Reflections on a Career in Venture Capital

A career in venture capital requires an ongoing need to learn and keep learning. After almost four decades in, Len Batterson shares his experience and investment stories.

VCapital CEO Len Batterson has observed that the successful VC needs to be:

• part prophet, seeing far into the future,
• part security analyst, dissecting market data and business models in order to understand how the venture can be expected to grow and make lots of money for its investors,
• part inherent skeptic, ready to reject a hundred or more deal opportunities for every one in which to invest, 
• part riverboat gambler, recognizing all the uncertainties and ambiguities in analytic and strategic calculations, while also possessing the resilience needed for a profession where more of one’s bets fail than succeed,
• part trader, needing to craft the best possible deal for investors with the entrepreneur (i.e. buy low) and then ultimately guide the successful entrepreneur to the best possible exit (i.e. sell high), and 
• part entrepreneurial voyeur and fix-it consultant, helping the entrepreneur see the need to squeeze every possible dollar, pivot strategically where necessary, and at times even convincing the entrepreneur to step aside and bring in a new CEO when the venture’s leadership and management needs have outgrown the entrepreneur’s capabilities.  

Putting all that together, the venture capitalist needs to be an extremely well-rounded business generalist, possessing broad know-how as well as “know-who” – who to call on for highly-specific technological or industry knowledge and counsel and where to turn when the venture needs new talent. The VC needs both the strategic acumen to participate in driving the venture’s strategic path and occasionally exceptional operating acumen as well to help right an errant venture ship and spearhead the turnaround of a venture that still has great potential but has lost its way. 

There aren’t many individuals who have all these tendencies and skills, and even fewer who also want to live life on the edge like this. Batterson chuckles as he acknowledges that living his career, life on the edge like this has been, and even today, remains his passion.  Here are a few of his investment stories. 

An early learning about timing: AMERICA ONLINE

When asked about formative learning experiences, Batterson cited one particularly extraordinary experience very early in his career. 

Just three years after joining Allstate’s Venture Capital Division in 1982, Batterson was named a director of that operation in 1985. In that role, he oversaw a large group of investors taking the division into a broad range of ventures. By 1987, the division’s portfolio included over 180 investments, in which over $350 million had been invested and was generating a 20+% annual return. 

One of those portfolio companies (or technically two, as the company’s initial failure was followed by a recapitalization and two sequential company name changes) proved to be a major learning experience and a formative career event. This was Allstate’s investment in a company called Control Video Corporation. After initial failure CVC morphed into Quantum Computer, and then renamed America Online, the pioneer in bringing Internet connectivity to homes through common telephone lines. 

A key learning Batterson took away from this experience is that sometimes an entrepreneur may fail because vision may be too far ahead of the targeted market.

That was the case for Bill Von Meister, the founder of Control Video Corporation. For an investment too early, loss is likely. Unfortunately, too late and a loss is for sure. So timing is often not an easy call, and requires keen vision and feel, along with luck.

Von Meister came up with the idea of downloading video games to the Atari video game machine over the phone lines from computer banks in Vienna, Virginia. To deliver this vision, he had developed a modem that could be sold for $100 that would connect the early home computer gamers used to best-selling video games on demand. 

Unfortunately, while Von Meister’s vision ultimately proved prescient, and he had been an effective pied piper attracting major VC funding, he lacked the luck of timing. He came to the battle too early and fired all his ammunition with minimal effect. As one of the veteran VCs from venture capital leader and Control Video investor Kleiner Perkins said, “They could have shoplifted more off the back of a truck on California Route One than were sold.” One of the most aggressively VC-funded startups to that time, $12 million in venture capital was burned through.

When all seemed lost, Allstate’s young VC Director Len Batterson, along with Citibank and Inco Venture Capital Management, stepped up and invested more to buy the company more time. Renamed Quantum Computer and then renamed again America Online, as they say, the rest was history. That history included the VCs’ active involvement in bringing in a turnaround expert, restructuring the company, and recruiting a new management team that redefined and redirected the business. That redirection repurposed the modem technology, ushering in the era of in-home Internet connectivity and email via telephone dial-up. 

