Growthink Blog

The Obama Stimulus - $17 Billion to ONE Tech Sector


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Aren't you sick and tired of watching Washington spend all of YOUR money and YOU not seeing any of it?

Wonder where all of the stimulus money has gone?

Well, try this on:  The Obama stimulus commits $17 billion in federal funds to reimburse medical practices for implementation of electronic health records systems and their use.

This involved doctors getting paid up to $44,000 each to transition their practices to the new technology.

And even before the government began throwing money at the sector, it was a $4 billion business growing at 23%/year

Why Should You Care?

Well, if you're interested in capitalizing on one of the fastest growing and most dynamic technology sectors out there, and one about to see turbocharged growth driven by federal dollars, you should care.

Meet an Industry Pioneer

I would like to invite you to an exclusive opportunity to meet, via web conference, the CEO (and Stanford MBA) of one of the fastest-growing and innovative companies in the industry.

He will talk about which companies and technologies are best positioned to profit from the stimulus money, how "cloud computing" applications are beginning to see real adoption rates, and what has been driving the record revenue months his company has had this quarter in this tough economy.

Best regards, and look forward to connecting.

--
Jay Turo
CEO
Growthink, Inc


P.S. I know too many otherwise intelligent business men and women who have been listening to all of the negative drivel that passes as business news out there, and sitting on the sidelines and missing opportunities.

Don't be like them.


CleanTech Nation: Why Investments Have Risen 477%


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You've likely heard all of the hype regarding Cleantech.

How the Obama stimulus plan fuels $83 billion into the sector.

How cleantech investment today is more than 477% greater than what it was in 2005.

How Vinod Khosla, arguably the world's most famous and well- respected venture capitalist, last week raised another $1 billion - including $150 million of his own money, to invest in it.

Wind. Solar. Geothermal. Water treatment. Smart grid. Fuel cells. Carbon capture. If you have turned the TV on at all over the past year, you've probably heard about all of these.

And here is one you probably haven't heard - Bio-friendly pesticides

Who cares?

Well, if you're interested in capitalizing on one of the great arbitrage opportunities of our time, you should care.

Because bio-pesticides, an environmentally friendly option to synthetic chemicals, is the perfect storm about to happen.

We're talking about a $70 billion+ industry, where new, effective and safe pesticide products are gaining traction.

One where governments worldwide are mandating -  through strict, new regulation - a fast transition from the old, synthetic-based products that have been damaging our health and the environment for far too long.

An industry that includes dozens of completely under-the-radar, private companies.  And cash - rich big boys, like DowAgro and Monsanto - on acquisition sprees.

Meet the Industry Leader

I would like to invite you to an exclusive opportunity to meet, via web conference, the CEO of one of the fastest-growing and most dynamic companies in the industry.

He will talk about the super-fast growth his company is currently experiencing, and how they relate to his public offering and acquistion plans.

If you're interested in learning how money is really made in emerging technology, then this is a presentation you don't want to miss.

Portfolio Theory and Angel Investing


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One of the most exciting trends in angel investing and private equity over the last 6 months has been the application of traditional

Some of the most interesting investment research over the last 6 months has been the application of traditional portfolio theory and hedging  techniques to angel and private equity investing. Research compiled by the National Venture Capital Association, by the Kaufman Foundation for Entrepreneurial Activity, and by the Entrepreneurship in the United States Assessment, highlight a number of both subtle and startling insights.

When compared to other asset classes, there is relatively little correlation between various private equity investing sectors. In other words, while the share  prices of publicly traded aerospace and software companies, for example, will move up and down more or less together, the success probabilities of that hot drug development company and that wind energy startup are reasonably uncorrelated.

Why is this important? Because it creates a far greater hedging opportunity than is available in public stocks, whereby the investment combination of the wind  startup and the drug development company has disproportionately less risk for the expected return.

The research also shows that the smaller the size of an equity financing deal, the less correlated is the success probability of that deal with the equity markets as a whole. A subtle, but critical point that had made a HUGE difference in investment returns over the past 10 years. Try on these two facts:

1) The venture capital industry as a whole - with average financing sizes over the past 10 years of greater than $8 million/deal - has returned ZERO percent to investors during that time frame.

