On Venture Capital
Recently I sat through a presentation by five notable venture capital partners who discussed the forecast for 2002 and beyond. While they were focused primarily on the Northwest, most of what they said applies to everywhere. By the way, this was a presentation of WSA, which you should check out if you haven't already.
These five guys were interesting enough that we wanted to share my notes with everyone on our leadership list.
Bill Ericson, General Partner, Mohr, Davidow Ventures said they are looking for five things in pitches:
- Great team of executives
- An ROI that gives a quick payback to the customer
- Low barrier of entry to the customer (i.e. make it simple for them to say “yes”)
- Customer realizes the benefits quickly
- Solving big problems for customers, like sorting, storing, and managing data, or solving network problems
What are the characteristics of companies today that are doing well? They run lean, manage their cash flow well, and really understand their customers.
Paul Goodrich, Managing Director, Madrona Venture Group, says VC's are looking for longer term investments. Where in 1999 investors were looking for big multiples and outs in 2-3 years, now it's more like 4-5 years before the exit. The good news is that means they're prepared to sink more cash in up front to go the distance.
The bad news? Early stage tech companies will participate in the recovery more slowly than the rest of the economy, because in troubled times, big companies will buy from other big companies, not the dotcom in your garage.
And here's more ugly news: since VC's want at least a 10x bang for their bucks, they need to keep the valuations low in the term sheets so they have a shot at the big pot in the eventual IPO.
When times got tough, companies re-negotiated term sheets as a defensive strategy. Did it work? “Having new term sheets didn't generate any more sales,” said Paul.
Was this guy just having a bad night? Actually, he did have some optimistic news. IPO's are happening. Look at PayPal up substantially since their IPO earlier this year. He's also seeing some action on the M&A front.
Tom Huseby, Managing Partner, SeaPoint Ventures, graduated from crazy entrepreneur to crazy VC a few years ago, so he knows what it's like to make a payroll. His philosophy? SeaPoint invests in “real business plans with real business models.” Models that are based on the “once we get <fill in the blank>” are “doomed.” He won't invest in a company that's waiting for something to happen that's completely out of its control, e.g., 3G wireless networks.
Tom says when you're shopping for cash, know who you're getting your money from. Get to know the other partners—and the other investors—not just the one who's dealing with you. If they hate each other's guts, consider a different investor.
What's he like? Tom likes companies that are making mixed wireless networks play nice together, content enabling, and point to point connectivity stuff.
Words of wisdom: “Today endeavor to make only new mistakes.”
My old boss Cameron Myhrvold, Founder & Partner of Ignition, likes wireless and software infrastructure. He believes that it's a great time to invest. Valuations are low and only serious people are starting businesses right now. Sees opportunities in long term trends. What are they? Well, for one, Intel architecture running Linux or Windows has a 10x price/performance advantage over “other” Unix hardware (you know who that is, don't you…). Also favors network security right now and wireless–LAN hybrid networks.
Final speaker Tom Simpson of Northwest Venture Associates ignores fads and trends. His mantra: “People, ideas, markets.” They like really early stage companies or else really late stage (“clear road ahead or else a nice view in the rearview mirror”). Middle stage companies come with too much dirty laundry.
The Workpump spin? Companies need to focus on basics: value for their customers, getting sales, running lean. VC's have money, but they're not smoking dotcom loco weed anymore and want to see real business smarts.
