Part Three: THE SUCCESSFUL NETPRENEURS
MS. SMITH: On the stage tonight, we have five great entrepreneurs from our
region who are going to talk about something that's important to them and which they want
to share with us. The first is Mario Morino, who is the co-founder of Morino Associates,
which later became Legent Corporation. Mario is a private investor and the founder and
chairman of the Potomac KnowledgeWay Project and the Morino Institute, and I might say
Washington's leading social entrepreneur these days.
MR. MORINO: First of all, thanks very much for showing up tonight. This is an
exciting evening. There are a lot of people here I've never met , so just a little bit
about my background. I broke into what was then the computer field as a grunt programmer,
and I came up the ranks, technical ranks, writing code for a lot of years. Folks like John
Burton made me think about marketing and sales because that was a different area. I was
lucky because I had a lot of people around me to learn from.
The company went on to become a very large business when I retired in 1992. Since then,
I've devoted most of my time to the non-profit sector and this program particularly. Most
of my time I deal with the Potomac KnowledgeWay Project, a regional initiative trying to
focus the power of this region as an information product producer, becoming for that
industry what Detroit was to the automobile industry many decades ago. This region should
be its world equivalent in the 21st Century in terms of information products. We do a lot
of work on entrepreneurship in this program and a lot of work with youth. I spend about
five percent of my time on the investment side. I'm a special advisor with a group called
General Atlantic Partners out of Greenwich, Connecticut. I'm invested in about eight to
ten different venture funds, and we occasionally do some one-on-one direct deals. Now,
that gets you the flavor of my background.
The most important message I'd like to give you deals with getting financing. Actually,
I'd rather use the term "getting the initial money you need to get started." I
think we confuse that with "financing" a lot of times and you see some people
trying to go to a venture fund right away. They're trying to go to a bank to get money.
I'd go back to the concept of what an entrepreneur is about. I think the key word is
"resourcefulness." A lot of people never get formal funding at all. I think you
should be able to sell your idea early on to somebody who is going to help you but who is
not a funder. It could be a customer. I know I was very blessed. I lived through several
product reincarnations in other companies, so when I left, I at least had a track record
of product development. But we sold a product idea, on one piece of paper, to a company
and the deal was that we would get five percent of the wealth through that product and
they would give us funding for two years for our expenses. They gave us offices, they gave
us computer time. They sold our product for us and we got a start. While we were doing
that one, we wrote the second one. While we were doing the second one, we started a third
one. And in that process we started doing contract work for people like Boeing and the
Federal government, and we were working our day jobs, getting our cash flow. Remember, the
issue is cash flow. We were able to create the fourth product, which launched the entire
line. You have to use resourcefulness to find out where you are going to get your funding.
MS. SMITH: Our next panel member is Charlie Heller, director of the Dingman
Center for Entrepreneurship at the University of Maryland which, by the way, has a very
robust and effective mentor program I hope Charlie will mention tonight.
MR. HELLER: I followed the rules by not wearing a tie, so I will also follow the
rules and spend the first minute talking about my background. Like many of you in the
audience, I started out as a techie with three degrees in engineering. I started out in
the aerospace industry and then a couple of years in academia before discovering a market
opportunity. There are people like Mario who have enough gray hair to remember that there
was another revolution in technology which brought about a tremendous market opportunity a
few years back, and it was called interactive computing. For many of us this was like the
Internet today. We went from batch computing to interactive computing. We were able to do
things in real time that people had never been able to do before. As a result, we started
our first company, a company called Bay Tech Associates and our product was a piece of
software for computer-aided instruction. We sold that company. The company which bought it
went public. We came out of that and started another company in an area in which I was
particularly interested, the area of computer-aided design and computer-aided
manufacturing, CAD/CAM, and started a company called CADCOM. After ten years, we sold that
company under a very complex earn-out type situation. I stayed with the parent company as
a V.P. of corporate development for two and a half years. We put together an ill-fated
joint venture with Honeywell which didn't work out, to get into electronic publishing
using the same technology that we had been developing for CAD/CAM. So we started our own
company under kind of a strange management buyout that one of my former partners and I did
from the parent company, and started a company called InterCad, since renamed InterCad
Graphics Systems. It has now become part of Intergraph Corporation in Huntsville, Alabama.
