Health Care Reform Presents Numerous Opportunities for VCs

Mark Brooks, Managing Director at Scale Venture Partners speaks with VCJ about the Health Care Reform and the opportunities for Venture Capital. More

Overshooting and Undershooting: Scale Venture Partners’ Kate Mitchell and Rory O’Driscoll on the VC Pendulum Swing

By Wade Roush

Part of the point of opening Xconomy San Francisco last month was to put our ear to the ground in the world capital of venture investing. Toward that end, I sat down earlier this week with Kate Mitchell and Rory O’Driscoll. They’re both general partners at Scale Venture Partners, a Foster City, CA-based firm that focuses on helping startups through the middle stage of their growth—after they’ve proved that there are at least a few customers for their products, but before they’ve shown that there are lots of them.

That’s an unusual and tricky place for a venture firm to dwell, and it means that Scale’s team is heavy on partners with operating experience, especially in sales, marketing, and business development. In fact, Mitchell herself co-founded the firm in 1996 after working at Bank of America, where she had guided the development of the bank’s first Internet offerings. (Scale was known as BA Venture Partners through 2006, reflecting Bank of America’s majority ownership in its early funds. The bank has been a minority partner in Scale’s last two funds, a $400 million fund launched in 2007 and a $255 million fund launched this year.) O’Driscoll, meanwhile, has a background in manufacturing and has been a venture investor for nearly two decades, working with mobile, Internet, and enterprise software companies from Omniture to Box.net. More   

Money for the Middle Stage: Part Two of a Conversation with Scale Venture Partners

I sat down last week with Kate Mitchell and Rory O’Driscoll, both general partners at mid-stage venture firm Scale Venture Partners in Foster City, CA. The firm was interesting to me because it lives up to the name: The folks at Scale don’t invest in early-stage startups, where the nature of the product is often still murky, and they don’t invest in late-stage companies, where often all that’s needed to achieve big time success is more capital. Rather, they specialize in that crucial middle stage, where a company has a proven concept but needs to find the ideal market and scale up its sales process. More

Sustaining the Unsustainable

Open Thread Radio

Presented by Kemal Rijken

Thread 5 -- Business / Episode 2 - Sustaining the Unsustainable

In this, the second episode of our business thread we discuss how entrepreneurs use the Internet and what venture capitalists look for in a web start up. [Boris Veldhuijzen van Zanten/Sharon Weinbar]

We talk to Internet entrepreneur Boris Veldhuijzen van Zanten and venture capitalist Sharon Weinbar about how the low overheads associated with starting an online business means that it is possible to start a business in a weekend and how start-up's should just get on with it. More

What Happened to the Surging IPOs of Venture Investors’ Dreams?

After the economic downturn that virtually froze shut the IPO route to exits, venture capitalists last summer began to dream of floodgates soon opening and deserving portfolio companies making a big splash in the public markets. But the demand has not been what they envisioned.

“The market right now is incredibly murky,” said Sharon Wienbar, a managing director at Scale Venture Partners, speaking at today’s New York Venture Summit. “The appetite for people to buy what we have to sell is very low.” More

5 Questions with Kate Mitchell

Alastair Goldfisher

The newest chair of the NVCA talks about women in VC and other issues affecting the industry

Since she was named chair of the National Venture Capital Association’s board of directors last month at the group’s annual meeting in Burlingame, Calif., Kate Mitchell has been busy.

As she says, there is no shortage of priorities for the NVCA to act on. Although carried interest right now is center stage, Mitchell says that the NVCA will continue to work across the industry to reduce the friction in the capital markets, particularly IPOs.

“A lot is happening in Washington, D.C., at a policy level,” says Mitchell, who’s also managing partner of Scale Venture Partners. “There is much we can do here in Washington, on Wall Street and in educating our own membership.”

In between her busy schedule, Mitchell recently answered a few questions from PE Week Managing Editor Alastair Goldfisher.

