I’m not sure where technology goes next with streaming content, but I think we have a convergence of traditional content and internet streaming in the not too distant future. Some how, entrepreneurs have to manage the dynamic environments of electronic devices (run for the hills, it’s the iPad) and streaming content. To top it off, we’ve got to build out the infrastructure to have the bandwidth to accomodate all of it. I’d expect a media mogul to attempt something like that, but the current generation is still trigger shy after Time Warner got slapped around with the AOL deal. Mind you, that parent owns HBO… so maybe we’re seeing some down road benefit of that catastrophe. Oh, and Google is also on the job (remember Google TiSP from 2007… yeah, it was a joke, but apparently they were thinking about connectivity to residential households).

If Netflix really wanted to put some pressure on the big media business, they should do a couple of things (in my not-so-humble opinion):

• Provide a rotating streaming big ticket picture on a weekly basis
• Provide the opportunity to stream weather and local media
• Provide streaming of live sporting events
• Build a library of musical performances

If we can keep technology and entrepreneurship on the tracks, we’ve got some real value-add developments coming. It takes a few years (late 90’s and early ’00’s) of stupid wasteful foolish risky ventures to help focus in on the viable opportunities. The show ponies are dieing off and the stallions are left behind. They may not get the attention of show ponies, but that’s because they’re stallions… they do –gasp– work. Our entrepreneurial communities aren’t dead, they’re focused on survival and committed to their concept. But enough of that, or I’ll start talking about the blasphemous and offensive fact that increasing government expenditure decreases small business growth and innovation.

I thought I’d write a few words about how I’ve prepared. I’ve looked over all the presenting companies and developed a short list of companies in our profile and/or that look attractive. I’ve reached out to most of those companies through emails or phone calls to make initial introductions. The way the conference is organized, their isn’t a real bullpen area where you can easily locate the companies. Plus, with so many potential investors in one place, it can be challenging to get the attention of folks. Even VCs get lost in the crowd when the crowd is other VCs. Same thing, if not more so, for entrepreneurs. I also plan to drop emails and calls to certain colleagues that tend to attend this event. It gives me an opportunity to catch-up with those folks, gaining valuable insight on how active they are and what areas they’re looking at.

After looking over the list of presenters, I noticed a few trends: lots of web-based platforms (i.e. accounts receivable, entertainment management, etc), lots of companies touting “cloud computing,” and a noticeably less “clean tech” companies. Make out of it what you will, but those are my observations. Also, here’s a good article on cloud computing that I stumbled across at Venture Beat.

Here’s some quick-and-dirty advice for presenting at one of these opportunities:

• You only get 5 minutes, so focus on the material the audience cares about. Sorry engineers and technologists, that probably doesn’t include CAD sketches and technical analysis.
• If you’re raising money, investors want to know– how will you make me money and how much money will you make me? Period. End of discussions. Please, no CAD sketches or technical analysis.
• Do not read off the slides. In fact, use the slides for context and support, not as the foundation of the presentation. Your personality, passion, and speaking should be the foundation.
• Investing is relationship driven, whether institutional or individual, so don’t forget to introduce and give context for your leadership team. But remember, you aren’t the product, so don’t act like it.
• Want other advice than mine, then checkout this post from Guy Kawasaki… The guy is an authority on presentations. Don’t believe me, just watch the video below:

Here’s a little laundry list of issues I’ve got with Toyota, most of them personal experience:

• I was given weather proof mats with the purchase of my car, to be shipped to my address. Two years later, still no mats.
• A few months after making the purchase and at 11,000 miles (1,000 miles over the 10,000 mile new purchase full warrant), the front bumper came unhitched from the wheel well. Mind you, this is cosmetic, but I expected the company to fix it. They did not, and quoted me a $800 price tag. Needless to say, I’ve learned to deal with it.
• Servicing the vehicle with the dealership has historically been expensive. The first 30k miles brought on a a couple of $250+ routine services. Even the routine oil changes were expensive at $50+. Over the last six months, the price of an oil change has fallen to around $30, much closer to my expectations.
• My little tray in the console between the front seats is stuck and won’t open. Apparently, a card of some type fell behind the latch, so I can’t get it open. Mostly cosmetic, but still very annoying.
• The company has 12 vehicles listed with a recall. 12… Really? I think we can call that a systemic issue at this point.

It’s a little early to criticize the company for its handling of the issue. After all, lets be honest, this isn’t an exploding gas tank problem. According to statistics from the company, over 80% of Toyota’s vehicles are still on the road after 20 years. I couldn’t even find Toyota listed when I googled for top ten automobile recalls (here’s one example). At this point, my issues isn’t with the company having recalls. My issue is with how poorly the company is handling the recalls. Here’s how the company has responded:

• Running a weak commercial
• A Washington Post Op-Ed by Toyota’s president of Toyota Motor Corporation
• A USA Today Op-Ed by president and COO of Toyota Motor Sales
• Shutting down operations at two US plants

I know the company is strong in its corporate culture, and maybe in Japan the brand carries enough strength to inspire confidence with consumers. But here in the US, we want to see executives stepping up to plate and taking responsibility for the problems. Failure to do just that it was drove many of us away from our own domestic car companies

Ultimately, I think Toyota is (hopefully) taking the right operational steps… but they are failing miserably in the PR department. I’ve almost reached my breaking point, between hearing about a new recall every morning on CNBC to listening to the talking heads opine about the issue in the evening. The company has to step up and reassure me as an existing customer. For me, that means some level of personal communication. It also means making a vehicle at an affordable price point that dominates in the quality and performance categories. Oh, and sending me my floor mats.

Clash of the Titans–Yes, I know it’s a remake, but the original was a favorite growing up as a boy. I remember watching it on TNT when spending the night at my Granny’s house. I recently asked/forced my wife to watch it and she made it through the whole movie, which is an accomplishment for her. I’m really hopeful that the remake is going to do it justice, and I think the special effects technology has reached the point of really giving us some cool scenes.

The Rum Diary–Hunter S. Thompson is someone that I’m fascinated with. His writing, his political views, his musical taste… all of it. Jonny Depp playing Hunter is even better (he played him in the film version of “Fear and Loathing in Las Vegas,” also). This is one of Thompson earlier books, before he got REALLY into the psychedelic drugs. It’s actually enjoyable without making excuses for the incredible talent hidden in sloppy jargon and syntax.

Jonah Hex--Two beautiful ideas meshed into a glorious product–comic book and western–in this post-confederate graphic novel. To boot, Megan Fox plays the gunslinging harlett and John Malovich plays the bad guy. Take your wife to this movie and you’ll probably lose move picking rights for a month… but it would be worth it.

The Wolfman–Also made my list in 2009, but release of the movie was delayed. This may be the movie I’m most excited about for 2010.  It’s another remake, but it looks fantastic. And the casting is incredible–Anthony Hopkins and Benetio Del Toro.

Tron Legacy-Combined with Clash of the Titans, 2010 is the year of movies from my childhood. If only Cloak and Dagger would make a return, but alas… The trailer looks awesome and the casting is true to the original. Also, the story sounds like a good way to explain the 30 years between the first and second movie. My only question, why make us wait so long?

Shutter Island–It’s hard for me to admit this, because I think DiCaprio is over rated, but this movie looks phenomenal. And after The Departed, I’m willing to accept that I may be wrong about DiCaprio. Murder, mystery, and Scorsese sounds too good to be true.

Robin Hood–I loved the original one, even with it’s cheesy Bryan Adams theme song, but this remake looks equally amazing. The casting is fantastic with Russell Crowe as the lead and Siene Miller as Maid Marrian (with a lot less emphasis on the maid portion than we’re used to). I get the feeling this will be a blockbuster budget action movie that will blur over some of the finer political points of the Robin Hood story… but I expect it will be so good that I’ll maybe forgive it. Did I mention Ridley Scott directs?

