MIT VC Conference: December 6th

The MIT Venture Capital club just opened up registration for the 11th annual MIT Venture Capital Conference. It happens on December 6th, and while registration costs $245 for early birds, there's also an entrepreneur showcase in the evening that's free for anyone to attend.

I'll be there, moderating the closing session with Harmonix Music Systems co-founder Eran Egozy. And I'm going to try to arrive early to see Dan Primack's opening session with Paul Maeder and David Fialkow, from Highland Capital Partners and General Catalyst.

More on the event:

...Every year, the conference brings together over 400 venture capitalists, entrepreneurs, and industry leaders to discuss current opportunities and challenges in Venture Capital investing.

This year, the conference theme is Reinventing Venture Capital. A Keynote Panel of founding partners from leading venture capital firms will open the conference with a discussion of evolving strategies of the venture capital community and the entrepreneurial ecosystem in the dynamically changing industrial, financial, and economic conditions around the world.

Dr. Jamshed J. Irani, Director of Tata Sons, one of India’s oldest, largest, and most respected business conglomerates, will deliver lunch keynote address. The conference will close with a fireside chat with Eran Egozy, CTO and Co-Founder of Harmonix, a MIT Media Lab startup which created Rock Band and Guitar Hero.

Highland Capital: We Do Cleantech Now, Too

Paul Maeder, co-founder of Highland Capital Partners, was a guest on NPR's 'Talk of the Nation' yesterday, analyzing the state of the economy. Maeder used the radio spot, essentially, to announce that Highland's now interested in doing energy and cleantech investments. In talking about innovation in the post-war period, Maeder suggested that there have been three major cycles:

1. The personal computer in the 1980s
2. The biotech boom of the 1990s
3. The Internet bubble of the late 1990s

"The next wave of innovation is going to be around energy and the environment," Maeder said, suggesting that there are big opportunities in "energy production, and making energy consumption more efficient."

I e-mailed Maeder this morning to ask him whether Highland is planning to actually dedicate money and partner time to the cleantech/energy space, as Polaris and General Catalyst have. He said they are, and that he's "on it full-time now."

Highland's only real cleantech investment so far was a Utah company called Amp Resources, which developed geothermal power generation facilities; Amp was sold last year for $90 million to an Italian company, Enel. (An earlier deal to sell Amp didn't go so well.) Maeder and Dan Nova from Highland had served on Amp's board.

As a side note, I spotted Highland's other founder, Bob Higgins, having breakfast this week with ex-Presidential advisor and Harvard prof David Gergen. As for whether Gergen will be joining Highland as a venture partner, Maeder would only say, "I can neither confirm or deny." But I think that's a long, long-shot.

What Happened at Today's Panel Discussion About Non-Compete Agreements

Probably the most interesting aspect of this afternoon’s discussion of the impact that non-compete agreements have in Massachusetts, held at Harvard Law School, was the absence of any company willing to publicly defend the practice of having employees sign non-competes.

The organizers had lined up Melanie Haratunian, an Akamai executive, to represent that point of view, but she backed out earlier this week. The reason? Akamai is apparently in the midst of enforcing a non-compete agreement against a former employee, and was concerned that that employee’s counsel might be in the audience today. That, at least, was the story I was told beforehand by several of the event’s organizers; perhaps one of you can fill in the details.

Moderator John Palfrey simply said, in opening the discussion, that Akamai “had to pull out of this event due to some pending litigation related to this topic.” (When I called Akamai spokesman Jeff Young for confirmation, he said he was not aware of any such litigation.)

I wonder why, if the stalwarts of the Massachusetts innovation economy believe so strongly that non-compete agreements are essential to retaining their best people, that no one would come forward to defend that position? EMC? Nuance? Genzyme? Boston Scientific? Anyone? Anyone?

Update: Here's some video I shot:



Some notes from the discussion…

Harvard prof. Lee Fleming said that people and ideas move from states that enforce non-competes to states that don’t (think California.) His research has found that non-competes squelch employee mobility by about 20 percent, and 30 percent for experts in a given field. Fleming asked whether non-competes might stifle the reallocation of the best people to the best business opportunities.

