The Daily Deal
(Copyright (c) 2001, The Deal, LLC)
August 16, 2001

It is the best and worst of times to be a venture capitalist or buyout specialist in technology. Deep pocketed financiers can pick and choose targets, but there is ongoing concern about the technology sector's trajectory and company values.

Mark Jennings, a managing partner with New York and San Francisco-based Generation Partners has an itchy trigger finger.

Generation has two $162.5 million funds, of which 60% is slated for venture capital and 40% for buyouts. But its second fund, closed in July, 2000, has not made an investment in nearly a year and 85% of it remains un-invested.

In June, TMP Worldwide paid $460 million for one of Generation's portfolio companies, HotJobs, of which the fund had owned 7%. Jennings is now hunting for more such successes. With a heavy background in leveraged buyouts, Jennings senses that now is a good time to buy or invest in small- to medium-sized companies.

Jennings spoke with The Daily Deal's David Shabelman about his investment plans.

The Daily Deal: How would you characterize the market right now for acquisitions?

Jennings: In the past year, you've had a lot of noise and a lot of companies have really been focused on their own internal issues. At the same time you've seen turmoil in the private equity and the buyout and the venture business, and you've seen turmoil in the credit market so that lenders are lending way less than they used to. All those things have resulted in declines in transactions volumes.

It's an extremely interesting time. We have not aggressively pursued a buyout this year, but we are now starting to turn the jets on in a few situations. I think what you're going to have over the next year will be a confluence of events that are pretty unique.

One, you've got companies that have their own share of problems and are probably going to be looking at non-core assets to shed. Two, you don't really have a whole lot of people that are capable of looking at those kinds of companies. So I think the competition from strategic buyers is going to be diminished. Before, if you wanted to buy a company that was in the components space, you were competing against the JDS Uniphases of the world who had a currency and they were just going great guns in terms of acquisition pace.

What kinds of companies are you investing in?

In our funds we've got about 60% venture and 40% buyouts. Generally our theme is businesses that are in one way or another able to use technology to accelerate their growth. We're looking at some outsourcing businesses right now.

Have you had to reinvent some of the companies you work with?

To me a reinvent or a restart is harsher than what's going on with our companies. But because of this environment, every company we're involved with on the venture side has rethought their business plans.

NTE [Inc.] is one of our most interesting investments right now and they're a good example. They began their business as an exchange that matched up excess trucking capacity with shippers. Year to date, they've more than doubled their budget because their business is a bit counter-cyclical. But even with that, the company has still expanded its business model to include a holistic customer software solution that gives them visibility into the actual execution of transportation. Rather than calling that a reinvention, I would just call it an evolution based on customer feedback, which is really the best way to do that.

You were able to avoid investing in many e-commerce startups. Tell us about that.

We've owned retailers before. We've seen distribution centers and real warehouses and real trucks. We recognized early on that it's very hard to make money in retail, and that the internet is not an end-all be-all distribution system.

Those are conclusions we reached back in '97 that led us to say it would be an excellent addition to a distribution channel and for customer service, but we just couldn't find any examples, other than eBay, where that would be an end-all, be-all distribution system.

Frankly, going backwards, I don't think there were a lot of venture capitalists that had people that had done a buyout of a retailer and really understood distribution centers and inventory management. And that's part of what happened in the financing of some of these companies that shouldn't have been financed.

How do you determine which companies you will buy or finance?

I would say in two-thirds of our investments, we've gone out and found the company as opposed to them finding us. Almost everything we're doing now is proactive, especially on the venture side.

On the buyout side, you can proactively target something all day long, but if a couple of key companies aren't for sale you're not going to get anything done. In that area, the intermediaries are key to us that they know what we're looking for.

What kinds of flexible investing strategies are you doing?

The ability to navigate between buyout and venture makes us very flexible. I'm not averse to any structure. Our whole philosophy is the transaction is the easy part.

The hard part is picking a theme and finding the right management team. We're as flexible as you can get. If I want to buy common stock in a company I can. Even in the venture side, people have asked me, "Are you early stage or late stage?" and my answer is, "I don't care." If we catch them early enough, great. If not, we're going to back the one we think is going to win.

How difficult was the HotJobs/Monster.com merger?

It really wasn't. It happened very quickly. They've known each other forever. Monster tried to buy HotJobs before they even went public. They had developed quite a bit of mutual respect and the CEOs had known each other for quite a while. It was reasonably clear they'd make a good combination.

Did it hurt not to sell HotJobs at the height of the market?

One of the things I'm proud of is that we stuck it out all the way. We were not one of the venture firms that just the second they went public distributed our stock to our limited partners and then moved on to the next one. And that's a little bit of our mentality. If we like the company and we like the space, we get deeply involved. And in some respects because we're on the board and in constant possession of inside information, it hurt our ability to sell at the peak. But that's what we do for a living. We get involved and we stay there.

How are you setting a timetable for profitability these days?

With any new investment right now, we're either going to be very early stage, where a minimum of two years of money is going to be in the bank, or we're going to be late stage enough that our money combined with anybody else's in the deal is going to take them clearly to profitability with a cushion. I don't want to play in the middle. The situations that we've had that have turned into problems in large part haven't been because the businesses were fundamentally bad, but more because we inevitably got short on funding in an environment where, even if you had a decent company, you couldn't get other people's attention. One of the things we want to avoid now is financing risk.

How do you judge when to pull the plug on a company?

We've had a tough time doing that. With our buyout mentality, we tend to dig in and stay deep for a long time. We make that decision when we've exhausted every bit of our energy trying to figure out what can be done with the company. It's just been our nature to dig things out, and we've done it successfully.

We invested in DiscoverMusic, which was an early version of Napster. We got sued by all the record labels and they almost shut us down. I was on weekly phone calls with the CEO two years ago trying to tell him which bills we could or couldn't pay. We ended up getting funded by Microsoft [Corp.] and Akamai and then sold ourselves to Loudeye Technologies. But I can assure you, it would have been really easy to just say, "This is too much pain and suffering," and punt.