2) In contrast, the average return on private equity classified as "early, or angel stage" had an average annual return during that same period of a whopping 32.9%! (Thomson/Reuters).

I talk about more about the application of portfolio theory to private equity and angel investing in the video below:



For our Friday live deals call, click here: www.growthink.com/livedeals

 


Angel Investing Returns - The Impact of the Stock Market


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The general misery that the public markets have subjected us all to over the past year (and really the past 10 years, with the Dow Jones, the S & P, and the NASDAQ all trading lower today than they were in 1999), begs the question - how does stock market performance affect angel investing returns?

The answer, on the one hand, is very obvious.  A falling tide sinks all boats.  So as goes the public markets, so go the private equity markets, of which both venture capital and angel investments are subsets.

This is best illustrated by the amazing (and depressing) statistic that in the last 10 years there has been more money invested into the venture capital industry than has come out of it.  A lot of effort for naught.

But in spite of this, and maybe even because of it, average angel investing returns this decade have been surprisingly, even shockingly good.  According to data compiled by Thomson Financial, average angel investing returns have been in excess of 20% annually since 1999.

Why is this and will it continue?  Well, it has to do with the difference between the "macro" and the "micro."

To hear more on this, please click the below.
 
 
 
 

 


What Separates the Best from The Rest?


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Accelerant. C8 Medisensors. Dakim. DCIP. Free Conference. Fresh Games. Green Medical. Helix Wind. InfoSpace. Integreon. L3D3. Mobeze. MyPublicInfo. Nolatek. Ometric. Pocketsonics. Precision Time. Raise Capital. Recoup IT. Research Scientists. Sandel Medical. Spring Medical. Telverse. Thrombovision. XCOM Wireless. Xorbent.

These companies all share a few things in common:

1. They are either past or current Growthink clients and/or investments (though this is by no means a complete list).

2. They all either achieved - or are on the path to achieve - successful exits through a public offering or a company sale.

3. They are all led by CEO's and senior executives that are a cut above. Men and women that are entrepreneurs and business-builders in the best and highest sense - the kind of managers and visionaries that are the bedrock of America's vibrant, free enterprise system and way of life.

I have been privileged to work and get to know inspirational, entrepreneurial leaders like Dan Michel at Dakim, Liam Brown at Integreon, Walter Alessandrini at Ometric, Brian Ashton at Precision Time, Rick Singer at Raise Capital, Peter Sobotta from RecoupIT. Jack Smyth at Spring Medical Systems, Ed Teitel at Thrombovision, and Dan Hyman at XCOM Wireless.

Here are 5 qualities they all share:

1. Their Work Ethic is Off The Charts. This may sound really obvious, but the great entrepreneurs are extremely disciplined and organized and make the sacrifices to commit themselves fully to their business. Work - life balance is a nice theory, but in entrepreneurs to back, the more zealous the better.

2. They Have Great Numbers Fluency. As Guy Kawaski so eloquently puts it, we live in the age of excel, not of PowerPoint. Great 21st century leaders are "Super Crunchers," - they undertand the power of statistics, of "evidence-based" decision-making, of testing, and of managing by the numbers. They are not enslaved by the numbers nor do they lose sight of their human and qualitative aspects, but they are highly informed by them. They are hungry for unbiased, third-party information about their markets, their customers, their competitors.

3. They Have Done it Before. Following up on #2, the entrepreneurs most likely, statistically, to be successful are those that track records of success. It doesn't mean that just because they have succeeded in a past company mean that they will necessarily succeed in the next one. Nor do this mean that those who have failed in the past will fail in the future. Only that the probabilities are that this be the case. All of the managers above had track records before their existing business of successes - entrepreneurial successes, corporate successes, educational successes. Success follows them, not the other way around.

