Remarks at the 2012 National Venture Capital Association Meeting

Good morning, everyone, and welcome to the NVCA 2012 Annual Meeting.  My name is Ray Rothrock, a partner at Venrock.

It’s a great pleasure for me to be here this morning and a special honor to begin my new role as Chair of the Board of Directors of this amazing organization with all of you here today.

I’d also like to acknowledge our outgoing directors, who were instrumental in our recent successes. And of course Mark Heesen and the rest of the staff at the NVCA deserve a huge shout out for their strategy, commitment, tenaciousness and good old hard work that makes the job of being an NVCA director look easy.

Thank you one and all.

I’ve been part of the venture capital industry for the last 24 years. During that time, the industry has grown and changed so much. We’ve had our ups and downs, but through everything I can honestly say that there has never been a day in the last 24 years that I wasn’t proud to be doing this work.  Reconnecting with many of you is wonderful.

That’s because at the end of the day, our mission as venture capitalists is to discover the very best entrepreneurs with the very best ideas, and help them build and grow companies. The capital and sponsorship we provide help eliminate barriers and reduce friction that might otherwise impede their growth. And when they are successful, our limited partners and we share in their success.

Even more important, the American people benefit from the success of innovation and entrepreneurs – through great new life changing products and services, through outsized contributions to the American economy and its global competitiveness, and through jobs.  This is the American story.

History has shown us that when bright entrepreneurs are given a chance and the capital, they can create great companies and in many cases great industries. Semiconductors, personal computing, local area networking, wide area networking, bio pharmaceuticals, medical devices, overnight delivery, ecommerce, social networking – the list of industries that came into being because of the partnership between entrepreneurs and venture capitalists goes on and on.

Now, most of the people in this room are painfully aware that the venture industry is coming out of a relatively bleak decade, perhaps an understatement. I’m sure we’re all happy to put it behind us. And while our economy is improving after the Great Recession of 2008, its global aftermath persists, creating a lingering uncertainty.

Through this entire gloomy decade, I’ve been continually amazed at how entrepreneurs just don’t seem to read the newspaper, watch TV or the news. And if they do, that just doesn’t seem to stop them. They keep on looking for opportunities to bring great ideas to life. Their ideas, their belief in a better future and their unflagging optimism is inspiring.

This year, we are seeing a renewal of the IPO and the public market in general.  Frank Quattrone’s remarks yesterday show this to be the case.  The renewal is stoked in part by companies reaching the scale to go public, but also by the buy side seeing these young companies up close, and having enough confidence in them to buy their stock and watch them grow.

The public market is so very important to venture. I don’t think we fully grokked its impact until it went away a decade ago.  Besides liquidity for our startup dollars, you may already know that 92% of all job creation from successful venture backed companies comes after the IPO.  Further – and I’ve said this many times – the public markets keep the M&A process honest and active. When growing companies have choices, everyone wins.

So in this next year – as the JOBS Act takes hold, as the public markets pay more attention to our startups, as our limited partners start to get a return on their invested capital – we all need to keep in mind that the company creation process is an essential element of the growth and prosperity of our economy and our way of life.  This industry matters for the nation, and for the world.  We must keep it strong.

This process is uniquely American. The industry is changing, yes. We’ll talk about some of that today in our sessions. But these changes are good. And just as entrepreneurs invent new products and industries, as venture capitalists we must reinvent ourselves to better partner with them.

Let me wrap up with one short story.

When I started at Venrock in 1988, we were backed 100% by the Rockefellers. Every year, like all good venture capitalists, we would give our annual report to our investors. In the room were David Rockefeller, Laurance Rockefeller, their aides, and many other family members. And every year we would go through our successes and our failures, giving a completely transparent report. Mr. Crisp, our CEO, held nothing back.

Our founder, Laurance Rockefeller, would sit patiently in the front row taking notes.  There would be questions sprinkled all through out the presentation, mostly details about this or that company.  But every year he would ask the same questions at the end of the report:

How many people does the portfolio employ?

