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Olson’s Observations

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

Archive for May, 2008

Book Review: Creative Capital: George Doriot and the Birth of Venture Capital

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Creative CapitalI received an advance reader’s edition of Creative Capital back in early March and have been dying to read it. The book, as I was told, was the story of the birth of the Venture Capital industry putting it right in my sweet spot. History and VC - what could be better? I knew I didn’t know the whole story but I figured there was going to be a lot about the early days in the Valley. Firms like Kleiner and Sequoia would be spoken about a lot and Hewlett Packard would be hailed as one of the early wins.

What I was surprised and delighted to find when I opened the cover and dove into the book was that the birth of venture capital happened right in my own backyard in Massachusetts with a firm called American Research and Development (ARD) and a Harvard Professor/Businessman/WWII General named Georges Doriot (oh, and Digital Equipment Corp founded right in Massachusetts was the first big hit for institutional VCs and for ARD).

While the book does give all of the requisite history of venture capital from Doriot’s founding of ARD after WWII, to the spinouts of ARD which included Greylock, to the rise of the valley with Kleiner Perkins and Sequoia what really kept me engaged was the biological information on Doriot and specifically his business philosophies and sayings.

Here are a handful of Doriot’s famous sayings:

A team made up of the younger generation, with courage and inventiveness, together with older men of wisdom and experience, should bring success.

One should not only be able to criticize but should always have a suggestion to make.

Don’t challenge others’ statements, have them repeat them over again.

Conditions which are best for workers will give best production!

Ask about prospects who didn’t buy product.

Always challenge the statement that nothing can be done about a certain condition.

Those are some great quotes from a very wise man and there are many more (in fact, Fred Wilson is posting one per day on his blog until he runs out).

I have to say that I subscribe to most if not all of Doriot’s philosophies and it is interesting to me that there are a lot of folks uttering the same philosophies today as if they were new even though they were developed by a man over 50 years ago (and there was someone who probably figured them out before him as well).

One particular section of the book hit me hard since it touched on the relationship between entrepreneurs and VCs (something I have thought a lot about and also have written a lot about over the years). I will quote the paragraph from the book in full here:

ARD’s biggest hurdle was usually convincing these small, yet proud companies that they needed outside help. But Doriot didn’t hold that against them. He knew that if entrepreneurs weren’t self-driven and a bit egotistical they’d be punching the clock for IBM or General Electric. [Doriot] then closed his lecture by stressing the importance of management assistance in the venture business. “There is always a critical job to be done,” said Doriot. “There is a sales door to be opened, a credit line to be established, a new employee to be found, or a business technique to be learned. The venture investor must always be on call to advise, to persuade, to dissuade, to encourage, but always help to build. Then venture capital becomes true creative capital - creating growth for the company and financial success for the investing organizations.”

That’s a mouthful and a half but what Doriot says in that small amount of words is very important. It seems as if there will always be a struggle between entrepreneurs and VCs in that entrepreneurs by nature will never think they need a VC or that VCs will add value to their company. In reality entrepreneurs need VCs and VCs need entrepreneurs in order to change the world which is what we’re all in it for in the first place. (Of course that statement doesn’t apply to all businesses as some can be bootstrapped and/or don’t take a lot of up front capital.)

I can’t do this book justice in a short blog post so I will stop here and say that I highly recommend this book to any VCs or aspiring VCs out there. Doriot’s words of wisdom can’t be beat when it comes to venture and to business. I would also recommend this book to entrepreneurs who are interested in the history of VC. History always provides context and this book certainly gives that much needed context to the entrepreneurial climate in the U.S. and abroad. Lastly, I recommend this book to any person interested in or currently practicing the art of business. This book will show you how America’s entrepreneurial scene came into being and why we still look to entrepreneurs and VCs to drive the next wave of technological innovation that will propel us even further into the future.

Written by Eric Olson

May 26th, 2008 at 9:54 pm

Posted in Books, VC

So you want to be a VC?: A look behind the curtain.

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Matt McCall pulled together a pretty interesting post on his blog VC Confidential the other day based on a 2005 NY Times article entitled “So You Want to be a Venture Capitalist” by Gary Rivlin.

As someone who has recently entered the world of venture capital I was interested to see what Rivlin had to say and luckily Matt had pulled all the salient points together in his post (The guy is working me pretty hard so reading a whole article is tough these days… I thought VC was supposed to be a cushy job!).

Turns out that there is a lot of turnover at VC firms (70%+ at some of the top firms over an 8 year period from 1997 - 2005) for various reasons but it seems that a lot of times it is due to lackluster performance. Looks like VC is a true meritocracy - just like entrepreneurship - as it should be.

It also takes a while to see a new VC through to the “go/no go” stage.

It is a mentoring business with a long gestation period…”probably 6-8 years and you should be prepared for losses of about $20 million (per person)”.

