whether they’re buying or selling assets.
The pre-season projected standings predicted such parity, with only 23 projected wins separating the leaders from the laggards entering this season and only 2 teams projected to finish with 90+ wins. Welcome to MLB’s 2015 Projected Standings, Where Everyone (and No One) Is a Winner:
Projection systems tend to forecast more conservative winning percentages than we’re used to seeing in the final standings. That’s because projected win totals reflect the most common outcomes of thousands or even millions of simulations, whereas a single season, with its wild fluctuations in luck, offers ample opportunity for teams to significantly exceed or fall far short of their true talent levels… As Phil Birnbaum and Neil Paine have noted, there’s an absolute limit to the accuracy of baseball projections. Even if we were omniscient when it came to team talent levels, we wouldn’t be able to predict luck. And luck has large effects: As Birnbaum wrote, “On average, nine teams per season will be lucky by six wins or more.”
It’s not only harder to separate yourself from the pack, there’s also less incentive to do so:
Last August, Birnbaum wrote that in a rational market, an expanded playoff field should make bad teams more willing than before to spend on free agents, and good teams more willing to tighten their belts. “With more teams qualifying for the post-season, there’s less point making yourself into a 98-win team when a 93-win team will probably be good enough,” Birnbaum wrote. “And, even an average team has a shot at a wild card, if they get lucky, so why not spend a few bucks to raise your talent from 79 games to (say) 83 games, like maybe the Blue Jays did last year?” That’s exactly what we’ve seen. … (However) as soon as it sinks in that not all “postseason” spots have equal value, teams might start prioritizing division titles over coin-flip wild-card games and aiming, once again, for greatness instead of good-enough-ness.
Somewhat ironically, the team suffering the most from bad luck so far this season is the very same team who invented “Moneyball.”
Billy Beane actually built a competitive team, but one that’s had an absolutely brutal run of luck. By BaseRuns, the A’s have played .596 baseball, good for a 51-34 record that would make them the second-best team in baseball. In reality, though, the A’s are a wildly frustrating 38-47 (.447), leaving them a whopping 13 games behind their expected record. No other team in baseball is more than five games below its BaseRuns-expected record. Oakland is 6-21 in one-run games; that .222 winning percentage would be the worst figure over a full season in 80 years.
The A’s will have more luck in one-run games. And they’ll play more like the .596 team than the .447 team over the rest of the season. If anybody in baseball has faith in trusting that longer view of performance, it’s Beane. The problem, of course, is that they may be buried too far in the standings to catch up.
Power Score is the new book by Geoff Smart and Randy Street, the authors of “Who: The A Method for Hiring” (with an assist this time from their colleague Alan Foster). “Who” has been required reading in our shop for several years and informs a lot of the questions we ask (and how we ask them) in our “people due diligence” when we are considering partnering with an entrepreneur or helping one of our portfolio companies hire a new senior executive.
So I was excited to read Power Score, which utilizes the data from 15,000 management interviews over twenty years that the authors and their team have done on behalf of corporations and private equity firms at their consulting company, ghSMART. I love data, and I was impressed with how they mined their unique database to come up with a formula that facilitates successful leadership.
As it turns out, successful leaders get three things right:
1) Priorities – ensuring that they have priorities that are correct, clear and connected to their mission,
2) Who – making sure they have diagnosed their teams strengths and risks, deployed their people against the right priorities, and continually developed their people, and
3) Relationships – working to make sure that their culture and incentive structures support teams that are coordinated, committed and challenged and promote strong relationships with both employees and external constituencies.
The formula seems fairly simple (simple is good on vacation), but the execution is very hard, and very few leaders operate at consistently high levels in all three areas.
The authors offer a scoring system that challenges leaders and their teams to rate themselves on a 1-10 scale in each of the three areas and then multiply the scores (PxWxR) to see how they compare with the best proven leaders in the ghSMART database. (Hint: 500+ is pretty good but 9x9x9 = 729 is the Holy Grail!) More importantly, they describe how to increase your Power Score by continuously improving in each area, and they also offer a lot of helpful real world examples of how great leaders do it.
The book is written in an easy to digest question and answer format and it won’t take long to finish, though I found myself rereading various sections throughout the book and applying them to companies I have been involved with over the years. Much like they do in “Who” for identifying and recruiting outstanding talents, the authors offer a process that can’t help but enhance leadership success if executed faithfully. And, again, unlike most business books it’s backed up by a lot of great data and research on what makes for a strong leader.
