Milestone Matters -
Summer 2002 Newsletter
"We'll never see again a wave of enthusiasm and investment
and speculation that rises and crashes the way the first Internet wave did. But we are in for a slow steady progression and a deepening of these technologies."
Andrew McAfee, Assistant Professor, Harvard Business School's Technology and Operations Management Unit
Editor's
Corner
Dear
Friends, Investors and Associates:
The last few months have brought more numerous
and more appalling distractions including additional tragedies in
the Middle East and the odious and mounting pile of evidence of
genocide in the Balkans at the hands of Mr. Milosevic and his
cohorts. In addition,
we have had to bear witness to yet another iteration of aspects of
the Louima debacle in the form of the Schwarz trial.
Closer to home, in a professional sense, the sleazeratti
have emerged on the business scene.
These individuals, through their malfeasance, in the delicate
phrasing of Chairman Greenspan, have mugged the American capital
markets along with many stakeholders.
The market is punishing these companies severely, although it
remains to be seen to what degree the key perpetrators will suffer.
With one eye cast in the direction of the
mid-term elections, politicians on both sides of the aisle are
aggressively moving punitive legislation forward while trying, at
the same time, to avoid killing the golden business goose.
The only thing we can be certain of is that those supportive
of business and market solutions and those who would rely on
government intervention to cure the excesses of market capitalism
will both emerge from this melee unhappy.
However, I am reasonably optimistic that the pull and tug of
our system with its many disparate power centers won't fundamentally
harm the economy and, on the margins, may help to restore
confidence.
The basic U.S. economic engine continued to
chug along at an amazing pace, particularly in the light of the
September 2001 horrors, compounded by the self-inflicted wounds
caused by some of our ethically-challenged corporate leaders.
U.S. GDP grew at an astounding annual rate of 5% during the
first calendar quarter but slowed
markedly in the second.
Performance for the balance of the year remains the subject
of much debate.
The stock market, save for some putative
rallies, has declined. I
think there are four factors of which three will recede in
importance over the coming months.
First, we are still experiencing a retreat in pricing from
historic high and unsustainable levels which peaked in March of
2000. Since then, the
S& P has fallen more than 35%.
Second, the corporate felons have wreaked havoc by
undermining confidence in the markets, which has been exacerbated by
media sharks with talk of systemic structural problems.
Third, despite the improving macroeconomy, a number of highly
visible companies, such as Intel and Apple, have failed to meet
their operating objectives for the year-to-date.
The fourth "wild card issue" is the
birth of preemptive strike foreign policy and its possible
implementation against Iraq. Putting
aside the question of the folly or wisdom of such a move, markets
like certainty and the specter of war is hugely destabilizing.
But Milestone's business is good. When I tell this to people, they look at me quizzically or
skeptically, but deploying capital in troubled times in
capital-scarce markets has always bred opportunity.
We are encountering many energetic entrepreneurs who focus on
the task at hand in their respective micro-markets and don't do too
much hand wringing about macro conditions and the state of the
world. We try to do the
same and we think over the long haul that we'll be rewarded.
Please let us hear from you with comments or
questions about Milestone's activities within the current
environment. Richard,
Todd, and I remain very appreciative of your support.
Yours truly
Edwin A. Goodman
General Partner
Milestone
Portfolio News
Two MVP portfolio
companies, Derivatives
Portfolio Management (MVP II) and PlusFunds
(MVP I), recently won substantial contracts to manage different
aspects of S&P's Hedge Fund Index.
DPM is the administrator with the responsibility for
verifying and reporting daily valuations electronically.
PlusFunds
has been granted an exclusive license to develop investment products
based on the index. The Index will contain 40 funds divided into three
sub-indices: Arbitrage, Event Driven and Tactical, which in turn
comprise a total of nine underlying strategies.
These strategies include: Macro, Equity Long/Short, Managed
Futures, Special Situations, Merger Arbitrage, Distressed, Fixed
Income Arbitrage, Convertible Arbitrage and Equity Market Neutral.
