Ben Rosen, one of the creators of modern venture capital, looks at risk capital in the '90s

The Manhattan office of the Sevin Rosen Management Co. is studded with announcements of initial public offerings: a framed tombstone each for Lotus Development (1983), Compaq Computer (1983), Cypress Semiconductor (1986), General Parametrics (1986), Acuson (1986), Convex Computer (1986), Silicon Graphics (1986), Pronet (1987), Landmark Graphics (1988), and Electronic Arts (1989). All of them business concepts that a few years earlier were merely hazy glints in the eyes of would-be entrepreneurs, their cumulative valuation as IPOs adds up to a robust $1.7 billion -- not to mention that on the last trading day of '89, that same stock was worth $5 billion more.

Even among the considerable triumphs of their venture capital brethren, those figures speak to a singular achievement on the part of L. J. Sevin and Benjamin M. Rosen, founding partners of the firm that backed the above-listed enterprises from scratch. And all the more so, considering that the two ex-electrical engineers, novices in the protocols of bankrolling, salted their first fund, a $25-million pool, with a meager $200,000 of their own.

As is a risk taker's due, Sevin, 59, and Rosen, 56, have become better heeled by untold multiples. So have their firm's private and institutional investors. And so has much of our native commerce itself -- the non-big-business, technologically innovative, foreigner-challenging part. Coming into the '90s, the Sevin-Rosen axis has provided both money and advice to 45 new entities, a sizzling birthing rate of five deals per annum. Thus can Rosen boast that his funds have served the nation palpably well, having created some 20,000 jobs in the nine years he's been at it. "And how many were created by economists?" Rosen likes to taunt from the cheek-by-jowl trenches of risk finance. "Zero."

Widely considered fast growth's farthest-seeing venturers, the founding partners no longer are as directly involved in pick-or-pass decisions as before. They haven't precisely withdrawn from the trade; rather, they've simply distanced themselves from the 18-hours-a-day, stay-on-top-of-everything hurly-burly that fiduciary duty -- at least as they practice it -- entails. A third Sevin-Rosen capital pool, this one for $65 million, closed in '88 with its general partner seats filled by younger associates.

Even before he left a vice-presidency at Morgan Stanley & Co. in 1980 to become a semiconductor-industries analyst on his own, the slender, soft-spoken Rosen was an indefatigable cheerleader for the future of the PC. From coast to coast, he conducted industry conferences at which there were barely more listeners than speakers, few of whom envisioned the force of the expansion to come. Indeed, the early-'80s expert view was that 64 kilobytes of internal memory would be all a microcomputer would ever need.

Some also felt that a five-inch screen was ample -- among them, apparently, one Benjamin M. Rosen. In 1981 his firm contributed to a modest equity round at Osborne Computer Corp., Sevin-Rosen's second capital foray; less than two years later, Osborne filed for Chapter 11 protection. Its first venture, Synapse Computer Corp., also fizzled. With the score threatening to become 0 to 3 against, the firm dramatically altered its passive tactics -- and to a large degree, the stand-back posture of venture capital itself. Rosen and Sevin pledged to get involved not in second or third financings, but predominantly at the start-up stage. For major investments, they demanded board membership. They went for a sizable fraction of the company and personally oversaw business details that otherwise were ignored by founder-owners.

Under that cuffed-sleeves regimen, the next two infusions took hold. Later in '81, when a young software designer sought some dollars to launch a new company, Sevin Rosen chanced a couple of million, and Rosen took on a Lotus Development Corp. directorship. At the same time, an enthusiastic band of Texans showed the partners a placemat on which was sketched a portable PC, and the venture capital firm parted with $2.5 million more. Rosen became chairman of Compaq Computer Corp., a position he still holds.

No wonder that on his desk 45 floors up in New York City's Pan Am building, where senior writer Robert A. Mamis spoke with him, Rosen houses the newest microcomputers running the latest software. He must get good discounts.

INC.: Since more than one venture capital partnership has recently disbanded, can we assume that the golden era is about over?

ROSEN: Absolutely not! It's as vigorous as ever. The fact that some prominent players have gone off to do other things is not a commentary on the industry.

INC.: It's no secret that among those prominent players are Sevin and Rosen. After Lotus and Compaq and other big scores, how can your twin retirements be read as anything but ringing down a curtain?
ROSEN: We're not quite out to pasture. We aren't as active at looking for new companies as before, but we're still involved with the portfolio companies in our first two funds, and we're on the boards of those companies. We're advisers to and investors in the third fund, and we attend their meetings.

