Friday, February 20, 2009

Thought Leaders

Vin Bisceglia: Strong marketing, business plans will survive

By Mass High Tech staff

Vin Bisceglia
General partner, Genovation Capital
MHT All-Star: 2006, Networking category
Previous position: CEO of Broadbus Technologies Inc.
 

What makes this economic downturn different in terms of its nature and how we have to approach it?

First of all, I think this specific downturn we are in the midst of is unprecedented in both its severity and its duration. I believe that while innovation stops for no one, the natural resources that an entrepreneur requires to build a business are scarce. Those resources are a collapsing private equity market because of the challenges that the investment sector faced in 2008, by a phenomenon called the “denominator effect.” What that is is that investors have lost a significant value in their public equity investments, which have skewed their percentage investments in other sectors like private equity and venture capital. So the funding resource that venture capitalists and ultimately entrepreneurs have enjoyed over the years began to dry up rather significantly in 2008. We’ve seen this happen before, however, again, the severity and duration is what’s remarkable this time around.

The need to conserve capital on the part of the entrepreneur is extremely important. But the need to innovate, however, is a reality that everyone is faced with, so the challenge is doing far more with far less. First time financings in the fourth Quarter of 2008 dropped down significantly, in fact they were down — according to (PricewaterhouseCoopers) MoneyTree they were down 28 percent from the third quarter of 2008 and it’s the lowest we’ve seen since the first quarter of 2004. So we have seen a dramatic drop in venture investing, particularly in the fourth quarter of 2008. We are concerned about that as we look at 2009 and beyond, but I think that if we manage our resources properly, we can come out the other end with stronger companies better positioned to do battle on the world stage.

Where are today’s challenges and opportunities in growing successful companies?

I think the challenges become much more severe in light of the scarcity of capital that is available to entrepreneurs, so that means that their differentiation has to be extraordinary. Unlike entrepreneurs of vintage 2006 and 2007 year funds, the 2009 vintage entrepreneur has to have a remarkable differentiation with their products and their ideas as to how they are going to build their business. They have to also absolutely demonstrate a monetization scheme that demonstrates cash-flow break-even in a relatively reasonable time. So the advantage aspects of presenting to a venture capitalist on the part of an entrepreneur becomes much more challenging because they not only have to be great technologists with a great market vision but the also have to be effectively incredibly strong “CFOs” in that they have to really understand the monetary measures of building their business. And they have to be believable in the sense that the investors buy into a break-even forecast. The challenge is so difficult because you not only have to be different, but because of the demand destruction that has gone on in so many sectors of our economy.You also have to sell venture capitalists on the notion that your product can derive demand in a marketplace that is very fickle and very weak right now from a demand perspective, so the challenges are extraordinary. But that’s why we have seen some of the really great companies were born in adverse times. Companies like Microsoft, Apple, Google are all heralded because not only the fact that they had great ideas when starting their businesses but because they did so in extremely adverse times, so they had to have their act together in order to attract capital and interest and that had to really have a differentiation in order to drive demand for their product.

I think there is light at the end of this tunnel and the sun will shine again on companies that will be remarkable, companies that will come out of vintage 2009 investments because they will be strong in all sectors of their marketing and business plan.The strong demand, differentiation of the story, strong financial plans in place, great management teams and category leaders that are really changing the way we interface with technology and even biotech and health care sciences as well.

How well-prepared is the U.S., and New England, to support growth of new companies?

First of all I think that when you look at Massachusetts and New England and the hierarchy of entrepreneurship in the U.S., Massachusetts is a clear and distant second to Silicon Valley as it relates to attracting venture investment. In 2008 approximately, 40 percent of U.S. venture capital was invested in the Valley, and 12 percent was invested in Massachusetts. So we are roughly a quarter the size of the Valley when it comes to investments. However Mass is clearly the second strongest, second most robust area to invest in, geographically, in the U.S.

Could we lose some great entrepreneurs that basically pack it up and say, “Well there’s no opportunity here, I am going to go to California or Finland or Costa Rica to start my business?” We run that risk. But I think that there’s a lot of great initiatives going on right now. Gov. Patrick has a council that he’s pulled together to focus on optimizing Massachusetts as the place to innovate and build great companies. There are venture capitalists and other companies that are working very hard to keep and attract talent here, particularly recent college grads. We are working very hard to keep them right here, by internships at startups and corporations, and getting them exposed to Massachusetts companies and venture capitalists through initiatives to allow college students, for example, to attend industry trade events free of charge, to get to build social networks. I think there are concerted efforts to retain talent and to position Massachusetts as a strong, robust innovation center once the recession subsides. I look at this as a time of opportunity because that’s what recessions are all about — they’re a cleansing process removing the excess from the market, but it also allows regions of this country and for that matter global economies to re-order themselves, and its going to be interesting to see who will emerge as the real leadership economies once the recession subsides. And so I think this is a time of opportunity for Massachusetts, its innovation engine and we are gearing up for that now to get ready for turnaround, hopefully later this year.

Who do you look up to as a leader today?

There are several leaders in the venture community that I think are aggressively investing in innovation today and there are so many of them it is hard to pinpoint one individual venture firm because so many of them are doing so many great things. Khosla Ventures, for example is doing some remarkable investments in green energy and next-generation energy. While that’s not a primary focus of ours at Genovation Capital, I am intrigued by what Vinod Khosla is doing with capital to bring value to his investors, but also the social aspects of why he’s doing it. He recognizes that our dependence on fossil fuels will be short-lived because we’ve reached peak oil sometime back in the mid ’80s and that there’s got to be another energy source that we rely on. So Putting his full thought and measure as well as capital into innovations in that sector is really noteworthy because he is not seeking just profit but he is also, I think, doing this for the greater social good, and I admire that. It’s a wonderful thing that we should all be trying to emulate.

How do you describe your role in your organization and industry today?

Genovation is a fund-in-formation. It is a remarkable accumulation of ideas and people that I am really excited about. I am one of three general partners. My other partners are Dave Fellows, the former CTO of Comcast Corp. and just a brilliant technologist, and Jeff Binder, who is the founder of Broadbus Technologies Inc. and one of the most prolific entrepreneurs I have ever met.

Also at Genovation, because of the way we’re approaching venture, which is radically different than we’ve seen under one roof in any venture firm, we believe that we’re going to generate a lot of excitement and a lot of positive financial returns for our investors by employing some of these best-in-class techniques that we’ve seen utilized over the years that we’ve been doing this. They say that venture is a game of home runs, and to a large extent that is true — you do invest in companies to see that one J-curve company that really returns the fund, but we also believe that there’s a vast middle class of portfolio companies that can be managed effectively and more aggressively by general partners and venture funds that can moved may of those companies into positive exits for investors.  I don’t want to delve too much into the techniques that we will utilize, because that is kind of our secret sauce at Genovation, but suffice it to say that because of our focus on what we call the vast middle class of portfolio companies, we will derive uncommon results for our limited partner investors.

Editors note: Thought Leaders is a Q&A feature in which we catch up with a Mass High Tech All-Star or Woman to Watch honoree and find out what they’re working on now. For the complete interview, visit www.masshightech.com/print-edition-stories.html