ShaulaBlog - clear-eyed capitalism

An example of institutionalized discrimination

I’ve been re-evaluating how I run my family foundation and I recently re-read my foundation bylaws. In an effort to live up to my social justice mission, I’ve been working to involve community members and grantees in my granting decisions. One squidgy issue has been ethical concerns about having members of grantees actually on my board. Because board members are prohibited from benefiting personally from grant money, we need to draw careful policy lines about who votes on what to make sure that no one can be accused of directing dollars into their own pocket. This has always seemed like a perfectly rational ethical line, but it tends to reinforce the “have”/”have not” divide – the haves decide to how much and when to give to the have-nots. Letting the advisory board make recommendations with separate board approval is a reasonable way to handle this, unless you’re seeking actual empowerment. But empowerment potentially opens the door to corruption to have folks empowered to direct dollars to their own pet projects.

It was with some interest, however, that I noted a specific clause in my largely boilerplate bylaws that allows board members to earn consulting fees from the foundation for performing whatever work they might normally perform professionally. I suppose that means if one of my board members were a laywer, perhaps I’d want to just use them to draft an expenditure responsibility contract, because I already trust them and know them to be competent, since they’re on my board. The Robin Hood foundation was recently criticized for doing just this sort of thing: that financial advisors who were on the board were earning fees for managing funds where Robin Hood had invested. I thought that was unethical, an investing friend thought it would be fine but of course they should have waived their fees (but they didn’t). There was a mix of opinion in the news as to whether or not this was unethical, so we have a prevailing social norm that maybe directing business to yourself is merely being prudent, not corrupt. The Robin Hood foundation did change the investments, however.

The Robin Hood example leaves us with a choice on the ethics of paying fees to board members for additional services (a foundation expense), but the law is fairly clear that paying grant monies to a board member via employment at a grantee (a foundation grant) is not ethical. Yet I perceive the latter example to have more distance, and thus less self-interest in the payment. Most interesting to me is that both foundation expenses and foundation grants count equally to the foundation’s annual 5% payout for tax purposes.

So why is there a clause in my boilerplate bylaws explicitly endorsing one of these behaviors? I can only assume it’s historical, from a perspective that there are those who are experienced and knowledgeable and not in need of grants, who of course do lots of internal cross-business, and there are those who need charity, destined to remain excluded from decision-making power.

This to me is an excellent example of institutionalized discrimination (to be very technical and specific, classism). My institution, reasonably following the examples of what’s been done before, has embedded within it default language that reinforces imbalanced power structures. To not take advantage of that language based on prevailing social norms is a weak correction; a strong commitment to undoing the institutionalized discrimination of the past means I need to actively question default power distribution, discover the institutional props behind it, and change them so equity is not about a prevailing social mood, but institutional structure. In this case, changing the structure would mean at least deleting the endorsement of fees to board members from my bylaws.

The baby boomers can claim civil rights marches and anti Vietnam demonstrations. For Gen X to lay a claim to history worth keeping, we need to take those grand visions and institutionalize them.

Green for Who?

Today was the Stoel Rives Cleantech Forum, I saw it advertised in a recent PSBJ issue. As a private equity investor I was aware of the event, but I already had plans – I attended some events for local community leaders to hear Van Jones speak about the Green For All movement. The irony is that these two disconnected events - one focused on investors and business leaders, the other focused on nonprofit, community and philanthropic leaders, are actually both about our transition to a “green” economy. We are in a long term mega-trend of shifting from operating in a world where resources seem infinite and wilds are untamed, to a world where we’ve summited the highest peaks, mapped the bottoms of oceans and we now need to learn to respectfully manage the environmental resources we’ve mastered. Carbon trading, energy efficiency improvements, and new ways of doing things are where economic growth will come in the future, and where the good jobs will be.

The Cleantech Forum met to discuss investment possibilities to fund and grow the companies that will develop these new, more efficient ways of doing things. These new opportunities are entirely new industries and their next challenge down the road will be the lack of a trained workforce: workers who know how to work with solar panels, mechanics who understand alternative fuel vehicles, mariners who understand how to place a tidal turbine.

