Young entrepreneurs grapple with VC drought

Partners at some of the world's best-known venture firms say they've all but turned off the funding spigot to undiscovered entrepreneurs.

4 min read
You're young, smart and ready to storm the corporate world with a technology business that will make Yahoo seem like a lemonade stand. As soon as you get venture capital, you'll be on your way.

Yeah, right.

Partners at some of the world's best-known venture firms bearing the Silicon Valley's most prestigious addresses on Sand Hill Road--ground zero for technology industry entrepreneurs--say they've all but turned off the funding spigot to undiscovered entrepreneurs.

"The doors on Sand Hill Road are bolted shut," said Ron Conway, general partner at Angel Investors and an early-seed investor for more than 20 years. "Last year I said...if you had an idea in the B2C or community space, go to Procter & Gamble or Goldman Sachs and get some operating experience under your belt because that market was bad. This year it's even worse, with B2B and possibly even optical networking dying."

It's no surprise that the technology downturn has stunted second- and third-round funding to adolescent companies. But VC panelists were unusually pessimistic about the fate of new business opportunities at the fifth annual Stanford University Graduate School of Business Conference on Entrepreneurship--usually a nurturing, how-to session for aspiring chief executives and technology titans.

The dour mood was ironic, considering the venue. Stanford has nurtured five of the six founders of the Internet portal Excite@Home; three founders of the e-tailer FogDog; one of the first employees of Yahoo; a pioneer of Trilogy Software; and a top executive with LinkShare--from the 1993 graduating class alone. Sun Microsystems, formed in 1982 to market machines based on a design by Stanford graduate student Andreas Bechtolsheim, was called "SUN" not for the celestial orb but for "Stanford University Network." Silicon Graphics came together in 1982 to make money on a graphics-processing chip that Stanford professor Jim Clark developed.

Students paying an estimated $45,369 per year in tuition and living expenses to attend the Stanford Graduate School of Business (GSB)--one of the nation's highest-ranked business schools--attended Saturday's event to learn how to penetrate the clubby world of venture funding and jump-start their businesses.

The students seemed to be searching for hope that their management education would bear fruit and that market conditions would improve by the time they finished their two-year degrees. But the panelists offered few rays of sunshine.

A constant drizzle and blasts of wind underscored the negative mood as students filed into Bishop Auditorium on Stanford's palm tree-studded, mission-style campus for a conference called "The Funding Game: Venture Capital at the Crossroads." Scores of crestfallen MBA students who paid $50 to attend the workshop shook their heads in disbelief that the state of their chosen industry had deteriorated so dramatically in the past year.

"I think the prospects for someone just coming out of the GSB are pretty dim," said Peter Fenton, principal at Accel Partners and a specialist in developing businesses focused on distributed computing, Internet data center technologies and e-business infrastructure software and services. "The quick hits just aren't there anymore."

Fenton said Accel funded about 50 companies in 1999 and 30 in 2000. He expects the firm will fund only 15 to 20 this year. In general, he said, the firm has stopped tapping MBA students for business ideas; rather, two recent companies started by young entrepreneurs had ideas rooted in sophisticated engineering Ph.D. thesis papers.

Wild pitches
When pressed for advice on how graduates of the MBA program could most impress critical VCs, the panelists offered some help. VC firms hear dozens of proposals each week from wild-eyed dreamers, so the experts rattled off a list of their pet peeves.

Several VCs lamented that new entrepreneurs usually don't have "realistic" attitudes about the competitive landscape of their business niche. Entrepreneurs searching for funds tend to be too cocky, said Michael Goguen, partner at the venerable Sequoia Capital, and he would rather see them exhibit "healthy paranoia."

"We always hear the big apples to big oranges comparisons: 'We'll build our product to work 10 times faster than the competitors,'" said Goguen, whose firm's partners have funded 500 companies since 1972, including Cisco, Oracle, 3Com and Apple. "Then we say, 'But when can you come out with this product?' They say in two years. Well, what do you think the competitors will have by then?"

Another annoyance is the rogue entrepreneur who doesn't believe he needs a team of more seasoned executives to run the business as it grows, the VCs agreed. Bob Marshall, general partner at Selby Ventures, which specializes in early-stage funding, lamented that few people who pitch him ideas understand their "realistic staffing needs."

"The founder must be realistic about his own strengths and weaknesses," Marshall said. "If someone came in and said to me, 'We need a CEO right now, and before the next round we'll need a CFO,' that would be impressive."

Randall Stross, a business professor at San Jose State University and author of a book on VCs called "eBoys: The First Inside Account of Venture Capitalists at Work," asked panelists what kind of research entrepreneurs should do before they target VC firms.

Several panelists said they should pick a firm that has funds in the entrepreneur's specific business sector--for example, Internet software, optical networking or mobile broadband. The Sequoia partner emphasized that the VC firm should be considered blue chip with a strong track record and entrepreneurs should expertly research each partner.

But Conway dismissed his competitors' advice and returned the discussion to its depressive state.

"In today's environment, I would say don't do any research whatsoever," Conway said. "I'd say if anyone is offering money, take it."