A START-UP COMPANY is only as good as the entrepreneur at the helm.
No one knows this better than venture capitalists, who are in the business of identifying smart, passionate and competitive business leaders.
But finding and holding on to these hot-shot entrepreneurs can be a challenge, especially in a market where deal flow has slowed. That’s why several Seattle venture capital firms are taking matters into their own hands, tapping well-known entrepreneurs to help discover the next big thing.
Known as entrepreneurs in residence, these mercenaries of the venture world can be as valuable as a full-time partner. Parachuting into a venture firm, they can open doors on new markets or run a company that may not have the bench strength necessary to go to the next level.
“Entrepreneur in residence is one of those terms of ours that covers all sorts of things,” said Dan Rosen, a venture capitalist with Seattle’s Frazier Technology Ventures. “In some cases, it is a holding place for somebody who you want to have in one of your portfolio companies. In other cases, it is somebody who helps define your strategy. And in other cases it really is somebody who has some specific skills that can help your companies in a lot of ways and does short stints with those companies.”
The latter has been the case at Frazier, where entrepreneur in residence and former Quinton Instrument President Steven Tallman has been acting CEO of two of the firm’s companies: Calypso Medical and Neah Power Systems.
Although Frazier has used Tallman’s expertise since 1999, other firms are just warming to the idea.
Two of the most recent venture-backed companies in the Pacific Northwest trace their roots to entrepreneur in residence (EIR) programs.
Portland software maker UXComm, which plans to announce $6 million in a first round of funding today, is led by former Intel vice president Rob Gowans, who became OVP Venture Partners’ first EIR last September.
MessageGate, which raised $5.1 million last month, is the brainchild of David Weld, the former Loudeye and Alive.com chief executive who spent eight months analyzing dozens of ideas as an EIR for Polaris Venture Partners.
Perhaps the most active proponent of the strategy is Ignition, the 3-year-old Bellevue venture capital firm. Three of the firm’s 17 portfolio companies – Consera Software, UIEvolution and Pure Networks – were started by entrepreneurs in residence. Currently, the firm is supporting four other entrepreneurs – including Consera co-founder Dave Feinleib and former Deutsche Bank Chief Technology Officer Peter Krey – who are working on projects that range from bio- informatics to financial software.
“I think it is fair to say that we are the most aggressive in town on doing these things,” said Ignition’s Cameron Myhrvold, who has counseled other VCs on the practice. “It is fun as hell. As a venture capitalist you are always somewhat removed from the marketplace. One of the reasons why this is so much fun is that you get to think about new things.”
Another reason the firm is cultivating entrepreneurs internally is that the number of high-quality business plans that it receives has slowed. Instead of waiting for the market to pick up, Ignition has decided to build its own companies in specific niches with the help of hand-picked entrepreneurs.
OVP, which recently backed network processing start-up UXComm, has taken a slightly different approach with its newly formed EIR program. The Kirkland firm wants to use the program to maneuver quickly into up-and-coming industries where its partners do not have expertise.
“If there is a hot issue that we are interested in or an emerging space, we may want to take a dive into it,” said OVP’s David Chen. “The reality is that given our day jobs and lack of deep Rolodexes in the area, it is not practical to assign it to one of the partners.”
The firm does not plan to give entrepreneurs carte blanche, Chen said. And just because an entrepreneur is chosen for the program does not mean he or she will receive funding.
In an effort to prevent entrepreneurs from wandering aimlessly from project to project, OVP has set a time limit of four to six months for a new company to be hatched.
Bringing entrepreneurs into a VC firm without a set business to pursue can be problematic.
“If you don’t pick the right guy or if you don’t pick the right space and go after it in the right way you can end up with it being an interminable project that never gets off the ground,” warns Ignition’s Myhrvold.
Another challenge is making sure chemistry exists between the entrepreneur and the venture capitalist. Since the two camps don’t always see eye to eye, this is not necessarily a given.
Weld, who joined Polaris as an EIR last September, said that was not a problem during his eight-month tenure. Knowing partner Steve Arnold for the past seven years certainly helped. So did the fact that Weld’s second start-up, Alive.com, was backed by Polaris.
“I think this is a great way to start a company, but you have to like the VC that you sign up with because there are expectations,” Weld said. “Typically, there are not contractual obligations but there are expectations that if they are going to help you out, you are going to work with them.”
The 40-year-old former Microsoft Corp. employee also is quick to point out that the programs are not suited for everybody.
“(VCs) want to pick someone they know,” said Weld. “If some person walked off the street and said give me a desk and bring me a nice lunch every day and give me a little money and show me all of your deals, it is not going to go very far.”
P-I reporter John Cook can be reached at 206-448-8075 or [email protected].
For more information on Seattle-area start-ups or venture capital firms, visit www.seattlepi.com/venture.
