Why Smart Companies Are Saying No To Venture Capital

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It seemed, at first, like the logical next act in the classic entrepreneurial script. Having developed his new database software on his home-built Heathkit microcomputer, Wayne Erickson packed his bags and set off on a pilgrimage to the venture capital mecca of San Francisco in search of the help he needed to turn his creation into a multi-million-dollar enterprise.

It was a well-worn path, that route from the entrepreneur's garage to the investor's suite. It was part of an initiation rite through which hundreds, if not thousands, of dreamers and doers had passed before. On the surface, at least, Erickson seemed little different from the rest.He was 35 years old, a former bass player in a rock band who at some point had discovered that his real talent lay in computers. Going to work as a software programmer at Boeing Computer Services Inc., he had developed something called the RIM (relational information management) software system to help track missing ceramic tiles on the space shuttle. After leaving Boeing in 1979, he had done contract work for the National Aeronautics and Space Administration at the University of Washington in Seattle, and -- in his spare time -- experimented with adapting RIM for use on microcomputers, eventually developing a powerful database system that could quickly and easily organized data from as many as 40 different files.

The system seemed to have commercial potential, so in 1981, Erickson and his older brother Ron, an attorney, formed Microrim Inc., to make and market the product, which they called R:base. Selling to a few large customers, Microrim enjoyed revenues of $360,000 in its first year, and the Ericksons began to think about broadening their horizons. They believed that with a little help, Microrim could become a major player in a burgeoning industry. What the company needed was capital and, equally important, the wisdom of those who had done it before. They hoped to find both in San Francisco's venture capital community.

And so, in late 1982, they traveled down from Bellevue, Wash., accompanied by Microrim's chief operating officer, Kent Johnson. Arriving in the city, they were as nervous as novices entering the Holy See. "We felt a little intimidated," Johnson recalls. "We were all small-town boys from Washington in big San Francisco. We knew that the venture capitalists there had made fortunes and had seen hundred of plans. We were the new guys on the block, and no one knew us."

Over the course of three months, they made two trips to the Bay Area and met with more than a dozen venture capital firms. Wide-eyed and reverent, they were ushered into the very offices where some of the greatest entrepreneurial successes in recent memory had been launched. There they demonstrated their product, analyzed their competition, talked about themselves, their company, and their plans for the future.

And something odd began to happen. As they moved from meeting to meeting, their awe gradually dissipated, giving way to a different emotion. They looked across the table at the people whose help they were seeking, and they felt -- disappointment.

Were these the venture capitalists they had heard so much about? They could scarcely believe it. To be sure, these guys acted powerful and important, and they undoubtedly had access to a great deal of money, some of which they indicated they might be willing to part with. But they were hardly the experienced sages that Erickson and the others had been hoping to encounter, people who had built fast-growth companies from coast to coast. Some of these venture capitalists didn't even know very much about running a business, having only graduated from business school two or three years before.

"Just because they had MBAs from Stanford or Harvard, they thought they knew everything about everything," Wayne Erickson recalls bitterly. "Their approach was pretty much antagonistic. 'Why don't you do this? Why don't you do that?' they would say. They wanted us to redo everything we had done, and most of them didn't know anything about writing software. I felt I had been nursing this baby and they were telling me that they didn't like the way the baby looked. But the fact is that we had done some things right."

In the end, several of the venture capitalists expressed interest in backing Microrim, and one made a firm offer. The company sorely needed the money: Erickson and his associates were well aware that their meager cash reserves and their bank credit line would soon be exhausted. Nevertheless, they decided to turn everybody down.

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