Since that time, I have been at the University of Maryland running the Dingman Center
for Entrepreneurship. I also run the Annapolis Consulting Group, along with my business
partner, Angela Tandy, who is in the audience tonight. We do a variety of things such as
working with venture capital firms, particularly one on the west coast, but others as
well, looking at deals, doing birddogging for them and so forth. We also work with large
companies doing corporate venturing and doing some work in Europe and doing training, and
serving on quite a few boards.
When I saw what this evening was about, I actually tried to list all the types of
financing we did at our three companies. I was absolutely amazed when I finished the
listing. On the debt side, we did some conventional bank loans, we did SBA-guaranteed
loans, we did receivables financing. On the equity side, we did the famous three F's:
friends, family and fools, several private placements, an R&D limited partnership, two
venture capital financings, an IPO, and acquired three times. And we also did some hybrid
What's my advice? Well, I think the first experience of entrepreneurial terror was when
I discovered that a seed or early stage company really cannot get venture capital from
venture capital funds. Most of the companies that we see at the Dingman Center come to us
because they think they are venture-capital ready, and they are not, just like we weren't
at that point. And the words we heard over and over again were "too early." In
fact, we thought about changing the name of our company to "Too Early, Inc."
So what do you do? My advice is, at that point, you've got to put in your own money,
you've got to bootstrap. When you're bootstraping, you get operational as fast as you
possibly can. You avoid spending money as much as possible, just as Mario was just
describing from his experience. You barter and you look for anything that will bring in
cash as quickly as it possibly can, even though you may not be quite as focused as some
people would like you to be. And more than anything else, you have to network during this
period. You have to get people to know you, you have to promote yourself, you've got to
attend events like this, and you have got to be a sponge. I think for an entrepreneur, the
work week has about 80 hours. So don't say you don't have enough time to attend events,
seminars, workshops, etcetera, where you meet people and get to network.
I wish that when I was in the early stages, there had been something like our Dingman
Center for Entrepreneurship, where there was an opportunity to find mentors who will work
with you one-on-one, where there is the Baltimore-Washington Venture Group, which will be
described to you in more detail, which helps you find capital from private investors,
where you have networking events and seminars and education events and so forth. And at
that point, I think, there comes a time when angels become the key investors and I know
John May is going to be talking about those. Thank you very much.
MS. SMITH: Chuck Stein is the former Chairman and CEO of Netrix, which was a
venture-backed technology firm. He personally raised many millions of dollars to get that
off the ground and has some interesting things to say about it.
MR. STEIN: I have also been given a format to follow which is that I'm supposed
to tell you about my background in a minute and give you wisdom in two minutes and I'm not
sure I can really do that. I was president of Netrix. Netrix raised $24 million in private
venture capital in four rounds, and one of the things I want to talk a little bit about is
the fact that at each stage we were raising money, we went to different kinds of venture
capitalists. Venture capitalists are not all the same. We then raised $26 million in a
Prior to Netrix, I was with Bolt, Beranek & Newman. I am not with Bolt, Beranek
& Newman now, despite the news release that you might have gotten. I have just retired
from Netrix and I want to spend the next period of my life working with entrepreneurs to
help them develop their companies, help raise funding, and help do the things that I think
are necessary to make them a successful company.
One of the things that occurred to me is that the people I have talked to recently
think about raising venture capital like selling a product. And I think that's about as
appropos as getting married and selling some woman or some man on the idea that you ought
to spend the rest of your life together. I think that the venture partner, the partner
that you are going to get to help fund you, is going to be your partner for the rest of
your business lifeor at least the major part of your business lifeand you
ought to give as much thought to this partner as you might give to your spouse. What I've
tried to do is to put down the five things that the investor is looking for from you.
First, I think that's vision. They want to see that you really understand what you're
Second, it's industry experience. They would like to be convinced that you know
every-thing there is to know about the industry, because they want to know that as the
industry changes, you are going to change, and change the company that you are developing.
Third, they would like you to focus on the business case. Ninety percent of the
entrepreneurs I talk to spend the first several meetings telling you about their
technology. And your technology is just interesting as hell to me because basically I'm
interested in technology and I really like it. But it says little about the business, and
what you really need to do is to focus on the business case and how you are going to make
money and therefore how your investor is going to be making money.
I think the fourth thing they are looking for is an experienced management team, that
is, you have shown some experience of having done this before or done some aspect of this
before. What that means is, you have to spend some time getting people around you that are
going to help you do this deal, because there is too much risk with an inexperienced
management team or with an empty management team: one guy with great vision.
