Something different today: Obama and the black athlete

I figured that this blog does not need to be about business or venture capital all the time. Hopefully people read this because they find some interest in what I'm saying. Yesterday I was catching up on some old Foneshows when I was driving (Foneshow really is, I believe, the ultimate commuting companion). One of my favorite commentators is Frank DeFord, who does a weekly program for NPR. One of the great things about Foneshow is that after you subscribe to a series, you call in and hear the most recent show in the series (like Frank's commentary from last week), then it will automatically cycle into the next most recent show that you have yet to hear. So on my way to Boston yesterday I was listening through some old shows and heard a great commentary from July 23, titled "Does Obama Owe A Debt To Blacks In Sports?" I've pasted the text below, but you can listen to it here and also sign up for the series at Foneshow here.

I've always been interested in race relations in this country and no matter what your political opinions, it's hard to argue that Obama's election as President is not an incredible marker for progress in this country. Watching Obama's victory speech at Hyde Park on Nov. 4 was a moving site for any person to see.

I also love Maine, but one issue I have is how white the state is. I worry a little bit about that with my kids -- growing up and not having a very multicultural experience. Sports is an area where I take solace in this concern in that I know my son looks up to people like David Ortiz and Jacoby Ellsbury. And he's also learned more about the history of race relations in this country by reading about baseball and Jackie Robinson. DeFord's commentary resonated to me in several ways, but when I view it through my kids eyes, I can very much see what DeFord says. Obviously this resonates through people of all ages, but I think this event will forever change the next generation in boundless ways. There are no glass ceilings any more with race. And any child growing up now of any color or socioeconomic background can look out and know that anything can be achieved.

Anyway, I thought this commentary by Frank DeFord on black athletes and Obama was very good and worth sharing.

Morning Edition, July 23, 2008 ·Obviously, there are so many factors that have been applied, incrementally, to bring us to a place where an African-American can be elected president. But I cannot help believing that the ubiquity and esteem of the black man in sport has played a significant part in this transformation of the body politic's thinking.

You see, the way the black athlete has evolved in the public mind has made him something of a precursor for African-Americans in other visible fields. Originally, in fact, blacks in sport were confined strictly to the arena. Many of the biggest stars — Jim Brown, Bill Russell, Muhammad Ali — seemed downright threatening.

Endorsements invariably went to lesser white athletes, for advertisers simply assumed that a product's association with even a noncontroversial black player must be off-putting to white consumers.

But, my — as well we know — how that changed. By the 1990s, Michael Jordan was accepted as the most prominent pitchman on the planet, and he has been primarily succeeded by Tiger Woods.

From a cultural point of view, this sea change in attitude in sport signaled that race did not constitute that much of a difference in public figures — which, ultimately, of course, leads us to Barack Obama.

Similarly, I've always felt that the recent ascendancy of black movie stars — notably Denzel Washington and Will Smith — can be largely accounted for by the prior acceptance of the black athlete.

Whereas Washington and Smith usually are viewed as the heirs to Sidney Poitier, he was really something of an anomaly, a distant one-off, separated by so many years.

But the celebrated African-American athletes were, in effect, leading men themselves, so an audience that grew up with the likes of Jordan and — just as important — all the black stars who were local heroes for hometown teams, could so much more easily accept the same sort of Hollywood crossover.

It's also true that just as the black superstar was, for so long, denied the chance to be a personality, so was the smart black player denied the opportunity to lead.

Now, we don't get the chance to see most decision-makers making decisions. But we can watch coaches and managers pulling strings on the sidelines. Surely it was most influential to be able to see black men dispensing judgment in those visible positions, and to see that black coaches were, as a group, just as smart — and just as dumb — as white coaches. Vivid equality.

Look, maybe Barack Obama would be the Democratic nominee if there had never been a Frank Robinson and a Michael Jordan and a Tony Dungy and a Derek Jeter. But I really don't think so.
I think the black athlete has, ultimately, made a deep, if subconscious, impression on whites. He's been heroic, of course. But beyond that, it's he who has had the chance to show whites that he can be congenial — "just folks," just like the white guy next door — and that he can demonstrably lead people, yea, even to championships.

This evolved comfort factor for fans must have eased the path for Obama, with voters.

As a closing fillip, it's always said that Obama is different from the African-American politicians who preceded him. I agree. He reminds me more of Arthur Ashe than anyone in his own business.

Q&A from "Ask the Expert"

Now I didn't call myself the expert, but I recently finished a month as a guest "Ask the Expert" for New Hampshire's Amoskeag Business Incubator’s “Ask the Expert” series.