I highly recommend the book and plan to send copies to our entrepreneur partners at Ballast Point Ventures, all of whom are looking for that extra leadership edge in their quest to build great companies. We’ve added it to “The Library in St. Pete” for books we highly recommend. You don’t have to take Power Score on your next vacation, but then again haven’t you watched enough movies on your iPad during those long flights?
We recently came across another excellent article on data, decision-making, and cognitive biases. It’s a story about Kristaps Porzingis , a 7’1″ 19-year-old, playing in Liga ACB, perhaps the second-best basketball league in the world. He’s “the type of prospect that has historically torn coaching staffs and front offices apart” as they try to assess his NBA bona fides before the draft.
All draft picks are crapshoots, but some feel like crappier shots than others. It’s uncouth to plainly say, “I have a bad feeling about this guy,” so we do our best to justify our vague inklings. The stronger our distaste, the stronger our effort. So of course it’s the foreigner with the spindly frame and the funny name who has people [grasping for answers]. … What is the draft if not complete pseudoscience? …
He’s like a young Robin trying on Batman’s utility belt — the tools are there, and they’re incredible. They just don’t fit yet, and you can’t be too sure that they ever will. His issues on defense are the same most players his age experience. He bites on pump fakes, he gets caught ball-watching, and he can be a step slow recovering to his man. But there is a chance that, five years down the line, he’ll be doing things that only a handful of NBA big men can do at a high level.
Maybe all of that hokey pseudoscience will prove prescient. Drafting isn’t an art, and it isn’t a science, but if you squint hard enough, it can look like a happy medium. It’s all just waves of confirmation bias on both ends of the spectrum posing as data points, right? It can tell you anything you want it to if you wait long enough. But it can’t, at the very moment, tell you the fate of Kristaps Porzingis. And so, like any other year, we’ll go on trying to find some illuminating detail that will solve the puzzle once and for all, blissfully ignorant to the fact that there’s only one person with the final pieces.
As with the NFL draft, pre-draft metrics have only some predictive power. The data don’t predict a player’s ceiling, can’t account for what kind of system a player will enter, the talent he’ll have around him, the luck he’ll have with injuries, or the intangibles he possesses.
If you’re looking for a bellwether of NBA success, look to the NCAA tournament. Its pressure-packed contests featuring the best college players in the country in front of gigantic audiences turns out to be a meaningful simulation of NBA conditions. Even though it’s a very small sample size – for most players just a game or two – the data show that players who move up the draft board as a result of their performance in March Madness deserve it.
The crucial distinction to remember on this topic is that Big Data has limits. While it may help make accurate predictions or guide knotty optimization choices or help avoid common biases, it doesn’t control events. Models can predict the rainfall and days of sunshine on a given farm in central Iowa but can’t change the weather. A top draft pick may or may not develop based on the system, surrounding talent, &etc.
In our experience the best results often come from a combination of deliberation and intuition. Too much data can lead to analysis paralysis, common sense can be a shockingly unreliable guide, and those who rely on intuition alone tend to overestimate its effectiveness.
The answer for Porzingis is obvious: enroll him in an American D-I hoops powerhouse – we’d recommend a school in the Southeast or Texas – and hope that school enjoys a deep run next March.
This past weekend’s WSJ had an excellent article on how recent, fascinating developments in targeted therapeutics and immunotherapy show great promise for the treatment of cancer. It’s a must-read for anyone interested in the topic – whether you’re a patient, family of a patient, or even an investor in the technologies that are used. (Full disclosure: as BPV is in MolecularMD, a molecular diagnostics company that develops custom companion diagnostic products and supports clinical trial services for targeted cancer therapies.)
Memorial Sloan Kettering Cancer Center CEO Dr. Craig Thompson explains why he’s optimistic about new therapies aimed at increasing the body’s own ability to fight cancer in The Future of Cancer – Closer to a Cure.
Most people don’t acquire a significantly higher risk of cancer from the genes that they inherit from their parents. Instead, cancer arises as a result of copying errors (mutations) in the inherited genes, as our bodies make new cells to maintain our various organs. A recent widely quoted publication suggested that these errors are an inevitable consequence of trying to copy three billion bits of information as a cell divides.
That may be true, but it doesn’t mean getting cancer is inevitable. The fastest and most extensive rates of cell division occur when we are developing as embryos. Billions upon billions of cells are produced each day, yet cancer in newborns is exceedingly rare. In contrast, cell division in each of our tissues slows as we grow older, while the incidence of cancer increases with age.
What accounts for this discrepancy? We damage ourselves through exposure to invading pathogens and other environmental threats, thereby “constantly damag(ing) our tissues, forcing restorative cell proliferation to occur in a war zone of damage.” But recent advances in targeted therapeutics and immunotherapy “can have stunning efficacy” in the right situation without the toxic side effects of traditional chemotherapy.