Batterson and the other VCs were instrumental in the investment going from a total loss to a return in the billions. These VCs had the vision to see that personal computers would be coming to desktops broadly and that technology advancements would result in an online communications and information explosion. They recognized the need for new management and for an insightful strategic pivot. And they also had the patience and resilience to execute the idea. 

AOL finally went public in 1994, several years after Batterson had left Allstate, at a market valuation of about $70 million, a nice return for those who held on. But for those with the fortitude to hold the stock until 2001, when AOL merged with Time Warner, market capitalization hit a high exceeding $350 billion. 

While Batterson had left Allstate before AOL’s riches arrived, the learning he gained was invaluable. Batterson points out that the relationships he built while working with this venture have also proved valuable. One of those relationships was with Steve Case, AOL’s early marketing leader and later CEO and today the founder, Chairman, and CEO of Revolution Ventures, which partners with Batterson’s VCapital on some of its investments. 

It's good to get lucky: NANOPHASE TECHNOLOGIES

Timing can be especially critical when exiting private ownership through an IPO, and Batterson acknowledges that timing admittedly can be largely a matter of luck. 

A key hazard with IPOs
A particular hazard with IPOs is that the private investors are often not permitted to sell their shares through the IPO and instead are required to continue to hold their shares for some pre-determined minimum amount of time following the IPO. IPOs often reflect a degree of irrational exuberance. Over time, about two-thirds of all VC-backed new issues decline in value post-IPO and stay below the heights reached in day one of public trading.

One can, however, get awfully lucky with an IPO as well, as Batterson learned in the case of Nanophase Technologies. The company went public in 1997, eight years after its 1989 founding. The IPO was successful as to both price and additional cash raised for Nanophase. However, this was one of those IPOs that required the private investors to continue to hold their shares for a period following IPO. Unfortunately, most of the company’s customers were in Asia, and when the Asian economic crisis of 1997 (known as the “Asian Flu”) hit shortly after the IPO, many customers cancelled orders and the stock price crashed before the private investors had a chance to sell. 

It’s great to get lucky
But then, in a lucky fluke of fate in a major speech, President Clinton touted the prospects for nanotechnology. Nanophase Technologies stock, as the first nanotechnology company to go public, then took off like a rocket, and the VCs and their investors were able to exit at a really high price. So while it’s great to be lucky, and IPO may indeed be the best exit option in some cases, Batterson learned well the potential risks of exiting via IPO as well.  

Another lucky development:  NORTHFIELD LABS

Batterson’s post-Allstate experience included another significant win through IPO with Northfield Labs, a company Batterson had invested in earlier while with Allstate. Again, he was lucky and came out well, despite the company never achieving its mission and ultimately having to shut down. 

In the mid-1980’s, the AIDS epidemic was ravaging society, threatening to move into the mainstream as a serious pandemic. It was determined that one major source of transmission was blood transfusion. An “artificial blood” was needed that would be totally sterile and guaranteed free of any such blood-borne diseases, could be used for any patient without having to match blood types, and could be priced competitively to then current blood transfusions. 

About a decade earlier, unaware of the coming AIDS epidemic, a U.S. Navy doctor in Viet Nam saw many soldiers and sailors die on the battlefield because there was not such a product, particularly one that would not require matching blood types. When the doctor returned from the war, he was determined to create such a lifesaving blood product. After he scrambled to secure government grants, recruit scientists, and move development into animal trials, emergence of the AIDS crisis gave the project even greater urgency and enabled much greater funding. 

This development effort, focused in Northfield, Illinois, came to Batterson’s attention, as did Nanophase Technologies, while he was with Allstate. Allstate quickly became the lead investor in Northfield Laboratories. Several years later, after tens of millions of dollars of additional VC investment from multiple sources, though still before the sought-after product was ready for the market, Northfield went public at a high value, with Allstate garnering a substantial return. Following the IPO, Batterson Johnson Wang made a modest investment in the publicly traded Northfield stock, Batterson’s first -- and last -- investment as a VC in a public stock, and along with others realized a significant gain, even as the company continued in R&D mode. 

