Excellent analysis of Micro VCs

David Beisel analyzes the structural and 'temporal' forces leading to the emergence of micro VCs. These are my favorite paragraphs of his excellent analysis. I relate to them, because as I develop the concept of my new start-up, what has struck me is how much less capital I would need compared to a similar start-up 10 or 15 years ago. It's still too much to self-fund, but not enough to require multiple VC rounds. Or even one big round. Without diminishing the size of the opportunity.

"In the sector of internet-enabled services where a majority of the Micro VC investment has transpired, startups can fundamentally do more with less. That’s no secret. Of course CapEx has been transformed into OpEx via changes in the tech infrastructure layer (open source, virtualization & cloud computing, offshoring, etc.). But leveraged distribution via platforms (organic/paid search, social networks, mobile devices) and self-service monetization (ad networks, app stores, payments) is what has truly empowered startups to become real scalable businesses on very small amounts of initial capital. All of these above changes aren’t just due to market inefficiencies (like the supply side), but are truly marked changes that are intensifying.
(...)
Yes, “seed-stage venture firms” have always been around. The difference now is that given the structural changes in the market, seed-stage investors are more likely to be rewarded in valuation given the value which is created during this segment of the company’s life cycle. Startups are now able to produce real meaningful early business traction which yields genuine valuation increases, not just a prototype or proof-of-concept which yields merely a ticket to another round of dilutive financing. During an initial seed round, companies are able to test and validate live product/market theses. These results are based on actual usage of product by early users, with resulting operating metrics which more than just validate a hypothesis.
(...)
Seed-stage firms and super-angels institutionalizing are now more appropriately called Micro VCs. (...) Small checks now have big power. "

Good advice on group decision-making

The following article by Stever Robbins in Harvard Business Review has good advice on running meetings and managing decisions that a whole group has to buy in to.
http://blogs.hbr.org/cs/2010/04/preparing_for_decision-making.html

Re-engineering public services

When I started work as a management consultant in the early 90s. Business Process Redesign (BPR) was the buzz of the day. As an instinctive contrarian, I was rather skeptical of this sudden need by every American company to apply BPR, like one adopts a religion. I have to say, though, that as I watched stock performances and productivity go up through the early 21st century, the savvy use of new technology, BPR, and the globalization of markets were the main engines that came to mind. I believe BPR was an enabler, that allowed companies to capitalize swiftly on new technologies and new markets and maximize the value from these opportunities.

Now, as the federal government takes over more and more previously private services, and as our local Mass government gets embroiled in a never-ending series of scandals; raising taxes, cutting services, and increasing every possible user fee, one thing cries out: the government needs BPR. As we give the government ever more influence over critical services in our lives, let's make sure it has the operational capacity to deliver them.

I'm not aware of the government version of Business Process Redesign, but I'm sure someone must have developed it. Busy days ahead for those companies!

Future of Newspapers

Scott Lehigh, at the Boston Globe, asked for reader's thoughts on the saving the Boston Globe. here are mine.

I disagree with the commonly accepted idea that the internet is responsible for the demise of newspapers. There is room for both newspapers and internet news; newspapers just have not responded correctly yet.

