Every year, Microsoft bigwigs trek down to Silicon Valley and brief the VC community on their view of the world and plans for the future.  They are kind enough to invite East Coast VCs, not just locals, and so I flew out last week to partake in the annual event alongisde a few hundred of my VC brethren.  Just as when I had attended the event in the past, the highlight was Steve Ballmer's address.

I personally think Steve Ballmer is the CEO of the century.  When he joined college buddy, Bill, the company's revenues were $2.5m.  This year, they crossed $60 billion.  Yet, when you meet him in person, he remains incredibly down-to-earth and accessible.  I remember a few years ago he gave out his email address.  For fun, I sent him an email.  I was stunned when he replied right back.  I love watching him speak as he is full of fire and brimstone, but also very insightful.

A few of the highlights from this year's discussion:

• Ballmer claims he thinks of himself like a VC (ok, he was probably playing to the crowd a bit) - and tries to have a similar mindset as he makes decisions to prioritize and direct their $9 billion R&D budget.
• He couldn't have been more bullish about the tech industry (which, he pointed out, feels as if it's in a different world than the CNBC crowd we've all been watching lately) – very excited about all the innovations in cloud computing, mobile, search, the enterprise and elsewhere.
• Interestingly, he identified his top competitors as Google, Apple and Linux.  Secondary foes included IBM, Oracle, Amazon and SAP.  It goes to show how consumer focused Microsoft has become that two of their top three competitors are essentially consumer companies and brands.  Amazingly, almost all of these companies are doing well – in large part thanks to innovation and global expansion.
• He admitted that they screwed up the Yahoo acquisition but vowed to get better at such transactions.  With their recent issuance of debt, clearly there is more to come.
• In times like these, Ballmer indicated, he wants to be the guy with his foot pushing hardest on the pedal, implying that some of his competition might be thinkig of letting up due to the economic situation.

Microsoft clearly remains a force to be reckoned with, particularly with an executive as talented as Ballmer at the helm.

One of my closest friends is Andrew Janower of Charlesbank Capital.  His eight year old daughter, Samantha, has a brain tumor, and AJ has created a non-profit to find a cure called the Pediatric Low Grade Astrocytoma Foundation.  Their story was recently featured in the WSJ.

American Express has named the foundation one of the finalists its considering providing a $2.5 million grant to.  They will make their decisions on September 29th based on cardmembers' votes.

If you are a card member, please take two minutes to VOTE (no donation required, just a click).  Here's what you do:

1. Go to http://www.membersproject.com/project/view/NN934A

2. Scroll down to "Vote for this Project" (located under the video/photo window)

3. Click on "Vote for this Project"

4. Click on "Log In"

5. Log in using either your American Express Card number* or your on-line account information

6. After logging in, you should have returned to the Project Brain Child description page –
http://www.membersproject.com/project/view/NN934A

7. Scroll down AGAIN and click on "Vote for this Project"

8. You're done!

Thanks for your consideration!

I don't need to repeat the facts behind last week's financial turbulence – from Lehman Brothers to Merrill Lynch to AIG and beyond.  To paraphrase Jon Stewart, it's a good thing the audience can't see me cry during the commercial breaks.  Beyond the obvious coverage in the Wall Street Journal, Business Week, The Economist and the Financial Times, a few of the sites I've found insightful are  Seeking Alpha and the Prudent Bear.

Watching the carnage on Wall Street has been a spectator sport for most of us in the VC and start-up community.  The rough going our investment banking cousins are experiencing has caused us to put down our popcorn and soft drinks and ask ourselves:  how am I impacted?  What will all this mean to the entrepreneurial economy?

In the dozens of meetings and conversations I've had with entrepreneurs and VCs this last week, it is clear that everyone is shell-shocked at the macro level, but surprisingly sanguine on the micro level.  "Our traffic numbers keep going up and up," pointed out one B2C CEO, shaking his head in disbelief.  "Our portfolio is basically not affected," claimed one VC with a tinge of hubris.

Yet everyone is clearly affected, it's just a matter of degree.  Henry McCance, one of history's great venture capitalists and chairman of Greylock, was quoted by my partners (three of whom are ex-Greylock) as saying in the midst of the 1998 Long Term Capital crash (which some say was worse than the 1987 market crash), "We know our portfolio is down 30%, we just don't know where".

But it's better to be down 30% than 300%.  In truth, most early-stage companies are not that affected by the stock market gyrations or even a general recession.  Yes, some consumer-based "if you build it, they will come" businesses will be more susceptible to the inevitable pullback in advertising spend.  But most venture-backed start-ups are technology-driven with deep Intellectual Property (IP).  If the technology works, value is created.  With only a few customer proof points, a few million of revenue can be generated from scratch and even more value can be created.  The holding period for early-stage start-ups is typically 6-8 years, and so an episodic recession shouldn't materially affect long-term value creation, so long as follow-on financing is available.  One VC observed that his partnership had done an analysis and realized that, "we have 20 companies in our portfolio seeking follow-on financing this year.  They'll nearly all get done, but none of them will be meaningfully up rounds.  Instead, there will be many flat and down rounds ahead".

But the VC and entrepreneurial community went through a far rougher period only a few years ago and most firms are run by executives who remember those times and remember the prudent actions required:  cust costs, but don't cut to the bone; raise more capital than your plans suggest you need to cover the dry period; in general, increase fund reserves and assume longer holding periods; with employees and investors, set expectations for patience and long-term business building rather than quick hits and quick flips. 

