UPSIDE, FEBRUARY, 2001

Reid Dennis, founder of Institutional Venture Partners

ong before venture capital became a household term, partnerships were being formed and traditions established. Reid Dennis is among this elite group of people who have been involved in the venture capital business for more than 40 years. In the early 1950s, Dennis, along with other friends who worked in the San Francisco financial community, invited entrepreneurs to present their business plans over lunch. After each presentation concluded, the entrepreneur was asked to wait outside the restaurant for a few minutes while the group decided whether to invest.

"It was very much an ad-hoc business. All of us had real jobs working for somebody else," says Dennis, who worked first for an insurance company, Fireman's Fund Insurance, and then for American Express (AXP) for a total of 21 years before forming Institutional Venture Associates in 1974 and then Institutional Venture Partners (IVP) in 1980.

Dennis is one of six VC pioneers UPSIDE caught up with recently. It was an opportunity for these wise investors to discuss the old ways and to offer advice to today's entrepreneurs and a new generation of venture capitalists.

In the beginning
William H. Draper Jr. was a co-founder of Draper, Gaither & Anderson, generally regarded as the first West Coast VC firm. His son, William "Bill" H. Draper III, joined the firm in 1959 after a post-Yale, post-Harvard apprenticeship in the Midwest steel industry. The VC business was so new in those days that Bill Draper recalls, "My wife used to tell her friends I was in private banking because no one knew what venture capital was."

Bill Draper was soon joined at Draper, Gaither & Anderson by Franklin "Pitch" Johnson, a colleague from Inland Steel and fellow Harvard alumnus. In 1962, the men established their own VC partnership, Draper and Johnson Investment. "I had a great job in all the smoke and the flames of a steel mill, but I realized I was a salaried employee, and I wanted to get in on the equity side of things," Johnson says. "And that was the fundamental reason I got into venture capital."

The men worked together for a couple of years before Draper went off to co-found Sutter Hill Ventures and Johnson started Asset Management, of which he is still a proprietor. In 1981, Draper left Sutter Hill to become chairman of the Export-Import Bank of the U.S. during the Reagan administration. From 1986 to 1993, he was head of the United Nations Development Program, after which he returned to venture capital and co-founded Draper International with the purpose of bringing venture capital to India.

Bill Davidow, after leaving Stanford University with a Ph.D. in electrical engineering, began investing in companies while holding down executive and managerial jobs at companies such as Intel (INTC), General Electric (GE) and Hewlett-Packard (HWP). "I always wanted to be involved in companies, and I used to say that when I got to 50 years old, I would get into venture capital," says Davidow, who left his job as a senior vice president at Intel to start Mohr Davidow Ventures (MDV) in 1983.

In the 1960s, Don Valentine was a sales and marketing executive, first for Fairchild Semiconductor (FCS) and then for startup National Semiconductor (NSM). Because National could not meet demand, Valentine found himself evaluating the company's potential customers to see whether they had the wherewithal to develop into long-term business partners. "Effectively, what I was doing was investing National's limited engineering resources," he says. "Later, I also began to invest personally in those companies." Those evaluations set him in good stead when he left the world of semiconductors for the world of venture capital to found Sequoia Capital.

Across the United States, Dick Kramlich was learning the world of finance in preparation to become a venture capitalist. "I was not an engineer, but I realized I needed a skill set, and so I decided that financing would be my skill set. So I went and practiced for five years before I felt qualified to enter the business," he says.

Kramlich's chance came in 1968, when, one night, he read an article in Forbes magazine about established venture capitalist Arthur Rock (who declined to be interviewed for this story). The Forbes article documented the breakup of Rock's partnership. When the reporter asked Rock what he was going to do next, Rock answered, "I'm going to find a younger partner and do it all over again." Kramlich immediately envisioned himself as that younger partner and wrote a longhand letter to Rock. A few days later, the telephone rang. Soon afterward, Kramlich was on his way to California. "I found out that my letter was, of all the letters he received — over 1,000 — the only one that was handwritten." After working for Rock, Kramlich co-founded New Enterprise Associates (NEA) in 1978.

