Reinventing the Venture Capital Business

Complacency vs. Adjacency vs. Free Agency

There is a lot of talk these days about the need to reinvent the venture capital model, and perhaps along with it many venture capital firms. Dave Strohm of Greylock was quoted -sagely - saying, "Reinvention is a very hard thing." And indeed it is.

But while we all need to reassess whether the way we've made money in the past will yield the same results in the future, it seems a little overblown to throw out everything we've learned. This is an argument about complacency vs. adjacency vs. free agency.

Now, no one wants to be accused of complacency. That has a pejorative connotation right from the start. But while inertia can be a powerful force, it is not always a bad force. Sometimes, inertia can keep you in place long enough to decide whether you really do want to leap across that open crevasse. Sometimes, the difficulty of reinvention can be a needed buffer against being a sucker for the transient mood of the herd.

It is indeed possible, perhaps probable, that we all need to evolve in our thinking, our investing models, and our investing targets. But, it is equally probable that the world as we knew it did not simply vanish. Perhaps it just moved slightly out of our sight. Perhaps it is just hibernating, awaiting the spring.

So, that brings us to adjacency. Most observers of successful businesses will tell you that you should stick to your knitting. And failing that, only take up needlepoint, not arc welding. All three can make something useful, but the first two have a whole lot more in common. It makes a lot of sense as investors to look for areas directly adjacent to where we have had success, if we do feel the need for reinvention.

For example, OVP saw some interesting trends about five years ago, and took our historical expertise in IT and in Biotech investing into the adjacent (or merged) locale of Digital Biology. It had the sizzle of biotech with the lower capital intensity of software. While there are some clear differences and we can't yet pound the table and prove we were right - all the signs are good. We found a very appropriate (for us) adjacency.

What is troubling about many of the conversations we hear today is the amount of free agency that is being advocated. We see firms heading to green tech, clean tech, later stage, roll up, India, China, you name it. Now, to be fair, this may be a legitimate case of adjacency for some firms, if they have been at the edge of those spaces, places and stages in their historical investing patterns. So, the move is as logical for them as Digital Biology was for OVP. But for many others, we see this as a bridge too far.

Many VC firms are branching out to these new areas not because they understand them, but actually because they don't. The grass is greener simply because the grass under their feet seems dormant at the moment

Startup activity in the Pacific Northwest

An important part of surveying the territory for us is tracking which technology companies are getting funded in the Pacific Northwest. We want to make sure we anticipate emerging trends, and see the vast majority of the projects that do get funded within our targeted spaces. Over the last two years, it appears we have.

Looking specifically at 2006, there were 45 investing rounds done in startups in OVP's targeted spaces in Washington, and 15 in Oregon. This is right on the historical 3-1 ration between our two primary markets. While Enterprise Security and Software firms are strong throughout the Pacific Northwest, the other top spaces differ markedly between Washington and Oregon.

Washington's Top 3

Washington sees the combination of Biotechnology, Digital Biology and Health Care as its largest investment sector - rising to 28% of their total deals done in 2006. Over the last two years, Digital Biology accounted for ten financing rounds, with OVP leading a full 50% of those transactions.

Security and Enterprise Software is the second largest sector, with 18% of the funded deals in that space. The Security sub-segment saw ten financing rounds in 2005-2006, with OVP leading in 30% of those.

Communications & Networking represented 16% of investments during the two-year span, with Mobile applications leading the way.

Oregon's Top 3

Oregon looks to Security & Enterprise Software for 28% of its newly funded startups in 2005-2006, with OVP leading two of the 12 rounds closed.

The lineage of Intel drives the second highest investment area in Oregon, in the Semiconductor space. OVP's investment in Octavian Scientific is the noted leader among the seven deals done by all venture firms during the past two years.

The third most popular category is Internet Applications and Services, a consumer-facing area where OVP has reduced interest - where six financing rounds were concluded.

In reviewing all the deals done in the Pacific Northwest, we were pleased that we had indeed seen the overwhelming majority of those in our domain that ultimately raised venture capital, while actually pulling the trigger ourselves on just over 10% of those projects.

Time will tell if our tight screen was also the right screen.

It is a very busy time

We usually devote this section to topics we feel can help our portfolio companies, But recently, there is so much going on at OVP, we felt it appropriate to spend a little electronic ink to keep you up-to-date.

At the top of the list, we are pleased to anounce the final closing of OVP Venture Partners VII. We set out to raise $200M, and stopped the fund raising at our self-imposed hard cap of $250M. This is our largest fund ever. We thank both returning and new LPs for their confidence in us. OVP has already made four investments out of the new fund, with another pending.

In addition, recently we were pleased to announce the addition of a new General Partner and a new Venture Partner to the firm, both in our Kirkland, WA office.

Mark Ashida joined OVP as a General Partner from Microsoft, where he served as General Manager of the Windows Enterprise Networking business. He will focus on security, networking and infrastructure investments. Mark's 25 years of experience includes serving as COO at the digital rights management firm InterTrust, sold to Philips for $450M, as well as a number of Valley startups.

Carl Weissman joined as a Venture Partner, focused on Digital Biology. Carl will continue to serve his primary role as President & CEO of Accelerator Corp., the entity OVP has backed with other venture funds to provide a boost to early-stage startups in the Digital Biology arena. Prior to Accelerator, Carl served as CEO of Centagenetix, which merged with Elixir Pharmaceuticals in 2003.

With these two experienced executives on board, we look forward to fresh perspective and extended networks to help generate new investments and guide existing ones.

Looking ahead, we are already gearing up for:

• Annual OVP Technology Summit in Seattle on May 6-7
• Annual Meeting with Limited Partners on May 7-8

This year's invitation-only OVP Technology Summit promises to break all records for attendance, and for provocative discussion. There will be three focus topic areas:

• Digital Media, the Internet and the Consumer
• Digital Biology and the Promise of Personalized, Predictive, Preventative Care
• Applied Nanotechnology

The high-powered lineup of speakers include:

• Rob Glaser, Chairman & CEO - RealNetworks
• Wade Davis, SVP M&A - Viacom
• Steve Mitgang, SVP Advertising Platforms - Yahoo!
• Joe Costello, Chairman & CEO - Orb Networks
• Seth Shapiro, Principal - New Amsterdam Media
• Dr. Leroy Hood , President - Institute for Systems Biology
• Dr. Walter Fontana, Professor - Harvard Med. School
• Dr. Bill Goddard, Professor - Caltech
• Bill Lloyd , CTO - Kodak
• Bob Gregg, EVP - FEI
• Augie Sick, VP - Invitrogen
• Keynote: Dr. Larry Smarr, Professor - UC San Diego, on "Livingin a World of Nanobioinfotechnology."

It should be a fascinating session!

Sponsors of the OVP Technology Summit include: Comerica Bank, Seed IP, and Wilson Sonsini Goodrich & Rosati.

Living the dream in Oregon means living right on top of the center of Open Source development. Now, OVP has found a way to capitalize on that presence. We recently financed Collaborative Software Initiative, Inc., a firm headed by the former CEO of the Open Source Development Lab.

The firm (known around OVP as CSI - Portland) will use a collaborative software development model to bring together industry segment leaders to provide lower cost applications where the target software is a core business process, but not part of anyone's competitive advantage. (Think: compliance in financial services.)

OVP did the $1M seed round in Collaborative Software Initiative. Gerry Langeler has joined the board of the company, backed up by John Hull. A full Series A round is planned for 2H 2007.