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.
