Steve Walker Changes Strategy, But Not His Upbeat Outlook

Washington Post, November 5, 2001
by Cynthia L. Webb

Steve Walker is a romantic venture capitalist.

He gets a thrill from young entrepreneurs with cool ideas and lots of energy, perhaps seeing a younger version of himself. And he is motivated by the idea that a start-up could really make it big with his cash and help, two things he did not have much of when he started a company with $30,000 after a career as a Defense Department technology geek.

His large, silver-rimmed glasses and newly grown beard reveal an understated style. He says "cool" and "neat" a lot and has a staccato giggle that bubbles its way into conversations — conversations that often trail into unguarded tangents about his helicopters, his children and, often, his enduring, simple optimism at a time when optimism in his business is low.

Walker was an ideal venture capitalist for the Internet bubble. Soon after he started his own investment firm three years ago, he became a kind of rock star to Washington's young entrepreneurial class. With a bank account filled with money from his own success, he started investing in dozens of people with "cool" ideas.

But things have gotten very chilly very fast, and several of his investments have gone sour. Walker's particular brand of venture capitalism is being tested. He's even had to lay off a handful of associates in his Glenwood, Md., firm, Walker Ventures. Now, Walker and his team are focused more on making sure their current investments survive. There's still interest in finding hot ideas, but the deals have slowed to a trickle.

His response to the changed environment is characteristically tranquil.

"I've often wondered why I don't really get angry or really lash out or something," Walker said in a recent interview at his office, an unassuming brick building that is bordered by his two houses. "Well, there's nothing to be gained by that."

In at the Beginning
Walker's firm specializes in early stage investing, providing the seed capital for mostly local companies that often consist of just a few co-founders and a business plan. Walker Ventures operates a lot like an angel investor, typically giving a start-up company its first lump of cash. His firm usually invests small sums of money, from $250,000 to $500,000, or at times less.

Walker and his team, headed by managing partners Gina Dubbe and Alan Burk, are known for working closely with entrepreneurs. They tweak business plans, hone companies' products and build an executive team. After a first or second round of funding, Walker has traditionally let other venture capitalists take the lead in much larger follow-on investments. The idea was to get a company rolling, attract other investors through Walker's contacts in the venture world, and then take a back seat as the company accelerated.

"When a company gets to be in its second or third round of funding, which a number of ours have, all of the sudden you start getting politics between the investors and the various folks in the company," Walker said. "I've come away from a number of board meetings like that where I think, you know what? Get me back to a start-up, where it's pure."

During the heyday, this philosophy worked great because larger venture capital funds were more than willing to take over. That is not the case anymore. Walker in recent months has found himself pulling the plug on a few companies rather than keep them going.

Art Marks, former general partner at Baltimore's New Enterprise Associates, said Walker is known for his "seed and sprout" strategy, funding lots of companies with little bits of money. "This environment will be a real test for his fund," Marks said.

Walker is not denying that times are tough, but he notes that his firm is no different from other early stage investors that have been affected by the burst of the Internet bubble.

"We're in a downturn," Walker said. "We have lost a lot of money in the companies we've invested in early on. Well, all right. We've lost it. It was sort of paper money anyway."

Walker Ventures says four of its firms have failed: RetailMetro, Newsletters.com, FastTrends and eContributor. Another investment, one of its first, ZonaFinanciera.com Inc. of Fairfax, started closing down last month, though Walker is trying to recoup some capital for investors. Northern Virginia software firms NetDecide Corp. and Internet recruiting firm Career Rewards Inc. have suffered management shake-ups.

But this is part of the risk of investing in companies that many other firms are not willing to bet on yet, and it is typical of other firms' track records, Walker and Dubbe said.

"We are going to be around for a long time. The companies are more than surviving — I won't say thriving — but they are exceeding our expectations right now. We are optimistic," Dubbe, 40, said of Walker's 29 companies.

Walker says his firm has about $20 million left to invest from a nearly $40 million second fund it raised last year. Walker said the fund will not have to raise more money for a few years.

"We can keep going for a good while. And we are looking at other alternatives, too. But we're still in the game right now," Walker said.

And at 58, Walker knows a lot about the game of business.

An electrical engineer by training, Walker landed at the National Security Agency out of college and then went to the Defense Department, working with the Defense Advanced Research Projects Agency, the creator of the Internet. After 20 years working for the government, Walker left in the early 1980s to start his own company, Trusted Information Systems. Walker took the network security firm public and sold it in 1998 for $350 million, with most of the buyout money going directly to him.

He suddenly had enough money to live a life of leisure. But he felt a desire to do more with his money.

