Well, I’m a technology-trained innovator in the sense that I was a tenured academic at Cambridge University. I stepped out when we had this bright idea that we patented and believed could change the world. And, the time was right for me because essentially I was finding myself frustrated with the academic world and in need of a break, because one can write great papers about the latest research, and believe in the “truth and the light”, but actually not really manage to influence—other than very indirectly—the way the technology or the market develops because the people who build products seldom read academic papers. What drives me now is an opportunity to really change the world rather than actually how much money I’m going to make out of it. What keeps me going is essentially the thrill of being at the leading edge of the field. So, for me being an entrepreneur is just a natural extension of the academic process.

Unfortunately academic computing research is under threat in that it is under-funded, by comparison with the venture funding available in the Valley. There are smart people around in academia and smart people in the Valley. But I have witnessed an enormous number of faculty members who are at the leading edge of their fields leaving academia, going into startups, because they may be slightly frustrated with the academic world and because there is an opportunity to make a heck of a lot of money.

So, for me being in a startup is really a completion of the academic process. More than that, it gives the entrepreneur the flexibility to “do it their own way.” What I was finding in academia was that the bureaucracy—which governs how research funding gets spent, and how much you can pay research staff—is too restrictive. And that makes it incredibly difficult to retain good people if you are trying to do bleeding edge research in high tech, and not lose them to industry. I actually think we’ve got to the point where a lot of the bleeding edge research actually gets done in industry on venture time scales. And if you throw enough money at the R&D problem, which is exactly what the venture guys do, you can solve the immediate problems as fast or faster than academia. So, in terms of pure execution speed and getting it done, this is where it’s happening, at least in my field.

So, for you it was a way of… you don’t care where the funding comes from, for you it was a way of getting the money you needed to pursue your research and do the exciting things that you wanted to do.

Yeah, in some sense—but I don’t think startups can afford to do research at all. It’s not about doing research. It’s about translating a research idea into an actual change-the-world product. If you can make some money on the side, that’s great. In fact, success will come from that. But for me, it’s about actually taking the idea which I believe is right, and making it happen in the world, and it’s the only way to do it. In fact, we started the company in Britain, and moved it here because this is the right climate to actually build it.

What makes this the right climate?

Culture. And money. It’s possible in the Valley for people to change jobs and not have to move home. So, you have access to great technologists who have an enormous amount of experience, who can bring skills to the job very quickly. And, there’s this sort of gravitational pull which attracts excellence here. There is also a culture of actually working hard to get things done. I don’t think you would get people working week after week, ninety hours a week, to get a product out of the door in Cambridge. Because there isn’t that pressure, and here the pressure exists. People here know that, success is time to market. The third component that the Valley offers is business expertise in the form of the venture investors. The venture community is a heck of a lot more than just a banking facility for entrepreneurs; it’s about having smart money on your side as you build a business. And as an early stage startup you really need those skills. I had toyed with the idea of having an engineering group in England and our marketing out here, and I now know why that was a bad idea for a startup. It’s not a bad idea for a mature company. But essentially, you risk losing time by having to communicate concepts and building a coherent, unified business goal across the time difference, and although it would cost half as much in terms of the actual cost to run the business, the risk is too great for an early stage company. The key to success in the Valley is execution: getting a small group of people focused on one problem, working together as a team, and having the business experience close at hand. So, the venture guys are quite right in discouraging people from doing that.

Why couldn’t you do this in Cambridge? Because it’s more of an academic environment? Or, business is not as competitive?

Cambridge has actually got a thriving venture and startup community. There have been several software & hardware startups there which have been successful. One of those, for example, is ARM, which has been tremendously successful in the low-power microprocessor world. ARM developed an extremely high MIPS-per-watt microprocessor and has licensed the technology into just about every mobile handset, so they’ve done superbly. And there have been others such as ATML, Adaptive Broadband, and so on. Cambridge has for a long time been waiting for it’s billion-dollar startup, and ARM is the first “Valley-like” success story. But there are fundamental reasons why it hasn’t happened more often, and why it is much more difficult to develop successful companies there: the money isn’t smart enough, you’re far away from the US market, the work ethic and ambitions of people are different, and there aren’t enough skilled people.

But there’s a big venture capital community in England?

Growing. It’s a tiny fraction of what’s available here. So, for example, in Cambridge you might find access to funds totaling perhaps $500 million, whereas that’s probably what’s under management in one Valley VC partnership.

How would you describe the differences in business between the U.K. and the United States?

Well, just in the venture investment category, it’s hugely different. The U.K. venture industry is extraordinarily conservative compared with the U.S. venture industry. Here the VC’s know what the key ingredients are that will create a winning company: great entrepreneurs, teams, ideas and a large market opportunity. They know that the most important thing is, to get the idea, get the team, and go like hell. In Britain, you need to come up with a full, detailed business plan, put it to the VC’s and they might say, “Well, how do you know your projected revenue in five years time is correct?” In other words, you might spend three or four months honing your business plan, whilst the market opportunity is slipping by, fiddling while Rome burns, when it should be absolutely clear that your business plan will have changed within in a year.

As an entrepreneur, all I have is this big idea, and some great technology, which can attack the market space, so looking into the future is pointless. The best way to predict the future is to create it, so you might as well just get cracking and execute. The Valley VC’s understand this and they don’t get hung up on tiny details, whereas VC’s outside the Valley (even in the US) get too wound up about the details before you start. The Valley is superb at technical development because each little startup is essentially an outsourced R&D facility, independent in its own right, but not necessarily independent forever. What’s really allowed innovation to happen very rapidly here, is that companies build technologies for sale to other companies. So there are several exit strategies which allow the VC’s to recoup their investments and entrepreneurs to realize the value of their creativity. One of the most common exit strategies here, at least in the telecom space, is to sell the company to one of the big six telecoms equipment vendors.

And that leads me to another vital point regarding success in the Valley (in the comms space): The Valley has the big players. The Valley startups execute the ultimate in outsourced R&D for Cisco, Nortel and so on. Small groups of highly skilled, entrepreneurial people innovate, go off and do something—create a product or technology, and are rewarded. One of the big players acquires it to add to their product line. Many comms startups are really the advanced R&D teams for the big players. And so, a common exit strategy is simply sale of the company. And when you sell the company, the engineers don’t have to sell their houses and move, because Cisco is just down the road in San Jose. It’s not such a big deal. But you can’t do that in England. What’s the exit strategy there? The only thing you can do is build an independent company with real revenues. That’s a lot harder to do, and not always appropriate for the technology or the business that you have in mind.

And you have to move because there’s no business cluster the way the Valley is here? It’s so integrated? Is that what you mean?

Well, by now there is a sufficiently strong high tech industry based around Cambridge in biotech and computing so engineers can change jobs without having to move, but it’s definitely not the case that you’ll find a bunch of networking startups. There’ll be one or two companies, and they’re not startups like you find here.

There’s also one other crucial ingredient which exists in the Valley, and that is that the entire business process is geared to supporting startups. Here’s an example of what I mean by this: our lawyers here are not just lawyers, they are also “startup nurturers. ” I’ll get a call from one of the partners in our law firm who will say, “Hey, I’ve been thinking about what you guys are doing, and I know someone who may need your product and I’ll introduce you.” And they can also help with strategy, creative technology licensing deals and so on. All of the support services in the Valley are geared up to help technologists focus on technology and providing all of the financial, legal, property and other services that a young company needs. What’s more, they all want to bet on us as well, by taking part of their compensation in stock.

By contrast, in the U.K. we have great lawyers, but they’re only lawyers. If I ask them to review a business contract, they mark it up, and send it back, here our lawyers understand what drives our business, and they can tailor the service to the way our business is developing.

Everybody adds value beyond just whatever their role is?

That’s right. And it’s true in a startup, too. Everybody in the startup does more than one thing. I cut code and I write PowerPoint slides. We’ve guys who run engineering and cut code, and so on. So everybody does more than one thing.

You’ve been involved in some other startups before CPlane, right?

No. The research group that I was running with my co-founder has previously spun out another small company, based in Cambridge, which was a technology play. In fact, that company was sold to one of the big networking companies.

Then CPlane is your first?

CPlane is my first startup, yeah.

You took the technology from Cambridge. It was like a technology transfer from…

Yes. Actually, the ideas were hatched within the research that Ian Leslie (my co-founder) and I managed, and one particular chap, who’s actually stayed in the research world, had the big blinding flash of insight. The great thing about Cambridge is that it has a very positive attitude towards exploitation of intellectual property, namely that it doesn’t assert rights to ownership of intellectual property developed by its researchers. The University also helps with patent filing, and essentially nurturing the initial stages of a technology company that is being spun out by providing some business expertise. As far as CPlane is concerned, the net result is that the University has some stock, and several of the inventors have stock.

You patented it while you were at Cambridge, and so they all got stock. But you were the one who took it and said, “Okay, I’m going to run with this idea and build a company.”

Right.

What’s the first thing you do when you… you have this idea and you have a patent?

Yeah. Well, you don’t do what we did, I think is the answer.

What did you do, and what would you have done differently?

We had this brilliant idea. The brilliant idea was patented some time ago. What we should have done right then was head straight to Sand Hill Road, and say, “Here’s the brilliant idea. Look what it can do. Now help us build a company.” Instead, we thought, “Hey, this is a really cool idea! We’ll form a business, and we’ll run it in Cambridge”. We thought we’d raise money from a few large corporate investors, which was a recipe for disaster because the decision making process in large companies is so slow, and so we wasted a lot of time. Everything just dragged out for too long, until we finally found a (U.S.) commercial player who gave us a contract, and from there we were off.

They gave you a one-time infusion of cash. And did they get equity for that?

No, they didn’t – they bought the first release of the software. It was a great deal for us.

What did they get out of it, then?

They got licenses to use the product in trials, and so on.

It was kind of like an advance against…

Yeah. We continue to work with them and, you know, as a result of that, hopefully they will be the first to deploy the technology. In a nutshell the lesson learned was this: “Don’t believe that you can do it yourself if you’re the technologist and you have no business skills.” You can learn business. Anybody can. It’s not that tricky. But learning on the job is too time-consuming. You cannot do it fast enough. You need to get smart money and business help behind you fast.

The ingredients of a successful startup are essentially the technological innovation and the founding team, the innovators who will translate the vision into product. And to this you need to add business leaders who can help to make the company succeed in the market, and smart money that can facilitate the process. What the venture guys do is grease the wheels. The founding team is important because they will attract the key employees who will engineer the solution. And the more successful they’ve been in the past, the better the grade of employees you will attract, faster, and the more easily you will translate the vision into a tangible product.

The business people are tremendously important, particularly here, because there’s a whole way that the Valley works, which is different to the rest of the world. A successful valley CEO understands how to build a business fast: where to find employees, how to build a product, how to sell into the different market spaces, and so on. When we finally went off to look for venture funding, we knew we had a big vision, we were trying to change the world. And we agreed on day one that if we couldn’t find smart money to back us then we were not going to build the company—it would be impossible on our own. It is still the case right now that there are lots of people out there who’ve made billions selling tomatoes, and you can probably convince them to throw you money for a very, very shaky business proposition, but there’s no point in taking money from people who sell tomatoes because they won’t understand the market space you’re trying to address.

If you have the choice of getting money from a VC who says, “Okay, here’s the money and we don’t really get involved in your company,” or smart money—someone who would get more involved—you would choose smart money?
We said no to a VC who offered us (a large amount) of money without doing proper due diligence on us. I actually turned them down. And they offered us more money than we have now, from our current investors. Why? Because they would be no use in a crunch, no use in helping to build the business—the only value they would add would be the money, and we needed much more. So, it’s vitally important that you work in partnership with the VC guys. One often hears of the tension between entrepreneurs and venture people, and I think that to some extent it really exists, but there’s a fine balance. On the entrepreneurial side, you’re trying to build a team. You’ve got limited money. The incentives have got to work for everybody. You know, it’s got to be worth people’s while to work 90 hours a week, because they’re making the bet that if this one comes off they can buy a house, or afford to live in the Valley. But, if the venture guys get the numbers wrong, then essentially that’s just as much a recipe for failure. So you need to get venture people who are willing to work in partnership with a company and my experience is largely that that is the case. They are very supportive. But we did meet with one VC, who wanted to put money in, but all they would give us was three days a month of their time. Essentially that’s a board meeting, and a few phone calls here and there, and they’ll go through their Rolodex and look up contacts for you. What we’ve ended up with is less money, but a VC partner who works with us almost full time. And the value of that is enormous – it’s fundamentally important when you’re at this early stage.

Did you get money while you were over in England, or not until you came here?

We didn’t need money until early this year—we had a large contract from a carrier and ran on that for a whole year. So we took Valley venture money.

So, you came here and… How much of a team did you bring over from England?

Just me, though there were a couple of guys who knew me who were here already, who have joined us.

So, what was it like putting together a team? How did you do that?

It’s hard. It’s about who you know, and who thinks you’re worth working with. And this is why the founding team is crucial because recruitment is based on your personal contacts, friendships, and so on. We knew we had a limited amount of money, we had to turn a research laboratory project into a prototype product, and so off we went and did that. But moving beyond that, where you actually build a big team is hard. One of the key ingredients when it comes to recruitment is the color of the money that you have behind the company. The people in the Valley are smart enough to look at the success rates of the different venture firms. So, they will know that, say, once Sequoia has invested, the probability of failure is say 15 percent and so on. Our investors have a greater than 90% success rate with their early stage companies. That’s reassuring! There is definitely a hierarchy of VC firms. That’s always existed, but people are now smartening up to the fact that if they join a company, which is funded by the top tier, the probability of failure is much lower. And so, getting money from those guys is a strong way of attracting good employees.