And finally, they are looking for a significant return. One of the things that I hear
entrepreneurs worry about most is the price of the deal. What you have to understand is
the venture capital investors who invested in Netrix put in their money in 1985, 1986 and
1987, and the company went public in 1992. They left their money in this company for a
long time, and therefore they are entitled to a pretty good return on that.
I think that if, as you write your business plan, you can think about, those five
things: vision, industry experience, the business case, the experienced management team,
and the fact that they ought to get a significant return, you produce an attractive story
for your company. I think from the entrepreneurial point of view, what I was always
looking for was recognizing that this was going to be a long-term partner and I wanted to
interview them as much as they wanted to interview me. I wanted to find out what deals
they had done, what deals they hadn't done, what deals had they done that had gone bad and
what did they do when they went bad? Were they there to put more money in? Were they there
to help you? Because the business plan that you guys are writing today isn't the way it's
going to happen. It's going to happen some other way, and you need your partner to
recognize that and be prepared to stay with you through the long haul. You should be
looking for help and guidance from them. You need more than the money. The thing that was
always pleasing to me was that I had three venture capitalists on the board of Netrix and
all three sat on the boards of a lot of other companies, so when we would come up against
problems, they were problems these folks had seen before and they were really able to give
me help in terms of other CEOs, of other partners, of other people they had worked with
who had been through this, and I got a lot of advice from other companies in their
The third thing you should be looking for is chemistry. Just like when you look for
your spouse, I think you should recognize that you are going to live together through the
good times and a lot of bad times, and you want the chemistry to be such that you can
really work together through this period.
And finally, I think you are looking for the money at a fair price. So there is a
conflict of interest here. They are looking for a great return. You are looking for the
money at a fair price. And I heard Mario say that if neither of you worries about what the
other guy gets and worries about if you get what you want, that this will really be a
successful deal. So I would focus on the long term and the partnership on both sides and I
think if you do that, you are in a good position to get the money and the help that you
MS. SMITH: Next up is John May. John is an associate of Calvert Ventures and
more importantly to this group, the founder and executive director of the Private
Investors Network (PIN).
MR. MAY: I think the best thing I can do would be to repeat verbatim what Chuck
just told you. The entrepreneurial effort I have been spending the most time on in the
last six yearsand this is something you have to realize about money sourcesis
that almost all of the money sources that you'll approach have had to raise that money
themselves entrepreneurially. Either they are cashed out CEOs and entrepreneurs themselves
or they're general partners of a venture fund, in which case they raised the money that
they are putting out in a fiduciary relationship. So don't assume we are all on the other
side of the table. We are all entrepreneurs together, in a way.
I've been managing Calvert Social Venture Partners. It is fully invested, so I don't
bring my checkbook to these events. We do represent Solstice Capital in Boston, and they
are looking for opportunities here, which is a good sign for all of you that outside money
is looking here. And I'm advising a new fund, which I think is great for this area, to get
a new fund, which is the Women's Growth Capital Fund, to invest in expansion stages of
The main thing I want to talk to you about, though, is the Private Investors Network.
There's a sheet in the back that says it better than I will. But there's also a list in
the back of all the resources that we think you should be aware of. I have been trying to
encourage all of the venture capitalists and other funding sources in town, instead of
just saying "no" to you99% of deals that come to venture capitalists get a
noto have a nice "no," and in this, give you some hints as to where else
to go, Dingman Center, George Mason, and so forth.
The Private Investors Network is a group of angel investors, cashed out entrepreneurs,
CEOs of companies, general partners of venture funds, investment bankers that have gotten
together in this region to try to look for opportunities like yours. They meet once a
month and to circulate the opportunities among them-selves. That's described in the front.
Other resources you can go to are in the back. I encourage you to use that resource and
any other resource to get to angel money.
A few tips or thoughts: Patience. I cannot stress more fully, patience. Persistence. We
will dangle. We will let you twist. We will let you wait to see what your persistence
level is. Creativity. What other ways have you tried, how much of your own money, how much
of your friend's money, what of your customer's money, what of the credit cards? What is
your creativity level, and most importantly for the funding sources: management,
management, management. Venture capitalists and angels never invest in patents and
technology. They invest in people. It's how you come across, and one of the greatest
things that was said here tonight from David Gladstone was the issue of honesty and
disclosure. Never fail to disclose a negative in your background to a source you hope to
get. They will find it out and you will lose that relationship. Always disclose.
