VC Blog on Storage, Wireless/VoIP, Internet

Political blog... McCain 2008

I am not a hard core member of the blogeratti.  As such, I don’t really know the rules of the blogosphere.  And since I am paying for my own blog with my own time and dollars, I don’t really care about those rules.

One of the rules I have wondered about is whether or not it is kosher for a technology venture capitalist to blog about politics.  After thinking about it, I have decided that, for me at least, it is kosher.  Anyone who knows me well knows that one of the most important elements of my life since August 2008 has been my involvement in John McCain’s 2008 Campaign.  So, I will hide this from my modest roster of blog readers no longer.

I love Senator John McCain.  I mean I really love the man.  I don’t love many men.  In addition to family members, I love Teddy Roosevelt, Winston Churchill and George Patton.  And, I love John McCain and Joe Lieberman. 

I happen to agree with 90% of McCain’s policies and 10% of Lieberman’s policies.  But that is beside the point.  I love McCain and Lieberman for the strength of their convictions and the purity of their patriotism. 

I have met John McCain three times, all in the last five months as I have become a donor, fundraiser and volunteer of his.  Our first meeting was the one that sold me for life.  We had a pleasant chat for a minute or so.  Then he turned to the next person in line to speak with him, a young man he knew well, perhaps a former staffer.  When Senator McCain raised his arms to embrace the young man, it was clear that he was barely able to raise his hands above his waist.  Senator McCain is so crippled from the torture he willingly endured in service of his country that he has been without the use of his limbs for more than three decades. 

And that, among other reasons, is why I am supporting him to be the next President of the United States, and why he has surged from a poor position to a contending position to win the Republican nomination for President.  Wish us luck in New Hampshire and please feel free to read more from the man himself at www.johnmccain.com.  Also, please feel free to donate at: http://curran.johnmccain.com.

If you feel I have offended the rules of the blogosphere by blogging about politics, please feel free to contact me directly.  Thank you for listening.

Can VCs help entrepreneurs hire execs?

Can VCs help entrepreneurs hires execs?  Yes.

One of my portfolio CEOs gave me some light grief about my last blog.  In that blog, I argued that venture investors are poor at delivering customer intros.  At the end of the blog I hinted that some venture investors can actually help entrepreneurs source, evaluate and close key executives to help them build their businesses.  My CEO basically pointed out that I blathered on about an obvious point (VCs in general do squat re: customer intros despite some heavy over-promise) and I barely addressed the key point... VCs can help recruit.

It is true.  I strongly believe that an entrepreneur who is fortunate enough to have his choice of early stage venture investors should pick one who is emotionally invested in helping that entrepreneur round out his management team in order to maximize his market opportunity.

Even if the VC in question doesn't know a soul whom he could recruit to the venture due to lack of relationships or credibility in the sector and/or region, any executive worth hiring is going to demand to speak with the key investors before joining the company.  So, that VC's ability to evaluate and close talent is critical, even if he cannot source worth a damn.

Something to think about as you build your business.  Pick investors who ACTUALLY CAN help you and measure them on metrics that really matter.

And yes, Mr. CEO, that does mean that I feel that my firm, Valhalla Partners, is particularly good at executive recruiting based on our sector and regional contacts.  We have been quite active and we believe successful in helping our entrepreneurs identify, evaluate, and hire key people.

Customer intros NOT a strong VC value prop

I am a young venture capitalist (33) but have been doing this since 1998.  So, I have heard a maybe a thousand entrepreneurs answer the standard question VCs use to wrap up a meeting: “What are you looking for in a financial partner?” Every now and then, a VC meets a real wild man who answers the question honestly: “Valuation.” The wild man gets bonus points for honestly, but that is all. I bet even corrupt Congressmen taking bribes don’t like to hear the yellow envelope labeled a bribe.  Call it “constituent management” or something if you plan to bribe a Congressman. We all like perfume.

So, when entrepreneurs are asked what they are looking for in a VC, they usually supply some mealy-mouthed answer about how we don’t just want the highest price or the prettiest face, but we want you because you are so great at X, oh, and customers… we want intros to customers and we think you could help since you invested in company Y.

