[Editor's note: Cross-posted from The Economist, 11/2/11]

New York Mayor-entrepreneur Michael Bloomberg, not known for shyness, recently proclaimed New York City as America’s new entrepreneurship capital, roaring past Boston in venture capital and soon to leave Silicon Valley in the dust as the “go to” destination for entrepreneurs. Indeed, the world media are awash with proposals to kick start entrepreneurship as a strategy for economic revival, with support for venture finance at the heart of many programs. Yet the title of Harvard’s Josh Lerner’s recent book, “Boulevard of Broken Dreams,” is no coincidence, because proclamations are one thing, actual success is quite another.

Fortunately, there is a lot of experience around the world about what works and what doesn’t. Here are some practical principles that the Babson Entrepreneurship Ecosystem Project have been identifying and developing for public leaders who have, correctly in my opinion, identified entrepreneurship as an essential plank in economic policy.

1. Be clear that the objective is to foster an entrepreneurial finance ecosystem, not to directly provide capital to entrepreneurs. Over time, a healthy entrepreneurship ecosystem makes available capital to ventures that deserve it, while denying it to ventures that do not. This does not mean that governments need to revert to selecting the deserving. This idea has regained currency recently, but we learn time and again (Solyndra anyone?) that it does not work. It does mean that the availability of capital, and other resources, needs to be part of a natural process in which the ecosystem elements—in this case, deal flow and capital—continually evolve and adjust to each other, a concept that is consistent with Smith’s “invisible hand.” But the concept goes further by suggesting that enlightened and skillful leadership can play a critical role in encouraging the evolution of a self-sustaining ecosystem, but leaders have to understand how and when to get in, and how and when to get out.

2. Stimulate financing, but stay off of ventures’ balance sheets. Presence of government and government-owned entities as direct debt or equity holders of ventures should be a red flag. The only reason government should be on a venture’s balance sheet is in the rare case when it is absolutely necessary to entice private, profit-oriented entities to get involved as the natural selector of investment targets, and in those cases, government should have a clear plan to get out. Governments can, as have Israel, Finland and some other countries, provide smart, off-balance sheet funding in the form of repayable grants, matching grants and so forth. But presence on ventures’ balance sheets ultimately leads to a conflict of interest between governments’ social priorities and obligations, and the need to provide a positive return to invested capital. Overall, there is evidence that a moderate amount of this kind of financing can be beneficial, but as it gets to be too great, the benefits rapidly turn into liabilities.

3. Make sunset clauses for financial support programs the rule, not the exception. Permanent, or evergreen programs of government-supported venture capital, loan guarantees, startup grants, angel tax credits and so on, risk becoming white elephants and/or political assets, not economic ones, and in the process risk squandering public funds. Sunset clauses, or “sell-by dates,” help focus policy-implementation programs on (a) achieving results, and (b) creating self-sustainability by building capacity and mutually reinforcing systems (for example, by showing private sector players that they can actually make profits.)

4. “Pulse” incentives to foster discovery. An implication of sunset clauses, in general, is that if providers and consumers of risky capital can “discover” that it is profitable to engage, then they will accelerate self-interested behavior when the “visible hand” is removed. Seeing if providers and consumers of entrepreneurial capital “discover” the correct pricing mechanisms to allow them to engage in a profit-seeking transaction is one test as to whether the problem is really a market failure or not, and is not just … Next Page »

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Is there anything worse than a Silicon Valley VC coming to Boston to poach talent from the startup ecosystem?

OK, that’s not really what Greg McAdoo is about. The Sequoia Capital partner was in town last weekend, in part for the Startup Bootcamp event at MIT (and related meetups), which featured talks by a number of founders backed by Sequoia, including Drew Houston of Dropbox (an MIT alum), Paul English from Kayak, and Nathan Blecharczyk of Airbnb.

McAdoo is a busy guy, serving on the boards of Airbnb, Bump Technologies, Clustrix, Greplin, Loopt, Achates Power, and other firms. He has been with Menlo Park, CA-based Sequoia since 2000 and is involved with the Y Combinator seed-stage startup program. He was also involved with Sequoia’s investment in Isilon Systems, now part of EMC, the whole story of which we know well.

We met for coffee on Saturday, and I got a download of McAdoo’s thoughts about the startup ecosystem and what he was hearing from local entrepreneurs—ideas on everything from smartphone security for enterprise to the prospects of nuclear fusion for energy production. I also took notes on his advice to entrepreneurs (which I found particularly insightful), and some important trends in consumer-tech and cleantech startups in Boston, New York, San Francisco, and beyond.

While Sequoia isn’t about to open an East Coast office, McAdoo says, there is certainly enough going on—think raw talent, ambitious entrepreneurs, and a few company investments—to draw its partners out here regularly.

Here are some highlights from our chat:

Xconomy: People talk about the consumer tech ecosystem, or lack thereof, in Boston and other cities vs. Silicon Valley. But you’re telling me there’s a bigger trend going on than whether or not we have enough role models here.

Greg McAdoo: There are a host of applications that appeal to folks that live in dense urban centers. The big shift is towards a startup community in urban centers. That, by the way, affects the San Francisco Bay Area every bit as much as the New York metropolitan area or the Chicago area. Whereas the suburbs of the Bay Area have a very well established startup community, I think everybody’s on equal footing to some degree in that major urban centers don’t really have that startup community. They used to many years ago.

If you wanted to get a consumer Internet startup off the ground in 1995 or ’96, you needed to have fabulous product sensibilities and a wonderful front end engineering and design team. But if you were building anything at scale you also had to have some hardcore technologists in the back end and be able to rack and stack servers. Fast forward to 2011, and much of that back end expertise is provided by service providers—cloud guys like Rackspace or Amazon. Also some of the hardcore back-end technology is open source software now. So you don’t have to worry about being in SoHo in New York and trying … Next Page »

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Steve Singh, the chairman and CEO of Redmond, WA-based Concur Technologies, put the recent stock market swoon in perspective on CNBC yesterday for this “From the C-Suite” segment.

While obviously worrisome, Singh takes a somewhat longer view that technology spending—by businesses in particular—will remain strong because it drives productivity. Singh said Concur (NASDAQ: CNQR), which makes expense and travel management software for businesses, is seeing “a very solid demand environment” and expects to grow.

