Information Arbitrage

Deal Syndication in Micro VC Land

Wed, 28 Jul 2010 07:55:22 -0400

As part of my transition from angel to VC, one of the issues I’ve had to grapple with is that of syndicate construction. I have always been a huge proponent of syndicates, seeking to get parties around the table with the best mix of domain experience, contacts and attitude to help de-risk the investment. While there are myriad ecosystem benefits to taking this approach, e.g., playing well with others, sharing good deals, it is also highly rational. My friend David Beisel just wrote an interesting piece on deal-sharing in the Micro VC space, positing that the three biggest reasons for “large and friendly Micro VC syndicates” are: (1) being capital constrained; (2) as a vehicle for deal sourcing; and (3) due to the immaturity of the asset class. While I believe these reasons to largely be true, they don’t address perhaps the most important element of syndicate-building: the tactics around syndicate construction. To lead or to follow? When and how to build a syndicate? How do you work with the company on syndicate construction? How a Micro VC, or a VC, for that matter, deals with these questions can often determine the level at which an investor can play in a deal - if at all.

In general, I view the syndicate construction question in much the same way as I view the management of an early-stage company: one lead founder is fine; equal co-founders are great, provided that one is the CEO; more than two co-founders without a clear understanding of who is the CEO is bad. While there are exceptions to this rule I find it holds in most cases, and provides an accurate metaphor for how a Micro VC should view syndicate construction. I believe every deal benefits from a lead. Ambiguity around this issue can be costly, causing a firm to lose an investment opportunity because of distributed decision-making and slowness in getting a term sheet issued and signed. It is not simply a matter of capital provision but of deal leadership, serving as the primary point of contact during the deal negotiation/term sheet stage, being ultimately responsible for getting the deal done and advising management on the most value-added syndicate members. It is important for syndicate members to know their role in a deal.

I believe strongly in working closely with management to build the best syndicate. Sometimes more experienced entrepreneurs already have a wish-list of strategic angels they’d like to include in a round. This has to be respected and built into the syndicate sizing and composition discussion. One can have a reasoned discussion concerning capacity, etc., but fundamentally if an entrepreneur wants a particular investor in I am going to make room - period. Other times a first-time entrepreneur brings no investors to the table and is looking to me for guidance on building the best investor base, and that is fine, too. Either way, the entrepreneur is an essential part of the syndicate building process.

Bottom line: someone needs to own a deal. Coming to the table as a two- or three-headed syndicate beast without a clear leader is a big, big mistake. How many VCs like investing into situations where there is “management by committee?” Answer: zero. Why should syndicate-building be any different? You like the deal? Step up and issue a term sheet. You can get your BFFs in line afterward. I have played every syndicate role in my relatively short time as a VC: lead dog, strong #2 and a subordinate syndicate member. And each role is fine. Just make sure you know which role you want to play and by all means, if you want to own a deal, step up and make it happen. Otherwise, someone else will.

From Angel Investor to Venture Investor: A Process

Mon, 28 Jun 2010 23:23:00 -0400

For several years I invested exclusively for my own account. Now I manage a fund. This has given rise to a necessary change in strategy and approach to investing. I didn’t really appreciate the magnitude of the differences until I was in the middle of the transition. The net result is an investment approach and money management strategy of seed stage investing that I like a lot. Is it “right?” I don’t think there is a right answer, but it feels right to me and my partners. Will it evolve? Certainly yes, and it will change based upon dollars under management. Another important cultural and operational issue is moving into a position of fiduciary responsibility. Now I’ve run fiduciary investment vehicles before, most notably as CEO of the Registered Investment Adviser DB Advisors, so I am familiar with the nature and magnitude of the responsibility. But it is a change of which newbie fund managers should take note. While every angel starting a fund has to wrestle with these transitional issues themselves, hopefully by sharing a bit of my story it will both create a dialogue around optimal investment approach and be useful for those starting their own funds.

My life as an angel - smooth sailing

Prior to starting a fund, I had been an active angel investor and entrepreneur for over five years. I had seeded or incubated 40 businesses, established my presence as an active blogger, Tweeter and online denizen, and deployed a significant amount of personal capital in building a new career and life. I focused my investing in verticals I understood, where I perceived there to be plentiful and attractive investment opportunities, and where I felt my domain knowledge and suite of relationships would be most helpful in building businesses: digital media, advertising technology and financial technology. Notwithstanding my angel status, I felt as if I invested and was perceived as a sort of “mini-institution,” bringing capital, energy, engagement, relationships and know-how more akin to what I perceived a real venture capitalist to be. I prosecuted my strategy with initial check sizes ranged from $25k to $100k, with a median of $100k. I would generally take advantage of my pro rata rights where possible, and had cumulative investments of up to $250k in the companies with which I was most actively involved.

From angel to institution - doh!

However, it wasn’t until I raised a venture fund that I realized I was woefully inexperienced in areas with which I was intimately familiar during my years as a derivatives and trading professional - asset allocation, optimal bet size and bet types. As an individual I was focused principally on one thing - doing great deals in my areas of focus whenever they presented themselves - and it worked pretty well. Sure, I was conscious of investing in verticals I understood well and in which I perceived I had a competitive advantage. And I always invested with an eye towards creating ecosystems around my investment themes, enabling my companies to work together and to extract the network benefits inherent in such an approach. However, I never really thought about how many big vs. medium vs. small initial investments I should be making. I didn’t actively consider that if I was going to follow on, how much should I invest and how should I think about my long-term percentage ownership objectives. I also didn’t apply strict discipline in how I allocated my time across my investments. These shortcomings became apparent very rapidly after becoming an institution as my team was deluged with incredibly attractive investment opportunities, yet constrained by fund size and our lack of a detailed approach to capital and resource allocation. We intuitively knew the issues we needed to address, but at the beginning lacked the experience and data to develop a granular philosophy and approach to money management. Thankfully, this has changed.

The IA Ventures Approach to Investing

The first order of business was to take our core “Big Data” mission and to convert this into investment criteria. We spent a lot of time articulating the Big Data value stack as we see it on our website, and this was a healthy process for codifying our investment approach. At the end of the day we decided on three basic investment criteria:

Investment Criteria

Mission: We will invest in and incubate early-stage companies building tools and technologies to manage or extract value from Big Data. Companies focused on “extraction” are generally shorter-term plays. Firms focused on “management” tend to be longer-term plays. We will not stray from our mission.
People: We have to love the entrepreneur(s) to do the deal. Period.
Space: One of the IA Ventures’ partners has to be deeply passionate and excited about the space to do the deal.

Given these criteria, the question then becomes which kinds of bets to make and how many of them can be made given the firm’s capital base and the ability and desire to follow on. After considering our investment philosophy (heavy alpha generation leveraging our specialized skill sets, experiences and industry contacts across a more concentrated portfolio), we bucketed our bet types and are constructing our portfolio in the following manner:

Portfolio Construction

Concentrated bets: (~75% of capital; initial check up to $1mm; 2x reserve; 8-10 companies). This is the core of our portfolio. We will lead or co-lead the round, take a board seat and invest a significant amount of time per month helping with business development, recruiting, etc. These are investments where we believe our domain expertise, technology know-how and business development relationships make our money better than other investors’ money. Even so, we always take a syndicate-based approach to investing, working with top firms and individuals to create the strongest and most strategic investment group possible. We expect a single concentrated bet to return a significant share of the fund’s committed capital. Examples of concentrated bets in the current IA Ventures portfolio are MetaMarkets and The Trade Desk.

Opportunistic bets: (~20% of capital; initial check between $100-$250k; 1x reserve; 10-15 companies). These are companies that fit with the mission of the fund and where we love the entrepreneurs, but where we either don’t have sufficient investment capacity or don’t want the depth of involvement required by a concentrated bet. We don’t take board seats and take a “lightweight” approach to helping out, e.g., leveraging our networks for business development opportunities, recruiting, etc., but not on the heavy lifting required of board-level engagement. We might want to get close to the entrepreneur because this will be the first of many companies they found. We could be particularly interested in the company’s technology or area of focus, and view investment as strategic to the fund. And we always look for a bet to generate an attractive ROI and diversify our overall risk. Regardless, we see so many attractive deals that fit within the fund’s mission that we want the flexibility to do a larger number of smaller investments when particularly attractive opportunities present themselves. Examples of opportunistic bets include CrowdSpot and FluidInfo.

Incubation bets: (~5% of capital; milestone-based financing of up to $500k; 3 companies). Occasionally we run into outstanding talent with ideas that need nurturing, but also need help with building out the operational infrastructure associated with the idea, helping to identify key early employees and require only a modest amount of capital to achieve critical technical and product milestones. These are companies where IA Ventures is able to own a significant share of the company in exchange for a ton of work and some capital. It is expected that a single successful incubation bet could return a multiple of the firm’s total committed capital. An example of an incubation bet is TraceVector. From an investment perspective, the hope is that these ventures migrate from incubations to concentrated bets over time.

Larger incubation bets require the companies to be domiciled in New York City; the high-touch nature of these relationships cannot be supported remotely. If I run a larger fund after this one, I could see having some in-house incubation space in order to both support our companies and to extract the network effects of being around other smart, early-stage business builders. We are also exploring doing smaller project-oriented “explorations,” where a super smart entrepreneur working at a company has a relevant Big Data idea and wants to leave to pursue it single-mindedly. These deals would be in the $50-$75k range for a small piece of the company, enough for the entrepreneur to quit and to work full-time on their idea for 6-9 months. These are opportunities driven largely by personal relationship, where someone within our network is ready to make the move and we are “jonny-on-the-spot” to provide the early risk capital and support to the venture. Kind of like a seminar-of-one version of YCombinator/TechStars/SeedStart. Call it the IA Ventures Way.