Paul Maeder of Highland Capital Partners said that non-competes are like diabetes -– a silent killer. Before a company can get off the ground, a prospective founder thinks twice about risking a lawsuit.

One problem with the way non-compete agreements are written, said Bijan Sabet of Spark Capital, is that they often prohibit people from working in “an area deemed to be competitive,” which can be vague.

Maeder said he is seeing a lot of California start-ups crop up that aim to challenge Akamai’s business of Internet content delivery. He said that one of them “will likely become the market share leader,” and asked whether we want that successor company to be in California, or here

Rich Miner, an exec at the Cambridge office of Google, says that the company doesn’t require people to sign non-competes. At a previous company, Wildfire Communications, Miner recalled trying to hire an engineer from Comverse. Comverse decided to chase the employee and enforce the non-compete, and so Wildfire had to pay him for six or eight months before he could actually begin working.

Maeder observed that Washington State, where non-competes are enforceable, has produced two great tech companies: Amazon.com and Microsoft. But he noted that there had been no great operating system spin-offs from Microsoft, or online bookstore spin-offs from Amazon.

Maeder also compared non-competes to indentured servitude, and said they foster “sleepiness” here in Massachusetts. He advised employees to ask about them at the beginning of the interview process, not on the first day of work -- when it's too late to negotiate anything different (like six months instead of a year).

Maeder says that he discourages his portfolio companies from requiring employees to sign non-competes, but he said that isn’t yet a firm-wide policy at Highland. (It is, apparently, at Spark Capital.)

Maeder suggested that there are three ways to change the rules surrounding non-competes in Massachusetts:

1. Legislative fiat (“I don’t think it’s going to happen,” he said, having visited Beacon Hill recently. Miner agreed, saying that change needs to be “a grassroots effort.” He did say, though, that he mentioned the issue to Governor Deval Patrick when Patrick visited Google’s office recently.)

2. Educating employees about their impact

3. Get venture capitalists and executives who serve on boards to speak out about the issue with the companies they work with.

During the Q&A period, Steven Chow, an attorney at Burns & Levinson, recalled that he used to sue EMC on behalf of Digital Equipment over employees who were violating non-compete agreements by going to work at EMC. (Didn’t that do a good job of preserving DEC’s dominance?) He said that non-competes help “keep the cost of engineers down,” since employers don’t have to compete as aggressively on salaries.

'Twas a good discussion, but it would’ve been about 10,000 percent more interesting had someone been on the panel to defend non-competes as a tool for talent retention, or make a case that getting rid of them wouldn’t necessarily make Massachusetts more competitive.

Next time?

Last Night's "Thinking Big" Party: How Do We Build a New Generation of Really Big Companies in Massachusetts?

I've been interested for a while in the question of how we can build a new generation of "pillar" companies in Massachusetts...companies like EMC, Lotus, DEC, Akamai, Genzyme, and Boston Scientific.

Last night, a group of folks put together a cocktail party to talk about the issue.

It was an amazing crowd -- it felt like someone had summoned the 'Super Friends' to the Hall of Justice. George Hatsopoulos, founder of Thermo Electron, was there, as was Bill Warner, founder of Avid Technology, Carol Vallone, CEO of WebCT, Scott Griffith, CEO of Zipcar, Tim Healy, co-founder of EnerNOC, Rick Hess, CEO of Konarka Technologies, Aron Ain, CEO of Kronos, Jonathan Seelig, co-founder of Akamai, and Robert Coughlin, the new head of the Mass Biotech Council. At one point, Russ Wilcox of E Ink was showing off a new Amazon Kindle e-book reader, which uses a screen made by his company. Wendy Caswell, CEO of ZINK Imaging, was our host, and the firms KMC Partners, Goodwin Procter, and BSG Team Ventures helped underwrite the event.

Dan Bricklin has some photos and an audio recording of the discussion. Paul Maeder from Highland Capital Partners touched on some of the same issues he brought up at a lunch last month: "We have been selling the seed corn," is his assessment.