“Our workforce for fiscal ’11 will be up about 20 percent, year over year. We expect it to be roughly the same growth next year,” Singh said. Concur has popped up on our radar several times this year with acquisitions and investments, including its purchases of GlobalExpense and TripIt and investments in Yapta and Cleartrip.

Concur hasn’t skated through the latest market turmoil, of course. Its stock closed at $43.89 last Wednesday, and tumbled along with the market in three consecutive days of trading. It hit a low of $35.42 this morning before rebounding somewhat as the day went on. Check out the CNBC video for more of Singh’s comments.

Programming note: Those of you tired of politics for the moment may want to fast-forward through the bits featuring the show’s other guest, former Hewlett-Packard CEO Carly Fiorina, since her answers quickly start sounding like campaign talking points.

Fiorina, a former U.S. Senate candidate and adviser to John McCain’s presidential campaign, is currently the vice-chairman of the National Republican Senatorial Committee, where she’ll be working to help boost the GOP’s chances in the upper chamber during next year’s elections.

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I recently had the pleasure of taking a two week academic trip to China with Babson’s MBA program, where several dozen of my classmates and I were led through Beijing, Dalian, and Shanghai by the inimitable Robert Eng. During the course of the journey, our group visited with government officials, leaders from state-owned enterprises, and a number of businesses operated by domestic and foreign owners. While there are many interesting and non-trivial idiosyncrasies of doing business in China, such as the need for government contacts, I thought it would be more informative to share some of the broader business trends that became clear during the course of our visit.

First, China is beginning to capture more of the value chain. As the world’s third largest manufacturer, China has developed a solid reputation as a nation that builds products for Western companies to attach their brands. Apple is one of the most famous examples of this. Perhaps more surprisingly, Nike and Reebok both have their shoes manufactured in the same facility. Li Ning, China’s leading sports apparel maker and the number four sports apparel company in the world, also has its shoes made there. If you’ve heard of Li Ning, you’re ahead of the curve. If not, you probably will soon. Li Ning has begun opening stores in the United States and other countries overseas. In the U.S., it decided to launch its pilot store in Portland, OR, which seems like an odd choice until you realize that it’s right in Nike’s backyard. It’s a bold statement from a bold company and serves an appropriate example for the changing mentality of Chinese business; no longer content with the margins available to them making things for others to sell, the Chinese are now looking for ways to move up the value chain and capture the margins commanded by being a globally recognized brand.

Second, China is starting to look inward for markets. While the rest of the world is still staggering from financial crisis to financial crisis, China’s chugging along at a brisk 9 percent annual growth rate. Shanghai has joined the list of top tier metropolises, on par with London and Moscow, complete with a Starbucks and a McDonald’s around every corner. Shopping malls are awash in luxury brands. With that kind of affluence at home comes increased spending power, and Chinese companies are beginning to recognize the potential of the domestic market. (By Chinese companies, I also mean the Chinese government. State-owned enterprises still command roughly half of the country’s industrial assets, and the government has tentacles in just about every successful business in the country, private ownership or no.) As evidence of this, the 12th Five Year Plan explicitly discusses the yawning trade imbalance that China has created with the U.S. and other nations, and proposes to address this dependence on foreign consumption by directing more goods to the domestic market. It’s uncertain what the government will do about Chinese households’ astronomical savings rate.

Third, national stability is not a guarantee. Incidents of social unrest have been growing more frequent in the past couple years. Chaffed by a widening wealth disparity and the trampling approach to development, Chinese citizens are expressing their dissatisfaction in a way that makes government officials and many members of the business community nervous. Restrictions on freedom of speech and the flow of capital have done a great deal to boost the Communist Party agenda of security and growth, but they’ve also created an economic and social pressure cooker. The 12th Five Year Plan seeks to address these concerns by explaining how the government plans to handle rising inflation and housing costs (regulatory controls), the income gap (higher taxes for the rich), and the blistering pace of development (cleaner environmental standards and lower growth targets). Perhaps more revealing, social stability was a concern voiced by several businessmen we visited during the trip. One Chinese business leader who spoke to our delegation put it especially elegantly: “China will continue to grow as long as the Communist Party is in power. The Communist Party will stay in power as long as China continues to grow.”

The state of Chinese development offers an interesting puzzle: free market incentives bounded by strict financial and political controls. The tremendous opportunities of doing business there are matched by equally tremendous challenges. From this point in history, it almost seems possible that Communist China will continue growing in perpetuity, achieving global dominance in our lifetimes. Or the entire system could collapse spectacularly, and we will ask each other why we didn’t see it coming. 

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[Editor's note: Cross-posted from The Economist, 6/16/11]

As the G8 last month pledged $10 billion to aid the Arab Spring to support the building of economic and political institutions, the May 24th NASDAQ debut of Russia’s $10 billion Yandex was but one of many green shoots of an equally significant Entrepreneurial Spring blossoming out from Chile to China, and Israel to India. Led by two brilliant entrepreneurs who knew how to take native search engine technology and implant it in the emerging Russian marketplace, for over a decade, Yandex, a Moscow-based Internet venture, had been growing inside of its language-walled garden. Finally, after a planned 2008 IPO was foiled by the economic crisis, this ambitious venture burst onto a global stage with the largest NASDAQ Internet offering in recent history.

Like its Middle East counterpart, the Entrepreneurial Spring is a grass roots movement, and, although fertilized by innovations originating in the United States, it is fundamentally global and only loosely connected to America. China’s RenRen, Estonia’s Skype, Japan’s Rakuten, and Bangladesh’s GrameenPhone represent ripe fruits of the last decade’s entrepreneurial investments in environments outside the U.S.

Also similar to its Middle East counterpart, the global Entrepreneurial Spring can lead to the democratization of opportunity and increased control by citizens over their own economic fates. However, just as the Arab Spring is a first fraught step on a long, even treacherous, path, so is the Entrepreneurial Spring neither a panacea nor a fait accompli. Left unaided, exposed to the vicissitudes of climate and availability of resources, the fragile shoots can easily be stunted or trampled. To take root, they will require enlightened leadership and the patient cultivation of a rich environment of institutions and norms in order to become part of a self-sustaining ecosystem.