Q: In addition to carried interest, what other issues facing the VC industry are you addressing?

A: The health care sector is highly impacted by what happens in Washington. Last month, we announced the Medical Innovation Coalition. It is a joint initiative with our portfolio companies to educate policy makers about the impact of government policy on small companies and innovation, including the implementation of Health Care Reform legislation.

Cleantech is also heavily influenced by energy policy. Our efforts here are to be sure that smaller, cutting edge companies can play a role in climate change policy as the U.S. works to reduce its dependence on foreign oil.

Q: In regards to VC-backed exits, liquidity events have been few and far between, especially in terms of IPOs, but how do you see is the rest of 2010 shaping up for your firm and the industry?

A: It depends on what week you ask me. While the number of IPOs this year has already broken the dismal record of 2008 and 2009, it is still well below the level needed by our industry to deliver the kind of returns our investors expect.

That being said, when I look at the underlying operating performance in our portfolio companies at Scale, we are seeing better performance with more visibility into the future than we saw even late last year.

Q: How has the economy changed the way you and your firm have invested?

A: Since the venture industry experienced its shake out, post 2000, the good news is that venture investors and entrepreneurs have learned important lessons about capital efficiency. In an odd way, the recession has made our partners think more about when to increase investments in our small companies so they can pull ahead of their large competitors.

Q: At Scale, what sorts of investments do you find interesting these days?

A: From where I sit, I am interested in cloud computing, which covers a lot of interesting areas from enabling technology to applications; the new smart phone platform, and all that is opening up in terms of applications and shifting business models for all participants, and health care services solutions for a system that will be strained by the increased demand for medical care coupled with a dire need to cut costs.

Q: The percentage of women VCs today is less than what it was a decade ago, according to Cynthia Padnos at Illuminate Ventures. Do you think the VC industry has a gender problem?

A: At Scale, with three out of eight partners being female and a team that includes people of Chinese, Indian and South African descent, we certainly don’t have a diversity problem at Scale. We don’t talk about it. The partners here just look for the best person for a job.

I am very encouraged when I see the numbers of women enrolled today in college-level science and engineering classes. This year’s top ten winners of the Intel Science Award included four women and people of all nationalities. I believe that in the venture and technology sectors, we benefit from a wide range of perspectives.

Will VCs Really Stop Funding Startups?

By John Cook

If the American Jobs and Closing Tax Loopholes Act is passed there will be a lot of unhappy venture capitalists, who say they may stop investing in startups.

The new legislation, co-drafted by democratic senator Max Baucus and democratic congressman Sander Levin, aims to re-classify the returns fund managers and venture capitalists receive as ordinary income and not capital gains, as it has been for much of the last decade. This amounts to a much larger income-tax hit for VCs, jumping from 15 percent to nearly 40 percent.

Proponents of the bill, such as angel investor and blogger Paul Kedrosky, say that since VCs, like hedge fund managers, don’t invest their own money when funding startups, that they should have to pay the same tax rate as the rest of us.

The closing of the tax loophole would appear the expedient thing to do in a political climate where bankers are being besieged over bonuses and the big hand of government is trying to better control the practices of all types of investors. But VCs are crying foul over a bill that lumps them in with all fund managers and takes away the one incentive they say rewards them for their long-term and high-risk investments in startups.

“If you talk to congressman Levin, who has been the architect of this, he’ll even tell you that what we do is different,” said Mark Heesen, president of the National Venture Capital Association (NVCA). “Does he want to see a distinction? Probably not, because he just wants the revenue, but he does see that what we do, from a job-creation standpoint and just from how we operate, is very different than what these other folks do at the end of the day.”

Heesen’s NVCA colleague Kate Mitchell, who is also a managing partner at Scale Venture Partners, said what she does as a VC is more a labor of love and is not as financially rewarding as many outside the industry may think.

“It’s not a high-flying sort of business,” Mitchell said, adding she hasn’t received any carried interest returns since 2000. “Most people I know in the industry have not gotten carried interest. If that entrepreneur drives a fancy new car, I’m still driving my partner’s used car.”

