As many of you may have followed, there is a battle royal brewing around the taxation of carry (the 20% of the upside GP’s receive). Historically, this has been treated as capital gains (usually long-term) so enjoys a low tax rate. With the excesses of the hedge fund & buyout managers, Congress has begun evaluating different ways to tax carry as current compensation just as salary is. What preceded this is that Blackstone’s CEO, Steve Schwatzman, hosted a very high profile, $2m birthday bash for himself (like the Romans would…) and then followed this up by taking Blackstone public (thereby exposing the significant carry & fees they earned). Now, carry charged by all types of investment managers (VC, Buyout, Hedge, Real Estate, etc) is under attack and the various asset groups are trying to extricate themselves from snowball. Daniel Primack published an interesting piece today in PE Week that lays out some of the resulting behavior. As a VC, I’ll enjoy being in the good guy camp for short interim period…

"Private Equity Cleavage

An interesting subplot to the carried interest tax debate has been how venture capitalists keep trying to disassociate themselves from buyout pros. PE Week Wire considers both groups to be part of the private equity landscape (I take “private equity” literally), but most VCs would sleep better is Kleiner Perkins was never again mentioned in the same breath as Blackstone or KKR. Buyout pros, on the other hand, keep clinging to VCs like elderly straphangers on a bumpy subway line.

Why the fissure? Because VCs believe they are forces for good and buyout pros are forces for bad. Or at least they believe Congress and the general public believes that – and they are worried about their halos being dirtied. For buyout pros, it’s the same idea in reverse – with LBO mavens hoping to launder their reputations through the VC wash…"

My friend from B-school and BCG, Al Warms, recently sold his firm, BuzzTracker to Yahoo.  Al created a viral approach to linking news stories with leading blogs to determine the importance of a given article. You have seen the VC channel of BuzzTracker in my left rail for nearly a year now. Creating channels is pretty straight forward in that the channel sponsor & BuzzTracker (often the same) define the influential blogs in a given space as well as the key news feeds. BuzzTracker does the rest. Now, Al is not only part of BuzzTracker but is taking over as GM of News. This is another great win for Chicago and for Al. He previously sold his stake in RealClearPolitics for a nice win last year. Definitely a rising star to watch…time to buy Yahoo stock!

Here is Al’s commentary on the acquisition: Joining Yahoo!

David Dalka asked an interesting follow-up question to my post yesterday about the consolidation in the venture business. What does this consolidation mean to the business? A couple of things:
1) a lot of the firms out of the business now should not have been in it to begin with. They drove up prices and encouraged a loss of discipline in the entrepreneurial world. So, this segment going away is actually a positive to both entrepreneurs and VC’s. If they had helped back successful firms (versus the 10th loser in a space), their performance might have been good enough for the next fund.

2) I don’t think that there will be a massive impact on quality start-ups. As consolidation occurs, there is generally room for the smaller niche or focused funds. These often, due to size, focus earlier stage. As the brand funds get bigger, most will keep an early stage segment going but raise like DFJ and Sequoia, later stage funds in addition to their early stage ones. So, the sub-$100m funds will survive as will the brands. The $150-400m funds will take the hits in numbers most likely.

3) as long as the cycle continues, angels and strategics will do a lot of earlier investing. Should the stock market turn ugly, this money will dry up. This will have the biggest impact, I believe, in the seed/early stage world.

This all said, good ideas & teams will get funded but not necessarily at the higher valuations or larger rounds sizes of today. Running these companies will require more discipline which is a good thing and there won’t be as many competitors. First time entrepreneurs will take the brunt of any kind of pullback. This impacts the future since it is these first time efforts that lead to bigger second or third time successes.

So, this shake-up is a natural, and in the long run, healthy, correction. It prunes the herd. It won’t always be enjoyable for the VC’s or the entrepreneurial communities, but does result in a better environment. We will see if I am right on this…

The team at OVP Partners in Seattle/Portland puts out a quarterly newsletter. In the most recent one, Charting the Course, they cut into the NVCA Yearbook numbers to get a better sense of what is going on with the consolidation in the industry. As I wrote in Fidelity Comes to VC, LP’s are driving a shake-up through choosing to invest in a core group of brand funds. OVP estimates that less than 50% of 2000 venture funds are still active. This number will continue to contract as funds wind down current investing and are unsuccessful at new fundraising.

"In 2000, there were 1156 different venture firms that made at least one new deal. In 2006, there were only 597. This is more like a 50% drop, not just 15%! We think that is the big, so far unwritten, story. The US venture industry has been cut in half. That certainly qualifies as a major shake-out."

My wife sent me this article. She is on the Women’s Board over at Children’s Memorial and comes across  these stories often. Talk about keeping things in perspective. No matter how hard my working world becomes, it is nothing compared to this one…

The Night Rounds
There’s no darker place than a children’s hospital at night. Chaplain Stacey Jutila brings light and solace to those lonely halls…

This is a hilarious video for all of you parents:

I am a firm believer that random acts of kindness are the lubrication that greases the entrepreneurial and VC worlds.  People doing good by others builds up the positive karma bank account. There is so much uncertainty in the tech world, that you never know when you will have to call in a favor or ask for return kindness. So, like squirrels waiting for winter, many successful entrepreneurs will tell you that success hinged upon a few breaks going the right way and often, those breaks came because of previous good deeds and good will they had stored up. Too often, we get so wrapped up in our own issues and challenges that we fail to look around and think about others. Why should we when we barely have enough time, money, etc for ourselves?

