Managing director and CEO John Banta has a wealth of experience in clean technologies, which are currently among the hottest investments for venture capitalists. The IVCA recently interviewed Banta to discuss IllinoisVENTURES, the current climate for green tech investments and the research that creates new enterprises.
IVCA: How did IllinoisVENTURES establish and distinguish itself as a seed- and early stage technology investment firm?
John Banta: We were born out of a conviction that competitive return can be achieved through investment in a portfolio domiciled in large part in Illinois and the Midwest. The impetus was a willingness on the part of the University of Illinois to attack a challenge in a creative and commercially powerful way.
We’ve developed a particular expertise in research-derived work and have developed a portfolio of industry-leading holdings in highly fundable domains. In the process, I think we’ve crafted a uniquely capital-efficient approach that has served us well in both good (and now with the rather bad) environments.
IVCA: The root of your company is in academia. What bridges the need between those academic roots and the venture capital community?
JB: Like any early stage venture investor, a significant aspect of our effort involves fostering successful co-investor relationships with leading firms that are active in our areas of technical endeavor.
Where we’ve excelled is in developing deep expertise in specific domains. When combined with our highly active approach, this allows us to act as “feet on the ground” for investors that may not have staff on the ground in the Midwest.
IVCA: In your development work with Midwest universities and federal laboratories, what type of research are you finding to be most attractive for investors?
JB: There are not a lot of new rules. As investors, we look for projects that start with a defensible advantage to allow sustained margins against scalable markets.
The trick when doing research-derived work is to focus on technology that can be made into a product in commercially relevant form and validated with real customers in a reasonable time frame. This is a requirement to achieve a competitive return. That approach tends to ring well with peers and has helped us facilitate the development of co-investor syndicates.
IVCA: Green tech has excited the investor community. What does IllinoisVENTURES focus on within the green tech realm that garners the most interest in the venture capital community?
JB: Beneath the trendy “green tech” and “clean tech” monikers are long-standing areas of work for us: industrial bioprocessing, advanced materials, device physics, etc. These happen to translate productively into applications like renewable biochemicals, water sensing, remediation and lighting.
That the venture spend has expanded so significantly in these areas is terrific, but as always, it’s critical to have a perspective on where the “puck is going to be” as it relates to current commitments while avoiding areas at risk of having become overfunded.
IVCA: How will the Barack Obama administration, which is committed to more science-friendly policies, help to expand the type of technologies IllinoisVENTURES is committed to?
JB: It’s clear that renewable energy research will continue to grow in key areas and that NIH funding will remain fairly stable. This bodes well for the continued flow of future fundable projects. Having said that, innovation would always occur even in tough environments as evidenced by Silicon Valley’s leading companies (many of which have roots in the malaise of the 1970s).
IVCA: Information technologies are a constantly evolving dynamic. What trends or areas of IT will garner the most interest in 2009 and beyond?
JB: Data. Data. Data. Over the last 10 years, the Internet went through several phases. The first phase was about commercialization and creating companies like Amazon and eBay. The second phase was about socialization through blogging, tweeting, Facebook, etc.
The next phase will be about helping make sense of all the data that is being created on the Internet through better understanding context, keywords and classification. Also, opportunities have emerged as information technology has met the power grid and has created the smart grid.
New challenges exist around monitoring, securing and protecting all the data.
IVCA: What advantages does IllinoisVENTURES have as a Midwest-based venture capital firm?
JB: We benefit from three factors. First, there were a limited number of truly early stage investors focused on research-derived investing in the Midwest. We are now among the most active.
Second, we’ve been fortunate to develop expertise in industries and technical domains that have emerged as highly fundable. This is a reflection of the nature of the vast high-quality research base in the Midwest and ashift in the venture spend. Finally, at the heart of all our projects are people. The human capital markets in many of our areas of focus are actually pretty rich in the Midwest.
