I recently began writing as a guest blogger on Seattle 2.0. What I'm finding is, not surprisingly, that property has much broader readership than the OVP blog does, and so elicits more comments when I say something provocative. 

So, for the benefit of readers of this column, here's a link to my most recent post there.  It seemed to be useful, or irritating, or controversial depending on one's frame of reference. The title was "How to avoid a no from a VC - part 1, People" .

What is a CEO-a-thon?

Portfolio companies of OVP know (and perhaps dread) this annual event.  However, we look forward to it eagerly.  It comprises three days in the first quarter every year where we have every CEO of ours stand up and deliver a one hour summary of where they've been, where they are going, and why we should still feel great about our decision to invest. Every hour, on the hour, another one steps up to the podium. On one hand, there is nothing quite as exhilarating as seeing all these bright, motivated leaders wax passionately about their companies.  On the other, there may be no more high stakes event for these folks, post our initial investment.  

Biggest Surprises of 2009:

• Massive smart phone (particularly iPhone) adoption this year, truly validating mobile as "the 3rd screen." Google buying AdMob for $750M didn’t hurt either.
• I'm surprised that everyone was surprised about investment banking bonuses. Its an industry built on bonuses! If it quacks - it’s a duck!!
• IT Enterprise spending post-crash came back as fast as it did. No, we are not at ‘99 levels, but this is a strong and large market that isn't going away.
• News flash: Tiger *blanks* hot chicks in Vegas and Nike doesn’t care. Surprised? Really?
• Sarah Palin. Nuf said.
• John and Kate are getting back together. I'm so relieved.

Best Predictions for 2010:

• Wireless service providers spend more money on infrastructure to support rate of data consumption - this will be the year that networks are truly open.
• Enterprises large and small continue to embrace cloud computing and software as a service. Why invest in non-core IP when you can rent?
• Congress passes a privacy law this year that will have a ripple effect in the online targeting market. Harder to drop those cookies. This will also be the last year where "click thru" remains a dominant advertising measurement.
• Google does a deal with the record labels...it will be a creative JV great for Google and not so great for anyone else. YouTube music videos rocketing (and benefiting Google now) have made this a certainty.
• For our country...a plus that health-care reform passes and a minus that Osama bin Laden remains at large this year.
• Tiger is still lookin’ for love in all the wrong places.

Biggest Surprise of 2009: Attending the inauguration of our first African American president.

Best Prediction for 2010: The U.S. will invest heavily in modernization and revitalization of its crumbling infrastructure. Big money to be made in the process.

Biggest Surprise of 2009: A pleasant surprise was the way our portfolio companies reacted quickly to the downturn. They made some very tough decisions but I think they became tougher, leaner and more focused – and so did we. Maybe that's the way we should be all the time, so let’s hope that the lessons stick with us.

Best Prediction for 2010: I think 2010 will be good for startups. Customers who deferred purchases in 2009 will come back into the market in 2010 with a renewed focus on infrastructure for improving basic platforms and efficiency. I think (and hope) that 2010 will be a good year for exits as well – whether by IPO or M&A. Virtualization and cloud computing will continue to mature but the transition will be measured for enterprises.

Biggest surprise of 2009: The vehemence of the negative reaction towards attempts to move the U.S. health-care system in a more positive direction. (Luckily, from a minority of the population, but it is a noisy minority.) Similarly, the vehemence of the negative reaction towards energy legislation that would put the U.S. on a path towards energy independence and environmental sustainability. (Interestingly, coming from roughly the same noisy minority. Hmmm …)

Best Prediction for 2010: Both comprehensive health-care and energy legislation will be passed, albeit with some (tolerable) compromises. The Democratic majority will recognize that they need to drive towards what is best for the country as a whole, vs. listening too much to the noisy minority and special interests. OK, I’m an idealist, but hope springs eternal ...

Biggest Surprise of 2009: The unbelievably rapid rise of Facebook as a mainstream communications medium for all ages. Facebook has done this in spite of NO visible business model.

Best Prediction for 2010: Human sequencing will become a commercial reality.  Before mid-2009 it was widely recognized that 8 complete human gene sequences had been compiled.  In 2010 the number will be in the thousands.

Biggest Surprise of 2009:  Android-based phones are coming out at a much more rapid rate, across more hardware platforms, than I expected. We could see another Apple duopoly here, a la PC Windows vs. Mac. While Apple’s iPhone is much more open than the Mac was – the same issue of broad hardware adoption and scale (read cost) of an “industry standard” could rise again, only this time with Apple having seen its user interface lead nearly eliminated in just a few years. Against a broadly accepted platform, their lead in applications won’t last that long either.

