Peter Barris, managing general partner of New Enterprise Associates, is always on the lookout for a few good companies that need some cash to get off the ground. He recently discussed his economic outlook, the firm?s impact on the Baltimore region and venture capital?s role in the current financial crisis.
NEA manages about $5 billion in capital?
That?s right. I think we are the largest, purely early stage firm.
Have you had to reassess that early stage concentration as the stock market has declined?
No. Actually, it?s something that we?ve stuck with over all of our funds. The mix changes somewhat fund to fund, but you?d find the vast majority of our investments are in series A or series B.
The reason we haven?t backed off in this environment is, one, because it?s what we know and do well and, two, if you invest in an early stage company, your time horizon is long enough that you?ve got a good sense that you?re going to get through this trough.
If we made a new investment today, we are looking at a four-to-seven year time frame typically for a liquidity event, so we?ve got to look beyond the current trough in the economy.
What do you see out there?
We?re generally optimists. I think that the macro trends in our environment, I?m talking about the venture environment, are still very positive. I?m talking about the rate of technology innovation. I?m talking about culturally, the willingness of people to take on entrepreneural endeavors. I?m talking about the dependence of corporate America on the sort of innovative products that come out of the companies we fund. I see that dependence becoming greater rather than less over time. All of those things bode well for the venture industry going forward.
I think we?ve got to get through another couple of years of a painful process. We?re going to come out the other side. We?ve been here before. Has the trough been as big and as deep? No. But our industry has never been as big as it is. There is every reason for us to believe that we are going to come through this in great shape.
How do you get through this in the short term? With the sharp market declines, IPOs are virtually nonexistent.
It?s a day at a time. Obviously, you?ve got to take care of the companies that you?ve got in your portfolio. That?s your first order of business: Making sure they are managing themselves properly. Many entrepreneurs haven?t been through troughs like this. They?re really not aware, intuitively, of the things you need to do day to day in order to get through it.
And finally, you want to be sure that you make the tough call, that those companies, [for which] you don?t see a prospect of coming out the other side, you may actually accelerate their closure.
You lost 21 companies from your portfolio last year. Has that rate continued?
We wrote down 21 companies, but some of them still live actually. We?ve just basically valued them at zero. Some of them we?ve closed the doors on — and some of them still live in what I?ll call a mode of hibernation.
Has that process continued this year?
Yeah, we?ve lost a few. The process has continued. I think the industry is likely to see a significant rebound next year.
Venture funding was down 52 percent nationally in the first quarter of this year. Are you following that trend and sitting on the sidelines?
We?ve actually been pretty active. I think if you compare our investment pace to the year 2000 — the end of ?99, early 2000 was probably our peak — we?re operating at about half that pace. That?s still, by any historical standards, a healthy pace.
We?ve invested year to date about $80 million in [the bio pharmaceutical] space. We?ve invested $90 million in the technology sector year to date. That?s a pretty healthy pace.
Have you been forced to cut back on employment as many of these tech companies have?
No, in fact we?ve been aggressively hiring. We?ve added several investing partners to our staff, mostly in the health-care arena.
How many do you employ overall?
We have 25 full-time investing professionals. Then, we have four venture partners, which are part-time.
How many of those are in Baltimore?
[There are six people there] five days a week. But all of our back-office is in Baltimore. So our largest office in terms of employees is Baltimore.As a Baltimore-based firm, do you target local companies for funding over other firms?
We?re a national firm, so we cover the entire geography of the country. [But,] our strong preference is to do deals locally. The closer you are to your companies, the better you can assist them and the more time you can spend with people. In our history, we?ve invested about half a billion dollars in the Baltimore-Washington region.
That money has gone to Columbia-based Corvis …?
Yeah. We?ve invested in 29 companies in Maryland, 28 in Virginia. [They include:] UUNet, Corvis, CareerBuilder, Codeon, Cidera [and] Advertising.com, which is in Baltimore.
The UUNet deal involved WorldCom?s current CEO, John Sidgmore.
When we invested, John wasn?t there. We brought John in.
Is he still involved with NEA?
Yes, he?s a venture partner. So, he?s one of those four people that are advisory to the firm and [are] part-time. Obviously, he?s not spending much time with us right now. He?s otherwise disposed.
Does NEA have any exposure to the WorldCom mess? You funded UUNet, which was then bought by WorldCom.
Right. No, that?s long gone out of our portfolio.
New revelations seem to appear every day about questionable financial practices in companies large and small. Because of this, much is being written about how to fix accounting and financial markets. Do you think that venture capital is culpable for any of this?
I think the governance issues relate to venture-capital-backed firms in ways similar to the way they relate to public entities. However, in the case of venture capital firms, the people who are on the board of directors that have the oversight typically represent the majority of the shareholders as well. They are the shareholders. That?s one huge difference. If we?re not doing our oversight job, we pay the price more than everybody else does; that?s not typically the case in a public company.
After the implosion of so many technology stocks, do you think that the IPO system of raising capital needs a similar overhaul to what is being suggested for accounting?
A question is being raised today, which I think is a fair one, about the inherent conflicts of interest between analysts and the investment-banking side of the house. That conflict can come into play at the IPO stage, as well as the post-IPO stage. So yes, I do think that some of the reforms and checks and balances that are being discussed are appropriate and relevant to our world, as they are to the public world. But I think we?re kind of a second-order issue.
