Explaining Southern California's economy

Do venture capitalists invest in people or ideas?

CFF VC Panel

Venture Capital in Southern California panel. From right, KPCC's Matthew DeBord, Rustic Canyon Partner's Nate Redmond, Idealab's Alex Maleki, and Ben Kuo from socalTECH.

Felix Salmon has an interesting post today about investing in people rather than companies. He introduces what he calls a "mysterious website" for company (or something) called Upstart that will provide individuals with funding in exchange for "future income." 

I don't know anything about Upstart, but once Felix covers the whole "people equity" concept, he gets into some points about venture capital. For whatever reason, I find myself disagreeing with him when he talks about VC, whereas I usually agree with him about many other things. I thought he mischaracterized the VC mindset in a recent post about the Matter and Kickstarter. And I'm not sure how I feel about this argument, either:

In a world where venture capitalists increasingly invest in a startup’s management team rather than in its business model or underlying idea, [the Upstart model] makes sense. Find the entrepreneur and invest in the individual directly, thereby guaranteeing that you’ll have a stake in their success if and when they finally hit it rich on their fifth or sixth attempt.

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For Matter, Kickstarter is advertising plus money

There's been a lot of discussion recently about Matter and its swift fundraising on Kickstarter, bringing in over $100,000 in just over a week (I've embedded the pitch video above). Felix Salmon thinks Matter has merit. Stephen Morse thinks it doesn't. You can watch them debate their positions here.

During the course of their he-said/he-said, the question of whether it's a good or bad thing for Matter to be avoiding venture capital funding came up. Felix summarizes:

In our debate, Morse snarked that no one down below us, in Times Square, had heard of Jim Giles or Bobbie Johnson, the co-founders of Matter. And in saying that he revealed his broader mindset: that of a would-be internet entrepreneur who raises venture funding by using the words “platform” and “scale” a lot while promising things like “explosive growth”. It’s no great secret that Giles and Johnson have talked to VCs, many of whom have been very supportive. But what they’re building doesn’t lend itself to the VC business model, where you either have monster, multi-million-dollar success, or else you die trying.

Morse uses the fact that Matter doesn’t have VC funding as a count against them, when in fact it’s a great count in their favor. VCs provide two things: money and advice. And Matter’s getting the advice; it’s just doing so without having to sell its soul to people wanting a monster return on their investment. All it needs to do, at least in the first instance, is pay for itself. And at the end of our debate, Morse finally came up with a number: if Matter can get 20,000 paying customers each week, he said, then he sees a sustainable model there.

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Facebook IPO: Will it rescue venture capitalism?

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Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California.

The venture capital business has been under some stress for a while now. It's not that it's doing all that badly. It's just that it isn't doing as well as it has in the past. This is related to the overall weakness in the economy, not just in the U.S. but also Europe: it's tougher for VCs to raise money, and it's tougher for VCs to sell their portfolio companies to established firms or exit their investments via initial public offerings (IPOs).

But that could all change with the much-anticipated Facebook IPO, due to happen later this year. 

Or not. This is from Fox Business:

“A little wind may have left the sails after some of the big name IPOs failed to live up to the overblown expectations. VC fundraising challenges are likely to start having a negative trickledown effect,” Tom Rodgers of Advanced Technology Ventures said....

That mixed track record is putting even more pressure on Facebook, which is expected to become the largest Internet IPO on record. Unlike some of the recent Internet companies that stumbled, Facebook has a well-developed business model and an estimated $4 billion in annual revenue, which may pave the way for a valuation of up to $100 billion.

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The hippest, coolest part of venture capital comes to public media

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Oli Scarff/Getty Images

People work at computers in TechHub, an office space for technology start-up entrepreneurs in London, England.

This is one of the best ideas I've seen in a while: following on its establishment of an early-stage venture fund at the beginning of the year, the Knight Foundation has announced that it's going to fund a Public Media Accelerator, to the the tune of $2.5 million. It's clear what Knight is up to here: it's putting together a fully functioning venture capital metabolism for the non-profit space, with a focus on media. 

It used to be that you could think of VC in terms of early and later-stage funding. But the emergence of incubators, like Pasdena's own Idealab, and accelerators with a somewhat different funding model — they seek to identify, nurture, and develop startups at an extremely early stage, sometimes before an actual company even exists — has made it necessary for any entity that wants to mimic Silicon Valley to think more broadly. 

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VC in SC: A panel discussion at KPCC

CFF VC Panel

Venture Capital in Southern California panel. From right, KPCC's Matthew DeBord, Rustic Canyon Partners' Nate Redmond, Idealab's Alex Maleki, and Ben Kuo from socalTECH.

Last night, I sat down with Nate Redmond of Rustic Canyon Partners, Ben Kuo of socalTech, and Alex Maleki of Idealab's newly formed New Ventures Group to talk VC in SoCal.

We enjoyed a lively and informative 90 minutes of discussion at the Crawford Family Forum with plenty of good questions from the full-house audience (Thank you, KPCC community!)

I'm going to post some outtakes from the event, but one of things that struck me, for whatever reason, was a recent grad who asked the panel about how to break into venture capital as a career. This got my attention because VC is a relatively new option in professional finance (dating back to the late 1960s and early 1970s) and because, well...most young people seem to want to start companies, not fund them.

That said, in my experience VCs, at every level, are interesting people, glad to share their knowledge and committed to the idea of entrepreneurship, innovation, and a positive future. I wasn't surprised that Nate Redmond's advice was simple but insightly. 

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