To sustain and spread these new ventures, like political democracy, leaders everywhere—not only publicly elected leaders, but a broad base of leaders of public and private, formal and informal, institutions—need to democratize the entrepreneurial choice without over-controlling it. That will require deliberately fostering an entrepreneurship ecosystem that (a) is conducive to increasingly broad numbers of citizens making the choice to take their economic futures into their own hands, and, (b) after that choice is made, facilitates the broad, merit-based access to the resources—capital, human, cultural, institutional, educational, and legislative—required in order to be successful. The helping hand and the invisible hand must clasp each other.

Fortunately, there are also green shoots of such enlightened leadership. Startup America, StartUp Britain, Startup Africa, and Start-Up Chile are but a few outward manifestations of the new national priority that leaders are assigning to entrepreneurship. Kauffman Foundation-initiated Global Entrepreneurship Week, launched less than three years ago, already conducts 100,000 discrete activities in more than 100 countries. In four years, Startup Weekend has spread to more than 100 cities in 30 countries with 30,000 participants. These two private initiatives, impressive by themselves, show that leadership of the Entrepreneurial Spring can and must go beyond government.

The bubbling up of the Entrepreneurial Spring shouldn’t be confused with the capital market bubble of social media valuations. Up-and-coming next generation stars from Lebanon (SABIS; management of K-12 schools in 15 countries), to Slovenia (Studio Moderna; multi-channel retailing in 20 countries), to Brazil (Tecsis; wind-turbine blades for the US and Europe) to Iceland (Actavis; generic pharmaceuticals in 40 world markets) show that entrepreneurship spreads far beyond the latest Internet technology. These rapidly growing, high potential ventures––and thousands like them––may still be under the public radar, but they are already having huge impact in their respective fields; no less importantly, they are making their economies more competitive, their citizens more prosperous, and they are creating jobs for many and inspiring further entrepreneurship in others.

For those countries not yet blooming with new ventures, get ready. As the successes become more visible and prove that value-creating entrepreneurship can and does happen anywhere and everywhere, the cultivation of a conducive ecosystem will not be a “nice-to-have” opportunity but a “must-have” necessity. Citizens everywhere will expect and demand the equal access to the possibility of prosperity that entrepreneurship can provide.

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Got five minutes? Here’s an eye-opening example of how markets are analyzed, how VC deals are won, how startups are built—and a little bit about what might have been.

New York-based 5min Media, a video syndication company, started in 2007 as a portal for how-to videos, and became a top video-content aggregator before getting bought by AOL (NYSE: AOL) for $65 million last September. (Some people think of 5min as the “other” deal that AOL announced on the same day as its TechCrunch acquisition, even though 5min had a bigger financial value.)

Boston-based Spark Capital led 5min’s $5 million Series A financing round, which was announced in January 2008. The startup was originally based in Tel Aviv, Israel, and was led by co-founder and CEO Ran Harnevo. It ended up taking just under $13 million in total VC/angel money, and was guided in part by Alex Finkelstein, a general partner at Spark.

Finkelstein talks fast and makes deals faster. He says he usually knows within five minutes (which is appropriate) of being in a room with an entrepreneur whether he wants to make an investment or not. But that’s after doing months of market research, of course.

Here’s the 5min story, in Finkelstein’s words:

“My thesis was that how-to videos would get the highest CPMs [advertising cost per thousand impressions] on the Internet, given that someone watching a how-to video is a super-defined niche demographic, right around the purchasing decision, and has intent. So my idea was, as opposed to producing this content, could you go out and aggregate content under really, really attractive terms?

“I spent 12 months flying around and put a list together of the top 100 DVD content owners in the country for how-to videos. The top guy was in Salt Lake City, he had 200 how-to-play-every-sport-at-every-level DVDs. Each DVD had 40 individual task-level how-tos on them. I signed him up to a very attractive contract. I found two guys locally doing the same thing in the music space, and did that with those guys. At the end of that process, I cold-called 5min. It was four guys at Israel at the time. They had the exact same vision, which was not to produce content but to aggregate it under very attractive terms and then to syndicate it all over the Internet.

“They were about to sign a term sheet the next day [with another VC firm]. We convinced them not to sign the term sheet, and to fly from Israel to Boston, which they did the next day. We led the $5 million A round into that company, and it was acquired around three years later by AOL.”

Still, a VC (and startup) can always do better. In 5min’s case, Finkelstein notes that the company probably could have sold for double the amount today, given the tech environment is much frothier now than it was in September.

Which leaves the rest of us wondering what that really says about the market. But our five minutes are up.

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[Updated at 9:35 a.m. with a correction, see Page 2.]Don Merino used to be the guy sitting across the table when someone went to Intel looking to sell a patent—sometimes he dealt with inventors, but a lot of times it was patent lawyers. Merino liked to say the job was about dealing with “random $40 million events.” It was hard to know when, but eventually, a company would find itself in a must-have position for intellectual property.

So when Merino joined longtime colleague Peter Detkin at Nathan Myhrvold’s Intellectual Ventures, the Bellevue, WA-based patent licensing company and invention incubator, Merino had a pretty good idea of the inefficiencies in the patent market. And that’s what he and Intellectual Ventures have set out to get rid of.

Not everyone is a fan of that work. There’s been plenty of ink spilled over whether Myhrvold’s firm is simply a “patent troll” on steroids, seeking mostly to profit from the ownership of ideas that it isn’t actually using. Myhrvold himself offered a defense of the company’s vision for a new “invention capital” industry last year in Harvard Business Review, keying on the idea that his work could lead to a better way of financing inventions. The company also sees itself as cutting down the cost of dealing with intellectual property conflicts for businesses.

Wherever you fall on that discussion, I’d say Merino’s stories are a pretty fascinating instant business history. It really is kind of mind-boggling that in the 21st century, with everything good and bad that modern finance has been able to conjure up, there was an unquestionably valuable asset being traded in a market that was still relatively wild, highly illiquid, and unpredictable.

As one of the key people helping Intellectual Ventures build up its massive trove of patents, Merino has been on the front lines of its mission to create a new kind of market for intellectual property. Merino is now the company’s senior vice president of licensing, spending a lot of time in Asia. When he started in early 2004, the company had been around for a few years, but had only recently corralled enough capital to bankroll large-scale patent acquisitions.