How much wealth for the companies and their shareholders was realized?

What incremental tax basis did we create?

What impact to the American economic landscape did we have?

In a few moments, we’ll hear from another superangel and statesman of our industry who also carries the highest regard for entrepreneurs and their impact on society: Arthur Rock. I hope it inspires you to remember that while our industry may grow and it may shrink, at the end of the day it’s about building great companies with great entrepreneurs.

Let’s Connect with them.  Let’s Discover with them.  And Let’s be Inspired by them.  If we do this right, the all the rest will follow.

JOBS Act is the Law – Congratulations America. Let’s get back to the Business of Innovation!

Today, in the Rose Garden at the White House at about 2:40, President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act.  This morning when I departed my hotel it was overcast and pretty chilly outside.  I suddenly regretted not having my overcoat.  But, as the morning past and early afternoon arrived it suddenly was a beautiful day with tulips in full bloom everywhere at the White House.  The sun was beaming overhead making it warm and soothing in the crisp spring air.  When I think about making the JOBS Act law, this day is a perfect metaphor.  From a gloomy start to a sunny and warm finish complete with exploding tulips there was a sense of optimism and renewal for American innovation.   This law makes capital formation easier, safer, and better for everyone from the smallest startup in Ithaca to the boldest tech startup in Boulder. 

The JOBS Act does not do away with any of the important work of the last decade bringing abuses under control.  It moderates and allows startup companies to obtain capital from the smallest of investors previously excluded to allowing the adolescent company to become an adult over a period of years or success.  Nothing was eliminated, the rules and regulations were only modified to adapt to the real world of American innovation.

There are so many places that summarize this new Law I’ll just link to them.  But let me say this.  It is very possible that fifty years from now, the country may look back at the JOBS Act and call it the 12 Act, kind of the like the “34 Act.”  The Securities and Exchange Act of 1934, known as the 34 Act was a seminal piece of legislation which put in place regulation and control of financial securities issued by companies following the Great Depression.  It created the Securities and Exchange Commission.

In his remarks today President Obama highlighted how important startup companies are to the United States and the world.  He cited Bell, Edison, Gates, Google and others that have created whole industries with their big ideas.  He cited how important it was that today’s entrepreneurs have access to American capital at the smallest amount.  And he emphasized how important that access to the public markets was essential for American to remain competitive and create new jobs.  He is so right.

Prior to the signing ceremony I also attended a Roundtable in the Roosevelt Room at the White House chaired by National Economics Council Gene Sperling and Steve Case.  There were 20 people in the room from small and large businesses from all over the United States.  Crowd Funding was a part of the JOBS Act and it was highlighted in this session to a great degree.  I pointed out that at the other end of the spectrum of capital formation that making it easier for growing, successful companies to tap the public markets was essential for two reasons.  One it would be source of unlimited capital for expansion leading to new jobs by the millions and to new industries.  Two that 90% of the jobs derived from successful startups are created after the IPO.  It was pointed out that this bill is also good for large private companies for a variety of reasons.  Everyone got something from this effort, that was clear.

My hope is that it will also shorten the lifecycle of risk capital that folks like I put into promising ideas.  Recycling capital more quickly means that we all get more swings at bat.  It also meant that more of my brethren in the venture business might return to their early stage roots and take chances on unproven but attractive deals, like so many people used to do in decades past.

JOBS Act Passes Congress – President Obama will sign!!!

President Obama is expected to sign the JOBS Act shortly.  Congratulations to us all!  It was passed quickly and with full bipartisan support in an election year.  Of the many provisions in the bill, one that the venture capital industry worked very hard on was the IPO On Ramp.  Many thanks to Kate Mitchell of Scale Partners for her leadership on this matter.

Because I am frequently asked, let me tell you the story behind the IPO On Ramp?  

