Blue Design

Outspoken financier Todd Dagres of Battery Ventures in Boston has plenty to say about how the current market conditions are affecting his firm's investments. Battery has financed a few recent success stories, such as Akamai (AKAM, info), as well as some fiascos, such as Dagres shares with Business 2.0 Online the advice he's giving to his portfolio companies, the lessons he's learned in the last year, and the worst idea his firm has funded. Dagres also is a guest lecturer at the MIT Sloan School of Management and has watched how the attitudes of students in his "New Enterprise" course have changed in the past year.

How has the curriculum of the New Enterprise course you teach at MIT’s Sloan School changed from last year to this year?

The curriculum hasn't really changed. We try to teach the fundamentals of starting a company--writing a business plan, getting funded, building an organization, competing, and all of that stuff. Even when things were going crazy, we stressed that you still have to build a good business and a good team, worry about cash flow, and that hype is less important than a product that works. But while the curriculum hasn't changed much, the tone of the class and the attitudes have. Last year, almost everybody in the course wanted to go start a company or jump into a startup, and now, while some people still want to do that, they are now extending their education by going and joining a big company like McKinsey & Co. or Boston Consulting Group. So the attitude of the students is the main difference. It's no longer the gold rush--it's the long, slow, pot-of-gold type of thing. Back to the future.

The other interesting thing is that while almost everybody stuck it through last year, we’ve noticed this year that more people are dropping the class, probably because they watched the dropping economy and Nasdaq and felt that starting a company wasn't the most important thing. Maybe a class on something like advanced marketing concepts was more practical since they were going to go work for Cisco (CSCO, info) or something.

Is there a sector you're paying more attention to now than you have in the past?

The intensive care unit. No, seriously, we continue to look for infrastructure and software companies, and we're looking for companies that sell big-ticket items to big companies, and we're staying clear of bubbles. Right now, the optical market is a bubble. We're still doing things in optical, but we haven't made a new optical investment in over nine months. We don't think the world needs too many more optical companies. We're looking aggressively at wireless and enterprise software. That's where we've always looked and that's where we continue to look. In the past, we thought we did too few dot-coms, and that we weren't progressive enough, and that we were missing out, particularly with some of the West Coast firms, and now we're glad we did miss out on that. We're fairly diversified across software, telecom services, and network infrastructure, so we're getting slapped around like everybody else, but we're not overweighted in the virtual economy.

Aside from the obvious lessons that VCs have learned in the last year, what's the biggest lesson the last year has taught you?

There's the old saying that you can never be too good-looking or too rich. I've learned that you can never have too good a team, or you can never raise enough money. Great teams can make it through tough times. During the nonsense of the late 1990s, I saw people compromising on the quality of their teams, thinking that the market was so good that these folks will rise with the tide, and also assuming that you would always be able to raise money.

In the past, time to market was the most important thing. There was an old saying by a Confederate war general that the key to war was to get there first with the most men. Obviously, that guy didn't have to finance that army. But if you have to finance the army, getting there first with the most people isn't necessarily the best tactic. What I've certainly relearned is that you just have to be very cognizant of cash flow and be able to finance the development of the companies.

Along the same lines, can you think of any messages Battery is sending to its portfolio companies that might run contrary to the current market conditions?

The conventional wisdom says to tell companies to cut way back and cut staff significantly and cut back product development plans. But I have a couple of companies that have a big opportunity right in front of them. At a time when big companies are cutting back their advance projects and smaller companies are having difficulties raising money, I have a couple of companies that have what it takes to build that big hairy market product. They have an excellent team, and they are building a product that is very advanced and difficult to build.

In those cases, I'm telling them not to cut back as much as some other companies are. If they really are better, then investors will see that. And when the clouds clear and the market opens up a bit, they will have a huge advantage because while the others were going 20 miles per hour, they were going 50 miles per hour. These companies still have to be very cost-conscious, but some companies I've watched will cut back their expenses and cut back their development such that they are doomed to mediocrity. They survived, but it's surviving like the walking dead. You don't want to be the walking dead--you want to get yourself an opportunity to thrive. Of course, you've got to survive before you can thrive. But I'd rather take a little extra risk and build a great company than guarantee that a company is going to be mediocre.

What's the worst idea that Battery has funded? Let's just say that we should have recognized that it was a dog right off the bat. But the other reason is that it occurred to a few of us that if it cost $15 to ship a $3 bag of kitty litter, it might not be a great business. By the way, that wasn't my deal, for the record.