In short, IA Ventures is seeking to most efficiently deploy its capital for the benefit of its LPs. This means not only investing in deals but building a real business, one which is well-known and respected for the value it drives to entrepreneurs and their businesses. It is this awareness and respect which creates the virtuous cycle of seeing great deals, having the opportunity to work with great business builders, helping them exit profitably and further reinforcing the reputation of being smart, supportive investors and partners. It also means playing an important role in the seed stage venture ecosystem, bringing together thought leaders and practitioners to help solve big, important problems of today. While IA Ventures is a small firm we take our roles and responsibilities very seriously, and strive to have an impact on business development, job creation and wealth building that far outstrips our modest capital base. This is how we roll.

[Addendum 6/29/2010 - What I gave up by becoming a fund manager]

During a breakfast meeting with my friend and High Peaks Capital VC Brad Svrluga it became clear that I had neglected to discuss a key aspect of my transition: what I’ve lost by becoming a very focused, thematic venture investor. Prior to the fund, I could invest in any deal that made sense to me. While I imposed a measure of vertical discipline on my angel investing activities, I had a far broader mandate than I do now as a fund manager focused on Big Data tools and technologies. I have extensive personal investments in social media, many of which would have been a “no go” for my fund but which fit my angel investment approach. Have I seen many of these deals go by that are getting done by friends and colleagues with broader investment mandates? Absolutely. And it is a bummer not being able to do them. However, I have unwavering passion and conviction for my fund’s area of focus, and feel that notwithstanding the give-up of flexibility it was a trade well worth making. But it is a trade that needs to be entered into eyes wide open. Being an angel and being a venture investor are not the same thing, with the only difference being a leveraged position in deals you would have done anyway. There must necessarily be a higher bar, both in terms of deal-specific thought process and due diligence and overall portfolio construction. Managing other people’s money is a big responsibility. It’s not just all about fees and carry.

Constructive Dialogue: Just Business, Not Personal

Mon, 07 Jun 2010 05:53:00 -0400

I have been an online denizen for some time, and have engaged in countless online debates both on this blog and elsewhere. At time those debates get pretty heated, as reasonable but opinionated people can disagree but do so with passion and intensity. Sometimes language can become snarky and sarcastic, as emotion and reason mix in an interesting and often entertaining brew. But when these dialogues devolve into personal attacks, where assumptions are made about people’s motives and character, the value of the entire discussion thread drops precipitously. And this is a shame, because often a lot of excellent thought is missed in the wake of judgment and hostility. And the online age has sharply increased the incidence of this kind of messaging, as the depersonalized nature of sending a comment into the ether has made it perilously easy to communicate things you’d never bring yourself to say to someone’s face. Yet this should be the check for whether something should be written as well.

While the catalyst for my message are the blog entries and tweets of Chris Dixon and Jim Robinson, this is an issue I’ve been thinking about for a long time. It’s just that Chris and Jim’s interaction, given the fact that I know them both and many of the others who have taken a stance in the carried interest taxation debate (e.g., @fredwilson, @bussgang, @pkedrosky), has made it much more real and personal. Chris and Jim are two exceptionally smart guys with strongly-held views. As it relates to the carried interest debate, they happen to be on opposite sides of the issue. Big deal; the often-snarky Mr. Kedrosky has more than a few times roasted me on issues where he and I disagree. And I have tossed it right back at him. But those exchanges are focused on the issues, not on either of our characters, motivations or integrity. Based upon Chris’s tweets in response to Jim’s strong but reasoned blog post, it is clear that he doesn’t know the Jim Robinson I know. No matter, the criterion for engaging in spirited but respectful debate should not be whether or not someone knows the commenter.

It should be that basic respect is afforded anyone who enters the debate in a respectful manner. Jim’s language is strong but not personal. It addresses Chris’s views and others who have staked out a similar position. But Chris’s response to Jim’s post was highly personal, not to mention uninformed. In my opinion it crossed the line and, in fact, much of the thread of “good versus evil” that has been taken up in this debate is neither intelligent nor helpful towards getting to a better perspective on the issues. Believe me, I understand the technique of “shock value” and taking a bold, hard-line stance. But to paint everyone who happens not to specifically agree with you as somehow morally bankrupt is absurd.

In other words, I am not arguing for a world where debates become some form of sanitized drivel. I am arguing for an approach where people can use colorful language to express their views with passion and intensity but with respect and in a de-personalized manner. I think people entering the fray need to take a deep breath, pause and consider their words before launching them onto Twitter, blogs or other forms of social media. Would you say these words to the person’s face? Would you want to be dealt with in this manner? If the answer is yes, then let it rip. If not, then resist the urge and re-cast the message. There are so many smart people with so much good stuff to say. It is shameful when so much good content is lost to poor form.

Seeding a Start-up Culture

Mon, 10 May 2010 19:27:00 -0400

About a week ago, James Kwak penned a very thoughtful post titled Why Do Harvard Kids Head to Wall Street? He provided a series of perfectly rational reasons as to why this happens, e.g., the job is billed as a good launch-pad for the future, recruiters make it easy, the money, etc. Whether he has all the right reasons is neither here nor there: he is asking the wrong question. The right question is: how do you lure the best and brightest into game-changing areas such as start-ups and social enterprises that can effect hundreds of millions of people or more?

One of the issues with making it easy to get into start-ups and similar enterprises is that persistence, focus and energy are often good screens for success in these fields. If you make things too easy it can lead to adverse selection. However, there are many things that can be done to change the calculus, some of which are already being done in Silicon Valley and Boston but less so in New York City. I know several venture capitalists in the Bay area who teach at Stanford and Berkeley, in the Business school as well as the Computer Science (CS) and Electrical Engineering (EE) departments. They use their positions as vehicles for identifying top students, building relationships that ultimately result in ideas getting funded or students placed in promising start-ups. The students are steeped in not only start-up lore, but myriad perspectives on the challenges and opportunities of start-ups as told by experienced Founder/CEOs. I can assure you that these discussions are a lot more interesting, colorful and compelling than presentations on the worlds of Wall Street or consultancy. My friends Larry Lenihan at FirstMark and Ed Zimmerman of Lowenstein Sandler both do this. They are not enough. And we need more technical lecturers as well.

The venture capital and start-up industries need to do a much better job selling, serving to funnel desirable candidates on the basis of excitement, impact and long-term rewards as opposed to (perceived) stability, basic training and short-term cash. Yes, it would be great if NYC’s great universities did a better job of this at an institutional level, but I’m not suggesting we wait around for sclerotic bureaucracies to change. I’m talking about a grass-roots effort on the part of local venture investors and successful start-up executives to get into the classrooms and onto campus to re-orient talented students away from the money culture and towards the building culture. Alter their utility functions through education and exposure and get them early.

I think many equate start-up enterprises with uncertainty and fear, and only appropriate for those with massive risk tolerances. This is bad marketing, plain and simple. Yes, doing a pre-revenue start-up is gut-wrenching, all encompassing and horrifying at times, but it is also mind-bogglingly stimulating, exciting and requiring all of a young person’s skills and abilities. There is not a job on Wall Street or at a top consulting firm that gives a young technologist or business person the exposure and responsibility of a start-up, even one that has received venture investment. There are early-stage companies all along the risk continuum, any of which can offer up great experiences for the right people. And every student that goes into these companies or or starts their own is part of creating something, and contributing to the engine of growth that can help the US and other Western nations fight against the weight of their aging populations and economic malaise. And the skills obtained while working at a start-up are applicable to a wide range of future opportunities, whether at another start-up, one’s own start-up or more established enterprises.

And once the ball gets rolling it becomes a virtuous cycle, with this enlarged crop of entrepreneurs and start-up athletes having an increasing number of successes, and subsequently investing in others start-ups and their own new businesses. This is part of what has made the SF/Silicon Valley community so vibrant, the recycling of capital from successful entrepreneurs into the businesses of others as well as their own. And so it goes…

But it is hard to escape the fact that education and re-orientation has to start in the universities. Because by the time these talented students get seduced by the fancy conference rooms and the cash, it is difficult to bring them back. And each year a talented student gives to old-line money businesses is a year taken away from building something truly great and seeding the start-up culture. Is changing culture easy? No. Can it be done with the work of all interested constituencies - universities, Governments, venture firms and start-up businesses? Absolutely. Let’s get to it.

Bond Analytics: Taking an Open Souce Approach

Tue, 04 May 2010 07:13:00 -0400

Much has been written about what’s wrong with the rating agencies: structural conflicts-of-interest; intellectually over-matched; lacking in creativity and orthogonal thinking. Some believe the rating agency industry as we know it is on death row. To be honest, I tend to agree. Attempts at resuscitation are unlikely to yield the material changes required. The biggest problem: lack of transparency and insight into the multi-trillion dollar debt market. Much as the OTC derivatives market needs an overhaul, the opaque corners of the debt market need to move out of the shadows as well.

One of the unique aspects of the debt market is its mind-numbing diversity and dimensionality: maturity, amortization, optionality, collateral, seniority, etc. A “one size fits all” approach simply does not work for the bond market, and it is questionable as to whether a single entity has the intellectual horsepower and access to the resources necessary to effectively and efficiently analyze its range of securities. Large, seemingly intractable software problems have benefited from the massive collaboration available through the open source movement. This has been an effective method for not only addressing a core problem, but for keeping up-to-date and relevant as technology evolves. It has also been a vehicle for value-added service providers to build on top of these solutions (e.g. Red Hat/Linux, Lucid Imagination/Lucene, etc.) for specific use cases, providing needed service levels and documentation, etc. While not a panacea, the open source movement has effectively harnessed the world’s intellectual capital and applied it to big problems relevant to a broad array of constituencies.

