Venture funds returning to technology entrepreneurs: D&T executive sees VCs rebound from dot-com trauma.

Most observers see a limited return to prosperity in the technology sector. With this return will be a re-assertion of entrepreneurship that has been muted by the lack of available venture funds. While the level and generosity of investment will be unlikely to match the levels that existed before the dot-com bubble burst, the question has been asked whether venture activity will come back to a technology industry, that has disappointed investors and VCs alike.

Editor-in-chief Mark Ferelli contacted Mark Jensen, national director of venture capital services for the Technology, Media and Telecommunications Group at Deloitte and Touche, where he focuses on venture capital firms and venture-backed companies. Jensen has worked with venture capital firms in structuring investments, large multinational fast-growing technology companies, as well as development-stage enterprises in structuring transactions and financial reporting matters.

Let's start with what you do at Deloitte and Touche. You're National Director of Venture Capital Services. What does that involve?

That involves services to the venture capital industry, so we provide services to venture capital firms that are usually audit- and tax-related services--and also, probably more importantly, our services to venture-backed portfolio companies. So, our focus is on the early stage company, if it is backed by venture capital firms. And we have a specific program which we have branded the "accelerator program" aimed at coaching and supporting the early stage CEO.

We have a number of new businesses and early providers among our readers so this ought to be a good match. Let's start with the first question: I'm detecting that the VC funding in the tech sector is on the increase, correct?

From last year, it is clearly on the increase. We're definitely not at the '99-'00 levels, but I think that we're at a very good level, from a historical perspective. In 2003, for the first half of the year there were 866 deals funded with a total of 7.5 billion dollars being invested. So if you annualize that, it puts you at a rate that's somewhere around the '96, '97, '98 average timeframe. That's generally the kind of activity level we're at. I think that if you go further back than 1996, what you see is that this investment activity level is actually pretty good.

So we're getting to a point before the artificial inflation and collapse created by the dot-com dot-not.

I think that is exactly what is happening. We have reverted back to when the industry was pre-bubble. Hopefully, we'll continue to see the industry rise.

But now that more than one VC firm from every size from large to medium to small has been bitten by the collapse of the artificial bubble, would it be fair to say that it's harder for a VC company to garner the attention that it needs to be funded?

That's a good question. I don't know that I would ever use the word easy or necessarily hard when it comes to getting venture capital investors. Because I think that what you're dealing with when you're trying to find venture capital is you're trying to find someone that is knowledgeable about the space that you're in. And I think that a lot of people miss that because a venture investor who knows semiconductors doesn't necessarily get to do deals with, for example, enterprise software. They don't know the industry and they don't know the business. I think that you've got to be in an area that a venture capital investor is interested in and it's got to be a space where they believe that there's a huge opportunity. What entrepreneurs are finding is that there are fewer of those areas. And so because during the dot-com era there were a number of things that opened up--computer products, c-commerce, selling in the electronic world--a lot of venture investors were starting to move out to fields that they weren't necessarily experts in and a lot of areas became saturated. I think that it is harder for the investor only in the perspective that there are fewer areas of interest. If you don't happen to be in one of those areas, you're going to be told "no" a lot. But I don't think that means it's harder. I think it just means there are fewer opportunities to find that right match out there.

What kind of technology companies are getting funded right now?

Well, good ones [chuckle]. If you look at what's hot today, I think any setting that deals with productivity improvements. And that's really where I see the real opportunity--in the area of productivity improvements. I think that there clearly are some huge opportunities in front of us in the life science area and we're starting to see that. We're seeing huge opportunities in semiconductors. We're seeing a lot of opportunities in that area.

Little Intel wannabes out there?

Not that kind of stuff. Semiconductors for special purposes. Unique designs in the Telecom sector. Things like that. I still think that there are a lot of opportunities in the software. We see a lot of companies that are new products in that area and there's a lot of opportunity there. I think that all you have to do to see the opportunity is look at all the product announcements out there by Oracle, Microsoft and Apple. You start to see that we're just starting to scratch the surface about what software is capable of doing today. So I still think that there's huge opportunity out there for software. The areas where I think that things are not hot will continue to be in areas that I would call e-commerce, consumer products--things of that nature. Because, fundamentally, those are not technology hut rather marketing. You don't want to be an investor in retail or even online retail if you don't have a very deep understanding of the retail industry. It's a very tough business.

It sounds like the match between a VC and an entrepreneur has to be a very tight one on sort of a subject basis. That is to say, the VC needs to be somewhat of an expert in the subject matter.

You just don't see VC in an environment like this. Moving very far away from what they know. That's really why they're venture capitalists. Venture capital, in my rain& is less about investing and more about building companies. The really good venture capitalists see it that way. In order to be able to build a company you really have to have a couple of strengths. One is an understanding of a specific technology or technology area. So you do see a lot of engineers and people that have been very deep in a particular sector of technology. The other types of venture capitalists that are very successful are people that have a deep operational background, but again within a very narrow specialty. And that's why venture capital is more about building companies and not throwing darts. No one is hoping to luck-out in the venture capital business. Everybody believes that the good venture capitalist knows where the good opportunities are. They know that technology. They get themselves comfortable with the team that they've got. Then they're prepared to take the chance. It is, after all, risk capital. It's the last form of risk capital other than gambling maybe [chuckle].

Tell me, we've got new restrictions in the tech industry. These would have to impact the VC field.

I really see all of those rules as a good thing. What they do is they inject a certain amount of operational excellence or discipline into a company. I think that companies in this environment need to execute other business plans perfectly. They really need to focus on being excellent on how they execute their plans. I think that a lot of the rules that are out about disclosures, accounting rules, that focus on internal controls, that make sure that people are following the processes of the company, create an environment that--from the beginning--companies are more aimed at achieving the right things that will make them successfully. Over and over again I've seen companies that take this stuff seriously early tend to have higher success rates. It isn't that the rules make them successful--it's the discipline.

When I think of VC, I think of people caught between two rocks. You've got the people that are stuck with the capital that say "go out and invest this" and you've got the folks on the other side saying "don't take any risks." How is such pressure handled?

Fist of all, I always like to say that venture capitalists are fundamentally optimists. But they're optimists a vast majority of the time. There's always a little bit of a dichotomy in a venture capitalist. They have a deep interest in doing a deal. They have a deep interest in making investments in moving quickly and yet at the same time they realize that the odds are not in their favor.