"In retrospect, everything becomes clear . . . If I had been more deeply involved in some of these things and thought through them more, maybe there would have been different outcomes . . . " Paul Allen, commenting on his investments, BusinessWeek, May 3, 2004

Editor's Corner

Dear Friends, Investors and Associates:

The evolving international scene and the war on terror and the conflict in Iraq remain very hard to assess.  I cannot find any headlines which read, "HOSPITAL REOPENED" or "POWER GRID RELIGHTS HERETOFORE DARKENED VILLAGE" or "500 NEWLY TRAINED POLICE GRADUATE".  Only if you read extensively, can you ferret out these developments in either Iraq or Afghanistan.  And they are arguably more important and substantive than violent upheavals which receive gruesome headline treatment.  But I think the fundamental problem is the lack of metrics to define success in Iraqi, Israel, Afghanistan and other hot spots.  Without them, we cannot measure progress or retrogression and only respond to the staccato pace of violent events which have recently escalated alarmingly.  In this context, I worry that we have not adhered to the POWELL DOCTRINE which as I recall, stipulates clarity of mission, utilization of overwhelming force to achieve the mission and a clear route to exit.

The 9/11 commission, although well-intentioned, has fallen victim to a cacophony of charges and countercharges which seem designed to discredit one political party or the other rather than uncovering information which would lead us to better defense procedures and a safer America. The media appears enthusiastic to report and indeed to amplify this finger pointing.

It is remarkable that despite the unsettling international scene, the U.S. economy appears to be inexorably strengthening.  Recently, we were all reminded to "spring forward" and adjust our clocks for the coming season and as I did so I felt that this seasonal ritual was an apt metaphor for this Spring letter.  There is increasing evidence that the economic recovery is real with more than 300,000 jobs created in March and corporate profits rising 20% in the quarter relative to the comparable 2003 period.  As the Wall Street Journal pointed out in a recent editorial, the "misery index" of 7.9% i.e. the rate of inflation, 2%, plus the rate of unemployment, 5.7%, is at an all time low.  And the quoted equities markets have resumed their cautious advance.

There is also a good deal of optimism within the precincts of venture capital.  Seven of ten venture capitalists recently interviewed indicated that they plan to invest more in 2004 than in 2003. This intention was reflected in the first quarter of 2004 during which venture firms invested $4.6 billion in 417 companies.  This compares with 432 companies which raised $4 billion in the 4th quarter of 2003 and total Venture investing of $18 billion in 2003.  Also notable from Milestone's competitive perspective, more money is being directed to more mature companies and, consequently less to start-ups and early stage enterprises.  In the course of 2003, only 479 start-ups secured venture financing - the lowest number in ten years.  These companies represented 26% of all venture financings and only 18% of the allocated capital.

Also encouraging is the IPO activity, which included 13 venture-backed issues coming to market in the 4th quarter of 2003, not an overwhelming number but the highest number since the 4th quarter of 2000.  On the M&A front, 289 venture-backed companies orchestrated mergers and acquisition transactions with an aggregate value of $7.7 billion during 2003.

So, MVP is operating within a macro environment characterized by the enviable combination of relatively light competition within our investing space and attractive, increasingly active avenues to liquidity for our more mature companies.  Notwithstanding these macro statistics, we are seeing relatively more competition than in the last two years presumably because improving economic conditions have encouraged the early stage venture investors, who remain active, to be more aggressive.  This has given entrepreneurs more leverage which, in turn, has been reflected in more relaxed investments terms and higher entry level pricing.

In light of the progress of our current portfolio companies, the quality and volume of opportunities that we see and the larger economic picture, we are quite bullish with respect to the balance of 2004.

Yours truly,

Edwin A. Goodman

General Partner

MVP II Portfolio SYNERGY

After making investments in Medidata Solutions and Octagon Research Solutions, Milestone continues to find the pharmaceutical information technology market an appealing area in which to put capital to work.   We believe many opportunities exist for companies with innovative applied technology solutions in clinical, submissions, compliance, quality control and manufacturing.  If you look at enough companies in the space, the same themes emerge again and again, such as the need for: reducing the time to market for new drugs; improving profitability given weak pipelines and pressure on pricing; improving the ability for executives to analyze and make decisions; and lowering the risk of adverse FDA sanctions through automated compliance.

One of the benefits of pursuing an investment theme in an industry is that a virtuous circle develops.  After we invested in Medidata, we were able to recognize the next opportunity, Octagon.  Having two investments in the space has led to better deal flow and has broadened our network of contacts who can help us assess new investments.  In addition, our ability to help our portfolio companies has increased.  If we see a new company with exciting technology, we can refer it to our portfolio companies.  In the case of Octagon and Medidata, we were able to foster communication between the two companies, which has led to a strategic alliance (they will close their first big deal together this quarter).  We have also found a stable of experienced salespeople who have worked in the pharma IT industry for a long time, which is extremely useful when one is trying to jumpstart a sales team after making an investment.
---------By Todd T. Pietri, General Partner

How VCs Help Their Investees

What's different after you've raised your Company's first round of venture capital from professional investors? The first change is the biggest; it's no longer just your company! You have acquired a partner or partners, whether you have realized this or not. You are still the managing partner with ultimate responsibility for the success or failure of the enterprise, but the concerns, advice, opinions and in some cases, the consent, of your new partners must now be taken into account.

Choosing the right partner is crucial to the success of the new enterprise. No real explanation of why this is so is necessary is required if one focuses on the meaning and implications of the word partner.  Just as the venture capitalist is evaluating you and your business, you need to evaluate him and his firm.  Has he had experience in businesses similar to my own? Do his (and his firm's) goals match mine?  Can I work with this guy (a uni-sex word) especially if times get tough? Does he have time for my company?

Handling the day-to-day issues and crises in a new business consume an enormous percentage of an entrepreneur's time, energy and concentration. This effort is invariably accompanied by a strong emotional commitment to the people and underlying ideas involved. 

The venture capitalist should not be caught up in these quotidian issues of running the business (if he is, both of you have a real problem!). What the venture capitalist should bring to the Boardroom table is perspective and experience. It is his job to ask, is the strategy right, is what the Company is doing working, will it accomplish the goals of the Company, and are the right people in the right spots? These questions are not criticisms!! They are questions you should continually be asking yourself. You may be, but let's admit that we all can still get very annoyed when others ask them of us. Still, the questions are valid and answering them honestly is key.  A continuous and understanding dialogue on personnel matters with somebody who has seen a lot and who is one step removed from center stage is nothing but helpful.

At Milestone we were able to provide one of our portfolio companies with what looked to us to be a perfect candidate for VP sales from a resume we received. Management rejected him, saying that he didn't fit the culture of the company or its customers. "He was too salesy." Both the candidate and we persisted. In the end, the CEO, to his great credit, understood that he was the right hire precisely because he didn't fit the company's culture, and that the culture needed to change to be more sales-oriented.

If I give the traditional exhaustive list of "VC benefits" short shrift, it is not because in certain instances they aren't invaluable; it is because they aren't the meat of the added value that the venture capitalist can provide. I've used the partner analogy. One could also use the parent analogy or coach analogy. The venture capitalist's success is bound intrinsically to the success of the entrepreneur's company and so he desperately wants you to succeed. He can offer experience, advice, an understanding ear and an occasional salutary trip to the woodshed, if necessary.  It is up to the indvidual to succeed, but how many of us can say that we did it without the support of our parents, spouse, partner, mentor or coach?

Mark Ain, the founder and CEO of Kronos, a very successful public software company, likes to tell a story that sums up the value that good investors and a good Board can bring to an entrepreneur.  Kronos was installing a personality profiling system to better understand relationships among employees and, of course, every one took the test including the CEO. When his results came back, the tester exclaimed, "You have the classic founder/entrepreneur profile" but then had a question, "How have you succeeded in becoming the CEO of a public company? Everyone else with this profile failed." Mark said that he listened to the advice of his investors and board. I can attest that he didn't always take it, but was always soliciting their opinions. As he might have said, (but didn't.), "As long as you're stuck with these people, you might as well use them!"
------Richard J. Dumler, General Partner

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