Thursday, January 29, 2009

The Cure

What's the big message for the tech industry coming out of Davos, Robert? (ANSWER: Innovation is only way out of economic hole)

Robert Scoble, via Twitter from the World Economic Forum
National advisors continue to tout GLOBIEs as the key component for sustainable economic recovery.

Reported by Jason Gertzen in the Kansas City Star in a story headlined Innovation “will be the path to revive our economy”, national political advisor David Wilhelm says that nurturing innovative companies with the potential for substantial and rapid growth very well could be one of the most effective strategies for rebuilding tattered regional economies.
“Those of us who are business builders are about to be brought front and center in a national debate over what constitutes honest capitalism, how to best promote genuine entrepreneurship, how to reconnect hard work, achievement and accountability in this great country of ours.”
Wilhelm has advised political campaigns for President Bill Clinton, Vice President Joe Biden and Chicago Mayor Richard Daley. More recently, Wilhelm advised President Barack Obama on innovation and entrepreneurship for economic development.

Wednesday, January 28, 2009

Innovation as it is Unveiled for the Very First Time

DEMO 09 • March 1-3, 2009 • Palm Desert, CA

Join us as the momentum continues at DEMO 09! DEMOfall 08 brought you well over 800 guests, including 100+ members of the press and many Venture Capitalists, Angel Investors and Corporate Development Officers. This was the largest DEMOfall event on record and we are keeping up the pace for DEMO 09.

DEMO is the Launchpad for Emerging Technology. We invite you to take part in product launches that will change the market and view 70 six-minute presentations of pure innovation. Palm, TiVo, E*Trade, IronPost, GrandCentral and Glam Media are all products that launched at DEMO events. Over 40 DEMO companies have been acquired by tech giants like Microsoft, Google, Symantec, Motorola, Adobe and Cisco; not to mention the products launched at DEMO that redefined their markets such as WebEx, VMware, iRobot, Linden Labs, Six Apart and Roku.

Don’t worry – 6 minute presentations are not the only time you get to spend with these innovative companies. During the DEMO expo you are free to explore each company’s booth and learn more about their product and business plan. The expo floor is where connections and deals are made, shouldn’t you be there?

Join us at DEMO 09 where the brightest innovators, savviest investors, biggest buyers and most sought after press will all be from March 1-3, 2009.

We are excited to announce our partnership with Golden Capital Network. This partnership means a better deal for you – Golden Capital Network members receive a ½ discount on the registration fee, meaning it will only cost you $1,495 to attend DEMO 09, one of the most innovative conferences. Reserve your discounted seat now by following this link.

Tuesday, January 27, 2009

Why Now?

History shows that when incumbents can't innovate, entrepreneurs do. The incumbents then try to legislate or litigate.
-- Shel Israel, via twitter
We've been hearing -- and repeating -- that one of the best times to start up a new venture is during a downturn.  This isn't just whistling past the graveyard, or simply wishful thinking.  As has been previously pointed out, some of the best companies were started in times of profound disequilibrium.

During the boom times, there's a lot more noise and crosstalk in the marketplace, as more and more frankly marginal ideas get funding and perhaps even some traction.  At the Start conference last August, David Hornik noted that "when guys are leaving McKinsey to start companies, you know things have gotten crazy."  One of the strategic advantages of launching during a period of economic upheaval is that there are fewer other entrepreneurs battling for scarce capital, media attention, and early adopters.

But it's also true that large companies who might attempt to disrupt competitive initiatives with their market power and political influence have enough problems of their own without diverting their resources to stamping out upstarts.  The cat's away.

Friday, January 23, 2009

The New Entrepreneurship

Everybody's talking about entrepreneurship and innovation these days as the path to prosperity. From the President and the Governor down to your local elected officials, the new mantra of economic recovery is "entrepreneurship and innovation". And that's great, because, as we've been saying for a decade, they really are the best hope any community or region has for developing and expanding its economy.

However, over that same decade, those of us at GCN who have tirelessly preached this gospel have lamented over the manifold defects of the word "entrepreneurship" itself. It's hard to spell, for one thing. And it's looooong. And it's too French.

More critically, it's been misunderstood and abused, to the point that for most people it means merely "small business". As we've pointed out repeatedly, it properly refers to companies that innovate, serve national or global markets, and have the potential to grow into very large businesses, indeed. But getting that point across still requires us to type "entrepreneurship" again and again.

We've searched high and low for a new term that more clearly (and concisely) articulates that unique growth enterprise, to no avail. We've even coined a new acronym, GLOBIE, but that still has "entrepreneur" in it.

Now we think we've found an existing word, that describes vividly why entrepreneurship is so critically important to a healthy economy. It's short, easy to spell, and by happy coincidence is the name of a famously exemplary entrepreneur.


