Upstarts: Rookie Venture Capital

Rookies break into venture capital

Trio raises $15 million for early-stage investments, filling void left by veterans

By Jerry Useem

Time was, to raise a new venture-capital fund, you had to be, well, a venture capitalist--and a seasoned one at that.

Now consider John Kohler, Russ Aldrich, and Robert von Goeben, who in 1996 raised $15 million for their brand-new venture outfit, Redleaf Venture Management, based in Saratoga, Calif. Their collective venture-capital experience: zero.

Never, it seems, have so many raised so much with so little experience. Last year, a record 47 new venture funds sprouted up, many of them headed by neophytes like Kohler, Aldrich, and von Goeben. Industry veteran William "Boots" Del Biaggio laments, "Seems like everybody thinks they can be a venture capitalist."

Rookie funds such as Redleaf are changing the complexion of an industry that only a few years ago seemed perilously close to losing the word "venture" from its name. The more established funds, burdened with a surfeit of cash, were putting larger and larger chunks of money to work in big companies, to the neglect of riskier start-ups. Now the newcomers are staking out that evacuated territory. Redleaf, for example, invests very small sums--as little as $500,000--in Internet-related companies too young and too small to interest the big funds.

If the Redleaf team consists of venture-capital greenhorns, it does not lack an impressive pedigree. Aldrich, once a member of the marketing team that launched the Apple Macintosh, cofounded Simba Technologies. Von Goeben previously ran Geffen Records' on-line division. Kohler, a former executive at Hewlett-Packard, was the 24th hire at Netscape Communications Corp.

But on Sand Hill Road, the Madison Avenue of the venture-capital world, such operating experience has traditionally counted for little. So what's changed? The answer lies in the torrent of money that has been pouring into venture firms in recent years, which has had a dramatic effect on their operations.

Lured by the industry's supranormal returns (averaging 41.2% yearly from 1995 to 1997, compared with 15.4% over the past two decades), investors have magnified their contributions almost ninefold since 1991. Though old-line funds such as Sequoia Capital and Accel Partners have absorbed much of the influx, plenty is spilling over to smaller fry and novices.

Still, Kohler couldn't simply anoint himself a venture capitalist. "Investors wanted to know, 'How do you know you'll have deal flow? How do we know you'll be good on a board of directors?" he recalls. To prove it, Kohler used $2.3 million of his own money to put together a private investment portfolio of five start-ups. That caught the eye of FLAG Venture Management, a group based in Stamford, Conn., that invests in new venture firms. Impressed with Kohler's professionalism, FLAG ponied up $1.5 million, enabling him to coax another $13.5 million out of institutional and individual investors.

Like politicians touting their "outsider" status, Redleaf's partners have tried to turn their lack of investment experience into a virtue. Kohler calls their approach "blue-collar venture management": rather than acting like passive financiers, he and his partners say they plunge themselves into the nitty-gritty of company building. They've donned polo shirts to work trade shows and have even made some sales calls. "The big funds have to spend more money on each company, and less time," says von Goeben. "Internet companies need just the opposite. They need less money, but more partner time."

That pitch doesn't impress everyone. "There's nothing new in that song and dance," says Jesse Reyes of the research firm Venture Economics. Moreover, with so much money competing for the same deals, observers say that novices such as Redleaf risk overpaying for the companies they invest in, and that a cooling of the market for IPOs crimps their prospects.

So far, though, so good. Redleaf is tight-lipped about numbers, but its first investment, a maker of Internet-advertising and direct-marketing software called NetGravity, went public in June, its stock tripling to $27 in its first month of trading. Redleaf's six other investments all have received follow-on rounds of financing from other VC firms. Kohler and the gang are already back on the road to raise a second fund, Redleaf II, intended to be four times the size of the first. Now they've brought on a fourth partner, Lloyd Mahaffey.

And how much venture-capital experience does he bring to the table? Exactly the same amount that his partners did.

M-o-n-e-y spells change

To understand the dynamic changes in the venture-capital world, which is attracting more unseasoned people to try their hand as venture capitalists, it's important to note one factor more than any other. That factor is spelled M-O-N-E-Y. Lots of it. The gush of money into venture-capital funds has been altering the industry's landscape.

Source: National Venture Capital Association 1997 Annual Report.

Playing the begging game

During his 12 years as a partner at Southwest Venture Partners, an established venture-capital firm in Austin, Tex., John Long spent his days listening to entrepreneurs beg him for money. But when Long departed in late 1995 to launch his own venture-capital firm, Trellis Partners, suddenly he was the one doing the begging.