Emerging Enterprise Center Blog - Commentary and Analysis For Entrepreneurs and Startups

This is an observation that I have made before in this blog, but I was a little surprised to see similar thoughts appear in an analysis piece by Joe Nocera in the New York Times on Saturday under the title "S.E.C. Chased Small Fry While Big Fish, Madoff, Swam Free." The article makes a pretty compelling case that there is an institutional bias in favor of chasing the small fry over the big fish. Among the points that Nocera makes is that the SEC enforcement people are judged on cases they bring and win.. As Nocera points out, the small fish tend to be easier marks. They settle and pay the fines, even if they may not be guilty. In part this has to with the fact that the small fry may not have the resources to fight. In Richard Kwak’s case (the case Nocera outlines in his article), Richard Kwak was essentially bankrupted by his fight against the SEC (which he won in the end).

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In a recent press release Mark Heesen of the NVCA had this to say:

"The venture capital industry will evolve significantly in the next few years as the asset class responds to a Darwinian contraction resulting from the recession, the rise of innovative industry sectors such as clean technology and the continued interest in venture capital outside the United States," said Mark Heesen, president of the NVCA. "As the survey results suggest, we will see more globalization in the next decade, not only in terms of investments but also in fundraising and exits as well. Those countries that can nurture entrepreneurs and investors as well as offer attractive exit opportunities have the most to gain economically in the next decade."

This comment causes me to think back to my trip to China of a few months ago. While in Tianjin, I visited an incubator where 930 tech companies were being incubated. I don’t know about India, never having been there, but at lease one of our competitiors is working on a scale that is hard to comprehend.

Beyond the comment about venture capital outside the United States, is the comment about offering attractive exit opportunities. Exits have been few and far between in the last year and more. In the end exits drive the whole investment model and somehow, directly or indirectly, the deployment of new technology in business and personal life drives the rate at which companies will be acquired or go public. Obviously other factors impact it as well, but I wonder if the aging of the U.S. population doesn’t slow down the rate at which, as a country, we can/do absorb new technologies. Is demographics a drag on innovation?

Consider how comfortable your grandfather, father, you, your children are with Facebook, iphone apps, or whatever. I still have not programmed the automatic garage door opener in my new car. I write this blog and I send the occasional tweet, but if the world has to depend upon me to drive adoption of the next big thing, you could be waiting a while.

I recently had occasion to look back through the data we have gathered on the presence (or absence) of cumulative accruing dividends in New England transactions and noticed what appears to me to be an interesting pattern. According to our research, 55% of Series A transactions had cumulative accruing dividends ranging from 6% to 10% per annum (and, obviously, 45% did not have such dividends). But, only 33% of Series B and later round transactions had these dividends (and the rates ranged from 6% to 8%). So, 67% of later round financings did not carry dividends. The sample is small (covering under 100 transactions) but it is somewhat random and covers 2008 and the first quarter of 2009. So, maybe the results are just random. It seems odd that Series A deals are more likely to carry dividends than later stage deals. I am not sure what the reason could be, if the results of our survey reflect a trend. One possibility is that Series A deals are riskier than later deals and investors are trying to gross up their yield.

It being the middle of June the numbers for Q2 are about to come out, with the inevitable result that many new blog posts will be added to the blogosphere providing all kinds of analysis. Our firm contributes to this quarterly cacophony with our EEC Perspectives publication which analyzes what is going on in New England. When we started this publication, we gave some thought to what we could/should publish and from what base sources. So, we look at the quarterly data that we derive from mining VentureSource and various searches of Delaware filings. We analyze the data ourselves and make judgments about its quality and significance and try to turn it into useable information. The way we think about the data is as follows:

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Fred Wilson's post on a Lesson from Morty has, perhaps, the final word on what is standard.  Here it is:

My post on the NVCA forms and levels of adoption did get one comment, which I did not get to releasing until yesterday because it got buried under an avalanche of work related email. The gist of the comment is that adoption levels for the NVCA forms are way lower on the west coast than the east coast – Yokum Taku (of Wilson Sonsinni) suggests in the 5% to 10% range. Our firm does not track west coast deals for the obvious reason that our home base is Boston. So, I don’t have a basis for disagreement with Yokum Taku. Having said that, I believe there are huge efficiencies in using widely accepted agreed upon forms in a field in which so much is basically repetitive and in which efficient use of resources is so important. I find myself surprised that competitive pressures and the ever increasing need to provide cost efficient services has not driven west coast firms in this direction as much as it appears to be doing in New England.

Negotiation can be about a lot of things. A great attorney that I know, he is now retired, once said that the most difficult thing to overcome in a negotiation is a good reason for something. A good reason – one that can be articulated so that the other side recognizes it as self-evidently rational – will often (very often) trump the power, the money and the clever posturing.

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