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a look inside the venture catalyst
partner with power
page three of three | previous page

the audience: q&a

Mr. Witzel: Thank you very much, Don. We appreciate your insights into the corporate venturing world. We have some time for a few questions before we bring Mario up here. One of my first questions is: Where do you start as an entrepreneur? Where do you find the people to tap into corporate venture capital? In the resources we put together to accompany this event is a list of the Top Corporate Venture Capital Investors of 2000. What are the best ways to identify, gain access to, and approach these corporate venture investing funds?

Mr. Laurie: That is a great question. It is easier now than it was, although I'm not sure what will happen as these corporate venture groups get shut down.

            There are two routes to access. One is through the company’s venturing group. For those corporations that have them, that is the best route in, and they are not hard to find. Their whole mission is to work with entrepreneurs. Their biggest difficulty is finding deal flow . . . well, grade A deal flow. I can almost guarantee that you will get an audience if you are in their target group.

            If you were to ask me whether I would rather talk to the corporate venture person or the division manager of a particular division, who is a little harder to find, it is a mixed bag because the general managers of the division have a shorter horizon. Their horizon is 12-18 months, so this is not as much of their strategy as it should be. If you find one of the curious, insightful managers, however, they can make things happen more quickly. Those are the two access routes that I would find.

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Audience Member: What do Sequoia and Johnson & Johnson have that others don't?  

Mr. Laurie: Venture capitalists talk in terms of being in the “top quartile” with their funds. One of the questions that I asked Mike Moritz of Sequoia was, “Mike, you are top 2%. How do you do it?”

            He said, “It is easy, Don. There are only 11 of us partners in Sequoia and we have all been together for 17 years.” The cumulative experience is the answer. Where the corporate types got it wrong is that they thought it was about being smart, so they would put the smartest people in the room. It is about the cumulative experience, and it is more about the business building process. You have to screen and select the right ventures, but it is also about how you help these people build their businesses.

            There is one other thing I want to mention about the corporates. Very few, if any, corporates ever lead an investment. With Johnson & Johnson, for example, which I know very well, I once brought them into a venture that I'm an investor in and work with. They loved it. It was a medical technology that could do rapid clinical diagnosis, and they said, “We will put $5 million into this, but you have to find the lead.” The corporates won't lead investments, so you can't make them the great hope. They will always look for a lead because their logic is that they are doing it for strategic purposes and they want somebody else to do the due diligence and make the financial commitment so that they don't call themselves “dumb money.”

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Audience Member: Where are the corporations and the entrepreneurs in product development methodology, and what do you think is the single most important thing corporations could learn from the entrepreneurs and vice versa?

Mr. Laurie: In terms of product development technology, I don't see much conflict. There are two types of corporate investors. One is the type that is investing in the company and letting the entrepreneur run their business. They have learned that lesson. It is not like 10 years ago when they wanted to over-control and have a heavy hand. The ones in the game understand that, and they also understand that their strategies will change and the entrepreneur's strategy will change. That is why they are investing in portfolios. Where there is a convergence, they will acquire the company; where there is not a convergence, they will let it go the normal IPO route.

            There is a second kind of corporate. A lot of corporates say to me, “I don't want to invest, but that seems to be the only way to get to the entrepreneurs. I want to get to these entrepreneurs so I can be a beta test site for them.” In that sense, they are actually interested in sometimes influencing so you can help them solve their problems.

            I'm working with the research firm, the Gartner Group. They are taking the book and the framework and trying to apply it to IT. If you think about future problems in IT, one is around connectivity. A lot of entrepreneurs are out there working on the connectivity problem. It is like a dating game. How do you have these IT managers find entrepreneurs that are working on the same thing and looking for solutions to their problems?

            To your second question, entrepreneurs have to stay away from the culture. They have to learn not to behave like these guys. That is one thing you can overdo, however, because entrepreneurs can absolutely learn grownup practices. I have been in organizations that have hired very accomplished senior managers who have chosen the entrepreneurial route. They are amazed at how disciplined, in a sense, the entrepreneurs are. A lack of discipline is not a skill in the entrepreneurial business. Sloppiness is not a skill. Entrepreneurs can learn things around quality management, business process reengineering, and good management practice in terms of how you get things done without slogging in the bureaucratic stuff.

            What can the big companies learn? They can learn about innovation. They can learn about how you create new business, the business-building process. They can learn about the preconditions for success, which means everything from the reward system to the support that you need to provide these people.

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Mr. Witzel: I will cut off the questions now to make sure we get you out of here by 9:30. Don will be here afterwards for additional questions. Again, I want to thank him for being here and sharing his insights with us.

            Now, it is my pleasure to introduce you to an individual who was inducted last week into the Washington Business Hall of Fame. His seven-year-old daughter describes his job this way: He carries a briefcase. He looks really busy, and he sends lots of emails. Of course this describes none other than Mario Morino, Chairman of the Morino Institute.

