By Craig Dauchy, Chair of Venture Capital Group, Cooley Godward LLP



Dauchy: You entered the venture capital industry in 1995. What were your expectations of venture capital at that time and have you been surprised by the industry?

Rieschel: I started as a venture capitalist at a very propitious time. The industry had just experienced the Netscape IPO, and there was a strong sense that the access to unlimited information was going to cause a profound change in corporate and individual behavior. Many entrepreneurs had started companies in 1995 and early 1996 to exploit this, so I was fortunate to see a number of fascinating ideas and business plans in a short period of time. We made over 50 investments in 1995/96 that were focused on the internet. We understood that the services sector was going to be dramatically affected by this access to unlimited information, so a number of our investments were focused in areas that took advantage of that, both for corporations and consumers. Most venture firms were doing traditional semiconductor and telecom equipment investments, so many of the early internet-focused deals were shared among a small number of firms.

Dauchy: What did you see in 1996 that caused you to focus your investments on just the internet sector?

Rieschel: As an operating executive, I had worked at Intel, Sequent, Cisco, and nCUBE, so I had seen the technology sector from semiconductors through systems, network equipment, and media distribution. It was not a great leap from my background to see how the internet was going to change how people accessed information and ultimately, change how people communicate, shop, and learn. The key was how to evaluate who was going to be successful in starting a business and why. That was the part of the venture capital industry that was most challenging and where my experience base did not necessarily apply. We made some great decisions and some unfortunate ones. I would say it was not until 2001/2002, that I became completely comfortable in assessing someone’s ability to successfully start a business.

This is a major reason why I remain convinced that executives with experience running operations have the best chance at being successful in venture capital. There is so much that you learn in either starting your own company or going through good and bad times in a corporation. The analysis of a market and learning to be realistic about the expectations on timing in that market is a valuable skill, but being able to identify the killer team and leader is more valuable.

The entrepreneur has to be smart, that cannot be taught. They have to be of high integrity and communicate well. They have to share with the investors a common goal of what success is for the company. They also have to be lucky. That sounds like a trite thing to say, but we all know people who have had opportunities in front of them but somehow it just never worked out. That is why the successful entrepreneurs are consistently funded, while the ones that had great ideas but never a success struggle to raise capital the second or third time around.

Entrepreneurs also have to have an excellent context for where their business fits in the broader universe of the market, their partners, and their competitors. This is an area where venture capitalists can be most helpful, since we should have a perspective on this point that is additive to most entrepreneurs. I also think the most successful entrepreneurs that we have worked with are ones that make a deal, stick to it, and move on. Personally, I do not work well with people where business terms or agreements are continually revisited after the fact.

Dauchy: Have you had specific people in the venture capital industry that showed you the ropes or gave you valuable advice when you set up the SOFTBANK Venture Capital group?

Rieschel: I was very fortunate that the first board seat I took as a venture capitalist was at USWeb, with Crosspoint Venture Capital as our co-investor. Bob Hoff was the partner at Crosspoint on the deal, and Bob’s partner John Mumford became someone I used for advice on a variety of issues as we grew the SOFTBANK Venture Capital operation and subsequently Mobius Venture Capital. Roger McNamee, then at Integral, was also very helpful to us in getting the lay of the venture capital landscape and how to approach various firms as a value added co-investor.

Dauchy: Mobius had partners on both the east coast and in Colorado. You still have the Colorado office. What are the challenges in running a venture capital firm with multiple offices?

Rieschel: Venture capital is a very local business, and unless you are willing to commit to a full infrastructure in an office, I think it is unfair for a firm to expect someone to be successful in a one person office. We all need to have the context to share ideas, perhaps not on a daily basis, but certainly on a weekly basis. The nuances of a deal, the personalities involved, etc., get much more complicated with remote offices. I think it is easier for a firm to do the work on an opportunity in a sector and then look at deals in different geographies than to hire partners in different geographies. We did make an investment in Colorado around Brad Feld, putting two more senior people there and an infrastructure to support him. That has been a great success. One of the issues facing many firms as they look outside the United States for investments is how to integrate the partners/staff in remote offices back into the brain trust of the partnership. Doing this well is one of the keys to being successful with your investments outside the country.

Dauchy: Speaking of that, you have been very vocal about the opportunities that exist for venture capital investments outside of the United States. What are your thoughts on the current venture capital interest in India, China, and other developing markets?

Rieschel: I am on the record as saying that the next ten years are going to offer venture capitalists an unparalleled opportunity through investments in China and India. It will not be a smooth ride, but the domestic venture market has not exactly been smooth during the past nine years. Rarely can you look out ten years at markets like India and China and predict with certainty massive demographic shifts, but in this case you can. The integration of technology into every part of China is occurring at an unprecedented rate. We were in Tibet in June of this year and nomads living at 12,000 feet were using solar panels to charge cell phones, televisions, and other electronics. In addition, the cellular reception in the far reaches of western China puts the I-280 corridor in Silicon Valley to shame. India has its own stories, including countrywide hotlines for kids in trouble, services that do not exist at the same scale in the United States or Europe today.

There will be many mistakes made in China and India. The canny investors will be looking for deals where the market need is reasonably well defined. The very early stage investments will have to be carefully vetted, since the governance issues on deals in China and India are legendary.

We also have the benefit of having a sister fund in Asia the last four years. We helped establish the SOFTBANK Asia Infrastructure Fund, and hired the leader of that fund, Andy Yan. They have been quite successful to date with over 25 investments, including a very successful IPO this year in Shanda. So Mobius feels that it has had eyes and ears on the ground in Asia for quite some time.

Dauchy: How do you see Mobius going forward? Are there particular areas you are focusing on for the future?

We grew rapidly as a firm from 1996 to 2000, and since that time have gone back to what I feel is a more manageable size. At one time we had business development staff, recruiters, public relations, and accountants, who did nothing other than support the needs of the portfolio companies. Much of this was due to the lack of resources in the traditional support industries to the venture industry: the recruiters, accountants, bankers, and law firms. All those organizations were experiencing real trouble in trying to keep up with the vast number of start ups created in 1998 – 2000. Now that venture capital firms have largely worked through their portfolios and have a sense of where to spend additional resources and time, the start up support industries are much more able to handle the current workload.

Rieschel: What are the major challenges you see for the venture industry going forward?

Capital overhang, lack of operating experience in the industry, international competition, the need to understand deal structure and competitive dynamics outside of the United States. What I do not see as a major issue are the concerns about confidentiality of fund and portfolio company information. I also know that many venture capitalists would like there to be fewer firms, but I think there will actually be more venture firms in the future, not less. The firms will be smaller in number of partners and capital, and more focused. Venture capital firms are really reflective of the individuals in the firm, and the firm as an entity itself is almost a misconception. Each partner is really their own brand, their own set of skills and attributes. The concept of large service organizations supporting the ongoing activities of senior partners in a firm is one that I do not believe will continue into the future.