What's on the horizon for venture capital investing? The founder of one Menlo Park (Calif.) firm predicts conflicting trends in 2008: the demise of a number of VC firms and healthy growth for others, especially those focused on the high-tech, biotech, and green-tech sectors. The founders of Rembrandt Venture Partners focus on early-stage companies with unique propositions and significant "unfair advantage" over their competition. General partner Richard Ling spoke to Smart Answers columnist Karen E. Klein recently about the future and how entrepreneurs might go about capturing his attention. Edited excerpts of their conversation follow.
Your firm has been around since 2004, you've invested in 19 companies, and you've returned all the capital from your initial fund. So you guys are doing well. But what do you see happening on the broader venture capital landscape in 2008?
We think there's going to be continued shrinkage of VC funds out there. A lot of them started in the late '90s, and they popped up solely to take advantage of the Internet bubble. Since the average VC signs 10-year contracts with its investing partners, many of them are reaching that deadline now. They will have difficulty raising new money if they haven't had an exit or returned much capital in the last year.
We also think there's a growing trend among smaller VC firms where they are reducing the size of their average fund, shortening their capital cycle from four years to two, and raising new funds more frequently.
What about trends you see in venture-backed firms and how they will fare in 2008?
We foresee a modest increase in IPOs, but we think that M&A activity will continue to dominate on exits, with lots of action particularly in the media sector. Traditional outlets are still struggling to develop new advertising models for the Internet, so they are consolidating their efforts by buying out these smaller niche media companies because they need them to move online. The other thing that's driving the media markets is the convergence of different data types, including voice and video. Phone companies are becoming TV companies now, and cable companies, because they're providing video on demand.
Teenagers now are spending more hours a week on the Internet than they are watching TV, but advertisers are still just scratching the surface of the Internet as an advertising medium, so there's a lot of growth still to happen there.
You invest primarily in high-tech companies. What's going on there?
We see two tendrils to every large technology disruption. In the early stages of adoption of a new technology, it gets hugely overhyped, way too many players try to get into the space, and there's a massive crash within about two years. This happened with the PC when it was introduced. It happened with the Internet during the bubble. But it's not that new: In 1929, there were 120 telephone companies in New York City alone.
After the crash, things shake out, and within about 10 years, it becomes obvious that the technology has had a huge impact in its own right. We think that's about where we are now with the high-tech industry.
What's the next big thing on the technology front?
We think there's going to be much additional focus on clean-energy technology. A lot of funds are being raised in that sector and there's been a shift in perception. It's not just "greens" who are promoting clean tech these days, but also military and conservative people who are increasingly aware that we're getting more of our oil from very unstable regions of the world. Clean technology is becoming important to the national security strategic discussion at many, many levels. The hawks are starting to see [importation of foreign oil] as a huge economic threat for the U.S., and that's why we're seeing many different constituencies getting behind the green energy movement.
Once you see an issue like that being promoted into public policy, the real business deals start to happen.
Could it be that the same massive buildup will happen in that sector next, as it perhaps gets overhyped and overfunded?
Yeah, we might be in the early part of that two-year cycle with a crash on the horizon. There will be a lot of investments in that space in 2008, but a lot of the companies probably won't survive. At that point, we'll again see massive consolidation and a lot of write-offs. The best position to be in as an investor is to pick up the survivors or work with the people who have learned something after the fact and are willing to start over again in a few years.
What do you tell entrepreneurs or would-be entrepreneurs who are looking for venture capital funding?
Their potential markets have to be huge in order to attract VC investment. But that's secondary to the people involved in a company. I always look for people who have a particular passion and who have something exceptional in their backgrounds. It could be that they've been part of a high-profile startup before, whether they started the company or just worked at it. It doesn't really matter if it was massively successful or not. What's more important is that they were exposed to that startup environment.
For instance, when I find people who've worked at Netscape, I just love it. I'd rather work with a midlevel guy from Netscape than a top guy who worked at IBM (IBM) for 20 years. I also like people who've gone to an exceptional school, because it shows me that at some point they were driven to accomplish something that was difficult to do.
I worked with a guy who was once a pro athlete. He did not graduate from college, yet he was a genius. I hired him for one of my companies just for his exceptional background. If entrepreneurs can show something like that, it makes them stand out and makes investors want to see them become successful.
How do entrepreneurs get your attention in the first place?
They must always have a personal introduction to us, because we will only look at sponsored deals. That means that somebody we know and respect in some way has introduced them to us. People we know from our past careers, professionally or personally, will send us e-mails and say, "This sounds like a great idea."
If I got something like that, I would definitely take a look at it, and probably take a meeting on it. If it was a good deal, and we couldn't do it, we might be willing to work with other VCs we know on it.
Is it always former colleagues who refer business ideas to you?
Not necessarily. A friend of mine got a deal from his barber. So you never know who has a good referral for you!
Do you get a lot of unsolicited business plans?
We probably get 500 plans a year, but we don't read them. I did three startups and I never did a business plan. I just wrote a two-page executive summary, added detailed spreadsheets with the financials, and spent a massive amount of time on the PowerPoint presentation.
Why don't you write business plans?
At the end of the day, VCs are sort of ADD [attention deficit disorder] in general, and most of us have the attention spans of 5-year-olds. If you show us everything in four bullets per page, we get it. But none of us are going to sit down and read 40 pages. Just make that PowerPoint incredibly compelling.
What kinds of deals does Rembrandt target?
We're looking for early-stage companies who need $5 million to $8 million. Some of them are two to three guys with a great idea. For them, we may do $300,000 in seed-level funding so they can form their company, buy some computers, buy some whiteboards, and get started. We're shooting for four- to five-year time frames, with seven to eight years on the outside.
You actually incubate some of the firms that you've invested in, is that right?
Yes. We've incubated, seeded, and started a third of our portfolio companies. I was the acting CEO of one of our companies for nine months while it got off the ground. It's really rewarding, though it's more an art than a science. The best part of it is that every company we're involved in launching has gone on to somehow change the world through technology.