Lights, Camera, Action!

We’re very happy to announce the public launch of the California Business Ascent video webcast series, showcasing the most exciting startups you’ve never heard of. For ten years we’ve introduced more than a thousand early stage ventures to our network of active investors at dozens of Golden Capital Venture Capital conferences throughout California and Nevada, and more than $1.6 Billion has been invested in our alumni.

Now we're taking it to the web, live and direct. We are planning an ambitious program of 50 entrepreneur showcase webcasts in 2009 from locations throughout California, culminating in a final competition in San Diego this November with 50 regional finalists vying for cash awards, investor traction, and the title of the Most Innovative Startup in California.

“We’ve been showing recorded elevator pitches on our Business Ascent social network, and some other sites have followed suit,” said Jim Mikles, Executive Producer of the webcast series, “but this is the first program that presents entrepreneurs pitching their companies in a real-time, competitive format to potentially hundreds of investors screening the deal flow online.”

Our first live program is this Thursday, April 2, starting at 4PM PDT, from the Monterey Bay Innovation Showcase in Watsonville, in the heart of the Monterey Bay region. A panel of six leading angel and venture investors will discuss “Raising Capital in Challenging Times”, followed by ten-minute presentations by seven sensational startups.

If you want a ringside seat to learn more about the next wave of entrepreneurs emerging from the nation’s most innovative state, join the webcast by visiting http://businessascent.com/go/webcast

88X ROI

We've been watching some talks from the recent TED conference.  For those who may be unfamiliar with this program, it is an annual colloquium of the brightest and most imaginative thinkers, thought leaders, and overachievers from the worlds of Technology, Entertainment, and Design, discussing "Ideas worth spreading".

Juan Enriquez, Managing Director with Excel Medical Ventures and the CEO and Chairman of Biotechonomy, gave a fascinating presentation examining the economic meltdown, specifying strategies for recovery, and concluding with a look at some emerging innovations in life science technology presaging the emergence of "homo evolutis"; a humankind that takes an active role in its own evolution.

In the course of his talk, about seven minutes in, he made a remarkable observation about the impact of venture investment in the economy.  He said that investment in startups represented about .02% of GDP, whereas venture-backed companies produced 17% of GDP.  He mentioned it in passing as he transitioned from a laundry list of necessary cuts to public expenditure to areas where spending must be increased, but it certainly caught our attention.

Then we saw a similar observation in the Economist special report on entrepreneurship we discussed last week, and we tracked down the source.  As it happens, it comes from VentureImpact, a research paper commissioned by the National Venture Capital Association, and prepared by Global Insight with data provided by Content First.  The actual proportion of GDP invested in early stage companies in 2006 was .2%, and the output was 17.6%, which translates to a staggering 88x return on investment.

The study also documents

 that these companies

 produced more than

 10 million jobs, and over 2 trillion dollars in revenue that year, and the trend over the previous 6 years was consistently increasing.  Venture-backed firms also significantly outperformed the economy as a whole, producing more than three times the compound annual growth of jobs (3.6% vs. 1.4%) and nearly twice the growth in revenues (11.8% vs. 6.5%).

We've been on the lookout for solid evidence of our central thesis -- that the most effective strategy for economic development is innovation and entrepreneurship -- and this research certainly provides meaningful support for it.  The study was published in 2007, and analyzed more than 23,000 venture-backed companies.  An update to the study is in process, and is expected this June.  We look forward to it with eager anticipation.

Required Reading

When I was in college, guys usually pretended they were in a band. Now they pretend they are in a start-up.

In the March 14th edition of The Economist, a special report on entrepreneurship offers a comprehensive analysis of our favorite subject.  Authored by Washington bureau chief Adrian Wooldridge, the report is a collection of nine articles examining virtually every facet of innovation-driven new enterprise.  Wooldridge cites our friends at the Kauffman Foundation in defining entrepreneurial companies as specifically innovative, as contrasted to replicative, businesses.

The leading article, Global Heroes, explodes the "five myths" about entrepreneurialism.  These include:

• Entrepreneurs are "orphans and outcasts"; solitary, antisocial nerds making widgets in isolation
  

Entrepreneurs may be more independent than the usual suits who merely follow the rules, but they almost always need business partners and social networks to succeed.

• Entrepreneurs are young.
  

The Kauffman Foundation examined 652 American-born bosses of technology companies set up in 1995-2005 and found that the average boss was 39 when he or she started. The number of founders over 50 was twice as large as that under 25.

• Entrepreneurship is driven by venture capital

Monitor, a management consultancy that has recently conducted an extensive survey of entrepreneurs, emphasises the importance of “angel” investors, who operate somewhere in the middle ground between venture capitalists and family and friends. They usually have some personal connection with their chosen entrepreneur and are more likely than venture capitalists to invest in a business when it is little more than a budding idea.

