shannon henry: q&a
First, I'd like to thank Jeff. He
doesn't know this, or maybe he doesn't remember, but I have been covering the
local tech community for about five years.
I was the editor of TECHCapital
magazine before I came over to The
Washington Post about two years ago. In between, I took two weeks off for a vacation.
I was just kind of hanging out one day, I think I had been to the gym,
and my new editor from The Post called and said, “The market has crashed and we need you
to pitch in.” This was two
Septembers ago. I hadn't started
yet, hadn’t written anything. He
said, “We need you to find someone to be interesting and quotable about the
crash today.” I called Jeff
Osborn. It turned up on the front
page the next day above the fold. Did
you see the placement?
Oh, yeah. It was great.
Jeff has always been insightful about what's going on, about both the
good times and bad in this technology world, and he also helped me out at that
moment in my first story for The Post.
The funny thing is I never met you in person until tonight.
Exactly. It's a virtual
The first question I have is about something you touched on a little bit
already. Explain to us what kind of
company shouldn't go for venture
capital. I’ve talked to people at
some companies who say that it's kind of a rite of passage, but I can see some
VCs saying that even though a business is making money, it’s not going to make
them a billion. Especially after
what happened in the spring, who is going to have a hard time getting the
attention of a VC?
That is an excellent question. They
are getting a little tougher now than they had been.
A VC wants to be able to make a heck of a lot of money as soon as
possible on the investment. The nice thing about VCs is that there’s nothing complex
about them. When VCs talk, there is
a great phrase called “the bag.” If
you turn $100 million into $700 million, that's a six bagger because you made
six times your money.
It's a pure motive.
It's a very pure motive and a very simple game.
There is no love; there is no art. There
is cash. There is an ROI. There's
a return for the limited partners, period.
Everything else is just nothing. There
is a purity to it that's nice because you don't have to worry about what they
are really doing. It's real simple. If they think you can make them more money than somebody
else, they will fund you.
Currently, the fashion in what people like is getting very narrow.
They like Internet infrastructure, anything involving optical switching.
There are like 40 people in the world who understand this crap, and I
don't think any of them are in this room. The
bad news is that what's hot when they are giving away money is something you had
to have started doing a year or more earlier, and started learning about five or
six years earlier. It’s not hard
to figure out what's right; the really hard part is figuring out what's right
early enough so that you can actually do something with it.
What's unpopular, now, is business-to-business (B2B) and
business-to-consumer (B2C). If
anybody is trying to do a consumer-oriented Web-based thing, get a clue. The thing is, a lot of entrepreneurs get so positive about how
great they’re going to be and how successful, it's like they're dogs sniffing
their own butts and calling it market research. Three people sit around drinking beer saying, “This is
going to be really cool. The world
needs another spreadsheet.” or “The world needs a word processor.” They come up with these stupid ideas, and, then, the dumbest
thing is that they operate in “stealth mode” like somebody is going to steal
their idea to make a word processor that corrects the words on the computer.
“We are thinking about adding a spell checker.” They operate in this stealth mode, which means they get no
input. Stealth mode is the
stupidest thing I have ever heard. Usually,
I know that when somebody hands me a nondisclosure agreement there is a 90%
chance they are going to have the stupidest idea I've ever thought of because
there's no cross-pollination. It's
three people in a box having an idea. We
can't talk to customers, it's stealth mode.
What is that? There is a
marketplace out there. How do you plan to advertise this thing?
But, are there companies that could just do good, old-fashioned business
with no need for VCs? Maybe they
haven’t got the greatest business idea in the world and they’re not going to
make a billion dollars, but they have customers. How do you see that kind of person?
The best way to fund a company that I can think of right now without
having to rely on somebody else is to start with a service-oriented company.
Wire Technology did that, one of our companies in Boston.
It was four MIT grads who were real smart and had a product they wanted
to build. They didn't want to deal
with VCs and give anything away, so they started renting themselves out as
consultants. They were getting
fairly big coin doing it and got relatively profitable.
They put something like seven or eight hundred thousand dollars in the
bank, and, after eight or 10 months, said: “Eeny-meeny-miney-mo . . . Okay,
Art, you stop consulting. Stay here
and start developing the product. We'll
go out and bring in the money to bring this thing alive.”
