Show me the money

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Everyone wants to be a VC. That was the catchphrase last year when Internet-finance mania hit its peak. Venture capital firms bulging with cash plowed billions of dollars into start-ups. Being a VC partner was the power job of the moment.

The Internet marketing business hasn't been immune to the siren song of money and power. During the past few years, a number of the industry's brightest stars -- including at least 10 of Advertising Age's 112 past Digital Media Masters (which last year was renamed i.20) -- are working at VC firms acting as private investors.

Among the i.20 players who have made the trek from i-advertising and i-marketing to Internet finance:

* Mark Kvamme co-founded Silicon Valley tech agency CKS Partners, merged it with USWeb and then took off for Sequoia Capital last year.

* Rich LeFurgy, chairman of the Internet Advertising Bureau and a former executive at Walt Disney Co.'s Buena Vista Internet Group, became a partner in WaldenVC.

* Jake Winebaum, a longtime Disney executive, co-founded eCompanies, an incubator/VC firm.

* Jim Savage, who was general manager of ZDNet and CEO of online calendar company PlanetAll, now runs his own firm, Longworth Venture Partners. .

* Bo Peabody, who created online community Tripod and sold it to Lycos for $58 million, joined with a college buddy this year to set up Village Ventures, which finds and funds start-ups in U.S. college towns.

* Chip Herman went from running marketing at Microsoft Corp.'s WebTV Networks to investing in companies at Trinity Ventures.

* Andrew Anker, co-founder and former CEO of Wired Digital, was one of the earliest in the bunch to sign on to the VC world, leaping to August Capital in 1998.

GREATER REWARDS

It's no wonder the executives wanted a piece of the action. Venture capital investments in the U.S. last year reached a record $48.3 billion, an increase of 151.6% over 1998, according to the National Venture Capital Association. Internet-related companies drew $31.9 billion, 66% of that total. NVCA does not make projections.

How good are these former i.20 executives at being investors, particularly now that the Internet finance craze has downshifted? Ad Age decided to check in and see.

The short answer is: It's too early to tell. Since venture investing is generally a three- to seven-year cycle involving several rounds, most companies in the portfolio of a relatively new VC are still in the process of growing and raising money. Until a company is acquired, takes its stock public or folds -- it's difficult to determine an investment's overall success.

"There are a lot of similarities to the agency business," says Mr. LeFurgy, who began his career at a New York ad agency. "You work with a handful of businesses that really matter to you, with personalities and individuals that really matter to you, and you're intimately involved with the details of the business. The differences [in the VC business] are that the stakes are a lot higher, the rewards are a lot greater and the entrepreneurs don't necessarily play by the rules of the traditional business world."

`READY, SHOOT, AIM'

In the start-up world, Mr. LeFurgy says, "it's ready, shoot, aim and business models change rapidly and it's difficult to keep up."

There's also the challenge of changing from running one department or company to being involved with several companies at once. Typically, a VC will invest in several start-ups and often will take a seat on each company's board.

"Someone made the analogy that being a president or CEO [of a company] is like being a parent, and being a VC is like being a grandparent," says Mr. Kvamme, who sits on the boards of six Internet start-ups. "You can give advice, but you don't run the company. You have to persuade them and that takes a little bit of time getting used to."

Some don't have the patience for that. John Danner, who sold Internet ad firm NetGravity to DoubleClick last year, gave up his months-long stint as an angel investor when he found a company for which he wanted to do more than merely hand over cash.

"I'm the bad example -- somebody who sold his company, thought he'd be an investor, but couldn't keep his hand off the steering wheel," Mr. Danner says.

DODGING BULLETS

After putting about $500,000 of his money into business-to-business Web services start-up Allibra, he became its chairman-CEO earlier this year.

VC investing has a steep learning curve, demanding that a person be able to foresee future developments in a particular business area, move quickly to make an investment before others do, and be able to defend that investment decision to partners and investors if things go sour.

In today's rough-and-tumble business climate, where a spur-of-the-moment decision can as easily be a huge success as a crashing failure, perhaps the finest art of being a VC is to look back on deals passed up with a sigh of relief.

"I came very close to spinning out the [online] business from Jenny Craig," says David Carlick, a former executive with Poppe Tyson and PowerAgent who's now a partner at VantagePoint Venture Partners. "What looked like a good idea in March looked like a bad idea in May. I feel like I dodged a bullet on that one." (Jenny Craig's site remains a wholly owned arm of weight-loss operation Jenny Craig Inc.)

For every sigh of relief, there are plenty of black marks on a VC's record. Not every new company launched is going to hit a home run and most companies, particularly Internet start-ups, go through numerous business-plan revisions. With the change in the financial climate from 1999 to 2000, nearly every Digital Media Master who has become a VC has had to weather several crises at portfolio companies.

"We are early stage investors," says Jake Winebaum, who cofounded eCompanies, an incubator and VC firm, after a long career starting and running media businesses at Walt Disney Co. Of the 28 companies in which eCompanies has invested or founded, "not every company has done exceptionally well," he admits. "There are some that are doubles and triples, and some that may not make it."

