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Why Obama Should (or Maybe Shouldn’t) Go to New Jersey

I was in New Jersey last week driving from an interesting meeting with a new investment opportunity and headed to meet with one of our CEOs when I had to stop for gas.  Now, it should be noted that I almost never buy gas in New Jersey.  In fact, when I know I am headed for the Garden State, I stop to top off my tank to make sure I never need gas while I am there.  The reason should be clear to anyone who travels often in New Jersey - and it is not the price of gas because gas is actually cheap in New Jersey.  As I sat in my car waiting for the man who was supposed to be pumping my gas to finish washing the window of the person behind me so that he could process my credit card, a number of thoughts ran through my mind.   . .  .  . I hate waiting for someone else .  .  .  .   Why am I buying gas, I might make it home on fumes.  .  .  .  .  Who would want this job pumping gas?   .  .  .  .  Obama should come to New Jersey.   Yes – Obama should come to New Jersey.

First, let me say that there is nothing wrong with pumping gas.   I served my time pumping gas at the 12 Mile & Evergreen Shell outside of Detroit the summer after graduating high school.  People pumping gas in NJ are working, mostly working hard, and are trying to get by.   I salute them.   I did it to earn money for college in a tough Detroit economy of 1981, and had the added bonus of three shirts with “Nate” in script across the pocket.  It looked more like “Mate”, so some people thought I was Australian and others thought it was the wish of a recent high school graduate.  Even in 1981, at 12 Mile & Evergreen Shell we had two self-serve lanes and two full-serve lanes, and full serve customers paid $0.20 more per gallon.  Self-serve technology was new and people were slow technology adopters, so full-serve was busy and I had a job.  As consumers became more comfortable with the self-serve model and technology continued to evolve, particularly with the invention of card readers at the pump, as we all know, the jobs available for gas pumping declined to almost non-existent, except in New Jersey. 

So why should Obama come to New Jersey?   Because there is a law in New Jersey that states that people cannot pump their own gas.  Truly – in 2011, this law remains.   As I drove on after my 22 minute gas stop (with no lines), I started to see the brilliance of the state.  It came to me that there are really two ways out of the job creation crisis, and New Jersey is highlighting one great solution.  It would involve the president doing the following:

  • Outlaw self-serve gasoline – creating all those gas pumping jobs
  • Outlaw ATMs – creating many more teller jobs
  • Outlaw EZPass – creating toll collector jobs
  • Outlaw Self-Pay Parking – putting people back in those booths
  • Bar executives from typing their own emails – bringing back the traditional roles of the steno pool and the secretary
  • Eliminate robotics from manufacturing – bringing people back to the manufacturing lines
  • Limit the size of a farm to 100 acres – restoring America’s past as an agrarian society where 46% of the US population used to farm

It sounds crazy – but these jobs still exist in other countries where the labor to capital trade-off has different outcomes.  We could legislate the same jobs back into our economy.   Sounds crazy – but I am sure there are member of congress who would support this.

This doesn’t feel like the best idea to solve our current sluggish job growth, even if you put aside my impatience at the gas pump.  What’s the other choice?  It’s called education and retraining.  Educate our children for the jobs of tomorrow.  Find mechanisms to retrain as many of the unemployed as possible into new jobs.  The world has evolved, just like gas stations - technology and the resulting productivity gains have probably eliminated far more jobs than outsourcing, and those jobs are never coming back.  A jobs solution should not be a short term band aid but rather a long term transfusion.   We need to pump up our education system, force innovation and quality, and prepare our children for the world they will live in.  The unemployed are the wounded in the battle of global competitiveness.  We don’t leave them on the field of battle.  We need to support them, give them the transfusion of new skills and talents necessary to work, to compete, and to thrive.

Technology innovation is only speeding up this process of job redefinition.   How many fewer IT people will be needed as companies shift to the cloud?  How many call center employees are needed now that we increasingly use IVR and the web?   When will the post office begin the inevitable job shedding?   How long until busses drive and airplanes fly themselves much as the drones do today?  We need to get ready and begin to create the next generations of jobs.   We only do this by training our children and retraining our country. 

