When you wish upon a star
Venture Frogs Wants to be a Fairy Godmother to Startups.
by: Theresa Urist and Aton Eyemine
IN THE FAIRY TALE CLICHE, the princess kisses the frog, which then turns into a prince. As the story closes, the two ride off into the sunset…happily ever after.
This scene is analogous to what hi-tech incubators, such as Venture Frogs, hope for. Incubators, or frogs, provide the setting for the drama. The princess provides the action that creates the happy ending. Is this a bit of the brothers Grimm in the heart of hi-tech land? Venture Frogs is banking on it. This innovative incubator hopes that the companies they kiss will bring them royalty.
For startups, Venture Frogs provides a storybook setting. Early stage companies can move directly into their own castle: a fully integrated office equipped with computers, Internet connections, phone systems, conference rooms, reception areas, copiers, and fax machines. System administration and human resource support is available to assist companies with daily operational issues. Startups also have access to legal, financial, and engineering consultants to help them refine their product and market strategies.
The incubator's founding frogs know how to jump. Formed by two members of the founding team of LinkExchange (acquired by Microsoft for $265 million in November 1998), Venture Frogs focus on the Internet, e-commerce, information, and telecommunications technology markets. In the past year, the group has made over 20 investments from its $27 million fund. Investments typically range in size from $100k to $3 million.
The frogs' cushy lily pad is located in the Historic Marquee Building in San Francisco, occupying 15,000 square feet in the main mezzanine and ground floor of the building. Rather than cooping Rapunzel in her tower, the website offers a restaurant, Frisbee and foosball. It's even adjacent to a movie theater. Prince Charming never had it so good.
A conversation with Venture Frogs' co-founders Tony Hsieh and Alfred Lin, and Millie Chu, associate, reveal just how the group goes about hand picking their hi-tech hatchlings.
E: Is the startup market more difficult today than when you started LinkExchange?
A: The startup environment is more difficult now just because it's more competitive. A lot of people are trying to peel off small pieces of what needs to get done. When the Internet first started--when we were getting on it--there were a lot of revolutionary ideas that , may or may not turn out to be a real business…but they were still testing it out. Now, there're like 5 or 6 companies that attack a certain area or field at the same time. I think it's more difficult in the Bay area because real estate has shot up about five times from when we started. We were paying about 12 dollars per square foot in the South Market area. Now it's about 48 or 50 dollars.
E: Wow, just in three years?
A: Just in three years…That's potentially one of the reasons people are starting incubators, because it's so hard to find office space. There's so many startups. Everyone wants office space. Landlords are not only asking for cash, but also for credit. Because of the need to move things fast, we were wasting 33% of our time on that sort of back office issue. It's even worse to do it now….because if someone else doesn't have to deal with that, things could move just that much faster.
E: What really makes Venture Frogs unique?
T: Both Alfred and I were involved in a very early data publishing company with five people, and we've had the experience of growing a really small company all the way up to, when we actually sold to Microsoft we had about a hundred or so employees. We've been through the different stages of growth and know what the different pains are that startups experience along the way. And that's where we can add the most value is by letting them know, when we were at that stage, what mistakes we made, what things that they should avoid, and hopefully, through that, they can save time and resources.
E: How is your physical structure, and the fact that you had historical relations at Harvard affected the image or impression applicants have of your firm?
T: I guess having Harvard on our resume helps; it doesn't hurt. But I think the main thing that people value is the fact that we've been through startups earlier, a few years earlier, and that's much more important than what school we went to.
E: Working with other leap-frogging entrepreneurs, this doesn't tempt any of you to wear the robes of CEO?
A: I think it's actually, it's two very different jobs, being an investor and a coach and being a CEO. Every now and then, I find myself wondering, Why don't I just start another company? But the interesting thing about working in the incubator environment or an investment environment is that you get to work on several projects at the same time. And that's very stimulating; it keeps you on your toes. You learn about very different business models. While we were at Link Exchange, we kept our heads to the ground, to the grind, and it was all about one company.
E: Okay, I'd really like to hear from all three of you on this one: What do you look for in a start up?
M: I think we look for things that every potential investor looks for. Aside from that, there are a lot of the things that we've learned just from working with our existing portfolio…those are things that maybe are always changing. You can definitely identify time, but even just spaces that are incredibly popular at a certain time or a certain stage. I think ultimately what you really want are flexible people, and I think definitely that's much more important than having a great idea because there's been so many great ideas. As Alfred said, office space is pretty crowded now, so I think who ultimately ends up winning are the team. So you want a balanced team, which is, I think more and more important these days.
E: You had a great line here, and I wonder if it came as an evolution of what you guys were getting when you formed Venture Frogs.
Well, it's not a hard and fast rule, but we strongly support investment companies located in the San Francisco Bay Area. In addition, we generally support/fund entrepreneurs with strong hands-on industry and/or Internet experience rather than consultants or business school graduates who have spent little time in the industry.
Why did you feel you had to highlight that. What was sort of happening when you first formed Venture Frogs?
