Jim Butz Interview | Peter Mehit

Jim Butz has extensive business experience working as part of Bell Labs, AT&T and Lucent Technologies. Currently he is a Venture Partner at California Capital Partners, a merchant banking platform. His decades of experience includes mergers, acquisitions, strategic alliances, organizational development and operational improvement. He brings his vast experience to the local scene along with a fearless perspective of where we are and where we need to go.

Mehit: What is Cal Cap? What are you investing in?

Butz: California Capital Partners is a merchant banking platform. Most of the people who are involved with Cal Cap are pretty seasoned people and have been in equity investing for thirty, thirty-five years. Phil Smith, who is one of the managing directors in New York City actually put together Citibank’s first venture fund together forty years ago.

Martin Mansfield, of Pacific Ridge Capital, shutdown his business and joined Cal Cap. So now, we’re Series 7, FINRA compliant, he’s got Series 24 so he can manage ten other people doing deals. What we’ve mostly been focusing on recently is higher up the food chain with people who are looking for money from private equity sources.

We did sixteen investments since we started in 2006. We’ve done everything from pet pharmaceuticals to a beer company and everything in between.

We’re currently raising some money for some people to drill oil down in Texas. We also looking to put together a fund of funds to investigate intellectual property that’s held by large corporations.

Mehit: What qualities are you’re looking for?

Butz:  A promising return, because you’re really still looking at it the way you look at any venture, which are large returns in a short period of time. Everybody still looks for a 5 – 10x return in three to five years even though the average hold time on a venture backed company was at 9.6 years.

Mehit: Did you read the Marion Kaufman study (about underperforming venture funds)? Any thoughts about it?

Butz: It came out in May. It’s pretty much true and sort of unfortunate. The question is, now, what’s the right infrastructure to make funding happen? The traditional funding mechanism has radically changed.

When 2008 occurred, venture capital was coming in at the bottom line at around $2 ½ to 3MM and angel capital was going up to about $1 1/2MM. All of sudden, angels started to pull back, because they just got hammered in the market place. At the same time, VCs started to move up. You have to get to $7MM to get a VC’s attention.

There’s a group called SuperAngels, who are investing pools of money, so they’re VCs. But they’re coming in at these lower amounts, you know $1 ½ to 3MM. There are also a couple of firms that seem to be doing a lot with financial people outside the United States.

Mehit: What’s your view about crowd sourcing? Will it be a panacea?

Butz: No, it won’t be. There are a couple of the issues that have to be resolved. One of them has already been determined. If you’re going to put a website and make these offers, you first of all you have to be a dealer/broker. You have to be Series 7 or Series 24.

Another issue is: ‘How does the investment get looked at from an ownership perspective?’ If someone comes to me for a second round of financing, and their cap table has 10,000 people in it, I say ‘Time out, clean it up.’ They have to deal with that.

The other thing is, for every one of these types of new organizations there’s a Facebook story, right? Kickstarter has Pebblewatch. They raised $10MM by selling their watch. It all sounds really good, but on average, how many people are there, how many things are out there, how many things get funded. I think it’s going to be an alternative. Is it a panacea? No.

Mehit: Are you happy with deal flow generally?

Butz: There’s a ton of deals around. I personally think there’s not enough investors that are coming to the table.

In 2010, TCA did twelve A and seed rounds, period, through all five chapters. They did 32 or 34 total deals, but only twelve were seed or A. Last year it was fifteen. How many early stage deals are around? There’s lots of them. Are there more deals that could be funded, absolutely.

Mehit: How do you think the environment is affected by the trillions of surplus cash corporations are holding?

Butz: My friend sold his investment banking operation because there were no M&A transactions. Think of it. There were none.

What you’ve seen towards the beginning of this year, some big players that are starting some interesting acquisitions. Facebook was buying intellectual property all over the place. Yahoo. Google. They’re all going out and starting to do things that say, ‘How am I going to grow this business?’

You also have companies like IBM, Hewlett-Packard that are on sitting money. Why are they sitting on it? Have the not figured out how to spend the money? Do they not have five year plans anymore?

I believe what most people say, this Marion Kaufman (study) is the first one to come out with it, says all job creation come from start ups. They went and looked from 1980, there were a few years that didn’t match, but not one net new job was created by a company that was more than five years old.

Now talk about where we, as a country, put money. We gave $7TN to the banking industry on a handshake. But these people who are the job creators, the ones that are in start ups how do they start up today? They can’t take five or six credit cards and max them at $10,000 a piece to get started because the usury rates of 29 – 30% won’t allow it. There’s no home equity and you can’t go to your 401k. So what government agencies are around to help me. The SBA?

Karen Mills comes out says there’s a billion dollars available. But the banks aren’t giving the money out. Why not? The SBA still requires banks to make sure that they have some way to get the money back if the loan goes south. And the only thing that banks know is personal guarantees against real estate. Period. All this nonsense that all this money is going to come from someplace: It isn’t.

Mehit: What motivates you?

I think that we have a problem with job creation. But the number is not 3 to 4 million, the number is 30 million jobs over the next 10 to 15 years. Because there is no way we can compete globally unless we can maintain 25% of global GDP, which we have right now. When [the world economy] gets to $200TN, if we don’t have enough jobs creating enough money as part of that GDP, we’re going to be overtaken by somebody.

Today, my real passion is creating entrepreneurial ecosystems because I think that to create the 30 million jobs required you need to come up with a better way of creating them other than standard incubators. Seed accelerators are interesting. The problem is the 91st day. They don’t have a solution.

Mehit: You mean like K5?

Butz: Ask him what happens at the end of it.

Mehit:  I did. The response was they’re part of the family.

Butz: Doesn’t work. When you take people that need to get over the learning curve and surround them with the mentors that they need, what they have at the end of the 90th day is a story solid enough to pitch on the 91st day to get the seed money to create their product or service. Now they need a place to do that.

If I have a space that has seed acceleration people in it, on the 91st day they start developing their product and they’re getting support in the incubator. And the people that are running the seed accelerator are responsible for that incubator also, to make sure that people and the mentors are coming in and doing what needs to be done. Make sure investors know what’s going on.

Mehit: Who, in your opinion, is close to having the right idea of how to do it?

Butz: Aside from me?

Mehit: Aside from you.

Butz: I haven’t run into anybody yet.

Mehit: So nobody you’ve looked at has got it right?

Butz: Actually the reason that they don’t is, and this will be an ‘aha’ insight, they’re only thinking of themselves. If you look at seed accelerators, you’ll find that they were put together by investors, including TechStars. David Cohen has said, when he went to talked to Brad Feld about this idea, it was because he was getting his brains beaten in as an angel investor and he thought there had to be a better way.

They’ve looked at it and they know they don’t have the 1 in 10 success rate that VCs have. So if I can do something and maybe get to 2 or 3 out of ten, I have an enormously more profitable financial portfolio than I had before.

I loved what Escondido was trying to do. They had an old police station that they gave to a guy for five years for an incubator. We were going to do a seed accelerator and an incubator. And right across the street was their transit area, ‘The Sprinter’. Right behind that they were building an eight story building to facilitate entrepreneurs. So they were doing all the necessary pieces.

Unless you define it properly, you have a problem. I define it properly, because I say, ‘Okay, let’s get the business community, let’s get the government, let’s get the university, let’s get them together and say what’s the one or two industries are we going to focus on?’ You can’t be everything to everybody. Pick one or two, max. Then drive it until it works.

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