Venture Capital Investments Are Risky

Venture Capital Investments Are Risky

Wrapping 2019 and as we venture forth into the next decade, on one thing we might agree, the state of venture capital is in flux.  The New Yorker asked, in January, “Is Venture Capital worth the Risk?

“Venture capitalists are different. They buy equity from brand-new or young companies, and they generally cannot get their money out until the startup enters the public market or is acquired by a larger company, like a herring being swallowed by a tuna.” – Nathan Heller; New Yorker

And as society questions the role of venture capital, I can’t help but wonder if that distinct definition of VC isn’t both accurate and lost on people.

Are we Expecting VC to be Something it’s Not Meant to Be?

We live in an era in which exuberance for entrepreneurship, attention on equity crowdfunding, and pop culture shows celebrating startups, have implied that everyone can and should be involved in the startup community; and what’s lost in that message is that entrepreneurship and venture capital might be among the most philanthropic of capitalist endeavors one can undertake.  

This work is not for the faint of heart, but the alternative would drive our economy, and solutions that come from startups and their investors, to a halt.

It was in 1946 that we could argue “Silicon Valley” really found the catalyst of innovation.  Indeed, that hub of technology was established around the turn of the last century as the military started making investments in the Bay Area well through the 1930s.  And it was the 40s and 50s which saw Hewlett and Packard meet in a garage, and the various semiconductor labs found a home in the hills of the valley. But it was on the other side of the country, in Massachusetts, that Georges Doroit established modern venture capital; the fuel that gave rise to most of what would come from that region of the world.

Georges Doriot, moved to the U.S. to get a business degree and later became an instructor at Harvard’s business school. Doroit, with Ralph Flanders, Merrill Griswold, and Karl Compton, established the first publicly owned venture capital firm, American Research, and Development Corporation (ARDC) in 1946.

Georges Doriot
The First Venture Capitalist: Georges Doriot on Leadership, Capital, and Business Organization
by UDAYAN GUPTA

That work is an easily and often overlooked piece of history and the story of Venture Capital, because BEFORE that, overwhelmingly most innovation and new business development was funded solely by massive wealth (hence the term “Angel Investor” – patrons of business): the Vanderbilts, the Rockefellers, etc.  Goroit came along and established that money could be pooled from everyone with sufficient means, in Funds; and that those Funds, managed by people likely more capable of investing in high risk ventures than your average person with wealth, were better suited vehicles such ventures – the risk was diversified among partners and businesses were funded by regulated organizations rather than individuals.

ARDC is credited with the first major venture capital success story when its 1957 investment of $70,000 in equity (“70% of the company”) and approximately $2 million in loans in Digital Equipment Corporation (DEC) became valued at many times the amount invested after the company’s success after its initial public offering in 1966.

DEC, of course, was founded around ARDC in Massachusetts but, it’s following the money where our story gets interesting.  DEC was acquired by a company based in Texas, the company through which an *exit* delivered a return to investors: Compaq, in 1998.   Compaq, as you may know, was later acquired by our friends in Silicon Valley: Hewlett Packard.

It’s in this appreciation of the role and region of capital that we can trace and further sow seeds of innovation.

And it’s in appreciating that Massachusetts schools uncovered funding in hardware, which found its way to fuel computing in Silicon Valley, that we can trace other regions of innovation and better support the risk investors take in venture capital by buying the distinct specialization that region of the world offers.

Regions Bank on Innovation Funded by Venture Capital

Startups, in working at the stage of greatest risk and innovation, are challenged with building teams, sourcing advisors, and finding early customers, partners, and mentors who know what they’re doing and can best support that work.  Venture Capital, wisely, seeks not just a single startup but a mitigation of that great risk by investing WHERE those resources are most readily available.

In just a few weeks we’ll find ourselves together in Austin, TX for SXSW and that conference is an example of that regional specialization where we can find more investors and in turn, a greater ROI, in funding innovation.  And we can (we should) look beyond Austin, to Texas, to really appreciate the point…

Some examples that come to mind reflect on the fact that the corridor between San Antonio, TX and Austin, is the fastest growing metropolitan region in the country.  From San Antonio, thanks to the Department of Homeland Security interests in the area, we see cybersecurity, data science, and military innovation.  SXSW is arguably home in Austin, TX given the concentration of media industry (Music, Film, Video Game, Podcasting, and Advertising) professionals, companies, and innovations in the area.  And from there, a skip to Houston should illuminate my point most obviously: America’s hub of energy and an epicenter of our space industry.

These regions aren’t just home to entrepreneurs and startups; they’re home to startups substantiating investment and fueling our economy because of the industry already well established therein.

When we talk of Silicon Valley as a region, we can trace those early semiconductor and computing investments to how and why it has been our hotbed of the obvious derivatives of those innovations.   From the computer we sought to connect them and with the rise of the internet, the region experienced most of the obvious solutions on that connected experience. From there, as we know happens with hardware, the race was on to make devices smaller and smaller until the smartphone was born.  Throughout, venture capital investment clearly focused on the opportunities and implications born of the specialization of that region.

