Value Added: A venture capitalist learned to invest in entrepreneurs by becoming one first
By Thomas Heath,
I write a lot about venture capital but not enough about venture capitalists. So I called John Backus, 53, who is a managing partner at New Atlantic Ventures in Reston.
Backus’s firm has invested $225 million in 35 companies, and he sits on the board of five of them. He’s chatty, the sort who likes to quote Warren Buffett.
I met him at his Northern Virginia home about a year ago when he hosted a party for a bunch of area entrepreneurs.
He grabbed my interest with stories from his days as a consultant and entrepreneur at Bain & Co. and, subsequently, at Bain Capital. One of his bosses at Bain was Mitt Romney, the Republican candidate for president.
Backus recounted Romney’s “otherworldly” knack for recalling numbers and his own days touring college cafeterias with then-colleague Meg Whitman (former chief executive of eBay and now CEO of Hewlett-Packard). He and Whitman were trying to find ways to increase profit at the lunchrooms.
One of the things Backus said that resonated is that you need to live in an entrepreneur’s shoes before you can invest in an entrepreneur. In other words, you have to have done it.
I circled back with Backus because I wanted to know what VCs actually do for their money.
“We are basically professional guides to the entrepreneur to help them navigate rapidly evolving industries and solve difficult problems,” Backus said. “We’re like their corporate psychologist.”
The Washington area is filled with venture capital firms: New Enterprise Associates, Revolution Ventures, Novak Biddle and Grotech.
Venture capital firms such as New Atlantic raise money from investors and then hunt for good — in this case early-stage — companies with lots of potential in which they can invest that money. They buy ownership stakes and try to help them grow.
The size of New Atlantic’s investments generally ranges from $500,000 to $5 million. After a half-dozen years or so, VCs push to sell the companies they invest in, or they take them public. They distribute the proceeds to their investors, keeping a piece for themselves.
Like it or not, this is how the Googles, Facebooks and LivingSocials of the world are born. Somebody has an idea, they find investors to help them develop it, and if it works — a big if — everyone makes out.
Backus attended Stanford University and went to Bain & Co. after he graduated in 1981. He got an MBA from Stanford Business School in 1984 and worked as one of the first 100 employees at Sun Microsystems in the summer between his two years there.
When Romney formed Bain Capital, he plucked Backus out of a Guinness brewery in tropical Malaysia to work at its first company, Salt Lake City-based Key Airlines.
Backus became its chief financial officer at 26, working 12-hour days and increasing revenue from $6 million to $50 million in three years. The number of employees grew from 50 to hundreds. When the airline was purchased by World Airways, he stayed on as an executive until 1990.
Backus and three World Airways executives left the company to found US Order, a start-up that had the idea early on that you could use your phone to check stock quotes, bank electronically and purchase groceries, among other things.
He helped US Order grow from a few dozen employees to hundreds, and ran revenue from a few million to around $50 million.
They took US Order public in 1995 and made some money.
It might have been a home run, but US Order thought people would use their phones to conduct transactions in those days — not their computers. That was the wrong guess.
“We had the right idea with the wrong platform,” Backus said.
He learned an important lesson: If you are a hard-charging young company with blinders on, you need to have outside advice — either a board member or a consultant — to see the big picture.
After leaving US Order, where his management included current local stars such as Joe Payne of Eloqua and Mark Lynch at Appian, Backus plunged into venture capital.
In 1998, he invested several million of his own money to found Draper Atlantic, which eventually became New Atlantic. He went nearly two years without taking a paycheck as he tried to get the VC firm off the ground.
New Atlantic’s big home runs locally include Mobile 365, a text-messaging company that it sold for $425 million in 2005. The sale earned the VCs more than 10 times their investment — known as a “10 bagger.”
Their biggest failure was ReturnBuy, which helped consumer electronic manufacturers such as Hewlett-Packard and Palm get rid of returned products and make some money on them. If something sold for $50, ReturnBuy might take $10, and the manufacturer and eBay would split the rest.
ReturnBuy went bankrupt and its infrastructure was sold because it could not sell enough of the returns online to put a dent in HP’s or Palm’s returns.
“We weren’t listening to our customers,” Backus said. “We weren’t solving their problem.”
Almost every manager I interview says good hiring is the hardest part of their job, and Backus echoed that.
What does he look for?
“For people who want to win at all costs. Who will dedicate as much time as it takes to be successful.”
How can he tell?
“The best single predictor I have found is upward mobility within a company. Someone who has been promoted quickly two or three times in the company is a superstar. Someone who got promoted by going to a new job at another company . . . is generally not a good performer. They probably left because they didn’t get something they wanted.”
He also looks for subtle signs, such as whether someone breezes too quickly through a PowerPoint presentation or gives canned sound bites to answer questions.
“One trick I find is how long does it take entrepreneurs to get back to me? If entrepreneurs are corresponding to me at 2 a.m. or 11 p.m., then I like that. It tells me that their business is their life and not just a job.”
Spoken like somebody who has been there.
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