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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."
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
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
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:
funds, in most cases, will not now provide A round financing to untried
entrepreneurs with a good idea. Early stage start-ups need to look
many, but others cashed out before the fall — and still others
stayed put in the executive suite of their corporations. These individuals
grew wealthy in the go-go 1990s, and at least some of them are willing
to get in on the excitement of launching a new venture. This group,
says Dimun, has taken the place of the venture funds that used to
be willing to take a flier on a new technology.
companies he advises to raise capital by going to individuals who
are knowledgeable about the technologies these start-ups are developing.
He says he recently spent a great deal of time trying to sell a wealthy
retired IBM executive on a new medical technology company, but in
the end, his IBM contact just did not feel comfortable with the technology,
and decided not to invest. Far better, Dimun learned, to pitch an
investment in a medical device start-up to a retired senior J&J executive
who understands the field. Partners in health care venture funds who
do outside investing are also good targets, as are physicians.
In other industries the players will be different, but the strategy
is 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 technology
in your industry — be it medical devices or wireless software
— is that they will be helpful later on. "They can open doors
to their former companies," Dimun points out. "They may have
contacts in Washington to help with the FDA. They may have contacts
it is important to show them that there is a huge market for your
technology. Says Dimun, "Investors want a large playground to
tend to be impressed by innovative, novel products that are well protected
clear route to the marketplace. It is not enough — especially
in the medical field — to demonstrate that a product can be up
and running quickly. In many cases, it is no good if a product takes
less than a year to invent, but two years to get through clinical
trials. Investors prefer technologies that, perhaps because there
is something similar on the market, can whisk through the FDA approval
process in a short time.
Still, there are no hard and fast rules. Says Dimun, "Many investors
have patience if the market is large enough to be rewarding."
Finding these investors is the key, and knowing the new rules for
spotting the elusive species is essential.
Plan the Exit
<B>Michael Mufson has ridden the investment banking
roller coaster for more than two decades, and his voice quickly betrays
the fun he finds in the ride. "I’ve survived 21 years," he
jokes, "I’m a zoo animal! They should put me behind bars."
Rather than being on display in a Darwinian case study of the jungle
that 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 Scott
with 30 people to start Commerce Capital Markets, the investment banking
arm of Commerce Bancorp, the fast-growing, Cherry Hill-based regional
On Friday, January 24, at 10:40 a.m. he speaks on "Planning a
Profitable Exit Strategy" (See previous story for details.)
A graduate of George Washington University (Class of 1976), who also
holds an MBA from that school, Mufson speaks fondly of his entry into
the investment world. "I had the good fortune to start in 1981,"
he recounts. "It was a seminal year. The IPO markets picked up
after a 10-year lag." After laying dormant throughout the 1970s,
the stock market perked up as the 1980s began. "It was driven
by the PC, PC networking, and life sciences," Mufson recalls.
Investors were excited, and by and large they remained excited for
a 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 the
Internet came along, sparking even more than enthusiasm than the PC
did a decade earlier. "Now," says Mufson, "it’s pretty
ugly." The current slump is by far the longest downturn in his
professional career. "Previous downturns were six months, nine
months," he says. "Now it’s two years."
Can he predict the end?
There is no hesitation. "No," Mufson says right away. Part
of the problem is that there is no big "next thing" to rival
the PC or the Internet in his scan of the horizon. "It’s a bit
of a problem," he says. "There isn’t a tech event. You don’t
need a new PC every month; the Internet has calmed down." Life
sciences will be huge. "There will be tectonic plate shifts,"
says Mufson. "The life science community will change the way medicine
is practiced." But not yet. Not for a number of years. Practical
uses 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 the
road. 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 get
it out again — fast. The Initial Public Offering (IPO) allows
them to do just that. When the company in which they invest goes public,
cash inflow stops, and there is often a handsome reward. "For
the 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, investors
still insist on getting their money out of a venture quickly. Mufson
says that three to five years is ideal, and that few investors will
wait around for more than seven years. With the IPO largely out of
the question, the best road to a pay-out often is a merger or acquisition.
This new reality affects the way entrepreneurs have to structure their
businesses, and how they have to approach venture capitalists. The
new reality for entrepreneurs are the following:
than a patent in an entrepreneur’s pocket. No matter. You may have
no permanent offices and few employees, but you must have an exit
strategy — a way to cash in on the company that does not yet really
exist. Investors want to know how they are going to get their money
back, and when. As a practical matter in this market climate, that
generally 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.
old days, circa 1999, the idea was to pull in vast amounts of capital
well before an idea became a product. With an IPO a possibility within
a couple of years, there would be plenty of cash for the entrepreneur,
as well as for his investors. Now, with valuations for new tech ventures
down two-thirds, or more, it makes sense to hang on to as much of
the company as possible for as long as possible. The pay-off is not
going to be what it once was. If you want a decent slice, you need
to keep as much equity as you can.
advises Mufson. The add-on venture rounds — $100 million here,
$50 million there — which were so common in the late-1990s, are
gone. That money has to last. "Don’t rent an expensive suite of
offices in Lawrenceville," says Mufson. Keep accouterments in
line with the company’s growth stage. Think twice about rewarding
salespeople with BMW convertibles. In short, he urges, "spend
money only when you need to."
money to get out of a new venture quickly, but they want the entrepreneur
and his lieutenants to be ready to clear out as well. "Funds are
suspicious of entrepreneurs who want to run the company," Mufson
says. In their view, the founder is the person who racks up 75 percent-a-year
growth in the first half decade or so. "Once it’s 20 to 25 percent
growth, the entrepreneur is not the best manager," says Mufson.
this cash tends to be in the hands of venture funds that raised a
lot of money late in the boom cycle, and did not get their management
acts together in time to spend all of it on hot dot-coms. Getting
a share of that cash now is not easy, but it is possible. To catch
an investor’s eye now, says Mufson, forget the flash. Investors are
reluctant to spend any cash, and are drawn to promising start ups
with a similarly frugal style.
