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.
Angel Mehta: Does that mean that entrepreneurs are born, not made? What are the characteristics that are presumably inherited?
Art Marks: They can be made through their other experiences - so they're not necessarily born. Ultimately, entrepreneurs have to commit to a path where they don't control the resources that are required for them to get to the goal.
Angel Mehta: Isn't that a ludicrous decision to make?
Art Marks: Sure. Entrepreneurs know it's going to take a long time and that they are going to be tested. And they're willing to endure. Not everybody has that characteristic, particularly if they have been a great manager at a large company. They can't easily transition from being a General Manager at General Electric to being an entrepreneur. In a large company, they would have access to resources to be able to get things done through 'brute force'. They would also have the finances and manpower to go after big targets. An entrepreneur doesn't start out with the resources to achieve his end-goal. They need to have a risk profile that says, 'I can endure that uncertainty… I can fail, dust myself off and keep going.' I can prove myself and earn the resources.
Angel Mehta: You mentioned that those characteristics could be acquired through experience….
Art Marks: Experience, yes.
Angel Mehta: So what precisely are the experiences that one needs to have to develop entrepreneur DNA? And where would one seek them out?
Art Marks: That's a hell of a question. I don't have the answer to that yet. I would say that a company like 3M that rewards innovation, historically, that would be a better source than a GE or an IBM. If I look at an entrepreneur and see evidence that he failed at something in life and then overcame it…that's much more valuable to me than the guy who never failed. In parallel, a guy who keeps failing all the time… well that's a different kind of problem. This is a guy who doesn't know when to give up and is going to waste your resources.
Angel Mehta: So you may have failed… but you can't have a track record of failure. Is that it?
Art Marks: Yes.
Angel Mehta: Just to clarify… when you say in your literature that the appropriate goal for an entrepreneur is unobtainable for most individuals in similar situations… explain to me why, if it were unobtainable, an entrepreneur would go for it?
Art Marks: I would say the goal would be audacious - nearly unobtainable. If it was easily obtainable, a lot of people would do it and there would be no return. If everybody can do 'X' then the rewards for doing that, at least from a venture point of view, are going to be diminished. You're much more interested in the guy that's reaching for something that is hard to do.
My second meaning is you do not have control over the situation when you begin. You basically have to be willing to take the risks… to earn your way… to prove yourself worthy … any real quest is going to be hard.
Angel Mehta: You also told me once that at the conclusion of every stage of the entrepreneurial journey, there is a test, and if you fail the test, the quest is over, but 'you cannot necessarily go home'. What does that mean?
Art Marks: First of all, I want to point out that I say 'if you can'tpass the test'. I don't say 'if youfail the test' - because you can fail and keep trying. However, when youcan't pass a test, the quest is over. The reason I say you 'cannot necessarily go home' is because when you go on this entrepreneurial quest, it changes you. You can never go back to the way you were before. You might decide to quit, but you can't change the impact of the quest on your psyche… the way you think about the world. You just can't go back in time and be the same person.
Art Marks is one of the most visible and successful investors in the Mid-Atlantic region. Art has held senior leadership roles in operating companies, venture capital partnerships and the Mid-Atlantic region's technology and venture capital communities for over thirty years. Prior to founding Valhalla Partners, Art had eighteen years of venture capital investment experience, including seventeen years as a general partner at New Enterprise Associates (NEA). Art can be reached for interview feedback at: art@valhallapartners.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
