Just to prove that this blog is actually written by two separate people with their individual points of view, here’s a follow-up post to Alan’s Edible Robots post.
Alan’s hypothesis is that Pittsburgh’s technology sector is more heavily weighted toward research than commercialization, and that Pittsburgh’s startup community often seems to consist of researchers who think that a scientific breakthrough in itself is sufficiently important/valuable to merit the creation of a startup (and that VCs should flock to their door). [Alan - let me know if I mischaracterized your post]
First, let me say that I’ve certainly seen the situation that Alan describes, but I don’t know if Pittsburgh’s culture is any more heavily weighted toward this type of startup than other regions in the U.S. that have large research institutions. If anyone has a good source of data for this, please suggest.
Here’s what I do know: Innovation Works (IW), being a seed fund that only invests in the Pittsburgh region, tends to see a lot of the local startups when they are still pretty raw — oftentimes when they are still in the process of spinning out of a university. In a typical year, IW will see about 100-150 new startups (not counting companies we’ve seen before), and on average, less than 20% of them are built around university-licensed technology. Admittedly, I’m using a university license here as a proxy for having deep research, and of course there are plenty of other startups with deep research that do not eminate from a university – they’re just more difficult to objectively quantify, so let’s use the university figure as a starting point.
Sometimes it surprises people to hear that 80% of the startups we see in Pittsburgh are NOT formed around university-licensed research. Of course, this varies by sector — for example, life sciences companies are much more likely to have a university license, compared to software and IT companies. And, historically, life sciences companies have only accounted for about a third of the companies we see each year.
So does the predominance of non university-related startups mean that university research (and research in general) is less significant than typically thought? On the contrary. When we look at the companies that we have actually chosen to invest in, it turns out that a full 40% of them are commercializing university-licensed technologies — which is double the amount you would otherwise expect based on the percentage approaching IW each year. And the number gets even higher if you include non-university companies that started by developing broad technology platforms (another proxy for deep research), rather than point-specific applications.
Why the discrepancy? I’d argue that it is because of the hope/belief that these companies may be able to use their technology as a competitive differentiator…. in other words, that the stuff they’ve been working on in the lab for five years is really difficult to do and requires specialized technical knowledge, and it will be harder for future competitors to become fast followers. Also, if the technology is hard-enough to duplicate, a future acquiror will be more likely to buy vs. build.
All of that being said, I agree with Alan that scientific and technical breakthroughs aren’t sufficient for company success, and investors are rarely convinced by the number of technical citations for a particular research project. If anything, it’s just a starting point. To test this hypothesis, we looked at the likelihood of companies in our portfolio obtaining follow-on VC funding, as well as the resulting growth trajectories. We found that after several years, the university-licensed technologies in our portfolio were no more likely to obtain venture funding, and were equally likely to result in failure.
Of the five fastest-growing companies in our portfolio (which are also the five companies with the highest current valuations based on recent financings), two (40%) are commercializing university-licensed technology and three (60%) are not. Exactly the same percentages as our overall portfolio of 112 companies. But what do these five companies have in common? They are all commercializing platform technologies rather than a single application, all have built teams with strong industry experience, and their products all have compelling value propositions for customers and are well-differentiated versus their competitors.
So I guess my point is that university-licensed technology (and deep research in general) is a good starting point and may initially give a company a leg up – but it only really matters if the company can effectively leverage its technological advantage to solve a (large and lucrative) real-world problem and build a high-caliber team to execute on the vision. Similarly, Pittsburgh’s deep research capabilities should give the region a good starting point, but we can’t blindly assume that our strong research capabilities will necessarily lead to a vibrant, growing regional tech economy. Our ultimate success (or failure) will likely depend more on business execution than technical research.
This post could be about 10 pages long… when thinking about how to build positive working relationships with partners of any sort (spouses, friends, children, co-workers), there are many “best practices” that apply. But I am going to focus on only one right now, and it is a high-level one:
With regards to a partner, don’t take any action that, when it comes to light, you aren’t prepared to fully defend to them with a straight face.
Jeff Horing and Jerry Murdock (image from the Wall Street Journal article)
To wit, see this article from yesterday’s Wall Street Journal (yesterday’s paper was chock-full of great articles!). In a nutshell, the general partners (GPs) of a venture capital firm made a HUGE personal profit on a smart investment that they made outside their fund, and some of their limited partners (LPs) were steamed that they didn’t get to participate in the success.
In an analysis of the situation, Daniel Primack, who writes the PE Week Wire, was surprised that most of his readers didn’t share his point of view that this situation wasn’t a big deal. From his original post:
Pete Lattman has a piece in today’s WSJ about how individuals at Insight Venture Partners made a fortune off last year’s $300 million sale of Photobucket to News Corp., while the firm’s limited partners made nothing. I love a good VC scandal, but there is much less here than meets the eye.
The facts are undisputed: Certain IVP employees and acquaintances invested $3 million for 20% of PhotoBucket in 2005, while partner Jeff Lieberman took a seat on the company’s board of directors. They did not include the deal as part of its $675 million fifth fund (it has since raised a $1.25b sixth fund), which means that IVP’s limited partners never paid in nor got paid out on what turned out to be a blockbuster investment.
Someone apparently believes this is a case of IVP partners cherry-picking a sweet deal for themselves, at least judging by the number of media outlets he/she tipped off before WSJ ran with it. Maybe a bitter LP, rival VC, passed-over entrepreneur or jilted girlfriend. I don’t know or care, because it’s a bogus accusation.
