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shaking the moneytree Q3/2000

what goes up . . .

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the audience: q&a

Q:  My question is for Mr. Biddle.  You mentioned the over the last couple of years, 100% return has been normal.  What are you looking for now?

Mr. Biddle:  Our goal, candidly, has been to be in the top 25% of funds and to have returned at least 20%.  The business is somewhat risky, it's an inefficient market and people invest in us because they believe¾and history has proven it to be true¾that we can outperform the public markets over the long term.  Our goal is to be better than the other guys and have positive returns.

Q:  What are you seeing as far as the banks stepping in and providing debt to alleviate some of the pressure of getting follow-up capital into a business?

Ms. King:  The high-yield debt market is totally closed; the sub-debt market is starting to close, if not already closed; and the Imperial Banks and Silicon Valley Banks of the world are being very, very, very selective.

Mr. Ayres:  Yes, I agree with that.  If you do close a venture round, usually you will be able to get a line of credit for some percentage of that equity investment.

Ms. King:  I just did a sub-debt round at one of my companies with Comdisco, and they said that they are being extremely selective.  The big players that typically funded a lot of the telcos are really hurting right now, and they are doing things like pulling term sheets and stopping funding.  It's ugly from the debt side.

Q:  Any rules of thumb that an outsider might use to determine how much of a fund is assignable for new investments?  If you figure that you reserve so much money for follow-on investments and that you probably have so much money reserved for subsequent years, how can an outsider figure out what you actually have for new investments

Ms. King:  Ours is half; it always has been.

Mr. Biddle:  At NEA, they always have money; they are not going to run out of money.  We have money.  All the good funds have money to do new deals.  If we need to raise another fund, we raise another fund.

Mr. Harris:  If you are in a meeting, I think you should just ask.  I'm very open.  Right now, we have the capacity to do two or three more deals in our current fund.  We are currently fundraising, so people ask me that all the time.

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Ms. King:  When we are raising a new fund, we warehouse new deals in the old fund and pay it back when we finish raising the new fund.

Q:  I saw some numbers that we have had a greater percentage decrease in funding in this region compared to some of the others.  Has there been a disproportionate decrease in valuations for DC area companies versus Silicon Valley, Boston or other heavy VC regions?

Mr. Ayres:  I didn’t put up the numbers, but I think San Jose was virtually even from last quarter, maybe up by $5 million.  That's it.  Boston was down.  Major tech centers were down this quarter.

Mr. Biddle:  I'm going to comment on that, but just with respect to the Internet.  I think Washington has become one of the major technology centers in the United States, and this slow-down is actually going to help Washington pull ahead on a relative basis.  We have all these integrators around here that do technology with billions of dollars in programs that they would have taken on if they could have gotten the labor.  They couldn't get the labor.  To the extent that we are going to have layoffs and cutbacks in the technology field, those people aren't going to miss a beat; they will just do some government work for a year or two and work for CSC. The region actually is going to benefit on a relative basis.  In Boston, their engineers are going to be on the street; our engineer will be working on tanks for a little while.

Mr. Harris:  I'll add to that and say that it is really becoming more of a national market in terms of valuations.  We are seeing VC firms from Silicon Valley being much more active in investing in our area, so the valuations are becoming normalized across the country a bit more.  Traditionally, you have seen a little bit higher valuations on the West Coast than the East Coast, but I think they are starting to come around a little bit more.

Q:  Looking back to other financial downturns, a lot of people have made a lot of money through intensive restructuring in vulture deals, rollups, etc.  Do you see anything like that in your futures in the region?

Ms. King:  We don't do deals like that.

Mr. Harris:  We don't really do buyouts. We prefer not to call them vulture deals, if possible.

Mr. Biddle:  I think we will be very aggressive in funding solid companies that aren't being supported or can't be supported by their current investors.  I wouldn't call them vulture deals, however, I would call it saving the company.  I think there are going to be a lot of opportunities to get positions in quality companies where the current investors have either lost faith or don't have capital.  We are open to that.

Mr. Harris:  I guess that in the public market you are a “value investor” if you buy when the stock is very low.  In the private market you are a “vulture” if you buy when the stock is very low.

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Q:  What are your thoughts on the peer-to-peer space (P2P)?  Do you think it can be a revenue generator and have you considered, or are you considering, any deals in that area, such as distributed computing?

Mr. Biddle:  I don't think it's a sector or business model; it's a buzz word.  There are specific business models associated with a proposed company.  If the model makes sense, we'll do the deal, but P2P, B2C, B2B¾I don't know what they are.

Mr. Harris:  We have looked at some deals that are technically in the space, but, I agree, it's really a deal-by-deal thing.  If it meets the criteria, then we are certainly interested.

Ms. King:  At the end of the day, if they have a business model, it will make money.  That's the key.

Mr. Biddle:  The interesting part is that we are in the business of funding losses.  We are not saying that we only want to invest in profitable companies, we want to fund losses, but there has to be a business model that has the potential to generate profits down the road.

          There is a lot of venture capital out there, and there are a lot of great ideas.  A lot of companies will get funded, and you are going to see some major corporations grow from basements.  They will get funded over the next year or two.  It's just a return to reason, and there is still a ton of opportunity for entrepreneurs and investors.

Mr. Ayres:  Let me ask one final question before we wrap up.  We said that there are some funds which may not be around next year.  What's the risk to a company of taking money from those funds?  Is there a risk?

Mr. Harris:  One of the risks is whether they reserve money to support your company in the future.  If you get into a situation where you are having difficulty raising funds, you want to have support from your financial partners.  If they don't have the capacity to support you, that can be a risk.

Mr. Biddle:  We have some co-investors in some of our deals that are huge, branded venture funds that don't have any money.  The most important thing, if you have a great idea and you are going to be an entrepreneur, is to get in the business any way you can.  If you can get someone like Kleiner Perkins, take them.  If you can't, you have to get into the business.  Any entrepreneur always has Plans B and C, including with your investors.  Take the money wherever you can get it.  You take the best money that's available to you and you get on with it.

Mr. Ayres:  I think that's great advice for anybody out there.

          We are going to wrap up this morning's program. now.  I want to thank the panelists for coming so early this morning, and I want to thank the audience as well.  We are looking forward to seeing you next quarter.  I want to reiterate that all of this data and a lot more information can be found at pwcmoneytree.com.  Have a great day.

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