In the final analysis, that's the who, what, and why of entrepreneurship. Yes, it also engages founders, introduces exciting new solutions to vexing challenges, creates sustainable value, and enriches private equity investors. But the thing it does best is create jobs - for the entrepreneur as well as her employees. Importantly, particularly for local economies, it creates good, sustainable, career-grade employment opportunities for knowledge workers, whose demand for goods and services creates even more jobs in the community. This multiplier effect is why smart civic leaders are committing resources to support their entrepreneurial companies.

There simply is no better way to stimulate employment across the industrial continuum spanning from services to production to symbolic analysis. And that growth in employment leads to another important benefit: revenue. The purchasing power of workers employed by entrepreneurial companies drives growth in the retail, commercial, and durable goods markets as they buy homes, cars, decor, apparel, and food and beverage. Those purchases in turn generate tax revenues, especially sales and property taxes that fund critical services, including education, public safety, infrastructure and cultural resources. Innovation is about solving problems and monetizing the solution. When you think of it that way, "Innovation" is another word for "Revenue".

So save your typing fingers from getting tangled up with the conventional nomenclature. Just remember: Jobs is the new Entrepreneurship, and Revenue is the new Innovation.

Beyond ROI

In a followup post to an earlier item about the availability of seed capital, venture investor Albert Wenger makes a very good point about the positive impacts startup companies have on their communities and human capital networks.  Whether a young company succeeds -- or even survives -- it generates benefits that don't necessarily increase the net worth of its founders and investors.
I had mentioned the experience gained by the entrepreneurs. But the human capital benefits don’t end there. All the employees and even the service providers accumulate knowledge and experience that outlives the startup. It goes even further though by having people who have worked together as a team, which means that they are much more likely and capable to work together on a new opportunity.

In fact, much has been written about how there is a significant network effect that occurs when you reach a sufficient density of startups. For instance, AnnaLee Saxenian examined the differences between Silicon Valley and Route 128 and identified network effects resulting from density and attitudes of startups as critical. Bijan has pointed out repeatedly how non-competes in the Northeast have been blocking some of that network effect. Critical here is the recognition that in a network effect setting there is significant value to the network that is not captured by the individual participant.
He goes on to point out that society has a compelling interest in the formation of startups, and that relying exclusively on returns to private equity to generate entrepreneurial activity may be insufficient to create the long-term network effect seen in established technology corridors.
There are powerful benefits that are not reaped by the individual startup. The net result of that is there is not enough startup activity if society relies on individual incentives alone.
He argues persuasively that public-private partnerships are needed to create the conditions which germinate and incubate startups as a stimulus for these secondary economic impacts that are beyond what the founders and seed investors accrue.

Thursday, January 22, 2009

Angel Investing Update

The good news is that angel investors are still deploying capital, and remain the single largest source of capital for early stage entrepreneurs.  So says Kasey Wehrum in Inc. online.

The bad news is that they're driving harder bargains, and taking longer to commit their resources.
If you are looking for funds, be prepared for a buyer's market. That means requests for more control as well as lower valuations. "I'm not saying we are going to be angels from hell, but we are not going to be stupid about how to price," says John May, managing partner of New Vantage Group in Vienna, Virginia. On the other hand, says Bill Warner, chairman of the Triangle Accredited Capital Forum in North Carolina, "no angel wants to put an entrepreneur in the position of not being able to reap benefits from a successful exit."
Wehrum also notes that while the total amount of money invested in 2Q08 -- $12.8B -- is up 4.2% over the same period in 2007, the total number of companies funded -- 23,000 -- is down  3.8%.  The trend towards increased deal syndication continues as investors put the risk burden on multiple shoulders.

Wednesday, January 21, 2009

Optimism Lives!

It's great to see David Hornik posting again on VentureBlog.  He's been on hiatus since the end of October, and his perspective on the private equity asset class has been sorely missed.

His latest note offers cautious optimism for the future of venture-backed technology startups.  It's a welcome notion after the beating the economy has taken lately.
So why am I optimistic about investing in 2009? Because entrepreneurship is an addiction, it isn't a choice. Great entrepreneurs aren't driven to create companies because it is easy, or because capital is plentiful, or because the public markets are swallowing anything the venture community will throw at them. Great entrepreneurs start companies because they can't help themselves. They see a problem or a solution or white space or an opportunity and they have to do something about it.
Indeed, there may be no better time for an entrepreneur to start a new business.  Some of the best and most successful companies were started during downturns, and there are some very important competitive advantages to doing so.  "Me-too" competition is stifled, pain in the market caused by economic disequilibrium seeks relief that only innovation can provide, and investors still must deploy capital, even if LPs are thin on the ground.

