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perspectives on venture capital in greater washington

shaking the money tree

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the audience: q&a

Q: How do you view "re-startups," firms that started off with one piece of technology, especially in the B2B Internet space. Perhaps where an enterprise application company discovers the marketplace shifted dramatically, brings in new management and tries to restart the company. How do you view valuations and raising capital, and what would you recommend to a firm of that nature?

Mr. Khoury: I think it's going to vary. We have all had a company where the business plan has changed. We did a company named SpaceWorks in 1994 that we have now been funding for five or six years, and it's the case study for why you stick with an idea because the company is going through some pretty exciting times. It's a B2B play now, but it started as a proprietary software language.

On the valuation front, I think the one thing you have to accept is, if your business model has changed, a lot of the asset value that had been created which you went out and tried to sell to the VC, has changed as well. We just did a restart in Boulder, Colorado. It was a restart because it was poorly financed and they had problems getting themselves right-sided on their balance sheet. You are going to take a little bit of pain on the valuation on the front end, but I think you have to find the right partner who understands the business model and how to drive it forward. You are not going to be able to get a strong Series A pre-money valuation on a restart. If you've got a good team and a good idea, it's just a matter of finding the right partner to understand where the business is now and help drive it going forward.

Mr. Novak: I think the operative phrase there is "right partner." We tend to be active investors, though we probably serve on fewer boards than these two guys because seed and startup investing is a lot more labor-intensive than second or third round. If we see a restart, to us it means a lot of work and a lot of effort, so we look at it as a startup. It has to have the same type of potential economic return that a startup would have in order for us to seriously consider it, and we are not looking at 10X returns. Because of the stage where we are investing, we are looking for multiple of the fund; every company having a potential for multiple of the fund.

Mr. Burns: Our quick strategic analysis would be: what is the synergy between the old business you were in and the newly restarted business? Is it organic—morphed to an adjacent space where we have some advantage with half the technology already built—or something bizarre? These restarts in an old business can actually be a blunting effect for the proper execution of your new strategy. A lot of entrepreneurs like to cling to the old thing because they can avoid admitting that it failed; or it's like a dog they kind of like to have around. Those old revenues, old customers and old technologies actually could be a boat anchor. Many times you would be better off to just jettison whatever the old thing was and set a clear, strategic, focused agenda and business plan for the new entity. I would say more times than not, the old doesn't really offer much synergy and it provides a distraction. Wall Street, if you ever get that far, hates it, and VCs do too. You are doing two things when it's hard enough to do one thing. There's the story of PowerBuilder which tried to get born inside an AS 400 manufacturing company in the early 1990s. Forget that. They discontinued, shut down and sold off the whole AS 400 manufacturing operation and let PowerBuilder live free on its own. The whole thing took off like a rocket. So, it depends, but usually it's bad, I would say.

Mr. Novak: If you have been in this business long enough, you will have made a lot of mistakes. I keep a visual reminder on my desk, a 50 caliber bullet with a pacifier and a heart on it. It stands for, "You love every deal when you do it, but when it sucks, you'd better be prepared to shoot it." Every day, when I look at every deal, I sort of have that in my mind. You need to cut your losses as soon as it is apparent.

Q: Where do you see the beginnings of new life cycles and exciting new markets?

Mr. Novak: Wireless. Long ago we believed that everything was going to be smart and networked. That says appliances. Online learning is also becoming big, as is knowledge management in various ways, shapes or forms. One of the overarching themes we have is that everything is smart and networked. A lot of us lost money on wireless years ago—a lot of money—but it's coming back, and we see wireless as a huge.

Mr. Khoury: One of our three flushes in the history of Columbia Capital was a company called Skywire. Today I see business plans out there getting $100 million, and they are Skywire again. It makes you think you were just a little too ahead of your time. Roger is right.

When you invest in carriers, you know what the carriers need. Don Gips at Level 3 Communications sits on a board with me. When he comes into a meeting, it is amazing what I learn by talking to Don about all the things they need on the infrastructure side. At Columbia, we see a lot of next generation technologies in access infrastructure, wireless, etc. for the next generation service providers. I think wireless is huge. Security is huge, and not just the security within the network, but the authentication. Everyone is talking about attacking the network today, why it isn't working, why it's not reliable and how we needed embedded software to make it more manageable, but you're not attacking the real issue, which is the person on the outside getting in and causing the problem.

Mr. Novak: With security, 90% is inside.