When you put your team together, did you just look for the technical skills, or did you look at how you were going to work together? How important were those considerations?

Oh, no. We absolutely focus on how people work as a team. Technical skills are very important, but there are a lot of competent engineers around. The key ingredient in a startup is speed, and teams work, and individuals don’t. So, you don’t want a collection of brilliant individuals. You need people who will work and pull weight as a team. That’s fundamentally important.

How did you assess that when you were forming your team?

Well here’s an example: when we are looking to hire a new employee, everybody in the company gets to meet them and form an opinion, irrespective of whether or not that new employee is going to end up as their boss. It’s a great test of somebody at, say, a VP level as to whether or not they’ll fit into this team, if they’re prepared to put up with questions from a junior engineer. I don’t think that we can continue like this as the company grows, but as a small team the operative word is team, and we have to pull together.

Okay, so you came over here and you have this one deal with the company, which gave you some cash to operate on. When did you decide to go for venture money, and how did you go about doing that?

We decided in the summer actually of last year. What we got wrong on our first try was that we didn’t realize how much we didn’t know. So we went down Sand Hill Road with a lot of bravado and said, “Hey, this is the coolest idea you guys have ever seen, you better throw us some money.” And, I’m sure that when we left the room, they were all convinced it was a great idea, but that we would need a lot of help to build a successful business.

I’m curious, when you first hit Sand Hill Road, how did you get in to see the VC’s?

We had help again, from this enormously supportive world around us, which is used to dealing with startups. A partner at our attorneys said, “Hey, you know, these are the VC guys you need to speak to,” and helped to set up the meetings by making the first calls.

So, you came over here. Was the first thing you did, then, to get attorneys?

Yes.

That was the first thing? How did you find them?

Personal reference, actually. One of the guys who started the company with us had contacts.

And then they gave you the introductions to the VC’s?

They gave us some, yeah. We had others from personal contacts. Again, we’ve been relatively lucky in terms of being able to trade on the research and personal contacts that I’ve had. Coming from Cambridge, I think, carries a bit of cachet with it, which has helped.

A lot of it is working your network.

Yeah. It’s all in working your network.

So, what is it like to walk in off the street and go into a VC and pitch your idea? I mean, it sounds like you had quite a bit of bravado, but other than that, what was it like?

For me, it’s not a big deal at all. I’ve been giving lectures to students for years, and there’s probably nothing more intimidating than lecturing Data Communications 101. And, after all, there is a fine line between who’s the seller and who’s the buyer during a VC pitch. The VC’s want smart ideas, and at the moment there is a lot of money around, and they want smart people to fund. They want smart ideas to throw the money at. And so, if you have a really good idea, there’s no reason to be scared of them at all or to undervalue what you bring to the table.

It really should be an equal relationship, because it’s really a… should be a win/win.

Should be a partnership, yeah.

Did you have a fully developed business plan when you went in to talk to them?

Yeah, we wrote one. In fact, we had some help from a consultancy that I had done some work with before. And, so we did revenue projections and so on, but in truth we were really sucking numbers out of thin air because in a new market you just cannot know what the numbers will look like. We did some big spreadsheets, and really threw a lot of effort at it, but in reality I bet that all that the VC guys cared about was: Is it a smart idea? Is it fundamentally different? Do these people look like they are smart enough? Is there is a viable business here? And, I think the VC’s are a hell of a lot smarter than entrepreneurs give them credit for. Because they can make the broad-brush decisions very quickly, and they make most of their decisions based on that, rather than the revenue projections. Revenue will take care of itself, if you have the right team, the right idea, and the market potential exists. And that’s the VC’s job. They’re there to identify the opportunities and to find companies to go into those spaces, and that’s what a portfolio is all about for them.

Where would you say you are in the development of your company?

Early stage. We’re still hiring in the business development skills we need. We have a CEO search out, you know, we are a young technology team with a really big technology. And, we’re in a big world with very big competitive players. Key to our success will be finding the right business people, building the right technical team, and going like hell.

How do you feel about the idea of starting this, and bringing in a CEO? Does it bother you that you won’t be leading the company?

No, not at all! No, no. That would be stupid. I’ve heard from VC people that they often find that entrepreneurs don’t want to step aside. And I think that’s just plain stupidity on the part of the entrepreneur. I know perfectly well what my skills are. I can manage people fine, I can lead technical people, but I don’t know the business side of building a company. And to pretend that I do would be stupid. I also know that learning on the job would be too slow.. You know, this is about success, not about control.

Tell me more what it’s like working with a VC, now that you have a VC that works with you. I’m also kind of interested, after you gave this presentation, what was it like cementing this relationship? How did you cut the deal?

The way it works is, typically you talk to one of the associates first. They’re the first filter, and they throw away lots of business plans. If they think you’re good, then they’ll introduce you to a partner. And then the partner introduces you to the partnership. So, you do several pitches. If the partners want to proceed then the lead partner will start doing due diligence. So, it’s very important to have a strong reference list, people who they can phone, who will say, “Yeah, these are great guys, they’re going to build a great company, and so on.”

Finally, if you jump all the hurdles and they wish to invest, then what comes your way is a term sheet, which describes the valuation of the company, the amount of stock to be sold, the amount to be invested. Those terms are negotiated between the company and the VC’s, and eventually get turned into legal documents by the lawyers.

Was it a big negotiation for you? I mean, was it a lot of going back and forth, or was it more like, “Okay, this is reasonable,” so nobody tried to lowball each other?

No. I think in the end, no, it was pretty quick. I mean, we set up a competing bid, just because it’s a useful negotiating tactic – it’s always a good thing for entrepreneurs to get competing bids in the venture space, because it keeps the VC’s honest.

Did the VC’s that you worked with, or potentially were going to get the funding with, did they invest very much time and energy beforehand?

In terms of due diligence on us?

Well, in terms of… did they give you any help?

No, no. Not beforehand. They just don’t have the time. These guys are getting hundreds of business plans a month. They’re not interested in you until they’ve given you money, and even then it’s hard to get time, depending on the VC firm you’re with.

I mean, after you went through the first associate, did they say, “Well, here. Go back to the drawing board and tweak this, here’s what you need to think about?” Or, was it more like, “Okay, that’s sound good. Now go talk to the partner?”

No. There are venture firms that will do that, and Onset (our investor) is one of them. Onset looks for a great idea, and a good founding team, and then they will work with you to build a business. A lot of venture firms just want to give you the money, and then expect you to go off and build the business. Onset describes their difference from the normal pack in the following way: A lot of VC firms sprinkle money around fairly liberally, and then when something starts to grow—when one of these shoots they’re watering starts to grow—they throw all their resources onto that so that it succeeds, and leave the others to die. Onset doesn’t do that. Each partner makes one or two investments a year, and then they work with you as a member of your team to make your company succeed. So, they invest an enormous amount of their personal time and success in you. It’s a personal failure if one of their companies fails, so they work hard to make you succeed. Here’s an example: Susan [Mason, of Onset] flies coach on redeye flights with us when we go on customer visits. And we fly coach class, cheap flights, late at night.

What’s your take on the future? Where do you think the future of entrepreneurism is going?

Oh, it’s healthy. It’s perfectly healthy. I think it’s in great shape. I think the venture climate that the Valley has is extraordinary. It’s a unique combination of ingredients. But a couple of things worry me about the Valley and its ability to continue to deliver. For example the cost of doing business here is going through the roof—high cost of engineers and overhead. It all still works as long as there is a lot of money on the VC side to continue to pay high engineers’ salaries, high rents, and so on. But if it dries up slightly, if the stock market does badly, we’re going to see some hard times. There is a shortage of good engineering people, and that’s making it harder to build a successful company here. And there is a tremendous shortage of really top class CEOs and businesspeople. So, it has the potential to be a victim of it’s own success. That said, whilst the incentives are there, it will continue to attract top people. So, overall the system is very healthy at the moment. I think some of the rewards have been disproportionate, and, I think there is too much money about in the venture world. You know, a lot of the people who are in the venture business have never been through a downturn. For them it’s been easy, just throw some money at e anything, right? Take some random business concept and it’ll IPO in six months and we’ll all be billionaires. It’s been too easy. A lot of them are not value-based business investors, and they deserve to get squared away, but I have no doubt it’ll happen, in time.

How about for you? What’s the future?

Well, we’ve got a whole lot of work to do here. CPlane is just taking off, and that’s the fun of it. The process that’s gone on here is just great fun. If for some reason this hits the wall, we’ll just do another one.

So, you’re just learning how to be an entrepreneur. If this doesn’t work, you’ll go on to the next one?

That’s right. I don’t think you can just do one, and then another, and then another. It’s pretty time-consuming, and draining. So, you probably do one and then you take a break, and then you think of the next idea, and do another. But it’s fun.

Well, my high tech career began right after I left college teaching. I was a college teacher in English and journalism, and I came to the West Coast on a year’s leave of absence after two years as a teacher at a graduate school. And… took a job as a technical writer with a technology company, and that really began my technology career. That company happened to be Beckman Instruments, and one of the persons that I was working with there went to a company, which was a computer startup… And this is way back in the fifties, late fifties. And I joined them and they were acquired by Burroughs Corporation, and so my whole subsequent career was with large high tech companies; Burroughs, and then I was with Univac, and then I was with RCA. And I was brought out here in ‘69 by Fairchild, which was the first Silicon company in the Valley.

And in all those jobs I was responsible for “communications,” which is public relations, marketing services, advertising, as well as—as the companies prepared to go public, or were public—investor relations. So, in my… at Fairchild, for the whole decade of the Seventies, I spent a great deal of my time on the investor relations side. And in 1979, we were acquired by Shlumberger, and—as I tell people, we became Shlumchild—so I was hired by a funky little company called Apple. And one of the guys at Apple, Mark Markula, had been at Fairchild years before and knew me from that.

So, I was hired by Apple to be the VP of Communications there… main focus being on advertising and PR, but also investor relations because the company was thinking of going public. Now, I went there in early 1980, and we didn’t go public until the following December. But I was on a road show with Steve Jobs, and so forth, when we went public—and also when we did a secondary offering the following May—in addition to handling all of the advertising, PR, marketing services and so forth. One of the guys that I dealt with—both at Fairchild and at Apple—on the investment side, was Hans Severiens.

Hans called me one day and said he was thinking of starting an investment group. And I’d always dealt with the Street, and people on the street—Ben Rosen, for example, when he was an analyst, and a whole gaggle—and so I knew a lot of the players. In addition, I’d now been with companies, large and small, which had a lot to do with Wall Street and financing, so I said I’d be interested. So, he and I and two others—Jack Carsten and Bob Lorenzini—had lunch and together formed the Band of Angels.

Why become an angel investor?

Because it’s a means of, hopefully, hitting a home run, or getting on base anyway, with startups in the technology space. Where if you have a group, such as we do, of seasoned and experienced and sagacious individuals, you can identify opportunity much more quickly than you do on your own. So the deals that we get to look at as angels have already gone through a filter, are sponsored by an angel by definition that we don’t look at any that are not, and in general are quite high quality. And so, the reason to do the investing is one, for the potential of return, and the second thing is the potential of being, you know, part of an enabling energy to continue the innovative tradition of Silicon Valley.

There’s a little bit, particularly for some of the folks who are so wealthy they don’t have to count anything, you know, they just are there for, are into investing as kind of a hobby. But they also have wonderful contacts and they also have resources. In my case, I’m not at the point where I don’t care about the return. I am at the point where I’m not uncomfortable, so therefore I have wherewithal and the resources. But I’m also very interested in finding the next big thing, and maybe being a part of it financially. Maybe… this is a public relations agency which I head—we only do high tech companies—so maybe representing them and helping to bring them… to give them visibility, and then take them public, as we often do. But all of those are motives for being in an organization like the Band of Angels, which is of course an alternative to venture capital. It’s another channel, and that channel—as I said in my talk [at VentureFest]—is both much smaller in the amount of money that’s raised (about one-fifth), it’s more patient, it tends to be more mentoring and more caring, and also it tends to be done with less research than the VCs might do. It’s a totally different model and a different avenue, but at the same time, because we’ve got such high quality people as members, we do have good calibration on companies coming to us. Because we’re a sponsor—everyone is sponsored—we do have some pre-filtration and some judgment applied early on.

And thirdly, the people who are in the Band of Angels are able to ask all the right questions from the presenter who’s presenting, and can cut through quickly to the core value proposition. And then we decide on that basis whether to invest. So, it’s less than just doing it on one’s own, where you’re talking to your uncle or your brother or your cousin who’s got a great idea and he wants you to invest. When you do it within this context and you have ability to get out of a reality distortion field, you have an ability to see deals that you might not otherwise, and then you make a decision. It’s all done individually, and we don’t make an investment as a group. We all do it one by one. And then take it from there.

You said angels don’t do as much research. Is it faster money, or easier money to raise?

