In the latter stages of the 1990s bull market, venture capitalists (VCs) had it easy. A robust IPO market meant that they could map a clearly defined exit strategy for their investments. But with the IPO market in hibernation, the rules of the game have changed. VCs are now on the hook to continue supporting their struggling investments, and have become more circumspect when it comes to investments in new firms.
But Tom Blaisdell, a partner in Menlo Park, Calif.-based Doll Capital Management, thinks quieter capital markets are no cause for alarm.
"We've always had a three-to-five year time horizon, so we don't worry too much about any short-term market issues."
The key, according to Blaisdell, is to focus on large market opportunities. "There's such a margin for error, so if you aim for a large market, you still end up at least with a decent-sized opportunity."
He also looks for companies that have an opportunity to displace an entrenched product or service.
Founded in 1996, DCM now has three funds with a total of more than $1 billion under management. The firm is an early stage VC firm focusing on communications, networking, and Internet service companies. Prior to joining DCM, Blaisdell spent three years at two Internet startups, Encanto Networks and Fatbrain.com (formerly Computer Literacy). Before that, he spent six years at Intuit, where he helped develop the company's Quicken financial services division.
And although Blaisdell was in the midst of the dot-com tornado, he always maintained a sober demeanor regarding the recent tech bubble. "The last three years were such an anomaly and we never lost sight of the fact that VC investing is a long-term proposition," he says. "Seasoned VCs know that these things go in cycles," he adds.
But Blaisdell acknowledges that investing styles have to change with the times. "People now want to invest in fully-funded business models," he notes, adding that "you can't assume that there will be multiple (funding) rounds. That means that startups must keep a much closer eye on expenses and adopt a "more realistic revenue ramp." In the end, the amount of capital raised now has to be sufficient to achieve cash flow break-even.
Positive cash flow has been a tough hurdle for Internet-oriented business models. So Blaisdell figures that some types of firms won't attract funding as easily as they had a few years back. "Pure advertising models are being shunned-especially those that garner ads from other dot-coms," he says. But Web firms with blue chip advertisers are still attractive. He cites his firm's investment in Takira.com as an example.
Takira develops digital marketing programs for large enterprises that are trying to build their presence on the Web. Although the privately-held company doesn't disclose growth metrics, Blaisdell notes that the company has already reached cash flow break-even. "And that's put them in the driver's seat" when it comes to future funding options, he says.
Blaisdell, along with other VCs, believes there will always be an opportunity to make money on up-and-coming organizations. "Large companies have fundamental roadblocks to innovation," he says, "and small companies will always be attractive…if they can develop interesting new products and services."
Indeed, many VC firms realize a capital gain on their investments when an established player buys them out, which often takes place once early strategic relationships have blossomed. "I don't know when the IPO market will rebound, but there will always be M&A activity."
Choosing amongst the hundreds of business plans remains the most challenging aspect of Blaisdell's work. A series of bad choices can scare off investors when it comes time to launch newer funds. And now that Internet think tanks such as Forrester Research and Jupiter Media Metrix have lost a lot of their credibility, Blaisdell has come to rely increasingly on internal guideposts when selecting firms to back.
The IPO market has been in a funk for almost a year. If it continues to struggle for another 12-24 months, Blaisdell and his partner at Doll Capital may need to again revise their strategies. For now, though, they're staying the course in anticipation of brighter days to come.
Iqbal Latif
News 
Market Data 
Discover 
