David Morganthaler Featured

1:23pm EDT May 25, 2006
When it comes to assessing Northeast Ohio’s business climate, venture capitalist David Morganthaler doesn’t beat around the bush.

Stagnant population growth, loss of good manufacturing jobs, bad weather, a brain drain of bright students, aging infrastructure and housing, and a poor K-12 education system all contribute to the problems we have, he says.

But the venerable VC also believes the region can be great once again. And at a recent innovation conference at Baldwin-Wallace College, where Morganthaler helped launch the college’s new Center for Innovation and Growth, he discussed how. Morganthaler also shared his thoughts on the role of venture capital in jumpstarting the economy and the keys to successful business leadership.

Create good jobs. It is the growth of attractive jobs that drives population growth in a region. And it is the export of goods and services from the region bringing back money that stays in the region that builds up the wealth of the area.

If the region does not export more of something — goods or services — for which it gets paid more than it imports, it will inevitably get poorer. It is as simple as that.

Industries mature. When they do, innovations that make people want more of their products slow down. If the new and growing industries go elsewhere, a region’s growth slows down. As industries age, their costs rise, and a region becomes less competitive.

Lower cost regions get the new plants. With modern transportation and telecommunications, most regions have to fight global competition.

Innovate or die. Most growth in the future will be technology-driven. The key to industrial growth is real innovation, not climate and not amenities. If we can produce really exciting new technology or concepts, venture capital will be there.

We must support and strengthen our research universities and also demand they keep improving on technology transfer. They must get into the 21st century as economic drivers, like MIT and Stanford.

We must improve our schools. Society must demand its children behave and perform better or (others) will beat us in high technology, as well as low-cost manufacturing.

Think global. Quit competing locally — the outside globe is the challenge. Unite. Everybody is responsible for thinking regionally.

There is no such thing as only leaking in your end of the boat. Do what we can to hold existing businesses and attract new ones — and realize this is limited. Businesses will do what they must do to survive in a competitive global market.

Think regionally, not municipality against municipality. The enemy is not the next suburb or Akron but rather is Boston, San Francisco, Baltimore and the newer cities. We must unite to fight them for the research dollars that come out of Washington.

We must quit fragmenting into so many small organizations that never get to critical mass and unite into larger, effectively run organizations. The consolidation of organizations into the Greater Cleveland Partnership is long overdue and gives me hope.

NorTech is the first step I have seen toward a technology plan for the region, and it must be supported. JumpStart is the most promising incubator we have seen in the region.

Address your problems quickly with self-reliance. Business problems are often like a small leak in a boat — easily fixed if you catch them early and can practice damage control but disastrous if somebody denies them and you don’t learn about them until the boat is full of water.

The hardest thing in life is getting good advice. Why? Because those that love you usually do not know, and those few who really know do not usually love you.

Understand the role of venture capitalists. Venture capital follows innovation, it does not cause it. There are about 700,000 new companies formed every year, counting all the one or two-person companies.

Institutional venture capitalists fund only about 1,000 new companies, or one in 700. Venture capitalists look for opportunities they believe can become big, so a disproportionate share of the high-growth companies is funded from our industry.

Venture capitalists have to take risks on technology, markets and the skill of honest, well-meaning managements. They know enough not to knowingly add character risks — they lose often enough, backing honest, well-meaning people who are doing their level best and working really hard.

If your character is judged doubtful, your chances of getting any financial backing from any good professional venture capitalist is usually ‘No way in hell,’ no matter how good your deal sounds.

And, the fact you seem really smart won’t help if he doesn’t trust you. The venture capitalist knows the chances are all too good you’ll use those brains to cheat him at some point.

The bad guy will find some way to cheat you. Life is too short to fool with such people. The mills of the gods grind slowly, but they can grind exceedingly fine.

Be ethical. Try to work for people whose ethical values match or exceed yours. If you misjudge an employer or find yourself in a situation where you’re pressed to compromise sensible ethical values, much less laws, try to change the situation.

If you can’t — and often you won’t be able to — get out as quickly as you can. It may be hard in the short run to give up an attractive or well-paying job just because you’re suspicious of your company’s legality or ethics, but if the situation smells bad and you can’t fix it, get out.

The word ‘integrity’ gets used a lot. To me, it means that you have what most of us would agree is a good set of principles, and you can be counted on to live up to them, no matter what the temptations are or how tough the situation is.

You won’t lie, cheat, steal, break laws, do insider trading, or act unethically, no matter what. You may make mistakes, but you will never knowingly give us a bad fact or wrong number. Your word is gold.

We write contracts down, so there is no misunderstanding and because perhaps others will have to implement them, but we don’t have to worry about you going back on an agreement — and we would never do it to you. Those are the kind of people we want as partners and employees.

Envision possibilities others do not. An entrepreneur must see unfulfilled opportunities that others have not seen, find ways to fill them, believe that he or she can accomplish this, and then go and do it. Without energetic execution, nothing gets accomplished.

A venture capitalist must be an optimist, or he will never make the risky investments he undertakes and persist in the face of the losses he sustains. But, the venture capitalist must temper his optimism with a strong dose of realism, or he will not survive. The world has many impractical dreamers, wildly over-optimistic entrepreneurs and a number of just plain charlatans that are out to cheat anybody they can.

They must see realistically the kind of people they are dealing with and be guided accordingly, just as a venture capitalist must judge the people he is considering investing in.

How to reach: Morganthaler Ventures, www.morganthaler.com