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what’s the real deal?
financing ideas to IPO

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Shannon:  So now that you have cut your hair, does this mean that you are getting up before 10 a.m.?

Jeff:  Not today.  Not yesterday.  I missed a board meeting.  Whatever.

Shannon:  We are just checking in on you.

          This is interesting.  A company founder asks, “A competitor wants to buy us out while the product is being developed.  Should I give them a price after the go-live date or see what they'll pay now?

Jeff:  Bulls win, bears win, hogs get slaughtered.  Basically, the way you lose in a negotiation for selling your company is by being greedy.  That is the primary thing.  How much money would you be happy walking away from it with?  There are a lot of people around here with big offers on the table, and the first thing they think is, “Wow!  If they offered this much, I must be worth three times that!”  They end up walking away and running out of money.  If it's a lot of money to you, whoever you are, if it's a lot of money to you and it would make your life really happy, and you'd spend a long time working on it, then do it.  What’s the problem?  If we are talking $50, well, rethink it, but . . .

Audience Member:  Can you lay out the topology of the various VC firms and where you see Osborn Capital fitting in?  Second, you talked about deal flow, yet there seems to be a half dozen billion-dollar-plus funds being raised.  Do you think that will lead to a lot of dumb money flowing into a lot of dumb ideas?

Jeff:  I don't know how to answer the first question, and the second one is really interesting, though I don't know what the answer is going to be.  I think what's happening is that there is so much money at the big VCs, most of which they got from institutional investors like pension funds.  CalPERS went from 2% to 4%, which is like trillions of dollars, and put it in Benchmark, Kleiner Perkins and other VCs that are all closing multibillion-dollar funds, yet the stuff is going away.  The exit strategy is going away on what they used to invest in.  The big question becomes, do they stop investing?  I don't know.  I don't know if they can.  What they tend to do is that the lousy deals out there aren't getting funded, and the really good ones are getting oversubscribed like crazy.  The latest deal we are doing is Bluetooth in Boston, and people are yelling and begging on the phone, “Please, let us get in this deal.”  So I don't know.  They are so far away from the pain.  It's like the dinosaur.  You hit one on the tail and two years later he flinches.  I don't know whether the big funds are going to figure it out, or the big institutions are going to figure out they are being hurt for a while.  I don't know.

Audience Member:  A radio show the other day quoted Jeremy Rifken’s book, Age Of Access, and said that the Internet economy has to find a way to make money off of the so-called “network economy.”  You create a big pool of users, a shared experience and then it's no longer a simple matter of selling something or doing an Internet version of something that happens today in the marketplace.  One obvious revenue source would be subscriptions, where people pay to come to a site.  Can you think of any other, and have you or your VC friends, prophets or soothsayers in the business thought about where the Internet network economy is going?

Jeff:  We approach it from a completely different direction.  The way we like to approach it is, is there someone out there with a big budget who is pulling out her hair because of a problem that this product or service will solve?  That's pretty much what we are looking for.  To quote John Sidgmore, if you can save somebody 90% of the expense of doing something and make it easier to do, it's probably a good idea.  We tend to come at it not just from “wouldn't it be cool to do this thing,” but “are there people with a bunch of money who would pay for it?”  I'd suggest that's really a better way to look at it.  Subscription models have really not done well yet.

Audience Member:  If you are right about your prophecy of recession, are VCs taking an increasing look at recession-proof industries like education, for example?

Jeff:  I don't know.  I don't know what other people are doing.  I'm looking at land, gold and bonds.


Shannon:  You heard it here first.

Jeff:  You heard it here first.  I hope it's temporary.

Audience Member:  We are seeing billions of dollars going into infrastructure investments such as all-optical networks.  People are touting the fact that the Internet will be sped up hundreds of times.  Who really needs an Internet, right now, that is hundreds of times faster?  I know plenty of people who are happy with their 56K dialup connection; and corporate users, like NBC where I work, can get fiber dropped in for a couple of hundred bucks a month.  What's the product that is going to drive the average person to get a broadband connection in their home? 

Jeff:  I don't know.  You have a product that I think is an interesting . . .

Audience Member:  The stock market?

Jeff:  The stock market?  It's not bandwidth-intensive.  At UUNET, we spent a lot of time trying to think about this, and we were really surprised.  The Web and the browser really surprised a lot of people.  I thought email was going to be the killer application of the Internet for the next however many years.  I remember seeing that browser out of the University of Illinois for the first time and thinking, “Everything's changed; the whole world is different.”  By definition, you can't predict it because, if we knew what it was, we would be doing it.

Shannon:  Here is a philosophical question.  Somebody wants to know, “If we were going to start all over, what would the Internet be like now?

