Date: November 28, 1999

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Red Herring's "NDA '99: Where Business Is Going" was held October 31 -
November 2, 1999 at the Four Seasons Resort Aviara, Carlsbad, California
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Dear Readers, Clients, Partners, Friends:

Herring CEO Tony Perkins led a lively discussion of on the changing world of venture investing, noting "it's always one of the most fun panels." [It's a staple at all Herring events, and pretty much his exclusive turf as moderator.] The only no-show was Ken Fox of Internet Capital Group, who presumably was doing more important things -- or at home staring at his calculator in amazement at his company's rocketing market cap--at this writing, almost equal to Amazon's. [No explanation was given for Garage.com being added to the panel as a substitute for Ken.]

Tony pointed out what a huge year it's been, with $7.7 billion invested by VCs in the second quarter, compared to only $4.3 billion for the same period last year. And 96 venture-backed companies went public in just the first six months of 1999, raising more than $7.1 billion (not to even mention the value of acquisitions).

In introducing the firms represented on the panel, Tony noted that Softbank now has an astouding $2.5 billion invested in the Internet. And, so far in 1999, Intel has already done 180 venture deals of its own -- "giving 'Intel Inside' a whole new meaning," he quipped. Garage.com is "trying to do sort of an end-around the VCs." Ann Winblad is "the only major VC he knows without a PR agent." And Redpoint Ventures is the newly hatched joint venture of VC firms IVP and Brentwood, "who together have invested some $2.5 billion to date in technology," ne noted.

"So what trend do you see in your business," Tony asked, "and how will you take advantage of it?"

Ann Winblad kicked off by noting she's been in the business now for 10 years, and it's changed dramatically. "Venture investing has moved from well-defined episodic moves to much bigger chunks of capital," she said. "We're now required to have more financial knowledge -- like, after the IPO, then what?" she said. The $200-300 million rounds that VCs are now doing require a much more demanding skill set, Winbald said.

She started her original fund in 1990, investing only in software. "That year," she said, "a total of $250 million was invested by VCs, in all of technology." Now, Ann pointed out, "we're forced to build the whole company, and tell a clear story to the financial market. It's just a whole new money game."

To illustrate even further how the stakes have changed over the years, Les Vadasz, senior VP of corporate business development for Intel, noted that the original venture investment in his company was only $3.2 million -- that for a company with a market cap now somewhere north of $300 billion. Today, Les thinks that many times too much money is being invested in early-stage companies. "It puts an unusual strain on the venture people, just to make sure the investment is spent correctly," he said.

A growing influence in the VC world today, Vadasz noted, are angel investors. "There are ever-expanding numbers of semi-retired technology entrepeneurs and experienced executives out there who are adding to the mix of money, smarts, and time," he said.

But Les clearly stated that "corporate investing is here to stay, because it works." He sees it as a kind of "market ecosystem," with many small companies contributing. He also noted that international investing is becoming more important to Intel, "using the road map from the U.S."

Gary Rieschel of Softbank Technology Ventures took his turn by noting he's been at it for 4 years. "We did 56 deals in the first 12 months. People thought we were nuts--but it turned out we were *under*invested!" He said the pace has not let up, with each partner now serving on 10 to 12 boards each.

Rieschel feels angels are a major force in venture investing today. "Even if the market tanks," he said, "there is just so much money available." Which brought one of the best laughs of the session: "If the market does tank, by the way, I'll see you on the golf course," Gary said. "I'll be the caddy."

But from the startup's perspective, money is not what it's about now, he said. "The entrepreneur wants to know how you will build the company."

Commenting on the workload VC partners are now expected to handle, Rieschel said he routinely schedules three meetings each on Saturday and Sunday. "The personal life and business life just kinda blends," he said.

Bill Reichert, president of Garage.com, spoke of an emergence at the seed-stage level of venture investing, with numerous angel funds coming into being. The entrepreneur, however, can be even more confused about what to do, where to go. "Getting funded by a major VC today is comparable to getting struck by lightning," he said. Garage.com is trying to address the problem, helping firms find funding at the early stage, as well as investing equity themselves.

Ann Winblad injected that her firm, too, still does early-stage investing, as they did much more commonly in their early days. "But there are so many more companies seeking capital today, and we must find the *time.* As it is, sometimes our entire partner meetings are devoted to pitches these days," she said.

Tom Dyal then spoke about his firm, the newly launched Redpoint Ventures, a joint venture of well known VCs IVP and Brentwood. "Both firms had been around for 20 years," he said, "but they realized the 'Net required special talents." Redpoint is focused now on broadband as an enabling technology. To adequately support early-stage companies, Tom said they will only do three to five investments per year per partner. "We must have a vision in each of our companies to be $1B+ company," he said, "which is why we're making larger investments." The philosophy of Redpoint, he said, is "plant yourself firmly in a market and declare victory."

