Part Nine: WHICH CAME FIRST? THE MONEY OR THE TEAM?
AUDIENCE MEMBER: Hi. My name's Harry Richardson and I'm a Netpreneur. I mention
that because we're all involved, to some extent here, I think, with this concept of the
Internet. And to me, it's fertile ground for lots of great ideas. And yet the consistent
story I heard from all of the venture capitalists is, "it's just not about the idea,
it's about the management team."
And I want to raise here a question I raised at one of the Coffee and DoughNet
sessions. There seems to be a potential Catch-22 here. You have an idea, but you don't
have the team. You can't get the team because you don't have the financing. If you have
the financing, you could attract some good team members. Somebody in the other session
commented that on the west coast, venture capitalists tend to help idea people form their
team; that they seem to be more proactive. You've got a good idea and you're one of three
players needed. We'll help you find the other two, because we want to seed some good
people into your idea and into your organization. I would like to have the venture
capitalists here comment on how they feel about this dilemma of a great idea but no team;
or team but no idea.
MR. RIECHERS: Let me tell you a real-life case I'm dealing with right now. First
of all, I'm willing to invest in what I define as leverage-services companies, which is
different than billable body hours. It's some kind of leverage because I've seen it work.
I helped build Transaction Network Services, which is now a $60 million revenue company
and the biggest bill they've ever sent on a per-unit basis is about two cents. But it's
leveraged and it's repeatable and it's a great business. He has brought in a management
team. They're all employed at other companies. They bring someone in and can't tell their
bosses where they're meeting right now. He says here's the things I know. Here's the
things I don't know. Here's what I need help with. Myself and somebody else at FBR are
spending a couple hours once every week or two helping this guy assemble a business plan
and helping him find the rest of his team. But he showed up with three quarters of the
story and a great idea and some really good key people who are all being paid by other
people and they're all working their jobs very diligently. But they're ready to join this
guy if things come together. So that's the way a venture capital firmnot just us,
everybody herecan help, in helping somebody assemble an idea. He didn't show up with
a complete business plan. He said, "I've got half of it," but it was a really
good half. So there's people here who I have helped build businesses before, as have many
of these others, and we'll do that kind of thing, and I think that any of us would sign up
MR. HELLER: Let me address the issue of the team as well. When we first started
our company, if you had called a meeting like this, you could probably have held it in the
men's room of this hotel. That's how many people would have shown up, because in this
area, the so-called entrepreneurs were either pushing paper for the Federal government or
they were playing with other people's money in real estate. There just weren't any people
like us around.
But today, things have really changed. You've heard quite a few here. There are
cashed-out entrepreneurs here who are looking to do other things. I think the way one
builds a management team today is to mix the youth with the gray hair, and get some of the
people on your management team, on your board of directors, board of advisors, and so
forth, who will strengthen your management team. They're around.
AUDIENCE MEMBER: Is there anything inherent about the Internet that scares the
venture capital community or makes them excited?
MR. MORINO: I just want to go back to your previous question. I think there are
a lot of comparisons between east and west. You've got to realize that some of the same
players are playing in both, and I think we lose sight of that when we talk about Silicon
Valley and Greater Washington, D.C. Good investors in both markets, by the way. So some of
our perceptions are fallacious. To the issue of investors here helping people get people,
I can tell you it's going on every day.
You go down into NetStart, the work that Updata has done with Rob. It is going on.
We're working with Raul Fernandez at Proxicom; same case. Ken Tarpy just joined them as
CFOused to be with John's organization. These things are happening. They are
happening almost every day in this region right now. Do not underestimate how much is
already taking place right now, today. You've got to be right to have it. That's the
frustration I think we are all feelingat what point is the venture guy going to step
up to give you that level of support.
Going back to your question about the Internet. Personally, I think it scares a lot of
investors. It's speed, it's time. Sometimes you are going into an investment today in a
specific niche and by the time you make an investment, there's a technology rolling out 90
days later that's changing the space. That's why the individual becomes so key in this
space, that the individualor management team, I think that's the way you may be
using the phraseit could be a single person who has such a command of their space
that you know this person can grow that business, and inherent in that one individual is
somebody who has the ability to recruit the right people. But there is a lot of fear of
the unknown, and you don't hear it just from casual investors. It's big guys looking at
it, and they're concerned because of its speed, how it changes. And there are guys who are
taking some risk. But, you know, I'll go back and look at one of those risks we're taking,
and there were some pretty definitive elements about that company when they made the call.
So I think you've got to look at it more than once.
DR. RITTERBUSH: Let me follow up. I think it's a point that from our community
here in the investor's side should be stressed, and that's that I think many of us here at
the tables have started companies. In fact, we're doing two companies where we're
providing the help that was asked for down there. Basically we're helping put the team
together. We created an incubator of four different venture funds both here on the east
coast and on the west coast to do exactly that, over time.
But I think from the entrepreneur's point of view, you have to recognize that those
deals take a great deal of your time. And, from the investor's point of view, you are
under pressure to also put out the money you have under your management. And so you can
only do so many of those. In some cases it's luck, being in the right place at the right
time that you hit one of us, and we say, "that's what we're looking for, that's what
we want to do," but I can only do one or two of those. And I would bet that at this
table with eight of us here, you'd be lucky to see eight of these going on at one time.