"I think the reason that I personally decided that I wanted to do this was because I realized . . . that I could actually do something for other people that I sorely wished that I had access to when I started TIS," Walker said.

Strategic Changes
With eight of his TIS associates (including Dubbe, who headed TIS's sales), Walker started his first fund mostly with his own money. The $5.3 million fund made its first investment in the fall of 1998, and 18 more investments quickly followed. The second fund, of nearly $40 million, was raised soon after, this time taking the shape of a serious venture capital firm with backing from a few banks and mostly other wealthy individuals. The second fund has been poured into 16 companies, including some of the same firms from the first fund.

Many of the firms have not matured yet, though Walker has had wins. Software firm ToFish was sold to AOL in January 2000 for an undisclosed amount. Portfolio firm EduTest was sold six months later and then WeFusion.com in November 2000.

"We are doing every bit as well as every other small investment group in the area, and I think in the long-run, it will be shown we are doing significantly better than most," Walker said. A few companies have not worked out, he said, but "we have a number of others that are doing splendidly well and will provide [good] returns."

But the failures of some investments and the toughening economy have forced him to change how he does business. Walker no longer takes common stock in deals, like he did in a few earlier deals. Walker now takes the more senior preferred stock so his fund won't lose all footing when new investors come aboard.

They are also sticking with companies much longer and doling out money less quickly. Companies are given less cash up front and must reach certain milestones, such as nabbing a set number of customers or hitting a revenue goal, before getting more.

"We're going to keep doing early stage," Walker said. "Now you have to set much higher reserves so that you do less deals, but you've budgeted a larger amount to stay with the deal through its life."

Walker Ventures is also going back to its roots, focusing more on companies with a security bent, Walker's area of expertise, and business software firms; no more dot-coms.

"We're not investing in anywhere near as many companies as we were two years ago. But the ones we are investing in, they are ones we believe in and that we believe we can really help," Walker said.

Only a few new investments have been made this year. BlueFire Security Technologies Inc. is one of them. The Towson, Md., company, which is developing security software for mobile wireless devices, got an $800,000 commitment from Walker this summer that will be handed out as the firm reaches certain goals.

Will Clemens, one of the firm's three co-founders, said his firm sought out Walker for his background in network security.

"Steve is on our board now," said Clemens, since a goal of BlueFire's was "not to just get Steve's money, but to get Steve . . . just because of his expertise. He really understands the subject matter."

Indeed, though his reputation as a prolific dealmaker has shrunk, his storied past as a geek who struck it rich remains larger than life for many. His fans are legion.

"He's extraordinary in pretty much every way," said David Levine, 35, who in the fall of 1998 received Walker Ventures' first check, to start what would become an online secondary mortgage market company. Walker has invested again in his second start-up, Butterfly.net Inc.

A 'Self-Deprecating Style'
On a crisp October afternoon, Walker was the guest speaker at First Financial Group's company conference in Ellicott City. Often found wearing a pastel button-down with pens stuffed into his pocket, Walker had dressed up, wearing a gray-tweed jacket and a shiny maroon Oxford shirt.

After the luncheon, Walker grabbed his coat to leave and was immediately surrounded by a line of people wanting to say hello and press a business card into his hand. Walker, a salesman himself, gave them a card for his firm and another for his "night job" — Capitol Rising, his charter helicopter business.

Walker often appears uncomfortable with this attention. Even at his company's fall bash at the National Zoo last month, aptly called Evolve to focus attention on the changes in the technology industry, Walker melted into the crowd, often standing next to a column, circled by well-wishers.

"I never sought this out and I don't feel very comfortable with it," Walker said. "But if we can help people, it's a good thing. It's worth doing."

Harry Glazer, who co-leads Greenberg Traurig LLP's national technology practice and co-manages the firm's Tysons Corner office, has worked on a handful of transactions with Walker. His firm helped with due diligence on BlueFire.

"Steve is definitely liked and respected, partly also because he's of a different generation," said Glazer, noting that Walker's experience leading TIS from start to finish gave him solid business experience.

"Some venture capitalists have a harder edge to them and he's just got this fatherly, self-deprecating style to him," Glazer said. "You can be kinder, gentler and still get results."

Walker sees himself leading his firm for at least six more years or maybe a "heck of a lot longer than that" before turning over the reins to Dubbe and Burk. The bang he gets out of his job is still strong, despite facing a much different world than when he started in 1998.

"I'm an optimist. I'm always looking for the brighter picture and sometimes now it's harder to find that brighter picture. But there are enough good things going on still," Walker said. "There are lots of things that make it very much worthwhile to be doing this."

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