ECompanies' first venture, eParties.com, failed as a standalone business; eToys bought it for a fire-sale price of $1.6 million.

Mr. Winebaum thinks some of its successes will be Business.com, a business portal and search engine; Icebox, an online entertainment company; and Xdrive, an online digital storage company.

Mr. LeFurgy has definitely tasted the downside at Walden.

Portfolio companies include AllAdvantage.com, a company with a pay-to-surf and sweepstakes business that pulled its IPO and laid off staffers this summer, and Snowball.com, whose stock has sunk from an IPO-day high of $15.31 in March to a recent close in the $1 range. It also has laid off dozens.

"We weren't really looking for huge wins and cash-outs at this point in time," Mr. LeFurgy says in assessing the success of Walden VC's investments, which include the more successful Lot21 Interactive Advertising and FizzyLab Corp., a Web services company. "We're an early stage fund. We have a three- to five-year time horizon and we're still building these companies over time."

SOME FAILURE INEVITABLE

Tony Hsieh, who helped to launch LinkExchange, a banner ad network Microsoft bought in 1998, opened early stage investment firm VentureFrogs with a partner in March 1999. Several of VentureFrogs' investments have not fared well. Affinia, a call-center site, folded this summer, while BBQ.com, a barbecue supplies and equipment site, shuttered its site and is trying to sell its remaining assets.

And among some entrepreneurs, the opinion of VentureFrogs, which got a lot of media attention earlier this year for opening a restaurant in its office building, is distinctly unsatisfying.

"VentureFrogs became the joke of the venture community when it started a restaurant," says Jad Duwaik, CEO of Greenhouse for Startups, a networking organization for entrepreneurs and investors. "The only common characteristic between restaurants and start-ups is their rate of failure."

Mr. Hsieh didn't respond to requests for an interview.

Accepting failure is a necessary skill among VCs. Says August Capital's Mr. Anker: "There's not a single investment I would take back. There's definitely a couple of winners in the group and no doubt ones that won't go out as planned, but that's the name of the game."

The small-VC firm's portfolio companies include Guru.com, a site for independent professionals; ImproveNet, a home-improvement site; Listen.com, a site for new music; and Topica, a site that connects people to e-mail groups.

CREATING NEW MODELS

Some newcomers to the VC business are attempting to create new investment models. Mr. Peabody's Village Ventures manages a network of local venture capital funds in areas such as Worcester and Berkshire counties, Mass.; Providence, R.I.; and Nashville, Tenn. So far the network has invested in six start-ups.

"I still consider myself an entrepreneur," Mr. Peabody says. "I understand entrepreneurs. I know what it's like to pitch VCs. I know what to look for. I know what's bullshit and what isn't."

Mr. Savage, the former ZDNet executive, says Longworth, his boutique firm with three partners and $20 million under management, can provide more focus and attention to start-ups than VCs with huge investment funds. The company has invested in eight start-ups and Mr. Savage acknowledges that he's still trying to figure out how to divide his time.

"The time-management challenge has been the single biggest adjustment," he says. "I'm trying to work closely and add value across four companies I sit on the boards of, while looking at new deals and trying to build our own company."

CONNECTIONS A PLUS

For executives who leaped from marketing and media-oriented careers to venture capital, the key to success is being perceived among start-ups and other investors as smart financiers, not just marketers. It's a transition some executive recruiters say not everyone can make.

"Marketing is not the only additive that will make a company successful," says Stephen Combs, chief recruiting officer for Venture Mill, a venture operating company that provides services to start-ups and is backed by well-known VC firms Accel Partners and Bessemer Venture Partners. He says less than half and possibly as low as 20% of executives with marketing backgrounds who have joined VC firms will be successful ultimately. It's a thought echoed by recruiter Ken Virnig of search firm Devine & Virnig.

"I think two years ago people that came with an advertising, branding or consumer marketing kind of operating background were much more in demand in venture circles than they are today," Mr. Virnig says. With diminished investor interest in the business-to-consumer companies, consumer marketing expertise has been less in demand.

For that reason, executives with CEO-level expertise may be more successful as VCs than people who were VPs of marketing or had mid-level management responsibility. Another benefit: connections. Several recruiters cite Mr. Kvamme as having the most long-term potential of the group. Not only did he run a successful Internet venture, but his father, Floyd Kvamme, is a longtime partner at Silicon Valley venture capital institution Kleiner, Perkins, Caufield & Byers. His father-in-law, Pierre Lamond, is a partner at Sequoia, where Mr. Kvamme works.

`BETTING ON PEOPLE'

"He's brilliant. He started his own company and he understands the big picture," says Karen Turrini, who runs executive search firm Karen Turrini. "To me those are all the requirements that make a good VC."

The other valuable credential for VCs: being able to spot and inspire talent. VC investing is as much, if not more, a people business as it is a money business.

"You're betting on people," says August Capital's Mr. Anker. "The industry we are involved with is all about people," he says. "As I look at my portfolio now and the [companies] that are working well and less well, I can always trace it back to strong people."

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