From: Linda (firstname.lastname@example.org)
Date: Wed May 31 2000 - 06:44:35 PDT
Adam - more on VC's; part 2 is of particular interest.
VC P.S.: Bill Tai's wild ride
By Lawrence Aragon
Redherring.com, May 24, 2000
If you didn't know any better, you might think that
Bill Tai was getting ready to rob a bank: he has no
fingerprints. He holds up his hands, proudly
displaying the battle scars of his most recent sail boarding
adventure off the coast of Baja. His fingertips were
worn raw from clutching the "boom" that steers the
sail. A day out on a lake wouldn't produce those
results, but soaring off of 15-foot waves for three to
five hours a day for six days sure will. Mr. Tai is
more than happy to give up a little skin in return for the
thrill. "Oh, it's great!" he says.
Mr. Tai, a general partner at Institutional Venture
Partners (IVP), goes on to describe how he was
trying to do a "forward loop," and ended up crashing
through his sail. "My head went right through the
sail," he says, again chuckling at his foibles. There
aren't many things that the 38-year-old VC is as
passionate about as windsurfing. But venture capital
is one of them. For Mr. Tai, spotting and investing
in the right company at the right time is like
catching a killer wave.
Over olive and mushroom omelets at the Late for the
Train Cafe in Menlo Park, we talked about his
exploits both in and out of the water. In his nine
years as a VC, he has taken more than a dozen
portfolio companies public or seen them through sale
to a public company, including cable modem maker
Terayon Communications (Nasdaq: TERN); wide area
network equipment vendor Premisys
Communications (acquired by Zhone Technologies); and
Ethernet switch maker Network Peripherals
(Nasdaq: NPIX). This year three of his portfolio
companies have registered to go public in the stormy
Nasdaq: iAsiaWorks (which he founded), Microtune, and
Chemconnect. Another, Transmeta, is also
expected to file for an IPO this year.
SURF VS. TURF
Q. With all of the success you've had as a VC, why not
just hang it up and go windsurfing every day?
A. I have thought about that, actually. But I know I
would get bored. There are still so many
opportunities that need to be financed. There are
still a lot of companies that need to exit that I would
love to help out. And if I look at the two companies
that I really spend a significant amount of time with
-- iAsiaWorks and Transmeta -- both are foundational
plays that could help transform industries and
economies. To the extent that I can steer capital
toward new opportunities that are powered by either
Transmeta or iAsiaWorks, one, it's fun, and two, I
feel like I'm doing something useful. As I watch the
Internet spread across Asia, it's pretty clear that
it's a wave that's happening with or without me. And
I can help shape that wave a little bit and help
create some great companies over there. And in the
case of Transmeta, a similar thing is happening. I see
waves of products coming from the foundational
technology that span from next-generation computing
platforms to Internet appliances to server
architectures that should exist. Given my familiarity
with the company, I'm probably in a better position
to help get those companies off the ground.
Q. If you could give just one piece of advice to
entrepreneurs today, what would it be?
A. Think foundationally.
Q. What do you mean by that?
A. We are in an environment that is at the same time
wonderful but deceptive. There is plenty of
financing around and more opportunities than you can
shake a stick at, but true value is created in
those companies that are foundational and everlasting.
I think many entrepreneurs today get pulled
toward doing things that are features or product
cycles. It's very easy to be tempted to quote "just
make money," as opposed to quote "just build
companies." And that's happening both in the venture
community as well as in the entrepreneurial community,
which is part of the reason we see an explosion
in the number of companies out there. But in the end
companies like a Transmeta or a Microsoft
(Nasdaq: MSFT) or an Intel (Nasdaq: INTC) or an Exodus
(Nasdaq: EXDS) create more market value
than several hundred product-cycle or feature
companies with, relatively speaking, not that much more
effort. So my advice would be to think about
maximizing the impact of your time spent, in terms of
market size and sustainability of the business model.
To be fair, those opportunities are really rare.
