If you've ever wondered what those meetings between entrepreneurs and venture capitalists are like, the title of a book by one VC executive,
A Good Hard Kick in the Ass
, might provide a clue.
In the wake of the dot-com/dot-bomb bust-up, bright ideas just don't cut it anymore, maintains Rob Adams, the author of that book and the managing director of AV Labs, an early stage venture capital firm specializing in technology and Internet companies.
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Venture capitalists today are casting a much warier eye toward entrepreneurs seeking start-up money for a new business, Adams says. And that's potentially good news for investors in IPOs, even in the technology and Internet sectors, Adams says, because any new stock coming to market in the current environment has been through a much more rigorous VC/underwriting process. Here, Adams tells Meet the Street exactly how he gives entrepreneurs who meet with him that good hard kick.
TSC: Where is venture capital money going now?
Seasoned entrepreneurs, the people who have been through it a few times and who really know their business ... and who offer a sensible capitalization structure paired with executing sales and marketing correctly.
TSC: Your firm specializes in Internet and technology companies. Do you think we can reasonably expect a resurgence in high-tech and Internet IPOs at any point?
Absolutely. In fact, we are one of the few funds around still doing this. We continue to see great technology and Internet ideas and continue to look for what we call "two guys and a dog" -- smart people with good ideas. And we try to help them through their first 12 months of life by helping them figure out markets, hire management teams and figure out a capitalization structure for the company.
TSC: So what's with the title of your book?
If you stick to the fundamentals and you work hard, you're going to get somewhere. But if you think it's going to be easy, like some of the hyperactive, overcaffeinated markets we have just experienced in the dot-com craze, it's just not going to happen.
TSC: What you are talking about is very commonsensical. Why is this such a revelation?
This is stuff everybody already knows, but we have tried to put it together in a way that just makes a lot more sense. We venture capitalists, attorneys and accountants sit down with entrepreneurs every day and we have to explain this kind of thing to them. And the entrepreneur comes back and says, "What's the 'silver bullet' answer? What do I gotta do?" Well, there is no silver bullet answer. It's a number of different very simple, very straightforward things that have to be done well.
There are two critical factors that make up a successful company. The first one is the team. The second, especially in the early stage start-ups we work with in our venture accelerated capital firm, is making sure you've validated the market ... by really understanding everything about your target market and your competition, through probing and surveying that market on a daily basis.
TSC: If venture capitalists are now scrutinizing companies far more carefully than they were during the Internet/technology run-up of 1998-99, does this mean that the companies that will eventually come to market as IPOs are better investments?
Yes, chances are that the companies readying themselves to go public are much better businesses than we saw 18 or 24 months ago, because only the best deals have survived the downturn, and only the best deals are going to make it to the public market. So investors can be pretty sure that some pretty good stuff is going on inside that company.
TSC: Investors seem to be expecting a lot from the upcoming IPO of online payment processing company PayPal. Is this the type of Net company we'll see IPO-ing in 2002?
Pay Pal-type opportunities are going to be few and far between, because face it -- that company is just riding on the success of
. But I do like basic infrastructure companies that will supply technology to all industries: networking, security, software applications, high-end servers, data management and storage area networks.
TSC: What's this thing you call "business porn"?
In the heyday of 2000, 2001, if you weren't on the cover of
, 20 years old and had body art, you were really a loser. Meaning that the media endlessly hyped IPOs and VCs and gave the impression all this stuff was simple to do. That if you weren't in Silicon Valley, on your way to retire by 30, you weren't "with it." That all you needed to build a company was have "dot-com" in your name and the money would flow, and the IPO would flow shortly thereafter.
And the rest of us investors, we all thought we were geniuses as well, because we were all making so much money in the stock market.
TSC: You have another curious phrase, your "rule of 1-8-20". What's that?
Back in the dot-com days, people got really excited about ideas. To sober people up, we tell them out-and-out, "Listen, your idea is not unique." If there's one person with a great idea in Austin, Texas, where I am, you can be pretty sure there are eight of them in New York and 20 of them in the garages of Palo Alto alone, by sheer dint of the population in those markets -- and the drive.
. It's a commodity idea that's been executed to brilliance by a superior management team. So, don't focus on your idea. Focus on the team that can go execute your idea.
TSC: Which mid- and large-cap companies already traded on the markets today would you say are implementing what you believe to be sound practices of smart entrepreneurs?
The best one at this is
. They go out and very aggressively analyze markets, make executions and build stuff internally when they think they have an emerging market, as with the Internet. They were late to the party, but they are a dominant player.
has bought many promising companies on the way up. They know what markets they want to go after. They know when they have the internal skills, and when they do not, they rectify that through acquisitions.
Another great one is
. Amazon has built a worldwide brand name for far less capital than any other brand name yet.
-- all those people have spent far more. Amazon really has the customer acquisition and care down to an exact science.
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