By investing in innovation and new ventures, we help create jobs but we also help speed how other jobs get made obsolete.  I worry for those who become unemployed but I would worry more if we stopped supporting innovation.   I also worry that the companies we fund won’t be able to find the people they need.  Today, finding great technical sales people, finding great developers, and finding data driven marketers is becoming harder and harder.  The jobs are there and will be there – the skills are not there today in sufficient numbers. 

Sorry New Jersey – I’m buying my gas across your borders, I’m sticking to my ATM, and my EZPass.   Anyone with great education, technology innovations, or training / retraining solutions – send them to me.   I’m going long on our new, technology enabled economy, and have dollars that need to go to work.


K-12 Education – The Sector Productivity, Quality, and Innovation Has Bypassed 

Today’s New York Times Op-Ed Section had a column by Nicholas Kristof entitled “Our Broken Escalator” which describes in depressing detail how the US has fallen behind other competing nations in educating our children and how continued budget costs at the local, state, and federal levels are accelerating the decline.   In the article Kristof cites the Center on Education Policy which reports that 70% of school districts nationwide endured budget cuts in the school year just ended and that 84% anticipate budget cuts this year.  He quoted Steve Chiovaro, Superintendent of a small district in Oregon where Kristof had been educated saying “Every year we say “what can we cut?  What can we reduce?” We’ve gotten to the point where we can no longer “do no harm”.  We are starting to eviscerate education.

We need to fix education in this country – but not just by throwing dollars at it.   As per the chart below, the cost of educating one student has gone up 2x in real dollars since 1970 and has gone up more than 3x since 1961 – IN REAL DOLLARS!  While the quality of education – based on just about any reliable metric you could use – the quality has declined, in many cases precipitously. 

SOURCE: U.S. Department of Education, National Center for Education Statistics. (2011). Digest of Education Statistics, 2010 (NCES 2011-015), Table 188 and Chapter 2 .

Current expenditures per pupil in fall enrollment in public elementary and secondary schools: Selected years, 1961-62 through 2007-08

School Year

Current expenditures in unadjusted dollars

Current expenditures in constant 2008-09 dollars1









































































































































































1Constant dollars based on the Consumer Price Index, prepared by the Bureau of Labor Statistics, U.S. Department of Labor, adjusted to a school-year basis.

2 Revised from previously published figures.


Let’s think about this data another way.   If educating a student is output of a system, then in the past several decades, productivity had declined (because it now costs us much more to do the same thing we did before) and quality has also declined.   I share the frustration that the system is not working.   I share the desire to reduce costs and improve productivity.   The real question is why productivity and quality have both declined so significantly in public education (and possibly private as well although the data is less clear) when innovation and technology have been applied in so many other areas of the economy to drive massive productivity improvements over the same period.  I think the answer is that true, broad sweeping innovation has been stagnant in public education.   We have failed to rethink the manner in which our children are educated and the best way to deploy capital to achieve the highest outcomes.

I recently had a discussion with a venture investor colleague who focuses on the education sector.  We were discussing areas of interest in terms of investment trends in the EdTech sector.  As an opening remark he stated that, of course they were avoiding the k-12 education sector because of the challenge of selling to individual schools or local districts and dealing with the local bureaucracies which rarely define objectives or have focused buying processes (or defined budget for technology innovation.)   My colleague David Drahms and I nodded because we too, have a similar view of K-12.  It is just really hard to sell innovation school by school or district by district. 

So – this is the way it is.   There are no budgets in the hands of innovators in schools – especially public schools.  To sell an innovation, one needs to sell a teacher or a principal – they then need to sell it upstream because the principal or teacher certainly doesn’t have budget.  The higher one goes in most school districts, the further they are from the mission, the needs, or the impact of innovation and the closer they are to the politics of running a district or the entrenched concerns of the unions.

I am not naïve enough to believe that I have the answers to the challenge of a broken education system.   What I do know is that the answers lie in unlocking innovation – at the district, state, and federal level -instead of just the classrooms of brave pacesetter teachers.   The answer also lies in true metrics of quality AND productivity.  We can educate more for less.  Why is it that my children are educated much as I was and my parents were and their parents were?  In a century which has seen the greatest age of innovation, why have we failed to apply these innovations to our future?  

