Kellogg PE/VC Conference

The 11th-Annual Kellogg Private Equity and Venture Capital Conference was a huge hit this past Wednesday, with over 400 in attendance. Approximately 35 students, including myself, partnered with a handful of valuable members of Kellogg's administration to pull off a sold-out conference (80% professionals, 20% students) in the heart of downtown Chicago. It was a ton of work, but it was certainly worth it. Here were the highlights from my perspective:

• PE keynote address from Chuck Esserman, Co-Founder, Managing Director, and CEO of TSG Consumer Partners
  
• VC keynote address from Dick Kramlich (NU '57), Co-Founder and General Partner of New Enterprise Associates
• I attended the 3 VC panels, which touched on the financial crisis, consumer Internet, and digital marketing. The PE panels were held simultaneously, so I had to miss those.
• Book signing by Andrew Sorkin. He also moderated one of the PE panels, but I skipped it to attend the VC panel on digital marketing.

Rather than attempt to recount the entire conference, I thought I'd provide an abridged glimpse of the perspective provided by the consumer Internet panel.

Investing in Consumer Internet: Separating the Needle from the Haystack

Panel

• Moderator: William P. Sutter, Jr., Managing Partner, Hopewell Ventures
• Bret Maxwell (KSM ’82), Co-Founder & General Partner, MK Capital
• Joe Dwyer (KSM ’08), Senior Associate, OCA Ventures and CEO, Brill Street + Company
• Justin Shaffer (@shafferj), Founder & CEO, Hot Potato (video link)

Evaluating Startups

Joe Dwyer provided an interesting lens through which to evaluate a startup: Maslow's Hierarchy of Needs. I had never heard someone refer to Maslow's Hierarchy of Needs (MHN) as a means for gaining insight into whether a startup has growth potential and is worthy of a VC investment, but that's exactly what Dwyer suggested we do. In a nutshell, MHN attempts to categorize human needs on a scale ranging from the very basic (e.g., food and shelter) to psychological, non-physiological needs (e.g., morality and spontaneity). The theory is sometimes taught in marketing courses as a method for developing a deeper, albeit somewhat theoretical, understanding of consumers' inner needs and motivations for purchasing. Dwyer recommended MHN as a filter for considering potential VC investments and argued that the more a startup hits the high level of the MHN pyramid, the more potential there is for growth.

Do I agree? I'm not sure yet, but I'm certainly chewing on it. Those bottom two levels are at the heart of the world of venture investing in life sciences and healthcare, where many startups directly target the consumer's basic need for survival. But I do think Dwyer's perspective is invaluable for evaluating social networking startups. For instance, where does Facebook hit MHN? In the love/belonging category? Or in the self-actualization category, that centers more on the need for self-fulfillment? The site clearly hits the former, but a quick glance at the Facebook page for a 20-something will often reveal a considerable effort toward self-definition, individualism, and joie de vivre. What about YouTube? Its success is entirely due to hitting the higher levels of the pyramid. Despite the inherently-subjective and philosophical nature of applying MHN to the question of startup growth potential, I think it's an interesting lens through which to look at the latest array of social networking sites.

Monetization in Consumer Internet

I'm always a fan of healthy debate, and this panel provided a satisfying degree of differing opinions on virtual goods and advertising. Dwyer immediately highlighted virtual goods as a hot area for investment, a perspective I've heard from several VC's in recent conversations. Zynga, Playfish, Playdom, Serious Business, and Facebook would all certainly agree, and they have the user bases, revenue, and IPO potential to prove it. Yet, Maxwell expressed guarded enthusiasm for this arena, arguing that the proliferation of virtual goods has raised important ethical questions. Others have raised similar concerns, such as Michael Arrington, of TechCrunch (watch the video at the end - it's entertaining). It was interesting food for thought, and I actually agree with both of them, in that I see a distinction between the virtual goods themselves (interesting with high-growth potential) and the methods that have sometimes been used for marketing them (deplorable).

Hot Potato

Shaffer joined us by video link to share a bit about Hot Potato and his thoughts on social networking. The video feed was "technically challenged," so I couldn't decipher most of what he said. From what little I could hear, I did get the sense that the company is focusing on product development and audience aggregation, rather than monetization.