Don Merino

“The question was, were we going to be able to get to critical mass? When I showed up there was $150 million committed to the fund, and I remember Nathan one time grabbing me and saying, ‘You know, Don, it’d be so great if we could buy 3,000 patents over the next couple of years and spend the $150 million we have.’

“About a year later I came back and said OK, I spent the $150 million, Nathan. Now what?” Merino says with a big laugh. “So we went from $150 million to $1.5 billion in the first fund, between basically 2004 to 2008. It was a bit of a rocket ride, needless to say. We did about 1,200 deals in the first fund, and I personally did about half of them. “

Merino sees some comparison in the problem of dealing real estate in the frontier days of the American West. It was hard to know who owned what, where the boundaries were, and how valuable the land was. In modern times, land boundaries and values have all been sorted out and there are plenty of people to assess and document the history of those assets, everywhere from the local county courthouse to Zillow.com. But there is nowhere near that much transparency for patents—or at least, there wasn’t.

“One of the very simple things that we ended up having to do in the buying was understand if the person selling the IP to us actually owned it or not. There’s no title companies in IP. And IP lawyers … Next Page »

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A proverbial giant has left the cleantech stage here in Boston—though he probably wouldn’t admit any part of that statement.

Hemant Taneja, a managing director at General Catalyst Partners in Cambridge, MA, has moved to the San Francisco Bay Area this week. Taneja is one of the top venture capitalists in the energy sector. Beyond investing, he has been a champion of the local cleantech industry as a founder of the New England Clean Energy Council. He also helped write the Massachusetts Green Jobs Act of 2008 and serves on the board of the Massachusetts Clean Energy Center.

Reached by phone yesterday, Taneja said he has moved his family to the West Coast but is keeping a home in the Boston area as well. He joins fellow managing director Neil Sequeira (another recent Boston transplant) and a small team of associates at General Catalyst’s Palo Alto, CA, office, which opened in the past half-year. (You can read more about these VC moves here and here; in addition, Silicon Valley VC Jonathan Teo, formerly at Benchmark Capital, recently joined General Catalyst in New York.)

So, is Taneja’s departure a blow to the New England cleantech industry? “I hope not,” he says. “A, I’m not that big a deal. And B, we’re continuing to remain active on the East Coast. We’ll tag team.” Taneja says he’ll split his time between Boston and the Bay Area, as roughly half his investments are on each coast.

Some more background: Taneja is a recovering mobile software veteran who converted to cleantech about five years ago. Before joining General Catalyst in 2002, he was the founder and CEO of Boston mobile startup Isovia (acquired by JP Mobile). He co-founded JumpTap and also previously sat on the board of m-Qube. In the past few years, he has focused mostly on building energy companies, serving on the boards of ARC Energy, Mascoma, Modular Wind, Stion, and SunBorne Energy, among other firms.

I asked about his original move from software to cleantech, and about a more recent trend I’ve been hearing about—that software investors who dabbled in energy are now flocking back to software. “We saw a lot of entrepreneurs and academics moving into the [energy] sector, and our job is to follow the smartest people,” Taneja says. “A ton of people jumped into the sector, and some investors got burned because they were looking at technologies that were way too risky for venture capital. Some of those … Next Page »

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[Updated 5:15 pm. See below] Ken Olsen, the co-founder and former CEO of Digital Equipment Corporation (DEC), died on Sunday. He was 84. The news was confirmed yesterday by Gordon College in Wenham, MA, where Olsen was a longtime trustee. There has been an outpouring of commentary about Olsen’s career and the impact of DEC on the computer industry. (You can read obituaries in the New York Times, Boston Globe, and CNET.)

Olsen, an MIT alum, started Digital with Harlan Anderson in 1957 with $70,000 in seed funding from Georges Doriot of American Research and Development. The Maynard, MA, company went on to dominate the minicomputer industry (as opposed to mainframes), employing more than 125,000 people in 86 countries and becoming the second-largest IT company behind IBM. Through the 1970s and ‘80s, DEC anchored the burgeoning Route 128 tech corridor and was joined by Data General, Wang, and other computer companies.

But DEC was famously slow to embrace the desktop computer market, and the company struggled through the late 80s and early 90s. Olsen resigned from DEC in 1992, and the company went on to be acquired by Compaq and then Hewlett-Packard. And as DEC went, so did the Route 128 ecosystem.

In a letter, Microsoft co-founder and chairman Bill Gates called Olsen “one of the true pioneers of the computing industry.” Gates added, “He was also a major influence in my life and his influence is still important at Microsoft through all the engineers who trained at Digital.”

Some of those engineers are weighing in with their remembrances. Gordon Bell, a principal researcher at Microsoft who spent 23 years at DEC as vice president of R&D, wrote in a post on Xconomy today, “I tend to remember all the humor and moments of irony that we shared while building computers at DEC.”

Yuchun Lee, the co-founder and former CEO of Unica (now part of IBM), worked at Digital from 1989-1992. He writes in an e-mail, “DEC was an organization with a terrific culture: one of intellectual honesty, meritocracy, and a desire to win. All of this can be directly attributed to Ken Olsen and his vision as the founder and leader of the best days of Digital. I’ve learned much of what a great and significant company ought to look and feel like as one grows up and am very fortunate to have cut my teeth there right out of school.”

History is made, and then it’s gone unless we pay attention. Olsen was the prototypical Boston tech entrepreneur. He leaves behind a legacy of thousands of employees who have gone on to new endeavors. DEC also provides a well-known case study of a hugely successful venture-backed company that failed to adapt to a changing market. Then again, not very many tech companies last more than 30 years.

I’ll update this space with any more unique comments or stories I hear from the innovation community.

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Last week, the online travel world watched with considerable interest as Kayak, the Norwalk, CT-based travel “meta search” company, filed for a $50 million initial public offering. There has been a lot of debate about how much Kayak is actually trying to raise, how much the company is worth, and why it wants to go out for an IPO now, given that there’s a lot of volatility in the online travel technology market. The company is currently in its quiet period, so it won’t be commenting on any of this publicly.

