INC.: Are we suffering from a superfluity of funds right now? After all, the need for venture capital has to be finite.
ROSEN: I don't think so. There's money available, but it's not being foolishly spent. In the early '80s, maybe we paid too high a price in terms of valuation. Now, the approach to valuations is much more rational. Also, a grass-is-greener syndrome appeared in the past few years among venture firms that had some money, so they said let's go into financial engineering and do LBOs. I think that has contracted recently, as well.
INC.: Still, the consensus is there are slim pickings in start-ups these days.
ROSEN: I'm aware that conventional wisdom holds that we old guys are leaving and there is a lull in the industry and there are no new technologies and the returns are lousy. But give me more conventional wisdom like that! I'm a contrarian, and I believe conventional wisdom is always wrong, whether in the stock market or in venture capital. I happen to think that investing now is going to pay off big, that we're going to make lots of money in the '90s.
INC.: Won't you grant it'll be harder?
ROSEN: It's always hard. It looks easy only in retrospect. I remember going into the business in '81, and my ex-boss at Morgan Stanley published a piece while we were out trying to raise money saying that the venture market was saturated and it's difficult to do any more start-ups. If it's hard now, it was just as hard 10 years ago.
INC.: Surely by this time you've developed a set of rules that makes it less chancy?
ROSEN: Only one: the Will Rogers rule. Will Rogers said, "Take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."
INC.: Seriously, though.
ROSEN: There are ways of improving the risk-to-reward odds. Before we make an investment, we look at the reward side quantitatively. We calculate what it's likely to be under worst-case circumstances. We try to determine the competitive risks, the technological risks, the product risks, the financial risks.
INC.: How much capital has Sevin Rosen Management injected into the economy, all told?
ROSEN: We've put out from $12 million to $15 million a year in venture money since 1981. But that includes add-on investments in portfolio companies as well as in new companies.
INC.: You mean you tap funds to shore up prior investments that go sour -- sort of a turnaround function?
ROSEN: That's nothing new. All venture capitalists try to help their portfolio companies. When companies get in trouble, either financially or operationally, it's our job to step in and fix the problem, if it's fixable.
INC.: And if it's not?
ROSEN: We commit corporate euthanasia and cut our losses.
INC.: Indeed, so far 10 of your 45 start-ups have failed. For what reason typically?
ROSEN: It varies. In one, we felt we had an outstanding software product. It accessed informational databases such as Dialog and Dow Jones, and was very user-friendly. Unfortunately, the market just didn't want it. Another, Synapse, was a case of a failed product; the company never could get its computer to perform as promised. At Osborne, neither product execution nor management was very good. And we've had instances in which companies simply weren't managed well. The market need was there, and the product would've been there, too, if management had gotten it together. By then it's too late to fix, because when you get off on the wrong track with a small company, you tend to run out of money and it's very hard to raise more when things have gone awry.
INC.: Nonetheless, don't you try?
ROSEN: We do sometimes. The hold-'em-or-fold-'em call is the most difficult decision we make.
INC.: Knowing when to stop investing is harder than knowing when to start?
ROSEN: Oh, yes. That's because people are the toughest element to judge. Not that we don't pay attention. We monitor them very closely. We attend formal board meetings monthly, we're in contact with the companies weekly, sometimes daily. Yet most of our mistakes have been people mistakes. The percentage of people who started with our companies and who are no longer there is quite high. One thing we've learned over the years is to make that decision early.
INC.: Even so, you're widely acknowledged to be among the industry's savviest judges of entrepreneurial potential. Can you identify what specific traits you seek?
ROSEN: No, just the common characteristic that they're extraordinarily driven. They have a vision of something they want to create, and they want to do that more than anything else. And they're fiercely independent. We try to find people who not only can conceive but can build and lead an organization from that concept to a reality. And that's what's hard to discern in advance.
INC.: Then you consider people more important than product?
ROSEN: You have to have outstanding people and outstanding product. The worst mistake is to be dazzled by a product and discover there's nobody running the company. We never invest solely in a product. And we like to see a large market. One of the problems is that a lot of start-ups have a potential market of only a few million dollars. There's nothing wrong with that, of course, but it's not appropriate for venture capital. When you have a fund of $50 million, you don't want to put it out at $100,000 a crack. You'd end up with 500 companies. We have a certain cutoff below which we can't invest, because they can't absorb enough of our money to make a difference in our portfolios.
