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A tale of two venture capitalists


© St. Petersburg Times, published February 11, 2001

TAMPA -- W. Scott Miller is sitting on $110-million, and he sees plenty of good opportunities to invest it now that the dot-com bubble has deflated. Don Burton still thinks he was wise to retreat from the capital market before the tech meltdown last spring.

Both are major players in the Tampa Bay area's venture capital business. They fund new ventures, both high-tech and more traditional, that show promise but aren't ready to go public.

Miller credits Burton of South Atlantic Partners with teaching him much of what he knows about running a VC fund. Miller spent six years with Burton, then went out on his own to open Lovett Miller & Co. in 1997.

Today, Burton, who raised $173-million in four funds over the past 17 years, is content managing the 20 companies in South Atlantic's portfolio. But Miller, who has invested in 22 companies, is still listening to pitches from entrepreneurs in need of capital.

In separate interviews recently, Burton, 56, and Miller, 37, aired their contrary views on the venture capital market, discussed portfolios and speculated about the future of private equity investing.

Q: How have venture capital companies been affected by the tech collapse?

Burton: The venture capital industry experienced substantial problems in the fourth quarter and many funds experienced losses on various portfolio investments. When the year-end reports come out in mid-February, there will be some unhappy reading. The returns won't be as good in the fourth quarter as they have been in the last five to 10 years, and it's going to be a shock to the limited partners.

Miller: The marketplace for unproven venture funds has gone away. Two years ago, institutions were throwing money into venture capital funds; now it will go to funds that have demonstrated track records.

The positive is that pricing and terms are now more in line with what they were five years ago. They're back to normalcy. The negative is that the IPO market has been shut off.

How has your portfolio held up?

Burton: We haven't issued our year-end numbers, but our average compounded rate of return from 1983 through June 2000 was approximately 30 percent after all fees and expenses. My guess is that our rate of return was less than 30 percent in the second half of the year. And if ours goes down, those who played a faster game have to go down, too.

Of our portfolio companies, we're in the process of selling PowerTel (a West Point, Ga., company that sells wireless communications services in the Southeast) to Deutsch Telekom. That's a huge position of ours with three of our funds investing over $20-million in PowerTel in the mid-1990s. The value of our investment was approximately $170-million at the time we signed the agreement to sell to Deutsch Telekom. But their stock has been quite volatile, so the value of the deal has gone up and down. We expect to close on it sometime this summer.

We had a B2B (business-to-business online) mortgage business that we sold and took a partial loss on. In April, the underwriters told us the company was worth $400-million. In October, we sold it for $35-million and we were very lucky to get that. The interest in those companies changed so fast. It's a devastating experience that creates quite a bit of personal turmoil for the management and directors.

That's as aggressive as we got and we still lost part of our capital. What we have left are good, solid companies.

Miller: We'll show a meaningful positive return this year. But since the multiples (in the public market) aren't the same, the opportunity to deliver extraordinary returns in the future is going to be more limited than it was two years ago.

We have two investments where we made bets on the quality of the technology and the size of the market and we had talented technologists. But all of the shareholders would have done better with the addition of talented general management earlier in the game. I think both companies are going to make it, but the order of magnitude of the gain will be lower than it would have been if we had added professional management earlier. We don't make that mistake anymore: Now we specify upfront when a talented CEO will come in.

Venture capitalists are looking at their portfolios and deciding which ones they're going to support and which ones to let die. Looking at the 19 companies now in our portfolio, I feel terrific about their prospects. Four are pre-revenue, and of the rest, about half are profitable. Several of them aspire to go public, but I don't know if that will happen; it depends on the market. If they don't, they can still survive because they either have enough cash or they're profitable.

We are going to put follow-on money in three companies to get them where they need to go.

What are you investing in today?

Burton: In early March 2000, the lawyer for our partnerships told me he thought the market for raising capital had a long way to go and we had the track record to raise another fund.

But I said that whether or not the money was there, I felt the timing for investing the money was off. And I think it's still off. We've really gone through a bubble and I don't think we'll have a six-month correction and it will be all over.

Miller: We just led a round of $1-million seed financing for Jibe Inc., which is the exception for us; we usually invest at a later stage. But Jibe is a Tampa software company that's going after a very big market -- peer-to-peer (direct sharing of documents and programs over the Web) -- and we think the company has the right people to execute delivery. It's also significantly smaller than most of our investments.

We're looking at investing $5-million in a software company in the Midwest that's in the networking segment. I'd like to invest $25-million to $40-million in five to eight companies this year. But if I don't find them, there's always next year. I'd rather wait than make a lower return.

How has your job changed in the past year?

Burton: When I started out in the venture capital business in 1973 with Fidelity, there was a long courtship of getting to know a company before an investment was made. Six months was the average time to do a deal. Now 30 days is the average and lots of deals close a lot faster.

I always thought I was in the business of building companies and building people and that was part of the great fun of the business. I think that attitude has changed among many venture capitalists who got into the business to generate fees, not a long-term rate of return. This business is a lot harder than it looks. It's not just about raising money; it's about helping a company succeed over an eight- to 10-year cycle.

In the last six months, refinancing has become very hard as people pulled in their horns. People used to call and say, "We'll give you the opportunity to participate" in this deal. Now if they said that, people would say, "Are you kidding?"

Miller: Now we're dealing with problems that are more typical of any venture capital firm: Are the management people getting along? How much infrastructure should we invest in now? How are we going to distribute the product? Standard growth issues.

We didn't do a deal in the last quarter, but right now, we have more companies on our active list than in the past. Pricing's more attractive today. There used to be a misperception that every company was worth a half-billion dollars. Now we're seeing deals at a significant discount to where pricing was in the past.

Who's going to suffer?

Burton: I would bet that over the next several years, some investors will actually lose some of the money they put in venture capital funds, and that hadn't happened in the past. Some funds had not done well but there were no funds that actually lost money.

I didn't raise another fund because I wasn't willing to take fees, then have our partners find out I couldn't generate a 30 percent rate of return. And it's not just me that can't do it: No one can.

Miller: If companies don't have a proven business model, show significant revenue ramp-up and show they're well-positioned vis-a-vis the competition, it's going to be challenging for them to get follow-on money.

In the past few years, companies spent more on marketing and scaling up at all costs. The focus was on market share versus return on capital. That's changed across the board. Now the mentality is that first, you have to prove you have something versus ramping up.

What's the future hold for venture capital investing?

Burton: Funds will be investing carefully because their limited partners will be looking over their shoulders very aggressively. And my guess is, returns will come down.

Miller: There are still a lot of dollars in the marketplace, but venture capital firms will be spending more time on their portfolios, re-evaluating their funds. And a lot of funds are going to have to make adjustments.

A lot of it is timing. If you were an early-stage tech investor who raised a fund in early 1999 and invested rapidly, that would be a challenging place to be.

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