Hands down one of your best shows Frank. Hammons is managing a successful fund and he tells us how he does it.

It's not surprising that his process mirrors Tom Perkins' instructions on how to be successful in venture capital. Both Hammons and Perkins contradict the instructions and advice of past guests that you have had on your show, who have eventually admitted poor returns.

Finally, a guest who doesn't criticize the Entrepreneur for dreaming big; and more than that, he says those are the ones he wants to see because those are the ones that succeed. An opposite perspective from those who say they have poor returns.

Hammons' focus on the nuts and bolts, the new technology, is the proper focus because the big profit to investment ratio is not going to be in the manufacturing process or in distribution. The technology is important to both Perkins and Hammons whereas your guests who have admitted poor returns hold that the technology doesn't matter.

Because technology is a requirement (according to Perkins), when Hammons mentioned that deals coming through his network always get priority because they believe that adverts risk, it would have been great if you questioned him on the fact that the effectiveness of networks decreases over time. Technology always has to be cutting edge and fresh. It would have been nice to hear how he balances the natural declining effectiveness of networks and keeping his finger on the pulse of the latest advances in technology.

Like Perkins, Hammons says ventures need different people running them at their different stages. Perkins says you never get the best CEO or VP of Marketing at the earlier stages, because the best don't need to take the risk. They come later after you have gotten the risk out. Whereas your past guests who have admitted to not doing very well claim to focus on investing in the best entrepreneur or team. Small towns have a saying for those outsiders who move in with their big city resumes; they couldn't run with the big dogs so they came here. Small towns believe they get the rejects of the big city.

I disagree with Hammons on just one point; that VCs have learned their lesson. When we look at the current technology market cycle in relation to technology market cycles throughout history coupled with the extremely large funds being raised by some based on their reputation and not based on the current technology market cycle, we see they still have some learning to do.

The boom leading up to the Great Depression has many direct parallels to our PC, software, and internet booms. Leading up to the Great Depression the new technologies of supplying electricity, the generator, electric motor, lead-acid battery, gas engine, diesel engine, air plane, and others, were every bit as pervasive as the PC, software, and internet.

During that time we see motors and engines being added to everything. Changing entire industries and creating brand new ones. Just a little earlier than the great depression, there was no such thing as the farm tractor. Buying premade clothes off the rack never developed as an industry until an electric motor was added to the sewing machine. Just before the great depression we see the advent of the vacuum cleaner, washing machine, electric typewriter, home refrigerators, home air conditioners, phone, car, airplane, broadband, and many other new things.

Modern man views the advent of computers and the internet as drastically changing life. We are able to perform paperwork and manipulate data much faster. The changes leading up to the great depression were even more drastic; not just data, but people and things also moved faster and on larger scales.

Historians tell us that the availability of easy credit caused the great depression; but I say it is obvious that credit alone cannot do it, if it wasn't for the new industries, investors would not have had anything to get excited about.

We can't predict when the next pervasive technology will come but historically it has been happening about every 70 years. Without a pervasive technology that creates new industries, venture capital has no choice but to revert back to a much smaller number of home runs. But now there is a lot more money chasing this smaller number good deals.

Being a VC during the time of a pervasive technology is very different. You don't have to prove the technology, just fine a new use to apply it to. Now we are limited to a new technology with one specific new use that doesn't create many new industries. The VC of today must work harder for fewer returns than the VC of the PC, software, and internet booms.

We know VCs have not yet learned this lesson because they tell us they are looking for deals where they can invest extremely large sums of capital, when they should be focused on the return on investment. God forbid they should have to increase the number of deals and hire more associates.

We also see John Doerr exhibiting a defeatist attitude. He can be seen on the internet saying we need to graduate more scientists and engineers and we need more government funded research, because government funded research is responsible for inventing the internet, computer aided design, and computer science as a discipline.

The defeatist attitude is in his use of the word 'need'. The first commercial computer retailed for a million dollars. At that price it is only natural that the government would be responsible for the early advances in software and the early employment of computer technicians. But the government did not invent the first computer. That was done by a 24 year old who built it in his parent's apartment. After the computer scaled into lower prices, the advances once again came from people in the private sector.

It is obvious but important to note that just because the government has funded the research, does not mean the new technology will be pervasive and lead to the creation of more industries. Even if we give the government credit for the internet and computer aided design, it was the private sector inventions of the computer and the telephone that allowed that software to be pervasive. So I say John Doerr is much too quick to say we need the government in order to make it happen. Perhaps he is feeling the stress of the large amounts of money his firm is now seeking deals for.

I also don't see that arbitrarily graduating more scientists and engineers is going to increase the number of good deals. We all know that as we increase the number of people looking for work in a particular sector the pay will go down. This means they will end up working elsewhere and not in science or engineering. It also means the lower pay will drive the higher quality people out of those fields.

So if you know how to read between the lines, Doerr is telling us that those funds that have raised extremely large amounts of cash have bitten off more than they can chew. There is a finite number of people on the planet therefore there is a finite number of good deals; and without a new pervasive technology creating new industries, the possible number of good deals shrinks considerably.

That is why Hammons is correct to not rely on statistics for success in his investments. With a finite number of good deals at any given time, successful investing in venture capital is not a numbers game. Invesitng in more deals without the proper research or validation, hoping that one will be a winner only increases your costs and not the number of winners you invest in.

Great show Frank. It separates the winners from the losers.