Musings on Entrepreneurship and Innovation
Sunday, July 18, 2004
Why Venture Funds Don't Want Your Cash
The New York Times reports that some VCs are concerned about the level of institutional investors' renewed interest in venture investing. Contrary to predictions, the total number of venture firms in the U.S. hasn't declined. Some general partners fear that shrinking fund sizes means that institutions turned away by "A level" firms will resort to investing in B and C-level funds. Consequently, GPs fear a return to too much money chasing too few deals.
Hmmm...sounds oddly like a fear of competition to me.
The 10-year limited life partnership common to most venture funds drives a very specific definition of success. That's particularly true for general partners, who (should) make most of their money on their 20% to 25% carried interest. In that context, there is, indeed, a short list of "bankable" companies. One would expect an influx of capital to drive returns down. But as long as money is invested in good companies, what's bad for investors turns out to be pretty good for entrepreneurs and other founding shareholders.
Furthermore, there are a lot of great companies out there that don't necessarily fit the liquidity timeframes mandated by the 10-year partnership. Some new VCs, including Thrive Capital, are hoping to put investors' capital to good use by following a somewhat different model.
Some may be concerned by what appears to be a more or less permanent increase in the level of funds dedicated to private equity investing. I'm more inclined to view it as a positive sign of the maturation, broadening, and professionalization of the venture capital market.
Rural Development Efforts Lacking
Looking for information about the state of rural ED efforts? Check out this EDA-funded study by Harvard's Institute for Strategy and Competitiveness.
In summary the report says that current policies to improve the disappointing economic performance of rural regions are, by and large, not working. This is increasingly the consensus among policy makers across political parties, not only in the United States but also in many other countries around the globe. Not only is the performance of rural regions lagging, but the gap in performance levels between rural and urban areas seems to be widening. This state of affairs exists despite significant efforts to boost rural regions through a wide variety of policies with budgets of billions of dollars in the United States alone.
Click here for more (PDF).
The authors of the report, including Michael Porter, conclude:
[T]here is still no rich understanding of the composition and evolution of rural economies at the industry cluster level; there is no comprehensive and detailed understanding of the evolution of rural development policy; aside from case studies, there is little comprehensive evidence on regional, state, and local rural initiatives; finally, there is an overwhelming focus on the problems of rural areas with much less focus on the opportunities.
Overall, many participants in the research debate lament the disconnect between what is advocated in the literature and current U.S. rural economic development policy. Policy does not seem to drive rural development, but responds to special interests. The many sensible ideas proposed by experts are not acted upon. The evidence that we have reviewed for this report confirms this view. Without a strong conceptual foundation, it is not surprising that economic development efforts for rural regions have been particularly vulnerable to political pork battles between small but well organized interest groups, frequent institutional redesigns without lasting effect, and the re-invention of old policies under new names.
Political advantage can translate into economic disadvantage when it serves to further insulate rural areas from the opportunities that arise from change (Why Rural Communities Can't Succeed Economically...and Why Some Will Anyway).
Boise Launches Angel Network
Ed Morrison's radar picked up a recent Idaho Statesman article on the launch of an angel network in Boise. Nothing novel about a regional angel network these days. What helps to differentiate Boise's effort are the backgrounds of the network's facilitators, including the representative from the Idaho Department of Commerce, Mary Givens, a Science and Technology Specialist. In her previous finance roles at Boise-based Akers Capital and Silicon Valley-based McCown De Leeuw & Co., Mary developed on-the-ground experience with the practice of private equity, which will no doubt inform the development of Boise's program. In business, value is increasingly derived from execution, rather than a novel idea. I suspect that holds true for angel networks as well. Consequently, given the people involved, the launch of Boise's effort looks promising.