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Olson’s Observations

Technology. Innovation. Science. VC. Media. :: by Eric Olson

Archive for June, 2006

Finding Start-up Talent in Rural Areas

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I had the opportunity to sit down with Tom Markiewicz of EvolvePoint last week while I was in Roanoke, VA for a wedding (pics will be up on flickr soon) and I am glad I had a chance to do so as he is a great guy. His company, EvolvePoint, is in the RSS space as is FeedBurner so it was good to talk industry for a while but our discussion on creating “Silicon-Valley-like” atmospheres in other parts of the country was particularly interesting. I brought up what Frank Gruber and I are doing in Chicago with TECH Cocktail and he loved the idea. However, he brought up an interesting point (I’m not directly quoting here) - it’s easier to build a community in Chicago because it is a city. The scene is there but just dormant. What about places like Blacksburg, VA where EvolvePoint is headquartered?

This got us into a discussion about finding and attracting talent to a start-up and how it is easier to do so inside of a city. The question is, why? Of course there are easy answers like the following:

  1. More stuff to do
  2. Great restaurants
  3. Commute is not bad

But those reasons apply to both younger and older people. What about the younger talent you are looking to bring into your start-up? Why are they less likely to want to live in Blacksburg even though they may have gone to Virginia Tech right in town? Tom sees a couple of reasons:

  1. The want to just get out of town after four years
  2. Social/dating scene is not there

The first reason mainly applies to people that attend great schools is rural areas (like VA Tech) and just want to get the heck out after graduation. The second reason is more the meat of the issue. How is a young person supposed to date and meet people in Blacksburg? It is a lot easier to meet people and date in the city presumably because the scene is there and there are simply more young people. So, while the Roanoke Valley is a gorgeous place to live, the cost of living is dramatically lower than Washington DC and there are opportunities there for tech, young people seem to prefer the city where they have a better chance of meeting people and even that “special someone.”

So it seems that, for now, it will still be hard to find start-up talent in places like Blacksburg even though a large tech university is in the very same town. The question is, when will the tipping point come and what will spur it? At some point the high cost of living will send people away from the cities and then start-ups outside of cities will find great talent. So if you are a company headquartered outside of a major city it seems like a social/dating scene comparable to cities is what you need to woo talent - not more perks.

Written by Eric Olson

June 28th, 2006 at 1:13 pm

Attack of the Mega Funds!

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After hearing about and reporting on Oak’s latest fund, the largest VC fund ever raised at $2.56B, I thought it was time to talk about where all this money is going to go. The short answer, I have no idea. It seems to me that more and more VC money is being raised while the amount of good investments is decreasing. Even good investments could be spoiled by VCs who want to inject too much cash into them. Also, as investors raise more and more money the amount they need to put to work in each deal grows pushing them later and later stage where they may not fair as well (Oak is a great example of this). Why would VCs raise so much money if they know that it will be hard to find good investments for all of it and will push them away from their core competency you ask? Again, short answer, greed.

While I think that some VCs who are out there raising more money genuinely believe they will find a lot of good investments I also believe that some are doing it simply because they can and it will make them more money. (Sidebar: I know some great VCs who are great guys to boot so this is not a slam to the industry at all. These are just some observations which will hopefully spur discussion that will help us all learn and grow.) At this time, a discussion on how VCs make money is in order. If you already know about this please skip the next few paragraphs and head to the conclusion.

When VCs raise money from Limited Partners (LPs) they do not actually take the money all at one and throw into a giant lockbox until they are ready to invest. They actually call capital (in what are appropriately termed “capital calls”) in chunks when they have investments to make. This is important to note because VCs, for the most part, only take their management fee percentage (their steady paycheck) off of the called capital, not the total. So, the more capital called, the more management fee they make. VCs are incentivized to put more capital to work because they get more money in return for it. This may not always work in the Limited Partners favor since the VC (aka General Partner) may find investments like sillycompany.com just to get money out the door and management fees coming in.

However, there is a counter balance to the management fee structure. While VCs can do quite well with management fees, they usually need their investments to do well in order to become very wealthy. Here’s why they need investments to pay off (this is the norm but there are exceptions). Typically the VC puts in about 1% of the total fund capital and the LPs put in 99%. In this example, let’s say the total fund size is $100 (LPs puts in $99 and the VC puts in $1). Now, the VC heads out and invests in 2 companies. Down the road the VC sells the first for $100 and the proceeds are split 99/1. Now, everyone is paid back (they are even). Here is where the VC can make some serious cash on what is called carried interest.

After the VC has paid back the LPs they start splitting all returns 80/20 with 20% going to the VC. So, even though the VC only puts up 1% of the capital they now stand to get 20% of the second investment’s proceeds at sale. The VC then sells company 2 for $200 and they take $40 while paying the LPs $160. You can see how the VC ends up with a better percentage return overall as a result of the carried interest while the LPs still do quite well.

