Q&A: Steve Lazarus of ARCH Venture Partners on Industry Intermingling
June 6, 2006 11:44 PM - IVCA
CHICAGO -- Steve Lazarus, managing director emeritus of ARCH Venture
Partners, sat down with the Illinois Venture Capital Association to
discuss the blurring of several industries over the years.
Illinois Venture Capital Association: Tell us about your current role as managing director emeritus with ARCH Venture Partners.
The title means I am not a general partner in the most recent sixth
fund. I am still one of the four members of the corporation that runs
ARCH Venture Partners. The others are Keith Crandell, Bob Nelson and
Clint Bybee. We are the founders going back to the first fund. I still
participate in the same way I participated before.
IVCA: Tell us more about your sixth fund. How big is the fund and what is the focus and average investment size?
It is a $350 million fund. The average investment isn't meaningful
because it varies according to technology. While we typically get in at
the earliest possible time, that is not always the case. The method of
management is a constant review and updating of the monies that have to
be maintained on reserve against the performance of the company and the
expectation of when the company will become cash-flow break even.
IVCA: How do you personally allocate your time? What industries do you focus on more than others?
Right from the beginning, I was more of a life sciences person than
anything else. In our world, though, these distinctions have become
very blurry. We find that the deals we get into these days are
combinations of major disciplines like the life sciences, material
sciences and information technology.
The kind of distinction
that has been used to categorize where the dollars go do not have a
whole lot of relevance for the way in which we manage. Though I still
probably spend more time on life sciences than I do on other things, I
spend a good deal of time on information technology.
You talk about blurring. Over how long of a period have these
industries become intermingled? Was this the case five years ago?
Our firm is now 20 years old. I would say we began to see it five years
into the game. In the very beginning of the 1990s, this trend was led
by the nature of university research.
More than 90 percent of
what we do comes out of university research. When universities started
to create multi-disciplinary centers and moved scientists together who
had different primary disciplines in the same general geography, it
became natural for us to approach technology in the same way.
IVCA: How has deal flow been for your sixth fund as compared to previous funds?
It is hard for me to make distinctions because we develop our companies
fundamentally from ideas that are emerging from university
laboratories. We have never had a problem with deal flow because we
find deals by walking the halls and getting to know the elite groups of
scientists who are responsible for most of the great discoveries in the
IVCA: With offices in Chicago, Seattle, Albuquerque
and Austin, where do you spend most of your time? Does the Chicago
office focus more generally on Midwest-based deals?
We have offices in different locations because we want to capitalize on
the really great universities and laboratories in those locations. The
reason we still have a branch office in Albuquerque is because Los
Alamos and Sandia each represent $2 billion to $3 billion of basic
research a year.
Nevertheless, each one of us has always flown
to other deals depending on which team within the partnership was
deemed most appropriate for that particular deal. We have an office in
San Francisco now, too.
IVCA: Please talk about the evolution of the Illinois venture capital community over the last 20 years.
The advent of the Illinois Venture Capital Association has meant a
great deal. The association has done a tremendous amount to catalyze
the professionalism of the industry.
In particular, its work
done in public policy has been extremely important in the region as
well as on a federal level. Of course, I have a parochial interest in
that one of my partners -- Keith Crandell -- has spearheaded the public
IVCA: How about the venture capital industry
at large? It seems like the industry is returning to normalcy after the
dot-com boom and bust.
SL: As I go back a long way, I
have a somewhat broader view than some others might have. My view is
that the great inflection point for the industry was in the late 1970s
when legislation was modified to allow pension funds to invest in
That made it possible for more money to come
into the industry. That happened to coincide with the beginnings of
both the biotechnology and microelectronics industry. Those two young
industries emerged at a moment when a lot of money started flowing into
the industry. There was an expansion that went right up to the middle
of the 1980s.
The economy then got somewhat hostile and a lot of
people left the industry. While it wasn't in a decline, it was
certainly flat. In the 1990s, it started to build up again. I have
always looked at 1990 to 1996 as a very healthy period for the
industry. For anyone who wanted to study the industry, that would be a
good period to look at in terms of the beginnings of the Internet and
so many other things.
I wouldn't define the aberration as
starting in 1996. I would say it was more like 1997 or 1998 and it
lasted through March 2000 and a little after. That was brutal. A lot of
stuff flowed into the industry that didn't really merit investment and
a lot of people left the industry. Since 2002 and 2003, the industry
has been returning to an equilibrium.
I think it is a much
healthier industry today. While there are people coming into the
industry, my sense is that they are much more sophisticated
operationally than the group in the mid-1980s who mainly had financial