Corrections or additions?
This article by Kathleen McGinn Spring was prepared for the January 15, 2003 edition of U.S. 1 Newspaper. All rights reserved.
Capital Conference A Cold, Hard Look
An impressive line-up of venture capitalists, successful
tech entrepreneurs, and executives from New Jersey economic development
agencies and organizations speak and lead workshops at the New Jersey
Technology Council’s annual New Jersey Capital Conference, taking
place on Friday, January 24, at the Princeton Westin from 7:30 a.m.
through 2 p.m. Cost: $210, but $25 for full-time students. Call 856-787-9700
or register online at www.njtc.org.
The event begins with a breakfast sponsored by Sills Cummis Capital
Markets Group, followed by addresses by Maxine Ballen, founder
and president of NJTC, and by Caren Franzini, executive director,
the NJ Economic Development Authority.
Concurrent workshops at 9:15 a.m. address “Life After the A Round:
Issues and Solutions,” moderated by Michael Weiner of Pepper
Hamilton, and “Taking Raw Technology to Market,” moderated
by Victor Boyajian of Sills Cummis Capital Markets Group. Panelists
for the first workshop are Robert Chefitz of the NJTC Venture
Fund; Robert Burke of Teleogue; and William Howell of
Silicon Valley Bank. Speaking at the second workshop are Amir Goldman
of TL Ventures; Scott Grimes of Canaan Partners; and Inderpal
Mumick of Kirusa.
Concurrent workshops at 10:40 a.m. look at “Taking Advantage of
NJ Infrastructure,” moderated by the NJEDA’s Franzini, and “Planning
a Profitable Exit Strategy,” moderated by Steven Cohen of
Morgan Lewis. Panelists for the first workshop are Mary Hildebrand
of Goodwin Proctor; Randy Harmon of the NJ Small Business Development
Center Technology Commercialization Center/Newark; John Tesoriero
of the NJ Commission of Science and Technology; and Gina Boesch
of Stevens Technology Ventures Incubator. Panelists for the second
workshop are James Piazza of Deloitte & Touche; William Green
of Greenway Ventures; and Mike Mufson of Commerce Capital Markets.
Concurrent workshops at 11:45 a.m. take on “Venture Capital: What’s
Old is New Again,” moderated by David Sorin of Hale and
Dorr’s Princeton office, and “Getting to the A Round,” moderated
by Peter Ehrenberg of Lowenstein Sandler. Panelists for the
first workshop are James Gunton of the NJTC Venture Fund; Brendan
Dougher of PricewaterhouseCoopers; and Barbara Dalton of
Euclid SR Partners. Panelists for the second round are Anthony
Dimun of Nascent Enterprises, and Derek Lau of Worldscape.
The event concludes with a luncheon at which Mark Heesen, president
of the National Venture Capital Association, who speaks on “The
State of the VC Industry from a National and Local Perspective.”
Top Of PageFor Initial Funding
There’s been a meltdown in the venture world,” says Tony Dimun.
Nevertheless, he and a partner
jumped deep into venture waters just a year ago when they founded
Nascent Technologies, a Short Hills-based company that gets life science
start-ups up and running, in part by helping them to secure initial
venture financing.
Dimun speaks on “Getting to the A Round” on Friday, January
24 at 11:45 a.m. at the New Jersey Capital Conference. See above for
details.
Dimun, who graduated from Rider University in 1965 with a degree in
accounting, went to work for large accounting firms, including Ernst
& Young, early in his career. A client was a Vital Signs (Nasdaq:
VITL), a young Totowa-based company involved in the design, manufacture,
and marketing of single-patient use products for the anesthesia, respiratory,
critical care, and emergency care markets. He joined the company in
1987, and became its CFO.
“Terry Wall was the founder,” Dimun recounts, “he focused
on internal growth. I built through acquisitions.” Dimun led Vital
Signs’ investment in five other medical device companies. He says
that identifying these companies and growing them gave him the experience
and confidence to launch his own venture. His success at Vital Signs
also provided him with the financial freedom to enter the exciting,
but risky, field of spotting and growing new tech companies. Records
of stock sale by Vital Signs insiders show he cashed in about $22
million worth of stock within the past two years.
At Nascent Enterprises, Dimun and Frank DeBernardis, his partner,
who has 30 years of marketing experience in the medical field, identify
promising life sciences companies just as they are emerging, often
from universities or hospitals. “Some,” Dimun says, “are
barely beyond a concept, but others are about to be funded by venture
capital.” The partners work with the start ups to identify market
opportunities, find a strong management team, look into manufacturing
possibilities, and find capital.
Nascent is working with about seven start ups. Its niche is medical
devices, blood products, and drug delivery systems. Ventures with
which it is working include a start up arising out of Rutgers that
is working on a polymer technology drug delivery system, and another
being formed by the chair of orthopedics at the University of Pennsylvania
that is being built around an electrical signal used to regenerate
cartilage and stop the advance of arthritis.
