A Reader Has Spoken: Four Stars, Says Serge J. Van Steenkiste

Just got a nice and new review today on Amazon.com from a prolific reviewer named Serge J. Van Steenkiste.

The Unexpected Father of Venture Capitalism , August 4, 2008
By Serge J. Van Steenkiste (Atlanta, GA) – See all my reviews

Spencer Ante sheds a powerful light on the life and accomplishments of a foreigner who came alone to the U.S. in 1921 C.E. That man had neither family nor friends at his arrival. Furthermore, he never graduated from college in his native country. On top of that, that man was not rolling in money. The WWI had wiped out his father financially.

However, that foreigner had some assets: a strong Protestant work ethic, a passion for technology and the future, a confident yet humble personality that was at ease with people of all stations in life, a strong volubility, a sense of compassion, and a deep understanding of the importance of education. Furthermore, that same foreigner wanted to run one day his own company after the example of his father.

Who would have bet in 1921 that such a foreigner would one day become:

1) Arguably the most influential and popular professor at Harvard University’s Graduate School of Business;
2) The driver behind the foundation of INSEAD, one of the leading business schools in the world;
3) The man who played a key role in the well-being of the American soldiers during WWII by spearheading to their benefit a quite revolution in engineering;
4) And last but not least, the father of the venture financing industry as we know it today around the world.

That foreigner was a Frenchman and his name was Georges Doriot. As it is often the case, an extraordinary woman, who remained mostly in the background, was part of that story. Her name was Edna Allen and she was American.

To summarize, Ante succeeds in bringing back to light a man whose contributions deserve to be better known, especially, in business circles.

THANKS SERGE!!!!

The Worst IPO Year on Record?

This year is shaping up to be the worst year for initial public offerings in perhaps 20 years.

In the second quarter of 2008, there were no venture-backed IPOs. Zero. Nada. Nothing.

I spoke to a bunch of big investors, venture capitalists, investment bankers and limited partners who invest in VC funds to find out what’s going on. Check out my story here that ran on BusinessWeek online.

In addition, I shot a video with DCM co-founder Dixon Doll and National Venture Capital Association President Mark Heesen. Check it out here.

Are VC Returns Unfairly Judged? Why Fred Wilson is a Great Host & Thoughts on Doriot Quote du Jour

For the last six days, Fred Wilson has been posting a Doriot Quote of the Day. It’s a new addiction of mine to see what quote Fred comes up with each day. He’s picked some of my favorites and surprised me some other times.

Like today, Fred quoted me! Here’s the snippet from Fred’s blog A VC:

“Thanks to Digital Equipment’s blockbuster IPO, ARD met Doriot’s goal of generating superior performance by producing a 17 percent rate of return during its twenty-one year history, a significantly better return than the 13 percent average of the Dow Jones index during the same period.”

This is not a Doriot quote either. In fact, it’s not a quote at all. Spencer Ante wrote this. The reason I posted this is that I think the expectations for venture capital have been skewed by several periods of strong returns (the late 90s in particular). Over the long haul, I think VC should produce high teens/low 20s returns after fees and carry. The 17 percent number that ARD delivered seems about right. You have to remember that 17 percent over twenty-one years is 23x the initial capital invested.

So far, the post has generated 13 comments.

One reader Mats Myrberg asked:
17% over 21 years is really an incredible record. If you take out the DEC IPO what does the record look like? Also is there historical data on VC funds (and managers) and their return rate to give this more context? This would be interesting data.

Good question, Mats. As Fred says, VC is a business based on the long ball. If you strip out DEC, ARD’s 25-year rate of return was 7.4%, according to a report by Patrick Liles that I sourced in the book. It’s 25-year rate of return was 14.7%.

Here are the rest of the return figures for ARD. As you can see, ARD reached its peak return as an independent firm in 1969 when it hit 17.9%. I bet if you held onto your portion of DEC shares, that return would have gone even higher, above 20%, because DEC continued its spectacular run for another 10 years.

1966 9.5%
1967 16.7% (this is the figure that Fred referenced in his original post, one year after the DEC IPO super-charged ARD’s portfolio)
1968 15.5%
1969 17.9%
1970 14.9%
1971 14.7%

One final thought: As the NYT review pointed out, Doriot’s “genius was to coax investors to wait through years of uncertainty.” Consider this: ARD did not generate a positive return on its original $3.5 million investment fund UNTIL ITS EIGHTH YEAR!!! And even then the return was a paltry 1.5%. It was not until 1959 that ARD started to generate returns in excess of 5%. And it never reached a double-digit return until 1967. So you gotta hit that home run to outperform the market.

What the Venture Capital Funding Data Means

VCs are getting a little cautious–and that’s OK.

In the U.S., venture capital outlays dropped 8.5 percent to $7.1 billion in the three months ending March 31 from the $7.8 billion invested in the previous quarter. First-quarter US investment totals were the smallest since the fourth quarter of 2006, according to the report prepared by the Thomson Reuters research house and the PricewaterhouseCoopers accounting firm for the National Venture Capital Association.

