You Want to be a Technology Investor?

One of the questions friends often ask how one can become a technology investor. The general advise usually includes the following which, though rational, do not offer assurance of success with any degree of certainty:

1. Get close to the venture firms, either by working at venture-backed startups or by providing advisory and consulting services to venture firms. Since most firms tend to hire people from pre-existing relationships, this is a reasonable idea. Seth Levine wrote more on his popular blog How To Become a Venture Capitalist.

2. Qualifications: There is no ideal resume for an aspiring venture capitalist. If you look at the background of successful venture capitalists you'll find ex-technologists, bankers, consultants, academicians, financiers, writers, college drop-outs, entrepreneurs, and several other professionals (including ex-Generals!.) This makes it hard to prepare oneself for a career in the venture capital industry. Leading a successful startup or exhibiting operational excellence at tech companies perhaps gives you the best shot, especially when you become a repeat CXO or an angel investor. But this circumstance will apply to only a few people.

3. Long Term Project: Actively network with the venture firms and keep a long term view of things. It's a small industry. Though no exact counts are available, it's safe to guess that the total number of Associates at all US venture firms will amount to less than 1,500. The industry association NVCA membership directory lists less than 700 members. A large numbers of firms are not NVCA members but few of them will have the resources to hire full time Associates. Only a fraction of the Associate positions will open for hiring in a year since few people leave by choice.

4. Point of Entry: There are usually two points of entry leading to a potential Partnership within a firm - a junior Partner (or a Venture Partner) or an Associate (or a Principal/Vice President.) The former applies to people who have already proven their ability to generate profits from funding or managing startups. Candidates for Associate face less stringent requirement but contend with a lot more competition. Often, I meet highly qualified people who are too young to be Partners but too old to be Associates. What's the right age to start? Most Associates (those with a potential of Partnership track) will usually start when they're 30-40 years old. If things work out, they can become a Partner in ten years or less. So, starting at the age of 40 is not entirely a bad idea.

5. Skills: Though it's hard to pin down required qualifications for budding venture capitalists, one can observe that domain expertise is more emphasized today than it was a decade ago. For example, an acknowledged expert in the field of nanotechnology or fuel cell can attract the attention of venture firms that are focused on those areas. Yet, non-quantifiable skills continue to be just as important. These can include interpersonal skills such as empathy, networking, coaching, judging and managing people. Time management, effective listening, and persuasive and organizational skills can be critical every day on the job. People that succeed in the long run also display broad awareness of economic and industry trends as well as the analytical ability to rise above the clutter of details and focus on core issues and possibilities.

I'm sorry if the list of requirements seems humanly impossible. Yes, the venture firms will say that they look for these attributes but few, if any, venture capitalists actually fulfill all of the above requirements. You can do a little experiment of your own. Ask any venture capitalist how they became one and most will say, "I was lucky to be at the right place at the right time." Luck, indeed, plays a big role. That should not surprise anybody - the odds of success are so low for any individual that chance plays a significant role. So, never assume that the guy financing your startup is smarter than you are. He is simply performing a different function.

If this subject is of interest to you, I'll encourage you to read the details of the Kauffman Fellowship in my next essay. It's a fine gateway to a career in the venture capital industry.

Playing the Cleantech Roulette

If you want an insight into the investment thesis of the current Cleantech venture investors, I recommend the following quote from a leading investor:

"There are many such things going on that are radical, implausible - each individually (is) somewhat implausible, on the aggregate (it is) highly plausible that one plan will work. That's the key to the solution."

Here is a commonsense translation. "I know that my investment looks, and is, funny to you. But hold your breath. From this mass of chaos, an intelligent plan will emerge. I cannot tell which investments will make money, but somebody somewhere will be alright. Take my word."

This comes from a thought leader of the industry. Where he goes, others rush in. Not surprisingly, smart people are questioning if the current investment approaches are working. We have already lived through damaging hype cycles in fuel cell and ethanol, and now working through disasters in solar and algae. When do we stop and say? "Enough carnage. Let's rethink what we are doing and explore if there are sensible alternatives to investing in the Cleantech sector."

What's Wrong with Cleantech VC?