Despite the video feed, I learned a ton about Hot Potato as a result of the conference, and I thought I'd share a bit about how my experience was substantially improved thanks to the app. As I've written previously, I'm a big fan of Twitter and have found it to be a useful means for communicating with classmates, following others' thoughts at conferences (e.g., SF New Tech), and tracking the latest developments in VC. Hot Potato has taken that to the next level by linking a Twitter-like feed with events. Why was that useful? Thanks to Hot Potato, the tech-oriented attendees of the conference maintained an invaluable ongoing conversation about the day's events, ranging from Kramlich's keynote to a discussion of taxes on carried interest during one of the PE panels. Although going to the VC panels prevented me from attending the ones on PE, I was able to monitor the conversation from the PE panels via the Hot Potato feed, enabling me to gain more value from the conference than I otherwise would have. The more important question: Why did I use Hot Potato instead of a Twitter hashtag? Both approaches provide a useful way for filtering out the noise in order to focus on a single conversation thread, but the decision to use Hot Potato boiled down to the interface. It was simply much easier and quicker to get to the conference event in Hot Potato than it was to get to the conference hashtag in Twitter. It's all about the interface.

Bottom line, I had a great time at the conference and look forward to (hopefully) being on the leadership team again next year. Thanks to everyone who helped put it together - it was one of the highlights of my Kellogg experience thus far.

VC Twitter List

There's been some interest in my last post regarding the usefulness of Twitter, particularly from those seeking to follow VC's. I thought I'd make it easier for those seeking to get plugged into Twitter's VC community by making a list: http://twitter.com/StephenWindsor/venturecapital

The list is broad and includes:

• Current and past VC's
• VC firms
• VC sites (e.g., VentureBeat)
• VC organizations (e.g., NVCA)
• Startup-related organizations (e.g., MIT $100K Competition)
• Others of interest to those who follow VC

I'm sure I'm missing several valuable Twitter users who belong on the list. If you see glaring omissions, feel free to let me know, and I'll update the list.

Why Bother with Twitter?

My uncle is dumbfounded that I'm on Twitter, and he's certainly not alone. Many people simply don't see the use in reading thousands of tiny messages that let you know that some guy in Alaska just brushed his dog's teeth. I'll admit to having been skeptical when I first heard of the site, but over the past year I've found it to be one of the most useful resources in my day-to-day life. Here's why:

• VC's are all over Twitter. Having followed the community for the past year, I've found it to be an immensely useful way to develop a better sense for what's happening in the industry. But you have to look beyond the single message to see the value. For instance, a recent Tweet by Brad Feld stating that he did CES in 3.45 hours isn't useful on its own, but thousands of messages just like that over the course of a year begin to paint a picture of what VC's are doing. Jeff Bussgang recently wrote an excellent article on peHUB in which he estimates that 10-15% of the VC community blogs and provides a succinct and convincing argument for the value of blogs and Twitter. I'm convinced that these new technologies are fundamentally changing the industry.
  
• Much of my news now starts at Twitter. People post articles throughout the day, which serves as a valuable way for me to find interesting and relevant info.
  
• MBA's are on Twitter in all their glory, albeit in small numbers. For instance, the Kellogg Twitter community currently has 41 students, alumni and staff. We're on there every day, chatting up various random events happening around campus as well as news, thoughts, and random observations. It's not just a social outlet - it's actually an invaluable means for keeping track of what's happening. For instance, if it weren't for Twitter, I would have missed the deadline for applying to NBI. And thanks to conversations that took place entirely through Twitter, I decided to take Turbo Finance, which was the right decision for me. I share fellow first year Orlando O'Neill's perspective that Kellogg students shouldn't be afraid of the course.

Altogether, don't look at Twitter through a magnifying glass. If you do, each message will seem strikingly pointless. Instead, take a 50,000 foot view, and you will begin to develop a broader sense for what's happening in your community and in those of others. That's worth a lot.

Innovation to Commercialization

Yesterday I had my first team meeting for Innovation to Commercialization (I2C), which couldn't have me more excited. I2C matches Northwestern University scientists with Kellogg students, who analyze the scientists' new products and ideas and help them carve a path toward commercialization. It's essentially a tech transfer project. Students apply to the program and are matched based on their past experiences and interests. I was excited to have been selected for a project related to cancer therapy, which made sense given that I did 2+ years of research in fluorescence molecular tomography (see here and here), focusing on imaging of cancer and cardiovascular disease. This is a high-priority project for me, given that it perfectly aligns with my interest in venture capital and entrepreneurship within biotech and life sciences.

