VC Perspectives

Microsoft started taking reservations for the limited beta of their Vine service today. Allegedly conceived after the Katrina disaster, it is now being brought to market as a twitter-service looking out for friends who need help.

The Microsoft Vine Beta connects you to the people and places you care about most, when it matters. Stay in touch with family and friends, be informed when someone needs help.

Although presented in a very humane context, that seems more like an excuse for jumping the real-time bandwagon extremely late. And it looks very improbable that the service will gain any particular traction, neither with the suggested use case nor any other. A remarkable lack of self-insight, or can there be a larger and more attractive agenda hidden somewhere?

VentureSource just released their Q1 numbers for the US venture investment, not surprisingly the IT industry was the hardest hit with the lowest levels of investments since 1997, in numbers 231 companies received  $1.68 billion, down 52% compared to the same quarter last year.

For a long time, technology companies have been the focus of the venture industry, but today when the IPO market is closed and the few larger companies that still are actively pursuing acquisitions pay a lot less, the return expectations becomes very hard to match. Fewer exits also means that the average holding time increases, thereby further decreases the returns. In addition longer holding times means fewer investments since more capital is need for non profitable companies already in the portfolios. To further reduce the available capital for new investments, a majority of the large institutional investors in venture capital funds, have a percentage allocation to investments in unlisted companies and when the overall valuations of listed companies go down the percentage becomes a smaller absolute amount.

That venture capital, as most industries, are affected by the cyclic economic climate should not be a surprise to anyone, but it judging from externally visible information, this pattern is generally not reflected in type of investments made by venture firms, only in number of investments.

For example, let’s assume a seven year period between peaks in the economic climate and that exits are most frequent and gives the highest return around a peak, then you should invest in companies that are mature for exit in the next peak.

Being an engineer at heart I’ve half seriously put it in a formula:

Next assumed peek (NAP):          2014
Current year (CY):                2009
Company plan to maturity (CPTM):  4yrs
Delay factor (DF):                25%

Investment timing fit:            =1/(3/2)^ABS(NAP-(CY+CPTM*(1+DF)))

In my example above this would be a perfect fit, i.e. 1.

If you vary the planed time to maturity from 1 to 7 years you get the following graph:

Conclusion: Today you should invest in companies with a 4 year planed time to maturity, assuming a 25% delay in executing the plan.

My intention is not to create mathematical formulas for how to invest, but rather to highlight the fact that to make optimal investments and building companies, the economical cycles should be taken into account, both for investors and entrepreneurs alike. Ideally both in what investments you make and what plan you follow in building the company to hit the next peak.

Although IBM in many ways looked like a more likely candidate, it now seems like Oracle instead will acquire SUN. Some questions immediately spring to mind:

• Why did SUN reject the IBM offer?
• What’s in it for Oracle?
• What will happen to MySQL?

As for the first question, I don’t think it was valuation. IBM offer is believed to have been around $6.85-7 billion and Oracle’s bid is supposed to be around $7.4 billion (or $5.6 billion net of Sun’s cash and debt). More important was probably the fear of SUN that the deal wouldn’t go through, because lack of commitment from IBM for example in case the deal would be subject to an antitrust review. More views on this question from Bloomberg.

As for the second question, Oracle is officially mentioning control of Java and Solaris as the main reasons, but I think there are a few more. The acquisition will help Oracle to really take on IBM as it can start offering integrated hardware and software solutions. Through the indirect takeover of MySQL, it also enables them to remove an important competitor while taking an even more powerful stab at IBM in the database market. Henrik Torstensson has posted a link to a good analysis by GigaOM of the acquisition.

As for what perhaps is the question closest to our Nordic hearts, Monty Widenius co-founder of MySQL offers some thoughts on his blog Monty Says. Knowing what problems SUN have had in integrating MySQL (and still SUN is a much more open source friendly and savvy company than Oracle), my feeling is that Oracle have a gigantic task at hand making the MySQL integration successful and I woudn’t be surprised if we will see many more MySQL employees leaving the company sooner rather than later. Maybe an opportunity for other open source companies to pick up some very talented people…

Most of you are probably familiar with Seedcamp, a great week-long event in London targeted at young entrepreneurs from across EMEA. Everyone I have talked to that have participated describes it as an extremely interesting and valuable experience. What’s cool is that it is really designed for the entrepreneurs; VCs, CEOs, successful entrepreneurs are there to help out the entrepreneurs rather than to mingle with each other.

This year, there will be seven mini seedcamps around Europe and one of them is organized in Helsingborg in southern Sweden on May 5. Last date for signing up is on Sunday April 19 so if you haven’t done so yet, visit the official website or their blog to find out how to do it.

I am going to be there as a mentor together with for example Hjalmar Winbladh from Rebtel and there will be interesting panel discussions with panelists such as Martin Gren (Axis), Thomas Weilby Knudsen (NorthCap Partners), and Hampus Jakobsson (TAT).

