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Q & A: A Chat With Michael Schwab

Monday, October 2nd, 2000

Michael Schwab got started in the venture capital business with a splash – quite literally. After going fly-fishing with a venture capitalist, he decided that a career as a high-risk investor was the one for him.

That was several years ago. Now, at 24, Schwab has put some of his personal funds as well as some of his father’s – a familiar figure to many online investors as the founder and frequent promoter of the Charles Schwab and eSchwab discount brokerages – into his newly-formed fund called Big Sky Ventures, based in San Francisco. The fund, with a total od $27.3 million at its disposal, has already invested in 15 companies. Daily Deal senior writer Katherine Goncharoff spoke recently with the younger Schwab about Big Sky Ventures, its style and its future.

How did your involvement in the venture capital business come about?
For the past 15 years, I have spent part of each summer with my family in Montana. I was there several years ago with my dad, some family friends and Don Valentine, one of the partners at Sequoia Capital.

I knew that Valentine was someone who, over the years, had invested in up to 500 start-up companies, 150 of which have gone public. I also knew that in a good year, he would see six to eight of his portfolio companies go public and end up owning stock in these companies at ridiculously small share process that would then rise to extraordinarily high values. This was sort of incredible to me and I knew I wanted to learn more about what he does.

One day, I asked Valentine if I could go fly-fishing with him. I ended up spending six hours with him in one of those rubber boats asking him a lot of questions about the venture capital business. That was the beginning of my getting serious about entering the business,

What were you doing before you started Big Sky Ventures?
I was working as a business development executive for a startup called CreditLand. One of my colleagues there brought a company to my attention called Microcast. In Order to invest, I decided I had to be an institution, and that’s when I created Big Sky Ventures. Originally, it was me and two partners. Now, it’s just me.

How large and investment pool is Big Sky Ventures?
Big Sky represents $2.3 million of money that I made on my own by investing in the stock market. I’ve been trading stocks online since I was11. Then there’s another chunk of money – around $25 million –that I manage for my dad under the auspices of Big Sky Ventures. We will invest anywhere from $50,000 to $3 million for as little as 0.5% or as much as 10% equity in a startup. We do both early – and later-stage investments.

Can you give me an example of a recent investment and how it came to your attention?
ProcessClaims.com is one. It’s trying to transfer the insurance claims process to the Internet. I invested $50,000 for less than a 1% stake in the company. The deal was brought to my attention by Brian Rutberg, a lead banker at UBS Warburg. I like to move quickly on an investment and I’ll spend anywhere from two weeks to one month or more doing due diligence. As an early-stage, seed-round investor, I am never a majority shareholder, but I am often the most strategic investor, opening up my Rolodex and trying to help the economy with my network of contacts, finding the best real estate deal, etc.

On this deal, four or five months later, I brought in an extra $1 million form my dad and took a board seat at the company in order to manage the investment. I work with the law firm Weiss & Weissman Inc in San Francisco on deals.

How would you compare your investment style to that of your dad?
We are pretty much the same. To some degree, he is more conservative, but he likes to empower young entrepreneurs as much as I do. One company that we both decided to invest in lately is Charmed Technology. They are producers of wearable Internet products. Their business is of particular interest to both of us because we are both dyslexic and they are producing products that can be very helpful to dyslexics, helping to grab the information you need off the internet when you want it.

What categories have you invested in to date?
To date, I’ve invested in everything from online credit companies, consumer lending companies and Web development shops to B2B startups, broadband infrastructure and wireless companies.

What sort of value added to you bring to the companies that you have invested in?
My investment in Transactions Unlimited is a good example of a company where I helped them revise their core plan. At least six out of the 15 companies I have invested in have had to do this. The company owns and manages more then 200 ATMs. What we realized is that this is also a real estate company that owns two to three square feet at a lot of shopping malls. We realized that we could use the ATM real estate to build out a wireless network and so now that’s what we are assessing.

