A Decade Later

It’s often said that 9/11 changed everything. No doubt, the horrible events of that awful day altered life in America and the world forever. Ten years later, it’s a question worth asking, even if there is no simple answer: What’s changed since then?

On the eve of the 10-year anniversary, VCJ wanted to better understand the impact of 9/11 on the venture industry, in particular.

It’s clear that from an economic standpoint, 9/11 was a terrible blow. Coming on the heels of the dot-com meltdown, it was like getting kicked when you’re down. In the year prior to 9/11, venture capital firms raised a stunning $112 billion from investors for new and follow-on funds. In the years following 9/11, VCs never came close to that kind of fundraising activity again. In 2010, for instance, U.S. VCs raised about $13 billion.

Today, the venture industry is noticeably smaller. Some say that would have happened no matter what. But 9/11 clearly accelerated the decline in fund sizes and made institutional investors who were questioning the asset class abandon ship that much faster.

“9/11 put our industry in a state of paralysis for years,” says Dixon Doll, co-founder and general partner of DCM. “It was the slowest period in terms of activity than any other point in my career. People were operating in almost paranoid-driven survival mode and everyone was just hunkering down.”

The most impressive thing, however, is that the venture community from Silicon Valley to Silicon Alley refused to die, even though many observers had already written off many VCs nationwide.

“I never thought I needed a new profession, even though there were people who were certainly thinking that way,” says David Hornick, a partner at August Capital. “The real lesson for me as a VC is that things are never quite as dark as they seem. We have a remarkably efficient and resilient capitalist economy here.”

We asked leading VCs to talk about the consequences 9/11 had—or didn’t have—on their personal and professional lives. What’s changed since 9/11? Their responses will surprise you.

Did 9/11 Kill Venture Deals?

Nearly every VC has a story to tell about a deal that went bad because of 9/11.

Charley Lax was a managing partner at Softbank Capital in 2001. National Leisure Group, one of his portfolio companies, was about to be sold to Barry Diller’s IAC. In fact, the deal was signed and was set to close on Sept. 11. But as events of the day took hold, Lax says that Diller backed out of the deal.

“Who wants to buy a leisure travel company when the skies are shut down and the world is in chaos?” says Lax, who is now a managing partner at GrandBanks Capital. “Barry just upped and walked away from the deal.”

Softbank didn’t forgive and forget. It sued IAC for breach of contract. As part of the settlement, IAC agreed to make a substantial equity investment in National Leisure Group rather than buy it outright. The deal worked out for everyone in the end when the company was acquired by World Travel Holdings Inc. in 2006.

But not every story had a happy ending. Gerry Langeler, a managing director at OVP Venture Partners, remembers clearly the cruel fate of one his more promising portfolio companies. In 2001, 800.com was starting to make real headway as an online retailer of consumer electronics.

The company, which raised about $121 million in total funding from about 10 firms from 1998 through 2001, had about $40 million in revenue and was about to double sales overnight by signing a contract to become the fulfillment arm of American Express’ rewards program.

The deal was in place and ready for signatures when the Twin Towers came crashing down.

“Amex had some offices in or around the Towers, and they lost some key people who were involved in the transaction,” Langeler says.

Amex pulled out of the deal, and 800.com lost a crucial revenue source. The company never recovered and Circuit City bought some of the assets of 800.com a year later at a bargain basement price.

Lessons Learned

Life is nothing if not one long learning process. And sometimes it takes a gut-wrenching crisis to drive those lessons home.

This was a profoundly introspective time for me. You realize that life is so fragile, but you also realize that every day you are here is a gift.”

Michael GreeleyGeneral PartnerFlybridge Capital Partners

Matt Howard, an 11-year veteran with Norwest Venture Partners, says he learned something on that tragic day that forever shaped him as a VC. He remembers being very excited in the days prior to 9/11 because he was about to close one of his very first deals.

He had worked hard to piece together a three-way investment syndicate and was applying the finishing touches.

