Online Extra: Q&A with VC Jonathan Feiber

The Mohr Davidow Ventures partner reflects on the lessons of the dot-com bust and where his company is looking for tomorrow's stars

Venture-capital company Mohr Davidow Ventures gained a reputation for sound investment practices because it didn't back consumer-oriented dot-coms during the boom times. BusinessWeek Associate Editor Steve Hamm talked to Jonathan Feiber, a Mohr Davidow general partner, about how the climate for entrepreneurs has changed. Here are edited excerpts of their conversation:

Q: How did you avoid the excesses of the Net era?

A: None of us understood the [dot-com] companies, and we felt uncomfortable investing in businesses we didn't understand. We considered investing in some consumer-facing businesses but got outbid each time. We weren't willing to pay the market price.

Q: Why do venture capitalists back people who have run startups before, even if they've made mistakes in the past companies?

A: There are two dimensions. In general, people who have been entrepreneurs and have failed in many cases are extremely attractive to invest in. They've taken a set of lessons and applied them to their next company. We love to hear from somebody that they tried to start a company, it didn't work, and they want to do things differently.

But there are other entrepreneurs who are only going to be entrepreneurs in a boom environment. They lacked experience in building a business. Back then, the cost of capital was so low that many times they didn't have to be good businesspeople. In some of these outfits, spending wildly was a core competence. Today, you'll find the entrepreneurs who get funded just have greater experience.

There were some great entrepreneurs in that period. But there haven't been that many durable companies that have emerged. Once you leave telecom equipment and enterprise software, then the numbers get really small.

Entrepreneurs today recognize that success is going to be measured by the traditional measures. But it's out of these times now that great companies are created. The leaders are more battle tested. It's harder to get to the next step and the next step. What will get forged in this period has that enduring quality.

Q: For a while, companies and VCs all seemed to be chasing the next big things. Has that changed now?

A: You see less piling on. It hasn't gone away. A lot of capital is still in the venture funds. We had five years of enormous increases, to the point were venture capitalists were investing tens of billions of dollars a year. Now that there's less money, you won't have 12 companies chasing the identical strategy. It's a handful instead. But still, some areas are overfunded. Storage, for one. It will take years for all of the bad investments to wash out of the system.

Q: What are the big themes for venture capitalists these days?

A: We look for companies that can demonstrate more cost benefits quickly to customers, companies that are capital-efficient in the way they deploy their products, and companies that are technology focused, as opposed to focused on a new business model or a new way of distributing products.

We're looking more at vertical applications. For example, we invested in Sabrix, in Portland, Ore. It [makes] tax-reconciliation software for Fortune 2000 companies that do international trade. The software sells for hundreds of thousands of dollars a year. It's not the world's most glamorous business. But it's a good business. Customers have a critical problem, and this company solves it. These days, you want to be attacking the $5 million problems. There aren't green-field expansion-budget opportunities anymore.

Q: Did exhaustion and the speed of change make it hard for people to strategize and think clearly back in the go-go days?

A: We debate what made it happen. It's a confluence of phenomena and circumstances. People are pointing fingers at other people. But the answer is, we all participated to some degree. With the distance of time, you say this was nuts. But people aren't stupid. For a brief period, a capital market -- from the entrepreneur to the investor -- created this belief in value creation that was not sustainable. Then, people took a step back and said this was not realistic.

At the same time, there's a legitimate and substantive change going on because of the Internet. It's not correlated to the Nasdaq. But the effect of everyone being on a network is profound. And it will play out over a long period of time.

The Internet-time myth is probably one of the most egregious myths. The world didn't speed up. The old way didn't disappear. I think the ability of customers to absorb the change was slower than the entrepreneurs needed. The supply side was running on Internet time, and the demand side was running faster than it ever had, but it was still slower. That was the clash.

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