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Sure, the dot-com headache continues and markets are bumpy. But is the present venture capital climate really that bad, especially given the cyclical nature of the business?
Speaking on a panel at the H. Naylor Fitzhugh Conference February 23, industry insiders provided an outlook for the VC community and charted several hopeful areas for investment.
Perhaps the highs and lows of the recent past offer opportunity for reflection, suggested moderator Clifton E. Strain (MBA '89), a managing director at Wachovia Securities.
"I don't think this is the most difficult financial environment ever," said Thomas E. Darden, who recalled walking UAW picket lines with his father in the 1970s. "The late 80s were ugly, too," remarked the founder of Reliant Equity Investors, a private equity firm investing in minority-controlled companies. "Right now, people are flush with cash. Even if you're only making 5 percent, it's on a bigger number. You do have to be more focused and work harder to compete."
"It's important to act with caution and be all over a deal—know it backwards, forwards, and upside down," agreed Kevin M. Jordan, vice president and COO of Goldman Sachs' Urban Investment Group.
| Transitions in the management of public and private school education interest me. |
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— Kevin M. Jordan, Goldman Sachs |
"We go out and meet managers," agreed Darden. "You can always find assets." Recalling his bewilderment at the height of dot-com mania, he said, "I didn't do any Internet deals because I couldn't understand how the businesses I looked at were going to work." At the end of the day, he continued, venture capital isn't that complicated—it's about being disciplined and sticking to business fundamentals.
Likes and dislikes
Now that the days of two- and three-year turnaround deals are over, where are the opportunities for long-term investment, asked Strain. Which sectors enjoy most-favored status, and which will panelists continue to avoid?
"I like telecommunications," said James Earl Brown III (HBS MBA '95), a former partner with Polaris Ventures who is now president and CEO of Invisible Hand Networks. "Enterprise software will continue to be tough—if you're not a 'must have' for business, you're not going to get any money."
Outsourcing continues to be attractive, said Darden, although it tends to lack strong management. Industrial technology that improves productivity and healthcare services for an aging population—particularly home care—also look promising. Wireless is another story, he continued, with low consumer adoption rates and a lagging infrastructure slowing the industry's growth.
"I'm big on brands," said Dufresne, noting that her firm recently invested in Fender guitar. Early-stage companies involved in managed network security are another favorite, as are deals that involve picking and choosing specialty pharmaceuticals and assembling them into a portfolio.
"Transitions in the management of public and private school education interest me," said Jordan. "In media, there'll be a lot going on in the ethnic and minority space. Everyone sat up and took notice of the demographic changes between the 1990 and 2000 census."
"We're basically software guys," said A. Anthony Gee, general partner at Carthage Venture Partners, "but it really depends on the management team and their ability to execute-based on that criteria, it's possible to find relatively successful companies in sectors you may not like as a general rule."
It's also important to consider the company's stage of development, added Brown. Some industries are ripe for early, not late, investment. The woes of some venture capitalists can be attributed in part to players who didn't make this distinction or thought that one stage was easier than the other. "Partnerships are ten-year cycles—people forget that," he said. Venture capital has become more institutionalized over the past three years, Brown continued, as consolidation and fallout occur on the market's downside.
Like working for the CIA
Citing Enron's collapse, one audience member asked how panelists could be certain they've found a management team with integrity.
"After doing extensive research, there's no absolute way of being sure," said Jordan. "At a certain point, you have to go with your gut."
"A good chunk of what I do is like working for the CIA," said Dufresne. "It's normal for me to make thirty phone calls on one CEO. We want to get a 360-degree view of the person."
"It's also based on personal interaction," said Gee. "How do I feel when we agree—or disagree?"
Gee went on to say that the number of African-American entrepreneurs who have received institutional investment is still extremely small. That will change as networks develop and more African Americans enter the venture capital industry. "Chase your dreams and visions," he told the audience. "It's important to believe in something."
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