Honorable Mention: Alice in Wonderland looks like it will be beautiful in that Tim Burton kind of way; Iron Man 2 because RDJ was awesome in the first one and its hard to screw up a super hero movie with that solid of a lead; Toy Story 3 because they are that good, even for a kids movie; Harry Potter Part I of the Last Book and, yes, I’m glad they broke it into two movies.

Unfortunately, I don’t earn my living thinking about UT football… so I need to get this off my brain so I can be productive. Here’s a download of some things going through my head:

Thoughts on Kiffin’s Exit:

• Let’s be honest… Kiffin’s career flourished at USC and his persona/identity is riddled with USC references (i.e. we adopted a “USC/West Coast” offense). I’d wager that inside his psyche, this was his dream job all along. The school has plenty of money, California loves big personalities, and he has a history with the school. I know its hard not to take it personal, but the guy made a career move. Ill timed and very inconsiderate, but he has wagered his entire career on making USC successful. He failed in the pros, he’s jumped ship on an SEC school after talking trash about most others, and now he’s inheriting a very bruised USC program. If he can’t make it work and quick, he will be reconciled to a tier 2 coach for the rest of his career. Particularly once his dad retires from football.
• I’ve supported Kiffin from the start, but let’s just be honest, the guy has a mouth on him. I grew up seeing Tennessee football and their coaches as classy and confident, not mouthy and arrogant. I’m not sure Kiffin ever fit the Tennessee culture, as much as we tried/pretended he did. Good riddance.
• While the fans are devastated by this, the real victims are the current players, including those enrolled for this season. They were sold loyalty, performance, and discipline from a team of coaches that turned on them in a moment of real need. We need leadership right now from the players. If they don’t step up, this team will have a very difficult time. We still have much of the same team that lost to the national champions by a blocked field goal… Much of that team is returning next year. I repeat, most of that team is returning next year.
• Recruiting is going to take a serious hit… Frankly, I don’t see anyway we hold together a recruiting class that makes it into the top 10. Fortunately, a couple of our large recruiting holes (i.e. quarterback) are “locked in” barring transfer restrictions from NCAA.
• The coaching cabinet is going to be cleared out… although I hope we hold on to some of them, specifically Lance Thompson and Kippy Brown (who has been named interim-head coach).
• I’m not one for taking pot shots at people in leadership positions, but from a business and competitive economics environment, what was Mike Hamilton thinking providing a $800k buyout for a young up-and-comer like Lane Kiffin. I don’t remember the link or the specifics, but I think we had a $4M buyout to fire him in his first year, but he could leave us for $800k. You know we were paying about 80% of competitive salaries in the SEC, so you know there was some flight risk involved. You’ve got to create more protection than that.

Now that I’ve got that off my chest, let’s talk about where we go from here:

• New head coach and recruiting coordinator… STAT! We need to analyze and make decisions on the current recruiting class. Now to be clear, I’m a big Kippy Brown fan and don’t mean to pass him up for head coach, but I’ve heard he isn’t interested. Some of the other coaches may be able to transition with a new coaching staff (can we keep lance Thompson, please?) and some of them need to find other homes. Either way, it needs to happen fast. As an aside, please stick with a pro-style or smash mount offensive strategy. Let’s not get gimmicky. Here are my three picks for head coach:
  • Will Muschamp–This guy is the heir apparent for Texas, so he won’t be cheap or easy to secure–he currently makes $900k + bonuses at Texas. The current coach, Mac Brown, has a contract through 2015, so maybe Muschacamp can be enticed away with an early opportunity to head coach. He’s a UGA graduate and worked at Auburn and LSU, so he knows the SEC. He’s currently the defensive guy at Texas, a school with a phenomenal recruiting and winning track record. He’s young and he’s fiery.
  • John Gruden–This guy is a little untested in SEC football, although he did work as a grad assistant at UT back in the mid-80’s. His recent stint as head coach of Tampa Bay brought a Super Bowl win and a couple of division titles, and he’s had mostly positive years. One thing that I think is a big selling point is that he has left a wake of successful assistant coaches during his time at Tampa, leading me to believe that he knows how to identity and develop talent– a critical skill for a college coach. His wife is a UT graduate and I’ve heard, although I can’t confirm, she was a cheerleader.
  • Kirby Smart– I know this is a LONG SHOT, but the current defensive coordinator at ‘Bama is a stud. He’s young, an awesome recruiter with experience all over the SEC, and worked Bama’s defense (with Saban, of course) into the monster that became the national champions. That defense destroyed Florida. I repeat, that defense destroyed Florida. He would be hard to get, seeing as he just turned down a lucrative offer from his alma-mater to be defensive coordinator at UGA, but the guys is a rising star. Also, making the career move from ‘Bama to the Vols would be a mini-version of Kiffin leaving for USC. All’s fair in love and war… and SEC football is war (thank you to my ‘Bama friends taking pot shots on my twitter and facebook accounts last night).