Both Heesen and Mitchell agreed that by removing the “carrot” for VCs, many of them will flee the industry, choosing to become bankers or entrepreneurs. They also suggested the new tax law will lead to less money for startups, as VCs will invest in companies they can flip more easily. More

Venture Capitalists Fight a Tax Increase

By Claire Cain Miller

Venture capitalists are fighting a bill, introduced in the House of Representatives on Thursday, that would sharply increase the taxes they pay.

The bill, The American Jobs and Closing Tax Loopholes Act of 2010, would, among other things, increase taxes paid by investment fund managers on carried interest, which is how venture capitalists make most of their money.

Carried interest, known in the industry as “carry,” is the venture capitalists’ share of the profits after a start-up goes public or is sold to a bigger company. A typical firm collects management fees of 2 percent of the capital it is investing, and 20 percent of the profits from a successful investment.

Today, carry is taxed at the capital gains tax rate of 15 percent, set to increase to 20 percent next year. Capital gains are defined as the gains from an investment after it is sold at a higher price, and the tax rate is low to encourage risky entrepreneurship and investment. But some legislators have argued that investing other people’s money, as opposed to the venture capitalists’ own money, is not that risky. The carry earned that way, they say, should be taxed at the much higher rate of ordinary income, just like wages.

The new bill would require that 25 percent of investment managers’ carried interest be taxed as capital gains and 75 percent as ordinary income. That would work out to be a tax rate of about 35 percent, according to the National Venture Capital Association.

“It’s going to discourage people from going into venture and it’s going to discourage long-term investing at a time when it’s exactly what we want people to do,” said Kate Mitchell, a managing director at Scale Venture Partners.

Venture investing requires taking a risk on an idea and then working closely with the entrepreneurs over a decade, she said. If the returns are taxed as ordinary income, she is worried that smart investors will choose other places to work, like hedge funds, that promise faster returns but do not create new companies or jobs. More

Venture Funding Improves for Some Startups

By Scott Duke Harris

sdharris@mercurynews.com

With the venture capital spigot slowing to a trickle, Silicon Valley's startup economy got leaner and meaner through the Great Recession. But a survey scheduled for release today suggests that financial prospects are improving for mature startups.

For the third straight quarter, the average value of successive rounds of venture capital financing edged upward, according to a survey conducted by the law firm Fenwick & West of 104 information technology and life science startups based in Silicon Valley.

The survey, which includes companies that are not Fenwick & West clients, reinforces the view that the valley economy is on the mend. "There's still a long way to go, but it's clear the tide has turned," said Adeo Ressi, founder of TheFunded.com and Founders Institute, two startups that cater to the valley's entrepreneurial economy. "More deals are getting done, and the valuations are improving."

Mountain View-based Fenwick & West found that 49 percent of venture financings in the first quarter of 2010 were so-called "up" rounds, meaning that the price per investor share in a startup increased from the previous round. Thirty-two percent of new financings were "down" rounds and 19 percent were flat.

It was the third straight quarter in which "up" rounds exceeded "down" rounds — but at numbers still far below the levels of 2008. In the third quarter of 2008, Fenwick & West's surveyfound 73 percent up rounds for valley startups before the full impact of the financial meltdown was felt by the venture industry. More

NVCA Chair Kate Mitchell Joins SVB Financial Group Board of Directors

SANTA CLARA, Calif. — May 17, 2010 — SVB Financial Group (Nasdaq: SIVB), the parent company of Silicon Valley Bank and financial partner to technology companies and venture capitalists worldwide, announced that Kate Mitchell, Managing Director, Co-Founder of Scale Venture Partners, and Chairman of the National Venture Capital Association, has joined SVB’s board of directors. John Robinson, former financial services industry professional and banking regulator, joined SVB Financial Group as an advisory director.