"But how do you pull off declaring victory," Gary Rieschel of Softbank asked, "with these firms that have, like, $300K in trailing revenues?" He also noted that they're seeing so many similar firms these days, too, "like 5 or 6 a week...pets, drugstores, 'e-pinions' type firms, you name it."

To which Ann Winblad responded: "Another trend we're seeing is the 'stealth' company," implying almost the opposite of the "declaring victory" strategy. "It's almost like they can't even have a normal 'early-stage' period anymore," she said. "They don't even tell anyone they've been funded. The first anyone hears of them is when their site is ready."

But in regard to the "declaring victory" philosophy, one that Ann really originally made famous, she had this to say: "It's not just a statement anymore--you have to *prove* it!" [See our coverage of her later talk at "The Personalization Summit" for a recent example of the above.]

Les Vadasz of Intel said that a problem large companies have with big ideas is that "they don't know how to manage small money." On the other hand, he raised the question "do VCs know how to manage or run big deals?"

Tom Dyal of Redpoint simply countered with: "You have to be first." "We've proven we can do that," Ann Winblad said -- but noted her job is a *lot* different now than it was four years ago. [Seeming to imply much more hands-on involvement with her companies.] Bill Reichert of Garage.com noted that, to be first these days, you need the really big VC behind you -- "It's like VC by intimidation," he said. And it takes a large amount of money.

"A VC firm today has to decide what they want to be," Gary Rieschel said. "We look positively conservative now, compared to 1996," noting Softbank is only doing 30 to 40 deals a year now. "We want to be 'first in' now, working from the early stage...and to do this, the team really matters." He also said that by "networking" their companies together, they add value. "Some 814 firms in the U.S. are now saying they do Internet investments," Rieschel said, "But 700 of them will go out of business."

Moderator Tony Perkins then threw out the question of the day: "What about these extreme valuations, like Sycamore Networks at $15B and Akamai at $13B, after only one day of trading?"

Redpoint's Tom Dyal: "Infrastructure is an enormous opportunity. We're only in the second or third inning of converting the telcom system. Voice is just another service in the broadband 'Net. It's now a 'virtuous cycle', with infrastructure advances feeding more and more opportunities in other areas."

Tony's next question, to Ann Winblad: "It's been a changing model for you--where are you now?"

Ann's reply: "We're in software, services, commerce companies, B-to-B exchanges. And content is making a comeback, big! We're getting better at leveraging content."

"And, Gary, where are we in this madness?" Tony then asked. "Well," said Rieschel, "if you buy a basket of 'Net stocks and can hold it for 10 years, you will get rich. We're going now to second-generation B-to-C, and also to B-to-B exchanges."

As for Bill Riechert of Garage.com, he noted that a tough thing today is for life sciences and hardware deals to get funded. "It's more painful for entrepreneurs," he said.

A question to Les Vadasz of Intel: "So what categories do you like?"

"Building the physical and logical infrastructure, B-to-B software included, and the applications on top," he said. "We look for things that stress the market...as in causing the need for faster microprocessors."

An audience question: "Can the VC process be 'templacized'? At least at the incubation stage?"

To which Redpoint's Dyal replied: "Yes, pieces of it can be institutionalized. But there's still a lot of art and instinct to it."

Ann Winblad's answer: "Yes, we get other companies we've funded to be part of a 'swat squad'. And we've had to make a lot of new friends, to get as board members--at Fingerhut and QVC, for example. The question is, how do you do a fast start? Execution is everything."

Softbank's Rieschel: "We recently started a new incubator, called HotBank. We'll be starting up 20 to 25 companies, on 6-month cycles. We want to be a place where returning people come to start new companies."

Another audience question: "What about the have-nots?"

Garage.com's Reichert: "The problem is now *everyone* is an entrepreneur. The VC industry is a very inaccessible community. Which is why there's a whole new cluster of funds to meet an exploding need around the U.S."

A question from the moderator: "Are there cultural issues in international venture investing?"

Intel's Les Vadasz: "A lot of past successes have been foreigners going home, and that is still happening."

Ann Winblad: We've just started doing trem sheets outside the U.S. But it's hard work! How do you build influence? That's really an important part of building a company."

And a final audience question: "What else do VCs do besides sit on boards?"

Softbank's Rieschel: "Well, we've started 11 companies inside, nine of which are still going. But vgood VCs do get involved, even working weekends--a fairly recent phenomenon."

Ann Winblad: "VCs are really getting caught in the middle--getting squeezed. We're always working."

To which moderator Tony Perkins made this final comment: "Well, in spite of the shake-out we'll see, we still think you all will be around."

That's it for now. For more about "NDA '99," just ask.

best regards,
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Graeme Thickins, Founder & Principal Consultant
GT&A Strategic Marketing Inc.
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