It is in this inhospitable environment that most cancers arise. We have known for some time that many of these environmental exposures damage DNA, making it harder to copy and resulting in more mutations as cells divide. Recently, we have come to appreciate that during regeneration of damaged tissue, the rest of the body pitches in to keep every cell in the damaged tissue alive. Not just the healthy cells, but also the ones that have acquired mutations that render them unfit. Our immune system, which usually detects and destroys cells with excess mutations, is turned off…
Patients whose cancer bears specific mutations are now more effectively treated with drugs designed to selectively reverse the effects of those mutations. Such drugs are termed targeted therapeutics. The downside of this class of drugs is that they usually don’t have any benefit in treating cancers that don’t carry that specific mutation. While we don’t yet have many therapies that target cancer-causing mutations, the results can be dramatic when such drugs are available…
Immunologists have found that our immune system has a built-in “off switch,” a checkpoint that shuts down an immune response a few weeks after it is initiated. A new and expanding class of cancer therapeutics have been developed that have the ability to block this normal shut-off switch and thus augment the ability to recognize and destroy cells carrying mutations… Some patients with widely metastatic cancer have been rendered cancer-free with therapies aimed at increasing the body’s own ability to fight cancer.
Dr. Thompson closes with optimism; an optimism we share, thanks to the great work done by the teams at companies like MMD.
Why is finding a cure for cancer taking so long? A major reason lies in the fact that cancer is not one disease, but many. Each tissue has its own unique progenitor cells, and each tissue uses only a subset of the genes we inherit from our parents; each tissue is exposed to environmental insults differently. We are just beginning to understand the interplay of all these factors in the origin of the many forms of cancer. Understanding these issues will ultimately allow us to optimize the treatment approach to each patient’s disease.
While we aren’t yet ready to put cancer on the extinction list along with “simpler” diseases like smallpox and polio, it is clear that with more science—the lessons learned from cancer research over the past two decades—we face the future with less fear.
Genomics vs. Genetics
On related note, the conversation about new targeted therapies includes two terms – genomics and genetics – that are mistakenly used interchangeably. Genetics is the study of single genes in isolation, while genomics is the study of all the genes in the genome and the interactions among them and their environment(s). Genome British Columbia has a useful explanation of the distinction:
If genomics is like a garden, genetics is like a single plant. If the plant isn’t flowering, you could study the plant itself (genetics) or look at the surroundings to see if it is too crowded or shady (genomics) – both approaches are probably needed to find out how to make your plant blossom…
In studying human disease, for example, genomics examines all the genetic information to determine biological markers predisposing an individual to disease, whereas genetics uses the information from one or two genes to explain a disease state. Many diseases due to single gene defects have been identified. Now, geneticists want to tackle multifactorial diseases caused by the complex interactions between multiple genes and the environment.
Great piece by Robert J. Samuelson in last Sunday’s Washington Post about how innovation resulting from M&A activity may lift corporate profits, but only the innovation generated by fast-growing start-ups broadly raises national prosperity.
(A) larger issue transcends individual deals. The popularity of M&A actually involves economic weakness. Unable to expand internally — by creating products or entering new markets — companies rely on M&A for growth. However, what works for the firm may work less well for society. Although buying another company may enhance the acquiring firm’s innovation, it doesn’t add much to society’s. And society’s capacity to innovate is crucial. It generates the wealth needed to raise incomes and dampen social conflicts…
In our mind’s eye, the economy is swarming with entrepreneurs. Competition is intense. Old-line firms adapt, or die. Just the opposite may be happening: Evidence suggests that entrepreneurship is in decline and that U.S. firms are becoming older, more entrenched and less dynamic…
American capitalism is middle-aged. Older firms, conditioned by success, are more rigid. They’re invested, financially and psychologically, in existing markets and production patterns. They can adapt and innovate, but it’s hard. The M&A surge is one way older firms strive to overcome internal stagnation. What’s worrisome is not the success of the middle-aged businesses; it’s the weakness of young firms and the apparent erosion of entrepreneurship. As other research has shown, start-ups ultimately account for a disproportionately high share of new job creation and innovation. The vigor of these new firms is essential for the economy to revitalize itself.
We don’t know what explains their slide, though the sheer mass of government regulations is one candidate. Older firms have the lawyers and administrators to cope with the red-tape deluge; many small new firms drown. But that’s just a conjecture illuminating the larger question. If the economy discriminates against young firms, we will all be paying the price for many years.
