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Small Business
Sculley: funding the future
May 22, 2000: 10:06 a.m. ET

Famed former Apple CEO reveals his formula for venture investing
By Staff Writer Hope Hamashige
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NEW YORK (CNNfn) - The spotlight doesn't shine as brightly on John Sculley these days as it did when he was at the helm of Apple Computer. Then, he was one of the most closely watched -- and highly regarded -- businessmen in the world.

Yet Sculley seems to relish his new, lower profile role in the "new economy." As a partner at Sculley Brothers, the five-year-old, purely private venture capital firm he runs with his brothers, the Sculleys are on the hunt to find, fund and nurture the next wave of high tech powerhouses.

That hunt has Sculley scouring the fertile technological grounds in Silicon Valley, New York City, Israel and London in search of entrepreneurs whose companies will change the way we conduct our lives and businesses. And who are going to build billion-dollar businesses along the way.

graphicThese days, it's not enough for venture capitalists to simply put their money into a company and wait for the return. Most put their brains and experience and connections to work for the start-ups they invest in.

The Sculleys have a lot of all those things. Brother John was the CEO of Apple Computer (AAPL: Research, Estimates) for nearly 10 years. Arthur was the president of J.P. Morgan (JPM: Research, Estimates) Worldwide Private Banking until 1995. David used to be president of H.J. Heinz USA (HNZ: Research, Estimates).

"Over the years, I have developed a pretty good Rolodex," Sculley added.

The Sculley brothers share the responsibilities of their firm, which include networking at industry conferences, meeting with entrepreneurs seeking money, advising those who have received Sculley funds and jetting off every couple of days for Europe, Israel or California. Even with a smooth partnership such as theirs, being a venture capitalist means you are working "seven days a week," Sculley said.

Yet, he seems to love it. The spotlight may have faded, but Sculley's enthusiasm for technology, building businesses and working with entrepreneurs clearly has not.

Sculley recently spoke with CNNfn.com about the very, very private world of venture capital, the future of the Internet and finding and funding the companies of the future.

Tell me how business plans for new companies make their way to your desk.

First of all, we don't look at any unsolicited business plans. We get our deal flow from our own network of relationships. In many cases, we come up with the ideas and co-found the companies with entrepreneurs.

graphicWe focus on very early stage deals where we can get the most leverage. It is where we can add the most value. We help recruit the management teams, other first-tier investors, build strategic alliances with bigger companies.

We try to look for CEOs who are on their second company, not their first. We try to go into businesses that we think have the potential to get to at least a $1 billion market value because it is not about going public as the exit strategy. It's about creating value, and when you are public you are working with a less expensive currency -- but you still have a lot of the growth ahead of you, even after you are public. It takes as much work to build a billion-dollar market cap company as it does one that is smaller, so why not try to build a bigger one.

The best way to build bigger companies is to get an experienced management team, attract first-tier investors. It not only gives you a chance to build a bigger business but it also takes a lot of the risk out.

Where do your ideas come from?

A lot of our ideas actually come from a network of CEOs. We stay in touch with people, even if we haven't invested in their company, because we may want to partner on their next company. A perfect example of that would be PeoplePC.

I knew [Nick Grouf] the founder of Firefly. I didn't invest in his first company but I was very interested in him and kept track of him through the years. He sold his company to Microsoft (MSFT: Research, Estimates) and then became entrepreneur in residence at Softbank. When he said he wanted to start a new company, I was very interested in being on the ground floor with him.

We were one of the founding investors, along with Softbank, of PeoplePC. That's a very typical way in which the deal is started. We like entrepreneurs who have been at least seasoned on a first company, which doesn't mean they are necessarily very old. Many of our entrepreneurs are in their late 20s or early 30s. But they are often on their second company.

Is there any other way an entrepreneur can get you to consider investing in his company?

We have worked with many investors on boards of various companies we are involved with. As a result, when they are looking at a new opportunity, they will often come to us and say: This is a business where there is a lot of marketing work that has to be done in order to make this a leader in its industry. We know what you did with that other company. Can you help us with this company?