Sage advice for a new VC generation
Fast-forward to today, and all six are still involved in the venture capital business. All, more or less, agree that although the scale of the business has changed dramatically, there are many aspects that have remained constant. For instance, there is a lot of agreement on the qualities required to become a successful venture capitalist. "I think the same qualifications that allowed one to be pretty good then would be similar today," Kramlich says.

"I think the qualifications are: No. 1, innate skills in evaluating people and communicating with people. And No. 2, having an intuition about technology and how it will affect the development of markets."

Draper concurs, saying a successful venture capitalist needs to have: "[one,] a good sense of people; two, a good sense of timing in the marketplace; and three, a good understanding of the product or service that is proposed." Draper says he believes that "a good venture capitalist has very powerful judgment and also a good bit of courage if he is to be separate from the crowd. There are an awful lot of sheep in our business."

Dennis says patience is a key quality. He says the get-rich-quick era of the past few years will return to a situation where valuations will be more modest and companies will take longer to develop. Venture capitalists should also be optimistic.

"I don't know any rich pessimists. I think optimists make a lot more money than pessimists," Dennis says. Going into meetings with an optimistic frame of mind is invaluable."A VC with an optimistic, can-do attitude gets a lot more valuable information." Being optimistic doesn't mean you have to invest, Dennis says. "In this business, we say 'no' more than 98 percent of the time. But you have to say no with a smile on your face. You've got to try and be helpful, point out things in their plan that might be correctable. Maybe you can think of somebody else who could be helpful to make their company more successful even though you couldn't."

Davidow believes that one of the secrets of success is for venture capitalists to be well-connected. For a business to succeed, "in general, it all depends on management and execution." Hiring good people is essential, Davidow says. "If they are backing situations where those people don't exist, they have to have access to good people. They have to have the ability to pick fundamentally sound situations and then get those situations to execute, either because they have picked the right people, or they can fix it by bringing on board the right people."

Along a similar vein, Kramlich says winning venture capitalists "make things happen." As a VC, "you have to be an activist. In other words, you have to be able to anticipate problems and requirements. It's basically a problem-solving business. We actually have to solve the problems before they arise."

Johnson says a successful venture capitalist must try to be a mentor as well as an investor, giving a lot of aid to companies in terms of business help, enthusiasm and zeal. "The mentality of being a partner of the entrepreneur in a real sense, being committed to their success so that they feel your commitment … those things were developed by several of us in the early days, and they are still important traditions."

Valentine says, "You have to be empathetic with entrepreneurs so that they see you as their partner and not their adversary." A successful venture capitalist must be "street smart," he says, and realize that "the world of a startup is an imperfect one. Almost nothing happens the way it is supposed to or the way you think it is going to. So you need people who are able to tactically recognize that the world is not as they perceived it [would] be. They must be patient and resilient enough to react and to respond to alter their prejudgments."

Advice for the would-be VC
When it comes to offering a few words of advice to people contemplating becoming venture capitalists, the six agree that such a step should not be a person's first job.

Johnson suggests that "after you have finished school, go and get a real job … an operating job in a company. Don't try to be a venture capitalist until you understand the operating side of business. Don't go and be a consultant, don't go and be an investment banker; go and be an operator for a few years and then become a venture capitalist." Johnson worked in the steel industry for five years after leaving Harvard.

"You don't need to be in a hurry to get in the venture capital business," Dennis says. "It will be around for a long time."

"Get operating experience. Find a mentor. Listen and learn, and then jump into the race," Kramlich says. "I have often wondered how consultants consult when they have never done anything else except go to school. It's always been a mystery to me."

Davidow warns new venture capitalists to keep their feet on the ground. "I think too many people in these heady times have concluded that they are masters of the universe. I think if we perceive ourselves as being quite normal people with a certain set of skills, we are going to survive better in the world."

And Draper says new venture capitalists should remember that they will back both winners and losers. "Venture capitalists should be able to recognize that there will be some losers, and it might be the first few they do. They mustn't panic. They have to stay calm and bear risk and take the point of view of the entrepreneur as much as possible, because it's usually very beneficial. Try not to buck the entrepreneur and the instincts that he or she has."