Best Prediction for 2010:  The IPO market will be much stronger in 2010 than people expect today. While we certainly won’t party like it’s 1999 again, by the second half of the year we’ll be talking about how great a year it is for IPOs.

Biggest Surprise of 2009:  Other than the wonder of watching Stanford smoke both USC and Oregon in consecutive games in football, the biggest surprise of 2009 was how long the recovery has taken, and how difficult it's been to regain economic traction.   This is not 1929. We are in the information age. In the Great Depression, Ma and Pa Kettle in northeast Arkansas could not tap into CNN.com (let alone TMZ.com) to find out what was really happening at the banks and in the underlying financial structure of the country. All they knew was that banks were collapsing and they needed to get their money out ASAP and bury it in the backyard. It was years before the news got to them that the banking system had been stabilized and they could re-inject their savings into the economy. Not so today. All of us could see on a real-time basis the reaction of the government and the banks and the financial infrastructure to the crisis, and whether you agreed politically or not, there was little doubt that heroic efforts were being made to ensure the stability of the system. This created confidence, no matter how tenuous, and has allowed money and credit to flow, albeit cautiously, on a time scale that is orders of magnitude faster than in the Great Depression.  My surprise is that the underlying structural weakness has been sufficient to keep the recovery modest. The Dow is back, but unemployment lingers at very high rates.  My hope is that confidence will return more robustly in 2010 and that we will roar out of this crisis into a fantastic new growth economy.

Best Predictions for 2010:  Okay, here we go:

Super Bowl winner: Minnesota Vikings (Brett Favre MVP, then retires…)

NBA Championship: Who cares – I live in Seattle…

Washington finish in NCAA tournament: Lose in 2nd round in an upset

World Series champion: Boston Red Sox. Really.

World Cup champion: Brazil (U.S. out in first round again…rats)

Tiger Woods tournaments played: 4 (majors only…working on a divorce settlement otherwise)

Dow year end: 11,990

Favre year end: Un-retires, now hates Vikings for limiting his options, joins Vikings biggest NFC North rival to spite them…Packers

Apple new product: iSee, contact lens-like monitors that are not touch screens but instead are “look” screens activated by eye movements and wirelessly control CPU’s the size of iPhones that you carry…or maybe not

Seattle Genetics: Huge positive news in multiple trials, stock doubles at a minimum

Zymogenetics: Not quite as much good news…

Mayor McGinn: Re-stripes every arterial route in Seattle for bike lanes. Violence ensues between bikers and commuters not seen since WHO riots

OVP: We make some investments in really cool new ideas, we get some fantastic exits, and we continue to be one of the best partnerships in which to work.

We know this is the most popular page on the OVP web site: Deals Missed

So, therefore rather than post this new information assuming loyal readers will stumble upon it, we figured we might as well put it up here on the blog, too - and let you enjoy watching us wring our hands, yet again.

Earlier this week, I participated in a panel discussion for TechAmerica (fka the American Electronics Association) that covered topics around the current state of the venture capital industry and startups in general. At the end of the session, the moderator asked the quintessential question of the audience, "How many of you think there isn't enough startup capital in this town?"  He followed with, "How many of you think there aren't enough quality startups in this town?"

Not surprisingly, the overwhelming majority of hands went up on the first question.  Just a few brave souls (including yours truly) raised their hands on the second.  As you might expect, there was general muttering about the latter, "Well, of course the VC would say that!"

Last week, OVP hosted what has become one of my favorite annual events – our 7th Annual OVP CEO Night.  It was great to be invited as a CEO in the early Accelerator days, and now great to host as the newbie partner at OVP.  This year, we had the added bonus of welcoming Adrian Hanauer, General Manager of the Sounders FC, as our special guest.

An interesting and unexpected speaker from a seemingly unrelated industry is one of the hallmarks of CEO Night.  Past speakers have included cycling legend Greg Lemond and famed restaurateur Tom Douglas.  Combined with creative themes for the food and beverages, this is what differentiates CEO Night from just any other networking event.

The University of Washington’s Computer Science and Engineering (CSE) department’s Affiliates Day is one of the most fun and rewarding days of the year for me as venture investor and geek.  It involves a showcase of projects and research areas by professors and students and is a festival of creativity, new ideas, and engaged smart people. It is a day my colleagues and I look forward to every year.

Last Thursday's meeting concluded with a panel on "The Changing Face of Venture Capital," moderated by UW's Ed Lazowska, who prompted us with a series of provocative questions. On the panel with me were Greg Gottesman of Madrona Venture Group, Ron Howell of WRF Capital, Bill McAleer of Voyager Capital, and Cam Myhrvold of Ignition Partners.