IVP says it didn’t put Photobucket into its fund because the company was far too small and early for an investment mandate that focuses on growth-stage, revenue-generating companies. This seems to square with a data search I ran on recent IVP deals, in that I couldn’t find an initial check written for single-millions of dollars. The “tipster” also accused IVP of not telling Photobucket executives that the deal was not being done via the fund – a charge that Jeff Lieberman denied during a phone conversation earlier this morning (that part isn’t in the WSJ story, but PaidContent had it).
Imagine if it had invested and Photobucket had cratered? Then LPs would have a legitimate gripe. As it stands, everyone seems to have acted appropriately. No harm, no foul. Guess we’ll have to wait ‘till next time…
My take: IVP should have seen this train wreck coming, and should have been open with LPs about how they were going to spend their time, or they should come up with an easy way to allow LPs to decide which of these “angel” investment they would like to participate in. IVP was OK according to the “letter of the law”, but they have been burned by not understanding the spirit of their relationship with their LPs. Now they have plenty of splainin’ to do.
When I was in high school, I had a part-time job playing in the orchestra pit of a local dinner theater that put on musicals; I asked a very good friend to substitute for me when I went on vacation, but I only paid him half of what I was making. When he found out what I was making, it almost wrecked our relationship. Although I was technically in the clear (he has agreed to play for what I offered him!), he was offended that I would establish that sort of relationship with him. I paid him in full for his time, and have been embarrassed ever since. That was a tough lesson, but one I was glad to learn when I was 17 years old.
OK - don’t say I didn’t warn you about getting your dander up…
Pittsburgh is fortunate to have a couple resident journalists from Big Media who cover the local scene, and often get us “above the fold” - witness today’s front page article (below the fold) in the Wall Street Journal entitled, Pittsburgh Puts Robots to Work, And Some Can Even Be Eaten.
In a nutshell, this is a feel-good article about something Pittsburgh does well: ROBOTS. From the article:
Today, there are more than 30 robotic companies in Pittsburgh. They make drowsy-driver warning systems, and robots that help with surgery, unload crates and search for life on distant planets. Alcoa Inc. has a 6-foot-tall robot spokesperson, Al, who hosted a recent Robot Block Party at the Carnegie Science Center.
What is my issue? My hypothesis (which I am collecting data to verify) is that Western PA is fundamentally a RESEARCH-oriented region, not a DEVELOPMENT and COMMERCIALIZATION-oriented region. Or, to put it another way, if you build a hammer, then you reflexively start looking for nails - our region, and its research institutions, build neato, gee-whiz technology, and our entrepreneurs think their job is to take those “hammer” technologies and find “nail” problems. We build complex technology companies, like any number of robotics companies mentioned above (at Meakem Becker we have seen most of them) and expect the customers to line up and buy our products, even though we haven’t assessed and solved any of their problems. They don’t have any problems that look like nails - their problems have nail-like bodies with hex-heads on top, and a fishhook tail… and our hammers don’t fit the problem.
Our region needs a strong research function (which we have), but we also need to balance it with developmental founders/entrepreneurs who think about assembling technologies into solutions that make companies. Currently, I see us taking technologies as-is, straight “from the lab”, trying to build companies around a whiz-bang feature - ahh… but a feature does not a company make.
Edible robots? A six-foot tall robot spokesperson? Gimme a break.
Am I on the right track? Lost on a tangent in Turtle Creek? Fire some comments back and let me know…
While at an Open Coffee Club meeting a few weeks back, I heard tell of Matt Harbaugh’s blogging adventures under the title of “Pittsburgh Ventures”. Checking it out, I realized it had been several months since Matt had last posted, and I knew right away what was wrong: it is hard to do something like this by yourself.
I have been thinking about starting a blog myself, but I know myself too well - what sounds like a good idea often fails in the execution.
What Matt needed was the same thing I did: a partner. Someone to share the load (much easier to post half as often consistently), someone to “compete” with, someone to put the stick about when busy-ness got in the way of keeping up with the blog.
Not unlike some of the great Olympic partnerships we saw in The Games: the beach volleyball pair of Misty May and Kerri Walsh, the synchronized diving duo Lin Yue and Huo Liang (really?!? Are you serious?!? What’s next?), the men’s 4X100m freestyle relay that whipped it up on the talkity French. That last example is especially apt, as we watched four US swimmers who all swam better than their individual abilities, all because each pushed the other to be the better as a team than as an individual.
So what in the world is this blog about? Matt and I represent a couple of guys on the investment side in Pittsburgh, PA. Matt is the Chief Investment Officer at Innovation Works, and represents a seed-level investor’s point of view; I am a partner at Meakem Becker Venture Capital, and represent an early-stage and later investor’s point of view. We want this to be a thoughtful series of discussions about what is happening on the investment side in Pittsburgh, which by definition means it will be opinionated and may raise some people’s dander, but we also want it to be good for the local ecosystem.
We are going to post on several topics - Western PA companies, the local entrepreneurial ecosystem, how seed investing works, how venture capital works, the national investing scene, hot startup trends, to name just a few. Look for us to post once or a couple times a week - so we will keep your (likely) overactive feed reader alive but not too busy. We will also keep the posts fresh by including guest blogs from other local and national luminaries.
AND we love feedback! Please feel free to drop either/both of us an email, and we welcome your public comments to be included along with our posts. You can find us at www.pittsburghventures.com; this is a new address, so please update your feeds accordingly.
Thank you.
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