A Conversation with Venture Capitalist Daniel Egger--

A Conversation with Venture Capitalist Daniel Egger(2)

2007-05-17 13:46:03 [ Big Normal Small ] 　Comment

Rui Wang: It was amazing that you did the similar thing more than 10 years ago.
Egger: You know, in business, it can be worse to be too early than to be too late. So it’s nice of you to congratulate me. (Smile) But I have often worried, because it can be painful and expensive to be the person who acts on a trend too soon -- before there is tangible market there for whatever you are doing.

That actually happened to me with Internet Search, because I had a tool in 1995 that filtered and reduced the amounts of web pages that are relevant to a search by analyzing hyperlink data. At that time, people still said, “we want the search to retrieve as many Web pages as we can get”, because they had no concept how big the Internet would soon be. At that time, there were approximately 30 million web pages. Within five years there were approximately 800 million. Now there are more than 3 billion.

So the same search engine algorithm that would return 20 documents in response to a query would now return 2,000; and without ranking them by importance it’s no longer useful. At some point around 1999 hyperlink-based search ranking became commercially marketable; but we had headed into that market three or four years too early, and had already been forced to do something else to survive.

Xing Zong: Let’s talk more about your start-up company which was sold in 1997. What experience have you learned from that?

Egger: Two things. I learned how to manage a commercial technology development project. The difference between small-scale prototypes that you know, theoretically, should scale, and full-size production IT systems is profound. For example, one client in our beta program asked us to please build them a test database for free, and then it turned out that they had what was reported to be the largest and most complex database of document hyperlinks in the world at that time. We built a system that worked, but we all had some sleepless nights. That’s how you learn.

I also learned how to put together a venture capital finance deal that aligns everyone’s interests, because what you want to do when you raise money for a venture is to put in place a deal structure where your investors, your employees, even your business partners outside the company, are all pulling in the same direction. If you don’t do that, you can have terrible problems. Having been trained in law, and having been both an entrepreneur and a venture capital investor, I understand in my bones how essential it is to structure ventures so that they can be win-win scenarios, not zero-sum games.

Rui Wang: Did you raise venture capital before you had proven the technology would scale, or after?

Egger: Well, I raised money having built a demonstration system, not having built a full commercial system, because it cost too much money to obtain electronic content. We needed electronic content from other people. The wonderful thing about the Internet is that now it will allow you to test your search engine for free!

That was not the case in 1993. In order to get a meaningful, commercially valuable set of electronic documents, you had to have a relationship with a publishing company. So we had to show up as a company with money and infrastructure to be able to even get the content to prove it would work. This is a chicken-and-egg problem: which comes first? You need both, but you can’t have one without the other. You have to put everything together at the same time, so that’s what we did.

Xing Zong: After you sold your company, you joined a venture capital fund and became a venture capitalist.

Egger: Actually, I helped form that venture capital firm and raise the funds. That was a start-up as well.

Rui Wang: What’s that like? Is it easier compared with previous one?

Egger: It’s different. At Eno River Capital, the job is investing in other people’s start-ups. And we managed a state economic-development fund, the North Carolina Bioscience Investment Fund, that combined financial and policy goals. The primary goal was to attract further investment capital into North Carolina, and keep technology in North Carolina that had been invented here. Ten years ago, there was a perceived problem that a scientist who invented something at Duke or NC State or the University of North Carolina or Wake Forest University would usually go to California and start a venture-backed company there, or license the intellectual property to a big pharmaceutical company in Germany or somewhere else, and the resulting high-tech jobs would not stay in North Carolina.

So the idea was to seed the growth of an entrepreneurial, Silicon Valley style culture here in the North Carolina. We did a lot of hands-on work with scientists, helping them develop Business Plans, helping them to recruit professional management. Our initial Fund was 26 million dollars (US). During the period where were we actively managing the Fund, our portfolio companies went on to raise about 300 million dollars (US) in follow-on financings. Significant out-of-state money came into the companies we were involved in. That was the real measure of our success.

Xing Zong: Let me ask you a question. A famous Japanese venture capitalist once said, 80% of his judgment is based on the personality of the entrepreneur and the team. Do you agree?

Egger: Yes, that’s absolutely right. Maybe 90%.

Xing Zong: Why?

Egger: Because everything will go wrong! No matter what a good business plan you have, what good ideas you have, things go wrong that you could never imagine. People with strong characters can somehow get through that and succeed anyway. Weak people become disoriented. They became demoralized, confused; they don’t know how to cope with adversity. Every successful entrepreneur has gone through the experience of having employees they need to pay now, vendors they need to pay now, and no money in the bank. Strong character is very important.

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