I had heard these numbers before so this wasn’t shocking to me. That said, I did make sure that I joined a firm where I was going to be able to obtain a lot of mentoring. If you are looking to join a firm ask them if they will be able to spare time for mentoring. If they can’t you should consider learning elsewhere. VC is an apprenticeship business, no question.

Success in VC, as most people probably know/guess, is mainly due to VCs ability to judge people and their keen sense for market inflection points. This quote from NEA founder Dick Kramlich sums that point up nicely:

…it’s more about people skills and the ability to assess whether there’s a market for something.

This is perhaps why the transition from entrepreneur to VC can be a tough one. After all when you invest in a company you aren’t going to operate it since that is what the operators/founders are there for. Operational experience will no doubt allow you to give the portfolio company solid and informed guidance but in the end you aren’t the one jumping into the day to day management.

As a VC you need to be able to asses the people, the technology and the market as well as recognize patterns. I would also argue that the people part is very important. A lot of top VCs agree with that sentiment including the founder of the very first institutional VC fund, Georges Doriot, who always said that a Grade A person with a Grade B idea will win over the Grade B person with the Grade A idea any day of the week. I subscribe to that completely. As with most things it always comes down to the people.

I would love to get my hands on some data in 5 - 10 years to see how well the “entrepreneur VCs” did compared to the folks who haven’t operated. With the current trend being to turn successful entrepreneurs into VC I think there will be some interesting data to look at (Noam - how about this for a subject matter on the next paper we team up to write?). It would be nice to have some hard numbers to back-up the anecdotal evidence Rivlin brings up in his article like this snippet:

“Most of us learned the hard way that venture investing is best left to the professionals,” said Marc Andreessen, the co-founder of Netscape Communications.

Shortly after America Online paid $4 billion to buy Netscape, Mr. Andreessen helped bankroll a venture firm called 12 Entrepreneuring, a short-lived partnership forged in early 2000 by Benchmark and a pair of successful Internet entrepreneurs, Halsey M. Minor and Eric Greenberg. But 12 Entrepreneuring ceased operations only 18 months after it started, and the partners, including Mr. Andreessen, lost nearly two-thirds of the money they had invested.

Of course that is only one case and I should point out that there are a number of great entrepreneur-cum-VCs around like Brad Feld. The point I am making is simply that success any given related thing - whether it be entrepreneurship or something else - doesn’t mean you will be a great VC.

“I think what a lot of these guys [i.e. people who jumped into VC in the late 90s] learned, some the hard way, is that you’re a natural athlete or you’re not,” said Sanford Robertson, the co-founder and former chairman of the investment bank Robertson, Stephens & Company, who has been investing in venture funds for more than 20 years. “Some can do it, and some can’t, and like with athletes there’s no way of telling until they take the field.”

It looks like you either get it or you don’t. It is a natural ability to asses people and their technology/business. Wow, for someone new to the business that’s a pretty interesting - and heavy - tidbit. I’d like to think I have a good (albeit naive at this point) sense for this business but time will tell.

I will leave you with a tidbit about the background of one of the most famous VCs in the world, Mike Moritz. Moritz proves there is no obvious background for a great VC. He was a business journalist and writer for Time before he joined Sequoia in 1986 (although he did hold an M.B.A.).

Side note: I have been meaning to put up my personal reflections on my first few months in VC. Those are coming soon. Stay tuned.

Written by Eric Olson

May 20th, 2008 at 5:39 pm

Posted in VC

iVentures10: Starting up in Illinois

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iVentures10As programs like Y Combinator and TechStars gained popularity I started to wonder why something along the lines of those programs didn’t exist here in Illinois. After all the modern web was pretty much born at the University of Illinois at Urbana-Champaign (mosaic/netscape, apache, etc.) and other notable web superstars like PayPal and YouTube have come from the minds of U of I grads. Well, I didn’t have to think about this idea for long…

Enter the iVentures10 program. iVentures10 is a program created by Illinois VENTURES initially as a “new kind of internship” for U of I computer science students. However, they recently announced a partnership with Mozilla along with their intention to take applications from around the world.

I think this is a fantastic thing for tech entrepreneurs based here in Illinois and a great way to get others that aren’t based here to spend a summer here in Illinois building their companies. Hopefully we can all show them such a good time they won’t want to leave! Keeping our tech talent here in the state is crucial to Illinois becoming the tech center it deserves to be and this program will clearly help with that effort.

You can learn more about the iVentures10 program on their site and if you think you want to submit an application make sure to get it together soon. The final day to submit applications is May 15th.

Side note: You can also learn more about the iVentures10 program at the next TECH cocktail mixer on May 29th. The team will be at the event along with some of the folks who have been accepted into the program.

Written by Eric Olson

May 1st, 2008 at 10:21 am

Posted in Business, Chicago, Technology, VC