April 3, 2007
We announced this morning that George Roberts has joined OpenView Venture Partners. I have been working with George for about 3 years on the Board of Scriptlogic Corporation where George has been a great advisor to both the board and management team. Over time, we have found that we are extremely well aligned with respect to our beliefs around building great technology companies and it became clear that we should be working together more closely. After George spent some time getting to know the rest of the OpenView team over the last few months, we were lucky enough to convince him to become part of our team.
George has a fantastic background in Sales and Marketing (including branding, lead generation, inside sales, channel sales, and field sales), senior management, and managing for both growth and profitability. (George spent 13 years at Oracle Corporation and attaining the position as EVP North American Sales reporting to Larry Ellison…more details on his background are here).
We asked George to join the firm for several reasons:
- George truly enjoys helping emerging growth technology companies grow both quickly and profitably
- George has a great global network, which should help our portfolio companies tremendously
- George has and extremely rich background in all aspects of sales and marketing, a major aspect of both growth and profitability for expansion stage companies
- George has participated at the senior management level of a very well managed, high growth, highly profitable company, and he brings many proven process and organizational methodologies to our portfolio.
- George has an extremely rare and extremely good ability to help companies evolve with the strategic and operational approach that is optimized for their specific situation.
- George is a great guy!
George’s role at OpenView is that of a senior investment professional. In this role, he will be the senior point person on several companies and, at the same time, will offer his functional expertise and network to our entire portfolio.
You can drop George a line at firstname.lastname@example.org
January 3, 2007
We announced this morning that Mark Barry has joined OpenView Venture Partners. Mark comes to us from Microsoft’s Emerging Business Unit where he was a founder and Managing Director. We have been working with Mark for approximately five years and he and the entire Microsoft team have been extremely valuable contributors to many of our portfolio companies. We now have the opportunity to have Mark’s full time and attention focused on our portfolio companies, which will dramatically amplify his impact!
Why we asked Mark to join us…
We asked Mark to join us for five primary reasons, all relating to increasing our ability to add substantial value to the companies that we invest in:
- Mark has a deep passion for technology and its applications and an extreme desire to assist emerging growth technology companies meet their objectives.
- Mark has a global network and a proven track record of working with emerging growth companies around the world. Our model of investing is global in nature. Our belief is that all successful technology companies need to expand globally over time, so the location where they start is not as important as succeeding in the major technology markets around the world. Mark will be a major contributor to this effort and has shown no fear jumping on planes to meet and assist the best companies globally.
- Mark has deep functional expertise in both Sales and Customer Service. In Mark’s 16 years at Microsoft and 9 years prior to Microsoft, Mark grew professionally as a salesperson, sales manager, senior sales manager and as a senior customer support manager and won multiple awards in the process. This experience is invaluable to our portfolio companies as they work to scale during the expansion stage.
- Mark has substantial experience with extremely professional approaches to developing strategy, organization and processes as well as all of the ingredients associated with their successful execution. Microsoft is one of the best companies in the world at execution, and many of the tools that Mark learned and deployed successfully at Microsoft will be extremely valuable to assisting our companies as they scale.
- Mark is a great guy!
Mark’s role at OpenView is that of a senior investment professional. In this role, he will be the senior point person on several companies and, at the same time, will offer his functional expertise and network to our entire portfolio.
you can drop Mark a line at email@example.com
October 1, 2006
I haven’t posted in a while. Unfortunately there has been little time, as I have been working around the clock with my team to launch a new Venture Capital firm, OpenView Venture Partners, located in Boston, Massachusetts. Today, we officially launched the firm with the closing of our inaugural fund on Friday night. Given my excitement about this new venture, I thought that I would take the time to share our concept and some of the details. (Also, take a look at the new website, www.openviewpartners.com.)
The overarching thrust for the firm is Operational Value Add (in addition to capital) for InfoTech companies, who have reached the expansion-stage of company development (as in “I have a product and some customers, Now What?”), and are located anywhere in the world.
We set the goal of operational value add because, in our experience, this involvement helps improve products, sales and marketing, and customer service. The improvement leads to enthusiastic customers and increased growth rates, profitability, and long term competitive advantage. Net net, the more value we provide, the greater and faster the enterprise builds value.
We developed and refined the approach at our prior firm, Insight Venture Partners (we had been working as its Boston Office). As we evolved the approach, we have found the results to be both significant and significantly different than the approaches used by other firms.
The goal of operational value add is a principle that we have spent a great deal of time operationalizing through a combination of focus, value add resources, and a small fund size. We believe that staying focused, having the best resources, both internally and in our network, and then “putting all the wood behind the arrow” is a great approach for delivering the most value (I gave similar advice to emerging growth companies last year and, again earlier this year). Finally, and perhaps most importantly, we work extremely well and in partnership with our portfolio company senior management (an earlier post on the topic is here). The feedback to date from our approach has been outstanding.
