The Masters of Private Equity and Venture Capital

307 Pages·2010·36.318 MB·English

by  Robert Finkel, David Greising

The
M A S T E R S
of
P R I V A T E
E Q U I T Y
and
V E N T U R E
C A P I T A L
MANAGEMENT LESSONS from the
Pioneers of PRIVATE INVESTING
ROBERTA. FINKEL
President, Prism Capital
.ith DAVID GREISIN6 c^fb„
siness Correspondent,Chicago Tribune
USD $34.95
TheMastersofPrivateEquityandVenture
Capital is a gathering of concise,en
gaging, and eye-opening profiles that grant
youavirtualaudiencewithtenoftoday's pri
vateequityandventurecapitalgiants.Through
theirexclusivestories,toldintheirownwords,
these wealth-creation experts share timely
advice andthewisdomoftheirexperience.
Each chapterin TheMasters ofPrivateEquity
andVenture Capitalisdedicated to adifferent
topic, as explored by a different expert. The
profiles ariseoutofextensive discussions with
the ten, arranged and conducted by Robert
Finkel,anexperiencedfundmanagerandven
turecapitalexpert,andDavidGreising,along
time business journalist. For each"Master," a
thumbnailbiographythat kicks off"eachchap
ter highlights their most important deals,
favorite accomplishments, biggest mistakes,
assetsundertheirmanagement,andothervital
facts. Chapters concludewithuseful takeaway
pointsthat encapsulate keylessons from:
•JohnA. Canning,Jr. (MadisonDearborn
Partners)—who describes howthe current
economiccrisisisputting anemphasisback
on financialfundamentals,isrefocusing
investorson operating performance,and is
markinganendtotheleverage-fueled
megadeals
•JefferyWalker (JPMorgan Partners/
Chase Capital Partners)—who detailsthe
importance ofpropercapitalstructuresfor
businessesand howto applythe rigorsof
privateinvestment into philanthropy and
socialentrepreneurism
(continuedonbackflap)
The
MASTERS
PRIVATE
EQUITY
and
VENTURE
CAPITAL
Management Lessons from the Pioneers
ROBERT A. FINKEL
with DAVID GREISING
Mc
Grat/u
Hill
NewYork • Chicago • SanFrancisco • Lisbon • London
Madrid • Mexico City • Milan • NewDelhi • SanJuan
Seoul • Singapore • Sydney • Toronto
heMcGraw-HillCompanies
Copyright©2010byRobertFinkelandDavidGreising.Allrightsreserved. PrintedintheUnited
StatesofAmerica.ExceptaspermittedundertheUnitedStatesCopyrightActof1976,nopart
ofthispublicationmaybereproducedordistributedinanyformorbyanymeans,orstoredina
databaseorretrievalsystem,withoutpriorwrittenpermissionofthepublisher.
34567890 WFR/WFR 016543210
ISBN 978-0-07-162460-2
MHID 0-07-162460-0
Thispublicationisdesignedtoprovideaccurateandauthoritativeinformationinregardtothe
subjectmattercovered. Itissoldwiththeunderstandingthatneithertheauthornorthepublisher
isengagedinrenderinglegal,accounting,orotherprofessionalservice.Iflegaladviceorother
expertassistanceisrequired,theservicesofacompetentprofessionalpersonshouldbesought.
—FromaDeclarationofPrinciplesJointlyAdoptedbyaCommittee ofthe
AmericanBarAssociationanda CommitteeofPublishers.
McGraw-Hillbooksareavailableatspecialquantitydiscountstouseaspremiumsandsales
promotions,orforuse incorporatetrainingprograms.Tocontactarepresentative,please
e-mailus [email protected].
This bookisprintedonacid-freepaper.
ForMattandAllison, mayyouneverstoplearning.
RA.F.
For Wes, Greta,and Claire,who make itall worth while.
D.G.
CONTENTS
ACKNOWLEDGMENTS ix
INTRODUCTION.
Robert A. Finkel
Prism Capital
PART I: PRIVATE EQUITY
1 METHOD OVER MAGIC: THE DRIVERS
BEHIND PRIVATE-EQUITYPERFORMANCE 17
Steven N. Kaplan
Universityof ChicagoBoothSchoolof Business
2 Operating Profits: using an Operating
perspective to achieve success 31
Joseph L. RiceIII
Clayton, Dubilier & Rice
3 Skin in the Game: investing
in service businesses 47
F. Warren Hellman
Hellman &cFriedman LLC
© v ®
vi • Contents
4 The Partnership paradigm: working with
Management to Build Toward Success 73
