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Shannon Henry's The Download Live
Discussion with Harry Weller of FBR Technology Venture Partners.
1 p.m. EST: Thursday, February 24, 2000

Shannon Henry
Shannon Henry

This week my guest will be Harry Weller, principal, FBR Technology Venture Partners. Last week one of their investments, WebMethods, became one of the most successful IPOs in history. He'll talk about the venture capital market in the Washington region and just how someone becomes a venture capitalist these days.

Join us Thursday at 1 P.M. and ask Harry about the fast-paced world of venture capitalists, where opportunities exist and just how long the current tech boom will last. Please submit questions early




dingbat





Shannon Henry: Welcome, Harry. Thanks for joining us today. Could you start out by telling us how you became a venture capitalist? It's not really something people study in college, right? And how did you end up at FBR Technology Venture Partners?

Harry Weller: The funny part is, I did study venture capital at business school. I became interested in the industry through that experience.

Serendipity rules -- nobody captures a job in the venture capital industry without having a "connection" or foot in the door. The entire industry revolves around referrals both in terms of recruiting (for the VC and for the portfolio companies) and in terms of deal flow. In my case, I had been an acquaintance of the other principal our fund, Scott Frederick, for many years. I had the technology and strategy background from my consulting years at Deloitte & BCG to appear like a credible candidate.

In the end, I had a good interviewing day two years ago.


Potomac, MD: How does someone with a business idea and a business plan get in contact with a venture capitalist?

Harry Weller: Continuing with the referral theme: the best way to get in contact is for the entrepreneur to build a base of advisors (good accountant, strong lawyers) that have relationships with the major venture capital firms in the region. Those advisors can help develop the business plan and, more importantly, contact the VCs at the right time.

There are good advisors at all the major accounting and law firms in the region.


Dulles: any thoughts on the attractiveness of the Washington area as a tech stronghold versus Silicon V.

Harry Weller: This region has an incredible technology talent pool and the statistics back that up. The New York Times recently reported that Netplex companies employ more technology workers than the companies in California's Silicon Valley or Boston's Route 128 technology corridor.

What's different in this region is that the number of first time entrepreneurs is much greater than the other regions. The innovators in the Netplex need a greater level of support and VCs need to provide a great variety of resources.


Bethesda, MD: What percentage of a company do you look to hold onto when making an investment?

Harry Weller: Many firms on the west coast demand a certain percentage of a company in order to invest. We often see a 20% requirement. Our approach is to value the company first based our impressions of the market and then put $3-6 million at work. We do not stick to any ownership percentages.

However, we often adjust our valuations based on a few observations. Here a couple of rules of thumb that could cause a valuation shift: we try to ensure that management remains highly motivated to work hard, we consider probable exit valuations and make sure we get to a return multiple that seems acceptable (around 10x at least), we hope to make sure there is room for error in case the company hits a few bumps in the road.


Shannon Henry: When I was interviewing your team for today's column, you said FBR likes to invest ahead of market waves. What's coming? What are the most interesting technologies or ideas you are seeing?

Harry Weller: The B2B opportunity is huge. Goldman estimates that the size of the B2B market will be around $1.58 trillion. What's interesting is that they estimate that 55% of that market will be spent on e-frastructure development and integration.

I believe a high percentage of capital that flows into B2B vendors will be spent on integration services and tools.

The reality is that B2B integration will have a heavy development component that will be difficult for vendors to provide out of the box. Heterogeneous systems, diverse platforms and multiple standards in an environment of great instability makes for a very difficult environment for vendors and traditional web systems developers

In the end, we are talking about mission critical systems. The change of focus from indirect material sourcing to direct with a heavy transaction component has raised the requirements for system functionality.


Shannon Henry: So you joined FBR when you were 28? You were telling me a bit about the program at the fund to encourage young VCs--Could you explain that to the readers?

Harry Weller: There are a couple of things we do to encourage young VCs. In this region, there is a group called YAVA which is a subset of MAVA (Mid-Atlantic Venture Association) which is made up of the young investment professionals that work in Netplex VC firms. It is primarily a social forum to allows the new generation of investors to network and build trust. Trust is important because we work competitively and in cooperation on a daily basis.

Additionally, we often hire interns or analysts to help with the workload. These individuals are groomed for business school where we hope they will spread the FBRTVP gospel. Business schools are obviously a fertile ground for new business ideas and future VCS.


Great Falls Va: Business Plans are a dime a dozen. Instead of the time to write up a long business plan, what are effective ways to present business ideas and assumptions to make an impression with financial community. As fast as opportunities present themselves in today's market, it seems people can waste too much time on creating a business plan that can become quickly out of date.

