ACCOUNTING

Start-Up Fever

In an interview with Inc. senior editor Joseph Rosenbloom, venture capitalist Ruthann Quindlen discusses the harsh realities that she sees emerging in Silicon Valley.
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Face to face

For Ruthann Quindlen, the fun of being a venture capitalist is working with early-stage businesses. That's also what makes it so risky

Ruthann Quindlen's byline doesn't include a middle name. But by all rights her nom de plume ought to be Ruthann Early Quindlen. As an investment banker in the 1980s, she made her reputation by defying accepted wisdom and becoming an early champion of software and Internet companies, notably Microsoft and America Online. As a venture capitalist for the past six years, she has gone against the grain again by advocating investment in companies that are just getting started.

Quindlen, the daughter of an air force officer, grew up in Louisiana but shucked her Southern accent long ago. ("People thought you were either stupid or a hick or both," she says.) She studied economics at Georgetown University and earned her M.B.A. at Wharton. While still in business school, she started as a summer intern at Alex. Brown & Sons. She went on to become a managing director there. By 1993 she had tired of handling the established companies that the investment bank customarily financed, and she quit.

She signed on, instead, with Institutional Venture Partners, or IVP, a venture-capital firm based in Menlo Park, Calif., that's on the early-stage side of the Silicon Valley spectrum, which is to say it prides itself on the number of fledgling companies it backs. But even within IVP, where the 46-year-old Quindlen is a general partner, her voice is one of the loudest in the earlier-is-better chorus.


"I used to love bootstrapped companies. The problem now is, you can't afford it. You lose too much time."


In shepherding start-up entrepreneurs, Quindlen says, she encountered a lack of basic knowledge about venture capital. So she wrote a book -- Confessions of a Venture Capitalist (Warner Books, 2000). Despite its title, the book isn't so much confessional as it is didactic. It's part primer and part a collection of Quindlen's "war" stories. What's next for Quindlen? Later this year she plans to raise $200 million to $300 million for a new venture designed to help entrepreneurs with problems they face at the very earliest stages of company building.

In an interview with senior editor Joseph Rosenbloom, Quindlen took a hard look at the frenzy of Silicon Valley, describing some harsh realities she sees on the horizon.

Inc.: What's your secret in dealing with early-stage companies?

Quindlen: Entrepreneurs come all the time with little ideas that could be big ideas, but they just haven't pushed them far enough. Part of the reason is that they don't quite understand what a big idea is. And part of the reason is that they're trying to reduce risk and protect themselves a little bit, which at the end of the day isn't the right way to approach these deals.

Inc.: Some people say that risk taking is really not what entrepreneurship should be about anyway, that smart entrepreneurs will minimize risk.

Quindlen: Well, you do and you don't. That is something that has changed dramatically. It used to be that you, as the entrepreneur, would gather your team together, try to make a product, and figure out what the customers wanted -- all in a sequential, timely, don't-spend-much-money process.

And you can't afford to do that now, because while you're doing all that, somebody else will take your market and run with it. So if you try to reduce risk a lot in this kind of environment, you're going to lose. You have to take on risk. You have to take big, bold steps. As venture capitalists we have to swing for the fences, because you're rewarded disproportionately if it succeeds.

Inc.: You say it's a mistake for an entrepreneur to have a bootstrap mentality. Isn't bootstrapping a wonderful way to impose discipline on a company when money is tight in the early days?

Quindlen: I used to absolutely love bootstrapped companies. The problem is, in this Internet environment, with everything moving so fast and money being a commodity and competition arising overnight, you can't afford to bootstrap. You just lose too much time.

While you're bootstrapping along, being all disciplined and staying small and trying to get your ducks in a row, your competitors are spinning like crazy, hiring like crazy, growing like crazy. And they'll either grow or flame out, but they'll be there ahead of you. So you just can't afford to do it.

Inc.: So bootstrapping is an antiquated virtue?

Quindlen: An antiquated virtue, yes. Now, that doesn't mean spend, spend, spend, and don't have a business model that makes sense, and hire until you drop. I'm just saying you can't afford to bootstrap anymore because of time.

Inc.: You don't hold angel investors in high esteem.

Quindlen: Angels serve a very important purpose. The issue with angels is that most of them don't want to spend a lot of time helping the companies in which they invest. A lot of them don't understand how to help the companies get ready to be venture financed. So the angels can help, but they don't necessarily fill the gap in the early stage.