Van Jones’s particular genius is to recognize this period of structural economic shift as a new level playing field for workers – a genuine opportunity to bring in folks who have been left off the economic ladder by securing government funding for training and particularly targeting these left-behind groups. A targeted effort to retrain workers can help us strengthen our economy in the face of uncertainty, provide real opportunity and support these fledgling industries as well as their investors.

My interest in socially responsible investing is about bringing these two perspectives together and recognizing that the system is connected all the way through – the troubles low-income folks have getting good jobs are related to the troubles startup companies have securing the resources they need. These two events, in the same city at the same time, should really be in the same room rather than two different buildings and two different audiences.

I have heard Van speak before, but this time I heard an additional message - it’s not just about job training. We’ve got to work to bridge the class divide. In California they did a pilot project where they trained solar engineers. 21 made it through the strict program, zero got jobs, ultimately because of an inability of the largely white-middle class companies in the biz to relate to the working class folks of color enough to use their newly polished skills. Are there enough downsized college grads to fill these green-collar roles that we middle-class whites can shrug this off as “their problem”? There probably will be enough demand for workers that I can make a business case for learning to be better leaders and managers for working class folks. As I write it now, it’s apparent to me that “making a business case” simply means finding economic leverage. No wonder poverty has long been referred to as a cycle, if you have to have economic leverage to get economic access, how do you get out? I’m putting my leverage behind Green For All.

Social Entrepreneurship

The Social Edge is hosting a discussion on the meaning of Social Entrepreneurship. It inspired me to think about my own definition.

Stanford Social Innovation Review had an article attempting to define a Social Entrepreneurship recently. They focused on the technical definition of entrepreneur and my read of their assessment is that it’s someone who creates a change in activity patterns that sticks – people now buy a new product or use a new service in a way that sustains… at least for a while.

Harvard Professor Amar Bhide, in his book The Origin and Evolution of New Business, cites 4 roles played by Entrepreneurs: coordinator, innovator, arbitrageur, and holder of uncertainty.

To me, an entrepreneur is like a firestarter – they bring together various components and help connect them in a way that can keep working together even after the starter steps away. Like a fire, the original starter plays a critical role, but others are needed to sustain it. Unlike a fire, it takes an ability to tolerate ambiguity and uncertianty – you’re bringing together components that aren’t guaranteed to burn together under current conditions, though Bhide’s book suggests that 70% of the time you’ve got the courage to try because you’ve seen something like it before.

Now for the social part. I’ve been researching Fair Trade policies to understand how I might evaluate the social responsibility of a company, and I’ve come to understand that the additional payments are only one aspect of Fair Trade – what’s more important is the financial and technical assistance to help the co-op partners develop their productive capacity. It’s a purchaser-supplier relationship that actually strengthens the supplier, rather than draining them.

In operations class at the Bainbridge Graduate Institute Sustainable MBA program, we studied The Toyota Way, and how it’s about levelized production and efficient but non-draining use of resources. In reducing defects they work to build up their partners rather than secretly compete with partners while partnering. At BGI we also talk a great deal about stakeholders.

So when I pull all that together, I find that social entrepreneurship is about creatively creating self-sustaining enterprises that enrich all their stakeholders as well – investors, suppliers, customers, community and employees come out of their participation in the enterprise as better people and organizations themselves. By that definition, all enterprises will fall a little short – there will always be a difficult balance between the needs of various stakeholders, but the question is, I suppose, how disparately do they benefit? It would be good enough for me if at least some benefit and none suffer. The other trick – how do we measure or know? Given that enterprises do take risks and face unexpected events, what would make it social to me in the long term is that it does regularly measure and rebalance if events drift things out of line.

8/8/2007 - a week later I find an article where the authors seem to be saying a similar thing: that social enterprise is transformative for its stakeholders - though they’re coming from the “social enterprise”=”nonprofit earned income” side, whereas I’m more interested in purely earned income (so usually for-profit) models.