It’s easier money to raise, and it’s also more patient money, as I said. But when I say don’t do as much research, I simply mean that a venture capital firm will really do some extensive due diligence, and that’s not to say angels don’t do due diligence, because they do—some more than others. But, you know, these are deals that come to us from out of the blue. Let’s just take one, which was actually low tech. It’s Pollo Rey, which is a fast food chicken restaurant chain, and the guy who came to us—Rey, by name—was very persuasive, and told us about a model that no one knew anything about. I mean, none of us have had any experience with fast food chains, not… unlike the companies before us in semiconductors, software, the internet, even healthcare, medical devices, somebody always has some experience. Nobody had any experience there. But, we were intrigued by it. And, even though I didn’t invest, a lot of people did. We happened to have Ben Rosen there that night. He invested significantly in it, and in fact his son actually went to work there. But bottom line on all this is that the kind of due diligence we do, it seems to me, is a little shallower than the traditional venture firm does.

We are—you used the word “venture catalyst” a little while ago—we are certainly a catalytic force as well as an enabler and a funding force. We’re also a mentoring force, because frequently we get involved with the companies. And we’re also, in the case of the Band of Angels, a social club. It’s an experiential thing. It isn’t hard-nosed, VC-oriented, cold-eyed, sharp-penciled, you know, let me take the biggest bite I can out of this. That kind of thing. It’s a quite different proposition, model, and climate.

So, is it an old boys network?

Largely. Yeah.

Are there women in the organization?

Yeah, but there are very few. There are very few. And that’s one of my personal crusades, is to reduce the testosterone level and raise the estrogen level. And so far, I’ve not been very successful, because it’s hard to find females who have reached this stage of life, where they have resources and want to do this kind of thing. But there are some. So, 120 angels—members of the group, or the Band—I would say that no more than ten are women.

So, how does the Band of Angels compare to some of the other angel organizations, like The Angels Forum or BayAngels?

Well, BayAngels has just started, and I was a speaker there. In our case, the deal… we have… I’ll have to be very honest with you. I don’t know how all the others are doing it. I know a little bit about BayAngels.com because I was a speaker there, at their first dinner, and they had a lot of people there, and so forth.

In the case of the Band of Angels, there are several characteristics. One is selectivity. It really is a club for which membership is by invitation only. And so therefore, you have to be invited to join, and there are people waiting, wanting to get in, and in some cases they’re not getting in for various reasons. We want people who are of substance, people who have the wherewithal to make significant investments, people who are experienced and therefore can give us insight into the deals, people who are congenial (because it is a social environment). And finally, people who are going to come and attend the meetings and so forth and not just put their name on a list. In other words, we want players, not watchers. So, given that, we’ve been quite discriminating in the people that we’ve invited to join. I think I mentioned at that speech that time [at VentureFest]—many speeches—that we started out with twelve. Like the Apostles, I usually say. And, you know we met in an upper room, which is at Chantilly [restaurant in Palo Alto]. Now, of course, we’re at Los Altos Country Club.

But, there’ve been people who wanted to join, and we’ve done a fair job of getting ourselves known through publicity. Part of that is me because I’m in the business. Guy Kawasaki asked me that, and he said, “How come you’ve done it,” and I said, “You’ve got to remember, I’m in the business.” But it really hasn’t been a conscious effort. We’ve not actually set out to do it. It’s just that I’m, by nature, dealing with the press all time.

So, we’ve had a wonderful degree of momentum built up, and interest generated, and yet we’ve kept this fairly spontaneous, fairly unstructured, fairly undemanding on our people. We hired a Ph.D., Ian Sovieski to help review the deals. We’ve also had the full-time attention of Hans Severiens, who does the newsletter and really is there. He’s the major… he’s the archangel. And, finally, we’ve had some deals that have come through and people get interested, etc., so there’s been no dearth of applicants, there’s been no dearth of interest, and there’s been no dearth of continuing excitment, and I like the model as it is. Now, there are some who would like to change it. There are those who feel that we are—now that we’re in our fifth year—that we’ve gone beyond the old boys network, or the Marching Chowder Society, the social club, and that we should get organized. And “get organized” means do things like provide training for those who are going to present to the Band of Angels, so that when they come to us, they get their proposition down clearly and are able to go a good job. Because it varies all over the lot in terms of how well they present themselves. Get organized in terms of setting up a fund. That actually is being done by Hans Severiens. I’m not part of it, but he is actually doing it. Get organized meaning that we become very stringent in how we accept new deals. We charge them now 15 percent or ten percent of the deal, or the money that’s raised—we didn’t use to do that. We’re doing different things that are more characteristic of a bureaucratic organization than I’m personally that comfortable with. I like the spontaneity, the looseness of it, and so forth. And that so far has worked wonderfully. But there are people who feel that we now should take another step and become more a formal and a more structured organization, and we’ll see how that goes.

You say you take fifteen percent. You mean you take a percentage that’s raised… the club takes a percentage of the money that’s raised for the entrepreneurs?

Right. And that didn’t use to be the case. That was just done within the last six months. But it makes sense. And, you know, we’ve got to do something to help defray the costs of it, so that is being done. And, but we’ve raised the rates—I mean the rates, it’s not any money of any consequence—but originally, you know, we asked them to pay $500 a year.

For the members?

Yeah.

You have a number of members who are also venture capitalists, right? Why would someone who is already a venture capitalist, running a venture capital fund, maybe doing seed stage financing, want to also be an angel.
Well, it’s an interesting question. Quite candidly, the venture capitalists that we’ve had are not coming to the meetings lately, I’ve noticed. And so, one can make a case that perhaps some of them originally came and were playing defense, and wanted to see, you know, if this was a rival here.

Doing a little competitive research
A competitor. And others just like the vibe. At the same time, you can make a case that those VCs who do come, come partly for the joy. I mean, it’s kind of a fun deal. I mean, knowing that we have hopefully good deals to look at—and that would be playing defense because they want to see what they’re not getting. But secondly is that, you know, we have speakers. I give a little speech each time about what’s happening in the Valley. We’ve had Bill Bradley and we’ve had Elizabeth Dole, Ben Rosen, and… people of some consequence. And then it’s just a fun environment, I mean, fun seeing all these folks and pressing the flesh, so that people show up and seem to like it.

Are they pretty active in making investments, too?

The VCs? You know what? I honestly don’t know. I just never tracked it.

I wondered if maybe it was that they wanted to make a smaller investment on something that might be too risky for their fund, but they still wanted to play?

I’m sure that that’s part of it, too. It’s an interesting question. I mean, frankly, we have been more open to VCs than other angel groups. And when we had our first two or three cocktail parties in January, which we do, we invited like forty VCs to come. Sort of like observers. I remember Pope John Paul XXIII—Pope John XXIII–when he was convening Vatican II, the Vatican Council, and there were a lot of Protestant clergy as observers, and he made comments saying, you know, “To all of our people, the Blessed People, and to our beloved of the observers.” And so, I thought of the VCs joining us as our beloved of the observers. I’m not sure that they would go along with the beloved part, but they have come for varying reasons of their own, one of which might well be that they want to get in on some action that wouldn’t be candidates for their own firm.

That kind of reminds me, also at VentureFest, there was a little discussion about—a little banter between vulture capitalists versus angels—and someone made the comment, “Well, Lucifer was also an angel.”

I said that. I think I did. Maybe it wasn’t in that context, but I’ve said it before. Yeah, he was the fallen angel. I mean… maybe I didn’t say Lucifer; I said that there are fallen angels.

So, what are the relationships like in general, not just with the Band of Angels, between angel investors and VCs?

I’d say there’s a little tension between the two. Less so on the West Coast than in places like Boston, my hometown. In Boston, they’re in open competition for a deal. Part of that is because there’s a ton of money around, as there is here, but there are far fewer deals. So, with more money chasing fewer deals, you tend to have rivalries. And here, on the other hand, we’ve got lots of money, but we have lots of deals. Probably five times as many deals as they would see in Boston. That being the case, there’s not the necessity for a pitched battle over who’s going to get to fund which deal. Because in our case, as I think I mentioned the other day, there is always follow on VC investing, which is something to the tune of five to one. They will end up investing five times—the VCs—what we invest as angels. So that the angels… I’ve often said that the angels fly ahead of the VCs, but they also fly much lower. And then they land quicker. And that is a relationship that then is symbiotic, and thus far has been pretty productive. There’s not been any notable acrimony or hostility or rancor between the two groups. Albeit, I have to say—because I haven’t thought about it until I did this interview—that I’ve seen fewer VCs in our ranks this year and last year than I had in the early years. Because in the early years we had quite a number, almost all of whom are not there anymore. They may have decided that they didn’t need to waste their time with this, and they had other things to do.

I wonder, too, if maybe it’s changing because companies are going public much faster, sometimes there are fewer rounds, and maybe more VCs are getting involved earlier?

Could be. It probably is. Now, you know, and also… you know, I mean, I’m a VC too. I mean, I’m a limited partner of El Dorado Ventures, but that’s recent. Owen Brown [?] is a limited partner of El Dorado Ventures; he’s an angel. So, I want to make sure that I’m being accurate here. It could well be that more members are involved with venture funding than I know about. They’re not thought of as venture capitalists—like nobody is thinking of me as a venture capitalist, and yet I am, I mean I’m limited partner of a VC firm. It’s not what I do, and not that I’m spending much time on it, but I am. But I’m not a general partner.

Hans Severiens refers to us as members of the unwashed, and he said… because we do, you know, such anemic investing compared to the VCs. Our deals are usually not much more than a million dollars per deal. It used to be like a quarter of a million dollars per deal, and it’s just progressively gotten higher. And as he said when we funded Sendmail to the tune of four million—and then there was an additional two million in angel money that came in after that, so it was really a total of six—he said, “I guess we’ve joined the ranks of the washed. But, once again, the amount of investment is lower, usually it’s an earlier round, in general it’s something on which we probably haven’t done that much due diligence, albeit we’re not just throwing darts, and that’s not to be misunderstood. And also, as I said in one speech that I think I did at the BayAngels, I said, “You know, I try to tell people we’re not like Chihuahua investors. The Chihuahua has no idea how big he is, but he barks at everything. So we try not to do Chihuahua investing!

So, coming back to the fallen angel piece a little bit. What is the downside for an entrepreneur to get angel investing? You hear about “vulture” capitalists. What’s the dark underbelly of angel investors?

The dark underbelly would only be that… it could be the angel is not giving you enough money that it’s undercapitalized. It could be that the angel is not really going to be that helpful in pushing the company. Because the VC, usually when they invest they go on the board, and it could be that the people who are investing are not going to add much to your board if they’re an angel. And third, it could be that the angels don’t represent serious money, that there’s an element of dilettantism, because after all, these guys aren’t doing it for a living. And so one could make a case that it’s more frivolous than a serious company might be comfortable with. Now, that’s not always the case by a long shot, but just looking at the worst case, if there is a dark side, it could well be that.

Is there a risk with angel money, for a company that may get into trouble, that maybe the angels wouldn’t have as deep pockets as a VC, who might invest in early stages, but is more likely to belly up to the table if they run into trouble?

Definitely. Absolutely. And, as a matter of fact, it’s quite interesting that we have had companies come back—some of which I’m invested in—come back for additional funding from the Angels. And there’s a sentiment within the angels that that’s not kosher, that we shouldn’t be looking at doing… you know, we’re not VC firms, you know they’re taking the place of other companies we should be funding, or looking at. And they’re really kind of pissed off about it. And in general, these are companies, which have not really been very successful, and have not performed well, and therefore need more money but they aren’t able to raise the valuation, so they come back maybe six months or later for another round at the same valuation. It’s not exactly what we want. And so there’s some resentment on the part of some members of the angels that this has been done, and I think we may try to stamp that out. Whereas, of course, on the VC side, they’ll be monitoring that thing, and they’ll put up money if they see the company really needs it and is worth saving. As opposed to letting it go down the tube. So the risk would be just what you say, that the angels do not provide enough of a safety net for companies that might get in trouble, or enough of a parachute.

What’s part of the value-added that angel investors, or Band of Angels in particular, offers, besides money?

Expertise. Knowledge of the marketplace, and so forth. In general, the sponsor is someone who absolutely has credentials and, you know, experience. As Oscar Wilde said, “Experience is the name we give to all of our failures.” So, they’ve been there, these people. And, you know, what is it? The old joke about… good judgment comes from experience and you get experience from bad judgment. So, their experience. Their relationships, their contacts, and they’re frequently very, very good because they have their own networks.

And finally, in the case of an angel, it’s usually a kind of a desire to, you know, hit one more… hurrah. One last hurrah. And if you’re on the final glide path like, for example, me… as I say, well, you know, you say, “Shit. I don’t want to get out of the game. This is too much fun.” And then you add to that the social sauce of being in an environment where you got a lot of your peers and people and mucking around with other gray heads and so forth—very good guys, of consequence, and nice to be around, and fun—and for that reason it’s worth coming to. People do it, and they press the flesh, and they hear about what the hell’s going on, and you have a window, and it’s a variety of people, it’s a large group, as opposed to a VC firm, and everybody’s got a new insight into something. So it’s quite a synergistic experience. And then, you add to that the fact that maybe, just maybe, one of our deals will really be a homerun. And you’re able to get in early, and these people want to come to you as an angel rather than the VCs, for all the reasons you suggested—the VCs, with their… you know, VC not only stands for “vulture,” it stands for “vampire.” And…

Say more about that. I mean, do VCs just have a bad rap? Or, has that changed?