Our first meeting was with the two professors on the project, both of whom are in the Department of Radiology at Northwestern's medical school in downtown Chicago, where we met. One is an interventional radiologist M.D., and the other is a biomedical engineer. After intros, they gave us an overview of the market space and then presented their idea / invention, which immediately got me excited. For privacy reasons, I obviously can't disclose what they're doing, but my gut reaction is that it stands a solid chance of becoming a bankable product.

Over the next couple of months, I'll be working with my team and the scientists to:

• Understand the innovation and its technology space.
• Assess intellectual property protection status.
• Identify the target market.
• Conduct a detailed market analysis and identify the value proposition, opportunities, competitors, etc.
• Evaluate the required resources and capabilities, i.e., what is needed in terms of capital, equipment, people, patents, etc., to take this product to market or perhaps even to start a company.
• Develop a detailed business model.
• Provide recommendations to the scientists.

We can get academic credit for this, but I still need to check whether that'll push me over the credit limit, which would require extra tuition. Even if I don't get credit, this experience should be well worth the effort.

A Day in the Life of a Kellogger

This past Monday was the first day of winter quarter at Kellogg, and I have to admit that I was excited to start class again. Mainly, it was great to see friends after having had a few weeks off of school, and I enjoyed seeing Jacobs filled with activity once again.

As the past few days have unfolded, I thought it'd be interesting for prospective students to get a glimpse in the life of a Kellogg student. Call me weird, but I used to enjoy reading these sorts of posts when I was applying to b-school, because they gave me a glimpse into what my life might be like if I were to attend. It's important to realize that there is no such thing as a typical Kellogg student or a typical day at Kellogg. Take this for what it's worth: 1 day in the life of 1 student.

Tuesday, January 5, 2010

• 5:30 AM: Wake up
  
• 5:45 - 7 AM: Run at the gym. Attempt to make up for having eaten my way through the holidays.
  
• 7-7:50 AM: Back at home. Get ready, have breakfast. Digest WSJ while eating. Review peHUB, VentureBeat and a few VC blogs.
  
• 7:50-8:10 AM: Knock off a few emails.
• 8:10-8:25 AM: Head out into the tundra to walk to class.
• 8:30 - 10 AM: My first class of the day: MECN 430 (Microeconomics).
• 10-10:30 AM: Catch up with friends I haven't seen since last quarter. Knock off a few more emails.
  
• 10:30 AM - 12 PM: Head to a 2nd-floor study room with a great view of Sheridan Drive and the snow. Review an HBS case for tonight's evening class, FINC 445 (VC/PE Investing). The case covers Yale's endowment as of August 2006, and the professor has instructed us to analyze the endowment's portfolio in light of its recent 25% decline. I read the case over the weekend and had jotted down my thoughts the night before. Now I begin writing a 2-page paper highlighting my perspective and recommendations.
• 12 - 12:15 PM: Get lunch down in the atrium and catch up with more friends. It's a lot of fun to hear about everyone's holidays.
  
• 12:15 - 1:30 PM: Finish the 2-page paper for FINC 445. Feeling good about what I've written.
  
• 1:30 - 1:45 PM: Attempt to print my paper. Fail miserably due to paper jams and general printing catastrophe.
• 1:45 - 2 PM: Relax a bit and reflect on what I'd like to discuss with the career counselor during my 3 PM appointment later in the day.
• 2-2:20 PM: Read for Thursday's FINC 471 class (Case Studies in Venture Investment).
• 2:30 - 3 PM: Meet with a member of my FINC 445 team in a small study room to review the HBS case on Yale's endowment. I'm amazed by the level of sophistication and intelligence of his perspective.
  
• 3 - 3:30 PM: Meet with a career counselor to discuss my efforts to get a job in VC. We discuss timing issues, such as when I should begin explicitly asking for internships, as well as my backup plan.
• 3:30 - 6 PM: I plant myself in the Jacobs atrium and catch up with several good friends. Simultaneously, I revise my FINC 445 paper based on the earlier conversation with my team member. The final version of my paper is fairly different from and much better than the original, thanks to my teammate.
  
• 6 - 6:30 PM: Early dinner.
• 6:30 - 9:30 PM: FINC 445 evening class. I'm not a fan of evening classes, but it's the only way I could take this course on VC/PE investing. We discuss Yale's struggles with its endowment.
  