Some details on each of the points:
Our value add starts with the focus that we have on market and stage. With this focus, we have developed a much deeper understanding of the issues and opportunities facing our portfolio companies and have geared our firm to help address those issues and opportunities. Our focal point includes the following:
- Our Market Focus is InfoTech, particularly around companies that configure software, data, and/or hardware into packages that provide meaningful value to their users. At this point our list includes software (all flavors from installed to on-demand), internet, information services, and technology enabled business models.
- Our Stage Focus is Expansion Stage. Expansion stage to us starts when a company has worked out the major kinks in its core product, has begun to address its first market, has a viable approach to reaching the market, and has some customers that use, like, and reference the product. (Generally, a good proxy for this is company revenue in the $500k to $1MM per quarter at a minimum with good historic growth).
- Our Geographic Coverage is Global. Our belief is that expansion stage InfoTech companies all need to develop a global presence, so the starting location is not as important as the company’s desire to expand globally, particularly in North America (given our North American presence).
We strongly believe that the issues and opportunities that emerging growth InfoTech companies face at the expansion stage are very different than the issues faced by companies in other sectors or in other stages of development. By choosing a sector and a stage, we could then more deeply gear our firm to deliver the most value against that more specific set of issues and opportunities. Separately, we have found that the major issues facing expansion stage information technology companies are independent of their geographic location, enabling us to have a wide geographic coverage (that is, we invest globally) without diluting our value add.
Operational Value Add
Our operational value add programs are described on our website. Our general approach is to determine the key issues facing each portfolio company at the senior management level, compare notes with the management team, help determine the top goals of the company, and then offer each company a “menu” of ways that we might help. The menu includes items such as offering our portfolio companies people on our team for small or large projects, introductions to our network, and/or helping our portfolio companies recruit senior staff and add to the “DNA” of their team.
Our efforts also include a number of functionally specific (sales, marketing, development) “best practice” forums for our portfolio companies. The forums are designed to help our portfolio companies network among themselves and also help to spread “best practices” in each functional area between and among our companies. These forums take the form of one-day events in Boston, each devoted to a particular topic.
My blog is also meant to be an extension of this work. By reading some of the posts in the blog, you can get a pretty good feel for the issues that we work on with the companies and some of the principles that we use to address the issues.
Optimal Fund Size
As OpenView took shape, we thought a lot about the optimal fund size. We believe that a smaller fund is better for both our investors and our portfolio companies, which ultimately makes it better for us. Yet, it was important that the fund was large enough to create a level of diversification and to give us enough time for the portfolio to develop before raising our next fund. Net net, we set the fund size at $100 million, which we believe is the optimal amount to meet our goals.
From a portfolio company perspective, the smaller fund size relative to some of the other VCs means that we will do fewer investments, allowing us more time for each portfolio company. From both a portfolio company and investor perspective, it means that a larger portion of our income comes from creating value in our investments, which results in highly aligned incentives between our portfolio companies, our investors, and us.
Working In Partnership
Finally, and perhaps most importantly, our belief is that we can’t add value without building strong relationships and working in close partnership with our portfolio company management teams. Every member of our team has outstanding professional credentials, great values, and a strong desire to build meaningful relationships with senior management teams. These characteristics, as well as an intense desire to add value, help to create great partnerships between our team and the portfolio companies.
You can Help!
To the extent you are interested and willing to help, there are a few things that you could do that would thrill us:
- The team would be very appreciative if you would be willing to mention OpenView Venture Partners and our URL (www.openviewpartners.com) so that the search engines have an easier time picking us up. Version 1.0 of the site just went live, so it will probably take some time for the spiders and indexers to register its presence. Your mention of the site would greatly help this effort,
- We are constantly looking for people to add to our network globally. To the extent you are interested in helping our portfolio companies, let us know via e-mail, and
- We are always on the lookout for the next expansion stage InfoTech company to meet with (our focus is above). If you know of one, send us an e-mail!
OpenView Venture Partners is all about Operational Value Add aimed at Expansion Stage InfoTech companies located anywhere in the world. Our approach has been in place and constantly refined for several years now and we take great pride in the references that our current and former portfolio companies offer about us.
If you want to participate in some way or have an interesting company that we should know about, let me know. My new e-mail address is firstname.lastname@example.org. I do my best to keep up with the e-mail, so drop me a line. This post marks the end of the beginning of what we hope will be great for everyone that participates!
A Special Thanks
It is hard to talk about the launch of a new fund without reflecting on and acknowledging some of the people that enabled the success. We had a significant amount of help from our portfolio company senior managers, enthusiastic and extremely high quality investors, and our tremendous network of individuals and companies who have helped us be successful over time. In addition, the team at Sparring Partners Capital did a fantastic job as the fund’s placement agent and the team at Goodwin Procter have done an equally outstanding job as council to the fund.
