"Be careful how you treat people because the toes you step on today may be
attached to *#s you have to kiss tomorrow"                           
         — Aunt Scotti

I had an entertaining talk with Bob Lepowski today about the state of the VC industry. It is clear that VC’s do not have the best reputation in the world. Some of this is do to attitude and actions and some of it is due to misunderstanding and miscommunication. Way too often, VC’s will develop an excessive sense of entitlement. They feel their voice needs to be heard and their desires realized. Often there is a disconnect between reality (especially given the specifics of what a CEO is dealing with) and what the VC conceptually thinks should happen.

There is a clear contingency of our brethren who view themselves as being higher up on the food chain than others. We came up with the term VC Feudalism, to describe this perspective. VC Feudalism sounds much better than Den of Thieves or Sith Lord Counsel. Conceptually, the analogy is that certain VC’s see themselves as feudal lords. They strive to remain independent and to set up moats around their castles. They are to be obeyed by the vassals and serfs. For the sake of survival, they syndicate/partner with other lords to form alliances…some brief and some long-term. These alliances are key in helping them to hold off assaults and gain new territories. See the post on the Hochberg paper about venture networks. So, tongue-in-cheek, in the world of inflated VC self-importance: lord=VC, vassal=entrepreneur, serfs=employees,fief=company, barbarian hordes=competitors. There is a good reason Feudalism died out…

Michael Lissick recently wrote about the old "waiter test". It is a great way to understand what degree of arrogance or "entitlement" your lunch partner maintains (VC or other).

"Have friends and family observe your behavior while dining. How we interact with servers at restaurants is a clue to the state of our integrity.  If you are treating these strangers as "subservient," it is a sign that compartmentalization has gone too far, cues are being overlooked, others are not being given their space, and that ethics issues lie in wait."

As I said yesterday, neither the VC nor the entrepreneur is entitled to anything that is not earned.

As I have been saying for some time, the Midwest is ripe for a tech rebirth. The technology is here and the customers are here. Technology is commoditizing and inexpensive, but domain/industry expertise is worth its weight in gold. The key is finding the right entrepreneurs to lead the charge (they are here, just hiding out building their businesses) and better national connectivity. Julie Johnsson and Shruti Singh wrote two great pieces on the "The New Face of Technology Part 1"  and "The New Face of Technology Part 2".

In fact, the mainstream in the Valley is beginning to take note as well as indicated by Om Malik’s post from these articles (thanks to Anjali Gurnani of TiE and LisleTech fame for forwarding this onto me). Om is one of the senior writers at Business 2.0 out west.

TicketsNow, FeedBurner, 37 Signal and Hostway are just the beginning here…

I have threatened to write a piece on the emerging importance of quantum physics. As scale shrinks down to the nano level in field after field, results are impacted by sub-atomic level interactions (quantum level) versus traditional Newtonian Physics (force, gravity,etc). While there remain considerable unknowns in Quantum Physics, there are also significant opportunities from solving some of them.

The most fundamental units of matter, quanta, are only clouds of "probability waves" with indeterminate location. That is, we can’t say with certainty where an electron in orbit around and atom is. We can only say probabilistically where it might be. However, simply by observing, the waves collapse into a fixed particle at a fixed location. There is considerable debate over what observations actually cause this collapse. A basic example of this (and the unknowns about the field) include the fact that it is impossible to know both the position and momentum of a photon (Heisenberg Uncertainty Principle). It does not have a given position (more of a probability of being somewhere) until it is observed. So, since everything is made up of atoms and atoms are characterized by quanta, it could be argued that reality is only that which we observe since it is only our observation that creates a determinant result. Einstein disagreed with many of the early pioneers in quantum physics, making statements such as "I think that a particle must have a separate reality independent of the measurements…I like to think that the moon is there even if I am not  looking at it." At this extreme, this literally means that you "create your own reality" each day! The popular indy movie, What the Bleep Do We Know!?, takes such a mystical approach in explaining all of this.

The holy grail of this space is the creation of a Quantum Computer.  While traditonal computing manipulate bits (0 or 1), quantum computers leverage superposition to exponentially process more possible states than traditional computers. The National Security Agency is closely monitoring this space as a Quantum Computer would be capable of breaking nearly every known security algorythm in short order (RSA, ElGamal and Diffie-Hellman). Our company, D-Wave, is part way down the path towards this goal though it has quite a ways to go.

Quantum encryption is another, more immediate, opportunity resulting from Quantum physics. There are several start-ups, including Nucrypt (www.nucrypt.net), which is a spinout from Northwestern run by a friend of mine, V Srikant. This field uses entanglement to establish secure transmission. Should anyone eavesdrop on a communication in the optical fiber, their observation would leave a trace.

