Part Eight: PRODUCTS VERSUS SERVICES
AUDIENCE MEMBER: Thank you. Rob Montgomery from Argosy OmniMedia, and formerly
from TeleTV. Two questions, actually. One, it's always been my perspective, that the
investors would favor or look more favorably upon product development activities rather
than services, simply because the leverage is higher. I would like for a couple of
investors to comment on the comparative characteristics of service companies or service
startups versus product startups. And the second question is: if you have a management
team that comes out of an existing company or has done some very impressive things and has
a track record in existing companies, does that carry more weight than when you've got a
bunch of guys trying to start something from ground zero, and it would be considered a
zero stage startup?
MR. RIECHERS: Just a comment briefly on the product versus services question.
Some of fellows here mentioned earlier that the key thing for most investors is the
business case. One thing that's happened in the last several years is that there is now,
compared to seven or eight years ago, a lot of very successful business case models in the
services business, the Cambridge Technology Partners, the Sapient Corporation, and that
side of the services business; a number of roll-up situations for professional services
and technology, and some of the more Internet-focused Web consulting businesses that have
become successful. There was a time, when Mario and John were running Legent, when having
service revenues inside a software business was a negative and now it's almost flipped to
be a positive. So I do think that model has changed somewhat and everything comes down to
whether the business case is compelling. I do think you are going to see a lot more
willingness from the venture capitalists to fund services deals if they look like other
successful service models that got venture capitalists successful investments in the past.
PANELIST: Yes, maybe I could add a point, too. I think it all depends on the
industry sector you are in. For example, I mentioned earlier that we do a lot of health
care investing and we've done a large number of service deals in the health care area. We
are doing a roll-up for physician practice management companies. We're doing one in the
dental area. So I think it all depends on the industry sector.
AUDIENCE MEMBER: I have a question regarding an evolving industry. If you were
to have a contract with a large multinational corporation for five years, based upon a
speculation that a certain market would evolve, and they are willing to lend support to an
organization to run and manage that infrastructure based upon that evolving market, what
would you expect to be the participation of a venture capitalist in that kind of
environment? Let's just say that the ratio of earnings to your profit were maybe four to
In other words, if you have an evolving market and you have to set up a certain type of
infrastructure in order to accommodate that market, and let's just say that we have a
five-year contract with a company that is willing to house this environment, what would a
venture capitalist be looking for beyond that? Certainly there is a market. There is a
built-in a sales force that the client has that is going to be pushing that market, so we
actually become part of their infrastructure, but we're providing a value-added on top of
their own surface.
MS. SMITH: We have to take that up one-on-one. I think it's too difficult to
repeat it for the audience here.
AUDIENCE MEMBER: My question has to do with the kinds of deals you all are
interested in investing in as a community, and the observation I want to make reflects
some comments that have been made earlier here about the type of deal seen on the west
coast, and the type of deal that comes in a software community. I assume most of us here
are software types. I worked out west with four guys who started a company called Netcode.
You may know that name. After seven months, they were bought by Netscape for $16 million.
They had a product which became JFC. It's now a part of the Java run time. That was not
the same kind of company structure I have heard talked about tonight. It wasn't a
long-term investment. It wasn't market-oriented. It was focused really on an exit
strategy, which was a buy-out by a big vendor. I would like to know if you are interested
in doing that kind of business.
MR. MORINO: I'll speak for myself: no. That doesn't mean other people won't be.
I don't want to grow to sell to somebody who wants to dominate the market. That doesn't
mean you don't sell out in the process. Don't get me wrong on that. But to go in with that
in mind is a very tough call, because so many things can happen to an exit strategy
between point A and point B, especially dealing with a Netscape or Microsoft, as an
example. It could be a very good business model, but I'm giving you a personal view. I
would be going after the person in whom I see a compelling desire to succeed in the long
haul, rather than to dominate a space. Again, there are definite niche plays that you
described that are very useful and can be funded well.
MR. MAY: I think the answer is, there are people who are interested in
everything. This is why you've really got to get into prequalifying the money. Never
assume there is an unified class of anything in the room out there, but always prequalify.
Ask, "Have you done a deal like that, are you interested in this kind of
relation-ship; could you help me execute this idea? My goal is to be out of this in 12
months, is that your kind of deal?" Don't waste people's time unless you've
prequalified your vision and exit strategy the same as the money. But there is money out
there to do that.
Part 9: WHICH CAME FIRST? THE MONEY OR THE TEAM?
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