Why venture capitalists give more money to entrepreneurs who have failed
Monday, April 07, 2008The venture capital world lionizes successful entrepreneurs, but failure is not the kiss of death.
That was driven home recently with the $50 million investment raised by BSG Alliance Corp., the newest startup from Austin tech veteran Steve Papermaster.
BSG's venture investors, which include longtime California firm Hummer Winblad, have put $70 million into the software services company in less than a year.
After my story about BSG's most recent infusion ran last month, e-mails and calls began arriving: Why were venture capitalists again handing millions to Papermaster?
Papermaster founded Agillion Inc., a high-profile software upstart that raised $45 million in venture capital. Agillion had a good product but almost no revenue in its 2½ years. Meanwhile, it spent lavishly. When the money ran out, Agillion went bankrupt in 2001.
Last week, I asked Hummer Winblad managing director Mitchell Kertzman how venture capitalists determine whom to back. He said investors don't look at an entrepreneur's record in black-and-white terms.
"Silicon Valley has always had a reputation for tolerating failure. It's not a badge of shame," Kertzman said. "Because if everybody thought it was a good idea, and you executed as well as you could and the market wasn't there or the economy was bad or it just didn't work, that doesn't mean people won't invest again. That's one of the great things about the Valley — it respects the effort."
Mitchell and Papermaster go back to Papermaster's first startup, BSG Corp., a software services firm he founded in the late 1980s. Papermaster made millions in 1991 by selling a big piece of his BSG ownership to Novell Corp. founder Ray Noorda. Five years later he sold BSG to Atlanta-based Per-Se Technologies for $440 million.
"Steve is a proven, successful entrepreneur who knows how use technology to change the way companies operate," Kertzman says. "I saw him do it at BSG, and I was impressed."
Papermaster later co-founded tech consulting firm Perficient Inc. and Rome Corp., an enterprise software company. He also founded Powershift Ventures, which fosters early stage tech companies.
Papermaster couldn't be reached for this column. In the past, he's lamented Agillion's failure but said, "You can't hit a home run every time."
Hummer Winblad and BSG Alliance's other investors are betting that BSG Alliance will be Papermaster's next breakout.
Founded in 2007, BSG Alliance focuses on making corporations more efficient by helping them shift from traditional systems to easier-to-use Web systems.
Papermaster told me last month that the company is in expansion mode. With a marquee list of customers including FedEx Corp., Merck & Co., Walt Disney Co. and Johnson & Johnson, BSG Alliance expects to have more than $75 million in revenue this year and be profitable, he said.
Still, the odds are stacked against venture-backed startups. Of every 10 venture deals, investors typically hope for one or two home runs, says Kirk Walden of Walden Consulting. The rest usually fizzle, he says.
"The odds of winning are low, and VCs go into deals knowing that," Walden says.
That's why investors place so much emphasis on the entrepreneur and the team.
"To have a winner, you need much more than a good business plan," Kertzman says. "You need someone who has this vision, this belief, this drive that no one can stop," he says. "But when you're backing that kind of person, you've got to accept that they're going to make mistakes. The best batter gets on base only three or four of 10 times."
Staff writer Lori Hawkins covers venture capital and startups for the American-Statesman.