The stereotype, because VCs have been notably vampirish in the past. And certainly have been less that altruistic, or anything approaching that, in their relationships with startups. And they’re very stern and… because that’s their business. They should be. Now that I’m one of them, as a limited partner, I say, “Right on!” But, the rap may be less deserved today than it used to be. It’s a little bit like, you know, the angel in a play, that’s what… I mean, the financier for a play, or anything like that. They’re pretty hard-nosed, and they have sharp pencils too. And the main thing is that some venture people are, you know, very intolerant of people missing their mark, and so forth. So, they become kind of onerous in the relationship. That is not true with angels.

Do you think angels are more altruistic, or more idealistic, in the kinds of investments they do?

They’re not necessarily altruistic or idealist, but they’re less onerous. They’re less high maintenance. They’re less hard to please, and that’s all to the good. So people are much more comfortable with angels. I mean, you’d rather be with angels than vultures, right? They both fly, but you’d rather be a flock of angels than a flock of vultures. And so, but at the same time, is it a bad rap today? Could be, because certainly, we’ve had a lot of experience with venture capital now and, I think there’s a lot of collective knowledge and lore, which is used to advantage by VCs and helping companies, helping fund them. After all, it’s been the availability of venture money that has fertilized this risk culture that we call Silicon Valley. And without that, we wouldn’t have this. And it didn’t used to… there didn’t use to be anything like this. You got to remember… in fact, I don’t know if I mentioned it the other night, but I have recently—because I just learned it—the first angel in Silicon Valley was the President of Stanford. Did I mention that?

Right

.
Yeah. David Star Jordan.

Hey, when Fairchild in 1957, when eight guys left… and wanted to start up their own companies, they couldn’t find anybody to finance them. There were no angels who were going to finance eight guys. They knew how to hire one guy, but not eight. And it just happened that Gene Kleiner had an uncle in New York, and the uncle said, “Well, I’m going to send this young guy, Arthur Rock, out to meet with you guys.” And he did, liked the proposition, and shopped it to 35 companies. Westinghouse, Sylvania, RCA, you know, you name it. And none of them would take it, till he came on this eccentric inventor of the aerial camera named Sherman Fairchild. And Sherman Fairchild sent Richard Hodgson, his CEO, or COO, out to meet with these guys. And Richard Hodgson says, “Alright. I’ll put up some money.”

So he was an angel?

And he was basically an angel. That’s exactly what he was. He was a corporate angel. Precisely. And, from that came Fairchild. Out of which came Intel, National, Advanced Micro Devices, etc. Out of which came Apple, and so on. So, that concatenation all goes back to the availability of money and the prescience of a person like Arthur Rock, and recognizing the opportunity of Dick Hogson, which is a big part of the secret of angels or VCs. It’s not just having the wherewithal, not just having the deals come to you because you want to have exposure, you want have a look, but it’s knowing what it is.

How does Ben Rosen… when Ben started his venture capital firm, I remember he told me—he’s a long-time friend of mine—and I remember him telling me he was going to do it, L. J. Sevin, they were going to start a venture capital firm. And I said, “That’s nice.” What did I know about it? But, you know, it was Ben that was able to sit down at Marie Calendar’s Pie House. And here’s Rod Canion, and the guys sketch on a napkin the idea for a portable computer. And Ben had not only the cojones, and not only the pockets, but also the recognition factor, that he would spot an opportunity and say, “This is the one.” And he did the same with Lotus, and he did the same with any number of others.

And all that is something you can’t teach… well maybe you can teach it, but you certainly… it doesn’t happen overnight. It’s a gift that many—some—people have and that’s what makes great VCs. I mean, why was it that Arthur Rock recognized in these eight guys, “this planar process you’re talking about to make transistors. And things are going to go with transistors. And these eight guys are very impressive. You got a guy named Gordon Moore in these eight guys; that’s a pretty impressive guy. And there’re a few others. You know what? This looks like a winning combo. And I don’t give a shit that nobody’s backing combos. We’re going to do it.” And of course Fairchild, which was not in the business at all—they were in the business of aerial cameras and things like that, that was their business (Sherman Fairchild was an eccentric bachelor who used to date Gloria Swanson and he invented the first practical, between the shutter lens, which led to aerial camera photography)—and they said, “Okay, we’ll put up the money, and we have a right to exercise our options in all of your stock in two years.” And that was in ‘57 and in 1959, they did that. And that became Fairchild Semiconductor.

So, how do you decide what to invest in?

In my case it’s far less scientific than it probably should be. And I don’t do enough due diligence, no question about it. I go largely on intuition and reference. And I listen to some guys who know what they’re talking about, and I’ve been known to listen to others who don’t know what they’re talking about. But, I’m certainly, I think able to smell a good deal and feel that it’s got a good shot.

What does a good deal smell like?

A good deal smells like… it smells like money, but not old money—new money. It smells like sweat, meaning that the kids are going to work their butts off because they’ve got fire in the belly. It smells like, you know, baking bread, which as somebody said, marketing has to be like, it has to have the smell of baking bread. It feels warm and it feels like something the customer’s going to want. And it feels also, it smells like value, that you’re going to get something delivered to you that’s going to be useful. It also smells new, and different, and maybe totally unique. So it’s a new smell. It’s a smell I can’t recognize, I can’t put my finger on, because it does have a differentiated proposition, value proposition.

All of those things together means that I’ll take a look at a deal and think that Sendmail sounds like a good opportunity. Because email is going to go—you know, it’s the corporate nervous system, as Bill Gates says—and these guys have a good way of doing it. And besides, it’s got Andy Beckleshine, and Ben Rosen, and so on. So I bring those two together and say, “Okay, if I can get in on this one, I’ll do this one.” Then there’s some others that I simply roll the dice and think that it’s good, and I’ve made some big mistakes. I mean, you know, big mistakes in those companies that are not going anywhere. I’m just taking a write-off on a couple of them this tax period. And there I was sold a bill of goods. It was a little early on, but the guy that came in—I won’t tell you his name—but he was a real great salesman and so on and so forth, and I thought, “Gee, this sounds pretty good.” And I was just getting my feet wet. Now I’m becoming significantly more critical and, hopefully, more insightful, but even now I’ll make mistakes. There’s no question about it. And, I just don’t want to be out of the hunt. As luck would have it, I have the wherewithal to be in the hunt, but I don’t have the wherewithal to throw it away like some guys. I mean, you know, if Paul Allen can… he can invest a few billion and he’ll never miss it. Well, that isn’t true with me. And at the same time, I am a risk-taker. I’m acculturated to that as having been out here, and so I am willing to take a flyer and roll the dice. I just don’t want to take too many… a wild flyer. And I’m not going to be a sucker for everybody and his uncle. And I get called all the time, because my name has been associated with the Band more than it should be, because I’m not the guy that’s really the guy. The guy is Hans Severiens and a few others. I mean, this is an avocation for me.

It might almost be easier to answer that question in retrospect. How many investments have you made over the years, would you say?

With the Angels? Oh, ten, maybe twelve. Twelve. Probably twelve. And of those, two have gone south. The others are alive. A couple have cashed out, and they’ve done okay… You know, I have to tell you, it could be more than that. I don’t want to just… not that it matters, especially for this. I mean it could be, but I’m thinking it could actually be fifteen or sixteen, because now I’m just mentally adding them up in my head. But let’s say it’s somewhere between ten and fifteen.

It sounds like you got a couple losers and a couple big winners, so… which is pretty consistent with what most venture capital firms probably do.

Right. Yeah. And then I’ve got a lot that are in—I won’t say in limbo, or in purgatory—but they haven’t happened yet.

How involved do you get in one of your investments? I mean, after. You mentioned earlier that angels offer mentoring and so forth.

Yeah. I’ve been involved with a couple of them. But quite frankly, not quite as much as some others have. So, I wouldn’t be a good example of a particularly committed mentor. There are some who spend quite a bit of time, you know. And that part is good, and I think we want more of that rather than less of that. But, because of my status in life working here, I just haven’t had time to do much.

So, what I started to ask you before was… this track record of yours. It might be easier in retrospect to look back and say, what do you think were some of the differences between the companies that succeeded and didn’t do so well?

Well, first of all, anything with .com seems to be, you know, hitting on all eight cylinders. I think that in some cases the management was not particularly good. And in some cases we… the market wasn’t particularly good and the plan wasn’t thought through. I’m beginning to be able to see through the slick presentation from the non-slick. In some cases the company simply had not truly thought through and evolved its plan sufficiently to be able to use it to practice. In addition to that, they didn’t really have the management team to make it happen. You know, we try to—I think I touched on the other day—we look at several aspects. One is, we definitely look at management. Two, we definitely look at the technology. Three, we definitely look at the market. Four, we definitely look at barriers to entry, IP [intellectual property]. And so on. There are some other criteria as well, but those are four right there. And not everyone of those was met by all of those that I went into. But the biggest, biggest weakness is in the management, the executional ability. As has been said by others, John Doerr, he said, “You know, there are four kinds of risk. There’s market risk, financial risk, technical risk, and personnel risk, or management risk.” And generally, they’re very comfortable with the financial risk and usually you can be pretty comfortable with the technical risk, because we’ve identified what that is. The market risk and the management risk are the two big things.

We haven’t as angels had an opportunity to look at some of the big home runs that have happened. I have in here [at Miller/Shandwick], I’ve had an opportunity to invest, and didn’t, because I’ve had them as clients, and I didn’t invest in the Globe.com, and I was offered an opportunity, and a few other things. We actually launched them. But anyway, the fact of the matter is that the homeruns that are the Netscapes, and the Yahoos, and the Excites, and Lycos, and so forth—we haven’t really had any of those.

Why do you think that is?

That’s a good question. That’s a very good question. I think those companies have not, maybe, come to angels. They’ve gone through a traditional VC, or early private placement, or what have you. But it is a very good question to ask, because we can’t point to any one of those breakthrough companies. And, it may be revealing about the whole angel process. It may be that the deal flow, which we congratulate ourselves on being so rich and robust, is all of that but that it’s not the highest alloy and that for varied reasons the high alloy folks look elsewhere.

If I’m an entrepreneur and I want to come to the Band of Angels, where do I need to be with my business, and how would I go about doing that?

You need to have a business plan. You certainly need to have a management team. You need to have a financial plan. And you certainly have to have a product that’s out of beta—out of alpha, and then maybe it can be in beta.

So, it’s not real early seed stage money. I should have…

It’s not. It’s not, we’re not looking at companies—and you’ve got to be local, too—we’re not looking at companies as a rule, albeit we have on occasion, companies that are, you know, just a gleam in somebody’s eye. I mean, we’re beyond that. And, we’re definitely looking at who the management is. We’re also looking at who the sponsorship is, you know, who’s championing it within the Angels. So, I guess you have to say, it’s beyond the stage where you go to your relatives and your parents and so forth to get some funding to get this thing… it’s not in the garage.

What do you think of garage.com, speaking of garages? It’s a different model.

I’ve not been persuaded that that’s a good model.

Why do you say that?

I don’t see how you get enough real insight into the company, and so forth, using that model and going on the web. Now they may be tremendously successful, and I know that they’ve got very good people. I know Guy very well—Guy Kawasaki. I know Rich Karlgaard very well, and I know Bill Reichert, who’s the President, and Bill was a client of ours. So, they’ve certainly got the management thing. Question is if the model is going to work, and I haven’t had enough exposure to it to know yet. Initially, when it came out, I just had a lot of questions about whether it would work. It might be great. I know Guy, I was on the platform with him the other day, and I know Rich, I had lunch with Rich, and they think, shit, it’s going to go through the roof, and they could be right. But, it doesn’t seem like a model that is going to produce a lot of real winners. I just don’t see it. What do you think of it?

I don’t really know.

You have reservations too?

Well, I’ve seen Guy present and explain the model.

Guy is a great presenter.

I think it’s a very interesting concept, though… So, if I’m an entrepreneur and I want to make a presentation—I know there’s more mechanics to it—but, so now I’m here, I’ve got a sponsor and I’m in front of the Band of Angels. What is my twenty minutes going to be like? Is it going to be like—speaking of angels—is it going to be like walking through hell?

No. You get fifteen minutes to present uninterrupted. It doesn’t mean that we have a prohibition on people raising their hands and asking a question, but in general we’re giving you the courtesy of that. Then after the presentation, then the questions come in. And, it’s a friendly group. So you’re not going to be held, you know, feet to the fire and you’re not going to be roasted. At the same time, you’ve got to try to find a way to spark interest. That’s a big challenge. There’s always a follow on luncheon, and that’s where the real deals are done. That’s where those who are truly interested— where you’ve hooked them, but they’re not in the boat—they come to that luncheon, and sometimes it’s as few as zero, or maybe it’s as many as fifteen who will come interested in the company, and maybe even more. And they then are given a more complete business plan and what have you.

The goal of the first meeting really is to sell people on coming to the luncheon? I’m not really asking for money yet.

Right. Correct.

And, am I going to get grilled more at the luncheon?

Yep.

So, what’s your advice for an entrepreneur in terms of preparing for that?

For the Band of Angels? Or overall?

Both. For the Band of Angels, for that presentation.