In the 2000s, after the Stock Market bubble popped, there were three substantial changes to the business of taking a company public.  One was the Sarbanes-Oxley 2002 law.  Second was the Spitzer’s work to break out research.  And third was the decimalization of Wall Street trading.  While one of these could have caused issues, all three at once just crushed young company prospects of going public.  But why?

Sarbanes-Oxley, or SOX, put an never before existing and enormous burden of accounting, internal controls and measurements on newly IPO’d companies as well as all public companies.  This was well intended and overall a good thing.  But, this costs money and took important management time away from running the business. SOX might cost perhaps $5 million per year to implement in a normal company.  It’s a whole different economic picture if this $5 million is 5% of sales, or 0.5% of sales.  You can see the little $100 million company needs to get big, like $1 billion or so, in order to afford it in order to get public, thus delaying when a company can go public.  This put the brakes on small company.  They are not created as giants!

New York Attorney General Eliot Spitzer decided that the run up in the stock market values in 1999 and 2000 before the crash was attributable largely in part to the coziness of Wall Street research and underwriting.  While there are obvious conflicts and certainly some abuses to the way it was structured, it was not hidden from the buyers in any way.  You see, for a public buyer to purchase new issues, they need information.  Research was the only economic way to distribute company information in a fair way for all potential buyers.  And the researches whose firms were taking a company public had the most interest to research the company.   Makes sense.  Without research for the smaller companies paid for by the bankers who take them public, the economics of a deal meant that only big IPOs could get done since research is not free.  Again, the little company was pushed out of the market as a result of the Spritzer‘s actions.

Finally, as computer trading systems evolved, Wall Street decimalization was implemented.  I’ve read some stories that indicate that the influx of mathematicians and physicists from the shut down SuperCollider in Texas flooded Wall Street with “Quant Jocks” who figured out to take advantage of this new trading world.  As the market from drill bits, e.g. $3/8 or $¾ to $0.01 to even $0.001 spreads, the economics of trading went out of the business, too.  Small IPOs don’t have a lot of float, so this impact also cut the economics out of small company’s going public making investment banks go for the larger deals.

All these things essentially cut the economics out of going public and the banks moved to larger deals, bigger companies, and left a gapping hole in the market between the pink sheets and Large Cap deals.  This is the gap exactly where fast growing tech companies come to market.  You might say, many were left at the alter.

So what?  First, the IPO On Ramp is an attempt to provide a gradual conformance to the SOX laws passed in the early 2000s.  These laws are important.  Unfortunately, the original law was a big paintbrush.  The IPO On Ramp is an attempt to repaint things starting with smaller brushes so that small companies can “grow into” the greater important SOX requirements.  The law is still there, but the time to comply is expanded based on time in the public market or scale of the company.  This is part of the JOBS Act.  The NVCA and many other organizations that care about small companies going public and ultimately becoming big companies worked very hard on this new law.

Senate Passes JOBS Act

I could not have said it better.  Thanks, Mark.

Senate Passes JOBS Act

By Mark Heesen, NVCAccess                                 3/22/12

http://nvcaccess.nvca.org/index.php/topics/public-policy/285-senate-passes-jobs-act.html

Champions of Change – Pablo Fuentes

Hey, my good friend Pablo Fuentes, CEO of Proven, got a special accolade from the White Housethis week as a Champion of Change.

Good News for Start Ups – Please support S. 1933. Call your senator!

APRA-E Energy Innovation Summit Mid Day 3

I’m not sure what Arun would have done if he had four days?  This conference is the most aspirational event I’ve been to in a long long time.  This morning’s keynotes were simply awesome. Speakers were Ursula Burns, Susan Hockfield, Senator Jeff Bingaman, Rep. Chaka Fattah, Senator Chris Coons, Deputy Secretary of Energy Dan Poneman, and Deputy Secretary of Defense Ashton Carter.  The highlight was the before-lunch speaker, President Bill Clinton.

Key themes that came from today’s list of speakers were education, immigration, creating demand in the Federal Government, driving down costs so that any new technology does not need subsidies.

