Jerry Mitchell, who is a special guy here in Chicago for his decades of helping entrepreneurs, just had his 70th birthday. He recently told that Teddy Roosevelt said one of his favorite quotes about perserverence and effort which I really liked:

“It is not the critic who counts; not the man who points out how the strong
man stumbles, or where the doer of deeds could have done them better. The
credit belongs to the man who is actually in the arena, whose face is marred
by dust and sweat and blood; who strives valiantly; who errs, who comes
short again and again, because there is no effort without error and
shortcoming; but who does actually strive to do the deeds; who knows great
enthusiasms, the great devotions; who spends himself in a worthy cause; who
at the best knows in the end the triumph of high achievement, and who at the
worst, if he fails, at least fails while daring greatly, so that his place
shall never be with those cold and timid souls who neither know victory nor
defeat.”
— Teddy Roosevelt

Eric Olson and Frank Gruber are launching their first TechCocktail conference in Chicago this week on Thur, May 29th at Loyola University. You can register by clicking here. They have pulled together a great set of panelist including Dick Costolo from FeedBurner/Google, Jason Fried from 37Signal and a host of other luminaries. They have also thrown in a VC panel which I’ll be on with Brad Feld, Kirk Wolfe, Rob Schultz and Bruce Barron. If you can make it, it is definitely worth attending.

"…it’s more about people skills and the ability to assess whether there’s a market for something."
  — Dick Kramlich, co-founder NEA

I was cleaning out my files the other day and came across a 2005 NYT article by Gary Rivlin on the venture industry titled "So You Want to Be a Venture Capitalist". It is well worth a read for any of you inspiring investors. Couple of takeaways from it:
— "Below the surface, there’s a huge amount of turnover."  I did not realize the degree of turnover at some firms, including 70% partner turnover at NEA (1997-2005) and 70+% partner turnover at Kleiner (1997-2005). Some is due to poor performance and other is due to strong performance and retirement.
— Up or out. A large share of a fund’s profits are often driven by 25-30% of the partners. This is a true meritocracy and the results are clear to quantify. Over half the partners will fail in the bigger picture.
— Entrepreneurs have a hard transition to the investing side despite the large trend towards this.
— Success is driven by being a good judge of people and for understanding when markets are getting ready for inflection. "you’re a natural athlete or you’re not"
— It is a mentoring business with a long gestation period…"probably 6-8 years and you should be prepared for losses of about $20 million (per person)".

One last point that the article doesn’t mention is that the entry period can be grueling. It is not as rosy as most people on the outside assume. 60% of a good fund’s deal will lose money or breakeven. The losses come early and winners take time to compound. So, sometimes you have years of carnage while being out in the wilderness hoping for the hits to come through.

"By all rights Stewart Alsop should have been a terrific venture capitalist. So why did Mr. Alsop, long considered a cyber-prophet among technology leaders, wash out in a profession in which he seemed predestined to succeed?

In recent months, as venture capital firms have announced the formation of new investment funds, a hot topic among the Silicon Valley cognoscenti has been the exodus of "tourist V.C.’s," as people from nonfinancial backgrounds are known here. Some have left the field because they did not pick enough winners; others have gone on to pursue different projects. Whatever the reason, there are hundreds fewer venture capitalists around today than just two years ago…." (click here for rest)

The nice thing about doing angel investing on the side is that I can invest in fun, if not wacky, ideas from time to time. I put a little money into a friend’s (John Funk, wonderful serial entrepreneur) IP incubator called Evergreen IP. His partners come out of the CPG world and they have licensed an array of innovations/patents and are now bringing several to market. One of these is the Dog Pause Bowl (www.dogpausebowl.com) which is targeted at obese dogs or dogs that eat too quickly. Look out Weight Watchers… He describes this better than I in his post "We Have Liftoff!".

There seem to be two styles of bloggers. Those that drop shorter snippets into posts but do so once or twice a day and those that like to write longer posts but do so once a week/month. While I have always assumed that the former better fits people’s consumption behavior, there have been a variety of studies that confirm this. In "Not Quite the Average: An Empirical Study of Web Use", the researchers concluded that the average web page has around 600 words and the average reader only spends time on around 100 of them (about 20-30%). So, keep the posts to under 100 words…(note to self!). We’ll see if I can do it…whoops, I just hit 119 words.

