The Man With the Money

Scott Sandell is racing through the tree-lined streets of the epicenter of Silicon Valley, an hour late for a meeting he arranged.

Waiting for him at an Italian restaurant are executives from an Internet start-up funded by Sandell’s venture capital firm, New Enterprise Associates, and investment bankers trying to elbow others aside and grab the millions in fees for taking the company public.

Sandell, a 35-year-old partner in NEA, wants to use that eagerness as leverage to convince the absent competition, a better-known investment bank, to promise an initial public offering in weeks instead of months.

In an economy full of race cars, it’s the sort of quiet conspiracy that runs under every hood.

Venture capitalists launched Yahoo, Apple and thousands of other firms, pacing the technology-driven U.S. economy and raising a record $46 billion last year. Yet with no regulators or shareholders to answer to, they’re out of public view as they carry out their frantic duties, delivering companies into the world and sometimes killing them off.

A day with Sandell shows that world to be a swirling mix of adrenaline, intelligence and polite but brutal conflict.

He spends it scrutinizing come-ons by CEOs convinced they have developed the Next Big Thing, cajoling bankers and fellow investors, and hashing over high-speed arguments with his partners about the direction of technology.

With just a few hours’ research, he must rely on hunches to invest millions of dollars, which could grow to billions or, more likely, shrink to nothing. All the while, he worries about where the guys down the street are placing their own warp-speed bets, knowing that no one will know who’s right for years.

The entrepreneurs depending on people like Sandell run their own risks, sometimes without knowing it. Executives he has just met stake their entire companies on a bet that he is trustworthy, even though he can have huge, unspoken conflicts of interest.

“It’s incredibly delicate,” says Sandell, who this day faces one such dilemma. “You’re holding their crown jewels in your hand.”

*

The day begins early. By 8 a.m., Sandell and his school-administrator wife of six years have tended to 11-month-old twin girls and he has driven the mile and a half to the two-story NEA office on Sand Hill Road, the Hollywood and Vine of venture capital.

NEA has backed Silicon Graphics, 3Com, Juniper Networks and more than 100 other IPOs and is one of the oldest and largest venture capital firms, with $2.5 billion under management.

Sandell, a mid-level partner, works the first two hours in his second-floor office, participating by speaker phone in a board meeting of one of the 10 companies where he’s a director.

He then joins most of his partners in the main conference room downstairs, slipping into one of the black leather chairs surrounding the table. A partner from the firm’s two Washington-area offices joins via a Starship Enterprise-sized video screen.

Natarajan “Nat” Kausik, one of NEA’s “entrepreneurs in residence,” is seeking money for his own start-up idea. He’s about to pitch the same people he has been working with for months.

What’s discussed next can only be partly described. Sandell allowed a reporter to shadow him for a day in June on the condition that the deals wouldn’t be detailed. The frenetic pace was similar during a second visit in August (see photos).

As the partners turn through the 14 graph-laden pages of Kausik’s business plan, Kausik gives a broad overview of why and where the Web gets congested and then details his plan for a company to develop software to speed some of it. Call it Company One.

Simultaneous queries fly at Kausik about the technology in his prototype, the competition, and whether his business should sell a product or a service.

The partner on the East Coast warns from the video screen that when he was at another business, getting PC users to download software proved a brutal task.

“There is a mental block,” Kausik concedes. He compares his program to the heavily downloaded RealAudio software, which plays recorded music on computers. “Winning the battle is hard. But once you get there, you’re hard to displace,” he concludes.

Kausik projects revenue of $44 million with a small profit by 2003. The partners remain after he leaves. “I came in in a dreadfully grouchy mood, and I still like this thing,” says partner Arno Penzias, a former Bell Labs research chief and co-winner of a Nobel Prize.

A flurry of investment terms are offered up. “What about $4 million for 40 [percent]?” one partner suggests. “If we’re too cheap, he will shop the deal.”

Sandell returns to his office and quickly checks his voice- and e-mail, most of which he will respond to tonight when he’s home and the kids are asleep.

Coming downstairs for another meeting, he runs into Kausik near the cramped kitchen. Kausik raises his eyebrows, the question being too obvious to ask.

“People were very positive,” Sandell starts. “They have some reservations.”

“What kind of reservations?” Kausik asks.

“Mainly, people want to know what kind of a deal to work out,” Sandell says.

Kausik smiles, almost relaxing. “That’s not reservations. That’s greed,” he says. “That’s good.”

*

Sandell’s voyage into venture capital, like most, was unplanned.

Growing up in small-town Connecticut, he wanted to become an engineer. Armed with a bachelor’s degree from Dartmouth College and an MBA from Stanford, he has worked for a software start-up in Europe and a management consulting firm. He was a product manager for Microsoft’s Windows 95, but didn’t like being part of a giant company.

Then, he says, “I got lucky.”