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We all have run into this scenario before. You're in the store, Best Buy, Dick's Sporting Goods or a wine shop, and you see a product you want to buy. You ask yourself - is this a good price, does it have a good rating, what do my friends think about his product? The new Buywyz beta enables you to get all of this information directly to your phone immediately by simply taking a picture of the product barcode, texting the product number from the barcode or calling in the product code. The applications integrates with your Facebook or Twitter account so you can immediately get feedback from friends.
Your're also probably thinking to yourself, I've heard of this before. You're right, there are popular iPhone applications and Google android applications that enable some of this functionality. The beauty of buywyz.com is that it works on any phone and you don't need to download any software.
Simple is best.
Just when I think great strides are being made to personalize marketing messages, I get a slap in the face to remind me that we still have a long way to go. It especially hurts this time because the slap came from the company that put the "e" in e-commerce. Yes, Amazon. Today, I received an email offer from them to buy the new Kindle.
The message said "As
a current Kindle owner, we'd like to offer you a special opportunity to
be among the first to experience Kindle 2. Even though we've increased
our manufacturing capacity, we want to be sure our original Kindle
owners are first in line. Order Kindle 2 by midnight PST on February
10th and you will be given priority."
One the surface, the message seems, kind and thoughtful, but what they should have recognized that I invested in 2 Kindle v1's less that 60 days ago!! So instead of thinking that this is a good offer, I'm disappointed that they didn't tell me about he new version as I was investing $700 in the now outdated version. Now, of course I know they wouldn't (nor should they) do that, but my point is that I should be the last one to get this message, not the first.
Sure, I don't live under a rock so I am aware of the exciting new, shiny Kindle 2, but Amazon doesn't need to rub it in - by saying, "hey dummy that just bought version 1, how 'bout re-up-in' " A classic example, of how some marketing manager just sent a generic marketing email to a segment of their database that was clearly too broad.
The good news is that if Amazon can't get it right, there is room for opportunity.
Obama has taken a play out of the VC handbook. Executive pay limits for company's receiving TARP funds is absolutely justified. It is standard for VCs to set cash compensation limits for executives. Incentives are provided through stock options to align interests with shareholders. Increase in equity value is makes lots of money for executives as well as shareholders. With stock prices of major banks less than a hat size, the same opportunity is available. Plenty of upside for stock options, but limit the cash compensation.
Too often I receive voluminous board packets from over zealous CEO that are 50+, 100+, sometimes 200+ pages. While CEOs intend for such a deliverable to be a sign of comprehensive hard work, it actually makes our life as board members difficult. The ideal board packet is a simple PowerPoint Deck that highlights accomplishments, issues, and goals to be completed by next session. The major theme of a board deck is marking accomplishments versus promises from the last board meeting. Annual board meetings should be much more comprehensive, but your typical board meeting should include the following:
A good executive summary sets the mood for the meeting.
1. Take care of governance issues like options, approvals etc. first.
2. Summarize cash position. Highlight cash on hand, anticipated burn and cash out date.
3. Summarize progress of the business. Have a two column slide on that outlines what you said you would do and what you accomplished.
4. Summarize any major issues/observations encountered during the quarter
Then methodically go through with a few slides for each functional area of your business, technology, product development, partner development, marketing, sales, customer service and financials. No more than 2 slides per area highlighting agreed upon goals for the period and what you've accomplished.
5. In the technology and product sections, highlight your product
development gantt chart highlighting actual versus planned
deliverables. Be able to speak to missed dates with rationale and how
it will be corrected
6. In partner development, summarize the meat of the deal. Are there pre-commitments or is it just a Barney deal? What will it cost to support the deal and what do we expect to get out of it?
7. In marketing, summarize PR placements and lead generation activity. How well are you converting leads into qualified sales opportunities?
8. In your sales section, walk through the pipeline deal by deal in salesforce.com format highlighting the deals you closed this quarter and expect to close next quarter, the quarter after that, etc and make sure those numbers tie to the quarterly financials you present. Your board should become very comfortable for your ability to predict timing of closings of your deals.
