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Part Four: THE INVESTORS

MS. SMITH: I'm going to introduce our featured guests, who will be prepared to take questions from the audience. Starting in reverse alphabetical order, we have Frank Tower, vice president with Silicon Valley Bank.

MR. TOWER: I'm Frank Tower with Silicon Valley Bank, with an east coast office of the bank. We lend to technology companies, emerging growth, high technology companies. You know, there aren't a lot of banks that do that. We are one. The one pearl of wisdom I have is really reiterating what John and the rest of the folks here have said. That is, really take the time and build a strong group of advisors. Attend events like this. Attend the Netpreneur Program, go to George Mason, go to the Dingman Center and they will help you build your advisory team, because you truly are building a company, not a product.

MS. SMITH: Next we have Angela Tandy, president of the Baltimore-Washington Venture Group.

MS. TANDY: Good evening. I'm Angela Tandy. I'm with the Baltimore-Washington Venture Group. The Venture Group has been around since the early '80s. We are a membership organization. We have over 500 members today. We create a forum that brings entrepreneurs and investors together. We hope to facilitate win/win business relationships. We are the sole gateway to the Private Investors Network. We screen all the deals that go on to John May. And if you have any questions, there is some information in the back or you can talk to me afterwards. My advice is just get out and network, network; be persistent, as John mentioned, and be pro-active.

MS. SMITH: Steve Ritterbush, managing general partner of Fairfax Partners.

DR. RITTERBUSH: Thank you. I'm a general partner in Fairfax Partners. We are an early-stage venture capital fund here in Washington, D.C., in the Northern Virginia area. We have been around since 1989. We invest in three principal areas: health care, medical devices, drugs, etc. We do a lot in information technology, with a strong focus on health care information systems and business-to-business Internet. The third area is what we call applied technologies, where we look for technologies that have been spun out of the defense sector: sensors, lasers, and the like. I might add that while we do invest—we've probably invested in over 50 companies in the last eight or nine years—we also develop companies on our own. Every one of the partners in our group has created companies on their own, and I think we've taken about seven technologies and built businesses within our organization which we then spun off into others. So we are a bit of a hybrid between a straight venture capitalist and an entrepreneurial group.

MS. SMITH: Gene Riechers, who is the managing director of technology venture capital at Friedman, Billings, Ramsey & Company.

MR. RIECHERS: I come to this from a very different background. I spent the last 17 years helping entrepreneurs build businesses and now have joined a venture capital fund and created a venture capital fund. So I'm going to do it more than one at a time. Pegasus Venture Partners is part of Friedman, Billings, Ramsey & Company. We were raising $50 million to invest in electronic commerce, tele-communications and Internet and intranet software and services companies, focusing primarily, but not entirely, in this region and we are going to do early, middle and later stage investing. Generally not seed stage—investing the smaller amounts. We are going to do $1 to $2 million per round, to give you some sense of what we are about. I can't add to the level of advice that's been given already. I think the emphasis you have heard on building a company and building a management team is exactly right. I have seen people do that successfully and I have seen people try do it by themselves with one product, and it doesn't work. So let me add something very different. I have seen a lot of entrepreneurs in this town develop consumer ideas, and they don't have consumer marketing backgrounds. My recommendation is to go find consumer marketing talent, if that's where you are going with your technology.

MS. SMITH: Jim Pastoriza, principal with AT&T Ventures, which opened here not quite a year ago.

MR. PASTORIZA: That's right. We opened an office here just about a year ago because we believe that this is a terrific place to be. We have got an office here now. We have got an office in New York. We've also got an office in Silicon Valley. We are an independent venture capital firm with about $230 million under management. We have one limited partner, which is AT&T, so our charter is to look for businesses that we think ought to be strategic to our limited partner.

A couple of areas of interest to us are enabling technologies that can do things like multiply band width, things wireless, things local loop, things Internet. We have got a portfolio now of about 40 companies that we have been able to build up over the last couple of years. Our group consists of a mix of professional venture capitalists, as well as people who have a pretty strong operational background.

MS. SMITH: Lyn Miller is the regional director for the Center for Innovative Technology, a Virginia institution that has two incubators under its wing.

