with the new climate in early-stage investing
you’re OK, but we’re not investing
has become conventional wisdom by now that investors are tightening
their wallets and riding out the market downturn since the dot.com
bubble burst. Everyone says that it’s harder to get deals done
and, when they do, valuations are down. While entrepreneurs
acknowledge this fact intellectually, it doesn’t seem to be
affecting their behavior according to many investors. At this
Netpreneur Coffee & DoughNets event held March 22, 2001, a panel
of experts discussed how the early-stage funding environment
has changed and offered specific suggestions for what entrepreneurs
must do in response if they expect to get funding in the post-bubble
made at Netpreneur events and recorded here reflect solely the views
of the speakers and have not been reviewed or researched for
accuracy or truthfulness. These statements in no way reflect the
opinions or beliefs of the Morino Institute, Netpreneur.org or any
of their affiliates, agents, officers or directors. The archive
pages are provided "as is" and your use is at your own
2002 Morino Institute. All rights reserved. Edited for length and
Lukaczyk, Avansis Ventures
Putney of NextGen
Walker & Associates
Smith, Qorvis Communications
Good morning. I'm
Mary MacPherson with the Morino
behalf of the team, I'd like to welcome you this morning to “I'm
OK, You're OK, But We're Not Investing.”
Let me tell you how that topic came about. A few weeks ago
our teammate, Fran Witzel, met with a group of early-stage
investors, many of whom are here today.
They wanted to talk about what has changed in the investing
community and what they might do about it.
One of the things that came through loud and clear was their
sense that entrepreneurs knew, intellectually, that things had changed, but they seemed to be doing
the same things they were doing a year ago and getting different
results, i.e., no money. They suggested that it might be a good idea if we had a
little fireside chat where they would be willing to talk about
early-stage investing in today's climate.
That's why we're here today.
This morning we have a panel of early-stage investors and an
extraordinary moderator, Esther Smith, who was seen yesterday on “Talk
The Talk,” our email discussion group for
entrepreneurs, commenting on what she called “gut-bucket funders.”
Maybe she'll elaborate on that because it's something she
seemed to feel pretty strongly about.
Let me introduce Esther
Thank you. It's
always great to be with Netpreneur.
I think I came to the very first meeting and have since been
a huge fan and supporter as much as I can.
I was in a hurry yesterday on Talk The Talk, but I didn't
want anybody to think that the OTC:BB was the right path to take.
I'm glad I got the point across.
Somebody else expressed it much better than I did, so I sent
a second message that just said, “Yes!”
If you really want to have a more informed discussion, read
This morning we have a topic that's near and dear to
everybody in the room and to the rest of our burgeoning Netpreneur
community. As a general rule, my observation is that the very early
stage-funders -- angel, post-angel and seed stage -- have had less
money to invest and have had to be extremely careful.
They are showing very good results in many cases.
It's great to see such a huge turnout and to be on a panel
with four tremendously well-informed people who are ready to share
what they really think. I'm not going to introduce everybody in detail because you've
got their bios in the links. They
are all wonderful people to work with and people I've enjoyed
knowing. They have a
lot of wisdom.
Each of our panelists will speak for about five minutes, then
we'll open it up for the Q&A.
Let’s start with Zim
Putney who's the founder of NextGen
Capital and a fixture in the tech community, perhaps for
longer than I have been.
wrestling with greed and fear
Thanks very much, Esther. Yes, I remember being in that room for the first Netpreneur
meeting as well, and I was on the Board of the Northern
Virginia Technology Council when you brought out the name
“Titans Of Technology” for our breakfast series.
We go back a long way.
I'll say a few words this morning about what's happening in
the investment community. I
think a lot of you understand it, but I'm not sure that any of us
understand it completely.
There's a lot of motivation coming through greed and fear. A lot of you are motivated that way, and a lot of us on the
venture side are motivated that way, too.
A year ago, I would say that we, the capital community, were
force-feeding the entrepreneurial system.
We were forcing a lot of money into a system that really
couldn't adequately and efficiently use all that money.
