The Changing Landscape of Entrepreneurial Finance: Or Is It?

This is the best info-graphic I have seen on the historical evolution of venture capital, from the early days of Arthur Rock to the current trend of “platform” investors offering the “everything in a box” approach to entrepreneurial investment.  The evolving venture capital models are overlayed onto a trend graph of the cost of startups contrasted with the number of startups.  At first glance one might accept the now common refrain that traditional “venture capital is dead.”  When I began my career in Silicon Valley, the typical entrepreneurial growth company needed $5 to $10 Million dollars to launch itself.  Today, the argument is that a promising company can be started on $5000 or less, and competitors eager to serve this new market have mushroomed.  But is this really the future?

Two recent PBS documentaries, one on the genesis of Silicon Valley in the early 1960’s, and the other about the emergence of venture capital in the same period, something unheard of prior to that time, underscore my point.

If we are to pursue the Big Ideas, can they be funded with $5000 and a “package” of services?  I doubt it.  Examples to the contrary are available right here in the Lower Mainland of British Columbia.  Quantum computing startup D-Wave, and nuclear fusion startup General Fusion, are prima facie evidence that traditional venture capital big money and expertise cannot be supplanted by an Alberta oil baron looking for a cheap risk investment.  Angel investors, even as birds of feather, do not possess the financial clout or expertise to make Big Ideas happen.

I also believe that the $5000 startup investment cost trend is not the future. It is directly related to the current infatuation with Web apps as the new frontier, rather than Big Ideas like quantum computing, clean tech, renewable energy or nuclear fusion,

PandoDaily has this week also published two stories on venture capital, launching a debate about the future of venture capital.   It is worth following.

Personally, I endorse Sarah Lacy’s defense of “venture capital classic.”

A rare defense of venture capital classic

BY SARAH LACY

REBLOGGED From Pandodaily

ON AUGUST 30, 2013

One of our most popular stories this week was about the future of venture capital. It traced the asset class’s history from its boutique roots to the age of mega-brands to the rage around international expansion and into the last few years of microVCs, super angels, and accelerators. The article argued that “platforms” were the future of venture capital. Indeed, we’ve written before about efforts that Andreessen Horowitz and First Round Capital are undertaking to be more service oriented — through armies of people or software, respectively.

I grant a lot of the points Erin made in that post — particularly relating to the necessary change the industry has gone through as a result of startups becoming dramatically more capital efficient. As evidence of big systemic changes, she cites a lot of people more experienced than I.

But as an entrepreneur, I couldn’t help but groan at the concept of venture firms becoming “platforms.” Respectfully, I need a venture capital “platform” like I need a hole in the head.

You know what works in venture capital? A group of incredibly smart, connected people who have the financial wherewithal and risk appetite to make multi-million dollar bets on unproven ideas and inexperienced founders. People who can make decisions quickly, and who spend their time trying to help entrepreneurs make the most of that cash.

That’s it. I don’t care what decade we are in or what wave of technology we are talking about. That’s it.

Watch “Something Ventured,” PBS’s excellent documentary about the earliest VCs. You’ll see pretty much the same qualities that make up the best investors today also made Arthur Rock the man who helped fund Fairchild Semiconductor and Apple. They are the same qualities that encouraged Don Valentine to take a risk on weirdo Atari back when the idea of playing video games at home was scoffed at by nearly everyone else. These qualities epitomize Tom Perkins’ bet-the-firm risks on Tandem and Genentech.

Yes, things have changed about venture capital since those halcyon days of silicon assembly lines and fruit orchards. Typical venture firms invest later and get far smaller stakes than they did 50 years ago. Deal flow is far less proprietary in an age of demo days, tech blogs, and AngelList. And we’ve learned that many people are just awful at the job of venture capital. We’re in the middle of a decade-plus long incredibly slow shake-out of zombie firms that have chronically underperformed the market. The dramatically low costs of starting a company have given new access to entrepreneurs of all skill sets, geographies, ages, and risk-appetites that the industry certainly didn’t see 50 years ago.

All of this is mostly good for entrepreneurs, and has forced VCs to prove that elusive “value add” they always talk about.

But VCs who perform well aren’t doing it, because they are jumping on the bandwagon of new marketing trends. They are doing it because they are good VCs the way Arthur Rock, Don Valentine, and Tom Perkins were good VCs. They take risk. They coach entrepreneurs. The respect an entrepreneur’s plan, even if it deviates from their own. And most of all — they have millions to invest in each company.

No matter how much we want to go on and on (and on) about how cheap it is to start a company these days, actually building a sustainable company has never been more expensive. Venture studies show the time and money it takes to get public are longer and higher than ever before.

It’s no wonder that the flood of accelerators and seed funds and angels on that chart we published earlier this week immediately predated the so-called Series A crunch. Did these firms revolutionize how many people could raise seed capital? Yep. But ultimately the vast majority of those efforts still need good old fashioned venture capital to keep going. And that’s still in short supply. Indeed, it’s indecreasing supply.

I’m not arguing that recruiting partners and marketing partners and new ways to leverage other members of a given portfolio aren’t good things. But at best, they are icing on the cake. If you are deciding between two great firms, perhaps it tips the scales. And in terms of returns, that’s not trivial. This is a home run business, and the difference between almost getting Facebook and getting Facebook is a multi-billion “almost.”