Then they got more consultants. They
peeled off more of them so that by the time they had a working, demonstrable
product and shopped it around to VCs¾which
is fun to do¾they
could walk in and go “Pfffft! Here.” The
VCs said, “Nice attitude!” and these guys said, “Hey, I don't need the
money. Ha! The product is done and
we did it all ourselves. It's
brilliant and you know it. What do
I wouldn't necessarily recommend that attitude, but what a relief to not
have to go in with that “forgive me, father, for I have sinned” approach.
“Please, give me some money.” The
usual butt-kissing that goes on with a VC gets old really fast, so I would
recommend that's how you do it. That's
the kind of company that doesn't need a VC.
I'll ask a few more questions as people in the audience come to the
microphones or pass their questions to the front on the cards provided.
Jeff, how do you spot a great idea?
I heard a joke that training a VC costs $30 million because, like all of
us, they make mistakes and bet on the wrong companies.
So many of us would never have bet on America Online, for example. Many
of us have bet on other companies that aren't doing well.
How do you spot greatness in a company?
Know your stuff. If you went
to the clubs every night in DC for four years and somebody asked you whether
such-and-such is a good band, you could listen to them for two hours and say yes
or no. It's the same thing with
companies. I have been screwing
around with data communications for almost 20 years.
If somebody comes up with a good idea, you know intuitively that at least
20 other people aren't doing it. I'm
similar enough to their average customer to say, “I would use that.”
A lot of it has to do with just knowing your stuff.
Between Eric, Sara and me at Osborn Capital, and I'm bragging on this,
the three of us have a combined 40 years of experience in the Internet.
Pretty much, if something comes along, we have seen it before.
My contractor came up and tried to sell me on some guy doing 80211
antennas today. I said, “Steve,
you are a carpenter. What do you know about this?”
“Well, it seemed like a really good idea, and he is trying to pitch
“Steve, if you came in and told me about siding that's washable or
insulation that doesn't itch, maybe, but what do you know about this?”
Have you ever had a company you bet on, that you liked the people or
something else about it, and it didn't work?
trying to think which ones I can admit to.
I can't do the crashing one because I don't think any of them are clear
enough that I'm allowed to talk about it in public.
Okay, I won't mention the company, but I was a really early investor in a
company in a state in America, a dot.com that was trying to sell a product that
people don't buy a whole lot of. They
created huge excitement, were raising money left and right, and I don't think
revenues ever exceeded $500 a month. It
was just too easy with the whole dot.com craze.
“We'll just raise some more money!”
At the very end, they had a $5 million offer on the table in April when
everybody was panicking and it got yanked, so, basically, they had about no
money one day and it went under. They
had a lot of guts; they were trying, and it just didn't work.
Have you ever turned anybody down that went on and was successful?
I had an email that begged me to buy 380,000 shares of a company called Critical
Path in California for $100,000.
I would have made $75 million for 100 grand and I didn't do it.
It was a 750 bagger.
Maybe they will crash.
So what? The lockup's done.
I could have gotten my money out. That
one just killed me. Thanks for
bringing it up. That's a very
We are now five months past the April crash.
Where do you see things going six months from now?
Lower. See, the thing that's
interesting is that while it was all going up, there was a big incentive to buy
quick. If you didn't put your money
in early, you were going to miss the next step, the next uptick.
I think that the general feeling now is that it's all drifting downward.
If anybody here was an economics major, you know that in a deflationary
time there is every incentive in the world to wait.
Why invest today when it's going to be cheaper next week and the week
after and even cheaper the week after? If
you have a company with three months payroll, and you are asking for a valuation
of $10 million, I’ll bet I get a better deal in six weeks.
Where is the IPO market heading six months from now?
Does it come back or are we still plateaued?
Well, I'm 41. Most of the
people I deal with have never been out of high school and in a recession at the
same time. I remember recessions.
