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Start-Up America – Will Execution Match the Vision? Let’s hope so. 

So – The Obama administration has come to the conclusion – backed by credible, recent economic research, that job creation is not driven by small businesses but instead by new businesses.  The research proves that many small businesses remain small, but new businesses are often funded for growth and if successful can evolve to be meaningful employers and an engine for job creation.  Funny – I thought most jobs were created by corner delis in NYC.

In response to this research and possibly to the polls which suggest that job creation is issue #1 among voters, the Obama administration announced the roll-out of “Start-up America” yesterday with much fanfare.  Steve Case of AOL fame and Carl Schramm of Kaufman Institute will be leading this program.  There is some suggestion that significant dollars will flow toward innovation and that there may even be dollars available to match private investment dollars in start-ups.  So far though, it appears that the announcement precedes much of the detail.   A visit to the website of the program provides little detail as to what is being planned or how the program will roll-out.

Structured appropriately, Start-up America could have a real impact on innovation and job creation in the short and long term.  Structured poorly, the program could set an already shaky venture capital industry back a decade.   Some of the things that I hope the administration and the new program leadership keep in mind:

  • Remember all the lessons of the SBA and the SBA-sponsored venture funds.  Debt may be a bad instrument for funds.  It creates a different risk profile for limited partners and does not give the government upside.   Also – the structure of SBA debt, then LP capital, then GP carry created a “swing for the fences” mindset for SBA-backed venture investors and drove billions in capital losses for the SBA and the demise of many SBA funds.
  • Stage and capital purpose is important.   Capital needs to be deployed in critical gap areas.   Early business formation around pure academic research.   Many small seed capital deployments at the proof of concept stage.  Initiatives which drive re-commercialization of urban areas.   The secret is not to place capital at stages where it competes with private capital with the net result is to drive up valuations on a limited number of good deals.   The capital should e deployed at stages where business formation occurs and thus more good businesses are spawned which is also where risks are high and a funding gap exists.  Private capital will emerge to fund high quality start-ups once concepts have been commercialized.
  • If the program involves providing capital to existing funds, it must be incremental versus windfall and must be distributed based on track record.   Funds should be required to match at least 2:1 to ensure that private investors have endorsed the track record of the investors.  Make sure the market determines investor quality.   This will also make sure that too much capital does not flood markets driving  poor investments, high valuations, and bad overall outcomes for private investors and public capital
  • Don’t reinvent the wheel.  States have successfully innovated off and on for years and many of these innovations have been successful.  Despite cutbacks in funding, the Ben Franklin program and the CFA program in Pennsylvania are great examples of direct state seed funding programs (Ben Franklin) and venture fund augmentation programs (CFA).  Other states have also had successful programs which should be studied and the best practices applied
  • Make returns matter.  A federal program which throws dollars at a market without a focus on return will imbalance a market and damage the ability of the market to attract private capital.   A federal program that selects funds based on track record, which shares in returns and which reinvests these returns will align with the current private capital in this sector.  Making returns matter will also have the impact of making these programs, at a minimum, self funded over time and possibly will drive increased capital over time without a budget burden.

Two early signs that this Start-up America program may be well conceived is the involvement of Kaufman – a true advocate of the entrepreneur as well as the early and growing involvement by tech corporations, many of which got their start as venture funded entrepreneurial businesses and whose involvement in the program includes meaningful financial commitments to support entrepreneurs.   If great ideas and great entrepreneurs get the bulk of the dollars and focus of Start-up America, then capital to support later stages of growth will follow.  Successfully run, this program is a bet on the American entrepreneur and the spirit which has driven success in this country since it was founded.  Poorly run, this is another government subsidy crowding out private dollars in the early stage venture sectors.   Let’s hope that the early signs are on target with where this program is headed.   Done right, this program will be good for entrepreneurs, good for the venture industry, and good for job creation.

Of course, the next initiative - Retrain America - will be required to supply the people qualified to work at the jobs created should Start-up America be successful..