Lolita gets an iPhone

A week at the beach meant I finally had time to catch up on my fun reading. On my stack was “Reading Lolita in Tehran”. I didn’t really know what to expect, but I really enjoyed it, it was an interesting mix of literature class and Iranian cultural history. Professor Nafisi is a big Nabokov fan, because for her he captures some of the experience of totalitarianism. In Lolita, I now understand Lolita (whose real name in the book is Dolores which Nafisi points out is Spanish for ‘pain’) to be a study in having your identity obliterated by someone more powerful, that the protagonist, Humbert, cares more about his desire to possess a representation of Lolita, than who Dolores actually is. Nafisi finds parallels to her experience as a woman in Iran who grew up in relative freedom and then had a suffocating identity imposed upon her with the rise of Ayatollah Khomeini.

I feel my own parallel, but my modern Humbert is named Sprint. Doubtless there are those among you who will initially find it melodramatic to suggest that I am Lolita to my cell phone company’s Humbert, but I urge you to reconsider. Allow yourself to sink, for a moment, into the helpless rage you felt the last time you interacted with your mobile provider. Hearken for a moment to the sense of molestation you felt when they forced you to choose among undesirable evils as you sought to get some need addressed – and indeed, that’s part of what makes this metaphor so apropos – that dependency we’ve developed on mobile technology. You and I can no more walk away from our telecom providers than 12 year old Dolores could run away from Humbert once he had become her guardian. Admittedly we have a little more freedom, we could run from Humbert to Uncle Willy or Neighbor Craven Moorehead, but the market power of scale and the contract legal environment keep us relative children when it comes to negotiating for reasonable treatment.

I recently upgraded my Palm Treo, to a new model that hangs for 6-8 seconds at the end of every call, reboots at least 3 times a week and while it turns on instantly, just as I’ve started to interact it remembers it has a lock-out feature to prevent pocket calls. The sync is much faster, and it seems like it should be better, but these rough edges have so constantly sanded me that I’m ready to stomp the thing into smithereens. The feeling of those raw places, as well as the supreme irritation of being forced to accept a 2 year contract to make the slightest change to my phone plan despite having been with my phone company for over 4 years at this point, built tension during the 2 hour wait keeping My Beloved company in the Apple Store line. Watching the crowds cheering the victorious purchasers with their beautiful black bags with brightly colored icons, I felt a glimmer of wishful hope, and thus when we reached the head of the line I took him by the hand and said “I’m in”. Now as I wait for activation, I look forward to switching to different sync software after 10 years of being restricted to 15 categories (ye gods, it really has been that long!) I marvel at the wonder of being able to use a single set of headphones for both making phone calls and listening to audio (currently, I have to have two distinct sets, both in little bags in my purse). I know in my heart that sooner or later AT&T will provide me opportunities to work on my meditation practice, but it feels like an afternoon of glorious sunshine to enjoy my window of wishful hope.

If we have to so disconnect from our sense of fairness and justice to cope with everyday experiences like getting telecom service, how will we ever address poverty or homelessness?

Workin’ on the Cramdown

From vcexperts.com: “Wash-Out Round: A financing round whereby previous investors, the founders, and management suffer significant dilution. Usually as a result of a washout round, the new investor gains majority ownership and control of the company. Also known as burn-out or cram-down rounds.”

At the CDVCA conference in DC in March, a VC made the ear-catching comment that “Angels get crammed down because they overpay.” After watching several Bay Area Angels grit their teeth as they referenced dot-com era cramdowns in the Kauffman seminar I took last year, this was definitely the other side of the coin. I definitely believe there are abuses on both sides of the investor-entrepreneur relationship, so it was interesting to be thinking about the Angel/VC relationship.

Do Angels overpay? A mentor suggested to me early on that the first round is the worst round, it’s the last round that gets the best deal. That runs counter to expectations, but makes sense if the company lives out a story like: 1) entrepreneurs, out of optimism or desperation to attract investor attention, set ambitious projections. 2) when you don’t meet your projections, you can find yourself in difficult financial straits, thus giving leverage to your next negotiating partner. 3) if you’re not making your projections, you’re not worth the valuation that took them into account. Thus, a down round.