First, I wrote an article about venture capital called "The Venture Caital Process: Pizza and Nanotech?" Then, a series of questions were submitted to me online during the month of October 2008. I thought I'd post the questions and answers below.

Question: I have read many different opinions from VCs and entrepreneurs regarding the importance of IP to a startup. I was curious what your opinion on the subject is. When you are looking at a startup for potential funding, do you have the expectation that at some point in the future that business will be issued patents? If so, is the future possession of IP a make or break deal? Clearly the importance of IP differs in different industries, but I wonder if you could still speak to the broad importance.

Answer: The importance of IP is business-dependent. The key question you are asking is about barriers to entry -- why will your team, technology and strategy win? As investors, can we become convinced of that?. When we look at a startup, we look at a variety of issues, including team, market, competition, IP and legal, among others. Team is by far the most important -- we, more than anything else, invest in people. Technology will change but we do not feel that we can so easily change people. But that said, IP -- or barriers to entry -- are important. We've invested in companies where patents were not yet issued, but we knew that we had a clear path towards patents and securing IP or another key market barrier for competitors existed. Without patents, the entrepreneur needs to provide other compelling barrier aspects to us such as the ability to build a strong customer base, with those customers becoming so entrenched with your product that you become "sticky" and extremely difficult to replace, etc... In the end, we need to know that you have the team, strategy and technology to win, so they are really all intertwined. But if the market is one such that the barrier to entry and customer switching costs are light without IP, then patents become more important and the lack of a clear path towards securing IP can actually break a deal.

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Question: What is the difference in the range of funds that an angel investor would invest in a business versus a venture capital firm?

Answer: I assume by this question you mean the amount of funds an angel investor would invest in a business vs. a venture capital investor - although you also might be asking how the range of businesses in which each invest might differ. As for amount of funds, angel investors (as individuals) typically invest anywhere from $15,000 to $500,000, with the average I've seen in New England typically in the $25,000-35,000 range. Obviously you would like angel investors with deeper pockets. When angels act as a group, the amounts can go from $50,000 to $500,000 - but getting "groups" to act and invest like "groups" is not as easy as it might seem. At the heart, angels are still individuals and decisions are made at the individual level. The most important thing you need to look at with venture funds as it relates to the amount they may invest is to look at the size of the fund. Take the size of the fund and divide it by 15 - that should get you somewhere around the "average" amount a fund might invest, over subsequent rounds, in any one business. Take it up/down by 25% to better see the range. So the size of the fund matters greatly for what a fund might invest. As to industry differences, venture investors won't touch real estate and tend to shy away from retail - anything with gross margins under 40-50% are virtually non-starters for a venture investor. While most angel investors also will stay away from such sectors, some may be willing to touch those areas if they have experience. Business model, margin, team and scalability matter most: you need sustainable gross margins in the 50%+ range, you need to be able to scale (make once, sell many times) and the team needs to be stellar.

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Question: If a firm is successful in obtaining venture capital funds, can you tell me how long the process typically takes from a first initial meeting to actually obtaining the funds?

Answer: With almost everything in life, there is no "typical" answer. We once did a deal from first meeting to close in six weeks and I never hope to repeat that again (and the opportunity was extraordinary and the timing paramount). For the other deals we have done, timing from first meeting to close has ranged from six months to two years. For a six-month close though, that meant that a term sheet was issued three months after the first meeting. When a company needs money, they should plan on anywhere from a six- to 12-month funding cycle.

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Question: I have never hit a point where I couldn't figure out my next step but I have reached this with a product I represent. The product is designed to plug a whole in a company's endpoint security that is often over looked. In a times when companies are downsizing creates the environment where protecting a company's information is the greatest. Visibility I believe is my greatest problem. How does a business incubator evaluate a product to determine the level of advertising investment needed to get a product off the ground?

Answer: It's near impossible to get to a right answer on this type of question.There's no particular metric or study that I'm aware of that points to a given return for a given level of spend in advertising. So, I wouldn't spend too much time looking for a reference point there for a couple reasons:Few private/angel/venture investors believe that any sort of broad-based advertising campaign is the right strategy to launch a new product, for a couple of reasons: 1) wrong tool -- to make a meaningful impact nationally, you'd need to spend far more money than investors will give you; given that advertising is hit or miss, major media campaigns not the best place to spend money, even if you could find the money to support it; 2) investors would prefer to see you test much more capital efficient methods of promotion -- e.g. narrow-casting your message to a discrete audience using less expensive forms of media (e.g. select a particular sector you think would respond to this product -- e.g. financial services, insurance--then do a discrete test to a sample of that industry by renting an email or snail mail list and send and email promotion or inexpensive print promotion (a small 3x5 post card) to trial the product. If you get some traction then you can show your results to an investor that might be open to funding the next stage of growth. PR is also a relatively inexpensive means of reaching audience. Write articles on your topic and see if you can get them printed by trade publications. Offer yourself as a speaker at relevant conferences. Use inexpensive means. But do NOT think about traditional media advertising as the way to get known. Better yet, hire or bring on your board someone with marketing expertise in this field.