It was like a big government program to build a super
computer in which you put a lot more money in than could be
efficiently spent. That's
what happened, and a lot of companies have fallen by the wayside.
It's happened in both the public and nonpublic companies. We were funding a lot of ideas that were not good ideas as
demonstrated in the marketplace.
As they say, “What's old will be new again,” and now
we're back to looking very carefully at deals, and working with
companies we've invested in to make sure that they're successful --
the companies that are already out there.
Basically, money is pulled upstream.
If you don't have an IPO market, the Series C investors are
reluctant to invest because there's no place to exit.
The same thing goes for the Series B and Series A investors. All of us are a lot more cautious without the ultimate exits
that were tremendously stronger a year ago --the IPOs as well as the
technology companies that had tremendous capitalization and could
spend their stock as cash to acquire companies.
All of us in the investment community are a lot more cautious
about putting out money. We
need to make sure that yours is not only a good idea, but a great
idea. We have to make
sure that it’s got some staying power, that it's really going to
work and that we will be able to find future rounds of financing -- but
there is money out there.
Some have stepped away from some of the seed stage,
pre-revenue deals. We've
done a number of deals. Some
of them worked out and some of them haven't.
It's a lot higher risk.
It's probably a lot harder to find seed money than it was a
year ago. You probably
have to go to angel investors, but there still is early-stage money.
Our fund is still doing investments in early-stage companies
that have modest amounts of revenue, and others are doing them as
There is still money out there, but people are going to look
a lot more carefully at your idea than they would have a year ago to
make sure it's something that has uniqueness, that you've got the
right team and that you're going to have the market potential over
the long-term to make the venture successful.
Most of us are looking at longer horizons.
A year or two ago there was this incredible gold rush
mentality-- we have to get out
there; we've got to get the money out there, we have to get the
companies turned around. We've
always looked at something like a five-year horizon, now we're
looking at a five-year horizon again.
From our point of view, at least, the money is more patient
now. A year or two
years ago it was impatient money.
It was, “Get it out there and get us a return quickly.”
With that, I'll turn it back over to Esther.
Thanks, Zim. Next
we're going to hear from Joan
Winston of Steve
Walker & Associates.
I have had a lot of fun as an observer of the Steve Walker
& Associates technique because of their relationship with WOMENAngels.net,
in which I'm involved. They have a couple of partners in it as well,
and have contributed very strongly on the due diligence side.
Thank you. I
certainly agree with everything Zim said.
Currently, we have about $50 million under management.
We consider ourselves seed and early-stage investors,
somewhat in the angel range, although we are investing other
people's money so some of our metrics are a little bit different.
Typically, now, as before, our first investment will be
anywhere on the order of $100,000 to above $1 million.
We typically like to keep our pro rata share for the next
couple of rounds, so our reserve analyses are very carefully done,
especially now, as the steady movement upstream has slowed a bit.
One of the things we've always done is that we don't really
look at our investments as just a money placement.
We are looking for a partnership, and we tend to work very
closely with our portfolio companies.
We have a lot of companies in our portfolio, and you might
ask how we can do that. The
answer is there are a lot of us.
We have about 12 people in the investment team.
The other thing we think is a strength for us as a partner
with a new company is that most of us have had a lot of operational
experience in the software industry -- in sales, marketing,
technology, human resources -- so we can bring that operational
experience to bear to help our companies succeed.
In addition to the analysis that Zim gave you, some of the
themes we're seeing now include a lot of companies that are
resurfacing, still looking for that first round.
That's sad because you know that a lot of them aren't going
to get that first round ever. On
the brighter side, a lot of the "me-too" ideas that were
trying to get big fast and get sold back during the craze are going
away. The noise to
signal ratio is getting better.
Maybe a lot of people are registering for spring semester
instead of starting a dot.com, and that's probably a good thing.
On the other side, for companies that are seriously going for
it, the bootstrapping phase is more important, and it's going to be
longer. A lot of the sources of that quick, easy, first $1 million
based on the back of a napkin -- if it ever happened -- it's
certainly not going to happen anymore.