Thanks to *there*, we’re experiencing the growing pains of those investments: security in banking, business models in entertainment, privacy in healthcare, accountability in politics, and more.

Regions bank on innovation because the local community, institutions of education, government entities, and the workforce, can bank on providing solutions to the sector it serves best.  Investors who appreciate the impact of that alignment, the mitigation of risk by investing WHERE an entrepreneur will find the ideal support, are the investors founders do well to seek.

Manhattan, London, and Singapore, a few among many regions specialized in banking and FinTech, might be best suited to addressing today’s challenges in finance.  Austin along with Los Angeles, Nashville, New York, give us examples of where founders, advisors, and venture capital can work together far more productively to innovate in media, communications, and entertainment.  Raleigh Durham, India, Philadelphia, and more are evident of domain expertise in healthcare. And with the 2020 U.S. election looming, we should ask if we can look to Washington to find better ways of governing, or if specific states and other countries are focused on the challenges of politics and governance.

Regions of the world are where we find the notable and meaningful that venture capital takes to improve our lives and help us realize the future.  It’s in that notion, and the embrace of it, that what’s produced through Funded House is so exciting.

March 13 – March 16 in Austin, TX during SXSW this year, the world takes a closer look at the sectors celebrated by the pivotal conference: Education, Music, Film, Interactive, and Health.  Given the global enthusiasm and impact of the 2 weeks in Texas, as we know, the conference shines a light on far more, from Video Games to Augmented Reality and from Cannabis to Aerospace and the next step we’ll take among the stars.

Regions Bank
Special thanks to our partners at Regions Bank for a bit of inspiration in our message here!

That’s the time, here, when we can hold most productive conversations and make connections with regions of the world along the lines of which they specialize.  Companies, entrepreneurs, and investors alike find themselves with us in Austin for just a moment, to celebrate what we each do best and uncover how venture capital can bank on regions to fuel innovation.

14 Comments

  • Jeremy Self, March 5, 2020 @ 3:35 am Reply

    This is very interesting. Thanks for sharing.

    • Paul O'Brien, March 5, 2020 @ 3:36 am Reply

      Distinct pleasure Jeremy! History informs 🙂

      And speaking for us Texans, that thought about Texas matters, a lot. How can we better work together to align not Startup VC (which is unspecific) and rather align the things Texas does particularly well with the wealth and capital that wants to invest (and can better trust that that investment will work out given it being an expertise of this region)?

      • Jeremy Self, March 5, 2020 @ 3:38 am Reply

        Paul O’Brien would love to learn more and connect. Not sure if you know Frank Barbella , but he was spreading the message of funded house and we were chatting about it.

        • Paul O'Brien, March 5, 2020 @ 3:40 am Reply

          Jeremy Self sounds like coffee, soon, is in order. This week some time and perhaps best… I’ll message you

  • Beth Mecchi, March 5, 2020 @ 4:46 am Reply

    Just learning all things startup and this helps answer some basic questions I’ve had about VC’s – thank you!

    • Paul O'Brien, March 5, 2020 @ 4:47 am Reply

      Beth, that’s precisely what we hope to accomplish in doing this. Thank you so much for sharing the thought.

  • Ronald Lim, March 5, 2020 @ 2:02 pm Reply

    Thank you Paul for sharing this article. Love how you captured the evolution of venture capital over the years and into different enterprises.

    • Paul O'Brien, March 5, 2020 @ 2:04 pm Reply

      Living life and working through it is wonderful when we have the opportunity to weave together a variety of things we love in order to spark a conversation. My pleasure Ronald.

  • Carey Ransom, March 5, 2020 @ 2:05 pm Reply

    Paul, this is so important on many levels. Participating angels and VCs should understand their role, it’s nobility and required patience. Entrepreneurs should appreciate the VC perspective. And non-participating capital in markets that aren’t innovating quickly enough should see how critical this ingredient and mindset are to their area.

    • Paul O'Brien, March 5, 2020 @ 2:06 pm Reply

      Man I hate that we so rarely have a chance to chat Carey! Let’s work on fixing that this year. Would love to explore this from our perspective in Austin and yours in Orange County.

      • Carey Ransom, March 5, 2020 @ 3:17 pm Reply

        Paul O’Brien agree on every level, friend!

  • Bob Barker, March 5, 2020 @ 2:08 pm Reply

    Paul, thank you for sharing some early VC history I wasn’t aware of. I had the pleasure of presenting to L.J. Sevin here in Austin in 1985 as a VP at my first startup. Interestingly, Ben Rosen on the East Coast was the major early investor in Compaq, which later acquired DEC.

    • Paul O'Brien, March 5, 2020 @ 2:11 pm Reply

      Bob let’s explore this further. The work you all are doing in Cybernance is a top of mind example of what we’re talking about here.

  • Carey Ransom, March 5, 2020 @ 2:11 pm Reply

    Thanks for sharing this with the world, too! You rock!

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