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David L. Ferguson, 42, is general partner of El Segundo-based Chase Capital Partners, a $4.5 billion venture capital investment fund. Since 1984, Chase Capital (which also has offices in New York, Singapore and Hong Kong) has invested in 550 companies, and Ferguson has been involved in dozens of those deals.

When Ferguson talks about the entrepreneurs he chooses to finance and invest in, he talks first of their personalities, and even their body language. He is looking for people who are able not only to give orders, but take criticism and advice.

Ferguson was born in Washington, D.C., and is a graduate of the Wharton School at the University of Pennsylvania.

Contributing reporter Benjamin Mark Cole recently spoke to Ferguson about the keys to entrepreneurial success and other issues related to starting and building a business.

Question: Is there a personality type in the entrepreneur you look for when you are planning to invest in a company?

Answer: There are personalities you avoid, not necessarily ones you are looking for. You are looking for a well-rounded personality and a solid business plan.

Q: What are the personality types you avoid?

A: Some of the negatives are the inability to delegate, someone who is very control-focused, very dominating, perhaps somewhat intimidating, and not necessarily open to other people’s opinions. Often, you will find entrepreneurs who have surrounded themselves with people who won’t even give their opinion.

Q: Is this part of the classic problem between the driven personality needed to start a business, and the professional personality needed to run a growing business?

A: Yes. The qualities of a person who can start a business may not carry them through to the stage of managing a growing business. Smart entrepreneurs recognize they have to give up some control to professional managers and investors, at some point. Most entrepreneurs generally don’t possess the skills for later-stage management.

Q: But you hear stories of entrepreneurs who built empires

A: Oh, of course, it is not always true (that entrepreneurs lack managerial skills). Look at Mike Gilliland of Wild Oats Markets. He was the entrepreneur, and he continues to function as CEO. But he knows his weaknesses, and he has recognized at every appropriate point in time he has been willing to go outside (his company) and draw in talented people. But for every example of an entrepreneur who can do it right, there are 20 examples of people who do it wrong, and many times businesses fail because of that.

Q: You hear a lot about business plans and financial projections

A: Of course, you want a strong business plan. You want to see a strong understanding of the market. If the entrepreneur has a new product, you want to see some evidence there will be market demand for that product. A lot of guys invent things but there may not be a market for them. An entrepreneur should show he understands the competition, and that he or she can differentiate their product from the competition’s.

Q: Do most entrepreneurs understand capital needs?

A: In general, they underestimate all the challenges and problems they face, and that’s generally manifested in capital requirements. A lot of entrepreneurs start out with a business plan they tend to see unfolding exactly as they developed. They are eternal optimists. So, quite often they find themselves short of cash.

Q: Is socializing with entrepreneurs important?

A: Absolutely. Someone can portray himself one way in the office; they are rehearsed so you are not really seeing the real person. It is important to spend social time with this person. If, after spending time socially with them you see something that causes pause, you might not invest.

Q: We hear there is too much money chasing too few deals, and this means entrepreneurs are getting better terms from venture capitalists. True?

A: Right now it is a market flush with cash, and some deals that otherwise wouldn’t get financed are getting financed. It is supply and demand, and some entrepreneurs have ended up with substantially more attractive deals than they would have a few years ago.

Q: What does that mean? Can an entrepreneur keep a majority stake of equity?

A: There are no hard rules. There are other issues besides majority control, such as board seats and control of the board, and corporate governance, and (investor) involvement in the development of the organization. That’s where much of the discussion develops (between investors and entrepreneurs).

But it is tough for investors to take a minority position, because we get back to where we started: Entrepreneurs are not necessarily open to criticism and suggestions. If (an investor) (has) less than 50 percent (of voting shares), it is hard to make sure you are protected. So you look for the bells and whistles that give you control if things go wrong, if certain targets aren’t met. At Chase, we may not initially have a majority of shares, or control, but if certain things happen to our detriment, we have the ability to step in and protect our investment.

Q: In the high-tech, design and fashion worlds, people often look and dress differently than financial types. Should an entrepreneur dress up for a meeting with venture capitalists?

A: How they dress is not so important. But I look at body language, how an entrepreneur interacts with others.

Q: Do entrepreneurs fully understand that venture capitalists are not passive investors?

A: Many entrepreneurs think they’ll get the money, and it’s a simple deal, but it’s more complicated than that. Many of them are quite disturbed when they get a term sheet (the structure of the deal and corporate governance outlines). They see all the issues of governance, shareholders rights, forced exits. I really think an entrepreneur should seek professional assistance in accessing the venture capital markets, and get a little experience on what are acceptable practices in the industry.

Q: What fraction of entrepreneurs fail?

A: Of the ones we finance, the failure rate is very, very small. But we invest more in the middle and later stages. By then you have an entrepreneur who has a company which is maybe not yet profitable, but there is a clear path to profitability.

Q: What kind of returns are you looking for?

A: The overall rate of return for Chase (since 1984) has been 35 percent (per year).

Q: It seems like there are more startups, buyouts and entrepreneurs than ever. Why?

A: It is partially the economy. There are a lot of people in large corporations who now seem prepared to go out and take the risk of starting a company. And then you have an enormous amount of capital financing deals. It is sort of self-feeding the professionals see deals getting financed, and they decide also to take that risk (of starting a company). And lately, there have been lots of examples of people who have been successful. Unfortunately, the public only sees the successes and not the failures, so they may not fully understand the risks they are taking.

Q: Will this boom of entrepreneurialism and venture capitalism continue?

A: In the medium term, yes. In the long term, we see cycles. As good as it is today, that’s how bad it will be someday. Now we are seeing lots of startups, lots of capital deployed.

Q: Most entrepreneurs think about a consumer product to introduce. But most venture capitalists prefer to back business-to-business products or services, because they are less subject to changing consumer tastes

Q: I think that’s right. Business-to-business is more predictable. We (at Chase) will finance both (consumer and business-to-business ventures). But we look for higher return on consumer, because we are assuming more risk.

Q: What should entrepreneurs do before signing up with a particular venture capitalist?

A: The most important thing is to talk to a number of venture capital firms, and try to look at things from a venture capitalist’s viewpoint. They should be very critical of the group they are getting involved with, and the individual they will be working with. Many times, entrepreneurs are sorry they took the money. Take time to get to know people before you take their cash.

Q: Is there an industry you won’t finance?

A: Apparel. Too much exposure to fickle consumer tastes.

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