 

mario morino: wrap-up

Thanks, everyone, for being here. The trouble is, my son said the same thing one year earlier, so there must be an impression in my house that they have no idea what I do except send emails.

            Don, thank you much. This was an excellent presentation. If you haven't read Don’s book, please do so. We have a common friend, Joe Schoendorf. When I heard the comments you made about John Chambers attending that session it made me think of our Chairman and CEO, Joe Henson. In 1992, he, our President, John Burton, and I spent two days with Accel meeting their portfolio companies. Accel does a great job of trying to create relationships between early stage businesses and established firms. When you see venture players of the Accel caliber, you want to play in those games. Joe and I tried to do a deal way back when, and we saw each other again last year for the first time in a while.

            There are two comments Don made that I couldn't support more. One is finding out: Does the CEO get it? It is amazing how many times a partnership takes place, you make a deal midway in the organization, and you find out that they haven’t a clue how to integrate what you have done organizationally. It is a shame. Does the business get what you are about? That is crucial. Second, ask: Is the culture consistent? More good opportunities go down because of culture issues than you can shake a stick at.

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            Another element is to make sure that you are important. In the dark ages of technology, back in the 1970s, we started a business based on creating technology that would sell through other vendors. That was unheard of in those years. We learned painfully that if what you sold didn't become an integral part of that business, and that if the sales people were not compensated to drive it, you got lost in the shuffle. You have to understand whether your effort and technology will be important in the partnership, and, second, will the sales force’s compensation recognize that importance? Otherwise, you are just lost. You will be waiting for those royalty checks, and it will be a cold day before you see them.

            Here’s a story some of you may have heard before, but it emphasizes Don's points. We were trying to hire a new President and COO for our business. It was a relatively small business and we had recently gone public. I had an interview with a remarkable guy; he was President of a large division at Coca-Cola. We had a great meeting, but I actually felt awkward interviewing him since he had more knowledge about management in his little finger than I had gathered in my life at that time. We hit it off and had two meetings. He started laughing one morning because I apologized for the interview.

            I said, “I feel funny interviewing you. You have this great background.”

            He started laughing and said, “This isn't going to work.”

            I said, “Why? What is your take on it?”

            He said, “I work for Coca-Cola. When you run a large business like that your objective is risk aversion, period. That's it. I don't know if I can adjust to this world. My natural defense mechanism, my way of thinking, is to avoid a problem instead of seizing an opportunity.”

            It was a remarkably candid and insightful conversation. It taught me the lesson that some people who come out of corporate America into emerging businesses can't see the distinction. They can bring a kind of death to the entrepreneurial organization.

            The five areas in Don’s framework -- organic growth, new ventures, internal, external, partnership and acquisition & integration -- form an excellent model to look at, not just for a large organization, but I think you have to look at it for an emerging organization, too. You have living proof of that model at AOL Time Warner. If you map AOL Time Warner, you see all of these elements in play right now and quite well. You have Len Leader who works with the guys in New York doing the investment side of AOL Time Warner. Meanwhile, you have guys doing the acquisition piece, which are different units, but there is a great, seamless integration at the same time, plus they are partnering. You see all of these models at work in the AOL Time Warner construct today.

            In 1987, our company was growing. We were small, and, in order to understand what we were trying to do, we mapped out a topology of the market and made it a very expansive topology. The area was called systems management, and we tried to map it in its most extensive manner. We looked at the sector map, and we tried to prioritize the points from “explosive” to “incremental,” so that we knew where we were. We tried to create a target map for our business plan since we did not have a hope of getting one of those explosive points ourselves. That’s because R&D begins to burn out unless you are a remarkable business. Therefore, it showed where we would acquire, where we would partner, and where we would invent ourselves.

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            We actually began to think that way about opportunity, and you should do that even as a small organization. It is a great exercise to go through because it forces you into honesty about your market. The inverse is true, too. You do it for the targets you are looking at. Get in their minds, figure out how they map this space, and figure out where you fit in that topology for them. If you do it for AOL Time Warner and Intel, you figure out what you have that is important to them and where it fits in their grand scheme. You have a scenario play, but you will be further along in the dialogue if you go through that scenario analysis.

            I'm a great believer in the idea of the venture catalyst model for large organizations, except that there is a reality which I have seen in my other life with General Atlantic Partners. I think that the Thermo Electrons, the GEs, the Cornings, and the Intels are unique firms, although I believe that it is the model of the future. The trouble is that there aren't many leaders like those in place. Where there is an enormous opportunity today is in the ability -- from the  point of view of investors such as the Sequoias Capitals, General Atlantics, Warburgs, and others -- to go into a Global 300 company and extract the significant business opportunities that will simply not be allowed to grow inside. The talents are there and the assets are there, but the culture will never allow them to grow.