Harry Weller: In the end, a great executive summary will get you an audience with a VC -- a great business plan will get you funded.

Look at the business plan as a way to shorten the VC due diligence cycle. The more homework you do for the venture capitalist, the more efficient the process will be.

However, I don't need a three ring binder. Remember Voltaire: short is good.


Washington, DC: What are the primary criteria that FBR uses in selecting companies to invest in?

Harry Weller: Today there is plenty of advice available to entrepreneurs trying to build business proposals that capture the attention of venture capitalists (VCs). The normal formula combines a large market, great products, clear distribution strategy and strong management.

Out of one hundred business plans, a VC will meet with about 20 companies, perform due diligence on five, and invest in one. The problem we run into is the final five because they are all great opportunities. We spend an awful lot of time trying to evaluate which one should secure a venture investment.

I like those plans that have an "unfair advantage". These companies have a clear execution path and something extra, a clear path to market penetration, a gold paved bridge spanning chasm between early adopters and mass-market adoption. Most of these cases involve a powerful partner that has a vested interest in the start-up's success.


Shannon Henry: How about some tips for a person with an idea but no connections. Do you look at all business plans? Any pet peeves or things you all really like to see in a pitch?

Harry Weller: I think the process is actually pretty simple. Build an executive summary and ask for feedback from your immediate professional and personal network. The trick is distilling the good from the bad advice - there is a terribly thin line between a ludicrous idea and pure genius.

The next step is to get involved in the local entrepreneurial events in the Netplex. A good place to get a feel for this is www.netpreneur.org which is run by the Marion Institute. Plenty of free and quality advice is available through organizations like this. Further, the advisors of importance are available and visible at these events.

Developing a referral network is fairly simple if you follow these steps.


London, England: Hi guys

Obviously there's a real frenzy of activity in the internet: stocks, start-ups and investments. But some talking about the bubble burst. So how long do you think this cycle of investment activity can last? Also Mr Weller, does FBR invest in ventures outside the US?

Harry Weller: December 23, 2000. Things always go wrong on my birthday.

I'm afraid I don't know when/whether the valuations we are seeing will return to levels that seem rational by any traditional method of analysis.

I do know that we, as venture capitalists, should invest in companies that are sustainable in the face of such a correction. For this reason, we find ourselves focusing infrastructure and enabling technologies more than ever.

We primarily invest in DC, Virginia, & Maryland.


Alexandria Virginia: Harry, do venture capitalists, when investing in a start-up, become subject to "reverse stock splits" if the underwriter determines that a reverse stock split is warranted and what percentage of the time does this occur with start-ups?
Bill

Harry Weller: Yes we do, but it rarely happens. As board members, we try keep the number of shares outstanding within a reasonable range.

We spend a lot of time fixing broken capitalization structures when we make initial investments. Many new start-ups get bad counsel from friends or associates who informally advise the founders. Unfortunately, everyone is an early stage investor today.

All the more reason for you to do your own due diligence on your advisors.


Shannon Henry: Two of the most talked about recent local IPOs, Webmethods and VarsityBooks, were both FBR investments. Can you explain why Webmethods was such a blockbuster and VarsityBooks, which closed the first day under its opening price, was such a disappointment?

Harry Weller: VarsityBooks is an e-retailer and the IPO was affected by the downward trend on e-retailer valuations. Actually, relative to its peers, VarsityBooks is doing quite well.

webMethods sits at the intersection of the B2B promise and the demand for transaction infrastructure. Of course, that area has tremendous potential for growth and a great deal of hype associated with it.

In the end, this is a story about waves of market potential and market interest. Since we are long-term investor, we are really concerned about the viability of the business model after the hype has subsided. Both of these companies are leaders in their respective markets and have ingrained advantages that will enable them to outperform.


Alexandria, VA: Harry, for start-up business to consumer Internet concerns, what are VCs focusing on to assess the long-term viability of their strategy? Where are VCs placing their bets in business to consumer concerns?

James

Harry Weller: This is my last question, so I hope I have been helpful.

Many VCs are making blanket decisions not to invest in the business to consumer market. I believe they are making a mistake.

I believe the real opportunity lies in the "push" or direct marketing ability enabled by the Internet. E-mail commerce executed with careful regard to the consumer could be an extremely powerful force. If you've seen the latest capabilities that are enabled with HTML enabled e-mail, you might know what I mean.

In the end, the combination of personalization, direct marketing, and the ability to bring the transaction closer to the means of delivery will be a greater market than destination sites.

Imagine being a parent and receiving a full color e-mail on December 15th for the highly sought after "Furby". Push this button and it's yours !!


Shannon Henry: Time to wrap up! Thanks Harry. Bye!




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