Monday, January 19, 2009

Beyond Doom and Gloom: New Economic Development Rules for Local Policymakers

By Golden Capital Network CEO Jon Gregory

Introducing GLOBIES

With Tuesday’s impending inauguration ceremonies there has been a lot of media, economic and political speculation about President-elect Barack Obama’s stimulus package. While debate continues in the beltway about how to rejuvenate the American economy from a macroeconomic perspective, little attention has been given to the equally difficult challenge local elected officials face in cities and counties across America. They are tasked with creating jobs, tax revenues and prosperity in their communities in a period compared to the Great Depression. It is at the local grass roots level where the effects of lay-off notices are exceedingly personal and the impacts on public services most noticeable.

The recent announcement of the closure of the remaining 567 Circuit City stores in the U.S. at a cost of 34,000 jobs, along with major reduction in employment levels at well-known companies like Hertz Global Holdings Inc., WellPoint, ConocoPhillips, Advanced Micro Devices, Saks and Motorola Inc. make the road to economic recovery for local policymakers pretty rough.

Recent studies by economists and academics, along with noted authors and distinguished reporters, suggest that innovation remains the one true economic advantage America possesses over other nations. Excellent publications such as Regional Innovation, National Prosperity by the Council on Competitiveness, and The Innovation Driven Economic Development Model by Collaborative Economics serve as excellent resources on this topic. Yet, despite the increased attention on innovation, discussion among thought leaders about innovation as an economic development strategy has mostly been relegated to the 50,000-foot-level rather than given merit as a practical solution that can be implemented at the grass-roots level.

Even more important is the distinction between long-established national and global businesses with divisions or stores located in hundreds of communities across the country but whose headquarters are located elsewhere, versus innovation-based businesses serving national and global markets with their home base of operations located in the community itself.

I’ve coined a new term for the economic development vernacular to better distinguish these types of businesses from others: GLOBIE (Growth-focused Locally-Owned Businesses run by Innovative Entrepreneurs). Even while major global corporations such as those I mentioned earlier in this article falter or stumble, at Golden Capital Network we are able to regularly observe the under-recognized progress made by hundreds of GLOBIEs. Just last week, for example, alumni presenting company GLOBIEs like Red Condor, Utopy, Alter-G, Inc., and Sentilla reported important business-related achievements, such as new customers, new management team hires, new rounds of capital raised and new technology milestones reached.

The most recent 10-year period of my economic development career has been spent in the trenches on a day-by-day basis with the founders and CEOs of GLOBIEs. It is this subset of the innovation sector that drives ongoing economic growth. Importantly, GLOBIEs exist everywhere in this country. They represent the bright spots in an otherwise struggling economy.

GLOBIEs deserve special recognition and support by local policymakers because they not only serve as the market-leading difference-makers in a community, but also usually have a true affinity for that community and a desire to stay and grow there.

With 25 years directly or indirectly involved in local economic development under my belt, I am concerned that our local elected officials -- and other civic leaders charged with economic development responsibilities -- are not fully equipped with the right knowledge or the most effective tools and strategies to stimulate their economies by focusing on GLOBIEs. Instead, many of the strategies being championed to elected officials in communities across the country today are the same ones touted when I started my career in economic development in 1985. The problem is that the economy of today is nothing like it was in 1985.

It is important to emphasize that GLOBIEs are the businesses that are most vital to the economic recovery and growth of a local economy, and that grass-roots efforts can actually have a positive impact on their success! With companies whose headquarters are located elsewhere, the ability for a local entity to impact their decision-making process is minimal, at best. In fact, the economic development strategies being advocated in many communities and states across the U.S. today offer little value to GLOBIEs. This is disheartening in that it is possible for local policymakers and other leaders of local economic development organizations to have a profound impact on the success of these businesses by helping to address their needs. The organization of a community’s human capital assets is a good example. I am referring not only to the employees who become the workforce for GLOBIE businesses, but all of the human-related input essential to starting, growing and exiting a GLOBIE company; known as the innovation eco-system.

Local policymakers can play a pivotal role in this process. Yet in most community’s economic development efforts exert no energy into proactively cultivating this innovation eco-system. It is this disconnect that has inspired me to write “Beyond Doom and Gloom: New Rules for Local Policymakers” as a guidebook for policymakers and other economic development leaders to implement a cost-effective, sustainable and compelling economic development initiative at the local level that is focused on GLOBIEs.

Over the course of the next two weeks, I’ll periodically release these New Rules seeking perspectives from throughout the extended GCN network. If you have inputs, feel free to respond here. Next we’ll start the journey with New Rule #1 for local policymakers: “Take Action Now! Don’t Get Bogged Down in the Minutiae.”