And then the attacks came. That’s when Howard learned that investment syndicates can be fragile things. One of his co-investors was so freaked out by the events of 9/11, he lost his nerve and backed out of the deal. Despite a signed term sheet, the deal unraveled.

“In my book, the person who backed out became a fair-weather investor,” Howard says. “The moral of the story is that it opened my eyes to how important it is to have great co-investors. The beauty of being a VC is that you are long-term investor and you should not be tied to events of the day. From that point forward, I’ve always tried to be more selective about my co-investors.”

Plenty of Changes Took Place

For better or worse, 9/11 changed the way VCs approach the business. Some of those changes were subtle, others were more profound.

Mark Siegel, a managing director at Menlo Ventures, says 9/11 made him think twice about doing early stage deals that required a lot of capital and many rounds of venture funding.

“When you are in an environment where you can’t see the light at the end of the tunnel, you start thinking, boy, I have to keep these companies going for a long, long time,” Siegel says.

He made a concerted effort to take some of the risk out of the equation by targeting later stage deals that already had some traction and were on the road to liquidity.

One of the first later stage deals he backed was 3Par, which had raised more than $100 million during the bubble days. But its valuation had taken a big hit after 9/11, and Menlo was able to jump into the deal at a reasonable price, Siegel says. The investment worked out. 3Par was acquired by Hewlett-Packard last year for about $2.4 billion.

For Lax of GrandBanks, 9/11 resulted in a dramatic change in lifestyle. Prior to 9/11, the Boston-based VC was on a plane almost every day of the week for business, often visiting three cities in a single day.

“I would have a breakfast meeting in New York, followed by a late lunch in D.C., and then wrap up with a nightcap in Atlanta or Chicago,” he says. “That’s simply not possible anymore because of the nightmare of TSA.”

In the days after 9/11, he quickly lost his taste for commercial air travel, as well as the long lines and an occasional groping from airport security that goes along with air travel.

“I’m so disgusted by air travel to the point where I no longer want to fly,” he says. Lax doesn’t think he’s alone. He believes many of his colleagues are not traveling as much as they used to, and that VCs once again have a strong preference for startups located in their own backyard.

“Cutting down on travel probably has impacted my job,” he concedes. “Our returns are good, but maybe they could be even better if I traveled more.”

Nevertheless, it’s no longer a tradeoff he’s willing to make.

New Investment Opportunities

Clearly, a whole set of opportunities were spawned by 9/11 around physical security and homeland defense. And some of those companies have gone on to do well in the years since.

Just ask Michael Greeley, a general partner at Flybridge Capital Partners. His firm spent two years considering what the post 9/11 world would look like and where the best opportunities would be.

Those deliberations led Flybridge to incubate a company called VidSys, which provides a cost-effective way to monitor security cameras installed in such places as the New York subway system.

The moral of the story is that it opened my eyes to how important it is to have great co-investors. The beauty of being a VC is that you are long-term investor and you should not be tied to events of the day.”

Matt HowardGeneral PartnerNorwest Venture Partners

If someone walks onto a train with a bomb, for instance, the VidSys video monitoring system can detect the threat.

“We found the technology, put together the team and spun out the company,” Greeley says. “We would never have even thought to do a company like this prior to 9/11.”

The firm was also an early investor in Reveal Imaging, which developed a bomb detection technology for checked airline baggage. The company was acquired a year ago by SAIC for an undisclosed amount, with Greeley calling it an “extremely successful investment.”

Bio-defense Startups

Bio-defense and pandemic related investment were all the rage after 9/11. Prominent venture firm Kleiner Perkins Caufield & Byers even carved out a $200 million fund dedicated to combating bio-terror and germ warfare.

Other investors got excited too.

“Here was an opportunity where the government was promising to write huge checks for companies that had to jump through fewer technical and regulatory hoops,” says Chris Ehrlich, a general partner at InterWest Partners.

But looking back, Ehrlich is relieved he didn’t end up making any investments in the sector, despite being tempted at the time.

“Most of these deals never panned out,” he says, mostly because development times are long and memories are short.

