So You Want to Be a Venture Capitali

[David Farber <dave () farber net>]

http://www.nytimes.com/2005/05/22/business/yourmoney/22venture.html? 
pagewanted=all


May 22, 2005
So You Want to Be a Venture Capitalist

By GARY RIVLIN
Menlo Park, Calif.

BY all rights Stewart Alsop should have been a terrific venture  
capitalist. So why did Mr. Alsop, long considered a cyber-prophet  
among technology leaders, wash out in a profession in which he seemed  
predestined to succeed?

In recent months, as venture capital firms have announced the  
formation of new investment funds, a hot topic among the Silicon  
Valley cognoscenti has been the exodus of "tourist V.C.'s," as people  
from nonfinancial backgrounds are known here. Some have left the  
field because they did not pick enough winners; others have gone on  
to pursue different projects. Whatever the reason, there are hundreds  
fewer venture capitalists around today than just two years ago.

The business of financing start-ups, it turns out, may not be as easy  
as it seems. "There are Darwinian characteristics to venture  
capital," said C. Richard Kramlich, a founding partner at New  
Enterprise Associates, a top Valley firm that hired Mr. Alsop in  
1996. "Below the surface there's a huge amount of turnover."

At first Mr. Alsop seemed destined for venture capital greatness. But  
for him and others who made the leap into venture capital in the  
second half of the 1990's, the experience proved humbling.

A technology journalist dating back to 1983, Mr. Alsop was the  
founder of Agenda, an invitation-only computer industry conference  
that drew the likes of Microsoft's Bill Gates. Part of the appeal was  
that Mr. Alsop had a talent for spotting promising technologies and  
undiscovered start-ups before others.

But Mr. Alsop and New Enterprise Associates parted ways in December.  
Mr. Alsop said he left because he felt most comfortable working with  
nascent technology companies, and, increasingly, N.E.A. has been  
broadening its focus well beyond investing in very small start-ups.  
He described his own track record over eight years as good but not  
great.

But Mr. Kramlich, who has worked as a venture capitalist since 1969,  
put it more harshly. The firm, it seemed, had simply run out of  
patience with Mr. Alsop, as it did with others who were not seen as  
pulling their weight. N.E.A. has raised a pair of billion-dollar-plus  
funds over the last five years, sums high enough to have raised the  
stakes of the game.

"We can't really have people learning on the job anymore," Mr.  
Kramlich said. Two-thirds of the partners who were at N.E.A. in 1997  
are no longer at the firm, he said, and then cited an internal study  
that went a long way in explaining why: the surviving third accounted  
for 85 percent of the firm's profit.

Turnover is the story at many well-known venture firms. Consider  
Kleiner Perkins Caufield & Byers, widely viewed as one of the two  
premier venture outfits in Silicon Valley.

In February 2004, Kleiner began a $400 million fund, but it isn't  
managed by any of the half dozen or so of the partners who worked for  
the firm in the late 90's; they had either left the firm or been  
relegated to secondary roles. Kleiner has hired three new managing  
partners since the start of the year.

And when Benchmark Capital closed its own $400 million fund last  
June, the firm announced that David Beirne, who had helped found  
Benchmark in 1995, was no longer a full partner. "Sometimes it's true  
that a partner left a firm over strategic differences or whatever  
they say, but that's the exception rather than the rule," said Steve  
Dow, a venture capitalist with Sevin Rosen. More typically, he said,  
it's "because they didn't have a good enough sense of smell about a  
deal."

Mr. Alsop and Mr. Beirne follow many other illustrious names out of  
major venture firms. Mitchell D. Kapor, the founder of Lotus  
Development, whose 1-2-3 spreadsheet software made Lotus one of the  
early giants of software, should have been a natural as a venture  
capitalist.

Mr. Kapor had enormous success investing for himself in barely-formed  
start-ups like RealNetworks and UUNet Technologies, both of which  
provided him with staggering payouts.

Yet he did not prove to be a star the years he worked as a  
professional venture capitalist.

"The fact that it's someone else's money you're investing, and that  
you're investing as part of a partnership, that was more different  
than I thought it would be," said Mr. Kapor, who went to work in 1999  
for Accel Partners, another top venture house in Silicon Valley. "I  
later found out that everybody who makes the transition like I did  
says that."

Mr. Kapor failed to choose a single company that made him, his  
partners and their investors any money. He confesses he was 0-for-5  
in the investments he made during his three years at Accel. "Most of  
us learned the hard way that venture investing is best left to the  
professionals," said Marc Andreessen, the co-founder of Netscape  
Communications.

Shortly after America Online paid $4 billion to buy Netscape, Mr.  
Andreessen helped bankroll a venture firm called 12 Entrepreneuring,  
a short-lived partnership forged in early 2000 by Benchmark and a  
pair of successful Internet entrepreneurs, Halsey M. Minor and Eric  
Greenberg. But 12 Entrepreneuring ceased operations only 18 months  
after it started, and the partners, including Mr. Andreessen, lost  
nearly two-thirds of the money they had invested.

