Archive for February, 2007

FOR WHOM THE FLYWHEEL SPINS

Wednesday, February 21st, 2007

  A little synchronicity this week between the Founders Fund based in San Francisco, and a breakfast panel led by Pearson Partners…

February 20 – an informal breakfast meeting was arranged by Dallas’ Adam Ross to introduce Founders Fund II  to a Dallas audience.   The Basic Idea is:  Founders Fund Principals have “experience-based” investing advantages, in fact have had enormous success in investing personally, (PayPal, facebook, IronPort) and then in the first Founders Fund, and are now raising their 2nd fund. 

An interesting feature of the discussion was the dealflow resulting from one seminal deal in particular – PayPal – whose early founders and senior team members went on to lead LinkedIn, YouTube, and IronPort, among others.  The family tree co-investment implications are like the “flywheel effect” quoted in, among other places, “Good to Great” by Jim Collins.  

Success breeds success.  Cash-outs drive innovation.  The effects are local. 

So what about the Texas Technology Company Family Tree?  There is a project to place it all online at the Telecom Corridor Genealogy Project led by UT Dallas.  One implication is that there is a great Texas lineage to leverage especially in telecom, but somehow the communications between generations is more fragmented here. 

That doesn’t mean Texas business conditions aren’t good.  I visited with Keith Pearson of Pearson Partners, who held a breakfast this morning regarding the strategic role of the CIO.  We discussed how I’d bemoaned local capital formation for technology companies, and I asked that given a capital-constrained environment, how healthy is the market for executive search assignments?  Keith said that his firm’s Texas-based search assignments for the last year had great urgency – it was the busiest year for his firm yet. As one measure of the health of the environment, he mentioned it was harder to pry good talent loose in this market than it was in the late 90’s.  His opinion is that the strength of the Texas economy is underreported, which ties back to the value thesis here. Part of the message of the Founders Fund is that there are still good values at the ‘A’ round level, although the later rounds are getting priced more and more aggressively.  The successes of the first Founders Fund would indicate that Fund II will get raised and invested.  Their partners would do well to look outside of the Bay area to Texas for a few of their future ‘A’ round investment success stories.

-John Reed   

 

 

 

 

 

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A Cold Stove in Texas

Thursday, February 8th, 2007

JR 2006    Can both of these statements be simultaneously true?

  1. Texas Technology companies are thriving (Investor’s Business Daily)
  2. Texas VC is in turmoil (also in Wall Street Journal)

This reminds me of a favorite story Trammell Crow used to tell about his partners from the 1970’s.  They had been through some challenging market conditions, and escaped to fight another day.  As market conditions improved, however, other developers were being more aggressive than the Crow Company.  When they were together at a partner’s meeting, he told them a developer’s parable something like this:  “You know, when a cat gets burned by a hot stove, he won’t go near a hot stove again.  Problem is, he won’t go near a cold one either.  The stove’s cold.  We need to get moving.”

Today’s Cold Stove – Texas VC funding challenges - stem from the sins of the past: specifically, from the poor returns being generated from VC investments made in 2000-01.  As a result, today’s good Texas technology companies have fewer opportunities to get locally funded than their counterparts on either coast, both in the amount of new investment dollars available and in the number of VC’s actively investing in new deals.

The first article above points out the degree to which the stove is cold, with tech companies growing and hiring employees.  The second article points out the hangover of the “stove is still hot” mentality which has resulted in a consolidation of investment capital in Texas, giving fewer options for funding, which for Austin Ventures at least has not been a bad thing.

These two conditions can’t coexist forever.  Two scenarios:

  • If capital remains a constraint in funding business, growth companies and investment opportunities will move to where the money is. Or:
  • If capital responds to the improved Texas investment climate, new investors will be rewarded with better valuations on the front end, generating solid returns, and beginning a cycle of increased capital availability in Texas.

-John Reed  

 

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