I am ready to fund those who will be agents for change – entrepreneurs and start-up businesses.   Osage sees EdTech as a great source of opportunity.  Innovation will come from the bottom of the economic ladder – not from governments or large corporation.   Yet I will not fund a business which has no chance of finding buyers.  We need to open up the purse strings of public education, create an innovation mandate, and let productivity rise, quality improve, and our children benefit.   Educators need to define return on investment and productivity goals and spend to achieve those goals.  When ROI objectives are clearly defined by the buyers – the schools, the districts, the states, or federally – then innovators and the venture capital industry which funds those innovators will focus on the k-12 segment.  I look forward to making those types of investments.


A Brief Adam Smith Refresher

The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniencies of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.

According, therefore, as this produce, or what is purchased with it, bears a greater or smaller proportion ti the number of those who are to consume it, the nation will be better or worse supplied with all the necessaries and conveniencies for which it has occasion.

But this proportion must in every nation be regulated by two different circumstances:  first, by the skill, dexterity, and judgment with which its labour is generally applied; and, secondly, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed.  Whatever be the soil, climate, or extent of territory of any particular nation, the abundance or scantiness of its annual supply must, in that particular situation, depend upon those two circumstances.

Adam Smith – opening paragraphs – An Inquiry Into the Nature and Causes of the Wealth of Nations


It should be obvious.   People make businesses.  People drive the wealth of nations - employed people of skill, dexterity, and judgment.  People also make start-ups.  Our great CEOs hire and retain great people.  Our biggest concern is where the talent for growth will come from.  A 9% unemployment rate does not mask the fact that great developers, marketers, and sales people are hard to find – within our borders.

We need to invest in people.  The impact will not be felt tomorrow because, as with any investment, returns compound.   Nevertheless, the investment needs to be made.   Investment drives wealth – of individuals and ultimately of a nation.


IPOs - Something to Watch

I got an email from a friend the other day offering me “friends and family” stock for an upcoming IPO.   Frankly, I thought they did away with this tradition after some of the scandals in the internet bubble period.   I was very pleased to make the list.   It also got me thinking.

This friend is about to complete a long awaited public offering.  Last week another friend and former work colleague who had worked for Flex-car which became Zip-car benefitted from a strong IPO.  Last month, our sister fund, Osage University Partners, had a portfolio company, Gevo, complete an IPO.   When is the last time I have been within a couple degrees of separation from three IPOs in less than three months?   It would have to be back when I was in San Francisco in 1998 or 1999.

According to VCJ magazine, there were 12 venture-backed IPOs in January and February of 2011 compared to 2 for the same period in 2010, 0 in 2009, and 4 in 2008.  For the last three years, the venture-backed IPO market has seen a rapid acceleration – 6 in 2008, 12 in 2009, 72 in 2010 (with 32 in the final quarter.)  All indications are that 2011 will blow away 2010.

I don’t know what this all means to the local early-stage VC market in the mid-Atlantic region but there are a number of things I am going to begin to watch:

  • The number of IPOs being completed by quarter and the sectors represented.  I am particularly interested in the enterprise technology sector versus some of the “hot sectors” such as Web2.0 or social networking.
  • The average trailing 12 month revenue of the companies having IPOs and the level of profitability or loss of the companies entering the public markets.   This will tell us  a lot about how many of our investments are within the reach of an IPO option
  • The post-IPO performance of these recent IPOs.  As of 12/31/10, the 2010 IPOs were up 38% on average.  That’s a pretty good number.  This means companies are performing, are deploying their new capital effectively, and are likely in a position to access more capital if necessary.   It also encourages other CEOs to try the public route.
  • Who are emerging as the “horsemen” of the new IPO trends?  These are the people our most successful CEOs and companies need to know and who we need to know.
  • The impact of a vibrant IPO market on the exit multiples of M&A transactions and if the IPO market is driving longer or shorter exits for investors.