But entrepreneurs wouldn’t (or shouldn’t) go with a firm they get a bad vibe from simply because they have someone in house who can help you hire people. They should go with a firm, because they trust that partner to stand by them and give them the unvarnished truth and material support in good times and bad.

And, by the way, as is almost always the case when it comes to Silicon Valley, it bears noting thatnone of this is new. The late 1990s saw talk of keiretsus and marketing partners and accelerators and incubators. Likewise, a desire to go international has come and gone a few times in the venture business. Even crowd funding had roots in Draper Fisher Jurvetson’s ill fated “meVC” fund.

Sure a lot of these trends are being explored today in more sober and sustainable ways. But the ideas aren’t new, just as the idea of classic risk capital isn’t an anachronism.

At our July PandoMonthly, Bill Gurley said that every time a venture capitalist opens his mouth these days, he’s marketing himself and his firm and how they are different. How much more entrepreneur friendly they are than the next guy. Ignore the marketing — just pick a good partner.

[Disclosure: Mentioned in this story are First Round Capital and Andreessen Horowitz. Josh Kopelman of First Round and Marc Andreessen, Jeff Jordan, and Chris Dixon of Andreessen Horowitz are investors in PandoDaily.]

REBLOGGED From PandoDaily

BY ERIN GRIFFITH 
ON AUGUST 28, 2013

The dramatic drop in the cost of creating a company over the last decade ($2 million in the late ’90s to maybe $5,000 today) has had an obvious effect on the venture capital world. Serious venture investment is not required in the earliest stages of a company’s life, so angel investors have been getting the best seed deals. That spawned “super angels” and their subsequent micro-VC funds, which in turn evolved into crowdfunding platforms like AngelList.

Meanwhile, old school venture firms with their ten-year investment vehicles and mostly mediocre returns are realizing that money is a commodity. It echoes statements made by Fred Wilson of Union Square Ventures, who predicts that venture capital as we know it won’t be around in ten years.

Good founders can get capital anywhere. So they’re choosing the firms that will help them the most. That’s why some VC firms, like Andreessen Horowitz, have adopted agency-like models, where they provide in-house PR, marketing and recruiting. Others, like First Round Capital, are building acommunity-driven platform that allows its portfolio companies to share knowledge and help each other.

VCs are even becoming publishers — First Round recently launched its “First Round Review.” Andreessen Horowitz hired Wired editor Michael Copeland to produce content for its site. Battery Ventures hired former Wall Street Journal reporter Rebecca Buckman for a similar role.

As Alex Bangash put it, “VCs are becoming platforms and platforms are becoming VCs.”

He would know — Bangash has acted as a fixer of sorts for institutional investors and venture firms over the last decade. He’s also built his own platform, a site called Trusted Insight. (Since Bangash made the chart, he’s obviously included his own platform on it, to the far right.)

The site might be the largest social network for limited partners, i.e., the pension funds, universities, family offices and institutions that invest in venture, private equity, real estate and hedge funds. Today he publicly unveiled it for the first time.

Trusted Insight has eight employees and has raised a small amount of funding from Data Collective, Founders Fund, RRE Ventures, Morado Ventures, Real Ventures, 500 Startups, Alexis Ohanian, Garry Tan, Eric Chen, Lauder Partners, Jon Moulton, and Marleen Groen.

The site has 58,000 registered users representing trillions of investment dollars, which is an impressive number when you consider how small the global pool of alternative asset limited partners is. Bangash estimates that a third of the world’s alternative asset investment managers are on the site.

Couple that with how insanely private they are. As a reporter, I know all too well how hard it is to track these people down. They make themselves difficult to find on purpose, mostly because they don’t need to promote themselves, and they don’t want to be harassed by fund managers begging for capital. “LPs want a new deal like they want a hole in their head,” Bangash says.

Limited partners are like the Field of Dreams of the investment world. I can remember the private equity conferences we threw at Buyouts magazine. As long as we got the big-name LPs to sign on, we knew the fund managers, service providers and various other industry hangers-on would be there. After all, the LPs are the ones holding the purse strings.

Through Bangash’s connections and word-of-mouth, a large population of them have signed up for his service. Around 60 percent of them return each month.

There they can network with contacts, get a serving of personalized news tailored to their interests and activity on the site, and see job postings and events that are relevant to them. There is also vouching, and users keep a much smaller circle of connections than on a typical social network.

Bangash is not planning to pimp them out to fund managers desperate for investment dollars, per se.  ”It’s built for them, to make them comfortable,” he says. He’s monetizing with a LinkedIn model. Users such as GPs raising funds, or service providers like lawyers, can pay a subscription fee for access to premium features, which includes the ability to interact with LPs. It’s akin to the way recruiters (and others) can pay LinkedIn to get messaging access to anyone they want. Since rolling out the paid tools six weeks ago, Bangash says he’s been surprised that more LPs than anyone have signed up to pay.

Bangash’s goal is to have investment professionals in the alternative asset sector use his site to do their jobs every day. As VC evolves from venture capital to venture platform, he’ll be there waiting.

[Disclosure: Mentioned in this story are First Round Capital and Andreessen Horowitz. Josh Kopelman of First Round and Marc Andreessen, Jeff Jordan and Chris Dixon of Andreessen Horowitz are investors in PandoDaily.]

