Garage retools – again

Venture advisor now a midwife for M&As

Shaking off the dot-com boom and bust, the company once called Garage.com and known for helping entrepreneurs develop elevator pitches and slide presentations to wrangle money from venture capitalists, changed its name two years ago and now is retooling its focus.

Garage Technology Ventures is trying to reinvent itself as an early-stage investor and deal midwife. With a recent $10 million cash grant from California Public Employees Retirement System (CalPERS), the ever-optimistic Palo Alto company is moving into new territory. After eliminating 75 percent of its work force and cutting salaries of its remaining 12-person team, Garage is expanding beyond brokering early-stage venture investing deals to merger-and-acquisitions consulting and direct seed investing.

“We can’t wait for Nasdaq to go to 5,000 before we start investing again,” says Garage co-founder, CEO and chairman Guy Kawasaki, one of the company’s four managing directors. “What Nasdaq is today has virtually no relationship to what I care about, which is what Nasdaq will be three years from today.”

The burst dot-com bubble changed the venture capital terrain.

“A startup today is very different than at the height of the bubble,” says Kawasaki, a former evangelist for Apple Computer Inc. and author of seven marketing books.

He says one of the hard-learned lessons of the past two years is cleverness alone doesn’t cut it today.

“A very clever idea without the technology behind it is not a fundable idea,” Kawasaki says. “But if you have an algorithm or some hard-core technology, that’s more fundable today. But even that’s difficult. I’m not a technical person, so I tell people here at Garage that if I can easily understand the technology behind the company, the company is not fundable. VCs are looking for real hard-core stuff.”

Kawasaki isn’t the only venture capitalist with this belief.

“That’s largely true; that’s correct,” says Ben Yu, a partner at Menlo Park-based VC Sierra Ventures. “Given the fact there’s less visibility to the market itself, we don’t think this is the right time to invest in business models and business plans, but rather invest in strong technologies and very strong products.”

Kawasaki says the shift may hurt innovation.

“There are many successful companies today that would not be funded under those strict rules,” Kawasaki says. “The pendulum has swung from funding anything and anyone who can do PowerPoint to funding only proven ideas. We think it has swung too far.”

With the initial-public-offering market stagnate, many small and viable startup companies view merging or being bought as the only viable cash-out strategy for their venture investors, he says. Only seven Bay Area companies have gone public in the past 12 months compared with 139 in the same period ending March 10, 2000, the day Nasdaq hit its all-time high, according to Los Angeles-based IPO Monitor. Garage hopes to stay afloat by advising on mergers and strategic purchases.

Garage’s strategy is to focus on companies that will make good acquisition targets for existing players, as Kawasaki believes the M&A market is the first to return in a recovery.

“Typically we would represent the seller,” Kawasaki says. “There are a whole lot of companies that can be acquired for $20 to $50 million.”

While Guy Kawasaki is a household name in the valley VC community, Garage has never had a homerun along the lines of Kleiner Perkins Caufield & Byers’ funding of Cisco Systems Inc. or Draper Fisher Jurvetson’s funding of Hotmail, which sold to Microsoft Corp. for $450 million.

Some of Garage’s better-known investments include Gator Corp., FutureTrade Securities LLC and Digital Fountain Inc.

Some future M&A candidates belong to Garage’s own stable of aging startups. Kawasaki doesn’t expect much competition from investment banks, claiming they shy from deals worth less than $100 million.

“We think there is a very attractive place there underneath what the bulge market will do,” he says. “But it’s still large enough where the fee structure could be several hundred thousand dollars. A couple hundred thousand dollars is what the bigger guys spend on catering.”

Garage also banks on seeding new companies with direct investments, using a $10 million infusion from CalPERS and some of its own money. It plans to fund businesses like single-idea software startups needing a small cash infusion to fully develop an idea — the type of venture bigger investors may overlook.

Garage will target California companies that that could be fully-funded at $15 million.

“With a few local exceptions, most VCs are not interested in seed round ventures right now,” Kawasaki says. “I predict we’ll look back at 2002 and 2003 as great years. We’ll all be saying we should have invested more money.”