I Like شبكة راصد Egyptians Want Their mTV

I became a fan of شبكة راصد   two days ago.  It means Network Monitor in Arabic and it provides news feeds, pictures, and video of the events in Egypt.  Of course, it is all in Arabic, so Google translations is critical.  I am intrigued and interested in what is happening in Egypt for a number of reasons which include: a long-term affinity for North Africa; a fascination with what just occurred in Tunisia and the impact of mobile technology and social networks on the speed of change and how this relates to both macro-political lessons as well as more mundane enterprise technology lessons; and the fact that my mother happens to be floating on the Nile on a tour as I write and that she heads to Cairo on Saturday.

I received the following from شبكة راصد   this morning which went out to all 350,000+ fans of this particular Facebook page.

Important Announcement | call upon all the Egyptians abroadtransfer these numbers and give them to your friends and families Egypt for posting them .. To send us events via SMS and help us be being our Correspondent in Egypt
Please do not contact numbers for any other reasons o......nly SMS

thank you very much for your support

I then heard on the news that the Egyptian government has shut down internet service across the nation and was working to quickly shut down all mobile networks.  This will leave landlines as the only source of uncontrolled electronic communication within Egypt.  The goal is to eliminate the tools the protestors are using to coordinate flash protest and to communicate their successes and government atrocities.  So the question is – will it work?

I have a couple reactions.

I was in Bangkok in 2002 for the Black May protests working as a consultant in the Thai subsidiary of a major multinational.  I sat in an office watching young female office workers – in their matching  short skirted purple uniforms – receive faxes about the protests and then distribute the messages to their own office networks across the corporate fax.  Newspapers were shut, the internet didn’t yet exist in any scale way, TV and radio were controlled by the government – yet in this wired world, there is always a way.  SMS through international conduits as per the above message may be the fax machine of the Egyptian movement.  Or maybe it will be another path.  In Thailand once the army started shooting, and shoot they did, another Thai industry went into overdrive producing hundreds of thousands of bootleg videos of the atrocities and spreading these to the middle class whose reactions were to join the protests.  The video also made its way to the King who ultimately stopped the army and forced a change to the government.

A second reaction relates to another North African country – Morocco – where I spent a couple weeks three years ago.  A wonderful country with a benevolent monarch who traces his bloodline back to being a direct descendent of Mohammed.  One of the lingering memories I have of Morocco – both of the cities and of the rural areas - is of satellite dishes and universal cell phone coverage (my Verizon phone coverage was better in the Atlas Mountains than the Adirondacks.)  It was explained to me that Morocco has worked to solve certain challenges facing other developing countries including rural to urban migration by delivering urban technologies – including TV and phone coverage – to the population as a whole.  Give the Moroccans their soccer in every living room and contentment levels rise considerably.

So in listening to the news reports of Egypt and of Mubarak’s decision to shut down the internet and mobile phone networks – all I could think of is Dire Straits singing “I want my mTV”.   Facebook has become the new mTV – it’s addictive, it’s time consuming, it’s generational.  The internet has become the new TV in terms of time spent and entertainment provided and mobile networks are simply the newest vehicle for internet access.  In a youth driven uprising, limiting internet and mobile access may make organization more difficult but as the purple skirted office girls in Thailand proved – not impossible.  The mistake by the Egyptian government may be that taking away internet and mobile is the ultimate act of tyranny against a Facebook generation.   Such tyranny will likely drive youth who have been sitting on the sidelines joining into the fray.   If the average Facebook user spends 421 minutes per month on Facebook and the younger users much more time than the average – with Facebook down and the internet down – the Egyptian government has created more time and more reason for the protests to continue.  And now they have all lost something more tangible than democracy or freedom.

What message can we take away from the events of Tunisia, Egypt and event Thailand from 20 years ago.   I can sum it up to youth driving change – in governments, in behaviors, in technologies, in adaptation overall.  Politically this is fascinating and exciting.  .  .  and a little scary.   As entrepreneurs and investors  focused on enterprise technology, we need to recognize that these mini-revolutions of technology are taking place in our offices, at our customers, and across the eco-system and we  need to make sure that the most productive workers are not sitting at their desks thinking – “I want my mTV.”   As a son with his mother potentially in harm’s way, I have to hope that calmer heads prevail and that a peaceful outcome can be achieved.


