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    (February 15, 2002) - We visit a few places inhabited by the sort of weird folks who all want to be venture capital mavens when they grow up. Begun by Andrew Carnegie in the middle of the 19th Century, Venture Capital Investing is an unusual discipline in the financial world. Focused on a ten to fifteen year horizon line, the VC process involves nurturing a business and its executives from a good idea to a big business. The very essence of the investment process involves a commitment to a long time relationship between investor and company. No intelligent deal is ever struck during the first round of funding that doesn't include provisions for follow-on infusions of cash.

    There are a number of good books on the subject. While the great ones cost several hundred dollars apiece, we've become extremely fond of Fundamentals of Venture Capital by Joseph w. Bartlett. The process of venture investing is, in reality, a form of for profit research and development. Since business must continually innovate, venture funding is the key dimension in the ongoing evolution of markets and technologies. Along with money, investors add expertise and involvement to help a small idea mature into a big one. Any competent investor understands that the development of a real business requires a patterned flow of investment and not a "one shot deal".

    One of the many untold stories of the "dot com gold rush" is the way that monied amateurs entered the investment arena posing as Venture Capitalists making unsubstantiated promises and wreaking havoc on the small companies they got involved with. Our industry includes a fair number of operations who received an initial investment, the promise of additional support and a lot of monkeying around. Many of them died simply because the investors were so inexperienced that they did not understand that their actions produced fatal distractions in the objects of their investments. 

    While blame can and should be spread to the companies who were brutalized by these witless spenders of Other Peoples' Money (OPM), the broken promises of the investors are directly responsible for the aggravating increase in the age of receivables throughout the industry. Many an executive reputation has been damaged for the trust placed in fancy talking managers who posed as Venture Capitalists without having the slightest idea of what they were really doing. The level of irresponsibility was staggering. For the most part, these idiots were spending the funds of their large parents while pretending to be investors. Their victims, where they survived are brutalized but wiser.

    The market has been ill-served by companies that grew their businesses based on the promise of additional capital infusions that failed to materialize. While the company founders usually take the blame, it is clear from our perspective that irresponsible investors are at the root of the problem. Usually, however, it is the customers who suffer the most.

    Unless growth is carefully managed by wise leaders who have already learned the lessons, it is easy to think that your company can grow as fast as it can take in orders. Unfortunately, problems associated with "scale" emerge when overlapping orders cause the time to install a system to increase. Even things as simple as the improvement of a user interface create layers of workload for the customer service department. Without seasoned managers in the queue, it is quite easy for growth to put a company out of business. Rapid growth always requires capital investments because the necessary workforce must be hired and trained in advance of the cash that comes from sales. That money has to come from somewhere.

    On Monday, we'll look at an emerging success story. RecruitUSA, ravaged by its inexperienced investors, has managed to turn its battering at the hands of fools into a foundation for market innovation and ultra-reliable performance.


    - John Sumser

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