Gamblers not bankers 090711 finland

Bankers Versus GamblersThe Rise of Private Risk Capital

Steve Blank

www.steveblank.com

Twitter: sgblank

Slides: www.slideshare.net/sblank

The Rise of Risk CapitalFamily Money 1940’s - 1960’s

• J.H. Whitney– 1st family office 1946

• Laurance Rockefeller– Draper Gaither & Anderson (1st limited Partnership) 1958

– Spun out as Venrock in 1969• Bessemer

• East Coast focus• Wide variety of industries

The Rise of Risk Capital East Coast VC Experiments

• 1946 American Research & Development– George Doriot– Right idea, wrong model

(public VC firm)• 1963 Boston Capital

The Valley Attracts Financial AttentionThe 1st West Coast IPO’s

• 1956Varian

• 1957Hewlett Packard

• 1958Ampex

1950’s – 1968

Stanford Engineering School sets up a secret 800-person military weapons lab

1950’s – 1968

Stanford Engineering School sets up a secret 800-person military weapons lab

The Valley’s Entrepreneurial Culture comes from this lab

Stanford and the Cold War Silicon Valley’s 1st Wave

EntrepreneursWeaponsFinance

Crisis ProfitMotivation

24/7 UtilitiesPredictable

Economic System

Infrastructure StableLegal System

ResearchUniversities

Risk TakingCulture

EntrepreneurialOutward-Facing

Tech UniversitiesFree flow ofPeople/Info

Customer Development

Mgmt Tools Agile

Development

Business ModelDesign

Design Thinking

Soviet Union Launches Sputnik and the U.S. Venture Capital Industry

• Soviet satellite shocked the U.S.• Galvanized congress • New agencies/programs

– NASA– ARPA– National Defense Education Act– SBA SBIC Act

The Rise of Risk Capital SBIC Act of 1958

• Gov’t match of private investments 3:1 • 700 SBIC funds by 1965

– 75% of all VC funding in 1968, 7% in 1988• Corporate

– Bank of America - George Quist, Tom Clauson– Firemans Fund/American Express - Reid Dennis

• Private– 1959 Continental Capital - Frank Chambers– The Group; Bryan Edwards, McGanney– 1962 Pitch Johnson & Bill Draper – 1962 Sutter Hill

The Rise of Risk Capital SBIC Act of 1958

• 700 SBIC funds by 1965 – 75% of all VC funding in 1968, 7% in 1988

• Corporate– Bank of America - George Quist, Tom Clauson– Firemans Fund/American Express - Reid Dennis

• Private– 1959 Continental Capital - Frank Chambers– The Group; Bryan Edwards, McGanney– 1962 Pitch Johnson & Bill Draper – 1962 Sutter Hill

The Rise of Risk Capital “The Group” – the first Angels 1950’s

• First Bay Area “Angels” – Reid Dennis– William Bryan– William Edwards– William K. Bowes– Daniel McGanney

~ 10 deals $75 -$300K

Reid Dennis Remembers

• “The first 25 electronics companies required total capital of $300k each and private individuals formed the basis of the early syndicates”

• “….in 1975, prior to the relaxation of ERISA laws, the entire VC industry raised $10m”

The Rise of Venture Capital The Limited Partnership

• Raise money from pension funds, private universities, wealthy individuals – the limited partners

• Investment professionals manage the fund – the general partners i.e. the VC’s– Compensate the general partners via the “2 and 20”– 2% management fee, 20% carried interest (i.e. of the profits)

• Draper Gaither & Anderson 1958

• Rock and Davis 1961

• Sutter Hill 1964

• Patricof & Co. 1969

• Kleiner Perkins 1972

• Sequoia Capital 1972

The Rise of Risk Capital 1978/1979 - A Watershed

• Capital gains slashed (1978)– 49.5% to 28%

• Employee Retirement Income Security Act (1979) – Pension funds can invest

Electron-Based VC’s

Venture CapitalSilicon Valley’s 2nd Wave

EntrepreneursVentureFinance



Economic System



Risk TakingCulture




Mgmt Tools Agile

Development


Design Thinking

Life Science-Based VC’s

Lean Angels

Venture CapitalSilicon Valley Today



Economic System



Risk TakingCulture




Mgmt Tools Agile

Development


Design Thinking

AngelFinance

VentureFinance

Entrepreneurs

Finally

Observations From Abroad

Startups are Smaller Versions of Large Companies

#1

Startups are Smaller Versions of Large Companies

#1

×oops

A startup is all about focus and execution of the business plan

#2

A startup is all about focus and execution of the business plan

#2

No business plan survives first contact with customers✓

A startup is all about a great idea

#3

A startup is all about a great idea

#3

An A-team with a B-product always beats a B-team with an A-product✓

Companies execute business plans

Startups search for business models

#4



#3



#4

✓

A startup is a temporary organization designed to search

for a scalable and repeatable business model

#5

Startups need their own tools, different from those used

in existing companies

#6

Customer Development = process to search

Business Model Canvas is the Scorecard

Agile Engineering is How We Build Startups

#7

Customer Development =process to search

Business Model Canvas =the Scorecard

Agile Engineering is How We Build Startups

#8

• Research Labs

• Equipment

Manufacturers

• Distribution

Network

• Service Provide

rs

• Technology

Design• Marketin

g• Demo

and customer feedback

• Cost Reducti

on• Remov

e labor force pains

• Eliminate bio-waste hazard

s

• IP – Patents

• Video Classifier Files

• Robust Technol

ogy

• Farming conventi

ons.• Demo,

demo, and

demo!!• Proximit

y is paramou

nt

• Organic Farmers

• Weeding

Service Provider

s• Convent

ional Farmers

• Dealers• Direct

Service• Indirect

Service• … then

Dealers

• Asset Sale• Direct Service with

equipment rental• … then Asset Sale

Value-Driven

Valuations are Inflating at a Rapid PaceEarly and Late Stage

#9

Valuations are Inflating at a Rapid PaceEarly and Late Stage

The Game is On AgainGet In It!

#9

Summary

• Cold War started Silicon Valley entrepreneurial culture • Military was the key customer for Valley technologies

– Semiconductors, computers, Internet• Venture Capital enabled by government funded VC’s

– SBIC Program• Limited partnerships and Pension Funds made it scale

Gamblers not bankers 090711 finland

Education

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