4. They Know When To Manage and When To Lead. Successful business exits require first and foremost, organization-building. Teams of people need to be assembled and directed to accomplish a common objective that can be quantified on the scorecards of business - revenues, profits, and cash flow. Balancing these left and right brain objectives require a sense of knowing when to manage and when to lead. Management is left-brained - it is analytical, numbers-driven, and dispassionate. It see business as a black box, with the sole objective of turning cash into more cash as fast as possible. Leadership is right-brained - it is conceptual, more long-term focused, and sees the business more as an organism as opposed to a collection of individual parts. Leaders sometimes will sacrifice short-term results for long-term gain, but do so carefully, deliberately, and warily. They are soft-hearted but hard-headed.

5. They are Proud and Humble. Great entrepreneurs are proud of their accomplishments and greatly desire more of them. They are confident in their vision and their abilities, and do not let adversity, criticism, objections or rejections deter them from their chosen path. They are not, however, headstrong nor arrogant. They respect facts, statistics, and informed opinions. And when these are in conflict with even their most dearly-held beliefs and strategies, they change. Not with the wind, but nor only at the point of a gun.

If you find these 5 attributes in an entrepreneur, savor them, appreciate them, learn from them, and back them. Till the cows come home. And then some more.


Angel Investors - Do You Want Venture Capitalists in Your Deals?


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The typical wisdom regarding the appropriate financing course for startup goes as follows:

  1. Founders start the company in classic "bootstrap" fashion - with a combination of sweat equity and their own financial resources. This usually consists of their personal savings, credit cards, and small loans from relatives (Mom, Dad, Uncle Bob, etc.).

  2. Through connections, or through a chance meeting at a networking or social event, an angel investor hears the entrepreneur's story, likes him or her and the technology, and on the spot, writes a check to provide the company with its first outside financing. The angel then introduces the entrepreneur to his or her wealthy friends and business connections who, based on the good reputation and respect that the angel has with them, also invest.

  3. With this capital, usually totaling between $100,000 and $1 million, the company accomplishes a number of key technical milestones, gets a key beta customer or two, and then goes on a "road show" to venture capitalists around the country. The first institutional financing round - usually between $3 and $10 million - is the first of a number of rounds of outside investment over a period of 3 - 5 years.  With this capital, the company propels itself to $50 million+ in revenues  and to either a sale to a strategic acquirer or to an initial public offering.

  4. With the exit, the entrepreneur and the original angel investor become fantastically rich (or in the case of the angel, even more so), and are lauded far and wide for their deep and keen predictive insight.

  5. The cycle is then repeated - the original angel investor utilizing the windfall from their successful exit to fund more companies.  And they are now joined in their investing by the once impoverished but now wealthy entrepreneur.

  6. All live happily ever after.

It all sounds wonderful and it is. The only problem is that it mostly a fairy tale. Here is what really happens:

  1. The entrepreneur pours their lives, their fortunes, and their sacred honor into their company- at great personal sacrifice to them, their families, and everyone connected to the enterprise.

  2. A "black swan" investor appears mostly out of the blue to fund the deal - less concerned re the efficacy of the technology than by the talent, desire, and grit of the entrepreneur. Technical progress and market traction are much slower and cost a lot more than anticipated. There are a lot of dark, hard days.

  3. There is considerable internal debate around whether or not to solicit and/or accept outside venture capital. For most companies, it is simply a non-starter. Management has the wrong pedigree, is geographically undesirable, competes in the wrong industry, and/or has a business model that lacks "scalability credibility" with the venture community.

  4. Usually unbeknownst to all, the conversation and decisions around pursuing or accepting a venture capital round above will be the factor most highly correlated with their expected return on investment.  But here is the key – contrary to popular wisdom it is negatively correlated.

New, groundbreaking research from the Ewing Merion Kauffman Foundation on Entrepreneurship shows that the #1 key for the angel investor returns in emerging technology deals is that there is never any venture capital invested in the company!

As interestingly, the data shows that when you remove a follow-on venture capital round from angel invested deals that expected returns skyrocket.

The data is somewhat inclusive as to why this is.  I surmise three main reasons:

  1. The Best Metric for the Health of A Company is Cash Flow. By definition, companies that receive venture capital cannot fund their businesses from operations - and thus need to seek outside capital. This may lead to inherent negative selection to venture deals – whereby the sample of companies that need outside capital are by definition weaker companies.  

