Chuck Martin on Local Venture Funding, Silicon Valley and the Dot-Com Bust
“We can handle half a dozen good solid, venture firms headquartered here,” says Charles Martin.
And Martin should know. He’s been a venture capitalist in Orange County for 15 years. He founded Enterprise Partners, the largest venture capital firm in OC before Martin resigned and Enterprise’s general partners moved to San Diego to focus on biotechnology.
Martin continues to be involved in the local venture capital community. He’s started another firm, VentureLab LLC in Newport Beach, with $50 million of his own money. He’s invested $3 million in OC start-up companies this year.
“I don’t need to work seven days a week, 16 hours a day and manage other people’s money. I manage my own,” Martin said.
Martin also oversees his personal portfolio and is a partner in Westar Capital, an investment firm backed by real estate developer George Argyros.
The Willard, Ohio, native just finished four years of chairing the board of the Orange County Museum of Art. He’s on the board at Chapman University and is co-chairman of the UCI Graduate School of Management.
Martin sat down with David Orloff to discuss venture capital in Orange County and other aspects of the industry.
How do you compare venture capital in OC to San Diego and Los Angeles?
The markets do not divide down by counties. The venture capital firms headquartered in San Diego will invest in Orange County and LA. The ones in LA will invest the same way. That’s the way the industry operates. We’ve just recently seen a few venture firms form in LA. You’re seeing another phenomenon that many of the venture capital firms used to be multi-industry,investing in healthcare, technology and other industries. They are becoming much more aligned along industry lines.
Orange County really is lacking substantive VC firms headquartered here. One of the financial weaknesses here is the county does not have a top-tier venture capital fund here. The county would be much better off if it had. We can handle half a dozen good solid venture firms headquartered here. There are some good branch offices here. A lot of money flows in from Silicon Valley, LA and San Diego firms. Firms tend to invest close to them. But there is more friction in the system if the early- stage companies are farther from their venture capital firm.
What has to happen to bring a top-tier venture capital firm to Orange County?
It is hard to say. It will happen with time. It is not something you can force to happen. How it happens is you will get some truly outstanding individuals that form a VC firm and grow it. There needs to be some new formation of first-class people that can build the venture capital firms of tomorrow for Orange County.
How has the lack of venture capital firms affected the growth of start-ups here?
A little, but not as much as you might think. The best companies are resourceful at finding the capital. If the management team … can’t get the capital by driving to Los Angeles or flying to San Francisco, then they aren’t going to cut it building a company.
The markets are pretty efficient in finding the best companies.
Then why is there a need for more VC firms in OC?
It’s a matter of degree. It would make capital more plentiful. The interaction between venture capital firms and the management teams will help generate more of that process with company formations. There is a lot that happens around venture firms that stimulates the creation of companies.
Describe the evolution of venture capital in the past 20 years.
The industry was born in the Silicon Valley in the 1960s. The industry grew up mostly around the Silicon Valley. Another center was the Boston area. The industry grew at a steady pace over the past 20 to 30 years, mostly concentrated in the Bay area, but began to branch out to Orange County, Southern California, Texas, and the Boston area.
How has the industry changed?
The industry has matured a great deal. It has become quite a substantial industry with a huge amount of capitalization and much diversity. Then a year or two ago the Internet phenomenon began to really get traction. The industry started to change again in quite a profound way regarding how venture funds ran. Just a few years ago, a large venture fund would be a $200 million to $250 million fund. Now there are many billion-dollar funds. The enormous return the funds realized with the birth of the Internet mega-trend fueled an enormous growth, especially in the top tier of venture funds. The investment rate went up dramatically and the amount of capital going into those venture funds went up dramatically. The industry really started to change.
The returns that venture capital firms were producing have gone up quite remarkably. A decade ago venture funds that returned 25% to 30% compound annual return rate would be in the top tier. Today the returns are above 100% and those are in the middle of the pack. There’s been an extraordinary explosion of returns where venture capital firms that invest in firms make 100 to 200 times their money in a single investment. They’ll have multiple companies and they have had one or two companies that reached those returns.
Since it is a young industry, how has it matured? Has it grown at a healthy rate?