Content
There are two reasons, IMHOP, people have been turning away from printed news. One, indeed, is the immediacy that the internet –and radio- offer. By the time an article appears in my daily Globe, I have already heard the news the day before and read it online. It is stale. The way to compensate for the loss of immediacy would be to provide greater depth in covering the news item. Instead, and that is the crux of the matter, the news coverage in the Globe tends to be the same AP news coverage I have already read on Google. That is the true failing. Newspapers’ assets are their probing editorial teams. Lately, instead of exploiting these assets, newspapers have been printing the same AP news stories, whether a reader has picked up the Washington Post, NYT, Boston Globe, and International Herald Tribune. Newspapers have lost their voice and their punch. That is why readers are turning away. They have less and less to lose by not getting their news through their local paper.
The Globe has shown leadership and distinction in raising interesting issues on state pensions, corruption, abuse, etc. This is the saving grace of newspapers. This is where investigative journalism shines and is irreplaceable. More of that, and less of the plain vanilla news, and the Globe stays in business.
The other great asset of good newspapers is their editorial talent. My boss in strategic planning at Dow Jones pointed out the impact of serendipity. Serendipity is the reason I was always grabbed by the individual profile articles in the WSJ’s front page, reading them before other news, although if I had been asked, I would have declined to follow news on that topic. Serendipity is the editor’s judgment that a story will interest readers, though they don’t know it yet. Serendipity is what’s lacking on Google news. It’s an editor revealing an article’s newsworthiness. The internet is unbeatable for immediacy and strict relevance. Request articles on known topics (your company & industry news) and you will get them as soon as they are out. Good editors, whether in print or online, will tell you everything else you need to know, but don’t know you want to know.

Advertising
I regret to say there is a good reason for newspaper advertising to continue shrinking over time. Why should I get weekly circulars, car ads, want ads, etc., when I am not interested in them in the least? How can it be cost efficient to print these four-color ads, process the paper, and distribute them to people who are sending them immediately into the recycling can? (At best). I don’t read most of the regular ads in the paper itself, either. On the internet, ads are based on keywords: users show an interest in a subject, and then the ad is shown. That makes sense. It is targeted and relevant. There are cases when an advertiser needs to reach a broad audience: Macy advertising a sale, a national brand launching a new promotion or product, etc., any provider targeting a mass audience for common purchases. For the rest, why doesn’t the Globe send me a monthly email, asking me about planned purchases for the coming month? Car? Fridge? Apartment rental…? Which supermarket & pharmacies am I interested in? Type of clothing stores? Then, they could print targeted ads in my paper during that month. The Globe would have more leverage with advertisers, since it could prove it has a targeted, interested audience. Advertisers would pay more for the ads, more than making up for the lost revenue from ads not printed. The Globe would reduce its printing costs, by not printing the irrelevant stuff. It would help the environment. How would it get my cooperation? I would cooperate if it reduced my monthly subscription cost. It should, since it would generate more income for the Globe and reduce their printing costs. I would also be more likely to receive special offers from advertisers on the items I showed interest in, so it would be in my advantage to cooperate.
The advertising industry at some point will have to change the way it prices ads. Current pricing is based on eyeballs, whether in print (circulation) or on TV (viewership). There is no accounting for whether the eyeballs are closed or open, focused on the ad or looking elsewhere. How can that compete with an internet ad, where the advertiser KNOWS whether someone has clicked on the ad or not? These old pricing mechanisms are bound to change. Sooner or later, advertisers will wake up to the value of a receptive audience. The newspapers that will be ready to offer that receptive audience will come out on top.
The reader-selected advertising approach (reader buy-in) requires a transformation of the printing process, practically printing on demand. (In effect, there might be a limited set of permutations, with maybe 20 different variants of advertising theme sets.) Still, this would require the ability to print different papers and track which subscribers they go to. That is difficult. How does VistaPrint do it? If VistaPrint can profitably print micro-orders, then maybe newspapers can adapt some of the same technology? Especially, if newspapers also change their format to reduce paper size. These changes will require major investments and pushing the technical envelope, but, in my opinion, it is the future of the newspaper industry.
There remains the issue of newsstand sales. These can’t be individually targeted. So, there will remain one standard, default issue. It will be interesting to see how ad sales compare between the subscription and the newsstand versions.

Format:
Many people would rather read a printed newspaper than stare at a screen. Based on my experience, and given the reduced amount of news –and potentially, ads- I think papers should shrink their format so it is less hard on the arms to hold up the paper for a long period of time. The free Metro News format is more user-friendly than the Globe’s. Given the decreasing amount of pages and news, why not shrink the format?

