The print hanging behind the receptionist's desk at Foundation Capital screams, “our greatest thrill is to loan you money'' in chunky, capitalised red letters. That's encouraging news for Michael Bauer, because he wants money and has put himself in a prime position to get it.
Bauer has set up shop on the second floor of Foundation Capital's offices at Menlo Park, California. to pursue his dream of creating an energy company from scratch. He pays no rent to operate out of the building, which is designed to evoke a Mediterranean villa. And he's free to enjoy all the trappings of this venture capital firm, including its ample parking, woodsy surroundings and outdoor patio.
Bauer has won these cozy environs through a new role as an “entrepreneur in residence.” This coveted position, called an EIR in Silicon Valley shorthand, is emblematic of the valley's economy of ideas. Most EIR's receive a monthly stipend of up to $15,000 to sit and think for about six months. In return, the venture capital firm usually gets the first shot at financing the idea that emerges from this meditation.
Track record of success
“The EIR takes out some of the risk because they are known quantities,” said Adam Grosser, a partner at Foundation Capital. “They have a track record of success and a proven ability to disrupt a market with their ideas.”
Venture capital firms have been struggling to find a company that will make them not just rich, but fabulously rich. They dream about investing in the next Intel, Apple, Sun Microsystems, Yahoo or Google. But after Google appeared in 1998, the hunt to find the next superprofitable household name stalled. The likes of Facebook and Twitter have garnered plenty of attention but have yet to strike on a business model capable of sending an IPO into the stratosphere. Ten-year returns for the venture capital industry have sunk to 8.4 per cent, annualised, in the decade ended last Sept. 30, from 40.2 per cent in the 10 years ended Sept. 30, 2008, a number inflated by the spectacular success of Google and other dot-com companies at the beginning of that period.
The entrepreneur-in-residence model has gained prominence as a calculated way for a venture capital firm to nurture a successful company into being and to increase the odds of solid returns. The firms often tap someone who has successfully started and sold a start-up, hoping that lightning will strike twice.
Bauer, for instance, has experience in fields ranging from high-speed Internet video to clean technologies.
“One part of the venture capital business is to write humongous cheques to people for ideas,” he says. “Before you write that cheque, you want to be comfortable with the people and be sure the money will be well spent.”
The villa, the executive assistant and the clubby lunches are not exactly the stuff of Silicon Valley legend, which abounds with tales of wild success sprouting from a garage or a dorm room where a pair of geeky unknowns toiled away, unable to keep their unconventional ideas in check. Cases in point are William Hewlett and David Packard, Steven P. Jobs and Steve Wozniak, and Sergey Brin and Larry Page.
Silicon Valley has had a knack for finding at least one of these remarkable pairings just about every decade. They're the creators of new industries — chips, PCs, servers, Web sites and ad-fuelled search systems — on which others build. But lately, companies started by EIRs have done yeoman work for the venture capitalists.
The investment firm New Enterprise Associates, for example, hit it big last year when the storage giant EMC bought Data Domain for $2.3 billion, the largest acquisition in 2009 of a venture-backed technology company. (The average deal that year was just $144 million.)
The Data Domain story grew out of a chance encounter. Kai Li, who would be a co-founder of the company, was on sabbatical from his job as a computer science professor. He had been thinking about some ideas for a start-up when he ran into an old friend from New Enterprise. A couple of chats later, he was an EIR.
Similarly, the biggest public offering of a venture-backed technology company in 2007 was that of MetroPCS, which raised $1.2 billion. It was started by Roger Linquist when he was an EIR at the venture capital firm Accel.
A host of other flashy companies have recently emerged from the EIR ether. Zimbra, an e-mail software start-up, was sold for $350 million to Yahoo in 2007. (In a very different economic climate this year, it was sold again to VMware for a reported $100 million.) Then there's Cloudera, one of the most-watched start-ups in Silicon Valley. It seeks to bottle the analytical smarts on which Google and Yahoo rely to understand their users' behaviour and sell the product to large corporations dealing with torrents of data. Cloudera came into being at Accel, where a pair of EIR's worked after having left Yahoo and Facebook.