At least for the non-individual angels, there’s another
theme that we're seeing. Instead
of getting $100,000 then another $100,000 a month or two later,
companies are now trying to pull together a syndicate's worth of
money so that they've got maybe 12 to 18 months, or at least enough
to get to reach a major milestone, such as the cash flow break-even
point, but at least a milestone that's credible in this environment.
We can't assume it's going to get better, although we hope it
does, so you have to reach a milestone that will let you close
Last week, I was at the Virginia Venture Conference and heard
a comment that I thought was great.
I wish I could remember who to attribute it to, but it's not
mine. This person said
that one of the things that you have to look at when you're
investing is whether a company is going to run out of money before
they reach a milestone or before they start getting revenues.
When that comes up, there's the concept that you can bridge
them, but this person said, “You want to make sure that you're
building a bridge, not a pier.”
That was great. Bridging
happens, and it's not always a bad thing or sign of mismanagement,
but, now, more than ever, investors are going to have to try to
decide right up front
how big a bridge they're going to build.
As we tended to do all along, investors want to be looked
upon as long-term partners. If
we intend to participate in initial rounds, we have to ask how much
construction equipment and materials we’re going to need for you
over the long-term to make sure that we can actually help the
That comes to another thing, which is: space
matters. I feel
badly about it, but a lot of companies come to us and we have to say
“no” because they're in a space we don't know enough about to
invest in, or at least we don't know enough about it to lead.
Those are not necessarily the same thing.
One of the lessons, especially in this environment, is that
entrepreneurs are going to have to do more homework about investors
and make sure that there's a plausible fit before they invest a lot
of emotional energy or time, or before they use up all their
referral chips from trusted sources.
You have to find an investor who can plausibly invest in your
space, who knows enough about it to be able to do that mental and
paper calculation to see what your requirements are likely to be and
how much value they can add in addition to the money.
When you get told, “Sorry, we're not in that space,”
there are two positive takeaways you can have.
One is that you have to find someone who invests in your
space. There's a story,
about going door to door selling cookies.
Somebody says, “Oh, no, I'm on a diet.
I don't eat cookies.”
You can either try to persuade them that they don't need to
be on a diet -- which might work, but probably not -- or you can
tell them that your cookies have no calories, or you can ask, “Do
you have anybody at home or in the office that might like
cookies?” It's good
to ask, “Who else might be interested in my space?
Who else do you know who is knowledgeable?”
Another thing you can ask is, “If we got a lead investor
who is knowledgeable, can we come back to you?
Would you be interested in talking then?”
Often, you'll find that the answer is yes.
For us, we're also looking at the management team, the
opportunity/technology and whether or not the company will be able
to have a protectable advantage in either its productivity gain or
its competitive advantage. If
we can't really feel comfortable about our role in all three of
those areas, it's not something that we're likely to lead. However,
if we can partner with somebody who knows the customer space better
than we do or who knows the technology better than we do, then
there's a synergy for early-stage investors, and you might get a
Instead of continuing to butt your head in a corner, try to
find a way out where you can get people to pool their intellectual
resources as well as their money.
Thanks so much, Joan. Now
next we're going to hear from Jeff
Weiss who, in addition to being the Managing Director of ASAP
Ventures, is also a serial entrepreneur from the tech
environment here in Greater Washington.
customers give the party
Thank you and good morning. I thought I'd start by spending a minute or two talking about
ASAP Ventures since we're very new on the scene and not as
well-known, then make a couple of broader comments.
It's interesting to have us here today because we are not a
venture capital firm. We
are a services firm, an Internet business accelerator. It's a group
that Cal Simmons and I founded last summer, together with a group of
investors including a lot of venture capital partners, such as Russ
Ramsey, Rick Rickertsen, Harry Hopper, Will Dunbar and a dozen
others. We are both an
incubator and advisory services company, and what that really means
is that we help in two ways -- strategy and capital formation.
