Startup Now: The Oregon Opportunity

While we obsess over the impact of the economic downturn and the State’s unemployment, we risk missing the incredible opportunity Oregon has. Obama recognizes this crisis is a once in a life time opportunity. Marching to the tune of “never waste a crisis”, the nation is collectively spending $1 trillion on not just solving the credit crisis, but recreating our social economic landscape.

We are going after climate change; international instability and terrorism; energy scarcity; and the aging population in the developed world, just to name a few. This combined with the international economic downturn is driving unprecedented global change. Oregon has the opportunity to play a lead role in this change and drive job growth at the same time.

Oregon has the expertise and experience in the segments that matter right now:

• Alternative Energy
• Urban Design
• Medical Records
• Opensource Technology
• Mobile Technology
• Elderly Care
• Universal Health Coverage
  

Oregon has attracted young highly educated people who flock here for the quality of life and affordability. For instance Portland has among the highest percentages of college degrees, spending on book purchases, and broadband penetration.

Venture Capitalists invest in Team (the skills and drive of the individuals involved) and TAM (total addressable market – the size of the opportunity). Some smart funds like Voyager and Madrona see Oregon’s potential and have put people here. In the past Oregon has lacked the will to drive growth. Voyager and Madrona are here as not to miss a potential opportunity: they won’t drive anything. The initiative has to come from the Oregon community.

Local money has been shy and scarce. Worse, to date, the state shows little support for its own potential. Only trivial amounts of capital have made their way to Oregon startup ventures.
If we don’t invest in ourselves it is worse than just missing an opportunity. We marginalize our entrepreneurs and starve them to death. Why would anyone else invest in Oregon companies if we can’t even see fit to do so? It is like a mother not supporting their child, you start at less then zero.

Small businesses drive employment. Venture models have demonstrated the potential return of small growth companies. We have the opportunity to spawn high growth businesses that will deliver additional employment and high return on capital. These businesses will succeed because the crisis we face will economically reward new businesses the deliver solutions to our problems.

A proposal is a foot to direct $100 million of State controlled capital to Oregon startup ventures. This is the right move at the right time. This effort seems to have prodded our State Treasure Ben Westlund into action. He is now hosting an event on April 29 to catalyze Oregon investment.

The big question: will this result in putting Oregon’s talent and money to work? It is the right move at the right time and it deserves our support at every level, especially that of our elected representatives. Or will it just be an exercise by all parties involved to look like they are playing lip service to this grass roots push while fulfilling their fiduciary responsibility and maintaining the status quo.

Stimulate VCs

I am amused by the controversy caused by Tomas Friedman’s comments on stimulating venture capital. The discussion is missing the point. We shouldn’t be arguing if government money would help or hurt Venture Capital. Nor should we be arguing about whether funneling money through Venture Capital firms would create more or less jobs than giving it to GM or Ford. The discussion about venture capital is relevant because we should be discussing what kind of world we want to build.

The old world is dead. The one dominated by industrial giants. The ones listed on the Dow. Yesterday we sold that world and no one was buying. Today we are willing to pay less than we did more than 10 years ago. And all indication is we will discount it more.

So the question is: what's next? The die is cast; the government is the economic engine of the next several years. We the people get to decide what we put our collective capital and efforts into. We will invest in infrastructure and services. We will invest in bolstering manufacturing. We will remake the systems that deliver education, health care and social services. We get to reinvent and reprioritize how we produce and deliver food, water, transportation, and energy. And in our choices of what we build and how we employ, we will create a new world.

So I really don’t care if government money goes to any particular VCs. If Gurley can do better with just the private, pension, and endowment money, more power to him. What I do know is venture money a couple of decades ago funded people and ideas. Now it seems to go much more to companies with established revenue: companies that have little market risk. This use to be referred to as expansion capital. It was second round capital and came after development stage funding. Venture money use to focus on building great companies that create new emerging sectors. Now it goes increasingly to creation of products and services that may be attractive to large companies; essentially nothing more than off balance sheet R&D efforts.

I am all for stimulus dollars for VCs if it puts venture back in venture capital. Small growth companies have always been employment engines. There is perhaps no better way to create jobs than to invest in high growth companies. But the real win - new ventures will innovate and create the world we need. Saving jobs at GM won’t do that.

Like the New Deal and the Marshal Plan, this stimulus and recovery needs to be about building and recreating, not saving what was. So what kind of world do we wish to recreate. Let’s have that discussion.

Why is long money short sighted?

“It takes 5 years to build a company.” Those were the words imparted to me 16 years ago by the venture capitalist across the table during my first pitch. Of course what he meant by “build” was first check to exit; ideally Series A to IPO. For all the talk about how things are faster or cheaper or “the Internet changes everything” the startup model really hasn’t changed much. That’s why venture psychology sometimes puzzles me: the return on a new venture investment is determined by an exit three to five years away, yet the frequency and valuation of investment is determined by what is happening this week.

The credit crisis and economic slow down has eliminated IPOs and acquisitions this quarter.
And this has brought a significant decline in venture deals. Not only are fewer deals getting done, more of the money is shifting to later stage deals. I know that VCs need to prop up their winners and ensure they survive to an exit. But, that doesn’t explain the flight from good early deals that will not be ready for an exit until this business cycle has swung back up.

