By Georges van Hoegaerden



Some people do not understand why I do what I do and why I bother, and underestimate my determination to fix Venture Capital. Certainly there are much easier ways to make money than to pursue the obliteration of an investment cartel, in which seemingly everyone belongs to the club. And some people's actions are distorted by my critical views of what goes on in Silicon Valley, and the increasing popularity of my views may slow down the chase for money that is dished out often so irresponsibly.

My story

Let me tell you who you are talking to when you ask me to give up. My story may also answer the irritable question "who is this guy" I overheard recently. I do want you to know who I am, and how I care about this country. My story is more than just a bunch of business titles slapped together. Ready?

I was born in The Netherlands, the youngest of three boys in a family with a lifelong teacher as a dad, and a gentler mother working to place elderly people in geriatric facilities built by the government. With our parents coming home late from work us three boys literally fought it out everyday. To get to or from school first after a one hour bike ride every day (rain or shine, in Holland that meant rain more often than shine), playing in tennis (while co-founding our new club) and basketball leagues, finishing our dinners first every evening or claiming the window seat in the back of the family car. Everything back then was a competition, and as the youngest I got the brunt of the attempted suppression. Silly stuff, but it honed our skills to compete and I became very good at it.

My Dad was an educated man without much empathy, as most men born his age were (see the Mad Men TV series on AMC). I got my interest in science from him, but not much else. His vast knowledge never seemed to extrapolate to reality and he made his frustrations trickle down to everyone around him. At age seven I realized my life with him was going to be short lived. I never wanted to become him or be around him. I learned from him an important lesson I am sure he did not intend to instill; how to ignore negative pressure. I left the house at around eighteen, the first of the three boys and never looked back. After a shaky start I blossomed.

My Mom was quite the opposite. Friendly, outgoing and always ready to support her children in whatever way she could. I remember vividly the many conversations we had as she put me to bed and we covered the important topics of the day. My love and respect for women grew out of that experience. My Mom's weakness was to let my Dad get away with too much, and nurtured her "blind" devotion often to the detriment of herself.

The most positive influence in my life was the patriarch of the family, my grandfather (my Mom's Dad). A self-made man he became a majestic business figure as one of the co-founders of "van Melle", the company that made the ever so popular Mentos candy (sold a couple of years ago to an italian confectionary) and the generous man who gave us, what we as children then thought of as worthless pieces of paper, real shares in "van Melle" and "Royal Dutch Shell" for our milestone birthdays. He had clear opinions and voiced them when provoked, but he was humble at the same time, always asking the factory workers for permission to test the candy from one of "their" machines. He could laugh at himself, remained a rebel and kept everyone in the family in check. Nobody knew how much money he had until he died. The merit of his actions stayed with us much longer than his few words.

I came to the U.S. on my own with some hard earned chunk of change in my pocket, invited by Marc Benioff (now Salesforce.com CEO, then Oracle VP) and Larry Ellison (Oracle's CEO) who wondered why I was able to sell their (then) emerging products while they couldn't. The difference between my approach and theirs was the business model, to which the new managers I was asked to report to had no clue, let alone respect. I left Oracle with fond memories as soon as my green-card was approved and jumped in Silicon Valley hoping to find more intelligence there. My first startup was a group of consultants with a horrible business plan, and I told them about my opinions in a way only I can. Instead of fleeing, they came back and asked for guidance (management incubation). We turned the company into a product company and raised a double digit series-A post 9/11. The company was sold in 2006 for triple digits. As a board member my encounters with Venture Capitalists quickly made me question their catalytic value. I went on to build a few other successful companies and had a brief part-time stint on the "dark side". A clear pattern of defunct VC governance and execution started to emerge.

To sum it up, I was brought up with an understanding of how to compete, how to separate rhetoric from reality, how to ignore distortion fields, how to be devoted to a cause, how to be clear in your convictions, how to do what you say, how to relentlessly pursue your goals, and how to do what is right even in the face of opposing popularity and extreme controversy. But most of all, I never bought into nonsense, not even when that nonsense is supported by the masses.

I put in my time to get to know every business I was in, and earned my way into becoming a systems manager, computer programmer, IT director, pre-sales engineer, marketeer, entrepreneur, serial CEO, Venture Catalyst and Venture Capitalist along the way. Nothing was handed to me (my parents decided to use my shares to pay for the private education they felt I needed), and my real world experience continues to be a priceless "bull shit" detector in every new endeavor I engaged in. After thirty years in technology (ignited by my addiction for the HP-41C) of which fifteen years in Venture, I have witnessed the workings of the Venture business like no other.

The importance of this story is not to emphasize a purported "micro celebrity status" but to highlight my convictions, as convictions drive consistent and persistent behavior. Everyone has a story like this and staying true to the convictions that are shaped by the past makes for more authentic human beings, and a more natural fit to our contributions in society.

