If you talk to enough venture capitalists, you’ll hear certain universal truths. For one thing, venture-backed companies provide something like 20 percent of all jobs in the U.S. Second, despite some contraction and a decade of generally lousy returns, the VC industry is as strong as ever. And, yes, the IPO and acquisitions markets could really heat up in 2011 after a couple of very tough years.
On a more personal level, you’ll probably hear all about the strengths of their firms’ portfolio companies (and the weaknesses of others’). You’ll hear that “super angels” are overblown in terms of their overall impact and competing with VCs for deals. And, of course, that any tax increase on carried interest (VC profits) is an abomination.
But—get enough VCs in a room together and ask more probing questions, and you’ll hear deeper stories and discussions. That’s just what Xconomy did last week at our “VC65” conference, which we organized in partnership with the National Venture Capital Association and the MIT Museum, and held at Kresge Auditorium at MIT. The idea was to celebrate the 65th anniversary of venture capital in America by bringing out insights and stories from some prominent VCs and venture-backed entrepreneurs—and nearly 1,000 people turned out to hear what they had to say.
Some pieces of the program I was already familiar with. Mick Mountz of Kiva Systems and Ajay Agarwal of Bain Capital Ventures showed their usual dazzling robotic-warehouse videos, with a twist—they also talked about a key early meeting between Kiva and Staples (before Bain invested in Kiva), which highlighted the importance of VC customer networks; Staples has gone on to spend some $20 million on Kiva products, and Kiva , which has raised $33 million in VC investments, recently became profitable.
MIT biotech and materials science inventor Bob Langer and Terry McGuire of Polaris Venture Partners talked about their “formula” for building companies together over the past 18 years. They said each of their 17 companies is based around six elements: a platform technology, products (not information), a key scientific paper in Nature or Science, patents (“to block everyone else”), in vivo data, and a core team of students, postdocs, and collaborators.
Henry McCance of Greylock Partners talked about his Cure Alzheimer’s Fund and implored VCs to use their skills and resources to transform society in a broader way—by focusing on their personal passion, whether it’s the environment, education, medicine, poverty, or hunger. “Over the last 65 years, you’ve changed the for-profit world,” he said. “Now change the nonprofit world.”
But there was also plenty of thought-provoking stuff I hadn’t heard before, from other luminaries across a wide range of fields. Now that I’ve had a few days for ideas from the event to sink in, here are my top 10 takeaways:
10. VCs aren’t bad singers. At least when they’re crooning “Happy Birthday” to themselves, as Bob Metcalfe from Polaris (and the University of Texas) famously led them to do early in the afternoon. It was a little surreal, but honestly, I’ve heard worse renditions. Much worse.
9. Traffic disrupts everything. Not just your commute. Metcalfe made the point that Internet traffic has disrupted everything from advertising to telecom, from music to television. The natural evolution of that trend, he says, is that the next wave of traffic across video, mobile, and embedded networks will disrupt three main industries—education, healthcare, and energy. (He didn’t say exactly how, but we didn’t give him enough time for that.)
8. Every company, especially a successful one, has its make-or-break moment. Howard Hartenbaum of August Capital told the story of Skype’s almost getting shut down by credit card companies after having problems with fraudsters. Hartenbaum, who was a founding investor in Skype with Draper Richards, had a few takeaways. One, “controversial companies tend to be the most impactful.” (If all venture partners agree on a deal, it’ll probably fail.) Two, “just because a company is successful on the outside doesn’t mean it’s not having trouble on the inside.” (Skype “almost died along the way,” he said, but was bought for $2.6 billion in 2005 by eBay, which spun it out in 2009.)
7. “We’re seeing the professionalization of startups.” That was Noubar Afeyan of Flagship Ventures. He said he wants to see a higher rate of success with startups—perhaps five or seven out of 10 should be hits instead of 1 in 100, say. This invited a bit of debate with Bryan Roberts of Venrock, who thinks startup success will still be a “lottery” won by inventors in a garage. “We’re an industry of exceptions,” Roberts said. “The median doesn’t matter—the exceptions are wonderful.”
6. Millennial generation? Nope, those 20-somethings are the “entrepreneurial generation.” On the same panel, Theresia Gouw Ranzetta of Accel Partners said she sees “a whole new generation embracing entrepreneurship.” These young people “want to be entrepreneurial from the start,” she said, and they view building startups “as the pinnacle” of their careers. (This fits with a theme we’ve been following at Xconomy—how startups have gone mainstream as of late.)
5. VCs hate the super angel hype. Even Jason Mendelson of Foundry Group, hardly an entrenched, old-guard venture firm, said he’s “sick and tired” of the super angel discussion. “Some of my best friends are super angels,” he quipped. “They’re just other investors. I don’t think it’s changing anything.” Mendelson noted that investors of all types are shifting from a “passive model to an active model” of mentoring entrepreneurs and startups proactively—often before they invest in them.
4. Show me the money—and the lives. The aforementioned Bob Langer-Polaris partnership has yielded 17 companies so far, with an overall internal rate of return (IRR) of 53 percent, if I saw the figure correctly. Even more importantly, those biotech firms have the potential to touch more than one billion lives, McGuire said.
3. VC is getting all Hollywood on us. Scott Kupor of Andreessen Horowitz talked about his firm’s organizational approach, whereby it employs a team of specialists—in talent, market, research, business development, and deal flow—to help with each investment, instead of having the relationship rest on one general partner. This is modeled after the Hollywood agency approach that began in the 1970s (using a team of specialists instead of one agent per actor). It’s also based on something more mundane—the structure of a modern corporation. Kupor said his firm is taking a new approach for VC, but time will tell if it works.
2. Global innovation can be brought to the U.S. The last panel of the day was asked how they think about entrepreneurship around the world. Peter Brooke of Advent International stressed the importance of caring about the local culture. “When we went to a country, we made sure we understood the culture and built relationships,” he said. “The most important thing I understood is the patience it takes. If you’re going to create something that survives in the long run, you have to learn to be patient.” Meanwhile, Linda Rottenberg of Endeavor Global pointed out that people are increasingly saying, “Can you bottle up innovation elsewhere and bring it back here?” Tim Draper of Draper Fisher Jurvetson agreed that “we’re seeing a bit of transfer of innovation,” from the widespread notion that Asia copies U.S. inventions to some copying happening here. (Separately, see Desh Deshpande’s efforts to bring an Indian innovation model back to Massachusetts.)
1. Venture capital is alive and well…at least for now. Perhaps Peter Brooke summed things up best, near the end of his panel: “Is the venture capital model broken? There are so many stupid questions,” he said. “People still want to do things here [in the U.S.]. Sarbanes-Oxley [the public company accounting act] is just something to get around. I think the world looks pretty good, aside from Congress.”
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