Tech Talk: Entrepreneurial Ages and the Latest Investment Numbers

What is the age of the average entrepreneur? A few very public examples on the extreme might skew public opinion, but the research shows experience is prized over youth – no offense, of course, to the young entrepreneurs making a difference every day.

Here’s a brief summary from the State Science & Technology Institute (SSTI):

Age is a predictor of entrepreneurial success – and not in the ways that many might expect – according to a new National Bureau of Economic Research article. While the venture capital community and the media sensationalize young entrepreneurs like Mark Zuckerberg, the authors of Age and High-Growth Entrepreneurship – Pierre Azoulay, J. Daniel Kim, Benjamin Jones and Javier Miranda – find that older entrepreneurs have more success.

In their analysis of multiple administrative datasets, the authors discover that the average founder age of a technology start-up with more than one employee is nearly 42 years old, the average founder age of the highest growth technology start-ups is 45 years old and the average founder age of technology start-ups with successful exits is nearly 47 years old.

With similar findings across a variety of industries, geographies and other subcategories, the authors suggest that the coverage of the millennial tech-entrepreneur has been overblown. Moving forward, these conclusions may prompt changes in how the economic development community designs and implements programs supporting entrepreneurship.

SSTI also has a brief recap of the first-quarter venture capital report, in which Elevate Ventures earns a mention.

PitchBook and NVCA released the 2018 Q1 Venture Monitor this week, and the data show that 2017’s trends toward fewer, larger deals are only accelerating into the new year. First financings are over $5 million for the first time since Q3 of 2006, and the average angel and seed deals are at their largest sizes in at least a decade – largely due to investments under $1 million now accounting for just 39 percent of disclosed deals.

Publicly-supported investors are leading the way in 2018 investments, according to the report, with Innovation Works (13), Elevate Ventures (11) and TEDCO (4) noted for angel/seed investments and Ben Franklin Technology Partners (7) and Connecticut Innovations (6) on the list for most active early stage investors.

The report also indicates that while several notable IPOs have brought renewed attention to exits, the number of exits in 2018 is on pace to be slower than in 2017. Finally, the report’s data on funds closing in 2018 show that fundraising — particularly for funds over $50 million — is also occurring at a slower pace than in 2017.

Tech Talk: Special Locations; Special Outcomes

Yes, we understand technology allows business processes to take place today that were never possible before. Yes, we know that people – no doubt about it – are the most important asset in any organization.

But location still plays a factor. And location is a central theme to two recent EchoChamber conversations. The guests: Rich Carlton of Data Realty in South Bend (where tech is thriving on the site of the former auto manufacturing giant Studebaker) and John Hurley of SmartFile and the Union 525 (the scale-up home in Indianapolis that is becoming the centerpiece of innovation and activity).

A few nuggets from each are below. But we encourage you to check out their full conversations.

Carlton

  • Data Realty family of companies is making 40 million calculations a day on data coming in from around the world
  • Talent from Stanford, MIT, Carnegie-Mellon and more now calling South Bend region home
  • Goals include becoming the first company out of South Bend to be valued at $1 billion
  • “If South Bend was a stock, I’d be buying. We’re in the infancy of what we’re going to be able to do.”

Hurley

  • Celebrating its ninth anniversary – “we’re like a grandfather in tech” – SmartFile manages digital content to meet regulatory and compliance standards for 1,400 organizations in 80 countries
  • Hurley loves the “collisions” at Union 525 where “great risk takers and thinkers are all there creating a lot of energy”
  • He is now receiving near daily communication from venture capitalists looking at Indiana and the Midwest. Union 525 is a part of helping to make that happen
  • The next phases of tech development on the southern edge of Indianapolis’ downtown are being formulated

And be sure to check out this week’s new episode featuring Brian Schroeder of Eskenazi Health. The subject is wellness – utilizing workplace wellness as a business strategy and the idea that we can move from treating chronic disease with a pill to utilizing lifestyle medicine.

Subscribe to the EchoChamber via iTunes or wherever you get your podcasts to be sure not to miss out on future guests from the innovation, business, education and political worlds.

