Ray Rothrock: The Nuclear Powered VC –

MENLO PARK, Calif. – Ray Rothrock may not be a practicing nuclear engineer any more, but his partners at Venrock Associates, can attest to the fact that the deals this managing partner does often seem to be nuclear powered.

“As the Rockefellers have asked us to do, we have made some pretty big companies,” says Rothrock, who focuses on infrastructure enterprise software deals. “I have made some pretty good investments for the firm,” he says, matter-of-factly describing his sizable contributions to the firm’s success.

In fact, in 1995 Rothrock spear-headed Venrock’s efforts to invest in Check Point Software Technologies Ltd., a Internet security company. A year after Venrock invested in the company, Check Point hit the public markets with a $500 million valuation. Today, the company is worth $20 billion and basically dwarfs the rest of the Internet security business, he notes. Besides the firm’s early and extremely lucrative investment in Intel Corp., Check Point is the biggest deal in Venrock’s history.

For Rothrock, the Check Point deal is one he is proud of both because of its success and because of the way he managed to connect with company’s founders. The self-described plain, old guy from Fort Worth, Texas found enough common ground with three ex-Israeli army veterans that when it came time for Check Point’s VC investors to leave the board of directors, the company asked him to stay put. “Somehow I gained their trust and their confidence and I am still on the board. It is a great feeling when you are able to do that with an entrepreneur,” he says.

Picking Winners

When it comes to picking winners like Check Point from the stream of deals that flow across his desk, Rothrock says he evaluates investment opportunities based on people, technology and the market space. “I’d say people carry twice as much weight as the other two factors and markets are probably given a little more weight than technology,” he says, noting “technology is necessary but not sufficient, and in particular, the ability to execute on technology is becoming less and less important because of the rapid development in today’s markets.”

It has been the deals that have gone wrong, which have impressed upon Rothrock the importance of people in evaluating funding candidates. Bad deals have occurred when he violated his people-first approach, by not taking the time to learn all he could about the entrepreneurs and management teams in question, he adds. “In every one of my deals that have gone south that is usually the case. I misjudged the people,” he notes.

As he evaluates entrepreneurs, Rothrock says he looks for people who can demonstrate success and the ability to complete missions and goals, as well as possessing the skill to articulate what they are trying to do. It is also a big plus for an entrepreneur to be proposing a new venture in an industry space in which he has professional experience, he adds.

Competent entrepreneurs and solid technology still cannot compensate for a less than thrilling potential market, Rothrock says. In 2000, Venrock saw a lot of deals that the firm liked, but ultimately did not back them because market due diligence just did not support the investment. “We had one potential deal in logistics that was very, very big picture – quite impressive,” he notes. “But at the end of the day our market due diligence just did not support it. It just could not be a big, big company…so we didn’t do it, despite the fact that it measured up in every other criteria we tend to look at.”

The State of the Market

The VC market currently is suffering from something like shock, Rothrock says. As the industry has scaled-up in size over the last few years, new VCs have come into a market place that was all up and to the right, he says. “Now it is all down and to the right and this never should have happened. These new VCs are all in shock,” he says. “The concepts of cash flow and profitability and business models and creating value for the consumer, who is your best source of equity, those concepts were lost in the last three or four years. Now they are coming back and are being amplified.”

Over the past few years VCs have been investing in companies with multiple risk factors, Rothrock says. Management, market, technology and financing strategy are four big risk factors in any deal, he notes. “People have been backing companies where the first three where high risk and the last one was risky, but they did not know it because they were depending upon the IPO market,” he says. “So they thought there was no risk in the financing strategy.” But now that risk has come back into financing strategies and there are still risk factors in the other three categories, there will be trouble, he notes. “And that is what is going on now,” he adds.

Going forward, VCs will likely put their cash to work at a slower pace, as they husband their resources and support their better companies, Rothrock says. “VCs are going to quickly dissolve or merge out the companies that are not performing, because the IPO market is essentially gone,” he adds.

Personal Goals

Having already achieved financial and emotional success as a VC, Rothrock says that he wants to help ensure the continued success of his firm, which now not only invests Rockefeller family money but also the capital of other limited partners. “My next goal would be to ensure, as I enter the back half of my career, that we recruit people into the firm and that I mentor those people, so that Venrock can go on,” he says.

Rothrock also hopes to go back to school one day and finish his doctorate. “I don’t know if I can execute on this, because I am getting rusty, but I am dead serious about it,” he says. “I tell my 10-year old son to figure out where he wants to go to college, because wherever he goes, I am going to go with him. I am going to work on my Ph.D. while he works on his undergraduate degree. He sort of smiles as he says okay.”