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Posts from the ‘Venture Capital’ Category

Dec 4

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Joining Wealthfront

It’s official. As per the announcement on the Wealthfront Blog today, I have officially accepted the role of Chief Operating Officer at Wealthfront. I feel incredibly fortunate to be joining such an amazing team, with an opportunity to help build an extremely important company.

WF Logo New

From Human Capital to Financial Capital

One way to imagine your professional life is overlay of two types of capital: the building and growing of your human capital, and the transformation of that human capital into financial capital.

It feels like just yesterday that I was writing a blog post here about my first day at LinkedIn. At its heart, LinkedIn is building, growing & leveraging human capital throughout your career.  Wealthfront provides an answer to the second part of that equation – how to grow and leverage the financial capital that you accumulate throughout your career.

As Marc Andreessen put it, software is eating the world, and it is providing us a platform to bring the features and sophistication previously only available to the ultra-rich, and making it available to anyone who wants to protect & grow their savings.

Too many good, hard-working individuals today lack access to many of the basic advantages accorded to people with extremely high net worth.  With software, Wealthfront can bring features and capabilities normally available only to those with multi-million dollar accounts to everyone, and at a fraction of the cost.

Personal Finance as a Passion

For regular readers of this blog, the fact that personal finance has been a long standing passion of mine comes as no surprise.  What many don’t know is that this passion dates all the way to back to my time at Stanford, where despite one of the best formal educations in the world, there was really no fundamental instruction on personal finance.

In fact, upon graduation, I joined with about a dozen friends from Stanford (mostly from engineering backgrounds) to form an investment club to help learn about equity markets and investing together.  (In retrospect, the members of that club have been incredibly successful, including technology leaders like Mike Schroepfer, Amy Chang, Mike Hanson and Scott Kleper among others.)

A Theme of Empowerment

As I look across the products and services that I’ve dedicated my professional life to building, I’m starting to realize how important empowerment is to me.  At eBay, I drew continued inspiration from the fact that millions of people worldwide were earning income or even a living selling on eBay.  At LinkedIn, it was the idea of empowering millions of professionals with the ability to build their professional reputations & relationships.

With Wealthfront, I find myself genuinely excited about the prospect of helping millions of people protect and grow the product of their life’s work.

We’ve learned a lot in the past thirty years about what drives both good and bad behaviors around investing, and we’ve also learned a lot about how to design software that engages and even delights its customers.  The time is right to build a service that marries the two and helps people with one of the most important (and challenging) areas of their adult lives.

A Special Thank You

I want to take a moment here to voice my utmost thanks to the team at Greylock Partners.  My year at the firm has given me the opportunity to learn deeply from some of the best entrepreneurs, technology leaders and venture capitalists in the world.  The quality of the entrepreneurs and investors at Greylock forces you to think bigger about what is possible.  Fortunately, Greylock is also a partnership of operators, so they understand the never-ending itch to go build great products and great companies.

… And Lastly, A Couple of Requests

Since this is a personal blog, I don’t mind making a couple of simple requests.  First, if you have a long term investment account, whether taxable or for retirement, I would encourage you to take a look at Wealthfront.  I’d appreciate hearing what you think about the service and how we can make it better.

Second, and perhaps most importantly, we are hiring.  So let me know if you are interested in joining the team.

Apr 12

7 Comments

User Acquisition: Mobile Applications and the Mobile Web

This is the third post in a three post series on user acquisition.

In the first two posts in this series, we covered the basics of the five sources of traffic to a web-based product and the fundamentals of viral factors.  This final post covers applying these insights to the current edge of product innovation: mobile applications and the mobile web.

Bar Fight: Native Apps vs. Mobile Web

For the last few years, the debate between building native applications vs. mobile web sites has raged.  (In Silicon Valley, bar fights break out over things like this.) Developers love the web as a platform.  As a community, we have spent the last fifteen years on standards, technologies, environments and processes to produce great web-based software.  A vast majority of developers don’t want to go back to the days of desktop application development.

Makes you wonder why we have more than a million native applications out there across platforms.

Native Apps Work

If you are religious about the web as a platform, the most upsetting thing about native applications is that they work.  The fact is, in almost every case, the product manager who pushes to launch a native application is rewarded with metrics that go up and to the right.  As long as that fact is true, we’re going to continue to see a growing number of native applications.

But why do they work?

There are actually quite a few aspects to the native application ecoystem that make it explosively more effective than the desktop application ecosystem of the 1990s.  Covering them all would be a blog post in itself.  But in the context of user acquisition, I’ll posit a dominant, simple insight:

Native applications generate organic traffic, at scale.

Yes, I know this sounds like a contradiction.  In my first blog post on the five sources of traffic, I wrote:

The problem with organic traffic is that no one really knows how to generate more of it.  Put a product manager in charge of “moving organic traffic up” and you’ll see the fear in their eyes.