INC.: What was life like before then?

ROSEN: I was doing 250,000 miles a year. I was traveling three or four days a week, visiting all the companies I was on the boards of, visiting new entrepreneurs, getting involved in recruiting, going to trade shows, making speeches. We have three offices, and we invest in companies all over the country. Some funds invest in only one section of the country, which cuts down on travel time -- on the other hand, it's hard to fund a Lotus or a Convex if you restrict yourself geographically.

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.

INC.: But they could be great little companies!
ROSEN: Oh, yes. There's a class of companies that can be outstandingly successful in every measure except one -- and that's size. We want our companies to be large enough to be able to go public. We need the public valuation and the public liquidity to sell our holdings. We're not for everybody.

INC.: Public valuation also establishes personal net worth, and some of it is staggering. What are your thoughts about, say, Bill Gates's becoming a billionaire just because his Microsoft stock went from $21 to $121?

ROSEN: I think it's absolutely terrific. He's one of the two or three most significant individuals in terms of creating the fastest-growing industry in history. Shouldn't he be rewarded for his pioneering?

INC.: A billion dollars' worth?
ROSEN: There are any number of billionaires in the country, but how many have contributed one fraction as much to productivity, to innovation, to job creation, as Bill Gates?

INC.: Who else do you consider a major pioneer -- Steve Jobs?

ROSEN: Absolutely. A couple more are Dan Bricklin and Bob Frankston, inventors of VisiCalc, the software product that helped launch the personal-computer revolution.

INC.: Would you invest in Jobs the second time around -- in NeXT?

ROSEN: NeXT is a high-ticket investment. It's an example of a successful entrepreneur going back for a second start-up, and the valuation goes way up. When you have to make an initial investment of $10 million or $20 million, it's hard to get big returns.

INC.: Might this rollover of successful entrepreneurs into second start-ups -- Bill Poduska, Allen Michels, Steve Jobs, and some others -- mark a new trend in venture capital?

ROSEN: I think it's small. What happens is the second-timers get publicity merely because they've done it before.

INC.: What has been the most significant change in your industry since '81?

ROSEN: Today, the most active investors in funds are Japanese.

INC.: Do you think that's a positive factor?
ROSEN: To the extent that they help entrepreneurial companies, it's positive; to the extent that technology flows from the United States to Japan, it's not. I'd certainly like to see more active participation by U.S. entities than by foreign entities.

INC.: Has native entrepreneurism itself undergone a change? When INC. was started -- at about the same time as Apple -- founders were better at building garages than businesses.

ROSEN: They're more savvy, mostly because now there are many role models to learn from. They're familiar with the different venture capital firms. And they read INC. and other business publications. All in all, negotiations are more sophisticated.

INC.: With the result that venture capital is giving something away?

ROSEN: Not really. Prices haven't changed much at the start-up level. But it may mean that venture firms can't steal deals where maybe they once did. . . . I'm not saying we ever stole a deal.

INC.: Of course not. But speaking of stealing, are hostile takeovers becoming a factor, now that small technology companies are maturing?

ROSEN: They haven't been a big factor. The few that have occurred were such disasters that they made thinking of a hostile takeover an even worse prospect. Takeover people look for predictable and high cash flow, low valuations, and assets that can be disposed of. Technology companies tend to have high valuations relative to book, little in the way of physical assets that can be disposed of, and unpredictable cash flows. So I think that they're safe.

INC.: In a similar vein, do you ever make aggressive sales pitches to try to woo a hot start-up -- such as Sun Microsystems or MIPS Computer Systems -- away from the competition?

ROSEN: Some firms do, but we don't. We want people to want us. In those companies' cases, they didn't know us and we didn't know them. There are good venture firms beside Sevin Rosen. I know, because I'm involved in investing for Caltech, which puts 2% of its endowment into venture firms.

INC.: They speculate with their endowment?
ROSEN: It's not speculation. In any individual venture investment the risk is high, but in a diversified group of partnerships that in turn invest in a diversified group of companies, the risk is reduced substantially, to the point at which it's an appropriate investment for a nonprofit organization.

INC.: Is Sevin Rosen itself doing anything different now from nine years ago?

ROSEN: We're focusing more heavily on incubating. Our main office is in Dallas, where we attract likely entrepreneurs and help them start their businesses. We think that the most added value and the highest reward comes at that pre-start-up level. Kleiner Perkins was the pioneer. It started both Tandem Computers and Genentech as incubated companies. We did the same with Cypress Semiconductor and Convex Computer.

