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10   LIVING WITH VENTURE CAPITALISTS POST-INVESTMENT
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12              Tuesday, October 19, 2004
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14                     Ritz Carlton
15                1700 Tysons Boulevard
16                   McLean, Virginia
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0002
 1                     A T T E N D A N C E
 2   
 3   VENTURE CAPITALIST PANEL
 4   Mark Frantz, Carlyle Venture Partners
 5   Harry Weller, New Enterprise Associates
 6   Steve Fredrick, Novak Biddle Venture Partners
 7   Scott Frederick, Valhalla Partners
 8   
 9   FEATURED SPEAKERS:
10   Jeff Bede, Chessiecap
11   Chris Cantarella, Ernst & Young
12   Jeff Lehrer, Gray Cary
13   Larry Robertson, Netpreneur
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0003
 1                    P R O C E E D I N G S
 2                                               [8:15 a.m.]
 3             MR. LEHRER: Good morning.  Welcome to the
 4   third meeting of the Living with Venture Capitalists of
 5   the Venture Capital Series, what entrepreneurs
 6   absolutely need to know about raising venture capital. 
 7   We really thank you for joining us this morning.
 8             The panel was actually started -- we had our
 9   first panel almost one year ago to the date, October
10   23rd, when the sponsors, E&Y, Gray Cary, Netpreneur,
11   and we also had a sponsor, Chessie Capital, got
12   together and said, "What's missing from the community?" 
13   And we thought a seminar where VCs give advice to
14   entrepreneurs as if they were their brothers or their
15   sisters, a really candid seminar on what is in the
16   minds of the VCs.  And we thought how wonderful it
17   would be to be able to share with the community, in an
18   open-forum type setting, what the VCs are truly
19   thinking in order to help entrepreneurs raise venture
20   capital.  So this is the third series in our panel, and
21   it's specifically focused on life after you do the
22   venture capital investment.
23             The first panel we did was Obtaining the
24   Necessary Investor Presentation Materials, and What
25   Life is Like at the Very First Meeting with the VC, the
0004
 1   questions asked and some recommended answers.  The
 2   second panel, we did approximately six months ago was
 3   on Due Diligence and Negotiating the Terms Sheet.  And
 4   this one, I think, is going to be the most interesting
 5   of the three panels.  Not only is it the least talked-
 6   about subject, but I think it is the most relevant and
 7   most important, what life is like and how to maximize
 8   the success of your company, and using the VCs to help
 9   with that success.
10             So it's my pleasure to introduce the speakers
11   for today.  My name is Jeff Lehrer, and I'm the head of
12   venture capital for Gray Cary.  Some of you may know,
13   as of yesterday Gray Cary merged with the law firm of
14   Piper Rudnick, and we're now going to be Piper Rudnick
15   Gray Cary.  We have 400- -- now we have 430 lawyers in
16   the Mid-Atlantic region providing the most dominant law
17   firm in the Mid-Atlantic that this market has ever
18   seen, and we hope to be able to provide even better
19   service for everybody.
20             Our next speaker is going to be my good
21   friend Larry, from Netpreneur, who is also the
22   president of Lighthouse Consulting, which is an
23   excellent, excellent company that provides consulting
24   to young companies about raising venture capital and on
25   operating plans, and he's going to be talking in more
0005
 1   detail to recap the previous seminars to put everything
 2   together.
 3             And then we're going to have our esteemed
 4   panel.  We have Harry Weller, a partner from NEA.  We
 5   have Mark Frantz, partner from Carlyle.  We've got
 6   Scott Frederick, partner from Valhalla.  And last, but
 7   not least, is Steve Fredrick, partner at Novak Biddle.
 8             And then at the end there's going to be a
 9   very short, concise summary from Jeff Bede, of Chessie
10   Capital, who's going to give you his impressions to
11   walk away, and the things to really focus on when you
12   leave.
13             So please join me in giving one round of
14   applause to our panelists for coming this morning.
15             [Applause.] 
16             MR. ROBERTSON:  Good morning, and welcome to
17   session three of our three-part series on Venture
18   Capital.
19             I want to also note that moderating the panel
20   today is Chris Cantarella, from Ernst & Young, and he
21   has done a fabulous job the last two sessions, and I'm
22   sure this session will be no exception.
23             I'm Larry Robertson, as Jeff said, and my job
24   in the next few minutes is the following: first, to
25   provide you with some context for this session, Living
0006
 1   with the Venture Capitalist Post-Investment, as it
 2   relates to the previous two sessions; and, secondly, to
 3   lay out some of the basic points, the need-to-knows of
 4   this particular session, really, to establish a
 5   foundation right up front so that our panelists can
 6   focus on the finer points of how it all comes together
 7   in the day-to-day world of venture capital or venture
 8   capitalist/entrepreneur relationship.
 9             Now, this three-part series on Venture
10   Capital was really designed to be a continuous
11   education or discussion, so even though each of the
12   three sessions stand alone, the sessions are really
13   also meant to hang together to give you a more complete
14   perspective on what venture capital is, why and when it
15   can be important to your business, how to most
16   successfully go about securing it and what to expect,
17   and what to do after you've secured an investment in
18   order to maximize the venture-capital relationship.
19             Now, I want to say that last part again.  The
20   point of this series, and the point of raising venture
21   capital, is to maximize more than just the capital;
22   it's to maximize the venture-capital relationship, and
23   hopefully that will become clearly evident this
24   morning.
25             So the first thing I want to do, which Jeff
0007
 1   touched on briefly, is, I want to talk to you about
 2   what we tried to do in laying out this series, as Jeff
 3   said, almost -- starting a year ago.  What we wanted to
 4   do is take you down the venture-capital path from the
 5   uncommon perspective, but the one that we think is more
 6   important.  This is typically where the venture-capital
 7   discussion focuses, somewhere between going out and
 8   trying to attract investors to your investment
 9   opportunity, and getting a terms sheet.  This is not
10   the complete venture-capital process, and so our goal
11   was, one, to make it more complete, but, two, to take
12   three stops along the way that are often overlooked
13   even in casual discussion, not only in formal
14   presentations.
15             And so the first place we started in our
16   first session last fall was really the process before
17   the process.  This was the idea of backing up the bus
18   on the venture-capital decision and really talking
19   about what you are getting into and whether or not you
20   should.
21             In our second session, we built on that, and
22   we assumed that at that point you had taken stock of
23   yourself and your business as an entrepreneur and you
24   knew what you needed and where you were.  In fact, we
25   assumed that at that point you had also taken stock of
0008
 1   the many different options for outside capital out
 2   there, in addition to venture capital, and you decided
 3   that venture capital was the most appropriate fit for
 4   your business.  It was a very important stopping point
 5   in this discussion.  In doing so, we also assumed that
 6   you understood how the venture-capital business
 7   operated, what the pluses and minuses were, that you
 8   were ready to assume those.  And so the focus of
 9   session two was really talking about, once you'd made
10   that choice, How do you get from that first deal to a
11   close -- not just a terms sheet, but to a close?
12             So in this final session, what we're doing
13   is, we're, again, carrying you beyond the typical
14   boundaries of the discussion on venture capital, and
15   we're talking about what life is like after you've
16   received that investment and you now have the venture
17   capitalist in your business as a partner.  So it's a
18   more complete process.  We think it is a more unique
19   way of looking at things.
20             But why should you care?  I'm sure that each
21   of you have your own reasons for being here this
22   morning.  Maybe it's to come and learn about this
23   content of this particular session or to complete the
24   education from the three sessions.  Maybe you came here
25   to network, or maybe you hope to meet one or more of
0009
 1   these five gentlemen here this morning and talk to them
 2   about your investment opportunity.  But there are
 3   bigger and better reasons for why you should be here
 4   and for why we did this series, and I would like to
 5   discuss a few of them, just briefly.
 6             These are some of the benefits we hope you
 7   gain from this session and from all three, and things
 8   we tried to focus on as we created this series.  The
 9   first is, we wanted to help make you a better-educated
10   consumer.  The more you know about venture capital, the
11   more you understand the process you're getting into and
12   whether or not it's right for you or wrong for you,
13   and, if you do decide it's right for you, how to best
14   secure it, the better and more effective you're going
15   to be in securing it.  By the same token, we wanted to
16   make you -- you have multiple roles as an entrepreneur
17   -- an educated seller, because ultimately in a venture-
18   capital transaction, it's the sale of a product; you're
19   selling the opportunity to invest in your business.  So
20   the more you understand about your consumer -- the
21   venture capitalist, how they look at things, what they
22   want to learn, how they operate -- the more likely you
23   are to be effective in securing venture capital.  And
24   so really we're hoping, in that sense, to make the
25   venture capitalist an educated consumer, as well,
0010
 1   because the more you understand them, the faster you
 2   can help them to understand you, the better the
 3   investment.  The two, combined, hopefully make for a
 4   more efficient market, and really that's a benefit to
 5   everybody in this room.
 6             None of us has time to waste.  The more that
 7   you know about them as investors, the faster they can
 8   get to the data points about you, the more you're
 9   working off the same page, the higher the percentage of
10   deals that get done.  The better the deals, the happier
11   the players in this equation.  And what we're really
12   talking about is a higher odds of success in you
13   securing funding and in you being able to take your
14   business forward to the next level.
15             We've all heard the old cliche that that nine
16   out of ten businesses fail, and the odds are even worse
17   for most companies that try to raise venture capital;
18   most don't secure it.  And there are lots of reasons,
19   but one of the main ones is a lack of understanding of
20   the process, and that was one of our main goals in
21   putting this series together, was to help you better
22   understand the process.
23             So, let's talk very briefly about some of the
24   lessons from session one and two.  There were lots of
25   good lessons, lots of good things to take away from the
0011
 1   first two sessions.  I want to focus on just a handful
 2   that I think are most relevant to the discussion today
 3   so we have that as a backdrop.
 4             First point, as I said earlier: There's more
 5   than one source of capital out there available to you. 
 6   Pick the one that best fits your profile and your
 7   needs.  In our first session, and, I think, again in
 8   our second session, we talked about the different
 9   sources of capital.  And, by the way, transcripts are
10   available for these events on the Netpreneur Web site
11   if you weren't able to attend the first two sessions. 
