Angels and VCs find Common Ground

A while back, we co-authored an article in the Venture Capital Journal with Knox Massey of the Angel Capital Association on the increasing cooperation between angels and VCs in the funding and development of innovative new companies. A copy of the text follows:

By David Spreng and Knox Massey, Venture Capital Journal

David Spreng is the Managing General Partner of Crescendo Ventures and a member of the NVCA Board of Directors. Knox Massey is the Executive Director of Atlanta Technology Angels and a member of the ACA Board of Directors.

The National Venture Capital Association and Angel Capital Association are committed to working together, say NVCA’s David Spreng and ACA’s Knox Massey.

It is said that during the Great Depression, wealthy individuals would swoop in and fund Broadway shows that might otherwise have not have opened, giving hope to actors and audiences at a difficult time in our nation’s history. They were coined “angels” and almost 80 years later these investors continue to give life to interesting projects and companies.

No longer focused on Broadway, today’s angels are leveraging their personal net worth to directly fund startups in the very same industries that venture capitalists embrace. One academic expert estimates that angels invested $25.6 billion in 251,000 mostly early stage deals in 2006.

Angel investors are also increasingly serving as trusted partners and helping to create new opportunities for the venture industry. Angels have funded startups that later became household names, often with venture backing for growth. Examples include Apple, Dell, Facebook, Google, Home Depot, Paypal, Starbucks and Yahoo.

Historically, the relationship between angels and venture capitalists has been an afterthought at best. Venture capitalists were often frustrated with non-standardized angel investment terms and what they would consider to be mixed advice to entrepreneurs that came along with an angel investment.

Likewise, angels often felt discounted both literally and figuratively by venture capitalists who seemed to lack an appreciation for the angel contribution. Yet, during the last decade, the sophistication of angels has increased overall and their ability to leverage their networks and organize into formal groups has caused the venture capital industry to stand up and take notice.

One of the more prevalent signs of sophistication is the growth of the Angel Capital Association(ACA) which currently has 140 angel groups, which in turn represent 6,000 accredited investors in North America. The group’s charter is to develop professional standards, share best practices and build relationships and collaboration between angel groups.

Recently the ACA conducted a survey of angel investors which supported the premise that venture capitalists and angel groups are forging new, complementary investment relationships. According to the survey of angel groups:

* 74% say relationships with venture capitalists had improved over the last three years.
* 80% report positive relationships with VCs in 2006 and 2007.
* More than 80% of angel groups focus on seed and early stage investment.
* Some VCs are angels themselves and 54% of the angel groups count VCs as members.
* The top industries targeted by angel groups are medical devices, software and biotechnology.

While both angel groups and VCs have issues to improve in our relationships and processes, establishing strong relationships with quality angel groups can be extremely valuable to a venture firm’s deal flow and ultimate returns.

At $250,000 to $1 million, the average size round for an angel group is often below what most venture capitalists would consider investing in a Series A round. However, respected angel groups may well have the next generation of promising early stage companies that a venture capitalist is not ready to invest in but also doesn’t want to lose track of.

The ACA and the NVCA are both committed to working together to improve the relationships between angel groups and venture capitalists by sharing best practices and enhancing communications between the two associations.

Transitions from angel groups to venture capitalists should be seamless and considered a valued relationship for all the stakeholders, including entrepreneurs, co-investors and limited partners. For venture firms that have yet to explore relationships with local angel organizations, a list of ACA members by region is available at www.angelcapitalassociation.org.

Feb 14, 2008

Patent Reform Act of 2007 Would Stifle Growth

     I am no expert on patent law, but I do know that the purpose of the patent system is to encourage the advancement of the state of technology.  Without patents, which grant special rights to inventors allowing them to benefit from their work, the incentive to innovate is diminished.  Weakening the value of a patent will reduce innovation, slow technological development and curtail economic growth.  Tragically, this would be the result if the Patent Reform Act of 2007 is passed into law as currently written. The Patent Fairness Coalition, which includes high-tech heavyweights Microsoft, Dell, Google, Oracle, and Hewlett Packard, seeks to reform the patent system to reduce their vulnerability to “patent trolls.”  Improving the patent system and curtailing trolls (def: http://en.wikipedia.org/wiki/Patent_troll) is a good and noble cause; but not at the peril of inventors and legitimate patent owners.   

     One area of particular concern is proposed changes to the way damages are apportioned.  As currently written in the bill, this language would change the way patent damages are calculated by limiting the discretion of judges in awarding damages to compensate patent holders whose patent rights are violated.  As crafted, these provisions would make it more difficult for patent holders to win an award based on the total market value of the product rather than the value of one individual patented component.   For example, the damage apportionment concept is particularly troubling to medical device companies whose discrete improvement to a product may shift the sale of the entire system to the inventor of that improvement.  Arbitrarily denying courts the ability to base computations on the entire market value of a product will lead to equally arbitrary results as judges grope for the hypothetical price of an unsold feature. 

