BUSINESSWEEK ONLINE : DECEMBER 11, 2000 ISSUE
BUSINESS WEEK E.BIZ -- NET WORTH VCs Who Still Believe in Consumer Sites Four successful venture capitalists share their secrets for finding opportunities amid the wreckage -- in art, groceries, and entertainment Consumer Internet businesses may be down, but they're not out. At least, not according to a handful of some of the most successful venture capitalists in Silicon Valley. Contrary to most of their colleagues, they're actually putting money into new consumer dot-coms -- some for the first time. C. Richard Kramlich, founding partner of New Enterprise Associates and backer of such hot tech companies as Ascend Communications and Juniper Networks, recently sank $8 million into his first consumer Web deal, online art site eyestorm.com. Gary Rieschel of Softbank Venture Capital -- backer of Yahoo! and E*Trade, among others -- says his firm continues to invest aggressively in new consumer sites. Redpoint Ventures partner Geoffrey Y. Yang is backing a new entertainment endeavor founded by Hollywood bigwigs Ben Affleck and Matt Damon. Even Vinod Khosla of Kleiner Perkins Caufield & Byers, who has perhaps the hottest hand in venture capital, is considering new investments. Silicon Valley bureau chief Linda Himelstein spoke with these investors about the state of the market and why good opportunities can still be had in the beleaguered dot-com sector. Q: Why are consumer-oriented Internet businesses so out of favor with investors? Yang: The companies that are really getting pounded are those that are not profitable and have no prospects of getting profitable. At the same time, they continue to burn capital in an effort to get profitable. Khosla: People indiscriminately first invest in and then back out of categories. This year, nobody is investing in or looking at good propositions [in the consumer space]. Kramlich: Everybody is avoiding it like the plague. We didn't do a lot of dot-coms because we learned from past experience. These tend to be more retail deals, and that's not really where we do well. Q: So why go against the tide and invest in the sector now? Rieschel: If you have guts and have capital, how can you not be optimistic about the consumer market? When technology improves and people have Internet access at home that's as good as it is at work, investors will make a different bet. Plus, we are roughly doing the same number of deals but in earlier stages and at much lower valuations. We can get higher ownership in a company for less money. Yang: We'd be stupid to completely ignore what's happening in the public markets and the carnage going on. But we believe [that] long term, people will differentiate those consumer businesses with attractive business models and those that don't have them. Khosla: People are more realistic about what are niche markets and what are large markets. There are still good opportunities out there. But they have to be based on good business propositions, not on hype. It's not the services and subscription models. It isn't a repeat of "Let's give free services to anyone or do ad-based deals." Q: What makes the deals you are doing now appealing? Kramlich: [He's backing art site eyestorm.com.] Art may really be something over the Internet. Eyestorm.com makes really good art available to a much broader selection of people at reasonable prices. They're doing $550,000 in revenue a month and expected to do $5 million this calendar year. By the latter part of next year, the company will be in the black. Plus, the people involved in the art world are really good, and there's a tough-minded manager running the place. This is not a small market. This is a business with real traction. It's not like pet food. Art over the Internet is a reasonable opportunity. Khosla: [He's backing ethnicgrocer.com.] This is a product that isn't available any other way. It's not competing with an existing channel. It has higher margins and low customer-acquisition costs. It also helps to have an experienced management team. Yang: [He just funded entertainment site LivePlanet.] Even though the markets are in the tank, we still really believe in the convergence and integration of traditional media and Internet media. We are coming to the conclusion that online media may not be a completely stand-alone type of media. The LivePlanet guys offer the traditional media side, and they are thinking about an integrated type of entertainment. Also, these guys will not burn through $100 million just trying to get traction. Q: How long will it take, if ever, to see these investments pay off? Rieschel: We have to be patient. It's going to take four years now instead of two years to build a business. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					e.biz Contents for Dec. 11, 2000 issue RELATED ITEMS Going Back to Dot-Coms TABLE: Try, Try Again ONLINE ORIGINAL: VCs Who Still Believe in Consumer Sites INTERACT E-Mail to Business Week Online

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