Back to mega funds. Now we have seen that there are checks and balances in place that work to keep the VC in the mindset of making good investments. So, what’s the problem with mega funds? There may not be a problem, only time will tell. However, it seems to me that there the amount of quality investments is decreasing while the amount of money to put into companies is rapidly increasing. This may not cause investors to lose money in the end of the day but it may cause them to underperform. For example, if the VC fund returns 10% per year and I could have got 8% in the public markets for far less risk then the fund wasn’t really worth it. Especially considering the management fees are much higher than those of a mutual fund.

I am excited to see what happens with the mega funds over time but I have to think that the disciplined investors who didn’t raise a ton of cash just because they could will win out at the end of the day (assuming they are tapped in and have good deal flow of course).

Written by Eric Olson

June 20th, 2006 at 12:23 pm

Posted in VC

Opening Markets for Microfinance Goods

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On the heels of one of my articles being published in the MicroVest summer 2006 newsletter I thought I would write a piece on microfinance I have had in my head for a while. I really need to get this idea out of my head and on to this blog so all of you can help me refine it. I also hope that some of you will be interested in helping to build it. Alright, here we go!

The question: Where can you or I buy goods made by microfinance backed entrepreneurs? Having found no answer to this question in a lengthy google search my mind shifted to one of the shortcomings of microfinance. In most cases microfinance will allow the borrower to reach a level of living above the poverty line but there is a glass ceiling that limits their business’ growth. I believe the glass ceiling stems from, in part, a lack of distribution channels for the goods the entrepreneurs produce.

A possible solution: an amazon.com style site where only goods produced by microfinance borrowers are sold. There is a great market for these goods here in the US and elsewhere. People are constantly looking for exotic handmade goods to spruce up their homes and, a lot of times, settle for mass produced look-a-likes from places like Pier-1 and Crate and Barrel (nothing against those places - I do like both of them). With an online store we could probably get buyers the real thing, possibly even for less than the big market stores price, and the purchaser will also know they are helping the world’s poorest people with their purchase. A unique product for a great price with an intangible feel good add-on. Sounds like a winning combination for the consumer. Now, what about the microfinance borrower?

The online store will open up vast markets for microfinance produced goods and, in doing so, breaks the glass ceiling while also creating jobs (which is listed as another drawback of MF - people say it doesn’t create jobs). Seems interesting for sure. Of course building the actual website would be fairly easy (for a web developer not for me personally - anyone up for the task?). The logistics of getting the goods together and shipped is the hard part here. My initial thought is to rope in the larger microfinance institutions who have a lot of people on the ground. These people could possibly facilitate the picking up of goods and the transporting of them to a central location. Then, we could employ some people to pack and ship the items from the central location. What do you all think? Obviously this needs to be fleshed out so please jump in on the comments.

In the end of the day, if this gets going, everyone wins and poverty comes closer to being eliminated. On a side note: I would also take a large portion of the profits from the company and donate them directly to microfinance institutions so they can make more loans (maybe even into my own MFI - I am thinking of starting an MFI in Cairo so if you know someone willing to give me a start-up grant please ping me). Looking forward to hearing your thoughts!

Written by Eric Olson

June 18th, 2006 at 9:42 pm

Posted in Microfinance

I’ll have a TECH cocktail please!

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This post is a long time coming and I really should have put it out earlier. So, without further adieu, I would like to introduce TECH cocktail. TECH cocktail is a series of mixers for bloggers, technologists, entrepreneurs, venture capitalists and other business professionals interested in Chicago area technology (although you don’t need to be from Chicago to come - all are welcome). I am working with some great people to put this together including Frank Gruber of SomewhatFrank.com so I am sure it will be a success.

The first event will take place on Thursday, July 6, 2006 at State Restaurant and Cafe in the Lincoln Park neighborhood on Chicago’s north side. Our goal with these events is to bring a community feel, like that of Silicon Valley, to the Chicagoland area since Chicagoland is home to many top tech companies and universities.

Stormhoek WinesWhat’s going to go on at the event you ask? Well, there will be some local companies on hand to show off their latest accomplishments, a great wealth of fun and interesting people to network with and lots of wine as South African winery Stormhoek was nice enough to supply the event as part of their 100 Geek Dinners (they mean geek in a postive way - I promise!).

If you’ll be in the Chicagoland area on Thursday, July 6, 2006 we would love to see you at TECH cocktail for a night of fun, wine, people, and demos. Oh yeah, did I mention you could win an iPod from our friends over at Apple and a gift certificate from RipIt Digital?

RSVP here

Promotion: If you’d like to promote TECH cocktail, and you use FeedBurner, I have created a piece of flare at www.ventureweek.com/flare/techcocktailflare.xml that you can add to your feed and/or site. If you have any questions about how to implement it just shoot me a note!

Written by Eric Olson

June 12th, 2006 at 10:33 pm

Movie Review: Paradise Now

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This will be the first of many more movie reviews to come. My movie reviews are both an effort to show you all more of my interests outside of VC and technology as well as an outlet for my love of film. Enjoy and please do comment and share your thoughts.

Paradise NowThe first film I will take a look at is one I just finished watching. The film is called Paradise Now and I knew if I didn’t write about it tonight I wouldn’t be able to get to sleep. This 2005 film (winner of the 2006 Independent Spirit Award for Best Foreign Film) spans two days and chronicles the story of two young Palestinian men who agree to become suicide bombers and who, after being separated, have to decide whether or not to carry out the mission on their own.