Time To Thin Out Ineffective Startup Accelerators

If properly managed and matched to local economic need, resources and capabilities,  local accelerators can be a significant local economic asset. However, the problem with so many of these “everywhere else” accelerators, is highly unrealistic expectations to be “the next Silicon Valley“, failure to connect with local economic needs, excessive focus on any and every new Web app, and most importantly, poor management.  It is also apparent to me that many of these more remote smaller communities are so distant from the mainstream economy, that many of the “great ideas” that come out of them, are embarrassingly late.

My guess is that of the estimated 7500 accelerators worldwide, perhaps less than a couple hundred are providing real benefit. The rest are enjoying the current overenthusiastic entrepreneurship bubble,  chewing up vast amounts of public funds and resources without much to show for it.

<blockquote class=”twitter-tweet”>

RT @bcic: “The Problems with Incubators and How to Solve them” http://t.co/vkS0cnMsZD #bcacceleration

— sba_bc (@sba_bc) September 2, 2013
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Two examples of local accelerators doing things right, and winning awards for their efforts, would be Andy Hamilton’s Ice House in Auckland, New Zealand,

Read more: Ice House, Auckland, New Zealand

and the Walla Walla Valley (Washington) Wine Cluster Economic Development Project,

Read more: Walla Walla Valley Economic Development Cluster

The background story  involves the economic decline of Walla Walla, whose economy had been based on grain farming, and establishing a wine industry accelerator in the local community college.  The result has been an astonishing revival of the town.

The author of the article below, is making a much too sweeping argument in favor of local accelerators, essentially “all” local accelerators, without much critical investigation or thought as to the vast sums of money being wasted in small communities that can ill-afford it.

6 Reasons to Keep Accelerators Everywhere Else.

There’s an accelerator bubble.

Accelerators, except for Ycombinator/TechStars, are irrelevant.

We should get rid of the Demo Day.

If you’ve been in the startup space for more than a minute, you’ve probably heard someone say something like this. Founders and startup advocates have naturally critical minds; it’s why we can solve complex problems in innovative ways. But, that also means we spend a lot of time second guessing and rethinking every single thing we do.

I’ve had my own doubts about the accelerator model, and they mimic most of the concerns people bring up. There are so many (2000 around the world). What company can really be built in 3 months? It seems that the only real success comes from the big names, so why bother with smaller, local accelerators?

But, this week I was convinced that accelerators everywhere else can be just as beneficial to companies as the more publicized YCombinator and TechStars. Yesterday I attended the Investor Day for Jumpstart Foundry, in Nashville, TN and was duly impressed with what I saw. Of course, they had the bells and whistles–cool venue, great food, open bar. But more impressive were the companies that presented.

Every company had made significant strides in the 3 month program. Most could give detailed explanations of revenue. Quite a few already had traction and are well on the way to making real money already.

Vic Gatto, founder of Jumpstart Foundry and partner at Solidus Company, is well aware of the negative perception accelerators carry.

“We’re definitely a young industry going through definitional challenges,” he told me. He talked about meetings with other accelerators around the world. The leaders of these accelerators are talking about what defines success. Is it funding? Exits? Revenue? Level of mentor networks?

By most metrics, Jumpstart Foundry is finding success. 65% of its graduates are still in business, either bootstrapping or with funding. They have over 100 mentors, and that network grows each year. Gatto insists, though, that another real metric of success will be future exits, and most of the industry is still too young to really see that achieved yet.

One mentor told me that this year’s cohort may be the best she’s seen. “And they didn’t start off particularly special,” she said. “I think that really speaks to how the program itself is growing.”

And, as far as getting rid of Investor Day, Gatto won’t be doing that any time soon.

“That pressure is important,” he said. It’s the deciding factor sometimes when a new founder is tired and wants to call it a night. With Investor Day looming, it’s easier to focus and do the hard work of a young company.

Make sure to check out Jumpstart Foundry’s latest cohort because there are definitely some companies to watch. We’ll cover some of them here on Nibletz in the coming weeks.

In the meantime, here are a few reasons we shouldn’t give up on the accelerators everywhere else just yet:

1. In the life of a young company, it can be easy to let an idea go when it gets hard. Surrounding yourself with mentors and good advice in an accelerator can help you push through those first stage challenges.
2. The pressure of Investor Day can give you more traction than you thought possible in 3 months.
3. Accelerators everywhere else understand companies everywhere else.We’ve talked before about how companies outside of Silicon Valley are innovating in industries besides the Internet and apps. Local accelerators inherently “get” that more easily than accelerators that are used to churning out consumer-facing apps.
4. A good accelerator can be a rallying point for a whole ecosystem. Yesterday in Nashville, it was a packed house. Not just investors, but anyone interested in the startup scene showed up to support the cohort.
5. Even if your first company doesn’t succeed, the 3 month MBA you get by doing the hands on work of an accelerator will be invaluable to the next companies you build.
6. Accelerators may not be perfect, but what is?Anything that spurs innovation is good for the local community as well as for global issues that need creative problem solvers.