“If you could have gotten a biopharmaceutical product out in 2002, that would be a great financial transaction,” Ehrlich says. “But it takes years to develop these products, and by 2006 or 2007, people had completely forgotten about this stuff.”

In the days after 9/11, a bio-warfare attack was the number one fear for most Americans. Today, against a backdrop of economic strife and record unemployment, it is near the bottom of the list.

“Back then, every time you saw a powdery residue in your house you thought it was anthrax,” Ehrlich says. “Today you just think it’s dust.”

Lasting Impact of 9/11

Many VCs point to 9/11 as the event that plunged the industry into a deep freeze, one that still hasn’t quite thawed. Returns have been abysmal over the last 10 years, and exits, especially IPOs, have been few and far between, despite the recent flurry of activity.

“The table was set with the dot-com and telecom crashes, but 9/11 ensured that any turnaround would be slow to happen and would take many more years to get people’s psychology to return to a normal state of mind,” says Doll of DCM.

But not everyone agrees.

“I don’t think 9/11 has had any lasting impact on venture,” argues Hornick of August Capital. “Yes, it created friction in big commerce with people not willing to travel and so on. But that was a short-term effect.”

The reality, he argues, is that venture industry was never in grave danger. 9/11 was not a death knell and did not usher in the end of civilization as we know it.

“9/11 didn’t change my thinking about the deals I was doing or the investments I wanted to make,” he says. “Sure, 9/11 was a terrible day, but statistically it was insignificant to the VC industry. In no way was it uniquely destructive to building value in companies.”

East Coast VCs

9/11 put our industry in a state of paralysis for years. It was the slowest period in terms of activity than any other point in my career.”

Dixon DollCo-founder and General PartnerDCM

Because of their proximity to the actual events, it’s possible that East Coast VCs took 9/11 more personally and felt its effects more viscerally.

But for Washington, D.C.-based John Backus of New Atlantic Ventures, what really changed was his understanding of how government works and how new legislation can impact venture investing. Before 9/11, he paid little attention to what went on in political circles. After 9/11 he became a policy junkie.

“I saw this drumbeat of the Patriot Act and legislation around things like energy independence and immigration,” he says. “These policies had the potential to affect big industry. And any time there are big changes coming, it creates opportunity.”

Before 9/11, for instance, New Atlantic Ventures would never have made an energy investment. After 9/11, however, it took the opportunity to back a company called Ember that aims to reduce energy cost and emissions and improve supply security.

“The investment was born out of our new understanding of the U.S. energy policy,” Backus says.

This type of policy-based investing has continued to this day.

“We aren’t health care guys, but since health care reform passed, we have made three investments in the space because we think we understand the impact of that legislation over the next decade,” he says.

A Change to the Worldview

The events of 9/11 encouraged many VCs to abandon their U.S.-centric approach to investing and start thinking globally.

DCM, for example, first dipped its toe in China in 1999. But it didn’t get serious about the country until after 9/11.

“As VCs, we look for the areas of greatest opportunity,” Doll says. “Prior to 9/11, that was always in the U.S., but after 9/11, we looked for hot areas anywhere in the world.

The tragedy of 9/11 made Doll realize that he needed to diversify his risk by establishing offices abroad and making bets in places outside of the United States.

“The fact that things were down-and-out here caused us to pay greater attention to China, find better companies there, and perform more thorough work than would have otherwise been the case,” he says.

That hard work led DCM to such Chinese companies as 51jobs, BitAuto, RenRen and DangDang, all of which have since gone public.

“We would have been seriously committed to China no matter what, but the existence of 9/11 made the relative risk/reward equation a much more compelling proposition,” says Doll, whose firm now spreads its money equally between Chinese and U.S. startups.

Similarly, Backus of New Atlantic Ventures says the tragedy of 9/11 made him think twice about putting all his eggs in one basket. In his first fund, raised prior to 9/11, some 90% of the money came from U.S.-based limited partners. In his next fund, only half the money came from U.S. investors, with the rest coming from Europe.