Perhaps my story will help you understand why the odds of building great performance in Venture that will save entrepreneurialism are in my favor. My background including fifteen years of first hand Venture experience in Silicon Valley begs me to unleash the financial choke-chain around the innovator's neck.

Silicon Valley needs help from above

The startling revelation, as proven out by the empirical evidence I have delivered for quite some time now is that according to a renowned money manager 95% of Venture Capital (VC) firms are not making any consistent money for their investors (Limited Partners). And that means Silicon Valley is at the brink of a serious implosion. Imagine what would happen if only about 35 of 790 VC firms were to survive in ten years from now.

Alarm bells should be going off by now, but few appear to be paying attention. Why not, you say?

Well, much of the money pumped into VC firms comes from Institutional Investors (pension funds, endowments, insurance companies etc.) with bulk loads of cash reserves they want to put to work. They dedicate a predetermined amount (usually by board consent), between 10% and 15% of those reserves to alternative investments of which a portion is then allocated to Venture Capital. To make a long story short, a tiny portion of assets from Limited Partners (even the non-institutional ones) is devoted specifically to Venture and a loss or break-even of less than 5% of total assets does not evoke a lot of emotion. Hence optimization discussions with Limited Partners about Venture turn with the agility of a big freight ship.

The alarm bells are getting muffled even more. Institutional Investors have built majestic constructs supporting the deployment of their Venture Capital assets. Many invest in Venture Capital through fund-of-funds with a "specialization" in alternative assets, a fuzzy term for anything that is not mainstream. And thus the actual performance of Venture is hidden behind the performance of the grab-bag of other financial instruments that resides in those fund-of-funds.

And it gets worse, VC firms themselves have been allowed to diversify their risk by embedding alternative investment strategies within the firm, and in worst cases even within the same fund. In short, Institutional Investors have stacked derivative, upon derivative, upon derivative (with of course zero marketplace transparency) and appear surprised performance of Venture Capital has lost the fantastic upside that made them all want to get in some 20 years ago.

And the mess does not end there. The mushy multi-tier asset allocation constructs allowed many General Partners entry to the Venture Capital business who have no credentials of being there. Their lack of experience and foresight has turned into fear and with it the implementation of Venture Capital risk has turned predominantly subprime. As a result Venture Capital risk has produced over the last ten years no more than micro Private Equity returns (less than 10% IRR), squandered about $1.7 Trillion in funds and eroded public trust in companies that never had any social economic value to begin with.

That fear from inexperienced General Partners in VC firms further exhibits itself by the deployment of 10 levels of diversification of risk when a VC firm makes an investment into a startup. Extreme fragmentation of assets and risk protects VC downside (making good money off management fees for 12 years) more than it protects upside, and thus Limited Partners are poised to lose out again, regardless of the economic circumstances. Improper deployment of risk cannot be mitigated by economic recovery.

Venture needs a reinvention from the top. But who cares?

Who cares?

Everyone in or around Venture should. The worst thing that can happen to a sector is that investors stop caring, and many have. Many Limited Partners will not renew their commitments and simply get out, and allocate their 5% of Venture Capital elsewhere. A speaker at a recent conference claimed the demise in VC firms to be as large as 30% over the last 10 years, with as much as 50% of venture folks already affected. New Limited Partners to the sector I speak with simply see no reason for getting in, given its deplorable performance.

And Venture Capitalists don't seem to care too much because ten years of a cushy management fee from a sizable fund with no way for the public to establish their merit gets them setup for life quite comfortably. Under the cloud of economic insecurity and with micro private equity returns in hand, it is still easier to raise another fund (and thus another ten years of fees) than to admit that not the economy is at fault, but their deployment of risk in it. Many idiot Limited Partners have fallen for their arguments again and Venture continues to spiral further down the slippery subprime slope it has been on for a while. To VC, survival of the fittest has turned into survival of the shrewdest. Or as a General Partner from Sequoia Capital allegedly stated: "We used to have a club, now we just club each other".

But the real impact of all this ignorance has already affected entrepreneurialism. Defunct VC governance has led to a dumbed down investment thesis that will only attract entrepreneurs that submit to that thesis. Hence the quality of innovation that surfaces is limited by the quality of the thesis that is projected. Subprime entrepreneurs, willing to be enslaved by subprime VC governance continue to tear down the potential of social economic value groundbreaking innovation is supposed to ignite.

Today, glorified programmers and VCs are the inexperienced partners in a dance that only a small audience (not the public) wants to attend.

Opportunity cares

With 80% of the world's population still not having access to meaningful technology applications, the opportunity to spawn new groundbreaking innovations remains enormous. Technology adoption keeps growing, even when Venture Capital declines in its ability to govern worthy innovation. So, the opportunity dictates that there is much more room for Venture Capital firms to grow, just not for ones that cannot establish a proper investment thesis of innovation.

Governance of innovation is improperly aligned with the opportunity of innovation, and thus any calculation of the size or number of VC firms based on its current workings is witchcraft, irrelevant and inaccurate (up or down) by default.