How Gigabit Fiber to the Home Will Transform Education Way Beyond MOOC’s

The post below caught my attention because of the current industry debate and competitive battle over deployment of much higher Gigabit Internet bandwidth via optical fiber to consumers, known as Fiber to the Home or FTTH, at prices much lower than they currently pay for even 50 Megabit Internet connectivity.  Gigabit connectivity is already a reality in Hong Kong and South Korea, with Europe not far behind. The big cable carriers, Comcast and Time Warner, have actually argued publicly that consumers don’t want or need higher bandwidth. How they came to that conclusion is a mystery.  Now Google has entered into direct competition with the cable carriers, deploying Gigabit FTTH in Kansas City and Austin, Texas to be followed by other locations, at prices a fraction of Comcast’s pricing for lower bandwidth.  This battle has been admirably described in the book Captive Audience, The Telecom Industry and Monopoly Power in the New Gilded Age, by Yale Law Professor, Susan P. Crawford.

So people have asked the question, “what will people do with all of this massive bandwidth?” Having lived with Moore’s Law for most of my career, I smile in bemusement. I can remember a fear that the 256K flash memory chip was “too big.” The truth is that if you were asked 20 years ago to predict how we would be using the Internet today, I doubt many would have accurately predicted our current global village.  The few exceptions would be visionaries like Dave Evans, Chief Futurist at Cisco Systems, who authored this Huffington Post article, providing an excellent prediction of how FTTH may impact just one aspect of the future: education.

Reblogged from Huffington Post ImpactX

Beyond Online Classes: How The Internet of Everything Is Transforming Education

Posted: 08/22/2013 10:36 am

By Dave Evans, Chief Futurist, Cisco Systems

éducation, 21st Century, Dave Evans, Internet Of Everything, Bblog-Cisco, Broadband,Connections, Dave The Futurist, Digital Classroom, ImpactX, Learning, Online Classes,BACK TO SCHOOL, Telepresence, Impact News

Over the next few weeks, students will be heading back to school for the fall semester. In fact, my oldest child will be starting college for the first time, and I have another one not far behind. So naturally, I’ve been thinking about the future of education, and the opportunities and challenges 21st century technology might bring.

Technology has had an amazing impact on education in the last few years. But what we’ve seen so far is nothing compared to the sea change that will be created by the Internet of Everything (IoE) in the coming decade. The networked connections among people, processes, data and things will change not just how and where education is delivered, but will also redefine what students need to learn, and why.

When we talk about technology-enabled learning, most people probably think of online classes, which have had mixed results so far. On one hand, online courses can make higher education much more affordable and accessible. On the other hand, not all students can stay engaged and successful without regular feedback and interaction with their instructor and other students. Even the best online classes cannot hope to duplicate the rich spontaneous interactions that can take place among students and instructors in the classroom.

But with connection speeds going up, and equipment costs going down, we can go beyond online classes to create widely accessible immersive, interactive, real-time learning experiences. Soon, time and distance will no longer limit access to an engaging, high quality education. Anywhere there is sufficient bandwidth, a student can participate in a rich virtual classroom experience — attending lectures, asking questions, and participating in real-time discussions with other students.

And the “sufficient bandwidth” requirement is not that far away. Connection speeds to the high-end home user are doubling every 21 months. Said another way, this is a doubling of almost 64 times over the next decade. Consider a home with a 10 Mbps connection today; this same home could have a 640 Mbps in a decade, and a home with a 50 MB broadband connection today might have a 3 GB connection in 10 years — this is sufficient bandwidth to display streaming video on every square inch of the walls of a 1,800-square-foot home! What type of immersive experiences could educators create with these types of connections?

Within the next decade, high connection speeds and low hardware costs could bring immersive, interactive classes right into the home.
Of course this is about more than simply raw network speeds; the Internet of Everything will also impact some of our basic assumptions about the purpose and nature of education. People today generally agree that the purpose of education is to convey knowledge. But if all the world’s knowledge is instantaneously available online via smartphone or Google Glass, how does that affect what we need to teach in school? Perhaps education will become less about acquiring knowledge, and more about how to analyze, evaluate, and use the unlimited information that is available to us. Perhaps we will teach more critical thinking, collaboration, and social skills. Perhaps we will not teach answers, but how to ask the right questions.

I know that technology will never replace the full, face-to-face experience that my son will have when he starts university next month. But technology can supplement and enrich the traditional in-person school experience. And I hope the school my son attends will teach the new set of 21st century skills needed to help him make the most of technology.

Social Media May Finally Have Become Radioactive to Investors…

Extraordinary Popular Delusions and The Madness of Crowds…

One would think that this should have happened sooner….but, well, there is a human tradition here…Wikipedia currently lists 342 social media apps, emphasizing up front that their list is not exhaustive. I can think of at least two more local social media startups, one of which has just announced significant new investments.  Extraordinary Popular Delusions and The Madness of Crowds, the now legendary book by Charles Mackay, first published in 1841, remains a classic text revered for its insights into social psychology and economic bubbles.

Investors of all stripes are so-called “birds of feather,” meaning that they tend to flock together. The risk averse nature of investing makes this inevitable… Like flocks of birds, the slightest unexpected and unwanted sound can set them off into flight.   This is even more true of much higher risk early venture investors.. The very term “due diligence,” meaning thoroughly investigating everything and anything related to a potential investment, implies “covering your ass,” (CYA).  No high risk investor wants to commit to any investment without partners.  Not being able to recruit other investment partners, suggests that you may be making a poor investment decision, and leaving yourself open to questions about the wisdom of your investment decision, or worse.