A: We're more likely to work with companies located in the San Francisco. It's just a lot easier. You'd think that in a world of wireless devices, wireless email, it's just as easy to work with someone far away, but it's really not. Just being able to have a great idea and walk over, and talk to someone is critical. The second part is that we found a lot of people who were really good at writing business plans, presenting themselves, but don't really have what it takes to get from day one when they start the company with one or two or five people, to the next level. A lot of these people that were very good at presenting business plans, had been working at large companies before. They could solve problems for larger companies…they know how to run a business that's already up and running.
E: I'm curious, there's the fact that you have the $27 million fund that the two of you (founders) personally put in to start Venture Frogs-is that correct?
A: No, actually, it comes from family, not just us.
E: Okay. I guess I'm curious to see what sort of statistics you're tracking in terms of the number of people that you actually hear from versus the number you then actually take into the portfolio.
M: For a while, maybe from January through March, we probably got about 50 to 70 a week for the first quarter. Most of the time we bring a company on board through referrals. Unfortunately, in terms of the percentage from just seeing us on a Website - I mean, we've met with many of them; it's not that we won't consider them-but ultimately, more than 90 percent have been referred. And we've already accepted about 25, and that was from last year. In terms of the incubator, I think the numbers would be completely different, I mean it's a completely different market.
E: Can you give us a description of a typical day and week at work?. I'd really like to capture this is terms of the psychology of business as well as of Venture Frogs, the experience.
T: There's no real typical day because every week is pretty different for us. Almost every week we spend part of the time talking with new companies that we may potentially incubate or invest in. And then a lot of time is spent with the existing investments that we have in our portfolio. Alfred and I both had pretty different roles at Link Exchange. Alfred was on the financial and legal side of things, I was really more involved on the product and development side of things. So, depending on what the needs of an individual company are, we may both be helping a single company at the same time in different areas, or he may be working with one company and I may be working with another.
E: How is working in San Francisco different than working in the Palo Alto, Mountain View area? Is there something unique about being a startup in San Francisco as opposed to being in the 650 area zone?
T: Three or four years ago there weren't that many startups in San Francisco, I think over the past three or four years we've seen a northward migration of companies toward San Francisco. I think it has a lot of appeal to younger people who like being near the city; a lot of people foresee living in the city as being more fun or more enjoyable.
A: Where Silicon Valley started, down south, where they make chips and semi-conductors and things like that, they're much more technical. A lot of engineering people are down there, whereas a lot of product marketing people are up here.
E: How is your firm reacting/coping with the lowered stock value of e-tailored websites, things like etoys, and pets.com. You have a few websites here that are in an e-commerce model. Is there a reaction?
T: For our stage of investing, it can be a positive thing. That way e-companies can be focused on building their business and not be as worried as they used to about some other company that may somehow suddenly get $40 million in funding. And because VCs are shying away from just throwing money at startups, it allows companies that are actually doing a good job to grow without having to worry about just being pounded away by advertising wars.
E: When your first few articles came out in December, versus now, a lot has happened, not just on NASDAQ but in terms of the more conservative investors we've talked to. They want us to ground ourselves not just as a dot com but as a business. Are you creating these strategies to prepare your dot coms, because you know you're incubating these people, and it's a dynamic time frame? What are you doing in terms of researching integration of your experience as well as insight into what your seeing to alleviate that risk?
A: We do a fair amount of reading and on the Web and we do a fair of amount to try to keep apace with what's going on. I don't think there's any specific thing that we're doing differently than before. But I think it has always been the case that people want to businesses rather than products. It's just a lot more magnified today because there's a lot of clutter out there. And so you have to be very careful about picking the team and the company that actually wants to do well in the business world rather than [just develop a product and] sell it to [Yahoo] or something like that. I think it's pretty interesting that people still think that they can just build a company, get a user base and just sell based on the user base. I mean you take Yahoo has 50 million users; your product may get one or two million users by the time you think you can sell it, but the overlap of the two will probably be pretty high. The unique users that you have is probably a small amount. You're not willing to pay for that anymore…As the Web matures and people understand consumer technologies and Web technologies more, it will be easier and easier for the big guys to roll out the interesting products [as opposed to acquire it]
M: I also changed a little bit of the strategy back with respect to the e-tailored, because I think even though you see a down-cycle in terms of the investors that are in the Valley, and all the press that we probably read, I think a lot of industries actually want to catch up. There's a whole rest of the country out there that is not as Internet savvy. And I think it's actually a very compelling opportunity for a lot of companies that are forced to go, maybe, outside the core VC community here.
E: In terms of the downward trend of the stock market?
M: No, no, no, I meant brick-and-mortar people… I think there are a lot of people that right now are accepting the fact that they actually need to invest time and resources in [their business segment] for however many years and that it's changing. I think that is overlooked in the press that we see.
E: Looking from the micro to the macro, are you guys worried?…In terms of just where NASDAQ is going and in terms of the future of e-commerce without the vertical affinity websites that are product-based, e-tailored models?
T: I don't think we're worried in general. More and more people are getting onto the Internet everyday, more and more people are buying online everyday, so we're not worried about people suddenly not buying anything online. I think that we view it as a good thing that the kind of players, that shouldn't be out there managed to get millions of dollars in funding just to throw it at marketing. Investors are starting to realize. We think that there are e-tailoreds out there that do make sense and those will still be there in the long term.
E: Where to you see Venture Frogs evolving, and how? You want to get bigger, you want to be able to incubate more?
A: We'll take it one step at a time.
