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what can dc netpreneurs learn from the ways of silicon valley?
a view from the valley

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ginger lew: the investor's view

Thank you, Nancy. TDF is a fund that invests across the United States. We look at early stage companies where we like to do the seed round, and we also like to be in the first round of institutional investors. As a result, I have been going back and forth to the West Coast on a pretty regular basis. In fact, last month, I was there every week for the entire month of April, and the same will be true in June. I go there for several reasons; in part because there are some extraordinarily bright people out there who are developing some very innovative technologies. Part of it is just intelligence—who's doing what in the industry—but part of it is looking at investment opportunities. We are looking to close on two West Coast investments in early June.

My comments will be focused a little bit differently as to why we are or aren't different from Silicon Valley. From an investor's standpoint, I have seen a marked change in the last six months, in part because of what has happened to the stock market. I serve on the Nasdaq listing council, which is the council that sets the policies and guidelines for listing companies on the Nasdaq Stock Exchange. Obviously, the Nasdaq has gone through some very big highs and very big lows in the last few months, and many of the companies listed on the Nasdaq are located in the San Francisco Bay area.

One of the questions that has started to float around is: have the fluctuations in the stock market had an impact on the availability of VC funding in Silicon Valley and nationwide? My initial response is, no, and part of the reason is that financial and corporate institutions and pension funds, which are the typical sources for venture funds, have committed to those funds, whether it's fund number two, three, four, etc. They have made those commitments because of their belief and trust in the investment advisors of those funds. However, I think there will be a shift, a marked difference in raising new funds. I have talked to some pension managers who say that they are going to start looking more closely at the mix of the portfolios in a fund's portfolio of investments, and they are going to look more closely at the feasibility of sustainability for those companies. They are also going to look more closely at how many .coms are in a fund's portfolio because, as the last few months have shown, some of these newer companies that have come to the marketplace don't have sustainable business models. Many of the VCs that led the charge in taking those companies public were from the Valley.

If any of you want to engage in a rather tortured exercise, but an enlightening one, you could go to the Nasdaq and identify all of the Internet companies that have gone public in the last two years. All of this information is publicly available. Then go to their Securities & Exchange Commission (SEC) filings and look at how much money they raised from their initial public offerings. Look at how much revenue they generated in the previous year, then look at how much revenue they have generated year to date. You will see a yawning gap between how much money was raised and their revenues.


I'm simply suggesting that this is causing some degree of nervousness. In some discussions I have had with some of our co-investors in the Valley, I have heard that the anxiety level is sky high. Why are they concerned? Because it's going to impact their ability to exit, to liquidate their investments, either in terms of the timeline or in reaping the potential of the rewards from their investments.

So, I believe, in Silicon Valley the VCs are looking at deals differently. Frankly, I'm welcoming that because returning to some of the fundamentals is important, such as the concept of doing a little bit more thorough due diligence. No matter whether you are in the Valley or here, who you know helps. It gets you in the door, but, in terms of the business model and your business plan, those fundamentals need to be looked at hard and closely. There is also going to be a closer look taken at the competitive space. In other words, just throwing money at you to drive traffic to your .com site, even with first mover advantage, is something the VCs will be less likely to do.

I also think that there is a difference in speed between the two regions, but I think it's not as big a difference as some people would have you believe. There have been a lot of stories about people in the Valley putting down a term sheet within 24 hours of meeting an entrepreneur. The entrepreneur thinks they have a deal going forward, but there have also been a number of those deals which have blown up in the process before actually going to closing. Those haven't received a lot of publicity. In fact, if you would like to read a bit more about the so-called "dark side" of Silicon Valley, the San Jose Mercury News ran a four-part series about three or four months ago that talked about some of the less-public practices that have not been helpful to entrepreneurs. Here in the Greater Washington area, the venture capital community takes some time to get to know you. Rather than the story of meeting you in a bar, so to speak, and going off together into the sunset, we would like to go out to coffee with you. If we are interested in your business plan, we would like to meet with you, get to know you and your management team and take a look at the technology.

Our firm does financial modeling. I don't know if anybody else does that anymore, but we actually do a bottom-up analysis. When we tell entrepreneurs that we do this, some of them are quite amazed. They talk to some VCs who just use the "sounds good to me theory."


Another impact the stock market has had is that we have seen some of the valuation go down. For a while, many of the Valley startups were saying, "So-and-so is a public company and they have this market cap. I'll discount it by X amount, so my pre-money valuation is $70 million." I'm thinking, "Wait a minute. You had $300,000 in revenue last year. I'm not quite sure how you reached $70 million." I once had an entrepreneur tell me, point blank, "Get over it." Let's just say that we didn't do that deal.

If you get too stuck on the valuation issue, and your company does not happen to meet some of your critical milestones between the first and the second rounds, you and your current investors face the real prospect of having a "cram-down round" in which the next valuation is close to the first round or even lower. Sometimes going for more reasonable valuations gives both you and the investors an opportunity to build a company and hit some critical milestones.

I'll close by saying that I have spent more than 30 years in the Bay area. I grew up there. I still have a home in the Bay area, and I have seen tremendous changes there. In the early '90s, when I went out to raise money for my own startup company, it was a struggle, so I know exactly what it's like to pound on a lot of doors, eat a lot of doughnuts and get turned down by a lot of folks. However, it's an exhilarating experience. Thank you.


Ms. Spangler: Next, we have Matt Haley. Matt's new to our area. He recently joined Andersen Consulting in Reston where he is working in a new organization that's focused on delivering Andersen's consulting capabilities to startup companies. He has been a consultant in Silicon Valley helping startups focus their businesses and build management teams to prepare them for venture funding and beyond. He was the founder and Vice President of Marketing of On-Link Technologies, a business-to-business (B2B) eCommerce tools provider, from 1997 through 1999. Matt was responsible for moving a technology team into a fundable company. Prior to On-Link, he founded Intrinsa Technologies, a software tools development company that was acquired by Microsoft. He has also worked with Digital Equipment, Case Technology, Control Data and Eastman Kodak. He has three patents in software developments and one for integrated circuit design. He has an electrical engineering degree from the University of Detroit and an MBA from San Jose State University. In his spare time, in the winter months, Matt coaches youth hockey teams. Good to have you with us, Matt.


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