The other truism shared with me 16 years ago is that investors are motivated by fear and greed. You would think right now rather than retreating in fear, greed would kick in and the down turn would be used as an excuse to get lower valuations and VCs would concentrate on new early investments. When the market is stagnating and resources are readily available it is the time to start new companies, and now is the time for VCs to make early investments in those new companies.

Taking my own advice

When should you start a company? This is the quintessential entrepreneurial question. A running debate rages: when do you have a feature rather than a company? When is a company being started because it should be rather than when it merely can be? What does it take to make a company successful? This debate heats up appropriately when exits are plentiful and lots things get funded that shouldn’t.

When potential entrepreneurs ask me when they should start a company? I tell them you should start a company when you can’t do anything else. When you have an idea that has such a grip on you, you can’t sleep at night. When you know it would be far worse not to pursue a venture than to fail miserably trying. If you have any intelligence at all, it is the only way you can do such an irrational thing as start a company.

It is called risk capital for a reason. Over half of all funded ventures fail: by most accounts fewer than 30% succeed in any meaningful way. The exercise of venture investment only becomes rational when 20% of the ventures in aggregate can provide ridiculous returns (better and 10 to 1). With diversity and persistence this looks somewhat rational and perhaps even highly lucrative when managed across multiple funds with portfolios of companies.

But take a specific venture, there is no rational for it being a good idea. In my experience companies succeed when they are meant to succeed; when all the stars align. It is like the old advertising adage: “we know half our advertising is a useless waste of money; we just don’t know which half.”

Don’t get me wrong, you need to do all the right things to succeed: identify a market; develop a compelling value proposition; get the right people; manage your cash well; keep maniacally focused, etc. etc. But all that’s not enough. You also have to have uncanny instinct (or maybe just dumb luck). When a prospective venture posses you, dominates your thoughts, doesn’t let you sleep, and jolts you from aha moment to aha moment yielding seeming clairvoyance, then you know it is time to start a company. New Stealth Co has that grip on me. I am going to build a wildly successful company and it will change the world.

Ignite Portland

Something is going on in Portland. Nearly 1000 people showed up at the Bagdad last night for Ignite Portland. Many, maybe 200 were turned away at the door. It was a totally cool event. I presented, declaring that it is time for Portland to start some great companies. I felt a bit like a mime at a comedy night with my business focused presentation wedged in between Why Deutschland Loves David Hasselhoff and How to be an Undercover Hooker. If you are in Portland you need to go to the next Ignite.

The format is 20 slides in 5 minutes, 15 seconds a slide, and the slides advance automatically. Any topic you want. It runs like a freight train through the Gorge: once it starts it doesn’t stop; some of the scenery is great, some is of old rail yards, but the ride is fun.

First post - why Blog?

The first blog post: a tall order. It should set the tone, establish a voice, and identify a point of view. It needs to justify its existence. Weeks from now I can drone on about how tedious Vegas is during InterOp, or how cool company X was at Demo. You will move on, with a click and a judgmental sigh . But this post, you read to determine if it joins your Blog roll, gets added to your favorites, or forwarded to a friend: is it worthy of your attention and your return?

I hate to disappoint, but all I am going to do here is reveal my motivation for blogging (in a way that initiates a respectably tag cloud). The rest you have to determine for yourself. So why am I writing this? I am moved to blog because the world will change more in the coming decades than ever before in history. I figure I get to play for at least a few more decades. This blog is but a small gesture, a minor contribution in my active participation in that change.

Fifteen years ago, I founded a company that was part of the initial commercialization of the Web. The mission of Fabrik Communications was to bring Internet email to the corporation. In 1993 email was the realm of academics, researchers, and a few groups inside governments and corporations that used PROFs on their IBM mainframes.

I was among the cognoscenti with an Applelink address and a Well account. I sat across from VCs at Crosspoint, Accel, Mayfield, IVP, Greylock, Brentwood, USVP, and others trying to convince them that within a couple of years everyone would carry an Internet address on their business card. I was fortunate enough to convince Accel, Crosspoint, Vangaurd and HVP to write a check.

After Netscape went public, I spent time with investment bankers trying to convince them that an application service provider was a legitimate business model – kind of like time share only better. With Fabrik, I was part of changing the world forever: when did you last get a business card that didn’t have an email address on it?

But, the first Internet wave, known mostly for the bursting of the Internet bubble, was nothing compared to what we will see in the coming decades. Everything we know will change: the way we live, the way we interact, the way we spend our time, the way we work, what we expect of our lives and what we expect of each other. Forget about the American Dream – "my kids will have a better life than I have": Things will be so different it will be impossible to compare.

Some of the emerging new world is apparent now. And those little edges beginning to poke through are so intriguing that it is becoming obvious how dramatic the change will be.

In my son’s life time the population of the planet will level off and likely decrease. We will move from a fossil based energy supply to something different. If you think it will just be windmills and solar panels, you’re betraying your limited imagination. For instance, it is likely you will heat your house from gas generated from bacteria digesting a diversity of materials including cellulous and oil shale. Steel in cars will be used only for esthetics, like chrome is used today. The structural elements will all be carbon fiber. We will be able to treat most cancer, but likely die in greater numbers from emergent viruses.

What will this world really be like? We can only begin to guess. But it is a great time to be alive. Adaptation truly distinguishes humans from other animals. What we get to do in the coming years is modify, re-conceptualize, regenerate, transmogrify, and adapt. What could be better that that. My motivation – be an active participant. This blog is a token effort in that direction.