9. In the financials sections, highlight cash flow. It is really all that matters. Bookings are great, but cash flow timing is start-ups is crucial to understand. Even the most promising business are out of business when they our out of cash. Investors hate bridge loan fire drills.
9. Strategic topic. If appropriate, pull one topic out of the weeds for a strategic discussion like product vision, next target markets etc. Have a slide or two to spur discussion.
10. Finish with a summary slides highlight key goals before the next board meeting.
This is a common slide floating around the web which is held up as evidence that the end is near for the venture capital industry. As a venture capitalist I should be torked. For many reasons I should be blogging that it is a bunch of c***, for reasons not least of which it came from the garbage site "The Funded" - talk about adverse selection, but don't get me started, it's not the purpose of this message. Additionally, I would say that one data point does not a trend make, however (a big however), there is some truth in the above graph.
What is not said in this chart as well is that the number of VC firms have doubled in the last 20 years; the average fund size is $170 million versus $70million 10 years ago with (and here is the kicker) roughly the same number of deals completed (2,200 in 1997 versus 2,500 in 2007). That means roughly the same number of deals are getting 2x the amount of money. Is it that much more expensive to build a start-up these days? I think not, in fact, good layout a pretty good argument that it is cheaper.
Very simply, the venture capital business is in the business of building businesses. There has been a slow fade in the industry away from this notion. It is hard for a VC to be active if they are compelled to allocate so much cash, so quickly, which is often bad. I have observed this in practice. Too much capital to a start-up so soon can be detrimental as they are forced to scale up an unproven or broken model.
Why would they do this? Often times, the incentives and motivations are not aligned between the super large VC and entrepreneur. Venture capitalists are measured on IRR which is a function of time and return. They would rather plow a bunch of cash in early to see what happens than wait until the model is ready to scale.
I'm not sure what the ideal size venture fund is, but what I can say is I believe that most of the time, smaller funds are better aligned with the incentives of the entrepreneur. For example, the vast, vast majority of software exits are less than $75 million. Smaller funds and entrepreneurs can make money on a $75 million exit and call it a success. This is not the case for many larger funds. Somethings- gotta-give and it shouldn't be returns to LPs.
Like everyone else, I've been watching the pundits and politicians try to explain to us how this financial bubble could have possibly happened. Every one is pointing the finger and everyone in search for who is really to blame. In America when something really bad happens, "someone" has to be to blame. Reflecting back to the 2000 Internet bubble the answer is that no one is to blame, but "everyone" is. Bubbles are caused by the systematic proliferation of poor incentives combined with a fear-greed imbalance. Looking back on the Internet bubble, I should have sold my entire stock portfolio in 2000 when my cab driver was suddenly an expert in U.S. equities. Or investment bankers bidding on my business were telling me my burn rate was too low. Likewise in 2008, I should have been smart enough to sell when systematic (governmental and commercial) incentives were put in place for everyone to own a home. No money down, 4ish% interest only loans should have been a hint for all of us that something was systematically wrong and a bubble was just over the horizon.
After the 2000 bubble, I lectured often on what I thought happened. I lived and operated through the heart of the bubble. I have numerous tales to tell that epitomized that period of history - like watching the valuation of my Internet company skyrocket from $25 million to $250 million in 9 months or an IPO in April of 2000 that was predicted to be worth over $1 billion. Back then the investment bankers were planning your secondary offering long before you were even public -- just as long as your burn rate could justify it of course. Messed up incentives from the greedy consumer investors that could now buy stocks cheaply on line to the over funded venture capitalists. I can appreciate why over the last couple of days that Sequoia Capital has been marketing its end of world presentations. I'm sure many of their companies have $1+ million per month burn rates and the capital markets doors are shut. For many of those companies the end of world is near. If your burn rate is at that level and you have no money, and no business model, your probability of surviving is close to zero. That is the high risk game of west coast venture capital. Timing is everything.