I am quite often asked, in some form or another, “What can [STATE][LOCAL] government do to spur on an innovation-based economy in [SEATTLE][WASHINGTON]?”

Well, as I said on a panel at the Technology Alliance meeting in Leavenworth on Tuesday, the single biggest correlate to the strength of an innovative biotechnology industry in any geography is the quality of the major research institutions. The two heavyweight biotech hubs are Boston and the Bay Area.  No surprise there:

• In Boston, there are Harvard, MIT, Tufts, Boston University, and various smaller but world-renowned research institutes such as the Whitehead and the Broad;
• Iin the Bay Area, there are Stanford, UC Berkeley, and UCSF.

What the facts are not: VC's want a bailout?

Sometimes, rarely, one has to dispense with the pleasantries that keep us all feeling like we are polite ladies and gentlemen.  Anne Field's blog post above is such a total crock that it deserves such a response.

Nowhere, I repeat nowhere, has there been any plea from any responsible or representative member of the venture capital community looking for a bailout from the US government.  The fact that the NVCA periodically does a study to assess the positive impact of venture capital investments on the economy does not mean we, as an industry, have our collective hands out.  It means that the NVCA, as our primary voice in Washington, wants to make sure the government doesn't forget what we do, and why it matters, and in one of their fits of "fixing" something have them inadvertently hurt what already works.

Many of us of a certain age can remember the game "20 Questions" - used largely by our parents to pass the time on long car rides.  One person thought of an object, and the others could ask up to 20 "yes or no" questions to guess what it was.  (You'll recall, the first question - not counted in the 20 - was "animal, vegetable or mineral?")

In figuring out what companies to invest in, venture capitalists are caught in their own game of 20 questions - usually built around the fundamental issue of, "If you build it, will they come?"  It turns out a key to playing this game successfully is not the number of questions you ask but how many potential customers you ask, and then the nature of the questions themselves.  For some reason, perhaps known to marketing gurus and/or statisticians, 20 is a magic number.  Once you've called and spoken with about 20 potential customers, especially if that list includes at least half not given to you by the prospective portfolio company, you've reached the point of diminishing returns.  Whatever you are going to learn from that process, you now know.

In my previous post, I focused my attention on what I perceive to be the problems facing our public school system. They are varied and complex, but I believe they can be solved. I’d now like to briefly highlight a few of the solutions I propose in my book, Outrageous Learning. Before I do so, I want to reiterate that my criticisms are primarily directed at the system. I know there are many talented teachers and administrators that are doing their best to educate our children within a broken system, but there is a shocking absence of common sense and it only seems to be getting worse.

By now we all know the recession has had (and is still having) a significant impact on venture capital investments. It is also restricting the amount of venture debt assumed by startup companies as this form of capital funding is somewhat tied to the amount of deals funded by VCs.

The global economic slowdown is not the only reason venture debt fundings have slowed. With the recession and the damage that followed came the realization by many in the VC and startup ecosystem that this debt actually needed to be repaid! This sobering reality has caused a material drop in requests for venture debt from companies who raised venture funding.

In past postings, Gerry Langeler has been discussing what happens “behind closed doors” at OVP and why they often say “No”. This posting is a story about what happened to one company after OVP and others said “No”.

It begins when I was approached by a friend to look at a company in the alternative energy space. The founders were two scientists, neither with any real management experience, but with what seemed like a true breakthrough idea in the market they were targeting.

While the idea was new, the market wasn’t. In fact, tens of millions had been invested in the market by quality venture capital firms with no real commercial success. So how could a couple of guys from Seattle, working in the equivalent of their garage, come up with a breakthrough in the space? And more importantly, given their inexperience and lack of a real team, how could they build a company?

Now for one of the really tragic whispers emanating from an OVP partners meeting...

"Right team, wrong idea." 

We really agonize over this one. It doesn't happen all that often, but every once in a while we get this absolutely killer team in to present, with deep domain expertise in an exciting market.  And then, after they explain their business concept we say...

"Is that the best they can come up with?  What a shame!" (and then we shed a collective tear)

OK - for those regular readers of the G-B-U feature, as promised here is a "G" story.  Actually, it's two stories rolled into one.  Most of the time, the entrepreneurs we back act responsibly, ethically, and professionally.  So, it can be hard to decide where to draw the line, since there are too many "Good" stories to tell.

But, over the last six to nine months we've seen two CEOs do something very similar that strikes us as exceptionally "Good."  In both cases, she and he (one of each gender) came off a very successful quarter - yes, even in these turbulent times.  Both came to their respective Board meetings with the happy news that the company had grown nicely and had finally achieved that wonder of wonders - cash-flow breakeven!