There is no valid reason why 100 VC firms with a single $100M fund cannot generate a six times return each, except for the improper deployment of risk. Certainly the gaping opportunity in technology dictates that there is also no reason why the total number of Venture firms in the U.S. could not reach 1,000.

The grim impact of doing nothing

The most powerful assets in the Venture ecosystem (see our Venture Primer) are the many entrepreneurs with groundbreaking ideas we have bred in this country. Yet, those outliers of innovation have systemically been ignored by a dumb financial system that favors those willing to be enslaved by subprime risk. Groundbreaking entrepreneurs have already left the party and quickly become extinct. Lured by lucrative offers they chose to find solace with better custodians of innovation, larger yet agile companies that simply took better care. Many returned home to their country of origin with an Ivy League diploma in their pockets. Silicon Valley, for what it once represented, has begun to implode.

With more than 50% of moneys spent in certain areas of Silicon Valley dedicated to startups, a 90% erosion of that money (from cutting down the systemic underperformance of 95% of VC firms and retrenching of disappointed Limited Parters) leads to an estimated 45% decline in overall jobs. That in turn creates massive economic deflation to the region and exemplifies why governmental intervention without fundamental reform (the current band-aids will be circumvented quickly) of financial systems in Venture does nothing to prevent the slide it is on. Our local and federal governments should be all over this case, to prevent a further systemic slide that could turn California into a grave-yard for what has been, and our country from becoming the lost leader of innovation.

Our government has simply not connected the dots between systemic failure in Venture and systemic failures in the economy, just yet. The pain and destruction probably need to become more obvious first.

U.S. Commerce Secretary Gary Locke did the usual politically correct thing by inviting members to his National Advisory Council on Innovation and Entrepreneurship with large statures in the old system, yet none in the new. The outcome of that exercise will be as expected, more of the same (yet no one will be able to politically accuse him). More importantly, Locke's agenda is flawed. The problems in Venture are not with the method of innovation, but with those who govern it.

Venture is the poster child for financial reform

As a reader of my blog, you may not be surprised to learn that the problems in Venture have nothing to do with some deep rooted and mysterious "Voodoo" of technology or innovation. We have an outdated financial system that does not need more regulations of its complexity, but a dramatic simplification and flattening of its marketplace behavior. The Venture business is the poster child for creating such a new financial system, as its current performance can nothing but improved on.

Innovation can only be saved by a financial system that is truly a free-market system, away from the existing cartel that offers no marketplace (transactional) transparency and is void of real competition that lies at the capitalistic fundamentals this country was founded on. Merit attached to money changes the bold lie capitalism is without.

So, my self-imposed journey to save America from itself continues, for I have seen its potential.

We can save the fantastic innovative capacity in this country and elsewhere when we apply the same intelligence of the way entrepreneurs build innovation to the way we fund it. Without a new free-market financial system in Venture be sure to strap in for a massive implosion in Venture that will take ten years for many to discover had been predicted by this annoying whistle blower all along.

At least now you know who he is.

Tags: Subprime, Limited Partners, Entrepreneurs, VC, Innovation, Integrity, Investment, Government, Growth, Arbitration, Capitalism, Cartel, Diversification, Economy, Experience, Free-market, Funds, HP, LP, Organic growth, Private Equity, Risk, SalesForce.com, Silicon Valley, SocialEconomicValue, Transparency, Venture, Oracle

By Georges van Hoegaerden

I think about the future of Venture Capital a lot (day and night, can you tell?) and how we can continue to drive and fund innovation. And I have said many times that "the quality of the deal intake is only as good as the quality of the investor", which specifically in venture means that an investor needs to have the experience and foresight of an entrepreneur to support others.

Raise the (public) value of innovation

Clearly with truckloads of money from Limited Partners over the last ten years, more highly skilled global entrepreneurs than ever, and 5/6th of the world population still void of essential technology applications, VC has done a deplorable job in the matchmaking process between the assets of the Limited Partner (money) and the assets of entrepreneurs (ideas), which should have tapped into that massive greenfield more aggressively.

Less than 10% IRR for more than 10 years, or to use another worrisome statistic: less than 3% of dollars invested in VC over the last ten years leads to the production of any public value by way of IPO (Initial Public Offering), as 10 years of VC investing at $200B/year (give or take) x 10 generated $66B in IPOs (per Dan Primack, PEHub). No wonder the Limited Partners who fund VCs scratch their heads at what just happened to their money.

It's all about the Benjamins (and the quality of people behind the money)

I referred to Albert Einstein before (way back in 2006) and an amuzing article from Dave B Lerner turning Sherlock Holmes into a VC reminded me how the principles of Einstein should be held against the selection process for General Partners (GPs) at a VC fund.

Quotes from the Genius

So, with Einstein's Wikipedia encyclopedia at hand let's roll out some of his famous quotes and see how the current state of venture stacks up:

"Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world".

