NEW YORK – While some little boys dream of becoming the starting center fielder for the New York Yankees, others dream of throwing a last-second touchdown pass that wins the Super Bowl like Joe Montana. Not John Baker. Ever since he was a teenager, Baker knew he wanted to become an all-star venture capitalist.
“My father was a business professor and I always wanted to be a principal involved with growing businesses,” Baker said. “My summer reading was always on business and historical entrepreneurs.”
In 1995, after a successful 15-year career at Patricof & Co. Ventures Inc., Baker founded Baker Capital Corp. with four partners. The idea behind founding the communications-targeted firm can be summed up in one word: Focus. “Maybe because it is that I am not very smart, but I always felt I could do a little better if I focused my energies,” he said. “There are returns to focus. And I always felt the private equity business had less focus than many other businesses, while, at the same time, we were always telling our companies to focus, focus, focus’.” The message has hit home with the firm’s limited partners, who have invested a total of $1.5 billion in the firm’s two funds – the $406 million Baker Communications Fund LP and the $1.1 billion Baker Communications Fund II – to date.
Baker Capital decided to focus on digital networks six years ago because of the potential the super-sized space and its global $1 trillion appetite for capital, held for success. “We had the idea that in the communications/digital network area there were tremendous opportunities to find interesting investments for our clients…And we thought that more and more of the economy was becoming information-related,” Baker said. While the communications sector is currently out of favor in the public market, Baker remains confident in his firm’s focus and its investment decisions. “We have a number of portfolio companies from the last several years where significant value is being created, although it will take a little while for that value to be recognized,” he said.
Twenty-plus years in the business has provided Baker with the chance to accumulate the kind of veteran wisdom many thought was lacking in the venture market over the last few years, as first-time funds and inexperienced investment professionals rushed onto the scene. “The smartest person in any private equity firm is the most recent arrival. This is a business which increases one’s humility with the passage of time,” he noted.
Another lesson Baker picked up is especially applicable to the current state of the venture market. “There is never a need to be depressed. There is always a reason to get up in the morning,” he said. “As a former partner of mine says everyday the smartest people in the world show you their best ideas and that should keep you excited and passionate about the business.”
Baker’s experience has also prepared him for the current downturn of the public markets, because he realizes that VC is a cyclical business that will have ups and downs. The key is to follow a few portfolio management techniques, which Baker says some in the business have been ignoring of late, like limiting how much a firm puts into any one deal and investing over a three- to five-year period, in order to smooth out the cycles.
Finally, in the worst downturns all the ways of making money in the private equity game are pared back to one, Baker said. “You have to finance your own projects all the way to cash flow break even and fund their growth. In the current environment, as we learned in the mid-1980s, you can’t sell companies prior to product for big up-ticks, you won’t even necessarily be able to mark-up deals from the first round to the third or fourth round,” he said. “And you may not even be able to attract additional partners, so that whoever you start with has to be able to fund pro rata with you all the way through to the end.”
One thing VCs should definitely not do is make investments for the sake of doing deals or out of fear that they are missing a trend, Baker said. He compares the right approach with going up to bat in a baseball game and having no limits on called strikes. “It doesn’t matter how many great ones get through. It’s just that the ones you decided to swing at ought to be good pitches,” he said.
Indeed, Baker Capital never prided itself on the speed with which it executes transactions and, in many cases, has spent from six to 12 months talking with companies and taking a thorough approach before the firm made an investment.
With the last two years being so dominant in terms of total dollar flows in comparison to the last 20 years, Baker believes the VC industry will be living with the after effects of the bubble of 1999-2000 for a while. “One number I looked at was that from the fourth quarter of ’99 through the third quarter of 2000, there was more than $100 billion committed to over 7,000 companies. I don’t know that there are 30 Microsofts in there,” he said. “For that amount of money to triple in the next five years that means there would have to be $300 billion of IPOs, which is a tall order…so I think we are in a period of reduced expectations in the cycle.”
Even though the exit environment is cloudy, the opportunities to invest have never been better, he added. “There is great stuff at reasonable prices,” he noted. However, this will not translate into a new boom in disbursements, because there is no rush to do deals, as most people in the business believe deal flow will stay strong and prices will remain low for some time to come, Baker said.
As the current market situation sorts itself out, there will be no mid-life career changes for Baker. “I’m doing the thing I have always wanted to do since I was a teenager, I can’t imagine doing anything else,” he said. “Like most people in this business I assume I will be carried out with my boots on.”
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