So, what did they ask the Board for at that moment of happiness around the table?  More stock options?  Bigger bonuses? Perhaps a relaxation of the expense plan so they could hire more employees?

[ view Scott's site here ]

Our nation’s schools are in trouble. I’m sure that isn’t news to anyone who’s reading this. I’m a product of the public school system and, while the system wasn’t perfect back then, it served me and my family well.  In the decades since my graduation, however, things have steadily become much worse. The problems are now so deeply ingrained, the outcomes are now so appalling, and the costs so astronomical that we, as a society, can no longer afford to accept the status quo.  I’m fortunate to be able to send my three children to private schools, but I understand this isn’t an option for many families. The public education system in our country is failing us and we need to take action. This is precisely what motivated me to write my book, Outrageous Learning: An Education Manifesto, which was recently published by the Washington Policy Center.

One of the thorniest problems in taking investment dollars from corporate strategic investors is the risk of "selling the company without selling the company."  You want the money, you want the benefit of the power that corporate partner can bring, but you don't want to be arbitrarily capping your upside.  However, the corporate partner has a set of worries, too.  They don't want to give you money so you can make yourself so valuable they can't afford to buy you later, when you have grown into a significant enterprise.  So, how to you deal with these conflicting issues and goals?

Recently, we saw a negotiation settle around a tried-and-true model from the world of sports - baseball binding arbitration.  The model worked like this:  The strategic investor would put their money in for X% of the company.  In addition, they received an option to buy the entire startup at any time over the following three years, unless the company filed for an IPO.

Now for the tricky part:  How do you set the price today for a possible event up to three years from now without either capping your upside (if you are the entrepreneur) or paying for value you helped create (if you are the strategic investor)? 

Ever wonder where those strange or seemingly onerous terms in a venture financing come from?  Well, you are about to find out, as part of our on-going series "entrepreneurs behaving badly." (For those who missed G-B-U part 1, feel free to go back and review the rationale of this series for context - and know that there are "Good" stories yet to come).

As with most lessons in life, the ones we learn the hard way stick with us the best.  And you would think that after over 25 years in the venture business, we must have seen it all and learned it all.  Not so!  What follows is an example in recent times of what we consider a "U" on the G-B-U scale - and one that actually caused a change in the agreements we strike with entrepreneurs going forward.

As we think about healthcare reform in this country, it might be a good time to contemplate the question of who really deserves to get healthcare paid for by others. (I have already, in a previous post, proposed the idea that much of the system remain the same and that those who cannot afford health insurance be supplemented through something akin to “Healthcare Stamps.”)

What I mean by this is: How much personal responsibility and accountability should we demand?  For instance, if someone gets drunk and gets behind the wheel of a car, and gets into an accident in which he is injured, should the cost of that person’s medical treatments be borne by that individual or should tax dollars paid-in by others cover the costs?

Many observers, myself included, consider the 1990s the decade of the computer scientist. Work in digital bits and bytes not only generated significant wealth, it raised the standard of living for hundreds of millions of people around the world. However, as we close out the first decade of this century, I believe that materials and molecules have already supplanted bits and bytes as the powerful agents for the next round of prosperity and growth. This is the decade of the materials scientist.

We've all seen it in technology over the years...somebody takes functionality that's been around for a long time, and finds a way to make it so easy to use that it changes the world.  Think of computer menus, touch screens, and search algorithms - and what happened when we all first saw and used:

• The Apple Macintosh User Interface
• The iPhone
• The Google Search Page

They all took what had been fairly powerful, but complex, processes and made them approachable.  In so doing, they created huge markets.  Really simple is really sensational when it comes to technology penetration.  Now, I'm adding a fourth item to my personal list of "this is what it always should have been like" - Google Voice. 

Immigration policy is an issue that causes much debate in this country, particularly on the West Coast. It is a complex subject that has many component parts that tend to be lumped together. I’d like to focus upon one aspect of U.S. policy that needs to be looked at in isolation: H-1B visas. H1-B’s are temporary visas of up to 6 years in duration primarily used by U.S. corporations to hire skilled foreign nationals. Prior to 1990, Congress placed no limitations on the hiring of skilled foreign nationals. The Immigration Act of 1990 changed the rules entirely with the establishment of a new H-1B visa category and created an annual cap of 65,000. Recently the cap was raised to an additional 20,000 for foreign nationals who graduated from a U.S. university with an advanced degree.