Carl D. Thoma
ThomaBravo, LLCandpredecessorfirmsGolder
Thoma& Co.;GolderThoma CresseyRauner, LLC;
and Thoma Cressey Bravo,Inc.
5 beyond the balance sheet:
Applying Private-EquityTechniques
to Not-for-profit Work 95
JeffreyWalker
JPMorgan Partners/Chase Capital Partners
6 the inside game: managing a firm through
Change afterChange 117
John A.Canning,Jr.
MadisonDearborn Partners
PART II: VENTURE CAPITAL
7 The Entrepreneurand
the Venture Capitalist 141
Garth Saloner
GraduateSchool ofBusiness, StanfordUniversity
8 Pioneer Investing: taking venture
Capital from Silicon valleyto
Bangalore and Beyond 151
William H. DraperIII
DraperRichards L.P.
9 Change for the Better: Managing for profit
as Markets and Technology Change 173
C. Richard Kramlich
New Enterprise Associates
CONTENTS • Vii
10 Beyond the ivorytower:
Taking laboratory research to market 195
Steven Lazarus
ARCH Venture Partners
11 FOSTERING INNOVATION: PEOPLE, PRACTICES,
AND PRODUCTS MAKE NEW MARKETS 221
Franklin "Pitch" Johnson,Jr.
Asset Management Company
12 RISK, THEN REWARD: MANAGING VENTURE
INVESTMENT IN RUSSIA 243
Patricia M. Cloherty
Delta Private Equity Partners, LLC
APPENDICES: TOOLS OF THE TRADE
1 checklist for evaluating investment
Opportunities 271
Franklin "Pitch" Johnson,Jr.
2 Guidelines for Transforming research
into Commerce 273
Steven Lazarus
3 WHAT WE WANT IN A CEO 277
Joseph L.RiceIII
4 Portfolio Companyvaluation template 279
Patricia M. Cloherty
5 "WATERFALLANALYSIS":THE STRESS TEST
FOR POTENTIAL PORTFOLIO COMPANY 283
John A. Canning,Jr.
viii o Contents
6 MANAGING DIRECTOR SELECTION CRITERIA 289
John A. Canning,Jr.
7 PERFORMANCE METRICS FOR MILLENNIUM
VILLAGES 293
Jeffrey Walker
8 "CARLISMS": KEY PRACTICES FOR PRIVATE-EQUITY
INVESTORS 297
Carl D. Thoma
INDEX 301
ACKNOWLEDGMENTS
Ineedtoacknowledge agroup ofpeoplewho made itpossiblefor me
to put thisprojecttogether:
First, thank you tothe wonderful people whose life work is herein
profiled; each interview was amaster class for me. Iwish to thank
theIllinois Venture Capital Association forthe opportunity to create
mentoring panels thatwere the inspiration for the book. Also, my
professional mentor, Art DelVesco, and the good partners atWind
PointPartners, forteaching metheropes withaloose tie.
Joan Shapiro, aguiding hand in my very fortunate life, introduced
me toDavid Greising. Leslie Pratch thoughtfully aided inourquest to
reach the masters. Emily Thornton ofBusinessWeek was kind enough
to introduce meto McGraw-Hill. Andto our editor at McGraw-Hill,
Leah Spiro, thank you for your steadfast commitment to doing this
right andontime. Iam grateful toeach ofyou.
To my loyal Partners at Prism, thank you for your patience as
I traveled to conduct interviews.To my top-notch assistant, Lauren
Belcher, for transcribing so long and so well and tothe passionately
focused Renata Johns, for your skillful research, well-crafted editing,
and attention to detail, Ithank you.
Throughthis processIhavegainedafriend inDavidGreising.Thank
you, David, for being a terrific collaborator, writer, and interviewer.
David artfully and faithfully incorporated the voice ofthe professional
masters who very generously agreed toparticipate. When looking for
awriter for the project, afriend ofafriend, Terri Savage, advised me
whatIknew inmy heart butwas good tohear again: "Ifyou gaveJohn
Canning areferral for aplumber, you would make damn sure itwas a
good one, right?" For me and this book, David Greising is the Harry
Tuttleofwriters (in themovie Brazil, Robert DeNiro plays theheroic
and good-natured craftsmanwho always appears when you need him).
TomylovelyandsupportivewifeLinda,for beingmylife'spartner,and
tomyparents,whotaughtmethatpersistenceis everything,thankyou.
—Robert Finkel
• ix o