While advances like these stand to revolutionize medicine, finding
the capital to make them a reality is substantially more difficult
than it was just a few years ago when Dimun was launching the start
ups he identified during his tenure at Vital Signs. “The five
companies raised $75 million, maybe more,” he recalls. “The
venture world was giddy with profits on the dot-coms.” Then came
the dot-com bust, and the venture capital world changed.
“It isn’t a lack of money,” Dimun says. “It’s just that
investors are extraordinarily more selective. They’re looking for
later stage, less risk.” In the mid-1990s, he says, it didn’t
much matter whether a company had a product to sell. “There was
no resistance,” he says of investors’ response to a good idea
with no product attached. Now investors want to see those products.
“Raising early stage money is extraordinarily difficult,”
he says. But it is not impossible. Here is his advice to those seeking
access to this funding:
Forget the venture funds, at least at first. Venture capitalfunds, in most cases, will not now provide A round financing to untriedentrepreneurs with a good idea. Early stage start-ups need to lookelsewhere.Look to individuals. The dot-com bust was a disaster formany, but others cashed out before the fall — and still othersstayed put in the executive suite of their corporations. These individualsgrew wealthy in the go-go 1990s, and at least some of them are willingto get in on the excitement of launching a new venture. This group,says Dimun, has taken the place of the venture funds that used tobe willing to take a flier on a new technology.Stay with your industry. Dimun is helping the life sciencecompanies he advises to raise capital by going to individuals whoare knowledgeable about the technologies these start-ups are developing.He says he recently spent a great deal of time trying to sell a wealthyretired IBM executive on a new medical technology company, but inthe end, his IBM contact just did not feel comfortable with the technology,and decided not to invest. Far better, Dimun learned, to pitch aninvestment in a medical device start-up to a retired senior J&J executivewho understands the field. Partners in health care venture funds whodo outside investing are also good targets, as are physicians.In other industries the players will be different, but the strategyis the same. Look for CEOs, retired executives, venture firm partners— and maybe even 20-something neighbors with a dot-com past —who know the industry, and the product niche, for which your technologyhas applications.Lean on your investors. An advantage of finding investorsin your industry — be it medical devices or wireless software— is that they will be helpful later on. “They can open doorsto their former companies,” Dimun points out. “They may havecontacts in Washington to help with the FDA. They may have contactsin manufacturing.”Offer up a large playground. Once investors are identified,it is important to show them that there is a huge market for yourtechnology. Says Dimun, “Investors want a large playground toplay in.”Be fresh, and safe. These wealthy individual investorstend to be impressed by innovative, novel products that are well protectedby patents.Show a quick route to market. Investors want to see aclear route to the marketplace. It is not enough — especiallyin the medical field — to demonstrate that a product can be upand running quickly. In many cases, it is no good if a product takesless than a year to invent, but two years to get through clinicaltrials. Investors prefer technologies that, perhaps because thereis something similar on the market, can whisk through the FDA approvalprocess in a short time.Still, there are no hard and fast rules. Says Dimun, “Many investorshave patience if the market is large enough to be rewarding.”Finding these investors is the key, and knowing the new rules forspotting the elusive species is essential.Top Of PageFrom the StartPlan the ExitB>Michael Mufson has ridden the investment bankingroller coaster for more than two decades, and his voice quickly betraysthe fun he finds in the ride. “I’ve survived 21 years,” hejokes, “I’m a zoo animal! They should put me behind bars.”Rather than being on display in a Darwinian case study of the junglethat is the investment industry, Mufson is hard at work at his desk,just a year-and-a-half into a new job. He left Janney Montgomery Scottwith 30 people to start Commerce Capital Markets, the investment bankingarm of Commerce Bancorp, the fast-growing, Cherry Hill-based regionalbank.On Friday, January 24, at 10:40 a.m. he speaks on “Planning aProfitable Exit Strategy” (See previous story for details.)A graduate of George Washington University (Class of 1976), who alsoholds an MBA from that school, Mufson speaks fondly of his entry intothe investment world. “I had the good fortune to start in 1981,”he recounts. “It was a seminal year. The IPO markets picked upafter a 10-year lag.” After laying dormant throughout the 1970s,the stock market perked up as the 1980s began. “It was drivenby the PC, PC networking, and life sciences,” Mufson recalls.Investors were excited, and by and large they remained excited fora good long time.”It continued right up to April, 2000,” Mufson says wistfully.Sure, there was a little slowdown in the early-1990s, but then theInternet came along, sparking even more than enthusiasm than the PCdid a decade earlier. “Now,” says Mufson, “it’s prettyugly.” The current slump is by far the longest downturn in hisprofessional career. “Previous downturns were six months, ninemonths,” he says. “Now it’s two years.”Can