The company DID ultimately develop an artificial blood, called PolyHeme, a hemoglobin-based, oxygen-carrying blood substitute. Unfortunately, the product failed the final critical Phase Three human trial by just a modest margin relative to goals pre-determined with the FDA, and so never received FDA approval, after a 20+ year effort. The company’s stock price fell immediately by more than 50%, killing the company’s ability to raise further funding that might enable continued development and another, better shot at success. Had that final clinical trial been just slightly larger, the product might have passed the FDA statistical hurdle. 

So once again, Batterson and his investors came out well, but he came to realize even further all that can go right or wrong in venture capital investment as well as in investing in the public stock of a still developing company. 

The importance of the “jockey” and strategic creativity: CYBERSOURCE/BEYOND.COM

In discussing his several exciting venture capital wins over his career, VCapital CEO Len Batterson recalls with particular glee a relatively modest $1.2 million investment made through Batterson Venture Partners (BVP) back in 1996 in a company called Cybersource/Beyond.com. 

Initially called Software.net, the company was founded in 1996 by the former president of an early major anti-virus software company, based over a barbershop in Palo Alto, the center of the then emerging tech industry. While strategically Batterson prefers Midwestern ventures due to their documented lower valuations, lower development costs, and higher average returns, he will consider Silicon Valley ventures when the deal is particularly attractive. 

This company began pursuing two distinct business segments. One provided easy downloading of software (Beyond.com); the other provided transactional software tools needed to sell products on the Internet (CyberSource.com). 

Just three years after that Palo Alto investment, in the frenzy of the dot-com bubble while it was still inflating, but before it burst, it was decided to move fast to IPO in order to capitalize on the excessive market exuberance.  Harvard MBA Batterson gained a terrific lesson in creative strategic thinking when the founder chose to split his company into two distinct companies and take those two companies public separately, recognizing the strategic reason for being and growth opportunity for each.

The entrepreneur’s strategic creativity paid off big. Benefiting from the strong market tailwind behind two discrete IPOs, early investors like BVP received 41 times their investment in just three-and-a-half years, right before the dot-com bubble burst! While Beyond.com ultimately failed, CyberSource.com was sold to Visa several years later for billions of dollars. For any investors with the fortitude to hold onto their CyberSource stock (full disclosure – BVP was NOT among them), the ultimate return was breathtaking.

This richly rewarding experience reinforced three important learnings for Batterson:

1. The importance of strategic creativity plus intuition. The entrepreneur’s intuition was that bundling two quite different concepts in a single company would not return as much as splitting his company into two separate, easy-to-understand entities.
   
2. The importance of the entrepreneur, the jockey driving the horse – the company and its assets. The Software.net founder had already succeeded in the software industry. Over the years, the greater success odds for ventures piloted by individuals who had already won big previously has become increasingly clear. Batterson has since assigned important weight to this learning in his investment decision making.
   
3. The importance of fortunate (and admittedly lucky) timing. In this case, the founder’s unusually fast rush to exit, cashing in when he could have taken the risk of “holding ‘em” longer, proved incredibly fortunate. Delaying just a year would have resulted in being buffeted by the bursting the dot-com bubble and inevitably dramatically diminished returns. 

Batterson concedes that timing on this one was extraordinarily lucky. And while it’s great to be lucky, he would prefer not to leave quite as much to luck. His focus increasingly, therefore, in the years since has included preference for exits via M&A, to circumvent the greater risks and volatility of public markets.

Conclusion

It is wonderful for ventures to achieve their noble mission. Batterson and many other investors and VCs are indeed motivated by more than just money. However, from a pure investor return standpoint, all that matters is what you pay for an investment and what you get back in return (and how quickly you get it). 

Focusing attention on those two variables is critical. Of course, you can control just one of those variables – what you pay or choose to walk away if you don’t like the price. What you get back is often out of your control. 

Occasionally you can have some control over what you get back – for example, whether to exit when given the chance or hold on hoping for more. There are times when it may be wiser to exit more quickly and not be too greedy because, as Kenny Rogers might have put it in a sequel to his hit song “The Gambler,” the longer you hold ‘em, the greater the risk that you might eventually have to fold ‘em.   

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