(#3 in a series of reports)
Date: November 28, 1999
Red Herring's "NDA '99: Where Business Is Going" was held October 31 -
November 2, 1999 at the Four Seasons Resort Aviara, Carlsbad, California
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
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,"
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
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,"
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
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.
Graeme Thickins, Founder & Principal Consultant
GT&A Strategic Marketing Inc.
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