CREATING VALUE IN ENTREPRENURIAL VENTURE CAPITALDIGITAL TUNISIA AND ENVIRONMENTAL INNOVATIONS IN AMSTERDAMJim de WildeJanuary 2012www.jimdewilde.netwww.twitter.com/jimdewilde

At this moment, we are reinventing capitalism and global capital markets. The theories are everywhere, the stale political debates about austerity versus stimulus, the B-Schools grappling with what models to teach finance.

The first thing that needs to be done is to sweep away all the archaic business models. Realeconomik is as valuable as realpolitik and that is why so many people are turning away from academically certified economics. Any business model works when the economy is growing at 20% a year and few work when it is at -2%. The business model for success in 1997 Jakarta or 2012 Equatorial Guinea is crony capitalism.

The power of this new realism (reinforced by a dose of Schumpeter) is that we are now living in a world where value creation will be valued. That is what I mean when I say that we are all venture capitalists now, involved in the direct creation of wealth, linking entrepreneurs to capital through microfinance, VC4Africa and the expansion of Silicon Valley models to Digital Nashville, Digital Tunis and Digital Chennai. While I long have argued that Silicon Valley is not replicable as an economic design, the metaphor is one about a capital market where entrepreneurs create growth.

This does not mean that traditional investment banking, at least that practices by the Carl Icahns and the Ted Forstmanns has no value. It is just that it will be recalibrated to be proportionate to wealth creation. In the 1990-2008 period, wealth creation and value creation became separated and value creation and job creation have long been disconnected.

Economic growth comes from a mixture of disciplined and patient capital markets with an ecosystem that rewards and provides incentives to innovators and entrepreneurs. If we know that, why has it proven to be so difficult to create this model in the mature industrial societies of the G8 countries?

The answer to that question is at one level obvious: the old always tries to delay the onset of the new. Healthcare innovations, which will create trillions of dollars/euros/yens of new value, are disruptive to existing organizational models with their networks of status, convenience, organizational loyalties and life-simplifying repetitive habits. U.S. capital markets are in a constant tension between models which create new values (Silicon Valley) and models, which provide enormous incentives for wealth management and wealth preservation

(Wall Street). The same is true of Canadian and European realities although less starkly drawn.

Venture capital is all about the creation of new value and the search for ecosystems which connect technologies ready for commercialization with teams of entrepreneurial managers who can realize this value. There is a global search for formulas which create competitive advantage in venture capital, but the task remains relatively simple in concept and enormously challenging in execution.

There are three things which are necessary conditions for entrepreneurial economic growth:

(1) A talent pool around a university (the mill-wheel of the ecosystem generating thousands of new high talent individuals annually). This is why Stanford, Waterloo, Helsinki University of Technology, Cambridge has proven to be such fertile epicenters for entrepreneurial venture capital. Daniel Isenberg of Babson writes in the ECONOMIST on the development of this kind of ecosystem.

(2) A venture capital community that is linked to global best practices in the development of new industries. One can back an entrepreneur to build a bowling alley without being a “venture capitalist” in my definition. A shrewd investor understands that a bowling alley is a mixture of real estate skills, entertainment and retail service management expertise. In investing $250,000 in a bowling alley, the shrewd investor assesses the dedication of the management team, the reality of the location-based competitive advantage and the coherence of the business plan. This is not venture capital as any new value; product, system or service has been invented and commercialized. A venture capital firm is defined by its global reach, its professionalism and as such is analogous to a university engineering department or a symphony orchestra. One can build a bridge or hum Brahms but to succeed, one knows who the best symphony conductors and most creative structural engineers are. It is amazing how often this point is omitted from discussions if venture capital.

(3) There has to be a success mix in the ecosystem. In Montreal, entrepreneurs can see how an inventor-entrepreneur with access to a world-leading engineering school could create Bombardier out of a company that started off putting small motors on skis. In Indianapolis, one can see how agricultural chemistry can be commercialized into multibillion products at Eli Lilly. We overuse the word ecosystem, but it is an accurate metaphor for the preconditions for success in modern venture capital.

As we start 2012, the urgency of venture capital is obvious to anyone examining the global economy. The philosophy of the moment (weltanschauung) is one of

entrepreneurially led development: a billion entrepreneurs in India and China, the linking of venture capital to Africans in VC4 Africa and Timbuktu Chronicles, and closer to home, the rhetorical certainty that an economic speech will discuss the need for new entrepreneurs.

A profitable bowling alley is an accomplishment in itself. I in no way denigrate it, but like all service activities, it requires other wealth creators for it to work. Tired auto workers relaxing after a shift will pay money for a bowling alley or a Tim Horton’s double, but their ability to pay for it depends on a wealth creating job or a stake in a wealth creating sector.

The next generation of value creation in a global economy looking for its moorings will come from organized networks of commercialization seeking acquisition of new talent. The model by which a Google or an Eli Lilly or a Dow Chemicals renews itself by acquiring a startup company is proving to be a viable one in the global economy. The discussion of venture capital is confused by the U.S. experience of IPO driven exits that were characteristic of a moment in time where public capital markets had excess capital and could provide expansion capital and acquisition capital to promising startups.

