12 Investing and Business Gems from Avalon’s Kevin Kinsella

3/22/12Follow @wroush

Current and former MIT students gathered at the Computer History Museum in Mountain View, CA, Tuesday night to hear one of San Diego’s most renowned venture investors, Avalon Ventures founder Kevin Kinsella, share insights from a long and adventurous career.

Fresh off Avalon’s huge Zynga payout—the firm invested $5.3 million and saw the value of its stake skyrocket to $340 million after Zynga’s December IPO—Kinsella and his partner Rich Levandov are looking like certified Midases. Their investment strategy, which cuts across tech and life sciences, today seems as canny as it is quirky. Which helps to explain why the audience sat rapt as David Schmittlein, dean of MIT’s Sloan School of Management, interviewed Kinsella about his investing philosophy and his views on markets like biotech and games.

“To be successful as a leader or manager, you have to make an investment in becoming an interesting person,” Schmittlein said as he introduced Kinsella. “A lot of people think that means you should become incredibly successful and then use the money to become interesting.” But that is not what Kinsella did, Schmittlein pointed out. Aside from founding Avalon back in 1983, the MIT management science graduate has done everything from advising the Peruvian government on nutrition programs to teaching algebra in Beirut to running international joint ventures for Caterpillar to, more recently, bankrolling the Broadway hit Jersey Boys and acquiring a Sonoma County winery.

Kinsella speaks with MIT students and alumni at the Computer History Museum

The Jersey Boys story, which Kinsella shared at length, was a revealing one, illustrating that Kinsella has invested from his gut as often as from his head. The son of Broadway and television actor Walter Kinsella, he was steeped in the theatre as a youth, and the passion has stayed with him. Kinsella said he attended a technical rehearsal for the Frankie Valli retrospective in La Jolla in 2005 and “from the first downbeat I was on the edge of my seat.” He insisted that he be allowed to invest in the show, and when a big Japanese investor later pulled out, he made up the difference, become the show’s largest backer—with famously positive results (the show won four Tony awards and the album went platinum). “The net is, go with your desire,” Kinsella said.

The Tuesday event was organized by MIT’s Sloan School of Management, the MIT Club of Northern California, and the Martin Trust Center for MIT Entrepreneurship, and capped off a week of visits by Sloan MBA students to technology companies and venture firms around Silicon Valley. I grabbed a few minutes with Kinsella after his talk with Schmittlein. Below is an edited amalgamation of the evening’s 12 juiciest on-stage and off-stage quotes.

On the search for original ideas: Avalon has not, historically, been in the me-too business. When you think about really successful companies, they are not repeating something other successful companies have done. You can’t invest in the rear-view mirror.

On the difference between biotech investing and tech investing: In therapeutics, all ideas are big ideas. You are curing a disease. Even [curing] an orphan disease is a big idea. The problem between you and capitalizing on that big idea is the FDA…We are thinking very differently about healthcare investments today because of the timeline it takes to get FDA approval. Venture partnerships are typically 10 years, and you need to start harvesting by the sixth year. [In drug development today] it’s too excruciatingly difficult and long and expensive to be able to do that.

On Avalon’s decision to invest in Zynga: What we liked was that clearly, Facebook was emerging as a novel platform on top of which things could be built—things you could do with your friends. We thought that was very clever. Mark [Pincus] had always made money for people in his prior ventures, so it was a really easy decision. At the time the company closed the Series A, it was already cash-flow positive. It was probably the best investment Avalon has ever made, and it was not a difficult [decision] to make.

On the “golden age” of biotech investing: Biotech investing is very different from the way it was in the golden age, from 1980 when Genentech went public to 2000. Boy, was I happy to be there. You could invest in a company and get a courtesy markup in the Series B. Pharmas were very interested in doing partnerships. There were three times as many pharma companies. You could take a company public or sell it within three years and you could make 10 to 100 times your money when your molecule, if you even had one, had never even seen the inside of a rodent. But the pendulum has swung back in the other direction, and has not come back.

On the future of personalized medicine: I am very skeptical about personalized medicine, for the following reason: People have plenty of information today about how they should lead a healthy life, and they don’t. They don’t exercise. They smoke. They drink too much. They don’t get enough sleep. They eat too much red meat and too many French fries. Certain parts of genomic and personalized medicine may in fact reveal things to people that they either can’t do anything about, or don’t want to know about.

On Africa as the next big investment prospect: I think Africa is an amazingly rich continent in natural resources and growth prospects. They are growing at 7 to 9 percent a year. Twenty years ago, most of Africa was headed by military dictatorships, and there were three governments headed by cannibals. I’m not kidding! That has all gone away. You have, in many countries, the rule of law. You have structures that help you start a business and tax structures that are favorable to entrepreneurs…But I think to develop a U.S.-based venture fund to take advantage of it would be a longer-term proposition than I’ve got.

On startup incubators (as opposed to accelerators): We don’t like incubators, for a very simple reason. We think companies need to get it down on their own. They need to develop their own scar tissue. Nothing is easy. I would be interested to know if any incubator opportunities have turned into some of the great Silicon Valley companies. I am unaware of it. [On the other hand, at least in the life sciences, Kinsella somehow gets an early peek at seminal discoveries and frequently organizes seed-stage businesses with core teams led by an Avalon partner and funded solely by Avalon. They seek other investors once the data gets promising. -Ed.]

On startup accelerators (as opposed to incubators): Y Combinator is more of a curation service for startups. We have invested in a couple of those deals and had at least one nice exit very quickly. The nice thing about Y Combinator is that there is a target. You are there for three months and then it’s up and out. You are not invited to be there a year from now. You do your thing under high pressure with a small amount of money and then you go to a beauty pageant where you see if you can get outside funding and you are off to the races. The question, anytime anybody is putting on a beauty pageant where VCs sit there and get pitched, is whether the economics work for the curators.

On the ease of starting a company nowadays, and the difficulties that creates for investors: Today, you can start an Internet company with less than $10,000. You can get a cheap laptop that is very powerful, you pay an ISP, and the rest is free. You can store things in the cloud, get a Web domain, establish a website, and do all of this sitting in your basement apartment coding in your underwear. But because it is so inexpensive to start and maintain a company, it can be very “nichey.” We have heard almost every niche idea on the planet. You have to figure out which ones are going to be earning $1,000 a month forever, and which ones are going to win millions of customers. That is the challenge we have.

On the value of an MIT degree: I must say as a graduate that there are two things about MIT I really like. It has never given an honorary degree, and it has never awarded an athletic scholarship. So everyone who gets in is academically qualified, and nobody is walking around with an MIT degree who didn’t earn it. If you meet someone and they have an MIT degree, it is a gold seal of approval. If somebody went to Harvard, you think “Did daddy go there too? Is that how you got in?”

On the San Diego startup and investing scene: San Diego has a lot of potential, but the most significant thing that has happened in San Diego in the last 25 years is Qualcomm. There has been nothing else to come along like that. There are a few interesting companies here and there, but Qualcomm is the name of the game. That does not bespeak a very fertile culture of ideas coming together with money, management, and so on. So we, as a firm, do a lot of deals in the Bay Area and in Boston and New York. I wish we could do more in San Diego, but for some reason it is not gelling.

Some final words of advice: Just do what you find interesting and fun. Be challenged every day, and don’t do what is expected of you. Do bold things. It will turn out somehow. It worked for me!

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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