Inc.: Has it always been hard to find early-stage venture money?

Quindlen: It's gotten much more difficult. What has happened is that all these venture firms have raised very large funds. And they're putting out the money very quickly -- like in a year -- and raising another giant fund. And that dynamic -- unless you're going to have a thousand partners in each fund, which nobody wants -- means that each partner serves on more and more boards every time his firm raises a new fund.

In that dynamic, it's very hard to focus on an early-stage company, because you don't have the time. You're on too many boards. And you have too much money to put to work.

Inc.: How bad is the problem?

Quindlen: I think it's a breakdown. With less help, the entrepreneurs build less great companies. It's almost like when people can't spend time with their children: they buy them toys to make up for it. This is a little bit like that. You say, "I'll give you some more money."

Inc.: You're on eight boards.

Quindlen: Yes. I'm pressed to do a great job with those entrepreneurs. I think if you talk to them, they would say that I do give them time. I've said no to doing some tasks that they've asked me to do, which I thought they were perfectly right in asking me to do.

Inc.: Have venture capitalists become more competitive?

Quindlen: Much more competitive. It's no longer a gentlemen's club. It's just like investment banking. It's a head-to-head competitive business.

Inc.: When you entered the business in 1993, what return on an investment did venture capitalists expect, and how long was it supposed to take to make it?

Quindlen: I think that the expectation then was that it would be five to seven years, sometimes longer. And then if you got 10 times your money, you had conquered the world.

Inc.: And now?

Quindlen: Two to three years, 100 times your money.

Inc.: You describe Silicon Valley as a bubble.

Quindlen: It seems unique in all the world. It's a bit insulated in that way. People have tried to re-create Silicon Valleys in other cities or other countries, and they've never quite got the energy level and infrastructure and insanity that happens here -- that kind of go-for-broke, never-say-die, don't-stop mentality, which is really what's been happening here.


"Most venture capitalists are type-A personalities who tend to thrive on what's hard, stressful, and lonely."


The enormous number of new companies and new ideas and new entrepreneurs and energy level generated here every day is just incredible. It continues to grow. The wealth scale is off the charts: instant wealth; overnight wealth.

Inc.: It sounds intoxicating.

Quindlen: Oh, absolutely. My husband, who is also a venture capitalist, and I have made enough money that we could retire for life. And we agreed that if we were to do that, we would have to go away to Italy and draw, because there's no way we could live here and watch this on the sidelines. It would be torture. And, in fact, we have a house in Santa Fe. And we talk about Santa Fe: would it be far enough away? And I'm not sure it is.

Inc.: Yet you say that the life of a venture capitalist is hard, stressful, and lonely. It doesn't seem that great.

Quindlen: Most of the people who do it are type-A personalities who tend to thrive on what's hard, stressful, and lonely. It is great, but you have to love it. You have to love working with entrepreneurs and creating companies.

I had breakfast with one venture capitalist the other day. He said, "It's like drinking from a fire hose. It's just nonstop." Venture guys have dark circles under their eyes, and they all don't see their kids enough. And they've all made more money than they need for the rest of their lives. And yet, they run, run, run, every day. It's just kind of an addiction.

Inc.: You're a venture gal, not a venture guy. How well do you fit in?

Quindlen: The system is mainly men. The men don't really like it if the women don't speak up. They consider them shy or insecure or noncharismatic or whatever. But they are ambivalent if a woman is really forceful and makes decisions. Then they consider her a bitch or hard-ass or ball buster, or something like that.

Inc.: How have you walked that line?

Quindlen: I chose the latter category. I just decided that I was just going to go for it and be as aggressive as I had to be, as straightforward as I had to be, and as driven as I had to be. And certainly I have nothing to complain about. I've had more than enough opportunity in my life -- probably some given to me because I am a woman and some not given to me because I am.

Inc.: You talked earlier about today's fast-moving Internet environment. Are venture-backed companies pretty much limited to Internet plays?

Quindlen: To tell you the truth, there isn't anything we're doing now that isn't Internet related. I would hazard to say that what's happening to the Internet is affecting the old economy, too.

Inc.: Non-Internet companies need not apply.

Quindlen: That's exactly right. I don't think you're going to get any substantial funding today unless you have some play on the Net.

