The Business of Venture Capital. Mahendra Ramsinghani
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Investment banking/consulting
When Jan Garfinkle, founder of Arboretum Ventures Fund, decided to be a venture capitalist, she polished her resume and approached several early-stage venture funds. But every fund turned her down. So she decided to start her own fund.
Jan had spent two decades cutting her teeth at two venture-backed cardiovascular device companies. A large publicly traded company acquired both these companies, leaving Jan a bit richer, wiser, and hungrier. She started off as a product manager with Advanced Cardiovascular Systems (ACS), a forerunner in over-the-wire angioplasty — a technique that reopens narrowed or blocked arteries in the heart (coronary arteries) without major surgery. The founder of the company, John Simpson, once remarked, “When we started the company, there was no interventional cardiology device sector.”18 C. Richard (“Dick”) Kramlich, founder of NEA, had then invested in Advanced Cardiovascular Systems. Dick once said of ACS, “The procedure was entirely noninvasive … the body didn't have to go through the trauma it once had to endure.”19 At Advanced Cardiovascular Systems, Jan spent six years in marketing and sales of angioplasty systems. When Eli Lilly came knocking and acquired the company, the foundation stone for Guidant Corporation was laid. “We were the largest single shareholder in Advanced Cardiovascular Systems… . The company did extremely well,”20 Kramlich would say. That was over 25 years ago, when Jan was at the threshold of her career. To be in an NEA-backed startup was certainly fortuitous for Jan's career path.21
Like all good serial entrepreneurs, Jan moved on to John Simpson's next company, Devices for Vascular Intervention. The same founder who had built Advanced Cardiovascular Systems was now leading the charge in the next wave of the cardiovascular sector. Devices for Vascular Intervention laid its bets on atherectomy — a procedure to remove plaque from arteries. Here, Jan wrote the first business plan, and over the next six years, as director of marketing and clinical research, she dove deeply into the universe of regulatory trials and approvals. Again, Eli Lilly had been watching closely and came knocking at the door. These two companies acquired by Eli Lilly became the foundation for Guidant Corporation, which was eventually spun off by Eli Lilly as a separate company and listed as GDT on the New York Stock Exchange (NYSE). Boston Scientific acquired Guidant in 2006 for $27.2 billion. At that time, the vascular intervention business was valued at $4.1 billion.22
When venture firms turned her down time and again, Jan decided to do what any entrepreneur does — never take no for an answer! She decided to raise her own fund and launched Arboretum Ventures, a fund focused on early-stage health care and medical device companies. Having lived close to Nichols Arboretum in Ann Arbor, and with her own DNA of a nurturing type, she found the name to be the appropriate encapsulation of her philosophies and style.
Like Jan, John Hummer, cofounder of Hummer-Winblad, interviewed at five venture firms. “All five turned me down — on the same day,” reminisces John with a smug smile. John went on to start his own fund. “I climbed in from the window, as most do to get in this business of venture capital,” comments the towering John, who once was a professional basketball player.
Most venture professionals agree that there is no straight path into the business of venture capital. You have to climb in from the window, if that's what it takes! Jan and John were able to raise their own funds: for others, the starting point is often at an entry-level position.
GETTING LUCKY — WHEN OPPORTUNITY MEETS A PREPARED MIND
For a few chosen practitioners, the entry into venture capital was not an uphill crawl or a series of grueling interviews. It was a calling — a blaring siren. Bryce Roberts was planning to go to law school and in the interim decided to start a ski company in Jackson Hole, Wyoming. “One of my neighbors, a venture capitalist, invited me to sit in on pitch meetings and offer feedback,” he says. Bryce went on to be the co-founder of O'Reilly Alphatec Ventures, which has led investments in a number of prominent technology startups.
Jack Ahrens, co-founder of T-Gap Ventures, has been in the venture business for over 30 years. While he was employed at a bank in Illinois, one afternoon he stumbled upon an internal memo that suggested his department was being shut down. “I was irritated and told my boss I would be leaving.” His boss promptly jumped in: “We have a venture capital arm — what if we made you the president and gave you a raise?” “I took it — I barely knew what the heck venture capital was, but here I was a VC for three decades,” says Jack. In these three decades, Jack has led over 35 successful exits, including 20 IPOs. Interestingly, neither Bryce nor Jack has the desire to grow his fund size beyond what is manageable. My own observation is that if they wished, they could easily raise a lot more capital and increase their fund size, but so far they have curbed any such inflated ambitions. For those who followed their calling, the ability to find strong investment opportunities, generate returns, and stay on the growth trajectory is not difficult.
There is no way of knowing whether you are a natural, as Sanford Bernstein puts it. Bernstein, founder of the investment banking firm Robertson Stephens and Company, had invested in venture funds for 20 years. “Some do it, some can't, and like with athletes, there is no way of telling ’till they take the field,” he once remarked.23
To prove they are good athletes, venture capitalists need to pick good investment opportunities. John Doerr used to say that training a new venture capitalist was not unlike preparing a fighter pilot for battle. It takes six to eight years, and you should be prepared for losses of about $20 million.24 Yet in its first fund, Hummer-Winblad invested in 17 companies, of which 16 yielded a positive return. Jan Garfinkle's Arboretum Ventures Fund I had two exits in quick succession that yielded strong returns — comfortably landing the fund in the top quartile.
It does help to have a reasonable measure of luck on your side. When Jan Garfinkle decided to raise her first fund, Arboretum Ventures, she met a leading LP over Chinese food to discuss her game plan. The LP committed, and the fortune cookie, now pasted in Jan's journal, said, “You will soon get something you've always wanted.” Fifteen years later, Jan is raising her Fund V, which is 10 times the size of her Fund I. When she launched her Fund I, she expressed the desire to serve this industry and be on the board of the National Venture Capital Association.25 Ten years later, she served as the chair of this association.