Let's Talk VC
By Carlo Longino, Mon May 21 00:00:00 GMT 2001

The recent hard times for dot-coms have made the hunt for venture capital even more difficult. But good ideas and good companies can still find funding, says First Tuesday founder John Browning.

The shakeout in tech stocks has certainly made things tougher for startups looking for venture funding. Venture capitalists are wary of investing in just about anything at this point after losing money in lots of ill-planned Web ventures, and many mobile startups are feeling the pinch. TheFeature sat down recently with John Browning, one of the founders of First Tuesday, a global networking organization dedicated to helping start-ups find capital, people, and technology, to talk about the changing venture capital landscape.

TheFeature: How is the venture capital (VC) landscape today different than it was 6 or 12 months ago?

John Browning: Weirdly, this time a year ago, everyone was sitting around and going, "Hmm, this market is really high." Venture capitalists were complaining that there was too much money chasing too few deals, and money had really become a commodity. There were crazy companies being financed and at the same time, none of them [VCs] were stopping financing crazy companies or cutting the prices they were paying, because they really felt they needed to be in the game.

There was too much going on; the lure of the some of the IPOs that were still happening was too big, and so everyone was walking around to some extent on eggshells waiting to figure out how the market was going to right itself, because it didn't feel right even though it was booming so much.

Now we've seen the market come back down, and I think in some cases this has been a welcome breath of reality. In other cases, it's overreacting. There's been a dimension to the downside as there was to the upside, so there are companies that do look very, very cheap one way or another.

Now, that said, what's interesting as well is that a lot of the crunch has come -- that I've seen so far at least -- has come in the second round and further financing, where VCs are being much harsher about companies meeting their goals, saying "Guys, you told us you were going to do this and if you want more money, you better have done it, and you better show us how you're going to get to profit, or it's just not going to happen." You're seeing all sorts of companies and all sorts of people adjust their business plans to make their cash last longer, to try to work against harder valuations in the later rounds, laying off people, focusing on earlier profits.

And a couple of things beyond the overall tenor of the market from being really, really buoyant to being critical have also changed, one being that there is a shift in investors' tastes. Last year, business model plays were all the rage. The notion was, "We'll devise new ways of doing business, new ways of organizing companies, new ways of getting revenues out of the market, and that will be really cool because the web lets us innovate."

Some of those are fine, but a lot of them really weren't and aren't, and I think there's a general feeling that that sector or whole theme is just out of fashion and not happening. It's not like nobody thinks the last business model play has happened, but there's plenty around right now.

What investors are looking for a lot more is technology. They want to see something that gives a traditional venture capital-style investment -- that a company not only has good management, a good track record, and a good market play, but also some sort of proprietary intellectual property that they can take.

TF: So what sectors are hot now?

JB: There's a lot of networking technologies: the mobile space, the broadband space. There are some software innovations that help people manage large quantities of information over networks that are interesting. I think we're going to see a revival of content, and content comes back after being hideously out of fashion. Now that said, it's got to come back on an entirely different cost basis because advertising doesn't support the stuff with big budgets.

TF: So is mobile content how the operators can make back the amounts they've shelled out for 3G?

If you look at the money being put out on 3G licenses, I don't think there's any way the operators are going to make their money back unless they do get the value-added services. They need to double their revenues -- they're not going to just get people to talk more, or at higher prices.

That said, I don't think anybody's really cracked -- and this is where the interesting content plays come in -- what sort of content you want when you're on the move. Portals are a wonderful technology for the Internet that's on your desk, because what you want there is to be able to sit down and pull in all sorts of information. Any sort of thing you can imagine, you can get it. You can bring it to your hand, you can compare this and the other and follow your curiosity wherever it leads you.

You don't want to do that when you're driving down the street or just coming in between meetings. You want just the information you need in the context you need it in. That implies a lot of information management technology to track your preferences and to hopefully marry up with your location, to look at what you've already seen and only show you new stuff so you don't have to go through all the old stuff -- just tell me what's new and interesting.

So there's a lot of both technological innovation, in terms of the software that manages that stuff and integrates it with the stuff that goes on your desktop, as well as editorial innovation to figure out how people want to consume information on those devices.

Another really rich area here is what I'll call "band-depth." Everyone is sort of rapping on in the industry about how we need more bandwidth, and I'm just not sure that's true. Yes, it would be nice to put video clips everywhere, but by and large, people are already deluged with more information than they can conveniently assemble or manage to deal with on a day-to-day basis.

