My father-in-law started in the brokerage trading business in the mid-1960’s. He showed me an industry tombstone advertisement page from 1969 that had over 50 regional and local brokerage firms, along with a handful of the growing national players (like Merrill Lynch). Today, nearly all of them are either dead or acquired and it is dominated by the majors. There are boutiques, a couple of regionals (Blair, Baird, etc) but it is dominated by the large players. The venture business is heading in a similar direction it looks like.

Scale is becoming increasingly important (domain expertise, visability, branding, etc) just as it was in the brokerage business. The challenge is that venture does not scale well. It is impossible, as we all showed in 2000, to do early stage venture from an $800m fund. However, LP’s are not interested in backing unproven groups. Groups with history are, again, getting big funds raised. So, I’m not certain how this trend continues to play out since the forces are pushing to larger organizations, but larger organizations ($800-$1B) groups have trouble successfully deploying money early stage and getting solid returns. So, they are likely going to:

— go later stage and compete with the hedge funds and existing later stage players. This will drive pricing up (as is happening in buyouts) which will hurt returns.
— go international and chase the China dollar
— put 50+ investments into a fund and take a portfolio approach.

In short, this is a mess (for both start-ups…too many competitors and for VC’s) and why we have pulled back to a regional early stage focus while leveraging the 34 offices worldwide in our network for scale. Below is the recent press release from Venture Economics reporting on the YTD fundraising in venture:

"Venture capital fund-raising activity in the second quarter of 2006 is further proof that fewer and bigger war chests are being amassed by investors.

According to new data compiled by VentureOne, a research unit of Dow Jones & Co., the number of funds closed during the quarter fell dramatically from the year-earlier period, to 23 from 37, but the amount raised remained steady, with $8.2 billion in the latest quarter versus $8.3 million in the period last year.

In addition, barring a second half flurry of small fund closings, 2006 as a whole is shaping up as the year that funds under $100 million were all but forgotten. In the first half of this year, only 28% of the funds closed have been less than $100 million. If that trend continues throughout the year, 2006 would have the smallest portion of double-digit funds raised since 1992, the earliest period tracked by VentureOne.

The percentage of sub-$100 million funds raised has been falling steadily on an annual basis for the past four years, the data shows, from some 71% in 2002, to 63% the following year, 52% in 2004 and 44% in 2005. The median fund size this year sits at a high $170 million.

The largest fund that closed in the second quarter is Oak Investment Partners’ Fund XII, which happens to be the largest venture capital fund ever raised at $2.56 billion. And as limited partners clamor to get into brand-name funds, the trend of bigger-is-better shows no sign of slowing down. The third quarter kicked off with New Enterprise Associates raising its giant $2.5 billion twelfth fund. DCM, a Silicon Valley early-stage venture capital firm founded in 1996, closed its largest fund to date, the $500 million DCM V, last Thursday."

"So you say you want a revolution…"
      — The Beatles

In previous posts, I have discussed how entrepreneurs are making a difference in philanthropy. This approach is very similar to how venture capitalists approach early-stage investments. I also want to point out that you don’t have to be Bill Gates to get involved. Everyone from the MBA to the Java programmer to the CEO can have an impact. It has a number of components:

1) People, People, People: if you have a day job, it is unlikely that you will be running the cause, just like VC’s enable but don’t run businesses. Successful companies and non-profits are willed into existence, usually by the vision, charisma and passion of the founder. Insight, connections, resilience/tenacity ability to execute and vision drive success. Before you invest your money or time, make certain you are backing the right person/people. More importantly, once you have found someone, your job is to enable and facilitate their vision without getting in their shorts. Find out what resources they need and what challenges they face. Define what success is upfront (milestones), help as you can and step back. Do your homework on the issue and space so you can knowledgably interact with management. Too many funders have little understanding of the battlefield and force the Executive Directors to spend a lot of management time managing their board, giving presentations and running down blind alleys. In other words, once they have given their money, these funders actually suck value out of the organization.

2) Sweat Equity: Your time is more important than your money. As with a VC, if you just bring money, it is helpful, but suboptimal. You have connections, experiences and resources. Once you have found an organization to support, find out what road blocks or short falls (beyond just money) that it needs. Spend time to learn more about the issue. Study other historical approaches, efforts and organizations that are involved. What worked & what didn’t. Visit and see in the field how services are provided. This is like coming up to speed on a new deal. You are only as helpful to the organization as you are knowledgable. No armchair quarterbacks. Lastly, find a cause or problem that you have a personal passion around. Like a start-up, this is a marathon, not a sprint. The impediments and challenges are much worse than in the tech world. Passion will help you manage burn out and set backs.

3) Milestones & Measurement: "I don’t know where I’m going, but I’m making great time." Too often in philanthropy, there is no sense of what success means. Often the goals are admirable but too lofty…feed the poor, improve education, etc. Don’t spend your time or money unless it is clear what you are trying to achieve. The Food Depository is great with this…how many families & meals served. Resources are scarce. This sector is dramatically under-funded (and always will be). Like a start-up, you need to be capital efficient. Know what you get versus what you give. A boot-strapping entrepreneur doesn’t just throw money blindly at a marketing campaign and neither should a cash starved non-profit.

