The Future Of Venture Capital: Trinity Ventures Partner Gus Tai (Part 5)

SM: There was a time when VCs stepped into uncharted territory even though they did not understand the risks. The disruptive potential made all the risk worth it. Today, if we need to break open new areas of potential, my guess is that they will be in territories which require cross-domain innovation. That will require visionary investing. I don’t see anybody doing that right now. What is your take?

GT: I would say that I see less of that today than I did in the late ’90s. It does still take place, even for capital intensive businesses. Trion World Network announced publicly that it has raised $90 million on a pre-revenue basis. It started by my working with Lars Butler and recruiting him away from a successful company to reinvent how entertainment could be consumed. That was a cross-domain market.

The big challenge for that one was with the uncertainty and innovation he was going to develop: would there be funding risk? It turns out we were able to solve that problem. I would say that we at Trinity practice that.

SM: How does that fit your model if they had $90 million in financing? Does the entrepreneur still have ownership left in the company?

GT: We believe it is a multi-billion dollar opportunity. Obviously it has not proven itself.

SM: That is OK.

GT: It is. When you go back to whatever model you want to use, it really comes down to an innovator’s dilemma of how the multi-billion dollar industry of computer gaming is going to be reinvented by a startup, because the large incumbents have successful businesses. When they face disruption, that causes their business to be materially harmed for a short period of time; once the new market has developed, they can then buy their way in and merge. That gives startups an opportunity to seize.

SM: Are you saying that Trinity is still open to funding a PowerPoint that has the right entrepreneur and idea behind it?

GT: Yes. We have experience doing that. That is a skill set we believe we have. The majority of companies we fund are pre-revenue and range from one person and a PowerPoint to four to five people who are pre-revenue. We will even fund some companies in revenue if we know the life cycle well enough.

I specialize in formation. The median sized company I have funded is three people. I have often been fortunate to work with brilliant CEOs like Mark Vadon, who called me from a pay phone to tell me about selling diamonds over the Internet. The company he incorporated was called Rock Shop, and he realized that he might want to evolve the brand. That became Blue Nile.

SM: Three or four years ago I had a conversation with Mark Kvamme at Sequoia. He told me that they do not fund anything that is not proven.

GT: That would include when Google and Netscape were funded to a degree. There is some romanticism about the funding formation that takes place in venture. I actually do practice it because I enjoy it, and I think it matches my skill set well. It is fraught with risk and does have some uncertainty. It does take a certain personality to do it.

SM: Who else in your orbit has that skill set?

GT: My belief is that people who have been in the venture business for over a decade and have correlated successes could be quite effective. The way I would interpret the quote from Mark is that they follow that practice by choice, not because they do not have the people who could do it. They follow by risk/return basis, and I would appreciate that.

SM: What is your analysis of the healthcare IT situation?

GT: I think that it is a great area for entrepreneurs and could be a great area for venture capitalists. I like that you are looking for wind at your back for discontinuities or things that will be helpful for you. The Obama administration has put energy behind revolutionizing healthcare IT with a lot of funding. That reduces the cost of capital. It nurtures innovation, and positive surprises will come out of that.

SM: Are you seeing a lot of investing in that category?

GT: We are seeing companies in the category. I don’t know yet if the rate of investments has shifted dramatically in healthcare IT. The number of entrepreneurs looking at it has increased.

This segment is part 5 in the series : The Future Of Venture Capital: Trinity Ventures Partner Gus Tai
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