Item: Venture capital funds are down an average 32 percent for the 12 months ended Sept. 30. — Wall Street Journal
Item: Kleiner Perkins Caufield & Byers agrees to release investors from 20 to 25 percent of their capital commitments. — San Francisco Chronicle
Item: Mohr, Davidow Ventures reduces size of its recent $843 million fund to $652 million. — Boston Globe
Item: The proportion of venture funding going to first-round investments sunk to its lowest level ever in the last two quarters of 2001. — Venture Capital Journal
Turbulence in the economy has finally sloshed downstream and in through the front doors of the venture capital community, where firms are reducing fund size, fees, and even reducing partners.
Bad news for investors? Worse news for entrepreneurs? Hardly, says VC Dan Ahn (HBS MBA '97). This back-to-basics movement is one of the best things that could have happened. "This is a great time to start a company," he says.
"Right now it's much more like VC used to be in the early 90s," says Ahn, pointing to a time of another significant economic slowdown. "This seems normal to me. (VC) was a hard business...and you needed a lot of expertise to make money."
Ahn, 33, is a managing partner at Woodside Fund, a Redwood Shores, Calif. VC specializing in early-stage companies in networking and communications, and enterprise and Internet infrastructure software.
In fact, says Ahn, the one-two punch of the dot-com implosion and slowing economy has restored to the industry a sense of level-headedness, emphasis on due diligence, and realistic expectations.
"Basically we are taking our time and building companies. We're not going to ramp product development and teams ahead of customer needs, which is generally what firms have been doing. We're more on the conservative side."
|We just want to make sure we are going after a real market with real customers who have money to buy.|
— Dan Ahn,|
Another change is to be more demanding of portfolio companies in achieving benchmarks, he said. And not just technical milestones. Much more emphasis is placed on startups hitting customer milestones, such as landing three beta customers by such-and-such a time.
"The difficult thing (for entrepreneurs) now is that the level and depth of customer validation is much higher," Ahn says. Validation doesn't just mean an expressed interest by a customer, but rather that the customer puts you in their operating plan and has the means to buy your product. And it's not just enough, say, that the head of a company's business unit gives you the thumbs up. Ahn says he wants to know if it's a viable business unit. "This is not something we did two or three years ago."
But fair is fair. In researching new market opportunities, Ahn has taken due diligence to a higher level in pursuit of his own ideas.
Ahn believes he has identified a market with huge potential in the network semiconductor industry, but is spending two months to validate that customers actually will buy what he is proposing. He has hired a full-time marketing consultant to do nothing but interview industry executives. He's also had discussions with a semiconductor design team to see what is feasible, and is thinking about an all-star management team.
"This is not your standard VC thing," says Ahn. "We just want to make sure we are going after a real market with real customers that have money to buy."
Despite appearances to the contrary, Ahn believes this is a great time to start a new company. Of course, this isn't 1999, when VCs shamelessly chased any idea with a URL and a teenage CEO up and down Sand Hill Road. But the downturn has brought with it opportunity.
Work Week: 60 office hours, another 20 doing related activities.
Phone Calls Per Week: 40
Address Book: 2,000 personal contacts
Time Spent Typing in Contacts into Microsoft Outlook: 6,000 minutes
"One of the most important things is the really great people you can recruit. This was not the case in 1999-2000," Ahn says. Plenty of smart, talented people are looking for their next opportunity in a well-back startup. Better yet for entrepreneurs, these execs have realistic compensation expectations.
The second advantage of this market is access to resources such as lawyers, consultants, and recruiters, all of whom were rather busier a year ago.
Ahn believes the dot-com mania pushed a lot of inexperienced business professionals into VC to make some quick money. "At some firms you saw partners who had no experience...It created a lot more noise in the business. It pushed the value more towards the money end than the expertise end. You should never take venture capital for just the money."
He says Woodside avoided much of the dot-com downturn. "We've never made a B2B or dot-com investment." The firm looks for proven business models and backs industry veterans, people ready to pour five years of their life into growing a business.
"The entrepreneur we work with isn't the recreational entrepreneur…trying to get rich quick."
While many of his classmates were more interested in careers in M&A and investment banking, Ahn was interested from the start in being a VC. He liked that investment firms back then were small, more like families. "I just thought it would be interesting; you get to work with an incredible array of the most brightest and talented people you'll run into in the business world."
Ahn also steered his own startup, an experience that provided perspective on the life of an entrepreneur. He co-founded and was president of Endpoint Technologies Inc., which developed and sold real-time manufacturing control systems for semiconductor device production. The company was later acquired by Applied Materials.
"I learned that I didn't know that much, that it's a lot different doing it yourself as opposed to coaching someone else. Entrepreneurship is best left to the professionals."
Today, the best potential markets he is looking at are those hardware, software, and services helping the transition of business communications from analog to digital, marrying the Internet with voice, video and real-time communications.
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Dan Ahn's advice to students considering venture capital careers: