INSME's Interviews

"The entrepreneur’s personal characteristics are key elements when selecting ideas on which to invest"

What aspects does a venture capitalist take into consideration when an entrepreneur presents his/her idea? How does he/she prioritise these aspects? How important is the entrepreneur’s personality?

These are a few aspects of a venture capitalist’s job that are investigated in Part 2 of the interview with Mr. Piol, given to INSME Editorial Staff in May 2004.

INSME: Let’s leave the macro-level analysis (the role of venture capital in the innovation systems) and narrow our focus on the micro-level (the enterprise and the entrepreneur that you target). The first question is about how you select the business idea on which to invest: do you more often happen upon the idea or do you have to search for the right opportunities? Do entrepreneurs contact you directly or rather do you have to be proactive in finding them?

Mr. Piol: During the days of the sector’s euphoria, we used to received 20, even 30 investment requests per day. Not all of them came with business plans. Sometimes they simply consisted in presentations of ideas or contact requests or requests for suggestions. Most of them were poorly presented ideas. So we had to reject them. At that time, the deal flow generated by the market was such that we didn’t need to go hunting for ideas. Nonetheless, we always used to screen them, compare them with the market opportunities that we envisaged and with the trends highlighted by the foreign venture capitalists with whom we were in contact. We also noticed that we received no proposals related to those areas in which we saw more opportunities. So in some cases we decided to have a proactive approach, singling out those areas in which it was worth investing (telecommunications is a paradigmatic case). So we looked for managers or entrepreneurs in those areas and then we supported them financially, grounding our support on business plans in whose drafting we were directly involved. As far as Italy is concerned, we had an active role in creating most of the initiatives in this country. On the contrary, outside Italy we acted on the wake of the deal flow coming from our contacts abroad: other venture capitalists and sectors’ operators.

INSME: : How many investment requests do you receive today?

Mr. Piol: Despite the fact that we are not investing at the moment, we receive 2 or 3 proposals per day. We tell the senders of these proposals that, though we do not have funds to invest at the moment, we can consider them for a future investment, when the new fund [Pino Innovation] will start.
When we started our activity, we interviewed all those that made us investment proposals. Today we are more strict in selecting proposals. We try to have all the needed information by email and we only make interviews if we deem the project really interesting. Generally speaking, requests arriving today are better presented than in the past.

INSME: In a speech you gave at “Fondazione CUOA” in 2000, you said: “Venture capital is not a tool for small and medium-sized enterprises: it’s a tool for enterprises that do not exist or for enterprises that need to grow. We do not invest in dwarf enterprises, we invest in baby enterprises”. You also added: “I think that increased employment and innovation come from new enterprises rather than existing ones, because innovation does not dwell in already established enterprises”.  Do these opinions still hold?

Mr. Piol: These are dangerous opinions [he laughs]. The basic idea is the following: in what sense venture capital is different from other kinds of investment? The difference lies in the fact that it tolerates a higher level of risk than other typologies of investment, for instance bank investment. If the level of risk is higher, venture capitalists need to have higher yields. Higher yields are not made by opening a grocery store. They are made on innovative enterprises.
Innovation is strictly linked to venture capital. Only if you enter new markets or act using different criteria than those used by your competitors (incumbents), you can have higher returns. Innovation doesn’t simply mean new products. Innovation also means new business models. Many Internet initiatives are not so much a matter of product innovation as of business model.
Anyway, I would add something to what I said in 2000: while it is true that innovation dwells in small enterprises and large companies resist innovation, it is also true that, talking about the Internet, it was generally thought that dotcoms could destabilise traditional companies, but on the contrary these reacted metabolising internet technologies. The Internet has been such a pervading innovation that traditional enterprises have successfully adopted it. Online banks are typical examples. Major successes have come from traditional banks that, by radically changing their operational structures through new technologies, have adopted the multi-channel criterion, adding new channels to the traditional ones.
In other words, it is true that innovation dwells in new enterprises, but in the case of the Internet, the threat of the dotcoms was so strong that traditional companies were pushed to adopt new technologies and in doing so they innovated.