Milestone Adds Summer Associate
Alon Bochman has joined Milestone Venture Partners as an associate. Alon has an extensive background in the information technology arena. Most recently, he was a consultant with the Investment Banking Division of Morgan Stanley. He also co-founded Buzz-Company.com in 1997, a developer and marketer of Internet software for online communities. BuzzCompany.com was later acquired by Multex (Nasdaq: MLTX), a global provider of investment information for the financial services industry, for over $30 million.
Alon earned his B.A. in Mathematics and English at the University at Albany, and received his MBA from Columbia Business School.
Building
the Sales Team
Improving the management team of an
early stage company is never easy, despite the fact that, in this
economy, we meet talented people every week who are looking for a
job. It is especially
difficult for a venture capitalist and a founding management team to
find a "home run" VP of Sales. This is because the really proven producers are hard to find
in any economy. When I
say "proven," I mean managers who have built and managed a
sales team over more than one economic or product cycle and
consistently delivered outstanding numbers.
I am not talking about a person who rode the wave of some hot
company, say Siebel in the late 90's, who can't cut it otherwise.
This person should have a deep Rolodex of customers,
potential sales hires, strategic partners and deep industry
expertise. The
candidate must still be very hungry and want to build a successful
company despite really challenging circumstances. He or she must be willing to travel and sell direct while
building the team and carrying a quota if need be.
These people aren't cheap.
They want to make well in excess of $300,000 in cash
compensation with a base north of $150,000 and want a meaningful
equity stake (depending on the stage of the company, funding level,
and base salary, up to 3% of the company).
But what makes a search like this
even more difficult is the culture and experience of the founding
management team. Companies
we back and find interesting often have technical founders.
They turned their knowledge, expertise, and commitment to
excellence into something of value.
Not surprisingly, these founders have made all of the sales
themselves and have close relationships with their customers.
Their customers tell the founders repeatedly that one of the
reasons they purchased the product or service is that they like
dealing directly with the founders and not some "slick"
salesman. Thus even
though the company may come to the right conclusion that it needs a
VP of Sales to grow the business, the founders have a tendency to
reach the wrong conclusion, i.e. that the new hire should be just
like the founders!
The bias is subtle and often not
completely understood consciously by the founders.
However, when the search firm brings in candidates, they are
frequently turned down quickly because the VP of Sales candidate
isn't, depending on the expertise of the founders, a scientist, an
engineer, or a finance expert.
That is when the search gets interesting and curious.
After all, the question the venture capitalist inevitably
raises with the founders is, how often do you find a VP of Sales who
has all of the proven qualities we have identified above who is ALSO
a technical expert? The
answer is just about never.
There are exceptions and we would of
course be thrilled to find such an accomplished person. But the reality is that successful sales people are
usually
very different from the kind of people who establish technologically
innovative companies. The
typical engineer won't camp out on the front stoop of a prospect to
unhook a deal from a competitor or persevere when a prospect says NO
for the fifth time.
One
point that is often missed by young companies is that the expertise
and credibility of the founders should, in part, be
institutionalized in the pre-sales (or sales engineering)
department, not in the executive sales management team.
The pre-sales group can satisfy a prospect's need to engage
in detailed technical discussions of a product's applications.
Thus, by dividing the sales responsibility between the
hunters and the product experts, between sales and pre-sales, a
business has a much better chance of growing rapidly and scaling.
The company will inevitably lose some of the magic that the
founders conjured in the early days, but the opportunity to build a
bigger, more valuable company with a lasting legacy is worth the
price.
---Todd T. Pietri, General Partner
Q2
2002 Profits
(In
billions of dollars)
| Computer
Software & Services |
8 |
| Banks
- Midwest |
3 |
| Cars
& Trucks |
2 |
| Semiconductors |
1.5 |
| Financial
Services |
1.2 |
| Entertainment |
1 |
| Steel |
.75 |
| Electronics |
-2 |
| Coal,
Oil & Gas |
-4.5 |
| Telecom
Equipment & Services |
-14 |
Source:
Standard
& Poors COMPUSTAT
Milestone
Venture Partners
Investing
in early Stage Enterprise Information Technology Companies in the New York
Metropolitan
Area
551 Madison Avenue, 7th
Floor, New York, NY 10022 V: [212] 223 7400 F: [212] 223 0315
www.milestonevp.com
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