Investing in Experience

VC-backed companies are turning to Old Economy execs in the belief that fundamental business sense trumps Net knowhow

Out with the new, in with the old -- executives, that is.

Two undergrads in a garage no longer constitute a business worthy of millions in venture capital. And many of the VCs who a year ago were funding those two undergrads are now scouring Corporate America to find the management talent they see as key to rescuing their foundering companies.

"The real issue is that we've got, in a lot of our interactive stuff, amateur night," said Howard Anderson, founder of YankeeTek Ventures in Cambridge, Mass., a $60 million fund for early-stage technology companies. What he and others learned the hard way, he says, is that domain knowledge trumps Internet knowledge any day.

The type of person who's attractive to VC-backed companies now, Anderson says, is "a general manager of a GE division who is running a pretty large profit center. They know the fundamentals of management and how to make the numbers." He acknowledges that these managers are tougher to get after the high-profile demise of so many Internet companies last year.


  But only about 10% of bricks-and-mortar execs have what it takes to adapt in a startup environment, Anderson estimates. That's also the figure cited by Peg Wyant, co-founder of the Isabella Capital venture fund in Cincinnati. Because Wyant spent a lot of years at Procter & Gamble and Isabella Capital co-founder Wendy Gardner came from Quaker Oats, both are grounded in Fortune 400 culture and know the value of having some of those executives in their startups.

"In simplistic terms, the Old Economy is too conservative and slow. The new one is too inexperienced and acts too quickly," Wyant says. "Our entire fund is founded on the premise of strategic planning and marketing. What we bring to the table is our intellectual capital in these areas, not in finance and technology," she says. "That is solidly Old Economy -- no disconnect there."

For some, the issue isn't Old Economy vs. New, or bricks-and-mortar vs. Internet, it's experience vs. naïveté. Entrepreneur Lauren Flanagan, the 46-year-old founder and CEO of WebWare in Sausalito, Calif., recently hired Daniel Enterline, formerly of Procter & Gamble, Johnson & Johnson, and Ericsson Mobile, as chief marketing officer. Rod Haden, who ran a $220 million line of business at IDG Books worldwide, was hired as head of direct sales at WebWare, which helps companies such as Martha Stewart Living and Amgen catalog and manage their brand assets, such as images, videos, and logos.

"As you grow, you outgrow the informal ways that work at small companies," says Flanagan, who took four years to get from two employees to the current 55. "Then, you look to executives with experience running bigger companies."


  In some cases, that experience includes running bigger companies that have hit trouble. Robert Bernstock, a former executive vice-president of Campbell Soup who became CEO of Vlasic Foods International when Campbell spun off that business in 1999, was hired earlier this month to be CEO of Atlas Commerce. Atlas, a software company in Malvern, Pa., creates so-called e-hubs, where a business and its strategic partners can work together online.

Bernstock's exit from Vlasic came three weeks before the company filed for Chapter 11 bankruptcy protection. "That doesn't bother me at all," says Dan Tiernan, co-founder and president of Atlas. The bankruptcy wasn't unexpected, he says, given that Vlasic was debt-laden from the beginning. And Bernstock "learned a hell of a lot from it," Tiernan adds. "He wasn't going to go anywhere that he didn't have a lot of confidence in."

In an interview before the bankruptcy filing Jan. 29, Bernstock said he was a good fit for Atlas because, at Campbell, he was helping to run the kind of company that Atlas is trying to sell to -- one with far-flung operations, many strategic partners, and suppliers who need a single online network to transact business. He was at the meetings where Campbell was deciding which technology to buy, and he has enough global experience to know the solutions needed, so he's in a position to evaluate Atlas' product.

"In essence, I know how large companies make these decisions. I made these decisions for 10 or 12 years," says Bernstock, who is 50. And, yes, "customers and potential customers know me, in many cases, so they have more confidence."


  For its first two years, the three-year-old Atlas concentrated on research and development. Then it was time, Tiernan says, to raise serious capital and get a management team. "I didn't really think about Old Economy vs. New Economy," he says. "I just wanted to find the best CEO on the planet. Ninety percent of bricks-and-mortar executives wouldn't have been able a brand new emerging-market space."

It's a faster, more nimble world than Campbell's, Bernstock acknowledges: "The strategic planning department is Dan and me -- after we've finished our regular jobs."

An infusion of old-line executive knowhow may be the key to success at some young Net companies, but it's no cure-all -- and it's not always easy to pick the most capable candidates from the corporate corps. Too often, the spark is missing, says Richard Shapiro, managing partner of Crosspoint Venture Partners, a venture fund in Silicon Valley.

"There may be some investors who take comfort in having executives from bricks-and-mortar [companies] running a young business -- we do have a few like that running our startups," Shapiro says, acknowledging that domain experience is valuable. At the same time, the kind of individual who can run a large organization is often ill-suited to acting quickly and non-bureaucratically. There's a certain fearless, passionate personality -- what Shapiro calls "the genetic defect we look for" -- that's endemic to entrepreneurs.


  The point, Shapiro believes, is to have quality leadership in place, no matter where it comes from. "One of the great sins of funding during the bull market is that the leadership issues went by the wayside," he says.

How does all this sit with the bright young entrepreneur who had the big idea and the hockey-stick business plan, showing a sharply climbing revenue line after the first quarter or two?

"We always need an entrepreneur to start," says Anderson of YankeeTek. "We don't need them to finish. We have the money. They have the plans they have not met. Our job, as the adult in charge, is to get someone in there who can make the plan work."

As in hockey, the ones who make the goals are the ones who get to play.

By Theresa Forsman in New York

Edited by Robin J. Phillips

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