MS. MILLER: We have two primary sources of funding. One is a seed and early-stage capital fund, which will be operational at the end of this summer. It will be a $25 million fund and it will be used to cover those that Gene's funds don't cover, which are the much earlier stages. We also have an even earlier stage, technology awards, which are primarily for research and development stages, and those involve partnerships with universities. One of our primary skills is putting you together with potential research partners from universities around the state and other institutions that can help facilitate some of your R&D work. So we have two sources of funding.

MS. SMITH: We also have Patrick Kerins from Grotech Capital Group in Baltimore. He joined them recently from Alex Brown, where he was in corporate finance.

MR. KERINS: Thanks. Grotech is an investment partnership located actually in Timonium, which is a suburb of Baltimore, not a chemical element, as somebody suggested earlier. We have $200 million under management to invest in a broad range of industries. We would like to put as much as 20 to 25 percent of that to work in information technology. We are focused in the mid-Atlantic and southeast and we have made a number of investments in this area, including currently being the largest shareholder in Digex. So, I look forward to having discussions with many of you and my colleague, Andy Jones from Grotech, is also here.

MS. SMITH: Not on the program, but at this table is the managing director of the new Women's Growth Capital Fund, Pat Abramson. I would like her to stand up so you'll see this new face in the crowd.

MS: SMITH: Suzanne Hooper from New Enterprise Associates.

MS. HOOPER: Hi. I'm from the NEA, as it's known. We are an early-stage venture capital firm based in Silicon Valley and Baltimore, and we just recently opened an office in Reston, Virginia that houses our technology team, which is myself, Peter Barris and Art Marks. We invest about 60 percent of our portfolios at the early stage. We have about a billion under management, but we are currently investing in a $310 million fund. Some of the local companies we have invested in are Netrix, UUNet and AMISYS Managed Care Systems, and most recently, two companies in Reston Virginia—Netstart and CTI Information Services.

We have about 300 companies that we've invested in over the last 20 years. This is our 20-year anniversary, so we're very proud. About a hundred of those have gone public over the years. Words of wisdom: I think one thing I haven't heard tonight, when you've actually gone to a venture capitalist and you've spent some time with him, make sure you ask about the process. You may think this person thinks you are the greatest thing since sliced bread. But in our firm, there has to be a majority vote. So you need to make sure you get in front of those other partners as well. Different firms have different processes, so make sure you ask about that process.

MS. SMITH: Jeff Davison, partner with Triad Investors Corporation in Baltimore.

MR. DAVISON: Hi. I'm Jeff Davison, and I have spent ten years in the venture capital business—all in the early-stage end of the business—and three years as the VP of sales for an advanced materials company in between two five-year stints. Triad is headquartered in Baltimore, and about two-thirds of our investments are pre-alpha companies. We have also started companies from scratch. One of the ones that we did that with was Dolly the Sheep, which you have seen on the Pizza Hut commercials recently.

We are focused on the Mid-Atlantic region. We spend 50 percent of our time in information technology, a third in health care, and the balance in others. We invest up to $750,000 per company, and typically co-invest with angels—sophisticated individual investors—as well as other early stage venture capital funds. I would, as far as advice, talk about something that no one else has talked about tonight, which is how to determine whether or not you and your company emotionally and psychologically want to get into the venture capital game, because this is one crazy business. You really need to look in the mirror and understand, for your lifestyle and your personal goals, whether you want to bring an outside shareholder, like a venture capitalist, into your business, because once you bring that money into your company, you have an obligation to those investors because those investors have an obligation to their limited partners.

There is nothing wrong with building a nice $5 million company that isn't venture driven. That can be a great lifestyle, and frankly I wish I owned a few of those companies, but I don't. So in any event, I think it's important to focus on whether or not you want to play the game.

MS. SMITH: Tony Carter, the Chairman of International Business Group's venture incubator.

MR. CARTER: The International Business Group is a venture incubator company. It does concentrate on the first three stages. I guess the nearest model would be Bill Gross' IdeaLab. We do, actually do, hands-on help in putting deals together, so we actually help hands-on with putting the team together. It's based here, but it's an international fund. We look forward to speaking and helping—mentoring—some of the new businesses go to the next stage of traditional venture capital.

MS. SMITH: I want to apologize to Phil Herget. I skipped over him briefly.