"I think what a lot of these guys learned, some the hard way, is that  
you're a natural athlete or you're not," said Sanford Robertson, the  
co-founder and former chairman of the investment bank Robertson,  
Stephens & Company, who has been investing in venture funds for more  
than 20 years. "Some can do it, and some can't, and like with  
athletes there's no way of telling until they take the field."

At the end of the 90's, it seemed everyone in Silicon Valley wanted  
to become a venture capitalist (except those who wanted to be  
entrepreneurs funded by venture capitalists). As the ranks of venture  
capitalists more than doubled, according to the National Venture  
Capital Association, from less than 5,000 in 1995 to nearly 10,000 by  
2001, firms started hiring people from outside traditional fields  
like finance or operations.

Suddenly many lawyers, entrepreneurs, journalists and executive  
recruiters were trying their hand at playing venture capitalist -  
just as today any number of investment bankers, financial analysts  
and others seem to be starting their own hedge funds.

IT'S easy to understand why so many joined the swelling ranks of  
venture capitalists. A general partner at a top-tier firm typically  
earns at least $1 million in salary. But the real payoff is what  
venture capitalists call "the carry" - the 20 to 30 percent of the  
profits they share among themselves before disbursing the rest to  
investors.

An informal survey of venture capitalists suggested that a partner  
working at a top-tier firm in the 90's could pocket roughly $50  
million over the life of a single fund - with venture firms typically  
raising a new fund every few years.

Beyond the vast financial rewards, there are the thrills. A venture  
capitalist is not unlike a movie producer auditioning tomorrow's  
stars. "Being a venture capitalist was viewed as a very exciting, top  
of the feeding chain sort of thing," said Scott Dettmer, a founding  
partner at the Silicon Valley law firm Gunderson Dettmer, who has  
been providing legal advice to venture capitalists since the 1980's.  
"But what I think a lot of people learned is that it's not as much  
fun or as easy as it might have looked from the outside."

Certainly, the early years are often painful. One of the industry's  
more legendary investors, John Doerr at Kleiner Perkins (his hits  
include Google, Amazon, Netscape and Sun Microsystems), used to say  
that training a new venture capitalist was not unlike preparing a  
fighter pilot for battle: it takes "probably six to eight years and  
you should be prepared for losses of about $20 million.

"Of course, while we take risk, we work like hell to avoid crashes,"  
Mr. Doerr said.

By that standard, Mr. Alsop was successful at N.E.A. He didn't lose  
money in his eight years, and, by his calculations, earned the  
partnership a 100 percent return on the investments he oversaw.  
Shortly after his arrival, he persuaded his partners to pay $1.7  
million for an ownership stake in a software start-up called  
Connectify, which was purchased by Kana Communications. That earned  
the partnership 22 times its money.

He could also take some credit for the success of TiVo, the digital  
video recorder company that went public in September 1999. Mr. Alsop  
didn't bring that deal to N.E.A., but he worked closely with the  
company founders as a member of TiVo's board of directors. He said  
that the TiVo deal had earned N.E.A. and its investors 11 times their  
investment.

"I think I've done very well as a venture capitalist, but I'm not in  
the god category," Mr. Alsop said. He defines a venture god as  
someone who has made $100 million to $500 million on a single  
investment. His list of industry deities includes Mr. Doerr, Mr.  
Kramlich and Michael Moritz at Sequoia Capital, who was an early  
investor in Google and Yahoo.

Mr. Moritz seems to prove the point that there is no obvious résumé  
for the perfect venture capitalist. Prior to joining Sequoia in 1986,  
Mr. Moritz was a business journalist and a writer for Time magazine,  
though one with an M.B.A.

Mr. Kramlich, who has a background in finance, said: "Venture capital  
doesn't necessarily take a lot of technical talent. "I mean, it  
doesn't hurt, but it's more about people skills and the ability to  
assess whether there's a market for something."

Certainly Mr. Beirne, formerly of Benchmark, has people skills.  
Before joining Benchmark in 1995, he had a stellar reputation as an  
executive recruiter able to persuade the most reluctant candidate to  
switch jobs. Yet how he performed in his nine years as a general  
partner at Benchmark depends on whom one asks.

MR. BEIRNE acknowledged that many in the clubby V.C. world may think  
he left because of a mediocre track record, but he disputes that  
perception.

"I have been personally responsible for returning a billion dollars"  
to investors, he wrote in an e-mail message. He decided to leave the  
partnership for a "personal reason related to one of my children" and  
"no other reason." Yet apparently for some, once a venture  
capitalist, always a venture capitalist. Mr. Alsop is exploring the  
possibility of raising a fund for new start-ups.

"I feel at this point I'm very good at this," he said. It's only a  
matter of time, he said, before he scores what he describes as a  
"godlike hit."

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