he predict the end?There is no hesitation. “No,” Mufson says right away. Partof the problem is that there is no big “next thing” to rivalthe PC or the Internet in his scan of the horizon. “It’s a bitof a problem,” he says. “There isn’t a tech event. You don’tneed a new PC every month; the Internet has calmed down.” Lifesciences will be huge. “There will be tectonic plate shifts,”says Mufson. “The life science community will change the way medicineis practiced.” But not yet. Not for a number of years. Practicaluses for the genome, for example, are a good decade away.Another possible source of market-moving excitement is nanotechnology,but there too practical applications are a still a good way down theroad. Meanwhile, Mufson says, “no one is buying green bananas.”This, of course, is a problem for the entrepreneur.Investors want to put money into a promising venture, and then getit out again — fast. The Initial Public Offering (IPO) allowsthem to do just that. When the company in which they invest goes public,cash inflow stops, and there is often a handsome reward. “Forthe last decade, it was commonplace to take a company public,”says Mufson. “Today, volume is off 75 percent.”But, while the profitable IPO exit door is largely shut, investorsstill insist on getting their money out of a venture quickly. Mufsonsays that three to five years is ideal, and that few investors willwait around for more than seven years. With the IPO largely out ofthe question, the best road to a pay-out often is a merger or acquisition.This new reality affects the way entrepreneurs have to structure theirbusinesses, and how they have to approach venture capitalists. Thenew reality for entrepreneurs are the following:Planning for an exit. A new enterprise may be little morethan a patent in an entrepreneur’s pocket. No matter. You may haveno permanent offices and few employees, but you must have an exitstrategy — a way to cash in on the company that does not yet reallyexist. Investors want to know how they are going to get their moneyback, and when. As a practical matter in this market climate, thatgenerally means identifying companies — the more the better —whose products could really use technology like that you are developing.One such potential suitor will not excite investors, says Mufson.Find a dozen, or better yet, two dozen.Doing without investors for as long as possible. In theold days, circa 1999, the idea was to pull in vast amounts of capitalwell before an idea became a product. With an IPO a possibility withina couple of years, there would be plenty of cash for the entrepreneur,as well as for his investors. Now, with valuations for new tech venturesdown two-thirds, or more, it makes sense to hang on to as much ofthe company as possible for as long as possible. The pay-off is notgoing to be what it once was. If you want a decent slice, you needto keep as much equity as you can.Conserving cash. “Hold on to equity as long as possible,”advises Mufson. The add-on venture rounds — $100 million here,$50 million there — which were so common in the late-1990s, aregone. That money has to last. “Don’t rent an expensive suite ofoffices in Lawrenceville,” says Mufson. Keep accouterments inline with the company’s growth stage. Think twice about rewardingsalespeople with BMW convertibles. In short, he urges, “spendmoney only when you need to.”Getting ready to get out. Not only do investors want theirmoney to get out of a new venture quickly, but they want the entrepreneurand his lieutenants to be ready to clear out as well. “Funds aresuspicious of entrepreneurs who want to run the company,” Mufsonsays. In their view, the founder is the person who racks up 75 percent-a-yeargrowth in the first half decade or so. “Once it’s 20 to 25 percentgrowth, the entrepreneur is not the best manager,” says Mufson.There is still money out there. Mufson says that, ironically,this cash tends to be in the hands of venture funds that raised alot of money late in the boom cycle, and did not get their managementacts together in time to spend all of it on hot dot-coms. Gettinga share of that cash now is not easy, but it is possible. To catchan investor’s eye now, says Mufson, forget the flash. Investors arereluctant to spend any cash, and are drawn to promising start upswith a similarly frugal style.Top Of PageLessons from the Dot-Com BustTech entrepreneurs in search of funding need to bringthat pie in the sky down to the table. “In this environment,”says Inderpal Mumick, CEO of Kirusa, “you need to look attechnology that can be reduced to products in a short time.” Hespeaks on “Taking Raw Technology to Market” at the New JerseyTechnology Council’s New Jersey Capital Conference on Friday, January24, at 9:35 a.m. (see previous article for details).Though he started his company in the fall of 2000, just months aftera tech crash of historic proportions, Mumick has been able to attractventure capital. A 1986 graduate of the Institute of Technology inNew Delhi, he spent 5 1/2 years at Stanford, obtaining a Ph.D. incomputer science and, he says, watching entrepreneurs all around himturn ideas into well-funded companies. From Stanford, he went on toAT&T, but his up-close look at business creation stayed with him.”In a large company,” he says, “it is hard to take thingsto market. I had ideas, and the most appropriate, most expedient wayto bring them to market was to start my own company. It is also theway to create wealth.” Risk, he acknowledges, is part of the equationtoo. He was willing to take that chance, and in 1997, he and severalAT&T colleagues founded Savera. He served as president of the