Shannon Henry's The Download:
Live Discussion With Guest John Backus
Thursday, January 7, 1999
Welcome to the second live discussion with TechThursday columnist Shannon Henry. Henry's column, The Download, is a look at the latest deals, hires, and business strategies in the region's technology community. The discussion will feature guests making waves in the local tech scene.
Today's guest is John Backus, whose new project, as reported in today's Download column, certainly qualifies as making waves.
The former CEO of Herndon-based InteliData Technologies Corp., Backus will be the hands-on managing director of Draper Atlantic, a new $30 million fund operated by powerhouse Silicon Valley venture capital firm Draper Fisher Jurvetson.
Henry will be live online with Backus on Thursday from 1 to 2 p.m. Submit questions now.
Welcome! Today we have John Backus online to answer your questions about Silicon Valley's famed Draper Fisher Jurvetson venture capital firm creating a $30 million fund in the Washington area. Ask him about tech hotspots and the wild world of venture capital.
Potomac, Md: Why haven't more VC firms located in this area ? Why are vc firms so focused on funding start up software/hardware fimrs and not internet, ecommerce, telecom innovations , etc ?
John Backus: This area has only recently seen a transformation of the local economy from government-centric to tech-centric. Only in the last 2-3 years have any real VC firms looked at this area. But, it is heating up quickly. I can't speak for other VC firms, but we love funding Internet, EC etc. Draper has done over 150 of these investments, over 50 being pure internet plays. We will focus AGGRESSIVELY in the Internet space!
Gaithersburg, MD: What is the minimum investment (from an individual investor)in the Draper Atlantic fund and how do I contact the fund to make the investment?
John Backus: Because there are legal restrictions on how many partners the fund can have (less than 100) the investment requirements are pretty high. you can email me at firstname.lastname@example.org for an offering memo that has all the info you would need.
Rosslyn Heights, VA: Why don't you take the $30 mil and invest in some Net stocks? How could a return be any better?
John Backus: We plan to invest in Net stocks before they are public net stocks. Yes, we have seen some incredible rides with ebay, amazon etc, but in the Draper funds they have seen even better returns, over an extended period of time - like 12 years investing even earlier. Companies like Hotmail, Parametric, C2B
Ft. Myer Hts, Va.: I read on this site a few weeks ago some comments from John Doerr that Kleiner Perkins wouldn't put an office in this area that geographically they're not really interested in this area. Your thoughts?
John Backus: Kleiner Perkins is a great firm with a great presence in Silicon Valley. They often do much larger investments ($5MM - $10MM) It is easy to hop on a plane with a $10MM investment, but hard with a $500K investment. So, they can manage big investments in VA for California.
Shannon Henry: Will you only invest in tech companies or will you consider other businesses?
John Backus: We will only do tech companies. Our focus is the Internet, Ecommerce, New Media (Content) and the Communications field
Shannon Henry: There's a lot of talk about Silicon Valley being glutted with too much money for too few deals. Is that true? Is there ever too much money?
John Backus: Money is what fuels innovation. Most VC funds invest in more losers than winners, but the returns on the winners outweigh the losses on the losers.
Shannon Henry: Is there a "Sand Hill Road" area emerging in Washington like the place where venture capitalists seem to all exist in Silicon Valley?
John Backus: Right now, Reston is the epicenter for the venture capital firms in this area. If I had to pick a building right now it would either be Mario Marino's new building or Reston Town Center.
College Park, MD: How will this new growth of technology companies especially in the computing end affect the many large university institutions in the VA/DC/MD area?
John Backus: I hope it means we'll graduate more technology students sooner.
Alexandria VA: Suppose somebody puts together a business plan which has some merits. What is to prevent someone else from stealing the idea content of this business plan and use it for their own gain?
John Backus: You have to take your own precautions to safeguard it from friends or others stealing the idea. No reputable venture capitalist is going to steal the idea. Their reputations are based on their integrity, and venture capitalists don't start or run businesses, they just finance them.