• Entrepreneurs must create world-changing new technology

Sir Ronald Cohen, the founder of Apax Partners, one of Europe’s most successful venture-capital companies, points out that some of the most successful entrepreneurs concentrate on processes rather than products. Richard Branson made flying less tedious by providing his customers with entertainment. Fred Smith built a billion-dollar business by improving the delivery of packages. Oprah Winfrey has become America’s richest self-made woman through successful brand management.

• Entrepreneurship cannot occur in large companies

Many big companies work hard to keep their people on their entrepreneurial toes. Johnson & Johnson operates like a holding company that provides financial muscle and marketing skills to internal entrepreneurs. Jack Welch tried to transform General Electric from a Goliath into a collection of entrepreneurial Davids. Jorma Ollila transformed Nokia, a long-established Finnish firm, from a maker of rubber boots and cables into a mobile-phone giant; his successor as boss of the company, Olli-Pekka Kallasvuo, is now talking about turning it into an internet company.

Just as importantly, big firms often provide start-ups with their bread and butter. In many industries, especially pharmaceuticals and telecoms, the giants contract out innovation to smaller companies. Procter & Gamble tries to get half of its innovations from outside its own labs. Microsoft works closely with a network of 750,000 small companies around the world. Some 3,500 companies have grown up in Nokia’s shadow.

As we've pointed out before, an economic downturn is a good time to start businesses.  Wooldridge notes that it is also an opportune time for growing entrepreneurial businesses.  Citing a study from Endeavor, entrepreneurs surveyed forecast that "their businesses would grow by 31% and their workforces by 12% this year. Half of them thought they would be able to hire better people and 39% said there would be less competition."

In addition to this overview, additional articles in the report include:

• Managing entrepreneurship
  
• Time for entrepreneurship
  
• The United States of Entrepreneurs
  
• Entrepreneurs in India and China
  
• Lands of opportunity
  
• The formula for entrepreneurship
  
• Entrepreneurs doing good
  
• The entrepreneurial society

Anyone professing an interest in innovation and entrepreneurship will be significantly better informed after reading this authoritative analysis.

Tom Hayes Stimulus Package

Our old friend Tom Hayes is at it again.  In an op-ed piece in yesterday's Wall Street Journal, he and Michael S. Malone critique the new administration's stimulus strategy, and offer suggestions for an innovation-based approach that certainly sounds more promising than propping up failed industries.

Readers of this page know that we have long argued that the best and most valuable jobs are created by entrepreneurs and the private investors who fund them.  And we've certainly celebrated the occasions when the public sector has recognized and supported entrepreneurial efforts, even while noting our disappointment in how little of that is evident.

Hayes and Malone rehearse the same catechism of entrepreneurship, innovation, private investment, and economic vitality, and go one to make some specific recommendations for policy makers to give serious attention.  Some highlights:

- First, kill Sarbanes-Oxley or make it voluntary. Right now.

- Allow entrepreneurs to more easily tap tax-free retirement accounts -- or better yet, let them create tax-free accounts specifically to fund themselves.

- Eliminate payroll taxes, which unnecessarily burden young companies. 

- Make the tax system more forgiving for Angel investors -- or allow the creation of tax-free investment vehicles similar to what we now see with nonprofit foundations or 529 college savings funds.

- Lower capital gains taxes on investments in early stage companies and higher taxes on later stage deals. 

- Help big business think small. 

- Convene a presidential summit on entrepreneurship and small business. The last president to do so was Ronald Reagan in 1982.

Hayes and Malone elaborate on these points, and we highly recommend their article as "required reading".  

In the "Q"

As long-time subscribers to McKinsey Quarterly's email newsletter, we enjoy the in-depth analyses featured on their website.  We'll continue to alert readers to useful and relevant content we encounter through this channel (links back to the Quarterly site require free registration for access to the entire article.)  We cited a report from the "Q" earlier this month, and now we are delighted that today's inbox brings credible third-party validation of one of our central theses: invention is science, innovation is economics.  

Excerpted from his recent book, Amar Bhidé makes a compelling case that despite falling behind rapidly emerging BRIC economies in secondary and higher education in STEM competencies and pure research generally, the United States enjoys a competitive advantage in applying discoveries from the laboratory to real-world uses.

Technological innovations, especially high-level ones, usually have limited economic or commercial importance unless complemented by lower-level innovations. Breakthroughs in solid-state physics, for example, have value for the semiconductor industry only if accompanied by new microprocessor designs, which themselves may be largely useless without plant-level tweaks that make it possible to produce these components in large quantities. A new microprocessor’s value may be impossible to realize without new motherboards and computers, as well.