I remember the cover of a magazine . . . was it Business Week? . . . that
said “The Death of Equities.” I
remember in college listening to financial radio, “Your money should be in
CDs, bonds and gold, period. What
is this equities crap? It's a
fool's game and everybody knows it.” So
much manipulating has gone on that, oh, well, if you bought stocks and held them
for a long time, if you bought this Fortune 500 company in 1900, how good you
would be doing now? You would be
doing squat. It included things
like American Ice. Where is that? It's a changing bundle of stocks. If you were smart enough to know when to change out, you
might have done well, but nobody did. RCA
fell 95% from 1929 to 1932. Cisco
is still trading at 140 P&E. That's
not right. That's not normal.
So you are asking the wrong guy because I'm actually calling a recession
on this one.
That's that eternal optimist entrepreneur, huh?
Well, there is optimism and there is stupidity.
You know, it was a nice run, but I have a concern, you know, not
everybody went out of business in a recession.
This year. I think we are
already in it. I think this quarter
will end, we just don't know it yet.
I have heard a lot of the VCs start to say there is denial going on.
That they are starting to talk about it among themselves.
One little aside. The
Washington Post ran something last week about companies like Lucent,
and others that have been doing a deal for the last year that's
creepy. With every dollar in
revenue they have, their stock price goes up $10 or $15, so one of those
geniuses figured out, “Hey, if we loan somebody $100 million to buy $100
million worth of our stuff, we'll be worth another billion dollars.
Then we'll loan another 100 million and then, and then, and then . . .
.” They have billions and
billions in loans out to VC-backed companies that aren't necessarily making it.
When these guys go under, what are the earnings going to be like?
I'm expecting the third quarter earnings to be kind of terrifying.
If not the third quarter, it will be the fourth because eventually this
catches up. The first and second
quarters were all fluffed up with their dot.com holdings that did okay.
How do you maintain an earnings increase when you can't use that trick
anymore? I could be completely
wrong, but . . .
Who knows? We'll be back.
How do you short a recession? That's
what I'm thinking about.
You said something that I have never heard from a funder before, that you
accept nondisclosure agreements. I have never found a funder who did and, in
fact, it was the best thing that ever happened to me.
They told me to go do something with myself every time I showed up with
one. Why do you sign them?
You misunderstood. I said
that if somebody shows up with a nondisclosure, it means it's 90% likely that
their idea sucks. I'll sign them
because they're amusing, but what's the point?
It's like signing a cocktail napkin.
Have you ever read one?
We have to sign them at The Post.
Can you tell us where your money comes from?
The US Mint has these big printing presses.
The money from Osborn Capital.
That's where it started.
Will you tell us your net worth?
Business Forward made a guess in March that was high, and they said $100
million. It's lower than that now.
It was never that high, and it's lower than that.
Yeah, I'm kind of uncomfortable.
I always love to ask that.
I get asked it too, all the time, and I usually give this answer, “It's
eight figures.” Not nine, and
it's not seven. It would hurt me to
buy a new jet aircraft, but, on the other hand, I don't look at the prices on
cars or houses, so I don't know. There
is a great term called “the minimum financial unit.” It's the dollar amount at which you check the price, like if
an item was for sale here and over there, there is a low enough price that you
wouldn't walk three feet to pay the lower one. I realized mine is well over
$1,000 now, which is kind of scary. My
wife's is still like eight cents. She'll
go to another store for chicken. I
talked to Steve Walker and he says he has gotten to the point where he will buy
a helicopter without having a discussion with his wife.
That's a lot of money.
If the market is cyclical and VCs and the public markets are investing in
infrastructure, etc., do you see the B2B and B2C markets returning after all
this technology is in place?
It's over? Over, over, over?
Jeff: Well, no,
it's over. It was being done in a
dumb way. Early on, some of the
neatest Web-based companies were two people in a room coming up with a great
idea. The bad ones were¾do you remember Pathfinder that Time
Warner did? They took
200 people and a budget of $50 million, threw them on this Web thing and said,
“Do something.” Two guys in a
dorm room are cheap, and any money they make is a bonus.
If it becomes even vaguely profitable, it's a huge deal to them, but what
the heck are three hundred people going to do? They just shut down Pathfinder because it was a stupid idea.
There is a lot of that going on. The
seventh guy to raise money to sell ice over the Internet went broke.
He should have. It was a
really stupid idea, so I don't see it coming back anything like it was.