12   But what we talked about is that it's important to
13   understand where you are with your business, what the
14   different sources of capital are that are available to
15   you, what their profile is like, and to make an
16   appropriate match before you decide to take one capital
17   path or another.
18             Secondly, anytime you take outside capital,
19   it's about compromise.  Anytime you go outside the
20   comforts of your own shop and ask somebody else to help
21   you propel your business forward, especially if that
22   somebody else is providing you with capital and has
23   extraordinary return expectations, it's about
24   compromise, and so you need to be prepared, and you
25   need to understand where that compromise comes in,
0012
 1   where it's appropriate, so that realizing that does not
 2   become a stumbling block along the way when you're
 3   already in the process of raising capital.
 4             Third, believe it or not, venture capitalists
 5   have a job; and, believe it or not, most entrepreneurs
 6   don't take the time to figure out what their job is. 
 7   Their job is to provide an extraordinary return on
 8   somebody else's money.  Just as you would make a sale
 9   to any other customer, it's very important to
10   understand the perspective of this customer, and it's
11   very important to understand what they're ultimately
12   trying to accomplish so that you can tailor the
13   information that you give them to what they're
14   interested in, to what they're trying to understand, so
15   that they can determine whether or not they want to
16   make an investment in you.
17             Fourth, there's really only one reason why
18   entrepreneurs and venture capitalists get together, and
19   that's around the activities of selling a product.  And
20   the product, as I said before, is the opportunity to
21   invest in your business.
22             Number five, there really is a process behind
23   raising venture capital, and it's on both sides --
24   yours as the entrepreneur, and theirs as the investor. 
25   There really is a somewhat systematic way that venture
0013
 1   capitalists get from determining what kind of companies
 2   they want to invest in, to identifying and sifting
 3   through those companies, and then deciding which ones
 4   they're actually going to make an investment in.  And
 5   on your side, there's a real logical path, as an
 6   entrepreneur, that you travel, between determining when
 7   you need outside capital, what's the right profile or
 8   source of capital for you, and then most effectively
 9   making that sale to that targeted customer. 
10             And, finally, the deal does not end with the
11   terms sheet.  This is something we focused on in the
12   last session.  It's really, when you get the terms
13   sheet, that is where it begins, that is where you're
14   really starting to sort out the finer points of what a
15   partnership with a venture capitalist would look like
16   and whether or not you can actually consummate one.
17             So those are some of the points from the last
18   session.
19             I just want to take a few minutes to build
20   the foundation for this session by highlighting a few
21   important points.
22             And the first and most important one is, you
23   have to remember that, after the deal is done, it's
24   very important, as an entrepreneur, to shift your
25   perspective on both the venture capitalist and your
0014
 1   relationship with them.  You're really moving from a
 2   sale to a partnership.
 3             Clearly, when you begin your relationship
 4   with a venture capitalist, they are your customer or
 5   your prospective customer, and the focus is on the
 6   sale, the sale of the opportunity to invest in your
 7   business.  But this is unlike any other customer/seller
 8   relationship, because once they buy, they become an
 9   owner in your business.  Selling them the product is no
10   longer the priority.  Working with them to reach the
11   goals for the company and the company's use of capital
12   is.  It is a partnership, and there are many shared
13   goals an interests, believe it or not.
14             But of course, like any relationship, there
15   are going to be differences of opinion along the way,
16   and the best way to start the partnership and the best
17   way to manage the differences over time is to properly
18   set expectations.
19             Now, this is something that, as an
20   entrepreneur, you should be doing when you're actually
21   selling them the opportunity to invest in your
22   business.  And if you overestimate the expectations,
23   either during that sales process or after, you're
24   likely to pay for it in the quality of the
25   relationship.  So keep in mind that as we move into
0015
 1   this period in our discussion of Living with the
 2   Venture Capitalist, you're moving from a sale to a
 3   partnership with a venture capitalist.
 4             Okay, "partnership" is a pretty powerful
 5   word, and it should say more to you than just a source
 6   of money in the case of your venture-capital partner. 
 7   In fact, your perspective all along the way in
 8   identifying a venture -- a prospective venture-capital
 9   partner, in seeking that investment, should have been
10   what they could provide to you in addition to capital.
11             Well, now, once the sale is done, it's time
12   to shift to that mindset.  So now you've got the money,
13   now you have to engage the partner in your business,
14   and you have to do that by more than simply reviewing
15   numbers at a quarterly board meeting.  The investor has
16   to understand the path that you're on, where it is you
17   want to go, and where you are at any point in time if
18   they're going to be able to help you and be effective
19   as a partner in your business.  The investor also needs
20   to know where you have needs and how those needs impact
21   your shared goals; in particular, return.
22             And once the path is clear, investors need to
23   be engaged in very specific ways to help you.  You need
24   to give them assignments, timetables, deliverables, of
25   course, that are appropriate to the relationship.  But,
0016
 1   like any other member of your team or any other
 2   contributor to the bottom line, if you don't engage
 3   them and you don't tell them what to do, it's very
 4   difficult for them to help you.  And it's important to
 5   think of them in this way because they are, quite
 6   literally, part of your team at this point.
 7             I think it's also important to point out that
 8   this is a relationship that has no predestined outcome. 
 9   It's your job as the entrepreneur, and yours alone, to
10   manage it, to be a good relationship or a bad one.  The
11   venture capitalist is like many other players on your
12   team, but, in the end, as the entrepreneur it is your
13   team, and so your job is to manage the players on that
14   team.  Many venture capitalists are very proactive and
15   they're very good at what they do, and they can
16   contribute a lot of value to your company.  However,
17   your job is to determine the best way for them to
18   engage and then work with them to make sure that they
19   contribute that value in the way that is going to allow
20   your team, your company, to meet its goals.
21             And related to this theme of players on a
22   team, let's get one thing straight, up front.  Venture
23   capitalists do not want to run your business.  This is
24   often a huge preoccupation for entrepreneurs around the
25   close of the deal and immediately after and, for some,
0017
 1   for a long time thereafter, but it can dramatically
 2   shade your relationship if you can't get beyond this
 3   perception.
 4             Let's go back to the point -- the earlier
 5   point.  It is your team, and it is your business.  It
 6   was before the investment; it is after the investment,
 7   regardless of ownership percentages.  Your job is not
 8   to worry about somebody else taking over that team;
 9   your job is to worry about what's important.  And
10   what's important is performance.  Performance is what
11   you were achieving before you sought money. 
12   Performance is the reason that you sought venture
13   capital in the first place, to continue and to expand
14   on your ability to perform.  Performance is why the
15   venture capitalist invested in you.  So focus on what's
16   important.
17             There's no question that venture capitalists
18   have strong opinions and they will share them with you. 
19   As co-owners in your business, you really shouldn't
20   expect anything less.  And because you're often talking
21   with them about your business, primarily talking with
22   them about your business and your performance, it can
23   feel very personal.  However, they invested in you, in
24   your ability to run the company and in your ability to
25   use their capital to grow the company.  In addition to
0018
 1   that, don't forget, they already have a job.  Their job
 2   is to invest in businesses like yours, not to take over
 3   the operations of them.
 4             The fifth point that I want to make is that
 5   this is a relationship that will evolve over time. 
 6   What it looks like today is not necessarily what it
 7   will look like next quarter or three years from now. 
 8   You have to expect it to evolve, and you have to allow
 9   it to evolve.  And if you think about your business
10   itself, if you think about it when you first started
11   out, if you think about it right before you decided to
12   raise money, if you think about what you want it to
13   look like after you raised the money -- it's in
14   constant change, constant flux.  So the goals for the
15   business will change.  Opportunities will come up or
16   disappear.  And your decisions about whether or not to
17   go forward with them will change.  You can't expect
18   that you'll always be on the same page with your
19   partners or that you'll always see things the same way. 
20   At some point in time, your views will differ. 
21   However, the key is to be aware of change, to
22   anticipate it and to manage the relationships that will
23   be impacted by it, and this includes your relationship
24   with investors.
25             The best way to weather change in your
0019
 1   business and any change it brings to your investor
 2   relationships is to communicate.  It's that simple.  Do
 3   it early, do it often, and do it truthfully.  Your new
 4   policy really should be "ask and tell."  If you don't
 5   ask them for help, if you don't tell them where you are
 6   and where you have needs, then you're very likely to
 7   throw the relationship off track.  It's really pretty
 8   simple.  If you don't ask, how can they help?  If you
 9   surprise your partner by not communicating with them --
10   just don't surprise your partner; it never has a good
11   outcome.  It always has a long-lasting effect.  And if
12   you don't tell them where you're headed, ask for help
13   when you need it, tell them where they fit, and then
14   engage them to do it, you really can't expect the
15   outcome of your relationship with them, or where you
16   want to go with their money, to be a very positive one. 
17             Perhaps most importantly, don't forget to
18   listen to them.  Good venture capitalists have been
19   through many growth cycles with many companies.  They
20   know a lot of things that can help your business.  No,
21   they don't know everything.  Sorry.  But, yes, their
22   opinions are very important, even if they may differ
23   from yours, and they deserve to be part of the equation
24   when you're making decisions about your business.
25             And, finally, you may have differences in the
0020
 1   goals that you have for your business versus the goals
 2   that your investment partner has for your business over
 3   time, but there's one goal that never changes.  It's
 4   always shared.  And that is the goal of return.  This
 5   one needs no window dressing.  Performance is why you
 6   sought capital.  Your ability to perform is why the
 7   venture capitalist provided you with capital.  Using
 8   that capital to achieve return is a shared goal.  That
 9   is what makes a business a business.  Don't lose sight
10   of that.
11             Chris Cantarella, your moderator, and I were
12   talking the other day, and, as we've been reviewing the
13   themes for the last two sessions, or the ones that I
14   just laid out as a basis for this session, it seems
15   that there's some commonality that runs underneath
16   them.  And if I was to oversimplify all the many
17   lessons you could take away from these sessions we've
18   had, including this morning's, and to try to draw a
19   lesson about how you could successfully consider the
20   decision to pursue venture capital effectively and
21   efficiently, secure it, and then leverage the capital
22   and the relationship to maximize value, I'd tell you
23   that it boils down to two things: discipline and
24   perspective.  And this is a constant balancing act.  It
25   is what we've tried to do in this series and what we've
0021
 1   tried to convey to you.  It is what you have to do in
 2   your business every day.