Here are some of my thoughts on the evening's "main event" -- a conversation that Maeder and Michael Greeley of IDG Ventures led, with my help and lots of input from the crowd.

First, the question of why pillar companies are important:

1. They get big, employ lots of people, and tend to be supportive of their community (through philanthropy, supporting local schools, etc.)
2. They tend to attract media and Wall Street attention, which lets the world know something important in their sector is happening where they are based. They also hold conferences for customers/users... think of the annual MacWorld conference in San Francisco as an example. All of this sends a message that a particular place is a center of gravity, which brings more people interested in that area -- and more small companies -- to that place.
3. They tend to think like acquirers rather than acquirees.
4. They tend to spin off smaller companies in their space. (But we need to get rid of non-compete agreements to foster this.)
5. They serve as a source of experienced employees and executives to other companies in their space. (Again, we need to get rid of non-compete agreements to foster this.)
6. They make it easier for companies in their space to recruit people to the area. Say a consumer tech company in Boston -- like Bose -- is trying to bring a marketer in from the West Coast. That person, should things not work out at Bose, will not have a lot of other wonderful choices of other employers here in the Boston area. Same is not true when a chip company like Intel tries to recruit people from anywhere in the world to move to Silicon Valley.
7. They pay more taxes.

Now, as for what we can do...

1. Entrepreneurs need to have a jones to build a big, important company. The typical New England VC will not push them to brush off acquisition offers and stay independent.

2. Big companies get their start by discovering emerging sectors and opportunities. I don't think we're going to build an important, independent new PC company in Boston, or a networking equipment company, or even a medical device company. Boston Scientific got big because they saw the opportunity for less-invasive medical procedures before anyone else. Invent a cool new medical device today, and you're basically gonna get integrated into the product line of someone like a Boston Scientific or Medtronic before you have a chance to launch a second product.

3. So that means we need to support entrepreneurs dedicated to building pillar companies in new, as-yet-undefined market sectors. (Avid, which helped establish the market for digital video editing, is a great example.) I think the media -- that's me -- plays a role, and I'm gonna do my best to focus on entrepreneurs working on these new frontiers. But angel investors and VCs also play a role (can they avoid the temptation to fund a serial entrepreneur doing his seventh enterprise software start-up, instead of a first-time entrepreneur who is breaking new ground?) And finally, entrepreneurs and executives who have built really big companies need to give back. This does not just mean donating to or speaking at their alma maters. They ought to be serving on boards, or as informal advisors, to a handful of interesting start-ups in or near their areas of expertise. Some do, but too many don't.

Dharmesh Shah, founder of HubSpot, offers a different perspective on his blog.

NEVCA Lunch: A Critical Look at the New England Market's Demise

The New England Venture Capital Association gave its annual networking luncheon a provocative title: "California Dreamin': A Critical Look at the New England Market's Demise."

Two two speakers were introduced as Muhammad Ali and Smokin' Joe Frazier; in real life, they were Paul Maeder of Highland Capital Partners in Lexington, and Tim Draper of the Sand Hill Road firm Draper Fisher Jurvetson (that's Draper on the left). Playing the role of Michael "Let's Get Ready to Rumble!" Buffer was Tom Finneran, host of Finneran's Forum on WRKO. The main event was held this past Thursday, in the Regattabar at the Charles Hotel. (And unfortunately, there was a lengthy musical interlude.)

Maeder and Draper, it turns out, were classmates at Harvard Business School.

Draper spoke first, giving a rambling talk that was anti-architecture and anti-history.

"Everyone I know in Boston is always quoting people from the past," Draper said. There are constant references to the Boston Tea Party, the Green Monster, "the British are coming." He said Boston needs to "maintain the philosophies" that made us so revolutionary in the 18th century, but "blow up the buildings," which he seemed to see as representative of some kind of crusty thinking or ennui. Apparently, bricks inhibit innovation.