INSME: Let’s shift our focus and talk about the entrepreneur.  In an interview you said that when you met with Mr. Renato Soru [Tiscali’s founder], he had a company with only 12 people and rather confused ideas. Nonetheless, you said “I met him at 3 p.m. and I invested 4 billion lira [about 2 million euro] at 5 p.m.”. So what convinced you to invest? Broadly speaking, when you meet an entrepreneur (or someone who wants to become an entrepreneur) what do you consider: the idea he/she proposes? The market opportunities you estimate? His personal characteristics (not only the professional ones)?

Mr. Piol: In the case of Mr. Soru, the situation was peculiar. At that time, I was starting a few regional initiatives in the telecommunication field [in Italy]. More specifically, I was setting up a company in the North-East of Italy, called Adriacom. The meeting with Mr. Soru didn’t come from the willingness to invest. Rather it came from the need to compare my initiative to a regional one [that is Tiscali] that was already settled and operating. The main point is that when I met Mr. Soru I clearly knew the fundamentals of this kind of business because I was tackling them. So having clear reference points when facing Mr. Soru, I realised that he did have confused ideas (in the sense that there was a strange relationship between his ambitions and the reality to which he referred), but the business fundamentals, the steps to undergo were quite clear.
This was the key aspect: we both spoke the same language and we faced the same data.
The second aspect that convinced me, besides his personal characteristics, was the fact that at the beginning of the Internet era, he obtained a licence from one of the first Italian Internet Service Providers and opened an Internet company in the Czech Republic.

INSME: So it was the makings of an entrepreneur that convinced you, wasn’t it?

Mr. Piol: Yes, I would say that.

INSME: If someone with a good idea contacts you, someone with an idea in which you believe, but you are not convinced by other aspects, for instance the person, how do you match these aspect? How do you solve this conflict?

Mr. Piol: The answer I give you today is different from the one I would have given you a few years ago. Today I wouldn’t invest in an enterprise if the entrepreneur doesn’t fully convince me. If I consider the bad investments, these are such because the assessment of the entrepreneur was not correct. For instance, I am very cautious with a person full of imagination and initiative, but who is not careful about costs. Once I thought: we can back this person and complete him. But then we realised that this is not possible. The person is a key element, more than the idea. I’ve seen initiatives starting with weak business models evolving into strong ones thanks to the fact that the management realised that changes had to be made. I’ve seen very promising, sound initiatives turn into flops just because the people that led them were unfit.
In particular, in choosing the person, the most important element is the person’s moral integrity, his/her honesty.  This has not often been the case in the latest years: the idea of becoming rich and famous through new technologies has corrupted almost everybody. In my 40-year career I haven’t seen as many cases of lack of integrity as those I have seen in these last few years.

INSME: What happens after the idea or the entrepreneur have passed this phase of scrutiny? What kind of activities do you carry out from that point on?

Mr. Piol: In order to answer this question I have to distinguish theory from practice. In theory after the enterprise gets over the starting phase, the so called hands off phase begins. The venture capitalist isn’t involved in the management any more and follows the enterprise’s life only through the board of directors.
Actually, this situation is dangerous above all in those periods when the markets are volatile. So, as far as we are concerned, even if the start-up phase is over, we try to know what happens within the enterprise in which we have invested and be proactive in terms of suggestions to the management.
Then our goal (and problem!) as venture capitalists is to disinvest from the enterprise and obtain a capital gain. This is a problem today. Two of the enterprises we had in Kiwi I went public (Tiscali and Vitaminic). We had 3 or 4 companies ready to go public, but then the market levelled out. We also have companies in Kiwi II that could go public, but this is not possible because of the market crisis. Nowadays it is hard to launch an IPO [initial public offering]. We hope that in late 2004 or early 2005 the market will rise because otherwise we risk being too involved in the company management and the company itself gets old in our portfolio.

May, 2004 Copyright © INSME 2004