 3             So these are the topics that the panel is
 4   going to focus on this morning.  And right now I would
 5   like to introduce Chris Cantarella, your moderator, and
 6   your panel.
 7             [Applause.] 
 8             MR. CANTARELLA:  Good morning, everybody.
 9             Thank you.  I really appreciate that summary. 
10   Again, I think we're very fortunate to have four of the
11   top real young guns, strong VCs that we have in the
12   community.  I personally feel privileged to be here
13   again with you guys, and look forward to this.
14             Now, what I would like to do is, we're going
15   to introduce ourselves real quick.  Let me give you 20
16   seconds each, as -- to just introduce yourselves and
17   your firms you're in.  But I want to poll the audience
18   real quick, I think it's always smart to know who
19   you're talking to and what the knowledge base is.
20             Let me start out with a question, just
21   basically, how many folks here have gone out to raise
22   capital before?
23             [A show of hands.]
24             MR. CANTARELLA:  All right, great.  Thank
25   you.  How many of you are going to raise capital in the
0022
 1   future?
 2             [A show of hands.]
 3             MR. CANTARELLA:  Okay.  How many of you have
 4   been successful at raising some type of investment
 5   capital?
 6             [A show of hands.]
 7             MR. CANTARELLA:  And how many of you have
 8   succeeded at obtaining venture capital?
 9             [A show of hands.]
10             MR. CANTARELLA:  All right, great.  That's a
11   great start.
12             Well, with that, again, I'm Chris Cantarella. 
13   I'm with Ernst & Young.  I'm a business-development
14   type of guy, I lead business development for our
15   private equity practice, formerly our venture-capital
16   advisor group, as well, and here based in McLean.
17             Mark, why don't we start with you?
18             MR. FRANTZ:  Mark Frantz, Carlyle Venture
19   Partners.  We're a $600 million fund here in the U.S.,
20   part of Clark Carlyle Group; it's a large private
21   equity firm.  We also have funds in Europe and Asia in
22   venture, and obviously the firm works in the buyout and
23   real-estate asset classes, as well.  Our firm, out of
24   the venture-capital side, invests in everything but
25   life sciences companies, so we'll do healthcare
0023
 1   devices, IT, security software, enterprise software,
 2   communications equipment, communications services, and
 3   the like.  We have done deals as early as three guys
 4   and not so much a napkin, but not much beyond that, as
 5   well as doing buyouts of small divisions of large
 6   public companies.  So we pretty much run the gamut.
 7             MR. FREDRICK:  I'm Steve Fredrick, a partner
 8   with Novak Biddle Venture Partners based in Bethesda,
 9   Maryland.  We're an IT-only-focus, early-stage
10   investor, investing primarily on the East Coast, 350
11   million currently under management funds.  We invest in
12   everything from three guys in a garage to companies
13   doing 50 million in revenue, but we haven't raised
14   outside capital before.
15             MR. WELLER:  I'm Harry Weller, a partner at
16   NEA.  We're a very large, early-stage venture-capital
17   firm, although we do do some later-stage
18   transformational capital, which means we invest in
19   stuff that either spin out or are fairly mature but
20   still require capital to grow pretty efficiently. 
21   Probably the difference between us and a couple of the
22   guys is just simply that we're bi-coastal, both on the
23   West Coast and the East Coast.  We've got a -- pretty
24   much a national footprint.  And our current fund, about
25   a billion and -- 1.2 billion, and we also do tech,
0024
 1   healthcare, med, life sciences.  We really run the
 2   gamut.
 3             MR. FREDERICK:  I'm Scott Frederick, a
 4   partner with Valhalla Partners.  We're about a $178
 5   million fund.  We focus on early-stage IT-centric
 6   investments pretty much up and down the East Coast, but
 7   we have a strong preference for deals that are closer
 8   to home.  Estimated probably, I would say, about 50-60
 9   percent of our deals will be within an hour's drive.
10             MR. CANTARELLA:  Great, guys.  Well, I should
11   correct myself, too, I said "young guns."  The truth
12   is, I have so much receding hairline, I think of a lot
13   of people as young these days.  But these are partners
14   at these enormously strong firms, and I think we really
15   ought to listen to them today.
16             And right into it, our first event, we talked
17   about, gee, how do we approach VC?  What perspective
18   should an entrepreneur have?  Who should we go to
19   target?  How should we go about the discipline of doing
20   that?  And what perspective should we wear as we go
21   into that first meeting?  
22             Then our second series, we put our second
23   panel on the series, we talked about how to try to get
24   the momentum and keep it, and it really reminds me of
25   the dating process.  I'm sure you've all heard this
0025
 1   analogy before.  There's nothing new to this.  But, as
 2   we all know, dating is, kind of, the -- it can be
 3   called the "fun time" -- it can be very challenging,
 4   but it can be called the "fun period."  You know?  You
 5   have a lot of freedom.  And as you start to move
 6   towards a lasting relationship, there can be some
 7   apprehension.  You know, you can be asking yourself,
 8   "Gee, what's it going to be like to live with this
 9   person?"  I'm sure my wife was very scared going into
10   our marriage, knowing me.
11             [Laughter.] 
12             MR. CANTARELLA:  So that's something that
13   really starts to happen.  You've got this momentum. 
14   You've hopefully got some chemistry with the VC at some
15   point, and now you're starting down this road where the
16   transaction is going to be completed.  You're going to
17   have this investor, hopefully, for a decently long
18   time, a couple of years, and you're going to have some
19   kind of relationship, and everybody has apprehensions
20   going into the long-term relationship.
21             And I think it would be really key to ask all
22   of you here, just as an open question -- I'm going to
23   ask some assigned questions here, too, but as an open
24   question, What is it like when you're first walking
25   into that first board meeting with the company?  Now
0026
 1   that the deal has been done, now that you're married,
 2   what are you thinking, what are your fears, your
 3   expectations, any apprehension, how does it feel
 4   walking into that room?
 5             MR. FREDERICK:  I would start just by saying,
 6   if there's too much apprehension, you shouldn't be
 7   doing the deal in the first place.  I guess my thought
 8   is that if the due-diligence process is done correctly,
 9   both parties should really have a pretty good sense of
10   what the relationship is going to be like in advance. 
11   And I really do mean both parties.  And I mean that in
12   the sense that both parties should have a sense of
13   their relationship, but both parties should also be
14   involved in the due diligence.  I think that's a common
15   mistake, is that entrepreneurs forget to do due
16   diligence on the VCs themselves.  Ask for references
17   and take them up on it, make calls, go one step further
18   and take our prior CEOs out to dinner and ask them what
19   we're like.  I mean, the diligence really has to go
20   both ways.  And if that process is done thoroughly, you
21   can -- both sides should have a really good sense of
22   what it's going to be like.  Because, as Chris said,
23   this is a long-term relationship.  It is five to seven
24   years in this environment.  
25             MR. FRANTZ:  I think Scott is right on, it is
0027
 1   a two-way street.  I think sometimes it varies by stage
 2   of investment, sometimes it also, at least by my
 3   experience, is whether the company is local or it's
 4   somewhere you've got to travel on a plane.  So, for
 5   instance, if it's local and it's very early stage,
 6   you've probably talked every day since the money was
 7   wired, before that first board meeting, so there's a
 8   real common knowledge base, there has already been
 9   actions undertaken.  If you have to get on a plane and
10   go somewhere and there are already four other investors
11   at the table, and you're the person who came in to do
12   the top-off round or the recap, or whatever, there can
13   be a little bit of apprehension -- or at least I've
14   experienced it -- where either sitting in the room or
15   having to walk into the room, it's like, "Wow, we saw
16   the terms sheets, we talked to you at one point on the
17   phone, but we've never done a deal with you before." 
18   And it's just kind of like you're just wanting to make
19   sure that you just show up in front of your partnership
20   and really lobby hard to make this investment and
21   everything's on track the way you made it sound.  As
22   Scott said, you have to do everything you can during
23   the diligence process to ensure that's the case, but
24   sometimes, especially with some later-stage deals, that
25   is difficult to do. 
0028
 1             I would also just add on Scott's point, do
 2   not be afraid to "diligence" us.  In fact, I encourage
 3   you to do that, because why have one of us, or any of
 4   our peers, sit on your board if, at the end of the day,
 5   after talking to some people, you find out we're ogres
 6   or we have a different philosophy than you do?  We're
 7   going to be owning a substantial part of your business.
 8             There is taking it too far, we all agree --
 9   to be very candid up here this morning, and so I have a
10   good story -- we had one CEO who kept pressing us for
11   somebody with a lot more operating experience, because
12   this other venture firm had a significant operator they
13   were going to put on, and so, as we were going back and
14   forth trying to win this deal, we ended up with Dan
15   Ackerson, who is the senior advisor at our firm, spends
16   most of his time in the buyout shop, say, "Hey, look,
17   I'd be willing to do this.  I think this is a great
18   company."  Now, I don't know how many of you know Dan,
19   but he was the CEO of Nextel, he was the CEO or the CFO
20   of MCI, and he was the CEO of XO.  And this particular
21   CEO asked Dan to come up and have lunch with him, and
22   then wanted to call all of his references, including
23   the CEO of American Express, where he sits on the
24   board, the CEO of Tyco, who is a friend of his from
25   business school.
0029
 1             So there is doing appropriate diligence, and
 2   then there is, "Careful what you ask for; you may get
 3   it."
 4             MR. FREDRICK:  But I think, to Mark's point,
 5   it really is important to do that due diligence, both
 6   on the firm and the individual from the firm that's
 7   going to be working with your company.  And if you turn
 8   up red flags, you need to track down those red flags;
 9   because, unlike a marriage, I mean, I would argue that
10   a divorce in this business is almost impossible.  I
11   mean, you're stuck.  And, ideally, that's a good thing. 
12   I mean, you can leave, but that is not what any
13   entrepreneur ever, I don't think, aspires to do.
14             You know, one thing I will add, that often,
15   in that first board meeting, I think, investors are
16   walking into that meeting and they're thinking to
17   themselves, "Okay, I'm going to find out how
18   transparent and forthright this team was during the
19   dating process, and I'm either going to be ecstatic
20   that they're ahead of plan and that they properly set
21   expectations or I'm going to feel a little bit like
22   they sold me a bill of goods.  I'm going to start
23   questioning, maybe unfortunately, the integrity of the
24   team.  Was it just a modest stretch?  Was it a real big
25   stretch?"  And to the points that were made earlier, I
0030
 1   think that can really get things off on the wrong
 2   footing.