Kayak stands to lose a fair amount of business if Google’s $700 million acquisition of Cambridge, MA-based ITA Software, announced in July, goes through. That’s because Kayak licenses ITA’s airfare pricing engine to power its comparison shopping service across different airlines and itineraries. With Google as a new competitor, it’s safe to say ITA’s technology will either become unavailable, or will be offered to Kayak on less favorable terms (see Fortune.com’s analysis of the financial implications here). In fact, Kayak is part of a coalition of companies—which also includes Expedia, Hotwire, and Sabre Holdings—that is formally opposing the Google-ITA deal, arguing that the acquisition will harm competition and lead to less choice and higher prices for travelers.

So why file for an IPO now? One senior analyst says going public is “an audacious objective” on Kayak’s part. “You don’t do an initial public offering filing if you think your business is going to be harmed in the near term,” says Henry Harteveldt, an airline and travel analyst with Forrester Research. “This is a sign of optimism and confidence on Kayak’s part.”

According to Kayak’s S-1 filing with the SEC, it has about $30 million in cash in the bank and has been modestly profitable since 2008. The company had net income of about $6 million through the first nine months of 2010, and had 140 employees as of the end of October. Its current contract with ITA Software expires at the end of 2013.

From talking with Harteveldt and other travel observers, it sounds like Kayak’s venture investors might be pushing for a liquidation event as soon as they can, before the effects of the potential Google-ITA combination can really kick in. In the meantime, filing for an IPO will give Kayak more information about how strong the market is. And if the company continues to do things like expand in Europe, increase its offerings in vacation packages, cruises, and hotels, and add new wrinkles to its search tools, it still could have a bright future—with or without ITA’s services.

Harteveldt emphasized that Kayak is not in a desperate situation. “This is not a cash call,” he says. “This is not a ‘burn the furniture to keep the lights on’ kind of move. This is a way to extract some value from a private company and see if it can grow in the public markets.”

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[Corrected, 4:40pm. See below] Last month, Jon Medved, the founder of Jerusalem-based Israel Seed Partners, a multi-million dollar venture capital fund, came to the University of Michigan to give a lecture on high-tech development. But Medved wasn’t there to talk about Silicon Valley or another U.S. startup hub. Instead he was meeting with a group of students to discuss the future of Israel’s high-tech economy.

Medved’s visit to Michigan was made possible by TAMID Israel Investment Group, an organization founded three years ago by two U-M students. The goal of the group, which has already expanded to a handful of campuses across the U.S., is to give business-minded students a way to connect to the Israeli economy, according to TAMID’s executive director Brett Siegal, a senior in Michigan’s business school. [An earlier version of this story reported that Medved had visited UC Berkeley, not Michigan. We regret the error---Eds.]

Though there are hundreds of campus organizations that connect Jewish students to Israel through cultural or academic activities, Siegal says that before TAMID (which translates to “always” in Hebrew), there was no outlet for students to make connections in a more business-oriented way.

And through a three-phase program, the group’s members get to do just that. The students get a crash course in important business concepts, and the chance to invest the group’s fund of Israeli securities or to do consulting work for a variety of Israeli companies. In addition, TAMID sends the students to Israel—and pays many of their expenses—for internships with Israeli companies or multi-national corporations with offices in the country.

Though the group works with companies ranging from a startup focused on solar housing to big firms like Thomson Reuters, Siegal says the nature of the Israeli economy means that much of TAMID’s work is focused on startups and the high-tech sector. “It’s about a 30-year-old economy, essentially, as a developed economy,” Siegal says. “The economy, for a number of different reasons, sort of spawns a lot of startups.”

According to Siegal, the Israeli government sponsors about 20 startup incubators and also participates in institutionalized venture capital programs that match private investments.

Though Israeli government involvement plays a large role in the proliferation of startups in the country, Siegal says the nature of Israeli culture also helps to foster self-starters. Compulsory military service “creates these very self-motivated people,” Siegal says. In addition, many of the immigrants that came to the country in large waves from the Soviet Union during the 1970s and 1980s were scientists in their home countries, and the Israeli government attempted to help these immigrants commercialize their ideas.

It’s for all of these reasons that Israel “has the highest level of startups outside of Silicon Valley,” according to Siegal. In addition, the country is home to between 3,000 and 4,000 high-tech … Next Page »

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As a reporter, you can tell when the innovation economy tide is turning, when a particular sector is rebounding, or when certain companies have turned the corner. How? Because all of a sudden CEOs want to talk on the record, PR people are your best friends, and marketing and real estate guys chat you up about the field at random events.

That’s the feeling I’m getting about radio frequency identification (RFID) these days—and I’m getting it from both coasts. The field of RFID comprises tags, readers, and software that, together, enable wireless communication via tiny embedded chips so people can gather information about everything from the location and status of product inventory on shelves to runners in a marathon. A couple of months ago, I profiled ThingMagic, a 10-year-old Boston-area RFID company founded by MIT Media Lab alums, whose time appears to have come, thanks to fortuitous changes in the market.

ThingMagic’s sister company in the Northwest is Impinj, a 10-year-old Seattle RFID tech firm founded by University of Washington professor Chris Diorio. Impinj is a bigger company than ThingMagic—and has raised much more venture capital—but both startups survived the RFID-for-retail-supply-chain-tracking hype around 2003-2004 (and the ensuing crash) and lived to tell the tale. The firms have worked together on RFID reader technologies, with Impinj selling its reader chips to ThingMagic. Now they and a few other survivors and competitors, including San Francisco Bay Area-based Alien Technology, are poised to make some bold moves.

I spoke with Impinj CEO Bill Colleran by phone last week to hear about the company’s progress, and some interesting new challenges ahead. One thing that grabbed me was how much the competitive landscape in RFID was decimated by the early hype and glacial adoption of the technology—plus the economic recession. That now leaves Impinj with relatively few competitors. “There’s been a shakeout along the way,” Colleran says. “We’re in a great position to grow as this industry takes off.”

And take off it apparently will, across sectors like consumer electronics, automotive, healthcare, and apparel and other retail applications—finally. “RFID has experienced a resurgence in the last year or so,” says Colleran. “The common theme is the technology has continued to move along—performance is dramatically better, and cost has come down…It’s a maturing of the technology and ecosystem. We’re seeing wholesale adoption.”

That’s easy to say, of course, but here are some stats to back it up. Impinj says it will ship as many RFID tag chips in the second half of 2010 as it has in the previous five years … Next Page »

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With all the talk about “gamification” of the Web—adding video game mechanics to websites to boost customer engagement, loyalty, and spending—it’s time we spoke in depth with a Seattle company that really has taken the trend to heart.

