I am writing to you today as a concerned citizen with a truly global perspective who also happens to be a co-founder and managing director of a small (~$30M) venture capital fund that invests in promising seed and early-stage technology and life science companies in Southern California.  I want to relay to you my deep concern regarding S.1276 (a.k.a. the “Private Fund Transparency Act”) and any other such legislative proposals that will, unnecessarily, impose new regulatory burdens on the venture capital industry whole-scale.  I truly believe these proposals will negatively impact the venture capital industry’s ability to fund and nurture the innovative start-up companies that have been and continue to be critical to U.S. economic growth as well as our country’s ability to effectively compete in the global market.  To put the importance of venture capital in perspective, the venture capital industry has created over tens of millions of jobs for the U.S. economy just during my lifetime and venture capital backed companies now make up a significant percentage of our GDP.

I have spent a good portion of the past decade in the emerging markets of China, India, Russia, and Brazil/Argentina and have been amazed at the lengths to which these countries have been actively changing their regulatory, financial, and entrepreneurial ecosystems to encourage venture capital all while we, as a nation, seem bent on hindering it.  While I am an educated man and understand that your analysis thus far has led you to believe that certain gaps in the regulation of U.S. banks and capital markets have been to blame for the subprime mortgage crisis and global financial calamity triggered after Lehman Brothers filed for bankruptcy a year ago today… I can only assume that the pending legislation in question is simply a result of our government asking and answering the third of three fundamental questions (1 how did the systemic financial crisis we are in occur?; 2 how do we fix it?; and, finally, 3 how do we prevent it from happening again?).  As the road to Hell is also surely paved with good intentions, I ask you to consider this letter (and others like it) as you continue to analyze and discuss attempts to prevent future systemic financial meltdowns.

As for my particular issue, I am opposed to the current language submitted that would regulate “private pools of capital” as part of the financial industry regulatory overhaul effort.  S.1276, if enacted as it currently stands, would require investment advisors to private funds, including hedge funds, private equity funds, venture capital funds, and others, to register withe the Securities and Exchange Commission (SEC).  I believe that, in the House of Representatives, Chairman Barney Frank is expected to introduce this legislation imminently.  While these proposals are typically referred to as “hedge fund registration rules”, they are much more than that and are truly unnecessary with respect to venture capital funds and I would like to take this opportunity to explain why.

While I use my own venture capital fund as an example throughout this blog post, it is merely included to illustrate the impact to small venture capital funds and the companies they invest in.  The potential impact is far greater and I think you will find that the vast majority of venture capital firms like mine (which is clearly not a hedge fund or a buy-out fund) would be forced to register as investment advisors with the SEC.  While this process is often portrayed as simply “filling out a form”, it implies a number of obligations with complications as well as a significant investment of financial and human capital resources.

If adopted, the current proposal would be an undue burden on the small yet significant venture capital industry as a whole, on that our industry and country can ill afford under the current economic circumstances and - more importantly - one that would not in any way help to prevent future systemic financial risk.  For comparison, last year venture capital funds only averaged 8.5 principals per firm and held approximately $197.3 billion in aggregate assets… whereas hedge funds held approximately $1.3 TRILLION in assets (See Hedge Fund Intelligence Ltd., United States: The End of an Era?  Global Review 2009).  By categorizing venture capital funds under this “private fund” umbrella, we are being asked to shoulder a burden that, in addition to the issues already addressed, does not benefit the government in terms of identifying or preventing systemic risk.

While I will not speak to the nature of the other fund entities here and now, venture capital funds should not be regulated under this legislature for several fundamental reasons:

1) Venture capital funds do not use leverage/debt like banks, hedge funds, and buy-out funds typically do and they do not engage in any lending of credit like banks do.  For example, my fund “calls” committed capital from its investors (a.k.a. “limited partners”) over the 10-year term of our fund to purchase preferred shares of private companies and we do not rely on debt the way banks, private equity, and some hedge funds typically do.  In fact, we are contractually prohibited from using debt in such a way pursuant to the terms and conditions of our limited partnership agreement.  Our financial risk is therefore contained and limited to ourselves, our limited partners, and our portfolio companies, and any resulting loss is limited to the amount of the investment only.

2) Venture capital funds neither trade in the public markets nor use complex financial tools such as derivatives or swaps like hedge funds do.  Like the vast majority of venture capital funds, my fund operates as a private, closed-end, limited partnership governed by an agreement wherein our limited partners meet the SEC’s requirements of being both “qualified” and “sophisticated” (i.e., such limited partners must have substantial net worth and be educated enough to appreciate the risk associated with investing in venture capital funds).  Additionally, my fund (and most other venture capital funds) is prohibited from purchasing public equities pursuant to our limited partnership agreements; therefore, we only purchase shares in private start-up companies through private, SEC regulated transactions.  While a few of the larger venture capital funds have admittedly evolved and now purchase public equities privately through PIPEs (Private Investment in Public Equities), I think you will find the vast majority of venture capital funds do not.