Developing the Entrepreneurial System – Here and There

ecosystem

A professor from the University of Michigan’s Ross School of Business is writing from his home state’s perspective, but sharing insights regarding Midwest entrepreneurial ecosystems and how they might differ from international efforts. He notes four key elements, including the always popular capital and worker skill aspects:

  1. The most important step is connecting with your customer

While understanding the basic fundamentals of cash flow and knowing how to manage a staff is important, businesses everywhere must put finding the customer first if they want to be successful. For Midwestern businesses, that might be a challenge for marketing. For startups in some developing economies, the search can be less abstract: Infrastructure challenges can make connecting with customers more difficult. For example, in Vietnam, the single biggest platform for ecommerce is Facebook — but in rural Morocco, a lack of infrastructure makes ecommerce virtually impossible. Interpersonal connections and marketplaces remain indispensable.

  1. Success begets success

In the United States, the story of every successful startup cluster begins with capital — and one of the best sources of capital is another company’s exit. We’ve also seen that for every $1 a Michigan startup receives from a Michigan VC firm, it attracts $4.61 of investment from outside of Michigan. Cash is the fertilizer, and the more of it in the environment, then the more likely the economy will grow.

This logic doesn’t always hold in developing economies, one of the hallmarks of which is no middle class and a huge income disparity. When wealth is created in these environments, there are many places that the money can be reinvested in besides another startup: to fund education, for example, or to buy more land. That being said, more wealth generated by new venture activity has the potential to lift the income threshold and lead to a more stable, flourishing economy. 

  1. Give your talent the fulfillment they need

A major challenge for small communities is talent, no matter where they are located. But talent isn’t just about having smart people — it’s about having people with the skills needed to build a business, and a community that can support them. In the Midwest, that talent gap often takes the form of local workers who are educated, well-trained, and experienced in running a business, but who might not choose to stay and work in their communities if there aren’t opportunities that appeal to them.

Robust entrepreneurial ecosystems with more activity have the potential to attract top talent away from more metropolitan areas. It can become a self-sustaining cycle once it gets going, but may take a significant event or local unicorn to get it kicked into action. In developing countries, that more often looks like workers who have limited skills, who need the determination and resources to invest in themselves — and who need an ecosystem that can provide them with that base.

  1. Take local differences into account

What works in Silicon Valley doesn’t always work in Chicago — and what works in Kosovo might not work in Vietnam. When it comes to translating what has worked in one place to another, the details become local, and critical. Some business climates trust banks and credit lines; others operate solely in cash. In some places, the local language is widely spoken; in others, that local language could be six different dialects. Just as the National Venture Capital Association has local chapters to better understand and focus on the small ecosystems being built all over the United States, context is everything for entrepreneurs looking to get off the ground no matter where they are.

While languages, customs, and currency differ from country to country, one thing doesn’t: When entrepreneurs and innovation win, it can lift the outlook of an entire economy. With the right resources and support, the Midwest has stepped up to create the jobs and standing it needs to survive in the modern economy — and developing ecosystems around the world are doing the same.

Tech Talk: Life After Unicorns

Editor’s note: Author Christian Beck is principal design partner at Innovatemap. This is excerpted from a more extensive post on “5 Trends Transforming the World of Venture Capital.” 

As a designer with no formal business training, I could be the last person qualified to write about the world of venture capital (VC). However, over the last several years of working with dozens of start-ups seeking seed funding and scale-ups pitching for Series A, I’ve taken it upon myself to learn the language.

To learn more about investing, I highly recommend Neil Murray’s newsletter, Series F. But for those start-ups trying to get a handle on macro-level trends in the world of VC, I am going to share how I see it from an outsider’s perspective.

One helpful piece of context is that my VC education is driven largely by witnessing first-hand how these firms work in the Midwest, contrasting with what I read from the SF-area firms. As with most things tech, Silicon Valley is the most mature market and often provides a glimpse of the future for other emerging markets. It’s also true that emerging markets can learn from the missteps of those pioneers and chart different paths.

I’ve been following a few trends in venture capital that I think are exciting and possibly transformative. One of those is zebras.