Domain May be the Most Critical Success Driver in Enterprise Application Software Entrepreneurs  

It seems to make sense.   Invest in people who know something about the industry or market segment they are building a business to address.  Prefer people who have a deep understanding of customer need and who understand the value of solving the customer problem.  Surround the domain expert entrepreneur with a team of people who understand key business functions that the entrepreneur may not – finance, marketing, development.  Let the entrepreneur be the visionary salesman, the first product manager, the strategist, the CEO. 

There are plenty of examples where successful founders lacked business model domain expertise.   Google founders and advertising.  Facebook’s founder and social engagement.  Even some highly successful founders of companies in our portfolio, focused on infrastructure and performance, know more about pure technology than underlying business problems.  Where domain is a critical success driver is in Application Software.  So often in these cases, domain trumps technology wizardry.

Many enterprise application segments began as consulting practices.  CRM in the late 80’s, SRM, Procurement, Business Intelligence – they all were emerging schools of practice that consultants sold to large corporations for millions of dollars at a shot.  As consultants did projects over and over, some entrepreneurial ones realized that they could shorten their projects and minimize their work if they made portions of the projects increasingly repeatable and thus software emerged.   This trend has continued even today and we often see new technologies emerge from boutique consulting practices – in fact we are currently under term sheet with a company with just those origins.

Does an enterprise application need to emerge from a consulting practice to be attractive?   No – absolutely not.   Does the entrepreneur need to come from the sector and understand the problem being solved and how customers will perceive the value of the offering? – In most cases, I would say yes.  Does the application have to be the most advanced technical platform out of the box?  It needs to be an innovative solution, but the embedded domain trumps the technology early on in the lifecycle.   Does the company need to have proven that corporations will buy and use the product?   We think this is key and as investors, we prefer a revenue run-rate approaching a million dollars in order to consider investing.

There is a lot of excitement today in specific investment sectors.  Currently enterprise technology investing may not be as sexy as clean-tech or web 2.0 or even biotech.  But while not sexy, certain regions are rich in opportunity.   The mid-Atlantic region where the most Fortune 500 companies are located, where the most top 25 software companies are headquartered, and where the largest amount of enterprise technology dollars are spent is one of those regions – and an often unappreciated one.  It is a region full of seasoned, experienced entrepreneurs who come from industry and who have often boot-strapped their businesses because they knew what they had to do to solve a problem they had seen growing for years in the industry they left.   Many of these entrepreneurs have the core domain DNA to drive the next wave of innovation and to build very successful companies.


Not Cool - or, Why We Don't Invest in Web 2.0


My kids, age 16, 19 and 23, are appalled that I am blogging, and even more appalled that I think that these entries constitute blogs in the first place.  They laugh at my formal sentence structure.  They mock my correct spelling.  They seem to believe I have car-jacked a Lamborghini to deliver my laundry.  Definitely not cool.

Then, thankfully, I was upstaged in cluelessness when my 84 year old father-in-law joined Facebook.  He friended my kids and their cousins, causing a minor surge in inter-cousin hilarity.  He was smiling, hugely, in his profile picture, and the picture was way too close-up, just his face, filling up 90% of the frame.  He described his politics as “conservatives,” a puzzle to everyone since he is not.  And he misunderstood the reference to “interested in,” and answered “men and women.”  This would come as a surprise to his 83 year old wife.  However, he did receive several nice but confusing friend requests from other elderly men.

What does this mean?  For my kids, the spread of behavior that defined their youth and technological savvy has now been democratized to the old and the decidedly un-hip.  The fact that blogging is now a big company marketing sub-category pretty much means the edge is moving elsewhere.  I’m not sure where my children will relocate to, but I don’t expect to find them on Facebook when I finally get around to joining.  By that time, when I answer “interested in” by writing “enterprise software,” no one will even know to LOL.


IT Spending

It looks like we will be seeing good year for IT spending, building off a good year last year.  While Forrester and Gartner do not agree on the rates of growth or the market size, they each have pretty bullish outlooks. 

Just this week, Gartner projected Global 2011 IT spending to reach $3.6 Trillion, up 5.1%. 