What I need is technology to help me marry up all of the different bits of information that I carry around with me, so for example, I can sync my Palm Pilot with my PC, but how do I make sure my assistant can track that as well? Or maybe I want the airlines to know part of my schedule, or I want to suck in part of my schedule to the airline's computer so I can track any changes to my flight. I might want to append weather information or travel information and bring together in a really convenient form all this stuff that I'm going to know, so that it's just there at my fingertips and I'm not clicking all over the map in order to find it. Because once it starts to get mobile, I'm just not going to click all over -- I'm going to want it to come to me, I'm going to want it there.

TF: So how has the market downturn affected your job at First Tuesday? Does it put increased value on organizations like yours that bring startups together with the resources they need?

To some extent, startups are startups are startups. So a lot of what we're doing is what we have been doing, and what we will continue to do, which is match up entrepreneurs with the resources they need to grow their company -- money, talent, partnerships.

But in the area that I get a chance to move in to, particularly in the wireless sphere, is also to do matchmaking between startups and big corporations. One of the areas in which I think wireless is different is it is something which fits very uniquely into the world of the big corporations, because it's as much often about customer service as it is about providing new information.

This flows out of that you want your information in context, and you're not necessarily looking for new facts. When it's mobile, it gives a great opportunity to a big company or a company that has a lot of relationships to improve those customer relationships by using mobile technology to provide information.

I'll give you an example -- airlines, which I mentioned earlier. The Web, arguably, doesn't have a whole heck of a lot to offer the airlines. Yes, they can sell tickets online, and yes, they can provide flight information and that's nice, but frankly, I wonder if they're ever going to compete meaningfully in online ticket sales with the Travelocitys. It has a broader choice, it carries a lot of airlines, and any individual one just selling its own tickets is not, in a sense, offering its customers as good a deal.

That said, in the mobile world, all of a sudden that all changes because you can offer this personalized information. If you're a gold card member, maybe you can be sent more -- "Tell me your itinerary, and if I know your flight is late and I know the car company you'll use to get to the airport, I'll rebook it for you, no problem."

It provides a lot of customer loyalty, customer relationship building to base the data on personalized information -- but aimed not so much at finding new services, but finding glitches in existing ones. This is where big companies and startups will want to work together, because startups will have a lot of new ideas and it's hard for big companies to think out of the box.

TF: So what does the VC landscape look like for the next 6 to 12 months?

JB: There are a lot of good deals out there, but a lot of bruised VCs too. I was rereading Joseph Schumpeter the other night for something I was writing -- he was the guy that came up with the phrase "creative destruction," and one of his insights, because he looks at the business cycle in a slightly different way, is one of the things about economies and business cycles is that capitalism is never standing still. It's always evolving, it's always moving on, and no two recessions are alike and no two upturns are really alike.

He described the cycles as really about revolution, creating new things, challenging instructions and then absorption of the revolution, and I think we're in a period of absorption. I think VCs are going to look at their portfolios, and they're going to go this worked, and that didn't work, and they're going to have a period of learning and rebuilding their confidence and reshaping their world view to find the next place where they can place bets with confidence.

I think they're going to be defensive for a period -- 6 months, 12 months, 18 months -- it just depends how quickly this plays out. There's just going to be a period of them figuring out what's next, then a period of sort of working through some of the lessons of the past period of heavy investment.

There's a number of dotcoms out there -- two the last time I looked are PlanetRx and TheStreet.com -- which are good companies, whether they'll survive or not. You look at their share price and they're trading for less than the cash on their balance sheet. The market's saying this business model doesn't work, and at some point, the market needs to make up its mind about that. That's a really weird thing for a new entrepreneurial company to be out there with more cash than share price, and until those get worked through, I think it's going to be difficult for investors, both private and public, to get the confidence to move ahead to take big swings at companies.

John Browning has done a variety of things which revolve around the notion that technology is transforming our world beyond recognition. He is a co-founder of First Tuesday, a global network dedicated to helping entrepreneurs achieve success. He is also co-editor of New Economy Watch, a publication tracking an economy in wild transformation, created in conjunction with George Gilder and Forbes magazine, and he is a contributing editor of Wired. He has consulted on the application of new technology and new media to business strategy with Monitor Company, a strategy consultancy based in Cambridge Massachusetts, CSC Index, Analysys and McKinsey & Co. he was executive editor of Wired UK, a tragically defunct European edition of Wired.

Previously, John spent 12 years at The Economist, writing about business, economics and technology. He is the author of The Economist Pocket Guide to IT and the Wired Encyclopedia of the New Economy. He is also a sometime contributor to The Economist, Scientific American, the Wall Street Journal, the Daily Telegraph, the Demos Quarterly and Newsweek. He speaks frequently at conferences on technology subjects, and appears regularly on radio and television. He has degrees in history (UC Berkeley) and computer science (University of London) and lives in London with his wife and two children.