Last, there is a lot of opportunity in this area. There is a lot of money coming into
this area. We are trying to find the vehicles like the Private Investors Network, like
increasing the Mid-Atlantic Venture Association, like trying to be helpful to individuals
who are trying to make these investments. It's what I call warm money. Always look for
somebody who brings you more than money. You will be disappointed in a spousal
relationship if you don't have a whole relationship. Look for warm money. Have a good
MS. SMITH: Our last speaker and sage resource tonight is John Burton, a partner
in Updata, Inc., and a former CEO of Legent Corporation.
MR. BURTON: For those of you who want to know a little bit about my background,
I started in college learning how to program, soon realized that it would be better for my
life and humanity if I sold it instead of built it. So I got in the marketing and sales
side. In Boston, where I was, there was a lot of opportunity in the services sector and I
went into the software business with Cullinane, which later became Cullinet. Frankly, I
was a student of how the business operated. It was a very successful organization, and
about the time I figured out I knew what I was doing, I joined a startup
companywhich was well-backedas the marketing and sales guy, and it was an
unmitigated disaster. It was the most important experience I ever went through, and it
served me well thereafter. I co-founded a business in Boston called BST with some other
partners, and that business was quite successful. We formed relationships with several
software companies, including Morino Associates, here, and Morino Associates, which had
become Legent, acquired BST. I moved down here and became, eventually, president and CEO
of Legent which was a lot of fun. We had an opportunity to grow the company and meet with
a lot of entrepreneurs because, as you well know, Legent was very acquisitive from a
strategic standpoint and we bought a lot of small companies. So, I've seen it.
Updata Group is an M &A firm in the IT industry which has a very good background,
and we have been the partners independently, individually as well as collectively,
investing in small startups, angel-level as well as some post-public opportunities. I have
had very good guidance or counsel, and as the other guys that have kind of a marketing and
sales background can think about things, and that's very simply five things: A, B, C, D,
A, you will be judged by who your Advisors are. Pick the best ones you
possibly can: people with backgrounds, people you can learn from. Be highly selective and
be very persistent in finding them.
B, you are Building a team. You are not building a product. You are
building a team first and that team will be people who complement your skills, who do
things you don't. If you are an engineer, find the best marketing and sales guy. If you
have a marketing and sales and engineering guy, find the best financial guy. Build a team,
and that team should include customers or people who will eventually use your product and
service, and that's just what Mario talked about.
Find somebody, even if they don't pay you. Will you buy this if I build it? Will you
help me build it? Can I build it according to your specs? Get consulting money, ask them
for that. Ask them for office space. Get a consortium of people who will then say, I like
C, you are building a Company, you are not building a product. VCs do not
invest in products. If you think you want to build a Vermeer here because you can sell
your front page to Microsoft for $130 million, you will not last. It will be just like
playing the lottery. If you build a company, you can survive a lot of things in a lot of
different generations. At BST, our first product idea was absolutely phenomenal. It was a
mainframe-based voice messaging system. Pretty good, huh? We had a great team. People told
us that it was really stupid. We didn't do it. We continued to bootstrap though consulting
and eventually came up with another product, which we built with funds from our customers,
and sold to Cullinet for about $3 million, which was an equity-free round of capital to
build our eventual product. The team was able to do that because of the agility the team
had, and people invested in the team.
D, Disclosure. Run your operation as if you were public. Communicate with
people as if they were shareholders. They will be stakeholders. They will be your friends.
Communicate. Memos, calls, do everything you possibly can. Run your business as if it were
public, and do not do anything you would be afraid to disclose to a lawyer, a friend, a
relative, or one of your shareholders.
E, Examine. And by that I mean, examine yourself, be honest with yourself
about what you can do well, what you don't do well. Take the input from the venture
capitalists very seriously. Ask them hard questions: "if you don't like this,
why?" "I can learn from you." Also, ask them "will you invest?"
and be hard on them, because they will string you along. It will take time and you don't
have time to give. Be direct with yourself, be direct with everybody else, it saves time.
And be very persistent in the way that you examine yourself, and do it daily, weekly,
monthly and ask everybody you possibly can their opinions about where in your organization
you are strong and not strong. The agility that you get and the discipline you get from
following those ideas tend to help you raise money along the way in multiple ways, because
your recruitment and your fundraising effectively never end, whether you're running a
company with an idea or a company that's $600 million.
Part 4: THE INVESTORS
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