AT&T Venture Fund Looks for Investments
Dick Bodman, managing general partner of AT&T Venture Fund II, is opening offices for the $150 million fund at 2 Wisconsin Circle, Chevy Chase, Md. Other offices are in Palo Alto, Calif., and New York.
Bodman, who joined AT&T in 1990, served as chairman of AT&T's first high-technology venture capital partnership. That $80 million fund was set up in the mirror image of a typical Boston-based or Silicon Valley-based fund.
Bodman is a former Comsat executive who once headed Washington National Investment, a local mergers and acquisitions firm. Head of AT&T's strategic planning under Chairman and CEO Bob Allen, Bodman spoke to WT Editor-at-Large Esther T. Smith about how he is leading the company's aggressive approach to acquiring innovative technologies.
WT: Why did you choose Washington for your headquarters?
BODMAN: Because this is an important emerging community in the high-tech area. We really think Washington -- Northern Virginia, Maryland -- is about ready to hit the big time. But we don't make money by being alone. We make money by getting a community of interest going. I would like to see us get a really institutionalized capability, first to raise funds for this area and second to deploy them behind management.
If you look at the Sand Hill Road complex [in Silicon Valley] where you have hundreds of firms together, where you can raise a lot of money, that's what I'd like to do here.
WT: How fast can you ramp up Fund II?
BODMAN: We have put four investments in Fund II and we only started May 17.
WT: Are any of your deals local?
BODMAN: They're in Texas, the Southeast, New York and California -- but we are actively talking with several right here.
WT: What kinds of companies are you looking for?
BODMAN: We're interested in companies that are in enabling technologies with regard to networked computing, networked communications, networked-based services and who manage services in networks. Companies with software that could be great productivity enhancers, particularly if they operate in a networked environment. Internet content companies -- we've got a number of those we like very much. Internet enabling platforms -- it's hard to find them. Wireless activities are very important for the big competition that's going on. Anything that really relates to the future of packet networking and technology as it relates to networked type computing.
An area that I am really interested in is the whole question of security, privacy, safety of commerce over these packet networks. We've worked up a system to keep the crime down to some level. We can't get it to zero but you can keep it at some level and then you can manage it, like bad debts. They understand in the basic telecommunications telephone area how to do that.
We don't know anything about what's going to happen in packet networks. I've noticed many of the federal agencies that are involved in [security] are going everywhere to learn what other people are thinking about these problems. I'm interested in people around here who have software and enabling technology and a service concept that will allow us to offer a much more secure and safe method for transacting business.
WT: Are there other factors?
BODMAN: The first thing is to ultimately satisfy ourselves that they are doing something that should be of strategic importance to AT&T. By that I mean in time AT&T might want to acquire something from the company, might want to partner with the company, might want to do some kind of co-development.
Second, we have to believe we're going to make a lot of money together. That's the principal thing. So when we invest in one of these small companies we become the ally of the client company we've invested in.
WT: Who are the principals of the new fund?
BODMAN: My two other general partners are Neal Douglas in Menlo Park, Calif., and Brad Burnham in New York. We have three associates -- our research director, our financial officer and Washington-based Jim Pastoriza, [a former AT&T operating manager,] in general venture activity. All are equity owners of the business. We operate the general partnership, but we have a name and logo agreement with AT&T.
AT&T, in turn, is our exclusive limited partner at this time, and both Fund I and Fund II are under our management.
WT: Will you co-invest with other funds?
BODMAN: We do co-invest. We are very happy working with other venture funds whether we are the lead or not. We tend to be the lead in about 50 percent of the deals.
WT: What stage companies are you interested in?
BODMAN: Early and in some cases seed. But we have $150 million to deploy in Fund II, so some will be second stage if it looks like extra capital would bring them to fruition.
WT: I'm sure the companies are finding you. Are you actively looking?
BODMAN: Unfortunately, yes. We live in
WT: What prompted AT&T to start the first fund?
BODMAN: One of the problems we were having at AT&T was the people in the labs. They didn't believe their good ideas were being picked up and developed. So they were hunting around for money and sponsors within the company. It turned out that my function -- head of strategy and development -- tended to get behind that and try to support it. It wasn't easy to fix. About every three months I'd think I had the answer and then I'd find out it's a much more sophisticated problem -- cultural and other things.