There aren't that many Microsofts or Intels. It's hard
to find those. But to the extent that you can
think about those kinds of things, do it. As I look at
both Transmeta and iAsiaWorks, they were both
gargantuan opportunities that in 1995 you could argue
were not appropriate to be funded by venture
capital, but the winds, the currents, and the waves
were right and they were funded. We're in that
kind of market right now where if you have a large
foundational idea you can get it funded.
Q. With the erratic behavior of the public markets,
what kind of advice would you give to entrepreneurs
about how to proceed during this time? Should they
stand back a little and reconsider what they're
doing, or just ignore the public markets altogether?
A. The answer will vary depending on where they're
positioned. In the end, it's all about the set-up
that comes well before the execution of the plan. It's
like surfing. You get out there in front of the
wave, and if you're on a foundational one, you don't
care about the chop. But if you're just kind of
riding a rising tide, you'd better worry. If a company
has its fundamental business model and value
proposition based on an overarching fundamental sea
change, it probably doesn't need to worry. But if
it's the Nth dot-com or the Nth edge router, the
business plan should probably call for an additional
level of conservatism right now and maximizing the
value of an exit [through an IPO or sale].
Q. Some VCs say they bet on people first. Others say
it's the market opportunity. Where do you stand?
A. I think it's markets, then people. I'm generally
predisposed to certain areas well before meeting an
entrepreneur, and I have kind of an idea of things I
like to fund. Then, when I see someone step into
the saddle that I like and respect, plus believe has
high integrity, that's when I launch.
Q. What are the traits of a great entrepreneur?
A. If I could describe a great entrepreneur, he would
be a chess player from a strategy standpoint, able
to see the industry structure, how it will evolve and
how to flow with it. He would also have the timing
and dexterity of a surfer. Once your brain has figured
out when to take your shot and how to execute
the next steps, then it's about getting up on the
board and going. There are a lot of people who have
the right mind -- like a chess player -- but just
can't get up. And, to the extent that a guy can get up,
you want somebody who has a lot of dexterity, who can
move with the ebbs and flows and the
changes of the tides, because there are a lot of them.
The third trait would be a smidgen of charisma.
In the early stages it's all about leadership. You
have to get people to buy into your dream. If you can't
do that, you can't pull a team together, and you won't
find a point of traction.
Q. How do you know if someone's going to be great?
A. Usually if you spend an hour at a dinner or
something talking to somebody, you have a pretty good
idea about whether they're really thinking about their
company's position within a larger context, or not.
And by digging a little bit into their background you
also get a flavor for an individual's tactics and the
way he has handled his career. What I've found is that
people don't change a lot, and they will revert
to whatever their norm is in times of stress or
Q. What do you consider hot investment areas right
A. There are two areas that I'm very excited about.
One is the enabling technologies for streaming
media, which I believe will be pervasive within three
years. There has to be stuff done at the device
level, system level, and network level to make
streaming media a reality.
Q. Have you funded anyone in that space?
A. Eyefrog.com is a seed-stage experiment I started to
explore and understand the architectures
underlying streaming media and applications.
Q. What's the second hot area?
A. There is a tremendous set of opportunities around
the global scaling of B2B [business-to-business].
Today if you look at the B2B and B2C
[business-to-consumer] worlds, the parts of B2C that have
worked, like an eBay (Nasdaq: EBAY), have worked
because there is structural integrity in the credit
and fulfillment of transactions. The true promise of
B2B will not be fulfilled unless there is a global
trading fabric that allows frictionless transactions
around the world. In the case of Chemconnect, it
would be ideal if Dow were to get on the Web and they
could get a TRW-like report on a potential
purchaser, click on a button to get the fully loaded
shipment costs, and click on other buttons for
scheduling and trade financing. I envision something
like Sabre for airlines. The analogy should exist in
the world of trade. Bill Stensrud and I have started a
company to do that. It doesn't have a name yet.
That's a five- to seven-year project.
NEXT TIME: Mr. Tai will field your questions, so send
'em on in.