In other words: BS, BS, BS, and customers. I have heard hundreds of entrepreneurs raising money from VCs say that customer intros are the primary non-financial value proposition they are seeking from VCs. 

Well, I have to say, with the exception of a few VCs that deliver on that (notably, I am told, Kleiner Perkins in selective cases), high level customer intros on a sustained basis should rank about last on the list of benefits you should expect to get from a VC.  It just isn’t what we do. We do a lot of things, some of them we as an industry do really well.  Corporate governance, interviewing IPO bankers, and self congratulation come to mind.  But, we do NOT, as a general rule, make many customer intros.  That isn’t the world most of us traffic in. Sure, each of us has 1-2 CIO friends or 1-2 VP friends at carriers.  Every mobile VC knows or at least knows he needs to pretend to know Paul Reddick. Maybe we can get you meetings with serious prospects to be 1-2 of your first 10 betas, but if you get more than 5% of your first 100 customers from VC intros, well then you need to tell me who your VCs are cause I have not met them and I want to. 

One thing we VCs can do well (most don’t but we can) is executive recruiting.  Some VCs are great at that. And that is a real and sustainable value proposition to the entrepreneur.  More on that in future postings I hope…

LinkedIn Street Cred

I noticed a month ago or so that my LinkedIn connection total was a paltry double digit number, so I started inviting more people to Link-In.  Then, LinkedIn encouraged others who had direct or indirect contacts with me to invite me, so my user total grew from 80 something to 222.  But, the organic growth stalled.  And, 500 is the cutoff where the pros leave the amateurs behind.  Below 500, one's connection total is listed next to his name.  Above 500, you get branded "500+."  So, I sent invites to each of my Outlook contacts who were not already "connected" with me via LinkedIn, but who were LinkedIn members.  I figure that non-members would bristle at the spam, but most members would not.

And, over the last 30 minutes, my connection count has grown from 222 to 444 (a double).  And, only 2 people thus far have emailed me asking who the heck I am.  Probably another 10-12 had that thought, but didn't bother e-mail.  All in all, a pretty good hit rate.  Hopefully the momentum will carry me over 500 relatively soon.

Now, let's see if my 200 new links provide any value to my firm...

Sales force size as a barrier to entry

As a young venture capitalist (33), I still remember some of the lessons I was taught in VC 101 when I entered the profession as a pup 9 years ago.  Part of the venture business is pattern recognition regarding making new investments (don't invest in knowledge management software, etc.).  Part of the business involves applying past lessons from your partnership's investing or operating experience to help guide portfolio companies. 

For example, venture backed entrepreneurs are much more likely to overspend on sales & marketing, or international expansion, too soon rather than too late in a market's development.  The entrepreneur, passionate by nature, believes in the real estate value of a land grab before the land has emerged from the sea, and flushes his B round, his founder's equity and his company down the toilet hiring too many sales reps chasing early adopters in the nascent stage of a market's development.  So, the young VC is cautioned by his mentors to tell all his companies to run an experiment.  First, hire 1 sales rep in NYC, then see if he sells.  If he does, hire two more in 6 months, maybe one in Boston and one in Chicago or DC.  Then, 6 months later, if 2-3 of the 3 are performing, hire another 4-6 sales reps in SF, LA, Texas, Seattle, Philly, etc.  9 times out of 10, maybe 49 times out of 50, I believe this is the right answer.

But, what about the other one time?  What about the entrepreneur whose passion and confidence in the market's rapid development is an accurate read on the market's readiness for a new hot product... the new Google, the new iPhone, the new core router, the new iSCSI SAN box.  In these rare cases, which, by the way, are where the bulk of venture returns are made anyway... it is an advantage to build out a formidable sales force EARLY in the market's development.  Clay Christensen says that the first entrant in a new market with a high quality national sales force often has a large barrier and reaps much of the rewards (that was from memory... may have some of my spin on it).

