We Don't Serve Your Kind Here

The Tampa Bay Business Journal just carried a story on the SBIR/VC-ownership debate and I've seen it kicked around enough now that I have some thoughts. At first, I wasn't sure where to land on this because 1) I start with a skepticism about most large government programs, 2) VC-backed startups are just jostling for their spot at the trough and 3) non-VC startups are just jostling for their spot at the trough.

The "debate" I'm referencing involves the SBA's Small Business Innovation Research (SBIR) grants that are provided to help spur small business innovation. Around 2001, the SBIR program ruled that startups who were 51%+ owned by venture capital funds no longer qualified for the innovation grants. This is particularly problematic for biotech startups who require large amounts of capital and sell large chunks of their company in the process of researching ways to help us live longer, healthier lives.

The argument in support of that ruling goes that SBIR funds should be targeted at research that otherwise isn't commercially viable, but could be with government "investment". Those companies with VCs investing enough to gain 51%+ ownership evidently have research viable enough to garner private sector support. The argument against suggests that the ruling will result in adverse selection for the government dollars -- the most promising research ("most promising" here meaning interesting enough to garner private sector investment), could be disqualified and SBIR dollars will flow to the research with a worse cost/benefit balance for society.

There is merit to both viewpoints, and that's why I harken back to my skepticism of large government programs. To unravel this requires understanding "why" SBIR's exist in the first place. If SBIR's exist primarily to advance US research, then why not reward startups with the most promising research, whether VC-funded or not. If SBIR's exist primarily to provide "gap funding" for the little guy trying to reach private-sector attractiveness, then keep the program exclusive -- maybe focused on dollars invested rather than ownership (e.g. a company that sold 51% for $5M is lot more a "little guy" than a company that sold 49% for $100M). If SBIR's exist because politicians from large research regions just want to "bring home the bacon" then maybe we should go back to the drawing board -- too hard, I know.

Because I believe a government program focused on "helping the little guy" could become a race to the bottom, I probably fall on the side of funding the most promising research possible. If those small companies are able to leverage venture dollars along the way then more power to them and, hopefully, better solutions for the world's ills.

Related posts:
- Open Up SBIRs
- Are SBIRs a Good Source of GAP Funds?
- Mo. legislators and Chlorogen push to change SBIR rules
- BIO's SBIR Comments (great resource site)

The IOS That Takes a Village

I've blogged before about the coming Internet Operating System (IOS) and about Mashups, but it's all one big ball of goo. Christine has a nice series of posts from Mashup Camp 2, and many of the session titles remind me of early Windows-OS/2 developer conferences I participated in. Whether we're talking about (de)centralized access control, security or even display systems (think maps), it's the OS problems being played out on a net scale. However, this time we've got 100 companies prototyping on-the-fly instead of one or two companies working on OS APIs that developers will embrace.

Therefore, those of you looking for your play in the mashup sphere, I'd recommend reviewing OS subsystems and focus on a chunk of direct or middleware functionality to build faster/better than others. In particular, I see opportunity for interface simplicity/abstraction on top of the multiple distinct ones being offered by specific vertical web properties.

Anyway, check out Christine's summaries and good luck...

Top Ten Ways to Multiply a Megafund?

The Thomson/NVCA report on Q2 venture fund raising is out and the numbers are big. In the quarter, fifty venture capital funds raised a total of $11.2 billion. Admittedly, the numbers are skewed because of a couple particularly large funds closing in the quarter. Oak Investment Partners XII landed $2.56 billion, the largest venture fund ever raised; and NEA raised another $2B+ fund.

Those are very big funds to try multiplying and deliver venture capital-type IRRs. If a 40% IRR requires 10X returns over 7 years, that would require $20B+ in returns over that period. My guess is $20B is virtually impossible to reach so either time horizons are shortened or IRR expectations are lowered. That suggests later stage venture investing, and more likely a blurring of what is venture capital, mezzanine, buyout and hedgefund investing. Although it may be doable, it surely doesn't sound as much fun as early stage company building.