Mr. Khoury: I think it goes on and on and on. The next generation optical networking switches, routers and hubs, and the stuff that's going to allow every piece of our lives to work better. Those are the hot markets right now.

Mr. Novak: B2B has a long way to run, too.

Mr. Khoury: Yes, no doubt.

Mr. Novak: Getting back to what Kevin was saying, we are at the beginning and you are going to see disintermediation in B2B. You already have the big three auto makers announcing that they are getting together on the car parts effort, and there is more coming. We are at one of those inflection points where you have a paradigm shift. It's a little different from the biotech industry, which was really just a technology rather than a true paradigm shift. This cuts across many, many different industries, but I think we are still going to have carnage. When you have this much money in the venture community which has to be put to work over a three- to five-year period, it's going to be back like when you had six disk drive companies. There will be some consolidation and people will lose money, but, long range, I'm bullish, too.

Mr. Khoury: B2B is different from B2C. B2C was a brand game, a mass market game—get all the stores on the Web as fast as possible. OK, now they are on the Web. B2B, however, is an enabler. There is a piece of B2B that has to do with enabling technology, with execution, management teams and a lot of things we typically deal with. B2C was just flat out, "get it on the Web so you can sell there." Well, once it's there, big deal. I think it's natural that you have to find an extension of B2C that is more attractive, such as new marketing techniques, new ways to get to the customer, instead of just, "I now sell my product on the Web." The enabling technology embedded in B2B makes it more attractive longer term.


Q: Good morning. My name is Michelle Dyson and I'm the President of CISglobal.. We are a system integration and B2B application company. We just completed a supply chain management application that is similar to the one that Oracle and Ford are looking at, and we are trying to get in to make a presentation of the application that is already completed. How does one do that?

Mr. Khoury: The easiest thing, from my perspective, is that you now know my name. My email is You have that contact we all talked about, so, if you send a business plan, you won't be sending it to the general email address. We would staff a team on it and someone would definitely get back to you one way or the other to try to set up a meeting.

Mr. Burns: And for Roger, print out a hard copy and snail mail it to him.

Mr. Novak: Actually, if you send it to, I end up with it anyway.

Q: I'm Pat Breslin from Relatable. Can you talk about doing deals with industry funds? Are there pros and cons from your perspective as institutional funds, especially if there are synergies between the startup and the larger company's technology?

Mr. Novak: We've done a lot with Intel, Motorola and some others. From our standpoint, we like to have them at a later round. A lot of these industry funds, yes, they can be "company makers," as the saying goes, but they can also very narrowly focus your efforts. We believe more strongly in bringing them in at a later round, and, especially, making sure that we understand the business deal first, before we even consider an equity placement. That's our philosophy.

Mr. Burns: I think your question touches on an important subject, which is, as an entrepreneur, you need to think not just about the money, but what kind of money you want. Do you want dumb money from doctors, lawyers and Indian chiefs who don't ask questions, or, rather who ask weird questions? Do you want smart money that can actually help, or do you want strategic money? There is an art in the various rounds about what kind of money to take to upsell and position yourself for the next leg of the journey.

I have seen a lot of entrepreneurs shoot themselves in the foot because they do strategic deals too early. When other possible strategic partners see a big strategic partner or investor on you board, they may think that you are in the bear hug of that large company or that you are going to be acquired at any moment. You can actually block those other partners out. I advise my companies that if we are going to do strategic deals, do a little basket of them. Keep them below 5% or something like that. Don't let them on the board. They usually pay higher values, and most of them won't lead rounds. Usually, they call, ask for a term sheet and pile their money on top of that. Don't think they can lead rounds and give you a fat valuation because, at the end, they will say, "Pencil me in for $5 million subject to . . . ." It's tricky, and you want to be careful.

Mr. Novak: The other thing we have encouraged entrepreneurs to do when they bring in strategics, is to tell them that they have to go along with the financial people and that they cannot block a transaction. You don't want to give them a right of first refusal, although you can give them a right of first offer. We have forced them, in many instances, to agree that they have to go along with whatever the majority of the financial people want to do or they can find another investment.

Mr. Burns: Many times they have a strategic agenda. They are not like us. We are just greedy people who want to make a lot of money. They want to get your product, tie it into something or the like. Make sure that you understand what their agenda is really about.

Mr. Grant: Well, to hold all of that money that you are making, I want to give each of you an engraved money clip as a gift for your participation today. Please give our panelists a big hand. I would also like to thank for hosting this event. We could not ask for a better partner. Thank you, Fran, Mary, Mario and everybody else, and thank you, audience, for coming.


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