  2. Venture capitalists Have Very Different Objectives than Angel Investors. Venture capital funds are usually 7 - 10 year partnership structures whereby the general partners, the VC’s, manage the capital of the limited partners, usually institutions (endowments, pension funds, etc.).  And at the end of the period, all profits and proceeds are distributed to the various partners on a pre-determined split. These splits are normally such that the general partner professional money managers need to obtain a “highwater” return for their limited partners before they, as the general partners, see any return. beyond their management fees   In practice, this creates a huge incentive for the general partners to hold on for home runs, and to be reasonably indifferent regarding smaller (less than 3x returns).  As a result, the VC will often block a portfolio company from harvesting a very attractive, but not a home run, investment return. Or as counter-intuitively, press for a far more risky strategy than the entrepreneurs or the angel investors in the deal would prefer.

  3. Venture capitalists Cut Tough Deals. Venture capitalists for the most part are very nice guys and passionate about entrepreneurship, but they are not shrinking violets. And they hire very aggressive securities attorneys to represent their interests.  This combo all too often leads to various forms of deal unpleasantness -  ncluding cram-down rounds, liquidation preferences, and change of control provisions, among others. Which in turn often leads to a lot of very unhappy founders and angel investors even in somewhat successful exits.

My suggestions for the angel investor looking to make money?  First, look for "one and done" deals - companies that need just one round of outside capital to get them to positive cash flow.  Second, look for companies that have short and realistic liquidity (exit, IPO) timelines.  And third, don’t get star-struck by big VC interest in your deal.  It can often be a double-edged and very sharp sword.   


The Stock Market Rebound: What Does it Mean for Angel Investing?


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With the Dow Jones up more than 35% from its early March lows of 6,440, the investing mood has undergone a 180 degree turn for the better. How does this rebound affect the angel investing returns?
Here are the negatives and the positives:

The Negatives:

  • A Zero Sum Game. On some levels, assets classes compete in a zero-sum game for investor attention. So with money moving back into the real estate market, with long-term treasury yields creeping up, and with the increasing attractiveness of traditional stock mutual funds ticking up, the risk-reward profile of private equity (of which, of course angel investing is a class) are relatively less attractive.

  • The Bad Behaving VC Older Brother. Venture capital performance over the past 10 years has been shockingly bad, with some estimates being that the entire asset class has had ZERO return since 2000.  And so many assume that as venture capital returns goes, so go angel investing returns.  While the actual return statistics actually show the opposite (Data compiled by the Kaufman Foundation, by Ibbotson Associates, and by The Economist, show a 25%+ 10-year average angel investing return performance), perception is too often reality and is sometimes self-fulfilling.

The Positives:

  • Venture Capital Returns ARE Improving with Improving Public Markets. Having said the above, return expectations for venture capital are looking up.   Why? Because the IPO market is in an early boom period with the big recent market move.

  • America is Returning to its Natural State: Deal making. One of the worst aspects of the September–March market “darkness” was the unprecedented crisis of business and financial confidence it precipitated. The mood in America – the land of Vanderbilt and Rockefeller and Edison and Watson and Walton and Gates and Jobs and Brin and Page – felt like, I am very sorry to report, France. The end-of-the-worlders were in their full bloom, and for once, the facts on the ground seemed to agree with them.
But we are getting our groove back. Consumer and business confidence have skyrocketed since March. Bank lending is up. Business capital expenditures are increasing. The real estate market, in most parts of the country, has at least stabilized (and in many places, greatly rebounded). Jobless claims are down. Most importantly, corporate profit forecasts are up.

All of this drives deal-making. It drives big companies to buy small companies to gain access to their people and their technology. It drives venture capitalists to agree to bridge financings. It drives entrepreneurs to get back to pushing the envelope with their growth plans. And all of this positive, forward-looking acting and thinking drives angel investing returns. Entrepreneurs grow their businesses faster, they exit faster, and investors turn their money faster and at great multiples.
All these factors have turned 180 degrees since March. And for those that love America and its entrepreneurial spirit, not a moment too soon.