VC P.S.: Bill Tai's wild ride, part 2
By Lawrence Aragon
Redherring.com, May 31, 2000
A woman who described herself as a doctor and
windsurfer sent an email chastising Bill Tai for wearing
off his fingerprints while engaged in the water sport.
It wouldn't have happened, she claims, had he
used the proper technique. Several other windsurfers
-- both venture capitalists and CEOs -- invited
Mr. Tai to catch some waves in Australia, Greece, and
the shark-infested waters of Waddell Creek,
which empties into the ocean just north of Santa Cruz,
California. For a while, I was starting to wonder
if my column had run on a sports Web site instead of
But the hard-core windsurfers were overtaken by
hard-core entrepreneurs who were much more
interested in Mr. Tai's exploits as a venture
capitalist than as an extreme windsurfer. Mr. Tai, a general
partner at Institutional Venture Partners, took time
out of his three-day weekend to respond. (For the
record, he says the windsurfing doc doesn't know what
she's talking about.)
Q. You talk about looking into a founder's background
-- how he or she has handled their career. Do
you look for the pristine type of career (MBA from a
top school, exec VP by 30, etc.), or do you think
that a good founder should be someone who has had a
more interesting career and background than
A. There are different skills required at the helm of
a company at different stages. Although I talk about
"markets first" -- at least with respect to a decision
about which beach to surf -- if it's an early-stage
company without a great entrepreneur, you are dead in
Later, as an organization scales, emphasis on
management and people skills grows in importance. This
presupposes that the founding entrepreneur's energy
and industry knowledge have become ingrained in
the culture and spirit of the company. Without that,
great managers sometimes end up managing air.
It's really less about where they went to school or
where they worked, and more about how they made
their decisions along the way. You can tell a lot
about a person's instincts, leadership, and people skills
by understanding why he or she chose particular
industries and companies to work for, as well as what
made him or her happy (or not) in roles that he or she
I'm a great believer in being happy in your work. If
you're not, your role is only temporary and
unsustainable. People's strengths are 100 percent
aligned with what makes them happy, and their
weaknesses are usually 100 percent aligned with what
they don't care to do. I'm always very interested
in understanding what makes people happy in their
work, to understand how best to work with them as
well as how to build a team around them that scales.
Q. You discuss building foundational companies. I am
working on a plan for a foundational company in a
market space that does not exist but is a transition
for an "Old World" service. Because this is a seed
venture, our team is unsure of what to include in the
financials of our plan that a VC/angel may want to
see. What should be included in a financial plan for a
A. It's hard to answer that without knowing what
industry is being targeted. But in any venture, it's
really important to model the P/L [profit and loss]
and cash flow in a dynamic way.
I always ask my companies to come up with three
things: an "instrument panel" to measure the
performance of the business, a meter on the gas tank,
and a P/L statement that encapsulates changes
to the business on the fly.
It's really important to model your assumptions that
become the basis for revenue and cost structure in
a way that can encapsulate changes as things change,
because you know that they will. Every board
meeting starts with a slide that is a reading of the
gas tank showing the "months of life" left on the
current funding. As the business evolves, having an
instrument panel that helps management get a
snapshot of every key metric driving the business --
sales calls, backlog, churn, etc. -- becomes really
important as a judgment tool to make incremental
In a nutshell, I am assuming that any financial plan
will be wrong. So I'm really looking more for the
thought process and modeling of that process, so that
accurate information exists later on to help
make better decisions.
Q. I'd like to ask you about service offerings in the
streaming video space. There are a few companies
offering Internet viewing services in specific market
segments, such as day cares, small businesses,
etc. Do you see these ideas holding much promise?
A. I am a big believer in that space. I don't yet have
a good feel on the timing of that opportunity,
though. There is no question that in a broadband world
-- where incrementally the cost of such
services is low, and where the access is pervasive --
that the applications layer of streaming media will
grow dramatically. The market is also incredibly
fragmented from an implementation standpoint.