Over the years, there have been a number of “hot” venture investment industries, that attracted hundreds of millions of dollars, only to see the investment funds go up in flames, from over enthusiasm..  After these financial disasters, investors, like the birds, were unlikely to return to the same area again, no matter how attractive it may have seemed.  Only one of many examples, would be the “traffic shaping” networking equipment opportunity just before the 2002 Internet bubble. After being burned in this debacle, venture capitalists could not be enticed to invest in new opportunities in this area, no matter how promising..  A local Okanagan company here suffered from this phenomenon and eventually faded away.  It appears that the now very crowded and maturing social media industry may finally have joined other such oversubscribed areas of investment.

It’s About Time!

REBLOGGED FROM PANDODAILY

BY CARMEL DEAMICIS
ON AUGUST 14, 2013

VCs are cooling off their social media fervor. A new study out today surveyed hundreds of investors around the globe. VC’s in 11 out of 13 countries had less confidence in the social networking/new media sectors than last year. That dip was even more dramatic for the US, with VC’s ten percent less sure about social then they were in 2012.

The National Venture Capital Association conducts the “Global Venture Capital Confidence Survey” every year with Deloitte.  They ask general partners at different sized firms from the Americas, Europe, the Middle East, and Asia Pacific how confident they feel about a ton of sectors — clean energy, mobile, cloud computing — and geographies — domestic economy, global economy, emerging markets. This year’s survey took place in May and June 2013 and 35 percent of the responses came from investors in the States.

There’s a lot of interesting factoids to be found in the flood of numbers, but the stat about VCs losing confidence in social jumped out at me. It mirrors a trend others have noted: the social media bubbleis quietly, slowly, timidly deflating. This latest NVCA report shows that confidence is still high in social media compared to other sectors — it’s just less high than it was last year.

Social is not going out in a big pop, and it’s not disappearing anytime soon, but it’s also not what VC’s look to invest in first. CBInsights, a research company that studies VC investment trends, foundthat in the second quarter of 2013, social media companies got only two percent of VC Internet funding. They’re getting a much smaller piece of the puzzle now than they’ve seen in past years.

So why isn’t social the hot kid on the block anymore? I have a few theories: Facebook’s IPO was a bust, the market has gotten saturated, and there’s perpetual questions over mobile monetization of social platforms.

Facebook’s face flop of a public offering made people question whether its valuation was founded on real earning potential. Investors got nervous about social’s money-making potential. And given that Facebook is the biggest social beast of them all, investor anxiety may very well have informed decisions about funding smaller start-ups focused on social.

The market has gotten saturated, some people are tired of social, and there’s a cultural pushback ranging from mocking social media job titles to compiling lists of how social is ruining your life. How many networks can a person possibly join?

And as always, there’s the struggle to monetize social networks on mobile. Facebook and Twitter have gotten small pieces of the mobile ad pie, and Instagram has no mobile monetization plan. Granted, Facebook showed a possible turnaround with its recent earnings report, but it’s by no means out of the woods.

As always looking forward, time will tell whether VC interest in social media picks back up again, or whether they’ve moved on to a new sector love. Last I heard, VCs were the Romeo to cloud computing and big data startups’ Juliet.

[Image courtesy Wikimedia]

 

Why The Biggest Tech Companies Are Not In Canada

Mayo0615 Reblog from July 22, 2013

It dawned on me that my blog post from July 2013, still has particular relevance to the current situation in Canada. I discuss the longer term structural issues confronting Canadian entrepreneurs and Canadian venture capital. When I first arrived in Canada, I learned quickly that the Vancouver startup ecosystem was nothing like what I knew from Silicon Valley. My personal case study was Mobile Data International, a pioneering company in wireless data, well before WiFi and Bluetooth, that could have led the market and the technology. Instead, the company was taken public much too early.  MDI was bought by Motorola Canada for $39 Million,  in a hostile takeover, and was essentially moved out of Canada and shut down.  Later, in 2012, I had another opportunity to be up close and personal with Canadian innovation, as a participant in the Canada Foundation for Innovation deliberations in Ottawa. These two experiences have played a major role in the development of my views on this topic.

The following reblog raises the tough questions that are holding Canada back.

From July 2013:

In 2013, ContentDJ founder Jerry Tian published a blog post addressing the issue of “Why Canada Has No Big Tech Companies” – Nortel is dead and RIM is quite obviously dying, he points out. Tian, who was himself responding to an interview with Boris Wertz, founder of Vancouver’s Version One Ventures, offers a thought provoking theory and one that applies to a large degree to all up-and-coming startup ecosystems.

The founder questions the commitment and willingness of Canadian investors and entrepreneurs to devote the ten years or more that it may take to build an independent multi-billion dollar company with staying power, rather than flipping that company for an eight, nine, or even ten figure exit – typically to Silicon Valley acquirers – and exporting that future innovation and wealth building. It’s a charge that could be applied equally well to New York, Los Angeles, Chicago, Austin, Boulder, and dozens of would be international startup hubs.

“’Silicon Valley is not a place but a state of mind,” Tian writes, quoting KPCB General Partner John Doerr. “Some of these insights are collaboration, competition, openness to innovation, failures and experimentation. Probably the most important one is the long term commitment behind technology companies.”

Of course, Tian and Doerr are spot on. What emerging startup hubs often miss when trying to “become the next Silicon Valley” – a flawed mission in and of itself – is that the grandaddy startup ecosystem is more than its physical infrastructure of entrepreneurs, engineers, designers, investors, service providers, universities, and the like. Equally important are the systematic irrationality and a feedback loop around the willingness to turn down the quick buck and go for the massive once-in-a-generation success story.

