[NYT] LA VC Scene: Bilger & Kaplan

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From: Rohit Khare (Rohit@KnowNow.com)
Date: Sun Aug 13 2000 - 11:04:45 PDT


Consider Art Bilger, who used to be co-head of investment banking at
Drexel. In 1990, when the firm filed for bankruptcy, he left to
become a partner in Apollo Management, a buyout shop started by
former Drexel executives. In the mid-1990's, he served a short stint
as president of the New World Communications Group, the television
broadcaster, and later joined Akamai Technologies, the Internet
information delivery service, as a vice chairman. In his latest
career turn, he started Shelter Ventures, a fund that invests in --
you guessed it -- communications and media.

"Los Angeles is a small town on the business side," Mr. Moelis said
in a recent interview. To prove his point, he turned and looked out
the glass wall of his 33rd floor office in Century City and pointed
out several new financial ventures in the row of high-rises leading
to the Santa Monica beaches. "We can almost see each other," he said.
"People know where to make phone calls to make things happen. That's
what kind of place this is."

...

Randall Kaplan, the 31-year-old founder of Jump Investors, a network
of individuals with $50 million to invest in young companies, is the
first to acknowledge that he was in the right place at the right time
when he helped write the business plan for the wildly successful
Akamai Technologies.

"I'm not the most intelligent guy in the world," he said. "But I
don't have to be. I'm a hard worker, and I have a good business gut."
The payoff for his yearlong stint with Akamai included options on an
estimated three million shares of stock -- now valued at more than
$200 million -- and the opportunity to join the leisure class of
young Los Angeles investors who have decided to manage their own
affairs.

But what Mr. Kaplan does best is not what he most wants to be
remembered for: networking. If there is any doubt, consider his
13-page, single-spaced, coded correspondence log from 1995. It is a
who's who of Hollywood finance -- more than 360 phone calls or
meetings -- and shows how organized and determined the young Mr.
Kaplan can be. Still, in a recent interview, he balked at the
comparison, almost with disdain. "I'm not a Hollywood guy," he said.

When Jump takes a stake in a company, he said, he wants to be a
hands-on investor who can influence the direction the company takes.
And that, he contended, "is different than 'let's do lunch.' "

Mr. Kaplan has put about $25 million of his own money into Jump, with
the other $25 million coming from 54 other investors. For the
privilege of being part of the Jump network, participants must be
active investors willing to help entrepreneurs the way a venture
capitalist would.

Among this new class of investor-cum-adviser, said Mr. Moelis at
Donaldson, "the lines are blurring." They emulate venture
capitalists, but are not beholden to investors like pension funds and
colleges who pay them a management fee.

For Mr. Kaplan, a Michigan native who got his start at SunAmerica,
the insurer, under Eli Broad, his new wealth gives him access to
promising companies and the freedom to pick and choose whom he wants
to work with.

"If I called John Doerr, he may not take my call," he said. Then he
smiles, rethinking his answer in light of his recent success. "Well,
maybe now he will."

=======================================================
http://www.nytimes.com/library/financial/sunday/081300biz-lala.html

August 13, 2000
Los Angeles, Back on the Money Map
By LAURA M. HOLSON
 

LOS ANGELES -- For one bright but ultimately fleeting moment in the
1980's, the financial industry here was as hot as Malibu in August.

Michael Milken, the former Drexel Burnham Lambert financier, presided
over an X-shaped desk in Beverly Hills, managing a brain trust that
helped finance the restructuring of corporate America. The
headquarters for two of the country's largest commercial banks,
Security Pacific Bank and First Interstate, anchored the downtown
business district. And the savings and loan business prospered,
offering cheap loans to home buyers and fueling California's housing
boom.

In a place built on the notion that fantasies can be manufactured
with little more than plywood and good lighting, financiers became
the Hollywood equivalent of bankable stars. Even Wall Street was
awestruck by the hundred-million-dollar bonuses and huge fees
generated by the junk-bond legerdemain of Mr. Milken and his minions.