However initial valuation is derived, it becomes a key point when negotiating the next round. According to a 2005 survey done by Tony Stanco and Uto Akah at The George Washington University [about 5 miles from my childhood home –sm] “The number one reason for making angel portfolio companies unattractive to VCs is the fact that angels tend to give start-ups overly high, unrealistic valuations.” (p 11.) according to this survey, VCs think angels need more work on valuation skills. This seems to be the case in the social enterprise markets as well. Cathy Clark and Selen Ucak write in their report on the market experience of Social Entrepreneurs that some feel like the funding markets are not rational. “Potential investors do not know how to evaluate our market or viability.”

So why not? I think its in part because Angels are at a serious resource disadvantage. As single investors without back offices we don’t have access to deal databases and can only read so many PE newsletters. In my observation, particularly since most exits these days seem to be via acquisition, estimating a value means knowing the current M&A market. The only way an Angel can be that informed is to hug close to a single industry, ideally the industry they made their money in and theoretically have an information advantage from their experience. Another key factor in valuation is simply negotiating leverage. If you’re a VC and can offer to fund ¾ of their current raise, you have much more leverage than a group of angels suggesting they’ll band together to cover 1/4, which is much more of the world I see outside the core VC money centers. A single VC is also much better positioned to apply that leverage as a focused negotiating party, as opposed to angel groups worried about fiduciary responsibility and being very hands-off in helping angel investors organize. To be thorough, we could also accuse Angels of not thinking too hard about future funding rounds. In order to do multiple rounds of funding with any kind of markup and end up at a valuation that’s realistic on the last round, that first round has got to be pretty low. We can put that blame on the entrepreneur as well.

However, surf any number of VC blogs and deal-pricing is inevitably referred to as an art. Let’s face it, we’re trying to predict the future value of something in the face of a great deal of risk – this is all about risk capital, right? In my mind, its all about negotiation, and if Angels are getting regularly crammed down to support VC profits that says as much to me about relative leverage as relative smarts. That said, I’m way more wary about high valuation. This is also changing in the world of SOX – the feds are getting more stringent about how assets are marked to market value and this may drive more standards in valuation and use of professional appraisers– but primarily in the professionalized VC leagues. The amateur angel leagues are still likely to wing it, which leaves us vulnerable to cram-down between our lower negotiating leverage and our less well priced first round, which I will contend is part of the higher risk of the early stage.

What to do? The National Association of Seed and Venture Funds (NASVF ) recommends doing convertible debt rounds for early rounds. That helps postpone the valuation negotiation until a later round when there will a) be more information and b) you’ll be side-by-side with those bigger, more experienced institutional players and get their same valuation. The next question with this route is how those seed round investors get compensated for their early risk. One common strategy is to convert into the next round at some discount to the round: IE if it’s $1/share you buy in at 85 cents. Or you accrue interest at some rate that allows the discount for the next round to adjust based on how long it takes. Or you get warrants of common stock for investing in the debt round. Does that help? Some. I’m seeing many deals go through more than one round of all-angel, so we build up a bigger pile of low-leverage, poorly organized investors before we get to the big guns.

Net, I do think companies frequently come to Angels with excessively high valuations, and Angels in the capital hinterlands are less well-equipped to negotiate those down. We need to develop more experience with valuation and perhaps appraisers, and figure out how to better negotiate as groups, and after the dot-com boom and bust hopefully we’re in an evolutionary stage where VCs and Angels are learning to play better together.

A bit more hot air

A followup to my energy post on the long-term future of windfarms:

My burning question about wind is: if climate change can impact the weather so much, and change the life-sustaining ocean conveyor belt, then can’t it affect wind patterns? so what’s the point of doing 1-3 years of wind studies to site a turbine farm if the wind might change?

