Art of the Deal

Venture deals are like love affairs. Some blossom, some turn ugly and some fizzle before they have a real chance to begin.

With that in mind, we asked seven venture capitalists to tell us about their best deal, their worst deal and the one that got away. The conversations were not only entertaining, but also instructive.

Some lessons we took away:

• If you really believe in a deal, do it even if you feel it is overvalued.

• No matter how great a particular technology is, make sure the market is ready for it.

• Don’t be afraid to bet on great entrepreneurs, even if you aren’t 100% certain about their business plan.

• And always trust your gut.

We hope you learn from the following venture capitalists’ successes and failures. They certainly did.

Alan PatricofFounder

Greycroft Partners(Patricof also co-founded Apax Partners, fka Patricof & Co. Ventures Inc.)

Most Satisfying: Cellular Communications Inc. (CCI)

Description: Constructed and operated cellular telephone systems located primarily in Ohio.

Funding: Raised $4.84 million from 1981 to 1986 from Patricof & Co. Venture Capital, The Crossroads Group, Cornerstone Management, DLJ Merchant Banking Partners, New Valley Corp., T. Rowe Price Threshold Partnerships, Tessler & Cloherty Inc. and Venrock Associates, according to Thomson Reuters and Patricof.

Lead investor: Patricof says Patricof & Co. led the first round.

Outcome: Went public in July 1986 and spun out four other companies. Patricof estimates his firm made 20x to 30x on its investment of $1 million.

“Mighty oaks from little acorns grow. This was certainly the case with CCI, which spun out four companies that were either acquired or went public, including Cellular International and NTL, a large European cable provider. The investment returned at least 20 or 30 times our money.

“It was very gratifying to be involved with CCI over a 15-year period. Back when we made the investment, the cellular business was projected to capture 2% of the market. No one realized how big it would grow, not even us. But we were fortunate to catch a huge growth trend at the perfect time.”

Least Satisfying: Computer Identics Corp.

Description: Pioneer of barcode technology.

Funding: Raised $700,000 million in 1975 from Patricof & Co. Venture Capital, according to Patricof.

Lead investor: Patricof says Patricof & Co. led the first round.

Outcome: Sold the company. Patricof says his firm lost about $350,000 on the deal.

“It’s great to be there when a trend takes off, but sometimes it can really hurt if you’re too early. That was the case with Computer Identics. They had this great technology that was a predecessor to barcodes. The idea was to put the technology on the side of trains to keep track of rolling stock. But we ran into every kind of problem you could imagine. The railroad industry wouldn’t comply, the labels could never be kept clean enough to read, and maintenance was a huge issue.

“We ended up selling the company for a fraction of our investment, even though it went public. I learned that it is very hard to educate a market. People sometimes drown while waiting for a market to catch up to a new technology.”

The One That Got Away: Starbucks Coffee & Co.

Description: Operates international coffeehouse chain.

Funding: Raised $32.4 million in three rounds from 1988 to 1991, according to the book “Strategic Management,” by Arthur A. Thompson Jr. and A.J. Strickland. Backers included Global Retail Partners, Invesco Private Capital, T. Rowe Price Threshold Partnerships, Trinity Ventures and individuals, according to Thomson Reuters.

Lead investor: Not available.

Outcome: Went public in June 1992. Current market cap of about $17 billion.

Starbucks was a deal that came to us from our West Coast office of Apax Partners in the late ‘80s. But being in New York, where there were coffee shops on every corner, it was hard to understand how anyone could start a new coffee concept that would make a difference.

“Perhaps if we got on a plane and travelled to Seattle we would have seen what it was all about. But it just seemed to touchy-feely for us. After that, I learned I shouldn’t be parochial in my thinking. I’ve seen [Starbucks CEO] Howard Schultz a few times since. He doesn’t rub it in too badly, just a little bit.”

Lip-Bu TanChairman

Walden International

Most Satisfying: MindTree Ltd.

Description: Global IT outsourcing firm based in India.

Funding: Raised $23.5 million in 2000 and 2001 from Capital International Asia, Global Technology Ventures, Templeton Asset Management and individuals, according to Thomson Reuters. Walden says it invested a total of $6.8 million for a 14.5% ownership stake.