MurrayHill-based company, which is now part of international holding companyXYK. Savera builds, markets, and operates interconnect billing softwareused for billing between telecommunications carriers for use of eachothers networks.Kirusa, Mumick’s current venture, aims to grow by making cell phonesuser friendly. “Interface is a major problem for mobile devices,”he says. Cell phones and their ilk now let users communicate visually— typically by typing or using a stylus — or vocally, butare not set up to enable the two to go on at the same time. Thereinlies the problem that is keeping mobile from reaching its potential.”The visual way is very painful when the device is small,”says Mumick. Taking the functions of a PC portable does not work wellwhen the keyboard is reduced to the size of a razor blade. The earlyanswer was to allow for speech. That works well, Mumick points out,but only for some functions. “You can talk and get results,”he says. “You can ask for a stock quote. You can say `read memy E-mail.’”But voice goes only so far in a mobile device. “Say you want directionsto Princeton,” he gives as an example. “It’s painful to hearback the directions. There are so many street names to remember! Itwould be so much easier to see the directions on the device; it mimicsthe experience of seeing them on paper.”Kirusa’s multi-modal technology combines the visual and the vocal,letting each put its best foot forward. “We noted exactly thepoint where visual is bad,” he says. “That is the point wherevocal is good.” And vice versa. “It’s almost an interlock,”he says. This observation led Mumick and his team to develop technologyto enable the two to complement each other. Instant messaging is anexample of how this works. “You see a list of your IM buddieson the cell phone,” explains Mumick, “then you communicateby speaking with them.”The technology is now being tested by two customers, France Telecom’sOrange Wireless unit, and Bouygues Telecom. Both operate in Europe,which, says Mumick, is about six to nine months ahead of North Americain spending money on cutting-edge wireless technology. “Italy,”he comments, “has 60 million people and 54 million cell phones.”An advanced wireless infrastructure, along with a unified wirelessstandard, makes Europe — and also Japan — excellent marketsfor new wireless technology, but Kirusa is also forging relationshipswith carriers in the United States and in Canada.Mumick estimates the size of the market for multi-modal interfacesfor wireless devices at $2 billion in five years. Kirusa does havecompetitors, large and small, but Mumick says his company is aheadof the pack in terms of development and that, in any case, the marketis large enough for a number of players. Kirusa’s business plan callsfor collecting licensing fees for its technology from carriers basedupon the number of subscribers opting to use it. The first licenses,Mumick says, may be for only 1,000 users, but fees will go up as moresubscribers sign on.Kirusa has attracted $5.3 million in venture capital from France Telecom,Deutsche Bank, and Silicon Alley Seed Investors. His advice to techentrepreneurs seeking to follow his success includes these suggestions:Avoid the excesses of the dot-coms. So many promisingcompanies flamed out within the past few years. Observing the birth— and demise — of these ventures, Mumick learned a numberof lessons. “Don’t overspend until you have customers bringingmoney,” is perhaps the most important. So many Internet companiesspent money on marketing, advertising, and amenities, he says. “Theygrew too quickly, flew first class in the airplane, and stayed atthe Ritz. It was a waste of money.”Grow organically. Reminded of Kozmo.com, the instant-deliverycompany that brought magazines, Haagen-Daz, and even a single sodato dedicated couch potatoes, Mumick comments, “They opened officesin 10 cities before they had success in one.” Better, in his view,to let early successes feed gradual growth.Define a clear niche. Another problem afflicting manyof the dot-coms was a tendency to buy other companies before gettingtheir own operations grounded. Amazon.com, for example, put millionsinto Kozmo.com before it had moved very far past its own infancy.Perfect a core technology. Tech ventures are built ona technology. Entrepreneurs need to have experience in that technology,and to know that it works.Work with a customer as soon as possible. Once a technologyis developed, the entrepreneur needs to take it to a customer rightaway. “Go and use it in a customer setting,” says Mumick.”See how it has to be improved, then fill the gaps that are relevantto the customer. Do this very early on.”Technology in a vacuum is no good, he stresses. The customer’s needsmust be the development centerpiece for any entrepreneur who hopesto take his idea to market.Get to the software stage as quickly as possible. “Youcan’t sell technology,” Mumick says. “You can’t sell patentrights. Maybe a big corporation can sell patent rights, but the start-upcan’t.” You must make your technology into a product. It has tobe saleable. It has to fit into a customer’s environment.The time when an investor would salivate over an idea is longgone. “In this environment,” Mumick stress, “investorswant technology that can be reduced to products in a very short time— six to nine months, twelve months at the longest.” Don’tspend too much time tinkering with the recipe, that pie needs to bakedand placed on the windowsill as quickly as possible.Next StoryCorrections or additions?This page is published by PrincetonInfo.com— the web site for U.S. 1 Newspaper in Princeton, New Jersey.