I was looking at the global statistics page at the back of the most recent Economist Magazine and noticed that it had a chart laying out the % of households in each country that use IPTV (internet) as their primary means of getting their television services (vs. cable, satellite, etc). Below are the top 7 countries on the list:

Hong Kong 31%
Iceland 27%
Estonia 10%
France 10%
Cyprus 10%
Sweden 8%
S Korea 7%
(US <1%)

Much like cellular has leapfrogged land lines as the primary telecom pipe in developing countries, many countries are going with IPTV as a prominent source of distributing content. Homes can get both internet access and video/TV delivered through one pipe. We have seen this phenomenon up close through our Growth Fund’s investment in UUSee, the leading IPTV P2P provider in China with over 30 million users.

In addition to this IPTV trend, we are also seeing videos come at us from the hosted video sites like YouTube, Metacafe and specialized channels like Celebtv. My kids are watching entire episodes of their favorite shows on the show’s website. While people complain about having too diverse a choice through the hundreds of cable/satellite channels, imagine the complexity when thousands of IPTV channels emerge. With the low cost of production and low cost of distribution, people will be able to set up extremely niched “channels”.

This will create quite the challenge for advertisers, who are still trying to figure out how to use banner ads. Instead of a simple decision of what image to put in a banner that is broadcast out, they will have to figure out if they want to use pre/post roll advertising, sponsored advertising, contextual text links beside videos, overlays on top of videos or jump into the creative game and produce content itself. The permutations of types of content with types of channels is becoming mind boggling. However, for creative lead gen players, this will present a terrific opportunity to capitalize on the complexity and the glut of ad inventory arising.

Of course, this doesn’t begin to get into the challenges of integrating cross-media promotions (text/SMS, website, etc) or the rise of mobile advertising. It’s going to be a great couple of years here as the IPTV revolution swings through!

Following up on my post on the buyout world, the VC world has also experienced valuation inflation over the past year. As more and more liquidity comes into the sector (mostly acquisitions), VC’s are beginning to feel bullet proof again. We are starting to see VC’s promising entrepreneurs $80m and $90m pre-$ valuations if they can get some proof points in a given area (we’ll see if they come through). Since venture does not use much debt, the debt crisis has not hit home yet (it will should the economy go into recession and ad budgets and cap-x budgets get slashed). If you want to get a sense of what is driving the increasing craziness, check out some members of the asylum. Slide at $550m and Rockyou at $325m??? While we have several on here (and fingers crossed they hit Henry’s values!), I scratch my head a bit. While not the extremes of 1999, there are a lot of $’s for eyeballs (or "attention" as it is now called these days). Here is Blodgett’s estimates of property values:

THE SAI 25: THE WORLD’S MOST VALUABLE STARTUPS

Rank
Company    Valuation
1.    Facebook $9 billion
2.    Wikipedia $7 billion
3.    Craigslist $5 billion
4.    Betfair $5 billion
5.    Mozilla Corp $4 billion
6.    Yandex $3 billion
7.    Webkinz $2 billion
8.    LinkedIn    $1.3 billion
9.    Habbo    $1.25 billion
10.    Oanda    $1.2 billion
11.    Linden Lab $1.1 billion
12.    Kayak $1 billion
13.    QlikTech $850 million
14.    Ning $560 million
15.    Slide $550 million
16.    TheLadders $500 million
17.    Stardoll $450 million
18.    Ozon $450 million
19.    Thumbplay $400 million
20.    Glam Media $400 million
21.    Rock You $325 million
22.    Tudou $300 million
23.    Efficient Frontier $275 million
24.    Zazzle    $250 million
25.    Spot Runner $250 million

Contenders
Federated Media    $245 million
Yelp    $225 million
Meebo    $220 million
Indeed    $200 million
Zillow    $200 million
LoveFilm    $200 million
Metacafe    $200 million
Adconion    $200 million
4INFO    $175 million
Photobox    $150 million
Vibrant Media    $150 million
Gawker Media    $150 million
Mahalo    $150 million
56.com $150 million
Youku    $125 million
Digg    $125 million
Etsy    $115 million
LinkExperts    $100 million
Powerset    $80 million
Trialpay    $80 million
Huffington Post    $75 million
Associated Content    $65 million
Live Gamer    $60 million
Twitter    $75 million
Mint    $50 million
Prosper    <$50 million

JB Pritzker sent this over to me recently. Shades of reality but tons of humor in this…

How to manage your company’s board of directors:

1. Meet by phone whenever possible. Most of them will be doing their email or goosing their admin or something and not paying any attention at all. They’ll just vote when you ask’em to.

2. Never distribute anything in advance; they might read it and get themselves all confused. Just present it all: gets you through most of the meeting.