Lead investor: Walden International, according to Walden.

Outcome: Went public in India in 2007 in an IPO that was reportedly oversubscribed more than 100 times. Currently has a market cap of about $500 million. Walden says it has divested 30% of its holdings for a return of over 13x.

“I had breakfast with Ashok Soota when he was an executive at Wipro. I told him any time he wanted to leave the company and do his own thing that I would write him a blank check. He called three months later and asked for the check. He promised me the company would reach $100 million in five to six years, and he delivered. Today they have about $250 million in revenue.

“What has made the MindTree deal so special is my relationship with Ashok. He is such a class act and has a very strong social responsibility. The company’s entire headquarters is filled with art done by handicapped children with just one finger or one toe. I even have an original print framed in my office. The company also has a volunteer program in which employees wake up at 3 a.m. to cook meals for school children and deliver them to remote areas throughout India. In India, many families don’t send their kids to school because they can’t afford to pack a meal. Because of this program many children can now attend school.”

Least Satisfying: Semiconductor Manufacturing International Corp.

Description: Semiconductor foundry in mainland China.

Funding: Raised $1.7 billion between 2001 and 2003 from AsiaVest Partners, Cadence Design Systems Inc., Creative Technology Ltd., DCM, Flextronics International, Goldman Sachs & Co., H&Q Asia Pacific, Hotung International Co., Motorola Ventures, New Enterprise Associates, Oak Investment Partners, Shanghai Industrial Holdings, Temasek Holdings Pvt., Vertex Venture Holdings and Walden International, according to Thomson Reuters.

Lead investor: Shanghai Industrial Holdings, with participation from Walden International, Goldman Sachs, Foxconn, H&QAP and AsiaVest, according to Walden.

Outcome: Went public in March 2004 on New York Stock Exchange for $17.50 per share. Stock price was $3.30 on 12/28/09. Walden says it is “underwater” on its total investment of about $45 million.

“SMIC has had all kinds of problems, including a lawsuit by Taiwan Semiconductor Manufacturing Co. [over trade secrets], which is now resolved. We are underwater on our investment. This is a very capital-intensive business that requires billions of dollars. I’ve learned I will avoid this kind of investment in the future. I also had issues with the former CEO, Richard Chang. I tried to mold him into a world-class CEO, but he was very stubborn and did not listen to my advice. It took a year and a half to replace him because the Chinese government is a major shareholder, and any kind of change required sign off from all government ministers.

“When you have government involvement in China, the decision making is not as quick as it is in Silicon Valley. I am already a very patient person, but I learned to be 10 times more patient. I also feel I have a big responsibility for this deal because I brought in other investors like NEA and Oak Investment Partners. I am still deeply involved with the company and I am not giving up. Hopefully the story will have happy ending. I am working very hard to make sure all the investors make money.”

The One that Got Away: Cavium Networks Inc.

Description: Provides semiconductor solutions for security, content and network service.

Funding: Raised $70.2 million from 2001 to 2006 from Alliance Venture Management, Appleseed Partners, Beachhead Capital, China Development Industrial Bank, Diamondhead Ventures, Menlo Ventures, NeoCarta Ventures and Rembrandt Venture Partners, according to Thomson Reuters.

Lead investor: Alliance Venture Management, according to Thomson Reuters.

Outcome: Went public in May 2007 on Nasdaq for $13.50 per share. Stock closed at $24.23 per share on 12/28/09, giving the company a market cap in excess of $1 billion.

“Cavium is a deal I approved, but my partners thought it was over-valued so we did not invest in the series A. Then my friend John Jarve at Menlo Ventures, who led the [second] round, gave us a second chance with the series B. But again we didn’t invest because of valuation. I kick myself for missing this investment—not once, but twice! That is unforgivable. I wish I had been more forceful with my partners about doing the deal. I learned that you must always look at the big picture, and not fight over a few cents per share. Sometimes you get so hung up on valuation that you miss the chance to be part of a billion-dollar company. That is very sad.”

Lisa SuennenCo-founder

Psilos Group Managers

Most Satisfying: Definity Health Corp.