     Another potentially problematic provision in the bill is “post grant opposition” where a new open-ended post-grant opposition system would allow challenges throughout the life of a patent, leaving uncertain the validity of intellectual property and thereby diminishing a young company’s ability to attract funding.    Looking forward, if Senate authors Leahy (D) and Hatch (R) are successful in achieving a compromise on remaining issues early in the year, it is likely that Majority Leader Reid will allow a Senate vote.  Since a similar bill was passed by the House in September, an affirmative vote in the Senate would almost certainly mean the bill would become law.  However, as more time goes by without an agreement the less likely any action will take place on patent reform because the 2008 elections make it more difficult to compromise on  legislative issues in Congress.  For more information about the issues involved, the players and their positions, the law firm Fish & Richardson provides an excellent background piece at http://www.fr.com/news/2007/Sept/Patent%20Reform%20Pres%20Sept%2007.pdf.  For an even deeper dive, check out Patently-O, a blog written by Professor Dennis Crouch of the University of Missouri School of Law (http://www.patentlyo.com/patent/2007/04/patent_reform_a_1.html).   

     The economic engine that drives America is innovation.  Providing legal protection to innovators is a fundamental tenet of our system.  Let’s not shoot ourselves in the foot while trying to kill a few trolls.  It is more important to protect the intellectual property rights of America’s inventors and small businesses than to save big business a few dollars in legal fees.  Don’t get me wrong, I am all for reducing wasteful and excessive IP litigation, but not at the expense of the inventor, innovation and economic growth. 

The University of Minnesota May Have Cracked the Code

     Nearly every research university is dissatisfied with its ability to commercialize its technological innovation.   And for good reason.  University based research in the United States may be this country’s most squandered resource.   U.S. domination in pure research rivals that of the military — each can be described as “the greatest force of its kind ever assembled”.  No country can come close to matching the United States here.  Our K-12 education may be a disaster but our colleges and universities are the best in the world.  Graduate students from all over the globe flock to America to study, innovate and invent at our Universities.  These immigrants and our own kids are prodigious producers of innovation, generating thousands and thousands of patentable ideas per year.  

     However, only a small number of these ideas leaves the university and finds its way to the marketplace.  Why is it that so much important innovation is stranded on campus?   This topic is complex and highly debated.  We often hear from practitioners that the problems lies in: 1) the lingering conflict between pure academic pursuit and capitalism; 2) poorly resourced university technology transfer offices; 3) a lack of “gap” funding to be used to prove a concept and extract the technology from the university; 4) inadequate start-up eco-system around the university; and 5) poor connections to the venture capital community.  Places like Stanford, MIT, and Berkley have done well, but many others have failed to reach their potential.  The University of Minnesota is a great example.  Among the most prolific patent producers in the world, the U of MN ranks #4 on Scientist Magazine’s list of “Patent Powerhouses” — behind only the University of California, the University of Texas and North Carolina State University.   Despite all this innovation, historically, the school has not seen its share of success.  There is no Google or Yahoo or Sun or Cisco (all based on technology developed at Stanford).  Not since the 1950s when Medtronic’s original pacemaker was invented based on work at the University of Minnesota has the school seen a blockbuster deal.  The world’s first web browser, Gopher, was invented here but was eclipsed by Mosaic (Netscape).  Sadly, the school has many other “woulda, coulda, and shoulda” projects that failed to achieve meaningful commercial success.   

     This may all be about to change.  Under the leadership of Doug Johnson, a former venture capitalist with Norwest, the University of Minnesota has developed a program that may have cracked the code on how to identify and extract disruptive innovation from a major research university and, importantly, how to ensure that its first steps outside the womb are successful.  Doug’s secret? — One that every VC should know – “it’s all about the people!”  Doug has recruited a stable of world class CEOs, all of whom have managed an early-stage technology company to a successful exit, to do the mining, filtering, extracting, and company formation work.  This program will succeed (where many before it have failed) because the likelihood of finding venture funding for a project when it comes with an experienced, proven executive, who has spent six to nine months researching the opportunity, is exponentially higher than if the same opportunity came “raw” (the way universities typically attempt to transition technology to the outside world).  Let’s face it; most VCs just are not organized to invest in raw technology.       However, combine highly innovative, patentable technology with a proven CEO who is passionate about the project and who will do the heavy lifting to extract the technology from the University and you’ve got a winner (at least in terms of getting an initial round of funding).  Based on early success, Doug plans to increase his current roster of “CEO’s in Residence” from three to six.  The Golden Gophers may not win the Big Ten in football any time soon, but Doug Johnson’s CEO-based innovation commercialization program may, in the near future, help the school achieve its ultra-aggressive goal to be one of the top three public research universities in the world in the next three years. 

Congress reneging, failing to fulfill promises of America COMPETES Act of 2007

Earlier this year the President signed the America COMPETES Act into law.  This is important legislation in the battle to remove obstacles to innovation advancement as it responds to the recommendations made in the National Academies’ “Rising Above the Gathering Storm” report, the Council on Competitiveness’ “Innovate America” report, and the NVCA’s MAGNET initiative.  The Act focuses on three primary areas 1) funding for R&D; 2) improving education in math, science, technology, and engineering; and 3) developing an innovation infrastructure.  Although the Act was made law with the President’s signature, Congress is still fighting over the annual budget and it is uncertain whether or not these critically important programs will get fully-funded as promised.  We need the folks in Congress to remember that this was bipartisan legislation with broad support, recognize that these programs are crucial to maintaining America’s innovation economy, do the right thing, and the appropriate the required funding.

The Layers of Innovation

Innovation occurs in garages, at universities, and in government labs.  The following Layers of Innovation outlines the various stages of advancement that innovation must achieve to realize it full potential: 

 

Note that we have excluded from our analysis and discussion innovation that occurs inside of Big Business – it’s not the purview of this site.