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VC Scott Hyten Even if your e-business is faltering, you can get venture capital . . . if you're prepared to trim the fat.

By P. Kelly Smith

Opinions expressed by Entrepreneur contributors are their own.

If you're a struggling dotcom and nearly out of money, ScottHyten may just be your new best friend. As founding partner ofAustin, Texas, venture capital firm Interfase Capital Managers andaffiliate company Eco Associates, Hyten provides restructuring andfinancing to distressed companies. To date, Hyten and his partner,Ronald C. Carroll have raised $100 million and invested $40 millionof that in faltering start-ups like drkoop.com andChipshot.com. What makes them invest? Hyten has someideas.

Entrepreneur.com: When you're making the decision toinvest in a failing start-up, what do you look for?

Scott Hyten: We like to look for cash flow of some sortwithin the company, meaning they've proven some way to generaterevenue. As you know, there are a lot of companies with largeexpense lines with absolutely no revenue lines. In the case ofDrkoop.com, where [they've got] a very large expense line ofmore than $100 million, at least they have the $20 million inrevenue. That's the first thing we like tosee-revenue.

Entrepreneur.com: And then maybe an established brandname?

Hyten: Oh, absolutely. And then following that isinvestments in marketing and a successful supply chain. (If theysell a product, it's important that they have a supply chainestablished and in place.) Inventory and hard assets-thoseare important issues as well.

Entrepreneur.com: With the companies that you invest in,you usually enforce a strict "weight-loss plan." Whatdoes that entail?

Hyten: We look purely at the cash flow of the company,and then we start looking at what products and services they selland what the operating margins of those services are, meaningwhether it's possible to generate a profit. If they can notgenerate a profit on a particular product or service, then wegenerally cut that out of the mix. We then try to focus on theprofitable lines of business. Really, we look at the cash and justfollow it to make sure that they can sell something for more moneythan it costs to produce it. And then once we have that, then wereally try to cut everything out of the business.

Entrepreneur.com: And then your goal is to sell off theacquisitions to more established companies?

Hyten: That is certainly one goal. Our primary goal is tomake the company successful and profitable. And once you have asuccessful, profitable company, you have a lot of liquidityopportunities.

Entrepreneur.com: For any dotcommers who may be readingthis, what are some simple steps to trim the fat in theircompanies?

Hyten: Well, a number of these companies really try toreinvent the wheel, technology-wise. They have very largetechnology infrastructures and staff. And probably the first thingI would do is advise them to look hard at outsourcing virtuallytheir entire technology infrastructure to someone who has economiesof scale. Very few of these companies have any economies of scalein this area. You can look at them and they'll be spending 50or 75 percent of all of their expense on something that can be donefor a fraction of that cost. So I would say, 'Don't bemarried to your internal technology programs.' Look atwhat's available in the commercial markets, and try to createoutsourced relationships for those. Everybody seems to have bought$10 million worth of servers, and everybody seems to have spent $15million on building a customer database when you can pick thosethings up on the market from established providers for a fractionof 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 businessif we didn't think they were going to rise again. I think the2000 numbers were $35 billion in e-commerce. No market has everrisen to that level so quickly, so those are real numbers thatrepresent real dollars. I'm not going to say it's evergoing to get back to the heyday of a 5000 NASDAQ, but I thinkit's going to have a second life.

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