Shannon Henry: So, how does one become a venture capitalist, anyway? You never hear anyone say "I want to be a venture capitalist when I grow up." What kind of personality does it take?
John Backus: It takes a risk-tolerant personality. In an average portfolio, you have to tolerate a lot of money-losers and you have to be willing to cut your losses quickly. And that can be tough to do. I think the best venture capitalists started out as entrepreneurs and started and ran their own businesses successfully or unsuccessfully.
Fairfax, VA: We are a startup company with only a couple people, and we have an internet application that we think would be successful. What kinds of features of the business or product would a venture capitalist be looking for in considering that company as an investment?
John Backus: The most important things we will look at will be the management team and the market potential. We are looking for people that are passionate about their business and are willing to put in the hours and sacrifices to make it successful. And we are looking for markets that are very big. If the company can't generate $100 million in revenue in the foreseeable future, it's probably not right for a venture capitalist.
Shannon Henry: You've talked a lot about how this area shouldn't compete with Silicon Valley why not? What do the 2 areas have in common and how can they complement each other?
John Backus: Silicon Valley has a dominant position in silicon-based technology much like Microsoft does in operating systems and I would not want to compete with Microsoft in operating systems. This area has unique strengths in electronic commerce, communications and the Internet in large part because of the federal government. So our two communities specialize in two very different industries that need to work together.
Shannon Henry: How will you work with the high-net worth "angel" investors in the area?
John Backus: Most angel investors have money and deals but no time. We will do the due diligence, the deal structuring and manage the individual companies side-by-side with the angel investors. But what this allows is the angel investor to focus on new deals and let a venture capitalist like Draper Atlantic manage the ensuing portfolio.
Much of what makes a company today is it's alliances. Are hi-tech Washington area companies disadvantaged against CA companies in this respect due to lack of proximity to the lions share of hi-tech business?
John Backus: The Internet collapses geography. One thing our fund will do is bring local high tech companies in close contact with successful California companies. Draper has done partnerships with and sold companies to the likes of Yahoo!, Microsoft, Cisco, Rational and many others.
Shannon Henry: Where will you have the east coast version of the famed Draper frisbee game?
John Backus: Probably on the lawn by the pond in Mario's building.
Alexandria, Va: How would a recent mba, interested in joining a venture capital firm, tap into the vc community in the area? any tips on the best firms to target?
John Backus: The best place is start is while you're still in business school. Try to do an internship or else a school project evaluating potential investments for a local VC. Since you have graduated already, hook into MAVA.
Washington, DC: Are most of the tech firms you are looking in the Washington area aiming at government agencies as their current or future customer base? Or are there more AOL's out there who for other reasons are starting up here?
John Backus: We will be looking at companies that can sell to many customers, not just the government. I think there is about to be a tidal wave of start-ups in this area coming from people who have recently made a fortune at AOL, MCI or Yurie Systems, to name a few. Those are the entrepreneurs we expect to back.
Shannon Henry: It's clear there are some good technology ideas in Washington, and, increasingly, more money to make those ideas into companies. So in your opinion, what's the biggest challenge as this region grows as a tech center?
John Backus: We need to encourage second-generation entrepreneurs. By this I mean people who took their money from a company that had gone public and staked their own ground. The success of Silicon Valley was built on second-generation entrepreneurs who left Fairchild, Atari, Apple and others to set out on their own.
Shannon Henry: One of my colleagues here wants to know if you are related to Jim Backus, AKA Thurston Howell III from Gilligan's Island.
John Backus: No nor am I related to the John Backus who invented FORTRAN.
What do you require to decide if a business idea is worthy of investment? If someone has an idea for a unique web-based business, a business plan, and a core management team, what else is needed to obtain funding in a startup.
John Backus: A product.
Shannon Henry: Following up on your comment about Microsoft... What's the buzz in the tech community here about the trial and what's the buzz in the Valley?
John Backus: The buzz is that there isn't much buzz....sort of like the impeachment trial.
Bluffton, SC: How does this East Coast area compare with the Silicon Valley in shear numbers of potential good investments.
