At an engineering conference here last month, Jim Breyer ducked out for a few moments. By the time he reached the men's room, he had company.
A conference attendee, knowing that Breyer was the managing partner of Accel, a venture-capital firm that has bankrolled dozens of Internet start-ups, wanted to solicit funding for a consumer electronic-commerce company.
"Five years ago, no one knew what a venture capitalist was," Breyer says. "Now I can't go to the men's room in peace."
Or anywhere else. He has been pitched in parking lots, at the fish counter of his local market, in restaurants, at movies. "Yesterday," he says, "I ran down to get a cup of coffee, and while I was waiting in line for my latte, someone I hadn't seen in two years said, 'Could we get together for 30 seconds to discuss my new Internet company?' "
It's not just happening in Silicon Valley. "In both Washington and New York," he says, "I've been routinely pitched by taxi drivers--they're entrepreneur wanna-bes who have a captive audience."
This summer, it seems, nearly everyone is soliciting money for their Internet business. It's a natural evolution: People began by browsing the World Wide Web. Then they started buying books and CDs and airplane tickets off it. Last year, they began chasing after Internet stocks, driving them to previously unimaginable heights. So why shouldn't they assume they could start their own company?
Once they do, they call, send electronic mail, mail in presentations or buttonhole a venture capitalist.
"Venture capitalists are the gatekeepers to the real money," says Frank Creer, a partner with Zone Ventures. "Most people's entry into the world of Internet start-ups is through us. That's making us more popular."
Perhaps because he's based in Los Angeles, Creer sees an analogy with Hollywood producers. "Just as I'm going to think that if I can get in front of Steven Spielberg my chances of becoming a famous actor are good, people now say: 'If I can get $2 million out of these venture capitalists and have access to their network, I'm going to make it.' "
To a degree that is probably unprecedented in the history of business, many of these entrepreneurs are indeed getting the cash.
"If you come out here and show you're not an idiot, and maybe even show you are, it's pretty easy to raise money," says Richard Kimball, a partner in Technology Crossover Ventures. "It'd be embarrassing if you couldn't get funding."
That's an exaggeration, but not by much. According to the research firm VentureOne, venture capitalists invested $3.8 billion in Internet-related companies in the second quarter, nearly triple the $1.4 billion invested in the second quarter of 1998 and greater than the $3.29 billion invested during all of 1997.
"It's a remarkable trend," says VentureOne President David Witherow. "There has never been a better time to be an entrepreneur."
Nor has there been a better time to be a venture capitalist. Even taking into account the recent tumble in Net stocks, so many of their investments have done so well--and some, such as Yahoo Inc., Amazon.com Inc. and eBay Inc., have been spectacular--that they have become everyone's best friend. Institutions and millionaires are clamoring to give the venture capitalists money to invest, while all those who wish to start a company seek their dollars.
By most estimates, venture capital represents only a small slice of the funding available to newly hatched technology companies. Other sources, which are also growing rapidly, include money from wealthy individuals known as "angel" investors; direct investments from high-tech companies such as chipmaker Intel Corp. and software maker Microsoft Corp.; and the time-honored practices of maxing out credit cards, remortgaging the house and borrowing from parents.
But it's venture capital that offers prestige as well as funding, along with the auxiliary benefit of hands-on advice by experts. The basic concept is old: The idea of investors pooling their money in the pursuit of hot deals has been around as long as capitalism. But the term "venture capital" was apparently first used in the late 1960s by Arthur Rock, the legendary investor behind Intel.
The Entrepreneur Next Door
Public interest in these financiers has been even more recent.
Entrepreneurship "was always part of the American dream, but now it's hit the mainstream," says Warren Packard, a partner with the venture-capital firm Draper Fisher Jurvetson. "Before, it always seemed more fantasy than reality. Bill Hewlett and David Packard began the first Silicon Valley technology company in their garage, but what did they build? An oscillator. Not many people say, 'I'm going to build the next great oscillator.' But now you see college students starting multibillion-dollar Internet companies that offer products and services people can relate to."
At the moment, Packard says, he has 43 Internet business plans in his in-box, 40 in another pile, 10 scattered elsewhere around the office--and none older than two weeks. Overall, Draper Fisher Jurvetson logged in 377 plans in June, nearly twice as many as the previous June.
That doesn't include the vast number of queries by e-mail, or informal personal approaches. Managing Director Steve Jurvetson has been pitched by reporters during interviews. He was pitched while picking up his car at the repair shop. It turned out the mechanic had clued in another customer, who hung around until Jurvetson came by.
