Venturing--Realistically
Brentwood Associates, L.A.’s premier venture capital firm, has $55 million waiting to fund brilliant new business ideas for the 1990s.
But like other investment firms, Brentwood is taking a much more disciplined view of what constitutes “brilliance” these days. In the late 1980s, many big ideas didn’t pay off for venture investors as they expected. So money is tighter, and more entrepreneurs are likely to go begging.
In 1989, venture capitalists invested $3.3 billion overall, an 11% drop from 1988 and 15% less than 1987’s record $3.9 billion, says Venture Economics’ monthly Venture Capital Journal in Needham, Mass.
Still, venture financiers aren’t sitting on their wallets. In fact, “There’s much more emphasis today on us going out and finding opportunities, rather than waiting for them to come in the door,” says Brentwood partner Roger Davisson. Brentwood hunts for entrepreneurs at new-industry conferences, through executives at major companies who have contact with new products, and via networking with other entrepreneurs.
Brentwood invests nationwide, but it hopes to put a substantial amount of its venture dollars into Southern California enterprises in the early ‘90s. Medical technology in Orange County is a key focus of the firm, but Brentwood hopes that other hot business ideas will emerge from the Southland during the next few years.
“There has been a legion of brilliant entrepreneurs in Southern California, but they all became real estate developers,” Davisson says, only half joking. That business doesn’t lend itself to venture financing.
But real estate here is unlikely to be the boom business in the ‘90s that it was in the ‘70s and ‘80s. That--and the layoffs of many talented aerospace workers--could lead to a wave of business start-ups in new fields, Davisson says.
David Chonette, another Brentwood principal, notes that “it was refugees from aerospace who originally spawned the medical technology industries in Orange County” in the 1970s and 1980s.
What does it take for an entrepreneur to attract a venture investor in 1990? Davisson says his firm wants to see strong management, a significant technological advantage in the product or service and a “very significant market opportunity”--a market at least several hundred million dollars in size.
Those criteria haven’t changed much from the ‘80s. What has changed is that deal makers want to see entrepreneurs take a more realistic view of venture financing--especially regarding the stake in the business that the entrepreneur will have to give up and regarding the changes the financier may suggest in the business plan. “People who are unrealistic are going to be more disappointed now than ever,” Davisson says.
Entrepreneurs may view venture money as cash to fund more risk, for more potential reward. But “the spending of venture money should be to lower the risk,” Davisson says--to get the initial product out, for example, or to strengthen the management team to guarantee the company’s long-term success.
Entrepreneurs should recognize that venture capitalists can bring more than money to the party, Davisson says. Experienced financiers can bring market contacts, a better business plan and the knowledge of how to recruit the right key employees, he says. Finding the best managers is a constant challenge, Davisson says. The right product is one thing, but before Brentwood commits its investors’ dollars, the firm wants to be sure that the managers running the company can get the product to market, and manage the bumps along the way.
Currently, three young companies that Brentwood is considering financing all need strengthening of management, the partners say. “There are never enough good managers around,” Davisson says.
The venture financier’s ultimate goal, of course, is to sell the business in two to seven years for a fantastic sum, either to another company or to the general public via stock. Although some independent entrepreneurs may cringe at that idea, it’s the reality of the business--and it’s the way entrepreneurs become millionaires, too.
Briefly: The average stockbroker earned $78,711 in 1989, up 10.4% from $71,309 in 1988, the Securities Industry Assn. says in a new report. The earnings rise was the first since 1986, when the average figure peaked at $97,100. The 1989 increase was helped by a turnaround in broker earnings at regional firms, which tend to concentrate more on the average investor than major Wall Street houses. . . .
L.A. brokerage Bateman Eichler, Hill Richards has pulled its “buy” recommendation on Paramount Communications, citing weakness in the company’s summer movie menu (mainly “Days of Thunder” and “Another 48 Hours”). Analyst Paul Marsh also lowered his fiscal 1990 earnings estimate to $2.30 a share from $2.72. Paramount stock has fallen to $40.75 from $52.875 earlier this year. Meanwhile, Dean Witter recently initiated coverage of Paramount. Analyst Alan Gould rates the stock a “hold,” noting that the big question regarding Paramount remains the same: What will the firm do with its $1.1 billion cash hoard? . . .
“An Investor’s Guide to Reading a Mutual Fund Prospectus” is available free from the Investment Company Institute, the fund industry trade group. Write: ICI, 1600 M St. N.W., Washington, D.C. 20036. . . . Rotten Timing Award: A Salomon Bros. research report dated June 22 was headlined, “Why the Fed Will Resist Easing Anytime Soon.” The Federal Reserve cut market interest rates three weeks later.