Description: Health insurance provider.

Funding: Raised a total of $84 million from 2000 to 2004 from Alta Partners, Bain Capital, Brightstone Capital, KKR, Liberty Ridge Capital, Merrill Lynch Capital Partners, Psilos Group Managers, TD Capital Group Ltd. and VantagePoint Venture Partners.

Lead investor: Psilos Group Managers says it led the first round.

Outcome: Acquired by UnitedHealth Group for $300 million in 2005. Psilos says it made in excess of 3.2x cash-on-cash on its aggregate investment of $21.6 million.

“This deal is special to me because when we funded Definity, people looked at us like we were nuts. Definity came to us with this idea of building a market by giving consumers more say about how their health care dollars are spent and allowing them to select their own health care services. That made sense to us. But I called all my contacts in the industry, and, to a person, they all said this was the stupidest idea they’d ever heard of. They said no company will say yes to this because employees aren’t smart enough to make good health care decisions on their own.

“But our instinct told us it was a good idea. The tale of the tape is that Definity’s concept worked phenomenally well and changed the insurance industry. This deal taught us to believe in ourselves and stick to our guns, even when everyone else thought we were crazy. I credit the Definity deal with helping to put our venture firm on the map.”

Least Satisfying: Navitas Cancer Rehabilitation Centers of America Inc.

Description: Network of clinics providing physical therapy services to cancer patients.

Funding: Raised $15.75 million between 2005 and 2008 from Psilos Group Managers, Shoreline Venture Management and individuals.

Lead investor: Psilos says it led the Series A with $4 million and was joined by Shoreline, which also put in $4 million.

Outcome: Folded company and merged intellectual capital with portfolio company SeeChange Health Inc.

Navitas was a big disappointment to me because the business didn’t work, yet it was so obviously a good thing. Cancer treatments like chemo and radiation are almost worse than the problem. But physical therapy services can dramatically improve outcomes for cancer patients undergoing treatment. Navitas’ patients felt the program was saving their lives. My brother-in-law was going through throat cancer, and I saw how Navitas was making a huge difference for him.

“But we just couldn’t get physicians to build Navitas into their practice patterns. Getting a referral was beyond difficult. They just forgot about it. I thought this was a real failure of the medical system. I learned that it’s very hard to change service practice patterns in physician offices. I also learned that specialty clinics are a real crapshoot. Some do succeed, but they are very challenging investments.”

The One that Got Away: Opus Medical Inc.

Description: Develops minimally invasive orthopedic medical devices for rotator cuff surgery.

Funding: Raised $23.6 million from 2000 to 2003 from Apax Partners Worldwide, Prospect Venture Partners, Three Arch Partners and individuals.

Lead investor: Not available.

Outcome: Sold to ArthroCare for $130 million in 2004.

Opus was a deal we were competing for, but we just didn’t get picked. I thought this was a super-cool company with a new way to do surgical repair for rotator cuff injury. We really wanted in on that deal, but we were not a well-known name at the time, and we got beat out by the big boys. The company went on to be very successful, and when they were sold to ArthroCare, I let out a big ‘Argh’ because I saw that one coming. We were the new kid on the block back then. Maybe now we’re in a position where we’d get that deal.”

Mike KwatinetzFounding General Partner

Azure Capital

Most Satisfying: VMware

Description: Provider of virtualization services.

Funding: Raised a single round of $26 million in 2000 from Azure, Dell Ventures, Goldman Sachs & Co. and J.P. Morgan Partners, according to Thomson Reuters (publisher of VCJ).

Lead investor: Dell Ventures, according to Thomson Reuters.

Outcome: Acquired by EMC for $675 million. Azure says it made between 2x and 4x on its investment of $5 million.

VMware is the most satisfying, in part because it was a controversial deal. When Cameron Lester and I invested, no other VCs were interested. At that time, virtualization just wasn’t pizzazzy. It was too new and no one else had made an investment in the space. We knew this market was a multi-billion dollar market, even if no one else believed it.

