SM: Where did you gain traction? What types of investors were willing to support you?
PG: I started working with other investment banks and high net worth private client groups. We started scaling up and investing in companies. The very first company was a chip company in Colorado. I ran right into the very issues that I was counseled on. Once you get more than 500 individual investors you become a de facto public company. There were inherent structural issues with that. I spent a lot of time going down to Washington, DC trying to prevail on the SEC.
SM: Are the laws still the same in that regard?
PG: Not only are they the same, but they have remained so even after others have done exactly what I did. I put a lot of money to work and had a traditional venture return. Some went to zero and some were terrific. The cost of capital benefit I was able to achieve at some level by getting rid of the intermediaries was removed by regulatory scrutiny. It was a wash because then I was competing directly with the Sequoias, which is difficult.
Others tried as well. Rich Karlgaard at Forbes tried to do this in the 1990s as a co-founder of Garage.com. He and Guy were doing this together. We were at the Churchill club one night and happened to be at dinner together. He said “Oh, your’re Patrick Grady, you did Garage.com before Garage.com did Garage.com”. He was so passionate and excited and asked me what I thought. I told him that I thought it was going to fail because he was enamored and captivated for all the same reasons I was but it does not scale because all of the regulations. He and Guy went down that path and they had to remake the business model.
SM: If I remember correctly, Garage.com was a very small fund. It never went to any scale.
PG: The idea was to scale it up. The idea was to empower individual investors to have the same opportunity as institutional venture capital.
SM: What I see from your description is that if you stay within 500 investors you could still have a sizeable fund.
PG: You can and there have been pockets of this. Angel capital has certainly become more mainstream but I had much more expansive plans to create a true marketplace. There was another big attempt in the 1990s, OffRoad Capital, which I counseled against. I was recruited to be their CEO and I passed.
OffRoad was founded by an entrepreneur who was incubated at Benchmark. He left and recruited some former SEC folks to help him build this up. He ran into the very same issues. It is very difficult to scale beyond hundreds of investors given the current securities laws.
SM: What was your next step?
PG: In the late 1990s I went to my mentor, Burt McMurchy, who ironically is a venture capitalist. We actually met competing on a deal. He has become my Yoda. He is an amazing human being. He knew what I was trying to do, and believed it was important to try. He did counsel me that Washington really does not understand capital formation.
SM: Which is a huge problem right now. There is a lot of rhetoric around this, some of which I do not mind. It focuses completely on venture capitalist and not on entrepreneurs which gets to the speculator versus creator debate. The pendulum has swung too far in direction of the speculators.
PG: I totally agree. It has been that way for 20 years and is getting worse.
SM: That needs to change, and it will require some policy restructuring.
PG: It has to be put on the entrepreneur. My company name is Rearden Commerce from Hank Rearden, the ultimate entrepreneur. I so believe in the power of the entrepreneur. I believe if you get out of the way of the entrepreneur and enable them, they can do great things. If you overburden them and put speculators in there things go the wrong way.
SM: We have built an environment where heroes live in relative obscurity while leeches are flying in private jets.
PG: I completely agree. I would love to see the administration talk day in and day out about small businesses and the power of the entrepreneur. It is not just about technology. Not everything will be a Google. It can be any type of industry. At the end of the day, we are the job creators and innovators.