Future
It may be that to pare costs, the future of newspapers relies on a common trunk of national and international news, complemented by really solid local investigative journalism. The common news would be shared AP-style, but reported with greater depth and probing. Local newspapers would then add their local and regional news, occasionally also raising a national issue that would then be shared in the common trunk.
The paper would be printed in a smaller, more convenient format. It would reflect readers’ stated interest in receiving ads on given subjects. People with a particular interest in a region other than theirs could also get the news pertinent to the other area.
Monetizing: I completely believe the future of information on the internet is in micropayments. I know many micropayment solutions have been tried and failed since the early ’90s, but the need has not gone away. It has only increased. The right solution just hasn’t been offered yet. Sooner or later, it will be standard practice for people to pay small amounts for interesting articles, whether they were written by a journalist or a blogger; for recipes; for pictures; for artwork; songs, etc. Then, the internet will be an additional, significant source of revenue for newspaper publishers, only if they have managed to retain their ability to write & publish good stories.

New pricing for a sustainable economy

Here is a radical suggestion to reduce global warming, over-consumption, the over-use of natural resources, and the excessive creation of detritus and pollution. We should change the pay we price things to reflect what it would cost to return to the point before the object was created. This means including 'replenishment', disposal, and environmental impact expenses in an item's cost. I call this 'comprehensive' pricing.

For example, bottled water would include the cost of re-creating the water (not just extracting more of it), plastic and paper that go into the bottle, the cost of disposing of the plastic bottle, and shipping expenses. Shipping expenses would take into account the cost of replacing the gas consumed and clearing the air pollution created in the process.
Wow! You say. Oil is not replaceable and the water cycle takes years to seep through the earth and come out in a source. Water bottles will cost a fortune. Yes, that's the point. Prices should reflect the fact that a resource is irreplaceable or hard to replace. Prices should also reflect transportation costs. If a bottle of Poland Spring is shipped from Maine to California, it should not be priced the same in both states. Reflecting the true cost of consumption will alter behavior, so that people are no longer indifferent between filling a re-usable water bottle and buying bottled water.

But, this will put the brakes on the economy, which is agonizing enough as it is! Yes, that is true. I'm looking for suggestions on how to deal with this. My first retort is that even if my suggestion were to be widely accepted, it would take a while before it is implemented. By that time, we will hopefully be out of the recession and better able to absorb the shock. The other answer is that since this recession is creating huge economic dislocation anyway, and since the economy that emerges at the other end will be quite different from the one we started with, why not make it better? This suggestion will create a new economy that reflects the true cost of making and selling things. (Quick adoption would be quite a surprise! Unfortunately, if taken seriously, this discussion will keep every lobbying firm in Washington gainfully employed for a number of years-- a completely unintended and unwelcome consequence.)

So, to recap, current pricing reflects the costs of obtaining resources. New pricing would reflect the cost of REPLACING/REPLENISHING/RE-CREATING the resources AND the cost of RESTITUTING the environment to the pre-production phase. The environmental impact also includes DISPOSAL costs. A manufacturing process that pollutes the air or water would have to include the cost of cleaning up that pollution. Anything that is transported would take into account the cost of replacing the energy consumed in transport and cleaning up the environmental impact of the transportation process. Styrofoam plates that clutter landfills should reflect the cost of dumping them, vs. cardboard plates or re-using plates.

The same applies to services. If a service involves transportation, it would reflect the consumption & restitution costs involved. Even storage would reflect the use of the land. From manufacturing to sale, every step in the value chain would reflect, in addition to the normal acquisition costs, the costs of replenishing this product/service and the cost of restituting the environment to its pre-product/service phase. Each step in the value chain would only add the cost of the impact it has created.

