Innovating Through the Downturn: The View from the Nantucket Conference
At the Nantucket Conference, an invitation-only gathering of New England-area CEOs, entrepreneurs, venture partners, and select others, first-time attendees get a single blue dot on their nametags. Alumni get another dot for every year they’ve attended, and veterans of five or more conferences get a gold starfish pin.
About a third of the participants at the tenth annual conference, held April 30 to May 2 on Nantucket Island, MA, had one blue dot, including myself (I was one of a handful of journalists invited by the conference organizer, Shayne Gilbert of Future Forward Events). But strikingly—despite the obsession among attendees with the economy’s drastic downturn and its effects on entrepreneurship—several of the starfish people said afterward that it was the best, most energetic edition of the conference they’d been to. It seems that the crisis has inflamed the classic innovator’s itch to get on with business—and to invent new ones.
In past years, the proceedings of the Nantucket Conference were off the record to journalists unless a source explicitly agreed to be quoted. This year, the organizers reversed the policy, so everything was on the record, unless a speaker indicated otherwise—which only happened once the entire weekend, to my knowledge. That meant attendees were free to indulge their social media passions, blogging and tweeting freely (you can see the whole conference Twitter stream here).
It also means I’m able to bring you a few of the main themes from the conference. Though the program included panels on topics as diverse as getting venture funding, robotics, gaming, energy, and the roots of the economic crisis, a few ideas seemed to frame the mood of the conference (and perhaps of the entrepreneurial set in general these days), a mindset I’d call pragmatic optimism. Some of the main elements:
Fundraising is getting harder—especially for new companies, but even for established ones. Michael Greeley, a general partner at Flybridge Capital Partners, pointed to estimates that only 600 new startups will win venture funding nationwide this year, down from 1,171 in 2008. VC firms have become exceedingly cautious, keeping $5 in reserve for every $1 they invest, rather than the more traditional 2-to-1 ratio, Greeley said. Jana Eggers, CEO of Leipzig, Germany-based Spreadshirt, a T-shirt customization company whose North American headquarters are in Boston, said that even though her company is cash-flow-positive, it had a very difficult time raising its most recent round of growth capital. The terms offered by potential funders were “shocking” and were “clearly based on the economy, not on our fundamentals,” Eggers said.
In areas such as robotics where New England has clear strengths, venture capital is largely absent, pointed out MIT roboticist Rod Brooks, a co-founder of iRobot who now leads stealth-mode startup Heartland Robotics. In the energy and cleantech space, according to General Catalyst‘s Hemant Tenaja, money from hedge funds and strategic investors has largely dried up, and the spigots will stay off until Congress and the Obama Administration work out energy and climate bills. And heaven help the startups that need cash quick: Each of Boston-Power‘s three funding rounds took a year to negotiate, according to CEO Christina Lampe-Onnerud. “The best time to raise capital is when you don’t need it,” said Andy Palmer, co-founder of Vertica Systems, former CIO at Infinity Pharmaceuticals, a veteran of Bowstreet (acquired by IBM).
On the other hand, companies need less money—and should probably be lowering their sights anyway. John Landry, a software industry veteran who is managing director at Wayland, MA-based Lead Dog Ventures, used his pulpit as moderator of a panel on “Getting and Staying Funded” to argue that infotech startups “don’t really need a lot of money” these days thanks to technologies like open source software, which is increasingly sophisticated; cloud computing, which allows companies to outsource their entire IT infrastructure; and social media like Facebook and Twitter, which provide free viral marketing platforms.
Raising less money would lead to a healthy lowering of expectations when it comes time for a company to exit and pay back its investors, said Jeffrey Anderson, former CEO of Turbine and the CEO and founder of new sports video game startup Quick Hit. Many VCs overfund startups based on inflated hopes, he argued. “How many people are going to buy a $400 million business?” Anderson asked. As companies raise more, he said, their odds of a successful exit “go down, not up.”
“So, are companies going to raise less money, or are VCs going to take lower returns?” Landry asked Anderson. “Both,” he answered.
It’s a time of increased friction, even occasional animosity, between entrepreneurs and venture capital partners. With capital flowing less freely, some entrepreneurs think venture firms need to fess up about where their interests lie, and how much tolerance they have for risk. Vertica’s Palmer said VCs need to be more transparent about the fact that they are out to make money for their limited partners—not to cultivate successful entrepreneurs. He also accused the venture community in general of failing to support early-stage companies as faithfully as it professes to. Flybridge’s Greeley said he “violently disagreed” with Palmer. “We make money when entrepreneurs make money,” he said.
