"If recent market patterns hold, fund-raising could well eclipse the $60 billion mark by year-end, making it the biggest fund-raising year since 2001.” Commentary on Private Equity market activity in the July 2004 issue of Private Equity Analyst

Editor's Corner

Dear Friends, Investors and Associates:

I suspect, like some readers, I have been watching and admiring the initiatives of Harvard President, Lawrence Summers.  Evidently, his administration will not be one which allows the nation's oldest university to rest on its august laurels.  In the course of a recent interview, asked which was more difficult - running the U.S. Treasury Department or Harvard University - he gave an arresting reply.  He said, to paraphrase, that Harvard was a community with shared values and one tended to support the work of one's colleagues and share in their successes.  However, in Washington, no matter the policy one pursues, fifty percent of the community ardently hopes you will fail.

Stimulated by the rhetorical liberties of a presidential year, this bruising partisanship is only likely to escalate.  The economy appears to be receding as the pivotal issue as marked improvement is evident throughout the U.S. and within the 17 "swing" states.  I believe the contest will turn on Iraq - certainly on the viability of the handover of "sovereignty" and perhaps on the thorny questions surrounding the war's rationale.

Against this national electoral backdrop, the ingredients are in place for improving economic growth and recovering IPO activity highlighted by the issuance of shares by Google and Salesforce.com.  Completed IPOs in the course of the second quarter of 2004 numbered 24 as compared with 2 for the comparable quarter of 2003.  These two dozen companies raised a total of $1.2 billion in contrast with the paltry $164 million raised during the comparable period one year ago.  Although these numbers are not stunning within a long historical context, they represent a marked improvement from the abyss of Q2 2000 and reflect a consistent pattern of market resurgence.

The same favorable indicators are evident within the M&A arena.  During the second quarter, 88 venture-backed companies were merged or acquired for total consideration of $5.5 billion.  Should these favorable trends continue, aggregate venture return statistics should improve over the next three years, back to historically attractive levels as measured against other asset classes.

We see these trends reflected in the renewed enthusiasm for the private equity business shared by entrepreneurs, general partners and institutional investors.

The New York region is very much a part of this resurgence.  One aspect of New York's appeal is that it is, broadly defined, the design center of the nation and design is a critical ingredient in business success.  Within the context of the bestowal of their annual product design awards, BusinessWeek's July 5, 2004 issue included a major story on a number of design-driven business success stories from Apple's iPod Mini to HP's Scanjet 4670 (desk top scanner) to Toyota's cutting edge Scion XB.

For a venture investor, a major attraction of New York is the number and diversity of energetic, entrepreneurial and creative people.

Some of you may be familiar with a magazine called Metropolis, published by Bellerophon Publications in New York.  Metropolis' editorial focus is excellence in design across many disciplines.  Recently, the magazine sponsored a contest with cash awards which required entrants to respond to the question "What is your big idea?" and to submit an attendant business plan.  A distinguished panel assessed the projects which were submitted by individuals from 22 countries and 30 U.S. states.  Ideas were organized in the following six categories; new building materials, planning public space, products/furniture, technology/media/communications and miscellaneous.

New York produced 260 project ideas including 55 within the technology/media/communications field.  California followed with 180 submissions including only 15 within the technology sector.  No other geographical area approached these levels.

We are excited to be providers of early-stage equity capital for such a dynamic, fertile community.

With best wishes for a restorative summer,

Edwin A. Goodman

General Partner

MVP II Portfolio NEWS

Milestone invested in CareGain, Inc. of East Windsor, NJ, on June 8, 2004. CareGain's Defined-Care(R) platform allows health plans to flexibly, rapidly and cost-effectively create and administer consumer-directed health plans, while leveraging their own internal systems and infrastructure. The company already has as customers two of the nation’s top ten health plans.

Investing $700,000, Milestone co-led the $6,890,000 financing with Mid-Atlantic Venture Funds (MAVF). Participants in the financing also included Inflection Point Ventures, Newlight Associates, Select Capital Ventures and NJTC Venture Fund. Milestone’s, Richard Dumler, will become a board member pending selection of an outside director.

Medidata Solutions, Inc. recently announced a $20 million financing commitment led by Insight Venture Partners, a large venture firm specializing in software and headquartered in New York City.

Medidata provides to its clients, pharmaceutical concerns and biotechnology companies, software products and consulting services to more efficiently track and manage clinical trials. The Insight financing will enable Medidata to expand its product offerings and to establish a global presence to better serve its customers.

This funding is another of Medidata's significant achievements this year which include long-term contracts with two of the world's largest global pharmaceutical firms, the opening of European headquarters and the release of RAVE™ version 5.0; the industry's first unified platform for electronic clinical data management (eCDM). RAVE 5.0 provides a complete range of clinical data management and electronic data capture capabilities within a single technology platform for pharmaceutical, biotech, and medical device companies - eliminating the time, cost and complexity of integrating multiple systems.

Breaking Point

Looking at the investments in any current early-stage venture capital portfolio, each will have broken at least one internal rule, including all those listed above.  Other rules dictate against investing when there is a lack of momentum in sales, lack of control by the investor group, or a royalty arrangement with company founders.  You get the idea.

None of this is to say rules can be broken with impunity. Nor is it in any way a justification for the ruleless excesses of the dot-com era. What you had then was less a matter of rule breaking than the creation of an alternate - some might say mirror - reality with "new rules," since the old ones were judged not to apply to the new economy. For example, "The more money you lose, the more valuable your business."  With rules such as this, it's no mystery why an enormous amount of money was lost in the tech bubble.

Broken rules are generally labeled as risks. Using this terminology has a certain function of absolution about it in that risks are perceived as inescapable in venture capital - as indeed I have argued they are - whereas the concept of broken rules carries with it more than a little hint of irresponsibility. Viewing the process in terms of risk is good, because it forces you to carefully analyze what rules you are breaking and why. This in turn means extensive due diligence, ideally over an extended period of time. Break the wrong rules or too many on a given investment, and you will lose.

In this context, it would be truly wonderful if risk did equal reward, as we are constantly told it does. Why this is so remains a mystery to me. As any student who has dealt with the concept of expected value knows, it takes only a few low-probability risks to dramatically lower the expected value of an investment. Throw in just a 30% or 40% probability that something disastrous could happen, and you will almost certainly be out of the game before it ends, or you will have been incredibly lucky.

And this doesn't even account for the biggest risk, which is all the risks that haven't been thought about or otherwise taken into account. Inevitably, there will be surprises, a word with generally unfavorable connotations. Hence we get the often-stated preference for being lucky rather than smart.

If all the venture capitalist does is concentrate on abiding by his rules, he will make very few investments indeed. Some of the risks can be managed. For example, management can be replaced, though this entails risks of its own. Other risks can be endured; competitors may prove less than perfect themselves. But it is most essential to understand what the investment's compelling value proposition is and the fundamental - one might say almost inevitable - trend or force that is favorably altering the marketplace in which the company competes.

The assumption is that these exist. If they don't, these are most certainly two rules you do not want to break. The more compelling the value proposition is, and the more favorable the trend, the greater the tolerance for a few broken rules.

And there is one other rule that shouldn't ever be broken - though, as we saw with Enron Corp., it often is by people who should know better. And that is simply this: Don't do business with crooks, if for no other reason than you'll sleep better.
------Richard J. Dumler, General Partner

VC Fund Raising Market Rebounds

Source:  The Private Equity Analyst

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