“Also, I have no proof of this, but I think there was some prejudice against women CEOs. Diane Green of VMware is a phenomenal CEO, but she doesn’t give flashy presentations and she doesn’t hype the numbers. We actually make a point of investing in companies where we think irrational prejudices lower the valuation. We have invested in a lot of women CEOs and have done pretty well that way.”

Least Satisfying: VMware

Description: Provider of virtualization services.

Funding: Raised a single round of $26 million in 2000 from Azure, Dell Ventures, Goldman Sachs & Co. and J.P. Morgan Partners, according to Thomson Reuters.

Lead investor: Dell Ventures, according to Thomson Reuters.

Outcome: Acquired by EMC for $675 million. Azure says it made between 2x and 4x on its investment of $5 million.

“VMware was also my least satisfying deal because we thought they should not have sold when they did. It’s not like we thought they would be worth $20 billion—the value five years later—if they waited another year, but we did think they would be worth a few billion. Sure, we did well, but there is still regret because the outcome was suboptimal compared to what it could have been. If circumstances were different, we could have made 10 or 20 times the money.

“What’s most dissatisfying is we didn’t get a board seat with our investment. We thought we knew what the company had to do, but we did not have enough power to influence the outcome. As a firm, we made a decision to always have a board seat and never allow that situation to happen again.”

The One that Got Away: Audible Inc.

Description: Provider of digital spoken audio information and entertainment.

Funding: Raised $9.1 million in August 2003 from Apax Partners Worldwide and Bertelsmann Capital Ventures, according to Thomson Reuters.

Lead investor: Not available. Bertelsmann invested $5.3 million and Apax put in $3.8 million, according to Thomson Reuters.

Outcome: Acquired by in March 2008 for $247.25 million.

“In late 2002, I told my partners I wanted to invest in Audible, which was a public company. The stock market had collapsed and companies like Audible had fallen out of favor. We could have taken our usual ownership stake at a tremendous discount. But we had never invested in a public company before, so we did more due diligence and took our time evaluating the options. But then the stock starting moving up and another venture firm swooped in.

“We missed our chance. We could have made 15 times our money in a few short years. As a result, our firm is much less worried about the form of a particular deal. It’s the substance that matters. If we spot a good company and a good team, we are much more willing to do the deal—even if it doesn’t look like a traditional venture transaction—as long as we can get the ownership we target at a price we feel is reasonable and have at least one board seat.”

Bob AckermanFounder

Allegis Capital

Most Satisfying: IronPort Systems Inc.

Description: Provides email and Web security appliances.

Funding: Raised $94.4 million between 2001 and 2004 from Allegis Capital, Amicus Capital, Chevron Technology Ventures, General Motors Investment Management Co., Menlo Ventures, New Enterprise Associates, Rembrandt Venture Partners, Starter Fluid and Western Technology Investment, according to Thomson Reuters. Allegis says it participated in three financing rounds, but declined to disclose its total investment.

Lead investor: Menlo Ventures with Allegis Capital as co-investor, according to Allegis.

Outcome: Acquired by Cisco for $830 million in January 2007. Allegis says it made about 10x on its investment.

“IronPort was a highly competitive investment with a very strong team. They could have raised money from anyone. In fact, they had term sheets for the entire amount from all the big guys. But we had prior experience with one of the founders. He wanted us in the deal because he knew the value we could add. At the end of the day, the IronPort management team insisted that we be part of the syndicate as a condition to accepting term sheets.

“That was a case where a group of entrepreneurs really went to bat for us. The IronPort deal was validation of our firm and our philosophy. When I started Allegis, I said we would be the kind of entrepreneur-centric firm that I wished I was dealing with as an operating guy. You win on your ability to add value rather than just pay a higher price. That’s how you build a sustainable competitive advantage in this business.”

Least Satisfying: Pensare Inc.

Description: Provides e-learning tools.

Funding: Raised $34.6 million from 1997 to 2001 from AIG Global Investment Group, Allegis Capital, Arcadia Management, Associated Venture Investors, Battery Ventures, GE Commercial Finance-Equity, General Electric Venture Capital Corp., and W.R. Hambrecht & Co., according to Thomson Reuters.

Lead investor: Allegis Capital (then called Media Technology Ventures) led the first round, according to Allegis.