But fame, like natural beauty, can fade. By the end of the decade,
many of the movers and shakers who enjoyed the city's moment in the
sun were burned badly. Drexel declared bankruptcy in 1990; Mr. Milken
served time in prison for securities violations. The major commercial
banks were taken over. And many of the savings institutions, like
Columbia Savings and Loan Association, crumbled under the weight of
too much debt.

In time, Silicon Valley, the center up north of almost all things
wired, grew to a point that, though its only game was venture
capital, it could claim status as the financial capital of the West.

Yet Angelenos have always been adept at reinventing themselves. And
quietly, the city's financial types are trying to do just that. A new
generation of financiers is emerging in Los Angeles, providing
financing in more diverse ways than before.

Fledgling idea factories, called "incubators" because they seek to
grow new companies quickly, are sprouting up from Pasadena to Santa
Monica. Young, wealthy technology entrepreneurs are turning
themselves into angels -- investors who use their own money to back
ideas in which they believe. Even investment banks are growing again.
Morgan Stanley Dean Witter, for example, one of the premiere Wall
Street institutions, has doubled the size of its banking staff in Los
Angeles in the last three years, to 32 professionals, adding bankers
to cover the burgeoning new-media industry.

Most noticeably, the venture capital business has had a facelift. The
number of venture firms based in Los Angeles County has grown
fourfold since 1995, to 32, according to the National Venture Capital
Association.

The money raised, meanwhile, quadrupled between 1997 and 1999, when
it reached $1.34 billion, according to the VentureOne Corporation
which also tracks the venture capital industry. That is much more
than in any other county in Southern California, which raised $5.4
billion over all in the last 15 months. Such numbers probably come as
a surprise to many.

"This level of venture investment will likely transform the
self-image of Los Angeles from an entertainment and defense economy
to an entrepreneurial and technology environment," said Dave
Witherow, chief executive of VentureOne in San Francisco.

Of course, Los Angeles will never rival Wall Street, with its
abundance of brokerage firms, commercial banks and investment firms.
And it is no sure thing that this generation of financial innovators
will have more staying power than the one that preceded it. Already,
a handful of promising endeavors have not panned out.

And some seasoned venture capitalists are playing down the prospect
that Los Angeles will come into its own anytime soon. Sure, Silicon
Valley financiers are making investments in Southern California
companies. But they are not moving here. Instead, they are choosing
to set up new operations in London or, in the case of the blue-chip
firm Kleiner, Perkins, Caufield & Byers, remain focused on start-ups
close to home.

"That is not a decision by omission," said John Doerr, a partner at
Kleiner and one of the most sought-after venture capitalists. While
Kleiner plans to make some investments in Southern California
companies, he said, it has no plans to open offices there.

The Digital Chess Game

An example of the new class of investors that is rising here is
Stephen Rader, a co-founder last May of Clarity Partners, a $1
billion venture firm. For him, the less competition from outsiders
like Mr. Doerr, the better. "This is great to hear," he said,
sounding upbeat during an interview in his ninth-floor office not far
from Rodeo Drive in Beverly Hills. "They figure they can fly in and
do it? Great," he said. "We are across the street."

Los Angeles deal makers have been buzzing about Mr. Rader and his
Clarity team all summer. It seems that almost anyone with a desk, a
pile of cash and a Rolodex can claim to be a venture capitalist these
days, but the Clarity team has experience running companies and, some
industry experts say, promises to be the firm to watch.

Why? Mr. Rader, for one, helped take public Univision Communications,
the Spanish-language television company, in 1996. His partner, Rudy
Reinfrank, has managed investments for the Disney family and Marvin
Davis. Two other partners, Barry Porter and David Lee, who has a
Ph.D. in physics, are founding executives of Global Crossing, a
fast-growing telecommunications upstart with offices in Beverly Hills.

The four are close friends as well as business colleagues: Mr. Rader
and Mr. Reinfrank were introduced by their wives 25 years ago, Mr.
Rader said. In the 1980's, both Mr. Rader and Mr. Porter were
investment bankers at Bear Stearns in New York. "This time is an
inflection point for telecommunications and traditional media," Mr.
Porter said.