If an open source approach has worked so well in software, why not apply it to the ratings problem? Whether or not ratings should be required for institutional investors to buy certain securities is not the issue; the essential point is getting better transparency into and analysis of instruments constituting the investable universe. Imagine a university or a large institutional investor seeding the open source initiative by putting their own debt ratings models into the public domain and allowing others to contribute to its development. I can see a suite of open source libraries by type of instrument, with a new industry emerging to deliver additional analytics, data and recommendations on top of these libraries. There would need to be a Wikipedia-type board of curators, ensuring that additions to the libraries are sensible and increase the stock of intellectual capital. But I can’t see why such an approach wouldn’t address the biggest problems facing the ratings industry today.

Combining bond analysis and the open source movement could deliver:

Transparency;
Unbiased input;
Access to a global talent pool;
Opportunities for specialized applications to be delivered in tandem; and
Institutional-grade analytics and research available to all.

I haven’t seen or heard of a better solution to the problem, and the problem certainly isn’t going away. If we as a financial community are committed to such an approach, it is bound to be successful. Let’s give it a shot.

Regulation vs. Retribution

Wed, 28 Apr 2010 18:43:00 -0400

The United States Congress, at the urging of our President, is in the midst of passing a “comprehensive” package of financial reforms in response to the recent financial crisis. Both the Executive Branch and Congressional Majority leaders have specifically stated that these tough regulations should be enacted, bipartisanship be damned. Democratic leaders sense a window of opportunity to play upon public anger and fear in order to roll back the clock on Wall Street and the financial innovations of the past 30 years. The problem is, however, that lost in the discussion is an honest accounting of who and what precipitated the financial crisis, the underlying motivations for the proposed regulations and a reasoned analysis of the structure of Wall Street by people who actually know what they are talking about. And because of this opacity and dishonesty, the desire to leverage populist rhetoric into votes and a fundamental lack of understanding of how Wall Street and capital formation works, we will likely get a package of regulations that will hurt the US and the global economy fall more than they will help. And this would be a shame, because it will reflect the loss of a golden opportunity to do something truly positive.

The financial crisis was merely the tail-end of a daisy-chain of events seeded by two policy disasters: (1) the Greenspan-led credit bubble; and (2) Congressional approval of a multi-trillion dollar expansion of Fannie Mae and Freddie Mac’s balance sheets (GSEs) and the resulting diminution of underwriting standards. This was neither caused by CDOs and other derivative securities nor the existence of Wall Street proprietary trading desks. As all manner of entities lined up to take advantage of the Federal Reserve’s and Congress’s largess - mortgage brokers, borrowers, banks, structured finance operations, derivatives desks and rating agencies - fraud, deceit and poor risk management emerged in its wake. A breakdown of conduct on this scale and associated conflicts-of-interest were enabled by poor rules and regulations as promulgated by the Financial Accounting Standard Board (FASB), the SEC and Congress. I would posit that this was due to a lack of understanding of the forces at work coupled with the influence of lobbyists, greed and self-interest. Nobody looks good coming out of the crisis and hundreds of billions of dollars were lost, so in our media and PR-driven society somebody has to pay - now. But the last thing Congress and the President should be doing is agitating for change without truly understanding its impacts, and focusing on payback instead of fundamentally reforming elements of the system that are truly broken. I am deeply concerned that this is exactly what they are doing.

Given the severe flaws in macroeconomic policy underpinning the crisis, the outcome was not surprising. But as we look at th subsequent chain of events what might have dampened the magnitude of the crisis? I see four core principles that, if they had been in place prior to the crisis, could have materially altered the outcome: (1) financial markets transparency; (2) enhanced accounting disclosures; (3) clear and punitive rules against conflicts-of-interest and (4) elimination of the US Government as a perceived back-stop for creditors.

Transparency should be the cornerstone of any discussion around legislation. Proposals agitating for banks to shut down or spin-off their swap operations are nonsensical and destructive. When used properly and with adequate collateral to handle changes in mark-to-market value, they are powerful tools for risk management and speculation to support efficient, two-sided markets. Moving the lion’s share of over-the-counter derivatives volume to exchanges will substantially enhance the transparency around market pricing, how derivatives desks make money and reduce risk of inadequate capital provision. Accounting disclosures have recently been tightened to better address off-balance sheet exposures, but still fall woefully short in areas such as fair value accounting. Conflicts-of-interest are still embedded in many aspects of our system; it is incomprehensible that rating agencies still retain their position considering their pivotal role in the credit markets crisis. Not smart enough to understand the possible impacts of highly structured instruments? Then they shouldn’t slap on a rating. The excuses provided for their miserable performance are divorced from reality: they were greedy, and they did what they had to in order to maximize short-term profits. Case closed. Open-sourcing credit ratings is likely the right avenue for dealing with this particular conflict, but many other conflicts remain. And until the US Government is no longer perceived as 100% certain to bail out the creditors of complex financial institutions, we will see a repeat of 2008 again and again. Could the answer be a tax based upon the complexity, scale and risk of a bank’s operations, rather than an open checkbook provided by the US taxpayer? Perhaps, provided that such rules were applied globally and in conjunction with regulators of the other major financial centers. This would also help address the “Too Big To Fail” issue, as super-sized institutions would pay out-sized taxes because of the risk they pose to the global financial system. But one thing is certain: without elimination of the implicit US Government guarantee, private and public/private (GSEs) institutions will revisit the sins of the past decade without adopting fundamental change.

I penned a little-read post back in November 2007 where I touched on certain of these issues; my fundamental views have not changed much over the past two and a half years. It is almost as if the aftermath of the crisis has turned into a soap opera; painfully slow-moving and not particularly entertaining. And the way things are looking, the outcome might be of similar quality to what is being served on daytime TV.

For the Good of the NYC Venture Scene I'd like to see...

Tue, 20 Apr 2010 13:35:00 -0400

…some chunky IPOs of NYC born-and-bred companies - Everyday Health, Gilt Group, TheLadders and others in or approaching the $100 million revenue club. NYC has spawned some great companies; it is time for the world to see them on stage and get to participate in their future growth.

…Foursquare to sell out (to Yahoo, Google, I don’t care) for $100 million-plus. What a huge success story to put in the bank for the NYC venture ecosystem when exits of this magnitude are few and far between.

…some successful NYC-based serial entrepreneurs with $5 million of spare change to get super active in the angel investor ecosystem. Smart angels finance smart ideas, create jobs and lay the foundation for subsequent funding rounds. Silicon Valley/SF has probably 20x the number of “scale” super-angels as NYC. More of these people will help turbocharge the creation of a vibrant, self-sustaining NYC venture community.

…the NYC area schools to get serious about entrepreneurship. Foster a culture of entrepreneurship within the Engineering and Computer Science programs. Get professors out into the real world, not of research but of commerce and creativity. Turn professors into feeders of great talent into NYC-based start-ups. Look at Stanford. They do it right. A little benchmarking and emulation wouldn’t hurt.

…more early-stage funds started in NYC. You can count the number of early-stage firms in this town practically on two hands. Not enough capital, not enough mentoring, not enough cross-fertilization. The early-stage ecosystem is developing with firms working together more and more, but we are in the first inning of a nine inning game. Greater collaboration. Greater communication. More capital required.

…tax policy support, not restrict, investment in early-stage businesses. Also, policies and programs need to be better communicated in order that start-ups can avail themselves of the benefits. Navigating NYC is neither easy nor cheap, and it is an impediment to starting a company here. Given its natural resources, e.g., home to seven of the largest industries on the planet, NYC should be a magnet for start-ups. Smart policy changes can help.

…a more vibrant hacker culture, where a few people, an Amazon account and some pizza and beer money can get a prototype built in a matter of weeks. It still feels like this town has a fear of failure. We need to embrace failing the right way as a badge of honor and praise pivoting into something more relevant and powerful as a natural part of the entrepreneur’s evolution.

…general adoption of clean, non-participating preferred term sheets with commercially reasonable protective provisions. The West Coast has had this right for quite some time, and NYC is getting there. But we need to fully get there in order to attract the smartest entrepreneurs and the best deals.

…less chest bumping and rhetoric and more results. There is a lot to be proud of, but until we see a spate of successful scale exits lingering doubts will remain. Put up or shut up. NYC will indeed put up; of that I am highly confident. But in the meantime, let’s just do good work, stay humble and kick ass.

U.S. Congress: Mandatory Training Required

Fri, 16 Apr 2010 13:32:00 -0400

This has been a week full of cloudy events: Icelandic ash, the Greek bail-out and the Goldman CDO lawsuit, to name a few. Notwithstanding the “transparency imperative” in the wake of the financial markets meltdown, we are still mired in opacity. Gillian Tett of the FT shared similar sentiments in today’s column. Readers of this blog are well aware of my views on transparency in every aspect of the financial markets: financial reporting, risk management and trading. Yet transparency remains a stubborn and seemingly unattainable goal, even with the knowledge that the social and financial costs of opacity are stunningly high.