I posed this question to a fellow student at the last BGI intensive, and he suggested that what shapes the wind is the ground shape, and that’s not likely to change. So I finally did a little websurfing.

I found a blog (I can’t tell who they are, but they’re really into renewable energy.) talking about how wind energy is really another version of solar energy (wait… familiar.. that was in our book!)

“All the mountains, oceans, valleys and whatnot effect the way the wind goes, but for the most part these large scale patterns develop and stay pretty consistent. You have to remember that wind patterns are driven by the difference in temperature between different parts of the earth, the temperature difference between the surface of the earth and space, and the turning of the earth. It can get complicated fast. ” ok, we’re validating my friend’s thinking…

“So how does global warming figure into this? Global warming is causing a lot of the parts of the earth to get warmer. The poles are warming very fast, as are the oceans. So that means that places that used to be cold are now getting hot. So in some cases global warming is making wind patterns weaker. Because the difference in temperature is less the wind will blow less.” Aha, so there is an effect. The blog goes on to talk about that impact on moisture distribution and how unpleasant that can be.

This NOAA site gets into how wind currents are created by the combination of high-pressure nodes, low-pressure nodes and the earth’s rotation. the high/low pressure areas are caused by humid air moving around (warming, rising, cooling, falling) which is again, something that is being changed by climate change, but this also seems like it would impact strength more than direction.

Last May an NOAA scientist named Gabriel Vecchi published a paper suggesting that global winds across the pacific have slowed 3.5% since the mid 1800s and will likely weaken another 10% by the end of this century.

Since the life expectancy of a wind-farm is far short of 100 years (more like 25), that’s not too concerning. So I guess that’s my conclusion: climate change (unchecked) *will* impact wind strength, if not patterns, but not within the lifetime of any windfarms we’re building now.

Just Business

Yes, I’ve been non-posting, as an admirably prolific (and worth reading) friend prodded me today. Time to lower my standards and share some of the memes flying by.

Today I told a friend the story – as I have heard it retold – of how Muhummad Yunus started Grameen Bank. I’ve just started reading his book (Banker to the Poor), so from his pen I know that he was teaching economics when famine hit Bangladesh and he decided that he needed to ditch the fancy book learning and get out in the field to see what was really going on in the world. Presumably, in a chapter or two I’ll hit The Story. The retelling is that he goes into the village and observes a woman making stools from something like bamboo. He asks her how much she makes a day and it’s pennies. Turns out she has to borrow capital from the local moneylender to buy supplies, and he lends her the capital on the condition that she re-sell him the finished stools at a fixed price. A price which he sets, low and behold, and only pennies above her costs. Yunus asks her if she could make more selling the stools elsewhere and she says she can, but she’s trapped in this loop. He does a survey of the village and discovers he can free several folks from such bondage for less than $50, which he decides to just lend out of his own pocket. I would prefer to do my readers the service of verifying this is actually his story, but it’s close enough for the purpose of this post which is not so much about his story but my friend’s response, which was: “He’s lucky the moneylender didn’t break his leg!”

Not something that came up at the series of micro credit events I attended recently, but a pretty interesting commentary on the difference between doing business here and doing business in a little village. As civilized as we may like to think the U.S. is, an aggressive countermove from the competition would likely have snuffed such a budding enterprise here. I was immediately reminded of comments by friends in the biodiesel industry about how the collection of waste oil is aggressively competitive. Waste management contracts are apparently fairly lucrative and therefore highly defended which in some cases includes physical intimidation. Some newer waste oil collection companies have had problems with their cans being dumped and run-over and flattened.

At the much more common, legal level, my spouse and I a couple years got to observe one company essentially snuff another with a nuisance lawsuit. (I’m surprised I haven’t already told that story, but I don’t see it in my blog.) Sure the instigator lost eventually, but in the meantime they had used their superior financial resources to drain and distract the market leader while they caught up and innovated ahead. Since this was a situation where network effects kicked in, company 2 moved into number 1 and was able to strengthen that position. Once strong enough, they used their market power to put the squeeze on all the participating suppliers. As a supplier, we were frustrated, but pretty helpless because on the Internet it’s all about ability to draw traffic, you need those intermediaries who can act as congregation points. Money as Power is really a problem of capital markets – you need to aggregate capital so you have power so your capital (and thus your investors) can ensure favorable treatment and a better return, but not many folks make it to be big and still play nice. Seems like folks get burned so much on the way there that any intentions for good are gone. I have another blog on this topic that I’ve held back because it’s depressing, but I’ll post it this week.