Unlike their peers, who have concentrated on one aspect or another of
the Internet, say e-business, Clarity's partners expect to invest in
five areas: network infrastructure, wireless communications, service
providers (like Global Crossing), e-commerce and broadband media.

But besides seeking investments for its own fund, Clarity is
providing advice to media executives who, perplexed by their
inability to crack the Hollywood code, need help navigating the
e-tainment world. "They say, 'You guys are in L.A. What do you think
we should do?' " Mr. Porter said. "They are sifting through this
treasure trove and don't understand the digital environment."

That is especially true in the wake of several announced mergers of
old and new media. "You make a choice like Vivendi-Universal and
there is a finality to it," added Mr. Rader, referring to the
recently announced acquisition of the Seagram Company, which owns
Universal Studios, by Vivendi S.A., the diversified French company.
"This is a chess game and you can see how the pieces are being taken
off the board."

A Financial Culture Clash

It is no surprise that outsiders are vexed by the "Let's do lunch"
crowd. Hollywood hates party crashers and, like the British upper
class, has peculiar customs that preclude success by the uninitiated.
Bryan Lourd, a partner at the Creative Artists Agency, a talent
agency in Beverly Hills, said: "It looks like English. It sounds like
English. But it is a very different way of doing business."

Just ask Matthew Cowan. In 1996, Mr. Cowan, then an executive at the
Intel Corporation and now a partner at Bowman Capital in San Mateo,
Calif., moved into an office at the headquarters of the Creative
Artists Agency to help it set up a technology lab and invest in
emerging media companies. But after a little more than two years, he
packed his bags and moved back home, frustrated with a business
culture at odds with that in Silicon Valley.

His biggest complaint was about the blatant disregard for a
start-up's Spartan budget. First, he said, there was the
entertainment executive who demanded that he have three assistants
along with a private car and driver. The man also insisted on giving
parties that were closer to theatrical productions, with costly
headline bands, than friendly afternoon beer bashes. "You sat there
watching your small bank account dwindling," he said. "It is
upsetting to see so much capital go into people's pockets and not
into building companies."

Further, he added, executives were reluctant to acknowledge failure
-- a badge of honor in Silicon Valley -- and did not learn from their
mistakes. "In L.A. I didn't see a lot of course-correcting going on,"
Mr. Cowan said.

Even those who live and work in Los Angeles are wary of the
entertainment industry's na´vetÚ when it comes to creating ideas that
will sell on the Internet. Greg Martin, an associate at Redpoint
Ventures' offices in Los Angeles, warned: "People in Hollywood think
their taste is better. They think they are funnier. My comment to
that is if you have better taste than me, then I'm not going to get
it anyway."

Finding the New Winners

Still, if there is money to be made in new ventures, financiers are
often the first to figure out how it can be done. And no one has had
a better seat watching the changing Los Angeles financial scene than
Donaldson, Lufkin & Jenrette. A decade ago, Ken Moelis, a former
Drexel managing director who is now head of Donaldson's corporate
finance department, joined the firm with nine Drexel associates in
tow. Since then, the banking staff has grown to 120 professionals. It
is by far the most prominent office of any Wall Street firm here,
including the Goldman Sachs Group, Morgan Stanley and Merrill Lynch.

Los Angeles County has always claimed its fair share of the
California economy; real estate and industrial manufacturing are
predominant. But the mix is changing, Mr. Moelis said, and along with
it, his business. About two-thirds of the revenue from Donaldson's
Los Angeles office now comes from advising technology, media and
telecommunications companies, particularly younger concerns. To
illustrate how the economy has shifted, David Posnick, one of Mr.
Moelis's colleagues, suggested following the career paths of some
Drexel alumni.

