The VC/LBO Combo

In today's "New Economy," it appears that two things are certain - change is a constant, mandatory force, and everybody wants to be a venture capitalist. The desire to enter the VC industry is not only limited to young MBAs coming out of top business schools, but experienced professionals who have spent their careers at Fortune 500 companies.

Whereas in the past, these individuals would be at a disadvantage when applying for VC jobs, it appears that VCs themselves are beginning to enter some uncharted territory and may need the expertise of "corporate types" to make their new business models successful. What am I getting at?

As the Internet business has matured, so have the venture firms. Venture capitalists have been moving upstream, making more substantial later-stage investments as Internet companies' valuations and market opportunities increase. Some visionary venture firms see an incredible opportunity not only in the new startup companies, but also in the companies that all of us have grown up with. The new breed of venture financing - "a la combination between venture and LBO" is certainly here to stay. Here are just a few examples:

• Benchmark Capital Partners led a $16 million investment in Nordstrom
• Red Point Venture Partners led a $50 million investment in Reflect.com, a Procter & Gamble subsidiary
• Softbank Venture Capital led a $62.5 million investment in Kmart subsidiary Bluelight.com

   

What Started It All
It is no surprise that given the genius and tenacity of Jim Breyer, Accel Partners played a key role in what has now become a blur between VC and LBO territory. A joint investment in Desktop.com brought Accel and Kohlberg Kravis Roberts (KKR) together last summer to begin brewing up the new venture that is now known as Accel-KKR Internet. To date, Accel and KKR have contributed $50 million each and plan to raise hundreds more from outside investors. Although the Desktop investment did give the two firms some ink, nothing made more noise than Accel-KKR investment in the powerhouse Wal-Mart.

~Why the partnership? According to some experts, "there's a whole world of bricks-and-mortar companies that need to be Webified, and KKR has a vast network of contacts in the off-line world. If successful, this venture will blend Accel's Internet connections with KKR's ties to corporate America. Some may contend that venture firms are just playing the "brand game" (i.e. investing in firms with brand names). Jim Breyer contends that Walmart.com will win the game "?not because of brand but because of warehouse and distribution capabilities. Though name brands like Nordstrom, Kmart, and Wal-Mart certainly help the cause. Although it may appear like a "slam dunk" idea, these firms will battle some tremendous issues and in most cases will encounter competition from pure Internet play companies with their "nothing to lose" mentality and behavior.

What does this mean for you?
The road to success is not easily navigated - there are clear management and market issues. The new entities formed by the VC/LBO combinations need to attract top talent to run these "new" Internet ventures. This means hiring from outside the traditional company talent pool. Furthermore, the new companies must design their compensation structure for the entire work force in order to attract management talent from the Silicon Valley firms that have lured today's top MBAs. Therefore, if you are working for a "bricks and mortar" concern and your company is a "dot.com wannabe", you may have a good chance of exposing yourself to some "heavy hitters" within the VC industry.