Friday, May 15, 2009

What exactly is a "seedling"?

A lot of the VC's I have spoken with recently are increasingly interested in funding "seed" stage companies. Of course, that has to do with the seemingly attractive economics of these companies. Valuations are quite low now so a large piece of the company can be acquired for less.

That is, of course, what venture capital is all about: funding companies (that often might not get off the ground without them) and having everyone end up ahead of where they would be alone. I am a huge believer in venture capital and its role in promoting innovation. It is (or should be) one of the great sources of long term growth we have.

But there's a problem with what I am also hearing from some of these same VCs: they give their seedlings a few months and then they have to have a clear path to "monetizing" (I use that word because it is such an important piece of the industry jargon).

That's what worries me: We have a seedling lemon tree in our front yard. According to all the experts, each time you see a bit of new growth in this seedling, you are supposed to pinch it off; this is so that growing the new shoot doesn't completely sap the whole tree. And you are supposed to do this for a few years.

The approach to the lemon tree is the way I have traditionally thought about seed funding: plant a seed and then nurture it till it realizes its potential (within reason). We have a few clients that are great examples of this: Canesta, today the leader in 3-D vision sensors, has been nurtured and is today hitting the ball out of the park. And cPacket, with a revolutionary approach to chip design has the most efficient approach to "complete packet inspection" (a networking and IT concept that is just coming into its own) is in just the right position today to be capturing that market. And I just learned about a friend's company, ZettaCore, that is doing some really important stuff in materials science and has investors who believe in this nurturing approach to building winners in the long term.

It's not clear, however, the most investors have that "lemon tree" approach to investing. They give lip service to seedlings and then are apparently willing to only give them a little time to turn their big idea into big business.

Sure. Everyone is under a lot of pressure today and needs to see "positive momentum" to keep funding companies. But, has the definition of "positive momentum" become too limited among most VCs? And does this mean that many of the seeds that have the potential to grow into important trees may be killed before they have a chance to blossom?

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