• 9:30 - 10:30 PM: Head out into the tundra to go to Pete Miller's. Have a drink with a friend who's interested in VC. We catch up and compare notes.
• 10:30 PM - 1 AM: Still at Pete Miller's, I share a few drinks with good friends who went with me to Morocco for KWEST. We catch up on what everyone did over the holiday.
• 1 - 1:15 AM: Back out into the tundra, I walk home and relax before going to bed.
  

So that's it. Hopefully this gives you a sense for what it's like to go here!

I'll leave you with this: The best blog post I've seen in a long time: a point-of-view walk to school by Orlando O'Neill, another 1st-year.

Winter 2010 Courses, Part Deux

Made a modification to my class schedule: dropped OPNS to take another class on venture capital. Here's my updated course list:

• DECS-434 - Statistical Methods for Management Decisions - Prof. Vohra - Mon/Thu 8:30-10 AM
  
• FINC-445 - Venture Capital and Private Equity Investing - Prof. Honney - Tue 6:30-9:30 PM
• FINC-471 - Case Studies in Venture Investment - Prof. Hochberg - Thu 6:30-9:30 PM
  
• INTL-473 - GIM India - Prof. Gupta - Wed 3-5 PM
  
• MECN-430 - Microeconomic Analysis - Prof. Mares - Tue/Fri 8:30-10 AM

On a side note, Orlando O'Neill, a fellow 1st-year, wrote an excellent post on why students shouldn't be afraid of taking Turbo Finance. I agree 100%. The course is legitimately difficult, but it is very manageable as long as you keep up with the work.

Entrepreneurship Trek

Earlier this week I joined a group of fellow Kelloggers to the Bay Area for the Entrepreneurship Trek. Given my interest in VC and startups, this was one of the highlights of the year for me. Here's the list of companies we visited:

• Chegg - Online textbook rentals.
• Plug and Play Tech Center - Incubator.
• SnapLogic - Components that facilitate data integration.
  
• Sinexus - Sinus-opening stints.
  
• Yammer - Internal microblog for companies. I.e., Twitter for companies.
• EventBrite - Event planning through the web.
  
• Bump - Connects two phones together to enable quick exchange of contact info.
  
• Meebo - Web platform for instant messaging on any network or site.
  

A fellow Kellogg 1st-year student, Dino Ganesarajah, wrote an excellent post that summarizes some of the lessons learned.

This brings to a close the career/Kellogg-related trips for 2009. All of them - the Biotech trek, VC trek, and Entrepreneurship trek - were enormously valuable.

Next up:

• VC trek to Boston (which I'm co-leading) - Mid January
  
• University Private Equity Summit, Salt Lake City - Late January

Bay Area VC Trek

This past Monday and Tuesday, I led Kellogg's annual Bay Area Venture Capital Trek along with another 1st-year student. Everything turned out much better than I had hoped, and from what I can tell, everyone had a great time and found the trek to be worthwhile. We met some amazing people, ranging from associates to managing directors, and we also spoke with a well-known blogger. Out of respect for their privacy, I'm not disclosing the names of the firms or the people we met; instead, I'll simply say that we met with 7 firms, all of which are well-known leaders within the industry.

Our conversations with the firms varied considerably, but a few topics repeatedly came up:

VC Industry is Shrinking

Without exception, every VC emphatically stated that the industry will shrink. This was of no surprise, given that I've yet to meet anyone who disagrees. However, it was interesting to see that the estimated extent of current over-capacity varied considerably, from 2X - 10X.

One VC, in particular, spoke extensively on the topic and shared his perspective that the industry is a "complete and total mess." While the industry is extremely productive on a smaller scale, it doesn't perform on the larger scale to which it has grown. Using GDP and NASDAQ as proxies, the industry is 4-5X the size of what it should be, the consequence of which is abysmal returns over the past 10 years. Despite this pessimism, this same VC made one of the most positive and memorable statements of the trip: "VC's will always be around as long as there is a market for human innovation." That's what I love most about VC - it enables human dreams and innovation to be translated into viable businesses.

On a funny note, the best quote of the trip nailed the state of the VC industry: "Can I give myself a paper cut and pour lemon juice on it?" The same guy also shared his belief that VC's have "the attention span of ferrets on crack." And one panel repeatedly vied for the title of dumbest VC in the room. Love it.