The Early Exit


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The next big private equity investment idea is the “Early Exit.” The best articulation of it comes from Basil Peters, a serial technology entrepreneur, co-Founder of Nexus Engineering, former Canada Entrepreneur of the Year, and Managing Partner at 3 venture capital funds – Fundamental Technologies I and II and the BC Advantage Funds. His blog is one of the best resources on technology investing out there.

Aptly to the point, Basil is the author of a great new book – “Early Exits: Exit Strategies for Entrepreneurs and Angel Investors.” His core thesis is that successful private equity investing is now driven by quickly getting to the smaller investment exit.  Or, as he says it, "Today, the optimum financial strategy for most technology entrepreneurs is to raise money from angels and plan for an early exit to a large company in just a few years for under $30 million."

I love this strategy because it is realistically attainable for the individual investor. Here's why:

You, Mr. or Ms. Main Street Investor, are NOT getting a piece of the next big IPO: The 2 best known venture capital funds –Sequoia Capital and Kleiner Perkins - because of their reputations and massive bankrolls – will continue to get the lion’s share of the deals with rockstar IPO potential. Try these names on for size – Electronic Arts, Apple, Google, NVIDIA, Rackspace, Yahoo!, Paypal, Amazon.com, America Online, Intuit, Macromedia, Netscape, Sun Microsystems.
They were all Sequoia and/or Kleiner investments that became mega-successful IPOs. To give a feel for the power of their investment model, estimates are that Kleiner’s investment in Amazon scored returns of 55,000%!

YOUR big problem – your friendly neighborhood stockbroker (if they exist anymore) isn’t getting you in on any of these deals anytime soon.  And if you don’t have a $100 million bankroll and the very right connections to become a Kleiner or Sequoia LP, you’re not joining their club.

Hit’em Where They Ain't:
The size of most modern venture capital funds has increased, with the average sized fund now having more than $160 million under management. As a result, the vast majority of professional investors simply can’t and won’t invest in smaller deals. The new VC model has, for better or for worse, become “Go big or go home.” As such, competition for smaller deals is much less and the deal pricing on them far more favorable.

Small Deals Rock:
You don’t need a lot of money anymore to build a technology startup – not with outsourcing, viral marketing, and the Software as a Service (SaaS) revolution. And if your business isn’t cash flow positive REAL FAST, you probably don’t have a very good business.

So the new technology investment model is to place small amounts (under $1 million) into companies that a) develop intellectual property and compete in markets with lots of active strategic acquirers (think Internet, software, biotechnology, digital media, and energy) and b) have management with the mindset and track records to ramp-up and exit FAST and at very attractive but not pie-in-the sky multiples. 

Not a game that big private equity or venture capitalists are interested in playing because it is just too hard to put large amounts of money to work in such a fragmented marketplace.
But if done right, an EXTREMELY lucrative one for thoughtful entrepreneurs and the investors that back them.


Here Comes The Sun


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In my role as the CEO of Growthink, I get asked variants of the same questions a lot, namely:  "What do you think about this economy?”  “Do you see things turning around?” “Are there any deals getting done out there?”  I answer these questions based on a number of factors:

  • How is the Dow Jones Doing?  While the performance of the index of the 30 biggest industrial companies is no way near as indicative of the health of the U.S. economy as is popularly imagined, it has enormous psychological importance.  While still massively off its highs, the trickle-down benefits of the market moving to its current 8,300 level from its March 9th low of 6,440 (an uptick of 29%) cannot be overstated.  If we can see the rally continue to the 10,000 level by the end-of-the-year, we can declare this recession officially over.

  • How is Consumer Confidence?   The Conference Board’s Consumer Confidence Index this month jumped to an 8-month high in May, spiking from a 40.8 level in April to 54.9.  The index had hits its lowest level in February (25.3) since tracking began in 1967.  As Lynn Franco, the Conference Board's research director, said "While confidence is still weak by historical standards, as far as consumers are concerned, the worst is now behind us.”

