Thursday, February 22, 2001

What VCs Want

As NYC got blanketed in the snow Thursday night, February 22nd, more than 200 hearty souls braved the elements to attend a grand panel and presentation by the MIT Club of New York, MIT Entrepreneurship Center, MIT Enterprise Forum of New York, MIT Sloan Club of New York and the NYU Berkley Center for Entrepreneurial Studies! The evening's topic was "What Venture Capitalists are Looking for in the Current Market." It was answered in a roundabout way by a few of the presenters. NYU Stern School of Business Dean George Daly introduced MIT Sloan School of Management Dean Richard Schmalensee, who then introduced MIT Entrepreneurship Center MD Kenneth Morse. Mr. Morse spoke on "Critical Success Factors in High-Tech Entrepreneurship," and he ruffled the feathers of a few of the VCs in the audience (and upcoming panel).

Starting off his talk, he mentioned that he loves bad weather because it keeps the riff-raff away, similar to being in a place like Route 128 as opposed to Silicon Valley. Mr. Morse said that he feels this shakeout will bring out the good talent and he reminded us that "failure is the mother of all success." His points for success were: have an "A" team that knows how to execute; everyone needs to know the technology; have a "value proposition;" and it's B2B (Back to Basics). For entrepreneurs looking for a VC, select one that will add value to your business. Look for one that's active in your space, has the essential impressive Rolodex/network, has cool limited partners, deep pockets and a lot of guts. Then we got the "Gloom and Doom" speech: the next round is a Bear market; the market's are terrible; plenty of plugs will get pulled; and there will be jewels and junk in the marketplace. Back to the success points: Morse's "A" team analogy continued. "A" teams recruit "A" people, "B" teams hire "B" people and "C" teams fill positions with dogs. The 50 percent rule is that everyone you hire should be better than the people currently there. Then we learned the 3K's: your "A" team people should know the market, know people in the market and be well known. The best business is repeat business. Ken finished his talk with "CFIMITYM:" Cash Flow Is More Important Than Your Mother.

A bit off the mark with the audience he was addressing, NYU Stern Professor of Entrepreneurship and Innovation Christopher Tucci spoke on "Development Webs: A New Paradigm in Product Development." While his talk was detailed and thorough -- all based on a paper he wrote with two collaborators -- it was micro-focused on new product-development processes, and new team organization and boundaries. The areas that will experience the biggest changes are: team organization and boundaries, relationship management, and coordination of interdependencies. Overall, the points he made were that development processes will be more fluid, dynamic and alive inside and outside an organization.

And then the clowns came in! Not really, of course, but things got more lively and interesting on "What VCs Want." Flatiron Partners Managing Partner Bob Greene, Starting Point Venture Partners's John Hector, GSVentures' Co-Head John Mahoney, I-Hatch Ventures' David Shrier and Draper Fisher Juvertson Gotham Ventures' Managing Partner and Co-Founder Daniel Schultz were the illustrious panelists, each with golden nuggets of information. Recalling one of Ken Morse's points, Bob admitted that he'd rather back an "A" team with a "C" idea than a "C" team with an "A" idea. Investments they would look at must have a large market opportunity, something that's not done before. It must also have a great leader. Mahoney mentioned that if they look at a B2C, which isn't the most favorable model right now, they better not be paying retail for their customers. A strong proprietary business with technology is what interests David and Daniel, who said flat out that they're not looking at B2Cs right now. He added that he thinks consumer sites should charge more-the Internet is about convenience; it doesn't need to be the cheapest option. The VCs said they are looking for companies that will grow massively, not just incrementally. They must fill a need and exit multiple are really important. When pressed about what they're looking for, each responded sheepishly, but directly. Bob likes data mining and DRM. Hector likes intuitive computing, voice-activated servers and interactive TV. Mahoney doesn't do pure tech investing; so, he's looking at the insurance industry and CRM. David replied with "if you read about it in the news, it's too late for VCs to be investing," meaning, they're looking at things that aren't in the news yet. Danny said he likes wireless (on the enterprise side), telcom, commerce and infrastructure.

Closing points were similar to what we've heard before: be smart about partnerships, be stealth, be careful, watch the money you have and cut your burn. Bob provided a historical reference and cited the confidence that returned after the Gulf War. While this is the worst time he's seen in 13 years of VC work, he expects things to pick up in the 3rd quarter. So, hunker down and get ready for an interesting Spring!