Q&A with Art Marks

Art Marks, who retired from New Enterprise Associates in June 2001, came out of self-imposed stealth mode in April to announce that he had joined forces with two other industry vets to start a new venture firm Valhalla Partners.

Marks says he gave the firm a lot of thought, but it didn’t really come together until he hooked up with Gene Riechers and Hooks Johnston, formerly of FBR Technology Ventures Riechers (see page 10, PEW, 4/22/02) The three men found they had similar ideas about creating a new firm that went back to basics.

Valhalla, based in Potomac, Md., will focus exclusively on deals in the Mid-Atlantic region. Private Equity Week chatted with Marks about what’s wrong with the industry and why Valhalla is in the right place at the right time.

Given your career and how successful you’ve been, why decide to found a new firm? What are you hoping to accomplish?

Marks: I thought about not doing anything, to be honest. Or not doing anything in the venture business, anyway. But my personal jollies come from working with entrepreneurs and being able to look around corners to see where the next technology is coming from. Once you get that in your blood, you’re addicted. So I see this as a way to continue to do that for many years.

You had a lot of time to think about how to do VC. What were your conclusions?

Marks: You really get a chance to kind of start all over, and we all kind of put up our feet and talked a lot about what’s happened to the business. What are the good lessons you’ve learned? What are the bad lessons? What do you learn from your mistakes and say: “How could you build a great firm in this environment?”

One thing that we concluded is that you have to have the right amount of capital per partner. You can’t have too much or too little.

[He declines to reveal the planned size of the fund, for legal reasons, but he has made it clear that it will likely be mid-sized.]

The high ratio of dollars to people is going to give us a lot more time and we are going to operate at a relatively slower pace than the rest of the industry. We sort of think our target is around a deal, or a deal and a half, per year per partner. That will give us time to help the companies. That will give us time to be smart about the investments and maybe it’ll give us time to have a life.

Given your many years in the business, why do you think this is the right approach to take?

Marks: I think this is the right approach mostly from experience. I think there’s some empirical data that seems to argue that medium sized funds and I have a theory on that do the best. The better guys attract capital and they get larger, but the problem is if you get too much money it’s really hard to do. You’re turned into sort of a momentum player, and right now we got caught out of step with the momentum. Momentum is good if you’re in the right spot at the right time, but I don’t think you can count on that in the venture business. We feel like if we go back to some old-fashioned values, like getting cash-flow positive and helping the company to get to that point earlier, would be better year in and year out.

How do you think the venture industry got to where it is today? Why did funds get as big as they got, and are they at fault for taking too much money?

Marks: I don’t know if anybody is at fault, but the formula used to be: “These guys have made money and let’s give them some more capital, remembering that they’re giving us a lot back and they’re investing it at a faster and faster rate.” What happened is this is a boom-and-bust business and we just had the greatest of all booms. And most venture firms went out at the top of the boom, say 2000 to 2001, and raised enormous amounts of money.

If you’re still in the boom and things are turning over in a year or two and the returns are unbelievable, then that’s OK. The problem is that the industry now has a lot more capital than it can deploy effectively in the same normal time period.