  • What is The Level of Venture Capital Funding Activity?  Venture capital funding activity in the 1st quarter of 2009 hit its lowest level since 1997, with venture capitalists investing just $3.0 billion in 549 deals (National Venture Capital Funding Association).  Signs are very strong that the 2nd quarter will be appreciably better, with the buzz created by the $10 billion valuation on a $200 million investment in Facebook by a Russian investment firm adding significant buoyancy to the overall emerging technology company arena.

  • How is the IPO Market Trending? The successful IPOs of venture capital-backed companies OpenTable, the online restaurant reservation service, and SolarWinds, a network software company are contributing long-awaited liquidity and bull market sentiment to the long-suffering IPO market.  Big valuations and big money being made by early investors in deals like this is what angel and venture capital investing are all about – so see more IPOs like these coming down the pike in the near future (Twitter and LinkedIn, anyone?)

  • How is Growthink Doing?  Because as a firm we touch so many entrepreneurs and angel investors every day, our business and investment activity has historically been a very good leading indicator of overall economic activity and equity investment performance.  And after going through the most challenging 6 months in the history of the company from September through March, business has picked up significantly. May 2009 already has been Growthink's best revenue month since last summer, and our deal pipeline is right now the strongest it has been since late 2007.

 

What does this all sum up to?  The Beatles say it much better than I ever could:

Little darling, it's been a long cold lonely winter
Little darling, it feels like years since it's been here
Here comes the sun, here comes the sun
and I say it's all right


The Future IS Ours To See


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"Those who cannot remember the past are condemned to repeat it" - George Santayana

The financial panic of 1873, which set off a severe nationwide economic depression that lasted for 6 years, included The New York Stock Exchange closing for 10 days, 89 of the country's 364 railroads going bankrupt, and unemployment as high as 14%.  During this extremely challenging time, a gentleman by the name of Thomas Edison started a company called General Electric. You may have heard of both of them.

The Great Depression of the 1930's is even scarier in statistics than in legend.  Industrial production fell by 45% between 1929 and 1932. Homebuilding dropped by 80%. 1,000 of the nation's 25,000 banks failed. US GDP fell by 30%. 

And during these dark days, DuPont created new products and indsutries including rayon, enamels, and cellulose film. RCA invented television.  And a little company called IBM started pouring research dollars into something called the computer.

The 1970's are commonly remembered as a dark period for American finance and business - stagflation, negative stock market returns for the decade, and hits to the national psyche including Vietnam, Watergate, and the Hostage Crisis.  It was also the era that 2 ambitious and visionary young men named Bill Gates and Steve Jobs got their start.

My 20 years in angel investing, small business and entrepreneurship have taught me to separate the world into two kinds of people: Those that comment and complain on how things are and those that do something about it.

Unluckily for all of us, television and the always on Internet give those that comment and complain bigger megaphones than ever to spread their false prophesies of doom. It is only human nature to be affected, depressed, and even scared by their strident negativity.

Very, very luckily for all of us, however, there always be budding Bill Gates and Steve Jobs and Thomas Edisons and Thomas J. Watsons amongst us. And where are these future shining stars devoting their prodigious energies to these days? I promise you that most of them aren't working at General Motors, nor are they drawn to politics or working in the public sector, nor to non-profits.

No, they are capitalists. They are entrepreneurs.  They start and work at Internet companies, they research alternative energy technologies they discover new drugs to make us all live longer and healthier lives. They are and they discover Black Swans.  They - in the words of Voltaire - make "life throb to a swifter, stronger beat."  

And you know what else? They're in it for the money. They want to build companies like Pure Digital (makers of the FlipCam) did and sell out to Cisco Systems for $590 million.  Or Facebook, on the verge of a public offering that will make its early investors billions. Or Integreon, whose business plan was perfected in a small Growthink conference room 10 years ago, and is now the largest legal outsourcing firm in the world (and saving a lot of folks a lot of money on their legal bills).  

With apologies to Doris Day, the future is in fact ours to see. As long as little boys and girls are raised to grow up to do something great with their lives, progress will march on.  Technologies will be commercialized.  New industries will arise.  Companies will be born and will grow and grow and grow. Fortunes will be made.  

The question, of course, is what will be in it for you? Will you be on the couch with the critics? Or will you be in the game with the builders and the doers?


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