While an 8% drop in the revenue of publicly traded company would prompt a whupping, these numbers aren’t as negative as they seem. Here’s why:

1. There is no capital crunch. VC funding is still at a historically high rate. VC investments levels hit a six-year high in 2007. And $7.1 billion is a lot of money. The outlays, while lower, remained in line with the $7 billion-plus level seen in each of the past five quarters. Wht does this mean? Good and/or promising companies can still raise money.

2. Parts of the VC market are humming. Web 2.0 is hot, while health care may be cooling, according to data from VentureSource. All this is a reminder that the VC market is not homogenous. Venture capital firms invested $1.74 billion in 142 health care companies, a drop of 43% and 19%, respectively, from the year-ago quarter. Since several health care firms have recently raised large funds, the drop-off may be temporary.

On the other hand, companies VentureSource classifies as information services, which includes many companies dealing on the Internet–continued to draw capital. Investment funding jumped to $1.59 billion in the first quarter of 2008, more than doubling the $776 million reported in the year-ago quarter. And the number of deals here rose 38% to 170 from 105 a year earlier.

3. India surpassed China as a VC destination. One interesting nugget in the Moneytree survey was that in the quarter U.S. venture capitalists invested $350 million in 38 deals in India, a 42 percent increase in dollars from the fourth quarter when $246 million went into 33 companies. That compares to $250 million invested in 32 deals in China, representing a 24 percent decline in dollar volume from the fourth quarter when $331 million was invested in 39 deals. Until now, China’s entrepreneurial economy was more advanced than India’s. This quarter could mark an inflection point in the race to become the next Silicon Valley.

How IBM’s Venture Capital Group Can Help Your Startup

The other day I had a chance to meet Claudia Fan Munce, managing director of IBM’s VC group since March 2004.  Born in Taiwan and raised in Brasil, Munce is a double threat with a Master of Science in Electrical Engineering from Santa Clara University and an MBA from Stanford.

While many VC arms of corporations invest directly in startups, Munce has fashioned a totally different strategy for Big Blue. IBM does not actually invest money in companies. Rather, Munce helps IBM form strategic relationships with hundreds of startups that can help the company deliver technologies that solve customer problems.  “The measurement we had was never financial return,” she says. “We take that strategic aspect and feed it back to the company.”

Since its formation in 2000, IBM has gone from working with 20 VC-backed startups to more than 1,300 today. Her group helps these young companies navigate the labyrynthian bureaucracy of Big Blue, connecting them with various business units, and offering them managerial advice and support. Munce and her team will help entrepreneurs with marketing, connect them with customers and sometimes fund joint development projects. “We invest very heavily in building these partnerships,” says Munce.

And every now and then, those relationships end up with IBM acquiring the company. Over the last few years, Munce says that IBM has scooped up 18 companies that have worked with the VC group, including Corio, Bowstreet, AlphaBlox, Trigo and most recently, AptSoft.

Currently, Munce says IBM is really focused on forging relationships with startups focused on blade servers, virtualization software and green technology. “The utility industry has always been a big customer of IBM,” says Munce. “And IBM has so many data centers around the world. The power management side is very important. Governments are asking IBM to come up with a solutiion to deliver power in a more efficient way.”

HOW TO BUY CREATIVE CAPITAL: To pre-order Creative Capital, click here to go to Amazon.com.

Adeo Ressi Unplugged

Here’s the Q&A I promised with Adeo Ressi, the grenade-tossing founder of TheFunded.com. Sorry for publishing it one day late!

Why do you hate venture capitalists so much?
The real question is why do VCs hate me? I don’t think they hate me. I think they feel slightly threatened by TheFunded especially because they don’t know all of the data that it has, since 70% of the content is reserved for members only. That said, the ultimate goal of TheFunded is to improve the relationship between the entrepreneur and the VC. I consider VCs to be among some of my best friends. I have nothing against VCs.

Did your unveiling in Wired magazine change your life? Any regrets?
It’s definitely changed my life. I don’t have any regrets. I had no intention of ever revealing my identity. I was concerned that it would leak out. Rather than have it leak and surprise me one day when I was working in the office and phones start ringing off the hook and I get cease-and-desist letters, I decided I would manage it and plan my coming out.

What’s the worst thing someone said to you as a result of the site?
I haven’t actually had anyone say anything bad to my face thankfully. But in some of the forums people are trying to say slanderous things about me. I presume that it’s people who are threatened by the site’s existence trying to discredit the founder.

Why do you like to stir things up so much?
I didn’t want to stir things up but VC definitely needed a kick in the pants. The way it’s been running the last five years with very complicated terms and strained relationships between entrepreneurs and their funding partners was troubling at best. TheFunded is designed to correct that relationship by adding some transparency. I did guess that it might stir things up but that was not the goal.

Since your site provides a forum for people to criticize the VC industry, do you think you could get venture capital funding for ventures you start in the future?
A number of VCs have offered to finance TheFunded. That presents the ultimate conflict of interest. I could imagine walking into a board meeting: “How are things going? How were we reviewed?” Obviously, taking VC for TheFunded can’t happen. My feeling is that it will be difficult going forward to raise VC.