MR. HERGET: I'm with Columbia Capital. We have two sides to our shop. We are based in Alexandria, right down in Old Town. We have an investment banking operation that's focused on mergers and acquisition advisory services, and we have our direct investment side, where I spend most of my time. Our direct investment strategy is focused on investing in early-stage telecommunications and information technology companies. As you build your business, one word of advice is: stay focused. Remember that you have limited resources. There's limited capital and limited people to accomplish what you are trying to do.

Manage the expectations of your stakeholders and that includes your customers, your investors, your employees. Be conservative, be realistic. Be upfront and open about issues, especially with us investors. We really don't like surprises, and we like to be treated as if we are partners and members of the team. And as you go out to raise capital, make sure you have a very clear, concise story that encompasses the product, the market opportunity, and really gets across your competitive advantages.

MS. SMITH: We have both Roger Novak and Jack Biddle of Novak Biddle Venture Partners, the most recently closed fund in our area. Congratulations, guys.

MR. BIDDLE: I'm Jack Biddle of Novak Biddle Venture Partners. Just a quick background on the fund. It's a new partnership. My partner was the founder of Grotech in Baltimore. Grotech has become very large and he likes early stage, so we're actually interested in very early-stage deals from $100,000 to a couple of million. As for my background, I actually was hired for Intercap—the successor business to the one that Charlie started—to close the company down. The venture guys figured I could do it a couple of days for a few weeks, and ended up turning it around. But I had the experience of going out to raise venture money, and everyone turned me down. The venture people like to back winners, and winners do not put themselves in positions where their futures are a binary yes or no. I was able to get the business profitable by doing deals with suppliers and customers and then I could raise venture money. Most of the money in our fund is from entrepreneurs who built successful companies before there was a venture business.

The other advice I want to give, when you do go the venture route, every venture person, and every CEO, and every entrepreneur has three tall stacks on their desk. The stack on the left is a big pile of things that if you don't get to, some-thing bad happens to you. The stack in the middle is stuff that something good happens to you, and the stack on the right is stuff that's indeterminate. Nobody ever gets to the stack on the right. So you need to make it easy for the people to get you onto the middle stack where there's some upside, where you have a chance—which means go ahead and pester them to commit to look at your plan.

Other advice: business plans are not operating plans. It's like a resume. When you have a stack of 300 resumes, you are looking first for a reason to say no. So we just want a reason to say no, we'll throw it out, and then what's left, we'll think about. The reason we'll say no is because you don't understand the market, you don't show us the business model. We want to understand the fundamental drivers. Then you get your meeting and you move towards the deal. It's the operating plan that you are going to be held to, not the business plan.

I have one other piece of advice. What we used to call in the business—I started in the venture business and then went to the operating side and am coming back—Rosen's Revenge. The 40-page spreadsheets in the back of the business plan are real heavy to carry in your briefcase and venture guys read these things on airplanes. Rosen's Revenge. They put up the original money for Lotus, so keep it light.

MS. SMITH: And finally, we have Marc Benson, a partner with Mid-Atlantic Venture Funds, formerly known as NEPA, who has a very exciting announcement to make.

MR. BENSON: We manage a total of about $80 million. We have offices in Pennsylvania and just down the street in Tyson's Corner. Our latest fund, capitalized at around $50 million, was closed two months ago. We've made three investments or commitments to date out of that fund.

We have been in business for 12 years and we have made 45 investments, mostly in the Mid-Atlantic area, which is where we focus. Thirty-three of those 45 investments were pre-revenue at the time that we did the first capital infusion, so it's certainly an area that we are comfortable in. We are comfortable in the $500,000 to $2 million range. Some of our most recent investments in this area include leading the first round at Visual Networks and NetSolve. I'm also pleased to announce that we have made two commitments in the last few days, one to Women's Connection Online, represented here tonight by Susan DeFife and Gary LeFevre, so we will do Internet deals, for those who said we wouldn't. My advice to you is start the process early. It's time-consuming. You are in a far better position to raise money under terms and conditions that are acceptable to you if you're not desperate for capital. So start the process early, get the business plan out there and start talking to people.

Part 5: THE AUDIENCE WANTS TO KNOW

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