"I looked at the plan--it was moderately interesting, more than most," Jurvetson says, whose firm has $500 million invested in 60 Internet companies. "And then the mechanic himself pitched three or four plans, but it turned out he had once been in the [Internet] business, so maybe that doesn't count."
Any moderately well-known venture capitalist has been hearing from a lot of dimly remembered people in his past.
"There was this guy I went to high school with, Tom. I haven't seen him in 14 years," says Jurvetson. "Tom was real popular, while I was a real nerd, the guy who programmed the Apple computer, a non-athletic pre-pubescent, an outcast by anyone's standards. I never imagined he would call, be so polite, say 'I'm sure you're busy.' He wanted to introduce me to two entrepreneurs."
Bill Gross runs Idealab, a Pasadena, Calif.-based incubator for new tech companies. In three years, Idealab has given birth to 20 of them, including eToys, Cooking.com, Tickets.com and the GoTo search engine. Idealab's Web site actively solicits more proposals for its venture-capital affiliate--and gets a thousand a month.
"Then there was the trash guy at my house," says Gross. "One day he said: 'I heard you were in the Internet business. Can I give you my plan?' "
If the future were obvious, none of this would be happening. "Venture capitalists and entrepreneurs thrive when there's a massive amount of confusion," says Breyer of Accel. "There's more confusion today than at any point in the history of the technology business."
It helps that the cost of becoming an entrepreneur has never been lower. A good computer can be had for a thousand bucks, and if you're really hard up (and willing to put up with advertising) you can get one at no cost. Ditto an Internet connection. Ditto an e-mail account.
"You can start a company for zero dollars and get a storefront up on the Internet," says Packard of Draper Fisher Jurvetson. "But to create a huge company, you need to distinguish yourself through marketing, and marketing costs a lot of money. That's where venture capital comes in."
Any analogies with Hollywood only go so far. If a member of the movie-going public sends a script to a producer or director, it will be returned unread. But the venture capitalists say they look at everything they get.
"What keeps me awake is the thought of missing the next Microsoft," says Accel's Breyer. He and his colleagues review 10,000 business plans a year, 10 times the level of a decade ago. Most of the current crop are concerned with the Internet and most--since they were referred by lawyers, other entrepreneurs and similar professionals--exhibit a fairly high degree of sophistication. Accel will fund 25 new companies this year, many of them barely more than a concept. Entrepreneurs who can't get money from Accel or one of the other top firms move on to the second, third and fourth tier of funders.
Investing in companies used to proceed at a more measured pace. It took years to start a factory, make stuff, ship it out, see if customers would buy it.
"A venture capitalist had the luxury of waiting to see if an idea was good before plowing in dollars," says Jurvetson. "You got feedback before jumping in. Now, with the Internet, there's zero cost of the goods, and you're a global company the first day you put up a shingle. So what we're funding is a good idea."
The danger is that a good idea spreads practically instantaneously. If you wait to see whether something like Hotmail, the first free e-mail service, or the instant-messaging sensation ICQ are successful, it's too late--they have millions of users.
"If I believe the dream, if I believe the vision but wait one month, it will cost me 10 times as much to get the same percentage of the company I could get today," says Jurvetson.
So the hunt to get in early on the next Hotmail--which Draper Fisher Jurvetson funded, and which made the firm a 36,000 percent gain on its investment when it was sold 20 months later to Microsoft for $400 million--is ceaseless. What they're looking for is something new, something different, something brilliant.
Which makes the "me too" business plans--"I want to be an online bookseller and compete with Amazon"--easy to dismiss. So, too, the ones that are complicated beyond measure.
"If I read the first paragraph and don't understand it, I give up," says Kimball of Technology Crossover Ventures. "If they can't explain it to me, how could they explain it to a customer?"
Likewise destined for the trash are ones written by obvious nuts, or that boast a Web address but don't really use the Internet.
"I had one that was on a mission from God--'You must fund this because voices have spoken to me,' " says Packard. "A retired truck driver wanted to fund us writing music. Then there was the next-generation rocket ship, which was a legitimate business, but they were looking for tens of millions of dollars."
The Future's the Thing
But there's a blurry line between loopy and ahead of its time. "Never decide not to invest in a company just because it does not make sense by today's standards," says Creer of Zone Ventures. It's all educated guesswork, he concedes: "You're going off what someone says they think they can make happen."
In the end, the ideas aren't the most important thing. They can be appropriated, imitated, stolen. "So it has to be: Are these people killers?" says Kimball of Technology Crossover Ventures.