In both cases we execute; we're a group that actually joins
the team and helps do these things.
Whether it's marketing, branding, business development or
operations or helping discover the value proposition and how viable
it is. It's our feeling
that with market conditions tougher than they've ever been, what we
want to do is help raise the momentum and the value of the company.
Now, following up on something that Joan said, and something
that I have felt very passionately about for a long time, we can't
lose sight of the fact that customers give the party.
If you think about what you're doing in starting a business,
from many points of view it's really all about making customers
There are some old financial metrics which say that there are
only four things that matter in a company, and they're very simple:
profits, growth, interest rates and risk.
If you know the financial equations and go back to how
companies are valued, that's what matters.
Borrowing from Zim, if you start with the idea that
companies, at some point, have market values in the public market,
then you know that there’s a Series C round before that, and maybe
a Series B, a Series A or an angel round.
From an investment point of view, everyone is playing into
that food chain. Ultimately,
it's based on profits and growth since you can't control interest
rates and you can only control volatility to some extent.
You can control your profits and your growth, however, and
that's really all about customers, so customers give the party.
Last year's business plans were somewhat typified by
something that was in the New
York Times 13 months ago. There
was a business plan for a company which amused me at the time.
The man said that he had the perfect business plan for that
market. The plan said
he was going to sell $100 dollar bills for $95.
It was a limited offer, only one per customer.
As a result he was going to have all the best metrics of any
site on the Internet -- more hits,
more traffic and, because it was only one per customer, he
would have lots of repeat customers.
VC's would love the metrics.
He would raise his A round, he would raise his B round and
then he would surprise everyone. He would dramatically improve his financial metrics by
raising his prices. He
was starting out with a pretty good set of financial metrics -- only
a 5% negative gross margin. After
all, Amazon had a 35% negative gross margin and look at their market
cap. He would only have
5%, then he would raise his price to $97 for a $100 dollar bill.
All his financial metrics would look so much improved that
Wall Street would take him public and the rest would be history.
That was last year's business plan.
Last year, as you all know, was the year of the first mover.
So what is this “the year of?”
What are we thinking about?
This is the year of the smart
mover. That's something
I'd like to talk about which we should have been thinking about all
As Joan was really saying, what venture firms have
traditionally invested in is disruptive
change. Just having
something which is incremental is not good enough.
There certainly were many companies and investments in the
momentum market of last year which were just incremental.
They were features; they weren't companies.
Disruptive change means creating new markets.
It means doubling productivity.
It means slashing costs or doing better than that.
It means something we knew about five, 10, even 20 years ago
called the “killer app.” Imagine
life without email. Imagine
creating financials without the spreadsheet.
Imagine life with only three television stations or research
without the Internet. Twenty
percent improvements just don't cut it.
There were a lot of ideas in the last year that got funded,
but that arguably weren't great ideas.
How many people have rushed to the Internet to buy a 50 pound
bag of dog food and have it delivered?
It just wasn't a radical change.
Here are some quick stories about this with things to think
about from the smart mover point of view.
They're stories from specific companies that I won’t talk
about in great detail. Here
are some of the issues that arose.
One is about ego. The
story about ego is that you really need the right “whole team.”
It's not just about having the good idea and coming up with
the theoretical disruptive change.
It turns out that the team is absolutely essential to making
the market because, remember, the customers give the party.
Quite often, the team needs domain knowledge which, when
you're very, very early, actually means going in and among and
becoming almost organically part of the customer base.
In this particular company that was raising money, a lawyer
had an idea and he hired a software developer.
They were both very bright and very passionate, and they had
a lot of charisma and desire to do what they were doing.
Neither of them, however, and it wasn't their fault, but
neither of them had any prior experience in the area that they were
The ego part is that they realized it, so they hired
somebody. But from a
team point of view, they didn't bring him in and really make him
part of their team. They made him an employee, but he was never integrated.
He was never part of that passion or charisma; he was the
teams is very important, and, even though they had an industry
specialist, they were never able to get the traction. When the due diligence came around it was sad, in some way.