Jon Gregory
Golden Capital Network
California Business Ascent

Thursday, January 8, 2009

Network Capital Golden

A fascinating paper by Manuel Acevedo of the Open University of Catalonia proposes a relationship between Social Capital and the Network Society that results in a new community asset he calls Network Capital.

With the rapid and explosive growth of social networks and the whole host of Web 2.0 applications, we are witnessing the formation of new forms of community.  Howard Rheingold (who tweeted a pointer to this article) wrote The Virtual Community in 1993, presaging the conceptual framework, based on some of the early BBS and real-time messaging tools available to the pioneers of what was then yet to be identified as "cyberspace".  Acevedo's paper validates Rheingold's prescience in a compelling fashion.
Communities are no longer defined only by place, but also by interest, becoming organized into social networks. When the interaction takes place among members of an electronic network, which are likely loosely-knit in geographic terms, the resulting social capital is network based. Network capital could then be understood as a measure of the differentiated value in the Information Age that communities structured as social networks generate on the basis of electronic (digital) networks for themselves, for others and for society as a whole.
While Acevedo examines this asset as an accelerant for human development, it seems to be an important resource for innovation-driven economic development.  Certainly, Acevedo's example of how Network Capital powered the Open Source movement illustrates its investment in creating value that can be monetized, create opportunities, and generate new wealth.
An early and still paradigmatic example of network capital comes from the creation of Free/Open Source software (FOSS). People from different locations, who may not ever see each other, use Internet and net-based tools to exchange information, generate knowledge, work collaboratively and develop well-defined products, ‘all for the love of it’. These people consider themselves as software artists (even activists), and participate on a voluntary basis. They meet at specific cyberplaces, eg. distribution lists, extranets or project management applications, and sometimes in person as well, at conferences or other public events.

FOSS communities have crafted a culture of sharing and solidarity which not only makes their processes sustainable, but is a stimulus and reference for others to also pursue electronic-based collaboration. The ‘Open-Source’ approach is becoming known for its methods and philosophy in fields outside of software production, as a collaborative methodology. This collaboration helps the individuals who take part in it, and the resulting products help specific personal or institutional users, as well as large sectors of society who in this way have additional software choices made available to them – a good example of knowledge as a global public good.
The graphic at the top of this post is included in the paper as an example of how projects can be enabled with Network Capital, as well.  As we develop and implement strategies to create value through innovation and entrepreneurship, it seems evident that raising and deploying Network Capital is as fundamentally critical to success as Private Equity Capital.

Wednesday, January 7, 2009

Job Creation Study

A study by John Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of the Census Bureau adds even more credibility to the argument that supporting nimble, innovative entrepreneurs is the most effective, sustainable method for long term job creation and prosperity within communities.

Jeff Cornwall from Belmont University blogged about this earlier this month, and while the data might be further dissected to show that one-off freelancers – with no intention of every creating another job but their own, and local service sector lifestyle companies – with no chance of every growing beyond the 5-10 employee range – could somewhat skew the data, there is enough there to take note.

“In terms of net job creation, the role of business formation is clearly critical,” the authors conclude. “But we also see that businesses that have survived their first few years and have already grown to a mid-sized business exhibit positive (and higher than average) net job creation rates.”

Locally headquartered firms – usually backed by some combination of family, founders, friends, angels, VCs, customers and strategic partners – comprise a significant portion of the small and mid-stage companies this study indicates are the pillars of new net job creation within communities.

From our 10 years at Golden Capital Network working hands-on in the field, we have observed several common characteristics among early stage companies with the greatest chance of growing to become these locally headquartered mid stage firms.

First, we generally characterize early stage companies as: 1) Earning annual revenues in the $0 to $5 million range– depending on the industry; 2) Being developed beyond the concept stage; 3) Being a stand-alone entity, and usually not an affiliated spin-off from an existing larger firm.

We classify these early stage companies with high growth potential as “innovative” in how, through their products, services and/or internal business systems, they: 1) Address new markets; 2) Address new pain or challenges within existing markets; or 3) Offer new solutions to existing customer needs or wants.

We have also consistently observed that while innovation is often technology based, this is not always the case, and innovative companies can be from within any industry.

We consider a scalable company one with the potential to grow or expand into a substantial enterprise, and it is our observation that only scalable companies can quickly grow from small to mid-size businesses. Scalable companies have one or more of the following characteristics: 1) Large, unmet market needs for the company’s products or services; 2) Potential customers all over the country or world; 3) A business model and management team potential that will allow for realistic, significant growth in both market share and revenue.

These companies are also characterized by their most pressing needs, which are access to capital, access to talent and access to networks of expert knowledge, industry advisors and potential strategic partners.

With the findings in this study, and others like them, it seems clear to us that community efforts to improve local economies should focus on helping innovative, scalable, locally headquartered early and mid stage companies to grow, thrive and win.