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.