3) There are no third party positions to be taken in venture capital in that no other entity aside from the limited partners and general partners of our funds and company founders are investing.  We are closed funds with a set term and are not open to the public.  Venture capital loss is strictly limited as any losses do not extend beyond our limited partners pro-rata.  Simply put, venture capital funds are private investments (i.e., do not act as a source of liquidity for the financial system) and only provide equity capital to a select few portfolio companies through private investments.  Venture capital funds do not pose any systemic risk to capital markets.

In summary, the venture capital industry does not meet a single criteria listed by Treasury Secretary Geithner as indicators of systemic risk, yet we are being swept into the proposed language.  To reiterate, if a venture capital fund or one of its portfolio companies goes under, the loss is limited to the amount of investment and would not affect the broader markets the way a failed hedge fund, buy-out fund, or bank might.

While I applaud the efforts to address systemic risk and the activities that were at the root of our nation’s devastating financial distress, and appreciate the difficulties associated with bringing legislation to bear as an ex-attorney, the venture capital industry played no role and should not be targeted.  Now is not the time to increase the burden on an industry that has been and continues to be central to our great nation’s ability to fund entrepreneurs, build start-ups, create high-paying jobs, and produce revolutionary technology and products that better our lives in so many ways.

Bottom-line:  Venture capital should not be included in the Privacy Fund Transparency Act (or any other such legislation) and I urge you to take these concerns forward on behalf of both your constituents as well as our nation as a whole.  For any Representatives or Staffers actually reading this, I would be more than happy to discuss this matter further.

Well, I’ve returned from an absolutely refreshing two weeks in Maui and am recharged and ready to go.  Seems my timing is good as recent M&A and IPO numbers have been showing some signs of life (relatively speaking) and folks I have been meeting with seem to have a new spring in their step.  Let’s see how this summer concludes.

I spent an extended July 4th weekend with good family friends at Lake Arrowhead and returned to a partially flooded house.  Normally, I would have been irate.  Instead, I simply chalked it up to shit happening and have rolled with the punches this week for the simple reason that I returned completely relaxed (thanks Will, et al!!!).  In fact, a thought occurred to me while swimming up to the surface during one of our swims after discussing deep sea diving.  Whether or not you one needs it, “decompression” should be mandatory.  What do I mean?  I suppose it is a self-realization that stress accumulates whether we realize it or not so it’s good to release it frequently regardless of whether we think we need to or not.  I have always been even-keeled and tend to stay calm through any calamity so have never focused on relaxing.  Sure, I take vacations and spend time away from “work” but more and more of my time away from the office is spent intertwined with work such that I do not consider it work.  In fact, I would venture to say that I am doing exactly what I would do if I did not have to “do” anything and feel truly blessed for that fact.  So go out and do some decompression this week!

I have been blogging less frequently these days and spent some time thinking about the reasons why over the long weekend.  Before I get into that, I thought I’d reiterate the reasons why I blog in the first place.  I originally started blogging when I was at Intel as a way to inform my team and fellow travelers what I was up to, where I was, and what was occupying my then current thoughts.  I did this as I spent ~15 nights a month out of the country and the other ~15 nights so incredibly busy catching up here in the U.S. it was hard to stay in touch with folks.  I picked the proverbial pen back up after my partner and I got Okapi up and running as way to more effectively communicate to the masses (family, friends, fellow travelers, and followers) and share a bit of my life with them in our increasingly busy lives.  I suppose a secondary reason was to my small part to help increase awareness for the under-served SoCal VC ecosystem and just what was going on down here in the shadow of Silicon Valley.  Well, my reasons for blogging are changing so I find myself blogging less frequently.  Let me explain.

I’ve noticed that I’ve been spending more time with my family, friends, and fellow travelers and less time with the general masses at the various conferences and industry events so I feel less compelled to communicate through my blog.  Additionally, since I started blogging about the SoCal VC ecosystem and number of blogs written/maintained by “relevant” authors have sprung up to cover the area (just take a look at my Blogroll for examples).  Once again, I feel less compelled to showcase what is happening down here given the expanded coverage.  In light of these facts and feelings, my rationale for blogging has morphed.  I now see it as a way to dynamically interact with the SoCal VC community and regularly engage members of my audience and am having a blast doing so.  Maybe I’ll blog once a week, once a month, or once a quarter.  It will now just depend on how busy I am and how much time I spend sharing/communicating in person rather than through my blog.  Having said that, I have a few posts stockpiled from my weekend off the clock that I’ll now share…

May your start-up get funded

and your customers be plenty

May your company be acquired

for a multiple north of 20

May good luck be with you

wherever you go

and your blessings outnumber

the shamrocks that grow!