For the Band of Angels, the preparation is—the thing I counsel—is to make sure that you manage to articulate very well your value proposition, that you’ve got it down cool and crisp. And also, realistic and related to things they can understand, and that it’s not a lot of hokey—jazzed up—but that it’s a real business proposition that you can reduce to a concise… you’ve heard me call it the, I think, the SOCCO.

The SOCCO?

I call it your SOCCO, which is your Single Overwhelming Commercial and Communications Objective. Just an acronym that I got somewhere. And essentially, be sure that you’re able to express that well. Also, be sure that you are able to excite people. You know, I say, “You can’t bore anybody to invest in you.” So, there you have it. Third, be sure that you’ve answered all the questions about the management, the market, the competition, barriers to entry, financially, and exit strategy. And get that down. So you have to have an executive summary, clearly. And fourth, make sure that you’ve done due diligence on all the competitors out there and how they’ve done, because there will be people who know. Because you’re talking to 70 or 80 guys at this dinner, at least one or two of whom will know this area—in addition to your sponsor. And they’re going to ask questions. And they’re friendly folk, but they’re… they’re not fools. So, be sure that you’ve thought through carefully, that you’ve both rehearsed your presentation and give it crisply, and can answer questions without shilly-shallying. Lastly, and we see this all the time, you will want to avoid, you know, slide presentations in which you’ve got nine thousand words on a slide. Or, you have crappy overheads and so forth. People generally that do that are just telling you—the Angels—that they don’t care enough, and so forth. We’re not looking for slick presentations, but we are looking for professional. If you’re going to use PowerPoint—you know, death by PowerPoint, as we say here—but just make sure that you’ve got the messages clear, and few words on a slide, and so forth. And only use the slides as support for what you say. I think, how you explain it yourself, without the visuals, how you come across—looking people in the eye, how you demonstrate your own ability and experience—is what’s ultimately going to sell people.

Looking at the future, what happens to angel money if the market goes south? I mean, right now everybody’s flush because the Dow is, the NASDAQ is, doing gangbusters.

If the market goes south and money dries up, angel money will dry up with it. But angel money, remember, is money, it’s a collection of individuals who have money of their own, so it might be less affected. You could say that they may be, because they are individuals who have their own wealth, and maybe they’re not tied to the fluctuations of the market.

So, you think angels will weather a market downturn maybe even better than venture capital firms?

Yeah. I do, because… for the reason I just gave you.

How do you think the market is changing then, for capital? We’re seeing a lot more angel organizations, we’re seeing a lot more VCs. Do you think that’s going to continue, or how do you think that will change?

Well, the thing about capital markets is that the accent is on capital, more and more. And that the capital is out there, and so… you’re seeing convergence, M&A, and all the rest, as a way of life today. So that, I think, capital markets have changes in terms of the availability of money and the willingness to take risks, and the continual hunt with large magnifying glasses by all of these people for things that they can acquire. It’s far more PacMan than it used to be. It’s also far more knowledgeable, and it’s certainly been catalyzed and ignited by the Internet and the trends toward the wireless world, and the trends toward the integration of voice, data, and audio and all the rest. And so, the technologies that have exploded, the markets that have exploded, have all meant that opportunities for capital have exploded. And, as luck would have it, we are in a position of capital abundance, and so we are not a capital-free zone at all, and that’s very important. We’re… neither are we a capital-averse or risk-averse culture, and so the capital markets—which have seen the incredible generation of wealth for people like Bill Gates and others—are perhaps more eager than they used to be. They’re not frothy, but they are watering… their mouths water. And I think therefore, there’s a tendency for capital markets to be much more aggressive in doing deals as opposed to being cautious. Now, one big downturn or two will change that, but right now, I just think there’s a lot of chutzpah, and eagerness and aggressiveness and fear. If it’s anything, it’s not fear of failure; it’s fear of missing the next opportunity.

You have offices all over the world. What do you think about some of the differences in culture? I mean, there are a lot of people that come to Silicon Valley, that want to replicate it in other parts of the world. Why do you think this can happen here in a place like Silicon Valley, but not in, say, London?

You know, we have been the home of cowboy capitalism for a long time. I think that there is just a natural spirit of, you know, innovation and experimentation and gambling—and we call it entrepreneurship. And the entrepreneurial gland is a far more active one in the West than it is elsewhere. Now, it is being replicated elsewhere and certainly we’re seeing the clones of Silicon Valley all over the world. I had breakfast the other morning with a group, with the Deputy Prime Minister of Singapore, and they’re very eager to replicate Silicon Valley to the extent possible. He said, “I don’t think we can have an exact clone of Silicon Valley.” But they definitely want to use this model, and the government has just put up a billion dollars to invest in entrepreneurial companies. And it’s targeted, it’s also the national investment policy, which we don’t have in this country, but therefore they’ve decided that they want to do it. So, the successes of Silicon Valley—the mythology attached to Bill Gates and Steve Jobs and others, and the pace of technology, the fact that change is occurring at such a rate, and finally, the great unknown, the emergence of the Internet and what is it all really going to mean—I think will lead other countries, other cultures, other environments, to be far more aggressive and willing to gamble than they have historically. I think there’s going to be less fear of the tulip bubble, or the South Sea bubble, and more recognition of the fact that, hey, this is the opportunity train and you damn well better get on, because it’s going to pass us by. Okay?

Well, I can think of a lot of other questions that I’d like to ask you, but was there anything that I didn’t ask you that you would have liked me to ask you?

No. You didn’t ask me anything about my age. That’s good. You didn’t ask me anything about my wealth. That’s good. You didn’t ask me anything about public relations, because then we would have been here another five hours.

Susan Mason, interviewed by Robert Ellis at the offices of CPlane, April 14, 1999.

Is being a VC all about money?

They have a lot of money. Money is not the driving factor for us. It’s about, it’s kind of what we call the psychic income, which is building great companies. And that’s an interesting perspective you might want to explore with the various venture capitalists, because I think that gives you a real insight into their personalities, who they really are underneath the covers.

It’s interesting, I forget his name now, but someone at VentureFest introduced himself that way. He said, “My purpose for being is to build great companies.” And the audience just kind of laughed, but I thought, “That’s pretty good, the guy really knows what his purpose is, the money is a means, or maybe a way of keeping score, but really it’s about being involved in creating something.”

That’s the most fun, which is why we like it, why we like being around entrepreneurs, because they’re the creative essence.

How did you get into this, and become a VC?

Probably more from an entrepreneurial background. I started my first company when I was in engineering school in college, and that actually ended up being a construction company. I was going to get my engineering degree and doing the sales and marketing for this company, and my partner was managing the day to day aspects of it. And so that gave me an initial flare, kind of a taste for entrepreneurship, and when I finished my degree I sold the company and went into NCR and ran some of their field operations for a particular product line. First started in engineering and then went into field sales, and then left NCR and went to Fairchild and managed their western region in sales and customer support, and then went to Fujitsu and ran their worldwide operations. So I had engineering, marketing, sales, and general management.

And then when I left Fujitsu, I started my own company again and had that for seven years. And what we were doing was business development for corporate clients. We would look out a three-year horizon and identify emerging market opportunities, and then work with these large corporate clients who couldn’t develop an internal team to effectively go after that opportunity, but we could do it on the outside. We were incubating companies essentially on the outside, and then spinning them back in to these large corporations. We did this for IBM and HP and Motorola, and what I figured out is that corporate money tends to have a lot of strings attached to it, and a lot of hidden agendas. And where I needed to go was where the purity was, and in venture capital there’s only one objective, and that’s to make money and to build great companies. And in corporate investing it tends to have a lot of strategic overtones, which isn’t always in the best interests of the company. So the movement into venture capital was kind of the next step for me. I actually came into venture capital through a program by the Kauffman Foundation. The Kauffman Foundation is one of the largest non-profits in America that is focused on entrepreneurship in America. That’s their entire mission.

One of the programs they have is, they choose between eight and ten people each year that they want to place in venture funds that they have an interest in as the next generation partners. It’s a fast track program to get people up to speed on the industry, and to help them take the leadership to the next phase. That’s how I came to Onset Ventures, and started that.

So, when you had your consulting business, you did the business research, you would come up with the business concept, and then put together an outside team?

We would go and recruit the team, the company would invest in the team, we would run it, and then eventually—what we had was a “ghost stock” concept—the company would buy it back then. So the employees got some benefit, but they also had the stability of a corporate investor. It was an interesting mixed model.

So it wasn’t really intrapreneuring, you weren’t taking people from inside the company.

Right. Sometimes we did, sometimes we’d take one or two people out, but usually we didn’t because we didn’t have a fit on the skill set. An entrepreneurial company is very different than a large corporate company, and the mindset is very different, so oftentimes there wasn’t that fit.

I’m curious, if you were doing that, and you were coming up with the business concepts, why not just become an entrepreneur and just grow one of those companies?

It comes back to that psychic income aspect, which is: I like the initial phase of companies, but once they get to about 60 to 80 employees it becomes process, it becomes a large company, and that’s not where I get my psychic income. I get that in the early stage, ground zero to that phase, and that’s where Onset Ventures focuses it’s efforts primarily. We do seed stage investing, and we take companies from ground zero, just a concept, a couple guys walk through the door with an idea, and we take that to being companies which are ready for investment. Then we start to peel off on our time, where we’re still involved but not nearly as actively, and so we get to experience that phase constantly, and that’s where the benny is for me.

You like being the idea person, kind of developing it.

Developing it initially, yeah.

How do you think your background prepared you for doing this? I mean, you come out of an engineering, sales and marketing background… seems like this is pretty different from that.

Yeah, it’s interesting. Venture capital, I believe strongly, after—I’ve been in it almost three years now—is very much an apprentice business. It is not something you can study and learn from the outside. It can only be experiential, because you learn so much every time you build a company. And so, that’s why I believe it takes a long time to really understand this business. I mean, the further I go along, the more I realize how little I know, and if you do talk to the guys who started venture capital, they’ll tell you the same thing, that they really don’t have it all. That’s part of the beauty of the business, is that you’re constantly learning new things. But part of the preparation is an operational background, because the phase that I go in, which is high operation intensity, is exactly a match with my background, because you start it from ground zero and it’s all operational. Once it becomes financial manipulation and engineering, that’s not my area. And that’s when we bring in other fund partners to work on that area, because that’s what they love to do and that’s their passion. So, it’s different skill sets for different phases of the company.

What personal qualities do you think it takes to be successful as a VC?

I think you have to have a lot of internal centeredness because a startup… You know, I have this wonderful graph where this graph goes—it’s the graph of like a day or a week in a startup—and first you go, started the product. Got “Hello, World” from the product. Customer didn’t like the product. Started on the second product and it seemed to work. Got some validation on the business model. Second customer didn’t like it. You know, and it’s like this, it’s all day long like this, and if you can’t stay centered with that kind of chaos, the emotional and the mental chaos, it’s very hard to be able to do things. That’s a key element, and that’s actually a key element we look for in our entrepreneurs as well, because it’s very hard on other people. It’s very intense.

How do you do that, how do you stay centered?

I think that’s part of the personal characteristic, is that that’s an element that you almost have to have within you, that you are—what is it my entrepreneurs say? “She’s unflappable.” So, you know when they’re coming in, and they’re like, “Oh, my god, we lost this,” you go, “Well, this is what we’re going to do about it guys, and this is what the impact is,” you know? When they come in all excited, you go, “That’s great guys, but let’s make sure we’re on this, and…” You always have to be the balancing influence in the company, and make sure that everything is moving forward. That’s a key element, I found.

I think the other element is… I mean, there’s the raw smarts, obviously, and the skills and capabilities, the tactical skills, but I think one other element is that you have to really enjoy this, you have to enjoy chaos, because it is very chaotic. Especially early stage investing. Mid- to later-stage investing, there’s a validated business model, there’s a team in there, it’s really much more of an execution play. Early stage investing is very much about trying to figure the puzzle out, so you have to be suited for that because not everyone really likes that. A lot of people like “let’s just execute and go.” And here it’s much more thinking, and reflection, and testing, and more reflection, and revision of the model, and testing again. And so, it’s a very different skill set.

It’s a real specialty to work in the early stage. But Onset Ventures, you will start with an entrepreneur in the early stage, but you will continue working with them. Do you have different people at your firm who specialize in different stages?

No, the way that we do it is, we’re usually the first investor in, but we stay with the company throughout it’s life, and even post-IPO oftentimes. But our activity level with the company changes depending on the needs of the company. So, if it needs business model development, operational things, we can really work, help in that way. If it needs financial engineering, what we try and do is, at each subsequent financing round, we look very carefully at who are the people we need to be in this company from an investor standpoint to help this company go to the next stage. We would look at the fund, and we would look at the specific partner within the fund, who has the skill set that will match what the company’s next need is, kind of next phase of requirements. So, if we’re moving into an execution phase, where maybe financial engineering is important, then we would go find that partner within a particular fund, and try to get them to invest and participate in bringing that skill set. It’s not so much in our fund, but we try and really use the best of what’s available in the Valley.

You try to put together the right combination of VC’s in the later stages?

That’s right.

Not just for money, but looking for the right expertise?

Skill set. It’s what we call smart money. You want to have, absolutely want to have smart money. Because, you know, when you’re going into a mezzanine round just before an IPO, then you can take what we call dumb money, which is, you know, they’re not going to do any work and they’re just a tagalong. But they’re not going to get the returns that the smart money gets. So, that’s kind of early stage, and kind of Series A, Series B round on companies, you want to really have smart money in there.

