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.

The day Capitalism bought Socialism

Capitalism, Socialism and Communism have been pretty tired labels for some time. Our capitalism seems to be buying nothing but socialism today. Today the only investment anyone wanted to make in our capitalist system was the US Government. This would indicate that the global market believed that the most viable institution and the one that would provide the highest return on investment was our Federal Government. Perhaps a vote of confidence for the new CEO, Barrack Obama, but disconcerting that no one viewed any other investments as worthwhile. This surely isn’t Socialism—no one is voting with anything but money: neither a popular revolution nor even government policy is driving this apparent nationalization of the auto and banking industries.

We need new monikers and conceptual frameworks to discuss and understand a system that has more than current supply and demand at work. We need to be able to conceptualize a system that is driven by climate shifts, demographic shifts, technology shifts, social and religious realignment. Without the global flow of money resulting from transnational resource purchases there would not have been a market for the highly leveraged mortgage backed securities and disastrous derivatives. The dimensional flattening that a pure monetary view imposes doesn’t even provide the facility to discuss quality of life issues that Baby Boomer aging and health care concerns generate. The “externalities” of terrorism or carbon driven climate change can’t possibly be evaluated in a system that only accounts for tax revenues, military expenditures and rising costs of resources.

Many of you are far more creative than I – what do we call this new global reality? What models do we bring to bear to set priorities and make tradeoffs on where we put our collective efforts? The complete lack of interbank lending, zero interest on T-Bills and a negative yield curve tell me the one we have is inadequate.

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.

Seed what exactly?

There is much talk about a new generation of Tech companies with a totally different business model. The claim is that with Facebook, Google widgets, Salesforce AppExchange and other platforms, you can start a company for just a few thousand dollars.

Reputable funds are jumping in the fray. Like Accel with it’s Facebook fund. And Bay Partners with its AppFactory. These guys are smart enough to do their homework. I assume they see enough of a play in quick exits and early positions to make it worth their opportunity cost.

These platforms are a quick way to deliver relatively narrow functionality to an identifiable target market; at best a cheap way to validate a value proposition. But this does not a company make. And, with over 1600 Facebook apps, it is already a questionable way to get distribution.

Names have changed and the delivery dynamics are different, but this is hardly new. Seeding engineering projects that have low cost distribution dates back to the Homebrew Computer Club. CNet’s Download.com is still riddled with the stuff.

VCs who caught religion around Web 2.0 and SaaS models early, like Niel Sadarangany at Bay, and Byron Deeter at Bessemer are quick to point out that the real capital requirements don't come from development or even operations, but rather marketing and customer acquisition. And they are larger than ever. Worse the recurring revenue model builds slower than a traditional enterprise sales model and leads to a longer burn.

Acquisitions of cool technology is all well and good. I just hope that in all the widget and platform hype we don’t delude ourselves into thinking that the fundamentals of building a company have changed.