4) Patience: the other side of #5 below. These issues have been around forever and will continue to be around. As with a start-up, it takes years and many different approaches to reach your goal. Failure should be expected. Learn from it, adapt and push forward. Set expectations and time frames accordingly.

5) Experiment: one of the key success traits of a start up is that it fails quickly and iterates. Burn as little capital as possible going down a dead-end. Pilot, measure, fail/succeed and iterate. Try new approaches and models. Irving Harris, one of the great Early Childhood philanthropy pioneers, used to seed pilots to address Early Childhood issues. He would measure them and if successful, would migrate it over to a full blown, state/federally funded program. The non-profit world holds onto its failed efforts way to long and there is a significant not-invented-here issue.

6) Small bites: these problems are massive. They can vacuum up enormous amounts of capital in the blink of an eye. Start with an effort whose scale is appropriate for the time and money that you have. Make the difference in a single person’s life, learn and then scale. Mother Theresa started by feeding a handful of people on the streets and scaled from there. Effective start-ups pilot with an initial customer or two, learn what works and applies that learning to the next pilot. You need to know what you are trying to achieve and how to measure success. Tutoring a student, mentoring a graduate, helping a person find a job, adopting a family, adopting a class room are all examples. This means anyone, regardless of income or status can make an impact. Again, it is your time that is key.

Like ants making an ant hill, each one only carries a few grains each time, but as a group, they make a significant impact. This is the case with philanthropy. Everyone can make moderate impacts on a modest scale, but it will all add up.

On Monday, I will post my detailed breakdown of the new Venture Philanthropy model. However, one of the key elements is the importance of focusing your initial efforts very focused, small scale initiatives. Make the difference in a single (or couple of) person’s life and scale from there.

Anthony Kennedy, Assoc Justice of the Supreme Court, sent a letter into the New York Times. In it, he wrote:
“Think of the people around the world, and particularly in Africa, who have no clean water. Women in Africa — and the job falls to women– must spend six, eight hours a day just in trying to bring clean water to their children.
Eight billion hours a year of human effort are spent just in bringing water. And when I heard that statistic, sitting like you are in an audience, I thought, ‘Well, he must have said 8 million.’ Then I thought, ‘Maybe it’s 80 million.” It’s eight billion hours a year of wasted effort because the water is often contaminated when it gets there. This isn’t roclet science. You can fix this.”

As you may recall, my wife, kids and I paid for a well in a village in Ghana. It is a small amount (couple of thousand), but impacts an entire village. It allows girls, currently carrying water, to go to school which reduces both the number of kids and age of motherhood for them.

Think small, focus and go from there!

Quite a few readers have asked for more posts around Venture Philanthropy. This is consistent with what Peter Drucker predicted in the early 1990’s. In a variety of books and articles, he wrote that the there would be a growing base of people with wealth, much of it gained through entrepreneurial activity. He also said that this wave of new wealth would begin to look for ways to make an impact in more societally beneficial ways. They would realize that success and wealth are hollow without meaning. He said that we would see a wave of venture philanthropy, where people began to apply their entrepreneurial skills towards solving the ills of the world. The not-for-profit model is broken and there is a massive amount of new capital pouring into it. However, this time, it will have a lot attached to it.

As I have written, I think that Warren Buffett’s recent moves are a water shed event in Venture Philanthropy. In a very telling Forbes article on Pierre Omidyar’s Foundation, it lays out the justification for a new approach to Philanthropy. One in which time and involvement is, in fact, more important than just the money. As many have commented, unless things change, they could easily spend $100 million and have no impact on the world.

Entrepreneurs are successful in business not because of money or because of good intentions. They are successful because they will companies into existence through determination, vision and hard personal work. Why should we expect dealing with societal issues, which are often even more stubborn and difficult, to be any different?

This is a very exciting time in the world of philanthropy. This chapter will be right up there with the Robber Baron Era with Ford, Rockefeller and Carnegie. I will post tomorrow on what I think this model looks like.

Slowly but surely, I find myself becoming a commencement speech junkie. Perhaps it is because we all look for inspiration and affirmation in our lives. Anna Quindlen is one of the most talented columnists of our generation (in my humble opinion). I came across this speech by chance when I was trying to chase down the Lennon quote for my previous post (never underestimate the power of serendipity…). You can click on a transcript of her Villanova Commencement Speech here.

To get a sense of the flavor of her speech, I have an excerpt below:

"Don’t ever forget what a friend once wrote Senator Paul Tsongas when
the senator decided not to run for reelection because he’d been
diagnosed with cancer: “No man ever said on his deathbed I wish I had
spent more time in the office.” Don’t ever forget the words my father
sent me on a postcard last year: “If you win the rat race, you’re still
a rat.” Or what John Lennon wrote before he was gunned down in the
driveway of the Dakota: “Life is what happens while you are busy making
other plans.”

