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Venture Profile: Art Marks, Valhalla Partners
By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search
Angel Mehta: Your career has been spread pretty evenly between corporate roles at General Electric and venture capital. Is it a help or a hindrance that you haven't been an entrepreneur before - other than starting Valhalla, of course. I've met some investors who argue that it's helpful to NOT empathize with the entrepreneurs because then it's too hard to make tough decisions about whether to re-finance a company. Others argue that successful venture capitalists must have been entrepreneurs in the past, because otherwise you don't understand the experience. Where do you sit on that issue?
Art Marks: Probably right in the middle. Your experiences align you to certain points of view - and that can give you empathy for others sharing those points of view - but it also makes you think that's the only way. When I came out of GE and into venture capital, my orientation was far too operationally focused. Entrepreneurs are passionate above everything, but if you want to be a good investor you have to be both passionate and dispassionate at the same time. It's more about understanding the quest… the journey… and figuring out how to help people. How's that for a political answer? [Laughing]… But that's what I believe.
Angel Mehta: You actually retired from the world of venture capital at one point. What made you leave and then what made you come back?
Art Marks: Normally a partnership starts off with everybody wanting to move in the same direction. I ended up in a partnership where the partners eventually wanted to go different ways. The founders and I were not moving in the same direction, so we agreed to disagree and separated. It wasn't an easy thing to do, not for any of us. In any case, I realized once I got out of NEA, I still remained passionate about helping to build early stage companies. I knew other people who were like-minded and shared the same value system, so Gene Riechers, Hooks Johnston and I decided to go back into venture capital. We called our partnership Valhalla because, like the mythical Nordic heaven, it represents a new and better life…a new approach to venture investing…and, we think, a better model.
Angel Mehta: Why is Valhalla's model better?
Art Marks: It's better because we've chosen to stay small, and, as a result, we conduct an extremely high degree of diligence before investing. Secondly, after we've invested in a company, we have more time to spend with the management team because, relatively speaking, we do very few deals. Those are the benefits of having a smaller fund.
Angel Mehta: Tell me about your first failures as a venture investor? What are some of the warning signals that eventually brought you to the decision to cut it off? How long did it take and what are the lessons you learned from it?
Art Marks: It didn't take very long. I think it was a company called LISP Machines. It was very capital-intensive. NEA brought in a new CEO and just raised a large round of capital. I eventually called these kind of assignments "Tar Babies" because the exiting partner would shed his problem company. He'd say, "That's not my record anymore, that's yours." Within a few months, LISP Machines was failing to meet its objectives, spending more money than it ought to and the CEO was not being candid with the Board. It was a painful, but easy, decision to say to the company, "we have no confidence that additional capital will change the outcome."
Ultimately, if you're asking about what I learned, I think the biggest mistake I've ever made is just not doing enough diligence. I suppose you could say that one could never do enough due diligence… but there really is a minimum you must perform. I know I've backed entrepreneurs on two occasions where, with just a little more diligence, I would have known up front that those were mistakes. In 1999-2000, we were all in a terrible hurry to do deals, so I made the mistake of putting too much faith in my own personal judgment, rather than comprehensive diligence.
I think the second biggest mistake is getting drawn into the CEO's view of his company without having a sense for how the industry views the company. It's easy to place yourself inside the company as a cheerleader and look at the rest of the world through the eyes of an entrepreneur. But you must stay in touch with reality and that requires you to obtain other feedback: about how the company is doing relative to the competition… how the company is doing with its customers and with its employees.
Angel Mehta: New Enterprise Associates, your old venture firm, has a significant presence in the Bay Area and no doubt you were involved in doing 'west coast" deals at one point. What are the differences between venture capital investing in DC, compared to Silicon Valley?
Art Marks: I worked with companies on both coasts. The people are different. The Mid-Atlantic has a much more collegial venture environment. There is a relative shortage of capital here and venture capital investors have to work together to make deals happen; it's not as competitive. From the entrepreneur's perspective, the Mid-Atlantic is desirable because employee turnover is much lower. People are not looking to sprint every 12 months to another deal, which may be more frequent in Silicon Valley.
Having said that, Silicon Valley has all the cultural assets in place to build companies, and go public quickly. The external pieces are all waiting to be assembled: the lawyers, the accountants, the headhunters, the talent. Still, I think it's easier to get to 'break even" in DC on less capital - the environment is more stable, and as a result, the company can focus more on becoming a profitable business.
Angel Mehta: I want to shift to what your view on how someone becomes an entrepreneur. You have said that one cannot learn how to be an entrepreneur - you either are one, or not.
Art Marks: Right, I thoroughly believe this.