Venture capital firms are closely held, so there is no data on the number of companies that the EIR process has created — or on how many of them have succeeded. But top firms say a new company is formed about 50 per cent of the time. The rest of the EIR's will either take on a job at an existing company in the venture capital firm's stable or go their own way.
It can be awkward if a venture capital firm, which knows the entrepreneur best, turns down an idea that arrives from the six months of meditation.
“Does it put a negative stigma on a company? I think the answer is definitely,” says Jeff Fagnan, a partner at Atlas Venture.
The idea of the EIR was developed in the early 1980s to maintain ties to talented people who were between jobs and to add a level of refinement to the start-up process.
“This is sort of the formalisation of innovation and new firm building,” says Andrew Feldman, the chief executive of SeaMicro, a start-up that grew out of his time as an EIR at Crosslink Capital. “The venture capital industry has matured and so, too, has venture creation.”
Leading venture capital firms today may have two or three EIRs on the payroll at any one time. An EIR typically has an office, an assistant and what people in Silicon Valley almost always refer to as a “nominal fee” of $10,000 to $15,000 a month. It's enough to tide over the elite business people whom investors are looking for, so that they aren't worried about lacking a day job for six months.
“In the days of the 9-to-5 job, you had some personal time to be creative and think of new ideas,” says Kevin Epstein, a former EIR at Mohr Davidow Ventures who now works at CloudShare, an online software start-up. “I don't see many of those jobs anymore.”
In exchange for the office and the stipend, the EIR provides a few basic services.
He or she becomes part of the audience for start-up road shows, sitting in on the daily presentations that other companies pitch to the venture capital firm and advising the investors about the ideas' merits. In addition, the EIR agrees — via contract or, more often, tacitly — to give the venture capital firm the first shot to invest in an idea.
“It is as ruthless and profit-oriented at the end of the day as anything else a V.C. does,” said Adam Gross, a former EIR at Redpoint Ventures.
This arrangement provides EIRs with a few major advantages over other entrepreneurs. The masses have to go to great lengths just to get in the door of a venture capitalist's office, while EIRs work there daily. They can sit in on Monday-morning partner meetings and pitches, and they can consult with the partners in the lunch line.
And, when EIRs are ready to test an idea, they can tap the vast network of contacts that the venture capital firm has built over time. This could include persuading a large company to provide feedback on a product or polling a host of companies about their technology problems.
“If you're doing surveys or trying to find out where the opportunities are, it provides you with some legitimacy to say you're an EIR at a well-known shop,” Feldman says. “You piggyback on a very rich network and sort of become part of the family.”
In addition, the process adds a touch of human companionship and vibrancy to an otherwise lonely, sedentary endeavour.
When Gross left his position as an executive at the software provider Salesforce.com, he wanted to work at a start-up but thought he needed “an intellectual palate cleanser to get a new perspective.”
At Redpoint, he saw a bunch of start-ups come in to pitch their ideas. He kept hearing about business software that incorporates elements of the consumer Web, and came up with his own idea for a software start-up.
“It's not just advice,” he said. “It's exposure to ideas and models and approaches and struggles that you wouldn't get otherwise.”
Gross left Redpoint before finishing his version of the next big thing; he received an offer from a partner at a rival firm, Sequoia Capital, to run sales and marketing at Dropbox, an online storage start-up in Sequoia's portfolio.
“I think we both would have preferred to continue working together, but they were very supportive,'' he says of Redpoint's partners.
Gross' tale highlights the rather forgiving expectations that surround the EIR gig. Still, venture capital firms take their trade in EIRs very seriously. These firms, after all, have no intellectual property of their own. They deal in relationships, and knowing smart, creative people gives one firm an edge over another.
When, for example, a large acquisition like Oracle's purchase of Sun Microsystems is announced, the venture capitalists might hit their phones, calling 10 or so brainy people at Sun to offer them a cushy way out of dealing with an acquisition.
Many people find their way into an EIR role through a fortuitous lunch or a meeting in the hallway of another company. The process requires a certain level of hand-holding, as the prospective investors guide the entrepreneur.
But that hasn't stopped people from trying to copy and, one might say, commoditise the EIR idea. — © 2010 New York Times News Service