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| Home - Venture Profile - Feb 06 Issue |
Venture Profile: Todd Pietri, Milestone Venture Partners
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Angel Mehta: What were the early challenges you encountered in starting Milestone? I think it'd be valuable insight to any ambitious investor who has an interest in starting his/her own fund some day.
Todd Pietri: It was a particularly difficult time for venture investing when we got started. In October of 1999, I remember having very young, inexperienced entrepreneurs coming in with slide shows and expecting very high valuations… expecting us to make decisions very quickly and they were pointing to market multiples that were insanely over-valued. It was so easy to get swept up by what was going on in the market and the hype that entrepreneurs were riding on… I'm thankful that we did not have a fund up at that time because the market started to crash and we avoided a lot of the carnage and had time to think about what we wanted to do.
Angel Mehta: Or whether you wanted to do it?
Todd Pietri: Or whether we wanted to do it, absolutely Angel. Although, we knew we wanted to raise a fund… we had confidence in our strategy. New York is kind of the hotel of the private equity sector. Everyone has a room in Manhattan, but nobody actually lives here (i.e. invests locally). There are a small percentage of investors who invest in local companies, but most of the firms are very large and invest nationally, or internationally, and invest very large sums of money.
My partner, Ed Goodman, is the one that really had this insight: the fact that there were not many firms doing small investments in early stage, local companies -- which left us with an opening. The downside obviously was that it was hard to raise a venture fund in 2000 or 2001 and so we raised much less capital than we wanted to. The management fees from such a small fund were not going to support a business so we had to suck it up and prove that we could do it, then go out and raise more money -- which is what we're doing.
Angel Mehta: If you identify the biggest challenge that Milestone was facing through its own growth, what would they be?
Todd Pietri: Making the transition from high net-worth individual investors to institutional investors. Institutional investors are very difficult to get for the first time. It's easy when they're just re-upping, but to get them on board the first time requires you to get past consultants and gatekeepers whose job is to help institutional investors avoid risk. So the default is to go with a fund that they have invested in before.
Another challenge is that with a small fund, you are limited in how much you can put into any one deal: in our current fund we can do about a million dollars per company over the life of the investment. But it's easier, as a venture investor, to secure better terms when you can speak for a larger percentage of any given round that the company is raising. Still, we've been pretty successful in leading rounds -- we've led 8 out of 12 transactions, though we probably missed a couple of opportunities along the way.
Angel Mehta: What advice would you have for the average entrepreneur; for example, about what the Board or a venture investor really wants to hear each month or each quarter at a board meeting?
Todd Pietri: Well first off, my advice would be to not try to modulate what you're going to say based on what you think the Board wants to hear. There is always the temptation to steer the business in the direction of where other people want it to go -- but ultimately you have to stick with your vision. But insofar as what the Board wants to see… I think overall, our push has been to get our portfolio companies to profitability -- we want to see companies on the path to making money before putting in more capital. Clayton Christensen, who wrote the 'Innovator's Solution" and 'Innovator's Dilemma', has a good catch phrase that we repeat around here: "You should have impatience for profits, and patience for growth." Step on the gas once you know the model works -- if the market is big enough you can raise more capital later and try to build a billion dollar company. If the market is not that big or growth is difficult to achieve but you are profitable, you won't be forced to raise more money and suffer dilution. You'll still be able to make a nice return for your investors and get rich yourself out of a more modest exit.
If you look at the statistics, the typical venture backed company does not go public, it's sold in an M&A event, and the value of that sale, the typical venture backed sale, is between $50,000,000 and $100,000,000. So if you have less than $10,000,000, or even less than $5,000,000 invested in your company, your investors can still make five to ten times their money off of a sale below $100,000,000, and the entrepreneur can still make many millions of dollars. You still have the option, if the market is big enough, to try to raise more money and create an exit that's $250,000,000 or a billion dollars but you're not forced to. We think the business strategy should dictate the financing strategy rather than the financing strategy or the amount of capital that a venture capitalist needs to invest dictating the business strategy.
Angel Mehta: Does the emphasis on profitability mean that companies are getting built much more slowly than before?
Todd Pietri: No. It has never been easier to build a company on a small amount of capital. As Joe Kraus points out, hardware costs one-hundredth of what they were five, eight years ago. You don't have to necessarily buy a database, an App-Server, a programming language. There is so much open-source software. You can employ offshore developers at one-fifth the cost of what it would cost you in America.
As for sales and marketing, you can now profitably acquire a customer at a much lower cost than you could five years ago. Google AdWords have revolutionized the sales and marketing strategies for a lot of businesses because you don't have to necessarily hire a quota-carrying sales rep in every major city with a high base salary and significant travel expenses to get to a customer. You can advertise on Google or on the Web. You can use direct email, direct marketing strategies. You can offer your software for free and sell advertising or at least offer it on a trial basis. You can get a lot of buzz generated via blogs and before you know it you can have a lot of users of your product cost effectively.
So all of these examples point to the fact that you don't need that much money to grow a business fast -- and you CAN get to profitability -- it's not an unreasonable requirement.
Todd Pietri is a General Partner of the fund and brings a unique combination of information technology and financial expertise to its management. Todd is currently a director of Bizbash Media, Inc. and Gene-IT, Inc and is a board observer of Derivatives Portfolio Management, LLC, ExpertPlan, Inc. and Octagon Research Solutions, Inc. For interview feedback, contact Todd at ttp@milestonevp.com
Angel Mehta is Managing Director at Sterling-Hoffman, a retained executive search firm focused on VP Sales, VP Marketing, and CEO searches for enterprise software companies. He can be reached for feedback at amehta@sterlinghoffman.net
 
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