So why do GPs demand to see a product demo before they can decide to invest, is it because they have no imagination? Perhaps we should encircle a world of innovation that is bigger than Silicon Valley?

"For knowledge is limited, whereas imagination embraces the entire world, stimulating progress, giving birth to evolution. It is, strictly speaking, a real factor in scientific research".

Why a SuperBowl ring is so much more valuable than an Ivy League ring, in any job in the venture business.

"A new idea comes suddenly and in a rather intuitive way. But intuition is nothing but the outcome of earlier intellectual experience".

Why relevant entrepreneurial experience is such an important attribute to a VC investor, intuition not analysis drives the selection of rewarding investment decisions.

"Whether you can observe a thing or not depends on the theory which you use. It is the theory which decides what can be observed".

Silicon Valley has commoditized the investment thesis (or what we refer to as the-same-difference investment thesis), no surprise that it cannot detect disruptive innovation even if it would show up at their doorstep.

"Falling in love is not at all the most stupid thing that people do — but gravitation cannot be held responsible for it".

GP should not be afraid to feel passionate about their companies and make independent investment decisions (that may not find other syndicates), but the gravity of investment commoditization can not be held responsible if they do not.

"It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience".

Customers need simpler technology solutions, not more complex. As investors that means we should not invest in technology, but the application of technology to meet customer needs. But not so simple that it has no macro-economic and public relevance (IPO).

"Humanity has every reason to place the proclaimers of high moral standards and values above the discoverers of objective truth".

A higher moral standard in the venture business would ensure that we deploy free-market principles to the support for innovation. We are far removed from deploying transparency to the venture business that would expose the true merit of investors with the true merit of entrepreneurs. Only then will the truth reveal itself.

"A happy man is too satisfied with the present to dwell too much on the future".

GPs locked up into 10-year fund vintages are fat and happy, too happy to dwell to much on the malaise in venture.

"The state of mind which enables a man to do work of this kind is akin to that of the religious worshiper or the lover; the daily effort comes from no deliberate intention or program, but straight from the heart".

Great convictions from the heart lead to great investments and financial returns in venture. The investor who is content with the current investment program will soon meet his maker.

"I am by heritage a Jew, by citizenship a Swiss, and by makeup a human being, and only a human being, without any special attachment to any state or national entity whatsoever".

We are citizens of our world, so perhaps we should start investing that way. We need to get away from Sand Hill Road more often and tap into global resources, not just to fund entrepreneurs but also to experience and understand what drives global marketplaces.

"Concepts that have proven useful in ordering things easily achieve such authority over us that we forget their earthly origins and accept them as unalterable givens. Their excessive authority will be broken".

Just because we have constructed the relationships between Limited Partners and VCs in a certain organized fashion does not mean we should accept them. Especially not when performance proves the vast majority of those relationships do not work out to satisfaction.

"Great spirits have always encountered violent opposition from mediocre minds. The mediocre mind is incapable of understanding the man who refuses to bow blindly to conventional prejudices and chooses instead to express his opinions courageously and honestly".

Entrepreneurs should expect to receive violent opposition from mediocre VCs (who focus on technology builds), but entrepreneurs should remain courageous and honest. Courageous in their entrepreneurial ideas and honest about their ability to build them.

"The important thing is not to stop questioning; curiosity has its own reason for existing".

Many people take for granted what has been imprinted in their brains from childhood, but you would be surprised to learn how many of those things are actually false. Not by design, but by interpretation. Drill deep in what you have been told as the truth and you will find new opportunities for innovation.

"Nature shows us only the tail of the lion. But I do not doubt that the lion belongs to it even though he cannot at once reveal himself because of his enormous size".

A Long Tail without a Torso is meaningless.

"What is thought to be a "system" is after all, just conventional, and I do not see how one is supposed to divide up the world objectively so that one can make statements about parts".

Markets do not exist, as I have stated many times before. Only marketplaces do, in which the choices of individual participants with unique ideas are married.

"Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are even incapable of forming such opinions".

The social environment on Sand Hill Road that has perpetuated the mediocrity in venture is preventing GPs from expressing opinions about how it should change. In fact, none of the Limited Partners I spoke to have received a viable plan from VC as to how to combat the venture malaise we are in.

"My political ideal is democracy. Let every man be respected as an individual and no man idolized".

When you do not belong to the (subprime) "venture club" or play their game, you are not let in and respected. So why should we repay that homage back with idolization?

"The really valuable thing in the pageant of human life seems to me not the State but the creative, sentient individual, the personality; it alone creates the noble and the sublime, while the herd as such remains dull in thought and dull in feeling".

Meritocracies are created by transparency, and we have none in venture. No surprise it is dull in thought and dull in feeling.

"My passion for social justice has often brought me into conflict with people, as did my aversion to any obligation and dependence I do not regard as absolutely necessary".