Why the trouble? Easy - lobbying, money and ignorance. While transparency is couched as super-sophisticated Wall Street issue, it is fundamentally a Main Street issue. Opacity is what leads to “unexpected” crisis, the price tag of which is invariably picked up by Main Street. Fundamental reform stuck in Congress? Tell your Congresspeople to get on the stick and to represent their constituencies - not their lobbyists. Moving the lion’s share of OTC derivatives to exchanges is both an academic and pragmatic no-brainer, yet this shift is consistently stonewalled by those with huge checkbooks and contacts in Congress. I have written about fair-value accounting and how it should be used in all situations where there is neither the intent nor the ability to hold an asset to term. Not surprisingly, there has been huge push-back on this issue from the same people who want continued opacity in the OTC derivatives markets. And more complete accounting disclosures with “plain english” footnotes would also be a thrilling development, yet many corporations are none too keen to have to display all their laundry, dirty and otherwise. Common sense has not prevailed, largely because of our system of lobbying, privilege and fear of reduced campaign contributions if a powerful business interest is angered.

The costs of friction in everything from complying with our arcane tax code to complex documentation for non-standard financial transactions to extra time spent analyzing byzantine financial statements has to exceed $100 billion - per year. And this says nothing about the reduced investment due to fears over the high costs of growing businesses. Consider the recent proposal to cause venture funds with over $30 million in AUM to have to register with the SEC because of fears over systemic risk. This is nothing more than a publicity stunt by an ill-informed Congressman, but it is simply a microcosm of the bias towards posturing and grandstanding instead of substantive, common sense reform. We are in the midst of a jobless recovery, yet a Congressman is wasting time and money talking about idiotic regulation of the venture capital industry whose very lifeblood is creating the high-value jobs we need to resume a healthy growth trajectory. Why isn’t he talking about tax reform, financial transparency, or something else that really matters? Because those issues don’t make for good headlines and he probably lacks the knowledge to propose something intelligent.

Perhaps the issue is that our Congresspeople are simply ill-equipped for the job. Based upon their decision-making, it is fairly clear to me that many lack even basic knowledge of economics and finance, yet have a hand in making legislation that requires real understanding of the issues. My guess is that the lobbyists and special interests, who have a very keen understanding of the issues and what’s at stake, have a large hand in how legislation is worded. This does those of us who pay our Congresspeople and put them in office a great disservice, and it is hard to see how this will change unless people get really angry. At a minimum, incoming Congresspeople need to go to school, a finance and economics “boot camp” for starters. Classes on micro and macroeconomics. International trade. Financial markets. Corporate finance. Basic yet important stuff. Should a Congressperson really be able to cede their vote to someone more knowledgeable (e.g., that lobbyist or special interest making a campaign contribution) than they are? Clearly not.

So much of what needs to be done is just so simple. None of this is rocket science, but it does require a basic level of understanding (and a good heart, common sense and a conscience). Naysayers will mutter “What you are saying is stupid - your suggestions are unrealistic.” My response: Why?

Twitter: Optimizing Long-term Value

Tue, 13 Apr 2010 19:03:00 -0400

After Fred Wilson’s Twitter “inflection point” post and the subsequent freak-out by much of the Twitter app community, I started to think about fundamental long-term strategy and whether or not Twitter’s approach was rational. Then I remembered that in October 2008 I penned a post titled “Twitter: Monetize the Apps, not the Platform,” and had provided some early thoughts on this very point. Here is an extract from the post:

I love Twitter because of its immediacy, the “one to many” concept
and the fact that culturally, so many of those on Twitter monitor and
manage their messages with a vigilance far exceeding that of email. This
is its power at the most basic level. But when you think of creating
communities around Twitter, be they related to companies, brands,
entertainers, common interests, politics, etc., it is easy to see the
massive power that can be harnessed pretty quickly.

So what do you
need? Groups. Perhaps human-curated groups. With hierarchies and
sub-hierarchies to help people best search and discover pockets of
people they want to follow. Much as AOL, iVillage and the other major
portals did to help organize and target their massive horizontal
audiences. This easily helps new users get engaged and get busy, as they
can simply wade in and find relevant groups with a few clicks. Further,
groups are great targets for future advertising and lead generation, as
they’ve self-selected into particular areas of interest.

You also
need vertical applications. Investing. Shopping - cars, music, etc.
Travel. And on and on. With a sufficiently robust API, the developer
community can innovate in much the same way as they have for the iPhone.
Create a Twitter App Store? Maybe. But the main goal should be
providing the environment for developers to come up with great stuff
that will be used, that ultimately people will be willing to pay for.

So Twitter itself didn’t create an app store; another company has done so (oneforty, one of my portfolio companies). I also backed the “group” thesis as evidenced by my investments in Stocktwits and TLists. Tweetdeck has evolved into a social dashboard that allows streams to be separated by both origin and in customized groups. Twitter has worked hard over the past few years to enhance the stability of its infrastructure and to provide increasingly open access to its data. But Twitter’s recent acquisition of Tweetie and the launch of its ad platform puts it squarely in the middle: it is neither pure utility nor suite of applications. It’s not Linux and it’s not Red Hat; it’s kinda both. It is this straddling of two worlds that is causing the tension and confusion among the developer community. They want Twitter as utility. Twitter Management has finally taken a stand and said “Being a utility isn’t enough. We are laser focused on the user experience, and therefore will control key elements of the value stack that we perceive most impact that experience.” Clumsy insertion of ads in the tweet stream? No way. Ceding of the mobile user experience to others? Nope. All of a sudden it is as if Twitter has finally come around to a strategy for controlling and extracting value from its vast assets - its users and those who wish to reach them.

If Twitter were to have continued its role as utility, it is hard to see how it could have generated an acceptable return for its investors (and sustained itself over the long run). If, conversely, it decided to go head-to-head with the developer community on all fronts, it would have made a lot of money in the short run but stifled innovation that would have damaged its long-run prospects for value maximization. However, it has chosen likely the most difficult but most rewarding path, that of providing the functionality of a utility while also owning pieces of the application value stack. This has created a delicate balancing act with the developer community that will take time to play out, and will require far better communication with the community than it has had to date. But when the dust settles Twitter will control the most valuable engine of monetization - mobile advertising - while enabling others to earn significant profits from their own applications. This potential for profits will continue to draw in elements of the developer community most consistent with the white space Twitter has left open, driving innovation that will further attract new users and potential ad dollars for the mother ship. Near term pain and discomfort for long-term gain.

The key is understanding Twitter’s strategy and intentions, and it is incumbent upon them to be clear - and fast - to help better shape third-party initiatives. This will result in a win-win for users and developers alike. Will some current apps be left out in the cold? Of course. But there will be plenty of residual opportunity to design new and useful stuff - just probably not another Twitter interface. And Twitter shareholders may well find themselves near the optimal point on the NPV curve.

Brands: Authenticity and Pattern Recognition

Tue, 13 Apr 2010 17:56:00 -0400

There are two catalysts for this post: Chris Dixon’s recent tweet that said

“Does anyone really want to have a “conversation with brands”? I I want my relationship to Starbucks limited to buying coffee.”

And Doc Searls post which proclaimed that

“Brands are Bull.”

Two bright guys whose views I respect, but I must heartily disagree with both of them.

When it comes to conversations, and specifically those conversations that are deemed valuable, I believe the overriding issue is authenticity. People tend to be pretty good at discerning who is real and who is merely a self-promoter, and power and influence tends to flow to those who are authentic. Do people want to converse with brands? I think that is the wrong question. The right question is “Do people want to converse with people who are authentic in their support of brands?” Starbucks the brand can’t talk to you, but a passionate Starbucks employee can. These individuals could be employees of the brand, external representatives of the brand, or merely fans. But if the people having these conversations are authentic, my sense is that yes, people want (and do in large numbers) have these kinds of conversations every day. Twitter, Facebook and other forms of social media are very personal, and when they are de-personalized (by brands acting big, stupid and impersonal) interactions are bound to be unsuccessful. I am an investor and Board member of a company called Buddy Media, that has developed and manages a powerful Facebook Pages platform (like the Bud Light fan page) that is used by major brands to connect with their fans and potential customers. People flock to these pages to chat with and learn from engaged communities organized around brands, take advantage of special offers on these pages and enter contests to win products being promoted by the brand. This could only be successful if people found value in the brand as an organizing principle, with Facebook and Buddy Media as facilitators of this interaction. And let me assure you, it is successful.

Doc Searls, in his post about the uselessness of brands today, discusses how the mere presence of Tiger Woods in an ad means nothing relative to what a company does.

Nike, the brand, famously supports its sponsored athletes because
the company is about athletes and athletics. Which is all fine. What
matters is what the athletes do on the field, on the court, on the golf
course. Sure. But what matters more is what these companies actually do.

Here in Reality, companies buy
Accenture’s services. Individuals buy Nike’s shoes. None of what
customers buy from either company gets an ounce of substantive worth
from Tiger Woods, or from anything those companies do with their
“branding” strategies, no matter how much those strategies serve to
help sales and stock prices.

We live in an age when we can kick tires hard. Accenture’s and
Nike’s tires are not Tiger Woods. And Tiger Woods, even if he’s long
been a lying sack of shit, isn’t a tire either. He’s a human being, and
that’s what makes him interesting. Not what his golf game says about
companies that pay him.

What Doc Searls is saying reflects the view of an empiricist: tell me the features, give me the stats, and let me make a decision. This is not how many - if not most - items are purchased. Consumers, be they retail or business, are impacted by the perception of a brand. What people say about it and what they’ve heard about it are both relevant to the purchase decision. Do I perceive it to be high quality (separate from the cold, impersonal product specs)? Will it make me successful? How do I project my experience as a result of purchasing the product/service? Issues of authenticity, trust and recognition all play a part in how successful a brand may be. Objective product features and quality clearly play a role, but if I equate Tiger (with whom I have a positive association) and his success with the outcome of using a particular product, then I’m likely more apt to buy the product. It’s just common sense and represents the underpinning of the entire advertising industry.