New know-how and products also require interconnected, nontechnological innovations on a number of levels. A new diskless (thin-client) computer, for instance, generates revenue for its producer and value for its users only if it is marketed effectively and deployed properly. Marketing and organizational innovations are usually needed; for example, such a computer may force its manufacturer to develop a new sales pitch and materials and its users to reorganize their IT departments.

Bhidé makes these observations in the context of anxieties in the policy and media communities about America losing it's "edge", and his concerns about resorting to protectionism or diverting scarce resources to pure research activities, or "what the economists Sylvia Ostry and Richard Nelson call techno-nationalism and techno-fetishism".

Techno-nationalists and techno-fetishists oversimplify innovation by equating it with discoveries announced in scientific journals and with patents for cutting-edge technologies developed in university or commercial research labs. Since they rarely distinguish between the different levels and kinds of know-how, they ignore the contributions of the other players—contributions that don’t generate publications or patents.

They oversimplify globalization as well—for example, by assuming that high-level ideas and know-how rarely if ever cross national borders and that only the final products made with it are traded. Actually, ideas and technologies move from country to country quite easily, but much final output, especially in the service sector, does not. The findings of science are available—for the price of learned books and journals—to any country that can use them. Advanced technology, by contrast, does have commercial value because it can be patented, but patent owners generally don’t charge higher fees to foreigners. In the early 1950s, what was then a tiny Japanese company called Sony was among the first licensors of Bell Labs’ transistor patent, for $50,000.

In the current economic climate, it is critical that resources and regulations be more closely aligned with the successful commercialization of new science, rather than deep, long-range investments in adding to the store of human knowledge.  As we have seen, the economies that benefit most from commercial application of new technology are not necessarily the ones in which it was patented.  License revenue and royalties create few new jobs.

Since innovation is not a zero-sum game among nations, and high-level science and engineering are no more important than the ability to use them in mid- and ground-level innovations, the United States should reverse policies that favor the one over the other, and it should cease to worry that the forward march of the rest of the human race will reduce it to ruin.

Immigration policies that favor high-level research by preferring highly trained engineers and scientists to people who hold only bachelor’s degrees are misguided too. By working in, say, the IT departments of retailers and banks, immigrants who don’t have advanced degrees probably make as great a contribution to the US economy as those who do. Likewise, the US patent system is excessively attuned to the needs of R&D labs and not enough to those of innovators developing mid- and ground-level products, which often don’t generate patentable intellectual property under current rules and are often threatened by easily obtained high-level patents.

Even factoring in outsourced manufacturing and back-office services, the most (and best) net new jobs are created by innovators who find a crying need and fill it with creative solutions fashioned from new discoveries and existing technologies alike.  As we've pointed out elsewhere, an innovative company isn't necessarily introducing widgets, but is also applying novel thinking and imagination to improving established business processes for greater effectiveness or efficiency.  Cloud computing, for example, offers familiar software capabilities, but in a new form factor and delivery model.  That's not the sort of thing you invent in a lab.

Silver Lining Dept.

We wrote last week about the ComputerWorld item discussing big corporations acquiring smaller companies.  Cesar Rojas with ANTs Software commented on that item, pointing out that smaller companies aren't always looking to get bought out.

I think there are exceptions to the rule when it comes to small tech companies. In this down economy there are real needed innovations that are very critical to significantly reduce IT costs. That empowers smaller companies to negotiate with the big guys because the technologies they develop can really jeopardize critical revenue streams of these firms while providing huge OPEX reductions for customers.

We thought this was an interesting perspective, and when we inquired with Mr. Rojas, we got a call back from Ken Ruotolo, ANTs' CFO, who explained a little more about why ANTs is sanguine about remaining independent.

For one thing, the company is publicly traded (OTC:ANTS), and has gone through several episodes of repurposing.  They sold their high-performance database line of business in 2005, and are now delivering a middleware solution for migrating databases to new platforms without having to modify applications.

Having some experience in data migration (we worked on the team at SynOptics that migrated from Oracle Financials to SAP R3 in 9 months, and led the team at Bay Networks that implemented a Scopus-based call center database on top of Informix in 11 weeks), we were particularly interested in this solution.  As Mr. Rojas continued in his comment:

We recently moved a 3,000 user call center app for Wyndham Hotels from Sybase to Oracle where the customer didn’t need to change a single line of application code. The whole migration lasted one week compared to the multi-month/multi-year application migration process that Wyhdham might have embarked without deploying our product.

Very cool stuff, indeed.  So why wouldn't ANTs want to be acquired by a giant like Oracle, say?  Because they have the potential to become a big player in their own right.  Mr. Rojas again:

I truly believe that smaller/innovative companies that can significantly reduce IT costs in this economy are the exception to the rule and we will be in the driver seat when negotiating alliances with big IT vendors.