Free-markets are created by meritocracies that rely on transparency. The social justice of a meritocracy is hard to grasp for those who hide behind walled gardens to protect their own insecurities.

"Mistrust of every kind of authority grew out of this experience, a skeptical attitude toward the convictions that were alive in any specific social environment — an attitude that has never again left me, even though, later on, it has been tempered by a better insight into the causal connections".

I mistrust many venture investors for good reason (their lack of merit), but have learned that the casual connection is the dysfunctional financial system that allows VCs to take it for a ride.

"Everyone is aware of the difficult and menacing situation in which human society -- shrunk into one community with a common fate — now finds itself, but only a few act accordingly".

Waiting, talking and reporting about the malaise in venture is one thing, offering solutions to it is another.

"The economic anarchy of capitalist society as it exists today is, in my opinion, the real source of the evil".

That is of course because the only form of capitalism we practice today is far from a meritocracy. Capitalism spawned by meritocracy is a wonderful thing and builds opportunity for all people with merit (within the Long Tail and the Torso).

No need to be Einstein to become a VC

Einstein himself did not think he was special and neither should a VC. All you need to become one is solid early stage experience and a vivid imagination of how the world should work.

Yet to make venture work, Limited Partners need to start by deploying money to GPs who themselves have proven how those crucial attributes helped them cross the chasm, before those GPs are allowed to tell other entrepreneurs how to do the same.

My investment and drive is for democracy, meritocracy and capitalism to work hand-in-hand to produce the powerful innovation that enhances the lives of people around the world. Until that happens, I leave you with a last quote from the Genius himself: "To punish me for my contempt of authority, Fate has made me an authority myself".

Happy New Year!

Tags: Marketplace, Meritocracy, Einstein, Capitalism, Long Tail, Democracy

By Georges van Hoegaerden

I was delighted to hear Barack Obama yesterday describe a marketplace mechanism as the platform for improving the meritocracy of healthcare, something I have talked about with regards to economies, venture investing and technology products for the last two years. I can only muse that the recent vists from Axelrod and Clinton to our blog delivered some inspiration for the change we need to undergo as a country. Perhaps one of my readers was right, I should be running things in Washington. But enough about me.

Our greatest assets

We should be proud to live in a country that has repeatedly earned its stripes as a staunch democratic and a fierce capitalistic nation at the same time. Each individually breaking new ground in creating building blocks for a more effective economy. We are blessed that way. Not all countries in the world have both assets represented in a single economy and their imbalance makes them more vulnerable.

More vulnerable than we are, for we can quickly swing either way and tap into those resources to correct a temporal imbalance that threatens our economy. With the rest of the world watching over our shoulder, learning from our resolve.

Artificial segregation is our biggest problem

Just like how we are still extremely racially divided (I should know) do we remain politically divided. We act as if we live under seperate roofs on a single property, sharing a bathroom through which we regularly flush the disdain for each other, in subtle and not so subtle ways. Whites against blacks, democrats against republicans, opponents of regulations against proponents of regulation, proponents of gun control versus opponents of gun control, etc. Idian reservations with autonomous rulings are a stark reminder of how we allow segregation to perpetuate.

We often take a hard stance by associating ourselves prematurely to an (artificial) association, without re-evaluting our actual stance based on the acute problem that is being presented. I could categorize myself in any of the aforementioned groups depending on the economic problem at hand and may want to change my mind at any time based on timing and perhaps my deeper understanding of the issue. The timing and situation would define my choices, not a party line.

We are all right

Monolithic democratic societies and monolithic capitalistic societies simply don't work, history has proven that out. Pure democracies (I should know given my country of birth) are known for their endless debates where everyone has a voice that eventually yields nothing but burgeoning baggage of complacency. Pure capitalistic societies are driven by classic neanderthal behavior, where the biggest stick gets rid of everything in its way and drives the majority of less fortunate and lucky to dispair.

For years have we benefitted from the surplus of democratic and capitalistic assets while ignoring the deficiencies in both. Now, the state of our economy forces us to illuminate and evaluate all the pluses and minuses.

Meritocracy = democracy + capitalism

We need our economy to be an organic reflection of the current opinions and capacity of our people, not a delayed distortion field of vintage parties, segments or groups. We need to combine the value of our democratic and capitalistic assets and get rid of the deficits of both.

Mathematically put: opinions plus actions minus complacency minus abandonement equals a meritocracy. And a meritocracy is the product of free-market principles (extensively described in my previous blogs). Free in terms of equal access to all participants, supply and demand.

Just like in the Venture business, politicians better prove that they accurately represent the meritocracy of opinions from the people (all people, not just the ones that vote). If not, replacement and removal of politicians will soon be upon them soon. They better stop bickering about party lines and start worrying about why the majority of people in the US still don't vote (36.8% voter turnout).

Perhaps technology can help shape up politicians by building a ballot marketplace in which for certain decisions, the house of representatives, senate and president can directly tap into the opinions from the people they represent.