INC.: But at what cost? When executives and engineers are lured from another company to take part in an incubator scheme, they leave that company in a weakened state. Principals jumped from Intel and National Semiconductor, for example, to start their own venture-inspired businesses.

ROSEN: Wait a minute! Where did Intel and National Semiconductor come from -- a vacuum? Intel itself was built by a group who spun out of Fairchild; so was National Semi. It's a continuum that has gone on for quite a while. And rather than weaken the parent company, it actually strengthens it. Intel is much stronger today because it had competition not only from the Japanese, but from latter-day Intels.

INC.: And, of course, you might mention that most of Compaq's founding management team came out of Texas Instruments. What's remarkable is that they've remained virtually intact for all eight years -- probably the most stable set of executives in the entire computer industry. How so -- is there some special chemistry?
ROSEN: That and the fact that, unlike many other entrepreneurial companies, they had an average of 15 or so years' experience when they started, and knew one another and had worked with one another. Further, the company is based in Houston, where there's a different ethic from Silicon Valley -- more stability, less job-hopping, fewer temptations. Plus the company has been very successful with many products for eight straight years, and that tends to keep people there.

INC.: Oddly enough, when you invested in Compaq, observers felt it didn't have a chance. The personal-computer field seemed already too crowded.

ROSEN: There wasn't a more crowded field around. Which proves you can invest in crowded markets and still be stunningly successful. When we invested in Lotus, it was competing against a giant called VisiCorp. In 1982, VisiCorp's sales were $20 million, and Lotus's were zero. VisiCorp dominated the industry, yet we invested in that industry. That's the way the system works. There's no central planner decreeing that there shall be only three companies per industry. The nice thing about venture capital is that when you lose, you lose only the amount of your investment; when you win, you make 10, 30, 50 times your investment. The rationale is that the successful ones more than make up for the failures. There's an analogy in baseball: great home-run hitters are also great at striking out. This is not a place for cautious investing -- prudent, but not cautious. We make multimillion-dollar investments when there is no product, no company, and one or two people with an idea. In Compaq's case, it was three guys and a sketch on a placemat.

INC.: But why even chance swinging when there's already a big player -- IBM, when Compaq started -- in the market?

ROSEN: Because all you have to do is do it better -- not a little better, of course, a lot better. There's a saying in venture capital that "slightly better is dangerous." And it's a trap entrepreneurs often fall into, going with a product a bit better than what's out there. A product has to be substantially better to make the world change its ways.

INC.: But even that product could be superannuated overnight. Doesn't it scare you as a long-term investor, how rapidly technology is changing?
ROSEN: I love it! Without change, the entrepreneurial sector of the economy would be dead. That's why it's so hard to have a successful venture business in nontechnology areas: there's no opportunity. We ride innovation, and we want it to change -- the faster, the better. We survive only because technology changes.

INC.: What do you mean, "only"?

ROSEN: If nothing changes, how are you going to compete with a billion-dollar company? Usually we go up against a large company whose decision making is much slower and that has a vested interest in protecting its old technology and not obsoleting itself. That allows us to obsolete the company.

INC.: Maybe some other innovative small company is thinking the same way at the same time, and will obsolete you.

ROSEN: We're willing to bet that our expertise allows us to identify the new and better technology. The edge is that in technology, there are barriers to entry -- technological know-how or some proprietary aspect.

INC.: By the way, do you actually use all the proprietary gadgets your companies produce?
ROSEN: Oh, yes! From day one. When I was an analyst, the thing that really got me started was when the companies I was following began building products I could play with. The first calculators -- Bowmar, and then Texas Instruments, and the professional calculators from Hewlett-Packard. When the PC came out, I was like a pig in -- how should I say it? -- heaven.

INC.: Lotus's huge out-of-the-gate promotional budget is cited as the factor that raised the entry ante for software companies forever after. In 1982 that line item was a bold stroke.

ROSEN: It was more than had been done before, and several companies actually did go bankrupt trying to emulate what we did at Lotus in the early days. They figured you just go out there and spend $3 million on an introduction, and that's the path to success. But it wasn't as much as they thought -- the perception was we spent that much. Actually, we spent only around a million dollars on the 1-2-3 introduction. The rest was done with mirrors. We got to the press, we got to the influencers -- the luminaries and consultants -- and created a swell of enthusiasm that fed on itself.

INC: Free stuff, in other words.

ROSEN: We're big on free stuff. When you don't have resources, you go for the free stuff.

