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NetSuds.com's "eDay" event was held November 28,
2000, at The Downtown Hilton, Minneapolis, MN
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Dear Clients, Partners, and Fellow Overt Optimists:

I had the pleasure recently of introducing a major name to our fair Twin Cities, prior to his talk here. My friend Matt Noah, who runs an outrageously successful networking and events organization in these parts, succeeded in getting one of his better known fellow North Dakotans to town, to speak at one of his now-legendary entrepreneurs breakfasts.

It was a lot of fun, and a real honor to have a guru like this guy in our midst. Recognizing the gravity of the situation, I realized I'd better write one hell of an introduction. So I did. (He said it was the best he'd ever had--aw, shucks.)

Herewith, the story of what came after that...

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Global VC Industry to Explode
As Big-3 'Tech Pillars' Rage On

by Graeme Thickins
grt@gtamarketing.com

"Almost anything could get funded before April 14. It was a once-in-a-century phenomenon, one we'll never see again."

So said Rick Karlgaard as he began his breakfast keynote-- speaking to a roomful of about 300 early-risers in downtown Minneapolis--including entrepreneurs, investors, and many of Minnesota's heavy-duty tech industry players. Karlgaard is publisher of Forbes Magazine, co-founder of venture capital investment bank Garage.com, and formerly co-founder of Upside magazine.

"Have we returned to normalcy, or is this just a pause?" Karlgaard asked. "Are you on a path to reach your dreams, or just on some funny fool's errand?" He noted how it's a tough time now to be a "rapid-fire-pitch entrepreneur" -- referring to the 30 local startup founders who would be delivering one-minute pitches soon after his talk.

"Well, I'm a bull," he said (with no surprise), "for both the entrepreneur and the VC." And he gave two reasons why he believes "your faith is justified" -- first, that the pace of risk capital "is on an extraordinary trajectory" and, secondly, that the underlying pace of innovation is so strong.

In the mid-'80s, Karlgaard said, VC investment was only at $4.5 billion a year. It dropped to $2 billion in 1990, he noted, but is now $80-100 billion per year. "That's 40 to 50 times growth in 10 years!" exclaimed Karlgaard.

"Will it go back again? If it follows the '80s, it could go to half that -- but that's still $40-50 billion," he said.

Come On, Floodgates!

Karlgaard feels we're underestimating the amount of venture capital out there. "I'm convinced it will be a $1 trillion global industry in 10 to 15 years," he boldly predicted.

There are a whole lot more VCs now than 10 years ago-- at least 350 to 400, which is why it takes big directories to list them all, he noted. But there are new players in this game now, too--the first of which, he said, was the Corporate Investor. "It's a trend that's only now picking up," Karlgaard said, "and will play out over the next 10 years -- essentially, it's the outsourcing of corporate R&D."

Seeing the returns VCs are getting, and knowing there's a major shortage of good R&D talent, large corporations are figuring it's better now to place their R&D money with VCs. "That want that VC-style ROI," Karlgaard said. And to give us an example of just how massive those returns can be, he told us that a recent distribution for just one of Benchmark Capital's funds was $300 million--per partner!

He summed up this trend by citing one of "Joy's Laws" (referring to the penchant of Sun cofounder Bill Joy to come up with oft-cited truisms): "The majority of the smartest people in your industry do not work for your company." Thus, the necessity for corporations to develop an "ecology" to take advantage of those outside people.

The second phenomenon Karlgaard said is responsible for the huge surge in venture investing is the so-called angel investor. "Within a 10-mile radius of Palo Alto right now, there are 50,000 people with a net worth of $10 million or more!" he said, noting that's generally the entry point to be considered an angel. "We're seeing these new players in droves," he said.

We're also starting to see "true American-style, first-round investing begin to take off elsewhere," Karlgaard pointed out. In Europe, there will be $20 billion dollars invested this year, he said--noting that, in Asia, it's still hard to measure.

