Heads Down
November 15, 2005
By Sara Smith

Slow and steady wins the race for Woodside Fund

A stereotypical VC enters private investment after a tour of duty at a global tech giant and a few stunning entrepreneurial triumphs. Rick Shriner, a venture partner at Woodside Fund, took a slightly different path. Sure, he put in his time at Apple, Intel, and Motorola. But then, as the CEO of Exponental Technologies in the mid 90s, he presided over a spectacular venture-backed flameout.

"I've done two startups [Woodside Fund portfolio company HotRail Inc. was the other], and I tell you I don't want to do another one," he chuckles. Now when he's vetting potential investments, "entrepreneurs realize we've made as many mistakes as they have, so they can tell us about them."

Chris DeMonico, CEO of portfolio company VeriWave, says, "I don't know of too many CEOs who are successful today who didn't have a few tough times in their career as well. If you're a CEO, that's the nature of the beast." Another portfolio company CEO, John Murphy of Athena Design Systems, says Woodside Fund offers "a lot of complementary skills," ranging from software development operational experience to analytical skills to recruiting savvy. Looking for investors, "you ask, 'Are we working with someone who can help us—or a banker?'" says Murphy. "You want to make sure that they respect you."

A Cautious Approach
During the recent downturn, Shriner says, a glut of unqualified companies crowded the market long after the good ones had found investors. And yet VC firms still had massive funds to spend. Across Silicon Valley, investors battled the temptation to throw good money at bad ideas in the hope that something might stick.

"We saw things coming through the door that didn't make fundamentally good sense," Shriner recalls. "So we set the bar higher and used a disciplined process" to continue to select portfolio companies at a steady pace.

Woodside Fund focuses on early-stage semiconductor and enterprise software startups with unique, technologically promising ideas. Because of process discipline, "we didn't experience the 'bad times' in the same way" as many investors, says Shriner.

"During the bubble in '99-2000, we got flack [from our limited partners] for the perception that we were missing out on the Pets.coms of the world, and that was not comfortable," says managing director Daniel Ahn. "On the other hand, after that fell apart there was a sense of relief that we'd stuck to a fundamental strategy. LPs don't look to us to hit it out of the park or fail miserably; they expect us to deliver consistent returns."

Still, "most VCs are wrong most of the time," he continues. Most firms are happy to see one-third of their portfolio companies succeed, but that doesn't stop investors from making high-risk bets. "Right now the rest of the pack is headed for India, China, and emerging markets."

Meanwhile, things have been heating up stateside. Rumors of a venture resurgence grow ever louder. Shriner holds that the real turnaround came in late 2002 or early 2003. "You're seeing [the results] today, but it started much earlier. Good resources inside big companies were getting frustrated, so they left to go start companies themselves. It generally takes six to 12 months before they start coming through the door, and then three to five months to get them money and get them moving."

Safety in the Early Stage
Some people fret that the larger technology market is headed for another stock bubble. But do the facts on the ground show that there's too much money pursuing too few deals? Ahn guesses that "a lot of dollars and firms are probably chasing companies in the expansion stage. But valuations are so high it's unclear how [investors] will make a return. People are willing to settle for 2X returns on later-stage investments now."

The early-stage market, by contrast, depends less on short-term liquidity plans, so it's more insulated from troubling stock market trends. It's also, as Ahn describes, "a much less efficient market." An investor can't swoop in, throw a few million dollars at a finished product, and wait for the money to start pouring back in. Startups need attention.

"To help an early-stage company, you need to devote a lot of work, experience, and contacts to starting out right. When the business itself might not even have a name, it's hard to raise money," says Shriner. And so within the pool of early-stage investors vying for deals, "it's not necessarily so competitive," Ahn concludes.

Of course, there's no way to quantify competition; research firms such as VentureOne and Venture Economics track only finalized investments, not the number of term sheets and PowerPoint presentations it took to get there. According to VentureOne, seed-stage and early rounds have recently constituted about one-third of all venture deals, whereas such rounds made up well over 50 percent of deal flow through most of 1999 and 2000.

If early rounds have grown less popular over time, that's fine by Woodside Fund. Shriner says that in labor-intensive early-stage investing, "we work hard to get to know [entrepreneurs] very well, very quickly. We get around the table and really talk to them and develop a relationship. So if it's a deal we want, we get it."

Woodside Fund
http://www.woodsidefund.com
Founding date: 1983
Founders: Vincent Occhipinti, Robert Larson, Charles Greb
Funds under management: $330M
Focus: Early-stage investing in enterprise software, semiconductors, and network infrastructure

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