On a related front of why we don’t get more socially responsible business here, I had the honor of meeting David Green at a recent BGI session. He’s an Ashoka Fellow and successful practitioner of “compassionate capitalism”. He helped establish a self-funded non-profit in India that does cataract surgery, revolutionized the supply chain for the needed lenses, and is now working on doing something similar with hearing aids. He commented that it would be difficult to set up such a company in the U.S. because non-profits quickly run into tax issues with unrelated business income, and if that doesn’t happen they’re likely to get sued for unfair competition by their for-profit counterparts. That’s assuming he could successfully grow the business on its own revenue. From other enterprises I’ve seen that the reason to start out as non-profit is because it is possible to get startup capital as grants. It’s when you have some revenue and need expansion capital that grants dry up.

The challenge of finding growth capital for successful earned-revenue social-service organizations is a topic discussed by Jed Emerson, Tim Freundlich and Jim Fruchterman in their paper “Nothing Ventured, Nothing Gained” about gaps in the capital markets for social enterprise. Tim has co-founded a company to try to address those gaps, called Good Capital that will work to fund socially-rewarding revenue-generating enterprise across for-profit and non-profit, while generating a return on capital. I will be working there this summer: mid-June to the end of September. I look forward to learning and sharing some more rays of hope.

Energy Insights

This quarter at BGI our one varying elective is a class on energy systems. I assumed it would be a study on renewable energy and certainly it is, but what I’m learning most so far is what a tiny fraction of global energy is provided by renewables now, and how little that’s expected to change.

So where’s the juice? Well, our most abundant energy supply is indeed The Sun. It’s collection, conversion, storage and distribution that stump us. For other energy sources, location, extraction, transportation and use also come into play. Solar energy is what gives us tidal energy and wind energy. Old solar energy is what gives us fossil fuels.

In looking at fossil fuels, many assessments of sources focus on a Reserve/Production ratio which gives a sense of how much of the source is left. Our book (Energy Studies by Shepherd & Shepherd), published in 2003, sums up that we have about 40 years of oil left, planet-wide. What we do have lots of, to my surprise, is coal. Coal is likely to last us another 200 years, and is widely available geographically. Over the last 30 years many countries (like the UK) have shifted from coal to natural gas because of pollution issues. Coal is what generates acid rain and international disputes because the rain rarely falls where the pollution is generated. Coal plant technology has improved over that time: smokestacks now include limestone “scrubbers” that interact with Sulfur Oxide and keep it out of the air, but it’s still one of our most polluting energy sources (depending on how you want to stack it up against nuclear waste). Thus the emerging “clean coal” industry, trying to figure out how we can hang on to this abundant energy supply w/o poisoning ourselves or compromising so much of our planet’s surface getting at it.

Most electricity is generated from coal-fired plants, which generate anywhere from 200 MhW to 500 MhW. In the US 2004 about half our power was generated that way. The other half was natural gas and nuclear about equally, then hydro at about half of those. “Other Renewables”, listed as “Wood, black liquor, other wood waste, biogenic municipal solid waste, landfill gas, sludge waste, agriculture byproducts, other biomass, geothermal, solar thermal, photovoltaic energy and wind” accounted for just 2% of the total US electricity generation. That’s a bit of an eye-opener for someone who lives in Eco-topia, aka The Pacific Northwest. My local utility, Puget Sound Energy (PSE) gets 42% of its energy from Hydro, and is about to go after Wind in a big way. I suppose I shouldn’t be that surprised, I’ve watched Kilowatt Ours – a documentary about the coal industry and electricity use in the southeast US.