"So the pool of risk capital is going up, and even the upper middle classes now want to participate--they're starting to bang the doors down," Karlgaard said. In 1929, he noted, only 1 1/2% of the U.S. population held stock--but it's 30% now, and actually 60% of households.

"But, the policy makers could kill this venture capital explosion," he said. "It's easy to demagogue--only the rich get to participate, etc, etc. However, with the pace of innovation, that's not so." They can't stop that....

Big Three Still On a Roll

Innovation will continue to advance at an impressive rate, Karlgaard said, with "the three big tech pillars" that underlie the Internet being processing, storage, and bandwidth.

Moore's Law, first put forth in 1965 (stating that the number of transistors on a microprocessor chip would double every 18 months) is not only still holding true, Karlgaard said, but the semiconductor industry actually thinks it may have another 10 years left on it!

Plus, he noted that the older microprocessors, like the 486 now in a Blackberry wireless device, for example, will soon give way to tomorrow's second-tier chips that will give it 30 to 50 times the power it now has, in a matter of just 2 or 3 years.

"But the real shocker," said Karlgaard, "Is that processing is actually the *slowest* of the three tech pillars. Storage is doubling every 12 to 15 months. And bandwidth has the fastest growth of all."

He cited how Nortel has now achieved a speed of 10 trillion bits per second over a short length of fiber. During the '70s, communications engineers squeezed a stream of digital data into a fiber optic wire the width of a human hair. Now Ciena, with a technology called wave division multiplexing, has taken the number of streams of data a fiber can handle from 16 to *several thousand* -- in just six years. Another technologist, Simon Cao at Avanex, is "working on a half a million wave lengths on a single strand," Karlgaard said.

"The last-mile problem, though," he continued, "more than irrational exhuberance, is *the* biggest problem for the Internet business." He said he wishes the Justice Department would have focused its attention, instead of on Microsoft, on forcing local phone monopolies to be more competitive. "The new administration should certainly focus here," he said.

Minnesota? Nice!

"So where does all this leave Minnesota?" Karlgaard asked. The realities of the startup marketplace now actually play to Minnesota's strengths, he asserted, as "cash is suddenly so important."

Minnesota has advantages in such areas as office space costs, which have now soared to $20 per square foot in Menlo Park -- *per month*! "That's right," said Karlgaard, "$240 per square foot per year on Sandhill Road." He compared that to the previous highest figure, $80 to $100 in midtown Manhattan.

It's practically impossible to find space anywhere in the Valley for less than $60 per square foot per year, said Karlgaard, even noting that space recently vacated in the building where Forbes leases space, in Burlingame--not considered a high demand area--is now going for $100 per foot.

"So, you're in an advantageous position for the huge differential in costs," Karlgaard told the Minnesota audience.

"How everyone manages their cash will remain critical."

(end of keynote)

Needless to say, Rich's talk was more than well received by the hundred-dollar-a-plate eggs crowd. And he even stayed on for the rest if the morning, listening intently to the 30 startups who gave one-minute elevator pitches [damn--they were good!]....then speaking again before lunch in a session of NetSuds' "bootcamp" for startups that continued all day.

And, he did all this while being somewhat under the weather with a bad cold. What a guy!

A networking reception in the evening attracted 800+. (For more info on the sponsor, see www.NetSuds.com.)

It was a great day for Minnesota to have such a supporter of the technology entrepreneur in our midst. And I for one made sure to ask Rich to make come back, often.

He, too, invited me to come visit him in California. No problem, Rich--I'll be there, guaranteed! And, hey, you *know* that I'm always ready for another one of those great Forbes parties....like the one in 1978 where, as a young turk, I got to meet Malcomb and the boys (at a gig for 3M execs and its agency).

I still tell people I've never seen shrimp that big, or ice sculptures that cool....

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the future, just email me, say "yes," and include your contact info.

your faithful, Capitalist Tool-wielding,
this time stay-at-home conference reporter
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Graeme Thickins, Founder & Principal Consultant
GT&A Strategic Marketing Inc.
*Twin Cities *LA *SF *Anywhere
Voice: 952/944-1672
Fax: 952/944-1673
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