This week's news about the suspension of operations and impending bankruptcy of Solyndra, a venture-backed solar film company that received sizable loan guarantees from the federal government, came as little surprise to the NVCA, but not because we had any advance knowledge of Solyndra's plans. Rather, we have been anticipating failures -- and sizable ones at that -- in the clean technology space for some time. Venture capital investment is predicated on failure because of the high risk nature of the companies in which we invest. This reality is even more prevalent in emerging, disruptive technologies such as clean tech. We should expect more failures in the months and years ahead as we test innovative technologies and business models. But, more importantly, we should also expect significant successes.
Venture capitalists and entrepreneurs are known for learning from their mistakes; they thrive on it, in fact. Recent coverage of Steve Jobs' career and his failures along the way speak to this phenomenon directly, but it applies to every single start-up company ever funded. In wake of Solyndra, it is critical that the federal government take this reality to heart and continue to support clean technology through loan guarantees and R&D funding. If the venture capital industry jumped ship at the first sign of failure in other sectors, we would be living today in the dark ages technologically, socially, economically.
There is much innovation and much success in our future in the clean tech space, with countless companies and technologies being tested in the market. Every new clean tech company equates to new jobs and new opportunities to reduce our reliance on foreign oil and save our planet. Venture capital investment has never been for the weak of heart - and, after this week's news, we expect clean tech investors to continue their down their current paths without pause. The United States needs to grow our economy, foster innovation, and remain competitive with foreign countries. To do so our government must also move decidedly forward in support of the clean technology industry.
We have been getting a large number of queries regarding how the debt ceiling, the S&P downgrade, and the market volatility are going to impact the venture capital industry. First, we need to clarify the cause and effect that is taking place. The seemingly unending and fractious debt ceiling negotiations caused the S&P downgrade which, in turn, is one of a few factors that is causing the current capital markets instability. Recently, I spoke about how the debt ceiling agreement is poised to impact venture capital here. While the S&P downgrade itself does not directly impact venture capital, the capital markets uncertainty caused by the downgrade is indeed problematic for venture capital. Why?
Over the past several months, we have begun to see a marked increase in IPO registrations for U.S. venture-backed companies. Today, that number stands at 57 - the highest level of registered companies since before the financial crisis of 2008. These companies are quality candidates that have every intention of becoming public entities. However, in the last week, the brakes were harshly applied to the steady momentum we were experiencing. No company is going to go public when there are 500 point swings in the market on a daily basis. Several companies have postponed planned offerings and others will likely wait out this storm. This environment creates delays we do not need.
At the same time, larger corporations who are buyers of venture-backed companies, are watching the price of their stocks rise and fall and quite possibly may slow down their acquisition strategies to understand better their own financial positions before spending cash. Thus, the current class of companies that are ready to exit will remain in the venture portfolio a little longer, which could impact venture returns.
In a normal environment, the venture industry could shrug off this delay, but we are coming off of a significant holding pattern for exits from the financial crisis. Venture firms that were waiting out the last crisis for a better market and thus better returns are now forced to wait out yet another set of market bumps before fundraising.
Hopefully the market will stabilize and companies can continue to go public again very soon. Otherwise we could see a repeat of 2008 when the IPO window closed completely, a shutdown that today would seriously jeopardize the venture capital industry and the entrepreneurial companies in which we invest.
Any signal that Congress can send to the investing public that meaningful progress is being made on the deficit will be extremely helpful to establishing some stability in the marketplace. To achieve this however, there must be bi-partisan support for policies that support economic growth. Like the rest of the America, we stand waiting and hopeful that this can be achieved.
Our Monday meeting in July is with Ketan Patel, Principal at New Venture Partners where he focuses on corprorate spinouts, enterprices security, mobile media and security, ad-hoc wireless networking, and communications. Having joined New Venture Partners in 2006, Ketan previously worked in a variety of operational roles in the semiconductor industry, encompassing startups and large multinational corporations including Cavium Networks, Inc. where he was part of the technical sales and marketing organization responsible for the commercialization of the industry's first 10Gbps in-line security processor. Ketan holds a BS, magna cum laude, in Electrical Engineering from North Carolina State University, an MS, cum laude, in Electrical Engineering from the University of Illinois, Urbana-Champaign, and an MBA from the Tuck School of Business at Dartmouth. His current investments include: GainSpan, Intelleflex, and TimeSight Systems.
