Transcript of "January 2012 creating value in entreprenurial venture capital"
CREATING VALUE IN ENTREPRENURIAL VENTURE CAPITALDIGITAL TUNISIA AND ENVIRONMENTAL INNOVATIONS IN AMSTERDAMJim de WildeJanuary 2012www.jimdewilde.netwww.twitter.com/jimdewildeAt this moment, we are reinventing capitalism and global capital markets. Thetheories are everywhere, the stale political debates about austerity versus stimulus,the B-Schools grappling with what models to teach finance.The first thing that needs to be done is to sweep away all the archaic businessmodels. Realeconomik is as valuable as realpolitik and that is why so many peopleare turning away from academically certified economics. Any business modelworks when the economy is growing at 20% a year and few work when it is at -2%.The business model for success in 1997 Jakarta or 2012 Equatorial Guinea is cronycapitalism.The power of this new realism(reinforced by a dose of Schumpeter) is that we arenow living in a world where value creation will be valued. That is what I meanwhen I say that we are all venture capitalists now, involved in the direct creation ofwealth, linking entrepreneurs to capital through microfinance, VC4Africa and theexpansion of Silicon Valley models to Digital Nashville, Digital Tunis and DigitalChennai. While I long have argued that Silicon Valley is not replicable as aneconomic design, the metaphor is one about a capital market where entrepreneurscreate growth.This does not mean that traditional investment banking, at least that practices bythe Carl Icahns and the Ted Forstmanns has no value. It is just that it will berecalibrated to be proportionate to wealth creation. In the 1990-2008 period,wealth creation and value creation became separated and value creation and jobcreation have long been disconnected.Economic growth comes from a mixture of disciplined and patient capital marketswith an ecosystem that rewards and provides incentives to innovators andentrepreneurs. If we know that, why has it proven to be so difficult to create thismodel in the mature industrial societies of the G8 countries?The answer to that question is at one level obvious: the old always tries to delay theonset of the new. Healthcare innovations, which will create trillions ofdollars/euros/yens of new value, are disruptive to existing organizational modelswith their networks of status, convenience, organizational loyalties and life-simplifying repetitive habits. U.S. capital markets are in a constant tensionbetween models which create new values (Silicon Valley) and models, whichprovide enormous incentives for wealth management and wealth preservation
(Wall Street). The same is true of Canadian and European realities although lessstarkly drawn.Venture capital is all about the creation of new value and the search for ecosystemswhich connect technologies ready for commercialization with teams ofentrepreneurial managers who can realize this value. There is a global search forformulas which create competitive advantage in venture capital, but the taskremains relatively simple in concept and enormously challenging in execution.There are three things which are necessary conditions for entrepreneurial economicgrowth: (1) A talent pool around a university (the mill-wheel of the ecosystemgenerating thousands of new high talent individuals annually). This is why Stanford, Waterloo, Helsinki University of Technology, Cambridge has proven to be such fertile epicenters for entrepreneurial venture capital.Daniel Isenberg of Babson writes in the ECONOMIST on the development of this kind of ecosystem. (2) A venture capital community that is linked to global best practices in the development of new industries. One can back an entrepreneur to build a bowling alley without being a “venture capitalist” in my definition. A shrewd investor understands that a bowling alley is a mixture of real estate skills, entertainment and retail service management expertise. In investing $250,000 in a bowling alley, the shrewd investor assesses the dedication of the management team, the reality of the location-based competitive advantage and the coherence of the business plan. This is not venture capital as any new value; product, system or service has been invented and commercialized. A venture capital firm is defined by its global reach, its professionalism and as such is analogous to a university engineering department or a symphony orchestra. One can build a bridge or hum Brahms but to succeed, one knows who the best symphony conductors and most creative structural engineers are. It is amazing how often this point is omitted fromdiscussions if venturecapital. (3) There has to be a success mix in the ecosystem. In Montreal, entrepreneurs can see how an inventor-entrepreneur with access to a world-leading engineering school could create Bombardier out of a company that started off putting small motors on skis. In Indianapolis, one can see how agriculturalchemistrycan be commercialized into multibillion products at Eli Lilly. We overuse the word ecosystem, but it is an accurate metaphor for the preconditions for success in modern venture capital.As we start 2012, the urgency of venture capital is obvious to anyone examining theglobal economy. The philosophy of the moment (weltanschauung) is one of
entrepreneurially led development: a billion entrepreneurs in India and China, thelinking of venture capital to Africans in VC4 Africa and Timbuktu Chronicles, andcloser to home, the rhetorical certainty that an economic speech will discuss theneed for new entrepreneurs.A profitable bowling alley is an accomplishment in itself. I in no way denigrate it,but like all service activities, it requires other wealth creators for it to work. Tiredauto workers relaxing after a shift will pay money for a bowling alley or a TimHorton’s double, but their ability to pay for it depends on a wealth creating job or astake in a wealth creating sector.The next generation of value creation in a global economy looking for its mooringswill come from organized networks of commercialization seeking acquisition of newtalent. The model by which a Google or an Eli Lilly or a Dow Chemicals renews itselfby acquiring a startup company is proving to be a viable one in the global economy.The discussion of venture capital is confused by the U.S. experience of IPO drivenexits that were characteristic of a moment in time where public capital markets hadexcess capital and could provide expansion capital and acquisition capital topromising startups.That reality may exist today as Groupon is capitalized not based on its currentearnings, but based on an assessment of its management team’s potential to build aviable company at a key corner of the digital architecture. Just as EBay became adominant player in auction and