The two main characters, Said (Kais Nashef) and Khaled (Ali Suliman), are childhood friends who grew up in the West Bank city of Nablus. Their lives seem hopeless. They hold dead end jobs, poverty is rampant and political oppression permeates the land. I had always wondered why someone would decide to go through with a suicide bombing plot. Now, after viewing this film that was shot on location in the gritty West Bank, I can see how people may think that suicide is their only way out and a way to become a hero to their people.

I’ll admit, I was a bit leery about this film as I thought it may turn out to be yet another piece of political propaganda. Thankfully it was not any such thing. The characters are rich, the emotions are raw and the cinematography is incredible. While tackling a very intense subject matter, Director Hany Abu-Assad manages to masterfully inject humor as well as romance into the film. The violence was artfully shot as well and allowed for the viewer to use his or her imagination to fill in the details.

Paradise now is a fantastic piece of film and it will entertain you regardless of your political stance or lack thereof. You will find yourself reevaluating everything you think you know about the conflict and I’m sure it will spur you to look a little deeper. I urge you to give this movie a shot. I don’t think you’ll be disappointed.

Side-note: There are subtitles but please don’t let that stop you for watching the film.

Written by Eric Olson

June 10th, 2006 at 12:15 am

Posted in Movie Reviews

Get Lucky - It’ll Help Your Career

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I should have written about this a while ago but, well, I have no excuse. Fraser Kelton, who writes Disruptive Thoughts and who I have been lucky enough to get to know over the past half year or so, asked me to write a piece for DT on what I have learned about business in my first couple years “out of the gate.” Here is what I came up with:

Luck is underrated. I grew up and went through my business education thinking that all I needed was my smarts and my work ethic to get me to where I wanted to go. What I’ve learned is that while smarts and hard work are very important, luck is how a lot of things happen in both life and business. With that said, I think one can do a lot to create luck for themselves. The most important thing one can do is get out there. Whether it’s writing a blog, producing a podcast, going to conferences, just get out there and meet people that share your passions. Once you meet these people, be a mensch. Then, when you’re a big tycoon, remember that at least some of your status in business (maybe even a lot of it) came from luck. It’ll keep you humble and that’s a good thing.

I am interested to hear what all of you think about my thoughts. Have you all found luck, both plain and created, to be a major factor in your careers and lives? What advice/thoughts do you have?

Written by Eric Olson

June 9th, 2006 at 11:14 pm

Posted in General Thoughts

MLB Advanced Media Blows the Save

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A little while back I wrote a post about how MLB Advanced Media (MLBAM) was doing some great things in the new media space. I was very impressed by their efforts. I emphasize the word was in the previous sentence because recent news has shaken my once very positive opinion of MLBAM. Adam pointed an article out to me over in the VentureWeek community forum that reviewed a debate between George Kliavkoff, executive VP of business for MLBAM, and Rich Buchanan, Sling Media’s VP of marketing, at the recently held Digital Media Summit.

SlingMediaFor those who don’t know, Sling Media produces a piece of gear (shown) that allows TV viewers to access their cable boxes and TiVos from anywhere with their web enabled devices. This is a very cool technology as it allows people, who are already paying for the content, to view it anywhere they want. For example, if I still lived in Boston and was away on business I could still tune into my cable at home from my laptop to watch my beloved Red Sox (who romped the Yanks tonight!). What’s wrong with that you may ask? Well, nothing should be wrong with it. I am paying for that content and just because I am not home to watch it doesn’t mean I shouldn’t be able to. I’m not stealing here. I pay good money for access to cable TV. Well, MLBAM sees things a bit differently.

MLBAM is upset because Sling essentially cuts out cable and satellite providers who pay a lot of money for transmission rights in certain areas. Since Baseball sells these transmission rights for certain areas they view Sling users as stealing content from local providers. MLBAM counters any rational claim that the user has paid for the content they are viewing with Sling by stating that the user is in violation of the scope of their terms of service if they do use Sling. This is very interesting. A terms of service that limits how I can use content I have paid for (well, those are pretty common I guess). I am going to look into my terms of service for Comcast here in Chicago to see what I have actually agreed to.

MLBAM is being very short sighted with this viewpoint and, will no doubt, alienate some fans. Content should be able to be viewed when, where and how the consumers want it and consumers will find a way to do that regardless of imposed restrictions. Allowing me to only view my cable TV while at home seems very silly. It would be like Apple saying you can only listen to music you purchased from iTunes in your home even though you have a device that makes that content portable. Art Brodsky, spokesman for Public Knowledge, brought up a great point when he said that allowing people to use Sling actually instills loyalty to local cable operators and the advertisers that support their programming. Now, even if I am in Thailand, my home advertisers can still reach me. That is powerful.

Sling’s Buchanan sums things up nicely when he says:

…I’d hate to be a lawyer arguing that I want consumers to pay twice for content.

MLBAM, you need to wake up and see that content, especially paid content, should be available when, where and how the purchaser wants it. If you don’t make it happen, the users will.

Written by Eric Olson

June 8th, 2006 at 11:00 pm