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In January, more than 500 Harvard Business School studentsabout one-third of the student bodytraveled to San Francisco and Silicon Valley as participants in WesTrek, an annual pilgrimage to visit established and start-up companies. More than 200 firms participated, ranging from Netscape to Chipshot.com, a site for golf enthusiasts.
As part of WesTrek, student organizers convened a panel of entrepreneurs and the venture capitalists who backed them to talk about the challenges founders face in starting companies and how the VC field has evolved. Among the panelists were Chris Larsen, CEO of E-LOAN, a Dublin, California, company offering mortgages, auto loans, credit cards, and small business loans online; Bob Kagle, a general partner of Benchmark Capital, a VC firm in Menlo Park, California; Rob Glaser, CEO of RealNetworks in Seattle, a leader in streaming media technology on the Internet; and Jim Breyer (HBS MBA '87), managing partner of Accel Partners, a VC firm in Palo Alto, California. HBS professor Jay Light led the discussion, highlights of which are presented here.
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Chris Larsen, CEO, E-LOAN:
First, let me give you a quick summary of our company. E-LOAN is the leading online lending company in the United States. We have about 350 people and did about $2 billion in loan volume last year. We originally targeted the loan business because we thought it was poorly served by the distribution networks. Our idea was to use the Internet to bring consumers to the point of productionto take out all the unnecessary costs. We knew that was going to get big play, but it was very difficult to get people interested at the time, which was about in 1996. We pitched to a lot of angel investors and several large venture capitalists but couldn't get anyone interested. So, after about six months of being very frustrated, we basically self-funded. We used our credit cards and $100,000 from family and friends and launched the product. After a couple of failed starts with some other venture capitalists, Bob [Kagle of Benchmark Capital] called us. At that time, we were literally running on fumes. Bob said, "Let's just meet." I think it was about two weeks later when he actually cut the check. In that time we had developed a really trusting relationship. A VC is a partner who's going to be on your board. If you can't bear to hang out with him or her, it will not work. You will be out, and your company could be wrecked. I'm absolutely convinced that our company would never have made it if we went with another VC.
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Bob Kagle, General Partner, Benchmark Capital:
Shortly after we formed Benchmark, we decided to focus a lot of our energy on the Internet. I don't think that was a terribly courageous thing to do at the time, because there was a lot of evidence that this was a really significant phenomenon. In some ways, I think it's more courageous to try to do that today, given the environment.
Mortgages were actually number three on our list of targets. We started calling around and heard a lot about this company, E-LOAN. We were really impressed with what we saw. They had done a number of very inventive things to put themselves on the map, early on, with few resources. Resourcefulness is something we always look for in entrepreneurs, and we saw it there, from a distance, in E-LOAN.
So I called up Chris. Actually, I didn't ask him if he was looking for money because I wasn't sure he was. I asked him if he had any sort of bias against venture capitalists, because I wanted to come by and just talk with him. We had a chance to get together, and it was immediately apparent to me that there was a very special partnership between Chris and [E-LOAN cofounder] Janina Pawlowski. Among all the advantages and attributes I saw that made E-LOAN an attractive investment, it was probably their partnership that impressed me the most. They had this combination of respect and affection for one another, which gave me a lot of confidence that they could get through the tough spots. In addition, we always look for a lot of domain expertise, and they had a tremendous depth of understanding of the business; they had started a mortgage brokerage business prior to E-LOAN.
Now, one of the things we like to see in entrepreneurs is that they will start their businesses without venture capital. What turns me off more than anything else is if people come in to pitch us an idea, and it's clear to us that they'll go after their idea only if they get the money. I like those people who are going after it, come hell or high water, and if you are fortunate enough to come along for the experience, good for you. I definitely saw that commitment in Chris and Janina. Another thing that impressed me is that Chris kept coming back to the customer experience. I find that the most successful entrepreneurs have a real sensibility about why they are in business. It's not for the employees or the shareholders, it's for the customers.
The other thing I saw at E-LOAN, which has proven out in spades as I've watched them face and overcome a number of challenges in the last couple of years, is a real decisiveness in the company. They don't waste a lot of time mulling over important decisions. They think them through carefully but, more important, quickly. They're not afraid to decide and move forward aggressively.
When you're looking for a venture capital investor, you should really look for a partner, somebody who's going to build this business with you. On the one hand, you should trust your gut on the chemistry; on the other hand, there's no substitute for homework. You should call at least a half dozen people who've worked specifically with that venture capitalist, not just with the firm. And don't ask, "Was there any value added?" Ask the entrepreneurs, "Is the world any different for your company because so-and-so was involved? What, specifically, did he or she do?" For the best venture capitalists, those answers are going to roll off the entrepreneurs' tongues. In fact, you're going to have to quiet them down a bit. And for the others, you're going to have to struggle to get them to respond to that question.
Finally, I don't think getting rich quick is the reason to come into the venture capital business or to be an entrepreneur. I believe it's about satisfaction, making a difference, believing things can be better, and being willing to make personal sacrifices to make that happen. It takes a lot of personal sacrifice to grow a business.
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Rob Glaser, CEO, RealNetworks:
When I started RealNetworks in February 1994, people didn't think of the Internet as a commercial phenomenon. I had just seen the Mosaic Web browser in 1993. It seemed clear to me that the Internet was going to be the lingua franca, in terms of it becoming the tissue connecting all these separate pieces and how the Net itself could be used as a distribution channel to bootstrap the technology that would be used to cause it to flourish. The idea of doing streaming audio seemed like a natural to me.
The first outside funding we took was in February 1995, just before we shipped the first version of RealAudio. It was through what would now be more formally called angel investors.
Our lead investor was Mitch Kapor, the founder of Lotus Development Corporation, who at the time was an individual investor. He hooked me up with Jim Breyer at Accel. Mitch said these were great folks who would help take the company to the next level. We began our negotiations in the spring of 1995, and they didn't end until early October.
What we were looking forand we talked to a couple of different venture firmswas obviously a set of financial arrangements that would be comfortable. But even more than that, we wanted people who matched our philosophy about wanting to have the maximal impact over the long term.
We ran into venture capitalists who erred on two extremes. There were those who wanted to "swing for the fences" every time upno matter what, just hit a grand slam. And if you don't, well, we've got a portfolio of these other start-ups, so let's go on to the next one. I didn't want to be treated like a member of a portfolio. I wanted us to put as much gas on the accelerator as appropriate, given the market conditions. Then there were others who were into hitting singles and doubles, who would be really careful and thoughtful. The problem is that they tend to miss the big, transcendent opportunities.
Accel was unique. They took a long-term view of what we're trying to do, not just from a strategy point but from a relationship standpoint. And it has worked out extremely well for us.
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Jim Breyer, Managing Partner, Accel Partners:
The venture business has changed dramatically since we did our deal with Rob, but the RealNetworkslike deal in 1995 was very typical of what today's best deals look like.
As Rob mentioned, we met at least a dozen times, from March until early October 1995. This kind of six-month deal is very standard today. Entrepreneurs have more leverage than ever before. They will talk to three or four firms and probably invest their own money in the first round. The first institutional venture round will very likely be a one-firm deal. If there's one disappointing part of the business today, it's that 75 to 80 percent of our deals are one-firm deals. Thinking back to 1994 and '95, I would say that same percentage would be twoor three-firm deals. It was a collegial business. It still is, but it's very different because there is an emphasis on one firm buying a 15 to 20 percent stake, valuations have gone up dramatically, and so the competitive intensity has increased substantially.
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