You just can't do more than that.
What we're really looking for is the entrepreneur who can put the team together.
Remember, we're looking for entrepreneurs, and not for people that want their hands held.
Come to me with your team, and show me what you've got. Show me what you can do to get our
interest, because we've all been entrepreneurs. We know what it's like. We've put
ourselves on the line, we've taken risks ourselves. And we're looking for people who want
to do the same.
I have heard the contrast between east and west, but 20 percent of my deals are on the
west coast. And there are differences between Silicon Valley and here. There's no doubt
about it. One of those differences is the quality of the managerial class; and the people
that have done it before. And one of the things we're seeing in the last three years is
the development of a group of professional managers that are stepping out and beginning to
do it here, which is great. That's what we need to see. But there are differences, and I
think it's going to take time to work things through. But what we have here is the basis
of a group that's beginning to work together. This is the first time we've had a group
like this in a room of this size. And I would argue that six years ago we probably could
have put us all together in the bar out there. So it's a big difference.
AUDIENCE MEMBER: My name is Vernard Gray. I'm from Northeast Washington. I'm
probably the only person in this room from Northeast Washington. And I'm involved in a
local effort out there to create a community development initiative around arts and
culture and technology, and I'm shopping for partners. So anybody in the room who's
interested in talking about that effort, just let me know what you are interested in.
AUDIENCE MEMBER: Suppose an entrepreneur convinces a venture capitalist that his
company will be worth about $50 million in five years. So let's just take that as a given.
What kind of a percentage of his company should the entrepreneur expect to give up for a
million dollar investment today?
MR. MAY: You can ask any of these people down here, but remember they're looking
for three to five times their money in three to five years, at least. And so you can all
play the game together on how to do that negotiation, and these guys can help you talk
MR. REICHERS: It really depends on the amount of money you need, and the stage
at which that money goes in. In an early stage investment, and different people have
different parameters, but just a general rule, we like to see a company that can get to be
a large market cap and have a dominant position. Because if you're doing very early-stage
investing and your market five years out is $100 million, the margin for error is
relatively slim. And when we look at something, you tell us you're going to get 50 percent
of the market, we assume that you're probably going to get ten to twenty percent of the
market. So it then works on an ROI basis. If we put a dollar in today, we probably want in
five yearsI'm looking for 50 times my money on a seed-stage deal.
AUDIENCE MEMBER: What's that, like 200 percent of the company?
SPECIAL GUEST: When I talk about a seed stage deal, I'm talking about two people
with an idea. One that I did a while back, we put in $300,000, took 25 per-cent of the
company, we assumed we'd have to put in more. The principals never took another dollar
from the investor group. They basically did exactly what these people up here did. And the
other thing that is really important to take away is that profits are good. They really
are good. These people lost $200,000 year one, then disciplined themselves to make money
every single time in succeeding years. Rather than go back to the investor group, they
hocked their houses, they deferred their salary, and they were determined to do it. Today,
we've had valuations on the company of $200 million. Now that's a type of deal that is
near and dear to all of our hearts. The investor group is waiting. We've had offers to go
public, but we're waiting because it's still building value. And so we're going to exit in
probably seven years. That's just an example.
AUDIENCE MEMBER: This is the second meeting where there is a clear disconnect
between some speakers who think there's absolutely no money to be gotten from the venture
people, and venture people who think there's lots of money there. And if I approach this
intellectually, there is a little bit of a question of honesty here. This time the other
way around. I would like our venture friends to be very honest when they tell us
entrepreneurs why they're rejecting a plan, and that doesn't seem to be always the case.
The entrepreneurs can learn a lot, if we're not told "it's too early, it's too late,
this will never fly." Be honest, tell us why it doesn't work and then we can improve
I understand venture people are not in the business of revising business plans or
helping with developing business plans, but there's got to be a better way, a more honest
way than just not returning phone calls or saying it's too early. Personally, I've worked
very well with venture people. I actually found, and got the first loan to financing and
matrix done. I have many friends in the venture world, but I also know a lot of people
here would appreciate more honesty and directness when plans are rejected.
Since I spent most of my life doing what you're doing, which is trying to raise money,
the good news is, that over my years of financing a bunch of different companies, I never
got a no. I got a million unreturned phone calls, I got appointments canceled, and I got
all kinds of things, but I never got a no. I think that world is changing. I think people
are trying to be better about it. And it's something I've sworn to be better about. But I
figured out why those guys don't give no's. No's are really a pain in the neck. I've had
some very complex and emotionalon the other sideconversations with
entrepreneurs when I've tried to deliver a no. So you make it easy on me, and I'll give
you all the thoughts I have.
AUDIENCE MEMBER: I represent Washington, D.C. City Pages and the D.C. Music Web,
and we think we have a good product, and we think we have the traffic right now, but one
weak link is the marketing part of the team. Where would I go to find a person that would
have a good marketing strategy on how to promote our product.
MS. SMITH: I think you ought to come right up here and talk to these guys when
the program is over.
AUDIENCE MEMBER: My name is Michael Stroh, the co-founder of Pro-Ball Sports,
where every second counts and every child matters. I have a concern. I hear a lot of
investors here speak about investing in technology. I think technology is great, but I
think we need to step down a little lower and invest in our children.
Part 10: WRAP UP
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