With technology stocks almost universally way off their recent highs, one might easily conclude this is a lousy time to get started as a venture capitalist.
If the stock market's appetite for the latest Internet start-up is waning, then how can the successful VC firm claim its windfall from either a blockbuster initial public offering or a sale of the company?
But at HO2 Partners LLC, a Dallas venture capital firm in the early stages of investing its first fund, the principals say they've welcomed the fall of the tech-laden Nasdaq stock index, now 37 percent off its peak in March.
"It's bringing the expectations of the entrepreneur back to reality," said Charles Humphreyson, a general partner in the firm.
Typically, entrepreneurs have pitched VCs on the idea that they should be valued in line with publicly held companies that have comparable potential in their markets. As in, they think they're going to be the next Cisco Systems.
HO2 general partner Daniel Owen can't hold back a chuckle. "They must practice in front of the mirror," he said.
HO2 seeks to invest in early-stage, Internet-related start-up companies, primarily in the Dallas-Fort Worth and Austin areas, where the firm says there are more opportunities to invest than available venture capital.
Mr. Humphreyson, 48, was a founding executive of Contact Software International, known for its ACT contact-management product. The company was later sold to Symantec Corp. Mr. Owen, 52, joined Spectradyne Inc. in 1975 during its formative stage. He helped develop the SpectraVision pay-movie concept.
The company's offices are on the 16th floor of an office tower at the Galleria complex. The firm shares space in a collegial, referral-heavy environment with other VC firms including Sevin Rosen Funds, which is a special limited partner in HO2's Fund I. Other special limited partners include H. Berry Cash of InterWest partners; Dennis Gorman, a recently retired Sevin Rosen partner; and John R. Sloan of J. Sloan & Co., a private investment firm.
HO2's plan for its $50 million Fund I is to find between 12 and 15 companies to invest in. Typically, it might invest $700,000 to $2 million initially in a company, with a cap of about $5 million. So far, HO2 has invested in OfficeDomain Inc., which has an Internet messaging product, and Traq-Wireless Inc., which seeks to manage wireless services for corporations. Both companies are in Austin.
The goal: At least a $100 million market cap for the portfolio company within three to five years.
Not every investment by a venture capital firm will be a home run. But the system encourages VCs to take risks. Investors in HO2's Fund I expect Mr. Humphreyson and Mr. Owen to swing for the fences. The investors know that only a minority of the start-ups will make it big but that the payoffs from those kinds of high-risk investments can be huge.
VCs make their money by charging a management fee and taking a percentage of the profits.
The world of venture capital sounds like fun to lots of people, and many are clamoring to get in to the business. Still, it's a tough business because the pressure is so high to produce stellar returns. For firms like HO2, if Fund I is a bust, there is no Fund II.
So what looks exciting these days to HO2? Companies that provide the infrastructure "building blocks" for the Internet economy are hot. That should be a no-brainer, right? Well, try picking the right ones, they said.
Also, HO2 is especially excited about opportunities in wireless data.
Technology junkies are increasingly able to communicate and gather information from the Internet while on the go. The HO2 partners say we'll all be doing this soon. They see an inflection point - the term coined by Intel chairman Andy Grove for a shift that profoundly changes industry conditions - in Web-capable cell phones and hand-held organizers offering vastly greater capabilities at a lower cost.
"These are the kinds of conditions that VCs look for all the time," said Mr. Humphreyson. Good things are going to happen, he said. "As a VC, you can't necessarily see it ahead of everyone else. But if an entrepreneur has an opportunity, if you're mentally prepared, you get it."
As for timing and the stock market, Mr. Owen insists they are lucky.
"We got organized at a point where we had a chance to look at the next wave of Internet companies. We're going in knowing how the rules have changed."
And Mr. Humpheyson said there's no way to predict where the Nasdaq will be when HO2's portfolio companies are ready to go through an IPO.
"Our responsibility is to pick good companies that the public markets will want to embrace and support at some time in the future," he said.
Technology editor Alan Goldstein writes about the Internet and electronic commerce for The Dallas Morning News. His e-mail address is email@example.com.