December 2007
Cheerleader and Taskmaster
As a Veteran VC Wharton Alum Bob Greene Plays Many Roles in Nurturing New Firms
Bob Greene, co-founder of Contour Venture Partners in New York, wants you to know that venture capitalists aren't half as tough as their reputations would have you believe.
"A lot of entrepreneurs think VCs are haughty or arrogant," says Greene, who earned his bachelor's degree from the Wharton School in 1982. "All the VCs I know, we do it because we love it. We want to see entrepreneurs succeed. If the wrong impressions get cast, it's because we get inundated with requests for review and capital."
On a typical day, Greene's firm, which specializes in investing in young technology companies in the New York City area, will see five to ten business proposals and meet with several entrepreneurs pitching ideas. At that point, he and his partner, Matt Gorin, won't commit any money. They're just screening for candidates; decisions to invest require lots more exploration and work. "Initially, it's always 'no' or 'maybe'," he explains. "The 'yeses' come later after you've worked the deal for some time."
Venture capitalists are guarded with their time not just because so many entrepreneurs clamor for their attention but also because they pick only a limited number of companies for their portfolio. They'll then work closely with those firms for several years, typically investing in subsequent rounds of financing as the company grows. And they're not passive players. They are advisers and, at times, even mentors to their entrepreneur-partners.
The role requires him to be both cheerleader and taskmaster, confidante and clear-eyed skeptic. Sometimes, he even has to act as company psychologist.
Witness Multex, which delivered investment research online. Greene invested in 1996. As he sat through his first board meeting, the contentiousness, with managers and board members sniping at each other, surprised him. "I was thinking, 'What mess did I step into? Do we have a product problem? A technology problem? A management problem? No, it was none of that, but rather what we had was a communication problem."
The company, though promising, was taking longer to deliver on its plans than it had promised, and some of the prior investors were losing patience. "To keep meeting in a big group like that wasn't very productive," he says. "So we formed an executive committee and met every two weeks for two years. That established constant communication. We always met at the company. Something venture capitalists do which is not always good is holding their meetings elsewhere. You should always meet at your companies. You go early and walk the halls and get to know the employees. You build trust that way."
His efforts paid off. Multex's management got refocused on executing its plans promptly, conducted an offering of public stock in 1999 and in 2003 sold out to Reuters for about $275 million.
Of course, not every deal works out so well. Venture investors take big, if educated, risks with the money in their funds. Sometimes, those risks yield hefty returns, as with Multex. Other times, they bring big losses. Such was the case with Kozmo.com, a much-ballyhooed firm that married web-based ordering with quick delivery of products. A customer could order a video and some food and have it delivered within an hour and pay no delivery fee.
"In my career, I've done over 30 tech deals and another dozen other investments, and I've only had three total wipeouts," Greene recalls. "Kozmo was one."
The company began in 1998, and the enthusiasm then for all things related to the Internet obscured the shortcomings of its business plan, Greene says. "It started replicating the model in lots of cities when the model wasn't proven out-how you build it, how you manage the logistics, how you source the inventory. We were opening in new cities with a half-baked idea."
Greene's firm-he was then with Flatiron Partners in New York-wasn't the only one that bet on Kozmo. A total of about $250 million in venture capital poured in, including $60 million from Amazon. The company burned through the cash almost as quickly as it arrived. By the time the venture investors managed to convince the founder that the company had to refine its model, much of the money was gone, and the market for new funds had dried up.
"The founder was too exuberant, and it took a lot to convince him that we had to charge delivery fees and couldn't send out a messenger to deliver a 50 cent pack of gum," Greene says. "It was too little too late." Though the company had filed to sell stock to the public, the market for internet IPOs had evaporated. In 2001, the company closed its doors.
Greene had been a venture investor for more than a decade when the bubble burst, but it taught him tough lessons, as it did many investors. Maybe the most important was not to fall in love with companies in which he invests and not to hold onto their stock too long. "Admire them, nurture them, help them grow-and then sell," he says. "I don't say that callously at all. Eventually you have to remember that you're investing capital as a fiduciary." Venture firms have investors, too. They raise money for their funds from institutions and wealthy individuals and aim to give their investors just as healthy a return as they seek in their deals.
Living through a bad bear market also reminded Greene that sentiment can sometimes play a bigger role in investor behavior than market fundamentals. As British economist John Maynard Keynes famously quipped, "The market can stay irrational longer than you can stay solvent."
"By late 2000, the market was starting to crack," Greene recalls. "And you said to yourself, 'It can't all crack everywhere at the same time,' when in fact, of course it can. When the market got these big jitters, it got bad everywhere."
The human side of investing-interacting with entrepreneurs, helping to select a management team-occupies a lot of a venture capitalist's time, Greene says. Occasionally, it brings with it one of the hardest parts of his job-replacing a CEO. If a VC does his job right, that conversation when it comes shouldn't be a surprise, Greene says.
"You don't just wake one day and say, 'This needs a change,'" he explains. "You start thinking about it and talking about it with your co-investors and the manager himself. You don't just surprise him or her. You try to treat the manager with respect. Some of the managers I've had to make changes with are still good friends. They're just people, and even good people can find themselves in the wrong role over time."
Asking a founder to step aside can sometimes be easier than removing other CEOs because founders typically hold a big slug of stock. "His or her stock could end up being worth a lot of money," Greene points out. "And you've got to look at what's best for everybody. You may have 20 or 30 employees. The founder may best fit now as the head of technology or as an outward face for the company." Ideally, Greene tries to retain the founder in some sort of role. "So much of the culture and the DNA of a company are about the founder," he adds.
Greene began his career as a commercial banker, lending money to firms in the communications and media industry. It was there that he first was exposed to venture capital. He'd sit across the table from VCs as he negotiated the terms of loans with companies that they'd backed. Their jobs fascinated him, so he decided to return to business school to earn an MBA as an entree to the field.
Upon graduation from business school, he joined Prudential Equity Investors. That job led to one with Chemical Venture Partners, which eventually became Chase Capital/JP Morgan Partners. In 1999, he signed on full-time with Flatiron, which, like Contour, specialized in investing in technology companies in the New York metro area. He and Gorin formed Contour in 2006.
They wanted to work with young tech companies, where they saw an underserved niche. "New York is a big buyout town, but the buyout firms don't do what we do-financings of companies of $1 million to $5 million," he says. "There aren't nearly as many firms doing that in New York as there are in Boston and California. And the guys in Boston and California aren't coming to New York trolling for $1 million deals."
Despite working in venture capital for about 20 years, Greene still marvels at the thrill of the field for folks like himself with deep curiosity about the inner-workings of businesses. "Every day, five or 10 people are willing to come in and tell me all about their business. I feel really lucky that they want to talk with me."
Posted December 2007