That was true… until recently.  On the web, no one knows how to grow organic traffic in an effective, measurable way.  However, launch a native application, and suddenly you start seeing a large number of organic visits.  Organic traffic is often the most engaged traffic.  Organic traffic has strong intent.  On the web, they typed in your domain for a reason.  They want you to give them something to do.  They are open to suggestions.  They care about your service enough to engage voluntarily.  It’s not completely apples-to-apples, but from a metrics standpoint, the usage you get when someone taps your application icon behaves like organic traffic.

Giving a great product designer organic traffic on tap is like giving a hamster a little pedal that delivers pure bliss.  And the metrics don’t lie.

Revenge of the Web: Viral Distribution

OK. So despite fifteen years of innovation, we as a greater web community failed to deliver a mechanism that reliably generates the most engaged and valuable source of traffic to an application.  No need to despair and pack up quite yet, because the web community has delivered on something equally (if not more) valuable.

Viral distribution favors the web.

Web pages can be optimized across all screens – desktop, tablet, phone.  When there are viral loops that include the television, you can bet the web will work there too.

We describe content using URLs, and universally, when you open a URL they go to the web.  We know how to carry metadata in links, allowing experiences to be optimized based on the content, the mechanism that it was shared, who shared it, and who received it.  We can multivariate test it in ways that border on the supernatural.

To be honest, after years of conversations with different mobile platform providers, I’m still somewhat shocked that in 2012 the user experience for designing a seamless way for URLs to appropriately resolve to either the web or a native application are as poor as they are.  (Ironically, Apple solved this issue in 2007 for Youtube and Google Maps, and yet for some reason has failed to open up that registry of domains to the developer community.)  Facebook is taking the best crack at solving this problem today, but it’s limited to their channel.

The simple truth is that the people out there that you need to grow do not have your application.  They have the web.  That’s how you’re going to reach them at scale.

Focus on Experience, Not Technology

In the last blog post on viral factors, I pointed out that growth is based on features that let a user of your product reach out and connect with a non-user.

In the mobile world of 2012, that may largely look like highly engaged organic users (app) pushing content out that leads to a mobile web experience (links).

As a product designer, you need to think carefully about the end-to-end experience across your native application and the mobile web.  Most likely, a potential user’s first experience with your product or service will be a transactional web page, delivered through a viral channel.  They may open that URL on a desktop computer, a tablet, or a phone.  That will be your opportunity not only to convert them over to an engaged user, in many cases by encouraging them to download your native application.

You need to design a delightful and optimized experience across that entire flow if you want to see maximized self-distribution of your product and service.

Think carefully about how Instagram exploded in such a short time period, and you can see the power of even just one optimized experience that cuts across a native application and a web-based vector.

Now go build a billion dollar company.

Oct 5

5 Comments

Joining Greylock

Today, John Lilly put up a really nice note on the Greylock Partners blog officially welcoming me to the firm.  Needless to say, I’m both honored and excited to be joining such a great team.

We’re fortunate to be witnessing the explosive growth of not one but two incredible new platforms for consumer products and services: social and mobile.  Both are literally changing the fundamental ways that consumers interact with devices, and are rapidly changing the dynamics for building successful new products and services.  After spending the past four years helping to build out social and mobile platforms, I can’t wait to partner with entrepreneurs to help them build out the next generation of products and companies over them.

Over the past few years, I’ve shared a number of insights here on this blog about building great products and companies.  Here are a few that are worth reading if you are curious about how I think:

And of course, the most appropriate for this announcement:

For now, I just want to say thank you to Reid, David, John and the entire Greylock team.  I can’t wait to get started.

Jul 21

1 Comment

Observations: The Paradox of Being a “Smart” Venture Capitalist

My last post, and observation of business & government students, was popular enough that I think I’ll share a second one here.   This is an observation that I’ve shared with a large number of people in the past seven years, as part of my greater set of take-aways on working in venture capital.

I worked for Atlas Venture from 2001-2002 as an Associate, and during that time I had the chance to observe quite a the interesting paradoxes that make up success in early-stage venture capital.  This particular observation is about the paradox surrounding being seen as “smart”.

In the short term, venture capitalists often look smart by saying “No”.  But in the long term, venture capitalists can only look smart by saying “Yes”.

This applies generally to new people joining the industry, regardless of level.  New associate, venture partner, general partner.  Venture capitalists deal with exceptionally long cycles.  It takes the better part of a decade to build most businesses, and it can take that long to really determine who in venture capital is doing the job, and who is just playing the part.

In the long term, the metric is simple: how many successful entrepreneurs & companies did the venture capitalist fund & help build to extraordinary outcomes.

In the short term, people are desperate for any tangible signal that will predict the long term.   Unfortunately, in many cases, the short hand for this becomes evaluating their critical thinking about risks and issues on every pitch.

As a product leader, I see this behavior play out on a regular basis outside of venture capital as well.  More experienced product managers will review the work of junior product managers, and will prove their capabilities by highlighting problems.

They don’t realize that they will never be great by pointing out flaws.  They will be great by translating that knowledge into solutions for other people’s products, as well as leading their own innovative initiatives.

I could always tell when a general partner, whether at Atlas or another firm, was “ready to fund”.  You would see their posture in meeting shift radically from finding ways to say no to finding ways to say yes.

