Friday, May 20, 2011

Flowing Like Molasses: A Response to the Central Penn Biz Journal Article

This morning's article in the Business Journal wasn't a complete representation of my comments about the PA investment scene. So I'll clarify here.

In 1997, I moved ChiliSoft to Seattle because I had raised money in the Silicon Valley. I had tried for 12 months on the East Coast, and the best terms we could get were the onerous, punishing 51% that you see on that disgusting show on ABC Sharks.

The Commerce Secretary wrote a scathing editorial in the Patriot News in defense of PA's pathetic level of investment capital. "Don't let the door hit you in the ass", it basically said.

Since then, the venture capital community in PA has grown, but not by a huge amount. Most of the growth has been in bio and pharma, which is great.

DFJ, which funded ChiliSoft, opened a branch in Pittsburgh. Michael Aronson started MentorTech out of Wharton in Philly, and just had a huge success with the sale of the company behind Diapers.com to Amazon. A number of small early stage firms have opened around the state.

The state itself has invested millions as a limited partner in a number of venture funds, with the requirement that at least part of the company stays in Pennsylvania.

Importantly, Ben Franklin Technology Partners has grown across the state, investing small amounts of money in startups and providing technical assistance, including to my last company, Mission Research, which is profitable and growing.

Mind you, this growth is a fraction--a very small slice--of what's happening in other regions.


But startups still move West, and still look to New York and Palo Alto for capital--but not just actual capital.

Josh Koppelman and Howard Morgan started First Round Capital in Conshohocken, and have invested in dozens of startups, including Hershey's CoTweet, which then moved to San Francisco.

Why? They got the money here, but then moved to the Silicon Valley for a very good reason: social capital.


People in the valley trade in social capital as much as actual capital (95% of the world's venture capital is on Sand Hill Road in Palo Alto). Connections matter for getting distribution deals done, companies acquired, talent hired, capital raised. It matters.

But my primary point wasn't that we need to create a Silicon Valley here in PA, or that I want that, as Mike Shoemaker wrongly stated in the article. But he illustrates exactly what the problem is.

Pennsylvania's angel networks are as much closed social clubs as anything. Indeed, the Lancaster Angel Network meets at the exclusive Hamilton Club. But that's slightly beside the point.

It sees 2 companies per month and decides whether to invest or not. Two. A number of the members have stopped investing altogether, but the total number of companies it invests in? Someone tell me--it's not 24 per year. I doubt it's 10 per year. (Yale Eastman is one of the great angel investors locally, and Art Mann has done some really good stuff too, including investing in Mission Research, which will give him significant returns).

The real Angel Network is worldwide, and it's represented at AngelList.com. It's not a club, though social capital helps. Anyone can pitch, and there's no middleman or gatekeeper like Mike Shoemaker.

Through it, angels invest in hundreds of startups. Monthly.

It's about open vs. not. It's about capital flow vs. not. 


Yes, Lancaster will never be Palo Alto, thankfully. But there are attributes of it we can adopt to improve our startup scene.

One is to get startup founders together to learn from each other and develop social capital among us. I connect entrepreneurs regularly to my network, but I'm just one guy, with one network. It happens to include venture capitalists, software execs, founders, and lots of other great people, but it's just one network.

Put everyone's networks together, and we start to develop some true social capital.

Next, capital still flows like molasses here, just like in 1997. More venture capital isn't what's needed, though I think more would help. Investor disposition & inclination is the issue.

We need angel investors to get off their asses and prepare to lose some money. That's right, I said lose some money.

If you aren't prepared to invest your capital and lose it, you shouldn't be wasting startups' time. I'm not saying be careless, I'm saying you need to let it flow. Set a personal target: $100,000 of investments per year in 4 companies. Or $50k per company in 10 companies, if you have that kind of capital.

Let it flow.

Don't invest to win. Invest to fund creative, driven, smart entrepreneurs who are more willing and more driven to create, innovate, and build companies than you are. And then get out of the way. Be supportive, open your own networks, but get out of the way.

Let it flow.

And make the terms generous for the founders. That's right, don't get hung up on terms. Standard liquidation preferences these days? 1x, non-participating. That's right, you either get your money back, lose it, or convert to common. No onerous terms.

At the end of the day, maybe one of them works. Maybe they all fail. Maybe one of them sells for tens of millions and you get everything back. You can't worry about getting your money back.

That's not your role. Your role is to catalyze a thriving startup community that is free to fail. And encouraged to bounce back. Where mistakes are talked about openly, and assholes don't spread nasty rumors about entrepreneurs struggling to make things work.

Through this we'll develop the startup culture, encourage innovation, and a pool of startup-savvy employees. And more investors. It's not like we don't have enough capital in the area--it just doesn't flow in the same way.

And yes, we have some assholes among us that hurt the startup scene. One of them recently said "no wonder Charlie Crystle's companies went bankrupt". Really? Asshole.

Never.

All of my companies have been successes. Within those companies I've had ups and downs, but never, ever have they been bankrupt, and never, ever have they failed as companies. Mission Research is profitable and has close to 10,000 customers or more.

Versicom was a tiny success, and I turned that into ChiliSoft, which was a massive success.

Jawaya? It will be the biggest of them all. Could it fail? Possibly, if it weren't for me and my endless tenacity.

Bankrupt? By definition, that's slander. I saw it in print on Facebook--that's libel.

My point is that this area likes the rumor more than the fact, apparently, and it is happy to pile on when someone's down. We should celebrate failure and encourage risk.

What does failure represent? Striving to achieve. Pushing that rock up the hill, day in, day out, to create something new and valuable.

The question is, will Jawaya happen here?

Maybe. Partly.

But most of it will happen in New York & the Silicon Valley. Because the social capital--the networks that really have power--is also concentrated there. And the actual capital flows.

And startups are celebrated and supported, in good times and bad.

So my message to Central Pennsylvania angels?

Let it flow, break down the barriers, invest much more frequently, and be prepared to lose everything you invest.

Stop pretending to be angel investors, and start actually investing and catalyzing the big thinkers and doers among us. Let it flow, be encouraging, and don't disparage our local innovators.

Palo Alto looks awfully, awfully good to me right now.

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