The issue isn’t whether brands are bull - they’re not. Creation of a successful brand results in pattern recognition that can help consumers more efficiently locate what they want and builds substantial value for the brand owner. The issue is whether it is bull (or just plain stupid) to choose an athlete or, for that matter, any single human being as the basis for selling a multi-billion dollar product line. As Doc correctly points out, humans are interesting - and volatile. Charles Barkley said it best: “I am not a role model.” Well, neither is Tiger or most people walking the earth. Building a brand around a successful individual is akin to leveraging up a corporate bond position and continuing to take on more leverage when things are good. However, when things go bad they go very, very bad very, very fast. Brands flee the fallen idol and the consumers (or the public stockholders of brand owners) flee the brands. We’ve seen this movie before in every market; why should brand management be any different?

Even in a long-tail world with increasingly available information, brands, like relationships, will continue to matter. In fact, they might even become more important as the flood choices becomes overwhelming, brands and offline relationships will become increasingly powerful tools in the product discovery process.

The Best Kind of Venture Deal

Tue, 06 Apr 2010 12:44:00 -0400

I have had the good fortune of backing many great entrepreneurs. I have been introduced to these companies in a variety of ways: through venture capitalists, angel investors, and other entrepreneurs. Some of these companies were investable from the time I met them. Others, less so. They were more ideas than companies, but with very talented founders who needed some input, mentoring and time to figure out the plan. While requiring the most time, energy and patience, I learn far more from the projects than the more fully-baked start-ups. And they also happen to be much more fun.

I just happen to be working on one of these deals as we speak. I am working with an entrepreneur with a big brain, lots of domain experience, endless enthusiasm and a persistence that borders on maniacal. In short, I liked him immediately. I met him probably eight months ago. He had lots of really great ideas, was focusing on a space I like a lot and understand pretty well, but was, shall we say, scattered in his approach. Focused on a Big Idea requiring big-time infrastructure and necessitating a first-round raise of $4 million or so. In my typically blunt way, I called bullshit.

I counseled that he was focusing on too many things that were initially on too large a scale. I recommended setting up a series of discrete, achievable milestones that would culminate with sufficient demonstrable traction to warrant a true Series A round. I wasn’t raining on his desire to execute the Big Idea, only the manner in which he was proposing to go about it. I connected him with a group of domain experts and professional investors he could pitch in order to continue getting feedback on and refining his idea. My associate Ben worked with him on his financial model, helping him define the milestones to be achieved and sizing a more sensible first-round raise of $2 million. This all happened over the period of a few months in the Fall. It was starting to come together. But it wasn’t ready - yet.

Armed with more realistic business and financial models, a bunch of people to talk to and a clearer sense of what constitutes an investable business (at least from my perspective), I said “Go bootstrap for a while, refine your plan, build an early product and get some early users. Then let’s talk again.”

At this point many things could have happened. He could have ignored my advice and gone on his way and succeeded or failed. He could have taken my advice and flopped. Or could have taken my advice and succeeded, and either come back to me as an investor or sought financing elsewhere. Well, over the ensuing months he stayed in touch, kept me apprised of his progress (e.g., finding a technical co-founder, securing three alpha clients, continuing to learn from discussions with both potential customers and investors), and basically did all the things he and I had talked about. And after five months he came back. And now I am leading his deal and building what will be a truly powerful, value-added investor group which will help make his Big Idea become reality.

This is the greatest part of being a seed-stage investor: having a positive impact on the vision and execution strategy of the entrepreneur. While it is terrific stumbling into those full-formed entrepreneurs with a substantially-baked plan that is fundable from the get-go, finding a truly great person who grows into the role and helping them get there is far more satisfying. It makes it fun getting up and going to work each and every morning.

Going Old School

Mon, 05 Apr 2010 16:49:00 -0400

I am frequently reminded that as much as technology has changed our world, the core principles of human communication have largely remained the same.

I was reminded of this today when a mentor, a person whom I respect a great deal who has a wealth of business and life experience, served notice that I really needed to take a “deep breath” before sending out an email that reflected my frustration with a particular negotiation. It wasn’t that my email was hostile or inappropriate, but it was tonally not the message I really wanted to send. I let my emotions get the better of me. And while I truly am conscious of this issue, and constantly think that “anything I write anywhere could end up on the front page of the Wall Street Journal,” his point was more subtle. Need I be ashamed of my note? Not at all. Did the note best reflect what I wanted to convey to the recipient? Probably not.

Today’s email and texting culture has created artificial distance between the message and the medium. It is much easier to rip off a “poison pen” email than to speak those words to someone’s face, and it is even easier than writing a letter and dropping it in the mail. Hitting send isn’t much of a challenge and doesn’t afford much time for reflection. At least with a letter you need to physically write it, put it in the envelope, stamp it, and walk it to the mailbox. Thought and reflection can enter at any time during this process, causing the sender to perhaps reconsider their action. The email sender has no such delayed gratification. From one’s brain to one’s fingers and off it goes. And sometimes the visceral reaction after sending such an ill-advised note is “whoops!” Too late…

I have also been reminded that physical relationships matter. Really, really matter. Technology is a great enabler, permitting tasks to be completed much more quickly and with much better information than in the past. But to sell, to convince people that new technologies are actually far superior than their current tool kit, requires skilled human communication. Relationship-building. Trust. Empathy. It doesn’t really matter how great a product is if the buyer doesn’t give it the time and attention necessary to make a decision. Why does the buyer give it the time needed? Because of the person doing the selling. If anything, relationships have become even more important in the information age, as it has become a key competitive advantage relative to those who have never developed the skill to sell effectively face-to-face. It is a different paradigm, yet one that has been around for hundreds of years. All this technology is causing certain of our skills to either atrophy or go undeveloped, to the detriment buyers and sellers alike.

Thoughtful communication and effective human interaction. Basic stuff, no? Not anymore.

IA Ventures Office Hours - getting our game on

Thu, 01 Apr 2010 14:49:00 -0400

While our little firm is still very young, we have been taking note of some of the best practices of our highly-respected brethren. One of those best practices, particularly among firms that do true seed-stage investing, is office hours. And we have finally scheduled our inaugural office hours time slot, from 9:30am-12:30pm on April 15th at TBSP, 17 West 20th Street. We have set up a Google Spreadsheet for this purpose which can be accessed here.

We intend to hold office hours every 2-4 weeks, initially with 30 minute time slots for each entrepreneur / team. If we need to recalibrate our approach, we will. Our goal is to get even closer to the start-up community, with the hope of building a reputation as the “go to” firm in NYC and elsewhere for seed stage, data-intensive and data infrastructure start-ups. This is a big goal and we’ve got a long way to go, but I’ve been pleased with the support and interest from established VCs and entrepreneurs alike who serve as sources of deal flow.

The bottom line is that you want to work with a firm and with people whom you like, trust, respect and believe can really help your company build its business and commercialize its technology. IA Ventures aspires to be this kind of firm. And by holding office hours and providing feedback and input to entrepreneurs in our areas of focus, regardless of whether or not we invest, we hope to contribute to the budding NYC venture ecosystem and to give back at least as much as we get from being a participant.

It's time to end the FASB (and shake up the SEC)

Sat, 13 Mar 2010 06:01:00 -0500

Recent “revelations” concerning the Lehman debacle highlighted a very important point: media and regulators alike have had their heads in the sand for decades. The headline of a recent New York Times article plainly makes the point: “Findings on Lehman Take Even Experts by Surprise.” If this is really true, it is quite an indictment on either the lack of intelligence or truthfulness of our regulators. Sadly, either one could be the case.

Between lobbying dollars and entrenched interests, our financial regulatory regimes have become so perverted as to have little basis in reality. I recently penned an Op-Ed in the Financial Times where I made the point that all the clamor and criticism around derivatives was ill-founded, that financial transactions completely divorced from derivatives could and have caused even more damage than derivatives themselves. The Lehman example is a case in point. This is not a story about derivatives, no more than Enron was a story about derivatives. But the key take-away should be that if our rules and regulations are so porous as to allow transactions like Lehman’s to gain approval from their “blue chip” legal counsel and expensive “Big Four” accountants, then there is a serious problem with the state of our regulatory framework.

The SEC is a highly politicized organization and the Financial Accounting Standards Board (FASB) is a kind of self-regulatory organization that is ultimately a stooge of industry. Consider this, taken directly from the FASB website (bolding my own):

Since 1973, the Financial Accounting Standards Board (FASB) has
been the designated organization in the private sector for establishing
standards of financial accounting. Those standards govern the
preparation of financial statements. They are officially recognized as
authoritative by the Securities and Exchange Commission (SEC)
(Financial Reporting Release No. 1, Section 101, and reaffirmed in its
April 2003 Policy Statement) and the American Institute of Certified
Public Accountants (Rule 203, Rules of Professional Conduct, as amended
May 1973 and May 1979). Such standards are important to the efficient
functioning of the economy because investors, creditors, auditors, and
others rely on credible, transparent, and comparable financial
information.

The SEC has statutory authority to establish financial accounting
and reporting standards for publicly held companies under the
Securities Exchange Act of 1934. Throughout its history, however, the
Commission’s policy has been to rely on the private sector for this
function to the extent that the private sector demonstrates ability to
fulfill the responsibility in the public interest.

