Like many venture capitalists, Brad Jones has plenty of money to invest in promising start-up companies in 2003.
But also like many of his VC peers, Jones is in no great hurry to put that money to work.
The 47-year-old is a founding partner of Redpoint Ventures, one of Southern California’s largest venture firms. Redpoint, formed in 1999 when it was spun out of Brentwood Venture Capital, is working its way through an experience widely shared in the business: The technology-focused firm has ample capital to put to work -- $450 million left in a fund to which investors committed $750 million -- but it is going slow in the aftermath of the tech sector’s deep slump.
Even so, Jones sees substantial promise in such areas as wireless data communications and network security, and he expects the stricter environment for venture investing today to result in a stronger, more seasoned roster of private firms selling stock to the public in the future.
Jones spoke with The Times last week.
Question: Venture capital firms raised record sums in the late 1990s, but there’s a lot of second-guessing today about how the money was put to work. What happened?
Answer: Everyone made mistakes. In the VC business, what we did wrong was investing in companies that looked sexy at the time but didn’t have the attributes to be a sustainable business. Sometimes you knew the business model was shaky but you saw other companies going public with $1-billion or $2-billion valuations -- and they had even shakier business models.
On the limited-partner side, returns were so astronomical for a while that they were pouring in money at a huge rate -- too much, too fast.
That’s corrected itself. Anybody who doesn’t believe in capitalism ought to look at how the system gets rid of the excesses. Everyone is investing more carefully. You see headlines about how VCs are chicken now, but that isn’t necessarily bad. It doesn’t help the economy if you’re investing in a lot of companies that are going to fail and end up throwing people out of work.
Q: What is the effect of the new venture environment in terms of your approach and the attitude of the entrepreneurs you work with?
A: Valuations of companies are far lower, so we’re able to buy the same size stake for less. For entrepreneurs, the downturn might sound bad but it’s really not. What was happening a few years ago was not sustainable. Money was so cheap and available that entrepreneurs were spending it recklessly.
Now, entrepreneurs are more careful and they’re getting more for their money. It might have taken $30 million to develop their products a few years ago, and now it takes $15 million.
Also, fewer companies are being funded, so that removes competition. You might be facing one or two or three other start-ups [in your industry], but not 10.
Q: You originally planned to raise and invest $1.25 billion through your second fund but scaled back your plans to $750 million. Why?
A: Our pace of investment was slower than we thought it was going to be -- and slower than it has been historically for us -- because it’s tough to find great deals these days. We want to invest over a reasonable time period -- four years or so -- because if it gets to be too long that can hurt the returns of the fund.
Q: Where did Redpoint invest this year?
A: The only Southern California investment we made was in Telasic Communications, an El Segundo company that makes chips for wireless communications. Telasic is run by a team spun out of Raytheon and it has an interesting technology that should lower the cost of building wireless systems. It might be able to get its first product to the market in 2003.
Redpoint also invested in five tech companies based in Northern California this year, primarily in the software and wireless areas.
We’ve averaged 15 investments per year, if you look at the combined history of Brentwood and Redpoint.
Q: What’s your outlook for 2003? Will the pace of venture investing depend on whether the stock market recovers after enduring three straight losing years?
A: The stock market and the initial public offering market are important, but they won’t necessarily affect the VC market immediately. First of all, the IPO market may not return even if the stock market goes up. There is a cascade effect, but it takes time.
The funding slowdown has taken the pipeline of IPO candidates away, and the criteria set by the underwriters have tightened. People want to see a couple of quarters of profit, whereas in 1999 and 2000 a lot of companies went public without even having a product.
For venture capital, I don’t expect 2003 to all of a sudden go from a slow deal year in 2002 to a return to the late-1990s heyday. I see 2003 as a year when the VCs will invest with a lot of scrutiny, which will position them for a lot of good IPOs in future years.
Q: What are the hot tech areas you’re watching?
A: One is wireless data communications such as 802.11, also called Wi-Fi or wireless fidelity. Another big area is 802.15, or ultra-wideband. You can see why people use the nicknames -- so they don’t have to remember the numbers [which refer to standards set by the Institute of Electrical and Electronics Engineers, an industry group].
These are fairly short-range networks for a home or office where you connect wirelessly and cheaply at high speed.
There are all kinds of potential applications. Business travelers could go online at airports. In home entertainment, you wouldn’t have to have coaxial cable running all [over] the place inside the house [to connect various devices].
But there are also a bundle of issues being sorted out, including how all the fragmented people who own the networks get paid. There are also all kinds of security issues, because you could be sending important information out there.
Q: Do you expect any Wi-Fi companies to go public in 2003?
A: One Wi-Fi company in our portfolio is Trapeze Networks [based in Pleasanton, Calif.], but it’s a little early. I don’t think the company is ready to come public in 2003. Wi-Fi is a year or two behind DSL and cable modem in terms of catching on -- at this point, only the very early adopters are using it.
In 2003, we’ll see more use by business and consumers, but the companies are not mature enough to meet the current standards for going public. If demand for IPOs improves, that could change, but I’m more inclined to think we could see Wi-Fi IPOs in 2004 or 2005.
In 2003, we’ll see a lot of growth in the industry and we’ll probably see more companies getting started.
Q: What other industries are you watching closely?
A: There is a lot going on in the [network] security area: software that screens users; intrusion detection; and the Web-services area -- for example, allowing people remote access to a system and letting them run parts of a program.
Take the accounting system at General Motors. You might want to let customers see how much inventory is in the system, but you might not want to let Company A, which makes exhaust manifolds, rummage through and see how many side doors you have.
Redpoint does not have any pure security companies in its portfolio, but we have several that have security as part of their application. In the future, almost every software company will have to adopt a Web services model that includes security as part of the application. Companies want to be accessible to customers and suppliers, but nobody wants that access to be unlimited.
(BEGIN TEXT OF INFOBOX)
About Brad Jones
Before launching Redpoint Ventures, Jones was a general partner with Brentwood Venture Capital (and its predecessor, Brentwood Associates), which he joined in 1981, when venture capital was in its infancy. Jones earned degrees in chemistry and physics from Harvard University and an MBA and a law degree from Stanford.
About Redpoint Ventures
Redpoint, founded in 1999, raised $600 million from investors for its first fund in that year. In 2000, the firm formed a second fund, through which it initially expected to raise $1.25 billion. But with the slump in the technology sector, Redpoint said it reduced the size of the second fund to $750 million, of which $300 million has been invested.
Between the two funds, the firm has investments in about 40 companies.
Redpoint has offices in Los Angeles and in Menlo Park, Calif.