 3             I will say that the greatest experiences are
 4   going into those first board meetings.  I remember
 5   going into the first Blackboard board meeting, and they
 6   had knocked their plan off the charts in that first
 7   month, and everybody looked at it.  The fellow with us
 8   looks around the table and said, "This is likely to be
 9   a good deal," and it turned out to be a good deal.  So
10   I think it is important to be transparent during the
11   process.
12             MR. WELLER:  I guess I'll be last.  I have a
13   little different take on it, just because I think it's
14   interesting -- I'm sure a lot of you have played with
15   recipes and thrown spices in.  You can know everything
16   about each individual spice, but when you throw it into
17   a broth, you have, sometimes, no idea what you're going
18   to get.  And what I mean by that is, I'm actually -- if
19   we did our due diligence right, we generally know what
20   we're into, as Scott pointed out.  But what you don't
21   know is how the board is going to work together.  And
22   what I'm nervous when I enter into a board meeting for
23   the first time, is, "Boy, how is this board team going
24   to work together?  What's going to be the emerging
25   character of that board, and is it going to be able to
0031
 1   work well together or not?"  And that's what I'm
 2   nervous about, is, you just never know about how the
 3   individuals are going to work.
 4             The other big concern I generally have is --
 5   to be honest, is, Is it going to be -- I have two names
 6   for this -- Is it going to be a war-room board or is it
 7   going to be theater?  And oftentimes you'll get into a
 8   board-meeting situation where you almost get -- you
 9   become audience, as opposed to working together on
10   common issues.  And a lot of that comes from how it's
11   run on the part of the CEO.  As much as you know a CEO,
12   as much as the due diligence you do, a board meeting
13   sometimes turns into this event, and you get a state-
14   of-the-union, as opposed to a discussion.
15             And so, for me, there's a lot around board
16   dynamics, a lot of the emerging phenomena, that are,
17   quite frankly, sometimes unpredictable.  And so that is
18   what I worry about, is how that evolves over time.
19             MR. CANTARELLA:  Those are great answers. 
20   Boy, I don't know about you guys, but it's scary to
21   think -- but I think I see the next reality TV show
22   coming on with somebody coming up with what the
23   boardroom's like and the VC relationship, "The New
24   Apprentice."  Certainly, a lot of drama can exude out
25   of those, I'm sure.  And I can see the gleam in your
0032
 1   eyes as you contemplate this.
 2             The other thing is that, when we talk about
 3   perspective, we always want the entrepreneurs to
 4   understand how they should view the relationship.  One
 5   of the things I love to ask here, for the audience's
 6   sake, is, What do you expect -- Mark, maybe you could
 7   help us with that -- What do you expect of yourself in
 8   this relationship?  And, to that end, how do you see
 9   yourself working with the company over time?  How do
10   you envision your role?  How do you envision the
11   chemistry, over time, with the company?
12             MR. FRANTZ:  Thank God none of my CEOs are in
13   the room for this answer.
14             [Laughter.] 
15             MR. FRANTZ:  You know, I think its gets into
16   what I would like to think I am providing, and then,
17   quite candidly, to Scott's earlier point, you should
18   call -- I would like to think, going into it, my
19   perspective is, I'm here to be a value-added member of
20   the team.  I thought Larry's line hit it right on, I'm
21   not here to run your company; I'm here to be your
22   partner. I'm here to do everything I can to help you,
23   out of my own network, out of my firm's network.  I'm
24   here to go sit down, have a cup of coffee and talk
25   strategy at any time.  I'm here to take the phone call
0033
 1   at 11:00 o'clock at night about why you're going to
 2   have to separate from the co-founder of the firm
 3   because you guys have come to a fundamental
 4   disagreement, et cetera.  You're there to be that
 5   advisor.  And it's going to vary by day, by week, by
 6   month, by stage of the company, if that's hands-on or
 7   not. 
 8             What I'm also there to do is be committed. 
 9   One of the things that I think many entrepreneurs don't
10   fully appreciate is that we don't just take the state
11   of Texas or the state of Michigan or the Boeing pension
12   fund, as Larry said; we're responsible for other
13   people's money, but we're also responsible for our
14   money.  I know every partner-up-here's firm has the
15   standard practice of, you invest alongside of your
16   deals.  I literally had a conversation with one my CEOs
17   recently about -- well, I've got so much invested in
18   this deal, I'm, like, "Yeah, so do I" -- my wife calls
19   it "The Carlyle Tax."  I've been writing more checks
20   from my firm than I've been taking back lately, and so
21   my money is in this game, too.
22             So, you know, my perspective is to be a
23   value-added team -- member of the team, to give advice
24   and counsel where needed on it -- and sometimes not
25   solicited -- but also to remain committed, to be there
0034
 1   and not walk away from the situation.  And again,
 2   personally, I like my money, so I'm going to be
 3   committed.
 4             MR. CANTARELLA:  Any other thoughts?
 5             MR. FREDRICK:  I will just add, I think one
 6   of the real value-adds a venture investor or a board
 7   member can provide is the pattern-recognition
 8   capability, the experience of having worked in a lot of
 9   different environments with a lot of different
10   companies and identifying potential problems early in
11   that percolation process.  I think pattern recognition
12   is something you ought to expect, as well, from your
13   investors.
14             MR. CANTARELLA:  Steve, real quick, just to
15   go into it a little bit, when you say "pattern
16   recognition," describe that just a little bit and
17   explain the value.  I think I know what you're talking
18   about.  I think we have some assumptions about what you
19   mean, but if you could just mention that real quick,
20   that might be a value-added, in and of itself, for the
21   board chemistry that Harry mentioned.
22             MR. FREDRICK:  Well, Harry's point was spot-
23   on.  I think a board -- that's one aspect of pattern
24   recognition, Is the board evolving in a constructive
25   manner to where it's effective?  Are we attacking the
0035
 1   strategy here for the company in a way that makes
 2   sense?  Where my firm may have done five deals in a
 3   space and may have some perspective to add to the mix
 4   that says, "This has often worked.  We've seen this
 5   approach taken four times, and it's never worked.  So
 6   for what that's worth, just add that to the mix." 
 7             But I think the ability to watch four or five
 8   or twenty football games at once, and to have that
 9   aggregate macro perspective, is something that venture
10   investors can provide, that when they're running a
11   company, and your head's down, and you're focused,
12   sometimes you don't have the luxury of coming up and
13   looking at it from 30,000 feet.
14             MR. CANTARELLA:  That's great.
15             MR. FREDERICK:  I think what pattern
16   recognition does for you is, it helps you with
17   anticipation, and that helps you with application of
18   best practices so you can see around the corner a
19   little bit.  I mean, in our shop, across our GPs and
20   partners, we've been involved with over a hundred
21   companies, and I would say we're private.  That
22   number's going to be smaller on this end than any of
23   the other three panelists.  But you think about all the
24   experiences and the learnings that go on across those
25   hundred, that's -- the patterns start to jump out at
0036
 1   you.  And if it is as mundane as when to make the
 2   transition from QuickBooks or can be high value-added
 3   strategic decisions, the pattern recognition leads to
 4   anticipation and then application of best practices,
 5   and that can be really valuable. 
 6             MR. CANTARELLA:  Harry, this one is for you. 
 7   Given what you've seen -- let me put it in perspective
 8   here, this question.  As an entrepreneur -- now, you
 9   know, the entrepreneur is thinking, "I'm going into
10   this first board meeting.  I've got my new investor. 
11   I've got to be a bit nervous."  You know that they're
12   nervous, they're probably even more nervous than the
13   VC, I would suspect.  And having been an entrepreneur,
14   I think their apprehension would have to be, "Gee, even
15   though we've heard it said that the VC does not want to
16   run the company, the VC has enormous influence over the
17   company now, and here's a new member."  This is a true
18   marriage in many senses of the word.  It's very hard to
19   get a divorce.  I guess the question is, at this point,
20   Harry, with what you've seen, How best should an
21   entrepreneur walk into that first board meeting with
22   the right hat on?  How should they view this
23   relationship and their expectations of themselves going
24   in?  How should they view this going in?
25             MR. WELLER:  So -- this was an assigned
0037
 1   question, so I thought about this, and my first
 2   temptation was to create this list of things not to do. 
 3   Then I decided that wasn't very productive, because
 4   then I would sound too critical.  And so probably in my
 5   -- I, sort of, took a step back, and I just said, you
 6   know, What if I were the entrepreneur and I wanted to
 7   talk to a couple of -- a lot of our partners are
 8   actually former VCs or former entrepreneurs of NEA who
 9   had successes.  And one thing to remember in all of
10   this, I realized when I went and talked to them is,
11   there's an entrepreneurial life cycle.  You've got to
12   have a very long-term perspective.  Even at your first
13   board meeting, you need to think about things in terms
14   of how long this relationship is going to be and how
15   this might not be the first relationship; it might be
16   one of a cycle of relationships, and it takes time to
17   develop, or it takes time to develop a VC relationship. 
18   So, with that in your mind, I don't think you should go
19   into your first board meeting too nervous.  I think --
20   give it some time.  So that's comment number one.
21             Comment number two, I think you should treat
22   a board as if it's a newborn creature that is learning
23   and evolving over time, and that you're part of the
24   central nervous system of that creature.  But don't
25   expect too much too early because the reality is, that
0038
 1   board needs to learn to communicate, it needs to learn
 2   to make decisions, it needs to, maybe most importantly,
 3   tolerate adversity as an entity, and it won't be able
 4   to do that well at first.  It needs to be educated over
 5   time, and it won't happen at the first board meeting.
 6             So, some thoughts about that.  One thought is
 7   that -- you hear everyone talk about why honesty,
 8   integrity, transparency is so important.  It's not
 9   because we go to church every week, it's not because we
10   go to church every day, it's not because we're good
11   people.  The reality is that being very transparent
12   reduces the friction in communication, it really
13   enables you to communicate better and more precisely. 
