Alan Knitowski of Curo Capital Talks about His Startup Experience and the Move to Austin from Southern California
What is your background?
I was a Captain in the US Army Corps of Engineers until August 1996, when I was recruited to Silicon Valley to work at Northern Telecom (now Nortel Networks). I spent 5 great years in the Bay Area from 1996 to 2001, and without a doubt it was an amazing time to be in San Jose to experience both the first big wave of the Internet and the entrepreneurial experiences associated with the VC world on Sand Hill Road. During my time there I not only worked at Nortel, but I also founded, ran and sold my first company, Vovida Networks, to Cisco Systems in November 2000, and also founded my second company, Telverse Communications, which was ultimately bought by Level 3 Communications in July 2003. In 2001, I relocated my family to Newport Coast in Southern California and spent the last 7 years working on several companies there before moving here to Austin in July.
Why did you move to Austin?
I came to Austin for a lot of reasons, some personal and some professional. I have family in Texas and have always had a great time with my friends in Austin, some of which transferred here from the Bay Area. Additionally, I thought that it would be a fantastic environment to raise my four kids, all of which are under 10 and none of which had ever experienced growing up anywhere but coastal Orange County. On the business side, I was thrilled to realize that Texas has no state income taxes and that there would be no state capital gains on any future company sales of start-ups as had been the case back in California. Additionally, I came here to be more centrally located for my business activities on both coasts and to assist some of my current companies with their growth and expansion activities in the Midwest.
What are some of the big differences in the costs of living in California versus Texas?
In California, pretty much everything is more expensive than here in Austin: gas, food, state taxes, labor, office space, etc. And, while Austin may have 2.5% - 3% property tax on your home here versus 1% - 1.2% in Newport Beach there, it’s all relative as 2.5% - 3% of the home values here are still much less expensive that 1% - 1.2% of the home values there. There are certain things such as electricity and water that seem to be more expensive than Newport Beach, but in general things tend to be lower and you seem to get more bang for your proverbial buck.
What kind of work do you do now?
I still work building start-ups and young companies as I did before, but I now also spend more time managing small investment funds and assets both for myself and other accredited investors. Over the past decade I have created, built or advised about 16 companies with my partner Luan Dang, who is still based in Newport Beach. We were blessed to have had four of them sold after the Internet bubble popped, including the two mentioned above, vCIS, which was an anti-virus and security software company purchased by Internet Security Systems and subsequently by IBM, and Bitfone, which was bought by Hewlett-Packard. Two other companies are “Managers” for two additional companies that are “Funds” for accredited investors, including my business partner and I, predominantly focused on private company deals in one and publicly traded securities in the other. We tend to look for deals that we can get involved in managerially and that we can bring some operating leverage and some of our networks across the country to help companies grow quickly and efficiently. For the most part we have only made one passive investment, as we have had our best results where we have been directly involved on a daily basis. One of my current companies is called Caneum, which does business process and information technology outsourcing. Recently it was awarded both the Deloitte & Touche Orange County Fast 50 growth award and the #3 national ranking on the 2008 CRN Fast Growth 100 National List. Outside of Caneum, my partner and I have been extensively involved with Vootage, an online video site anchored with high school athletics and communities, Edgewater Networks, a communications networking equipment company venture backed by Palomar Ventures and El Dorado Ventures and Windspring, focused on data miniaturization technology and software for in-car navigation systems and personal navigation devices. I also have a personal LLC that my wife and I use for other business and investment activities, as is similarly the case with my business partner.
How do you find the funding environment here?
For the most part it is quite a bit different from California on the institutional side, as I sense from talking with many local CEOs that there’s not much VC funding going on locally at the early stages of new ventures. For instance, it appears that Austin Ventures has moved their investment focus a bit further upstream, so many local CEOs still seem to be flying back to California to explore the more traditional venture financing. On the Angel side, however, Austin and Newport Beach aren’t that terribly different as there appear to be quite a few people involved in investing as high net worth individuals or on behalf of family offices or small private equity funds. There are not as many companies in Austin as in the Bay Area in terms of Dell or Google like successes, so there is probably a little bit more investing on the west coast in absolute dollars and a little bit more redeployment of successful liquidity event monies in to new companies and ideas. However, I am hopeful that this will change over time and I am excited to now be here in Austin to be a part of that process. With all of that said, it pretty obvious due to the market and economic conditions that there’s no silver bullet or panacea available for raising funding for just about any young company, whether here locally or out in California. I find the current climate more challenging than at any point since I’ve been doing start-ups because people are confronted with whether to invest in new private companies or simply go out in the open market and buy mature, profitable companies with great dividends for as little as 1 times earnings or less than 1 times cash on hand. Between that, and the lack of meaningful corporate M&A of young companies and a closed IPO window, I think that we’re all looking forward to getting back to somewhere between the irrational exuberance that we had before and the irrational stupidity that we appear to have currently.
What is your advice to other investors?
While I think that it’s important to be cautious, I think that people need to remember that the goal is to invest early in great companies that can develop and mature over the mid and long term to provide for meaningful returns and exits. Some of the greatest companies of the past 10 years came out of the post Internet bubble era and I would expect the same now that the credit and housing bubbles have popped this time around. Additionally, I would suggest that people should try not to be surprised by just about anything that can happen right now for start-ups in this environment. I had one startup not too long ago where the (now former!) CFO was convinced by Wells Fargo to put some of the company’s investment and working capital dollars in to State of Pennsylvania Student Loan Structured Investment Vehicle auction-rate securities via Merrill Lynch so that they could get an extra 70 or 80 basis points in interest on their money. The CFO thought that the suggestion was sound and quite safe because the underlying securities were AAA rated and implicitly backed by both Merrill Lynch and Wells Fargo. Needless to say, the credit markets froze for these securities and suddenly the start-up found itself without access to its capital to run and grow its business. Strange contractual items appear to be coming up all over the place these days, so please be cautious with your management teams and your investors’ investment dollars.