“Zebra” is a term created to contrast the unicorn, which has typically referred to companies valued at $1 billion or more. Zebras represent companies that are profitable, sustainable, and beneficial to society. As I’ve been digging into this trend, I can see the need to insert a new metaphor in the start-up world.

zebra

Unicorns are being chased at all costs, and it’s had a negative effect on entrepreneurs. What may start as an idealistic passion to change the world can easily get bastardized into chasing user acquisition, monthly recurring revenue (MRR) and hockey stick growth … at any cost.

At the heart of this is the notion that VC firms are chasing 10x returns. I’m no financial analyst, but that seems a bit like overkill. You might want to be Lebron, but if you could settle with playing in the NBA, you’d probably be just as happy.

And that’s what is really behind the Zebra trend: a reality check that every start-up doesn’t need to be a unicorn. Indie.vc proves this with a long list of companies they fund and other companies that have scaled based on revenue rather than funding (also note how simple their own web site is: the zebra mentality is carried through top to bottom).

It’s not that becoming a unicorn is inherently bad, but the mentality to get there can create a series of bad decisions that lead to failed products like the Juicero – a SaaS-based juice start-up – when simply making a better juicer would’ve been sufficient.

What it means for the Midwest

The Zebra trend is particularly relatable to Midwest tech hubs that are trying to evolve older industries like agriculture and manufacturing. Creating unicorns is less attractive than creating strong companies with the goal of establishing a healthy local economy. Pumping start-ups with cash in hopes of a 10x return may be fun in the short-term, but it doesn’t provide long-term stability and healthy growth.

Ultimately, tech products should solve problems, but businesses should help local economies. Nowhere is this more pronounced than the Rust Belt. Here, it’s less important to roll the dice on unicorns and more important to establish strong companies that strengthen local economies. As the Rust Belt continues to emerge as a key player in the tech industry, this trend will become the norm.

Takeaways for start-ups

Focus on jobs over profits: Maybe it’s just the Heartland in me, but I tend to believe that while tech companies can service customers around the world, they can still have a local impact. The Fortune 500 is full of companies that grew slowly, created long-term value for investors and provided amazing places to work. Tech doesn’t need to be different. SaaS products can still grow by focusing on employees as much as they do their profits.

Set realistic revenue targets: The path to healthy growth starts with realistic targets. Given enough time and creativity, every start-up can plot a path to unicorn-land and often VC’s may feel the same way. But setting realistic expectations early on will lead to better product decisions down the road. Ultimately, you may find that early on you might have more revenue-based growth opportunity than you realize and wait to take on more investment (if at all).

‘Please Mr. Postman’ Bring Me a New Wardrobe/Makeup/Pet Item/Toy

Delivery

The masses were familiar with hearing “Avon calling” at the doorstep in the 1950s and 1960s as employees of the skincare company went door-to-door offering samples and direct sales of makeup products.

Fast forward to today and the person bringing makeup samples, clothing, luxury products, wine and other items is the postal worker, delivering subscription boxes full of goodies.

The service gained popularity a few years ago with companies such as Birchbox, which delivers high-end skincare and makeup samples monthly for $10. Numerous other companies have followed suit with monthly subscriptions or on-demand services. The services run the gamut from specialty pet items to STEM-related toys for kids to disposable razors and meal kits, to name a few. (There are 2,500 companies that sell subscription boxes, according to a 2016 Bloomberg article).

But what are the benefits of these services, and are they sustainable business models?

We all probably have an anecdote about someone telling us about the service they subscribe to (I can think of two: one of my co-workers subscribes to monthly makeup samples through IPSY; another has tried Hello Fresh as an easy and quick way to get a foolproof homecooked meal on the table on busy evenings).

And I’m quick to recommend my own experience with personal styling company StitchFix. As someone who would never initiate or pay for a personal stylists’ services at a department store, I absolutely love being able to have the service delivered to my doorstep. Not one to follow fashion trends (and at 6-feet tall), the company sends me five pieces tailored to my size, shape and style preferences for a $20 styling fee. I keep what I want (the $20 comes off the top of the price of clothing) and send back the rest for free.

There are a few reasons these services are popular, one being they are personalized experiences with the convenience of not leaving your home. There’s also the anticipation factor – you don’t know what you’re going to get until you’re opening the box and pulling back tissue paper.

But can the practice sustain? Particularly as large companies begin to capitalize on the idea, can start-ups survive stiff competition?