14   Because I think every VC -- I don't know how many of
15   you have read "Hitchhiker's Guide to the Galaxy," but
16   in "Hitchhiker's Guide to the Galaxy" there's something
17   called a "babblefish" you insert in your ear, and it
18   allows you to translate anything anyone says from any
19   galaxy.  Every VC has a "babblefish" that gets tuned
20   over time relative to how that board is communicating
21   and how that entrepreneur is communicating.  The more
22   translation that has to occur, the more handicapping
23   that occurs over time, the bigger that "babblefish" is. 
24   And the reality is that oftentimes a board will learn
25   to tolerate a lot of miscommunication and adjust in the
0039
 1   background.  
 2             So my point is, on all this, I think it's
 3   extremely important to be transparent up front, to
 4   build and educate your board as if it's an entity, to
 5   communicate well.  Do not shield the board, because the
 6   reality is, is then you'll build -- you won't build the
 7   tolerance in that group for dealing with adversity.  As
 8   you would teach your child -- I mean, it's very good to
 9   get your child in front of adverse situations, right? 
10   Same with your board.
11             So, that's probably the main points I would
12   leave here.  One other quick thing, though.  Remember
13   that a board meeting is not an event.  I think the
14   reality is, a board meeting is a part of a process.  So
15   one tip, always season your board.  And what I mean by
16   that is, call each of your board members before a board
17   meeting, tell them what you're agenda's going to be,
18   tell them what your concerns are, tell them what your
19   changes in strategies are.  A board meeting is not the
20   time to introduce a new idea; it is a time to discuss
21   the new idea you introduced a week ago.  So, that way
22   you basically level-set the playing field.  God knows,
23   I've seen so many board meetings where the whole board
24   meeting is set -- level-setting everybody, and by the
25   time you actually get into truly discussion issues, the
0040
 1   board meeting is over.
 2             So there are a couple of thoughts.  I would
 3   leave it to you guys to, sort of, fill in the rest.
 4             MR. FREDRICK:  I like the notion that a board
 5   is like children, which I think -- tongue in cheek, a
 6   little bit -- but I think there's a lot of truth to the
 7   fact that you've got to "grow" a board.  You've got to
 8   grow them, as Harry said, to understand your business,
 9   to understand each other, to become an effective
10   working unit that they're not going to be on day one.
11             MR. CANTARELLA:  Well, we've had a few
12   assigned questions.  We'll have a few more.  
13             A candid question here.  There must be some
14   good stories from that first board meeting, something
15   you guys went into, I want to hear about if you can
16   keep it anonymous.  Is there anything that happened
17   where you maybe had some overanxious expectations or
18   who knows what?  Nervousness?
19             MR. WELLER:  I've got one, but it's not me;
20   it's Peter Bayer's biggest deal.  This one's really
21   actually unbelievable.  So Peter Bayer's -- and I'll
22   tell you who it was; it was UUNet -- and he invested,
23   along with Xcel, a million dollars.  And he went into
24   his first board meeting -- one of our venture partners,
25   Mike O'Dell, he's now a venture partner; he was one of
0041
 1   the founders of UUNet -- he went into the -- Peter goes
 2   into the board meeting, they go through their strategy
 3   and report on their success.  They had good sales, but
 4   then, all of a sudden, the founder turned around and
 5   said, "But I've got one problem.  I'm out of cash." 
 6   The first board meeting.
 7             [Laughter.] 
 8             MR. WELLER:  They had not properly accounted
 9   for, because they didn't have a CFO, all of the
10   accounts payable.  And bum on NEA for not doing the due
11   diligence to identify it.  So they didn't have a CIO. 
12   But then they identify it.  But they didn't have a CFO. 
13   So when they hired the CFO they found this.  And
14   literally Peter had to go from that meeting back to the
15   partnership and said, "Oh, we need another million
16   dollars."  So you can imagine --
17             MR. FREDERICK:  The punch line is -- tell
18   them how much money you made on that.
19             [Laughter.] 
20             MR. WELLER:  So the punch line is, again,
21   initial conditions, look at board meetings, in the end,
22   as an evolving process; don't do a surprise like that. 
23   That almost destroyed the deal.
24             MR. FREDERICK:  The lesson there is not to
25   run out of cash.
0042
 1             MR. WELLER:  But what I do think is
 2   interesting is -- looking back on it, is, in the end it
 3   was, sort of, an endearing experience, but that was
 4   Peter's first -- one of his first deals, and he nearly
 5   -- it nearly killed the deal by there being that big a
 6   surprise, and it would have been a shame, because it
 7   was one of the biggest-returning deals in our firm, and
 8   it almost died right there.
 9             So I would very much advise no surprises. 
10   That is an accent on that one.
11             MR. CANTARELLA:  That's a great story.
12             MR. FRANTZ:  Can I take 30 seconds to say --
13   in terms of the entrepreneur's expectations, ought to
14   be the partners sitting at your table at the board
15   meeting as an ally.  You didn't just cut the deal.  Now
16   they're something of an adversary at the table that the
17   owner is -- my firm is now different.  You've got
18   somebody who if -- to Harry's point, you surprise them
19   -- and I'm sure Peter did not enjoy going back to the
20   partnership and explaining what had happened.  None of
21   us feel like that.  We all are very big advocates to do
22   the deal -- that is why we're on your board -- and so
23   you should expect, one, by that open communication,
24   that transparency, you're helping prevent them from
25   having a very rough Monday when they go back to the
0043
 1   partnership.  But, more important, they're expecting to
 2   help you.  So you should go into that first board
 3   meeting with, "How can I leverage Scott, Harry, and
 4   Steve as best as possible?  I don't want to overwhelm
 5   them the first time.  I've to bring them along a little
 6   bit, but I want to get some things moving here."  Your
 7   expectation ought to be that they are to help you.
 8             MR. CANTARELLA:  And I think maybe the lesson
 9   learned -- that's a really great story, Harry.  Thanks
10   for sharing that.  It's kind of funny to us, but think
11   about it if it happened to you.
12             Clearly -- but think about it, if it happened
13   to you -- clearly, you can hear that you have to
14   communicate right up front -- if it happened to you,
15   can you imagine what would have happened?  As good as
16   the deal turned out in this case, could you imagine
17   what would have happened if they had tried to hide
18   that?  Would the deal have turned out the same?  Just a
19   thought.
20             Steve, I'm going to throw you this next ball. 
21   You know, there's analogies that we hear often about
22   the VC and entrepreneur getting into bed together, and,
23   not to get too risque here, but, as we were talking
24   about this dating/marriage thing, I think that is a
25   very poor analogy, because, in reality, again, talking
0044
 1   about a relationship, we're talking about the fact that
 2   you're not in bed together, you're in a marriage
 3   together.
 4             Now, with that being the case, those of us
 5   who have recently been married, or who have been
 6   married awhile, know that there are certain buckets and
 7   processes that you have to think through, especially
 8   early on in the relationship.  For me, it was how I
 9   turn the toothpaste tube and a few other things I did
10   around the house, and how did I deal with the list of
11   things to get done.  Now we're outside the board
12   meeting.  Now we've gone and started to execute.
13             Steve, when you think about it, in this first
14   -- the first early days of execution, what are the top
15   issues that need to be addressed by both parties -- top
16   processes, top buckets that should be addressed?  And I
17   guess the other side question to that is, What's the
18   best way for each party to best communicate their
19   concerns or issues with those things?  Because I've
20   found, in a marriage, if you're not communicating about
21   those key areas, you end up with some conflict.  So how
22   does that translate to this environment?
23             MR. FREDRICK:  So it's interesting that the
24   bulk of these questions all get back to this constant
25   of communication.  And, in many ways, just like a
0045
 1   marriage, you get married, you have a little bit of a
 2   honeymoon period, and then you realize you don't know
 3   everything about your spouse that you thought you knew. 
 4   Maybe it's the toothpaste; maybe, in my case, it's the
 5   toilet seat, whatever it might be.  But there's an
 6   ongoing relationship that has to be built that's
 7   focused on communication.  And also, in this instance,
 8   I think, especially for the investor and entrepreneur,
 9   it's the building of trust.  You both need to be
10   working to build that trust factor to where it is rock
11   solid.  And if there are any lingering suspicions
12   about, What does this person really want?  What is this
13   person's agenda? -- I mean, hopefully that's all far
14   been put to bed before the investment is made.  But
15   that trust factor, to me, is what makes the deal work. 
16   If that is not there, then you never know whether
17   you're getting the straight scoop.
18             And this can work both ways.  I mean, there
19   are venture investors that perhaps don't communicate as
20   effectively as they should, right?  So it is a two-way
21   street to make that work.
22             I think, in terms of how you go about it, I
23   mean, you've got to sit down and talk 'em through.  And
24   in the early days, if it's an early-stage investment,
25   we do quite a number of very early deals where it's
0046
 1   maybe us and another co-investor, and the company is
 2   being started as we make this investment.  And so, as
 3   Scott mentioned earlier, there's daily communication
 4   either by phone or by e-mail, there are breakfasts
 5   outside of board meetings and lots of ongoing dialogue.
 6             I think it is also constructive for the
 7   investors to say, "Hey, here is how we would like
 8   information to be shared with us."  For instance, in a
 9   board meeting, "Here's a sample board packet.  Here's
10   how we would like the financials to look."  Or, "Here's
11   some examples.  We're not going to tell you exactly how
12   to do it, but here's some thoughts." 
13             Now, again, the level of guidance there is
14   going to depend quite a bit on the level of experience
15   of the management team.  That team has done this a
16   hundred times before.  Shame on me to try to tell them
17   how to do it.  I'm investing in people that are
18   accomplished.  But there are going to be teams and
19   times where folks haven't ever taken venture money
20   before, they don't know what we want or how we like to
21   see things.  And I know all of us have examples of
22   that.  In fact, some firms have even compiled books,
23   and, kind of, best practices, here are great ways to
24   put in place a hiring plan and a pro-forma financials
25   and -- et cetera. 