Lastly, materials behave differently at the quantum level. This impacts how we can get materials to do what we want, when we want.

Enough musings about the Quantum world. Feel free to jump in, and if any of you can figure this stuff out, let me know!

I have threatened to write a piece on the emerging importance of quantum physics. As scale shrinks down to the nano level in field after field, results are impacted by sub-atomic level interactions (quantum level) versus traditional Newtonian Physics (force, gravity,etc). While there remain considerable unknowns in Quantum Physics, there are also significant opportunities from solving some of them.

The most fundamental units of matter, quanta, are only clouds of "probability waves" with indeterminate location. That is, we can’t say with certainty where an electron in orbit around and atom is. We can only say probabilistically where it might be. However, simply by observing, the waves collapse into a fixed particle at a fixed location. There is considerable debate over what observations actually cause this collapse. A basic example of this (and the unknowns about the field) include the fact that it is impossible to know both the position and momentum of a photon (Heisenberg Uncertainty Principle). It does not have a given position (more of a probability of being somewhere) until it is observed. So, since everything is made up of atoms and atoms are characterized by quanta, it could be argued that reality is only that which we observe since it is only our observation that creates a determinant result. Einstein disagreed with many of the early pioneers in quantum physics, making statements such as "I think that a particle must have a separate reality independent of the measurements…I like to think that the moon is there even if I am not  looking at it." At this extreme, this literally means that you "create your own reality" each day! The popular indy movie, What the Bleep Do We Know!?, takes such a mystical approach in explaining all of this.

The holy grail of this space is the creation of a Quantum Computer.  While traditonal computing manipulate bits (0 or 1), quantum computers leverage superposition to exponentially process more possible states than traditional computers. The National Security Agency is closely monitoring this space as a Quantum Computer would be capable of breaking nearly every known security algorythm in short order (RSA, ElGamal and Diffie-Hellman). Our company, D-Wave, is part way down the path towards this goal though it has quite a ways to go.

Quantum encryption is another, more immediate, opportunity resulting from Quantum physics. There are several start-ups, including Nucrypt (www.nucrypt.net), which is a spinout from Northwestern run by a friend of mine, V Srikant. This field uses entanglement to establish secure transmission. Should anyone eavesdrop on a communication in the optical fiber, their observation would leave a trace.

Lastly, materials behave differently at the quantum level. This impacts how we can get materials to do what we want, when we want.

Enough musings about the Quantum world. Feel free to jump in, and if any of you can figure this stuff out, let me know!

On Friday, UoC and UoI hosted their annual Private Equity Conference. Steve Kaplan, the primary organizer from UoC, did a masterful job pulling together quite a few interesting panels with panelists from leading universities such as UoC, Northwestern, UoI and Berkeley as well as numerous participants from the general partner ranks. Topics included:
— Agency costs of VC Control
— How Smart is Smart Money? (yes, there was some modest value uncovered…)
— Friction points in the GP/LP relationship
— Networks in VC Firms
— Use of Leverage in Buyouts

Prof Yael Hochberg, one of Northwestern’s rising stars, presented her paper on Venture Capital Networks and their impact on Performance. I provided some commentary and perspective from the trenches. Some of the more interesting elements of her presentation (file attached and downloadable) included:
— VC’s clearly rely on their networks & relationships with each other to drive superior performance
— She & her collegues looked at various venture firms based on the number of deals they were invited into and the number they invited others into.
— VC firms with more experience tended to have larger networks and higher performance
— Those with networks had higher exit ratios (IPO/sale) and more follow on rounds
— Supporting Kaplan’s work, successful VC’s performance persisted across funds raised
— Commented that perhaps there is a cycle that success leads to better networks which in turn leads to more success and so on…persistence
— a high profile exit/IPO has a disproportionate impact on a fund’s reputation & network
— VC networks in a region can create a significant barrier to entry and more attractive pricing

Well done, Steve, Michael, Morten, Yael and others!

Download hll_slides_for_gleacher_042806.ppt

On Friday, UoC and UoI hosted their annual Private Equity Conference. Steve Kaplan, the primary organizer from UoC, did a masterful job pulling together quite a few interesting panels with panelists from leading universities such as UoC, Northwestern, UoI and Berkeley as well as numerous participants from the general partner ranks. Topics included:
— Agency costs of VC Control
— How Smart is Smart Money? (yes, there was some modest value uncovered…)
— Friction points in the GP/LP relationship
— Networks in VC Firms
— Use of Leverage in Buyouts

Prof Yael Hochberg, one of Northwestern’s rising stars, presented her paper on Venture Capital Networks and their impact on Performance. I provided some commentary and perspective from the trenches. Some of the more interesting elements of her presentation (file attached and downloadable) included:
— VC’s clearly rely on their networks & relationships with each other to drive superior performance
— She & her collegues looked at various venture firms based on the number of deals they were invited into and the number they invited others into.
— VC firms with more experience tended to have larger networks and higher performance
— Those with networks had higher exit ratios (IPO/sale) and more follow on rounds
— Supporting Kaplan’s work, successful VC’s performance persisted across funds raised
— Commented that perhaps there is a cycle that success leads to better networks which in turn leads to more success and so on…persistence
— a high profile exit/IPO has a disproportionate impact on a fund’s reputation & network
— VC networks in a region can create a significant barrier to entry and more attractive pricing

Well done, Steve, Michael, Morten, Yael and others!