The due diligence verified that it was a very good idea and a
very good market. Because
of the way the team worked, however, which was, to a large extent
dysfunctional, it wasn't a company that the investor thought could
be built with that team.
Now, greed is point number two. We're all hearing about lots
of deals. Esther and I
were talking about the concept of one earlier.
Everyone wants the best financing and the best valuation, and
you want to have ever-increasing numbers.
The truth is that, since customers give the party, getting
the market is what's really important.
Even if you get this round of financing or the next round of
financing, ultimately what's going to matter are your profits and
your growth. Profits
and growth happen when you have a dominant market position and
you're in front of customers. Don't
be greedy. Do the best deals that you can.
Having money is better than not, and being positioned is
better than not. In one
particular case, at the height of last year's market, this company
was doing the right thing. They
got what was an awesome term sheet, then one of the members of the
team got greedy. As a result of his personal comportment, they scared away a
major investor at the last minute.
The final comment I'll make is about discipline.
Branding is very important to any business, but doing it in
the relevant range is important.
Netscape started a trend which was something of the
cornerstone for a lot of what happened in the last five years in the
financing market. The
trend was that going public was a branding event. When Netscape went public, no one had heard of them.
Arguably, they went public dramatically earlier than any
company had, from a metrics point of view.
They were pre-revenue. All
the things we think about happening ordinarily during the last five
years, hadn't happened ordinarily before that point in time.
If you look at that as the beginning of the spectrum of what
happened in branding during the last five years, the end of the
spectrum was the idea that a Super Bowl ad could be a branding
event. By a year ago
January, and the year before that, there were a large number of ads
which in the Super Bowl were viewed as branding events. The interesting thing, as the research shows, is that the
retention of the dot.com ads in that time was extremely low.
The fact remained that one ad in one show, even with the
reach of the Super Bowl, wasn't good. It didn't do it for those companies. Building enduring brands is critical. People who understand
that customers give the party, such as AOL and Dell, didn't get to
where they are without doing that.
Zim said, in essence, that there was way too much investment
chasing too few ideas in the bubble. The
interesting thing about our times, right now, is that the range
we're all in, and the range that Alan Greenspan deals with, this is
an investment-based market collapse.
There were way too many companies funded and there was way
too much money put out. It's
not a traditional inventory or production-based market collapse.
As a result, the best opportunities now will be in building
real businesses that customers love, offering sustainable advantage
from their disruptive changes in the market -- companies that are
market-driven and offer solutions to problems that keep CEOs awake
at night. That's really
that are fair will be built to last.
Companies, like the $100 bill company, which were built to
flip, will fizzle just like new Coke did a few years ago.
Thanks Jeff. Our
last presenter this morning is Laura
Lukaczyk from Avansis Ventures.
Laura's fund illustrates something that, to some degree, the
other funds here do also, but it is more explicit with hers.
She has a long-standing relationship with New
Enterprise Associates (NEA), the largest venture fund
based in our region. This
kind of “food chain effect” is part of the golden handshake that
is being developed here in the Greater Washington venture community
among the venture capitalists, service providers and so forth. Now, Laura will tell us about her perspective on things.
rely on your networks
you, Esther, and thank you, Mary, for having me. This is my first panel within the community and I'm very
pleased to be here to share some of the things I know about and have
My fund, Avansis Ventures, is a $25 million early-stage
technology fund which acts as a feeder fund of early-stage deals
into NEA, Oak Ventures and some other funds as well.
It's because Oak, for example, has such a large fund now that
they can't really invest in a company and actively participate in
helping it grow unless they put something like $20 million to work.
Well, a lot of the excellent early-stage deals don't need $20
million, and that's where I come in.
I help companies groom their management teams, vet out the
customers, vet out the revenue models, and bring them along with
more of a hands-on approach and smaller dollars out the door.
I'll put out between $100,000 and $3 million and be very
active on the board, or, if I'm not on a board, I'll be less active,
but participate in helping you recruit and do things of that nature.
