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Venture Profile: Paul Maeder, Highland Capital Partners

By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search

Angel Mehta: What was the worst experience youíve ever had with big company bureaucracy?

Paul Maeder: Probably when I was working for a company called Andros doing artificial heart development for the National Institute of Health. So it wasnít so much the company I worked for as it was the customer: there were huge problems with the way government contract research was done. Medical research is based on a couple of bad ideas. The first problem is that medical research is run by scientists, not by engineers. For a scientist, each step in building the pyramid of human knowledge has to be absolutely proven, rock solid, beyond a reasonable doubt, before you can take the next step. An engineer would say, ďHey, I just want to make it work Ė who cares how I stumble upon the solution?Ē For an engineer, the point is to get the solution: cure people of cancer. Scientists want to build this enormous body of knowledge thatís irrefutable. An engineer wants to solve the problem.

Angel Mehta: Not so sure cancer patients would appreciate thatÖ.

Paul Maeder: Not likely. The second issue is that the National Institute of Health requires you to write a proposal for each project that has to be totally incremental. No great leaps, no lateral thinking, no out of the box ideas. Letís say youíre going to do a test that requires you to kill eight cows to test artificial heart prototypes. After the second implant, you discover that your design has problems and needs to change. So why bother killing the other six cows, right? Well to get a new grant, you have to kill the other cows Ė even if you know itís going to waste time and moneyÖ in this case, something like $10,000 per cow in surgeonís time, equipment, etc. But no matter what, you have to do exactly what you said you were going to do in your proposal; otherwise you wonít get another grant.

Angel Mehta: So thereís no room for learning on the fly?

Paul Maeder: None. You cannot deviate from your original plan

Angel Mehta: So was that the time that you decided you wanted to be involved with smaller companies?

Paul Maeder: Probably even before that. I just decided early on that there was something supremely depressing about having to wear a security badge and walk past security into a large building with neon lights and not see sunlight all day long. I wanted to be involved in a place where it wasnít a question of what you were allowed to do Ė it was a question of whether you had time to do all the things that needed to be done. So when I came out of Harvard Business School I joined Charles River Ventures in Boston and gravitated towards investing in software.

Angel Mehta: Iím surprised it was software and not life sciences or healthcare, given your early training.

Paul Maeder: So was I. Bob Higgins, now my partner, had already staked out the life sciences space at Charles River and had been quite successful in doing that. They didnít really have anybody specialized in or who understood software back then and I remember reading an editorial in the IEEE journal that said software would be the most important field over the next 20 years. So thatís where I ended up.

Angel Mehta: What is the biggest difference you see between the state of venture capital in 1984 vs. the present day?

Paul Maeder: Itís so much more sophisticated now. When I got into venture capital in í84 people didnít really specialize by industry at all. Everybody was a generalist. There was arguably a shortage of venture capital and a shortage of good entrepreneurs. We were ecstatic when an entrepreneur came to us who had actually graduated from college. We rarely saw CEOs who had business degrees or could speak to more than just a casual experience in the software industry because the software industry didnít even exist.

When Bob Higgins and I founded Highland Capital Partners in 1988, our Ďnewí idea was to specialize by industry. Today itís a generally accepted practice, but back then, it was common to look at a PC protocol company one day, a biotech deal the next day, and a specialty retail deal at the end of the week.

Angel Mehta: For a venture investor trying to minimize risk, do you think it makes more sense to put less money into more deals, or more money into fewer deals?

Paul Maeder: Thereís a term that venture investors used to use 10 years ago called Ďthe choke levelí. The choke level was when you had so much money in a company that you were starting to choke. At that time, people would choke at the $1 million range. But even then, our first fund was $78,000,000 and we had 22 portfolio companies: something like $3.5 million per company. The bottom line is that itís hard to find good deals. It just is. So our philosophy is that when you do find a good deal, youíre better off putting more money into that company than chasing after another group of entrepreneurs that you may never have met and have to do the diligence all over again.

The approach resonated with entrepreneurs because it meant they werenít going to have to take 25 red eyes and meet with 25 other venture capitalists to do their next round of financing. They could spend their time building their companies.

For us, the approach yielded tremendous venture discipline. We were putting in so much money that we had no choice but to do incredible diligence before diving in: itís prevented us from moving into the mode of the late 90ís where investors would spread a few hundred thousand around 2 dozen companies and hope for the best.

Our first fund proved that we were on to something. We had 22 companies and we made money on 21 of them, which is an unusual batting average. Those were the days when Wade Boggs was in Boston and we used to say we had a Wade Boggs Strategy, which was a lot of base hits. Sometimes you hit home runs by accident when you were swinging for base hits, but if you swing for home runs, the only thing you can be sure of is striking out a lot. We preferred the base hit approach.

Angel Mehta: So then letís talk about enterprise software investing. We hear that the software world is saturated and that there really isnít much room or space for software start-ups anymore. So are we all just wasting our time?

Paul Maeder: Software is unquestionably more mature than it was in 1984. Many of the big problems have been solved and I think you can make an argument that there wonít be many more billion-dollar software companies. However, you can still do well as a venture capitalist with small problems that can yield very profitable, high margin businesses.



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