Capital For High Tech Still Available

September 27, 2002
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GRAND RAPIDS — A local attorney who specializes in business investment says that capital still is available for new dot-com industry firms.

But Mark E. Derwent, an eight-year practitioner with Dykema Gossett, told the Business Journal that getting capital entails a much more rigorous approach to investors than was the case in the ‘90s.

Derwent said the capital is a lot harder to get nowadays because investors have returned to traditional ways of assessing the risk they face.

Derwent, who earned his JD degree at Notre Dame University and his MBA from Grand Valley State University, said that he sat in meetings with investment bankers during the ’90s and listened to pitches for funding that basically consisted of saying, “The Internet is huge!”

“Well,” Derwent said, “the reality is that the Internet is huge, but that doesn’t correlate to who’s buying the services.”

Nowadays, he said, a firm seeking investment concerning the Internet won’t get a penny because of the availability of potential customers. “What you’ve got to show is who are they? And are they willing to spend the money? And when are they willing to spend it?”

In another example, he recalled the euphoria in the wireless industry during its 1999 craze about China and the underdeveloped nations.

Thinking in the industry, he said, was that a billion Chinese and millions of people in other underdeveloped nations would need millions of cell phones. Land-line service either didn’t exist or was too expensive to put in place.

“That’s the way the market was defined — a billion people in China,” Derwent said. “They don’t have cell phones. It’s a huge market.”

But, he said, “The problem is: When will those people buy cell phones?  The reality is: not that soon. They don’t have the money right now.”

Any investor looking at the “huge” Chinese wireless market today, he said, is going to be asking a great many, very pointed questions.

“What I would say has happened is that the traditional, classic methods of funding are being reinstated,” Derwent said.

He said this means investors, first are going to look for the right people who can show track records of success. 

“The traditional method is that people are where you start,” Derwent said. “I think it’s a common misconception that you start with the business idea or the market. You start with the people.

“A fantastic, wonderful idea with the wrong people will not get funded,” he said firmly.

“And when I say the right people, it’s got to be the right people for the idea. And they need to have a track record in that industry that gives an indication that they will be successful with that idea, that product, that business.”

He said that if the proposal is for a consumer product that one wants to get funded and brought to market, the investor will look for someone first with a track record in bringing consumer products to market. “What investors are looking for is something that gives them confidence that these are the right people for the right market at the right time.

“They want to see the industry-product-team fit.”

Business strategy, he added, also has become traditional.

He said that because the Internet particularly was growing so rapidly, the strategy in the late ’90s was to be first to market. “You had to go now. If the people weren’t perfect, but the idea was right and they could execute quickly, the strategy was to go. Now.

“Internet use was growing at a rate of 100 percent a year. You had 10 million users this year, 20 million the next, and 40 million the next. The market was growing exponentially. You couldn’t help make money.”

Except that, Derwent noted, even had the number of users been quadrupling annually, the number of people who were paying for Internet services wasn’t growing at anything close to that rate.

Another fundamental difference between the thinking of venture capitalists today and during the preceding decade concerns exit strategy.

The traditional thinking, he said, was that capital would fund a new venture over a period of years until it became profitable, then do an IPO so that the original investors get their money out and the public takes over capitalization. Typically, Derwent said, such strategies contemplate a five to 15-year period from investment to IPO. 

“In the Internet boom, what you had was a very compressed timetable,” he said. “The goal was not to get funded, started, operating and profitable and public and sold inside two years — it was to go public in two years, profitable or not.

“The dynamic there,” he explained, “was that venture capital was being flipped into the public market. And what subsequently happened was that the public said, ‘Oh, no! We’re not going to do venture investing. We’re not going to buy stock on companies that don’t make a profit.’”

Derwent said the business of capitalizing technology has an incredible numbers of facets. 

What large companies are doing right now, he said, is capitalizing small businesses to fill in pieces of their own strategic puzzles.

He noted that rather than hiring a stable of geeks to do programming, many businesses today will capitalize the right geek to design specified software. Officials from an X-Rite, for instance, create a venture capital entity that helps fund firms that fit into X-Rite’s grand strategy.

Likewise, he said, capital also is at work in creating strategic alliances for certain focused operations.  Locally, he said, one finds a SageStone, which is one star, so to speak, shining in the Microsoft cosmos.

Meanwhile, firms such as SageStone have their own galaxies of relationships. 

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