This Forbes article gives a good in-depth look at growth in the industry, demographics of the targeted audiences and up-and-coming companies, as well as the major challengers getting into the subscription box game.

Scaling niche businesses is also a challenge. How do you keep the products personalized and quality high when you start marketing to a broader audience in order to grow? And with the highly-personalized nature of these services, can automation ever play a role in the manufacturing process?

Bloomberg recently focused on meal delivery company Blue Apron, which went public earlier this year. The article notes company shares have fallen by half in about two months’ time.

Five-year-old Blue Apron, which raised close to $200 million in venture capital before its IPO, has warned it may never be consistently profitable. And that isn’t just a Blue Apron problem: The business model for subscription boxes turns out to be much tougher than it sounds, because of the high costs of getting and keeping customers. “You’re coming into an area where margins have always been thin, which makes turning a profit a huge task,” says James Wester, an analyst at researcher IDC. “Just applying new technology on top of traditional industries doesn’t work.”

About 2,500 companies sell different kinds of subscription boxes in the U.S. alone, with the top handful generating nine-figure annual revenue. Profitability, however, is a different matter, and the past year has been littered with box companies that couldn’t work it out. The recently shuttered services have names like Treatsie (for high-end candy and other sweets), Fair Treasure (jewelry and other accessories), and Blush Box (beauty products, lingerie, and sex toys).

Now that Blue Apron has gone public, its numbers are more transparent than most. In pre-IPO filings, the company said it had spent an average of $94 in the past three years to acquire each subscriber, that each was paying an average of $236 a quarter for about 24 meals’ worth of preportioned ingredients, and that those numbers had dipped slightly since 2016. Counterintuitively, scale hurts subscription-­box makers, because getting big means they have to spend way more on marketing. (Blue Apron spent $144 million on marketing in 2016, a 182 percent increase from the year before.) Among subscription boxes in general, “the pricing is not smart given the price of acquisition being so high,” says Ross Blankenship, a venture capitalist at Angel Kings.

As with any relatively new service or company, only time will tell if this section of the retail industry can last. Until then, tell us about your experience (in the comments section) with subscription box services.

We’ve Got New BizVoice For You!

The September/October edition of BizVoice magazine is now live!

We’ve highlighted venture capital, banking/finance/investments and Indiana innovation. Our own Tom Schuman also followed Indiana Congressman Larry Bucshon (R-8th District) for a day in Washington D.C. Read his story and the rest of the new content in the online edition.

You can also subscribe to receive a hard copy every other month.

Tech Talk: Don’t Miss Out on inX3 Extravaganza

What is one of the biggest challenges for Indiana’s technology and innovation communities? Many would agree that it’s securing the needed venture capital to take promising start-ups to the next level.

What is a new event to try and overcome that hurdle? It’s inX3 and it’s coming in just two weeks – June 13-16.

inX3 stands for inspire, innovate and invest. Indiana’s leading tech organizations are coordinating a series of events that will bring together entrepreneurs, venture capitalists and investors. And most of the action takes place at The Union 525 space in downtown Indianapolis.

A special Almost Fail Entrepreneur Reception celebration kicks off the week, which concludes with the next in a series of Indy Civic Hack programs. The two middle days feature a variety of programs – Pitch Competition Finals, Invest Indiana Forum and much more – as well as an AT&T Street Party on June 14.

There’s something for everyone at inX3. Details are on the web site, with app updates available through iTunes and GooglePlay.

inX3 asks the simple question: Are you in? The answer should be equally clear: Y-E-S.

Many Tech, Entrepreneurship and Innovation Priorities Remain in Budget Bill

The House Republicans’ budget priorities were recently announced, as HB 1001 goes from the Governor’s initial budget priorities to more in-depth House consideration. The Chamber was glad to see several technology and innovation priorities in the bill including:

  • Makes the Venture Capital Tax Credit transferrable to people who don’t have Indiana tax liability. It also removes the 2021 expiration date of the tax credit, which helps enhance certainty
  • Several parts of the $1 billion over 10 years for innovation and entrepreneurship plan:
    • It caps the amount of the Next Level Trust Fund that can be invested in Indiana businesses to 50% of that $500 million fund. It still appoints a board of trustees to oversee the investment policy of the fund
    • Has $20 million over the two years for the Indiana Biosciences Research Institute
    • Due to budget pressure, it reduced the 21st Century Research and Development Fund by $10 million per year to $20 million per year
    • It allocates $1 million for the biennium for the Launch Indiana program

We expect many changes in HB 1001 as it advances through the legislature. The Chamber will continue to educate legislators on these important economic development priorities currently in the bill and why they need to remain.