Our financial system is not a meritocracy

Barack explained why healthcare is not a meritocracy yet needs to be, and if you read my marketplace blogs you would not be surprised to find that our stock-markets are not meritocracies either. Stock-markets, the way they work today, violate fundamental supply and demand rules associated with free-markets. The foundation of our financial system (copied around the world) is based on the same artificial arbitration as healthcare, posing a systemic risk to our economy.

Testament of the misalignment in our financial system is its size; an exorbitant 11-times the size of the businesses it represents (2008 Wikipedia). That means that the size, performance and characteristics of our financial system is far removed from the size, performance and characteristics of the underlying businesses. It also means we have become a nation built on gamblers rather than on value creators, and that too poses a high risk to our economy.

So, to remove the systemic risk of our economy we need to remove most derivatives (similar to parties and associations in politics) and create a marketplace (which is macro-economically not the same as an exchange) in which the meritocracy of ideas meets with as few financial derivatives as possible. That will re-ignite the innovative culture our country was founded upon, as it tears down the artificial arbitration that prevented a meritocracy of ideas from taking shape in the first place.

We need a transparent, trustworthy and flatter economy if we want to protect its vibrant future.

Tags: Meritocracy, Macro-economics, Government, Marketplace, Capitalism, Democracy

By Georges van Hoegaerden

Subprime VC, as described in a previous blog is easily recognizable, here are some of my metrics. Run for the hills when the investor...:

1/ ...seems more interested in how it is built rather than what the disruptive business proposition is.
Innovation becomes successful when it marries macro-economic value with micro-economic (technology) execution. Technology risk is the least of our worries in Silicon Valley, yet fundamental disruption is crucial and should take up the majority of the discussion.

2/ ...seems more worried about cost of development than cost of greenfield customer acquisition.
Capital efficiency is a buzz-word investors love to throw around. In most cases they want you to be as cheap as possible. But capital efficiency is relative to the cost and value of customer acquisition. Not all venture capital deals start with a seed round below $250K, more disruptive innovation usually costs more to build well (think iPod, iPhone, iTunes, eBay, etc).

3/ ...talks about valuations before you’ve explained the value of becoming the market leader.
A favorite trick of investors is to value the company based on its present accomplishments and many entrepreneurs fall for it. Their companies become undervalued and underpriced which leads to early loss of control to investors. And when investors run a company, statistically the chances of success have diminished significantly. Early stage companies should be priced based on the value of the idea and accomplishments along the trajectory of market leadership. Your glass should be seen as half-full not half-empty.

4/ ...seems more occupied with categorizing the investment than understanding its unique business value.
When investors start categorizing investments in technology categories and subsequently base their investment decisions on them, that means they clearly missed the fact that you business proposition could have value regardless. Again, technologies are not the business, application of technology to a market segment is.

5/ ...talks about capital efficiency without probing market inefficiency.
Again, capital efficiency is a relative term. When a large market is extremely inefficient it probably means that the absolute cost to enter is high (otherwise someone else would have entered it before you). So, the cost to enter the market is a function of its current inefficiency. Many investors are less versed in inefficiencies than you and therefor misjudge the price it takes to enter. As the entrepreneur you will be faced with the inequitable consequences if you decide to bow down and take the investors’ word for it.

6/ ...doesn’t question market entry risk, but focuses on cost.
Investment risk is what should be top of mind to investors, but many of them think they have the operational experience to challenge the assumptions of the entrepreneurs. In many scenarios market entry risk can be mitigated by developing a better product, but a better product costs more money to build. At any time would I rather spend a dollar on R&D to make the product better, than spend a dollar on marketing expenses to try and make a “cheap” product land better. So, the right amount of money (not cost) is imperative to disrupt a market.

7/ ...doesn’t ask about the runway to profitability, but the initial round to get in.
Most companies require multiple rounds of funding. Those rounds are not there for you as the entrepreneur, but for the investor to establish milestones to make him more comfortable. An investor that does not allocate sufficient runway, is effectively selling short on the promise of your company and will cost you months of fundraising efforts at every round.

8/ ...asks you which other investors you’ve spoken to.
Investors are lemmings, and so you should not disclose who you talk to until you have all their term-sheet on the table. Force them to make their assessment of your company independently. Usually each investor has a different risk analysis of your company and last thing you want to do is add up all the negatives before there is a buying signal on all sides. Herd the positives.

9/ ...asks you to talk with his associates first.
As discussed in this blog many times over, associates are graduates that should be used to perform due diligence, not to discover a black swan. Many investors will use associates as a way to offload the workload created by the noise inherent to our industry. The minute you get the associate, you have become noise.

10/ ...asks you more about your education than your work experience.
Building innovation that is truly unique requires an analytical mind and ignorance to anything else but bottom-line results. Education teaches you how to respond to prescribed scenarios, innovation requires the opposite; an ability to respond adequately to a myriad of circumstances that have never presented itself to you, in that composition before. Any investor that focuses on your (or his) business school accomplishments has a warped view of what innovation really is.