Ketan Patel, Principal, New Venture Partners
From which industry sector do you think we will see the most innovation in the next 2 years?
Mobile security. The existing security paradigm is arguably broken, as evidenced by the multitude of high profile attacks on seemingly secure enterprise and government institutions, and does not scale well for mobile devices. Consequently, innovations that result in new security paradigms that leverage the unique attributes (such as location awareness) of a mobile device while addressing the scalability challenges of the mobile environment will be interesting. There are at least two key rules that apply to security: 1) Hackers go where the people are…they look for scale, and 2) Hackers go where the money is. The growth of smart-phones, the introduction of various mobile payment systems, and the latent value of personal information that people store on their cell phones leads me to believe that mobile security is going to get a lot of attention in the next two years.
2011 is the year of ....
Acquisitions. As the economy recovers, we have seen our large corporate partners that have been building up cash reserves increasingly looking to deploy that cash to buy companies and technologies that present them with growth opportunities; presenting startups with interesting exit opportunities.
The biggest threat to the US venture capital industry is ...
Depressed returns in the asset class.
What is your favorite book of the last year?
Against The Gods: The Remarkable Story of Risk by Peter L. Bernstein. The book is a deceptively easy read that outlines the evolution of human risk perception and resultant human behavior.
Name a venture-backed company you are not invested in but wish you were.
Zynga. They drove a business model innovation (vs. a technical innovation) in the gaming industry that has upended the classical model of game/content creation, game delivery, and monetization.
Name a practicing VC from another firm who you admire and why?
Larry Finch at Sigma. His endurance in the Venture Capital industry is simply amazing. He has had tremendous success over three decades in Venture Capital, yet retains a tremendous excitement and passion for building great companies and helping entrepreneurs. Larry’s energy towards Venture Capital is truly inspiring.
An old Chrysler plant in Newark, Delaware will be buzzing again as Bloom Energy opens East coast operations there in mid-2012. Funded by NVCA members, Kleiner Perkins, Caufield & Byers, New Enterprise Associates and Mobius Venture Capital, Bloom Energy delivers fuel cell technology to compete with electric power. The company demonstrates well how venture capital drives innovation - in this case clean technologies that will help reduce our dependency on traditional fuel sources -- and create jobs for Americans.
The Bloom Energy plant in Delaware is expected to employ as many as 1500 workers from the First State as well as Pennsylvania and New Jersey, transforming a once defunct brownfield area into an innovation zone. Positive news such as this reinforces the importance of a public policy agenda dedicated to supporting clean energy technology as it is clearly a driving force of the American innovation economy. We look forward to continuing to break new ground -- in Delaware -- and across the country as venture capitalists invest in the most promising technologies and people.
Last week, Intel Capital announced four new investments which, on a stand alone basis, would be considered by most as "business as usual." But these investments were significant in that they launched Intel Capital over the $10 billion dollar mark in total investments since inception. The milestone is incredibly meaningful - for Intel Capital to be certain as it evidences its commitment to funding innovation - but also to the venture industry and the US economy as it underscores the importance of corporate VC to the continued health of the start-up ecosystem.
In the first quarter of 2011, more than 15 percent of all venture capital deals had corporate venture capital participation, up from 14 percent in all of 2010. Approximately 10 percent of the investment dollars in the first quarter of this year came from corporate VCs as well. As the venture capital industry continues to contract, the start-up economy needs the corporate contribution in terms of both capital and support. Corporations such as Intel - and many others -- bring not only dollars to the table but perhaps more importantly expertise, vision, a “built-in” customer base, as well as a keen understanding of the global markets which young companies are striving to access. In turn, the NVCA Corporate Venture Group continues to expand as more companies are recognizing the value of investment in innovation at the start-up level. There is tremendous competitive advantage to be had with a seat at the emerging company table across all industries but certainly IT, life sciences and clean technology. Here at the NVCA we expect to see continued growth in this area of investment as more corporations and start-ups experience the win-win of strategic corporate VC investing -- an experience with which Intel Capital is well familiar.