"Valentine has somewhat surprising advice for anyone contemplating a career in the VC business: "I tell them not to do it. There are far too many of me and not enough great [company] presidential people. It is infinitely more fun to create and run a great company as the president. It is also massively economically more rewarding, if you are interested in that." Valentine thinks that "the venture business, by comparison, while interesting, exciting and quite compelling, is nowhere near as rewarding as being a successful entrepreneur."

Wisdom for entrepreneurs
What advice would seasoned VCs give to entrepreneurs?

Valentine says it would be the same advice given to him in 1959 by Robert Noyce, co-founder of Fairchild Semiconductor and Intel. Noyce told him, "When you are the entrepreneur, you want to make sure that the financial partner you choose has the same vision, motivation and commitment to your enterprise that you do."

He adds, "That is the best advice I ever got, and it's the best advice that I always give entrepreneurs."

Johnson thinks the same way. "Get involved with venture capitalists who not only supply you with the money you need, but also the advice and help that you will surely need." He also urges entrepreneurs to think about not only their products, but also the markets for the product — and to make sure that those products have large markets. Valentine has a mock license plate in his office with the words, "WHO CARES." He routinely asks the four or five companies that come into Sequoia each week, "Who cares about this product enough that they will allow you to build a great company and [who cares] enough to allow us to help you build a great company?" And when the entrepreneur has a great answer to that simple question," he says, "you have the opportunity to create a great business."

Dennis believes that entrepreneurs should do due diligence on venture capitalists just as VCs do on entrepreneurs. "When we look at a new company and when we look at a management team, we ask for a lot of references. We call potential customers, or we call former employers." Dennis' advice to entrepreneurs would be "to ask the venture capital firm for their references, too." Dennis suggests, as well, that entrepreneurs "call the CEOs of some of the other companies that the venture capital firm has financed. Not just one or two and not just the successful ones. Call the unsuccessful ones and find out how they were treated."

Draper has much lighter advice. "Have fun, have fun, have fun. If it isn't fun, you might as well work for a big company," he says. "Don't take your eye off the brass ring, but be willing to modify your position when faced with reality. Don't give up, but if the company flames out, try another."

Davidow succinctly says, "Focus on doing a great job of executing with tremendous conviction."

Kramlich hopes that entrepreneurs come to realize that the mission is more important than they are and that they are subordinate to the mission. "Because if that is the case, a culture will form around the mission. People who sign on to the mission will be accepted into the culture. It's the mission that makes the team and keeps them on target." Putting the mission first is not easy, says Kramlich, but he points to companies such as Yahoo (YHOO), Ebay (EBAY) and Juniper Networks (JNPR) as examples of where the founders thought the mission was more important. "And what the founders did was bring in the very best people to execute the mission."

Looking back on achievements
All six have had illustrious careers, so it seemed appropriate to ask each what he thought was his most memorable achievement.

For Davidow, it is MDV's investment in Rambus (RMBS), the controversial company that licenses its DRAM (dynamic random access memory) accelerator technology to semiconductor companies. "It stands out in my mind because it was something that nobody wanted to do, and we just stood up and did it," he says. "Everybody had pretty much turned it down." Davidow serves as the chairman of Rambus, which he says has been a tremendous investment for MDV. "That was an investment made in a very small fund for us, and that single investment today has a value of, say, 20 times the fund it came from. That's what the game is about, making investments that got big, big returns."

Controversy will always follow Rambus, though. "We have some very fundamental intellectual property, and we are licensing it broadly to companies in the semiconductor industry. Everybody respects intellectual property until they have to pay for it," Davidow says.

Dennis goes back to 1961 to remember the time he persuaded his then-employer to make its first venture capital investment, although the Fireman's Fund Insurance finance committee didn't call it venture capital. It was a "special situation." Fireman's Fund Insurance invested $1 million in an optical-character recognition company, Recognition Technology, because it thought that if the technology could be commercialized, it would be useful to a paper-laden business such as insurance."At the height of the market, that investment was worth over $40 million, which, in the 1960s was an outstanding performance. We didn't get all that out. By the time it was all over, Fireman's probably realized a $15 million or $16 million profit on the investment."