Jeff:  I'm trying to remember who said, “We are never allowed to know what might have happened.”  That's an ancient quote and I can't think of who said it.  I have no clue.  It could be wireless.  I have no clue.  Do you?

Shannon:  No.

Jeff:  I can't even imagine.

Shannon:  Yes, it's hard to think about it, but, boy, if we knew, you would be making more money and I would have better stories.

Shannon:  Should an entrepreneur take more money than he needs?  This person says, “I was told by an angel group to ask for $10 million, not $3 million, because VCs don't want a company to be undercapitalized.

Jeff:  That goes back to the idea that there is too much money chasing deals, if you ask me.  It's changed a lot, and I think people are more willing to invest small amounts now.  People are willing to seed.  It used to be that under $5 million and over $1 million was the dead zone.  I think that people are willing to come down a whole lot more.  Don't fund yourself to the nickel of what you need, but three and a half times as much?  I think that's kind of overkill.  Never go on the advice of one person.  Try to get a little consensus because there is so much information about this running around right now, and you have just heard a bunch of it.

          The bigger issue is not to take too long.  If somebody offers you money, just say yes politely and consider taking it.  The worst thing in the world is to say, “Hmmm, I don't know.  Can you go back and change this?”  They change it and you say, “Uh, I don't know, how about that?”  You are doomed.  Pull that and you are doomed.  It's never going to happen.  Figure out up front what you are willing to deal with, and, when you get it, say yes, please, thank you and take your money. . . . And run to the bank to make sure it clears.

Audience Member:  How long will they wait?  They say two weeks.

Jeff:  Right.

Shannon:  I have heard a lot of entrepreneurs complain about the VCs, saying, “Well, maybe.”

Jeff:  They say it all the time, because what if it's a good idea?  You just heard my Critical Path story.  I would have dragged them along for years if I could have.  It's in the VC’s best interest not to have you talk to anybody else and not to do anything.  A friend of mine, Barry Unger, who sits on a zillion boards and is a Boston University professor, has a quote.  When they come to you with a term sheet, they make you sign something that says you won't talk to anybody about this for 30 days.  Barry always says that the only people who ask you not to talk are child molesters.  I'll never do it, and that's the piece of it that's the harshest, if you ask me.  It's called the “no-shop clause.”  Basically, they give you a term sheet and if you say, “Thanks, I'm going to keep looking,” that would be fine, but you can't talk to anybody else.  That will kill you because, at the end of the month, they go, “Kidding!”  And now you are out a month’s more cash.


Shannon:  If you are looking to a VC, is it okay to tell them who else are you talking to?  Sometimes they ask you to test the waters.  Is that a good thing to say or not?

Jeff:  If you are asked point blank, you'd have to lie not to say; and, if you say that you can't disclose it, I think you would look pretty disingenuous.  It’s a good question.  I don't know.  What do you think, Eric?

Eric Janszen (of Osborn Capital):  In my experience, it depends on the situation.  You have to be aware that some of the VCs you are talking to are competing with other VCs you are talking to, and not avoid that fact.  It's good to do your homework and know what VCs have done work together.

Shannon:  So, basically, be diplomatic about it.

Jeff:  If you are working with Accel or NEA or Kleiner Perkins or somebody like that, it's a little better to say it than if you are dealing with a guy who owns a chain of pizza joints.  As a group, they stink as investors.

Audience Member:  Where do strategic investors and incubators fit into all of this?

Jeff:  Incubators?  You know what?  You turn up the heat on an incubator and you get an incinerator.  I don't like incubators at all.  It was a good idea as initially conceived, and currently it's one of the stupidest wastes of money I know of.  It tends to be four bankers and a  broker who get together to lease space, and they are willing to lease it to you.  What possible value do they add?  When it’s a guy like Bill Gross at IdeaLab!, that’s different.  He had brilliant ideas three times a month and would walk in and go “You guys, be a company.  Here's a great idea, now go.  And, I’ve got another idea.”  That made a lot of sense, but many incubators now, the incinerators, are just real estate plays, if you ask me.  Not that I have a strong opinion.

Audience Member:  What about strategic investors, like the corporations that have set up investment arms?

Jeff:  They are great to do and hard to get into.  I don't know of anybody who has gotten a strategic round without a VC round first, but it may have happened.  Your VCs will get you in on stuff like that, and that's where having a really topnotch VC helps a lot.

Audience Member:  My question is about VC syndicates.  For example, if you are trying to raise, say, $3 million, and you approach a VC who normally invests, say, $1-1.5 million, will they invest as part of a syndicate?  Who should take the lead in forming the syndicate?  Will it be VCs who will drive it or is it on the entrepreneur who should contact other VCs and make sure that the total money raised is what he needs?

