On a beautiful spring day in San Francisco, I sat in my venture capital firm’s conference room overlooking the blue ocean to my right and Trans America building to my left, talking with a CEO of a company, who had raised and burned through over ninety million dollars in venture capital funding. CEO was looking to raise a total of $3 million at a $1 million valuation. He had left a lucrative job at Microsoft before becoming an entrepreneur. His company had built a mobile e-commerce platform and signed a contract with an iconic telecom company to sell phones, ring tones, music and other telecommunications services using their platform. When, I had moved to San Francisco to work for a west coast venture capital firm, these were the type of companies I was hoping to find to invest. I left the meeting hoping to make an investment in the company.
In the late nineties, as the Dot Com boom reached to its peak, over $100 billion in investments were made by venture capital, private equity and banks in the telecommunications industry. As the Internet exploded, larger and faster data networks were built to carry terabytes of data. With the projected growth within a few years of data, voice and video all to be carried as 1s and 0s over the fiber networks, telecommunications companies were looking to build networks able to carry petabytes of data. It was unprecedented and fuelled innovation never seen before in the industry. New telecom switching and routing technology, web applications, streaming videos and mobile data spawned thousands of new companies looking to raise money and change the way of day-to-day life.
My life in corporate venture capital began in a major telecommunications corporation. I have been working for the telecom company for over five years before the company decided to launch a venture capital arm. Rationale to launch a venture capital fund was to get access to new technologies and able to influence them early in their design and also make money in the process as these companies succeeded in the future. Fund was led by some very smart executives and was overseen by half of the company’s board. Within months, we went from learning telecom data protocols, latest switching and routing technologies and building fiber networks in our day jobs to reading business plans from companies designing latest semiconductors, large scale telecom systems, latest internet application you could not even imagine and learning venture capital terms such as liquidation preferences, preferred stock, pro-rata rights, pre and post money valuation, discounted cash flows and meeting with executives and entrepreneurs with rock star personalities. Average day was filled with learning about technologies and ideas, which gave a glimpse into the future and meeting people who have created hundreds of million in wealth and tens of thousands of jobs in their previous professional life. The best and brightest explained and helped you learn about the future and the feeling was exactly the same as you felt when you visited a zoo or a theme park as a five year old. It was almost like drinking the most exotic drinks from a fire hose.
In the midst of the overwhelming experience of a lifetime, we found that collectively we had a unique skill to go through hundreds of business plans and select a few companies to consider for an investment. To identify a opportunity for investment required to first understand the need of the product in the marketplace, ability to work with the technical team to understand the uniqueness of the intellectual property without getting drowned in its details, learn the competitive landscape and assess the quality of the management team to not only carry out their ability to deliver the product but also build the right partnerships and marketing channels to take the product to the market with an absolute perfect timing. Key was to do that in a relatively short time before you are asked to evaluate a new opportunity in a completely different domain. If all these things go right, it’s a home run investment. Even finding the right investment opportunity did not guarantee success. As I would learn over the future years that a million things can and would go wrong.
I was personally encouraged, as the fund’s executives and board members supported the selections I made. Our board members were leaders in their industries. They had created billions of dollars in wealth for their shareholders across various industries. Microsoft acquired the very first company I proposed for investment for over $200 million. Intel acquired the second company I selected for investment for $215 million in cash as we presented a term-sheet to the company to lead the investment. As a group, we delivered hundreds of millions in return on our investment to the parent company at the peak of the venture capital boom.
Implosion of Dot Com bubble brought the dose of reality to the venture capital industry. Some of us became concerned when we passed on to invest in companies like PayPal and invested in companies, which seemed like buddy investments (by investing in a company where one of partners buddy had invested even though the due diligence screamed no for an investment) than thought through venture capital investments. Large west coast funds threw irrational amount of money to save poorly executed ideas, whose time had run out. Corporate venture capital being a conservative cousin of risky venture capital is always late to the party and first to exit when things go sour. Even though the parent corporation recognized us for our work, each of us read the sign on the wall that the amazing journey we all took was coming to a close. So when an opportunity came through to work for a venture capital firm at the west coast, I took the opportunity to find companies who had a real product but have fallen on hard times with changing of times in the industry.
The west coast firm was led by folks who had worked in the corporate venture capital and started a new fund during the boom years of venture capital. Firm looked to invest in early stage companies or companies who are re-starting after they had raised a lot of money and looked like early stage investments with their rebirth. Like any industry, venture capital is no different. It has a herd mentality. Firms always look for other VC partners to share the risk and invest in same set of technologies at one time. Soon I realized that even though the firm’s partners talked about finding companies with a particular profile, but were more comfortable in making buddy investments.
When we discussed making an investment in the company who I met on that spring morning in my office, it was rejected as it broke some cardinal rules. Since the company was not local, none of buddy VCs was interested in investing in the company. It felt like I was just going through the motions– finding winners by going through hundreds of business plans, meetings with tens of management teams and then identifying the right investment opportunities but then unable to make the investment I really wanted to make.
At the same time in mid 2000s, public markets continued to lose value month over month. Acquisitions and Initial Public Offerings (IPOs) became a thing of the past. The whole venture capital industry and start-up world seem to come to a grinding halt. Not only it looked bleak for the west coast firm I had joined a couple of years ago, the overall venture capital industry seemed to shrink. Established venture capital firms with long histories of success and deep relationships with the Limited Partners made up of university endowment firms, state pension funds and established financial firms were the only ones who were able to continue to raise their next fund. Value of my “carried interest”, which was typically the most lucrative part of the venture capital compensation, did not hold much promise. I had enjoyed every minute of working in the venture capital industry and believed that I had the right skills to excel as an investor but the market had changed and most of the smaller funds were seemed to be going through the motions of a slow death.
One of the experiences I had enjoyed working in the venture capital was to work closely with management teams of the portfolio companies. Even though investors typically worked with the management teams at the board level working through strategy, compensation, financial and corporate governance, I was able to work with multiple portfolio companies management teams in helping them with financial management, product management, business development and product marketing.
Start-up environment is chaotic but exhilarating as it allows you to cut through all bureaucratic processes and in a short span of time see an idea take shape and bring real change in company’s overall direction as well as its customers day-to-day lives. Most employees working for start-up companies are full of passion for what they do. Every day you meet with smart people and you always end up learning a lot from them. They are all looking to change the world. It is like founding a new nation with a mission statement of life, liberty and pursuit of happiness. Things, which could take months in a Fortune 100 company, are done in weeks. Best ideas not the political moves are rewarded.
Looking to take charge of my own destiny, I decided to leave the comforts of venture capital industry behind and joined the ranks of entrepreneurs to take a wild, adventurous and thrilling ride of a lifetime. The venture capital company I left behind could not raise its second fund and closed down within the next two years. The company I met on the spring morning and insisted my firm to make an investment was acquired for $492 million three years later. If my firm had made that investment, it would have not only been able to return the investment back to its investors and perhaps would have lived to raise its next fund.
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