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| VCs Mentor Their Fledglings |
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| March 13, 2006 | Wall Street Journal |
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Tough IPO Market Means VCs Get More Involved With Helping Management
By Rebecca Buckman
As a first-time Silicon Valley chief executive, Jim Fowler needs all the nuts-and-bolts management help he can get. These days, he's getting a lot of it from an unlikely source: his venture-capital investors.
Mr. Fowler, an ex-U.S. Navy diver, runs Jigsaw Data Corp., a San Mateo, Calif., Internet start-up that allows salespeople to trade business contacts online. He chats with one of his venture-capital backers, Tom Peterson, about operational matters and other issues several times a week. Mr. Peterson also keeps in near-constant touch via email, dropping Mr. Fowler messages about analyst reports and business referrals.
Late last year, Mr. Fowler even attended a 12-hour management-training course organized by Mr. Peterson's firm, El Dorado Ventures, of Menlo Park, Calif. Mr. Fowler used some of the tidbits he gleaned from the four sessions -- mainly about how to better recruit and interview job candidates -- to snare a new vice president for engineering, Ed Komo, earlier this year.
El Dorado, which has invested about $2.5 million in Jigsaw, is "incredibly involved" in the company, says 41-year-old Mr. Fowler, who started the business in 2003. In today's tough environment for start-ups, where making money and going public is much harder than it was six years ago, venture capitalists "have to justify their investments," he says, and thus "they spend a lot more time on them."
Call it Start-Up Management 2.0. In high-tech hot spots like California's Silicon Valley, Boston and Austin, Texas, venture-capital investors are going back to basics: They're monitoring the start-up companies they fund more closely than they did during the technology boom and trying to foster better management practices. In the late 1990s, many start-ups didn't get attentive care and feeding from their investors, since even poorly managed companies could launch successful initial public stock offerings and make venture capitalists rich.
It's a different story today. With the public markets less receptive to tech IPOs, venture capitalists must hold on to their investments longer. That means they can no longer rely on green, unskilled management teams to steer their start-ups toward quick IPOs or sales and must build companies for the long term. According to research firm VentureOne, a unit of Dow Jones & Co., venture-backed companies that went public last year had taken an average of more than 5 1/2 years from the time of their first venture investment to complete a listing. That's up from less than three years in 1998.
"I don't think there's any debate that the companies you invest in . . . are going to be private for longer periods of time," says Lou Volpe, managing general partner at Kodiak Venture Partners in Waltham, Mass. Venture-capital returns are also down compared with six or seven years ago.
As a result, early-stage investors are now intervening in their start-ups' day-to-day affairs more often. Mr. Volpe, former president of Internet-switching company ArrowPoint Communications Inc. -- which went public in 2000 and later sold itself to Cisco Systems Inc. for nearly $6 billion -- says he now helps his start-ups do everything from hire new executives to file for patents.
Other venture firms, like El Dorado and Austin Ventures, in Austin are organizing more educational seminars for start-up executives, effectively sending managers back to school. Seminars might focus on outsourcing to China, or keeping a company blog. Venture capitalists, who have backed tech success stories like Google Inc. and Apple Computer Inc. typically take equity stakes in start-ups and hope to earn returns later through an IPO or company sale.
"During the bubble, everyone spent time on technology, and they totally ignored the other aspects of business," like good management, says Phil Soran, chief executive of Compellent Technologies Inc., an Eden Prairie, Minn., computer-storage company. But in today's more rational market, "if you don't have good management, it's going to bite you," he says. Compellent, which is backed by venture capitalists, has recently worked on issues like career development and executive succession, Mr. Soran says.
Executive hiring is one focus for venture capitalists today. Highland Capital Partners, in Lexington, Mass., last year launched a new Web tool called CareerNet that lets candidates apply for jobs at many of the firm's start-ups online, says Michael Gaiss, Highland's senior vice president for marketing. Many venture firms, by contrast, rely on informal networking to find new talent for start-ups. But it has become more difficult to snare top-notch talent these days, since the promise of instant riches through an IPO has vanished.
Jigsaw CEO Mr. Fowler says venture capitalists were far less involved in some of the previous start-ups where he worked as a sales executive. But when he founded Jigsaw in 2003, two years after the tech bust, the investors offered hands-on help immediately. The company has raised about $6 million in funding, primarily from El Dorado and Norwest Venture Partners.
When El Dorado hosted the four management-training sessions at its offices in November, December and January, Mr. Fowler was only one of about a dozen start-up CEOs to attend. El Dorado hired a professional management consultant, Dell Larcen, to offer the executives detailed advice about how to ferret out, interview and hire top candidates for critical jobs -- and then set concrete goals to help them succeed.
Mr. Fowler says Ms. Larcen's lessons were valuable, particularly since start-ups have limited cash and little time to correct bad hiring decisions. "At start-ups, you tend to think, `What's the fastest way to get from A to B?' You cut a lot of corners," says Mr. Fowler.
He also learned from the session that hiring the wrong top executive can cost a start-up more than $2 million, according to some research. "That gets CEOs' attention," he says. So when he hired Mr. Komo as engineering chief earlier this year, Mr. Fowler and his team used tips from Ms. Larcen. They planned strategies for the interviews in advance, agreeing ahead of time which executives should ask the candidates certain questions and reconvening after the interviews to discuss the candidates. "Without a doubt, we would have gone through a less rigorous process" if not for the management sessions, Mr. Fowler says.
Ms. Larcen says she's getting more calls from venture capitalists these days to fix management problems at start-ups before they start affecting the company's business. "The pressure [on investors] to get results now is much greater," she says.
Not all start-up executives welcome the increased attention from venture capitalists. If start-up CEOs and their venture investors don't have similar working styles, today's more-active venture capitalists "could be perceived as meddlesome or interfering," says Francis deSouza, a tech entrepreneur who recently sold his instant-messaging company, IMlogic Inc., to Symantec Corp. for about $90 million, according to regulatory filings. However, Mr. deSouza says he appreciated the expertise of IMlogic's venture board members and their assistance with tasks like hiring key executives.
Today, CEOs and their venture backers should view their relationships "like a marriage," Mr. deSouza says. "We're going to have to get along for a long time." |
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