That reality may exist today as Groupon is capitalized not based on its current earnings, but based on an assessment of its management team’s potential to build a viable company at a key corner of the digital architecture. Just as EBay became a dominant player in auction and Google in search, a similar calculation is being made about Groupon (local trading arbitrate models) and LinkedIn (commercializing social networks). This changes venture capital calculations as shrewd venture capitalist contemplate building to sell to…Google or Merck or Monsanto or Eli Lilly or now Groupon or LinkedIn. This is particularly important for Canadian entrepreneurs as we try to design business models that will have a successful exit in the way in which the global economy expands. There are any $250,000,000 niches that will not be occupied by Groupon or Google.

With this in mind, the global venture capital scene enters 2012 with some incredibly rapidly growing areas, looking for the right business models and management teams for the next generation of growth. Let me provide five thoughts for the beginning of this course, obviously not meant to be exclusive, but “promising leads” for investment philosophies. If you have looked at my website you see that I am at least consistent in the core areas:

(a) We are globalizing the digital architecture creating venture capital opportunities from Tunisia to Vietnam.

(b) Canadian venture capital has been very creative in categories other than Silicon Valley as alternative energy; environmental technologies, water industries and bioremediation to materials science become major venture capital categories;

(c) Social media is real and the social media generated content category is an area where Canada has “no competitive disadvantage”.

With that, here are five (among many) trends for 2012:

(1) Food production will drive global capital markets for the next decade in the way energy did in the 1980s and 1990s. Innovation in all areas of food (profitable use of arable land, preservative technologies, packaging innovations, cultivation of new food sources) will revolutionize capital market thinking as Chinese, Indian and Arab investors determine a different set of priorities for their investment portfolios and G8 investors become more conscious of the environmental risks of the current food production model. There are several new investment models reflecting this new trend. New Seed Advisors is an excellent and high profile example of these new trends.

(2) Education is redesigned. The Khan Academy is one example of many, but well known and critically acclaimed . Some venture funds position themselves to be poised for this disruption but as content, education, gaming and entertainment create a complex new Venn diagram, the likelihood is that this will be even more disruptive than we have previously imagined. For the beginning of this see some of the work being done at MIT’s Media Lab: http://web.mit.edu/press/2011/mit-launches-new-center-for-mobile-learning.html and the Center for 21st Universities at Georgia Tech http://www.cc.gatech.edu/research/21stcenturyuniversities.

(3) The commercialization of technologies requires a whole new business model. For years, a European venture capitalist and I have been advocating a 50TECHNOLOGIES.COM concept for focusing on developing a commercialization process in areas, which are not as hot as data storage or industrial biotechnology. For practical purposes, we need to invent new investment models, specialized venture firms with a capacity to work with global scientific researchers to bring to market new ideas in everything from acoustical engineering to marine ecology.We are creating new technologies with commercial applications and yet the process of commercializing new technologies remains haphazard. We either rely on corporations to do this (Bausch becomes the instrument for commercializing ophthalmology) or we expect venture capita firms that are concentrating on mobile applications of alternative energy to broaden into other areas. The MIT Technology review remains the source to be followed and Boston area VCs have taken the lead in a number of these areas, which are off the radar, e.g. biofuels where an earlier MIT Technology Review Innovator of the year became, a venture partner. This year’s TR 10 can be found at http://www.technologyreview.com/tr10/. Another perspective on new technologies comes from the Electronic News. http://www.eetimes.com/electronics-news/4231126/EE-Times--20-hot-technologies-for-2012 .

(4) Social media generated content will change a number of markets, including how we spend our entertainment dollars. This trend has already started to take place but we still aren’t sure about the business models. See for example the excellent analysis by Ross Garland in the Wall Street Journal: http://blogs.wsj.com/venturecapital/2011/02/18/social-media-genomics-driving-data-tsunami/.

(5) We will need new technologies to sort through and present the data, which will be collected as crowdsourcing, and remote sensing makes more data available than we have ever imagined. The world of data crunching will develop different business models, transforming healthcare among other sectors. The aggregation of data will change. I am a believer that crowdsourcing will be disruptive in many ways: anti-corruption efforts that aggregate recorded patterns of corruption, epidemiological data that leads to best practices health care. Data analytics is going to put unimagined demands on the existing system leading to information design companies, which simplify the presentation of large pools of data and the investment in companies like Kaggle. For a sense of the scale of the venture capital activities in this space:

http://gigaom.com/cleantech/5-companies-using-big-data-to-help-the-planet/,

http://www.nytimes.com/2011/12/01/business/dna-sequencing-caught-in-deluge-of-data.html?pagewanted=al

We are living through a technological revolution and a global economic realignment simultaneously. It is exhilarating, terrifying, motivating and an opportunity to do enormous good while creating commercial value. Crowdsourcing means that corruption can be eliminated if large data tracks patterns of abuse in rural Nigeria. Google maps means that illegal foresting cannot be hidden and if some does manage to hit the market genetic barcodes can track illegally harvested products. Of course, this wonderful world cannot happen without a political system that ensures that Orwellian abuse does not become the post-technological norm.

The point for venture capitalists is that new areas of value creation are increasing, not decreasing. The point is also that sources of capital are increasing, just coming from new places. The business models of the past will be replaced by new business model. Social media will replace some institutional investors and people will (how radical is this?) be rewarded by what they build as opposed to how much money they can raise from existing networks.

When there is this much change, the skills of best practices venture capitalists become more in demand than ever, which is why we do what we do,