Venture capitalists fighting a sluggish economy

This recent business cycle has been a sobering experience for entrepreneurs and venture capitalists alike.

By nature we are optimists, and optimism fueled by success and wealth generation creates a sense of invincibility that an economic downturn destroys. However, markets demand pragmatism, so in order to survive we have had to pull back. But pulling back does not mean pulling out. We are still fighting to build great companies.

Many of you are probably fighting your own financial battles -- battles that began months before the Sept. 11 terrorist attacks on America. You've watched as stocks have struggled, as 401(k) statements show losses and as businesses everywhere are cutting costs to the bone to keep their doors open.

We must spend money to keep the economy moving, but we sometimes feel unable to plan the next 90 days, not to speak of the next year.

And, yet, the livelihood of venture capital firms depends on looking much farther into the future than the next 90 days. As venture capitalists, our responsibilities are to identify companies that have a strong business plan, a vision and a high probability of making a profit within the next three to five years. Of course, when I continually see the economy negatively impacting many start-ups, I sometimes shrug my shoulders. But the reality is that the events of Sept. 11 have not dampened my investing plans.

For venture capitalists, this is a good time to back start-ups. Now is when we should be making investments -- when valuations are low and prices are reasonable. The current state of the economy puts us in a stronger position to negotiate with entrepreneurs and make smart investment decisions that are in the best interest of our investors and that will yield the greatest return.

While the world has changed, as we know it, the core business elements that make a venture capitalist want to invest in a firm have not. Those business elements my company looks for in any start-up include:

* Being in a large, demand-driven, high-tech market. The company must be in a market where `'all boats are rising.'' More specifically, we must be able to determine through investigation and analysis that there is a likelihood the company is capable of building its business to $50 million to $75 million in sales within three to five years.

* Having a distinctive technology. The company must be able to demonstrate that its technology is unique and has a real marketplace advantage and that the company's product is protected by patents.

* Well on the way to building an experienced management team. The founders should be striving to cultivate a management team focused on growth and capital gains.

* Focusing on return on investment. Like most venture capitalists, we look for investments that have the potential of returning 10 times the initial investment in a three- to five-year period. That means if $5 million is invested, the targeted return would be at least $50 million within three to five years. Successful companies are typically funded through several rounds of capital, often from a variety of investor types.

At the same time, I want to stress that venture capitalism goes beyond simply supplying capital. We also add value by serving on a company's board of directors and by helping to recruit key members of the management team. Meanwhile, here are some important considerations regarding management, value and raising more money:

* Recruiting. A venture capitalist should help you identify a management team and make certain people are doing the right jobs in the right positions. You need good people who know their specific job at the company to make it run smoothly and successfully.

* Value and strategy. I like to think of venture capitalists as the vitamin that helps a company grow, or an aspirin that helps cut costs. As a venture capitalist, it's our job to help a company define its message clearly. We also need to give the sales team the tools to convince potential customers of the company's value.

* Raising more money. Let's be candid. Running a company does require a lot of money. You should expect your venture capitalist firm to help you make new contacts with potential investors and investment banks, as well as assisting you in delivering presentations and providing follow-up.

As part of the fabric of American choice and capitalism, I believe this economic environment is a battlefield on which we can win. And despite the uncertainty I sometimes feel, I am inspired daily by the perseverance and the talent of entrepreneurs making headway in today's business world. I believe American entrepreneurs will continue to persevere and venture capitalists will continue to be at their side to help them succeed.

Robert Rees, a native Oklahoman, has more than 28 years of marketing, sales and strategic planning experience with large (Mobil, Tenneco) and small companies. He was a limited partner for Woodside Fund III for six years. Before joining Woodside Fund, he founded and operated a successful family-owned venture firm in Oklahoma. He has been a director of the Oklahoma Venture Forum and the Oklahoma Business Incubator Association, and is a graduate of the Venture Capital Institute. Rees may be reached at (415) 586-0132 or bob

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