The Economy and Venture Capital

One of the most frequent questions I get these days is "What does the current economic downturn mean for you and venture capital?"  It's still early to fully know the answer, but here are some thoughts.

1.  Good companies will continue to get funded.  This has two levels: (1) Great companies, technologies and ideas still come about during tough economic times -- and the best will find funding.  Pain killers and problem solvers find capital.  And (2), some longer-term macro demand trends are real and will sustain through this downturn such as the continued move to clean technologies and Healthy Living.  These are two real, longer-term trends and are a focus of Clear Venture Partners.    For example, even in the downturn, natural/organic products are still growing much faster than traditional products, but perhaps at a slower clip than pre-downturn.

2.  Venture funds have money to deploy.  Over the past few years, many new venture capital funds have raised capital -- and that capital must get deployed.   In most cases, LPs (investors in venture funds) have not backed out of their commitments to funds.  There are often harsh penalties for doing so.  Therefore, funds that were raised and intended to invest in 15-20 companies, still need to find those companies.  Your best bet when raising capital is to find funds that have had their initial closing within the past two or three years; those are the ones with the most capital left to deploy.  There was an article last week in the Wall Street Journal called "Venture Capitalists Get Creative" that made it seem as if venture funds in general were pulling back, but that article focused on funds that were closer to the end of their 10-year life cycle (venture funds exist for 10 years -- with the possibility of a one-to-two year extension), then cease to exist.  What the WSJ article really said was that funds closer to the end of their 10-year cycles were pulling back on commitments to existing companies (let the losers die sooner), shoring up their winners (feed them) and save money for fund management fees (gotta feed their own children too).

3.  Earlier-stage companies, in general, will have a tougher time raising capital.  The credit squeeze has forced a lot of mid-stage and later-stage companies that typically went to debt markets for lines of credit and other forms of debt are finding a less-receptive market. This is forcing those companies to look for equity instead.  While this is great for venture capital in general (better, later-stage companies to fund at attractive valuations given the increased demand), it also squeezes out earlier-stage, higher-risk companies.  That said, my point #1 still applies:  Good companies will continue to find funding, but perhaps at tougher valuations.  Attitudes and expectations will accordingly adjust.  As I've heard from investors lately, "flat (valuations) is the new up."

4.  Raising new venture funds will also become more difficult.  Institutional LPs to venture funds typically set aside a percentage of their overall asset value to deploy in alternative (venture/private equity) asset class.  As their public equity portfolio is now worth 50-70% of what is was this time last year, the 10% they had set aside for alternatives may still be 10%, but it's 10% of a much smaller number.  To catch up, some LPs may actually skip a year or two on new investments.  Others will ratchet down.  It's ironic that this is likely short-sighted thinking.  This may perhaps be one of the best times to deploy private capital.  Demand is high, quality is high, valuations are low...  My partner and I plan to be in the market in 2009 to begin to raise Clear Venture Partners.  Hopefully some potential LPs might be reading this post and thinking the same things...

5.  Angels investors will close their wallets.  Angels are fickle and idiosyncratic.  And raising money from angels can be like herding cats.  Well, the fat cats aren't as big as they recently were and are likely to see many of their early-stage investments die off, or get severely crammed down, in 2008/9.  I think many will simply stop investing for the near-term.  Time for friends and family, credit card debt, what's left of home equity...to get startups through the early phases.

6.  Time to tighten the belt for all.  Given the above, companies that have capital need to figure out how to make it last longer.  Sales cycles will grow, revenue will not be what projections said six months ago, M&A markets have/will slow down in the near-term...so you need to make your cash last longer and work smarter.  Time to cut salaries and take out your own trash.  Startups need to make sure they act and spend like startups.

While those are some quick thoughts from me, here are some thoughts from others:

Jason Mendelson has a good post called How Does the Market Craziness Affect Venture Capitalists and Startups?   There is also an excellent presentation from Sequoia Capital which attempts to put some historical perspective on the current situation.