Arguably the most important activity for an entrepreneur is recruiting. A great idea is a good start for any successful startup but great companies are built by great people so being able to round up a kick-ass team is usually even more important.

When we at Creandum evaluate startups, the team is often the most important criteria. Although we don’t necessarily require a full management team, it is still a great sign if the founders have been able to attract great talent or expertise as employees, board members, or advisors. First of all, it shows that you are able to make people enthusiastic enough to spend their most valuable asset, their time, to help you out. Secondly, it hopefully shows that you are smart enough to complement your strengths and weaknesses.

So bearing this in mind, it could be interesting to think a bit about how recruiting is performed. I am currently reading a very interesting book called Sway by Ori and Rom Brafman. In one section, Professor Allen Huffcutt, who has made extensive research on recruiting, argues that the usual job interview recruiting process is pretty useless. His research shows that there is a very low correlation between normal job interviews and actual job performance. He’s especially skeptical to interviews involving questions addressing how the candidate would like to be or think he/she should be to get the job. Basically questions where the candidates are asked to evaluate themselves, indicate their future plans/ambitions, or general reconstructions of past events.

Instead, Mr Huffcutt recommends focusing on job-related hypotethical scenarios and specific past experiences based on data and verifiable accounts. Or even more drastically, skip the interview and go for aptitude tests instead.

My take is that interviews still can be very valuable but I am certain that most companies could improve their recruitment success rate substantially by thinking through what one hopes to achieve with the interview and complement it accordingly with more job-like scenarios. As an example, many software companies use programming tests for the applicants making sure they actually know how to code.

And make sure that recruiting is treated as a core competence within your company. Because it needs to be.

During my latest Helsinki trip, I had a very interesting conversation with Ville and Antti at Arctic Startup about what, if anything, is missing in the Nordic startup and VC environment especially compared to the US. One of many things that we identified was lack of successful serial entrepreneurs in the Nordic region.

I have often heard that successful serial entrepreneurs are tricky to invest in. Reasons include:

• If they have been successful enough, they are not hungry enough the second time around
• They will just try and repeat what was successful the previous time
• Only young entrepreneurs are naive or crazy enough to be able to change the world
• Luck never strikes twice

While I am sure we can find numerous cases where some or all of these statements are true, according to Josh Lerner, who has made significant research on the topic, in general this is not correct. Rather the opposite. In his research, Josh has found a strong positive correlation between the success of the startup and if the founders have been successful serial entrepreneurs. Another interesting aspect is that top VCs to a much higher extent invest in successful serial entrepreneurs than other VCs.

Also, successful serial entrepreneurs play an important role not only as founders of new startups but as business angels, board members, advisors and role models.

Unfortunately from a Nordic perspective, this is a bit of a chicken and egg problem. Until we have created enough successful startups, we will not have enough successful serial entrepreneurs. I still feel that we are on the right track with more and more entrepreneurs making good exits for every generation but it is also important that our state systems allow for people to be successful in our region so that these people stay on to either make it again themselves or helping others achieve success.

Every year Red Herring selects the 100 most promising technology companies in Europe. As companies need to apply for being considered, it may not be a completely relevant list but anyway it’s a pretty good source of what’s considered to be interesting start-ups. It is also a good opportunity to see how for example Nordic companies compare to the rest of Europe.

UPDATED: The process is such that Red Herring first selects 200 finalists and then 100 winners. The complete list is now published. The Nordic region is represented by 28 companies which is pretty impressive and Sweden together with Germany has most companies.

The Nordic distribution:

Sweden: 13 companies
Norway: 6 companies
Denmark: 5 companies
Finland: 3 companies
Iceland: 1 company

After almost a year of speculation, Google revealed the plans for its VC arm yesterday. The site holds a nice FAQ section, but a couple of questions remain unanswered. VC Perspectives help you understand:

Are superior financial returns the ultimate goal for Google Ventures?

No. In fact it is unlikely that our portfolio will provide better returns than our VC colleagues, given that neither selection nor quality of post-investment value-add are superior to that of our competitors and potential co-investors. Neither is it likely that 100 M invested in “the-next-big-thing” start-ups over the first 12 months will provide shareholder value comparable to that coming from growing our main lines of business.

Aha. So the overriding objective of your investment activities is strategic?

No. If that had been the case, we would have limited our scope of investment to businesses we understand and which Google can benefit from growing. And unlike the few successful corporate VCs out there, we aren’t really relying on the opinion of the commercial and technological experts in our various business units to assess the potential investments. We invest across all types of markets, also those completely unrelated to Google’s current or future business.

OK. So if it’s not for financial or strategic reasons, you’re basically doing this … to build your brand?

Yeah! And because it’s fun. At least to start with. We’re not so sure about the internal-down-rounds or the shutting-companies-down parts, but investing in- and being associated with clean technology and not least entrepreneurship in general is very valuable to us and to our shareholders.