BusinessDallas THE 16TH FLOOR

A WEEK AGO, I CALLED A FRIEND IN THE VENTURE CAPITAL BUSINESS. “I want to play a little word-association game with you,” I said to him. “It’ll only take a second.” My friend has been an investment banker and an executive and knows his way around computer chips and wires.

“Sure,” he chuckled. “Go ahead.” 1 heard a newspaper fall.

“The 16th floor.”

“Two Galleria Tower,” he shot back. “Sevin Rosen.”

Every venture capital investor or technology player I called to ask about the 16th floor answered in perfect harmony. Most never needed to put down the paper. In the world of early stage technology venture capital circles. Sevin Rosen Funds and the other firms and individuals that office together high above Macy’s at the Galleria are simply referred to as “the 16th floor.” In the fields of telecommunications, e-commerce, infrastructure, and Internet technology venture capital, the 16th floor is arguably the most important incubator in the nation, bankrolling and mentoring young companies in an unusual manner that mirrors the wide-open business environment of Dallas.

The riskiness of early stage technology investing virtually requires competing venture funds to underwrite start-up and adolescent companies. But the openness of the 16th floor extends the principle of portfolio theory by an order of magnitude. A walking tour gives the impression that the floor houses a single entity. Instead, four distinct venture capital funds operate on the 16th floor: Sevin Rosen Funds, InterWest Partners, CenterPoint Ventures, and H02 Partners.

Amazingly, no walls separate Sevin Rosen from H02, or Inter West from CenterPoint, or any of them from “stray” individual investors who’ve found an empty office there and settled in. Yet each is responsible to a differing group of limited partners. Imagine competing airlines or real estate agents sharing office space-they’d have to padlock their pencils. Sixteenth floor office doors are left open. Legal documents and financial projections occupy floors, credenzas, and chairs, all within easy reach of wandering eyes. But there’s no need for eyes to wander on the 16th floor. Twenty and 30-year relationships among the principals allow them the liberty to share information without reservation- even if it means that by doing so they’ll receive smaller pieces of good deals. The word that gets batted around when describing the environment is “co-opetition.”



BERRY CASH, A GENERAL PARTNER OF Inter West Partners, pushes back from his sandwich and walks to the dry erase board. I had asked him to draw a picture of the web ol’ relationships among members of the 16th floor to get a sense of how they came together and how they make their odd brand of collaboration work. Cash, Bob Paluck of CenterPoint, Dan Owen of H02, Jackie Kimzey of Sevin Rosen, Tom Aschenbrenner (one of the strays), and I had assembled for lunch in a conference room on the 16th floor.

Cash, who arguably knows the story as well as anyone, draws three circles, connects them with lines, studies the three circles for a full minute, then puts the cap back on the marker. “I guess it can’t be done,” he grins, walking back to the table. The problem: Over the past three decades, the venture capital investors of the 16th floor have worked for each other as subordinates and with each other as equals. They have co-founded companies together, invested together as general and limited partners, and have operated as private investors in adjoining offices. They never leave each other’s orbits.

This much is certain: If there was a big bang for the idea of co-opetition and the 16th floor, the molecules began swarming at Texas Instruments in 1969 when TI discovered that one out of every 11 Dallas families was getting a company check. Management decided that it wanted to reduce TI’s presence in Dallas. “They came to work one day and said, ’You guys are going to love Houston,’” says Cash, pointing with a potato chip. “I knew better. I was born in Houston.”

So, Cash and fellow TI engineers L. J. Sevin and Vin Prothro (now CEO of Dallas Semiconductor) left to found Mostek Semiconductor. Bob Paluck and Jackie Kimzey soon joined. The “Mostek Mafia” operated the company until 1980 when it was sold to United Technologies. Afterward, the gang rearranged chairs. Sevin and Ben Rosen, a securities analyst at Morgan Stanley in New York, started Sevin Rosen Funds in 1981 with $25 million and a grand-slam investment idea: Compaq Computer. (Rosen apparently has no aversion to Houston: He is currently serving as Compaq’s chairman). Since then, Sevin Rosen has raised $1 billion through seven funds. The last fund raised $485 million.

Cash started his own venture fund before joining up with Inter West and making his way to the 16th floor. At one point he hired Kimzey to serve as CEO of a company backed by Inter West.

Paluck headed off to start Convex Computer after briefly hanging out at the offices of Sevin Rosen. “I didn’t want to be a venture capital guy,” he says. Paluck has the hearing of a kindly thesis advisor. “Not yet. 1 didn’t want to watch from the sidelines.” He stayed inside the hash marks until 1995, when he sold Convex to Hewlett-Packard.

It seems like all of the venture investors on the 16th floor were “strays” at one point or other, a term coined by Tom Aschen-brenner. The strays camp on the 16th floor at L. J. Sevin’s invitation, usually between stints at start-ups or while contemplating their own venture funds. The floor has served as a daytime hostel and employment agency for people who don’t have to work.

Aschenbrenner made his career with DanRay, the company that supplied switches for a nascent MCI. Northern Telecom ultimately purchased DanRay, giving them their first presence in Richardson’s Telecom Corridor. Aschenbrenner tossed aside a potful of options in Nortel to start a company called Intecom further up the road in Allen. He took that voice and data switching company public in 1981 and later sold it to Wang Labs.