How far back do we go when calculating environmental impact? To the original tall tree forests in the Northeast? To the newer forests? We have to be reasonable. For fairness and expediency, I suggest we only look at the state of things before the immediate activity took place. This will reward bad behavior before the change becomes effective, but it is the only manageable approach. We cannot recreate the old growth forests the settlers took down. We cannot decide on an arbitrary historical comparison point. Today, a developer weighs the cost of building vs. the cost of land. I argue the equation should also take into account the opportunity cost of the land being developed. A shopping mall spread out on acres will entail cutting down forests that could have absorbed CO2, furnished shade, filtered water, etc. The price of land should also include the price of what grows on it and what is filtered underneath it.

I have not studied the price of wood, but I would venture to guess that since the founding of this country, the price of wood has been shifting from reflecting the cost of cutting down a tree, to reflecting today the cost of replacing that tree. That is, the many years required to replant & grow the cut tree. That is what I call restitution: returning to the original point.

Similar thinking needs to be applied to coal and the materials used in cement, for example. It is not just the cost of buying the land and extracting the resources that matters, but also the price of replenishing them. And when they are irreplaceable, then the price should reflect that.

Why does this matter? Businesses are rational. They make cost/benefit decisions all the time. If new equipment costs more, but pollutes less, vs. older equipment that costs less and pollutes more, a defensible position is to buy the equipment that costs less and pollutes more. Decisions such as these are made in the immediate shareholders' interest.

Consumers are similarly rational. If they had to pay for the garbage they generate, they would be more wary of disposable items. If it costs me more to wash a water bottle than to buy a new one, I will buy new ones.

If the law changes to require every economic activity to take into account its environmental impact, then every cost/benefit analysis changes radically. More expensive equipment that pollutes less, becomes the right one to purchase. The disposable culture, with all its pre-packaged, single-use emphasis, comes into question. By revealing the real cost of consuming resources, comprehensive pricing would let every one of us make enlightened purchasing decisions. It is the right thing to do on a moral, environmental and economic basis. That is the change we need. Align rational self-interest with our larger interest in making sure our consumption is sustainable.


Questions for further discussion:

• how to mitigate the impact on consumption and the economy?
• how do we price irreplaceables, like coal, petroleum, minerals; and hard to replace items like water? [for water, the cost of land through which the water has to seep to emerge or to pool at the source; plus the time value of money for the years required)
  

LinkedIn's reid Hoffmann asks "What are the best ways to enable grassroots stimulus, esp. with entrepreneurship?"

The most efficient way to stimulate grassroots entrepreneurship is to increase the availability of small sources of funding, Funding of $10,000, $25,000, $75,000, with a max of $100,000. These amounts are too small for angels and VCs, but in this economy, they are way too big for friends and families, banks are not lending any more, and credit cards are shutting down credit limits arbitrarily.
These seed funding amounts are essential for a start-up to explore the concept's viability and build something significant enough to attract regular investors &/or customers. I consult to start-ups and I have come across many companies for which an investment of this size would make the difference between launching a new product or not.
Existing SMBs also need access to loans of this size to stay in business, especially when their credit lines have been reduced overnight.
$1 billion would provide 40,000 seed investments of $25,000. How many of these billions have we already plunked down businesses that will never recover?
The money could be an investment in exchange for stock or loans.
It is critical that these be made available to start-ups and that it happens soon.

In response to the question about whether this should be government-funded?

That's a good question. I think these mini-loans and mini-investments should be profitable, with a risk-return profile somewhere between a VC fund and a decent commercial bank. So, these should be attractive to regular investors in the for-profit world. It might start with a special bank or investment fund focused on this size of mini-investments,similar to the specialization of micro-lending banks. Once the model is successfully established, regular commercial banks would adopt these investments as part of their lending portfolio. Same with mini-funds, smaller than the current angel funds.
The economic situation today is exceptional and might indeed call for exceptional steps. In this respect, if the government is stimulating construction, education, health care, clean tech, etc, then, yes, why not also stimulate start-ups and SMEs? I am advocating making these funds available to existing SMEs AND new start-ups.