That movie and our textbook emphasize another oft-under-mentioned energy source: conservation. We live in an infrastructure that was built on an assumption of energy abundance, as capital investments depreciate there are many improvements to be made, but the kicker is we’re waiting for the depreciation to do it. I’m personally due – we’re about to replace our 10+ yr old clothes washer. Friends said they were able to drop from 16 gallons of water/load to about 2.5, and drying is shorter now because the clothes aren’t as wet when they come out of the washer. PSE includes conservation in their energy planning.

As an investor, wind gets a lot of air, but I’m getting skeptical. A guest speaker at BGI asserted that most of the good wind sites are now taken, though a Canadian student begged to differ, there are some good sites on Vancouver Island that need to overcome political resistance. Like the highly contested Cape Wind project off the coast of Massachusetts. I’ve also heard rumors that all the commercial wind turbines expected to be produced in the next 5-7 years are spoken for, and it will take time to build new plant capacity. My biggest concern about wind came up when I learned that consultants usually do multiple years of wind studies on a site before deciding where to put turbines. How fixed are wind patterns in an era of climate change? I’ve seen one new innovation that seemed to have potential – a company working to actually store wind power. Currently the biggest recognized drawback to wind is availability – you get power when you get it, not necessarily when you want it. Folks talk about “backing” wind power with something more on-demand like hydro. You can’t go “all wind”, you need the on-demand power source to fill the gaps and meet demand. If this company figures out how to store it, that will be a big boost for the industry, assuming I’m wrong about climate change and wind patterns. I’m the only one who seems to worry about it, but I was also the only one in high school physics who decided that if moving electricity creates a magnetic field, and changing magnetic fields can generate a current, maybe we should think harder about electric blankets.

Why a Blog?

Why did I start a blog? As someone coming out of high tech, there’s an element of feeling that if I don’t exist in cyberspace, I don’t exist. As someone who believes we have an economy and social system with some growing problems, I’m choosing Voice over Exit. In my journey to figure out what’s wrong and how do we fix it, this blog helps me in three key ways:

1) clarifying my own thinking I can write all the rants I want in my journal, but posting it where someone might actually read it requires I work to construct balanced arguments and think through potential criticisms.
2) building relationships I’m seeking fellow travelers. Having a blog accelerates that process – if you have no interest in what I’m talking about or think I’m fringe, then let’s not waste our time. If you have a suggestion for me on something else I should read or someone I should talk to: email me! Do you have a response – email me! If something I’ve written seems inaccurate or inappropriate, email me! I’m betting you have my address because that’s the only way I advertise this blog – in my email signature, so people can quickly figure out who I am, what I’m about and whether or not we should come together. I have comments turned off because the only comments I ever got were from spammers saying “nice post! Check out my site at www.BuyMyThing.com” or some such and I got tired of deleting them.
3) Marking progress & holding integrity I’m working and thinking hard but sometimes it can feel like I’m not getting anywhere. The blog is a way of keeping me on track – each post codifies an understanding I’ve come to. Making publicly-findable (if you’re looking) statements about what I really believe it keeps me from muting what I really think so someone with money or connections will accept me. It helps me stay authentic. Though I’m ashamed to admit I don’t write as much about my social justice thinkings as I would like because it does feel too fringe for the capital market focus I’ve taken. Perhaps I’ll work on that.

Bottom Line: this blog about my own thinking. As you might hope or expect, I allow my thinking to be influenced by the thinking, public speaking & writing of others. If it leads me to new (at least to me) insight, I will write about the insight, and where it came from. I try to balance appropriate attribution to others with respect for confidentiality. It is not my goal to be a reporter or columnist: I make no effort to publish on a regular schedule, I don’t publish everything I write, and I don’t advertise for readership. I’m not interested in gossip or name-dropping, I do not make any money off this blog (-yet, I’m thinking as a good business person I should add an Amazon affiliate page with my own book recommendations, but that would assume I get enough readers to bother) and I choose all the content myself.

