May 20, 2008

VentureWire

Venture Firms Stock Up On In-House Entrepreneurs

When Facebook Inc. Chief Technology Officer Adam D'Angelo announced recently his plans to leave the company, rumors abounded that the company's venture capital investors offered D'Angelo a roll as an entrepreneur in residence.The firms declined to speak about offers to D'Angelo, but the potential of one of Facebook's longstanding employees making a move to an EIR position shows how eager VCs are to lure the most promising entrepreneurs.While venture capitalists have always worked closely with their favorite entrepreneurs - often giving them space in-house to plot their next company - the importance of the entrepreneur in residence role appears to be escalating. As the technology industry continues to mature since the boom days of the late 1990s, many restless executives at big tech companies are heading back to their entrepreneurial roots. At the same time, venture capital investment reached its highest point last year since 2000, and competition for quality start-ups is fierce.Evidence of the trend is anecdotal - EIRs are difficult to track because they usually only stay at firms for about six to 18 months - but the value of a strong EIR program is apparent as venture firms fill their rosters with entrepreneurial talent.In the past few months, executives from Microsoft Corp., Yahoo Inc., Salesforce.com Inc. and others have left their companies after long stints to join venture firms in an EIR role. Benchmark Capital, which is investing from a $500 million early-stage fund, has hired six EIRs since August, including four in February: Rob Bearden, a former executive at JBoss Inc. and Red Hat Inc.; Lewis Cirne, founder of Wily Technology Inc.; Dan Finnigan, former senior vice president at Yahoo Inc. who ran HotJobs; and Keith Krach, who was Benchmark's first EIR in 1996 before co-founding Ariba Inc.Venerable early-stage firm Venrock said it has recently had a stable of as many as 12 EIRs, more than any other firm. Other investors that have stocked up on EIRs in recent months include Austin Ventures, Charles River Ventures, Emergence Capital Partners, Ignition Partners, Redpoint Ventures and Sofinnova Ventures."I think the reason it may be more in vogue is that prices for early rounds are being driven up," said Madrona Venture Group Managing Director Matt McIlwain. "Firms see they need to be involved early and roll up their sleeves."The highly coveted position comes in several variations. Typically firms bring in successful entrepreneurs or experienced executives who leave corporate positions in search of something more entrepreneurial. Other times it's a young entrepreneur who needs help building an ideal and leverages the firm's resources and the minds of the partners. While the structure can vary, most firms offer EIRs a small monthly salary to analyze potential deals, while retaining the right to invest first in their next venture.Benchmark General Partner Steve Spurlock said there is no overall strategy for building the firm's EIR team other than finding the best and brightest. "The focus is entirely around finding great people that can turn an idea into a big company," Spurlock said.Todd Kimmel, a principal at Advanced Technology Ventures, said the current market for investors makes EIRs even more key to a firm's early-stage strategy. "I think it's really important when the market is uneasy," Kimmel said. "The EIR becomes a very important role for a venture firm because it helps us see the white spaces or the gloom and doom."Kimmel originally joined ATV in 2003 as an EIR. In that role he examined ethanol technology and eventually left to found Coskata Inc. with $10 million in Series A funding from investors including ATV."You can take a sector and really take a deep dive," Kimmel said. "That's one of the advantages of being an EIR. You can get a nice theme or thesis of what type of technologies you need to be in."Another advantage of an EIR is that you have the reputation of a venture firm behind you. You can pretty much get into any venture firm you want because you have the stamp of approval."Much of the trend is about VCs looking to corral the brightest entrepreneurs amid strong competition. An example is Sequoia Capital's hiring of outspoken entrepreneur and former AOL LLC executive Jason Calacanis. He took the title of "entrepreneur in action," which he publicly described at a conference as "a new title that basically means I'm going to build another company with Sequoia."Last year, Calacanis launched an Internet-search company called Mahalo.com Inc. Of course, Sequoia is an early backer.Another notable trend is for former executives of big companies to make a stop at a venture firm to serve as an EIR before they move on to their next role - often a return to entrepreneurship.In January, Jim Lanzone left his position as chief executive of Ask.com to serve as an entrepreneur in residence at Redpoint Ventures to help with several seed-stage companies in the firm's portfolio.When Paul Pellman left his position in 2007 as executive vice president of marketing for Hoover's Inc., he hooked up with Austin Ventures to serve as an EIR. "For me it was really a great opportunity to sync up with the Austin Ventures team and use my EIR role to work with them on a lot of projects and a lot of opportunities," Pellman said.The move paid off for both Pellman and Austin Ventures. One of the firm's portfolio companies that stood out to Pellman was Click Forensics Inc., which offers click-fraud and click-quality management services for advertisers and publishers. When the company was ready to hire a new chief executive, Pellman was waiting in the wings."It came to the point I wanted to do something more entrepreneurial, and when I was ready to make a move the team at Austin Ventures opened their doors," Pellman said. "I can't say I specifically went to them looking for [a CEO role]. I was very opportunistic."While EIRs are certainly popular at the moment, it remains to be seen if stacking a firm's team with entrepreneurs is a fad or a long-term strategy for the venture industry.McIlwain, of Madrona Venture Group, said he believes it's a trend that's here to stay."It's a lot easier to build the house right and not have to do remodeling down the road," he said.