Never forget that a great entrepreneurial idea sponsored by the wrong investor yields nothing but failure. Keep searching for the right partner and don’t bow down to subprime investment tactics.

Tags: VC, EBay, IPhone, Growth, Capitalism, Subprime, Startup

By Georges van Hoegaerden

As any economist will tell you, a dollar bill is not worth a dollar. And so the real value of that paper bill is defined by the trust we put in it. The trust that you will receive a certain (yet fluctuating; some days a dollar is worth more than others) amount of goods and services in exchange. Simple right?

So given that, trust is the most important denomination in determining the value of a product or a service. And trust builds from consistent delivery on stated promises, which - in turn - requires the unwavering commitment from people with integrity and honesty....do you feel the slide coming?

So:
1/ Why do many companies make promises they don’t keep?
I evaluate a lot of technology companies (about 60 this year alone, public and private) and most are simply lying about, or overstating (decibel marketing) the benefits of their proposition. Because the majority of potential customers and investors are ill-informed about the pros and cons of this specialized industry, technology companies can often get away with sneaky monetization strategies that take advantage of a lesser informed audience.

In Silicon Valley, “success” is often defined by how skilled you are in fooling customers and sucking up to aristocratic investors (to which few have access), rather than the authenticity of your proposition. A mediocre ecosystem is what still remains after the technology bust from 2001 in which self proclaimed “serial entrepreneurs” and investors have been able to dodge real value creation and sell out short.

Not the VC model is broken, but many of the participants are. That noise is severely eroding the trust in an inherently sound technology industry. We need to enforce more transparency and hold ourselves to higher standards to restore the integrity and trust.

2/ Why do we allow short-selling on public company stock?
First, the performance of public stock says nothing about the actual value or outlook of a company, in the same way the dollar offers no guarantee of what you get for it. Public stocks are already a lousy interpretation of the actual performance of a company, as it merely echos popular opinion (and not the company facts).

So, selling short is really a bet on performance of popular opinion and does nothing but undermine the trust in the longevity of a business and cannibalizes shareholder value. Quarterly earnings reports are an absolute joke as many companies move profits around, claim leadership in a market that is defined by themselves and reduce cost rather than improve their marketplace position in order to make quarterly earnings look good. They also force healthy companies to focus on often unpredictable economic aberrations rather than on their long term and macro-economic leadership position.

The ability to sell short creates unrest and undue fear in a system that requires the opposite. Can you imagine holding the president of the United States accountable on a quarterly basis? That would be bad for our country (in most cases).

We should implement a predetermined holding period for the sale of stock, the expiration determined by the company and regulated by the SEC (which can also prevent some nasty insider trader deals) to build back trust.

3/ Why are some allowed to resell securities?
Reselling securities (which was illegal a few years back) based on finagled credit scores are perhaps the double whammy in the erosion of trust in public companies. Company credit scores that are maintained (and marketed) by commercial companies create profit driven scores and unrealistic prices (up and down) for securities. We simply need to stop the resale of securities and regulate the process of maintaining credit scores (both business and personal) vigorously and immediately.

Regulations do not turn us into a socialistic society, but the reality is that no economy operates without rules to protect trust. Free-markets require a basic set of rules to prevent a few bad apples to create insurmountable fear for the rest of us.

For the technologists amongst us: eBay deploys no less than seven dedicated servers to detect suspicious transactions that could challenge the trust in its free-market model.

In the same way we deploy rigid traffic laws to drive a car, should we deploy rules of engagement to protect our economic serenity. As long as we don’t dictate the destination of our travels or where we place our individual economic bets, we should be just fine in our support of a blossoming capitalistic society.

Trust comes from transparency, integrity and authenticity that builds real value, not from taking advantage of the ill-informed. So, building a successful company does not start with a new product strategy but with a leader who has the drive to win that is larger than his greed. Building disruptive products that truly improve people’s lives will yield personal satisfaction and trust that will keep customers coming back for more.

Trust is the only currency that matters, so stop squandering it.

Tags: EBay, Economy, Eco-systems, Free-market, VC, Stock, Transparency, Securities, Capitalism, Macro-economics, Economy

By Georges van Hoegaerden

Many times I am asked to help a foreign (usually European) company to make it in the United States. But the pursuit of the American dream requires that sacrifices be made. Everyone wants to be a star like Elvis Presley, yet few have the real determination to do so.

So, why are US companies so different. The internet is releasing the fictional boundaries of technology, making its usage and its future development available to anyone. Universities in Europe are doing a much better job teaching technology, yet we don't see a significant amount of European companies become successful. What is going on?

While I don't have all the answers, I can offer a few personal observations of why the American way - and - dream is alive and well:

1/ More entrepreneurs are bred by a capitalistic society than a socialistic society. Entrepreneurs with a personal stake and drive for success boost investor deal flow and premium supply. A significantly larger investor pool yields higher valuations for premium supply.