How to allocate funds between start-ups and SMEs?
That's a critical question, too. I'd say they both have to be judged on their business merits. We are in a much higher risk phase for all businesses (the beta of the entire economy is up), but we still have no better tool to evaluate business decisions than the traditional toolset of ROI, NPVs etc. If I were investing stimulus money, I'd focus on the business risk and separate out the systemic risk - unlike a private investor, who'd be reluctant to separate the systemic risk.
When start-ups compete with existings SMEs, SMEs have a clear advantage: they don't need to prove they could become reality: they already are. Again, if I were investing stimulus money, existing companies would have a leg up, and rightly so, because it's easier to keep existing jobs alive than to bet on the creation of future jobs. So, maybe I'd allocate 20% to 25% to start-up funds and the rest to SMEs. If the start-ups survive 15 months, then they can apply again as an SME.

Yertle the Turtle and the financial collapse

Two articles in the Boston Globe stand in stark contrast to one another. James M. Stone, "former Chairman of the Commodity Futures Trading Commission and prior to that commissioner of insurance for MA, [now] CEO of the Plymouth Rock Group" insurance companies, wrote an OpEd in the Globe on 2/5/09, in which he outlines six criteria for effective new financial regulations. The article is remarkably lucid and clear, a call to "think of financial regulation as mainly a set of prohibitions on harmful practices, more a rulebook than a bureaucracy".
In contrast, I was appalled to read in the 2/6/09 Globe that Timothy Geithner is considering changes to the 'mark to market' accounting regulations. The argument is that since the market has lost so much value, marking to market reduces banks' assets, limiting their ability to lend. This is the worse possible reaction to this crisis.

I would argue that the only thing that can salvage financial markets is TRANSPARENCY. We are in the depressed economic state we are in now because of a failure of TRUST. Let us stop pretending the financial markets collapsed because homeowners started defaulting on their mortgages. True, homeowners' default rates went up, but the markets collapsed because of the flimsy financial structure that was built on these mortgages and other consumer debt.According to Stone "By 2008, banks and brokers were leveraged [on their derivative instruments] as much as 30-to-one." The true weakness of the markets stems from the huge shadow projected by the leverage on derivative products. Warren Buffett has compared derivatives to a neutron bomb with the potential to destroy the entire world economy: a "disaster waiting to happen."

An article by DK Matai, Chairman of ATCA Open, quoted by former FT journalist Tome Forenski, gives a sense of the size of the derivatives threat. According to the article, the total global dollar value of derivatives, as of December 2007, was 1.144 Quadrillion dollars (or 1,144 Trillion US dollars).
To give a sense of the size of $1.144 quadrillion dollars, DK Matai specifies:

"1. The entire GDP of the US is about USD 14 trillion.

2. The entire US money supply is also about USD 15 trillion.

3. The GDP of the entire world is USD 50 trillion. USD 1,144 trillion is 22 times the GDP of the whole world.

4. The real estate of the entire world is valued at about USD 75 trillion.

5. The world stock and bond markets are valued at about USD 100 trillion.

6. The big banks alone own about USD 140 trillion in derivatives.

7. Bear Stearns had USD 13+ trillion in derivatives and went bankrupt in March. Freddie Mac, Fannie Mae, Lehman Brothers and AIG have all 'collapsed' because of complex securities and derivatives exposures in September.

8. The population of the whole planet is about 6 billion people. So the derivatives market alone represents about USD 190,000 per person on the planet."

Clearly, this type of exposure is large enough to terrify anyone who is worried about financial risk.
I believe that as long as we do not face up to the risk in leverage and derivatives carried by financial institutions worldwide, it does not matter how much money the government invests in financial institutions, it will never be enough. If big banks own 10 times more derivatives than the entire US GDP, our government will never be able to stabilize banks by cash infusions alone. We must remove the veil and deal with the real risk. It will no doubt be painful and staggering amounts of value will be lost, but I just don't see how we can avoid losing that value. The only tangible assets are the homes, cars, and even diplomas those consumer loans were buying. Let us salvage the true assets and burst the financial bubbles, instead of throwing money at bubbles and letting the assets go under.