On the face of it, a small company shouldn't be able to compete with a large company. The large company has all the advantages -- a well-known name, an installed base, financial resources, marketing clout, advertising dollars. Fortunately, the small company has advantages, too -- fast decision time, tremendous incentives to succeed (if it doesn't, it's out of business), its ability to attract creative people. But the levelest playing field is in public relations, where there's only a finite amount either can spend. We try to help out there.

INC.: Businesses we see in INC. often feel that venture capital grabs too much for too little. Does that concern you -- that you take a big chunk at a low price?

ROSEN: Everything is relative. The object is to make the venture successful; if it is, everybody is successful. The only times we hear such animosity is when there's failure. Generally, there's a lack of understanding among entrepreneurs about what "control" means. Most of them think it means 51% or more, in perpetuity. My partner is an entrepreneur. He started Mostek, a semiconductor company, in 1969, which he sold in 1979 to United Technologies, and he owned only 3% of the company at the end, yet it was he who controlled Mostek. Control doesn't mean owning the majority of stock. As long as you're successful at running the company, you're controlling that company.

INC.: Have you gotten involved in negotiations where the founder strongly objects to giving away a certain percentage?

ROSEN: All the time. The founder, understandably, wants as high a percentage as possible. But that's only part of the equation. The arithmetic is that the reward is equal to the percentage times the value. What we focus on is not the percentage but the value. We can make the value portion of it much larger than could an entrepreneur without a venture capitalist.

INC.: He or she couldn't do it from internal cash flow alone?

ROSEN: No. The reason you need a lot of money is that it's very difficult to bootstrap a high-growth company without external funding. Your rate of growth will be too slow. If you're in a rapidly growing industry, and you're growing slowly, it's very hard to succeed. For Compaq, we raised $30 million in venture capital in the first year alone. Unless we had been able to build a factory and a work force and some products to start right off with at a very high rate, we never would have made it.

INC.: And with that money comes advice?
ROSEN: Plenty of advice. When a company is just starting, the entrepreneur's job is to get a product out as fast as possible, and most of them have never dealt with commercial bankers, investment bankers, lawyers, accountants. So our job is to help them there, and with management recruiting and strategy. We've made every mistake in the book, and the entrepreneur benefits from those mistakes, because we don't allow him to repeat the same ones. Occasionally, though, they invent new mistakes.

INC.: Then what?

ROSEN: We add them to our backlog.

INC.: Small-business people also complain that to get venture capital, they have to go for millions when really they need only a few hundred thousand dollars. Why not let them have some small amount from your huge funds, if for nothing else than out of a personal concern for enterprise?

ROSEN: First, the funds are not our money; we're fiduciaries. But would I do it personally? I have made personal investments in little things, things that you can't invest in in venture. I loaned my gas-station guy some money, for instance. No doubt there is a hole in the system: how do small to midsize businesses attract outside investment? Banks prefer to lend, not invest; they're not risk takers. And venture funds have this size limitation.

INC.: Can that hole be filled? Could there be a really small-business venture fund on a fiduciary basis like yours?
ROSEN: There could -- but how would you exit? You'd end up with 20% of a local drugstore doing maybe $5 million a year. Whom do you sell your 20% interest to? It's illiquid, that's the problem.

INC.: At the other end of the scale, will Europe -- the Eastern countries and the '92 alliance -- open up big markets?

ROSEN: Eastern Europe is still relatively small, but with the opening of Eastern Europe combined with the '92 revitalization of Western Europe, we're very optimistic. Every one of our companies competes and sells worldwide. I can see it in Compaq alone, where our European business has been growing much faster than our U.S. business over the past four years. Compaq's European business is now about equal to its domestic business, and still growing.

INC.: Yet venture capital has been slow to come around in Western Europe. Why isn't Sevin Rosen over there nurturing companies?

ROSEN: For one thing, because the United States is the only country in the world that has all the elements you need for the entrepreneurial sector. We have the entrepreneurial culture, the ability to fail without stigma, the fact that people leave large companies with impunity -- whereas they're reluctant to do that in other countries. And we have a much more mobile work force. We have the broadest technology base in the world applicable to this field. And we have the most liquid private and public financial markets. You need a way out as well as a way in. Other countries have some of these elements, but you need all of them. We're an order of magnitude ahead of the rest of the world. Plus we have this marvelous single-language market where a start-up can instantly sell to close to 250 million people, even before you go outside the country. If you start in France, say, initially you're talking about fewer than 60 million people before you have to worry about translations and other things. That should improve as they start removing the tariff barriers and become more unified -- but very slowly.