I have a very narrow focus because I'm only one person,
although I do take advantage of the broad Oak and NEA networks.
My sweet spot is optical components, data communications
equipment and storage equipment and software.
I do look at wireless, but when I see a wireless deal I
usually team up with one of my colleagues who is great in the space,
such as Mark Ein at Venturehouse
Group or Scott Schelle who ran American Personal
Communications and is now at Sterling
One of the reasons we came up with this panel today is that
the market has really changed in the public sector.
What happens in the NASDAQ and the Dow eventually funnels
down to us at the early stage and to you folks trying to get money.
Many of my colleagues at the bigger funds are only working on
their portfolio companies, doing things to cut costs, lay people off
and get their cash flow to be positive earlier.
Some have been doing so for the last six months. They're
almost consumed by it, and they haven't been putting a whole lot of
new money out the door.
That led us in the Washington area venture funds community to
have a meeting to discuss the current climate and see what we can do
to work together. Venture
funds are colleagues as well as competitors.
There are areas where we all work together and areas where
we're very competitive, but what we're trying to do is help the
community here get funded. That's
why we're here today. There
have been some things that we've been seeing that we want to let the
community know about because you all have these great businesses
that you're trying to get funded, and we would like to help you get
them funded as well. We
have to help each other.
One of the things I've been seeing a lot of is that a deal
comes in that has a good technology basis and there's some
technology domain experience, but the team has not done a good job
of figuring out the competitive environment.
By that, I mean that you have to network into people you know
within your various companies who are your potential competitors.
People know each other through their networks, either through
technology symposiums, or because they've worked together before or
things of that nature. You
have to come in and say, “This is what I'm seeing.
This is the customer set that such-and-such company is going
after. My customer set
is a little bit different. This
is why my technology is better or more revolutionary or
business plans I'm starting to see, because the funding was easier
in the past three years, haven't really drilled down into that.
The other thing I'm seeing is that knowledge of the
customer’s space is not completely there.
For example, when somebody comes in, one of the things that
I'm going to want to do is talk to your customers or your potential
customers. You may just
have a technology idea, and that's okay, but, when you start to
figure out your feature/functions on a switch, for example, have you
talked to anyone in your community of people that you used to work
with or sell to? Can I
call them up and ask them what they think of your idea?
If I can't do that, you haven't done enough of your homework.
You haven't put enough sweat into getting your idea launched,
and that's a problem for me. I
may think you have a wonderful idea; I may even mention it to some
of my venture colleagues who may think it's a good idea also, but I
can't go any further because you haven't helped me.
I can't do it for you.
All of us love to help the companies we work with, but there
are only so many hours in a day, so you have to help us as well.
That means that when I give you an idea -- certainly, we're
not always right -- but if we do give you a suggestion, well, go see
the venture fund we referred you to, or the technologist or
potential advisory board member. Sometimes, if we're really excited or we think we're going to
do the deal, we'll go with you or make the call for you, but we need
you to take that step to drive it.
I'll hear comments back like, “Well, aren't you going to do
that for me?” Or, a
lot of times, “I can't.” I
need you to show a great deal of initiative and drive and enthusiasm
that you're going to go to town.
One last thing. I
spent the weekend in Los Angeles at an optical components symposium
which was attended heavily by technologists, investment banks and
venture capitalists. What
we're starting to see is an example of the “Loudcloud IPO
phenomenon.” At their
last private round, Loudcloud
was valued at $17.33, I believe.
They went public at $6, which was way below their prior
valuation. They went
public at that lower valuation because the one they would have
gotten from their private equity investors would have been worse.
When I looked in the paper this morning, it closed yesterday
at $5.13, or something like that.
While I was at the conference in LA, I was hearing that there
are probably a lot more companies like that in the pipeline.
That means that there is probably going to be a trickle-down
effect for valuations all through the food chain, and it's probably
going to start to hit in December or in the last quarter of this
year most severely within the private follow-on and IPO rounds.
I think that just tells us all that we have to work harder
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