Tech entrepreneurs in search of funding need to bring
that pie in the sky down to the table. "In this environment,"
says Inderpal Mumick, CEO of Kirusa, "you need to look at
technology that can be reduced to products in a short time." He
speaks on "Taking Raw Technology to Market" at the New Jersey
Technology Council’s New Jersey Capital Conference on Friday, January
24, at 9:35 a.m. (see previous article for details).
Though he started his company in the fall of 2000, just months after
a tech crash of historic proportions, Mumick has been able to attract
venture capital. A 1986 graduate of the Institute of Technology in
New Delhi, he spent 5 1/2 years at Stanford, obtaining a Ph.D. in
computer science and, he says, watching entrepreneurs all around him
turn ideas into well-funded companies. From Stanford, he went on to
AT&T, but his up-close look at business creation stayed with him.
"In a large company," he says, "it is hard to take things
to market. I had ideas, and the most appropriate, most expedient way
to bring them to market was to start my own company. It is also the
way to create wealth." Risk, he acknowledges, is part of the equation
too. He was willing to take that chance, and in 1997, he and several
AT&T colleagues founded Savera. He served as president of the Murray
Hill-based company, which is now part of international holding company
XYK. Savera builds, markets, and operates interconnect billing software
used for billing between telecommunications carriers for use of each
Kirusa, Mumick’s current venture, aims to grow by making cell phones
user 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, but
are not set up to enable the two to go on at the same time. Therein
lies 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 well
when the keyboard is reduced to the size of a razor blade. The early
answer 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 me
But voice goes only so far in a mobile device. "Say you want directions
to Princeton," he gives as an example. "It’s painful to hear
back the directions. There are so many street names to remember! It
would be so much easier to see the directions on the device; it mimics
the 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 the
point where visual is bad," he says. "That is the point where
vocal is good." And vice versa. "It’s almost an interlock,"
he says. This observation led Mumick and his team to develop technology
to enable the two to complement each other. Instant messaging is an
example of how this works. "You see a list of your IM buddies
on the cell phone," explains Mumick, "then you communicate
by speaking with them."
The technology is now being tested by two customers, France Telecom’s
Orange Wireless unit, and Bouygues Telecom. Both operate in Europe,
which, says Mumick, is about six to nine months ahead of North America
in 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 wireless
standard, makes Europe — and also Japan — excellent markets
for new wireless technology, but Kirusa is also forging relationships
with carriers in the United States and in Canada.
Mumick estimates the size of the market for multi-modal interfaces
for wireless devices at $2 billion in five years. Kirusa does have
competitors, large and small, but Mumick says his company is ahead
of the pack in terms of development and that, in any case, the market
is large enough for a number of players. Kirusa’s business plan calls
for collecting licensing fees for its technology from carriers based
upon 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 more
subscribers sign on.
Kirusa has attracted $5.3 million in venture capital from France Telecom,
Deutsche Bank, and Silicon Alley Seed Investors. His advice to tech
entrepreneurs seeking to follow his success includes these suggestions:
companies flamed out within the past few years. Observing the birth
— and demise — of these ventures, Mumick learned a number
of lessons. "Don’t overspend until you have customers bringing
money," is perhaps the most important. So many Internet companies
spent money on marketing, advertising, and amenities, he says. "They
grew too quickly, flew first class in the airplane, and stayed at
the Ritz. It was a waste of money."
company that brought magazines, Haagen-Daz, and even a single soda
to dedicated couch potatoes, Mumick comments, "They opened offices
in 10 cities before they had success in one." Better, in his view,
to let early successes feed gradual growth.
of the dot-coms was a tendency to buy other companies before getting
their own operations grounded. Amazon.com, for example, put millions
into Kozmo.com before it had moved very far past its own infancy.
a technology. Entrepreneurs need to have experience in that technology,
and to know that it works.
is developed, the entrepreneur needs to take it to a customer right
away. "Go and use it in a customer setting," says Mumick.
"See how it has to be improved, then fill the gaps that are relevant
to the customer. Do this very early on."
Technology in a vacuum is no good, he stresses. The customer’s needs
must be the development centerpiece for any entrepreneur who hopes
to take his idea to market.
can’t sell technology," Mumick says. "You can’t sell patent
rights. Maybe a big corporation can sell patent rights, but the start-up
can’t." You must make your technology into a product. It has to
be saleable. It has to fit into a customer’s environment.
gone. "In this environment," Mumick stress, "investors
want technology that can be reduced to products in a very short time
— six to nine months, twelve months at the longest." Don’t
spend too much time tinkering with the recipe, that pie needs to baked
and placed on the windowsill as quickly as possible.
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