In contrast, we have Timothy Geithner proposing to veil the risk of even the fraction of assets that must be disclosed at fair market value. Everything I learned in a Wharton MBA hammered in that transparency and information comfort markets, while opaqueness destabilizes them. How can less disclosure help us out of this crisis? Banks will not lend because they know they need the cash to cover their own mistakes, their leveraged derivatives etc. Until we take care of the flimsy foundation and bring all our financial institutions to a firm footing, credit will not flow.

'Yertle the Turtle' is the Dr. Seuss story of a turtle king that built his throne by climbing on other turtles' backs, believing he ruled all that he could see. Little turtle Mack brought down the whole edifice of 281 turtles perched on his back, by burping. In my opinion, homeowners defaulting on their mortgages are akin to Mack's little burp, while the highly lucrative derivative products that enriched the financial establishment for years, are akin to the throne built by layer upon layer over Mack's back. We are all free-falling into the mud as a result of this collapse.

Another Madoff victm: future whistle blowers

The fallout from Bernie Madoff's Ponzi scheme is enormous already in dollar terms, not just because of the defrauded investors and evaporated $50B, but also for all the work sponsored by charitable foundations that had invested with Madoff that will now lose its funding. Today, it turns out Madoff's brokerage arm never traded a penny. http://www.reuters.com/article/topNews/idUSTRE50F0BY20090116?pageNumber=1&virtualBrandChannel=0
Madoff might have traded through third parties, so we can't completely judge that yet, but it would be extremely surprising. Given the decidedly fake data on investors' monthly statements (trades in a Fidelity fund that was renamed years ago, trades at prices that were not hit on a given day, etc..), I'll assume not a penny got traded.
My concern is for future whistle blowers everywhere. In this case, the SEC had extensive warnings from Harry Markopolos. It chose to ignore them, probably because of Bernie's stature as a Nasdaq chairman, pro trader (what irony!), and superbly connected glitterati. Apparently, newspapers & the SEC receive a stream of unsolicited warnings every day, & they have to prioritize. So, if you're part of the old boy network, you're off the priority list. I don't know of any effective way to keep this dynamic in check, so we'll leave it for another day.
What about future whistleblowers? To some extent, Harry Markopolos had it easy: he was not endangering his job by submitting these warnings. On the contrary, his colleagues were rooting for him. This is not like the smoking industry whistle blower case. Nobody was threatening Markopolos. What if in a few years, there's a whistle blower in, say, the defense industry, who wants to alert us to huge financial mismanagement there. (Where would I ever get such an idea?!) He or she has to weigh the real risk to their livelihood, reputation, ability to get another job, and stress on the family, with doing the right thing and being a whistle blower. The Madoff scandal might make them think it's useless to be a whistle blower. The government won't act, anyway. That's the huge, invisible cost of the SEC's inaction in the Madoff case.

The questionable value of Mergers and Acquisitions

In "Mergers and Acquisitions' Losing Hand", an article published in Business Finance Mag by Anand Sanwal at Brilliont (http://businessfinancemag.com/article/mas-losing-hand-1118), Anand makes the argument that, based on his firm's research, the 33 largest mergers and acquisitions between 2002 and 2007 returned, on average, negative value and increased the combined entity's volatility.

"In what was arguably one of the greatest bull markets we've ever seen, we observed that megadeals actually destroyed value over 60 percent of the time. On average, transactions resulted in negative cumulative excess beta returns (--4.03 percent) in the year after their announcement."