Why is this an issue? Here are some interesting facts that shine a light on it:

Over the past several weeks there have been some blogosphere debates about the “Seattle Startup Index” and the “Future of Internet Investing.” I’d like to summarize my thoughts on these topics, but first I’d like to set some personal context. Back in the 70’s I was a computer science faculty member working on the ARPANet when there were a few thousand people in the world with access to networked email. Later when I was VP of the Advanced Technology Group at Apple Computer in the early 90’s, my organization helped fund the development of the Mosaic browser at NCSA that made the Internet accessible to casual users. I recall that one of my Labs launched www.apple.com on a local Internet-connected Mac as an experiment in sharing research information with others on the emerging Web (within six months Corporate Communications at Apple said “thank you very much, we’ll take it from here!”). So, I’ve been on the ARPANet/Internet/Web from the beginning, and have seen how it has fundamentally transformed business and society.

Who's running the show?  On March 9, 2009 and again at the National Academy of Sciences, President Obama called for government scientific policy to be developed on the basis of scientific facts, not politics or ideology.

With that declaration he called for a lifting of the ban on federal funding of research on embryonic [pluripotent] stem [ES] cells imposed by President Bush on August 9, 2001. Bush had banned funding of both new ES lines, but also producing pluripotent stem cell lines by SCNT. In SCNT, the nucleus from a body cell of an adult individual is transferred into an egg that had its own chromosome removed, stimulating the NT egg to divide, and rescuing the pluripotent cells from that entity. SCNT has been done tens of times in mice, and a few times with nonhuman primates. In mice, if the donor has a genetic disease, the pluripotent stem cell line has those genes, and if these stem cells are incorporated into a developing mouse, the cells and the mouse may get that disease. So the science says one can capture a disease in a pluripotent stem cell line, and have the expectation that the disease can be understood and eventually treated; the cell line is the basis for both, including drug screening.

Don't worry, I'm not about to propose that we should all invest in personal space travel, although some of our colleagues apparently have.  No, what this is about are the unintended consequences of pushing the boundaries of science.  Space as the final frontier may be one of the most sexy of these, but this article could easily be written about most any area of technological advancement.

Every time someone talks about the next great challenge in space, the nattering nabobs of negativism talk about how much it costs, and couldn't those dollars be better spent on the problems right here on earth?

Stories of entrepreneurs behaving well, and badly

We’ve all heard the horrific tales of venture capitalists behaving badly. And while all of us who practice the profession would like to brush them off as sour grapes, we have to admit that sometimes they do hit close to home. See: VC Non-Admissions

However, so far, we haven’t seen any venture capitalists brave enough to point out that there is a corollary issue that only gets aired behind closed doors.

"Right idea, wrong team."

This is a tough one.  If you were listening in to our partner meeting after presenting your startup, what would you do? Well, the first thing might be to think hard about why we were feeling that way.

Does your team have deep domain expertise in the business you are starting?  If not, then we worry a great deal about what you don't know you don't know. (Or to paraphrase Will Rogers, "It ain't what you know that hurts you.  It's what you know that ain't so.")  

When I was in high school a rather influential book was published by Thomas Kuhn called The Structure of Scientific Revolutions.  Kuhn popularized the concept of the "paradigm shift" in science, which can also be applied to technology, markets, history, etc.  Almost all historical transformations follow a classic S-curve, with early disruption, a period of rapid change/adoption, then maturity/consolidation with secondary effects until the next paradigm starts to emerge.  The period of these transformations can be over decades or, in the case of nations, centuries.

OK - so you've passed the test of "What do they do?" (see: Behind Closed Doors - PT 1).  Now comes the next set of words you don't want to hear with your ear pressed to the OVP conference room door...

 "Who cares?"

So, you think we're just being rude?  (Well, maybe)  But, in reality those words level a verdict on the startup as falling into one of two traps...   

Health care is not a "right."  Health care is a collection of products and services, offered for sale by a diverse group of individuals, partnerships, and corporations. Healthcare is no more a right than food. In fact, both healthcare and food fall into the category of “necessities.” But necessities are not rights. These two categories are dealt with very differently by our federal government. As an example, necessities like food are often subsidized in programs like Food Stamps.

"Invested in Venture Capital? You would have been better off in T-bills for the last 7-8 years."

"The technology advances we've seen in the last decade or two just won't be repeated in the next."

So, when were those quotes (or some just like them) put forth?

Do you ever wonder what REALLY happens around the venture capital  partners table once you, the entrepreneur, leave the room?  Well, it's time someone told you.  Hopefully, out of this you'll become more skilled at getting to "yes," or getting to "no" - but faster, or getting some value out of the experience.

The most dreaded words you can hear (if you had an ear pressed to the conference room door) are: "What do they do?"