This isn’t the case with every company, founder, or investor, but it exists in enough density in the San Francisco Bay Area, and based on results to a lesser extent in Seattle, that these are the only two areas areas in the country that have led to multiple ten billion dollar plus technology and internet companies – the true giants that transcend their local ecosystems and seep into the lives of average consumers.

It is these companies, with their ability to attract talent, make acquisitions, invest in long-term R&D, and create systemic wealth that make ecosystems. And with very rare exception, getting to this scale requires a decade or longer commitment and a willingness on the part of founders and investors to turn down near and mid-term paydays. Similarly, it requires a vision and an ambition  to build something that will be around forever.

Tian writes:

So, why is nobody talking about these acquisitions? I think it’s simply because investors are getting filthy rich off these deals.

And that’s exactly what not to do if you want to create the next Silicon Valley. You cannot sell the hen that lays the golden eggs for a few quick buck [sic]. Technology companies take 10 years to really manifest the value. To really build a billion dollar company, it takes tremendous multi-decade commitment. And that’s the biggest missing piece in Canada.

Like or hate Zynga founder and former CEO Mark Pincus, one has to respect him for saying that he wants to build a “digital skyscraper,” a company that would be around for 100 years. Pincus went further to say that he views serial entrepreneurship as failure and that he wants to run Zynga for the rest of his career. Ironically, he recently replaced himself as CEO, personally recruiting Don Mattrick for the role. But Pincus made the ego-busting move in an effort to return Zynga to its former glory and to get it back on that century-long track.

In his somewhat controversial on-the-ground reporting on the Chicago ecosystem last summer, Trevor Gilbert delved into “the Midwest Mentality” and the impact it has on the types of companies that are built there. Gilbert called Chicagoans “pragmatic.” Lightbank partner Paul Lee offered an example of this pragmatism, saying that Chicago startups typically focus on generating revenue from day one, rather than building a massive, but unprofitable user base, a la Facebook and Twitter pre-monetization. Profit is all well and good, and should be the ultimate goal of any business that wants to be around for the long term, but focus on it too intently early on and it can be impossible to invest in growth. It takes a special kind of vision and fortitude to look past the short term and make the big bets required to create massive companies.

This is not to pick on Chicago. A similar phenomenon seems to exist in LA where companies race out to a low nine-figure valuation and then either stall out in that vicinity or sell for sub-one billion dollars to a larger out of town acquirer. Call it the curse of the big-little deal – maybe everyone here just wants to see their name in lights. In a market that is desperate for success stories and validation, these medium-sized exits are hailed as “wins” – and they are, given the difficulty of building a hundred-million dollar company – but they often rob the ecosystem of potential multi-generational tentpole companies. This is a mentality that appears to have changed in recent years, but that change has not yet bore fruit in the form of LA’s answer to Google, Amazon, or Facebook.

New York has seen its own version of this phenomenon, with the ecosystem’s biggest success stories, DoubleClick and Tumblr, being exits to Google and Yahoo respectively. Local darling MakerBot followed suit, selling for $600 million in June. New York does have Fab, Gilt, and Foursquare all shooting for the moon but these companies and the ecosystem as a whole still must prove that they can sustain this ambition and parlay it into a giant company.

As Tian points out, part of the blame for these exits falls on investors. It’s not that investors aren’t interested in massive outcomes – they most certainly are. But not all non-Silicon Valley investors are equipped for the financial and time commitment it takes to create them. These investors, many of which operate out of first- or second-generation funds, often have smaller pools of capital to invest out of.

Write a $2 million check at a $10 million valuation out of a $100 million fund, and a 50x return looks pretty good, returning 98 percent of your fund. Make that same investment out of a $1 billion fund and the impact on fund economics is decidedly less interesting. This is one of the few arguments in favor of mega-VC funds. But it also benefits firms that are on their fourth, fifth or sixth fund and have less to gain reputation-wise with solid base hits.

Returning to Tian’s piece, he closes by writing, “If you are wondering why Canada doesn’t have the [sic] billion dollar company, it cannot be more obvious than this. Too many people are in it trying to get rich quickly off entrepreneurs. Not enough people have the gut [sic] and commitment to create or help create something truly meaningful.”

Tian paints with a broad brush, yes, which ignores many of the subtle nuances and external factors that contribute toward building massive technology companies. But there’s little arguing that people in Silicon Valley think differently. Armed by decades of case studies and social proof, the ecosystem has developed a healthy disregard for rationality.

Mark Zuckerberg famously did just that when Yahoo came calling. He was just 20 years old and Facebook, at less than two years old, was unprofitable with just $30 million in revenue. Yet Zuckerberg and Facebook’s board, which included Peter Thiel and Jim Breyer, turned down Yahoo’s $1 billion offer. When the elder advisors tried to convince the young founder that his 25 percent of that offer would be a big number he said, “I don’t know what I could do with the money. I’d just start another social networking site. I kind of like the one I already have.”

Israeli social mapping company Waze just made the opposite decision, selling to Google for slightly more than that mythical $1 billion. Sarah Lacy cautioned Israel-bulls to “reconsider too much high-fiving over Waze.” While legendary local angel investor Yossi Vardi likes to compare Israeli startups to tomato seeds which need more experienced farmers to grow properly, Lacy believes that the country has the potential to build and sustain globally dominant Web companies without selling, offering MyHeritage as an example.

