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Venture Profile: David Lane, Diamondhead Ventures
By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search
Angel Mehta: There has always been so much talk about how engineers and business people don’t connect, but naturally, most technology companies are going to be founded by technical people. How do you think this issue should get resolved?
David Lane: Well, let’s put it this way… I started my career as an Electrical Engineer at Hughes Aircraft Company, and I gained an appreciation for what electrical engineers do. I decided to expand my business base so I went to work for IBM selling computers, which included mainframes and SNA networks. I think EVERY engineer should carry a sales bag at some point in his/her career – it is a real critical stop along the way towards making one a better business person. From there, I was introduced during a summer job into the venture capital community between my years at the Harvard Business School and decided I liked it enough to pursue a job in that industry. That was in 1987, and I’ve been involved in the venture capital business since that time.
But back to the point, I remember a very specific situation at IBM where, if I remember correct, 20 years ago there was a new storage technology in which IBM invested about $100 million to develop. I tried to convince one of my customers that the technology was better then any other that IBM had ever produced. The customer, rightly so, asked me not to describe the technology but to talk about how much it cost, what was the power usage, price performance, power requirements, how much square footage it would take, the cooing requirements, etc. This was when mainframe storage was in large physical boxes. So my customer quickly taught me that technology may or may not provide a solution that they would value and technology is not a sufficient solution in and of itself – and that’s a very valuable lesson for all engineers to learn.
Angel Mehta: So when you meet entrepreneurs that are technical in nature who may not have that experience, how much of a strike against them is that? How do you communicate that to them?
David Lane: What I look for is an entrepreneur who can ‘empathize’ with the customer. Entrepreneurs should understand their customers pain points. The best entrepreneurs don’t necessarily have to have been a customer nor do they have to have sold to customers. But all good entrepreneurs sell their concepts, and sometimes products, every single day of their life. I look for people who frequently touch their customers and do not believe they’re building a monument to the ‘technology Gods’, but rather a valued solution to their customer set.
Angel Mehta: What were some of the more significant experiences early on that prepared you for a career in venture capital?
David Lane: In venture capital you deal with many diverse people, and a successful venture capitalist has to be able to work closely with all types of people. The Silicon Valley in may ways looks like the “United Nations of technology”, as entrepreneurs come from all over the world to make their mark. I think some of the things that shaped my career and outlook on life early on was growing up in Los Angeles. As you might image, LA is a very diverse city.
In fact, there were 99 nationalities represented in high school; it was really a microcosm of the world. My high school was basically an ‘inner city’ school – there were gangs and gun fights and things of that nature. It was incredibly helpful to me because it gave me an appreciation for and understanding of people who come from different parts of the world. That’s important in the venture capital business because you deal with entrepreneurs who come from all around the world.
Angel Mehta: Let’s talk about Diamondhead… what was the planning process like – how did it come into creation?
David Lane: In the middle of 1999 my prior fund was rapping up the investment cycle, and I had made a decision not to raise a new fund with my partner. I was having discussions with my current partner, Raman Khanna, because he was being approached by other venture capitalists to join them, and he was asking me how he should negotiate with these different firms. Prior to that time, I had brought Raman on to the Board of one of my portfolio companies. He was the Chief Information Officer at Stanford University at that time and had a wealth of business contacts, IT knowledge and had spent a lot of time with start-up companies. So we looked at creating something that had our own footprint on it as opposed to stepping into someone else’s environment.
We believed that the structure of our firm and our sub-focus on the university environment could, in fact, create a unique and differentiated venture capital fund. Because our investment areas are the communications and computing infrastructure, the first thing we did was we went and got Sun Microsystems, Oracle, Fujitsu, – in total about seven corporate partners - to form our core corporate partners. They also provided our initial capital commitments. We then went out and signed up our world-class industry advisory board, of which we were extremely proud. At the same time we also added strong advisors on the university side; there are five universities that we targeted. We looked to create an ecosystem where entrepreneurs stepping out of either corporations or universities would have a lot of resources available to them in the very beginning steps of their journey.
Angel Mehta: Were there any other firms that had the focus, at least, early on in terms of extracting technology from campuses?
David Lane: Not to my knowledge. The five universities we targeted because of our focus were Stanford, UC Berkley, Caltech, Carnegie Melon and USC. We have strong personal relationships within those top tier research universities.
Angel Mehta: Tell me about some of the challenges associated with extracting deals from academia as opposed to the beaten path.
David Lane: There are very strong similarities between typical venture backed start-ups and university spinouts in that they typically involve first-time entrepreneurs. First-time entrepreneurs usually don’t have strong corporate partners, and they typically don’t always know the company infrastructure that needs to be created whether its law firms, accounting firms or search firms. That is almost always the case spinning out of universities and it’s usually true for the ones that are spinning out of the corporate world. Diamondhead created an ecosystem that entrepreneurs can leverage to their advantage.