“After I got out of Intecom, Berry told me thai I ought to look at deals for him and lend my technical expertise.” Aschenbrenner says, looking across the table at Cash. “I became a ’stray.’ Look, one of the things that makes the 16th floor cooperative spirit unique relative to the rest of the venture business is that most of the people here have come out of an operating environment. They’ve sat in the same seat as the entrepreneur. When the inevitable happens and the business gets into trouble-and let me tell you, it’s not a question of if, it’s a question of when-we’ve been there. That allows us to take an increased amount of risk.”

“So what happens when a deal comes in?” I ask. “Who gets it?”

“It depends who brought it in.” Cash responds. “Then, whose background applies. For instance, there’s not a deal done on the 16th floor in telecommunications, datacommunications, or wireless technology without Aschenbrenner taking a look at it.” That is another strength of the 16th floor: Layered atop personal friendships is the fact that every office contains the equivalent of the professor who wrote the textbook.

“So what happens when there’s not room for all of you in a deal?” I ask. I had seen several examples of transactions in which three members of the 16th floor had invested together, leaving the fourth on the sidelines. Each time, the odd fund out was different.

Cash leans on the table. Among his roles on the 16th floor, Cash is the man who answers first. “If there’s not enough room, somebody gets left out,” he says. “It happens. I got left out of a deal recently. You move on. The friendships and relationships are more important. There will always be other deals. I don’t think that there is another venture environment in the country that operates in same way we do.”

“When we tell our story on the West Coast,” Paluck seconds, “they don’t get it.”

“In fairness,” Cash adds, “The original Silicon Valley venture capital guys say that the early days were a lot like this. But not anymore.”

Apparently, 16th floor method works. “L.J. Sevin set a tone of collegiality,” Owen says as everyone gets up to leave for two o’clock meetings. Owen and partner Charles Humphreyson’s entire fund is a stray. H02 is the second venture fund to he incubated on the floor. CenterPoint was the first. “The 16th floor is about ideas and intellectual curiosity. An instinct for the main chance,” Owen continues. Renovation is about to incorporate the rest of the floor. Pretty soon they’ll have it all. “I’d rather wear a dust mask than move out during the construction. The 16th floor is that kind of place. An incredibly fertile environment.”

The 16th floor is confident of the supply of early stage investing opportunities and the unique power of co-opetition. When Austin Ventures, an Austin-based venture capital fund {at $1.6 billion under management, the largest single technology fund in Texas), announced in June its decision to open two Dallas offices, Sevin Rosen partner Al Schuele mostly yawned. “There’s room for all of us,” he says. Then Schuele hedged his bet: He moved to Austin to set up a Sevin Rosen shop. CenterPoint is going with him. Together they will operate in the same 16th floor manner, exporting to a distinctly Dallas way of doing business.



ON THE DAY I VISIT THE 16TH FLOOR, FOUR 30-ISH MEN PAUSE in the reception area on their way out. The area itself is pleasant but plain: teal carpet, side chairs upholstered to match any floor or wall covering, a non-committal mix of real and fake plants, and a bleached-wood reception console whose intermittent staffing suggests the impact of direct dial telephone numbers and e-mail.

Bob Paluck is escorting the men to the door. Other man a check with two commas in it, Paluck’s parting words must have been the validation that the four hoped for when they tucked their parking passes into their shirt pockets and rehearsed their pitch a final time. “That was a great presentation,” he congratulates them, stretching to shake everyone’s hand. “I guess it’s easy when you’ve got a good story to tell.”

The 16th floor is a place of stories. All day long and into most nights, knots of engineers and entrepreneurs-lone geniuses who have haven’t slept in days-troop up to the 16th floor and lay out their ideas for solving pressing technological problems. Like how to pinpoint shipments in transit between manufacturers and customers and predict arrival times with stopwatch accuracy or how to take advantage of the bandwidth available in fiber optic technology.

The best stories address the biggest problems and are rewarded with millions of dollars in venture capital and a board of directors stacked with the hands-on builders of Compaq and Convex Computer, Mostek and Cypress Semiconductor, CIENA, Intecom, and dozens of other successful technology companies.

Paluck has a display in his corner office overlooking the Dallas North Tollway that captures not only his philosophy, but also the philosophy of the 16th floor. Almost everyone I spoke with gleefully asked if I had seen it. The display features two glass shelves mounted one above the other. On the bottom shelf stands a row of chrome-plated bullets. Attached to each of the bullets is the name of a company, among them Chorum Technologies. “That one,” Paluck says, pointing his finger, “is going to be huge,”

I ask the obvious, “Why the bullets?”

“When we set up CenterPoint, we knew what we were looking for: elephant-sized returns,” Paluck answers. The bullets on Paluck’s display looked like they could take down a house.

“Raising money is not the difficult part of investing,” he continues. “Time is. You can always raise more money, but you can’t raise more time. We decided that we were only going to make 12 investments.”

There were 12 bullets. An ammunition canister on Paluck’s floor contained additional bullets, perhaps another fund down the road. But for now. he’s keeping a close watch on Chorum and others. “We make a big deal out of each investment because of the time they involve.”

Scott Grout is the CEO of Chorum, a Richardson-based company. The 16th floor actually found Grout, who had left AT&T and Lucent Technologies after 15 years to run Chorum when the company had eight people and no business plan. That was two years ago. Chorum now has 300 people and recently completed a $42 million round of venture capital financing. Sevin Rosen, CenterPoint, and Inter West participated. H02 had not yet strayed onto the 16th floor when the deal closed. Chorum is at the leading edge of fiber optic switching.

“They’re ahead of their time, collaborating the way they do,” Grout tells me, between breakups in the cell phone signal. “Competition can be pretty stiff when you have to place a large amount of money. But I’ve never seen so much as a hint of a problem. It amazes me that it works.”