The group that I would like to single out here are my (now technically former) partners from Insight Venture Partners. The partners have been very supportive over the years as I pushed on different initiatives, and since the idea of OpenView started gaining traction they have been extremely supportive, helpful, and generous with their time. In addition, we have been able to work out an approach whereby we will continue to work directly with our Insight investments until each of the investments has grown and exited, something that is extremely important to us given our value add focus. Thanks guys!
EndNote: I have apologized many times to my network that has had difficulty reaching me over the last several months and appreciate the enthusiastic support and encouragement that has come from everyone. I expect that now that the firm is formed and the fund is closed I will be returning to a more normal schedule of focusing on my portfolio work and network and even updating my blog more frequently 🙂
November 3, 2005
I wrote a post the other day on whether the need for capital is changing among emerging growth companies. As I read the comments and looked at some of the other postings on the topic (MikePK has a write-up and some good links to others, so I won’t repeat them here), I realized that another issue is that some (many?) companies might be more happy not having a VC (for them, it wasn’t that they were happy not to need the money, but rather they were happy not to need the VC that came along with the money).
My view is that with all of the different types of VC firms and individuals that make up the industry and with all the different companies, products, and situations that companies find themselves in, the range of possible outcomes is extremely large. When there is a solid fit between the management team, the VC, and the situation, the outcome is generally good (that is, the market opportunity is maximized and everyone feels good that they worked well together to optimize the outcome). When the fit isn’t right, many things can (and do) go wrong and/or the process and results do not meet the ingoing expectations.
Determine the fit before the deal closes!
I am a strong believer in making sure the fit is right for both sides in any VC/management team relationship. As an expansion-stage VC (that is, I invest in companies once they have a product and some customers), I learn as much as possible about the market, the company, the products, the distribution approach, the customer relationships, and the team. I also spend enough personal time with the senior team so that we can build a working relationship and to make sure that we share similar views on how to build a great company.
From the company’s view, I am a huge believer in having the management teams “turn the table” by doing due diligence on both my firm and me to make sure that they understand how we work and how we compare to others. (It actually worries me when they don’t do their work, as I start to wonder if all they want is the money, which is not the basis for great relationships!)
No two VCs are alike…
VCs are diverse, as are the firms that they work for. There are several major differences that are relatively straightforward to determine prior to closing an investment that can help you determine if you have the right fit.
The best due diligence that the senior management of a company can do is to call several of the CEOs that have current or former investments from the VC (the VC will give you a list or you can look them up online and cold call them) and ask them a number of questions (note: most, if not all, of them will say they are happy with the VC and that the VC is great. In order to truly get something out of the interview, you need to ask them much more specific and fact-based questions…see some suggestions below). Also, take the time to understand the individual VC and the firm. Ask to speak with other partners and members of the “value-add” team. Ask them all the same questions. It is a great exercise and you will have additional relationships to call upon once your investment closes!
The Differences- What to look for…
- Market Focus– What is the market focus for the VC? The more closely the VC’s market focus matches your company, the better the fit. Also, the more focused the VC on particular markets (or business/economic models), the better the VC will understand the market. You can easily determine market focus by looking through the VC’s portfolio and asking the VC what interests them (note: You should not depend solely on the portfolio here, as it is a “rear view” mirror of the VC’s interest in particular markets. Talking through the issue with the VC should help you understand current interests…some VCs study a new market for a long time and gain some level of expertise prior to making an investment in that market and many markets are new, so no VC will have the direct experience.)
- “Stage” Focus– What situations are the VCs most familiar with? The skills and network necessary to help very early companies are different than the skills necessary to help companies at the expansion or later stages. Also, while most VCs are growth investors, some investors are extremely good with turnaround situations or other special situations. Again, examining the VC’s portfolio and asking the questions to the VC will help here.
- Past and Current Investments– Understanding the VC’s portfolio is another great way to understand the VC. Most VCs portfolio investments are online, but you might want to ask the VC for the entire list or visit the wayback machine to make sure that you have captured all of the VC’s past portfolio companies (this is also a great vehicle to find out how consistent the VC has positioned itself over time). Call (or, better yet, visit) several of the CEOs of these companies and ask as many questions as you need to get the detailed information.
- Culture and Reputation of the VC Firm– Is the VC firm/individual engineering oriented, distribution oriented, financially oriented or some mixture of skills? Is the firm focused on adding value or more passive in nature (almost everyone says they are “value add,” so you need to dig deeper to truly understand what they mean by it)? Do the partners help out on each other’s deals in a true team manner, or are there silos? Do people in the industry want to work with the VC’s portfolio companies or do they shy away from them? Lots of good questions to ask here!