So, all is not lost Orange Nation. Maintain your composure, stay positive, and don’t riot on the campus (again). If you need a laugh, just remember that at least Lane Kiffin used a Trojan to screw Tennessee.

Back to work and… Go Vols!

So enjoy…

Unfortunately, members of his own party were not listening.  Or, maybe they were but they chose to disregard the president’s guidance. Yesterday, without a public hearing or committee vote, the Democratic controlled House of Representatives voted to raise the tax rate on carried interest paid to equity fund managers to 35% from 15%. This 133% increase was accomplished by reclassifying carried interest from a capital gain to ordinary income. That’s why today’s headlines should read “House of Representatives Loves High Unemployment, Punishes Job Creators.”

How Does Venture Capital Work?

While this bill applies to many investment groups—including broader private equity, real-estate partnerships, and oil-and-gas partnerships—my perspective is focused on the affect of small business growth resulting from venture capital investment. Venture capital is high risk portfolio style investing that utilizes equity and equity-like investment tools for the purposes of providing development and growth capital for start-up companies. Companies fitting this profile typically have a curve-jumping quality, focus on an underserved and growing market, and have all kinds of risk due to their infancy, sensitivity to the overall economy, and dynamic change factors. As a result, most venture investing is done with a portfolio approach and with a significant return-on-investment expectation.

Investment capital is typically raised from institutional partners such as endowments and pensions, with the occasional inclusion of a high net worth individual. These investment partners compensate a staff, led by fund managers, to manage the investment capital and the portfolio investment. This staff has two methods of compensation, through an annual management fee and with a carried interest bonus upon liquidation of the fund. The management fee goes to pay all expenses, including salaries of the fund, for the life of the fund—typically around 10 years. In my experience, staff members have lower salaries than they could find in other industries, with the majority of their compensation coming in the form of the carried interest bonus. For purposes of this conversation, these salaries are taxed as normal income.

Over ten years, the fund may invest in a handful of companies. Some of those companies may fail, some may break even, and a small number will make a significant return. At the end of the fund, the goal is to return all investment capital to the investment partners, plus the additional money made off the fund. A portion of this additional profit is set-aside as a carried interest bonus to the management team. Traditionally, this bonus has been taxed as a capital gain because of the nature of its source—the money comes from a successful investment and is not a guaranteed return. The money occurs after many years of tedious and patient management of investments.

Changing the tax structure on carried interest changes the economics of incentive for the people that work in venture capital. As financiers, we’re very sensitive to the idea that there is a cost to the capital we deploy. If we fail to meet that hurdle, our investors will look for other investment opportunities. Likewise, there is a cost to the time and resources we commit to managing that capital. If our compensation doesn’t justify the stress and commitment necessary, we’re likely look for alternatives. Ultimately, less potential carried interest return to the management team leads to increasing salary compensation, which results in less capital available for deployment. The other alternative is that we run the risk of venture capitalists seeking careers in other industries. While there are arguably too many funds active today, the mind set and culture of the venture capitalist is a rare animal. Run too many of them off, and you’ll find this to be an endangered species and industry.

Why Should I Care?