Do we need any more examples of the private sector’s inability “to fulfill the responsibility of public interest?” I think not. The FASB has accumulated exceptional power and influence over the years, yet has merely served as an appendage of those whom it was supposed to be regulating. Consider further these points made on the FASB website:

To accomplish its mission, the FASB acts to:

Improve the usefulness of financial reporting by focusing
on the primary characteristics of relevance and reliability and on the
qualities of comparability and consistency;

Keep standards current to reflect changes in methods of doing business and changes in the economic environment;

Consider
promptly any significant areas of deficiency in financial reporting
that might be addressed through the standard-setting process;

Promote the international convergence of accounting standards concurrent with improving the quality of financial reporting; and

Improve the common understanding of the nature and purposes of information contained in financial reports.

Has the FASB really acted to improve usefulness, kept standards current, considered promptly any significant areas of deficiency and improved common understanding? It is pretty clear that they’ve broken almost every one of their stated precepts, and the SEC has been complicit in allowing this charade to continue. Someone has to call these people out and demand a change. And I am calling for nothing less than a complete de-certification of FASB and the creation of a new group of practitioners that have no linkage to industry whatsoever. Because we can’t continue with a regime that is so clearly biased and ineffective, and which has been instrumental in permitting the spate of financial “revelations” to continue apace. I think this group needs to be a mix of accounting practitioners and theorists, with the practitioners coming from the ranks of those who have gamed the system for years. Because they know best how to plug the holes that they themselves marched through for the benefit of their firms and their firm’s clients. It is akin to taking an accomplished hacker and putting them in charge of an NSA Tiger Team focused on preventing network intrusion. Who better than those who have beaten the system to fix the system?

I ultimately think this group should be part of the SEC, but that the SEC itself needs to be re-tooled. Lifelong politicos need not apply. It also needs to be staffed by practitioners who are pragmatic and beyond the influence of lobbyists and the like. They can have no conflicts with legacy firms through shareholdings or contractual relationships. The last thing we need is another Geithner/Paulson replay where their integrity and judgment is questioned at every turn because of ties to prior firms. We need people who really understand the markets and view such a position as an opportunity to impose ground-breaking change and to create a legacy of common sense, pragmatism and integrity. It would a refreshing change to the political morass that the SEC has become.

I have written many posts about changes to improve transparency, efficiency and fairness in both regulatory and accounting rule-making, but here are five issues (plus a bonus issue) I’d like to see changed - tomorrow.

1. End off-balance sheet transactions. If the substance of a transaction is a sale with all the risks and rewards of ownership transferred to another party, then take the asset and related liabilities off the balance sheet. But if there is some risk retention, even if it is structured to be “remote” (e.g., a sharp ratings downgrade; you see where that got firms like Citigroup, etc.), the assets and liabilities need to remain on-balance sheet. This would also end the use of securitization as a vehicle for improving balance sheet presntation. Debt is debt, regardless of where the obligation is housed. This covers the “Lehman type” transactions as well as those entered into by Enron and myriad municipalities. Substance over form must rule.

2. Impose mark-to-market accounting on bank balance sheets based upon asset funding. Financial assets should be marked-to-market. This has been a hotly contested issue for reasons that baffle me. Bottom line: if a financial firm does not have the financing in place to carry an asset to term, then it has to be marked-to-market. Mortgages and illiquid investments funded with short-term liabilities should not be able to be carried at cost. It creates an accounting charade that hits at precisely the worst time - when financing is hard to get and the assets are unable to be sold. But if stable financing is in place and the asset can (and is intended to) be carried for the long-term, then by all means reflect it at historical cost (less a haircut for permanent impairment).

3. Move over-the-counter derivatives transactions to exchanges. This is black-and-white; the fact that there are detractors to this shift amazes me. The focus should be on standardizing derivative instruments (interest rate and foreign exchange swaps and options, credit default swaps and options, etc.) and making the use of over-the-counter derivatives prohibitively expensive through capital requirements. The OTC clearing house approach would include posting of initial and variation margin, with margin thresholds that are routinely changed based upon changes in the volatility of the hedged instrument. We have the technology and the math to be able to do this. We should move towards this regime change immediately.

4. Create a cap on derivatives to be written equal to the physical underlying. A big part of dislocations in the credit derivatives market relates to the derivatives written being a multiple of the underlying asset. It theoretically and practically makes no sense that, for example, $5 billion of credit derivatives should be written on a $1 billion bond issue. This can create both increased volatility and increased risk of market failure upon settlement. This cap should be an immutable fixture of the derivatives markets.

5. Enact common sense rules regarding the capital structure of financial institutions. The suggested changes above will help better define the true liabilities of financial firms. But the one missing piece is the mismatch between the assets and liabilities of many firms, creating massive gaps in both interest rate and liquidity risks that have consistently brought down firms for generations. Whether “riding the yield curve” (lending long/borrowing short) and bleeding cash/draining capital when short rates spike (thousands of S&Ls in the 1980s), or getting into a liquidity crunch when asset values decline and short-term funding sources dry up (Bear Stearns, Lehman, etc.), this is a dangerous practice that has to be stopped. Maximum liquidity gaps need to be imposed, as well as policies around “Too Big to Fail” (TBTF - the source of a future post). These policies along will substantially enhance the stability of our financial sector, and create a more sustainable (though less profitable) industry.

Bonus issue: Eliminate the flawed financial presentation of leasing. This is
related to (1) above. The hard-rules differentiating between operating
(off-balance sheet) and capital (on-balance sheet) leases has created a
multi-billion dollar industry more focused on accounting presentation
than economic efficiency. If the substance of a lease is really a loan,
then both the asset and the associated liabilities should be on the
balance sheet. The threshold of what constitutes a “capital lease”
(booking the asset and liability) should be sharply reduced to prevent
transactions that fundamentally give rise to a debt-like obligation to
be treated merely as a lease payment.

This is intended to be the start of a conversation, but one which is important and cannot be pushed aside or politicized any longer. The safety and stability of our financial system depends on it.

ADDENDUM

In the wake of my post, I just had an email exchange with the Director of Communications of the Financial Accounting Foundation/Financial Accounting Standards Board. I am posting the exact exchange below. I find his inquiry both interesting and depressing, as he is focusing on quite possibly the least important part of the issue at hand and avoiding the substantive parts (because there really aren’t many good arguments against the substantive parts, I guess). He wants me to say “I made a factual error” because the rules for off-balance sheet accounting were changed last year, and I put it on my laundry list of things that need to be remedied. My intention was to raise awareness of the issue as most people don’t read new FAS releases. However, if my characterization was misleading to my readers my apologies. And apologies to the FASB if I didn’t give them credit for something that was done last year that should have been done more than a decade before. Anyway, here is the exchange:

FASB: Your credibility as an opinion columnist would be greatly
helped if you did your homework before writing. Off balance sheet
transactions
were largely ended last year by the FASB under FAS 166/167. This was the
number
one complaint you voiced about the organization. The new rules were BIG
news—they
got lots of national news coverage that continues. I guess you missed
it.

Roger: Your organization would have far more credibility if it was
forward-looking and principles-based, not merely reactive in the face of
withering public pressure. I am quite aware of FASB’s changes. My
article extends far beyond your single point, and is an indictment of
the way the body itself functions and its self-regulatory nature. The
FASB is no better than the rating agencies, Neal. I appreciate your
position and motivation to defend it but as a Wall Street practitioner
for almost 20 years I have a pretty good idea of FASB’s past, present
and (likely) future if it is not forced to change. It has not covered
itself in glory.

FASB: Yes, your article does extend beyond a
single point. And I defended nothing else except the fact that one of
your article’s
key points—is wrong and misleading. You blew it in terms of what you
told
your readers about off-balance sheet transactions. It would be nice if
you
admitted it.

Roger: It’s not inaccurate. You are interpreting “keeping standards current” as
being what FASB changed last year. That is like calling the fire
department after the barn has burned down. Had FASB been keeping
current, it would be seen these types of transactions being promulgated
(and they started well more than a decade ago; I touched the structured
product world from 1987-2001) and changed the rules in anticipation
of abuse, before something catastrophic happened. That is not what
happened. I stand by my opinion and believe it to be factually correct
in all respects.

FASB: You wrote
about rules that you would like
to see changed tomorrow. The first one
was “end off-balance
sheet
transactions.” They were ended last
summer. Can you give
me a small break here?. That’s
wrong Roger. You’re making the
case in your piece that they should be ended. And they already were
months ago.
That’s like writing a column now that George Bush should not be
re-elected. It’s just my
two cents, but your readers
would probably appreciate it if you admitted a mea culpa on that. I’m
not
asking you to change your opinion about us. Just pointing out a big
mistake you
made.

Roger: It’s not really a mea culpa - my blog is designed to raise broad
awareness of issues, and that is what I did. That said, I never want to
be accused of being anything less than forthright, and if my prose
lacked clarity I am more than willing to make the clarification.

So readers, consider the issue clarified.

IA Venture Strategies - now on the Web

Tue, 09 Mar 2010 19:19:00 -0500

While I have written a bit about my new fund, we have not had a web presence - until now. Please check out the new website. You will learn more about our mission, investment approach and the team. We still don’t have much on the portfolio page as several of our companies are still in stealth mode, but what I can say is that we’ve already closed deals or have signed term sheets with companies in the realms of predictive analytics, database systems, intrusion detection and advertising technology. We are currently pursuing deals in cloud-based data distribution, data normalization and an array of related domains. Our portfolio companies are based in New York, Boston, Los Angeles - and soon to include San Francisco and London. I continue to be shocked by the amount of high-quality global deal flow across the big data realm, and as long as we see strong seed-stage deals being led by super smart, experienced and passionate entrepreneurs with vision, we will continue to deploy capital at a healthy pace.