Not surprisingly, my fondest memories of venture capital surround the start-ups where I said yes.

Jan 5

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Startups, Technology Companies & Giambattista Vico

I had one of those “delightful” newspaper moments today.  I was going through my Sunday morning ritual, page-by-page through the Sunday New York Times, when I happened upon an interesting editorial in the Week in Review.

The article itself was interesting, but likely one I would have ignored in the online version.  (It’s still one of the virtues of print that I put myself in the hands of the editor, and read the Week in Review from beginning to end.)  What was delightful about it was its philosophical reference to Giambattista Vico.

You see, until today, I had no idea who Giambattista Vico was.  However, it turns out that this 18th century Italian philosopher published a theory of societies that happens to match, almost exactly, my recent theory about start-up technology companies and their development into large, successful enterprises.   Here is a summary from the Stanford Philosophy website:

Nations need not develop at the same pace-less developed ones can and do coexist with those in a more advanced phase-but they all pass through the same distinct stages (cursi): the ages of gods, heroes, and men. Nations “develop in conformity to this division,” Vico says, “by a constant and uninterrupted order of causes and effects present in every nation” (“The Course the Nations Run,” §915, p.335). Each stage, and thus the history of any nation, is characterized by the manifestation of natural law peculiar to it, and the distinct languages (signs, metaphors, and words), governments (divine, aristocratic commonwealths, and popular commonwealths and monarchies), as well as systems of jurisprudence (mystic theology, heroic jurisprudence, and the natural equity of free commonwealths) that define them.

In other words, Vico outlines three distinct phases for societies:

  • An age of gods, when man and immortal walk amongst each other
  • An age of heroes, when the gods have departed, but their children or disciples perform wonders with their power
  • An age of men, when their is equality and democracy among men, and a lack of the supernatural

(Yes, I’m grotesquely paraphrasing.  Bear with me on this one for a moment).

When I left eBay in 2007 to join LinkedIn, many people asked me why I was interested in joining a startup at that time.  Being an avid fan of Greek Mythology, I told friends that there were three phases to the tech company lifecycle in Silicon Valley:

  • The golden age, when gods (aka founders and first employees) walk the floors.  This is a time of incredible vision, passion, and risk.   The events and people of this era become myth and legend rapidly.  The company typically at this time has a product/concept, but no proven business model or engagement with customers.  The company is usually measured in tens of employees.
  • The bronze age, when the gods give way to the heroes, the first wave of executives who help grow and scale the company and fulfill its destiny.  Usually this is a time when the business model has proven out, and the larger risk to the company is its ability to manage growth and scale the organization in both talent and execution.  This is still a time of passionate debate and eccentricity, but now at a larger scale as the organization and business broadens.  This is when the company goes from tens of employees to thousands.
  • The iron age, when the gods and heroes have fled, and the company is managed as a large, public technology company.  At this point, the company is typically measured in tens of thousands.

Amazing similarity… no doubt both Vico & I were both fans of the classics.

When I joined eBay in 2003, it turns out that I joined the company well into its bronze age.  Many of the early employees (and a founder) had left, but most of the original heroes who worked under them and with them remained.   There was no separate corporate entity, and the PayPal acquisition had just happened.  In 2003, a product manager would still present a product strategy directly to Meg at times.  But by the time 2007 rolled around, as many of the heroes  departed, it was clear that eBay had entered its iron age.

Obviously, there are later phases for technology companies that can be interesting.  (Believe me, as someone who joined Apple in the mid-1990s.)  And there are always outliers (Google has stayed in its bronze age longer than most.)  But these phases do a fair job of describing the cultural dynamics of those first few phases of a technology company.

For companies, there are no clear delineations between the ages.  The transitions tend to be gradual, and as often as not tend to reflect the four-year pattern for stock option vesting schedules.  In the last few years, however, I’ve found this framework fairly effective in describing how company cultures evolve, and how that influences the enjoyment and job satisfaction of employees who prefer one phase over another.

Maybe the reason this analogy has been useful for me personally is because, as Vico supposed, it reflects a more general description of how groups of people evolve socially when they dedicate themselves to a single social contract.  For Vico, that was a nation.  For Silicon Valley, it’s a start-up.  It’s interesting to consider that the venture capital financing model and stock option vesting model tends to encourage this type of phasing almost naturally over the growth of a new technology venture.

Something to think about, of course.

Nov 4

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J-Curve & The Hype Cycle: Potential Exits

Will Hsu had a very interesting post on his blog, Hitchiker’s Guide to 650.  (Yes, it’s a pretty cool blog title)

Will overlayed the now infamous Hype Cycle and a hypothetical startup valuation J-Curveover each other, like this:

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(Minor nits – the J-Curve here likely shouldn’t start at zero, but at some higher amount.  The founding team and the concept itself has some value, and typically, while the startup is nascent, the value hinges on that alone.  In fact, it probably rises initially as risk is taken off the table with a few key hires/revisions.  It doesn’t change the insight from the overlay, however.)

