How long can these good times last? The question dogs John H. Martinson, the
newly elected head of the National Venture Capital Assn., a 26-year-old
trade and lobbying group representing some 300 venture-capital firms. During
1998, a record $24 billion flowed into VC firms, a 64% jump from 1997 and
the seventh straight year of growth in funds at the disposal of venture
capitalists, the NVCA data says. That has translated into a huge windfall
for entrepreneurs, who soaked up $16 billion in fresh cash last year, with
34% going into the computer software and services companies that are driving
the Internet revolution. Another 5% has gone into semiconductors and other
electronics ventures and 4.5% into computer hardware companies. Venture
money has backed many of the Net's startup legends so far, including eBay
and Netscape. Paradoxically, that worries Martinson. He's concerned that
those extraordinary success stories will distort both investors' and
entrepreneurs' expectations. "This condition won't last for long," he warns.
He should know. As a 25-year investing veteran, Martinson has endured
speculative cycles, most notably the biotech boom and bust of the 1980s.
"The challenging thing about (being a venture capitalist) is that you cannot
hang onto a business," he says. "You're constantly reinventing." Martinson
is founder and managing partner of the $225 million Edison Venture Fund,
which invests in information-technology companies based primarily in New
Jersey, Pennsylvania, and Washington, D.C. On Apr. 20, Business Week
Frontier Online's Dennis Berman spoke to Martinson, who discussed the state
of venture capital, his role as NVCA president, and how long the good times
can keep on rolling. Here's an edited transcript of their conversation:
Q: What was your first venture investment?
A: A company that made sheet feeders for the first word processors. They
worked automatically, so you didn't have to load the typewriter each time
you wanted to add a sheet of paper. It was a good success, it went public,
and it got me hooked.
Q:Venture capital has changed a lot since then. Most notably, the funds --
and their investments -- are getting bigger. How does that affect
entrepreneurs looking for funding?
A:As some funds get much larger, they must raise their average investment.
The average deal size is now $7 million. Some must change their strategies
to deal with that. Certainly the "first mover" concept is more prevalent.
We're seeing many more big deals where companies are aiming to be the leader
in larger emerging markets. [Both VCs and entrepreneurs] are somewhat more
willing to compete with larger companies. That's a phenomenon on the
Internet, where companies are raising $20 million to $30 million and going
public after a year or two. It used to take five or six years. What that
leads to, however, as we saw in the '80s, is that there are going to be more
also-rans -- companies that don't survive.
Q: How is the success of, say, an eBay [whose stock has increased over
tenfold in value] affecting investor and entrepreneurial expectations?
A:It's unrealistic to have that kind of spectacular performance. Even in the
Internet world, it is still an exception. We need to still aim for those
high winners, but we need to set realistic goals, too -- to base our
economic goals on much more realistic models. Still, it's healthy what has
happened on the Internet. It has raised the expectation and ambition of
entrepreneurs to get ever more creative and aggressive. That has made the
U.S. the leader in these new industries.
Q: Are venture capitalists neglecting other growth industries to concentrate
on Net investments?
A: Approximately 40% of VC [money] is now going into the Internet, where
there are still many creative ideas and business approaches. We're probably
starving certain other industries. But that will balance quickly, as certain
markets become oversaturated and others underfunded. One of the surprises of
the Internet world is that there used to be a perception that it was easy to
enter, but to really make a dent requires a great deal of capital.
Q: Is there still room for Internet entrepreneurs to make their mark?
A: They have to pick a unique market and stay focused. If you try to copy
somebody else's idea or see it described in the popular press, it's way too
late. So many people misplace their energy and capital by pursuing
businesses that are actually too mature, even though they're just several
years old.
Q: What are your objectives for advancing venture capital as an industry?
A: We need to keep the flow of capital going for entrepreneurs. That's a
tremendous advantage we have here in the U.S. What's surprising is that even
with the success of venture capital, most large institutions -- pension
funds or insurance companies -- are still by policy or regulation restricted
from investing in entrepreneurial companies or VC pools. We think of it as
an entrepreneurial explosion, but most of the American financial resources
are still on the sideline.
Tushar J. Mehta
email: [email protected]