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Venture Capital A 27 Year Perspective

Gary Kalbach

September 2005

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Gary Kalbach

> 27 years as a venture capitalist> $45 million invested – over $600 million value> Founded two venture capital firms with $550 million> Seed investor in Sun Microsystems, Novellus Systems,

Integrated Device Technology…> 83 companies funded, 40 board seats, 50% worked> Created the angel/institutional fund model> BS, The Business School, University of California,

Berkeley; MBA, San Jose State University

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Backyard

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Granddaughter In Garden

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Senior AssociateScott Irwin

West Coast Venture CapitalEl Dorado Ventures

> Investing since 1978> Seed/early stage – West Coast> Information technology industry focus

Enterprise software and services Communications

> 40+ Entrepreneurs – Technology Partners

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Seed Investor In…

> Sun Microsystems> Integrated Device Technology> Novellus Systems> Access Health (acquired by McKesson/HBOC)> Earthlink Networks> Amati (acquired by Texas Instruments)> Datasage (acquired by Vignette)> NuSpeed Internet Systems (acquired by CISCO)> Cyras Systems (acquired by CIENA)> Efficient Networks (acquired by Siemens)

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The Process?

> Write business plan> Raise venture capital> Sell product> Go public or sell company> Retire

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Keys To SuccessMy Perspective

> Management team> Products and markets

Markets that are not there – yet!

> Financing Ownership

> Opportunistic exits

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INTEGRITY

CREATIVITY

DRIVE

FOCUSPASSION

LEADERSHIP

TEAM WORK

VISION

EXPERIENCE

Management Teams Make Or Break A Company

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Vision

> Thinking out of the box Example:

Sky Dayton, EarthLink NetworksAt age 22, Imaging design firm, coffee house operatorVision of the need for connection to exploding Internet

$1 billion company

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Drive

> Often multiple motivating forces Example:

Bob Graham, Novellus

Intel founder, built Applied Materials• not recognized

Driven to prove he could build a company

Built a $1 billion company

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Leadership

> The team is usually right about the CEO – Listen! Example:

Sun Microsystems

Brought in professional manager

Team revolted

Scott McNealy promoted to President

$18 billion company

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Problems Along The Way

> Suddenly out of money> Key non-performing member of team> Management team member leaves> Product/Technology doesn’t work> Market/Competitive landscape changes> Investor group falls apart on vision/execution

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Management Teams

> Finance them> Build them or > Change them

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Markets In The Late 1990s

> Idealab! Paid $50M over 10 years to license the .tv extension from the Pacific Island country of Tuvalu

> eCompanies paid $7.4M for the domain name “business.com”

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2000 – A New Paradigm

> Brand: first

> Product: later

> Profitability: never

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Over-Funded Sectors

> Pet Assure

> Pet Food Giant

> Pet Food WareHouse

> Pet’s Choice

> Pets.com

> PETsMARTGood ads or good business models?

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Flawed Business Models

> You cannot fix slim margins with high-cost advertising

> WebVan did not have a viable business model

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What Went Wrong

> Too many inexperienced VCs> Venture capital has traditionally financed B2B> Most dot-com’s were consumer oriented

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What’s Happening Now

> Back to basics> Customer-oriented/market-oriented

Build the brand by building the business.

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How Do VCs Find Opportunities

> Successful entrepreneurs> Successful entrepreneurs> Other networks

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El Dorado Technology Partners Competitive Advantage

> Created 27 years ago> Successful entrepreneurs> Recognized experts in targeted industries> Must be involved to co-invest> Frequent interaction

Venture capital is a team sport.No cowboys!

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200 Deals

1,000 Deals

6 -7 Deals Selected

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How To Get Through The Funnel

> Business model that satisfies market> Understanding of what it takes to build team,

product lines and business> Well thought out business plan> Experience helps – crusty sales person vs. 5

PhDs

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Non-starter Quotes

> Founder will run to $100 million> All you need is 1% of billion dollar market> Year 5 sales of $1,457,987,238 with 50% profit> Product will sell itself> There is no competition

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In Conclusion

> Venture capital is an apprenticeship business

> Careers are built brick-by-brick

> Craftsmanship comes with experience

In 1986, it cost $10 million to train a venture capitalist.

What does it cost now?

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Thank You.