You walk out of here this afternoon with only one thing that no one
else has. There will be hundreds of people out there with your same
degree; there will be thousands of people doing what you want to do for
a living. But you will be the only person alive who has sole custody of
your life."

“Life is what happens while you are busy making other plans.”

                                                — John Lennon

Sorry for the delay in postings. I am out in Telluride on vacation with my family which is an internet challenged part of the world. I understand that the main ISP providing broadband to Mid-Mountain has gone under. I am very happy to be alive as my friend took me down the "Ridge" for my second mountain biking experience ever. This is a steep path with slanted rocks and exposed roots that winds through dense trees. I am a much more religious man from the experience. 🙂  Ironically, although he is a veteran rider, he went over his handle bars separated his AC on his shoulder.

Saw Lyle Lovett on Sunday. I have never listened much to him but our friends had tickets. We worked our way to about five rows out in the standing crowd. What a blast we had. I did not realize the breadth of music styles he and his 18 person band (yes, 18) kick out. As I was listening and watching the dedicated fans fully engaged in the show, I was struck by a couple of similarities to entrepreneurship.

1) Substance over style: no one would ever call Lyle handsome. Poor guy will always be known as the Julia Roberts’ 6 month husband. He does not promote or push a flashy image like most in the business, and yet he is an icon in the music world.  In short, he has figured out what his fan base (niche) wants and delivers it flawlessly. Too many entrepreneurs start focusing too early on with PR campaigns. The market will listen if you have something of substance to show or say. Focus on getting your product or service right and the Buzz begins to take care of itself. Apple gets its buzz because its products are so awesome. Push PR with a weak product and it will come back to bite you.

2) Enjoy what you do: it is clear that Lyle really enjoys performing and being with his band. He referred several times how lucky he was to be able to travel with his best friends. I was attracted as much to his attitude and ethos as I was to the music. Traveling from city to city can really be draining (like trying to get a company ramped). You had better enjoy and live for it or it will consume you.

3) Find the best talent: Lyle has an amazingly talented group of performers in his 18 person band. He also let each of them get some recognition and/or solos during the performance (share the fame & success).  Interestingly, other than one or two, no one was under 50 years old. He did not go with the young, hot flashy performers but with proven veterans. His leadership was in getting all of them to perform as a team. Too often, CEO’s drive their teams hard with letting them share in the glory. Dick Costolo does a great job getting all of his core team out in the public eye. Also, too many companies hire hot resumes versus substance.  This requires a much deeper evaluation and care in picking team members as well as a strong focus on fit.

What all of this particularly reminded me of is that the best things in life (personal, work, business, etc) come when you least expect them and from directions you never expect. This is why persistence is so key in entrepreneurship…if you persist long enough, good things will happen. Too often, people either a) drop out before entering the concert hall or b) fail to actively seek to embrace all the opportunities that are out there…

I am a very frustrated Republican. As a result, I am violating a tenant here by throwing up a political post. The far right is pulling the party way too far to the right.The most recent incursion of this over-reaching is Bush’s veto of the recent stem-cell legislation. It is the first veto of his presidency.

Since having our children, my personal view on abortion have moderated. However, as our firm is an investor in one of the leading stem cell firms, Novocell, we have seen the incredible potential that stem-cell research has (and is manifesting). Diabetes, which affects an increasingly frightening number of children, can finally be brought under control. Alzheimers, Parkinson’s, the list goes on.

Bush first banned federally funded research on stem-cells except for a handful of grandfathered cell lines upon coming into office. Unfortunately, many of these lines have become contaminated and have limited value in future research.

Meanwhile, other countries in Asia and Europe push forward aggressively and threaten to surpass our Biotech industry. Also, every day, cells are destroyed from left over fertilization procedures. These are cells that will never become children. However, they have the ability to save the lives of thousands (if not tens of thousands) of children.

Popular opinion supports stem cell research by an enormous margin. Research, nationwide, is impeded significantly nonetheless. Research centers that have bought equipment in the past with federal funds, can’t use that equipment for stem-cell research. Since federal funding accounts for the vast majority of research funding, it is next to impossible to replace these lost dollars.

The elections can’t come soon enough…

For all you budding sociologists (or simple voyeurs), Google Trends is a must. You can type in a term of choice and it will return what region of the US has devoted the largest percentage of its searches to that term. Steve Rushin, at Sports Illustrated, points out that:
— Salt Lake City leads all for "nude volleyball"
— Portland leads for "marijuana" and "jock itch"
— and my backyard, Elmhurst, IL (for US cities) for "sex"
Dive in and enjoy…

Congrats to Dick, Steve, Matt, Eric, Brent, Rick and crew on their recent acquisition of Blogbeat. They say it much better than I so click on this article link for details.