“9/11 made us realize that you can have these horrible events that disproportionately impact one region over another, so in our next fund, we made a concerted effort to be geographically diversified,” Backus says. “A small fund like ours simply can’t afford to have over-exposure to U.S. investors.”

Personal Effects

Alex Rosen

, managing director at IDG Ventures, has a more philosophical take on 9/11. He grew up in Russia during the communist era. His family’s apartment was bugged by the KGB. His great uncle was executed by the Stalin government. People around him were shipped off to the gulags.

So the events of 9/11, while devastating, did not have the same shock value to him, considering he had experienced large-scale violence and devastation in his own backyard before.

When you are in an environment where you can’t see the light at the end of the tunnel, you start thinking, boy, I have to keep these companies going for a long, long time.”

Mark SiegelManaging DirectorMenlo Ventures

9/11 confirmed to Rosen that the world is a dangerous place and bad things can and do happen. As a VC, that terrible day made him more aware than ever that external events can create chaos and destruction in a particular industry and even a particular portfolio company.

“Most Americans are fortunate enough to think of the world as a fairly safe place to exist,” he says. “They know bad things happen on TV and in the newspaper, but they don’t really happen to them. 9/11 shattered that sense of security permanently.”

9/11 was a life changing experiencing for many people, including Greeley of Flybridge Capital Partners. He lost his very good friend from business school in one of the Towers. The friend had just landed a new job at a hedge fund.

“It was a profoundly introspective time for me,” recalls Greeley. “You realize that life is so fragile, but you also realize that every day you are here is a gift.”

He was determined to follow his dreams and not waste another minute of his life. A week later, on Sept. 19, he quit his job as a VC with Polaris Venture Partners and set about creating his own venture firm from the ground up.

“I was scratching my head over starting my own fund for several months and I really think it was 9/11 that put me over the top,” Greeley says. “I had just had this devastatingly personal experience. I was happy at Polaris, but life is so short. I had to go for it.”

Tom Stein is a Palo Alto, Calif.-based contributor. He can be reached at tom_stein25@yahoo.com.

VC Perspective

10 9/11s Later

Scott Maxwell, Founder, OpenView Venture Partners

Everyone remembers where they were on Sept. 11, 2001.

I woke up in a New York hotel and took the train to Philadelphia for a board meeting. I received a BlackBerry email from one of my partners who told me about the first plane hitting the Twin Towers.

I then received another message that one of our team members’ husband worked on one of the top floors. It was a really, really sad experience. We helped arrange his funeral a few days later and worked hard to make sure that everyone in our midtown Manhattan firm and our families were making it through the ordeal.

On 9/11, everything seemed to stop. The world tends to work because everyone anticipates that everything tomorrow will be the same as today and we all go about our business knowing our routines.

But with 9/11, those expectations changed. We did not know what would happen next and everyone pretty much just stopped. The biggest change that I remember is how the planes stopped flying, and when they started flying again there were only three or four passengers on some of the flights that I was on.

It was like the flywheel just stopped and it took an amazing amount of effort for everyone to push and slowly get it moving again. We kept pushing and the flywheel slowly got going, quicker and quicker.

From an investment perspective, we were starting do go through a tech bubble deflation and the events of 9/11 really helped that along. We had gone from the best of times partying in 1999 to the worst of times in late 2001. Any investor who went through that experience thinks about the scenario as they consider possible events that could impact their portfolio companies.

That said, the economic flywheel continues to turn. It slowed again during the recent economic downturn, but has been turning faster and faster since. The planes are overbooked again and the economy is seeing solid improvements.

It still needs to turn a lot faster to recover to full employment, and I suspect that it will. The memories and impact of 9/11 are fading, but those of us who experienced it will all have permanent scars.

This year we will experience our 10th 9/11 anniversary. I hope that it’s a quiet one focused on embracing our people and remembering those that are not with us any longer.

I also hope that the flywheel keeps accelerating.

Scott Maxwell founded OpenView Venture Partners in 2006 and has worked in venture capital for more than 11 years. He blogs at http://blog.openviewpartners.com/author/smaxwell/ and can be reached via Twitter at @scottsnews.