None of this is to say Silicon Valley is immune from this syndrome. There are thousands of entrepreneurs in the Bay Area who would rather flip their company than do the long, hard work of building something sustainable. But the sheer density of the ecosystem means that a dozen or so each year choose the road less traveled. Also, given the scale of the Valley ecosystem, building a big company is the only way to move the needle and attract talent and capital. Everyone in line at Philz coffee is working on the next “billion dollar business.”

Finally, Silicon Valley is a magnet for those entrepreneurs around the globe who want to build great technology companies, and the ecosystem surely benefits from this imported talent. This was actually Wertz’s central point in the original interview and is one that Tian touches on briefly. It’s a difficult problem to solve, given the power of knowing someone (or several someones) who has summited the mountain before and who can show you that it can be done. In each of these other markets, someone will have to be the first.

In many cases, it is highly irrational to turn down a nine- or ten-figure acquisition offer. There are real benefits to gaining access to the financial and personnel resources of a larger acquirer, ones that can often make or break the success of a still fledgling company. But, if there’s anything in Silicon Valley that Canada, LA, New York, and other startup ecosystems should aspire to it’s this willingness to roll the dice. Sometimes the shooter rolls a “7.”

Alberta Bitumen Bubble And The Canadian Economy: Industry Analysis Case Study

Alberta Tar Sands In Their Indigenous State 

The Canadian media (CBC, Globe & Mail, Canadian Business) have been buzzing with analyses of Alberta Premier Alison Redford’s  pronouncement last month that the “Bitumen Bubble,” is now crashing down on the Alberta economy, and potentially the entire Canadian economy. The Alberta budget released last Thursday, March 7, acknowledged a multi-Billion dollar deficit from this year, and “even larger declines in the next several years,” due to forecasts for significant price decreases for “Western Canada Select“ (WCS), the market term for the Alberta oil sands. This is contrasted with “West Texas Intermediate“ (WTI) which is also known as the standard for “light sweet crude,” which is much cheaper to refine.   Canadian Finance Minister Jim Flaherty echoed the impact of reduced oil sands revenue on the federal budget, by warning of significant cutbacks in federal spending as well.  The impact of this sudden change in the prospects for the Canadian petroleum industry and for government oil tax revenues, will likely also have serious implications for the BC economy, jobs growth, business investment, consumer spending: essentially the Canadian economy as a whole will suffer.

As an Industry Analysis case study for Management students, how did this happen, why was it not foreseen?  Why weren’t foresighted  policies put in place, and what are Alberta and Canada‘s strategic options now?

The June 25th, 2006, CBS News 60 Minutes report by senior CBS News Correspondent Bob Simon, can be taken as a convenient departure point for this analysis.

Video (1min 52 sec.) CBS 60 Minutes: 6/25/2006: The Oil Sands

The so-called “proven reserves” of oil in the Alberta oil sands are estimated to be 175 Billion barrels, second only to Saudi Arabia’s estimated 260 Billion barrel reserve. In the CBS video, Shell Canada CEO, Clive Mather estimates that the total may be as large as 2 Trillion barrels, or eight times that of Saudi Arabia. The CBS 60 Minutes report at the time in 2006, was considered so positive, that it was eventually shown in an endless loop in the foyer of Canada’s Embassy in Washington D.C., at Canada House in London, and elsewhere around the World.   The Alberta oil sands were seen as the harbinger of a great new era of Canadian economic progress and wealth.

Since that time a variety of external market factors, and long-standing failures of Canadian government policy have converged like Shakespeare’s stars, to turn this Pollyanna scenario into the national disaster it has become for Canadians.

Perhaps the single most important point in this discussion is that Canada has historically been a natural resource based economy, which has led to complacency and neglect of investment in innovation.  Innovation is the most important determinant of business competitiveness and economic prosperity in a world of global markets and rapid technological change.  Canada’s overall investment in R&D in science and technology has been below the OECD average for decades, and continues to decline year to year.  As a consequence, Canada has also fallen sharply behind the United States in productivity.  Essentially, there has been a “robbing Peter to pay Paul” mentality in Canada with regard to investment in the future of the Canadian economy. So long as we can simply dig a hole and ship the rocks or oil overseas we are doing just fine, thank you very much!

In a serendipitous coincidence, the current events in Venezuela have provided a parallel to the petroleum industry issues in Canada. Yesterday, the HBR Blog Network published a post by Sarah Green. Ms. Green interviewed Francisco Monaldi, Visiting Professor of Latin American Studies at the Harvard Kennedy School. Professor Monaldi is a leading authority on the politics and economics of the oil industry in Latin America.

During the HBR Blog interview, Professor Monaldi referred to the “resource curse” of Venezuela, also citing Canada and Saudi Arabia as suffering from the same malaise. Venezuela has done all the wrong things under Chavez, and consequently the Venezuelan economy is in shambles. Monaldi cited Chile, who also had a natural resource boom, but are creating a national stabilization fund by not putting all of the money back in the economy at once, a counter cyclical policy almost unheard of in Latin America. A similar scenario of reinvestment in innovation has occurred in New Zealand, whose government has sought to reduce its vulnerability to over-reliance on natural resource exploitation.