When the idea and the vibes are right, things happen quickly. Lorne Abony, a lawyer, and Andrea Reisman, a Harvard Business School graduate who had run a beverage company division, were high school friends 15 years ago, but it was a chance encounter in an airport last summer that led them to combine forces in developing an online pet-care company. By the beginning of this year, they had raised $300,000 from family and friends and $150,000 from a Toronto venture capitalist.
Petopia, as the firm was dubbed, quickly merged with two other fledgings, and in May it secured $9 million in funding from Technology Crossover Ventures in return for what Reisman says was "a meaningful percentage" of the company.
"What we saw were very tenacious, energetic, smart entrepreneurs with a strong consumer background," says Kimball. The investment wasn't just a matter of faith: "You have to feel you have the beginning of the ingredients for long-term success."
Success for Petopia will be difficult; at least a half-dozen Web start-ups are seeking to seize a chunk of the $23 billion pet industry. That's one reason it has already had to secure an additional $66 million in funding from Groupe Arnault, the investment arm of the European consumer-products giant LVMH Moet-Hennessy Louis Vuitton SA, and Petco Animal Services Inc., the land-based pet-supply retailer. All this before Petopia sold its first can of Nature's Recipe Intestinal Lamb and Rice Canine Formula; the Web site became operational only three weeks ago.
"Building brands online is becoming increasingly expensive," notes Reisman.
There's a second reason investments in new companies are growing larger: Venture capitalists are seeking--indeed, can only seek--home runs. Not only have expectations risen, but the funds have more cash they must put to work.
Accel, for instance, just put together its seventh investment fund. In two weeks, it had commitments for a billion dollars--three times the $350 million it had been seeking. The fund eventually closed at $480 million.
The firm warned the investors that the 100 percent annual returns of previous funds were unsustainable. Don't get your hopes up, they were told.
No one backed out.
Five million dollars is now a standard amount for a start-up company to receive on the first go-round. The companies have not only the opportunity but also the necessity to get very big very fast. If they stumble, they're road kill.
Tony Perkins, the founder and editor in chief of Red Herring, a magazine that tracks new technology companies, points out that 5 percent of the technology companies that have gone public since 1980 are responsible for 87 percent of the group's market value.
"That's venture economics," he says. "Ten percent of your portfolio will provide 90 percent of your return. So everyone's chasing the big deal. It's the American way."
That return becomes real only when the company is acquired or taken public--which might be one reason why so many Internet companies are going public so early in their lives.
Microsoft was in business for 11 years before it sold shares in 1986. Drugstore.com, to take only one recent example, opened for business in February. It went public two weeks ago. Despite an immediate tumble, its shares are valued at well over $1 billion, providing huge paper profits for its venture capitalists and other backers.
"This is the best time in the world to be a venture capitalist," says Perkins. "The guys who are my age--late thirties, early forties--are sitting here laughing because it's so easy to make money. None of them will ever have to work again, but right now they're working like dogs. They know this is a short window of opportunity. They dumping stock into the public market, and individual investors are buying them with blindfolds on."
Anyone who was a venture capitalist before 1992--the last time the business was weak--would be lying to you, the editor asserts, "unless he looked you in the face and said, 'This is out of control.' "
And those who have taken up the profession during the boom of the past seven years? "They're drunk with Internet mania," says Perkins, who is nevertheless planning to jump on the bandwagon by taking his magazine and Web site public next year. "They think this is the way the world works. They should get ready for a rude awakening."
For individual investors, that's already happening. Last winter it was news when a new Internet stock didn't soar on its first day. This summer it's news when one does. Many Internet companies are hitting new lows, and even venture capitalists are starting to question the speed at which new firms go public.
"In many cases, the need to quickly build brand and infrastructure and make acquisitions is compelling companies to go public before they should," says Accel's Breyer. "It's a problem." He predicts "a massive blood bath across the board," with many of today's Internet firms, both public and private, not making it.
Breyer compares the present moment to the early '80s, when there were 50 or 100 personal computer makers. "A couple, like Compaq, made it," he says. "Many, like Eagle, went away. Dell didn't get started until 1984--and it's become the defining company in that space. It's an applicable lesson."
The companies that will dominate the Internet in the future, then, are now barely formed ideas in the heads of entrepreneurs in Ohio or Omaha. Which naturally redoubles the desire of venture capitalists to find and fund them.
Five years ago, Kimball says, if a venture capitalist had a sleepless night weighing the pros and cons of a deal, "95 percent of the time he'd end up turning it down. Now 95 percent of the time he'd do it."
It's probably the wrong moral, he concedes, but here's the biggest lesson learned by every venture capitalist during the past couple of years: "We should have done more."
CAPTION: VENTURING OUT (This graphic was not available)