Editor’s note: This is the third of a three-part interview.

RESEARCH TRIANGLE PARK — Conflicts between venture capitalists and entrepreneurs sometimes turn into bitter boardroom brawls, fired company founders, and legal fireworks.

But Dennis Dougherty of Intersouth Partners who helped create a venture capital business in RTP and the Southeast, says he enjoys working with entrepreneurs.

In this third part of Local tech Wire’s discussion with Dougherty, he talks about his favorite startup stories and also the qualities he looks for in potential deals.

What’s your favorite success story about VCs and an investment they have made?

I have two. One is mine and one from a good friend. The friend’s first — this is not an urban myth. He was asked to invest $100K along with one of his friends who agreed to also invest $100K in a high risk startup. When it came time to close, his friend says that he doesn’t have his half. So my friend digs into his savings and does the whole $200K. He really couldn’t afford it, but the entrepreneur was also a good friend who was counting on him. The high-risk startup went on to become Intel.

My story is inspirational and one I share with worried and dejected entrepreneurs. We had an investment in a software company that struggled for years to make ends meet. We invested up to our legal limit and were out of money for the deal. The CEO had convinced a local bank to loan them $200K to help smooth out the lumps between accounts receivable and payroll. One day the bank called and said that they no longer considered software to be collateral, and called the loan. The CEO says, “OK, we will try to pay it off in the next several months.” The bank says, “No need. We cleaned out your payroll account.”

The CEO calls a company meeting, stands on a desk and tells the employees the story and says there is no money for payroll and he will understand if anyone needs to find work elsewhere. The employees got together and agreed that some could afford to not take pay and others could afford to invest a little money in the company. They used the invested money to pay those with families that really needed a paycheck. Nobody quit, sales took off and they never missed another payroll, and the company went public in the same year. Every employee did very well and a dozen or so became millionaires. The ones that invested to help make payroll were especially well rewarded.

You have been through VC and economic downturns before. Any predictions as to when we might see a turnaround this time?

I have long gotten over the belief that things couldn’t get worse. Things can always get worse. However, a recovery will probably occur in stages, yet we will all be pleasantly surprised when it really happens. — There is plenty of private equity in the system and it can only provide returns if invested, so it will be invested. I actually believe that the Research Triangle will have a surprisingly robust year in 2003.

Your firm closed on $205 M – the biggest deal of the year so far in the US. What are your plans for the money?

It was the biggest deal for about 20 minutes. One of the things that helped Intersouth to raise money in these uncertain times was our ability to point to a business model that we have followed in a disciplined way for most of our existence. We have had successes in backing early stage entrepreneurs, primarily in this immediate region, and investors need to see a repeatable investment style. Therefore, Fund VI will repeat the theme of Fund V, and Fund V repeated the theme of Fund VI, and so on. We plan to back early stage, technology and life sciences companies, primarily in the Research Triangle and Mid Atlantic region. We plan to invest $5 to $10 million in each of 20 to 25 companies over the next 4 years. We will throw in a couple of California and Boston deals to help maintain a broad network of potential co-investors.

For the record, list your top criteria for considering an investment and at least inviting in someone for an interview.

Sometimes you like a deal and can’t say why. However, the general criteria for me are:

1. An excellent team usually tops my list. This doesn’t necessarily mean a full management team. It means that the founders and early team members have great credentials and are committed to something bigger than just making money.

2. Which leads to the next criteria — an important idea that would be a big deal if it worked. I am not personally attracted to marginal improvements and the neither are the best founders.

3. A realistic understanding about the dynamics of money is important. We are near the bottom of a long food chain of demanding investors. It is important for companies seeking funding to understand that we must make money to survive as a venture fund, which is good for them and other entrepreneurs. Most teams and their advisors in the Research Triangle are good about this.

Intersouth Partners: www.intersouth.com

Part Two: A Sense of Humor: www.localtechwire.com/article.cfm?u=5749

Part One: A Driving Force. http://www.localtechwire.com/article.cfm?u=5735