0047
 1             The last thing I guess I would add is, I
 2   think it's also very constructive to sit down and talk
 3   about, What are the goals for the business over the
 4   next quarter, or the next year, or prior to some
 5   meaningful milestone?  Let's get those out on the
 6   table.  I mean, oftentimes it's things like rounding
 7   out the management team, the hiring plan, rounding out
 8   the board composition with outside board members,
 9   securing X-million of new revenue, or launching a new
10   product or getting that customer validation.  And I
11   think a good venture investor is going to be focused on
12   a couple of high-level issues and not down in the
13   minutia.  They are there as a resource for any question
14   that a company might have, but I think a good investor
15   is going to be focused at the high level, saying,
16   "Hey," in a supportive way, "let me know what I can do
17   to help us get these three things accomplished."
18             MR. CANTARELLA:  That's a great answer.
19             Any other thoughts on that?
20             MR. FREDERICK:  If I were to stress just one
21   thing, it would be to make sure -- I mean, there's so
22   much focus and attention on the board meeting, but the
23   communication needs to go so much deeper, and it's
24   everything from calls late at night to breakfast
25   together.  But one thing, unfortunately, we find is, a
0048
 1   lot of board meetings get consumed by corporate
 2   housekeeping, and you run out of time and you don't
 3   have time to do the really deep kind of, "What's next? 
 4   What's around the corner?  What's the big strategic
 5   questions you're facing?"
 6             So make sure you schedule time with your
 7   board members to have those breakfasts, have the heart-
 8   to-heart.  We have our CEOs send us weekly reports.  We
 9   talk, I guess, about -- I mean, depending upon the
10   relationship, but most probably average every other
11   day.  I mean, the communication has to be really,
12   really tight.  If it's boardroom only, you're asking
13   for trouble. 
14             MR. WELLER:  Let me have some fun with this,
15   just for the fun of it.  The reality is, I think,
16   though -- one of the things that's really funny to me
17   is, we're all up here, "You've got to communicate,
18   you've got to be transparent."  And you do.  There is a
19   "but," though; and the "but" is, it's got to be
20   relevant.  And why that is so important is, a lot of
21   CEOs will say to me, "But, Harry, do you really want to
22   know everything?"  And the answer is, no, I don't. 
23   There is a demilitarized zone in which you can play
24   with a little bit, because you've got to keep it to the
25   big issues, the relevant issues.  We leave it to you to
0049
 1   have that decision-making power, and we will build
 2   trust in your ability to make those decisions over
 3   time, and you will build trust in our ability to focus
 4   on the right things at the board meetings and in the
 5   calls and in the relationships.  But make sure you've
 6   got a test of relevancy.
 7             Now, don't use that -- I mean, what happens -
 8   - what happens over and over again is, very well-
 9   intended entrepreneurs say, "I've got a little bit of
10   evidence of what could be a big problem.  I'm not going
11   to say anything."  But then they become subject to
12   their history of reporting, and the problem becomes
13   bigger.  But because they didn't report it before, it
14   continues.
15             And so my point is, is that this is an art,
16   not a science, and the art here is, you need to
17   establish early what is relevant and what is not, and
18   so do we, on our side.  But there's a lot of judgement
19   there, and that's, I think, where you hit Steve's point
20   about trust being so incredibly important.  And that is
21   something that is learned over time; it doesn't happen
22   immediately.
23             MR. CANTARELLA:  So what I'm hearing is that
24   if you set the proper expectations up front, if you
25   maybe set goals, Steve, as you mentioned, and you maybe
0050
 1   even -- it's probably a sign of power that if an
 2   entrepreneur asks you, "Do you have best practices of
 3   how we should we go about this long-term so we can
 4   separate from the chaff and the noise from what we
 5   really need to focus on in the board meetings and the
 6   communications and the calls?"  It's probably a good
 7   thing if the entrepreneur does that earlier rather than
 8   later, right?
 9             MR. FREDERICK:  Absolutely.  You need to use
10   common sense, and it's going to depend on who the board
11   member is.  To give you an example from our shop, one
12   of the things we do is, we double-team every deal, and
13   we do that intentionally.  And I do a lot of deals with
14   Art Marks.  The level of accessibility between Art and
15   I is very different, and it's that way by design.  And
16   so I think our CEOs use me with a lot more of the --
17   they're trying to figure out how to separate the wheat
18   from the chaff, and then I help them do that.  And then
19   once that's done, we get Art more involved.  So use
20   common sense.
21             MR. FREDRICK:  And, Chris, let me also add
22   one thing that I think is important here.  Tensions are
23   going to occur.  There are going to be disagreements or
24   miscommunications.  And, I think, just like in a
25   marriage, both parties want to defuse those quickly. 
0051
 1   In a marriage, the adage is, "Don't go to bed mad at
 2   each other," or, as my mother-in-law told me, if you're
 3   going to fight, always fight naked.
 4             [Laughter.] 
 5             MR. CANTARELLA:  Okay. 
 6             [Laughter.] 
 7             MR. FREDRICK:  Maybe that was too much
 8   information.
 9             [Laughter.]
10             MR. FREDRICK:  But the point I'm trying to
11   drive home is that you need to defuse tensions when
12   they occur, because they will occur, but you need to be
13   proactive and get those behind you.
14             MR. FRANTZ:  I'm not going to another board
15   meeting with you. 
16             [Laughter.] 
17             MR. FRANTZ:  He is spot-on.  And just to
18   extend off that, you grow in that relationship. 
19   Sometimes when you butt heads like that, you will learn
20   that much more about one another and how you can take
21   that relationship to a new level by working together to
22   solve the problem.  So I think he is spot-on.
23             MR. CANTARELLA:  In all fairness, I've heard
24   that before.  That is a good one, though.  I think the
25   key is to -- that transparency that Harry and Steve so
0052
 1   eloquently talked about.
 2             Scott, this one's to you.  Now, we've heard
 3   this time and again, what value -- right? -- the VC
 4   brings.  Now I think the way we usually hear this, it
 5   comes in the form of, "Well, we can help you
 6   financially, we can help you do these other things." 
 7   But earlier today we were just talking about pattern
 8   recognition.  You rarely hear about that.  Maybe you
 9   could expound on the top three ways that you think it's
10   really happening, the value is really being provided. 
11   It seems like pattern recognition would be a great one.
12             MR. FREDERICK:  Absolutely.  And I'm glad you
13   said "top three," because that's all I had.
14             [Laughter.] 
15             MR. FREDERICK:  I put, kind of, venture-
16   capital value-added in three main buckets.  It's
17   connections and introductions, and the value there is
18   pretty self-explanatory, and almost any VC should be
19   able to bring that to the table.  Of course, the scope
20   and the depth of the rolodexes will be different, but
21   connections and introductions is, kind of, self-
22   evident.
23             The second is what I call industry-specific
24   knowledge or, kind of, help with strategic vision. 
25   And, again, that is relatively self-explanatory, and
0053
 1   it's going to vary by -- that's really going to vary by
 2   venture investor and it's going to vary by sector.  I
 3   mean, there are some investors who are very deep in
 4   particular verticals, and they're not going to be deep
 5   in others. 
 6             The third big bucket of value-add, though,
 7   is, I think, the one that is often least appreciated on
 8   the front end, but ultimately turns out to be most
 9   appreciated, and that's help with what I call, kind of,
10   the five key company-building processes.  Any company
11   that succeeds has got to do product development,
12   customer acquisition, customer deployment, and then
13   finance and administration challenges, and learn how to
14   build a team.  And it's that kind of pattern
15   recognition across those five company-building
16   processes where, I think, really starts separating the
17   value-add of some VCs.  And you're not going to find
18   all three buckets, you're not going to find a VC who
19   has all three buckets.  So think through what is it you
20   really need, and then try to recruit a board member
21   accordingly.  It's like when you select a basketball
22   team, you wouldn't have five centers or five point
23   guards.  Boards are the exact same way.  Think about
24   where your holes are, and try to plug the holes.
25             MR. CANTARELLA:  As a side question, Scott,
0054
 1   do you have any examples where the entrepreneur went in
 2   really expecting too much right up front from the VC,
 3   started asking for introductions the first day, and you
 4   really need to get through the basics first?
 5             MR. FREDERICK:  It's a good question.  We try
 6   to flush that out in the diligence process.  And one of
 7   the things that started as an internal process at
 8   Valhalla which has now really manifested itself and, I
 9   think, really helps us in due diligence and helps get
10   our relationship with an entrepreneur off on the right
11   path is, we have a hundred-day plan.  We sit down with
12   the entrepreneur once we have decided to make an
13   investment.  We try to get away from that being on
14   opposite sides of the table negotiating a deal, and
15   sweating the terms, and we try to sit down, and we will
16   go have dinner together and drink wine, but we will map
17   out a hundred-day plan, "These are the things that we
18   think are highest priority.  What are the things you
19   think are the highest priority?"  And we're going to
20   put names and dates, and we're going to make specific
21   assignments to, not only the company, obviously, but
22   also to us and our entire team.  And so that process
23   helps, kind of, weed out the entrepreneur who has
24   unrealistic expectations.  But that process will flush
25   it out.
0055
 1             We've had entrepreneurs who will just think 
 2   -- sure, we have a relationship with, say, Cisco, but
 3   that does not mean that we can get Cisco to buy you for
 4   $250 million on day one.  There are entrepreneurs who
 5   will ask for those meetings, those kind of instant
 6   introductions, and something like that is probably
 7   inappropriate.
 8             MR. CANTARELLA:  That's great.
 9             Well, Mark, I'll throw this one to you.  We
10   hear a lot about being a good corporate leader, for the
11   CEO to be a good leader.  As we know, I think many of
12   us realize, and I think it is well established, that
13   leaders are not born; they're made.  What does it mean,
14   first of all, in your interpretation, for a CEO, and
15   even the other CXOs on the team, to be good leaders? 
16   And what can they do?  Maybe even some specific
17   examples you've seen where somebody has worked on
18   themselves and become a better leader over time, what
19   have they done to do that?
20             MR. FRANTZ:  In my opinion, it is -- you
21   provide that leadership by making that level of
22   commitment that one would expect with that position of
23   responsibility, taking that responsibility and
24   projecting it through the actions you carry all day
25   long, interacting with your team.  Oftentimes, in
0056
 1   companies like these, you have people in roles they've
 2   never been in before.  They've stepped up into a role
 3   from their last firm, so the controller of X-firm is
 4   now the CFO of this firm, the VP of product development
 5   is the CPO here, the VP of sales is now the CPO.  And
 6   so they've got to learn in that role and in themselves,
 7   but they need to go into it understanding what it is
 8   that role entails and try and commit to that, both to
 9   the people above them, whether it be the VP of sales to
10   the CEO, or the CEO to the board, and the people below
11   them, because a lot of times they're first-time people.