A good example of that is that we were early investors in a company called is More.com, which is a superstore for healthy living. Another one of the venture investors was Rho Management. Rho Management came to us last summer and told us they were looking at an investment in a new company that was going to take pre-owned office technology that comes off lease and refurbish it, warranty it and bid it out over the Internet. They saw it would take marketing skills to in order to make the business successful, so they invited us in and we joined them in the first round of investment.

We went on the board, helped come up with the new name of the company, which is TechSmart, and helped recruit key managers and helped coach the management team. They knew what to expect from us and we knew what to expect from them. They were much stronger in financial analysis and we respected them tremendously for their skills. By putting our respective skills together we were able to help the entrepreneurs not only build the company but attract in the quality of management they needed as the company got bigger and bigger.

Specifically, what types of companies are you most interested in financing?

We work on wireless infrastructure, on broadband infrastructure, we work on business-to-business exchanges, B2B services and entertainment and media-related ventures.

The thing that all of our businesses have in common is that there is some marketing inflection point in the business opportunity or business model of the companies that we are looking at. Our background is marketing. My brothers and I all came out of marketing.

What interests you about the entertainment field?

We became interested in the implications of the Internet in terms of how it is going to touch people's lives.

graphicOne thing that became obvious was that you couldn't be part of the new economy if you couldn't read. You have to have some level of literacy or you are going to be left out. The level of illiteracy in this country is unparalleled anywhere in the industrial world. Instead of waiting for the schools to be reformed, we thought why not start at the preschool level and see if we can take advantage of technology to begin to address some of these cause related issues such as reading literacy -- so we helped co-found a company here in New York called Sirius Thinking that is now doing the largest children's entertainment project co-venture with WGBH called "Between the Lions."

Kids learn how to read at a preschool level, say 4 to 7, and (this program) is having amazing success in terms of the research and anecdotal evidence we are getting back. That is an example of using technology and focusing on a new economy problem by using the Internet to solve it in ways that weren't possible in the old economy.

There are a lot more venture capitalists with a lot more money competing for the good deals. Are you able to leverage your experience and marketing background to get in on the best deals?

We recognize there are a lot of very smart people in venture capital. To be able to get the quality deals, you've got to be convincing not only to the entrepreneurs you are talking to. You've got to be convincing to the other investors you are working with that you are going to be an added-value investor that is going to help build the success of the company.

Venture investors who are most sought out are those who can bring some experience of actually building businesses and not just qualifying deals and doing due diligence from a financial standpoint. The space we try to fill is in the roles where operation, marketing and scaling up to build big brands is particularly important.

How difficult do you think it is now to create a new brand in the new economy? Is there anyone you can point to now who is doing a particularly good job of it?

In the early days of the new economy, let's say it coincides with the commercialization of the World Wide Web, new companies were being created with brand new brands. You had Yahoo! (YHOO: Research, Estimates) and Amazon (AMZN: Research, Estimates) and eBay (EBAY: Research, Estimates) and a number of other wonderful success stories.

It would be very difficult to create those kinds of companies today and justify the investment it would take to build a brand new brand. The reason is the investment you have to put into marketing for a business to consumer brand can be in excess of $100 million.

When those earlier examples were created as companies, it took almost no money at all. It is becoming much more practical to take brands that are already established in the old economy and Internet-enable them.

So, you're interested in helping old brands build new economy ventures?

In our case, for example, we are working with Wolfgang Puck, who is the most recognizable chef in America. We're helping him build the new economy model of his company. He's known for his restaurants and now we are building an online cooking school, an e-commerce service with Wolfgang Puck-branded cooking tools, developing a daily television series cooking show, infomercials and a whole line of things to monetize a brand that was well-established in the old economy and bring it into a new economy model.

If you look at any new technology that turns out to be very important in shaping an economy, it goes through several phases. With the Internet, when it first appeared, it was not well understood. It was a novelty. We're just now at the stage where the Internet is doing useful things. The next phase of the Internet is the most interesting of all and that is where the Internet moves from something that is useful to something that is indispensable.