When you say, “Series A and Series B,” what do you mean by that?

That’s… Series A would be your first financing.

First round.

And Series B would be your next financing. The way it goes is, Series A is seed stage. Series B would be kind of after seed, you’ve got the model validated, now you’re going to start to put together the rest of the team, get initial design wins. Then you go to Series C, which is, now we’re in execution mode. And then you made have a D, although in this, in today’s market, there’s no D, usually.

People are skipping right to IPO.

Right.

Walk me through a day in the life of a VC, or Susan Mason.

Okay. Depends on what’s on the front burner, obviously, because everyday is different. At Onset, we only do one to two deals per partner, per year. And that’s very different in the venture industry because, I mean, there are venture funds out there doing 26 deals a quarter. We just don’t do that, because we’re early stage, we’re very hands on in helping the entrepreneur build the company. So, we don’t play the portfolio game. When we have an active seeds deal, seed stage deal, which is what this is [CPlane], I’ll spend 50 to 60 percent of my time at the company, in customer accounts with them, in partner accounts with them, actively recruiting for them. I mean, really helping to build the company. And then, that lasts usually about six months, until you can get a good CEO in there, and you can start to transition that effort. And then, what’ll happen is, we’ll start to become much more of a traditional, where we’re not, it’s not 60 percent of the time, it’s maybe 20 percent of the time in a week. That’s kind of the phases that we go through. When it’s active, it’s here, it’s operational, it’s very traditional. In a coaching role, though, because we don’t run companies. What we do is we coach the team on how to build their company, and we’ll use our contacts, we’ll use our contacts for recruiting, for customers, for partners, all that stuff. But we won’t run the company, necessarily.

You don’t become an interim marketing person, or…

Well, when you’re going into customer accounts and partnerships, you know, it’s always a little awkward to say, “Oh, this is my venture capitalist here.” So, usually what we’ll do is take an acting role, like here at CPlane, I’m acting VP of Business Development. But it’s usually not CEO, unless we need one. But fortunately at CPlane we have a great entrepreneur who can play that role, and I can coach him. And then, once we get a regular CEO in here, then he will become a CTO.

When you say you coach the entrepreneur, you’re doing more than just business coaching, you’re really developing the person for the role of CEO? This is someone who hasn’t been a CEO before.

Right. If they want. Or, we don’t have to. It depends on the skill set. Each person is unique. If they have the capability… What we don’t want to do is slow the company down to accommodate someone’s ego because they want to be CEO and they’re not ready for it. That’s not of interest to the best of the company, and that is our primary interest is, what’s best for the company. We will not play that game. We’re pretty, we’re very up front with our entrepreneurs before we make the investment. We’ll say, “You know, likelihood is you’re not going to be the CEO of this company. Is that okay?” We’re going to kick off a search right away. And if we get a lot of push back, and we don’t think they’re ready to be a CEO, then that tells us that they’re not willing to do what it takes to build a great company, because you have to be able to push aside your own ego.

That’s a real interesting point because we were talking about this last night with John Nesheim, and someone said that something like only one percent of founders are still CEO when a company goes IPO. What percentage of the founders of your portfolio companies makes it to IPO?

I would guess that’s probably pretty consistent.

So what happens to them then?

Oh, CTO’s. In fact, over 92% of our companies, even after IPO, have their founders in them. We’re not interested in letting them go, absolutely not. In fact, we want to shackle them to the company because they are the essence of the company. They are what we would call the chaotic essence inside the company, and when you start to bring in the management team, who tend to be more managers than entrepreneurs, the worst thing you can do as a company is take all that entrepreneurial zeal out of the company. And it’s the founder that does, is that chaotic element that’s, you know, coming up with new ideas. And, yeah, they’re a pain in the neck, but absolutely, you need that in a company, because otherwise you become very staid and the company doesn’t really live to it’s potential.

Do they play a… part of the discussion last night was whether or not you then get kind of shuffled aside and you’re given a title and so forth, or do you really play an active role?

We like to see our founders play active roles in the development of the company. Now, they… have to behave, right? I mean, they can’t be totally out of control inside of the company, but we want them. And, usually they’re on the board. We really, we form very close relationships with our founders because we’re working with them usually for the first six to nine months, one-on-one, and so we’re very attached to them. That’s one of the reasons we’re so intense about recruiting. When we’re in an early stage company, we will often interview every single person that comes into that company. The reason is because we have to make sure that the foundation of the company, kind of everything is clicking, because the worse thing you can do is get it off center because you’ve got the wrong people in there, and they’re not clicking together as a team. So, it’s really important that the right mix… and the CEO and the founder is critical.

How do you do that? I mean, other than selecting people for the right expertise, how do you decide whether or not they’re the right team?

You mean before we find them, or after we’ve already put them together?

Well, let’s say you’ve found them, and now you’re helping to put together the team, and you’re interviewing people, or helping the person to recruit and so forth. How do you do that?

Okay. It’s a matchmaker job. It is. It is very much. What you’re doing is looking for all the right signals to make sure that there’s a good mix. That’s part of why we focus on the relationship with the founding team, to make sure that it’s a very open relationship, and that we can really converse with each other. And, you know, I can hear what I need to hear back when we hit it right. And then hopefully from the CEO’s side you’ll get that as well.

One of the things we were talking about last night, too, was culture and how important it is to be conscious of the culture you’re creating early on because the founder… I think John Nesheim said, “Character is culture,” so the founder is very important to that. How do you fit in with that, or look at that when you put together a team?

Well, we don’t try and heavily influence it, is one thing, because we’re not going to be there every day when the company starts going up. So, again it’s that coaching role. We look for key indicators. We train them that, you know, cash is king in a startup, so you have to be careful with cash, but your people are the most valuable asset you have. You have to be flexible, and treat them well, and make sure that it’s a team atmosphere, because you’re going to go through a lot of hard times. So, those kinds of discussions we oftentimes have. Not in a formal sense, but much more in a casual kind of, you know, “Have you thought about this, and what do you think about that, and maybe you ought to think about this?” It’s a lot of psychology in our job. A great deal.

Interesting. You said when you were working with one of your portfolio companies about 60 percent of your time will be devoted to that in the early stages. How do you divide up the rest of your time?

I have other companies that have already gone through that phase, so you’re still continuing to interview people, or recruit people. You’re a board member and so you need to be an active board member, we’re strong believers in that. We’ll spend a lot of time doing that. And then we’re always looking at new deals, so we are constantly getting referrals, and so I spend a lot of time networking. Outreach programs like the SVASE, and other things, because what we believe in Onset is that if you educate entrepreneurs then it will ultimately be a better company in the long run, and so we try to do a lot of outreach workshops. We’re training them, think about a business model this way, this is what you need to understand, this is the way deals are put together, so that they’re educated when they come to us, because then we don’t have to spend the time doing that.

You talked a little bit about what you like about being an venture capitalist, the psychic income and all of that. What’s the downside to being a VC?

You spend a lot of hours. Usually, I probably get breakfast three or four times a week, and that’s about 7:00 A.M., and you’re going… Last night, I think, I left here at eight and these guys were still going strong. So, it’s a lot of hours. And then weekends. I’ve got this weekend two workshops I’m doing, and next weekend another one. You spend a lot of time at your job. Not really your job, it becomes your life. And so you have to have a compatible mate. Luckily, my husband is a startup entrepreneur so he does that as well. We have many debates.

Neither one of you have time, so…

Yeah. You know, you arrange your life. You balance it as best you can, and then it depends on what turns you on. So, you end up doing a lot of that.

Let’s say I wanted to be an entrepreneur. What qualifications would I need?

Well, I’ll tell you what we like to see in the entrepreneurs we fund. First of all, in the area that they are trying to build the company, we like to see them being in the top level of people in the world in that category. We like to see a lot of flexibility in our entrepreneurs. Part of the reason is—and this is something that we will work at with them before we fund them—we’ll do a lot of working sessions, whiteboard sessions, where we’ll push them on different aspects of their idea, to see the flexibility there. And we want them to be flexible because the market is changing very rapidly, the game has dramatically changed out there, and it’s very fast moving, and it’s moving with the rapidity, not just subtle degrees, but right angle turns. So our entrepreneurs need to be able to listen well to the marketplace, kind of digest that, and then come back with creativity and ideas and changes, and yet maintain some level of focus. There’s a real, it is a real balance of capabilities and skill set. We like to see a lot of openness in dealing with, you know, it’s what we call intellectual honesty, being very open to criticism, and yet being able to discuss openly their ideas and support them. If they have a very closed tendency, then the likelihood is you’re going to run into problems later on when the hard times hit. You need to have a lot of openness, a lot of internal stability and, kind of, just stamina because it’s hard on them, because it just takes a lot of emotional, mental, and physical effort to build a company. Every morning, you know, I have this friend of mine who’s a venture capitalist who says, “Every morning you have to come into your startup and do mouth-to-mouth resuscitation on it, every day.” And that’s what it’s about.

It sounds like a lot of it is, you’re looking for some personal character. And what about on the technical side, what if I don’t have a track record, what if I’m fresh out of Stanford, or not even Stanford, I’m just someone who just has a great idea?

We would probably be open to that. We would want to look at it pretty carefully, and we would probably want to match them up with someone with a little of experience, somebody else we might know, to make sure we have that. You’ll oftentimes get the brilliant, you know, youngster out of Stanford, or Berkeley, or MIT, and then you have to be very careful who you match them, to make sure that they have a mentor there to help them to develop that. So, we have a lot of young entrepreneurs. And that’s okay. And unknowns is fine, too. But what you’re looking for is, it’s a subtle mixture of all the elements, and it’s sometimes difficult to describe and yet, when we sense it, we know it.

There’s no real knock-out factor, no checklist you go through, but it’s like…

It’s kind of like that quality issue: you know it when you see it.

But it’s like, you know, here’s Bill Gates who dropped out of high school, right?

Yeah. Yeah. And, I mean, look at the Yahoo founders, real fresh out of school. We funded Trilogy, and that was a guy who dropped out of Stanford. So, it isn’t so much that they need that, but what we’re looking for is, where is that spark? Where is that essence? And can we mold it? And that’s what we look for.

What if I have a checkered track record? Let’s say I’ve been an entrepreneur, I’ve been in some startups that didn’t work out so well.

Fine. Not a problem. Because in the Valley, I mean, in other parts of the country that would be a problem. In the Valley, that’s kind of, you know, you learn from that experience, so tell me what you learned. That’s what I’m going to look for, because hitting the wall is not something to be ashamed of in the Valley. Not learning from hitting the wall is. And so, yeah, in fact, in a CEO candidate, I like to see that because that means they have a little dose of reality.

How do you find your CEO’s, then?

That’s what I had my breakfast for this morning. We’re in this CEO search right now, and so we’re interviewing CEO recruiter firms. In the Valley right now, he was telling me, there are 85 CEO open reqs right now at top tier venture-funded startups. So these are not schlumpy companies, these are really hot companies, and there isn’t enough talent pool to go around. You have to be very creative, you have to really work your network. I spend a lot of time kind of doing that network and, when I’m out on the outreach, looking for key people, when I’m at conferences, kind of watching for people to keep an eye on as they progress in their career. And there is a very tight community in the Valley of venture capitalists and entrepreneurs, and so if I’ve got something going on, I’ll send out an email to all of them. And they’re very good about coming back with some names, or pointers, suggestions, and then likewise, I’ll do the same. We really depend on each other. It’s a very synergistic relationship that happens.

What are you looking for in a CEO? Is it someone who’s already run a company, or are you looking for people that…

One of the things that’s kind of first on the list is the personal characteristics. There’s the openness, the ability to lead, the ability to sell, because you’re constantly selling—employees, recruiters, new investors, customers, partners—you have to be able to sell. Your folks underneath you are always going to say, there’s always going to be someone who’s going to say, “Oh, he doesn’t know what he’s doing, she doesn’t know what she’s doing.” And, your investors are going to say, “And, how much money are you making? And how fast are you growing? Can’t you do a little faster?” You know? So, it’s a very lonely job. You need a lot of personal chutzpah to pull it off.

And then, usually, for each company, we have a specific past experience that we’re looking for, and that’s one of the tactical issues of, Where did you spend time? Where did you learn your foundation? You know, I love HP people because they understand processes. I like them to have spent some time in a company that has very good processes. Not too much time, because then they’ll have become too ingrained. So, you’re looking for some characteristics. You want them to have been in a winning company somewhere in their past so they understand that model, and then, having been at a startup, at least. Whether that startup made it or not, is not important. But have they experienced an early stage company and what that means.

So, they don’t necessarily have to have been a CEO before if they have the tactical experience and the right characteristics. It sounds almost like you’re describing the entrepreneur. They have to have a lot of vision and passion…

Yes, but they have to have more management skill set, whereas the entrepreneur doesn’t have to have that. The entrepreneur has to be able to do the visioning aspect of where to build this company much more so than the CEO. The CEO has to be able to sell the vision. The entrepreneur has to be able to come up with the vision and be the spokesperson in the industry from a vision standpoint. But the CEO has to be able to sell that vision to everybody around them, 360. It’s a tough job.

Okay, let’s say that I’m an entrepreneur now and I’ve got this great idea. The first thing is, how do I know which VC’s I should target?