How do deals typically come to your attention?
I try to go to a lot of conferences, but I also get a lot of leads on deals from friends and colleagues such as Shay Stern at Yazam, a portfolio company, Brian Rutberg at UBS Warburg and Michael Alpert at BusinessDevelopment.com


The Sun Also Rises

Friday, September 22nd, 2000

Michael Schwab is starting Small – but with a big name.

Schwab, the 24-year-old son of discount brokerage pioneer Charles Schwab, is forging his own entrepreneurial path financing seed and early-stage companies with his $2.2 million venture firm Big Sky Partners Inc. Venture investing allows Schwab to make the most of his extensive contacts and the ability to tap deep pockets when he discovers promising early-stage companies.

‘It’s all about leveraging relationships,’ said Schwab, who currently runs Big Sky as a one-man show from his home office. When your father is Charles Schwab, you start learning about investments at a tender age. Michael Schwab began as an 11-year-old, courtesy of a $10,000 gift from his dad. He poured the money into Gap Inc., Coca-Cola Co. and other companies that were familiar to him.

More recently, prior to his full-time focus on Big Sky, Michael Schwab managed community development and fund-raising efforts for Walden House and was later manager of business and development for Creditland. Schwab, who attended the University of Southern California, said he was inspired to leap into the venture capital arena after taking a rafting trip with legendary venture capitalist Don Valentine in Montana – thus the firm’s name.

‘I was impressed with his grasp of the future, and I said to myself that’s what I want to do,’ Schwab said of the venture capitalist, who was an original investor in Apple Computer, Oracle, LSI Logic and Electric Arts.

And it’s the success of Valentine’s Sequoia Capital and other Silicon Valley venture groups that has prompted many of these firms to raise their minimum investment requirements, creating a greater opportunity for small VC firms and angel investors to finance smaller deals that in the past would have been financed by traditional VCs.

Big Sky Partners’ Investment portfolio holds 15 small companies, primarily in the Bay Area. Also among the holding is Processclaims.com, based in Irvine. Big Sky recently participated in a $5 million financing of the Irvine dot-com along with the Orange County Tech Coast Angels, Springboard Capital and other investors.

Processclaims.com uses the Internet to streamline the handling of auto insurance claims between insurers and auto repair shops and their trading partners. ‘My decision to further invest in Processclaims.com is a direct reflection of the business model and what I’ve seen accomplished by the management team,’ said Schwab, who will join the company’s board.

The company has two contracts signed with insurance companies and is operating five live pilot projects. ‘Michael has been one of the strongest supporters of Processclaims.com since the beginning,’ said CEO Paul Farber. ‘He believed in us back when the company was simply a concept on paper.’

Some of the more nascent companies in Big Sky’s portfolio are little more than what Schwab calls a ‘visionary with a business plan.’ But Schwab says helping young entrepreneurs and their ever-changing business plans is exciting. And he’ll get an even bigger taste of startup life when his Union Street restaurant opens later this year.


Me and My Mentor

Tuesday, August 1st, 2000

When youth starts a business, it needs someone to trust.

There was a time when, if you started anything in your late teens or early 20s, it was a band. And you wanted grown-ups as far away as possible, preferably in another solar system – unless they happened to represent a major record label. These days garages have gone quiet. Instead of picking up instruments, kids are hunched over computers polishing business plans. If they want to pick up anything these days, its probably a round of venture funding as they guide their own companies through the startup minefield.
And they’re looking for grown-up guidance.

With a maturity that does not belie their years, many of these young CEOs turn to mentors to keep them on course. They are parents, teachers, colleagues. Or the people investing in their ideas. What mentors bring is experience, something no garage CEO can really claim.

BIG SKY VENTURE CAPITAL – There are a huge number of people for whom Charles Schwab, 63, has been a mentor when it came to investing, but they didn’t start hitching rides to work with him when they were 12 years old. Michaels Schwab, 24, did. The younger Schwab says he absorbed the lessons of long-term investing championed by his father. He also tries to emulate his father’s management style when running his own venture fund. Big Sky Venture Capital, and performing his duties at Creditland. ‘Every time my father tells me about a company, he talks about the people; that’s what you are investing in – that’s the key,’ Michael says. ‘He has taught me how to treat people.’