2/ Solid early-stage business acumen. While technology and programming skills can be acquired by virtually anyone, the European petri-dish, the ecosystem that supports the early-stage exchange of technology products and services is missing. As a result people with the business skills needed to bring those early stage products to market rapidly is virtually non-existent in Europe.

3/ Resilient attitude. Young Americans (and ex-pats like me who never felt at "home") are taught to make money and make themselves happy, young Europeans are taught to get a job at a reputable company and be happy. Taking risk and thinking different is a requirement of being a successful entrepreneur, in addition to withstanding a great amount of adversity.

4/ More risk-taking buyers. Customers, partners and acquirers are more entrepreneurial too. Aggressive competitive cultures force buyers to be more entrepreneurial. Technology innovation is accepted as the instrument of differentiation in many US businesses and customers will buy products that give them competitive edge and better quality-of-service.

5/ Continuous focus. Focus on success, short and long. Building a business that goes through several transformations to meet continuous market milestones is crucial to success, rather than a formal majestic plan with many dependencies that never materializes.

So, is there no hope for foreign technologists? Au contraire, I've seen some great technologies that, if unlocked, can find early traction and impressive valuations. It's time to judge a technology not by the country it comes from but the content of its innovation. The american dream is waiting for you. Are you up for the ride?

[In remembrance of Martin Luther King]

Tags: Capitalism, Democracy, Resilience, Entrepreneurs, American, European, Premium

By Georges van Hoegaerden

On a regular basis entrepreneurs approach me with jaw-dropping technology, wonderful to look at from an innovation perspective but many times hard to envision as a standalone sustainable profit center. So what technology makes a successful company?

Technology is becoming a commodity. Think about it from a macro-economic perspective. Information technology is the instrumentation, not the differentiation of customer businesses. World's largest retailer, Walmart does not rely on technology to be successful, technology was barely available when Walmart started. Walmart built an effective business model and, in-house continuous to shape technology to support the business model. No packaged apps, or technology silos here.

Technology companies do become successful when their technology drives, usually with incremental improvements, the evolution in a marketplace. Google is successful because it optimized the online advertising business model and increased its effectiveness. It's all about market principles, not technology (BTW: which average user can tell the difference between Google and Yahoo! search). eBay is successful because it empowers free-market principles and supports true meritocracy in the sale of goods.

Bottom line:
1) Investigate de-funct, constricted or outdated markets and build technology that improves the effectiveness of those markets.
2) Find capital from investors that understand the market and appreciate technology, not the other way around.

Market principles are seldom wrong, the instrumentation often is.

Tags: Entrepreneurs, Walmart, Google, Innovation, Evolution, Yahoo, Commodity, Capitalism, EBay

By Georges van Hoegaerden

Free market principles are over 400 years old when the Dutch started selling flowers using a manual auctioning system. eBay has done a masterful job of bringing this age old success to the internet in selling person-to-person goods. The benefit of eBay is macro-economic not technology (or user 'friendliness'). That may be the reason why it barely escaped the (2-3) veto at Benchmark Capital. The success of free-market principles can be extended to many verticals and it remains a big surprise to me that eBay has not delved into other verticals using these hard earned principles.

Recently, a new job site TheLadders where I posted my resume (for research purposes on marketplaces), raised capital with a new approach to job search. Instead of charging recruiters it charges the job seeker (specifically the ones above $100K/year salary) a price for access to the premium jobs on the site. A nice concept but how do we know that instead of trusting the applicant, we can now trust the recruiters. Are these posts for real. How are recruiters held accountable. How do I know if my personal data is not abused? As NY attorney general Eliot Spitzer declares: "For a market to be truly free and efficient and have the full confidence of its participants two things are required: integrity and transparency". Why would I trust a job site that does not tell me what transactions are committed. Would I be drawn to eBay if I did not know what products really go for?

Free market principles will change the record industry, new players like Apple have implemented the first phase of a free-market for music. Without truly recognizing it, the record labels are participating in a movement in which the stars are no longer produced by labels, but stars are produced by people. But Apple needed the labels to draw the participants into its marketplace first.

Open-source represents another form of free market principles. Virtually unlimited software development supply is matched with the diverse appetite for the Linux operating system. Why are we still entrusting the publishing of books to the demi-cartel of the book publisher. You can publish books in Audible on iTunes and the software is ready today to publish Adobe's PDF format (yes, in iTunes). What stops Apple from becoming the media hub where free market principles apply to any data type and buyers can tap into the Pareto and Long Tail supply simultaneously.

There are some real hurdles. Hurdles that require capital and domain expertise and VC's to fund them. But we need a different VC, not the technology nut that wants to send a new rocket into space, but one that understands the power of history and evolution.

Tags: Free-market, EBay, Transparency, Integrity, ITunes, Linux, Adobe, Pareto, Media, Capitalism, VC, Evolution