            There’s an inverse to that, too, which may be surprising for people. As small firms, you will be amazed to find that a large corporation may have a technology or an entire service that you could use or own. Right now especially, they are trying to get rid of this stuff. Don't think that you couldn't acquire it. They might even pay you to take it off their hands. Think very boldly at this point in time. As strange as this sounds, these guys are sitting with assets they want to get rid of. Everybody has cost issues. The world has fundamentally changed for some period of time. You might be sitting in the unique position where you could pick up significant market share and be paid to do it. It’s not unthinkable for someone at a large corporation to give you $3 million in advance money on a deal to get rid of something at rock bottom operating cost. Their P&L gets clean and they couldn’t care less about that $3 million going out the door. To you, that's everything in the world, so look at it hard.

            There are many reasons why businesses have trouble. When you look at the schedule for an executive today, it is anything but driving for explosive growth. Take parachutes, for example, which I hate. It’s one of the reasons I believe that an entrepreneur is different from a “hired gun” executive, and why a lot of the firms that tried to fabricate businesses failed. They didn't realize the importance of an entrepreneur. If you have an executive who is a hired gun, he probably has one heck of a parachute. Even if they fail, they will walk away whole. I don't invest in those companies. If they go down, I want that entrepreneur to go down in flames. I mean that. I want them to know that purgatory is around the corner when they fail. That is what I went through, and you want that person to drive the company like no one could believe. It is not just about having the right business factors or the right growing market, you have to have that drive. That was the fact that was missed in incubators and fabrication models all over this country. They tried to fabricate businesses, but you don't fabricate an entrepreneur.

            There are other points that came out of Venture Catalyst that I think are important. Don said something remarkably insightful at the end. The really great investors realize that it is not about investment selection; it is about building organizations. That was totally left in the wind in the last six years. Some companies, which will remain nameless, made enormous amounts of money, some were the biggest names in the field, but they were a disaster to the firm’s portfolio. They had people who could make investment selections but didn't know anything about helping people build their firms. What you have to have on your side is a firm that helps you build your organization.

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            A top consulting firm just finished a study on the venture capitalist world and it is pretty condemning. It will probably never see the light of day because it is so condemning. It ends up saying that the two most significant points that show the brilliance of a VC today are the price point they bought in and the price at which they exited. So much for great value-add. The most significant criteria of earnings for VCs was point of exit/price of exit, period. When you see the numbers, the conclusion is that if you invest in VCs, short of the top quality guys, you might as well just invest in an index fund. Isn't that sobering?

            Two years ago, Ted Leonsis of AOL gave a keynote to the Mid-Atlantic Venture Association’s (MAVA) venture conference. He didn't have a lot of people smiling for the first 30 seconds because he said, “Good morning, welcome to the Venture Capital Moron Hall of Fame.” He proceeded to read off a series of quotes from venture capitalists, and he had the whole place in stitches. A lot of people came into this field who had no business being there, not in the class of the Sequoias, the NEAs, the Accels and the Warburgs, of course. Don’s point about long-term experience in helping business is critical. When you are looking for a partner, you look for that. How will they help you besides the check? There has to be an explicit and evident way that it will take place, or you question the money.

            It seems like ages ago, but on January 22, 1998, Netpreneur did one of its first Coffee & DoughNets sessions on partnering, and it echoed much of what Don laid out, especially one point that I want to stress -- the importance of treating the early customer as a partner. That was one of the most effective things we did at our company. Especially during the last year, you are going back to entering into agreements to beta test products with firms because they want certain capabilities desperately. If they believe you can deliver, they will step up to the table. They may fund you. They may advance you money and take an ownership position in your businesses. Do not underestimate the early-stage client as a strategic partner in your investment. It is the greatest litmus test you have because, if you can't sell that one, you aren’t going to sell dink later on. Can you sell your concept to a company that has a need for what you are doing? If so, it is found money. You couldn’t ask for a better starting relationship with somebody.

                Between the book, which is eloquent, and the element of partnering and how you do that, there is still one critical issue:  Be careful of dancing with the gorillas, because, in the end, they will screw you to the wall. Don't forget that. All the way through the negotiation they will be buddy-buddy, we love you. It is great until everybody steps to the table, and then it is time to put the terms down. They know that they are the gorilla, and there has been legendary road kill at that point. It doesn't mean that you don't do these deals; just go in very carefully, know what you are doing, and be realistic about your relationship.

                I think you heard some remarkable words of wisdom this morning. I went through the book, and I'm right in line with everything that was said. When Joe Schoendorf says it is good, it is good. Don, thank you very much, and thank you all for coming.

[End]

Page three of three

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