References are always good. From your lawyers, your accountants, people you trust. To get references of, especially the lawyers. I mean, the lawyers in the Valley here know who the good VC’s are and who aren’t, because they’re sitting on the boards. They see what’s happening, they see the deals that are getting done, so they know a lot of the inside scoop.

So, if I’m an entrepreneur and I just have this great idea, what’s the first thing I do, then? Do I get a lawyer?

First you need to go spend some time at getting educated at, like, SVASE, you know, the software entrepreneurs group. Within the Valley we have a plethora of infrastructure here to help educate people. And also, go and visit with some CEO’s of startups, and learn about their experiences. And again, you’ll get references from them. And oftentimes in the Valley, there is, you know, they can say, “Oh, well you should go see these people at Cooley Goodward. This guy is great from a business standpoint. You should go see this person at, you know, Price Waterhouse. This person is great.”

And then, what’ll happen is, they go there, and then they get referred to a venture capitalist. To come in cold to a venture capitalist, kind of what we call over the transom, is not, you didn’t do your homework, and that shows, from our standpoint. We want to see that you have done your own homework and have gotten educated. And it’s kind of a tricky balance because there are a lot of bad stories out there, and yet there are a lot of good stories. And so, for an entrepreneur, you have to be able to filter stuff and form your own mental picture, not just take what’s out there.

Give me an example of what you mean.

There are a lot of entrepreneurs that feel, you know, maybe that they wanted to run their own company. And they didn’t feel like they should have been put into a CTO role, they should have been running the CEO role, and then they would have been educated on how to do that. But from a venture capitalist standpoint they may not have been ready. So, there’s always that disgruntled aspect to it. So, you always hear those stories out there, and the control issues. There are a lot of issues that come up running a company. It’s not an easy thing.

And, vulture capitalists…

Yeah. I mean, there was a time when the VC’s were not the easiest people to deal with. I think that the tide has changed because there’s more money now and less great entrepreneurial deals, and so the entrepreneurs really have the best deal today. They can pick and choose.

It seems like it’s gotten a lot more competitive, partly for that reason. Has it always been true that VC’s have offered all these different services besides money? I mean, it seems like most VC’s now help with recruiting, and coaching, and…

They didn’t use to. I mean, the really early stage venture guys did, because they were operating guys. Then there was a phase where it became more of a portfolio play, and you had the financial guys in. And now, we’re back to, our companies need help. And, you know we’re all looking around the table going, “Well, I guess that means me.” So, you got to pitch in, roll up your sleeves and pitch in. And that’s the differentiator as well, because there are a lot of venture funds. You know, I’m sure you can get the numbers from VentureOne on the new funds that have been started. It’s astronomical. And the new people that have come into this industry, the venture industry in general. And when the downturn comes it’s going to be interesting to see the shakeout that happens, because you have a lot of venture funds that haven’t gone through a downturn, so they don’t understand how to get their companies through that downturn.

Onset Ventures. What’s your value proposition, or your positioning?

We’re an early stage investor, and we partner with the entrepreneur to build the company. We’re very active, but we don’t run the company. So, it is very much a synergistic relationship. But if an entrepreneur just wants money, we’re not the right fit. And, we’re up front about that because that’s part of our value-added, is to be very active.

Okay, so now I’m this entrepreneur. I’ve got this idea, I’ve done my research, and I have a lawyer. Now I want to start looking for VC’s. If I want to approach you, what else do I have to do first before I should contact you? Let’s say I’ve even got a referral now.

Okay. So, if you’ve got a referral into me, what normally will happen is, I’ll get a phone call from that person, a phone call or an email. And they’ll say, “Hey, Susan, you should take a look at this deal, great guy, interesting concept, they’re not there yet, but I know you might be interested in this.” And, so what I’ll do is, I’ll bring them in, because it’s a referral, usually I’ll bring them in right away. Take a look at the deal. And then, try and identify if it’s feasible. If it’s not feasible, I’ll always try and give them a referral to another VC that I think might be a match. So, what I would suggest is that they get the references, which is the list of VC’s, from people who have dealt with them before. CEO’s of existing companies of the venture firm, or accountants or lawyers who’ve worked with them before. Because it’s not just the fund, it’s the partner within the fund that’s important, because this is very much a relationship, people business. And the fund is going to help from a standpoint of bringing you cash, but it’s the partner in the fund that will make you successful.

If I brought a deal to you, the likelihood would be that I would basically be partnering with you, not just Onset Ventures?

Right. Because, I mean, this is a six to seven year marriage. When we… that’s the way we look at it. Now, the time frames have been a lot shorter in the last couple years because of the market conditions, but that’s very unusual. So, it’s a six to seven year commit, and that’s a long time. I mean, that’s actually one of the things we look at when we’re evaluating a deal is, Do I want to be with this person for the next six to seven years? And if I can’t answer yes to that, then that’s not a fit.

So, how much of a business plan do I need to come to you?

For early stage investing, an executive summary is what we want to see. We probably want to see a presentation of some kind of what the thoughts are. What we’re really looking for is how much market validation have you done on the concept. And that’s really talking about customers, talking to partners, getting feedback on that initial concept. And, we’re not really as interested in how much technology have you, how much code have you written. Because one of the things that happens is that entrepreneurs get really enamored with the technology, and then go off and write all the code, but they forget that there’s this whole market element. And most of them are technologists. And so, what we say is, “Backup.” We really like to see it fifty-fifty. So, the amount of time and effort you’re spending should be equivalent on the two. And they’re not as comfortable in that range, and that’s where we really come and say, “Okay, let me help you. These are the kinds of questions you need to ask. This is the kind of information you need to be getting.” Oftentimes, the first one or two customer meetings, I’ll take the lead and show them how to do it. And then I’ll let them take the lead on a couple of customer meetings and see how they do, and give them coaching, and then again, back and forth. Or, I might bring in a consultant who will help them on the business development side, or the marketing side, to work with them.

If I come to you to present my idea, how important is my presentation going to be?

You know, we don’t want wiz bang animation stuff. What we’re looking for is the kernel of the idea. Let me just give you an example. Inhale Therapeutics, which is one of Terry’s [Terry Opdendyk, General Partner] companies came to Terry originally—John Patton, who is the founder there—came to Terry with a presentation that was all about a drug development idea. And so, you know, Terry and team were sitting there listening to this, going through, and one of the bullet items somewhere deep in his presentation was, “Oh, and we’ve developed this unique delivery mechanism as well.” And then he was going on, and then Terry said, “Wait a minute, wait a minute. That bullet. Go back to that bullet. Tell me about that bullet.” And, John said, “Well, you know, it’s this, basically what we do is, we don’t have to deliver this drug via intravenous. You can deliver it by inhalation.” It was like, that’s a great idea. Why are you screwing around with all this other stuff? He goes, “Well, gee, we never thought about that.”

So, that wasn’t even the original idea, that was kind of secondary…

No. It was a totally secondary element. But that’s why if, you know, when we have entrepreneurs come in, oftentimes their first concepts and ideas are not where you’re going to end up. If you look at the original business plans on companies and compare them to where they are… I mean, Inktomi is a good example. It’s not one of our companies, but it’s a classic. They started in search engines, and they ended up in load balancing software. How does that work? Well, they listened to the market. That’s that flexibility. Where’s the money? Follow the money. And, that’s kind of what we do is, we look at, Where’s the differentiation?

So, I don’t have to have a developed plan, and my presentation isn’t that important. If I come in, you’re going to take whatever I’ve got and start asking questions…

We’ll go to the whiteboard. We’ll say, “Okay. That’s a great idea. Let’s talk about this.” And what we’re really looking for is kind of the interaction, the thought process, the homework that’s been done, the person, and, you know, looking for the other elements.

Okay. So, walk me through a typical deal. Let’s say I present this idea to you and you’re interested. What’s going to happen?

Okay. Let’s see. Let me just give you some timelines as well, because I think that would be helpful. On one of my deals, I met the two founders in June, and it was a complex area, it was the security area. And, we spent three months in working sessions on and off, giving them homework assignments, them coming back, talking about it some more, going off, doing a little bit more validation, coming back, talking some more, and we didn’t make that investment until October. So, we spent a lot of time with those founders. The process is that they came in and presented. The original idea was… okay. It was not where the money was. And so, what we did is, we took that kernel of technology and we said, “Okay, let’s go figure out where some of the money might be. Where’s the low hanging fruit?” I actually spent some time going to customer accounts with them, to hear what customers are saying about the technology and the reaction. Because I’m not looking so much for a sales pitch to the customer, to close a deal. I’m looking for, kind of other aspects of the responses from the customers, like, “How would you buy this product if it were out there? Do you want to see another company providing this technology in the market? Or, do you have enough vendors, and you’d just like to see one of your vendors doing it? How big is this point of pain for you, and how strong is it?” Because it’s that vitamin versus Excedrin pill, and if we can find the Excedrin headache, and it’s a big one, but bounded, then we can put dollar signs to it. And that’s what we want to figure out, and how many dollar signs are associated with that.

Now, are you doing all this before you ever funded this company?

Yeah. Now, it depends. On some deals, they move very fast. And, if the deal’s moving fast and it’s in a competitive space, then we will adjust, and we’ll just do an intense period. But I have one deal that… A lot of times if I’m going to go in to, not a seed stage, but maybe the Series B round—it’s early, it’s still in the company, they still need a lot of operational skills that we can bring, and it’s an area I like—I’ll preempt their financing round and go in early. You know, six months ahead of when they’re going to need to be raising money, and get to know the team, and do all that process, so we’re ahead of that financing curve.

Do you have any kind of agreement then, or do you run the risk of helping them to develop the company and then they get the money somewhere else?

You always run the risk. Sure. But, if they’re going to do that anyway, you don’t want to do business with them. So, there’s your answer. You can spend some time… I haven’t had an entrepreneur do that to me, because most of the time it’s very much, you know, What is the honorable thing to do here? Now, if I weren’t adding value, that would be different issue.

How do you decide, then, what companies to fund? I mean, do you have certain criteria? You talked a lot about the personal characteristics of the entrepreneur and the idea, but what other factors go into it?

One of the things that we do is we track the marketplace very closely, that’s why we’re not generalists. I cover communications sector, another partner covers the enterprise software and internet space, another partner covers medical devices, and the other partners cover other different areas. So, in that sector we have a framework in our mind of what’s happening in the market today, and where we think it’s going. And what we’re trying to do is put ourselves in the flow, or the stream, of where those deals may come from. So, if it’s in the optical area in the communications category, I’m spending a lot of time at optical conferences. I spend a lot of time visiting Lucent, you know, visiting, hanging out with the guys in different categories that are doing R&D in that area, visiting universities in that area, because I’m looking for a deal.

It’s almost like you don’t wait for someone to come to you with an idea, you see where the market is going, and you come up with the ideas, you see what the market needs, and then you try to find someone who can do that.

We’re very proactive. And, sometimes we get deals that just happen to come through the door. But usually we see, we look for, what we call disturbances in the market scene. And where there’s a disturbance, there’s an opportunity. And what we’ll do is, we’ll zero in on that and then we’ll just start to aggressively get into that path of flow. And, there may be a deal that comes through the door, but it’s because we’re in that path, because we spoke at a conference there, or we happened to meet somebody who was there, you know, that kind of thing. But you have to put yourself in the path, otherwise you’ll miss it.

What would you say the characteristics are that go into the successful companies, and how would you weight those? Like, you’ve got the entrepreneur and their personal character, you have the idea, you have the market opportunity. What are the other pieces, and how important are they?

Okay. Three things that we look for: One is the market opportunity. How big is the market? How fast is it moving? Who are the competitors? What are the entrenched aspects associated with it? How easy is it going to be for a startup to start in there? That’s number one. Number two is the team. What are we dealing with? What’s the raw material we have? Who do we need? How easy is it going to be to put new people in there to match the things that we need? And how well does the team match with the market opportunity? The third thing is the technology. How good is the technology? How defensible is it? How risky is it? So, those three elements are really what we’re looking at.

So, you have this portfolio of companies, and every one of those companies you had this set of criteria before you invested in them. Tell me now about some of the successes and some of the ones that didn’t work out so well, and if they all met the criteria initially, what happened or what did you discover?

Interesting. We had a telecom services firm that was a little early in the market space. Sometimes in a chaotic market situation you can’t tell the timing, so what you want to do is hold the company stable, but not burning a lot of cash until you start to get the market signals that it’s ready. And when it’s ready, then you just want to drop the hammer and say, “Go!” But if you do that too soon, you’re going to burn through a lot of cash. So, we had a company that was in that category, and that company was started in ‘96, I think it was, it was a little early, the deregulation act just happened, they were going after the international market. Deregulation of the international markets took a little longer than what we thought, so we started burning cash too early. Then, what we did is, we made a mistake of bringing in a CEO who came straight out of a large corporation. Never been in a startup before, and that was a disaster. So, we’re very sensitive to that. That goes back to the CEO. The CEO and the entrepreneur are so important, because the CEO will make or break the company. And that’s why you want to make sure that you choose very carefully.

So, it was a timing issue and…

It was reading the market, and then, bringing in the right people. Those two things. And in fact, I’d say that’s the majority of the time we have problems with. The people, and reading the market. It’s usually not the technology.

What is the problem with people?