Inc.: Which kind of Net companies make sense to you and which do not?

Quindlen: Most of retail is not a very attractive business. Look at drugstores online: cotton balls and Q-tips. Are you going to pay $2 to buy those online? There are shipping costs, right?

So a lot of those businesses have very low gross margins, and in fact some E-tailers have negative gross margins. And they have to spend a tremendous amount of money to get people to come to the site and to continue to have them buy on the site.

Inc.: What made them so attractive for so long?

Quindlen: I think that Wall Street fell in love with them because they were an early Internet play. That's why they bid Amazon and others up so high. And then the venture community did something that I think they didn't do in the past, which is they followed Wall Street.

Inc.: Which of the Net models look like long-term survivors?

Quindlen: I liked business-to-business two or three years ago because I thought that there were fundamental changes that the Internet could bring.

Going forward, I think wireless is interesting. I think there's going to be a fad around it, unfortunately, which will drive up prices crazily, and there will be a lot of momentum plays. But I do think that your phone is going to be your fundamental information device. And you're going to want to do more and more on it. And it's important for us to put in place the infrastructure that allows you to do that.

Inc.: Who decides when a company can't cut it and it's time to stop the flow of venture money?

Quindlen: That is not happening much anymore. The reason is, there's so much money around that companies get two and three and four times to get it right. It used to be in the venture community that you probably had write-offs for at least 10% of the companies you backed. You would have 35 companies in a fund, and 3 to 4 of them might be complete write-offs.

Now you have a lot of time to find somebody to invest in them or to sell them to somebody that has an inflated stock and can find some use for them. I would say that the number has gone down to maybe one a fund, as opposed to 5 or 6 a fund. The environment has changed dramatically.

When it does happen, the company and the venture capitalist decide together, because the first premise is that they're anxious to keep going, right? Generally, what happens, if it hasn't worked and you've stuck it out for more than a couple of years, you're pretty tired. You're tired of breaking your pick on a rock. It's very much a team decision. It's not as if we pull the plug because it's our money in there. We're all in the same boat.

Inc.: What's been your biggest mistake so far?

Quindlen: I had the chance to invest in a company called Onsale that was one of the earliest auction sites on the Net. It was a new model. The Internet was new. And I didn't go for it. And that was a huge mistake for a lot of reasons. Number one, I could have had an early success on the Internet. It would have brought me other deals that I never saw because I didn't have that very early success. And Onsale merged with Egghead.com, and they're a large public company now. I fudged the decision.

Inc.: Why?

Quindlen: I wasn't willing to take the risk. I was a coward. I didn't want to be wrong.

Inc.: When the music stops, won't boldness seem vastly overrated?

Quindlen: Yes, but until then, if you're not bold, you're standing on the sidelines watching everybody else who is succeeding. I also think that even when the music stops, the market rewards boldness. It likes new ideas. It likes new concepts. It likes people striking out in new directions, if they can show that they can make their ideas succeed over time.

Inc.: Did the stock-market drubbing in April rattle Silicon Valley?

Quindlen: Like the coldest of cold showers. I think that everyone was dreading a significant correction. And that week of dropping stock prices sure felt like one. Some of my partners looked almost gray.

Inc.: So you weren't blindsided?

Quindlen: I wasn't completely blindsided. In fact, I had personally sold a significant amount of my personal holdings in January and February because I was worried about a correction. I know that the Street usually overcorrects. It's like the hangover that you get as payment for too much partying. Still, the severity of some of the individual stock movements was certainly a surprise to me.

Inc.: What steps have you and your partners taken to adjust?

Quindlen: We are encouraging our companies to cut their burn rate and show a faster path to profitability.

Inc.: Are you any less optimistic about the prospects for cashing out your investments at full value?

Quindlen: It's hard to tell what will happen to technology valuations. I don't believe that valuations will return to their recent highs. In that case, are we going to move back to the pre-Internet valuations, with earnings as an absolute requirement and valuations based on a multiple of those earnings? We don't really know.

Inc.: What are the ramifications of the wobbly stock market for entrepreneurs?

Quindlen: They should start fewer "me too" businesses, pay more attention to building great -- rather than hyped -- companies, and stay focused on profitability targets.


Please e-mail your comments to editors@inc.com.

Last updated: Jul 1, 2000




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