Venture Capital

Describes motivation process for creativity with emphasis on intrinsic motivation by Corey K Katir

California’s venture capital market is about 10 times bigger than Washington’s, both in terms of deals and dollars.

Silicon Valley Bank has established a new life science practice in the Pacific Northwest under the direction of Rob Derry, a board member of the Washington Biotechnology and Biomedical Association who before joining SVB worked in sales at Onyx Software. With five percent of the total venture capital pool in the state going to life science companies last year, SVB is hoping to assist life science companies as they grow here.

Venture investments in clean tech soared 41 percent during the second quarter to $961.7 million, with The Associated Press reporting that 38 percent of the capital is going to later-stage companies.

Venture capitalists have been getting a black eye to go with their blue shirts. A recent report from the Kauffman Foundation slammed VCs for ashortchanginga investors, pointing out that public markets deliver better returns. The next day, Fred Wilson, general partner at Union Square Ventures and prominent VC blogger, suggested that a flood of crowdfunding money unleashed by the JOBS Act could sweep away venture capitalists altogether.

It could happen.

aThe game has changed,a says Paul Kedrosky, a senior fellow at the Kauffman Foundation whoas focused on entrepreneurship, innovation and the future of risk capital. aItas obvious to everyone in the industry that crowdfunding is no longer just a toy.a

For startups, itas now a realistic option to traditional sources like first-tier VCs. And that could spell trouble for the guys on Sand Hill Road. aFor the most part, VCs add very little value, so itas not surprising that if you can get a high-liquidity, low-maintenance form of early-stage funding for your startup, that will pretty quickly push aside more traditional capital providers like bad VCs,a Kedrosky says.

Fred Wilson pointed out that if every American decided to allocate one percent of his or her liquid net worth to crowdfunding, thatad add up to $300 billion – 10 times the amount now sloshing around in the venture sector. And while the chance of that happening has been pooh-poohed by some observers, Kedrosky calls $300 billion aa credible number.a

Going Mainstream

Crowdfunding has yet to hit the mainstream, but itas getting there. There are vehicles on the way that will help casual investors allocate a piece of their paycheck to startup ventures the same way they deduct now for a 401(k). aThen,a Kedrosky says, athis becomes a tsunami.a

But Kedrosky thinks itad be aa disastera if it happened. aIt could end up destroying the marketplace. I love vandalism as much as the next punk, but Iam very leery of embracing the idea of even more money flowing into the venture industry. The problem fundamentally is subpar returns – and the reason for that is thereas already too much money in the industry.a

Back to Wilsonas point. What will happen if and when the crowdfunding fire hose gets turned to full blast? Will VCs be crowded out?

Some of them will.

If the market is made more liquid, bid-ask spreads will contract. Deals will be priced higher, returns will drop and the market will be an option for only the top players. Big-brand VC firms will survive but others will go the way of Palm – or be forced to become Series B and C investors.

Who Is This Good For?

So, more freewheeling crowdfunders and fewer meddlesome VCs. For startups, that might seem a positive trend.

Not so fast.

Crowdfunders are fickle. They may crawl all over you on a first date but not take your calls when itas time for follow-on rounds. aCrowdfunding is great for the shiny new thing,a Kedrosky says. aBut the acid test is, if you hit a speed wobble with your company, can you raise a subsequent round of funding? The early record on multiround financing is not good.a

VCs have noted this and tuned their pitches accordingly, telling startups that only they will be there in sickness and in health. aWhile VCs are not as good about sticking around in bad times as they claim they are,a Kedrosky says, “they are still much better than crowdfunding seems to be.a

VCs – at least the good ones – wonat be going away. But Kedrovsky finds it entertaining to watch the industry confront the creative destruction that so many of its evangelists preach:

aThe amusing part for me is that if you go back to orthodox disruptive-innovation thinking, which VCs love – the old Clay Christensen stuff – the hallmark of innovation is that incumbents dismiss it initially as a toya| Look how VCs have responded to crowdfunding. They call it a toy. They say, aSure, itas good for little lifestyle companies, but itas not good for venture-type companies.a Itas lovely how disruptive thinking has come back to bite them in the ass.a

Image courtesy of jan kranendonk/Shutterstock.com.

Facebook became a $104.2 billion company Friday in much the same way it became the worldas biggest social network and a cultural game-changer: by stubbornly forging ahead despite criticism and calls that it couldnat be done.

Last week, rumors turned into full-blown financial news stories that the initial public offering was getting a lukewarm reception in road-show presentations to investors in New York City, Boston and Palo Alto, Calif. CEO Mark Zuckerberg was criticized for wearing his trademark hoodie to the event in New York and skipping the event altogether in Boston, and some analysts said Facebook could open with a value as low as $75 billion.

And yet, by this week Facebook had raised its expected share price and was making more shares available to meet demand. By the close of markets Thursday afternoon, Facebook had set its opening share price at $38 (after considering levels as high as $40). Whatever happens in trading today, Facebook will be the third-largest IPO in history and will net the company $16 billion.

aIt shows tremendous confidence in the guy wearing the hoodie,a Erik Gordon, a professor at the University of Michiganas Ross School of Business, told Bloomberg. aHe hasnat specified how heas going to do it, but heall have to do it to justify this price.a

Market Cap Now More Important than Number of Registered Users

But share price doesn’t really matter. The most important number for now is that $104.2 billion. The $100 billion marker is symbolic, as is so much that surrounds Facebookas evolution into a publicly traded company. Beyond the hoodie, Zuckerberg has been sending all sorts of signals that heall be a different kind of CEO, from his decision to not travel to New York to ring todayas opening Nasdaq bell, to celebrating the IPO not with champagne but with Red Bull (the company had one of its famed hackathons last night).

And while $104.2 billion can (and will) change as Facebook ebbs and flows through the ups and downs of being a publicly traded company, at least for now it makes the eight-year-old company more valuable than all but a handful of U.S. companies. Facebook is bigger than McDonaldas, bigger than Citigroup and – also symbolically – bigger than Amazon, arguably the biggest success story from the first dot-com boom.

aFacebook is here to stay,a Navin Chaddha, a managing director of the Mayfield Fund, a venture capital firm, told The New York Times. aItas a virtual economy where people are spending more time than any other Internet property.a

Still, its stock is still highly speculative, leaving investors unsure of what to do. A steady stream of them have been interviewed on cable television and all make the same basic point: Invest in the company and you may see it wither, much asGroupon, last yearas IPO darling, did. Skip putting money down, however, and you may kick yourself if Facebook ends up like Google, which now trades about 100 times higher than its IPO price.

At its open this morning, Facebook was trading at 100 times its earnings for the previous 12 months. By comparison, the Standard & Pooras 500-stock index trades at 14 times earnings. People who run the price up today are mainly buying into the hype, and may be too late: The true short-term winners are the companyas early investors, people who bought shares on private exchanges and Zuckerberg (his stake is now worth about $19 billion).

aIt could take many years to calculate Facebookas impact,a Martin Sorrell, chief executive of advertising company WPP, told The New York Times. aThereas a lot of pressure for them to monetize their content and demonstrate productivity, but you canat do it overnight.a

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