The team is still pretty frantic closing the fund, investing in and working with our companies and just generally figuring out how to best run a fund of our size and scope. The work is virtually endless, but it is the best kind of work there is. We are working towards setting up office hours, but are not quite there yet. We also have lots of job opportunities at our companies, but that utility is not yet active on the site. My colleagues Ben Siscovick and Brad Gillespie agreed that we should have a bias towards action, getting the site up and out there even though it is a work in progress. We’d love your feedback and suggestions as we are new at this and want the site to be useful and informative for entrepreneurs, venture capitalists and media alike.

Hopefully the site helps clarify some questions about the fund, and will serve as a reference point for those considering a raise from big data domain experts who roll up their sleeves and have strategic Limited Partners who do the same. Having a baked-in set of relationships with top firms with big data problems is pretty unique among venture funds, especially one as small as ours. But creating this big data ecosystem was an essential part of my strategy to help solve the generational problems arising from the onslaught of data and information. We are in the early-innings of what is likely to be an extra-innings contest, and Ben, Brad and I are laser focused on helping to be part of the solution to these seemingly intractable problems.

Please continue to check back as we make improvements to our site and grow our business. I will also keep you posted on this blog and at @infoarbitrage as well. I will likely write one more post about the fund and its LPs after I do a final closing, but for now let me say that starting a fund has been among the most satisfying things I have ever done. And it helps having two great partners like Ben and Brad helping to make our vision of improving the management and extraction of value from big data a reality.

A new model for investing in "social"

Fri, 05 Mar 2010 11:10:00 -0500

I had the pleasure of sitting on a panel last night sponsored by GoodCompany Ventures, a very interesting shop that helps entrepreneurs with a “social investing” (but not necessarily a non-profit) mission get their start with advice, mentoring, and sometimes capital. I sat on the panel with some outstanding thinkers including Jacquie Novogratz (Acumen Fund), Fred Wilson (USV), Jacob Gray (Murex Investments) and Scott Edward Anderson (The Green Skeptic). I had never spoken on the topic of “social investing” before and, quite frankly, didn’t exactly know what it meant except I that generally thought of the term as pejorative from an investment perspective. Social investing? This means not really generating attractive returns, right? Well, after last night’s discussion and thoughts that came to me on-the-fly during the debate I have a very different perspective on what this burgeoning asset class really means, and how it has the potential to change the world in an array of positive ways.

First of all “social investing” is a really dumb term. If you’re going after conventional for-profit investors the social moniker will kill the pitch every single time. Fred Wilson raised an interesting point about the difference between short-term and long-term profit maximization. He is personally willing to take the long view on building an attractive, sustainable business even if its goal isn’t maximization of short-term profits (read: Etsy). And, in fact, he cites personal examples of companies that have been short-term profit maximizers that flamed out because of unhealthy business practices. But I think the issue is more fundamental than that. Many of the companies being incubated by GoodCompany or funded by Jacquie’s Acumen Fund wouldn’t make the grade even on the terms Fred laid out. It’s not strictly a short-term/long-term issue. It’s an issue of how you define capital and return.

My hypothesis is that we need a whole new regime for quantifying the value of businesses that have goals other than strictly financial profit. We need hard numbers - real metrics - to demonstrate the value of initiatives that create value for society beyond the payment of staff and the generation of profits for shareholders. For instance, Jacquie brought up the example of a company Acumen funded that provides treated mosquito netting for families in Africa. These nets provide people from getting malaria, saving enormous amounts of money on acute health care and work time lost, while insuring economic productivity among the youth for their lifetimes that otherwise could have been cut short by infection and disease. These benefits are able to be quantified: we have the economic data to do the crunching, and the econometric modeling techniques at our disposal to quantify the ROI of these investments. But the “R” - the return - isn’t simply financial profit: it’s economic utility, real benefits being enjoyed by society. These are the terms we should be used to define the benefits of this kind of investing - this asset class - which really does need to be viewed as an asset class separate and distinct from businesses principally focused on financial returns.

So if the appropriate measure is economic utility (which encompasses both financial and social profits), how should these businesses and initiatives be funded? I would argue that it should tap into capital from two key sources: Government and funds that have traditionally gone toward conventional philanthropy. Fishing around in the traditional for-profit pond is a waste of time: utility in this sphere is generally uni-dimensional - profits first and last. Let’s be honest. Investing in this asset class has the potential to generate traditional financial returns, but they are tenuous. And if this is the benchmark by which capital is allocated among projects, many critical projects will go unfunded because the measure is wrong. So if we can all shed the stigma of “social investing” and acknowledge that you can still “invest” and “do philanthropy” at the same time, I think it would go a long way towards improving the messaging of this vitally important asset class. I see this approach as addressing the capital allocation problem among philanthropies. By taking a disciplined, numbers-based approach to quantifying cumulative benefits, it will become increasingly clear which businesses with a social mission should attract investment capital and which should not. It will no longer simply be a marketing issue, but one grounded in logic and reason. Will some projects go unfunded that would otherwise have attracted capital because of its PR? Yes. But will many more important projects get done that otherwise would have gone unnoticed because they might have a low Q score but massive economic utility? For sure.

These are only my initial thoughts on this topic. I will definitely be applying more mental cycles to these incredibly important issues. I’m looking forward to both stimulating and participating in this critical dialogue.

Does being a VC mean "trying to change the world?"

Sat, 27 Feb 2010 03:19:00 -0500

My friend Chris Dixon just wrote an interesting post titled It’s not East Coast vs West Coast, it’s about making more places like the Valley. It is very interesting and provocative, and as with all Chris’s posts, it’s a must-read. However, it honestly rubbed me the wrong way and prompted me to write the following comment:

Chris, I think it comes down to what being a VC really means. You seem
to equate the VC mission with “making things that change the world.” I
believe this is a narrow and potentially dangerous definition, and
actually highlights one of the biggest problems with the Silicon Valley
venture scene. It also, in my experience, doesn’t reflect the true
dynamics of how large-scale West Coast VC works, which is a lot less
sexy and entrepreneur-friendly than you indicate.

Should a good
VC be working to fund ideas that change the world? Yes. Should they
also be looking to back young companies working on important problems
that are, say, built on top of something else and very useful but not
transformational? I’d say so. There are lots of start-ups of value that
will never be the next Google, Twitter, Microsoft or Apple, but that
doesn’t mean they shouldn’t be funded and nurtured as any start-up
should. If one were to apply the “change the world” mission to venture
investing, the amount of capital being invested in such companies (or
even that should be invested in such companies) is probably less than
20%. To me the key is making sure that those 20% or so get the
requisite support and time to thrive from their venture backers, which
is the much bigger issue at hand.

I’d like to think that I back
worthwhile start-ups and am very entrepreneur-friendly without all that
negative financial engineering you ascribe to certain East Coast VCs,
but do most of my portfolio companies have a chance to change the
world? Not in the way I define changing the world. And personally, I’m
ok with this. I’m helping to create useful products, create jobs, and
foster entrepreneurial excitement and possibilities. This is what
venture investing means to me.

As it relates to large West Coast
VCs, many of these firms are structurally bound to trying to change the
world because they need those kinds of wins to return their funds. This
doesn’t make them paragons of virtue; it makes them rational. But
buying this series of far out-of-the-money call options has an ugly
dark side as well: if companies don’t appear to have the potential to
change the world (read: sell for $1 billion+, go public, etc.), they
often get squashed and orphaned since they are no longer worth the VCs
time. Now I’m painting with a broad brush here but you get the point.
Does this dynamic help create a favorable entrepreneurial culture? Is
this approach really making the world a better place? Not to me. Plenty
of companies that would have made it on the East Coast will fail on the
West Coast precisely because of the need to hit home runs to the
exclusions of singles, doubles and triples.

Chris, I certainly
agree that those investors who are heavily focused on metrics and
traction are noxious and ill-placed as seed stage investors (they are
really Series B, C and D investors). However, I would say that
entrepreneurs who combine vision with pragmatism are more attractive to
me than entrepreneurs who simply have vision. Might this pragmatism
keep the starry-eyed entrepreneur from changing the world, and only
building a really large, successful company? Yes. Is this necessarily
an indictment on the NY VC reputation of wanting to understand plans
for commercialization even in pre-revenue companies? I don’t think so.

Thanks for penning this, Chris. You’ve raised some really important points that warrant discussion.

Roger

These were my $.02. I’d be interested in your thoughts, too.

Advice for CTO Founders: Don't Let Business Kill the Business

Mon, 22 Feb 2010 19:28:00 -0500

Founding a technology company is an amazing thing. I have met dozens of brilliant technologists with fantastic ideas, ideas requiring nurturing, mentoring and support. Too often, however, I have found CTO / Founders paired with business people who not only don’t add value, but frequently detract from the value of the business. And from my perspective as an engaged seed stage venture investor, this makes them unfundable. This is not only sad but incredibly frustrating, because it is so easy to see how a great technology can be developed and commercialized if only - if only the CTO hadn’t been impulsive and insecure and brought on a business partner too early in the game.

I am a business person, not a technologist. While I know I can add value, I also know when and how I can add value. It is generally a soft touch at the beginning of the development process, perhaps identifying 1-2 early alpha/beta customers to help flesh out use cases to be built upon over time. It is gently laying the foundation for a subsequent financing, helping the CTO set sensible milestones to be achieved that can demonstrate execution skill and release cycle management. It is helping with recruiting by leveraging my networks and experience in a particular domain. And it is most certainly not about me, it is about the CTO, the technology and the company. But I am doing this from the vantage point of an investor / Board member, not an operating executive. Because early in a technology company’s life, a true operating executive is NOT what the company needs. In fact, they generally just get in the way.

