Dr. Russell F. Henke -- Business Consultant
Case #12 -- Helping a Venture Capital Firm
At 4:00 PM on a balmy Bay Area Monday afternoon in November 1999, the consultant's office phone rings. It's the General Partner of a well-known Silicon Valley Venture Capital firm, an old acquaintance of the consultant. There's to be a big meeting Tuesday morning over on Sand Hill Road, wherein the CEO of a Company seeking a large round of capital will be making a major pitch and demo. It has just occurred to the busy General Partner that the technological field to be discussed at the meeting is somewhat outside his comfort zone, but he recalls that the topic is right in the technology/business wheelhouse of the consultant. Can the consultant sit in tomorrow's meeting? Sure; a consultant is nothing if not responsive.
The consultant attends the Tuesday meeting. The pitch is given jointly by the experienced CEO and by a twenty-something technical ace who leads a small group of Internet experts just acquired by the Company. The proposals offered are indeed exciting and innovative, although the demo doesn't work properly…par for the course. The need for capital is urgent and time is relatively short for a decision by the Venture firm, having come to the table toward the end of the Company's fund raising road show.
The fundamental dilemma becomes immediately obvious to the consultant. The Company has been mildly successful in a traditional computer aided design space for nearly two decades. It now wants to propel itself into the wild and wooly chaos of the Internet space with a small band of possibly hard-to-manage newcomers offering a product which may not work well and which no one might use. Yet if it all does work, it could be an explosive breakthrough!
The capital requirements are not insignificant. The Venture Firm would have to syndicate the total funds needed. This puts even more pressure on making the correct judgment, since the reputation of the Venture Firm is at stake, not just its own money.
The Tuesday morning presentation is over and the Company reps pack up their demo gear and depart. The General Partner turns to the consultant and says, "Well, should we invest"? The question is not unexpected, nor is the consultant's answer. The consultant advises that no decision should be made on the spot, but there are some people that the consultant can talk to, some technology reviews to make, and some references to check. Maybe even a customer survey to get a sense of market receptivity? Can such due diligence get done in two weeks? No, but the consultant can give it a try. Go for it, he is told!
Through the magic of the consultant's ready list of long-term industry expert contacts and the use of modern telecommunications, the consultant casts his net for information over a wide array of potential names around the country. While he knows many of these people are busy and are possibly traveling, the broad net will surely yield a sufficient sample size. This is what happens and some ten (10) interviews occur in the space of seven days. The consultant also gathers and studies the latest technology news and literature. He asks for a personal pitch live-and-in-person from the Company's VP Marketing. He designs a questionnaire and compresses weeks of typical market survey time into days via the power of modern Internet-based survey portals, pulsing some 3300 potential users of the Company's proposed Internet products.
The consultant summarizes the results of his two weeks of effort in electronic form, has a multi-partner conference call with the Venture Firm, and the decision is made by the General Partner to proceed with the investment…on time…to the satisfaction of all concerned.
The General Partner recommends the consultant to one of the potential syndicated investor candidates. And so it goes…
Epilogue: A collective $6 million investment is consummated in February 2000. One month later, the investors had already enjoyed an unrealized gain of 250% ! Subsequently the company is divided into two parts, new executives hired, and one of the two parts is acquired in late 2000 by a leading CAD company for an attractive multiple.