I just returned from a week in Tahoe where I was reacquainted with fear in the truest of senses and thought how relevant overcoming it is for investors in today’s markets.  My first “uh oh” moment was when we encountered a complete white-out on the 50 while driving up to the cabin.  My wife and I had a place in Tahoe years ago when we lived in Silicon Valley so I had driven in snow storms before.  The differences this time were driving on the 50 (narrow 2-lane on a cliff) instead of the 80 and having my wife and kids in the vehicle with me.  I would have simply pulled off until it passed but I could not see the road (AT ALL) due to the conditions and the icing of my windshield and knew the “cliff” was somewhere lurking.  As I said a silent prayer, I was reminded how (for me) faith plays a big part in overcoming fear.  I did not panic.  Nor did I freeze up or suffer paralysis through analysis — I simply persevered and proceeded with caution trusting we would make it through.  One of the lessons I was reminded of during this experience, as it relates to this blog, is that an investor’s visibility if often impaired when making investment decisions.  In such situations one can only trust in the methodical, disciplined approach and make a judgment call based, at least in small part, on faith that the future will occur and that it will be positive.

My second brush with fear occurred while standing at the top of my first run since severely separating my shoulder last February while snowboarding.  My family and friends had been asking me whether I was nervous or scared most of the preceding two weeks and had been making comments such as “I can’t believe you’re going to go after what happened to you last time”.  Well, I have been snowboarding consistently for 10 years (albeit my frequency has gone from ~30 days/year to a pathetic ~3) and I was not going to let the only injury I have ever suffered (from snowboarding) set me back.  I was determined to get back on the horse.  I began my descent a bit timidly and could feel the pit of my stomach tightening up as I gained speed.  Thoughts of wiping out crept into my head and I began to question my judgment in my decision to go…and then I remembered our drive in the white-out, and many of my other experiences with fear, and a strange thing happened.  I relaxed.  I began to “feel” my way down the mountain gaining momentum the whole time until I finally reached a point where I was at ease.  Sometimes life puts obstacles in front of you so that you can overcome them.  Or not.  It really is up to you as to whether and how you proceed in such situations.  So, my advice to you entrepreneurs is to raise your money (despite the economy) and lauch your company.  Things will, eventually, improve so you should ask yourself one simply question:  what position do I want to be in when they do???  Until next time, keep the faith.

Well, in light of the past few weeks in the financial markets and all the doom and gloom being reported and pontificated upon, 2008 just may well go into the history books as the vintage year for the “Mattress Fund”.  What do I mean?  Let’s put it this way, when one of the hottest selling items at Walmart the past couple of weeks has been home safes…something is going on.  So, is this the year of the Mattress Fund???  I honestly don’t know.  What I do know, however, is that all capital markets are cyclical and what goes down will eventually go up and that time can reward patient investors.  One of my long-held beliefs is that fear and greed drive all capital markets, be they public or private, and understanding where the market is on such spectrum facilitates good investment decisions.  I also tend to subscribe to Warren Buffet’s adage of being fearful when others are greedy and greedy when others are fearful so I’m actively looking for good investments as we are clearly in “fear mode”.  There are 2 weeks left until the elections and 10 weeks left in 2008 so I don’t see much changing for the time being, but I guess that’s why they say patience is a virtue…  Until next time, happy venturing.

Wow, time sure does fly when you’re having fun…  It’s been almost a month since my last post and I’m just getting caught up from a whirlwind last few weeks that included making a new investment in the mobile sector (stay tuned), a half-dozen board meetings, a mini-vacation, and some fund administration matters.  I’ve been thinking through a few topics for my next post so I’ll get back to you when I have something worthwhile to post here.  In the interim, enjoy the summer.

For those few brave souls who check my blog daily and have been wondering where I’ve been… No, I’ve not been away on a surfari (I wish).  I’ve simply been more buried than usual on the work front, but all of the work being VERY GOOD.  Not to fear, I’ve had a fair amount of “in between time” to think through a few things so stay tuned for a more meaningful post.

A lot of you have contacted me asking about the progress of my shoulder, if you’re not one of them you can stop reading now as this post is just about my shoulder.

I suffered a level 3 AC separation of my right shoulder (see pictures below from the “slopeside ER”) on February 8th and was told the injury is one of “3s”. Specifically, 3 days before the pain becomes tolerable, 3 weeks before I can start to use that arm, and 3 months before I return to any sense of normalcy. Well, I’m happy to report that I’m ahead of schedule. I went to physical therapy for a few weeks until they “released me” to proceed on my own with the exercises they gave me to do at home. The swelling has completely gone down now such that my clavicle is significantly more pronounced, but I’m able to work through the shoulder exercises daily and have even begun to swim again (albeit, MUCH shorter distances and at a MUCH slower pace). My goal is to be back on my surfboard in time for the warmer water this summer. Until then, aloha.