EVO Media Group, the maker of the DevHub website-building software platform, has been around since late 2007. It released DevHub, aimed at helping bloggers and companies create websites and make money from them, in early 2009, and started turning a small profit itself about a year ago.

In the past week, the company has rolled out a new and improved (gamified) version of DevHub—one that incorporates game mechanics like characters, virtual currency, and a graphical dashboard interface that shows you how your website is doing. So far the overhaul seems to be paying off in terms of traffic and site-building activity. Which goes to show how vital gamification can be to a young business—at least in the short term.

Yesterday I had a chance to connect with EVO Media co-founder and CEO Geoff Nuval. Here are his answers to a series of e-mail questions about everything from the new DevHub to where gamification is headed:

Xconomy: What’s the history of your involvement with the Web gamification trend?

Geoff Nuval: DevHub, the EVO Media Group’s flagship product, is one of the first products on the Internet to completely undergo the full gamification process. Remember, a few months ago it was purely a website builder. Now it is a rewarding, social, fun website-building game with characters called Devatars running the show!

In essence, DevHub is our proof point in the gamification movement that a well thought-out integration of game mechanics and great creative can really increase engagement and virality—within the first 5 days since our gamified launch we’ve already seen a 9x increase in site building activity. That means the average new user now on DevHub is creating a full fledged site! That’s insane when you compare that to the millions of underdeveloped sites and blogs you see on regular site creation systems.

What we’re realizing with our gamble on DevHub paying off is that you can add fun to something serious without losing its effectiveness. This is actually the tagline of the EVO Media Group, “Seriously Fun.” DevHub is only the start of EVO’s contribution to the gamification movement. If you go to our corporate website (www.evomediagroup.com, which itself was built on DevHub in 20 minutes), you’ll find that our overall goal is to bring our knowledge and expertise gained through the gamification of DevHub to other serious systems on the Web, either built internally or via partnerships with already established systems.

The switch to gamification isn’t only something we did for DevHub, we’ve actually applied … Next Page »

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At the end of 2009, we were optimistic that the M&A markets would pick up and become the key near-term source of liquidity for investors before any real momentum in the IPO and capital markets kicked in. We also believed the technology sector, led by reemerging growth and profitability, would be at the forefront of the deal flow. And finally, we envisioned a good M&A ecosystem, with sellers motivated by the need for exits and buyers in search of much-needed new products, innovation, and revenue growth.

But our fairly positive stance for the technology sector was tempered by caution, given the cloud of uncertainty surrounding the economy and its fragile recovery. So, as we approach the middle of 2010, are we sticking to our guns?

The short answer is yes. But acquirers and investors are still wary, and they’re doing much more diligence before closing deals. They’re also more partnership-focused—that is, they view an acquisition as the continuation or initiation of a partnership with the former management or founders of the purchased company. Thus, their diligence expands beyond the traditional financial or technology variables.

The current consolidation trends will continue, and as a result it’s critical for sellers to understand how to demonstrate and maximize their value in the eyes of the consolidators. So what should those who are positioning themselves for liquidity do to improve their prospects? Based on our insight and conversations with key industry leaders, here’s our best counsel on the subject:

· Focus on building value. Create value in your products, for your customers, and in your underlying industry segment. Value will always be recognized and rewarded. This means you can’t set out to be bought or sold; you need to focus on the core business and establish value through your product in order to achieve strategic and financial success.

· Understand where your company, technology, or service sits in the overall ecosystem of your segment. Know who all the players are, how you match up, who your competitors are, and where you provide value. By understanding your ecosystem, you’ll be better able to guide your company and your product or service toward true value creation. You’ll also learn how you fit into current consolidation trends and, ideally, gain insight on how acquirers view your company from the outside. In many cases, this can differ from your internal viewpoint.

· Stay close to your strategic partners. Form close relationships with strategic customers, resellers, and industry leaders—but don’t get so close that you lose competitiveness or independence. When you develop these relationships, a host of potential acquirers is only a phone call away, and they already understand your value proposition. Be sure not to sign exclusivity agreements, … Next Page »

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What were we just saying about cross-pollinating ideas between Seattle, Boston, and San Francisco? As if to hammer home the point, Bellevue, WA-based nuclear reactor startup TerraPower announced today it has raised $35 million in Series B funding led by Charles River Ventures, based in Waltham, MA. Silicon Valley-based Khosla Ventures also participated in the round.

TerraPower was spun out of Intellectual Ventures, the invention firm led by Microsoft Research founder Nathan Myhrvold. The three-year-old company is developing a new kind of nuclear reactor, called a traveling wave reactor, that uses depleted uranium (spent fuel) or natural, unenriched uranium to produce the nuclear-fission reactions necessary to generate power for 60 years or so without refueling. The design is early and highly experimental. But if it works, it could produce cheaper power with much more plentiful fuel, and also lead to more efficient nuclear waste disposal and less risk of nuclear proliferation.

The company has gotten a lot of attention, in part because Microsoft co-founder and chairman Bill Gates is an investor, advisor, and key evangelist on the project. Until now, though, TerraPower has been tight-lipped about how much funding it has received, and from whom.

Raising a large venture capital round seems to be a promising step forward for the young nuclear-power firm. As part of the financing deal, Izhar Armony, a general partner at Charles River Ventures, has joined TerraPower’s board. The company says it now has almost 40 full-time employees and some 75 technical consultants.

“We are thrilled to attract VC investment in research and development. It shows markets are putting value to what’s required to bring about real advancement,” Myhrvold said in a TerraPower statement.

I spoke with TerraPower CEO John Gilleland back in March about the company’s long-term prospects. He talked about the experiments that still need to be done—including some international partnerships for testing—in order to meet the company’s goal of having an operational reactor by 2020. Gilleland, a prominent physicist, stressed that the technical aspects of the problem are well understood. Now it’s mostly about some serious discipline and execution to show that the process can work in a prototype reactor, he said.