"Kate and John will add significantly to our dynamic, hands-on board of directors and we look forward to their perspectives, guidance and insights as we navigate the many changes facing the financial services industry," said Ken Wilcox, CEO of SVB Financial Group and Silicon Valley Bank. "Kate’s experience with entrepreneurs and influence within the venture capital industry complements our core business greatly; and John’s career in banking will offer invaluable insight as we continue to find new ways to support our innovative clients.”

Mitchell is a Co-Founder and Managing Director of Scale Venture Partners, a venture capital fund with more than $900 million under management located in Silicon Valley, California (www.scalevp.com).  Mitchell leads investments in software and business services. She has more than 25 years of experience in technology, business development, finance and management and she has actively worked with successful portfolio companies such as Hubspan, Jaspersoft, mBlox, and Wayport.

Mitchell is also the newly appointed Chairman of the National Venture Capital Association (NVCA) and a member of its Executive Committee. She is actively involved with regulatory and economic policy impacting the venture industry and the companies that are funded by venture capital in the areas of technology, cleantech and health care. As Chairman, Mitchell promotes the importance of venture capital to the U.S. economy and innovation nationwide. She also sits on the Silicon Valley Bank Venture Capital Advisory Board

Prior to his service as Executive Vice President of Corporate Risk Management for Washington Mutual, Robinson spent five years as Deputy Comptroller for the Office of the Comptroller of the Currency and ten years in a variety of senior management roles at the Office of Thrift Supervision. In both regulatory roles, Robinson was responsible for supervising and monitoring the health of financial services institutions in Western regions of the U.S.

Both Mitchell and Robinson’s board positions were effective as of April 22, 2010.  Mitchell was elected by SVB’s stockholders at its Annual Meeting of Stockholders on that date.  

About SVB Financial Group
For nearly three decades, SVB Financial Group and its subsidiaries, including Silicon Valley Bank, have been dedicated to helping entrepreneurs succeed. SVB Financial Group is a financial holding company that serves companies in the technology, life science, venture capital and premium wine industries. Offering diversified financial services through Silicon Valley Bank, SVB Analytics, SVB Capital, SVB Global and SVB Private Client Services, SVB Financial Group provides clients with commercial, investment, international and private banking services. The company also offers funds management, broker-dealer transactions and asset management, as well as the added value of its knowledge and networks worldwide. Headquartered in Santa Clara, Calif., SVB Financial Group (Nasdaq: SIVB) operates through 26 offices in the U.S. and international operations in China, India, Israel and the United Kingdom. More information on the company can be found at www.svb.com.

Banking services are provided by Silicon Valley Bank, a member of the FDIC and the Federal Reserve System. SVB Financial Group is also a member of the Federal Reserve System.

State Correct to Invest in Clean Tech, Growth Capital Symposium Speaker Says

By Tim Henderson

YPSILANTI — Michigan was correct to focus economic development activities on clean technologies, Kate Mitchell, the opening keynote speaker at the 29th annual Michigan Growth Capital Symposium, said Tuesday.

“The investment Michigan is making in clean tech will matter, and it will make you stand out from other states. You're so smart to be doing it here,” said Mitchell, the co-founder and managing director of Scale Venture Partners, a San Francisco-based venture capital firm with almost $1 billion under management.

Mitchell is also chairman-elect of the Washington-based National Venture Capital Association. She said that two continuing trends in VC investing will be clean tech and social networking sites and related technologies. She said that while a lot of attention has been paid to clean tech, investment in the sector has continued to lag, particularly spending by the federal government.

For example, the National Institutes of Health invests about $30 billion annually in grants for medical research, the U.S. Department of Energy invests only $1.5 billion. Despite a relative lack of federal spending, the sector's growing influence was shown by two slides.

In 1998, spending by VCs nationally included nothing for clean tech. Last year, clean tech spending accounted for 13 percent of all VC spending nationwide, a number she expects to continue to rise substantially this year and again next year. One plus for the sector? “There are no lack of good ideas,” she said. More