Time.com has called Bob Davis, former CEO of Lycos, “one of the few Internet entrepreneurs who rode the elevator to the penthouse and got off before it plunged earthward.” Davis started at Lycos in 1995 and while there, completed the fastest IPO in Nasdaq history. Last year he sold the company to Terra Networks, a subsidiary of Telefonica, for $6 billion. The original venture funding was $2 million.

Now a partner in Highland Capital, an early-stage venture capital firm with over $1 billion under management, and the author of a new book entitled Speed Is Life, Davis was the keynote speaker at the Wharton Entrepreneurship Conference on November 9th. Also speaking was Alan Patricof of Apax Partners, one of the largest VC firms in the world. Both men offered words of advice for the audience of fledgling entrepreneurs and VCs.

Davis told the audience, for example, that there never was a “new economy” – just an “irrationally exuberant bubble that existed for a year or two,” although he also noted that “the true potential of the Internet remains grossly under-hyped.” Calling the Internet one of the most significant business process improvements in history, Davis identified several basic business capabilities and talked about how companies can best exploit these using the web. Two of the ones he focused on were innovation and customer service.

Innovation (speed plus imagination): Citing such breakthroughs as instant messaging, digital publishing technology and timesaving business-to-business software, Davis said that “speed saves money, makes customers happy and drives revenue.” When an audience member argued that speed was what brought down the dot.coms, Davis responded that the Internet bust had more to do with “companies that had no concept of revenues being rewarded in the financial markets.” Any company in any industry that could bring its product to market faster, serve customers faster and hire the best employees faster would always have the advantage, he said, adding that “even the mighty Jack Welch, looking back on a flawless record at GE, said, ‘My biggest mistake was taking too long to make decisions.’”

Speaking about imagination, Davis said the key to success in a knowledge economy is to invest aggressively in your imaginative capital and ensure the best talent. The pharmaceutical and entertainment industries are examples of this, regularly spending millions in such areas as drug research and film production.

Customer service: Davis advised companies to “seize their customer service moments of truth.” He recalled how 25 years ago he saw a grocery store manager win over an irate customer with a gift of a candy bar and a simple, sincere apology. With the Internet, he said, “stores can institutionalize and automate that Snickers bar you drop in the bag to keep customers coming back.” He cited the Land’s End virtual model and Amazon’s recommendation tool as examples of good customer service.

In general, though, according to Davis, an overwhelming majority of companies handle online customer service so badly that they “un-sell their own company … Fifty percent of customers expect an accurate response to their email within six hours, yet only 20% of companies do that. And 30% never reply at all: They have slapped up a website, added some e-flash and dazzle, and then assigned one or two hapless souls to maintain it. The Internet is possibly the best thing that ever happened to customer service, yet few companies leverage the opportunity properly.”

Davis also noted that while the tremendous information-sharing power of the Internet is well recognized, the security risk is not. Cyberterrorism, according to Davis, can go beyond simple hacking to a so-called denial of service attack. Websites can be shut down for hours by individuals referred to as puppet masters. “It’s not Hollywood; it’s a viable threat,” warned Davis, and recommended that companies spend what it takes to secure their systems, even in lean times when IT tends to get cut.

What about the people it takes to build a successful business? Davis described them as individuals with “a burning desire to succeed, not for the money, but to succeed for the sake of success.” And he named perseverance as his own most important skill. Orphaned at a young age and having withstood a litany of setbacks and failures in his life as an entrepreneur, Davis today keeps a framed t-shirt outside his office bearing his personal motto: “You Let Up, You Lose.”

Alan Patricof then shared his thoughts about the state of the venture capital business in the current economic downturn. Patricof is chairman of Apax Partners (formerly Patricof & Co. Ventures), which he founded in 1969 and which now has $12 billion under management. His early successes came, he said, because “I happened to be lucky enough in the mid-‘60s, when I was running family money mostly in public stock, to make three accidental investments that worked out very well.” The three investments were the medical electronics company Datascope, today worth $50 million; New York magazine, where Patricof served as chairman of the board, and LIN Broadcasting, which a few years ago was sold to AT&T. Patricof is also credited with involvement in the early stages of Apple Computer, America Online, Cadence Systems, Office Depot and FORE Systems.

“Now that the VC industry has become more professionalized over the last decade, can we expect even bigger returns?” asked an audience member. Patricof’s response: “A lot of you dream about going into the venture business and getting stinking rich overnight. Forget about it. It’s a long-term business, 5-10 years. What’s happened in the past few years – start a company and six months later you go public and move on – has been unnatural.”

Patricof also believes that the returns publicly reported in the last few years have been inflated. “It’s almost inconceivable to have rates of return of 50-100%. You would own the world.” And even if you hear about high rates of return in a short period, he added, that doesn’t necessarily mean they were viable companies long-term. “Real companies are built on earnings and cash flow. In the last few years, we VCs underpriced our capital. We gave away millions of dollars for crazy projects, and no one did the hard analysis of what companies could realistically earn. Rationality’s coming back, though: You may not believe this, but institutions are talking about being happy with a 15-20% rate of return.” Patricof believes that the current economic period will continue to drive returns down. “Companies have all got religion. They aren’t going to make acquisitions, and nobody’s going to get bailed out.”

What types of entrepreneurs and proposals do Patricof find worthy of funding? His list included: 1) Someone who’s done it before. 2) A team of people who have been doing the same thing together – such as three people from a large pharmaceutical firm who decide to set up a spinout of the company. If the team comes from different industries and cities and has never worked together, that’s a much greater risk. 3) People who have demonstrated they are leaders and can energize others. This includes how they speak, write and tell their story. 4) Someone with an ‘unfair’ competitive advantage such as a patent or raw materials source. 5) People who understand the financials and the economics of the business. Patricof also noted he would rather have the right people with no product rather than a good product with a poor management team.

“I’d love to hear an entrepreneur say, ‘We have two or three competitors and we’re going to price our product 10% higher because we’ve got something people will pay a premium for,’” Patricof said. He gave the example of a videotape rental delivery business that proposed to be fifty cents cheaper than the competition. They should have priced it $2 higher, Patricof said, and offered 30-minute service plus Ben and Jerry’s ice cream and pizza delivery.

Purchasing an existing business is a good option for entrepreneurs, Patricof added. He described a recent project by two business school students to locate in the Midwest “a dull manufacturing business (it made space heaters for military vehicles) that was going no place. Patricof said he put $250,000 into the business; during its first six months the company had returned 90% of the investment.

During their talks, both Davis and Patricof were asked by audience members what new industries or opportunities they thought business school graduates should pursue. Davis named several technology areas:

• Web-enabling traditional business systems such as payroll or order tracking: Davis believes this is a massive marketplace that’s largely unexploited.

• Wearable computing: It’s estimated, said Davis, that five years from now, 60% of us will wear a chip somewhere on our person for six hours a day.

• Inserting chip technology into everyday devices: Major appliances and other products will contain tracking chips for security purposes.

• The security field: Davis said that this market was burgeoning prior to September 11th and is now perceived to be even more vital.

Patricof’s response may well have been a less popular one with his audience. “All of you shouldn’t be running your own companies. There isn’t enough capital to sustain you. There are a lot of people laid off in the venture capital business and a lot more in investment banking, all trying to get into private equity. There’s nothing wrong with going to work for AOL Time Warner or Cisco or General Motors. You can acquire more skills and become a much better venture capitalist at a later stage.”