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Andy Sack has been working behind the scenes for more than a year. Yes, we know he’s been busy bringing the first session of TechStars, the startup bootcamp, to Seattle this fall. He’s also been co-leading Founder’s Co-op, the seed-stage investment fund, for the past couple of years. But just when you think the Seattle tech entrepreneur and angel investor has his hands full, he busts out with a new venture. This one could have even greater implications for startups, entrepreneurs, and innovation—and not just in Seattle.

It’s called RevenueLoan, and Sack is the founder and CEO of this new company. Its goal is to provide capital for promising startups in the Pacific Northwest, and across the country, using a different kind of investment model called “revenue-based financing” (sometimes called “royalty-based financing”). Before we get into exactly what that means, here are the hard facts. RevenueLoan has raised $6 million from Seattle-based firms Voyager Capital, Summit Capital, and Founder’s Co-op, to make investments and support operations. Sack says he will remain a partner with Founder’s Co-op, but will step away from co-leading that fund to focus on RevenueLoan and TechStars. (Founder’s Co-op will be led by Chris DeVore and Geoff Entress.)

The idea of RevenueLoan is to make investments in the range of $100,000 to $500,000, Sack says, targeting companies that already have between $500,000 and $5 million in annual revenue. Instead of taking an equity stake in the company like a traditional VC firm would, RevenueLoan will receive a percentage of future revenues (typically 1 to 10 percent). The investor can generate a maximum of a 3-to-5 fold return on his investment. That’s the “revenue-based” part of the equation, and the goal is to open up a wider range of companies to invest in, where the investment returns will flow if the company is able to execute on its business plan. Such an investment model doesn’t depend on a company going public or getting acquired, like traditional venture capital.

Since the IPO market has been in a drought for years, and acquirers in such an environment can afford to drive a hard bargain, this revenue-based model definitely has appeal. After all, early-stage investors are starving for some way to generate returns. And for entrepreneurs, it can offer a new way to get the capital they need for expansion, while allowing them to spend more energy executing on their business plan rather than chasing the all-important “exit” that VCs crave.

“We’re going after a segment that is today underserved by traditional equity like VCs and banks,” Sack says. “It’s a huge market.”

Revenue-based finance is not a new idea. As I first described in a feature last October, the model dates back to traditional mining companies and government economic development programs. Since the early 1990s, it has been applied to early-stage technology startups by a handful of … Next Page »

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It’s obvious that the financial downturn has negatively impacted innovation. Lack of investment has meant fewer startups, and lack of capital for liquidity events and exits has pushed a listless market into even greater torpor. Overall, the downward pressure is preventing a lot of great new ideas and technological advances from getting off the ground.

But is there a positive side effect of the recession? What if the legacy of the most acute economic distress since the 1930s is that, rather than simply returning to our old pace and methods, we shift to a studied, more sustainable form of innovation and growth? What if we’re entering an era of “refined” innovation that will change the way ideas move from concept to market for years to come?

Stop adopting, start assessing

We’re coming off a ten-year run of hyper-innovation that has revolutionized our daily lives. From consumer electronics to energy efficiency to alternative materials to data interchange to entertainment, virtually every aspect of our lives has been impacted. The past decade has essentially been a large global whiteboard on which visionaries have jotted down earth-shattering new concepts that ultimately formed and transformed big and bold markets.

But the new truth is that we can absorb only so much innovation—and so much change—in a given period. That’s why, at some point, consumers, commercial markets, investors, and strategic partners need to stop adopting and start assessing and refining.

This means we’ll begin to embrace new technology on a more selective basis. It means we’ll begin to incorporate and absorb the long-term impact of innovation and transform past fads or previous follies into sustainable evolutions. And it means we’ll begin to look for synergies across various breakthrough ideas that have survived the vetting process and extract their most positive and efficient attributes.

Call it innovation refinement or innovation consolidation, this is where we need to go. It’s about catching our breath and extracting maximum value from the super-spasm of innovation that has just taken place.

Low-risk funding

What does this mean for financing? Everything.

There are vast opportunities for low-risk innovation investment today. And the foundation has already been laid for this approach. A vast array of science projects has been hatched and funded, and now we need to focus on which of these innovations can be improved on with additional … Next Page »

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Cascadia Capital is optimistic that the resurgence of information technology M&A and financings in late 2009 and early 2010 will continue throughout the remainder of the year. The evidence for this activity is supported by the market data and the sentiment of cautious optimism expressed by the CEOs with whom we regularly collaborate as part of our “thematic” business model.

Under our thematic approach, Cascadia’s IT Practice has identified 11 technology themes. We build an ecosystem for each theme, comprising companies, financial sponsors, and potential transaction counter-parties.

There has been a material improvement in the number of IT M&A and financings in the third and fourth quarters of 2009, offsetting, to some extent, record weaknesses earlier in the year. Second half 2009 IT M&A spending increased 50 percent from the first half, as the markets saw an increase in valuations, with higher multiples returning. More specifically, deal activity in the global technology sector grew for the third consecutive quarter in Q4 2009. Deals done in the technology sector rose by 13 percent, to 553 in the quarter, compared with 488 in Q3 2009. Total deal value also quadrupled in Q4 2009 ($35.4 billion), compared with Q4 2009 ($9.2 billion). M&A in January 2010 alone show 83 completed deals, a healthy pace if considered a run rate for the remainder of the year.

Cascadia believes that the number of IT M&A and financings will gradually ramp up throughout 2010 from the economy-induced hiatus of 2008 and the first half of 2009. Recent M&A activity by major public company “aggregators” suggests that the market is re-emerging and will pick up momentum as 2010 unfolds.

Our view is that the strategic acquirers will stimulate the majority of M&A in 2010, as private equity still lacks leverage, with growth equity funding future M&A targets. The need to acquire leading technology companies to round out software and service offerings, rather than building these technologies and services in-house, will drive M&A. Additionally, stronger balance sheets, improving credit markets and market valuations will help to narrow bid-ask spreads. All of this will combine to improve prospects for strategic deal making over the next 12 months.

Here we assess 2010 prospects for two of Cascadia’s IT Practice themes:

Governance Risk and Compliance

We believe that the Governance Risk and Compliance (GRC) market is at an inflection point as regulatory changes and increased compliance requirements are forcing companies to look for enabling software and services to help manage their businesses. We also see that the market for GRC software and service companies is fragmented and ripe for consolidation; currently, there are at least 13 privately held GRC companies that have revenues in excess of $25 million. Several of the large consolidators are focusing on the GRC space and as 2010 unfolds, we expect that several of these acquirers will move to strengthen their presence in what continues to evolve into one of the most mission-critical software categories of the next decade.