This approach was institutionalized several years ago by Catherine Ryan Hyde with her "Pay It Forward" program that gained attention through the movie starring Helen Hunt & Kevin Spacey as well as Oprah’s "$1,000" challenge. Hyde’s foundation is the Pay It Forward Foundation. In short, the idea is that you commit a random act of kindness. It could be to a stranger or to someone you know. This could be assistance, money or whatever you have to give. The only condition is that they, in turn, help someone else ("pay forward" the kindness or aid). While I was aware of and a fan of the approach, I was not aware of the program’s genesis. As she said in a recent Motto interview:

"I had an experience, probably more than 25 years ago, where I was by myself in a bad neighborhood, driving late at night and I had car trouble (car caught on fire). I was stranded by myself when these two men–total strangers–came out of nowhere. They were running and running fast. One of them had a blanket under his arm, and I thought, "Oh my God!" It never occurred to me that they intended anything but harm. But they put out my car fire by hand with this blanket.

Then the fire department showed up. In the process of talking to the fire department, I turned around to thank the two guys and they were gone. I have no idea who they were or what their motivation was.

So I got back on the highway and noticed a really interesting difference: Now I am driving on the highway every day and have one eye on the side of the road looking for someone in trouble.

So the whole impetus behind the pay-it-forward idea is: What is it about receiving an act of kindness from a stranger that makes you want to give an act of kindness in return? When we have received it, we want to give it."

So, as you go through your daily routine, look for opportunities to pay it forward. It could be helping someone find a job, helping with a customer intro, giving advice to someone, helping monetarily or simply just being there for someone. Too often, we feel that our resources are limited and that using them on others means that much less for us. Ironically, there is a strange multiplier effect and you find that there was more resource there originally than you thought and additionally, the kindness seems to come back (though from a different direction). Food for thought…

On August 23rd, ironically on the second anniversary of Hurricane Katrina, a tornado hit the western Chicago suburbs and a micro burst swung through the northern suburbs where I live and work. By the time the storm had passed with its 70+ mph winds, Winnetka looked like a scene out of the movie, Twister.  Nearly every third or fourth street was shut down due to fallen trees and crushed cars.

Being the bright, proactive venture capitalist, I had installed a backup battery on our sump pump in case power went out during a storm. It worked perfectly for the first 6 hours. Unfortunately, we lost power for over 2 days. Like with my portfolio companies, another lesson learned…  Most of the North Shore of Chicago is going out and buying the propane driven generators for their houses albeit a bit late.

These two poor cars were passing when a tree (about 2 feet in diameter) snapped in half, was carried up and over 10 feet by the wind and dropped down crushing both cars.

Rain came down faster than any time in Winnetka history, flooding many houses and streets.

This three foot diameter tree was snapped in half like a twig and blocked our street.

Just about one in four trees along major streets either snapped or were pulled out of the ground like the one below across the street from our house.

Our golf club lost over 100 trees including this tree on the 10th hole. This Willow has a 12+ foot root system. It was blown over, crushing the paddle court and two cars behind it.

Having gone through a "gentle" version of a disaster, I can better appreciate what New Orleans went through two years ago. Basements are ruined throughout town due to fresh water, not the salt water that submerged much of the city for weeks. We had 70+ mph winds that ripped up trees versus the 175 mph winds that tore off roofs and destroyed buildings. And, we were out of power for a couple of days while they were down for months in some parts. It was quite a surreal 4 days for us but things have gotten back to normal pretty quickly. New Orleans is not so lucky, having gone from the 16th largest city in the US (nearly 500,000 people) to just over 220,000 today.

No global warming Mr Bush????

On August 23rd, ironically on the second anniversary of Hurricane Katrina, a tornado hit the western Chicago suburbs and a micro burst swung through the northern suburbs where I live and work. By the time the storm had passed with its 70+ mph winds, Winnetka looked like a scene out of the movie, Twister.  Nearly every third or fourth street was shut down due to fallen trees and crushed cars.

Being the bright, proactive venture capitalist, I had installed a backup battery on our sump pump in case power went out during a storm. It worked perfectly for the first 6 hours. Unfortunately, we lost power for over 2 days. Like with my portfolio companies, another lesson learned…  Most of the North Shore of Chicago is going out and buying the propane driven generators for their houses albeit a bit late.

These two poor cars were passing when a tree (about 2 feet in diameter) snapped in half, was carried up and over 10 feet by the wind and dropped down crushing both cars.

Rain came down faster than any time in Winnetka history, flooding many houses and streets.

This three foot diameter tree was snapped in half like a twig and blocked our street.

Just about one in four trees along major streets either snapped or were pulled out of the ground like the one below across the street from our house.

Our golf club lost over 100 trees including this tree on the 10th hole. This Willow has a 12+ foot root system. It was blown over, crushing the paddle court and two cars behind it.

Having gone through a "gentle" version of a disaster, I can better appreciate what New Orleans went through two years ago. Basements are ruined throughout town due to fresh water, not the salt water that submerged much of the city for weeks. We had 70+ mph winds that ripped up trees versus the 175 mph winds that tore off roofs and destroyed buildings. And, we were out of power for a couple of days while they were down for months in some parts. It was quite a surreal 4 days for us but things have gotten back to normal pretty quickly. New Orleans is not so lucky, having gone from the 16th largest city in the US (nearly 500,000 people) to just over 220,000 today.

No global warming Mr Bush????