An informative and thought provoking presentation from @Ventures.
What's Wrong With Cleantech VC

View more presentations from CleantechVC. (tags: greentech alternative)

VC-backed Comapnies line up for IPO

I still see too many entrepreneurs who believe that the U.S. capital markets will never again roll red carpet for venture-backed technology companies. Guess what? Markets have always been cyclical and things are turning around, particularly for the venture-backed technology companies. Witness the recent filings of New England companies founded by TiECon members including Airvana, BladeLogic, Netezza, Virtusa, and Starent.

Venture-backed technology IPOs came back in vogue in the latter half of 2006 and produced good market returns (difference in the first-day closing and the offering price,) signaling that the public is showing more appetite for technology companies than before. As a group, technology IPOs posted a very impressive 37% average return from the offer price. Notable tech IPOs this year include Mellanox (Infiniband interconnect, rev. $44M,) Clearwire (WiMax network, rev. $95M,) Sourcefire (network protection, revenue $41M,) Salary.com (rev. $17M,) BigBand Networks (video network, rev. $140M,) Glu Mobile (games for handsets, rev. $39M,) Comverge (power management, rev. $24M,) EnerNOC (power response management, rev. $23M,) and Aruba Networks (enterprise wireless, rev. $73M.)

Revival of the Capital Markets: The capital markets have been on a bullish streak. The Dow Jones index surpassed its previous peak reached in 2000 late last year while S&P 500 is almost back to its closing record of 1,527 of March 2000. But the Nasdaq Composite Index, which is dominated by technology stocks and lost the most of any major index in the bear market, would have to nearly double to return to its old record of 5,048 of March 2000 - a sign that the technology investors are optimistic and rational, not overzealous and speculative.

The IPO market experienced the best first quarter since 2000 in terms of volume and proceeds. Overall, IPO offer amounts by venture-backed companies dropped to about $2B in 2002 and then slowly climbed back to $5.2B last year. We expect that this year will be a particularly strong year, easily outpacing the amount raised last year. The total number of Nasdaq IPOs for the first quarter, 42, was the most since the same period seven years ago.

Healthcare and IT: 2006 was a good year for the healthcare sector. However, most of these listings were priced below their ranges. Technology and telecom companies accounted for about 22% of the IPOs and produced good market returns. Riverbed Technologies, a WAN optimization vendor, was the top performing IPO, producing 215% return. Other solid performers included Ominture (web analytics,) Isilon (clustered storage systems,) Techwell (fabless IC designer,) and Synchronoss (VoIP software.)

Alternative Energy IPOs: Solar Shines
As the buzz surrounding solar investments peaked, a quartet of solar power products manufacturers raised $822 million in proceeds. The notables included Canadian Solar (+35%), Trina Solar (+2%) and Solarfun Power (-20%) that pitched China-based operations. First Solar (+39%) is very active in Germany, the second largest solar market in the world.

While Ethanol Runs Out of Fuel: Used as a fuel additive since the 1930’s, ethanol’s recent rise to prominence has been fueled by a favorable regulatory environment and the phase-out of competing fuel additive MTBE. While market conditions appeared ripe, investors were concerned about long-term viability. After strong initial trading, VeraSun and Aventine both plummeted amid concerns over narrowing ethanol spreads. Similar concerns led Hawkeye Holdings to pull its planned IPO in November and forced U.S. BioEnergy to price its offering at a -13% discount, according to IPOHome.

VC Firms optimistic: The venture firms in Boston and Silicon Valley have a clear sense that this is a very viable market for technology companies. 2007 should be a big year for venture-funded tech companies. I expect VC-backed technology and internet-based companies to continue their IPO revival in 2007 as many companies that got off the ground in the aftermath of the tech meltdown are now maturing. Proposed changes loosening the burden of Sarbanes-Oxley (SOX) should also entice more technology IPOs where such costs can take a large bite out of their profit margins before their business models reach full scale. We do see segments of the technology sector strengthening their presence in the IPO pipeline on a sustained basis. These include cleantech, mobility, and multimedia applications and infrastructure.

A Boyout Industry Crash?

An informative presentation by David Rubenstein, co-founder of the Carlyle Group, addressing a widespread concern of an impending crash of buyout funds. It is a remarkably forthright discussion of excesses in the buyout industry but opines that the industry is ready for a correction, not a crash.