What was important is that 30 or 40 years ago, 35 percent to 40 percent of all scientists that were doing good work in the telecommunications technology field worked for AT&T. Today AT&T probably has only one-half of 1 percent of the people working in these areas.
Let's say we fixed this problem of tech transfer, we only had half of 1 percent. It wasn't enough just to look internally. That became a thought of mine. And AT&T businesses were indicating that they wanted to partner with other people.
I got together with Bob Kavner, who was heading our multimedia products and services. We made a partnership that he would fund, out of line funds, a startup of a venture capital company. If it had been financed out of a staff department fund in AT&T -- or any other corporation -- the minute you had a bad deal everybody would close in on you and you'd have to shut down your fund. That didn't make any sense. You need to have staying power.
AT&T had an interest as a general partner as well as a limited partner, and so I spent a great deal of my time in Fund I making sure those distinctions were made between the interests of corporate line managers and the responsibilities of investors to invest profitably, to liquidate profitably and to look after the companies they had investments in. And lastly, not to get diverted. That fund worked very well and has invested in about 27 companies.
WT: Is Fund I fully invested?
BODMAN: It's still got about a third left to go. But they have been very successful, so much that we felt we had a good program and that we should go forward. Several of the companies have either gone public or are just about to.
We then raised some more funds and AT&T decided it wanted to break up again. I was the angel of the first fund, and the general partners came to me and said, 'Why don't you join us and become our managing general partner, and by the way, help us raise the money for the second fund?'
I thought I had a little bit of conflict since I was representing the company, but [AT&T Chairman and CEO] Bob Allen and I were having conversations and I suggested that we acquire the fund outside of AT&T. So the general partnership is no longer owned by AT&T, and that's where we are today.
WT: What's the procedure if someone brings you a deal?
BODMAN: It doesn't cost us much to say no. So if someone has something that they think might be marginal, we'll take a look at it and we can tell them very quickly whether it's in or not.
WT: What's the evaluation process?
BODMAN: We started up with effectively four offices: Menlo Park, New York, Washington, and Basking Ridge, [N.J.], where AT&T still maintains space for us. We are trying to get our offices virtually linked up. It's very important that we can bring a company into any of our offices and all of us can sit down and hear the case. There's not a territory in the United States that we won't go to or listen to.
But I'm looking for a business concept that I can express in simple English. I find if it takes me half an hour to get the point across, it probably is going to have a hard time in the market.
We're looking for a management team that looks as though they can really drive that [concept] into the market.
We like solid technological underpinnings, but we don't care where it came from as long as that company has the right to use it and make a profit off it.
In fact, one of the things we like to do is to bring together one or more companies that we're involved in and one or more prospective companies to start working together so they can have a little jump on the market -- we've done that several times.
WT: What about management talent?
BODMAN: Startup activity is far more institutionalized in Boston, New York, Silicon Valley and maybe Austin, Texas. So what. There's a lot of terrific ideas here, there's a lot of technology, there's a lot of terrific young people. I've very seldom found a venture deal where the management team is perfect as presented. So there's always a measure of recruiting. That gets solved by asking if you have a community people want to come to, and we do.
WT: What sorts of funds will you co-invest in?
BODMAN: That has everything to do with our relationship with the individual partner who is representing the fund and the fund's solidarity. We have no interest in investing with partners that have no depth. If you've got a fund that only has $3 million worth of capital and something happens to the company, they can't follow through with the second line investment. So, we tend to look for companies that have larger pools of funds.
But the most important thing to remember in venture capital is: You invest in 20 companies, and if you're lucky three turn out great. No matter how good you are, seven or eight are going to be awful, and in those cases you need partners whom you can communicate efficiently with, who will put in the time to turn these companies around, who will see things through your eyes and be able to back up what they see.
WT: Do you expect to have any sort of relationship with entrepreneurial support programs?
BODMAN: We have an intellectual interest in all of them. But we make money only by finding companies we can invest in, so it's a question of how much time we can allocate. Our hope is to be an important member of this community. We're one of the larger -- we may be by far the largest fund here in the Washington area, so we want to meet everybody who's involved in it and find out what our role is.