In a series of consulting jobs, he prepared business plans for a variety of companies, including one that wanted money from NEA. After hearing Sandell’s pitch, the firm called and said it wasn’t interested in funding the company. But is was interested in him.

It was a huge gamble for NEA, because investing in a company is a lot safer than investing in a venture capitalist.

A successful partner might strike gold with one company out of 10. Because it can take years to determine which one of 10 companies, if any, will hit it big, it can cost a venture firm $20 million to find out if a new hire is any good.

“In order to keep my job, I figured I had to turn $10 million into $40 million,” he says. He did better than that: A $5-million investment in one of the two software companies that merged to become NetIQ is now worth $116 million.

No one’s record in venture investing is perfect. Sandell passed on Vignette, a maker of e-business applications that is now worth $9 billion, after he and the CEO took turns canceling meetings and annoyed each other.

There isn’t enough time to check out all of the people, their plans and their technology. The most important thing Sandell says he has learned is to listen to the wordless murmurs in his stomach.

“I may do a whole bunch of analysis, but I trust my gut. It’s a repository of information that we can’t access,” he says.

*

At six o’clock, Sandell drives 15 minutes to a company he heard about just a week ago.

The company is seeking a second round of funding and already has struck alliances with better-known companies, a standard step for getting credibility with the rest of the marketplace and funders.

But like Kausik’s idea for Company One from this morning, it turns out to be another Web-page delivery speeder. Call it Company Two. It’s Sandell’s most awkward part of the day.

Sandell asks probing questions about the company’s trade secrets. Not only can he not share the information with his colleague Kausik, he can’t ask questions in a way that Company Two’s executives can detect what else Sandell has been looking at.

Sandell has little time to walk this tightrope. Company Two is meeting other VC firms and could close a deal in days. If NEA is going to fund the company, it will have to decide that at the partners’ meeting in four days.

Sandell asks for references from the company’s customers and mentally tears up his schedule for the next three days.

In his briefcase sit notes on two more companies with still other potentially competing designs, one of which Sandell learned about only as Kausik was talking earlier, when a partner passed him a note.

“Whenever there’s an important market opportunity, three or four companies will show up in your office within two weeks,” Sandell says later. “I’ve got to figure out which one to back, and then convince them to go with us, and then convince my partners.”

Perhaps monthly, Sandell must juggle such conflicts, combining the silence of a priest with the power of a mob boss.

If he does his job right, everyone wins.

Say the two companies turn out to be competing dead-on, and Sandell thinks Company Two is ahead. He would suggest that Kausik do something else, saving everyone a lot of money and eliminating a rival to Company Two.

If Company Two competes only partially, Sandell might suggest that Kausik talk to its leaders and find out if they should team up.

If the two companies’ products don’t conflict at all, no one gets hurt. In this case, Sandell thinks Companies One and Two overlap by about 20%. That’s not enough to stop NEA from investing in both, but enough so that Sandell wouldn’t serve as a director at both.

Sandell says that if he spills the beans on what he has learned, word eventually would get out that he can’t be confided in, and his flow of deals would dry up.

*

It’s nearly 8 p.m. as Sandell quickly drives to the dinner that he had suggested for an NEA company that is getting ready to go public, and a group from what we’ll call Investment Bank A.

Investment Bank A isn’t based in New York, and your grandparents haven’t heard of it. It is one of the co-managers for the upcoming IPO, meaning that it will sell some of the shares to fund managers and will keep some of the profit from the underwriting.

Much more of the IPO deal’s profits--about half--are supposed to go to Investment Bank B, a New York firm that your grandparents know about.

Bank B is getting cold feet about taking the company public in the wake of the market pullback, which hurt other stocks it had backed and its credibility with investors. It wants to wait for more profit.

Sandell doesn’t like waiting. He asked A’s bankers if they would be interested in stepping up and running the IPO. Would they ever: The team threw together a plan and drove down from San Francisco.

The old-school Italian restaurant in which they are meeting has a movie poster from “The Godfather” hanging near the back. The engineers, marketers and money men order pasta, fish and wine.

An aristocratic salesman from Bank A raves about the pre-IPO company’s business plan. He brags about the major investors he could get to attend the “road show,” where the IPO will be presented to institutional investors.

He mocks the way Bank B might push the stock, apologizing for the company’s limited track record.

“I’m not afraid,” he says. “We sell it at 20, it goes up to 25, which is good for everybody, really, and then you rock ‘n’ roll.”

Soon the agreement is made: Sandell and his CEO will go back to Bank B and give it one more chance, telling them Bank A is ready in the wings. Sandell leans across the table and locks eyes with the salesman, speaking deeply and deliberately.

“Irrespective of how this comes out, this will not be forgotten,” he says.

It’s almost 11 p.m. Sandell checks half a dozen messages on his voicemail while heading home.

“Sometimes it’s overwhelming,” he says of his job. “But it never fails to be interesting.”