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December 12, 2002
 By Julie Meyer, Chief executive officer, Ariadne Capital Somewhere along the way, VC failed to be the engine for creating category-defining companies that it was meant to be in Europe. It's easy for investors to show up at board meetings, drink coffee and talk in a detached way about how the sales pipeline isn't converting and what a shame about the revenues. But there's nothing more fundamental than determining whether people buy what you sell. Geoffrey Moore, a veteran business author and VC, recently said he cringes when he reads what he wrote about the New Economy. But much of what he wrote about the product adoption cycle is absolutely correct - if the early adopters don't engage, you never get to the mainstream. A great wireless start-up company recently quietly shut down after selling only 800 devices - it just couldn't cross that chasm. Around two years ago, Jorge Mata, CEO and founder MyAlert, which merged into Buongiorno, said on a panel discussion at Insead: "Some day VC performance will be measured by how much revenue they help to create for their portfolio companies." What many old school VCs dismiss as a 'trading issue', as opposed to the more important 'investment issues', is after all what venture capital is all about. So how can parties with potentially diverging agendas align interests for as long as possible in the risky business of building a business? The answer is by having as much managerial and entrepreneurial DNA in the VC gene pool as possible. By cross-fertilising entrepreneurs and managers with the VC community, we can develop a deep well of talent, investors who understand entrepreneurs, and vice versa. Of the 100 or more companies that approach Ariadne monthly, 90% need sales, not capital. They need help accelerating sales, targeting new markets, understanding why their sales pipeline isn't converting and determining the right target clients. Pretty soon we realised that helping to get a start-up from GBP 1m-GBP 2m in annual revenues to GBP 5m-GBP 7m over 18 months was the dominant hurdle facing most businesses in their quest for the stamp of 'venture capital backed start-up'. Not only is it difficult to raise capital, but it should be that way. All companies need to prove that people buy what they sell and there's a Darwinian filtering effect in the process of becoming a venture- backed company. A partner in a global VC with offices in London recently confided in me that he had solved the problems in his portfolio with sales directors. He only hired sales people who had spent significant time in the US or who were from the US because he wanted a sales team that could close a discussion as well as open one. The current VC trend to hire a portfolio development manager to work with the portfolio firms is just a fad. What matters is the backgrounds of the partners in any fund, their track records building companies and, most importantly, whether the CEOs of their portfolio companies would bring them in as investors now if they could do it all over again. One fund that has consistently done well is Israeli firm Gemini. The track records of the partners is instructive: they've built and run companies. That's why they were able to raise $200m (GBP 128m) as a seed fund after the bubble burst and after the Intifada started in September 2000. They had the right DNA to take the right risks and to make the right returns to their investors. Some day VCs' performance will indeed be measured by how much revenue they help to make for their firms. Happily, that day is coming soon. Julie Meyer is CEO and founder of Ariadne Capital, a European VC firm which invests in early stage private and advises later stage private and public companies. |
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