Google in search, a similar calculation is being madeabout Groupon (local trading arbitrate models) and LinkedIn (commercializingsocial networks). This changes venture capital calculations as shrewd venturecapitalist contemplate building to sell to…Google or Merck or Monsanto or Eli Lillyor now Groupon or LinkedIn. This is particularly important for Canadianentrepreneurs as we try to design business models that will have a successful exit inthe way in which the global economy expands. There are any $250,000,000 nichesthat will not be occupied by Groupon or Google.With this in mind, the global venture capital scene enters 2012 with some incrediblyrapidly growing areas, looking for the right business models and management teamsfor the next generation of growth. Let me provide five thoughts for the beginningof this course, obviously not meant to be exclusive, but “promising leads” forinvestment philosophies. If you have looked at my website you see that I am atleast consistent in the core areas:(a) We are globalizing the digital architecture creating venture capital opportunitiesfrom Tunisia to Vietnam.(b) Canadian venture capital has been very creative in categories other than SiliconValley as alternative energy; environmental technologies, water industries andbioremediation to materials science become major venture capital categories;
(c) Social media is real and the social media generated content category is an areawhere Canada has “no competitive disadvantage”.With that, here are five (among many) trends for 2012:(1) Food production will drive global capital markets for the next decade in the wayenergy did in the 1980s and 1990s. Innovation in all areas of food (profitable useof arable land, preservative technologies, packaging innovations, cultivation of newfood sources) will revolutionize capital market thinking as Chinese, Indian and Arabinvestors determine a different set of priorities for their investment portfolios andG8 investors become more conscious of the environmental risks of the current foodproduction model. There are several new investment models reflecting this newtrend. New Seed Advisors is an excellent and high profile example of these newtrends.(2) Education is redesigned. The Khan Academy is one example of many, but wellknown and critically acclaimed . Some venture funds position themselves to bepoised for this disruption but as content, education,gaming and entertainmentcreate a complex new Venn diagram, the likelihood is that this will be even moredisruptive than we have previously imagined. For the beginning of this see some ofthe work being done at MIT’s Media Lab: http://web.mit.edu/press/2011/mit-launches-new-center-for-mobile-learning.htmland the Center for 21st Universities atGeorgia Tech http://www.cc.gatech.edu/research/21stcenturyuniversities.(3) The commercialization of technologies requires a whole new business model.For years, a Europeanventure capitalist and I have been advocating a50TECHNOLOGIES.COM concept for focusing on developing a commercializationprocess in areas, which are not as hot as data storage or industrial biotechnology.For practicalpurposes, we need to invent new investment models, specializedventure firms with a capacity to work with global scientific researchers to bring tomarket new ideas in everything from acoustical engineering to marine ecology.We are creating new technologies with commercial applications and yet the processof commercializing new technologies remains haphazard. We either rely oncorporations to do this (Bausch becomes the instrument for commercializingophthalmology) or we expect venture capita firms that are concentrating on mobileapplications of alternative energy to broaden into other areas. The MIT Technologyreview remains the source to be followed and Boston area VCs have taken the leadin a number of these areas, which are off the radar, e.g. biofuels where an earlierMIT Technology Review Innovator of the year became, a venture partner. Thisyear’s TR 10 can be found at http://www.technologyreview.com/tr10/. Anotherperspective on new technologies comes from the Electronic News.http://www.eetimes.com/electronics-news/4231126/EE-Times--20-hot-technologies-for-2012.(4) Social media generated content will change a number of markets, including howwe spend our entertainment dollars. This trend has already started to take place
but we still aren’t sure about the business models. See for example the excellentanalysis by Ross Garland in the Wall Street Journal:http://blogs.wsj.com/venturecapital/2011/02/18/social-media-genomics-driving-data-tsunami/.(5) We will need new technologies to sort through and present the data, which will becollected as crowdsourcing, and remote sensing makes more data available than wehave ever imagined. The world of data crunching will develop different businessmodels, transforming healthcare among other sectors. The aggregation of data willchange. I am a believer that crowdsourcing will be disruptive in many ways: anti-corruption efforts that aggregate recorded patterns of corruption, epidemiologicaldata that leads to best practices health care. Data analytics is going to putunimagined demands on the existing system leading to information designcompanies, which simplify the presentation of large pools of data and theinvestment in companies like Kaggle. For a sense of the scale of the venture capitalactivities in this space:http://gigaom.com/cleantech/5-companies-using-big-data-to-help-the-planet/,http://www.nytimes.com/2011/12/01/business/dna-sequencing-caught-in-deluge-of-data.html?pagewanted=alWe are living through a technological revolution and a global economic realignmentsimultaneously. It is exhilarating, terrifying, motivating and an opportunity to doenormous good while creating commercial value. Crowdsourcing means thatcorruption can be eliminated if large data tracks patterns of abuse in rural Nigeria.Google maps means that illegal foresting cannot be hidden and if some does manageto hit the market genetic barcodes can track illegally harvested products. Ofcourse, this wonderful world cannot happen without a political system that ensuresthat Orwellian abuse does not become the post-technological norm.The point for venture capitalists is that new areas of value creation are increasing,not decreasing. The point is also that sources of capital are increasing, just comingfrom new places. The business models of the past will be replaced by new businessmodel. Social media will replace some institutional investors and people will (howradical is this?) be rewarded by what they build as opposed to how much moneythey can raise from existingnetworks.When there is this much change, the skills of best practices venture capitalistsbecome more in demand than ever, which is why we do what we do,