12             So it is conducting yourself in the
13   appropriate manner commensurate with the title one has. 
14   Sometimes you don't know what that is.
15             So the best entrepreneurs that I've seen do a
16   couple of different thing.  One, they take advantage of
17   their network amongst their peers and ask an awful lot
18   of questions, "Hey, I'm going to be interviewed for
19   this VP of sales slot at this company that NEA just
20   backed.  What is it they expect at NEA on the
21   enterprise software selling cycle, et cetera?  Once you
22   get the job, they call up the other VP-of-sales guys at
23   the firm, they engage themselves in community
24   activities, like Mindshare.  I think that's been a
25   great thing for this region.  I know one of our CEOs
0057
 1   just finished it.  I was looking at the alumni list,
 2   and it was, like, wow, this is pretty amazing.  So they
 3   will take that effort internally, externally, and then
 4   externally into the community to take advantage of the
 5   resources that are there, and are constantly working to
 6   educate themselves.
 7             The other thing is the adage of the really
 8   best and brightest.  Our capable leaders are those who
 9   go out and hire people who are brighter than them and
10   then empower them to be able to do their job.  And I
11   think that rings a hundred percent true, in my personal
12   opinion.  Every one of our CEOs who I've seen grow,
13   initially has not been afraid to hire somebody on their
14   team, either at their side, above them, and then, as a
15   sub-segment of that, would be outside directors going
16   and getting former CEOs, former founders, former CFOs,
17   whatever the case may be, by the sector, and asking
18   them to participate.  So hire the best and brightest to
19   work with you, even if it means hiring your new boss,
20   and not being afraid to go out and tap in.  I've had
21   the pleasure of working with some great independent
22   directors, and I am the biggest, biggest fan of them,
23   because I think the value they add at the table is not
24   just keeping the investors honest, which a good one
25   will do, but is also there for the CEO to be like,
0058
 1   "Man, I just -- I need a shoulder to lean on.  You've
 2   been here before."  And that perspective is so much
 3   different.
 4             I would point out one thing.  As I can see
 5   here in the audience, I have a perfect example.  At
 6   Blackboard, Michael and Matt have grown this company
 7   into now a half-a-billion-dollar market-cap company,
 8   but along the way they've not been afraid to ask people
 9   of great seasoning to join the team to get them through
10   opportunities.  Sometimes it hasn't worked out.  We've
11   had two CEOs, or one CEO and one COO, in the past who
12   were very valuable to the company, but as the company
13   grew, it didn't work out.  We've also had people like
14   Mary McPherson, who we wouldn't have gotten through
15   this recent IPO had she not joined the team and helped
16   these guys and get them ready for the public markets
17   and the like.  And Pete Rapetti, who's the CFO.  So
18   these two young men have done a phenomenal job of
19   growing this great big company.  But, in doing it, they
20   have brought on people who are older, wiser, and more
21   experienced than them to help them make a greater
22   enterprise.
23             MR. CANTARELLA:  Has there every been
24   anything that -- I mean, there's certain things that
25   tip you off or make the hairs stand up on the back of
0059
 1   your neck about a particular entrepreneur or leader? 
 2   What are the types of things?  Just as an aside to this
 3   question, more on the candid side, that you've seen
 4   that have given you some kind of a warning sign, you
 5   say, "Oh, geez, I've got a little bit of a worry now
 6   about this leader."  Is there anything you could
 7   mention? -- anonymously, of course.
 8             MR. FRANTZ:  I would say, candidly, taking a
 9   page out of Steve's pattern recognition, every now and
10   then -- anybody in this room can go look at my bio; I
11   didn't run Cisco, I didn't run Microsoft, I didn't run
12   Intel at any point, so my operating experience isn't
13   the depth of some other members of this panel, as well
14   as some of the partners in my own firm.  And every now
15   and then I'll get one of my CEOs giving me the, "Hey,
16   you don't know what it's like to run this company." 
17   And, well, actually, "No, you're right, I actually
18   don't.  But, however, I sit on six other boards, whose
19   combined revenue is close to $200 million."  And so I
20   would like to think that, between me and the other
21   members of the board, who probably do have operating
22   experience, we do at least have some perspective.  But
23   when you get that perspective very early on, like, you
24   know, "I really don't want to hear your advice and
25   counsel because you can't relate," I, kind of, start
0060
 1   going, "Gee, maybe you picked the wrong person to sit
 2   on your board."  I mean, when they're that offensive
 3   about it -- not offensive.  One could take it
 4   offensively; I don't.  But I mean offensively, like
 5   trying to define their space.
 6             MR. CANTARELLA:  "You don't know what it's
 7   like," if they said that.
 8             Well, we talked a little bit about chemistry
 9   earlier on.  There has to be some kind of chemistry for
10   the transaction to be taking place.  But I would
11   imagine that -- and, Harry, this -- I'm going to shoot
12   this one to you.  There's some responsibility in the
13   entrepreneur to ensure that chemistry is optimal over
14   time and that it gets better and that it grows.  Are
15   there any ideas you have as to -- or anything you've
16   seen, where an entrepreneur has been able to improve
17   chemistry over time?  Anything outside the boardroom,
18   keeping in touch, doing something to ensure that the
19   chemistry is there between the entrepreneur and the VC?
20             MR. WELLER:  Let's see, I guess -- I want to
21   answer this question differently than I had planned --
22   I guess, to me, it's often good to just lay out what
23   the tensions are in a board in between a VC and
24   entrepreneurial relationship.  Ultimately, we haven't
25   really discussed it, but there's an obvious tension
0061
 1   that is always there -- control, ownership.  And the
 2   reality is, is a VC wants to own as much as we can, and
 3   we want to have almost as much control as we can
 4   without having to run the business.  And an
 5   entrepreneur wants as much control as they can get, as
 6   much ownership as they can get.  And it seems like
 7   these are often directly in opposition, and they are. 
 8   And the reality is, probably the best entrepreneurs
 9   I've worked with are able to discuss that tension,
10   because it is the most -- it is one of the biggest
11   tensions that is just inherent in the way the
12   relationship is built.  And, frankly, it's also a very
13   useful tension, it needs to be there in order to make
14   sure management stays incented and the board stays
15   incented, and everyone can get the general returns.
16             But I think where it sometimes gets off
17   kilter is when you do something, like try to build a
18   team.  That can come across as taking control.  For
19   example, let's say we've decided, as a board, and the
20   entrepreneur doesn't agree, that we do need to get a
21   new CEO.  Is that really a control issue, or trying to
22   mitigate risk because we see, through some pattern
23   recognition, that the CEO really doesn't understand how
24   to take a better grasp of the market that seems to be
25   emerging?  It goes without saying this is some
0062
 1   entrepreneurs' worst nightmare.  And, frankly, from a
 2   board's perspective, it actually is our worst
 3   nightmare, as well.  It's not fun to go through this
 4   process.  And I think you have to throw it out there,
 5   because I think it actually is sitting in the back of
 6   everyone's minds.  Generally speaking, in a board
 7   meeting, if you don't -- particularly if you don't have
 8   an experienced CEO or experienced entrepreneur -- and
 9   this is where I get back to number one, make sure
10   you've got all the issues on the table.  If you are
11   fearful of that, discuss that with your board and
12   discuss how we can help you grow as a CEO if that is a
13   role you want to keep.  But, more importantly, the
14   thing that really works out well is when you engage
15   your VCs and your board as mentors, to the question
16   that Mark got.
17             The reality is, is that if you engage your
18   board as a set of mentors -- I mean, in NEA, half our 
19   -- as I said, half our partners are former
20   entrepreneurs -- you'll understand that the
21   entrepreneurial life cycle is one that goes on, as I
22   mentioned earlier, over and over and over and over
23   again.  And it is not just this position, it is not
24   just this company, and it's not just this role.  The
25   idea is to enhance you as an entrepreneur over time. 
0063
 1   And if you've got concerns about control, or if you
 2   have concerns about ownership, or if you have concerns
 3   about how the team is going to be built, you really
 4   should lay them out on the table really, really early
 5   so the board can discuss that so there are no surprises
 6   from the board coming to you, saying, "Hey, you're
 7   going to get either replaced or we're going to bring
 8   someone in over you."  I think that is -- that tension
 9   around control is one of the bigger tensions you have
10   to address over time, because it is very rarely said,
11   people don't like to talk about it, and yet it's a
12   healthy tension at the same time.  I mean, you need to
13   have it in order to have things properly allocated as a
14   company.
15             So I guess the net of it -- sorry for
16   changing my answer in midstream, but I guess the net of
17   what I'm saying is, bring those things forward, make
18   sure you discuss your development as an entrepreneur
19   over time with your board members so they can tell you
20   where they think you really are in the cycle and where
21   you're going to be.  What I saw in Kutu that fascinated
22   me is they have such a long-term perspective, he was
23   not CEO of Silicon Graphics; he was one of the early
24   founders of the company, but he was not CEO.  He let
25   himself get replaced.  He learned from Jim Clark.  He
0064
 1   learned from Mark Perry.  He learned from Dick
 2   Cranmark.  He learned from Scott Sandel.  He learned
 3   from Jim Clark, who's on the board, and others.  He got
 4   bought by Netscreen and then bought by Juniper, very
 5   quick transactions.  He is now next in line for CEO of
 6   Juniper, and -- if we can't hire him ourselves, which
 7   we're desperately trying to do -- 
 8             My point is, is that these are long-term
 9   relationships, very long term, and you've got to look
10   beyond the current control, the current ownership, the
11   current life cycle.  You've got to look very far
12   beyond.  Because I think in the end, that's what will
13   really make things great for everyone involved, because
14   I think the VCs generally want to keep it a very strong
15   relationship with very creative entrepreneurs and
16   develop them into leaders, but it takes time.
17             MR. CANTARELLA:  That's a great answer.
18             MR. FREDERICK:  If I could just add one
19   thing.  Chris brought up reality television and "The
20   Apprentice," and I can't not comment on it, because the
21   show drives me crazy.  But if there's one lesson on how
22   not to do the chemistry, I think it is that show. 