In January 2010, EMC announced that it will acquire Archer Technologies to add IT-centric GRC capabilities to EMC’s RSA Security product line and position the company against infrastructure software competitors IBM, HP, CA, McAfee, and Symantec, who have, so far, remained … Next Page »

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Yesterday, we ran the first part of a sit-down interview with Nick Hanauer, a noted entrepreneur, investor, and co-founder of Seattle-based Second Avenue Partners. Hanauer, who has been involved in the early stages of such prominent companies as Amazon, aQuantive, and Insitu, spoke about the importance of new metaphors in recognizing and understanding breakthrough ideas; why venture capitalists don’t take enough risks; and the challenges of healthcare reform.

In what follows, Hanauer talks quite a bit more about Amazon, Insitu, and how to think about solving the biggest problems in business and society (hint: don’t conform). He also touches on why he’s generally bored with the online advertising sector (except for Seattle-based Marchex), and the one key area in which he would seek omniscient advice.

Here is part two of our interview:

Xconomy: What are the prospects for another big tech company like Amazon to come out of the Seattle area?

Nick Hanauer: I think the prospects are very good. It’s a very dynamic, creative, and risk-tolerant business culture here. There’s a fabulous ecosystem of people who understand technology in all sorts of ways. There’s software, Internet, biotech, aerospace. Insitu, as an example, is a big company now. And in 10 years, that could be a huge company. I think they employ 600-700 people now. We [Second Avenue Partners] don’t own it anymore, Boeing owns it, sadly. We have as good a shot at creating more big technology companies as almost any place on planet Earth. Probably not as good as Silicon Valley, but better than most places.

X: Tell me more about Second Avenue’s involvement with Bingen, WA-based Insitu, and when you first invested in it. (This company makes unmanned aircraft systems for surveillance and intelligence applications.)

NH: It wasn’t the first round of financing, but they were a teeny tiny company, employed half a dozen people. We looked at it in June or July 2001, and they were like, “Fishing, we’re going to find tuna with cool planes.” We thought it was really interesting technology. [CEO] Steve Sliwa was so good. We got that if they could pull off this technology in this domain, there are an infinite number of applications. And then [September 11, 2001] hit. And we said, oh. The military’s going to buy a lot of these. OK, we’re in. We led that round, and kept on backing them. I’m sad that we sold it, because it was such a civic achievement; it made such a difference in the lives of so many people. It’s maybe the single biggest thing to happen to that region of Washington and Oregon economically in decades. We were very lucky [with the Boeing sale], there was this incredible global bidding war going.

X: How should one learn to think about solving big problems in business and society?

NH: I think the capacity to think creatively isn’t gated by your intellectual abilities so much as your psychological ability to not conform to what other people want you to believe about … Next Page »

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Last week was a pretty good one for Nick Hanauer. When I visited his office, he was basking in the glow of the mid-afternoon sun—and the afterglow of President Obama’s signing of the much-ballyhooed healthcare reform bill. (Yes, he’s a staunch Democrat.)

But I wasn’t there to talk politics. Hanauer is one of the Seattle area’s most successful investors and businessmen, and one of its most influential thinkers. He is a founder of Second Avenue Partners, an investment group focused on early-stage companies. He was the first non-family investor in Amazon.com (and a board advisor until 2000); the founder of Avenue A Media (which became aQuantive and was sold to Microsoft for $6.4 billion in 2007); and an investor in such diverse companies as Insitu (sold to Boeing for some $400 million in 2008), Newsvine (sold to MSNBC.com in 2007), Market Leader (formerly HouseValues), Modumetal, and Qliance.

He is also a political activist, a die-hard science buff, and an amateur astronomer. And he’s giving the opening keynote today at our Xconomy Forum (“What’s Your Breakthrough Idea?”) at the University of Washington at 1:30 pm. He will set the table by discussing where “breakthrough ideas” fit into the overall taxonomy of startups and entrepreneurship, and he’ll give examples of some transformative ways of thinking from his own experience.

To whet my appetite, and those of our readers, I sat down with Hanauer for an extensive and wide-ranging chat. I should have known better; it was like partaking in a 15-course dessert buffet just before the main meal. But it was vintage Hanauer—talking in depth about not conforming to societal expectations and how to think creatively about new ideas and metaphors, reflecting on why venture capital doesn’t work as a sector, quoting famous philosophers, and discussing the one area in which he would seek omniscient advice if he could. All of that sprinkled with insights from Amazon, Insitu, and other prominent companies.

Here is an edited transcript of the first part of our interview:

Xconomy: You’ve talked about the importance of new metaphors in thinking about potential breakthrough ideas. What do you mean by that?

Nick Hanauer: OK, here’s a non-business example of what I mean by that: The entire edifice of modern economic theory—Chicago school, efficient-market hypothesis, market fundamentalism, that has dominated our political discourse for 30 to 40 years—is based on the understanding of the world as a linear system. Modern economic theory requires the system to be linear in order to make the numbers add up. It requires humans to be rational calculators of their self-interest. The only way it works is if you assume every human can make an instantaneous net present value calculation about what they should do at every moment. What that does is it creates this idea in your mind that the market is this perfectly efficient machine.

The dominant narrative has been that markets are perfectly efficient. If it’s perfectly efficient, then the market is always right. And if it’s always right, you also have to believe, among other things, that the rich deserve to be rich, and the poor deserve to be poor. How could it not be, if the market is always right? You have to believe that any civic intrusion into market constructs is an abomination, because the market is always right. These things have to be true if that’s your metaphor for understanding how the economy works. But if you understand the economy for what it is—it is a complex, adaptive system. Our market isn’t just like an ecosystem, our market is an ecosystem. It’s complex, it’s adaptive, and it is shaped by the evolutionary forces identical to the forces that are at work in Puget Sound.

X: So what’s the breakthrough here?

NH: If you understand the market in that way, then it forces you to reckon with it like a giant garden. In that garden, we get to make choices about what’s going to grow, what we’re going to eat, and so on. All of a sudden, a civic intrusion into that structure doesn’t become an abomination, it becomes … Next Page »

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