Internet

Internet/26″/dt1st/mark2nd By JASON BOOTH Staff Reporter Tisno Onggara ruefully recalls the time three years ago when he had a chance to make an early-stage investment in Stamps.com, an L.A.-based company that allows users to download postage via the Internet. “I thought it was a great idea and my instincts told me to do it,” said Onggara, managing partner of Century Financial Partners Inc. But when he found out that the company would need a license from the U.S. Postal Service, he shied away. “I didn’t believe that the federal government would license anything,” he said. In June, Stamps.com went public and its share price is up 300 percent. Meanwhile, Brad Jones, general partner at Brentwood Venture Capital, guessed right on Stamps.com, and today his firm controls 18 percent of the stock. With so many dot-coms to choose from these days, how do local venture capitalists tell one company from the next? Or, more to the point, how do they know what a fledgling Internet company’s potential might be when the marketplace is virtually untested and virtually no one is making any money? A lot of it boils down to gut instinct. But at a time when some of the large venture capital firms are receiving dozens of Internet proposals each month and there’s a feeding frenzy to find the next hot Internet play, that instinct is working on overload. Choose the right company and there are fortunes to be made. Pass up the right company and there’s crow to be eaten. “In the Net space there has become a greater dependence on instinct than in the past,” Jones said. “There is no hard data on many of these companies, so you have to guess whether it will work or not.” By nature, venture capital investing is a hit-and-miss affair. The industry’s rule of thumb is that out of every 10 companies invested in, only one or two will be successes. The rest will either die within a couple of years or stumble along making a moderate profit. It’s too early to tell whether this new model of instinct investing requires greater risk. But the competition to find the next big Internet offering means less time to analyze company strengths and weaknesses. That, and the fact that there is little data to go on, raises obvious questions about a greater failure rate down the road. “It will be interesting to see in five years whether these new funds being started up will still be around,” said Jonathan Funk, general partner at Media Technology Ventures. Of course, the shoot-from-the-hip decision-making process has paid off for venture capitalists, especially because so many start-ups have made enormously successful public offerings. Funk points to his firm’s investment in Trading Edge Inc., an online bond trading firm, back in May 1998. “We had one meeting and instinct told me that this was a well-positioned deal,” he said. Media Technology put $4 million into the company in the initial stages. Today, Trading Edge is valued at around $125 million and seen to have strong IPO potential. But the success of e-commerce companies over the last year has spawned hoards of imitators crowding the desks of local venture capitalists with proposals. “We see every category killer.com,” said Paul Nadel, president of East-West Capital Associates. “Pets, furniture, kids, drugs. We see 10 players in each of these segments, on and on. A lot of these plans have no merit.” When it comes to high technology, the few tangible indicators available usually show that a company or concept isn’t worth the risk. In most cases, they are losing money and will continue to bleed red ink for years. Management is inexperienced and the market undefined. One idea that hasn’t inspired Thomas Gephart, chairman of venture capital firm Ventana in Irvine, are Web sites that allow users to listen to radio stations from around the world. “My wife might use it to check the weather in Sweden,” he said. “But I just don’t think that many people will use it.” But the view of one venture capitalist does not mean a company isn’t going get its money elsewhere. Zone Ventures, the Los Angeles wing of Silicon Valley-based venture capital firm Draper Fisher Jurvetson, has put money behind Internet radio service Rocket Radio Inc. “This is the reason that companies shop deals around,” said Joe Stubbs, a partner who runs the emerging growth and technology group at Troop Steuber Pasich Reddick & Toby. “A lot of times they get turned down because of the perceptions and biases of the venture capitalist.” Sometimes something as unscientific as having the right name can be the difference between getting the money and going without. Nadel said a few companies in his portfolio have considered changing their names because having a “dot-com” has taken on a negative connotation. “If you have dot-com after your name, some people think you are a flash in the pan,” he said. Just as following instincts can make a venture capitalist rich, it can also lead to missed opportunities. MP3.Com Inc., the online music store that last week went public and soared more than 100 percent on its first day, is the latest example of an opportunity that has many VC-ers kicking themselves. While DynaFund Ventures had big scores on eToys Inc. and Gadzoox Networks Inc., it missed the boat with MP3.com. Tony Hung, vice president at DynaFund, said he just didn’t have faith in the company or the industry. “The standard hadn’t been set and we thought it was pretty risky,” said Hung. The bottom line in this hot Internet market is that pretty much anything can be a success, and putting your money on the right horse can be as much a function of luck as anything else. “It comes down to picking what idea will work or not,” said Jones. “Many times it is a guess.”