The Internet, when it becomes indispensable, is going to be vastly different from the Internet as we know it today. Once it's indispensable, the difference between brands in the old economy and creating new brands in the new economy can come together.

Old economy companies can no longer think about whether or not they have an Internet division. It's about how do I rethink my entire company to Internet-enable it. In effect, find a new economy model. We are as interested in looking for opportunities to extract new economy value out of old economy businesses as we are in starting new companies that are designed to do entirely new things.

You have funded a number of companies from outside the United States. That is a bit of a departure from the way venture capital firms conducted business, which was usually on a very local level. Will you explain what is fueling your interest in funding companies abroad?

In the broadband area, we work with a number of companies in Israel because Israel is very rich in technology. For us the advantage is to be able to bring the marketing experience to help put together major business partnership deals, to be able to attract management as the Israeli technology turns from technology into a company.

There is one company called Veon that is building the broadband infrastructure for what is called hyper video so it's enabling interactive broadband video for both entertainment as well as e-commerce services.

We have another Israeli company called Gizmoz, which is transforming the Web from a publishing model, which is what http and html is all about, to a broadcast model. Gizmoz can take any content company and turn it into a broadcast private network.

We're very active in London, too. We have an incubator in London.

There is a lot of logic as to why venture capital stayed local. Many deals were shared and syndicated in a particular region. Sand Hill Road is a prime example of that.

My brothers and I have spent most of our careers working on a global basis. We've worked just as much outside of the United States as we have inside the United States. My brother Arthur lived nine years in Asia. My brother David lived five years in Europe and I lived several years in Europe and South America. We're very comfortable working on a global basis and from New York we can travel easily to California, to London and to Israel.

We work very closely with venture funds in these markets. We've been doing business in Israel for about five years and we have strong ties with a number of the Israeli venture funds.

What are you looking for when you read a business plan? Is there any aspect of the plans you have seen that will push a plan to the top of your list of prospective investments? And conversely, is there something you see in plans that instantly turns you off?

Business plans are really not very useful to determine whether you want to invest in a business. People have learned the art of writing business plans that often have no connection to whether that is going to be a successful business. More and more we are interested in meeting the people and looking at their relevant experience. We want to know things like why they think they can dominate that particular market segment and why they think they can scale it rapidly grow it into a large company.

If someone can't explain their idea in what they call the elevator story -- the amount of time it takes for an elevator to go from the 32nd floor, where we are, to the ground floor -- chances are that they don't really understand their business well enough. We look for businesses that are very well focused in terms of what they are trying to do. We like businesses that are not trying to do five different things, but one thing particularly well.

We also want to see who the competitors are and who is backing the competitors. It makes a big difference who is investing in and managing competitive companies because the Internet disproportionately rewards winners. It's much easier to do that through our own network of relationships than to try to sort through thousands of unsolicited business plans. While we run the risk of missing out on something that could be terrific, the amount of time it would take us, as a small firm, to process all that is really not worth it. We have enough connections through our own networks that we have been able to get a pretty good deal flow without having to rely on unsolicited business plans.

What would you say to entrepreneurs out there who have a great idea and are looking for venture capital to get their company rolling?

Appreciate that the idea is not where the value is. There are so many smart people with so many good ideas that the thing that separates the good companies is rarely the idea.

It's usually the quality of the management team that is usually able to turn the idea into a successful company. We are much more interested in investing in people than in an idea. We know that from the time the company is founded to the time it actually becomes a public company it is going to go through several changes and there are going to be lots of surprises along the way. The best way to increase your chance of being successful is to be working with a management team that is experienced and fast and flexible. Good people attract good people and mediocre people attract mediocre people. If you start off with a mediocre team, the odds are you are going to end up with a mediocre organization. If you have stars, you have a much higher probability they are going to attract people like themselves.

Also, recognize that the new economy disproportionately rewards winners. If you were No. 1 or No. 2 in a market, you are going to be very aptly rewarded. If you were No. 4 or 5 or 6 nobody is going to remember who you are. Back to top

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