Dan Kellogg and Joseph Tzeng tackled a daunting task: They set themselves up as the investment leaders to back companies doing business in a field — the Internet — that stomps out old innovation nearly as quickly as it is produced.
As a result, Crystal Internet Venture Fund LP was the first of its kind in Northeast Ohio to invest solely in Internet and Internet infrastructure-related companies.
“We felt the Internet was going to be the big thing,” says Kellogg, the firm’s managing director. “When we started our fund three years ago, I don’t know if there was even another fund that was focused on the Internet. That just tells you how fast that world has evolved.”
That was 1997, when Tzeng, president, and Kellogg raised $40 million to create Crystal Internet. Last year, a second fund raised $200 million. The company staffs offices in Silicon Valley and Taipei and soon will add another in Singapore. Within 12 months, the pair plans a third fund, “north of $500 million,” that will focus on businesses in Europe and Israel.
“Since we have operations here, California and China, it’s not unusual for us to be working almost a 24-hour day,” Kellogg says. “It makes for an interesting lifestyle, but it’s a fun business. The people you deal with, the exciting things that you help get to start, you get to see some of the cleverest ideas going on around the world.
“Crystal Internet is 100 percent focused on Internet-related investment, and that is right now one of the exciting areas.”
Investing is a hit or miss process, but Kellogg and Tzeng try to increase their odds by looking for three things when deciding where to place their bets.
Invest in the future
“If I could predict the future, I’d invest in it,” Kellogg says.
But since there is no crystal ball, the two must make their best educated guess.
“The Internet is a dynamic environment,” Kellogg says. “The hardest thing is to try and figure out where markets are going, where the technologies are going, where the needs are going and how they will evolve. We must always analyze where to be in that evolutionary process. There’s no definitive answer. If there was, this would be an easy business.”
With the proliferation of investment companies and companies in which to invest, the problem isn’t finding ideas, or even finding good ideas, it’s weeding through thousands of proposals to uncover the enterprises that have the best chance at success. So far, Crystal’s bet on three winning horses — www.about.com; www.babycenter.com, which was acquired by eToys in April 1999; and www.cobaltnet.com — and has several more in its stable hoping to make a little noise.
Invest in people
A good idea. The right market. A drive to succeed. These are all necessities for a business to succeed, but they can’t stand by themselves.
“I have been approached by people whose sole purpose for starting a company is absolute, unmitigated greed,” Kellogg says. “And, unfortunately, when the going gets tough, and it always does, greed is insufficient to make a company a success.”
So what is the single most important factor Crystal looks for in a project?
“Whether it’s Rust Belt investing, Internet investing or biotech investing, you invest in people,” Kellogg says. “I don’t care whether you’re building engine blocks or whether you’re building database engines, people make the difference.”
Invest in potential market leaders
“We see a tremendous number of business plans,” Kellogg says. “We see a tremendous number of entrepreneurs who are thinking about putting together business plans. In that process, we continue to be at the cutting edge of great ideas.
“You get an opportunity to meet great people and ask them questions and to hear them. That keeps you in tune with where things are going.”
When considering which projects to throw Crystal’s considerable financial support behind, it’s imperative to pick the ones that have the best chance to lead their respective industries.
“Do we miss opportunities? Everyone misses opportunities,” Kellogg says. “You don’t worry about the ones you miss. You worry about the ones you invest in. On the whole, though, staying in touch with where things are going is a large portion of our business.”
And when does Crystal choose to invest?
“We tend to invest in the first stage, first true institutional rounds where the entrepreneurs have probably worked with angel money, family money, their own personal money to get it to that stage,” Kellogg says.
But there are exceptions.
“We have actually seeded companies,” he says. “But that is very rare. It’s a harder thing to do because it takes too much time. Time is, of course, the one thing we’re all very limited on.
“There’s no way to whip up another 10 hours in a day, whereas you can always try and find more money.” How to reach: Crystal Internet Venture Fund LP, (216) 263-5515
Daniel G. Jacobs ([email protected]) is senior editor of SBN.