Download hll_slides_for_gleacher_042806.ppt

Boy, did my post last Saturday about US students not going into engineering strike a nerve. Between my site, Digg and other sites, there were nearly 700 Diggs and over 200 comments posted in two days putting it as one of the top 100 Digg articles worldwide over the weekend. There were over 12,000 pages views from 1,200 different cities around the world to my site. For this kind of activity to take place on a weekend tells me that this topic is sitting on a lot of people’s minds. The core question being discussed across all was whether we have a crisis in the US or not.

Some argued that while China, India and others may have larger absolute numbers, their engineers are not nearly as innovative as their US counter-parts and hence not as productive. Even if this is true, I would argue that it is very dangerous to assume that it will remain so. We used to assume that the Chinese entrepreneurs would be content with knocking off American products are a fraction of the original price. That came to an end in past couple of years. We are now seeing silicon coming out of Chinese fabs, designed and made by Chinese engineers, that is significantly faster than its counter parts in Silicon Valley.

I still focus on the 5% number. Only 5% of our students chose to go into engineering. I believe that the arts, languages, finance and other liberal arts subjects are essential to the quality of our life, our advancement and our culture.  However, cold, hard science drives much of productivity and industrial innovation. The Industrial Revolution, Computer Revolution, etc were driven by scientists. I would simply be more comfortable knowing that we weren’t relying on 1 out of 20 students to carry this torch. I don’t know what the right number is, but I’d certainly like to see it north of 15 or 20% (still only 1 in 5 or 1 in 6).

This weekend, while we were out, the police came to our house and had to chase away a stray, mangy coyote that had wandered into our yard and was stalking our dog. Our dog, Beau, is a pound dog, is half border collie and terrorizes unsuspecting lawn guys coming into our backyard. In short, Beau can take care of himself and is about 50% larger than the coyote above. That said, the police commented this coyote has killed bigger dogs than Beau in the neighborhood and would likely do so to our dog if we were not careful. Their comment was: "Beau is feed everyday and the coyote needs to win to get food." In short, be wary of competitors that are hungrier and more impoverished than you as they have less to lose and an imperative to win. And, 5% is way too low for my liking…

According to Ad Age, it is projected that in 2006, magazine ads will be the first big medium to get passed by online advertising in terms of total dollars spent. While publishers have jumped onto the web, they have been very slow to fully embrace it and its full potential. I find it amazing that in vertical after vertical, it is usually not the existing incumbent (with its massive offline subscriber base) but new players that sit at the top of visitor rank pages. They need to need to be much more aggressive about reformulating their content, modifying their revenue models to fit the web and adopting new marketing approaches online…smaller chunks (as Fred Wilson says), actively distributed.  Paidcontent.org has a recent post detailing the 30% growth in 2005 of online advertising.

If one is to believe that a country’s long-term prosperity and growth is tied to the strength of its innovation and science, the US is in increasing trouble. I fear that we will not begin to take things seriously until we are fairly down the declining path. Marc Faber presented two interesting tables from Robert Herbold (former COO, Microsoft).

                            BS/BA Degrees  BS Engineering   % Degrees
                                    (000’s)         (000’s)          Engineering
        US                    1,253.0                59.5                   5%
        China                  567.9              219.6                  39%
        S. Korea              209.7                56.5                  27%
        Taiwan              117.4                 26.6                  23%
        Japan                 542.3              104.5                   19%

All four Asian countries have a 4-8x the relative number of students going into engineering and China & Japan have 4x and 2x the annual number of BS degrees in absolute terms compared to the US. Another set of figures is around Ph.D’s.

Students Receiving Ph.D’s in Physical Science or Engineering
                                              1987            2001      Growth
     US Citizens getting degree   4,700          4,400       (6.4%)
     Asian Citizens getting          5,600        24,900       345%

We need to sound the alarm, in my opinion, and start to get our kids excited and interested in science even before middle school while also more prominently promoting scientific role models. We also need to get them engaged in science through the likes of Junior Achievement, BizWorld, the Lego First Robotics Leagues and local museums (like the Chicago Museum of Science and Industry). Funny thinking from an Econ/History major making a living in finance…