John Backus: I think there are more sheer number of start-ups in Silicon Valley that are good investments, but there is also a lot of money chasing those good investments. I think the East Coast has more good investments for the dollars available in this area.
Washington, DC: How would you compare the promise of this area to other emerging tech centers like Austin?
John Backus: I think we will win hands-down over Austin. Their economy has grown up around Dell Computer. Our economy has grown up around the Internet. The Internet will be a lot more important in the next decade than the box you use it on.
Shannon Henry: Say you're hearing a presentation from a budding entrepreneur. Is it okay if he has a business plan that could go five different ways or should he be more focused? Is that flexibility or uncertainty?
John Backus: If he has a business plan that can go five different ways then he doesn't have a plan and won't raise any money. Focus is critical.
Washington D.C.: Much has been made about this area becoming a tech center, or becoming more Valley-like. I think and I'm not knocking D.C., I love it this area is way too stiff and govt-like to ever be like SV. And thus, it'll be hard for us to draw young talent from Calif. and Boston. What do you think?
John Backus: I agree the area is still too stiff. I don't wear a tie and I don't like having to put one on to go somewhere to eat. I think, however, with the AOL-Netscape deal, we are going to start importing more of a Silicon Valley mindset. At least I hope we will.
Shannon Henry: While a venture capital investment can give a company new life, it also takes away some of the CEOs control. Why should a company NOT take VC money?
John Backus: A company shouldn't take VC money if they don't need money. MicroStrategy is a great example of a company that turned profitable very quickly and did not need outside capital to grow.
Washington, DC: What area e-commerce company do you think has the greatest potential?
John Backus: MSTR [Microstrategy].
Washington, D.C.: How many professionals are working with you at your Reston office. Do you plan hire any VC associates? What are the plans for raising the next round of funding? For example, How much do you expect to raise and invest in 1999 and 2000?
John Backus: We plan to hire one associate in the spring. We hope to close this fund in two parts. Part one in the spring, and part two in the fall. And I'm not even thinking about the next round of funding beyond that.
Shannon Henry: Tell us a little about your involvement in a company you fund. What kind of advice will you give? Will you take a board seat?
John Backus: Our role is corporate psychologists. We help the entrepreneur wrestle with what we see as common problems, but what they see as unique problem such as how do I meet payroll next week? We help in filling out a management team, setting corporate strategy, finding the right partners and building distribution channels. With most investments we will take a board seat.
Shannon Henry: Why did you choose to focus the fund on early stage investments?
John Backus: The earlier the investment stage, the greater the opportunity for an extraordinary return. Many of the successful early Draper investments paid off fifty or one hundred to one on the amount invested. You only need a couple of those in your fund to deliver truly remarkable returns.
Shannon Henry: What do you think of the wild swings in Internet stocks? Do you think vaporware companies give the real businesses bad names? And...what's your opinion on Amazon.com?
John Backus: I think the wild swings in Internet stocks are caused by the increasing number of Internet online investors. I think there are more real Internet companies than vapor Internet companies, although they have very high valuations. I love Amazon.com. I bought over a dozen Christmas presents there and they all arrived on time. And I don't own their stock.
Tyson's, VA: Following up on the College Park question: What local schools do you see with the strongest tech academic programs?
John Backus: The University of Maryland, GMU and Virginia Tech all have very strong technology programs. I wouldn't even dare try to pick the strongest.
Shannon Henry: The tech community here seems to have a love-hate relationship with the government. It's their biggest customer, but it's also the source of a lot of the buttoned-down sentiment. How do these two mindsets converge?
John Backus: The government is not only the biggest customer for many companies, but it is also behind the region's dominance in the Internet, electronic commerce and communications. Yes, it may be buttoned down, but I'm glad it's in my backyard.
Hey, thanks for the conversation John, and for enlightening us on the world of venture capital. To the crowds who asked for John's e-mail: it's email@example.com. Next week .com columnist Leslie Walker will converse with Kevin Kelly, executive editor of Wired magazine. I'll be back on Jan. 21. Bye!
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