2000 VC backed companies still seeking exit

According to the annual Venture Insight study released today from Dow Jones VentureOne and Ernst & Young LLP, venture capital investments is showing continued signs of expansion, but "its return to health is still weighed down by nearly 2,000 portfolio companies from the dot-com days that have yet to find exit opportunities. "

They sited slower rates of both company and investor consolidation (5.6% and 3% declines respectively) noting that the number of VC firms has shrunk by 49% since 2000. Meanwhile the expansion is led by new fund raising by the largest firms.

Perhaps the VC are also seeing some competition. I am also seeing a trend for tech companies to raise money from hedge funds (trying to goose their returns) and angel investors in Europe hoping to list their investments on the AIM in London (particularly leading up to the mid-year rule changes).

Bottom Line: Know your potential investors.

Selecting Talent

There are three things investors look for: management, management, and management.  But how do you select the right people?

A recent book has some answers.  Take a look at Executive Intelligence: What all Great Leaders Have by Justin Menkes.

Menkes defines the three areas of managerial work as: accomplishing tasks, working with other people, and self-evaluation.  Some highlights of the critical skills:

• capacity to distinguish between primary and secondary goals
• ability to anticipate probable outcomes and unintended consequences
• ability to recognize the underlying agendas of others

Don't let the cover fool you. In my opinion, these skills apply to everyone in the team.  In a fast moving environment everyone must be a leader.

Menkes is critical of traditional interviews, personality profiles or work-style tests as a selection technique. I tend to agree, however, they can be very useful for team building and ensuring that you develop a more balanced team.

The best way to select staff is to use an "oral exam", setting a series of hypothetical business problems and asking them to verbally answer how they would solve it.  This technique has saved me from a few problems.

Bottom Line: Everyone must be a leader. Use hypotheticals to test candidates. Don't forget the self evaluation.

Cheaper to run a start-up?

VentureOne reported that VC "poured more money into U.S. companies in 2005 than in any year since 2001". But perhaps the most interesting analysis was that money was moving from health care and IT (which experienced a dip in funding) towards consumer and business-services sector, which according to VentureOne "encompasses Internet commerce companies" and "produced gains in 2005 not seen since the dot-com boom days."

"Fueling this shift in investing is the lower start-up costs involving Internet start-ups, which are benefiting from open-source software, and cheap online memory and storage technology. "

I have been amazed in the last couple of years how much cheaper it is becoming to get great tools for your business, either on an open source or pay-per-use basis.  Some great examples are Basecamp for project management or Arena Solutions for PLM.  If your business is software, then you can get lots of infrastructure and tools that can enable you to unleash your creativity.

Bottom Line: Look for low cost tools, effectively outsourcing non-core parts of your business.  However, such advancements also lower the barriers for entry, so we can expect the competition to intensify.

Bandwidth 2

Good article: "Why Google will falter in 2006, 8 predictions for tech, including why Yahoo's expansion of search will hurt Google" by David Kirkpatrick in FORTUNE.

 One point provides further info on my previous post:

"But telcos may have some advantages over the other players. Wolfgang Ziebart, CEO of Infineon (Research), recently told me that the German chipmaker will ramp up production of its so-called VDSL2 chip in early 2006. This chip can send data at the Holy Grail rate of 100 megabits per second over ordinary copper phone wire for distances of more than 600 feet.

"That may not seem very far, but it represents a much greater capacity to transmit data than has previously been available on copper wires. This will enable phone companies to avoid stringing expensive optical fiber all the way to consumers' home computers. Instead, telcos can install optical fiber cables to hubs and then use traditional pre-existing copper phone lines to connect them to nearby households. Texas Instruments (Research) and other chipmakers are working on similar technology."

Now if only we could also upload that fast.

Bottom line: More bandwidth is coming.

Play to the investing trends

Ann Grimes of Dow Jones VentureWire put together a report entitled "The Journal Report: Trends" dated 21 Nov 05.  The trends are:

• The China Strategy
• Cleantech
• Digital Living Room
• New Kids on the Block (i.e new VC firms)
• Rock Stars (i.e appointing Colin Powell or Bono to join your venture firm)
• Web 2.0 (a new crop of internet companies)
• Older and Wiser (money going back into old companies that weather the dotcom storm)
• Adopting Orphans (funds set up to buy and spin technology that major corporates ignore)
• Telecom Comeback (VOIP and new broadband technologies mean telecom is back)
• Late Exits (it is taking longer to achieve exits, an average of 5.5 years for trade sale and 5.8 years for IPO)

Bottom Line: Know your investors. Play to the trends. Read the full article.