It grew at a steady rate for several decades until two or three years ago when it started on the explosive growth rate. The curve was steady. Then it was like all of a sudden the ballgame changed. It accelerated dramatically.
There was also an explosion in the opportunities. There is no question the mega-trend related to the Internet is creating an exceptional flow of opportunities in many ways and not just in the dot-com type of companies or the more traditional companies you are aware of. It’s those companies building out the Internet infrastructure with communications equipment and other technology that make the Internet infrastructure more efficient. There are just huge opportunities. It has many dimensions.
infrastructure that is an Internet-based infrastructure. It’s like the skin of the Earth is being converted to this digital communications infrastructure. The impact of that is very profound. It creates and enables many business opportunities that never existed before. It’s like the whole process, which was a great process before, has become supercharged.
How has the dot-com shakeout changed the venture capital industry?
Actually it doesn’t seem to have slowed down anything. One of the things which happened was many of the venture capital funds loaded up on capital before the Nasdaq crashed, so they’re sitting there loaded with capital to invest. People view it not as a terminal illness, but one hitch in the road in what is a mega-phenomenon now going on. I don’t see any slowdown occurring in investing. I don’t see any slowing down of capital flowing into venture firms. It certainly gave people pause. The thinking of investors is changing dramatically. You’ve heard of B2C, business-to-consumer companies like Amazon.com. The next generation is the business-to-business companies.
Now people are talking about P2P, which is “path to profitability,” because they want some of these companies to make some money. You’ll find investor thinking to be much more discriminating in the companies they back. A year or two ago, many venture capital firms were throwing money at anything that moved with a dot-com at the end of it. With the shakeout, there is a lot more sobriety in the thinking. Many of these firms came up dramatically on the learning curve and are understanding at a much more sophisticated level what kind of ventures can succeed.
The plus is there is still a huge flow of opportunities and ideas. The negative is on any given idea there can be 20 or 30 or 40 other smart people forming the same types of companies at the same time. The ease of entry is one venture capital investors are starting to pay more attention to. And they are asking the tough questions of whether this is a venture that can succeed and can remain successful for a duration. And those are tougher questions to answer.
Are angel groups and other investment groups changing as well?
The other phenomenon going on in the venture capital industry is that it is transitioning or morphing into a number of different players. There used to be uniformity. A venture capital firm did a certain thing. But now there are many different types and varieties of players in the marketplace, even within the traditional institutional venture firms. Some of them have gone up to these billion-dollar funds and they won’t even look at an investment that is less than a $20 million investment. Others will invest $3 million to $5 million and will work with a company earlier.
Then you have the seed funds and the incubators that developed and the angel groups. There has been a very large increase in the number of angel groups and angel investors. A lot of wealth has been created through venture capital technology investment, and those players are investing in these companies in a much less organized way then a venture capital firm. They don’t do the same level of due diligence. But they represent a source of capital that’s available to get some of these companies started that wasn’t there before in any substantive way. So you see this fragmentation of this whole category of venture capital. The seed investors, incubators and angel groups getting more organized. Now there are multiple players.
How have venture management and venture catalyst firms played a role?
There is another segment that has emerged that didn’t exist before. What has happened to traditional venture capital,because there is so much money going in and because their investment rate has grown so rapidly,they have very little time to help out their portfolio companies. It used to be venture capitalist general partners would really roll up their sleeves and help greatly in the emerging companies. Typically, a partner would sit on seven or eight boards of directors, and he was really completely overworked when he was on 10. Now many of them are on 15 boards and they have very little time to deal with portfolio companies.
How is that changing venture capital?
That represents a problem. Venture capital has added a lot of value to the portfolio companies they were invested in. Not all of them, but many of them, are becoming more investors and somewhat more passive. They provide the capital and they will do the board service, but are less inclined to roll up their sleeves and really work the deals they way they have traditionally. That isn’t true of all situations, but it is increasingly something that one can observe in the marketplace. Some chief executives of venture capital backed companies are calling them “drive-by venture capitalists.” They drive by, throw out the money, and attend the board meetings by telephone. That is not very good. n
