Playing matchmaker, SiliconValley style

VCs are having trouble finding suitable startups to fund with their millions
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The Independent Online

MATCHMAKING IS suddenly a big deal here in SiliconValley. Its mating rituals are, like everything else here, a bitdifferent from what you'd normally expect.

MATCHMAKING IS suddenly a big deal here in SiliconValley. Its mating rituals are, like everything else here, a bitdifferent from what you'd normally expect.

One couple I know of met inthe fast lane on Route 85, which bisects Silicon Valley from east towest. He, in a BMW, spying her in a Lexus, flashed fingerssequentially to broadcast his mobile phone number: she dialed, theytalked, they pulled off at the next off-ramp. Then blissensued.

But I'm not writing about that kind of matchmaking - theusual boy-meets- girl (or girl-meets-girl or whatever)stuff. Nope, we're talking about a brand-new Darwinian nichethat's sprung up here in the Silicon Galapagos. When we're not busyinventing the Internet IPO, we're out there building really crazystuff.

Some background: there's a big problem here in thevalley: not enough venture capital-backed companies are failing.Worse, the ones that are succeeding are succeeding too well. Even morepreposterously, some of the failures are producing huge financialgains.

Take Netscape. Most observers pronounced its sale to AmericaOnline a "failure" since they didn't beat Microsoft for Internetsupremacy. However, one local venture-capital firm is believed tohave realised $400m for its stake, which initially cost just$4m.

So, with failures paying off at 100-1, it's nowonder that there are huge piles of cash around. Most of these folks havesomething like 100 times the amount of money that they had four yearsago.

Now, since the basic VC business model calls for keeping all oftheir available capital invested all of the time, this means that they'rehaving a real problem keeping all of that money invested in future Netscapes,or, even better, successful companies.

One problem is staffing.There are lots and lots of business plans floating around - for everypotential Netscape, there may be 10,000 less-than-Netscapes(and remember, Netscape "failed"). A lot of VCs nowrequire one-page business plans, and schedule 15-minute meetings,but it's still not making up the gap.

Anyway, VCs only like to beassociated with success; so, even though they can afford lots offailures, and even though many failures will return profits, theydon't want to do them because it looks bad.

Another issue is that,try as they might, VCs haven't been able to recruit people as fast asthey've recruited profits. This means that they can only do so many dealsa year, which, in turn, means those have to be bigger deals ifthey're to stay fully invested.

Thus, startups such as pets.comreceive $30m in funding (and its two competitors, Petopia andpetstore.com, didn't do badly, either). So, the easyanswer to the VCs dilemma is to just do bigger deals.

There are a coupleof problems with this strategy, however. One is that, when you'remaking $30m investments, versus paltry $3m and $4m antes, youhave to be a lot more careful. You have to check out the concept verycarefully, and the team even more carefully. So the deals take moreeffort to put together, and this further limits the number of deals even thevalley's notoriously hard-working VCs can do.

The other problem isthat most phase-one startups, even the good ones, don't oftenneed $30m. When a company first comes together, the founders usuallyhave a concept and a technology that's been proven in principle. Whatthey need is a small, innovative team and a quiet place to work; thebetter to refine things and work out the best way to go about making money fromthe technology.

Small companies don't need to be worried about thelogistics of managing tens of millions of dollars. They want to be free tofocus on getting their ideas right.

So, if the VCs can't do smalldeals any more, how is this mighty Silicon Engine to continue nurturing thecrazies-from-the-garages who are thefoundation of Silicon Valleyinvention?

Enter the matchmakers. Matchmakers are typically savvySilicon Insiders, often people who cut their chops by bringing a startup orthree to a successful IPO and who specialise in scouting for The Next BigThing.

Matchmakers pan the Silicon Valley grit looking for goldennuggets. When a matchmaker finds a potential winning idea and team, shegoes to work; simultaneously finding money and coaching the nascent team.Money means the principals can leave their day jobs and work full-time on thedream technology. Coaching means that the team will be directed to finduseful and profitable uses for that technology, and will learn how to presentits benefits clearly to potential investors.

Guy Kawasaki is among thebest-known matchmakers. His startup, garage.com, justreceived $12m in funding from local VCs, who appreciate the service.And how did Guy get his dot-com going? He went to another valleymatchmaker, Heidi Roizen!

cg@gulker.com

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