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.

Where Angels Fear To Tread

In an article published yesterday in the New York Times, Claire Cain Miller and Brad Stone provide a pretty good snapshot of the state of angel investing in the current economic climate.  Although the headline writer claimed that angels are "fleeing" from tech startups, the article explains that angels are indeed still investing, if less, and more selectively.  

Some angels who are still investing have become pickier, making demands of start-ups that they would not have a year ago. When David Levine started Wireless Environment, which makes motion-sensor light-emitting diode bulbs, in November 2006, he quickly raised $135,000 from family members and business school friends, with few questions asked.

The angel investors he met with this fall, though, were far more demanding. “I could not believe the complexity,” he said. “For small investments compared to their net worth, they brought in financial advisers and a whole list of questions.”

They are also investing more of their time and acumen, getting directly involved in the operation of their portfolio companies.

Some angels are considering only low-cost companies that could become profitable without venture financing. Others are acting less like angels and more like venture capitalists, spending much more time than is typical advising companies, including taking seats on boards.

Aydin Senkut, a former Google employee who has invested in 40 companies, is serving on the board of one of his investments, ImageShack, a media hosting site, and spends two hours a week working at the start-up. “Where I can really help is building the next growth stage,” he said.

Angels are also heeding the wisdom of the adage "safety in numbers", syndicating with other angels to reduce their individual exposure, while still getting the deal done.  While the caution about "too many cooks" has some relevance here, the entrepreneur undoubtedly benefits from the advice and counsel of many partners, and can leverage the "wisdom of crowds".

Some angel investors are putting less of their own money on the line by finding other people to invest with them. Co-investments increased in 2008, according to the Center for Venture Research, and half of those surveyed by the Angel Capital Association said they would increase co-investing with other angels this year.

While some of this restraint and prudence has the benefit of weeding out the knuckleheads and marginal deals, giving the stronger startups a quieter marketplace for seed money, the reduced pipeline is likely to result in fewer Series A opportunities for venture funds to consider.

Angel investors are a critical element to a healthy innovation economy.  It's not for nothing that their money is called "seed capital"; they water the economic garden when it first sprouts.  But they're also a vital source of expertise and experience many early stage entrepreneurs lack, giving their companies more of a chance of survival to the next round.  Indeed, the counsel of angel investors may be more valuable, in the final analysis, than their operational funding.  Fortunately, angels are organized into networks, so that they can not only spread the risk, but alert each other to opportunities they uncover.  In a down market like this, the benefit of having multiple eyes on the horizon is an intelligence asset.

The angels, and angel groups, that have been involved with Golden Capital Network over the past decade have been critical early support for the alumni from our programs that have gone on to lucrative exits.  While many angels are banking their fires and exercising more caution, they're still risk-tolerant by nature.  Why do they go out on a limb? Because that's where the fruit is.

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.

Jobs.

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.