Opportunity in Disaster

Over the past year, as I've repeatedly read of the decline of VC, I've viewed this less as a time to shy away and more as a tremendous opportunity for the coming generation of VC's to make their names. Yes, the risks are greater, but as the industry shrinks, those who remain will be strong for having gone through it. Roughly half of the VC's we met urged us to stay away from the industry, but a surprisingly large number encouraged us to go for it. One VC put it perfectly: "if you see opportunity in disaster, this is your business." The same goes for startups that choose to launch in this climate.

How to Get into VC

It was of no surprise that this topic was repeatedly discussed, given that we were a bunch of MBA's on a career-related trip. Here were some suggestions from the VC's we met:

• Be a successful serial entrepreneur first.
  
• Do bus dev for a large corporation and develop your network.
• Take a sales job out of b-school.
  
• Get an operating job out of b-school.
• Don't be afraid to fail. Join a startup. Even if it fails, you will have learned something valuable.
• Look at mid-stage companies in order to minimize risk.
• Ask yourself: "If I were CEO of a startup, who would I want on my board?" That's who you need to be if you want to be a VC.
• Go for it, and go for it now. But remember that many firms will die, so it's important to pick a good firm.
• Do lots of pro-bono, part-time work for firms.
  
• Look at Kauffman.
• Meet as many VC's as you can - it's all about networking.
• Become an expert in a domain.
• There's no need to be an expert in a domain.

Clearly there were significant differences of opinion (e.g., domain expertise is a plus vs. a negative; get in now vs. wait 15 years). How am I interpreting this? Bottom line, nobody really knows the best way, and it's up to the individual to figure out (a) whether they're ready; and (b) which approach is best for him or her. Use your own judgment. Every VC I've met has a unique story of how they broke into the field, and VC hopefuls shouldn't expect their stories to be any less individualistic.

What Makes a Good VC?

I was particularly interested to hear what VC's had to say about what differentiates those who succeed from those who fail in the industry. Thoughts varied:

• Success happens to you and is largely a matter of luck.
• Failure is important, and you learn a lot from it. It forces you to think. The hardest thing about VC is that you're right 1/10 of the time - and that's if you're really good. Failure is a natural part of VC. You have to be comfortable with this.
  
• Declaring victory early in the life of a startup can be deadly. Higher valuations are simply estimates and should largely be ignored, given that they can lead to inflated optimism.
• Look at every hour as a moment of education.
• You can't out-think all of the entrepreneurial world, so don't try. Remember that the best ideas are extrinsic, rather than intrinsic. Consequently, if you rely too much on your own expertise and not enough on that of your entrepreneurs, you may be acting against your own interests. Ultimately, the best preparation is not to be an expert, but to have the experience of not having a clue of what you're doing. [I got a good laugh out of this one, but I do see the point.]
• Have an opinion. This is the essence of leadership.
• Invest at a slow pace at first. Then ramp up.
• The art of VC is to get things done the way you want them done without using heavy-handed authority. [I think that's the art of business in general.]
  

That wraps up the heavily-abridged version of my notes. Altogether, the trip confirmed what I already felt: this is where I want to be.

Winter 2010 Courses

Finals just ended yesterday, but I'm already excited to get started with next quarter's classes. Here's what I'll be taking:

• DECS-434 - Statistical Methods for Management Decisions - Prof. Vohra - Mon/Thu 8:30-10 AM
  
• FINC-445 - Venture Capital and Private Equity Investing - Prof. Honney - Tue 6:30-9:30 PM
  
• INTL-473 - GIM India - Prof. Gupta - Wed 3-5 PM
  
• MECN-430 - Microeconomic Analysis - Prof. Mares - Tue/Fri 8:30-10 AM
• OPNS-430 - Operations Management - Prof. Lariviere - Tue/Fri 10:30 AM - 12 PM
  

GIM India will involve a trip to India over spring break. We'll be hitting 5 cities and the Taj Mahal. Can't wait!

Post-Finals Chill

Finals are over! I think they went relatively well - tough, but no surprises. Now it's time to take a break, enjoy the holiday, and spend some serious quality time with recruiting.

Now that finals are over and school is in hiatus until January, the temperature has fittingly dropped to 1 degree Fahrenheit with a -22 wind chill. It's as if the weather realizes that school has come to a hault and has decided to follow suit. We've gotten a fair amount of snow the past few days, which has turned E-Town into a winter wonderland.

Some pictures of Evanston:










This morning, the lake looked particularly unusual - a thin later of fog was rolling over what appeared to be a frozen surface. Here's a video: