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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 stuff.

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 public offering.

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 life—or at least the major part of your business life—and 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 looking for.

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 portfolio.

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 need.

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 years—and this is something you have to realize about money sources—is 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 women's capital.

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 you—99% of deals that come to venture capitalists get a no—to 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 time.

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 company—which was well-backed—as 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, E.

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 this thing.

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.


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