Outcome: Company ceased operations, but founder Doug Donzelli is now CEO of Aprion, another company in the Allegis portfolio. Allegis declined to disclose its loss.

“Back in the late ‘90s, Pensare was the hottest team with the hottest technology in the hottest space. Everyone was talking about e-learning, and we were the poster child for this brave new vision of ongoing learning in the corporate environment. But then we ran into the buzz saw of the dot-com crash. All those companies that talked about forming corporate universities suddenly weren’t talking about it anymore.

“At that time, I don’t think the cure for cancer could have gotten funded, let alone e-learning. The one big lesson I took away is that you can’t take for granted that customers will actually spend money the way they tell you they will spend money. I have a lot of passion around education. I really thought the stars were lining up for e-learning to have a transformative impact. But in the end, customers weren’t prepared to defend it when their budgets got cut.”

The One That Got Away: Control4 Corp.

Description: Provides IP-based home control and entertainment system solutions.

Funding: Raised $98.4 million between 2003 and 2009 from Foundation Capital, Frazier Healthcare and Technology Ventures, Mercato Partners, Thomas Weisel Venture Partners, The University Venture Fund and vSpring Capital, according to Thomson Reuters.

Lead investor: Thomas Weisel and vSpring funded the Series A round of about $4 million in August 2003, according to Thomson Reuters.

Outcome: Raised $17.45 million from eight investors in June 2009. No liquidity event for investors yet.

“We really liked the Control4 management team and the market they were going after, but we simply concluded it was out of our domain. We could bring money to the deal, but not expertise. And if you can’t bring expertise in a way that mitigates risk, then you are just betting on luck. And that’s not a sustainable competitive advantage. The company has gone on to do phenomenally well without us.”

Jeff ClavierFounder

Softech VC

Most Satisfying: Mint Software Inc.

Description: Online personal finance tool.

Funding: Raised $31.6 million from 2006 to 2009 from Clavier, Benchmark Capital, DAG Ventures, First Round Capital, The Founders Fund, Shasta Ventures Management and Sherpalo Ventures, according to Thomson Reuters.

Lead investor: First Round Capital led the seed round, with participation from Clavier and others, according to Clavier.

Outcome: Acquired by Intuit for $170 million in November 2009. Clavier says he made 15x to 20x on his investment of about $50,000.

“I was thrilled to receive an awesome payout from this investment. But what is really special about Mint is they are proof that every now and then our industry actually works. You back an entrepreneur and his dream, and you do everything you can to support the business. And then, three years down the road, all that hard work pays off because somebody comes along and pays an insane amount of money for that startup. Mint was also satisfying because [founder] Aaron Patzer and his team did such a great job on execution. They made very few mistakes, which is so rare for a startup. In my mind, Aaron has set the bar for all entrepreneurs I meet.”

Least Satisfying: Edgeio Corp.

Description: Operated an online listing marketplace where individuals and large online stores could submit listings that appeared throughout its network. Co-founded by Mike Arrington of TechCrunch.

Funding: Raised $5 million in a Series A in October 2006 from Clavier, Intel Capital, Millennium Technology Ventures, RSS Investors and Trans Cosmos USA, according to Thomson Reuters.

Lead investor: Intel Capital led the Series A, according to Thomson Reuters.

Outcome: Company’s assets were sold in December 2007 to Looksmart and Clavier says he lost about $50,000.

“Sometimes there are good reasons why investments blow up, like the product isn’t strong enough or the market doesn’t pan out. And other times you just botch the opportunity by making a series of hiring mistakes and execution mistakes that turn an interesting idea into something that fails. I would say that’s what happened with Edgeio.

“I don’t regret making the investment based on the information I had at the time. I learned a lot, like trying to aggregate online content is really challenging. Still, I feel like we had some execution issues that prevented us from completely leveraging the opportunity.”

The One That Got Away: LinkedIn Corp.

Description: Operates social network for professionals.

Funding: Raised $103.45 million from 2003 to 2008 from Bain Capital Ventures, Bessemer Venture Partners, Goldman Sachs & Co., Greylock Partners, McGraw-Hill Ventures, SAP Ventures and Sequoia Capital, according to Thomson Reuters.