For Valentine, it was Sequoia's investment in Cisco Systems (CSCO). "If measured by fame and fortune, [it is] clearly the financing of Cisco, which we did alone in 1987. We bought a third of the company for $2.5 million."

Johnson says "the creation and building of Amgen (AMGN) has been the most exciting and rewarding." He is also proud of his role with Boole & Babbage and Applied Micro Circuits (AMCC). "Sometimes sticking with things for a very long time can really pay off, and it did in the case of Applied Micro Circuits, which took 15 years to be successful."

For Draper, "starting Sutter Hill early on in the venture world was certainly an achievement."

Forming Draper International with partner Robin Richards Donohoe and "having cut the path for other VCs going from the U.S. to India" is also something he is very proud of.

Co-founding NEA gets Kramlich's vote. "I think it is an organization that is going to go on for 100 years, and I am always going to be proud of it," he says. "First of all, the first 22 years are the hardest, and I think we have the right culture, the right people and the right performance."

NEA has turned into one of the juggernauts of the VC world, with an acknowledged $4.7 billion in capital under management and investments in more than 400 companies. "One can argue about who's the best, but no one can argue about who is the largest. So I am not saying we are the best, but I am saying we are the largest."

What is the crux of NEA's business philosophy? "I think we are known for having a long-term point of view. We also believe in the 'drowning man' theory. That is, you have three chances to get it right before a business doesn't work."

Hands-on and supportive is how Davidow describes the philosophy at MDV, which specializes in early-stage funding. "We are focused on the ventures that we do. We are focused on being involved in early-stage. There is a tremendous amount of teamwork here, working through the deals."

At IVP, Dennis says the firm has been criticized by some investors for being too patient with people not achieving their business plans. But he says that IVP will continue to give the entrepreneur every chance. "You should not be in a great hurry to cut them off. That's a harsh kind of message that I have never been able to deliver, and I hope I never will be able to deliver. If the management team thinks it can pull it out, and they are willing to put in the six or six and a half days a week that is required, then we give them every opportunity to be successful. As long as they don't give up on the project, I don't want to give up on them. If I have a recurring nightmare … it's a nightmare of the entrepreneur who I tried to shut off, and he comes back three years later, having done it without me."

Sticking with the entrepreneur is also important to Johnson. "Because I'm an individual investor and don't manage a fund, I can have a very long-term approach … limited more by my own age than my patience… I have always felt, though, that you stick with a deal a long time if you believe in it."

Interestingly, Valentine says Sequoia disagrees with most of the VC world by downplaying the importance of the individual entrepreneur in the evaluation process. "Everybody else you ask will tell you it's people, people, people. We have always invested on the basis of the market. Markets are easier to measure and analyze, whereas people are very difficult to measure and analyze."

On the present state of VC
Much has changed in the VC world since these pioneers wrote their first check — and not all of it for the better.

Dennis is worried by the fact that "financing is riding on a bubble with people hoping to make enough money on the way up that you can get out and leave somebody else holding the bag when the bubble bursts. That's not my idea of a very constructive approach to shoring up the capitalistic system."

Dennis wants to create a new wave of capitalists who will follow in the steps of the Bill Hewletts, David Packards and Gordon Moores of this world and create huge charitable trusts. "I get a big kick out of helping people get to the point where they can give money away," he says.

Valentine, however, says venture capitalism has "moved from a very collegial, cooperative, finance them-together, work-on-things-together, divide-up-the-work, share-the-burden" business. He continues, "It's become a world where the original firms are no longer collegial, but highly competitive, and a whole bunch of new firms have naturally entered the business because it looks like an easy business from the outside looking in. The character and nature of the business has changed massively. It's now populated by overeducated, charmless, highly viciously competitive people who do not understand anything about a collegial approach to building corporations."

Despite Valentine's misgivings about how the business has developed, he and his contemporaries remain very supportive of the U.S. system that attracts, finances and develops entrepreneurs and turns them into capitalists. Draper and Valentine are especially thrilled at having funded immigrant entrepreneurs.