He then postulated a few different exit points, with reasonable valuations and time frames, and then highlighted the different ROI values for each.

  • Exit #1: 2~4x, 50~150% IRR (assuming 1.5~2yr hold, 1~2 rounds)
  • Exit #2: 2~4x, 30~70% IRR (assuming 3~5yr hold, 2~3 rounds)
  • Exit #3: 10~100x, 30~70% IRR

(You can read the full details here)

I must have seen versions of the  J-Curve and The Hype Cycle curves a hundred times, but for some reason, seeing them overlayed in the context provides some unique insight into the highs (and lows) of a venture backed startup.  It also highlights the incredible cost to being caught flat-footed (ie, needing cash) at the wrong points in the curve.

I also like the clear, numerical validation of a simple truth of venture investing (and entrepreneurship):  you achieve the highest internal rate of return by cashing out quickly.  But to achieve truly game-changing cash returns for investors (ie, return the fund), the big win is required.

The numbers really aren’t as material as the visualization of the two curves together.

Jun 18

2 Comments

LinkedIn and the Three Bears

Alright, alright.  I know I’m not supposed to be posting about LinkedIn on my personal blog.  But sometimes, the news is really big, and worth sharing with friends & family who read this blog.

So, before you read it in tomorrow’s newspapers, you might want to catch the blog post by Dan Nye, our CEO, on the LinkedIn official blog.  Dan did a great job with the intro:

One of our fundamental beliefs at LinkedIn is that the company you keep is one of the most credible reflections of who you are and what you have to offer.

Like individuals, successful companies are also built on strong networks of relationships, and LinkedIn continually strives to create the right partnerships to help us build a great service for our members, and advance our business.

Today I am happy to announce that LinkedIn has raised additional funding from our original investors and added another world-class investor to our team. Bain Capital Ventures joins our existing group of investors – Sequoia Capital, Greylock Partners, and Bessemer Ventures – and leads this round of investment at a total of $53 million.* (LinkedIn has previously raised $27 million).

The (*) is the footnote that the investment implicitly values the company at over $1 Billion in total.

As a result, there is a lot of press already published, and a lot more to come I expect.  Reading through comments already in the blogosphere, I’m definitely seeing a “Goldilocks” theme to the comments:

  • This bear thinks the price is too high
  • This bear thinks the price is too low
  • This bear thinks the price is *just* right

But I think Dan’s post reflects the true issue with an investment like this – we have a great new partner joining the LinkedIn team who believes in the vision and the value we are creating with the company and its products and services.  More importantly, it’s a reminder that investors are placing millions of dollars in trust with the LinkedIn team to fulfill this vision, and create a business of extraordinary value.  Our users also invest in us every single day with their time, their effort, their passion, and their careers.

So, I’m going to bow out of any debate on valuation, and focus on the real challenges ahead.  I’m hoping that our actions and efforts in the coming months and years will speak louder than words (or numbers, in this case).

Let me leave you with some thoughts on LinkedIn from our investors:

Dec 5

2 Comments

Here Comes Another Bubble: YouTube Video (The Richter Scales)

Hits a little too close to home… especially on the housing prices in the Bay Area. :)

So clever I watched it twice. Plus, I feel like being a fan boy because when they say “hire an engineer”, I’m pretty sure I know that engineer! :)

Jun 12

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The Best Blog Posts on Venture Capital

Sorry, but I couldn’t help providing these pointers.

I’ve been thinking for a while about writing some posts explaining venture capital. While I have a lot of friends who are serial entrepreneurs and venture capitalists, one of the my realizations in the brief time I spent in the industry was how poorly understood it is by 99% of people.

Well, it looks like Marc Andreesen beat me to it.  His posts contain roughly 90% of what I was going to say.

He has three of them:

Marc describes his experience with venture capital as follows:

My experience with venture capital includes: being the cofounder of two VC-backed startups that later went public (Kleiner Perkins-backed Netscape and Benchmark-backed Opsware); cofounder of a third startup that hasn’t raised professional venture capital (Ning); participant as angel investor or board member or friend to dozens of entrepreneurs who have raised venture capital; and an investor (limited partner) in a significant number of venture funds, ranging from some of the best performing funds ever (1995 vintage) to some of the worst performing funds ever (1999). And all of this over a time period ranging from the recovery of the early 90′s bust to the late 90′s boom to the early 00′s bust to the late 00′s whatever you want to call it.

Normally, I’d be skeptical, but as I read his posts further, I found myself really appreciating the perceptiveness of his comments.

For example, here is a brief passage from the first post:

Within that structure, they generally operate according to the baseball model (quoting some guy):

“Out of ten swings at the bat, you get maybe seven strikeouts, two base hits, and if you are lucky, one home run. The base hits and the home runs pay for all the strikeouts.”

They don’t get seven strikeouts because they’re stupid; they get seven strikeouts because most startups fail, most startups have always failed, and most startups will always fail.

So logically their investment selection strategy has to be, and is, to require a credible potential of a 10x gain within 4 to 6 years on any individual investment — so that the winners will pay for the losers and in the timeframe that their investors expect.

All early stage venture capitalists will repeat the above analogy to you, but personally I found that in 2001-2002, very few venture capitalists internalized what that analogy really means. What it means is that you need to take a certain number of “swings” every year, just to make sure your odds of connecting with a winner pan out. In 2001-2002, too many venture capitalists sat on the sidelines, debating whether $4M should buy them 50% or 60% of a Series A company, instead of making sure that they kept investing. After all, any contrarian investor will tell you, you force yourself to put money in when times look grim.

I also really appreciated this quote from Marc’s second article:

Why we should be thankful that we live in a world in which VCs exist, even if they yell at us during board meetings, assuming they’ll fund our companies at all:

Imagine living in a world in which professional venture capital didn’t exist.

There’s no question that fewer new high-potential companies would be funded, fewer new technologies would be brought to market, and fewer medical cures would be invented.

We should not only be thankful that we live in a world in which VCs exist, we should hope that VCs succeed and flourish for decades and centuries to come, because the companies they fund can do so much good in the world — and as we have seen, a lot of the financial gains that result flow into the coffers of nonprofit institutions that themselves do huge good in the world.

Remember, professional venture capital has only existed in its modern form for about the last 40 years. In that time the world has seen its most amazing flowering of technological and medical progress, ever. That is not a coincidence.

This is what made me passionate about venture capital when I was in the industry, and it’s why I will likely return to it in some form again. There is an extremely important role to play for venture capitalists to play in getting money from large, conservative institutions effectively into the hands of risky entrepreneurs who are building the new technologies and businesses of tomorrow. You won’t get there with government funding or small business loans.

My favorite part of Marc’s series, however, is in his third article, when he discusses the current paradox of venture capital, one that has surprised me personally. The question is this:

If venture capital in the past 7-8 years has had such horrible risk-adjusted returns compared to the public markets, why hasn’t the amount invested in venture capital funds decreased dramatically?

The answer is asset allocation.

I remember my Private Equity class at Harvard, where Dave Swensen, of Yale Endowment fame, came to speak. Venture capital has become an asset class that every multi-billion-dollar institution feels like it needs in its portfolio. This is because after 25 years of modern venture capital, it because a proven fact in the 1990s that over the long term, venture capital has returned almost 2x the public market return, with low correlation to the public stock market. That may not sound like much to you, but that’s music to a money-manager’s ears.

This predictably led a significant number of institutions to shift massively into alternative investments and venture capital in the late 90′s, just in time to get hammered by the crash of 2000-2002.

Here’s the interesting part: that hammering — by people who, say, only started investing in venture funds in 1999 — has not resulted in a significant pullback on the part of institutional investors from venture capital.

Instead, venture capital has become an apparently permanent asset class of many large institutional investors — and increasingly, smaller institutional investors.

One element that I do believe Marc missed here is the behavioral finance aspect of why institutions still put billions into venture capital. You see, on average, venture capital has done poorly the last 7-8 years. But there have been some great funds that have performed spectacularly (Google, anyone?) Like hedge funds, many institutions have money managers that believe that the venture capital funds that they have picked will be the few that outperform. (Of course, most of the best venture funds turn away money regularly, but that’s another story.)  Thus, everyone believes that they will be “above average”, even though that’s not possible.

In any case, definitely read Marc’s articles. Bookmark them. Read them and think about them the next time you read some press about venture capital. They are keepers.  I just wish I had written them first.

Apr 18

1 Comment

Top Ten VC Lies

Too good to pass up… from Paul Kedrosky’s blog tonight.

The Top 10 VC Lies…

10. We’re all on the same side here.
9. A lower Series A valuation is good for you too.
8. We’re not funding XXXX companies anymore.
7. I liked it. Really. But we just don’t have the bandwidth right now.
6. We don’t do deals we can’t drive to.
5. Come back when you have a lead investor.
4. Absolutely, we know top people at Google and Yahoo well.
3. Absolutely, we know people at Sequoia and KP well.
2. We love your CEO.
1. I liked it, but I couldn’t get it past my asshole partners.

Enjoy.

Mar 1

2 Comments

Sonofusion: Could the Key to Fusion Lie in Bubbles?

This week’s Science Times in the Tuesday, Feb 27, 2007 edition of the New York Times was just phenomenal. So many things worth writing about!

I’m just going to write one tonight, but I had to give a shout out to their cover story, and one of the coolest technologies I had the chance to investigate years ago, sonoluminescent fusion.

New York Times: Practical Fusion, or Just a Bubble

The basic concept behind sonofusion, also known as bubble fusion, is to take advantage of a unique behavior of liquids when exposed to sound waves. The sound waves can create spontaneous bubbles in the liquid, which then collapse with such force that they actually generate light. This behavior is called sonoluminescence. Here’s the innovative idea: if you use heavy water, which features radioactive forms of hydrogen, it may be possible to actually use sonoluminescence to actually create temperatures high enough to create fusion. And with fusion comes a 50-year dream of using the ultimate form of clean energy, not for weaponry, but for commercial and personal use.

When I was in venture capital, I specialized in software companies, not experimental physics. When you work for a top-tier firm, you get hundreds of unsolicited business plans submitted to you, by email, on a weekly basis. In most cases, an unsolicited submission is the worst possible way to connect with investors.

However, one day I got an email with a business plan for a company in Grass Valley, CA called Impulse Devices. It wasn’t every day I got a plan for a new energy company (this was 2002, and the recent boom in clean energy companies hadn’t begun yet.) Imagine my surprise to find the founders with credible backgrounds, and published material in peer reviewed journals.

Over the course of a few months, I took a few calls with the company, both to better understand the technology and the potential opportunity. It wasn’t a good fit for the firm I worked for, but I was nonetheless curious.

I don’t know if they’ll be able to deliver the addition orders of magnitude improvement in energy generation to generate viable fusion where other approaches have failed. The NY Times piece has a nice summary of current fusion efforts, which, while successful, currently take in more energy than they produce.

Mainstream science is pursuing fusion along two paths. One is the tokamak design, trapping the charged atoms within a doughnut-shape magnetic field. An international collaboration will build the latest, largest such reactor in southern France in coming years. The $10 billion international project, called ITER, could begin operating around 2016 and is intended to demonstrate that all the scientific and technological challenges have finally been tamed. Commercial tokamak reactors could perhaps follow in 10 years.

The other mainstream approach is blasting a pellet of fuel with lasers, creating conditions hot and dense enough for fusion. The National Ignition Facility at Lawrence Livermore National Laboratory in California is to start testing that idea around 2010. The cost of the center, with 192 lasers, has soared to several billion dollars. Harnessing that approach will also take decades.

However unlikely it is that a maverick approach like sonofusion will be the one to succeed where others have failed, there was a great quote in the article I wanted to spotlight:

“It’s really a shame the Department of Energy has such a narrowly focused program,” said Eric J. Lerner, president and sole employee of Lawrenceville Plasma Physics in New Jersey, another alternative fusion company. Mr. Lerner has received NASA financing to explore whether his dense fusion focus might be good to propel spacecraft, but nothing from the Energy Department.

The department is spending $300 million on fusion research this year, and President Bush has asked for an increase to $428 million for next year’s budget. Almost all the increase would go to ITER.

The department supports research for many approaches, said Thomas Vanek, the department’s acting director for fusion energy sciences, but that has to fit within tight budgets. “Since the mid-’90s, it has been a tough environment for fusion energy.”

Some fusion scientists argue that fundamental physics makes these alternative approaches unlikely to pay off. Some agree that financing some high-risk, high-payoff research could be worthwhile.

“I personally think there should be more of these smaller ideas funded,” said L. John Perkins, a physicist at Lawrence Livermore. “Ninety-nine might fail, but one might pay off.”

This is the problem with large, centralized-planning-based approaches to big science, and the reason why private capital markets can be so much more effective at generating innovation.

The big dollars, whether they are from large corporations or from governments will always go to the most practical, the most developed, and the most accepted approaches. The idea of funding 100 ideas, knowing that 90% will fail is not something that seems prudent to stewards of public capital. This is what the venture capital industry, however, enables in the aggregate, and society benefits heavily from that 1 in 100 approach that actually does change the world.

I am so excited now for space exploration, because for the first time, the great giant shackles of centralized government planning for the industry are being broken. Vanity contests and start-up capital are generating more innovation in spacecraft and related technology than the entirety of the post-Apollo space program. That same approach is breathing incredible new life into technologies around clean energy.

So, just in case sonofusion ends up being the miracle that brings practical fusion to the world, just maybe you read about it here first. If not, let’s all hope that another 99 ideas as out-of-the-box as this one get funded.

Feb 22

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Cisco buys Reactivity for $135 Million

Super quick post this morning, but I’ll flesh this out later today.

However, I had to say a big Congratulations to the entire Reactivity team, and in particular, the close friends of mine who are founders. John Lilly, Brian Roddy, Bryan Rollins & Mike Hanson, a very special congratulations. Mike & Brian, I think this means your going to be working for Cisco for a while. :)

Here is the official press release from the Reactivity website.

Reactivity was in the XML Gateway market, which means that they made a secure, fast box that would allow the routing of XML messages. For modern distributed development, which involves exchanging messages in the XML format, a new level of security and management software is needed.

I feel very close to Reactivity, even though officially I was never an employee. The company was founded while I was roommates with John Lilly, and I even attended one of the earliest (if not the earliest) classic Silicon Valley lunches where the model was sketched out on a napkin. The idea was to build a technology business around the very best people coming out of top schools – people who wanted to start their own companies, but hadn’t found the right mix of people or ideas to get going.

Reactivity’s original mail server was my old PowerMac 8500, and I believe my old color laser printer went into the company as well. Later in life, as a venture capitalist, I was able to consult and help advise structuring during their Series B. I always felt good when I could be helpful to my friends and to the company.