I am going to exclude the Facebook’s, the LinkedIn’s. the Groupon’s from my consideration.  I will also exclude the clean-tech pre-revenue IPOs.  These may be huge, they may be bubbles, but either way, they will skew the analysis.   My interest lies in the mundane IPO data that sits within two standard deviations of the mean.   Frankly, the IPOs which the popular press does not cover are the ones which drive the economics of the industry.  This is not some sort of reverse snobbism.  It is simply that these more grounded sectors are where we invest at Osage

Having been a CEO of a public company for five years, I can speak at length of some of the challenges of being public, especially when the institutional market has moved on and the retail market drives your destiny.  Yet I have to say that the whole thought of the IPO and what it means for those involved remains for me a very exciting investment outcome and the increase in these events bodes well for all exits, public and private.

I look forward to collecting the data above and seeing what it tells me.


Angel Funds – The Devil is in the Detail

I love the role that Angel investors play in the formation and early funding of early stage ventures.   Individual angels are pretty much in every deal we do.   In most cases these angels represent friends and family of the entrepreneur who have bet on the idea and on the individual.  This is the easiest money for a new venture to raise and can be the hardest on the founders as the entrepreneur sees these people all the time.   Great motivator!

We also invest after or along-side angel funds.  These are groups of high net worth individuals who want to invest in a portfolio of early opportunities and who want more structure and more expertise than they personally have.  These groups have structured leadership, deal flow processes, investment committees, and effectively leverage specific domain expertise of their members.   Many of these groups are a pleasure to work with.

One thing we have seen when working with these angel groups is that structure matters – for us as co-investor and even more for the management of the company.   The distinction comes down to angel funds versus angel networks.  I support the angel fund concept.   I think the angel network concept goes stale beyond extremely early stage investing.  Here is a real world example.

One company in our portfolio has multiple angel groups who have invested millions of dollars over the last several years.  One is an angel fund and one is what I will call an angel investing club.   The angel fund has commitments from its members and invests as an entity – one investment amount, one reporting structure.  This fund’s members commit to an investment level, an investment focus and a process.   Capital calls occur much like a venture fund.  Reserves are kept on all investments.  The only difference versus a venture fund is that no one is full time and that there is no carry or management fee given that the investors do the work.  

The angel investing club is a different beast entirely.  This group looks at companies as a group, appoints a lead, but in effect each individual makes an independent investing decision.   This means each signs individual documents, each is a shareholder of record, and each is solicited for shareholder votes.   Each round of investment has a different set of names – some old ones don’t participate, some new ones do.   A director may be selected to represent the group but the director cannot speak for the group and how it will vote as investors.   This creates a myriad of challenges for the CEO, especially as time goes on and multiple rounds of funding take place.  These include:

  • Logistics challenges which create time consuming and more costly processes and which slow down rapid action by the company.
    • It is challenging to have several dozen individual shareholders who are represented by leadership but who act as individuals
    • CEOs often need to hold separate Angel Club investor meetings to pitch a group of what should be informed inside investors
  • Behavior of the crowd means broad emotional swings and mixed participation by round makes for difficulty in long-term thinking
    • Having many people in for $5k – 20k in a deal means that when a deal is exciting, the momentum is strongly positive.   When things get challenging, individuals leave it to others to figure it out.  
    • With each round having different mix of Angel Club investors, no round is truly an “inside round” and typical venture behavior like bridging a company to an exit to protect invested equity becomes a challenge
  • Angel Club investors do not invest with reserves.  As a venture investor, we like to invest alongside entities that can support a business through a challenging period by having adequate reserves and a culture of multi-round investing.
    • Angel Clubs do not have formal reserve structures and need to resell the angel club members on every financing.  

At Osage, we value Angels.  Friends and Family angels are critical and often continue to invest alongside our capital in later rounds.  Angel Funds with structured capital commitments are tremendous participants in the early stage capital eco-system.   We look forward to seeing more of them as the Angel market continues to gain in sophistication.    More and more informal angel groups are adding formalized structures which make them easier to co-invest alongside and which make them easier for a CEO to consider as investors in his or her company.  This is a very welcome change from our perspective.  When it comes to Angel Investing Clubs – loose affiliations of people connected by a common investing interest – we will continue to be extremely wary when considering an investment where such a club is a co-investor.   The mettle of an investor is determined in challenging times and in such difficult times, a club can become a mob.