As Mr. Ruotolo explained to me, ANTs Compatibility Server product enables a company to migrate large enterprise-wide databases from costly proprietary platforms such as Oracle or Sybase to an open source platform like MySQL, reducing cost of ownership to a fraction of current operating expense.

As data center managers increasingly try to squeeze more efficiencies from operations through consolidation of hardware and software solutions, ANTs Compatibility Server bids fair to be enormously disruptive.  By employing platform companies as channel partners, they have every reason to expect that the potential for growth to be substantial.

California Business Ascent Announced

MEDIA CONTACTS:

Josh Morgan for Golden Capital

(916) 941-0901

josh@morgandorado.com

FOR IMMEDIATE RELEASE

Golden Capital Network, California Business, Transportation and Housing Agency, California’s Small Business Advocate, and California Association for Local Economic Development Announce Statewide Initiative to Help Growth Oriented Businesses Climb Out of Economic Doldrums

Private and State Groups Coming Together for California Business Ascent Statewide Business Mentoring and Competition

Sacramento and Chico, California - Feb. 18, 2009— Golden Capital Network (www.goldencapital.net), along with the California Business, Transportation and Housing Agency, California’s Small Business Advocate, and the California Association for Local Economic Development today announced the California Business Ascent (www.businessascent.com), a statewide competition and mentoring program to identify, assist and encourage innovation-based, locally-owned companies throughout California.

“Local-businesses focused on growth are the key for California to lead the way out of this economic downturn,” said Dave Sanders, chairman of Golden Capital Network and managing partner of WorldBridge Partners. “The Business Ascent is all about identifying the companies with the best chance of success and giving them as much help as we can, to try and make them successful, for the benefit of the companies, the employees and the people of California.”

The California Business Ascent will include regional competitions in up to 25 communities throughout California, culminating with the top two companies from each community competing in the California Business Ascent Finals to be held in San Diego at the Catamaran Resort on November 17-18, 2009.

"California has a long history of innovative entrepreneurs creating jobs and unparalleled prosperity driving new industries to global leadership, with entrepreneurs working in collaboration with government," said Secretary Dale E. Bonner, of California's Business, Transportation and Housing Agency. "It's going to take the collective effort of everyone in the state to rise out of our current economic situation and we can do it together by proactively supporting our next wave of innovative entrepreneurs."

The initiative is a unique new type of public/private partnership that includes both State government and local government leaders, and new types of private sector partners including entrepreneurs, angel investors, and venture capitalists. Through this process contestants will make important connections with investors, bankers, professional services providers, executives, policymakers and other entrepreneurs on a statewide basis. In-kind professional expertise and a substantial cash prize (amount TBD) will be provided to the winner of the competition.

“The California Business Ascent provides a new economic development tool for cities, counties and local economic development corporations to add value to their locally-owned growth companies,” said Wayne Schell, president and CEO of the California Association for Local Economic Development, ”These companies represent a critical and growing part of California’s local and regional economies, and until now have been difficult to assist with more traditional types of economic development activities.”

Wavepoint Ventures (www.wavepointventures.com) is participating in the California Business Ascent by helping to engage California's venture capital and angel investment community in the effort to accelerate economic recovery.

Cities and regions throughout the state including the Yolo region, Greater Stockton and San Joaquin County region, Greater Chico and surrounding counties, and Greater Redding and surrounding counties, have already begun scheduling events as part of the California Business Ascent.

Other cities and regions interested in participating should contact the California Business Ascent initiative organizers at Golden Capital Network, 530-893-8828.

For more information about the California Business Ascent, please visit www.businessscent.com.

ABOUT GOLDEN CAPITAL NETWORK

Golden Capital Network is a non-profit networking, training and consulting group that fosters growth entrepreneurship and early-stage investing as an engine for economic growth.

Since 1999, GCN has coached and showcased more than 1,000 companies to more than 500 active angel and venture capital investors. GCN’s venture capital showcases are the largest and most robust events of their type. The GCN event formula has resulted in more than $1.3 billion raised by presenting companies. More information on Golden Capital is available at www.goldencapital.net.

ABOUT THE BUSINESS, TRANSPORTATION AND HOUSING AGENCY

Led by Secretary Dale E. Bonner, the Business, Transportation and Housing Agency includes 13 departments and several economic development programs and commissions consisting of more than 44,000 employees and a budget of $20 billion, a budget larger than that of almost half the states in the nation. The Agency's portfolio is one of the largest and most diverse in the State of California. Its operations address myriad issues that directly impact the state's economic vitality and quality of life including transportation, public safety, affordable housing, international trade, financial services, tourism, and managed health care.