VC Numbers Look Good in Q2

PricewaterhouseCoopers and the National Venture Capital Association are the leaders in surveying venture capital investment deals and statistics. And the State Science & Technology Institute is the best at putting the numbers in perspective.

Below is part of the analysis from a strong second quarter of this year. Also, SSTI has a spreadsheet that breaks down investments by quarter over the past six years.

In the second quarter (Q2) of 2013, venture investment totaled $6.7 billion over 913 deals, according to the quarterly survey by PricewaterhouseCoopers (PWC) and the National Venture Capital Association (NVCA). Compared to the first quarter of 2013, the amount of venture capital investment increased 12 percent and the number of deals increased 2 percent. Although still well below venture capital investment highs in 2007, Q2 2013 had the largest total amount of investment in a year.

In total, $12.6 billion in venture investments has been made in the first half of 2013 in 1,776 deals. This represents a 3.8 percent decrease in the investment amount compared to the first half of 2012, but a slight uptick, 4 percent, in the number of deals completed.

The software and biotechnology sectors were the largest two recipients of venture capital investments. The software industry received $2.1 billion in investments, although this was a 7 percent drop from the previous quarter. Biotechnology rose 41 percent in investments to $1.3 billion in 103 deals. Other sectors receiving large totals of investments were IT ($654 million) and medical devices ($543 million).

Clean technology, which includes a range of activities across sectors, captured $364 million in 43 deals. This is a 6 percent investment decline and 31 percent deal decline, and is the lowest level since the fourth quarter of 2006.

Breaking investments down into company stage, seed and early stage companies together accounted for 57 percent of deals made, while expansion stage companies had 23 percent and later stage companies had the remaining 20 percent. Early stage companies closed on $137 million in 37 deals in Q2, while early stage companies had their highest levels of investments in six quarters.

First-time financings were also up in Q2, raising 24 percent to $1.1 billion, a 10 percent increase from Q1. The first-time financings were 17 percent of total investment amounts and 33 percent of total investment deals in the quarter.

Compared to the rather pessimistic survey from the first quarter of this year, and despite a decline in clean technology investments, this Q2 report appears to offer some optimism, with more than half of the sectors surveyed increasing in investment dollars.  In addition, a 39 percent rise to $1.9 billion was invested in “internet-specific companies” in Q2, with five of the 10 largest rounds in the quarter in the internet-specific sector. This suggests venture capitalists are looking for investment possibilities in more flexible and nimble companies with less overhead and low-capital-intensive operations.

 

 

In the second quarter (Q2) of 2013, venture investment totaled $6.7 billion over 913 deals, according to the quarterly survey by PricewaterhouseCoopers (PWC) and the National Venture Capital Association (NVCA). Compared to the first quarter of 2013, the amount of venture capital investment increased 12 percent and the number of deals increased 2 percent. Although still well below venture capital investment highs in 2007, Q2 2013 had the largest total amount of investment in a year.

In total, $12.6 billion in venture investments has been made in the first half of 2013 in 1,776 deals. This represents a 3.8 percent decrease in the investment amount compared to the first half of 2012, but a slight uptick, 4 percent, in the number of deals completed.

The software and biotechnology sectors were the largest two recipients of venture capital investments. The software industry received $2.1 billion in investments, although this was a 7 percent drop from the previous quarter. Biotechnology rose 41 percent in investments to $1.3 billion in 103 deals. Other sectors receiving large totals of investments were IT ($654 million) and medical devices ($543 million).

Clean technology, which includes a range of activities across sectors, captured $364 million in 43 deals. This is a 6 percent investment decline and 31 percent deal decline, and is the lowest level since the fourth quarter of 2006.