Samuelson’s piece fits nicely with what we wrote last July in Not All Innovation Is Alike:
Some politicians think “innovation policy” means spending taxpayer money on promising young firms favored by bureaucrats. Rather, innovation policy means ensuring that the status quo is continuously challenged by upstart rivals and threat of failure. Those are the keys to the Schumpeterian “gales of creative destruction” that drive innovation, which in turn drives long-term economic growth and improvement in living standards.
National prosperity is generated by the start-ups who innovate and challenge entrenched incumbents. Anyone who’s worked for a large corporation – especially in an R&D department – would not rely primarily on that model for innovation. Anyone who’s worked for a large corporation – especially in a dying industry – would not rely primarily on that model for job growth. Yes, start-ups lack the economies of scale and R&D budgets of larger firms; but that’s the support venture capital provides. Those start-ups that do gain traction are able to raise capital, and, with hard work and a little luck, become large companies… and then face the next generation of innovators.
“Cyrus W. Field may not have been the first entrepreneur in the modern mold, but he was without doubt one of the greatest.“
So writes John Walker, about the laying of the world’s first trans-Atlantic telegraph cable. He also has this to say about entrepreneurship in general:
There are inventions, and there are meta-inventions. Many things were invented in the 19th century which contributed to the wealth of the present-day developed world, but there were also concepts which emerged in that era of “anything is possible” ferment which cast even longer shadows. One of the most important is entrepreneurship—the ability of a visionary who sees beyond the horizon of the conventional wisdom to assemble the technical know-how, the financial capital, the managers and labourers to do the work, while keeping all of the balls in the air and fending off the horrific setbacks that any breakthrough technology will necessarily encounter as it matures.
When the first trans-Atlantic electronic message arrived – Queen Victoria telegraphed congratulations to President Buchanan – it was as if a new era had dawned, as if a new envisagement of the world were possible. More than a century before the internet, Cyrus Field had taken the first steps towards wiring the world together.
The initial euphoria gave way to deferred dreams. Stretched to the limit with un-perfected technology, the cable and the endeavor were soon both dead in the water and had to be rescued with follow-on rounds of financing and a new vocabulary of electrical engineering (Watt, Ohm, Ampere).
This documentary tells of the setbacks and bouncebacks, both technical and commercial, from the earliest stages of Field’s start-up company through to the completion (13 years later) of his world-changing entrepreneurial success.
Field’s ability to coax ever more capital from investors in the face of so many failures (and accusations of fraud!) was remarkable, and likely made possible by (a) his confidence-inspiring optimism, “the eternal sunshine of the entrepreneur’s mind” and (b) the sterling reputation he had earned in his first business, during the turnaround of which he had “made good” on outstanding debts for which he had no legal obligation to pay.
The Top 10 (to us) highlights:
1. The cable was a copper wire, covered with a foul-smelling tropical sap called Gutta Percha for insulation, with thick iron wires wound around it for protection.
2. They found a flat area under the North Atlantic that was so perfect they termed it “The Telegraph Plateau.”
3. The flip side of Field’s optimism: he badly underestimated the scope of the project and blew through the initial round just to get to Newfoundland.
4. No single ship could carry the entire 2500-ton load. Two ships met midway across the North Atlantic, spliced together the wire, then sailed very precisely and carefully in opposite directions.
5. The first attempt failed utterly, the cable repeatedly broke.
6. During the second attempt, the ship’s compass was affected by the amount of iron and created serious navigational errors.
7. Pressed for time, because he was pressed for money, Fields forged ahead with insufficient testing of his chief scientist’s theories of the voltage required. A month after the first successful message they burned through the insulation somewhere on the ocean floor. Subsequently, the future Lord Kelvin invented the Mirror Galvanometer to amplify the weak signal at the end of the line.
8. The scale of the debacle caused the first ever “Board of Inquiry” after a technical failure. The board laid most of the blame on the chief scientist, but also faulted Field’s impulsiveness, calling him “a man obsessed by insanity.” He drove the project forward and harnessed the people who needed to be involved, but was “a bit blinkered” and did not take in all the information available to him.
9. For the third attempt a decade later, the largest ship in the world (The Great Eastern) was available for purchase at pennies on the dollar. No longer would they have to worry about mid-ocean splicing. In a cruel twist of fate, the circuit failed mid-project and miles of bad cable had to be spliced, mid-ocean! The captain reversed course, dropped a grappling hook, snared the cable after multiple attempts, and winched it 3 miles (!) up to the surface for repair.
10. Even today, most of the communication between North America and Europe is carried by trans-Atlantic cable.