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News from October, 2000

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