Consider Art Bilger, who used to be co-head of investment banking at
Drexel. In 1990, when the firm filed for bankruptcy, he left to
become a partner in Apollo Management, a buyout shop started by
former Drexel executives. In the mid-1990's, he served a short stint
as president of the New World Communications Group, the television
broadcaster, and later joined Akamai Technologies, the Internet
information delivery service, as a vice chairman. In his latest
career turn, he started Shelter Ventures, a fund that invests in --
you guessed it -- communications and media.

"Los Angeles is a small town on the business side," Mr. Moelis said
in a recent interview. To prove his point, he turned and looked out
the glass wall of his 33rd floor office in Century City and pointed
out several new financial ventures in the row of high-rises leading
to the Santa Monica beaches. "We can almost see each other," he said.
"People know where to make phone calls to make things happen. That's
what kind of place this is."

The Incubator Experiment

Four miles from Mr. Moelis's tower, an example of the most recent
business phenomenon of the technological age is tucked away in a
small office complex in Santa Monica: Ecompanies, a factory-like
builder, or incubator, of Internet start-ups. At first glance, it
looks like a typical start-up itself, with concrete floors, exposed
air ducts, the obligatory table-tennis game and a shower stall in a
side room. There is also a surfboard hanging in the lobby, and on one
recent day, the 29-year-old co-founder, Sky Dayton, who also started
the Internet portal Earthlink, dashed around the office eagerly
showing off the stitches in his forehead from a recent surfing
accident.

Incubator is a dirty word on Wall Street these days. Analysts, for
one, are questioning this get-rich-quick approach to building
companies, where entrepreneurs are offered a soup-to-nuts menu of
services that include business development, recruiting and marketing
advice. "So far the incubator model is unproven," said Mr. Witherow
of Vent-ureOne.

As a result, shares in several of those that have already gone public
-- including CMGI and the Internet Capital Group -- are trading well
below their highs. Idealabs, the Pasadena-based brainchild of the
entrepreneur Bill Gross, has also run into trouble. Almost all of the
public companies in its portfolio have stumbled recently, some down
as much as 90 percent since the technology-stock meltdown in April.

Not surprisingly, Idealabs has delayed its own initial public
offering until the market is more receptive. Executives there
declined several requests for interviews, citing the pending offering.

But Wall Street's discomfort with the incubator business model is of
little concern to Ecompanies' other co-founder Jake Winebaum, 41, a
former chairman of Walt Disney's Buena Vista Internet Group. He says
he does not feel pressure to take Ecompanies public anytime soon.
"The rationale for starting this," he said, "was not to start an
incubator." Instead, he added, he and Mr. Dayton want to be efficient
entrepreneurs.

On average, Ecompanies has created one company a month since it
opened last year. But none have gone public yet, and critics say it
has had few successes, with the exception of Icebox, an Internet
content creator.

In many ways, Ecompanies has become its own experiment, changing to
suit the difficult and amorphous investing environment. Recently, the
venture capital arm of Ecompanies has had trouble raising funds,
industry executives said. As a result, Ecompanies is expected to
unveil several partnerships with both old- and new-economy players in
the next week. Mr. Winebaum would not discuss any pending changes at
the company.

He did say is that the past year has been one of lessons learned.
Most important, the strategy group -- Step One in Ecompanies' "Henry
Ford approach" to creating companies -- no longer writes the business
plan for a new concern. That is left to the founding executives, he
said, so that "the idea becomes their own." Second, Ecompanies'
executives have learned not to micromanage start-ups, letting them
succeed or fail on their own. In particular, the venture arm of
Ecompanies is less likely to invest in in-house companies, forcing
entrepreneurs to find their own financing. "If we do too much for a
company then it fails," he said.

He cited Eparties, an online party service inspired by his
grade-school-aged daughter. He said Eparties' executives were
ill-equipped for the rigors of the corporate suite, having been
coddled by Ecompanies' advisers. And Ecompanies, for its part, failed
to recognize that the company could not survive on its own. As a
result, certain Eparties assets were sold to eToys in June for $1.6
million in stock. "It's amazingly like parenting," he said,
reflecting on the experience. "Your child does most of its growth
when it leaves. But when they want to move back in you ask, 'What are
you doing here?' "


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