Show Me the Money
November 13, 2000
© 2000 Forbes.com
By Julie Pitta
AMONG SILICON VALLEY'S NEW generation of venture capitalists, Erik Lassila is known as the poster boy for lost opportunity. The 35-year-old was smart enough to want to back two of the biggest deals of the Internet era: Yahoo and Ebay. But the senior partners at the Mayfield Fund, where Lassila was an apprentice, balked at both. "I just didn't have [enough] credibility in the firm," says Lassila.
Mayfield's senior partners sheepishly admit their mistakes, but their greater loss may have been Lassila himself. He quit the firm last year and eventually ended up running, solo, the Silicon Valley office of Idealab Capital Partners, a three-year-old firm managing about $500 million.
"The senior partners used to tell me it would take five to ten years to know whether I was a good venture capitalist. There are too many that don't allow their up-and-comers to guide the firm and share in the economic rewards," he says.
For decades venture capital firms stuck to a simple ethos of patience and seniority. Making senior partner with full profit participation could take as long as a decade. But young Turks like Lassila don't have that kind of time. They demand a greater piece of the action, now. If they don't get it, they quit to set up their own shops.
To the old guard this behavior smells rather shallow, impetuous and greedy. "They've started their careers off during a boom that's been unrivaled in history. They've never seen a downturn, years when there weren't any technology [initial public offerings]," grouses Grant Heidrich, a 47-year-old general partner at the Mayfield Fund with two decades of experience. "Are these people really good venture capitalists? Who can tell? A lot of them have created wealth, but not much value. Great venture capital is not about the quick flip."
But to young VCs the status quo was little more than exploitation. Says one 30-year-old pup: "At the rate it was going, it would be 10 to 20 years before I could get the kind of money I deserved for the amount of work I was doing."
The rise of the Web and the flood of money into high tech has heightened tensions between young and old. This year some 750 firms are on track to raise about $70 billion, up from 567 firms raising $14.5 billion in 1998, according to VentureOne, a research firm. That translates into more opportunities than ever before for the aggressive, young financier--and more peril for old-guard firms that don't cater to their juniors.
"Older VCs develop such strong rules of thumb that they tend to ignore new phenomena. A young investor is more contrarian," says David Cowan, 34, the top partner at Bessemer Venture Capital. Youngsters are hardly infallible: Cowan turned down Ebay. "Stamps? Coins? Comic books? You've got to be kidding," he thought at the time. And Cowan twice passed on hot Web host Exodus. The second time he dubbed it too expensive at a $40 million valuation. The company is now worth $17 billion.
Last October the charismatic Cowan became the youngest partner ever named managing general partner at the VC arm of the 93-year-old Bessemer Trust. Some whisper that Cowan, who funded fiber-optic-switch maker Ciena and Web-security firm VeriSign, won the promotion after threatening to quit, but he denies it. "He got what he wanted by being very aggressive," a friend insists.
Bessemer's Ravi Mhatre, 33, chose to flee rather than fight. He led investments in four companies that went public and two that were acquired. But his bosses turned down his idea to invest in Yurie Systems, a networking firm bought by Lucent last year for $1 billion. Mhatre left Bessemer two years ago for San Francisco-based Weiss, Peck & Greer. He declines to discuss details of his departure.
Mark Lotke, 32, made a bundle in E-Trade and Priceline while at General Atlantic Partners, but he never made partner. Lotke left late last year for Internet Capital Group, where he is a managing director. Friends and colleagues say the parting was bitter. Lotke maintains it was amicable. His bosses at General Atlantic say Lotke's was the first unplanned departure in five years and their firm's investment record continues to be strong.
The exodus of unhappy young staff is leaving once-strong firms struggling. Cowan of Bessemer quickly runs down a list of firms he considers has-beens. "Mayfield's fallen off the map," he says. "Sutter Hill Ventures and InterWest had good franchises, and now they're totally out of it."
Benchmark Capital, the five-year-old firm that did back Ebay (its $6.7 million stake grew into $4.2 billion for the fund's investors), was started by three refugees from old-line Silicon Valley firms such as Merrill Pickard and Technology Venture Investors. Redpoint Ventures rose from the split-up of Institutional Venture Partners. "Yeah, there was frustration," says Timothy Haley, 45, the oldest partner at Redpoint. "Most of us were playing at the top of our game.... We wanted to get a bunch of people at the same table who were working on all cylinders."
When the young Turks leave, they discard the old ways of senior partners and junior staff in favor of "flat partnerships," democracies in which decisions and financial rewards are equally shared and there are no junior staffers to lean on.
In January Paul Vabakos, a sharp 33-year-old former Cisco engineer, fled to such a partnership after a frustrating experience at 40-year-old Norwest Venture Partners. At Norwest Vabakos funded Cerent, which was sold last year for $6.9 billion in stock, making it one of Norwest's biggest payoffs. Even so, Vabakos was never made partner. He walked, joining ComVentures; he declines comment on the move. One young venture capitalist calls the post-Vabakos Norwest "a bunch of sleeping old dogs."
The "old dogs," naturally, take offense. "I'm shocked at those kinds of comments," says William Younger, managing director of 36-year-old Sutter Hill Ventures in Palo Alto, Calif. Younger points to Sutter Hill investments such as Vitria, a successful designer of enterprise software, and Copper Mountain, a well-regarded DSL-equipment provider, as proof of his firm's viability. And Younger says that Sutter Hill has taken pains to promote and reward the younger members of the firm.
Richard Kramlich, a dean of Silicon Valley venture capital, sees little difference between the moneymen of yesteryear and today. "We've built a meritocracy in Silicon Valley, an environment that's gender-neutral, nationality-neutral and age-neutral," Kramlich says. "Why should the venture capital business be any different?"
Entrepreneurs see the generational mix as an advantage. Sundeep Jain, chief executive for Aceva Technologies, received funding from Erik Lassila's Idealab Capital, as well as the more august Sequoia Capital. Aceva's software automates financial transactions on the Web. "How do I compare an Erik Lassila to a Donald Valentine [the venture capitalist who bankrolled Apple Computer as well as Cisco Systems]? The words that come to mind are 'different perspective.' Call me greedy, but I want both of them."
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