Lawyer and investment banker Jim Watts said he learned something about promising technology companies a while back.
Before introducing a startup’s conference-calling technology to the firm he was working with at the time, Watts said he decided to check out the product. The technology promised to allow up to 48 people to speak on a call at once.
It could have been a great investment idea, except for one small hitch, he said.
“It worked miserably,” said Watts, now managing director of Irvine-based Pacific Summit Capital.
Watts said his discovery came after doing the simplest of research,putting the company’s technology to the real-world test.
“There was all this razzle-dazzle presentation, but they just couldn’t prove it worked,” Watts said. “Entrepreneurs,God love ’em,always want to put the best spin on their technology because they do need the money. You have to watch out.”
The case underscores a major challenge for venture capitalists, bankers and other players who have more expertise in business than technical know-how. How can you tell which technology has potential and which will become road kill?
For many firms, the fix has been to hire a tech guru.
When Watts started Pacific Summit Capital, he said he hired on 20-year technology veteran Gideon Kory to help the firm kull through potential deals and find those worth pursuing.
“Gideon’s great,” Watts said. “He has the experience in technology we need.”
Having done stints at large financial firms such as Bear Stearns Cos. as well as small upstarts, Kory represents the cocktail of experience venture capitalists and bankers put at a premium: tech savvy with a twist of finance.
Ditto for Russ Robelen at Costa Mesa’s InnoCal Venture Capital. Having started his career at IBM Corp., Robelen had a hand in designing some of Big Blue’s more avante garde chips before founding his own company and then moving into venture financing.
“He knows a ton about communications and software,” said InnoCal’s managing partner Harry Lambert. “He’s been with us since the beginning. He knows a lot about technology and is a seasoned venture capitalist.”
These tech-finance types are secret weapons for many firms, helping steer investments away from companies and technologies prone to the pitfalls.
Young companies, hungry for money to help them get their businesses up and running, have a tendency to overstate expectations, venture capitalists say. In one case relayed by a local investor, a startup didn’t accurately report how its competition was pricing a product. The company eventually was undercut and went out of business.
Venture capitalists hope to avoid those scenarios when considering tech investments, said Mark Heesen, president of the Arlington, Va.-based National Venture Capital Association.
“Many VC firms need people who are very proficient in analyzing whether specific technologies have marketable potential,” Heesen said, “especially in the more technical and confusing areas, like life sciences.”
Venture firms traditionally have relied on the general investment expertise of their senior partners to sniff out the good ideas from the bad. That meant choosing a specific technology sector to invest in,like chips or software,and then deciding on a company through traditional methods such as quality of management and cash-flow analysis.
Venture investors say raw experience and basic business sense always will play a major role in guiding investment decisions.
“After about 15 years in the business, we can look at demonstrations and be able to tell,” InnoCal’s Lambert said. “You can look at how the president manages, talk to the customers, use the products.”
But now that the potential of specific technologies has become more critical, firms say they need to bring in the right people. That means expanding the ranks of the small, chummy venture capital world.
“We need more people to find these companies. We’re ripe for expansion,” said Heesen of the venture capital association.
Even the most seasoned venture investors concede it is good to have a technically savvy associate sitting at the table to offer a reality check on the business plans of enthusiastic entrepreneurs.
“Of course it’s a free-for-all when we ask the entrepreneurs questions, but most of the technical questions come from me when it’s a software company that’s presenting,” said Dan Lehman, an associate at Newport Beach’s Forrest Binkley & Brown who has a long history working in the software business.
When Forrest Binkley & Brown brought Lehman on board, they were looking for someone that had some knowledge of software and systems, he said. Since he was hired, Lehman said the firm also has brought on another associate with expertise in chips.
“It’s just the natural evolution of the firm,” Lehman said.
And if a particular technology goes beyond the expertise of the firm’s tech-savvy partner, venture capitalists turn to a special weapon: the Rolodex.
“At any time, we have about 75 to 100 people we can draw upon to ask about any given technology,” Lehman said.
Often times, venture capitalists have friends who work at the large companies, such as Cisco Systems Inc. or Intel Corp. Those ties can help them evaluate how a technology might make it in an industry.
“Usually it’s a friend of the firm,” Lambert said. “Someone who’s well placed at a company like Broadcom or Cisco. They can help us evaluate a technology. When we don’t have anybody, we’ll hire a consultant.” n