Bringing in the wrong people. Either the founder and the CEO gets into a huge fight, and one of them leaves, and you got this, you know, “Okay?”

It’s the personalities. It’s not necessarily they weren’t qualified, but the team doesn’t come together, the relationship doesn’t work.

Yeah. Because when it goes under stress… You know, when you’re recruiting, you’re not under stress, everyone is cooler. When you get under stress, that’s when it happens. And that’s why we have to monitor the situation very carefully, so that if we need to step in to help mediate a situation, we can do it immediately before it gets into a crisis. So, you have to watch it very carefully.

What about NDA’s and things like that? I’ve seen a lot of entrepreneurs, they always ask that question.

Yeah, sure. We come across so much information flow, that what we say is, “Don’t tell us anything that you consider confidential. And, frankly, if your idea isn’t defensible enough so that you can tell me your idea, then it’s probably not investable. Because the minute you hire the next person, and they happen to go speak to their brother-in-law, he speaks to someone else and it’s gone. So, that’s not very interesting to us. When we start to go into what we call serious due diligence, where we’re going into technology due diligence, no problem, NDA’s, we would expect that. In fact, we would hope that they’re going to ask for that. But at the initial meetings, kind of the initial discussion of business model, the ideas, etc., we’re not going to do an NDA.

What else do entrepreneurs need to be concerned about in working with venture capitalist?

They need to check and make sure that the venture capitalist portfolio companies don’t overlap. And, we’re very up front. I’ll always try and find out what the idea is about before I go into a meeting. And if I’m in a meeting and I sense that we may have a conflict, I’ll stop the meeting and say, “Hey, I want you to know we have an investment in this company, and this is the potential overlap. Do you want to continue?”

Would you fund a company that was…?

No, not if they’re directly competitive. But, if there’s some slight overlap, and the space is big enough, we probably would.

Would you try to partner them, or look for strategic advantages in putting them together?

Gosh. That’s so tricky.

You wouldn’t want to do it in the early stages.

You know, we have a saying, “Tying two rocks together doesn’t make it float.” That’s usually not the way you rescue deals, if that’s what the intent is.

The other question I wanted to ask, when we were talking about the idea and the founder, is, “What do you think is the most important thing?” I mean, how important is the idea versus the founder versus the technology.

The idea is not as critical if you have a kernel of it, because you can modify it. The founder is very critical, because the likelihood is whatever idea he or she has first is not the right one. So, you have to have enough smarts and flexibility to be able to work with to say, “Well, why don’t you go off and think about this?” We’ll bring them in and sit them down in one of our offices and say, “Go think about this. Come talk to me when you’re ready.” And, we’ll chat and talk and have them look at some of our deals coming in, talk to some of our companies, and see if that’ll gel, you know, kind of percolate stuff up. So, we’ll do that if we find the right person.

I think a lot of entrepreneurs have the notion that the idea is the most important thing. All I have to do is come up with this great idea.

Well, seeing this idea in the market opportunity space is important, but the details of the idea may not. The really nitty-gritty kind of details may not be as important as sensing the opportunity, being able to clearly identify it. And then say, “Okay, and this technology is kind of what we would plug in here, and this is how we would go at it, and this is the market validation…”

All that’s probably going to change. I think you said at SVASE that most companies go through four or five business models.

As soon as you start talking to customers. Four to five models, and that’s in the first year. That’s a lot. And it’s ugly, it’s ugly when we’re in that phase. It’s like making sausage. You do not want to see it, because there’s chaos, everyone’s going, “What’re we doing? What’ve we thought about?” And, this is when the team will get very uncomfortable. And so this is when we as investors have to be there to say, “It’s okay. This is the way it’s going to work. This is what’s going to happen.” You know? Just guiding them through, kind of, the smoke and the fog.

I was reading an article by Arthur Rock in the Harvard Business Review, and he says that the most important question that any entrepreneur can ask is, “How do I build a business?” As opposed to, where do I get the money, and all that kind of thing.

Well, I mean I would put a corollary to Arthur, which is, “How do I make money?” Which is really, “How do I build a business?” And, this is part of our business model development stuff that we do, we spend a lot of time on. So, how do I build a business is, you have to match up all these elements. It’s like playing slots, everything has to click, and you have to see cherries all the way across. I’m trying to think how to put this succinctly, because we have a great interactive presentation on our web site on business model development that I would vector you to.

What are the most important people to put together for a core team? Who are the first people that you hire? Besides the founder, and you look for a CEO, who else do you need?

Okay. It depends on the company, depends on what it’s doing. Usually you’ll have the entrepreneur or founding team. Then you want to get your CEO in. You don’t want to fill out your management team too much before you get your CEO there, because they like to bring in their own people, you know, that’s who they’re comfortable with. That’s what you want. You want them to take ownership. Usually, then, the next person will be your VP of biz dev, because usually you’re doing a lot of business deals early on. And then, maybe you bring in your VP of Marketing, and then your VP of Sales, from an executive management standpoint. You know, your engineering team is, you’re constantly recruiting for that. And I’m kind of assuming in the founding team, you have a CTO and a VP of Engineering. If you don’t, then you need to bring a VP of Engineering on pretty early. And your CFO is, kind of, later.

Let me ask you a few more questions about being a venture capitalist. If I wanted to be a venture capitalist, what qualifications would I need?

Boy, that’s tough, because they are each so different.

You don’t have the typical background.

Let’s see, at Onset I do. We all have operating backgrounds. We’ve all started our own companies. We’ve all run our own companies. So, it’s very, in seed stage investing the backgrounds are very similar. In mid-stage and later stage, the backgrounds may be very non-similar. You have liberal arts people who become venture capitalists.

So, you don’t have to have an MBA?

No. Well, you know the woman who funded Compaq out of Oak, Ginger More, was a secretary at Oak. And one of the venture capitalists looked across, and, “You know, I can’t go to this meeting. Why don’t you go to this meeting? Go find out what this entrepreneur…” Gets on a plane, goes down to Dallas. “Oh, you know, you like this deal, go do this deal.” And, now she’s one of the veterans of the industry. She’s very smart.

That’s like being a waitress, though, and being discovered in Hollywood.

Yeah. It doesn’t happen like that all the time.

So, if you’re not an entrepreneur, and you don’t have an MBA, or—it seems like a lot of them have technology backgrounds or engineering backgrounds—but you’re sharp, and you love this business, is there any chance to get into the business?

Uh huh. I think you have to be a really good coach, because that’s what you’re doing most of the time, is you’re coaching. And you have to have your own opinions, obviously, so you have to be a leader in essence. But venture capitalists, I liken more to lone wolves who happen to be running together in a fund. They’re very individualistic. And, in fact, they likely would never fit in an organization, because they just are, that’s not what they like. So, very independent thinkers.

How do you work together with your partners, then? What kind of team are you as a firm?

Well, we all do our own deals, although we usually do two partners per deal, so that we have a backup, and we also have a reality check on what’s going on. And, so, what we’ll do is we will work together on looking at deals. It has to be a unanimous decision around the table to invest in a deal. In our specialty areas, though, we become the experts, the individual partner does, but it is our job to educate our other partners, so that they are educated when the time comes to make a decision on a deal. We work a lot with each other to help and get resources for our companies, help to find recruiting, whatever else we need. But, you know, at Onset anyway, there’s a personal commitment to every investment we make by the partner who’s the lead on that investment. And so, I think that’s probably why we have such a high success rate, because of that personal commitment. And so we take the responsibility on to do what it takes to make this company successful, or else shut it down.

Who’s your competition at Onset Ventures?

Competition? You know, we probably wouldn’t look on it as competition, but people who do early stage deals as their focus. There are a couple of funds. There’s… Red Leaf Ventures does it, Eldorado Ventures does it, Mohr Davidow does a lot of them. So, there aren’t a lot. You know, in the eighties there was a big push toward seed stage funds, and what happened is that those seed stage funds weren’t big enough to keep themselves from being diluted out in later rounds, and so a lot of them went broke. And so, we were actually one of the few that made it through. And this is part of that, when the down cycle comes, the shakeout, what’s going to happen, is how you manage your money to make sure your companies have money when the down cycle hits and you can’t get them public, you can’t get them extra cash, is very difficult. You have to have had experience in that.

So, with so much money chasing fewer really good deals, is that part of the reason why there are fewer seed stage investors? I mean, companies have so much money that they really want to invest big chunks?

Big chunks. I mean, think about it. Partners time. If I could be doing ten investments a quarter, versus one a year, that’s a big delta. So, the big funds, which is why we kept our fund, our last fund was $105 million, we could have easily gone to 150, 200 if we wanted to, because there’s so much cash out there. But how would we possibly put that to work? We’d be old and gray by the time we had that put to work.

Especially at the seed stage.

Yeah. So, you know, it’s like, this is what we like to do, this is what we’re good at, and we’re just going to keep it that way. We’re not going to be a $600 million fund. If we want to be, then go off and join one of those.

What kinds of returns do you get? I mean, obviously, you’re in the riskiest stage, so your looking for high returns.

Yeah. And this is probably one of the sensitive topics in the venture industry, so I would refer you to VentureOne statistics, which is what’s the average across the industry. What has been true, and the way you rate it is kind of like wine, it’s what year was the fund started. So, we have a ‘97 fund, we have a ‘94 fund, we have an ‘87 fund, and so what you want to do is compare funds that were started in that year, because that is more representative of the financial conditions of the market at that time. And so, for funds that were started pre-’94, the best funds, what we call the top quartile funds, were returning roughly 33 percent on an ROI basis, which is very good. And it went down from there.

That’s beating the market by a little bit.

Right. So that’s kind of the target in the industry.

So where is Onset?

We’re always in the top quartile.

Let’s talk a little bit about the future. How do you see the industry changing, and where do you think it’s headed?

Boy. It’s highly dependent on what happens in the stock market. It’s so hot right now out there. I think you’re going to start to see a lot of companies having trouble getting liquidity. And so, mezzanine funding is going to become more important. I think you’re going to see more venture funds…

Why do you say that?

Because your companies are not going to be able to get liquidity in the public markets, so you’ve got to get money somewhere, and the debt markets aren’t going to be there, so that says you’ve got to go the equity markets. And that’s those mezzanine guys. So, a lot of the venture funds right now are either starting huge mezzanine funds, like billion dollar funds, because they can see this coming down the pipe, and they want to make sure they’ve got cash available for their companies. And so, that’s one aspect of it, is I think that cash will become very important in the years to come. You will get some very good deals of companies that were over priced in the early stages, because of the go-go kind of market situation, can’t get liquid because the market outlet disappeared, need cash to survive. So, you’re going to see a lot of down rounds.

Is that going to skew the curve? I mean, right now you’re in the perfect place to be riding the wave, being in seed stage, right, because companies are going public faster?

Well, you know, it’s kind of interesting. In the seed stage, we actually will likely not do three-digit kind of returns on our funds, but also we don’t go low. And it’s because in the seed stage you’re really buffered from a lot of the market gyrations. Mid- to later stage, you’re riding those gyrations, so you get a lot of whipping around.

But if there are more rounds, your investment is going to be diluted more.

True, but that’s why you need to reserve enough cash in your fund so you don’t get diluted out. That’s part of managing your fund.

Where do you think the hot investments are going to be going forward?

I think the coms area just continues to be hot. Obviously, the Internet space. We’re seeing, we think there’s another whole wave of business-to-business Internet commerce kind of plays that hasn’t hit yet. A lot of the consumer stuff is out there right now, but I think the whole business-to-business infrastructure plays are still going to come online. We still continue to invest in medical devices, and drug delivery. We’re seeing some interesting new business models coming out of the drug development category. Almost outsourced R&D drug development, and we have one company called Proliance that we’re playing with that model. It remains to be seen if it works, but we’re experimenting on some new business models out there. Don’t see as much in the enterprise space, enterprise software space, tougher to get in, you need to find the niches much more carefully. So, that’s kind of where we’re looking.

What about for you personally? Where are you going to be five or ten years from now?

I hope I’m still going to be doing companies. It depends on if I’m any good at this business, you know? It takes so long to figure out if you’re good at it that you won’t know for seven, eight years.

So, you’ve been doing it for three years. How many companies are in your portfolio?

Four. I have Alteon Networks, which will probably be going IPO later this year, or next. I have Arcot Systems, which is kind of mid-stage development, we have a ways to go on that. I have Accelerated Networks, which just took a $30 million investment from Siemens, and they’ll be going IPO in a couple years, about eighteen months. And then I have CPlane, which is just the baby. So, that’s kind of where we are.

What would you ask another VC?

Oh, Dick [Kramlich, of New Enterprise Associates]! How does Dick have the magic investment nose? How do they pick, how do they know when the deal’s right. I mean, how did the Benchmark boys know that eBay was the deal? My gut tells me they didn’t know! But Dick has a great track record, and so, there are people in the venture industry who just seem to have the golden touch. So those are the ones you want to find out, “How do you do it?” And a lot of it’s instinctual. That’s that experiential thing that I was talking about. You can’t learn this business from a book, it has to be experiential.

What part do you think intuition plays? I mean, you’re always trying to predict the future.

Oh, a lot. It’s a lot. I mean, you have to crunch the numbers, and do the supporting evidence, but a lot of it, because it’s so people oriented, it’s very gut feel. And to do that, you have to have successful models in your mind to do the matching on. And that’s why, I think, it takes so long to learn this business.