I have a friend named Marcus Ranum who is a world class e-security pioneer.  As a techie, he built the world's first commercial firewall Gauntlet for a company called TIS which had a successful outcome.  As an entrepreneur, he built the world's first world class IDS platform (intrusion detection) for a company called NFR.  It was loved by the security IT thought leaders at Fortune 50 companies, and deemed much superior in performance to the rival product by ISS.  But, ISS, like EMC in storage, built a world class national sales force (ultimately led by a friend of mine, Tom McNeight).  And ISS whupped poor Marcus and NFR and because a successful company worth billions (now part of IBM) wheras NFR became worth a few million I believe in its modest exit.

As an active investor in the storage appliance world (LeftHand Networks, SEPATON, for example).  I am seeing hyper growth by my companies and my companies' rivals in some emerging storage categories, such as iSCSI SANs, WAFS, disk-based backup, and dedupe.  These markets are so hot that many companies are "winning."  But who will win biggest?  Will it be the companies first to build an EMC-class or ISS-class national or global sales force? 

Would Juniper (a proud win by my former employer which taught me VC 101, NEA) be Juniper today if it had not hired a large sales force to compete with Cisco in the 1990s?

Long Term Asset Bubble and Impact on VC Biz

Here is a question for you.  How long will it take a high net worth family or small endowment to grow from $100m value to $1bn value?  If they earn 7%/year (10% historical stock market nominal return less 3% estimated inflation), then in 34 years, they will achieve $1bn. 

What does this mean?  It means that as we have a somewhat high number of families and institutions with $100m to put to work today seeking higher returns from "alternative" investments such as venture capital and LBO, in a few decades, if historical returns hold up, we may have many many more billionaire families and institutions seeking the turbocharged return promise of alternative investments.

What this says to me is that the absolutely staggering amount of wealth in the world today will grow many times from here, and there will not only be more yachts in the French Riviera, but the value of VC and LBO managers with "alpha" will grow over time, as probably will the value of beach front property in Carmel and the Hamptons.  Why?  The amount of money desirous of "beating the S&P 500" by investing in alternative investment vehicles is already so great as to almost be silly (for example, $2 trillion in hedge funds which as an asset class have a way of underperforming the S&P 500 after deducting 2% for fees and 20% of profits).  Yet, it will get even sillier, and the few VCs with a proven ability to deliver true value, not just as investors but as co-entrepreneurs (think Kleiner Perkins, General Catalyst) will be in such demand by these growing trillions of dollars that it will make one's head spin.

The result will probably be, as it has been in the hedge fund business and I would argue also in the VC business and the LBO business, too much money chasing performance depressing the excess returns sought by the asset class and enabling many mediocre managers to earn large salaries for not adding true value.

Of course, the VC and LBO businesses will have cycles.  VC returns peaked in 1999-2000 and perhaps LBO returns are peaking now... but the long term trend of the asset bubble funding the efforts by both asset classes seems to be well in place.  And the growing investment interest by rich people and governments in formerly underdeveloped economies will only add fuel to the fire.

LinkedIn Spam

I just cleaned up my e-mail inbox on LinkedIn and was surprised by how many unsolicited LinkedIn invites I had from people whom I didn't know and who didn't know me.  Many were from recruiters spamming for more hooks into people.

Don't these people realize that LinkedIn stands for the exact opposite of what they are attempting?  LinkedIn is about extending the trust between friends to friends of friends in a seamless digital way.

Amp'd & MVNO viability

According to a Business Week article on Amp'd, "By May, the number of nonpaying customers reached 80,000. That's nearly half of Amp'd's current customer base of 175,000 subscribers."  Amp'd filed for Chapter 11 bankruptcy protection this week.

That is really too bad.  Amp'd, by most accounts I had heard, had a terrific service.  But, clearly, the business model didn't hold.  Amp'd had a blue chip roster of investors and some good people on its team so I think it is more likely that Amp'd's failure suggests a lack of viability of a smaller MVNO versus bad execution in a good market.

Boost (owned by Sprint) and Virgin USA (IPO pending) are each closer to 5 million subs.  Will they continue to prosper?  I think and hope so.  Virgin is not profitable but those are bigger entities, $1bn in revenue and not far from profitability in Virgin's case.  But, this news, following the death of ESPN's MVNO, sounds suspiciously like a death sentence for tier-2 MNVOs with less than 1m subs. 