INC.: Then would you consider opening a venture capital fund in Europe?

ROSEN: We wouldn't, but other funds are. There are opportunities. Our problem is we'd really have to be domiciled there, because our style is to stay intimate with our companies. And you can't stay intimate across an ocean.

INC.: Well, maybe we at INC. could scrape together $200,000 as you and L. J. did in '81. But how would we convince outsiders to contribute $24.8 million more?

ROSEN: It's not easy, unless you've been in the venture field and have a track record. We hadn't been. I was a securities analyst, a writer of a newsletter, and a holder of conferences. L. J. was an entrepreneur who had started a company. So we thought it would be a cinch to raise money. It turned out that it wasn't.

INC.: What did you do?

ROSEN: We milked all the contacts we had worldwide. We retained an investment banker -- L. F. Rothschild -- and it helped us. It took us about six months to raise the $25 million. We saw everybody all over the world. Once we went over to see the crown prince of Liechtenstein. We met in his castle and he listened politely to our pitch. He had a great collection of fine art and other stuff, and we thought here was a gold mine. Then he said, "Well, I'm not going to give you any money, but I'll give you a tour of the castle."

INC.: Could novices pull it off today the same way?

ROSEN: Today would be harder, because most of the venture money is going into either existing venture funds or funds started by people who have spun off from venture firms. That's regrettable, because we wouldn't have been in business had not someone taken a chance on us.

INC.: Was it truly the capital gains tax change in '78 that sprung all this venture money loose, or was it there anyway, waiting to happen?

ROSEN: It was a combination of things. Yes, the old rate was oppressive, almost confiscatory. The reduction -- eventually to 20% -- was a big factor in helping not just to shake loose the supply of capital, but also the supply of entrepreneurs. If you're making a good salary with good benefits at a major company, you don't want to risk going over to a start-up that has more than a 50% probability of failure, unless there's a big reward in the end. Lowering the capital gains tax made entrepreneurs much more willing to start companies. Also, it made it easier to recruit people to come over to those start-ups, because usually part of a start-up's compensation is in the form of stock options, and a low capital gains tax furthers that tactic substantially.

INC.: You cited a combination of things. What else?

ROSEN: Simply that technology moves in cycles, and at the same time as the tax adjustment, two immense technologies happened to be coming to the fore -- the microprocessor and biotechnology, each poised to spawn hundreds of new companies. But the point is, if we'd had a 70% capital gains tax rate, I can assure you there would be no industries as we know them today in the entrepreneurial sector.

INC.: You're not just saying that because it hurts venture capital returns?

ROSEN: Well, sure, I want to make lots of money, and I want our entrepreneurs to make lots of money. And if we both make lots of money, the country is going to benefit. Every million dollars of venture capital that's put to work creates about 100 jobs -- and that's allowing for failures as well as successes.

INC.: What new-technology wave will we all be making money on in the '90s?

ROSEN: I honestly don't know. But I'm confident it will be something we're already investing in -- telecommunications, semiconductors, electronic systems, biotech. It will take a while to find out what products best meet the needs of the marketplace.

INC.: In other words, you predict nothing startling.

ROSEN: I'm sure biotech products will be startling, but I'm not conversant in them. For us, one predictable trend will not be toward the computer itself, but incorporating that computer as a building tool, wrapping an innovative application around it, and selling the solution.

INC.: Can you give us an illustration?

ROSEN: We've invested in an electronic publishing company that uses a microcomputer to put its software on for magazine publishing. It performs functions that previously had to be executed on a mini or a mainframe. Another potential market is in the workstations used for securities or currency trading. Today it's done by maybe a million dumb terminals worldwide, attached to giant computers. In the '90s, they'll fall into the realm of the PC. There's a very rapid technology slope that is allowing us to do make such things smaller, faster, better, and at lower cost. Scratch under the surface of that trend, and you're looking at a lot more entrepreneurial businesses creating spectacular new products.

INC.: But not entirely new. That's kind of leeching off fading minicomputer firms.

ROSEN: Well, it's not the invention of the wheel or the discovery of fire. On the other hand, if you can do something more conveniently at a tenth the price that broadens the market by ten- or a hundredfold, it's not all that bad.

INC.: Given the fact that Sevin Rosen was the principal investor in two of the most sensational venture-backed start-ups ever, where would you place yourself in the history of the industry?

ROSEN: Among the lucky ones.