Novak and Biddle, The Worrywarts of Venture Investing

By Terence O'Hara
Monday, April 10, 2006

Jack Biddle and Roger Novak seem to compete to be the biggest worrier at their venture capital firm, Novak Biddle Venture Partners .

Now in their 10th year together, they are personable, smart and at times quite funny. Their Bethesda-based firm's first three funds have been among the best-performing early-stage venture funds in the nation. Yet according to people who have known and invested with them for years, each man has a strain of chronic discouragement, as if deep down there's fear it could all come crashing down.

"I think they're out to prove something, to prove that they're not a fluke, even though they've really already proved it," said a longtime Novak Biddle investor who, like most, spoke on condition of anonymity about their private investment dealings.

"I'm the bigger worrier," Novak said last week at the end of the firm's five-hour annual meeting at the Mandarin Oriental hotel. It was attended by about 150 current and potential investors in Novak Biddle funds -- endowments, pension funds and rich folks. "The history of this type of investing . . . you almost can't be consistent. We've had a great run, but my job right now is to manage expectations."

"I'm not a worrier, I'm a low-baller," Biddle said. "I try to under-promise and over-deliver. . . . You can't stand up in front of your investors and say you [stink], but you want to surprise people on the upside."

Novak Biddle allowed me to attend its annual meeting, an event typically restricted to people who have more than a million dollars available to put into a venture fund. I was invited on condition that I not write about certain aspects of what was discussed, such as proprietary financial information about investments.

Over a buffet lunch (nothing fancy) and coffee in the hotel's grand ballroom, the annual meeting was a mix between a public company annual meeting -- minus the lawyers and accountants -- and a venture investing seminar. Novak and Biddle analyzed the early-stage venture market and reviewed their funds' winning and losing investments. There were expert panels, and several portfolio companies gave presentations.

The meeting provided a look into the state of early-stage technology investing, a source of financing that has helped create many of the region's technology companies. Attendees included some of the best-known names in local venture investing, including Art Marks , formerly of New Enterprise Associates, now of Valhalla Partners ; Frank Bonsal , a founder of New Enterprise Associates, now retired but advising a number of local venture partnerships, including Novak Biddle; Edward J. Mathias , a managing director at Carlyle Group who seems to have some connection, financial or social, to every private equity firm in town; William Schrader , founder of now-defunct PSINet and the chief executive of a Novak Biddle portfolio company; and Michael Chasen , co-founder and chief executive of publicly traded educational software firm Blackboard Inc ., one of venture capital's local-boys-make-good stories.

Some of the themes, and worries, that emerged from the Novak Biddle meeting:

· The technology needs of government, especially in defense and intelligence, will continue to fuel the creation of companies in the near term. But expect declines in federal discretionary spending that will increase pressure on companies to develop a private-sector business as backup.

· Sarbanes-Oxley and other corporate accountability requirements continue to make it difficult for small companies to go public. Venture investors can't count on initial public stock offerings as a way to cash out of many private firms. Selling portfolio companies -- either to bigger companies or to bigger private equity firms -- will be the most assured way to liquidate an investment. Last year, only 56 venture-backed companies went public, compared with 93 in 2004, and only 10 went public in the first quarter of this year, according to Thomson Venture Economics.

· Many venture-backed companies that do go public will have to wait longer and become much bigger first. This means the venture funds backing them will have to hold more cash in reserve to carry investments longer, so the funds will have to be bigger, and that could hurt returns. "I sometimes worry that we're under-reserved," Novak said, worrying again.

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