President Clinton was charming, witty, and really connected on energy matters.  He’s not a domain expert on energy, but what he cited in terms of the benefits to people, the impact to jobs of energy fixing, and some historical perspective and climate change were remarkable.  He beautifully connected it all to real world stories about people.  For example, he discussed how capturing gas from landfills and cleaning them up or restructuring them with local labor helps everyone nearby.

After President Clinton’s conference address, he came to a separate room to meet with all the students attending the conference, 82 of them from 30 universities, representing all the energy clubs in all many American universities.  Clinton took questions for over an hour demonstrating further his connection with energy and people and how it all matters to all parts of American society.

APRA-E Energy Innovation Summit – Mid Day Two

I’m in attendance at the APRA-E Energy Innovation Summit in Washington, D.C.  By all accounts, based on my many and various hallway discussions, random meeting of old friends and new, this is a huge success for America.  The focus and attention being paid to this important area, energy, is paying off; no doubt about it.

No matter how depressing the news might be – whether it is something awful we did in Afghanistan, or the continued unwinding of America’s mortgage debt that is dragging the economy or whatever – if you were here, and you paid even half attention you would be over the top encouraged, excited, and delighted that innovation in America is still job one.  The thousands of people here represent academics, investors, inventors, policy makers and just interested folks, and obviously represent an even larger group “back home” of Americans wanting to solve America’s energy problem.

Dr. Arun Majumdar this morning delivered a pre-luncheon address that was second to none.  I hope it gets put on YouTube quickly.  He was his usual charming self with his analysis of the issues and technology problems.  But then he presented a representative company in his portfolio that was working on a specific problem.  He is an inspiring leader and we are all very luck to have him on this mission.  Thanks, Arun – you are truly a great American.

Also on the podium have been Bill Gates, Fred Smith, Lee Scott, Sen. Lamar Alexander, Congresswoman Nancy Pelosi, Congressman Steve Womack, and of course, Secretary Chu.  This all-star cast is only half done.   Tomorrow will be just as exciting.  Getting this set of folks here to talk about energy, the big issues and the big opportunities is not trivial and signals just how important this is.

Happy New Year!

Like always, at the end of the old year and the beginning of the new, there are many articles and magazines that try to capture what just happened.  It’s always fun, but hey, we all did just live through it.

Natural Gas is a Bridge to the Future. But we have to work together.

David Brooks of the NYT in his op ed on Nov 4, 2011 talks about the shale gas revolution — and what a revolution it is!  Developing and exploiting natural gas through fracking is only the latest technology to come on the scene.  In the mid 1970s the United States figured out how to drill for oil and gas in deep sea.  In the 1990s fracking was perfected by George P. Mitchell (an Petroleum Engineering from Texas A&M ’40, by the way) even though it had been around for some decades.  This event has opened up a whole new source of energy for the United States and many other countries around the world.  (We are a very lucky country, in case you don’t know).  Some say as much as 100 years of fuel is possible.  Further, gas is a key feedstock to many other chemical processes not just a fuel for heating our homes or powering our electric power plants.

Brooks points out that economics drives energy in the U.S.  He is so right.  Now with plentiful gas, a new floor for energy prices has been put in place.  Also what Brooks brings out so well is the demonization and the personal attack element that the various political parties seem to be applying to this find.  His statement that “Especially in the Northeast, the gas companies are demonized as Satan in corporate form.”  Wow.  That’s pretty strong and pretty awful if this what it has all come down to.

Energy is pivotal to modern society.  Without it, we freeze, our economy stops, and basically everything you know will go away — perhaps even the law.  So, rather than going for someone’s throat because they are bringing energy to us, we should open a discussion about how best to do that.  We should make sure it’s done in a way that fairly balances the risks and rewards for the producers and the consumers.  How to have a rationale discussion in this age of political ideology, demonizing things we don’t like, and never listening to the other side is the real question.