What are the long term profit margins of a tier-1 MVNO in the USA?  Probably slim, but positive I believe.  Boost and Virgin are innovative and do deliver unique value to their subs.  Both have been on the cutting edge of mobile content for example (as was Amp'd) but spread over a larger subscriber base than Amp'd has.  Still, neither will be as profitable as a carrier that owns its own network.  That is the law of the telecom industry, at least today.

11 years ago, I was a junior telecom M&A banker on Wall Street.  Once of my jobs was to track the long distance "comps" or valuation multiples of the publicly traded long distance carriers.  Back then, there were 3 tier 1s which owned a full scale network (AT&T, MCI, Sprint), 3 or so tier-2s which owned a smaller network (Worldcom, LCI, Frontier), and 12 or so tier-3s (Midcom, ECI, etc.) which were either pure resellers or which owned a small number of Lucent switches (often one).  One by one, the tier-3s died.  And the tier-2s consolidated.  And, due to perfect competition in the long distance market, the tier-1s struggled.

Fortunately for tier-1 mobile carriers, there is not perfect competition.  It is a government protected oligopoly, with a certain number of spectrum owning carriers.  So, the tier-1 mobile carriers and tier-2s who own network and spectrum are making good money.  Unfortunately for those who don't own spectrum, like Amp'd... it is a tough business. 

Overcoming inertia: what would a new CEO do?

I read a dead tree interview recently with Richard Tedlow, the well regarded HBS historian who wrote a new book about Intel's Andy Grove.  He mentioned a critical event in the evolution of Intel and the microprocessor market in the USA.  In 1985, before grove was promoted to CEO, Intel was getting beaten in its core memory business.  The right answer was to get out of the memory business and focus on microprocessors, but this was difficult for Intel to see at the time due to the forces of inertia

"Andy proposed a thought experiment to his then boss, Intel CEO Gordon Moore.  'What would happen,' he asked, 'if the board kicked us out and brought in new management?'  Moore immediately deadpanned, 'They'd get us out of memories.'  Andy looked at him and said, 'why don't we walk through the door, come back, and do it ourselves.'

-Source: NewBusiness, Arthur Rock Center for Entrepreneurship, Spring 2007, Harvard Business School

It is a good lesson for those struggling to make tough choices.

Smart mobile carrier CXOs

I have been accused of being a mobile carrier lover before, and I will be again.  I prefer to think of myself as "fair and balanced" compared to the vitriolic carrier haters.  I had an experience recently that re-invigorated my belief that carriers are rational market participants rather than innovation killing cavemen.

I had dinner with a telecom thought leader who has had a close relationship with the CEOs of several tier-1 US carriers for many years.  I will call him, Mr. Bigshot.  Bigshot has a business relationship with the CEOs of a number of Fortune 500 companies in a number of industries.  I would love to drop his name, but I didn't get permission, so you will have to trust me that he is highly credible.  Bigshot is also tired of the enmity toward tier-1 carriers, and the theory that they are just big dumb monopoly pipe operators run by big dumb people who are too stupid or cowardly to innovate.  Bigshot's key point is that the CEOs of the biggest US carriers among the smartest CEOs in the world, and that you can trust that the key executive-level decisions made by these big carriers were made by smart, experienced people who weighed the pros and cons prior to acting or not acting.  For example, Bigshot was in touch with these carriers years ago when it was believed that the carriers should acquire AOL if they wanted to survive in the new world.  The carrier execs told Bigshot that they had considered it, but that they didn't need to buy AOL because they would beat them.  AT&T & Verizon own the pipes AND customer.  Smart pipes and smart execs indeed!

A few days after our dinner, the Wall Street Journal announced that Yahoo's $300m/year revenue stream from AT&T was at risk since AT&T planned to end or at least renegotiate its Yahoo contract upon expiration.  Guess whose stock fell over 5% that day on the news???

So, the next time a carrier moves slower than you want it to, remember that it might have a reason, and a plan...