Top of Mind: Taylor Scanlon

Who better to give venture capitalists an informed perspective about their industry than someone who’s been through the fund-raising ringer and has come out in one piece? We sat down with serial entrepreneur Taylor Scanlon, CEO of Pintail Technologies, to get his perspective on the current fund-raising environment and the various issues facing VCs and entrepreneurs alike. Scanlon has a unique perspective because he raised money before, during and after the bubble. He’s now pounding the pavement looking for a $5 million to $7 million Series B round for Pintail, a Plano, Texas-based startup that makes semiconductor testing software.

VCJ: What’s different today from the first time you went in search of VC?

Scanlon: Certainly everyone is still a bit gun-shy because of the collapse [of the bubble]. We’re on an upswing right now and I notice that optimism is improving daily in investors’ eyes and they are starting to loosen their purse strings. The absolute amount of money or valuations that you’re willing to give to startups are somewhat more conservative right at this moment, but they have improved a great deal over the past 12 months.

I would not be surprised by the end of this year that there is little difference between what I saw in ’98 and what I see today. There are a couple of dilemmas for investors that I am very sensitive to. One is that they still have more money than they know what to do with. …

The investors today that I talk to in the technology space seem to be conflicted. On the one hand they don’t want to get involved in capital-intensive endeavors [like telecom equipment companies] again, but on the other hand they still have large blocks of money that they would like to place.

VCJ: When do you think they’re going to work through that?

Scanlon: I think that by necessity they’re going to have to make more small investments-small meaning $5 million or less, as opposed to $5 million to $10 million.

Does that mean VCs will have to invest in more companies, which means juggling more investments?

I think so. As you know their industry collapsed. [For example], Austin Ventures raised $1.6 billion and gave half of it back. But they still have $800 million.

Which is about twice the size of new funds being raised right now.

Right. And in $5 million pieces, it’s very difficult to have enough people to dole it out carefully. But personally I believe that’s what they’ll do.

What else are you seeing in the market?

Another observation that has been shared with me by some of my venture capital friends is that the biggest problem today is that there is no macro-level driver that everyone can count on. My guess is that wireless is probably the strongest possibility. Nanotech is a buzzword, but is too speculative.

Back at the advent of the Internet-or the advent of the microprocessor, and so forth-most of the really successful venture capitalists I know would piece together large visions of how the whole industry was going to go, and they would place investments in multiple firms that were contributing to that macro trend.

Give me an example.

A technical example, although this isn’t a hot investment area, would be HDTV. You need ground stations, TV sets, satellites, content. A wide range of different things have to be done in parallel to get it all together.

What I’ve noticed from a venture capital standpoint-and I’ve talked to three highly qualified guys, friends of mine are who are in big firms here [in Silicon Valley]-they’ll actually want a piece of each one of these things. If there are chips made, base stations, content, satellite systems, service providers, they’ll want one of each of these in their portfolio. They’re trying to catch a macro trend. It’s an all ships rise in a rising tide’ kind of thing. …

Today, other than wireless, folks are struggling a little bit as to where to put their money. Is it China? Is it wireless? Is it content? Personally, as an entrepreneur, I think people got spoiled with the Internet rollout. Things like that don’t happen very often. It’s simply harder today. You have to do more homework. It’s harder to pick winners, quite frankly.

Look into your crystal ball. Will another macro trend that we don’t know about yet open up and allow these guys to put a bunch of money to work or are they looking at many years of tougher investing?

Part of my answer is clouded by the fact that I’ve read other analysts who have speculated on the same thing. I don’t disagree that there is at least a three-year period ahead of us where the investor is going to have to work harder at finding good deals and both the entrepreneur and the investor are probably going to be refocused on fairly traditional execution issues, customer satisfaction issues and doing something that gives a good ROI in and of itself.

Are VCs OK with the fact that they are are going to see lower returns?

I don’t think they’re OK with it, but I think they see it as reality. Because the way you run a company can be somewhat different. I get certain guidance from my board members. You recall from my background that my first startup was Virtual Silicon. We started raising money in 1997 and closed our first round in 1998, so it’s curious to me to hear financial reports that say times today are like they were back in ’98. If that’s true, I have some experience with that whole thing.

What was the environment like when you raised your first venture capital?

In 1998 the guidance we agreed upon with my investors was that we would run the company at all stages as though it were going to be a public company-so you’d get properly audited financials, you’d invest somewhat in infrastructure, you’d invest in trademarking, IP protection and so forth.

Today, I think there is a little bit more focus, from a reality standpoint, of preparing or keeping your eyes open for M&A partners at all steps along the way. I have felt that some of the best investors are those who have the exit figured out in their own mind-the entrepreneur may not even know it-but many investors, particularly in Silicon Valley, have knowledge of some need at another company and are putting one and one together.

Have VCs accepted the reality of the new tougher market or are they still looking for a magic bullet?

Most people I’ve talked to have accepted reality, but it doesn’t mean they’ve stopped looking for the magic bullet. It’s more in the background. They’ve got to come to work each day like you and me and make small things happen. Another way of saying it is that you’ve got to change your business strategy to hitting singles instead of home runs.

But you still hear VCs talking about home runs.

The baseball analogy still applies. Even though you say your strategy is singles, I think by saying that you recognize the power of the home run and you’re always hoping for one. But you can’t put all your eggs in that basket and pause all of your activity waiting for that to happen.