"Is VC Past Its Prime?" or "Five Things I learned at the MIT VC Conference"

The keynote speaker at the MIT VC Conference, Alan Patricof of Greycroft Partners, was clear:  venture capital funds are getting 'inappropriately' large and change is coming.  Mr. Patricof is a legendary pioneer in the VC world (but note: while he is fine with being termed a "generational figure", compare him to Bono or Sting but never Tony Bennett), but the current market is not sustainable.  Because of the investment metrics and their need for certain returns, LPs writing larger checks means that VCs are forced to make larger investments into companies that don't need that much money.  The prevailing winds in the VC industry are heading toward capital efficiency and VC2.0, which he summed up as: "small is beautiful".  VCs, said Patricof, need smaller, more targeted investing; smaller funds will find the most success in this economy. Overall, the MIT VC Conference was, in my view, a big success.  MIT always does a great job bringing together talented and accomplished speakers and attendees to advance learning.  And it is always good to reconnect with friends in the industry as well as new many new faces.  While I could go on at some length about the information presented at the conference, here are a few points that I thought were valuable:

1. Capital Efficiency is Key.  As Alan Patricof noted in the keynote, which was echoed by several of the presenters, the trend of ever increasing VC funds is not sustainable.  Oversized funds investing $20-50MM in companies will become the exception rather than the trend.  The current economic environment will force VCs to focus on targeting their investments and using more discipline.  That could be good news for early stage companies.  I will note that not all of the VCs on the panels agreed that funds are too large.  Some argued that they invest their funds in different ways, or have founded new efforts like Dogpatch Labs or Start@Spark to bring seed capital to startups, but nonetheless did agree that the market is applying new pressures on VCs.
2. Will This Bring New Relief to the Funding Gap? The effect of this pressure on VCs in relation to angel investors was touched upon at the conference, but will likely be looked at in more detail as the market develops.  As VC funds increased in size over the past few years and angel investors increasingly formed angel groups to invest larger amounts, a capital gap increased for early stage companies struggling to locate seed funding.  If VCs retreat to smaller funds, angel groups may have to do the same, which may alleviate the situation and provide much needed seed capital to entrepreneurs.
3. Entrepreneurs Need to Focus on the Problem.  More discipline in the VC market means that entrepreneurs will need to be ready.  As Rich Wong of Accel Partners noted, it is not enough to pitch the next best thing as a solution - VCs need more than just a cool app.  To paraphrase, "entrepreneurs need to spend more time on articulating the problem rather than just pitching the solution".  If you are not focused on solving a problem, your solution will come up short.  True.
4. Mobile Hardware Doesn't Matter.  An interesting discussion about the future of mobile devices showed that in the greater scheme of things, mobile hardware design is not the future - unless of course it solves a new problem.  Humphrey Chen of Verizon noted that it has 66 mobile devices in its catalog, each of which is pretty similar in functionality in relation to its competitors.  But that means there are 66 different ways for which developers have to design solutions.  That is not sustainable.  As mobile communications develop and people begin to move more services into the cloud, your mobile device will not matter as much.  It is the software that will drive innovation.  But even there, where apps are currently selling for an average price of $2.78, innovation is needed to propel the industry forward.  John Backus of New Atlantic Ventures noted that the current "chaos in the mobile market is a great fertile opportunity for entrepreneurs".
5. Be Bold, Fail Fast.  ChaCha CEO Scott Jones presented important tips for entrepreneurs to remember: you have to be bold in your vision and be sure to fail fast.  Don't be afraid to try new things.  If they don't work, stop doing them.  But also be willing to come back to them later - maybe it was the timing that wasn't right.  The key is that entrepreneurs need to be focused on solving problems and taking risks to provide the right solutions.
6. Oh, and Hubspot can really throw a party.  Thanks Brian and Dharmesh!

What do you think?  Is venture capital working for entrepreneurs?  Can something new provide a better solution?

Massachusetts Data Privacy Regulations Get Delayed ... Again

For those of you stressing over the changes to personal information policies and procedures required by the pending Massachusetts data security regulations, you can breathe a sigh of relief... sort of.  The deadline for implementing the new policies has been pushed back - for the third time.  Now the new regulations will take effect on March 1, 2010 (rather than in January), and some of the more controversial aspects of the law have been watered down to make the requirements more palatable to small businesses. If you are a business owner who is not aware of the upcoming changes, you need to take a look.  The far-reaching regulations are a response by lawmakers to the highly-publicized security breaches at TJX, The Boston Globe, and others where thousands of social security numbers, credit card numbers, and other personal information were carelessly unsecured.  As described by Mass High Tech:

The Massachusetts regulations, first promulgated last fall based on a legislative directive, will go further than any other state by requiring any company that handles state residents’ sensitive data to take measures to protect it. Measures include encryption and extend to ensuring that all third-party IT service providers adequately protect sensitive data — a clause that drew criticism from business owners as an onerous requirement.

Specifically, the revisions to the data security regulations moderate the specific requirements to make them more consistent with the federal privacy requirements under the Gramm-Leach-Bliley Act.  The new Massachusetts privacy regulations apply to any business - yes, even outside of Massachusetts - engaged in commerce that collects and retains personal information of Massachusetts residents in connection with the provision of goods and services.  While these regulations will apply to all businesses regardless of size, the new revisions make clear that the regulations will apply a risk-based approach based on the size and scope of each business. (i.e., smaller businesses storing small amounts of information will be required to take different actions than would a large company with much more information and resources).

So, what does this mean for you?

If you are a business owner who collects the first name or initial and last name of a Massachusetts resident in combination with that resident's (a) Social Security number, (b) drivers license or state issued identification card number, or (c) financial account number or credit or debit card number, you must comply with the new regulations by March, 2010.  That includes, at a minimum:

1. creating a comprehensive information security program for safeguarding against "reasonably foreseeable internal and external risks to the security, confidentiality, and/or integrity" of the personal information, including employee training and education;
2. encrypting all data and files containing the personal information to the extent "technically feasible" and maintaining "reasonably up-to-date" firewall protection and operating system security patches; and
3. taking "reasonable steps" to select and retain third-party service providers that are capable of maintaining appropriate security measures consistent with these regulations and any applicable federal regulations.

The steps that were originally included as required actions are now offered as guidance to comply with the regulations, but whether a company is ultimately in compliance will be determined on a case-by-case basis.  In any event, all businesses should take a look at their data security procedures to make sure they are up to date.

Are you concerned about how the new regulations will affect you?  What do you see as the biggest challenges to comply?

Great business plan - when location means everything!

Great article from the Wall Street Journal that was fun to read because my wife and my MIT Sloan friends often frequent the Clover Food Truck in Cambridge.  The Rosemary Fries described in the slideshow are a bit hit!  Not exactly what you first think of with a lunch truck:

Lunch trucks once represented the nadir of culinary achievement, conjuring up images of withered hot dogs and hygienically-challenged kebabs. Today, even some chefs from Michelin-starred eateries are migrating into a sector of the food business that seems particularly well suited for a financial downturn. For would-be restaurateurs, launching a culinary truck requires far less start-up capital than a brick-and-mortar restaurant. At a time when consumers are cutting back on restaurant spending, a food truck serving inexpensive lunches and snacks can be an easier sell to diners.

They always say that location is everything with small businesses, particularly restaurants.  These businesses are not only able to capitalize on that, but also connect with their customers via regular Tweets on where the truck is located, specials of the day, and updates on what food is avaiable (or has been sold out).  Another great way to use older techniques with modern tools to keep customers engaged.