Reactivity went through several generations. It began as a stand-alone product consultant and innovation factory, incubating people and startups. They were the hot place to work in the late 1990s for smart, savvy Stanford & MIT engineers and entrepreneurs. Zaplet came out of the company, as did Raplix (which became CenterRun). They became VC backed, getting funding from Peter Fenton and Mitch Kapoor at Accel. In the downturn, the company re-started with a focus on product, and their new product and platform was born.

A special congratulations to the team again. What a great way to start a day. I’m going to have an extra spring in my step all through the week.

Update:  Some nice words from John Lilly, on his personal blog, about the acquisition and about this post.  Funny.  I forgot the laser printer was called the 800 lb. Gorilla.  It was an Apple Color Laserwriter 16/600.  It was HUGE and LOUD.  Funny.

Jan 8

Isilon & IronPort: A Tale of Two Startups

Two of the startups that I had a chance to work with when I was in venture capital had big news lately, and I thought I’d write up a quick post of congratulations.

Isilon Systems (Ticker: ISLN) went public on December 15th, just sneaking in before the new year. They raised $108 million in their offering, and they are trading well above their offering price. Their market cap, as of Friday, January 8th, was $1.5 Billion.

IronPort Systems was acquired on January 2nd by Cisco Systems (Ticker: CSCO) for the bargain price of $830 million.

For me, these two liquidity events provide me with incredible validation, as these were two of my favorite startups that I was able to see at Series A funding during my limited time in venture capital. I can’t take any credit for their success, but I do think that these companies had a lot in common, and recent events give us a chance to reflect on what led these two start-ups to go the distance, when so many others fail.

  • Great, technical founders. There are a lot of different types of entrepreneurs, but I’ll admit that I have a bias towards experienced and deep technical founders. Sujal Patel fit the profile, exactly. As an engineer, Sujal had solved some of RealNetworks most complex back-end operational challenges. That experience gave him the insight for a new type of solution, a type of virtualized storage optimized for media. His experience gave him the insight to a real customer need, and his deep technical knowledge gave him the ability to spot a solution not on the market. Scott Weiss & Scott Banister also exemplified the profile. As early pioneers for Hotmail (Weiss) & Listbot (Banister), these two knew the email businsess well. They were also technically deep enough to see the potential for an optimized server for outbound email services. These are the type of founders that you want to see and fund, when possible.
  • Leveraging new technology to solve customer needs. Despite the mythology about startups in the press, most successful technology startups do not invent some radically new technology or application that no one has ever heard of. However, they do tend to take today’s technical innovation, and apply it to a real customer need that can now be uniquely addressed in a way that wasn’t possible before. Open source operating systems had become big news in the late 1990s, and into 2001&2. However, both of these companies were technically based on the idea that an open source operating system can allow a very small team to add incredible value by optimizing just a portion of a modern operating system for a specific application. Isilon optimized their threading & file system for virtualized storage for high intensity media use – high bandwidth, long reads, lots of simultaneous sessions. IronPort optimized their threading & file system around Sendmail.

    Like most innovations, this insight was not unique to these two companies – Tivo, for example, had done the same thing, and you could even argue that Cisco had gotten its start optimizing an OS for routers. However, it was still relatively early days for this type of platform, and open source operating systems gave entrepreneurs the ability to create incredibly robust, high-end vertical platforms with amazing speed and low cost.

    The perfect “next step” usually has to be technically robust enough to be reliable for customers, but new enough that the entire market hasn’t already adopted it. It’s not surprising to me that both of these companies had latched onto this next step.

  • Learn & adapt based on customer feedback. If you read the websites for Isilon Systems or IronPort Systems, you’ll see that these two businesses have evolved significantly since those Series A rounds in 2001 & 2002. It’s trite to say that the technology market moves quickly, and that startups have to move quickly as well. The real issue, however, is that no matter how insightful the founder, and no matter how breathtaking the technology, the difference between a great pitch and a great business is a relentless dedication to learn & adapt. If you are smart, and you have a strong technology in a space with an underserved need, you will have opportunities to win. But they are hidden, and good teams know how to listen, move, and take action based on incomplete information.
  • Tough funding environment. For people who haven’t worked in financial markets, this reason can seem counter-intuitive. How can a tough funding environment make a company more likely to succeed? Success is about the team, the technology, the product, and getting there first? Right?

    Wrong. Well, at least, it’s not completely right. Tough funding markets force entrepreneurs to think harder about potential opportunity. They force investors to focus more on true differentiation and economic potential. And they prevent the funding of 100s of copycat ideas in the same area, which can destroy the economics of a previously viable area through over-supply.

    I believe I was extremely fortunate to be in venture capital in 2001 & 2002, extremely tough markets. Believe me, there is just as much BS in a tough venture environment as a strong one – it’s just a different flavor of BS. The reality is that, when times are tough, and everyone thinks that its better to not be doing deals, you need to have the strength, fortitude and intellect to make some investments. Isilon & IronPort are examples of deals worth making in 2001 & 2002, when conventional wisdom said it was OK to not be making investments.