Competitive Investing

What did I do for my spring break? Attend a conference on community development venture capital, participate in a student competition, and help out at a conference on business incubation. A veritable mini-quarter!

The Sustainable Venture Capital Investment Competition was intensely fun. It was so satisfying to do due diligence in a compressed period with a team of committed partners. We pulled an actual all-nighter. Literally we went back to the hotel at 8 am and I slept for 1 hour before getting back up to be back at the competition by noon. Besides that, it was a little unlike real life in that we reviewed business plans first, did research, then saw the pitch and then later had 15 minutes with the Entrepreneur. I’ve raised the issue with my angel groups that I’d like to see business plans before I see entrepreneurs, so I can actually ask intelligent questions when I see them. However that’s not the way it’s done, in part because angel groups need investors in the room to make it worth the entrepreneur’s while, and so if it’s not a surprise, investors might decide not to show up.

I’ve also learned in the last couple weeks that by far a VCs most valuable and constricted resource is time. It makes sense that the most effective use of time is to screen pitches, and then get into the business plan of those that pique interest off the pitch, and then meet with the entrepreneur for deep Q&A. That’s the argument for why VCs ask for no-shop agreements – because they can’t afford to invest the due-diligence time and have a good investment get a competing offer.

There were eight teams (Berkeley, Michigan, Duke, Harvard, Wharton, UNC, somebody else traditional, and us). Michigan won Entrepreneur’s Choice, I think Wharton and Berkeley won. It was a little confusing because they give us all fake team names to hide the school identities from the judges. Given that, well, one of these schools is not like the others, it’s a little flattering that the organizer commented that when the judges were trying to guess which team was from which school they did a pretty poor job. After winners were announced they had an excellent setup where we rotated from judge to judge for specific feedback. Our major fall-downs: we failed to game the rules correctly – the judges were to grade us on team work - we chose to have a single (rotating) leader for each session, but each session had different judges, so to each set of judges we seemed to have one dominant member and little team interaction. So it’s a learning for us about this competition.

The second failing was in working to build rapport with the entrepreneur. That I chalk up to genuine learning – we had four sessions and in each session we steadily moved the valuation questions closer to the end of our 15 minute sessions and I think we really improved just over the day. It’s also a pitfall from my angel experience where entrepreneurs often walk into the room with a term sheet drafted, and I’ve yet to be a big enough piece of the pie to have negotiating power (or the confidence to try and get it -but I’m getting there!) We actually had to draft a term sheet, and I did that part. This was a perfect experience for me because negotiating about valuation and proposing term sheets is right where I’ve been wanting to dare to go, and this pushed me into it. So that’s another reason I was perhaps a little too aggressive about tackling valuation immediately in our entrepreneur interviews, I was geared up. Finally, as a team we agreed that being from the “sustainable” school, we probably overcompensate to avoid being perceived as insufficiently concerned about the numbers.

Other feedback in my mind amounted to failures to correctly game expectations – the judges wanted more finance and less on our social metric, and didn’t care about why we didn’t invest in the other companies.

Our big disappointment – we worked really hard to come up with a quantitative measurement of the social value potentially created by these companies. We came up with our own GreenToGold Ratio TM (Green-To-Gold was our assigned fake team name, and we TM’d our invented ratio as we imagine good business students should do.). We are pretty proud of the ratio. Two of my team members actually work for socially responsible investment companies (Trillium Asset Management and Progressive Investment Management) so we’re all intimately aware that the current state-of-the-art in the industry is the struggle to quantitatively measure social return. It’s particularly tricky in equity. To us, this was the entire point of this competition – it’s the Sustainable VCIC, as opposed to the regular VCIC competition which has its finals on April 12th at UNC. But the judges didn’t ask about our metric at all. Which also meant those team members didn’t do any talking during the Q&A part of our presentation.

However, a few days later comes redemption – one of the judges who works for a socially responsible fund scheduled a conference call to follow-up with us and talk about our metric as we were the only team to put a bunch of effort into designing one. All-in-all, I can’t imagine a better spring break.