Below is a slide from the lecture I gave from 2001-2005ish. After 2005 or so everyone had forgotten about the Internet bubble, therefore it was less interesting (plus the students I talk to were too young to remember). Given where we are now with the Nasdaq back around 1500 and Dow around 8200, I thought it was appropriate to pull out the old slide. The story is the same, but the characters are different. You'll get the point.
Image via WikipediaMany of us Bubble #1 veterans are having flashbacks on what it was like to run a company through a capital market crash followed by a recession. I remember vividly what it was like to run DigitalWork through the 2000-2002. I will never forget the 3rd week of our IPO roadshow in April 2000. After we realized the IPO was not happening, we spent the time between meetings in the back of the limo cutting every long term committment we could including leases, advertising committments, software licenses, outside contractors, etc. in order to preserve capital.
Here are a few lessons learned:
1. Have 1.5 - 2 years of capital on hand. If you don't see below:
2. Raise now. Look to your key partners and customers as potential investors. If you are so lucky to raise money, be reasonable on valuations and assume it is that last capital you will be able to raise.
3. The consumer/small business will cut spending first, and corporate spending will follow. So don't try and change your consumer oriented business model into a commercial software model thinking that you will ramp revenue. By the time you change, corporations will stop spending. Stick to your guns and see number 5. During 2000 many companies, including DigitalWork, tried to sell the infrastructure they built to serve consumers to corporations. By the time we adjusted it was too late - corporations stopped buying software.
4. Cut all non necessary expenses. Operate profitably if you can. Duh, but when you think you have cut enough cut 20% more. It will force you to do fewer things better. Fire your PR firm, advertising agency, retained lawyers, retained recruiting agencies, external consultants -- you get the picture. Let expense follow the revenue.
5. Sell stuff. In the Internet bubble era we gave everything away to build a "brand" and "get big fast". You see some of that today. Once you put a price tag on your product/services you'll figure out what you really have. In these times fewer, paying users are better than "lots of eyeballs". At DigitalWork, we shelved all activities that were not recurring revenue generating.
6. As a leader, stay solid, don't panic. Focus on what you can control, not what you can't.
I received this email from Amazon today. It is yet another example of how unbusiness friendly Illinois is. I only wonder how many affiliates have been affected.
For well over a decade, the Amazon Associates Program has worked with thousands of Illinois residents. Unfortunately, a new state tax law signed by Governor Quinn compels us to terminate this program for Illinois-based participants. It specifically imposes the collection of taxes from consumers on sales by online retailers - including but not limited to those referred by Illinois-based affiliates like you - even if those retailers have no physical presence in the state.
We had opposed this new tax law because it is unconstitutional and counterproductive. It was supported by national retailing chains, most of which are based outside Illinois, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that its enactment forces this action.
As a result of the new law, contracts with all Illinois affiliates of the Amazon Associates Program will be terminated and those Illinois residents will no longer receive advertising fees for sales referred to Amazon.com, Endless.com, or SmallParts.com. Please be assured that all qualifying advertising fees earned prior to April 15, 2011 will be processed and paid in full in accordance with the regular payment schedule. Based on your account closure date of April 15, 2011, any final payments will be paid by July 1, 2011.
You are receiving this email because our records indicate that you are a resident of Illinois. If you are not currently a permanent resident of Illinois, or if you are relocating to another state in the near future, you can manage the details of your Associates account here. And if you relocate to another state after April 15, please contact us for reinstatement into the Amazon Associates Program.
To be clear, this development will only impact our ability to continue the Associates Program in Illinois, and will not affect the ability of Illinois residents to purchase online at www.amazon.com from Amazon’s retail business.
We have enjoyed working with you and other Illinois-based participants in the Amazon Associates Program and, if this situation is rectified, would very much welcome the opportunity to re-open our Associates Program to Illinois residents.
The Amazon Associates Team