[Financial Times} Guy Kawasaki on Nasdaq's fall and VC's

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From: Linda (joelinda1@home.com)
Date: Wed Jul 12 2000 - 04:53:20 PDT

He makes a rather bold prediction: "In six months' time...the backbone
of the internet will be totally set. All the optical networks decided
and so on. Then e-commerce will explode. Everything that is stone cold
now - e-commerce, content - money will pour into it. That is a safe



Interview: Guy Kawasaki

Garage.com's founder tells Katharine Campbell how the Nasdaq's fall
has affected venture capitalists

Published: July 4 2000 23:16GMT | Last Updated: July 4 2000 23:49GM

When Guy Kawasaki was recently shown around the London headquarters of
3i, Europe's largest venture capitalist, he pulled out his camera and
started taking pictures.

"I have to say I was astounded," says the boss of Garage.com, an online
service that matches entrepreneurs with investors. "Every venture
capital firm I had ever seen consisted of five to 10 very senior
partners sitting around a walnut boardroom table. Here were dozens of
venture capitalists on the phone cutting deals."

Unlike many Silicon Valley entrepreneurs, Mr Kawasaki is not convinced
the West Coast way of financing start-up companies is necessarily the
best. To its detractors, 3i may be an inflexible, large organisation
- with less-than-photogenic offices - that fails to give entrepreneurs
the hands-on assistance for which the small partnerships on Menlo Park's
Sand Hill Road are famous. But Mr Kawasaki sees something else: "I no
longer believe things are right or wrong. They either work for you or
they don't."

It was a perception that the Valley was failing a certain kind of
entrepreneur that inspired Mr Kawasaki, a 47-year-old former
"evangelist" at Apple, to set up Garage in October 1997. "I wanted to
democratise the process. I saw it had become very difficult for people
with good ideas who didn't have a pedigree or pre-existing relationships
to get [funding]."

The Valley's very success was reducing its efficiency, he argued.
Venture funds were getting ever bigger, which meant that individual
deals had to be larger. That suggested an opportunity in helping people
raise more modest sums.

Venture capitalists were duly sceptical of the model at the outset.
"They said we would only get the deals that [didn't deserve funding].
Yes, they said all the things you would expect an entrenched system
would say to a newcomer."

But Mr Kawasaki, who is to be found at 5.30am three times a week playing
basketball with leading Valley venture capitalists and investment
bankers, saw "the thing maturing very fast". Now most of the best-known
firms are among the 2,000 investors to whom selected entrepreneurs can
show their business plans on the Garage website.

Garage, which has helped more than 50 companies find about $130m, filed
for an initial public offering this year. But that was before April 14,
the day Nasdaq lost nearly 10 per cent of its value. Even Mr Kawasaki,
an irrepressible individual who wears a permanent smile, acknowledges
the impact of that sudden change in investor perception.

"Until April 13, if you had buzz, you got the money and then you figured
out the business model. Today if you have the business model, you get
the money to build the buzz. It's the exact reverse."

You also need to prove you have "a sustainable unfair advantage . . .
what you are trying to do is create an unlevel playing field for

Other calculations have changed dramatically, too. While people could
hope to take a start-up to IPO within 12 to 18 months, they must now
reckon with the process taking three to four years.

So, yes, the mood is subdued. There are fewer "hallucinations", he says.
"But things in the Valley are never as bad - or as good - as they seem."

Venture capitalists are still investing. But they are more selective,
and are putting even more money behind chosen companies: "Before,
a $1bn fund would put $10m into 100 companies. Now they are backing
30 companies at $30m apiece".

Firms are also once again displaying their well-developed herd instinct,
says Mr Kawasaki: "The argument has always been, Benchmark [a leading US
venture firm] has a pet supply play, Kleiner Perkins [another top tier
firm] has a pet supply play, so we need a pet company."

Another thing that irks him is the importance venture capitalists attach
to the size of an entrepreneur's prospective market: "This is something
that is rather difficult to answer when no market exists. If you had
asked Marc Andreessen [in the early days of Netscape] how big his market
was, I wonder what he would have said."

He tends to think business angels are much more visionary: "They take
realrisks." Garage's angels include Ben Rosen, chairman of Compaq,
and Sandy Robertson, co-founder of Robertson Stephens, the technology
investment bank.

The venture firms have gone overboard on science, he thinks. But that
will not last. He believes it may not be long before everyone decides
that the business-to-consumer investment wave was not misguided at all
- only premature. In six months' time, he ventures, "the backbone of
the internet will be totally set. All the optical networks decided and
so on. Then e-commerce will explode. Everything that is stone cold now
- e-commerce, content - money will pour into it. That is a safe

What happens to Garage if there is a more prolonged downturn? Can an
entity born at the height of the most bullish of bull markets survive
more sober times?

Perhaps conveniently, US securities regulations relating to the
prospective IPO severely constrict what Mr Kawasaki can say about the
business's future prospects.

One answer to difficulties in the US is Garage's growing international
network. It opened an office in London in January, and is present in
Israel. But Mr Kawasaki has a different reply. "In a down cycle,
investors will be more careful, so they will want to look at more
pre-screened deals," he says, unconvincingly.

Then, altogether more convincingly, he adds: "Look, I'm an optimist. You
give me a scenario and I'll tell you why it's good for Garage.com."

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