Lead investor: Sequoia Capital was the sole investor in LinkedIn’s $4.95 million Series A in November 2003, according to Thomson Reuters.

Outcome: Company is rumored to be an IPO candidate. It raised $53 million at a $1 billion post-money valuation in June 2008.

“To this day, I still kick myself for passing on LinkedIn. [Founder] Reid Hoffman invited me and some other friends/angels to invest when the company did its Series A round with Sequoia. I was a huge fan of the service, had great respect for Reid and was spending a ton of time on the site. I guess at the time I thought the valuation was too high and I didn’t really see the monetization [strategy].

“This will probably prove to be my most costly mistake. I’m sure I would have made 100 times my investment. I should have done this deal based purely on my passion for the service and its early traction. Basically, I should have trusted Reid. I learned that sometimes it’s OK to pay a bit more than what you would otherwise price a company at.”

Sharon Wienbar

Managing Director

Scale Venture Partners

Most Satisfying:

Description: Operates an online marketing platform.

Funding: Raised $22.87 million from 2005 to 2008 from ATEL Ventures, Outlook Ventures and Scale Venture Partners, according to Thomson Reuters.

Lead investor: Scale Venture Partners says it led the first round in 2005.

Outcome: One of the fastest growing companies in Scale’s portfolio.

“ is my most satisfying, despite all the sleepless nights it has given me. The company serves the automotive and real estate sectors, which were hit hardest by the recession. I remember one surreal moment when we had an emergency board call about whether to extend credit to GM and Chrysler for marketing services—right before these companies were about to file for bankruptcy and we weren’t on the approved creditor list!

“However, the founder, Payam Zamani, was able to turn the company around even while the market was melting down around him. It would have been easy to say, ‘Hey, the company is not doing well, so let’s replace the CEO.’ But there wasn’t anything he should have been doing differently. In fact, he made the hard choices to cut costs faster than revenue was falling. I learned that if the entrepreneur is willing to make the hard choices, let him do it. Reply is now one of the fastest growing companies in our portfolio.”

Least Satisfying: BellaMax Inc.

Description: Provides digital photo enhancement services to consumers, professionals and businesses.

Funding: Raised $9.3 million from 2003 to 2006 from Adobe Systems, Apex Venture Partners, Granite Ventures and Scale Venture Partners, according to Thomson Reuters.

Lead investor: Apex Venture Partners and Scale Venture Partners led the company’s $6.3 million first round in March 2003, according to Thomson Reuters.

Outcome: The still operates with a couple of employees who run it for cash. Scale declined to say how much it lost on the deal.

“BellaMax was a total wipeout deal. The two founders were from Adobe, where I once worked. Shortly after I invested it was clear the two founders did not get along and within six months, both were gone. We hired a new CEO who pushed every button she could to find a market for this technology. But in the end there was no market because this was not something consumers were willing to pay for.

“When we invested, BellaMax had promising tests with companies like and eBay. But they could never build on this early traction. I think I was overeager to make this investment. As an ex-Adobe person, I may have assumed more than I should have. I really wanted this deal to work. I learned that you have to step outside your own set of experience, scrutinize all the facts, and peel back every layer.”

The One That Got Away: Playfish Ltd.

Description: Develops games for social networks.

Funding: Raised $17 million in a single round from Accel Partners and Index Ventures in October 2008, according to Thomson Reuters.

Lead investor: Accel Partners and Index Ventures.

Outcome: Acquired by Electronic Arts for up to $400 million in November 2009. EA paid $275 million in cash and $25 million in equity retention arrangements and agreed to pay another $100 million if Playfish meets certain milestones.

“We did everything we could to invest in Playfish. We flew people to London and Seattle to meet them, we did favors, but we couldn’t get in. We knew the founders because their previous startup was acquired by a mobile gaming company in our portfolio. We weren’t at all surprised at their huge exit.

“I’m not sure we could have done anything differently. Playfish is based in London and they were bridged by Accel London, so they had local investors from the get-go. They also liked that Accel was in Facebook, and it’s hard to compete with that.”