VC Scott Hyten
Even if your e-business is faltering, you can get venture capital . . . if you're prepared to trim the fat.
If you're a struggling dotcom and nearly out of money, Scott Hyten may just be your new best friend. As founding partner of Austin, Texas, venture capital firm Interfase Capital Managers and affiliate company Eco Associates, Hyten provides restructuring and financing to distressed companies. To date, Hyten and his partner, Ronald C. Carroll have raised $100 million and invested $40 million of that in faltering start-ups like drkoop.com and Chipshot.com. What makes them invest? Hyten has some ideas.
Entrepreneur.com: When you're making the decision to invest in a failing start-up, what do you look for?
Scott Hyten: We like to look for cash flow of some sort within the company, meaning they've proven some way to generate revenue. As you know, there are a lot of companies with large expense lines with absolutely no revenue lines. In the case of Drkoop.com, where [they've got] a very large expense line of more than $100 million, at least they have the $20 million in revenue. That's the first thing we like to see-revenue.
Entrepreneur.com: And then maybe an established brand name?
Hyten: Oh, absolutely. And then following that is investments in marketing and a successful supply chain. (If they sell a product, it's important that they have a supply chain established and in place.) Inventory and hard assets-those are important issues as well.
Entrepreneur.com: With the companies that you invest in, you usually enforce a strict "weight-loss plan." What does that entail?
Hyten: We look purely at the cash flow of the company, and then we start looking at what products and services they sell and what the operating margins of those services are, meaning whether it's possible to generate a profit. If they can not generate a profit on a particular product or service, then we generally cut that out of the mix. We then try to focus on the profitable lines of business. Really, we look at the cash and just follow it to make sure that they can sell something for more money than it costs to produce it. And then once we have that, then we really try to cut everything out of the business.
Entrepreneur.com: And then your goal is to sell off the acquisitions to more established companies?
Hyten: That is certainly one goal. Our primary goal is to make the company successful and profitable. And once you have a successful, profitable company, you have a lot of liquidity opportunities.
Entrepreneur.com: For any dotcommers who may be reading this, what are some simple steps to trim the fat in their companies?
Hyten: Well, a number of these companies really try to reinvent the wheel, technology-wise. They have very large technology infrastructures and staff. And probably the first thing I would do is advise them to look hard at outsourcing virtually their entire technology infrastructure to someone who has economies of scale. Very few of these companies have any economies of scale in this area. You can look at them and they'll be spending 50 or 75 percent of all of their expense on something that can be done for a fraction of that cost. So I would say, 'Don't be married to your internal technology programs.' Look at what's available in the commercial markets, and try to create outsourced relationships for those. Everybody seems to have bought $10 million worth of servers, and everybody seems to have spent $15 million on building a customer database when you can pick those things up on the market from established providers for a fraction of that cost.
Entrepreneur.com: With the current state of the economy, do you see dotcoms rising again?
Hyten: Well, obviously we would not be in this business if we didn't think they were going to rise again. I think the 2000 numbers were $35 billion in e-commerce. No market has ever risen to that level so quickly, so those are real numbers that represent real dollars. I'm not going to say it's ever going to get back to the heyday of a 5000 NASDAQ, but I think it's going to have a second life.