3. Never number the pages of what you are presenting. Lots of time can be used constructively figuring out what page everybody is on. If you email the material (preferably just after the start of the meeting), send lots of separate files. Turkeys’ll never know what to look at. Bonus suggestion: send slightly different copies of files with different pagination to everyone; it’s a lotta work but it’s worth it.

4. Have your CFO present numbers, lots of numbers. Make sure they get a chance to go over variances in the pencil budget.

5. If you have to meet in person – it is gonna happen sometime – use food. Any discussion you don’t want input on should be right after lunch. No one’s gonna be awake then.

6. Speaking of lunch, you can play this for lots of time. Have your dumbest admin take orders off some huge takeout menu. Get what type of bread they want, dressing, meat, lettuce, all that. Then have a smart admin shuffle the list so NO order is right. Wrong bread with wrong filling etc. No veggies for vegetarians (they tend to be nitpickers anyway). Kills lots of time and helps make sure they meet on the phone next time. BTW, they’ll pay no attention to anything between when lunch is ordered and when it comes so minimum of an hour.

7. Do bring up board comp and director’s liability insurance. Sure to get their attention and won’t interfere with the real business of the company.

8. Have a nine person board with three insiders, four VCs and two people who don’t have a clue. Just four VCs alone should guarantee gridlock.

9. Every meeting should run way over schedule. You control the agenda: presentations up front; substance in the third overtime period.

10. If they’ve gotta discuss something, get’em down in the weeds. Color of the office; words for the new ad campaign; what bank to deposit tax payments in. That keeps everybody out of trouble.

11. If you’re public and their questions are going where you don’t want to go, tell them you’d be glad to answer but that’ll make them insiders for the next two years. You can also tell by who squirms who was planning to sell.

Daniel Primack wrote a great piece on the continuing insanity in the buyout world. It is amazing that the writing is clearly on the wall and is nearly identical to the venture world in 2000 and yet the LP’s and funds continue unabated. VC’s kept raising massive funds even though it was clear that the liquidity engine (IPO’s) had died. This capital festered in the funds and either a) was returned or b) was pumped mindlessly into misguided companies. With the credit markets down, the LBO world has lost its primary liquidity engine (dividend recaps, etc). So, I am amazed that LP’s are going along with these funds doubling their size. More on the Venture cycle version of this soon…

Warburg Follows the Herd
Warburg Pincus yesterday announced that it has closed its tenth fund with $15 billion, or nearly twice what it secured for its ninth fund in 2005. It’s also $3 billion more than the firm was targeting when it began fundraising last May.

This certainly fits the recent mega-firm pattern, in which Bain, KKR and others have raised record amounts despite a paucity of new deal opportunities. Fee today, call-down in a few hundred tomorrows (unless they spot a problematic PIPE or cratering leveraged loan portfolio).

I had really wanted Warburg Pincus to help retard this trend, which skates the thin line between optimism and greed. Few other firms exude the same spirit of independent thinking – having been an early adopter of globalization and stubborn defender of transacting both massive LBOs and early-stage venture deals out of the same fund. If there was any firm willing to stand on objectivity, it would have been Warburg.

But, alas, it was not to be. Maybe I should have been stripped of my delusions when Warburg propped up MBIA, in a bid to replicate its long-ago success with Mellon Bank (Question: Did LPs who came in on the final close get some sort of discount?). I guess Warburg is willing to stand apart, but not too far apart.

So Blackstone is the now the only fundraising firm left with enough gravitas to help stem market overcapitalization, but looking to Blackstone for moderation is like looking to the Boston Bruins for a Game 7 goal. Sure a few big firms will claim fundraising sanity, but beware the difference of intentional and unintentional fundraising scale-back (yeah, I’m gazing toward Chicago)…

Warburg Pincus would likely respond that it has a flexibile enough investment strategy to handle macro-economic fluxuations, and that it’s investing for the long-term (Note: It declined to comment for this piece). Fine, but it’s a specious argument.

How can any private equity firm claim that it requires the same amount of money today that it did in May 2007? Even if Warburg plans to do the exact same number of deals, many of them will require less cash due to decreased valuations. In fact, the only reason Warburg was raising more money in the first place was because the private equity targets were getting larger and more expensive. Doesn’t what goes up also go down?

Finally, it’s worth emphasizing that LPs share much blame for this fool’s goldrush. I keep hearing investors complain about 2008 fund sizes and strategy drift, but then learn that Warburg got its highest-ever level of LP re-ups. If you don’t want mega-firms raising so much money, then don’t increase your commitments. It’s just as simple as it sounds…