To put it bluntly, venture capital provides a unique and critical service to our economy—capital and guidance for start-up companies. According to U.S. Census Bureau data, companies less than 5 years old created nearly two-thirds of net new jobs in 2007. While not all of those companies were candidates for venture capital, a substantial number of them were rapidly growing businesses serving unique market needs. These companies often lack the assets or history to secure debt, making an equity investment like venture capital a lone source of financing. Without access to capital, those companies grow at much slower rates or even close down completely. Our small business economy isn’t a recent phenomenon; it’s been the staple of our economy for the past fifty years. The small business economy and innovation spurred companies like Microsoft, Apple, Oracle, and Amazon to name a few.

Tinkering with the economics of venture capital is playing a dangerous game.  While the short term intent may be to supplement incentives in other areas of the economy, the long-term effects may be regression of small business growth and capital deployment. Why punish a critical piece of the mechanism responsible for two-thirds of business growth?

I love to read. It’s probably no surprise that my job requires reading dozens of business plans, industry reports, market analysis, and other professional literature. I’ve almost always got a book or two by the bed, and I try to read for 30 minutes to an hour every night before going to sleep. The office closet in my house is packed full of boxed up books because we don’t have the book shelf space in the house (yet). My wish list for Santa this year (yes, I said Santa… got a problem with it?) includes Thunderstruck by Edward Larson, Dante Club by Matthew Pearl, and What Goth Hath Wrought by Daniel Walker Howe. I think you get the point… I love to read.

I stumbled across a list of 50 Books for Our Times from Newsweek. I’m not really a fan of most media outlets, and certainly not your watered-down-for-the-masses types, but my love for reading pulled me to this page. The number one book they recommended was a satirical novel from the 1870’s– The Way We Live Now by Anthony Trollope. I wasn’t familiar with the book or the author, so I did the normal thing. I googled it.

The book is written to capture the general dishonesty of British society during the Victorian-era. The reviews call it a satirical criticism of the commercial, moral, political, and intellectual dishonesty of the age. The more I read, the more I thought about current events. Do we live in an age of rampant dishonesty? I’m not sure, but I can say that I personally feel so disengaged because of the sheer complexity of things. From social to economic to environmental challenges, I’m having a difficult time discerning fact from fiction. Frankly, I feel that  so many issues are driven by disinformation, often in the form of hidden agendas or conspiracies. How do you take your news? Bias parading as fact? Or opinion-driven with a factual grounding? In the digital age, the exchange of information has increased, regardless of value or quality. It’s like the old saying that a lie makes it halfway around the world before the truth even gets its shoes on… Take national security, institutional religion, health care, global warming, the financial system, etc. You spend most of your time digging, looking for something that you can build on. In the end, you’ve got postulations, theories, and eloquent speeches… but do you really have substance? Or just some well constructed theory? So much of it is just smoke and mirrors.

Life deserves to be lived with a sense of honesty. Honesty comes from the truth. Truth comes from questioning.

With the Christmas season in full swing already (we’ve got a tree up and decorated, as well as decorations around the house and wreaths on the windows), I thought it was appropriate to take a moment and think about what Christmas is really about. I think Linus does it justice…

With all the craziness of this season, try to remember to take a few minutes and give thanks for the greatest gift ever–a Savior.

On deals (micro-economic):

• 2008 average investment per deal was $276,918
• Average number of investments was 6.3
• Average number of new investments was 3.7
• The largest identified sweet spot, with over 40% support, was between $250,000 and $500,000

On the investing (macro-economic):

• More than 2/3rds of respondents think current economic conditions will extended until 2010
• Uncertainty of the economy, a desire to preserve capital for follow-on investment, and loss of wealth were identified as the primary reasons for closing less deals
• 2009 will bring more quantity and quality deals for angels
• The current environment is providing more attractive (author’s note: and realistic) valuations
• Nearly 3/5ths of respondents expect the liquidity time line to be greater than five years
• Respondents expect to increase their co-investment with other angel groups, early-stage VCs, and individual angels
• Angels are increasing management activity and follow-on investing