I searched the blogosphere for ideas on how to multiply billion dollar megafunds and came up empty. Any good ideas for the "Top Ten Ways to Multiply a Megafund"?

Forecast for a Reason

Josh, Fred and Matt have a nice series of posts on forecasting, including some models for tracking and updating. Josh even provided a sample waterfall XLS. As they mentioned, these exercises are good for all companies, but critically important when early/mid-stage companies have some revenue and trying to reach escape velocity.

One comment I'd add is to remember why you're doing forecasts. It's not (entrepreneur) because the board asked and it's not (board) because you're looking for a quantiative way to evaluate the CEO. Forecasting (and review) helps schedule and prioritize resource allocation.

For example, doing some post mortem on prior quarters actual vs. forecast can help identify whether expenses should be adjusted to match revenue ramp actuals -- setting aside long-term R&D expense, a revenue slope that doesn't catch expense slope in a quarter or so is reason to check assumptions. At a more granular level, actual vs. forecast pipeline/sales analysis can help to identify whether sales installation is the problem, pipeline conversion rates are the problem or size of pipeline is the problem -- allowing knowledgeable allocation of sales resources at the bottom, middle or top of the pipe.

Forecasting can be a pain and feel like a no-win exercise for early-stage CEOs, but that's only if viewed as a scorecard. Using it as a tool to hone your personal "take over the world machine" is much more rewarding.

If Michael Jordan and Howard Stern can do it...

And now a word from our sponsor, literally -- I mean this post will contribute $10 to pay my hosting fees.

The era of celebrity endorsements has arrived for bloggers -- or at least gotten a whole lot easier. No, I'm not saying that Nike just backed a truck up to my house with shoes my size and color; rather, Pay Per Post (PPP) is here with a mass-market simplicity/scale.

With www.PayPerPost.com, Maitland, FL-based MindComet has created a platform to connect advertisers and bloggers who will blog for cash. BusinessWeek's article "Polluting the Blogosphere" hasn't even hit the shelves yet and already the keyboards are buzzing about this new platform.

Not all the buzz is good buzz, but when is it ever. With controversial platforms, there is often a middle-ground that addresses major concerns while retaining disruptive potential. If the founders listen and learn, there are a lot of free focus groups sharing their opinions about the best/worst angles of PPP.

Will June 30, 2006, be as important as February 21, 1998 when GoTo.com started, god forbid, "selling positions" in their search results -- launching the Pay Per Click (PPC) monster? Here's a snippet from BusinessWeek's 1999 article reviewing GoTo's model:

"GoTo.com is one of the Web's stranger ideas. It sells its listings, and how high a site ranks depends on how much the owner is willing to pay for each visitor. The payment is clearly displayed with the search results, which can be odd. The top response to my Sony query was online auctioneer WebAuction.com, which sells some Sony products. The site paid 29 cents for my visit, but listed no Sony products on the page it gave me. Sony's own site, which didn't pay, ranked 14th. GoTo seems to be getting payment mainly from sites that want to latch on to a popular name, a formula that doesn't work well.

Except for GoTo, all of these services are useful tools in the hunt for information on the Web."

I don't know if these local guys have something that will stick or if they know how to build a platform company, but if the buzz is any measure -- they're on to something.

As for FVB, this posting is really just a test of the PayPerPost service. I don't expect FVB to go commercial beyond trying/learning new technologies on the site, and I'll continue to highlight when my posts have a potential for conflict -- right after I finish this ice cold Coca-Cola...

(sponsored posting)

Battle of the Founders

Andrew shared some tough, but valuable founder lessons in his post Key Lessons From Cryptine Network’s Failure. I've seen this multiple times, from both sides of the table, and it still surprises me how severe founder disagreements can become when money starts to show up. It doesn't even require bad people in the mix, just a poorly structured founding agreement/cap table and a few passionate founders who are trying to capture the value they each helped create. Add to this the difference between compensating past contribution and future contribution, and you've got a brew that really benefits from outside perspective.

Note, it's also usually easier to have the tough/equity discussions before money shows up than risking a blow-up in the middle...