The type of network models you would need for security
as compared with personal broadcast or day
care monitoring are radically different. Some
implementations require more or less multicasting, others
require significantly more or less bandwidth at a
central server, whereas still others require significant
amounts of edge caching. All of these things have to
be narrowed down to their respective
implementations to get a handle on a model that
The billing principles also need to be thoughtfully
constructed, as the user needs will vary quite a lot,
affecting the cost structure. Some implementations
require an "always on" model; others require lots of
real-time storage; and still others require
point-to-multipoint backbones. I think there are tremendous
opportunities, but the real opportunity lies in
sorting all that out and coming up with a business model
that scales and that is efficient.
Q. Mr. Tai treated us very well [during a previous
fundraising effort]. He was very honest and helpful....
Here's my question for Bill: You were quoted as
saying, "The true promise of B2B [business-to-business]
will not be fulfilled unless there is a global trading
fabric that allows frictionless transactions around the
world." It seems that to have success in this space,
the process requires a tremendous amount of
resource and cooperation between strategic partners.
If you were evaluating a business model of this
nature, what keys to success would you look for?
A. Thanks for the nice words. I'm happy to see that
you moved forward with your project and learned
from it. There is no experience that does not build
value for you and your next set of investors, if you
learned from it and handled it with integrity.
As for your question, you are exactly right on your
analysis of my analysis. This can't be done from
scratch very easily. In the business-to-consumer (B2C)
space, Webvan (Nasdaq: WBVN) is taking on
part of the challenge of doing the last-mile B2C from
scratch because they have been able to contain a
high-value part of the problem set. The B2B space is
much more complicated and must be done with
I speak of a "fabric" because I think that in the end
the problems presented are too big to solve alone.
In this case, I would look for a model that has an
anchor tenant to provide a point of traction, and a
customer partnership to drive efficient definition of
what the high-value problems are that need solving.
Q. When asked about founder traits, most VCs that Mr.
Aragon has interviewed in the past focus mainly
on previous management and entrepreneurial experience.
Mr. Tai instead talks about qualities of the
person and their knowledge of the industry. He's also
the first VC I've heard say "markets first, then
people," instead of the usual stuff about how "ideas
grow on trees." Is he the first VC that will actually
invest in someone who wasn't previously a CEO or VP at
a major startup or financial institution?
A. Am I the first VC that will invest in someone who
was not a CEO? At a starting point of a company, I
have only invested in a second-time CEO twice.
Usually, experienced management at the CEO level
comes in later. With respect to a VP-level person,
that is not a requirement in and of itself. But,
typically, someone at that level has the domain
knowledge I am looking for, really understands the
industry structure, and probably has the right people
skills and charisma to bring a team with him or
My tendency toward "markets first" is pretty easy to
intellectualize. I would back any of the CEOs I
work with now with a (small) personal check if they
wanted to build an ice cream store in Alaska, just
because I like them. However, when it comes to
fulfilling my job as a VC for my limited partners, it's
probably a no go, because there just isn't enough
critical mass in terms of size of market to make a real
return [on investment]. You can take a great CEO in a
little space, and she or he will own that little
You can take the same great CEO in a big market, and
he or she can own that big market. I'd rather
make sure the opportunity set is large enough first
before getting in the water. With respect to the
qualities of the people, I have found that if you set
your sights on really big projects, that they are
five- to seven-year projects at a minimum. In such a
case, you had better like the people you work
with because you will go through every emotional state
with them that you do in a marriage.
It's important that the frame of reference and
decision-making processes are similar enough that
decisions can be made together. Without the right team
chemistry at the board level, you're dead,
because there are lots of battles to be fought along
the way. I go into each of my projects thinking
that I want to build something big that will be around
for a while. In an ideal situation, they would be
wonderful companies that grow every year of my life,
and in such cases the relationships I build with
the people would last throughout my lifetime, thus the
emphasis on philosophy and character.
NEXT TIME: There were so many questions for Mr. Tai,
I'll bring him back a third time to get those
queries answered. If you have another question, please
send it in. I'll pepper him with the best ones.
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