23   Duplicity and voting blocks make great television; it
24   makes for horrible corporate governance.  So just don't
25   use those guys as role models.  It does make good
0065
 1   television.
 2             MR. CANTARELLA:  A lot of drama, that's for
 3   sure.  But some you don't want in the boardroom.
 4             Steve, when we're talking about a marriage --
 5   you keep hitting on this, but I still think it is
 6   worthwhile to keep this in mind -- you're working on a
 7   constant goal.  In marriage, it's long-term
 8   relationship, hopefully.  This is where it diverges. 
 9   In this kind of a relationship between the entrepreneur
10   and the VC, there can be times -- there will be,
11   potentially, times where there are subsequent
12   differences of opinions as time goes on about what the
13   end game is, what the exit is probably going to be,
14   where to drive the company to achieve a multiple for
15   the exit that is expected.  Or there might be some
16   difference of opinion.  How best does an entrepreneur
17   deal with this very difficult issue in navigating,
18   especially if there's a disagreement between the VC and
19   the entrepreneur about the end game?
20             MR. FREDRICK:  So I have two different
21   answers for this question.  And I guess the first is
22   that in my experience, I typically haven't seen the
23   entrepreneurs or the management team and the investors
24   disagree on the goal of liquidity.  That may happen. 
25   Others may have experience with that, but I haven't
0066
 1   seen that.  I have most often seen different investors
 2   who sit on the same board disagree over the right
 3   course to liquidity, with management aligned with one
 4   group of investors, but with another group posing a
 5   problem.  This gets back to Harry's point of
 6   structuring boards so that they're functional and that
 7   the investors work well together.
 8             And if I could just add one thing to the
 9   notion of, when you raise money, do your due diligence. 
10   I mean, ideally you're going to work with groups that
11   have worked together before, you want to work with
12   investors that have relationships with each other and
13   know each other, because that does a lot to mitigate
14   this risk down the road.  But I've seen situations
15   where the obvious exit scenario presents itself, but
16   there is an investor that has a very beat up portfolio
17   elsewhere, has been counting on this one particular
18   portfolio company to bail out an otherwise devastated
19   portfolio of investments, and they have got to make 25X
20   on this return, and they are motivated, as an
21   individual and as a firm, to go quadruple or nothing,
22   because anything less and they're out of business as a
23   firm.  So to sell the company for 2X or 3X or 5X,
24   whatever the number is, isn't rational.  I mean, it is
25   rational; but, for them, it presents a problem.  So in
0067
 1   those situations, I think, what entrepreneurs have to
 2   do, and management teams have to do is, they have to
 3   work through their investors.
 4             And we had an experience like this at
 5   Blackboard.  Not that experience, but a different
 6   experience, where you have a problematic investor, and
 7   you've got to work through your other investors to
 8   apply some peer pressure to work outside of the
 9   boardroom to -- anything short of strong-arming people
10   toward the consensus agenda.  At the end of the day,
11   whoever has the votes can carry the day.  But that is
12   not typically the way you like to have to resort to
13   things.
14             But I think the bigger risk is that all your
15   investors aren't aligned, versus management, versus
16   investors.
17             We did have one experience where we had a
18   company, Telegy Networks, that had two suitors -- one
19   suitor was willing to pay 800 million; the other suitor
20   offered a billion-two.  The management team said, "We
21   cannot work for the CEO of the company that offered a
22   billion-two.  We would prefer to sell to TI, who
23   offered 800 million."  And the board said, "Okay, it's
24   your call," gave up 400 million bucks.  But, at the end
25   of the day, the management team has to see this through
0068
 1   to make it successful, and you're buying stock or
 2   you're being paid in stock, and there's some upside
 3   that comes from that down the road. 
 4             So those are two very different answers, but
 5   keep conscious of the board dynamic between investors.
 6             MR. CANTARELLA:  That's extremely insightful,
 7   thanks, Steve, because I don't think a lot of the
 8   entrepreneurs think through that fully and realize why
 9   syndicate partners tend to like to work with each other
10   on a more regular basis than not, and how that works.
11             MR. FREDERICK:  And if I could just add one
12   thing, because there's a good -- I know people have
13   heard the "Martini Rule of Venture Capital."  Venture
14   capitalists are a lot like martinis -- one's good,
15   two's better, three can be too many, and four is
16   generally an absolute disaster.
17             [Laughter.] 
18             MR. CANTARELLA:  Well, we're catching up on
19   time here -- I mean, we're not catching up; we're
20   getting behind on time here.  We planned for the panel
21   to be around for a couple of minutes here.  We've got 
22   -- 10:00 o'clock, I think, we're scheduled to.  I have
23   two more questions.  Maybe I will ask the one here to
24   you, Scott, and I had a wrap-up question, and I'll,
25   kind of, keep that -- ask for you to keep that short.
0069
 1             Scott, we talked about some negatives that
 2   happen -- tensions, negative things that happen in a
 3   marriage, negative things that happen in a relationship
 4   between the VC and the entrepreneur, communicating
 5   that, building trust and confidence.  I guess this is
 6   going to hit on some of the things we've already talked
 7   about, but to ask the question again because it's so
 8   critical, How should an entrepreneur view difficult
 9   kinds of communication like this?  How should they
10   approach bad news?
11             MR. FREDERICK:  I shouldn't say it's easy,
12   but I think the roles are easy.  The sooner you can
13   tell bad news, the better.  Be straightforward.  You
14   don't need excess drama.  Focus on problem-solving, not
15   excuses.  If there's a golden rule, I think -- being
16   close to D.C., I think we can learn from politicians --
17   don't try to cover up.  The cover-up is always worse. 
18   Just be straightforward, get it out in the open.
19             And one of the things I always try to tell
20   myself during, kind of, bad-news situations, I think it
21   can be helpful for an entrepreneur.  We can't always
22   control the circumstances we find ourselves in, but you
23   can control how you respond to them.  So bad-news
24   situations can be a time for an executive to shine. 
25   Step up, deliver the news early, crisply, focus on
0070
 1   problem-solving.
 2             MR. CANTARELLA:  You know, I really
 3   appreciate that, Scott.  That is a key.  And if you
 4   think about it, I think it was summed up in the way
 5   Harry told that story about, "Well, hello, good
 6   morning, I'm out of cash."  If you have to do it, you
 7   have to do it.  You don't get there -- you know, you do
 8   everything you can not to get in that position.
 9             I think because we're so short on time and
10   because Jeff Bede is going to wrap up here for us with
11   some commonalities, I had one last question that had to
12   do with this commonality theme through this thing, but
13   I think we've hit on so many of them.
14             Jeff Bede, from Chessiecap, is going to give
15   us a summary.
16             First of all, I would like to thank our
17   panel.
18             [Applause.] 
19             MR. CANTARELLA:  Let me just make one
20   comment.  It's always a pleasure to work with these
21   guys.  I know there's a sold camaraderie among them,
22   and it's not easy to be a VC and be this candid.  It
23   doesn't come naturally for a lot of folks in the
24   community.  I think that it is very difficult, and it
25   is a very difficult job they do.  And I think a lot of
0071
 1   people need to realize that, and I really appreciate
 2   you guys spending time with us today.
 3             MR. BEDE:  I want to echo what Chris said. 
 4   Any good seminar, the enthusiasm and the openness of
 5   the panel is absolutely critical, and these guys were
 6   great today.  So I'm just going to quickly wrap up what
 7   we talked about today.
 8             The purpose of these three seminars, as we
 9   talked about before, was really to get a tangible and
10   inside look at the venture-capital process.  And what
11   we've tried to do is go a few levels deeper than the
12   typical seminar and really get more honest and open,
13   which these guys, thankfully, did.
14             Today's session was on living with your VC
15   and how to maximize that relationship with your
16   investors.  It's something that really isn't a focus of
17   these type of sessions, and I think we've talked about
18   it today.  It is extremely important.  VCs can add a
19   lot of value to your company.  They are partners.  They
20   should be treated as such.  And I've seen it on several
21   occasions where companies -- the relationship turns
22   sour, and it can be extremely poisonous to a company. 
23   And so, as an entrepreneur, you should do everything
24   you can to manage that relationship.
25             So a few thoughts we've talked about already
0072
 1   -- I'll not go into too much depth -- but
 2   communication.  I know it is obvious, but people --
 3   especially as time goes on, the VCs are busy, you guys
 4   are busy, but make sure that you keep that flow of
 5   communication going.  It has a lot of positive benefits
 6   that open dialogue, it helps avoid surprises so
 7   everyone's on the same page.  And there's nothing that
 8   investors hate more than being surprised.  I think all
 9   of these guys mentioned that.  
10             The second thing is, keeping that
11   communication going builds chemistry.  It -- both
12   inside the boardroom, but also outside the boardroom. 
13   The more you're having that regular dialogue, the
14   better the chemistry, so that when the hard decisions
15   come, you're better equipped to make those decisions.
16             The second point is milestones.  My opinion. 
17   Set objective, realistic milestones and goals.  We
18   talked about it today.  It gets everyone on the same
19   page.  It brings a buy-in from your investors and from
20   the team, and really builds that transparency these
21   guys talked about, where everyone knows what they're
22   going to do; then you execute on that plan and you're
23   able to identify problems sooner than you otherwise
24   would.
25             A few more thoughts.  Manage the
0073
 1   relationship, as Harry mentioned.  Make it more of a
 2   war-room, not a theater where they're just kind of
 3   watching you act up there.  Really manage that
 4   chemistry, manage the relationship, and manage your
 5   board.  And if all else fails, get naked.
 6             [Laughter.] 
 7             MR. BEDE:  And then the last point is, be
 8   demanding of these guys.  They have a lot of
 9   experience, they are busy, and sometimes have other
10   focuses.  Make sure that you -- you know, we talked
11   about the ways that VCs can add value.  Well, make sure
12   you take them up on it.  Make sure that you get that
13   commitment and buy-in from them.  It can be extremely
14   helpful for your company.
15             So, with that, I would like to thank the
16   panel again, thank our sponsors, and thank you for
17   attending.  Everyone's going to be around for 30 more
18   minutes afterwards, so please stick around and ask
19   questions.
20             Thank you.
21             [Applause.] 
22             [Whereupon, at 9:45 a.m., the meeting was
23   adjourned.]
24   
25