If you would like more information on the NVCA's Corporate Venture Group (CVG), please contact me at firstname.lastname@example.org.
This month we are privileged to hear from Sean Dalton, General Partner at Highland Capital Partners, who focuses on leveraging disruptive technologies in the mobile, enterprise and media markets. He currently represents Highland on the boards of Calxeda, CENX, Movik Networks, QD Vision and Zoove and also actively works with Picochip and MokaFive. Sean is a former director of AccessLan Communications (acquired by Advanced Fibre Communications), Altiga Networks (acquired by Cisco), Casero (acquired by Radialpoint), CCTV Wireless (acquired by TerreStar), CHiL Semiconductor (acquired by International Rectifier), Covergence (acquired by Acme Packet), Envoy Networks (acquired by Texas Instruments), Ocular Networks (acquired by Tellabs), Optasite (acquired by SBA Communications), P.A. Semi (acquired by Apple), Starent Networks (NASDAQ:STAR; acquired by Cisco), Telcobuy.com (merged with World Wide Technology) and Telica (acquired by Alcatel/Lucent). Sean serves as a Director of the New England Venture Capital Association.
Sean Dalton, General Partner, Highland Capital Partners
Q. From which industry sector do you think we will see the most innovation in the next 2 years?
A. We all are enjoying a massive renaissance in innovation, particularly given that it wasn’t so long ago that it appeared the world economic order was about to be up-ended. How far we have come! Among my favorite trends are ubiquitous mobility, cloud computing and “over-the-top” content distribution. It’s also interesting to see how large industries like healthcare and critical issues like conservation are being addressed with new vigor by technology.
Q. 2011 is the year of...
A. ... the young entrepreneur. Of course, young (let’s say under 30) entrepreneurs have seemingly always been at the heart of the greatest companies: Apple, Microsoft, Google and Facebook just to name a few. But there are two trends that seem to be adding jet fuel to the fire. First, the barriers to build a company and launch a product have never been lower, due largely to technology innovations. But an equally important trend for college and graduate students is that choosing an entrepreneurial path is now viewed as the goal – the desired path -- as opposed to joining IBM, Merck, McKinsey or Goldman Sachs (with all due respect to these great companies). Being an entrepreneur is the long-term “safer” path.
Q. The biggest threat to the US venture capital industry is...
A. ... forgetting what it was like in January 2000, when very few asked “what could possibly happen?” While I’m not saying we are there yet, I can see the harbormaster going out to change the flags…
Q. What is your favorite book of the last year?
A. Severe Mercy by Sheldon Vanauken. Earlier this winter I took a few days off to spend time in a monastery. My first night there I randomly chose a book off the shelf. It’s the self-biographical story of Sheldon and his wife Davy as they meet, fall in love and marry. A desire to experience the world and fate brings them to Oxford where they befriend C.S. Lewis. It is with Lewis that their intellect is challenged by examining Christian doctrine to figure out whether there is a Trinity. So they do that and reach a conclusion (you’ll have to read it to find out), only then to be given a tragic circumstance that once again challenges both to their core. What really comes alive is how powerful a bond can be between people.
Q. Name a venture-backed company you are not invested in but wish you were.
A. This is a trick question on many levels! But I’m going to have to say Facebook. If for no other reason than my kids would actually think I’m cool. No one outside of our universe has any idea of what a “Starent Networks” is.
Q. Name a practicing VC from another firm who you admire and why?
A. Doug Leone of Sequoia. Early in my career we were on a board together. Doug was, and still is, great at cutting through the inconsequential to get to the core of the situation. One moment it might look as though he were sleeping as another board member and I debated the application of an IETF protocol. A moment later Doug would be all over the head of sales. “OK, enough stories. What was the number, did you hit it and why or why not? Let’s walk through the pipeline line-by-line…” Doug seems to consistently get to the heart of why a business is being successful, or why not. If I were to create a personal board of directors, I would ask Doug to be on mine.