Further, I would observe that many of the macro-trends that the entrepreneurial economy is based on remain very positive.  For example, I would argue that the following trends are inevitable:

• The $600 billion advertising industry will shift to online (particularly search) and mobile – an area that is still growing north of 20% per year.
• Advances in nanotechnology and materials science will yield valuable medical technologies and devices – with health care spending still 18% of GDP, this is a big sector of the economy ripe for innvoation and value creation.
• Advances in energy technology will yield profitable new approaches in solar, wind, LEDs, batteries, and numerous other renewables – revolutionizing this massive industry (see Tom Friedman's inspiring NYTimes magzine:  "The Power of Green").
• Globalization (reported thoughtfully in a special report in this week's Economist) continues to accelerate, making it easier for young companies to attract capital and deploy resources in the most efficient locations, irrespective of geographical barriers.

At the same time that these macro-trends are bubbling along, the fundamentals of the start-up ecosystem remain strong — seasoned (and novice!) entrepreneurs are enthusiastically tackling these issues.  Venture capital funding remains plentiful – almost everyone in the industry will tell you there is still too much money chasing too few ideas (good for entrepreneurs, but more challenging for individual fund returns!).  The ecosystem has modest dependency on the debt markets, inflation or commodity prices.

For all these reasons, although I am a short-term bear (yes, it will continue to be an ugly year or two for the global macroeconomy), I remain a long-term bull when it comes to the entrepreneurial economy and the potential for start-ups to impact the world and create value.

The role of a Chief Technology Officer (CTO) in a company is an incredibly critical, but poorly understood one.  Unless a member of the founding team is a strong technology visionary that occupies that role, many start-ups neglect the position.  Instead, they assume the CIO or VP of Engineering can be responsible for setting technology strategy as well as delivering on it – an impossible burden even for the most talented technology manager.  Within our portfolio, I have always been an advocate of separating the two positions:  an internally-facing VP of Engineering or CIO, who is responsible for delivering the goods on time and on budget on an operational, quarterly and annual basis; and an externally-facing CTO, who is looking over the horizon to set strategic direction and establish the priorities of where to invest taking into account how the world will look in 3-5 years.

Therefore, I read Lotus founder, Mitch Kapor’s call for the next President to hire a CTO for America in MIT’s Technology Review with great interest.  Historically, America has never had a CTO.  The President’s Science Advisory Committee, which had great prominence when it was first established in 1957 during America’s “Sputnik moment” under Presidents Eisenhower, has had little influence and visibility since Nixon abolished the committee in 1973 and it returned under President Ford in a weakened form.  Yet technology strategy and policy permeates so many of the critical issues the country faces today:  from energy policy to defense, from education to homeland security and obviously the big elephant in the room in any budget debate – health care.

During Bill Clinton’s 1992 campaign, his campaign manager James Carville famously drummed home the mantra, “It’s the Economy, Stupid”.  After taking office, President Clinton elevated the Council of Economic Advisors chairman to a cabinet-level position and appointed the highly respected Wall Street heavyweight, Bob Rubin (who later became Treasury Secretary and arguably one of the most influential stewards of our economy in recent memory).

With a nod to Thomas Friedman, I might submit that an appropriate election theme this time around may be “The World is Flat, Stupid”.  More and more of America’s success in the global competitive environment depends on our knowledge economy and government is playing a large role in shaping this.  For example, ethanol subsidies appear to be a narrow and short-sighted way to spend billions of tax-payer money, yet they persist because no credible voice provides Congress and the cabinet with an authoritative technology perspective.

No matter who wins in November, I hope they bring with them to Washington the technology version of Bob Rubin to help steer our course.  Our needs seem more urgent than the mere challenge of putting a man on the moon.

Everyone said the 2008 summer doldrums were going to result in the worst exit environment since the Internet bubble crashed.  After the first half of the year produced one of the worst 6 months for VC-backed IPOs in recent history, the anemic results were bound to trickle down into the M&A market during the slow summer months.

I spent the last few weeks in Israel (pleasure, not business) and so left a pile of non-urgent emails from PE Week, VentureWire, etc. in the “post-vacation” reading folder.  After reading through them in one sitting (something I don't recommend trying at home), I was surprised to piece together the data.  To my surprise, there have been a good number of summer exits, providing some optimism during an otherwise grim economic picture as we head "Back to School".

It appears that high-quality corporate buyers are still trolling for acquisitions and opening up their pocket books where start-ups with traction can be found.  Here’s my accounting of the situation (blend of public and private data):

• SBA Communications acquires Optasite for $430m
• Microsoft acquires DATAllegro for $240m
• Cisco acquires PostPath for $215m
• Nuance acquires SNAPin for $180m
• Belden acquires Trapeze for $133m
• Comcast acquires Daily Candy for $125m
• Cisco acquires Pure Networks for $120m
• BT acquires Ribbit for $105m
• Monster acquires Trovix for $72.5m
• Publicis acquires Performix for undisclosed amount, but likely north of $100m

This isn’t to say that many VC-backed companies aren’t affected by the economic environment – of course they are.  As a VC mentor of mine once said – when the NASDAQ is down 30%, I know I’m down 30%, I just don’t know where!  That said, it was nice to see a few glimmers of light in the dark tunnel of 2008.  Perhaps we'll see more of the same between now and year-end?