The year 2012 will go down in the record books as one of the strongest years the venture industry has seen in some time. Even as Wall Street can be tough on Facebook, Groupon, and other graduates of venture, when the IPO and M&A windows are open and working in tandem, as they did for a big part of this year, it’s a great environment for venture returns and for realizing just how good this asset class can be. While the macro-global economy is still trying to shift out of neutral, the venture industry, and all of its participants can share some collective pride that young companies are still pushing the limits of innovation and are a big driver of overall economic development around the world.
We VCs are a notoriously impatient, ambitious, and future-looking bunch, justifiably focused on bottom line return. Yet ‘tis the season to be contemplative, and here are my key takeaways from 2012, along with wishes for the coming year.
Avoid market timing and falling in love with the latest trend.
Let’s not forget the value of diversity, and having the courage to be contrarian, when it comes to investments. In 2012 alone, we’ve gone from viewing investing in consumer businesses as the rage and then seemingly just as quickly moved back-to-the-future to investing in the good old enterprise, which only last winter was somewhat cryogenically frozen for most firms.
Market timing has never been a great long-term strategy and therefore we need to recognize the perils of mass adoption of certain categories and technologies as being “awesome,” followed by a mass exodus when things head south. Instead, let’s better balance ourselves. If we do we’ll avoid getting whipsawed by the cyclical booms and busts our business has been witness to.
One of the perilous side effects of massive trend investing is what it is doing to some entrepreneurs. As opposed to dreaming up and building businesses that are based on substantial value props or technical differentiation, far too often entrepreneurs are jamming their investment decks with the latest jargon — whether it’s apps x.0, big data this-and-that, the cloud or what-have-you. We’re dangerously close to the point where too much focus is being placed on what you are saying rather than what you are actually doing.
I’m not suggesting for a second that valuable businesses won’t be built around such big themes. It’s just important for us all to keep check on the substance and not just the headlines.
Don’t be afraid of doing what’s really hard.
I’m concerned that as an industry we’re moving away from the things that are really hard to pull off and time-intensive to build. It comes up casually in conversations among investors: “Wow, that is really big, but really hard to pull off – sure if it works it’s a total game changer, but I could never get that through my partnership,” etc. You overhear it in Starbucks where entrepreneurs dismiss massive ideas in favor of more subdued goals, as they believe it will be easier to raise money. More often than not, to change the way we live and work takes real effort and time, and I hope that as an industry we continue to realize that we need to be fueling such endeavors as they are a big part of the path to driving the returns our investors are looking for.
There is nothing more intoxicating than seeing a really difficult problem solved within the context of building a great new company. I got a taste early on in my tenure at Battery when I was lucky enough to see the genius that became Akamai, and I’ve been hooked ever since. The late Danny Lewin, Tom Leighton (just last week went from Chief Scientist to CEO) and the team, which mostly hailed from MIT, changed the paradigm of delivering data over the web with breakthrough mathematical algorithms, that were super difficult to develop and which are still responsible for their critical role in delivering up to a third of all Internet content. Since our initial investment in 1998, I have witnessed companies of all sizes trying to topple Akamai’s category leadership. Hasn’t happened yet though because they’re still a company that’s focused on the hard stuff
I’m happy to say that, while we are not the only firm to do so, Battery still invests in portfolio companies that are trying to solve the unsolvable hard problems. Whether they are a bit further outside the box such as Champions Oncology, which is creating the largest information bank of cancer tumors in the world, or companies playing on themes that are a bit more mainstream like Zerto, a next generation replication solution for virtualized computing. My bottom line is that great companies are born out of defensible, creative solutions to big and hard problems.
Invest more not only research, but in scientists and engineers, too.
I was having coffee with a recently retired CTO of a Fortune 50 company. One of his laments was that the days of major R&D funding for game-changing science coming out of American corporate icons, like the former Bell Labs or Xerox Research Park, is a thing of the past. Even with an economy growing more stable, the funding for real innovation inside isn’t coming back so quickly, if ever. With this as a backdrop, it’s an important opportunity for the VC community to step up. Easier said than done, yes, of course, but this gets back to having the appetite to go after the hard stuff, even opportunities like semi-conductors, innovative materials, and industrials.
I know you are saying, “What? Hardware! Are you crazy? Capital intensive, long time to market… No way!” Well, I’ve seen a ton of “capital efficient” software and Web businesses that have needed to raise more than $100 million, so let’s put that argument aside. The reality is that there is a ton of innovation going on in lots of segments and businesses like Anobit (Battery portfolio), FusionIO (wish it were a Battery portfolio company, but it’s not), Calxeda (Battery portfolio) and Vayyar (Battery portfolio), are making their presence known in a big way against potentially giant market opportunities.
In the coming year, it also means easing visa restrictions to qualified engineers and scientists looking to work in U.S. high tech. It also means working with universities looking to partner with government and industry. A good example of this is the JV between Cornell and Israel’s Technion for the development of their new campus in New York City.
Geography is both all Important and irrelevant.
Speaking of different places, in 2008, after more than a decade of investing out of our office in Boston, I made what folks have told me was the unusual move of relocating to spearhead our Israel build out. While still frequently on the ground with my colleagues in Boston and Menlo Park, I am often asked if geography still matters. Bottom line: geography both doesn’t matter at all and matters big time.
I see it clearly with my kids, ages 2 through 15, faced with the challenge of learning two very different languages at the same time, adapting to a foreign culture, dealing with their issues of being immigrants yet thriving in a new international environment. I also see it clearly in Silicon Valley, the dominant beacon for the VC industry and the source of a disproportionate share of sheer innovation, energy, and tenacity.
But at the same time, I think it’s irrelevant and that great companies and great returns can be found in many places. As an illustration, take Indianapolis where this year we’ve enjoyed great success with portfolio companies like Exact Target, Angie’s List, and Consona, or more recently Diablo in Ottawa – beating the odds of a hardware company raising money these days to the tune of $30 million, one of the largest investments in Canada since RIM.
I think some people and some places just get it, and some don’t and, as a firm, I want to make sure we’re working with those that do, regardless of where they are. To sum it up, from our firm’s perspective, 2012 has been a terrific year in terms of realization of returns on companies we invested in and in terms of new investments in sectors that will drive out paced returns in future as well.
But our business comes down to what we’re going to do next. Jeremy Wertheimer founder of ITA (leader in airline software and later sold to Google), once asked me, “Have people totally given up the dream to build the next IBM?” I hope the answer is a resounding no.
We need more entrepreneurs dreaming up and building them, and more VCs willing to back them. In 2013, let’s work together to realize that thinking big and hard and growing the bottom line can go hand in hand.
[Image courtesy daily sunny]