Breaking investments down into company stage, seed and early stage companies together accounted for 57 percent of deals made, while expansion stage companies had 23 percent and later stage companies had the remaining 20 percent. Early stage companies closed on $137 million in 37 deals in Q2, while early stage companies had their highest levels of investments in six quarters.

First-time financings were also up in Q2, raising 24 percent to $1.1 billion, a 10 percent increase from Q1. The first-time financings were 17 percent of total investment amounts and 33 percent of total investment deals in the quarter.

Compared to the rather pessimistic survey from the first quarter of this year, and despite a decline in clean technology investments, this Q2 report appears to offer some optimism, with more than half of the sectors surveyed increasing in investment dollars.  In addition, a 39 percent rise to $1.9 billion was invested in “internet-specific companies” in Q2, with five of the 10 largest rounds in the quarter in the internet-specific sector. This suggests venture capitalists are looking for investment possibilities in more flexible and nimble companies with less overhead and low-capital-intensive operations.

 

Venture Dollars Up for Quarter, Down for Year

The optimist points to increased venture capital deals and dollar amounts in the second quarter of 2012 compared to the first three months of the year. The pessimist notes that both the second-quarter and first-half numbers for 2012 are lower than those figures in 2011.

The brief recap: January through June 2012 saw 1,707 deals worth $13.1 billion; for the same time period in 2011, it was 1,942 deals with a value of $14.7 billion.

Further numbers and analysis from one of the longest names/reports on record: The MoneyTree™ Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters.

The number of Early stage deals reached the highest quarterly total since Q1 2001, with $2.1 billion going into 410 deals, an 18 percent increase in dollars and a 28 percent increase in deals from the prior quarter. The Internet-specific sector also saw increases during the second quarter, rising 22 percent in dollars and 31 percent in deals from the prior quarter to $1.8 billion going into 261 deals in Q2.  The Life Sciences sector (Biotechnology and Medical Devices), however, experienced a decline in funding in the second quarter, dropping 9 percent in dollars and 6 percent in deals from the prior quarter to $1.4 billion going into 174 deals in Q2.

“The concentration of venture capital dollars in the hands of fewer firms will increasingly dictate the flow of investment,” said Mark Heesen, president of the NVCA. “Currently, this translates into more funding for IT start-ups and less capital available for life sciences and clean technology.  We hope to see this investment mix rebalance over time as the start-up ecosystem is better served with more diversity, not less.  Additionally, we continue to watch the early stage and first time financing numbers as they are critical to the U.S. innovation pipeline.  We are encouraged that these numbers were stronger this quarter and hope that this signals an ongoing commitment on behalf of venture firms to make these longer term, breakthrough investments.”

“If funding levels in the second half of the year remain consistent with the first half of the year, VC investing in 2012 will fall short of the nearly $30 billion invested in 2011 but will exceed the $23 billion invested in 2010,” remarked Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US.  “Software and Internet companies continue to be attractive industries for VCs since most of these companies tend to be capital efficient and don’t require large amounts of capital to operate.  VCs also find the potential for profitable liquidity events to be attractive for these companies.  On the contrary, given the regulatory challenges currently impacting the Life Sciences industry and the amount of capital required to fund these companies, it’s no surprise that investments in this industry have declined for the fourth consecutive quarter.”

The Software industry received the highest level of funding for all industries with $2.3 billion invested during the second quarter of 2012, which is the highest investment total for the sector since the second quarter of 2001.  This level of investment represents a 38 percent increase in dollars, compared to $1.7 billion invested in the first quarter.  The Software industry also had the most deals completed in Q2 with 290 rounds, which represents a 16 percent increase from the 251 rounds completed in the first quarter of 2012.

Life Sciences investing declined for the fourth consecutive quarter, most notably in the Biotechnology sector where $697 million went into 90 deals, representing the lowest quarterly total for the industry since the first quarter of 2003. 

Seed stage investments rose 33 percent in dollars and 15 percent in deals with $199 million invested into 63 deals in the second quarter. Early stage investments also rose, climbing 18 percent in dollars and 28 percent in deals with $2.1 billion going into 410 deals, the largest quarterly deal total since the first quarter of 2001.  

First-time financing (companies receiving venture capital for the first time) dollars increased 24 percent to $1.1 billion in Q2, and the number of deals rose 27 percent to 282 deals in the second quarter.