Interviews at The Entrepreneur Center @NVTC

Bisnow on Business: Were there any significant moments in your childhood in Pittsburgh that got you interested in business?
My father worked 38 years for Westinghouse. I was brought up to believe that one worked for a very large company and stayed there forever. My actual career has been involved in the chaotic life of entrepreneurship in the Washington area and that ultimately led me into the venture capital business. My family and I have tried to figure out how I went off the rails and we’ve never come up with a good answer. Along the way I realized that working in and with technology companies was a great way to do intellectually challenging work and deal with really smart and interesting people. I’m not sure that I figured that out when I got into technology, but that kept me in.

What made you transition from working in tech companies to being a venture capitalist?
I spent 16 years in technology companies. I was fortunate enough to join four start-ups that went public. It was a great ride. What I figured out along the way was that I was not the kind of person who was going to come up with some great invention. But I was pretty good at helping people who came up with the invention and the new ideas. As I started to explore the venture capital industry it occurred to me that instead of helping entrepreneurs one at a time, I could help numerous entrepreneurs at the same time and that was even more appealing. It was a turbo-charged version of my previous career.

Your first job as a venture capitalist was at FBR. Did FBR approach you or did you start feeling out jobs in venture capital?
I was exploring starting a venture fund and they were exploring starting a venture fund, and those discussions led us to each other and we decided to join forces.

How is the life of a venture capitalist different today compared to the late 1990s?
The life of a venture capitalist before the late 1990s, 2000, and 2001, and the life of one since are similar. There was a period in between where it was very different. The similar parts are that venture capitalists meet a lot of entrepreneurs, invest in a relatively small number, and good venture capitalists get very involved in the companies they invest in. The other period was one where everything seemed to accelerate, where venture capitalists, including me, made investments at a higher rate and were inherently less involved with each company. That era has proven not to have worked out so well for the venture industry in the long run. The venture industry and my own behavior has reverted to how the craft was practiced prior to the bubble.

What in your job as a VC takes up most of your time today?
The large categories of time invested are, first, our clients, who are the limited partners in the venture funds. We’re regularly talking to our current investors and making sure they have all the information they need and are up to date on what we’re doing with their capital. The second is to meet either people who might introduce us to interesting investment opportunities or to meet interesting investment opportunities directly. The third is to spend time with the companies we’ve invested in and try to be helpful to them.

It seems today that some companies take pride in saying they haven’t sought venture capital to get their start or to grow their companies. Do entrepreneurs view venture capital differently today?
Venture capital is not appropriate for the vast majority of businesses. Some people don’t recognize that. They come up with an idea and they can build a really good $5 million revenue-generating company. That can never be a venture capital candidate because the venture capitalist is never going to get the kind of return that they need. But that doesn’t make it a bad idea or a bad business for that entrepreneur. Certainly there were some bad stories during the bubble, stories of venture capitalists that are correctly or incorrectly blamed for the problems of the business. The venture community frankly needs to describe better the successes that benefited everybody where venture investors were involved. The most fundamental point is, it’s not right for most people. And that’s OK. Dry cleaning has produced more millionaires in America than any other industry. I don’t think there’s a lot of venture capital in dry cleaning. But, there’s a lot of hard-working entrepreneurs in dry cleaning.

What truly went wrong with the tech economy a few years ago?
The biggest issues aren’t so much about capital formation, but about what are sustainable businesses, where over the long run there will be a cash-generating, profitable business. A lot of the things that people started and invested in during the bubble just had no opportunity, regardless of how much capital went into them, to ever become a sustainable, reasonable business. The next layer is, there was too much capital put into certain categories, for example, where a certain type of market could support four or five players but 30 got funded. And maybe none of them survived because they beat each other’s brains in. The telecommunications category certainly saw some of that.

Did you learn any personal lessons?
Some of the lessons are the usual obvious business lessons. Meaning, there’s got to be a real management team and a real market opportunity. Even if the market is not there yet, there’s a reasonable way that one can develop. You’re not trying to do something that violates the laws of physics, like build a national consumer brand name on $5 million. It has happened but it’s pretty rare. Some of the things people invested in violated basic laws of economics.

What are you looking for these days in companies to invest in?
They have the people. Maybe it’s a very small subset of the ultimate team they need. They have a big market opportunity. And they have reasons why they can be unusually successful in that market. For someone to start the 20th company in a new market isn’t so appealing. It’s appealing if they have attributes about why they can win in that market where other people may not be able to succeed. It’s got to be things that are appropriate for venture capital, which means it needs to have a reasonable capital requirement. If it’s really huge, that may not be appropriate. If it’s really small, it may not be appropriate. It needs to have the ability to produce returns for us and our investors. There needs to be some way we believe that through a public offering or the sale of the company, someday we’ll get our money back and a good return.

How do venture capitalists get paid?
Our investors pay us an annual management fee to run the business and that in effect pays the salaries. And then when there are profits to distribute from the sale of a company or public shares of a company, we return the capital they’ve entrusted us with and then we can share in the profits after that. Our incentive compensation plan takes many years to play out.

What’s the next big thing in technology right now?
There’s no simple answer to that. We look at a lot of different categories and try to stir up ideas across all of them and then try to find the best idea. I get asked this question all the time and it’s very hard to give any answer that’s as useful as people would like. It’s more about staying in touch with the broad market and then reacting appropriately.

How many business plans do you look through per month and how many of them make it to the “interesting” pile?
We as a firm see in some form or another hundreds of ideas a month and we’ll invest in four to six a year.

Has the flow of business plans coming in slowed down or stayed the same?
It’s a similar level as prior to the bubble. During the bubble there were certainly more business plans flowing. There are just as many good ideas as during the bubble, and a lot fewer bad ideas now.

What’s the most challenging thing companies are going through these days?
Buyers of all sorts - consumers, small businesses, big businesses - are ever more sophisticated. As a seller of anything - any service or product, consumer or business oriented - you have to always look for ways to increase your value to customers and to communicate that more effectively. The techniques that worked last year probably don’t work anymore. You have to be constantly raising your game. If you’re not trying to do that, you’re going to lose.

What’s the most painful investment you’ve made in your career?
All the ones that didn’t work.

Are there many?
We’ve been involved in some great successes. We’ve been involved in some that didn’t work out well. It’s the nature of being an early-stage investor. You’re very proud of your successes and you try to learn from your failures.

What do you see yourself doing 10 years from now?
Probably still doing this. 50 doesn’t seem very old anymore. I still have three more college tuitions to pay for.

What advice would you give someone wanting to launch a company?
Do something you’re an expert at and passionate about. If you are both of those, it’s probably a good idea. If it doesn’t pass one of those tests, don’t do it.

(This interview conducted by Tania Anderson for Bisnow on Business.)