  • Limited access.
    “I would not join any club that would have someone like me for a member.” – Groucho Marx

    Early stage venture capital is a branch of private equity, which has become a household term these days due to the large amount of money involved and the high returns of the funds. However, it’s important to remember that private equity has higher returns than public equity for only one reason – it’s private! Limited access to information, to the investment, to the people, to something. Otherwise, our good friend the efficient market would have reduced rates of return already to something that risk-adjusted wouldn’t look so special.

    Whenever you see what you think is a great deal, you have to play Groucho. You have to ask, “Why am I uniquely getting this opportunity?” With Isilon & IronPort, we had concrete answers.

    I’ve seen too many eager, young, aggressive venture capitalists who don’t seem to realize that for good teams and concepts, there are ample sources of capital out there. The selection of an investor is a hiring decision, and there needs to be a good reason why the founding team needs you. Money isn’t the answer.

It’s interesting to me, personally, that I saw both of these deals thanks to our Seattle office, now closed. I actually worked the internal diligence and analysis of IronPort Systems, and was extremely positive one team and the company. Although Atlas passed on the Series A, Scott Weiss was someone I reached out to when I left venture capital, because I was that impressed with the company.

The current early stage venture environment is clearly over-heated at this point – too much money still chasing too few real economic opportunities. Still, great companies are started and built in the worst of times, and great companies are also started and built in the best of times. As long as technology continues to turn things that were previously expensive and complex into things that are now cheap and simple, there will be opportunities for entrepreneurs to solve today’s customer problems in whole new ways.

I’ll write about what some of my takeaways were about how to be a great venture capitalist another day. Today, I just want to say a hearty congratulations to the Isilon & IronPort teams, whereever you are. You deserve every bit of it.

Dec 23

VC Lifestyle Myths (in Retrospect)

A great post this week from Susan Wu at Charles River Ventures on the myths surrounding the legendary lifestyle of Silicon Valley venture capitalists:

Susan Wu: VC Lifestyle Myths

I was reading along, waiting for something to resonate, when I saw this screenshot:

Ah yes, it is all coming back to me now. The VC Lifestyle.

Now, let me be upfront about something here. I love venture capital. Honestly, I do. The idea of job where you are striving to know as much as possible about technology, people, strategy, and building businesses is definitely in my sweet spot. Not only that, but I continue to be amazed at the almost accidental set of circumstances that gave birth to the modern venture capital industry in Silicon Valley, and the amazing value that has been generated because of it.

All of that being said, the reality is that the VC lifestyle is not as glamourous as you might think, and definitely has elements to be desired. Susan captures a few key elements that definitely resonated with my memories of being an Associate at a large, early-stage venture fund:

  • Tyranny of Outlook. Meetings, meetings, and more meetings. Easily 6-8 a day, mostly pitch meetings with entrepreneurs & executive teams. The day is blocked off weeks in advance, and as a result, you are constantly moving things around as things come up, meetings go over, and you are trying to meet with just one more person.
  • Miles wide, but inches deep. It’s hard to imagine being lonely when you are meeting literally 20 new people everyday, and your rolodex grows to the thousands. But a vast majority of your contacts are people you meet once. Many others you might talk to once or twice a year. Even fellow venture capitalists and entrepreneurs that you are close too might touch base on a weekly basis. The reality is that the only people you truly see every day are those in your office, and our office was small. At it’s largest, we had two partners, an associate (me), an analyst, two executive assistants, and a receptionist. That’s not a lot of people.
  • Coopetition. Without getting into the nuanced politics of venture capital, it can be draining at times. As a young person in the industry, you are at once trying to build a reputation for yourself and carve out a niche, but at the same time you need the support and assistance of others around you. In the long term, you are judged on your own success, but in the short term, you are judged on your support of the senior partner(s) you are working with.

When I think about my life at eBay, it’s amazing at how much my experience in venture capital has helped me.

First of all, my Outlook calendar still looks like that. :) Maybe that has more to do with growth, drive & Silicon Valley than venture capital itself.

Second, I truly love the number of people I get to work with at eBay. Love it. Not only have I met literally thousands of great people at eBay & PayPal over the past four years, but there are hundreds of people that I now know fairly well. Leading large project initiatives and new businesses at a larger company may be more constrained in some ways than leading a startup, but the counter-balance is the number of people you get to know and work with.

Third, my orientation towards senior executives has shifted. Before venture capital, there was some degree of awe that I felt around CEOs & executives of large technology companies. While I still respect their achievements, I found that venture capital gave me more grounding around the fact that these are, in fact, just people. At eBay, this has allowed me to be more comfortable, in general, around meetings with our senior staff. I still see to this day so many bright people, with excellent ideas, get tripped up the moment they have to succinctly and convincingly present an opportunity to a senior executive.

I’m quite happy with my move back to an operational role in 2003, and I’m extremely happy with the opportunities I’ve been given to help design, launch, and build brand new sites & businesses at eBay.

But some day I’ll likely go back to venture capital. Maybe. Right time, right place, right people. But not yet.

(BTW, If you aren’t reading Susan Wu’s blog, it’s worth bookmarking. I have a special place in my heart for any venture capitalist who actually play World of Warcraft, and can actually comment intelligently on technical issues.)

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