But aside from that, Draper didn't take many digs at Boston or New England. He cited a few of the companies that have made DFJ money here, including EnerNOC, AthenaHealth, and Parametric Technology Corp. (He skirted the issue of whether DFJ will continue to have an affiliate fund locally ... there used to be DFJ New England, in Cambridge, but that fund has separated from the mother ship and become New Atlantic Ventures.)

Draper spent a lot of time talking about how "entrepreneurs are heroes," and how most of the "solutions to society's problems come from business," not government; Finneran, former Speaker of the House here in Massachusetts, tried not to wince. Draper listed a number of successful companies that have taken on "something that's old and decrepit and needs to be changed":

Hotmail reinvented the post office
Overture reinvented advertising
Skype reinvented telecommunications
...and so on...

None of Draper's examples were Boston companies.

Toward the end of his talk, Draper launched off into la-la land. He talked about how the future is "a la carte government," where citizens will be able to choose to abide by the corporate structure laws of the Cayman Islands, the religious freedoms of America, the healthcare of Sweden, etc. (Not sure exactly how that will work.) He talked about the potential for "near-thought communication," and something called a "food drop," and the need for the human race to "get off this planet."

Draper wrapped up by singing -- no, caterwauling is the better word -- a song he wrote, a capella, to the tune of John Lennon's 'Imagine.' Some random lines: "Imagine there's no business".... "Imagine there's no VCs" ... You get the picture. I fully support Yoko Ono in demanding a couple million in royalties from Draper for this "performance." (Maeder sang back up, so he's on the hook, too.)

Maeder's talk actually had some shape to it, focusing on "how we can make New England better than it is."

He started by slyly taking apart the notion that Massachusetts is somehow lagging California, using a lot of stats.

1. Nobel Laureates
California has 74, Massachusetts 56
But if you adjust it per million population, California has 2.0, Mass has 8.8

2. NIH grants
California has received 5192, Massachusetts 7464

3. Small companies
California has 1.4 million, Mass has 296,000
But adjusted per million population, California has 39, Massachusetts has 46

4. Patents
California has been granted 25039, Massachusetts has 4368 (not sure of the time-frame here)
Adjusted, it's 688 to 683

5. Average temperature
San Francisco is 53 degrees Fahrenheit, Boston 52

6. 2007 tech IPOs by region, <$400M
California has had 11 so far, New England has had 8

7. 2007 tech IPOs by region, >$400M
California has had 5, New England 6

8. VC IRR (internal rate of return) over the last 15 years
California VCs have chalked up a 44.4 percent IRR, Massachusetts 57.8 percent

Maeder did concede that 39 percent of the US companies that have $1 billion or more in annual sales are headquartered in California, and then he went on to focus on three really interesting problems.

First, Maeder argued that "we sell just a wee bit too soon...we take the money and run." Cisco, he observed, got big not by selling out, but by becoming an acquirer of little companies. "We have been selling the seed corn," he said.

A second challenge is that Harvard, the top-ranked university in the world in terms of faculty publications, hasn't been doing a great job of commercializing its inventions; Harvard falls off the list when you look at number of patents issued, leaving MIT, CalTech, and Stanford on top of the heap. (Draper chimed in later, observing that "we see nothing from Harvard," and theorizing that "the people who get into Harvard haven't failed...so there's a fear of failure." It's unlikely that you'd become an entrepreneur if you fear failure, he said. "You don't create a monster business by being smart," he continued. "You create a monster business by being dumb. It's an irrational thing to do.")

Maeder's third hot-button issue is that non-competes are enforced in Massachusetts; not so in California. Enforcing non-competes is "a silent killer, like high blood pressure," Maeder said. "It has a dampening effect on innovation," discouraging employees from big companies from going off to give life to new start-ups.

Draper, loopy as he was, conveyed that uniquely West Coast sense of possibility: pitch me on an all-electric sports car, and I just might invest. Maeder was logical, focused, and methodical: pure East Coast.

The dessert served at the lunch may have biased me (Boston cream pie, one of our city's great innovations), but I thought Maeder won this match.