A Canadian Broadcasting Corporation interview March 7th on The Current with oil industry expert Robert Johnston, and CBC business columnist Deborah Yedlin, revealed that the Venezuelan Orinoco crude is actually very similar to Alberta WCS, but it does not require massive destruction of the land. Transportation routes to U.S. refineries designed to deal with extra heavy crude have been up and running for years.  The U.S., despite the political tensions with Venezuela, is currently the single largest customer for Venezuelan extra heavy crude.  In The Current interview yesterday, both Johnston and Yedlin admitted that the Alberta oil industry was ” very uneasy”  about their competitive situation vis-a-vis Venezuela.  Yedlin also underscored Canada’s “resource curse” and the failure to diversify Canada’s investment in innovation and technology.

Listen to the CBC interviews: http://www.cbc.ca/thecurrent/episode/2013/03/07/the-future-of-venezuelas-oil-industry-and-what-it-means-for-albertas-oil-patch/

Alberta oil sands, by contrast, are completely land locked, and the Alberta producers are in the midst of an unsavory political wrangle over two pipelines, which has brought undesired attention to the other problems with Canadian bitumen.  Without at least one pipeline, the Alberta oil sands industry is in a questionable state. Should the United States elect not to approve the Keystone XL pipeline to the Gulf of Mexico, Canada’s only viable remaining option would be to sell the oil to China.  Some Canadians are taking the position that Canada “should” sell the oil to China.  The Harper government is now hypersensitive to China’s interest in the oil sands. Others have suggested that we should refine the oil ourselves, but it is cheaper to send it to Texas than to build refineries in Canada. According to Yedlin, Canada is now locked into the urgent need for the pipelines, with no other options or strategy.

The argument can be made that Canada should have been implementing policies like those in Chile or New Zealand years ago, anticipating the boom and bust of the global petroleum market, and socking away money to deal with it.

The most recent 2012 OECD Economic Survey of Canada also serves to underscore the urgent need to change our national policies with regard to natural resource exploitation and investment in innovation to improve our performance in global productivity.

As the oil boom and high value of the loonie have pushed wealth westward, Canada’s productivity growth has been relatively flat in recent decades, and has actually dropped since 2002. Meanwhile, as the OECD observes, productivity growth south of the border has risen by about 30 per cent in the last 20 years — a gap that is causing Canada to lose competitive ground.

“Canada is blessed with abundant natural resources. But it needs to do more to develop other sectors of the economy if it is to maintain a high level of employment and an equitable distribution of the fruits of growth,” study author Peter Jarrett, head of the Canada division at the OECD Economics Department, said in a press release.

Meanwhile, yesterday, Friday, March 8th, the Globe & Mail published a scathing criticism of federal Natural Resources Minister Joe Oliver for characterizing the Alberta oil sands industry as the “environmentally responsible choice for the U.S. to meet its energy needs in oil for years to come.”  G&M Journalist Tzeporah Berman wrote, “At a time when climate change scientists are urgently telling us to significantly scale back the burning of fossil fuels, having a minister promote exactly the opposite really does feel like being told that two plus two equals five.”

Our most respected national journal simply reached the end of its patience with Canadian government “doublespeak.”  Every independent study, including one from the U.S. Department of Energy, has found that the oil sands are one of the World’s dirtiest forms of oil, producing three times more emissions per barrel produced and 22 per cent more greenhouse gas emissions than conventional oil (when their full life cycle of emissions, including burning them in a vehicle are included).  The problem is simple: the massive “energy in versus energy out” equation simply does not work for oil sands.  Large amounts of natural gas and water are required simply to prepare the bitumen for transport to refineries. Yet our government continues to wave its arms in a desperate attempt to divert attention from the facts, rather than to deal with the facts. One would think that our national government by now would have a reality-based strategy to deal with major economic and political issues of this scale.

This discussion has barely touched on the opposition to the two pipelines, Keystone XL and Enbridge Gateway, attempting to move the landlocked tar sands out of Alberta. This is a strategic market issue that should have been addressed years ago, but was not.  The thorny issues of both pipelines are now a rod for Alberta’s own back. Considering the market competitor Venezuela, with comparably unattractive “extra heavy crude,” but having existing transport, the prospects for Alberta are not favorable, and it has finally sunk in for Alberta oil executives.

The long awaited U.S. State Department Draft Environmental Impact Assessment (DEIA) on the Keystone XL pipeline, released early this month, was written by oil industry consultants which have raised significant concerns of a serious conflict of interest in their findings. The Executive Summary of the State Department DEIA took a decidedly neutral position, saying that the pipeline would have “no effect” on the development of the Alberta oil sands. But buried in the report were findings that argue against the need for the pipeline.  The recent developments in Venezuela and the increasing energy independence of the United States were not factored into their findings.

The DEIA specifically evaluated what would happen if President Obama said “no” and denied Keystone XL a permit. It concluded that not building the pipeline would have almost no impact on jobs; on US oil supply; on heavy oil supply for Gulf Coast refineries; or even on the amount of oil sands extracted in Alberta. If these findings are accurate, then one must ask why it is necessary to build the Keystone XL pipeline.

So in conclusion, how could the Canadian federal government not have foreseen this calamity, and prevented it?  Could it have been the giddy euphoria of the 2006 CBS 60 Minutes report?   The only best solution, investing government oil revenue into innovation and technology R&D, may no longer be a viable option.

In such a situation, what would you do to address this crisis for the Canadian economy?