Jeff:  I think it's a good idea to keep looking yourself, because it's a really good selling point to say so-and-so's going to come in, but they don't want to lead.  Rather than saying, “I'm Joe Nobody,” if you walk in and say, “Goldman Sachs is going to put money in my company, but somebody else has to lead,” you will immediately move to the front of the line and get their interest.  I would say it's generally a good sign.  People used to syndicate more, then they stopped because they had too much money to throw at things.  Syndicates are a good thing because you get more VCs for the buck and that way you get more contacts.  I would say to keep looking.  Don't just let them do it, because they have a million things going on.

Audience Member:  If it's a syndicate of three or four VCs, will everybody want to be on the board?

Jeff:  VCs rarely put in money without a board seat.  I can't think of any of ours. The lead investor will, certainly, but usually all of them want a board seat, which isn't bad.  They sit on boards all the time.  They know a lot, and it's very useful having a VC on your board.  They will criticize your food at the meetings, though.  They always do.

Audience Member:  From the outside, you get the impression that VCs decide what to invest in by picking up The Wall Street Journal and deciding which stocks are going up today.

Shannon:  Or The Washington Post.

Jeff:  At Osborn Capital, we read The Post.


Audience Member:  Is the VC system capable of looking at something like intrinsic value or something that has potential for profitability regardless of what Wall Street is doing?

Jeff:  Of course.  You are talking about¾geez, I have never made this statement before, but I guess it's true¾when you are talking about VCs at top ranking firms, you are talking about some of the smartest, best-educated minds in America.  There are some really bright people, and it's a really great job to have.  They are looking to maximize the value of the limited partner’s and the general partner's investment, so they don't do lockstep anything.  If they are doing a good job, they earn nine figures a year.  It's a bunch of kids, who are usually younger than me by a lot.  Anything that works, they are going to do.  They have very little religion or orthodoxy about, “We only do this.”  As you come down the tiers there are some real jokers, but the really good ones are some of the best minds going.

Audience Member:  And it’s also people who have done it before.

Jeff:  Exactly.  They are very well trained or, better, they are people who have done it before, and that's a great VC.

Audience Member:  We have an arrangement with a bank that might possibly want to invest but doesn’t want to lead.  What do you suggest?

Jeff:  We get that all the time.  Somebody wants to invest and they don't want to lead because investors are sheep, unfortunately.  They never want to be the first one in; they want to be the last.  You basically have to do a lot of talking and find somebody else to do it.  One of the frustrating things people miss is that if you do a first round of, say, a million bucks with 10 people at $100,000 each, the first person is taking a much bigger risk than the tenth.  Entrepreneurs rarely remember this.  If you are trying to raise $1 million and I walk in and like the idea, my incentive is great.  Go get the other nine to write the checks and come see me.  If I'm the first person to write the check, I'm hugely exposed, so what usually happens with the first person is that you will get warrants or options or a pony or something like that to mitigate the risk.  This is a common problem.  Sometimes I think they say they don't want to lead because they don't want to say no.

Audience Member:  No, they have already said yes.

Jeff:  They don't say yes until the check clears.  No funder has done squat until the check clears.  Everything else is fluff.

Audience Member:  Generally speaking, I have always been told not to even bother talking to a VC who is more than 30-90 miles away because the money guys want to be able to drop in at 5 a.m. and make sure that you are chained to the drawing table.  Do you agree with that?

Jeff:  No.  No.  Absolutely not.

Audience Member:  Look for money on the West Coast?

Jeff:  There’s someone who showed up here tonight.  I've put six figures into his company and I’ve never met him before tonight.  Seriously.  He walked up and I saw the name tag.  I said, “Dave, how are you doing?”  I have funded, sold and cashed out of companies and have still never seen the faces of the people who did it.

Audience Member:  That's as a VC or as an angel?

Jeff:  As an angel.  I sit on boards in Virginia with guys who live in Mountain View and Boston.

Shannon:  Has that changed in the past few years?

Jeff:  Yes.  They didn’t like to come to this area before, and now they realize . . .

Shannon:  We're seeing a lot more of VC funds and offices opening up here.

Jeff:  Part of that is just me.  We got the sales force at UUNET up to a billion dollars in sales without a remote sales office.  We did everything from one floor in Virginia, so I prefer to do things on the phone rather than fly places and wear suits and other silly, expensive crap.

Shannon:  We are going to have to wrap up.  I'm sorry I didn't get to all these great questions, but we’ll have more time at the chat tomorrow, which will also be archived.

Fran:  Let’s have a hand for Jeff and for Shannon.  We got a lot of straight talk tonight.  On behalf of the team and UUNET's Head Start program, thank you very much.  Thanks, also, to everyone in the audience for being part of the program.  We look forward to seeing you at the next event and online.  Good night.


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