Venture-backed companies are proactively downsizing—but at least some are trying to do it humanely. Aron Ain, CEO of Chelmsford, MA-based Kronos, told an eye-opening story about his company’s strategies for dealing with the downturn. Ain said Kronos, which makes workforce management software, realized by September 2008 that revenue would be down by some 20 percent in 2009, so the company made plans to eliminate 300 out of its 3,300 positions. “We had to size ourselves to the market,” Ain said. The company’s strategy was to “over-communicate” about the downsizing strategy and to handle the actual layoffs as gently as possible, even providing “hall monitors” whose job was to help the individuals affected pack up their offices. “We knew we were going to be throwing people into a very difficult economy, so we upped severance pay by 25 percent,” Ain added.
But the layoffs were also cleansing for the company, Ain said. “Bluntly, there were people in the company who had lost their edge” and wouldn’t be hired if they were applying today. And it’s far better to cut dead wood than to cut salaries or bonuses, he said. “You have to pay a fair wage or some other company is going to offer one,” he said.
Christopher Zannetos, CEO of Framingham, MA-based Courion, agreed with Ain. “You have to think about people who remain,” he said. “A 10 percent pay cut puts stress on every employee you have. If you cut 10 percent of your employees you are confining the stress.” Zannetos said Courion stuck to its policy of “ruthlessly rewarding the high performers,” even when it’s meant cuts in other areas.
In the new economy, we need to build things, not just finance them. Eric Janszen, the founder of financial news website iTulip.com and author of the forthcoming book The Post-Catastrophe Economy: Rebuilding After the Great Collapse of 2008, gave an illuminating, largely depressing, but somewhat hopeful talk about the policies that got the world economy into its current mess. He said the U.S. has, since the 1970s, developed a “FIRE” economy—one dominated by finance, insurance, and real estate rather than by the traditional cycles of production, employment, and government investment. Unrestrained credit at low prices created a huge supply of “fake money” that drove up housing prices, which led to such brilliant inventions as collateralized debt obligations, which…well, you know the rest.
Janszen said the way out is for governments to direct spending in ways that will nurture a productive economy, shrink the financial economy, and increase personal and national savings. In the ideal new “TECI” economy of the future—dominated by transportation, energy, communications, and infrastructure—there would be hefty incentives for private investment in innovation, he said. “The last thing we want to do is anything to put the golden goose at risk—the chain of entrepreneurship from education to culture to property rights to financing to liquidity through IPOs and mergers and acquisitions,” Janszen said. Adding credibility to his whole argument is the fact that he laid out much of it in a February 2008 article in Harper’s—before the global financial markets really seized up.
In many ways, New England is in good shape to lead the recovery. Rod Brooks pointed out that between iRobot and Foster-Miller, New England has a virtual lock on the military robot business. He said Governor Deval Patrick and the Massachusetts Congressional delegation are quickly getting up to speed on the industry’s importance, and that education efforts like Dean Kamen’s FIRST Robotics competitions are helping to get young people excited about the industry. Brooks wouldn’t give details about what his own company, Heartland Robotics, is up to—but he did say that it’s working on systems that will help American workers be more productive, and that unlike iRobot, it’s “not doing anything with batteries or wheels.”
The video game industry is another regional strong point. The industry is going through tough times overall, with many small and mid-size studios closing down in the last 18 months, said Ian Lane Davis of Rockstar New England (formerly Mad Doc Software) in Andover, MA. But there are also more new gaming companies sprouting up in New England than in any other region, he said. Studios aligned with big game publishers “are growing rapidly, probably more in Boston than anywhere else,” Davis said. Brett Close, CEO of 38 Studios, agreed, citing big anchor companies like Turbine, Harmonix, and Rockstar and calling the local gaming industry “recession resistant” (“No one says recession-proof anymore,” Close added).
It takes courage to be an entrepreneur these days—but to win, you might have to bet big. While most of the Nantucket Conference focused on information-technology entrepreneurship, an excellent closing-day panel, chaired by Nick d’Arbeloff of the New England Clean Energy Council, took a sober look at the cleantech and energy sectors. Hemant Tenaja of General Catalyst said energy startups need to search for new ways to scale up. While venture investors are used to investing $100 million in return for an eventual 20 percent share of a market, he said, they’re not used to investing that much in return for a share of a fraction of a percent—which is the portion of the nation’s ethanol currently coming from cellulosic biofuel producers like GC’s own portfolio company, Mascoma.
Unfortunately, Tenaja predicted, venture funding for more innovation to solve the scale-up problem is going to be scarce throughout the rest of 2009, and it’s going to take the Department of Energy several years to staff up to the point that it’s capable of disbursing stimulus money at a worthwhile rate. What the industry therefore needs, he says, are people who can afford to make big bets. “The typical profile of the entrepreneur who comes into the space is someone who says, ‘I’ve already made enough money—now I want to go for something massive, and I’ll take that risk.’ Those are the guys who resonate with me.”