I wonder if this finding also applies to smaller deals. A year ago, I was researching success stories in municipal Wi-Fi for a client. (That's one difficult place to find success stories!) I noticed a trend. I would find little companies that won awards (sometimes national awards) providing superlative Wi-Fi service in their region. Then, these companies would disappear off the radar screen. A lot more research later, I would reconstruct a little fish/big fish story where these successful small companies would have been bought by a bigger and bigger player, until finally, the large parent company would go belly up. All this value, destroyed. Essential communication services in isolated regions, shut down. All because of some quixotic model of growth and corporate success.

Schumpeter's Small is Beautiful notwhithstanding, I think an unquestioned assumption in business thinking has always been 'bigger is better'. Bigger means you're too big to fail (these days). Bigger means more access to credit, more power to crush your competition, more leverage with suppliers and distributors, etc. But are there countervailing forces? Bigger means too big to manage efficiently. Bigger means your managers don't feel personally responsible for their business unit's performance, because of corporate overhead's damper effect. Bigger means nobody at the top has a personal sense of your clients at the bottom.

When the CEO of a small municipal Wi-Fi has personally signed on a client, he will probably do everything in his power to keep that client happy. When the CEO of a large corporation needs to cut costs, he might slash the equipment budget of as small municipal Wi-Fi business unit. he has no idea that this means the unit will not be able to service clients competitively a year from now and will therefore progressively lose its customer base. At the same time, the business unit head might not want to fight for that investment, hoping that if he meets his quarterly numbers, he'll have been promoted to something else before the impact of the lack of investment is felt. Etc. Nobody owns the end user anymore, so paying customers end up leaving. That's just my hypothesis of a possible scenario to explain why once thriving businesses end up dying when acquired by large corporations.

It would be interesting to explore whether 'The rule of 150' that Malcolm Gladwell describes in The Tipping Point is one of the factors that helps explain the loss in effectiveness when small businesses are acquired by large corporations. Gladwell quotes Robin Dunbar, a British anthropologist, saying below 150 people is the size at which "orders can be implemented and unruly behavior controlled on the basis of personal loyalties and direct man-to-man contacts. With larger groups, this becomes impossible." (Little, Brown, 2000, p.180) It turns out the military historically keeps its units below 200 people, Hutterites (a religious sect) start new groups whenever one of their groups reaches 150 people, and Gore Associates, the makers of Gore-Tex, start a new group every time they reach 150 people. These small groups keep Gore Associates profitable and innovative because the peer pressure to create good corporate earnings is "much more powerful than the concept of a boss". (p. 186) Small groups also enable members to know each others' strengths & weaknesses, interests and distates, thus knowing who to call on. (p. 190) This intimacy, shared purpose, transparency of action and effect, and shared responsibility are all lost when a company gets too big.

I think business school professors should be scrutinizing the issue of value creation in M&As, and the costs and benefits of bigness.

A NEW TYPE OF INVESTOR

VCs are getting a lot of flack these days, for a number of reasons. (See the discussion on Techcrunch http://www.techcrunch.com/2008/11/12/a-scary-line-has-been-crossed-for-vcs/ ).

I think what is needed is a new type of investment fund; I'll call it the 'annuity investors'. Like VC funds, it would invest in technologies that respond to a current market need. Unlike VC funds, it would invest in businesses that promise a steady flow of revenue. Small and steady trickle of profits wins the day.

Why the need?

VCs cannot, by their nature, invest in "sure bets" that use established technologies. I hadn't been aware of that until a presentation yesterday at HBS, where Nick d'Arbeloff (Executive director of the NE Clean Energy Council) answered questions from the audience that asked why VCs were not investing in proven technologies such as geothermal heat pumps and heat and electricity co-generation. The answer: there isn't enough new proprietary IP in those fields to justify VCs' investments. Remember the funders of VCs: they invest in VC funds as one buys a lottery ticket - high risk, high odds of losing, but if you win, you win big. VCs are their risky investments. Annuities and bonds are their safe investments. If VCs started investing safe but steady, for their investors, they wouldn't be VCs anymore.

However, the market needs investors who will fund start-ups that are revenue-based, not exit-based.