“Gartner expects that among technology segments, telecom will advance the farthest in 2011 at 9.1 percent growth, followed by computer hardware and enterprise software at 7.5 percent IT Services will see only 4.6 percent growth in 2011, Gartner said. “

“ . . . a fundamental enabler of cost reduction and cost optimization, investment in IT is seen increasingly as an important element in business growth strategies,” “As the global economy repairs itself in coming years, we are optimistic about continued healthy spending on IT."

Forrester took a more aggressive view projecting global spending in IT to grow 7.1% in 2011 versus 7.2% in 2010 and then accelerating in 2012 to 8.7%. Forrester sized the market at a smaller $1.7 Trillion.

Growth this year is expected across all IT categories, ranging from 6.2% for communications equipment to 7.4% for computer equipment and IT consulting and systems integration services. In terms of actual dollar amounts, software will be the largest category at $430 billion, with computer and communications equipment following at $362 billion and $335 billion, respectively. IT services will be fourth at $309 billion, with systems integration accounting for two-thirds of that amount. Next year will usher in some shifting in IT spending, with software expected to grow the fastest. “

“The regions with the highest growth rates this year will be Eastern Europe, the Middle East and Africa (considered one area), and Latin America. Spending is expected to rise by 9.8% in each region. Asia Pacific will have a growth rate of 8.5% and the U.S. 7.5%, Forrester predicted. The lowest growth rate will be Western and Central Europe, 4%, followed by Canada, 4.9%. All growth is calculated in U.S. dollars. “

As a fund committed to the enterprise technology segment with a particular focus on software, Osage is encouraged by the bullish views.   The real questions though, have to do with where the dollars get spent and how aggressively large corporations seek innovation versus status quo when it comes to investing their IT dollars.   When one looks at the projections of growth in enterprise software, for example, at 7.5% it appears to go well beyond status quo investing into innovation and we have seen this borne out across our technology portfolio with growth rates averaging well above 20% across the board and well above 50% in a number of portfolio companies based on 2010 performance.

Some other interesting observations can be drawn from this data:

  • With the US economy projected to grow at 3.3% for 2011, the Forrester estimates in growth in enterprise technology spending in the US are over 2x the growth of the US economy.  If a sector outperforms the average by this much, what does it say about corporate priorities?   What does it say about some other areas in the economy?  I am certainly glad our investment dollars are focused where they are.  This is a big market and one which is growing fast.
  • Asia Pacific is projected to grow at 8.5%, a rate which comes close to matching the projected 2011 growth rate for China in 2011.  This is an area of huge opportunity which may be masked by the fact that everything is growing quickly in this region – infrastructure, manufacturing, services, etc.  Innovators who understand how to penetrate the challenging channel structure in this region will have first dibs at this major opportunity.  While we all look at China first, India next, this market has opportunities well beyond these two obvious choices.
  • Western and Central Europe lacks the excitement of the US or Asia-Pacific.  Slow growth of 4%, entrenched competitors, deep entrenched country-specific business and cultural norms make this a costly region to enter and support without the benefits of high growth which are found elsewhere.  This is a large market in aggregate but must be approached as a series of small markets each with their own byzantine rules, regulations, employment, and tax structures to say nothing of their buying processes.  When a US start-up is ready to expand outside of its home market, should it look east to Europe or west to the far-east?  Increasingly it appears that the far-east is the right answer.
  • Eastern Europe, Middle-East, and Africa, and Latin America are the highest growth regions of all yet one needs to look at market size relative to effort and the timing of entry.  Within our portfolio, Eastern Europe is more a source of engineering talent than an end market but Russia’s market size can’t be ignored.  Brazil is also a market which is close, yet often off the US radar.  I wouldn’t encourage our portfolio companies to go here as their first international target, but depending on the company and the specific market needs, Russia and Brazil can’t be ignored.

Bottom line – it is a good time to be building a company in enterprise technology if the product meets a real need and is a true innovation versus what is available.  The US is a great place to start because market demand will be high.  Global expansion in the future may follow a different path than that followed previously.   More on this to come in future posts.