In 1995, the Internet barely even registered in the approximately $6 billion that VCs bet on young companies that year in the U.S. Four years
later, over half of the nearly $36 billion in VC investment went to Net companies. In that time, the Web has morphed from a playground for geeks into
a utility like the phone system or electricity grid, eclipsing other types of high-tech investment, such as biotechnology, in the process. Along the
way, such fundamental measures of company success such as profitability have been thrown out in favor of "traffic."
Advanced Technology Ventures (ATV), a 20-year-old Waltham (Mass.) firm with $750 million of assets under management, has followed the changing face
of Internet and high-tech investing. The firm, which takes stakes in software companies, Internet plays, communications ventures, and health-care
outfits, recently closed a $400 million fund — its sixth and largest. Business Week Online's Margaret Popper spoke to general partner Michael Frank
about how the high-tech VC game has changed over the past few years. An edited transcript follows:
Q: Your new fund has nearly twice the capital of your previous one. What are you investing in, and why is the fund so large?
A: Probably 85% of our dollars will go toward information technology broadly defined and the balance toward health care — medical devices, drug
delivery systems, and e-health.
[There's] a kind of a vicious cycle. There's lots of money out there, so there are many more competitors in a number of these markets. The dollars
required to rise above the noise — and really the cost of playing poker — has simply gone up in a number of these market segments. The
time-to-market pressures are just tremendous. It takes more money more quickly to get these people to market. In the Internet-infrastructure or the
communications-equipment spaces four or five years ago, it might have taken a total of $20 million-to-$25 million to get a company to an IPO. It may
take $50 million-to-$75 million, or $50 million-to-$100 million today.
Q: Does that mean that your internal rates of return (IRRs) are going down?
A: Our IRRs have been above 100% for several years. As long as the public market continues on the pace that it's on — the technology market, most
notably the Nasdaq — it's safe to assume that these kinds of returns will continue.
Q: How many of your companies turn into IPOs, and how many are sold to other companies?
A: There is a much higher rate of acquisition today than there was five years ago. Five years ago — of the companies in our portfolio that got to
the point of liquidity — maybe two-thirds or three-quarters went to an IPO, and one-quarter to one-third were purchased. We're probably pretty
representative of early-stage investors. I would say a good half of the companies of ours that see liquidity are getting purchased, vs. an IPO. Maybe
even more.
Q: A company like Oracle or IBM buys a company that has some little piece of technology they want?
A: That's right. And because those companies' currencies in the public market are so high, they can afford to pay a lot of money [for access to
that technology]. And they typically pay for it in stock, which is obviously at very high numbers these days. So that translates to very high
acquisition values.
Q: Are there any areas that you avoid?
A: We've selectively done some business-to-consumer opportunities, but it's our belief that the business-to-consumer market is very competitive,
very capital-intensive, and a lot of the major segments are spoken for right now. The model that we tend not to like, which is the prevalent model in
B-to-C, is [building] a brand from scratch. That requires a tremendous amount of money and involves a huge degree of financial and marketing risk.
Q: Are subscription-based or ad-based e-commerce models more likely to succeed on today's Web?
A: I think that for general advertising, the bloom is off the rose. That is a declining revenue model. I think the history of subscriptions on the
Web is very poor. Very few sites have successfully actually gotten people to pay to subscribe to some kind of premium service on the Web. What are
becoming more common are revenue-sharing models based on either more personalized ads or transaction-revenue splits. If I link you to my site, and I
drive a customer of mine over to your site, and they buy something on your site, I will get some kind of commission or bounty on that sale. We're
looking more at transaction-revenue models and more personalized-sponsorship and ad-revenue-sharing models than general ad models, for sure.
Q: Do you have any words of wisdom for entrepreneurs approaching venture capitalists in this market?
A: The first and foremost thing I tell entrepreneurs is they should network around to find a credible industry source as an adviser, or find
someone who can network them into the firm as opposed to [sending their business plan] over the transom. It's more important than it used to be —
based on the volume of plans that we see.
Q: Has the volume increased?
A: We saw about 12,000 plans in calendar '99. We'll probably see at least 15,000 to 20,000 plans this year. Of the 12,000 plans we saw, half to
two-thirds of those came in over the transom. And the rest came in from people we knew — and we looked at [those plans] seriously. We might have done
about 18 to 20 deals last year.
Q: And of the 20 deals you did, did most of them come through the people you knew?
A: Every one of them. From the start, we as a firm have never done a deal that was not brought to us by someone we knew as a firm or someone we
knew of that was a credible industry reference.
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