So why do inexperienced (as entrepreneurs), ultra-skilled CTOs fall into the trap of engaging a business partner too early? Fear? Lack of confidence? Camaraderie? Perhaps all of the above. Many CTOs I know are not that comfortable with the business end of business, directly engaging with customers, speaking with investors and managing business operations. These weaknesses can be addressed in a variety of ways, ranging from engaging part-time, outsourced help to bringing on experienced advisors to help out early in the company’s life. These are not revolutionary suggestions, just not necessarily those acted upon by first-time CTO / entrepreneurs. Selecting value-added angel investors and advisors can also help with the camaraderie issue, as they can provide advice and counsel during the solitary period of hard-core coding and product development. A full-time business partner is definitely not required at this point in the company’s life.

But sometimes, too often, the CTO falls back on hiring a friend or someone to whom they were introduced that sells them on their value-added. They might give them too much stock, and even have that stock not subject to vesting provisions. And if this business partnership doesn’t work out, the CTO / Founder, the engine of value for the company, is stuck in a bad, bad place. Fire the business partner, and the stock they’ve granted is off the table, stock which is needed to attract and retain talent that can actually help build value and sustainability of the business. Keep the business partner, and the business itself might be rendered unfundable, because quality investors will not put money into a venture with a weak business partner in conflict with the founder. Try to get the founder to negotiate a reasonable exit for the business partner, and this can take years off the founder’s life. By the time this point has been reached, the focus has ceased to be the technology and the product, but on organization. And this is one thing that should NOT be the focus of the CTO / Founder during the company’s development phase.

So my advice to CTO / Founders? JUST SAY NO TO BUSINESS PARTNERS BEFORE YOU HAVE A REAL PRODUCT THAT IS READY FOR PRIME TIME. And for gosh sakes, spend the time to find the right one. You’ve spent your entire career working towards this moment. Give it the justice it deserves and don’t act impulsively when seeking to address business needs. Your technology brains got you this far; use some of them to make yourself stop, breathe and think. Seek advice from a mentor. Solicit trusted advisors help with interviewing. And if you do feel you’ve found the right person, by all means make their stock contain standard vesting provisions to guard against a bad fit that takes significant amounts of stock off the cap table.

I don’t want to see any more of you with crappy business guys ruining your great ideas, ok?

Are Derivatives the Real Problem?

Mon, 22 Feb 2010 18:31:00 -0500

This piece was published in FT.com earlier today…

Regulators, Congress, and
the media generally focus on the crisis at hand. The Enron scandal gave us
Sarbox. The market crash has created a PR flurry against “sponsored access” and
proprietary trading. AIG generated a firestorm surrounding the use of credit
derivatives. The common thread is that policy-makers are reactive and missing
the big picture, leading to short-termism and a host of poorly constructed
rules and policies. And invariably the word “derivatives” is used as a
lightening rod for why new regulations should be promulgated. The problem,
however, isn’t exclusive to derivatives; it’s the underlying “business purpose”
of transactions. Hedging has a legitimate business purpose. Making markets,
speculation, and financing projects have solid business foundations as well.
But entering into transactions that serve to hide or obfuscate economic reality
work against this principle. And this lack of business purpose is not confined
to the derivatives markets, but frequently takes place in the cash markets as
well.

Consider leasing, a transaction
that has been popular for over 50 years. As the industry has evolved,
transactions such as sale/leasebacks and “asset defeasance” have been used to
synthetically borrow money without the obligation being reflected as debt on
the balance sheet. The form of the transaction: a lease. The substance of the
transaction: a borrowing. The
multi-trillion dollar securitization industry has the same motivation: moving assets
(and liabilities) off the balance sheet, while economic recourse still exists
should asset values and/or debt ratings drop. This is what the market
discovered when Citigroup’s multi-billion structured investment vehicles (SIVs)
began to fail and the assets and liabilities came back onto its financial
statements. What is the proper characterization of a contractually obligated
stream of payments? Debt. How should a portfolio of assets and associated
liabilities be treated if the risks and rewards of ownership haven’t been
completely transferred? As never having left the balance sheet. Yet the
accounting profession, with the SEC’s support, has enabled this charade to
continue.

Derivatives have also been
used to achieve similar ends. Structured transactions have been designed to
generate upfront cash without a corresponding obligation being recorded on the
financial statements. The recent discovery of Greece’s use of these instruments
has shined a light on the dangers of hidden borrowings. Municipalities have
mortgaged their futures by selling strips of participations in cash flow
generating assets (roads, bridges, airports, etc.) in order to generate
liquidity today (at a steep cost to financial solvency tomorrow). The virtually
unbounded rise of the credit derivatives industry is partly due to the mismatch
between the notional value of derivatives being written and the actual value of
underlying instruments. This mismatch can be 5x or more of the bonds being
“hedged,” leading to market failures when physical delivery is demanded from
counterparties lacking actual ownership (or the ability to borrow the
position). Neither of these examples embody true business purpose.

Both cash-market and
derivative instruments should be put to the “business purpose” test. Accounting
rule-makers, with support of the SEC, should move towards a “principles-based”
system where common sense, and not black-and-white rules around which myriad
loopholes can be found, should become the new paradigm. But let’s be clear. The
issue isn’t derivatives; it’s all financial transactions whose objective is to
deceive or to weaken financial transparency.

IA Venture Strategies - Working to Build a Better Venture Mouse-trap

Sat, 30 Jan 2010 14:08:00 -0500

As was ably covered by Dan Primack in PEHub, I am starting a new venture fund. However, as my friends and venture colleagues know, I am extremely down on what the venture industry has become. To be clear, it is less an issue of structure (management + incentive fees in a GP/LP structure) and more an issue of size. It is clear to understand how motivations get skewed when venture firms effectively become asset managers, where the management fees alone are sufficient to make the partners rich and investments must become increasingly large and non-venture like. Growth capital is not venture capital in my parlance. Venture capital means funding “ventures” - taking on early-stage risk - and actively helping companies execute their plans and achieve their potential. I have a theory that the largest a true venture fund can be, which means, having a seed-stage investment charter together with a “life cycle” approach to investing (leaning into winners, deploying larger amounts of capital in Series A and B rounds, if necessary) is around $300 million. But I digress…

I decided to start my fund after determining that many of the deals I was seeing were both strategic and thematic, strategic to my trading company and thematic in that they all had a common thread - helping to manage and extract value from massive, often real-time data sets - “big data” in jargon. Rather than prosecute them as an angel, I felt a fund structure would better enable me to “size up” in particular deals and to cast a wider net across the big data domain. I wanted the fund to be small ($25 million stated goal, but with the ability to go a little higher) and I wanted it to be different than most venture funds I know, who have raised money largely from pension funds and endowments. I really wanted the fund to be an extension of my activities as an angel, where I frequently build syndicates of value-added angels and select venture firms to help de-risk the portfolio companies and create a network effect across a particular domain. This approach has helped me win deals from conventional venture firms that couldn’t (or wouldn’t) bring such a syndicate to the table and generally had terms that were more oppressive than those I offered (less about valuation, more about participation and specific protective provisions). So how to create a fund that achieved my value-added investor objectives and offered the network effects I was seeking…

My answer was to raise money from “non-traditional” investors, e.g., strategic firms and individuals with knowledge of and deep interest in the big data domain, focusing on verticals with particularly acute data problems. Further, my explicit goal was to bring such strategic LPs to the table as part of a “big data ecosystem” I am creating among my Limited Partners, my venture portfolio companies, my trading company, and leading academics and thinkers in the field. Big data problems are, by their nature, big, and substantially benefit from collaboration across a wide array of domains. For instance, this is why there are several open-source database projects currently in operation, because the problems are growing at such a rapid rate and are so complex that discrete teams are often not best equipped to tackle the issues at hand.

So investor engagement, and not just money, is a ticket to play in this game. Funny thing is, they want engagement. They know that the value of the insights on the edge can impact their operating businesses to a far greater extent than any normal investment they could make. Their early involvement can also help to “de-risk” the portfolio companies, giving them early access to real customers with a strong motive to help out. My trading company also acts as a strategic partner, helping to evaluate the technologies of these big data opportunities and, on occasion, to become an early customer as well. Also, the LPs are excited about the network effects of participating in this ecosystem and sharing ideas with the other members of the community. Finally, they are interested in seeing the filtered deal flow and possibly helping with due diligence, becoming an early beta-tester and even a paying customer. It is really an institutionalized form of what I’ve been doing for the past five years, except with a unique array of people sitting around the table due to their operating companies and ability to test and deploy the tools, technologies and analytics being developed by the fund’s portfolio companies. Neat stuff.

I am also extremely excited to be doing this fund in New York City. I have found NYC to be a great place to base my investing activities and couldn’t think of a better place to start my fund. Proximity to Wall Street, big Media, the Pharma industry, several major insurers and health care providers, and a short flight to the Defense complex down in Washington D.C./Virginia. Fertile commercial ground on which to launch a big data fund. I already have three deals for the fund, one in the predictive analytics space (closed), one in database architecture (term sheet) and a NYC-based incubation of a new intrusion detection system. I couldn’t be more excited to be working with my early companies and syndicate partners. I am also looking forward to working with those domain-expert angels and venture firms as partners in my portfolio companies. I’ve always believed in having the right people around the table, and having a venture fund won’t change this one bit.