- Background, Skill, Intellect, Personality, Current Interests and Passion of the individual VC– The partner involved with the deal, who will most likely be sitting on your board, is the most important individual to evaluate fit with and get to know. Some firms, including mine, assign a full team to a portfolio company. When this is the case, evaluated each of the team members and make sure that the fit works and that you are going to enjoy working together (at least as important as money in my view). Ask the portfolio companies about the individuals and spend as much time with the team as possible before the investment. Also, ask each team member individually the same questions. It is always good to see the consistency of the answers.
- Engagement Approach– How does the VC work with its portfolio companies? Does (s)he show up daily, weekly, monthly, Quarterly? Are they formal or informal? Is there a team of experts behind the VC that helps on various functionally specific issues? How do they work with the companies? What is the relationship between the VC and the company (do they partner well or does the VC expect to be the “boss”)? Do they engage when asked?
- Philosophy/Values– This is not a throw away touchy-feely point, as mismatched expectations are important to identify up front. Is the VC conservative or aggressive when it comes to deploying capital? What is the “right” level of profitability? What is the “right” growth rate? How does the VC think about the “operating points” for the “dials” of product development, sales/marketing, and customer service? Is the VC looking for “control”, to set up a multiparty governance structure, just a “seat at the table”, or some other approach to the control issues? Does the VC want to replace senior staff, work with current staff, or see how the individuals and company evolve? What is the “exit” philosophy (“reasonable exit” or go for the grand slam, sale or IPO)?
- Available time– Most VCs are extremely busy people. They are trying to digest a huge amount of information every day to stay on top of the “news”, build their networks (that are extremely helpful to the portfolio companies), build relationships with the large technology companies (again to help their portfolio), work directly with their portfolio companies, and find new investment opportunities. Just how much time are they going to spend with you? There are a few approaches that I would recommend to get a basic understanding. First, find out how many companies the VC is personally involved in and/or sits on the board of. Second, take the full staff of the VC and divide it into the number of portfolio companies (to get a staff per company calculation). Third, take the full staff and divide it into the new portfolio companies over the last 12 months (to get a staff per new company…this is important because the VC is generally the most intensive the first 18-24 months of an investment). These three stats can give you a basic idea of what to expect, especially if you are evaluating relative to other VCs. Also, ask the current portfolio company CEOs for the details on how much time they get with the partner and the team in general (again, ask for the details!). Finally, ask the VC directly and get his/her commitment early on of the amount of time (s)he will be spending with you…setting expectations early is good!
- Level and type of Value Add (most important)- All of the points above add up to the value add (or value minus) that you can expect to get from the VC, but there are two more questions to ask both the VC and the VC’s CEOs to get the most detailed understanding possible:
- Can you give me a detailed list of the value add that the (current portfolio) company has received from the VC in the last week, month, quarter, and year?
- Can you give me one or more difficult issues involving the portfolio company and VC and how you worked through those issues?
I believe that you will find that most good VCs will accept, even encourage, your due diligence effort. I encourage the effort for every company I talk to, as I believe the fit is a truly important vehicle for success. I know some truly amazing Venture Capitalists and I believe the process that I outline above will help you determine the right one for you…
Additional thoughts on the process
I can’t help but point out two other relatively obvious points on how emerging growth companies can set up for the most favorable outcome in working with VCs:
- Don’t get your company in the situation that you “need” the money (I know, easier said than done in some circumstances). This will allow you plenty of time to determine if you have the best VC partner.
- Get yourself the best deal lawyer with the best experience that you can find. A good lawyer will be in a position to help you understand the terms (it is just math and logic, but the words are unfamiliar and the lawyer can point out where terms are “off market”). From the VC perspective, it makes the legal documentation process a lot easier as well.
Take the time to do your work!
Choosing a VC is similar to going to the supermarket to get an avocado (I hate overripe avocados and am too impatient to wait for an avocado to ripen). I have only figured out one way to tell if an avocado is ripe (not too soft or too hard)…You need to squeeze the avocado!
November 1, 2005
I met with Jan Hichert, CEO of Astaro, over breakfast yesterday morning. As we were catching up on industry gossip, he asked me the question if VCs were becoming unecessary for internet start-ups. We had a good discussion on the topic and then I came back from breakfast and read Rebecca Buckman’s article, Many Internet Start-Ups Are Telling Venture Capitalists: ‘We Don’t Need You,’ in today’s Wall Street Journal (October 31, page C1).
The article was about Venture Capital effectively becoming superfluous. The basic argument of the article, and the question posed by Jan, was that the cost of getting to “product” release in an internet start-up has gone down considerably over the last decade (which it has by at least an order of magnitude) and many companies, therefore, do not need Venture Capital. It cites Flickr as an example (which was sold to Yahoo for an estimated $25 million). Clearly a good payoff for the management of the company and it looks like a wise purchase for Yahoo. Everyone involved won. And no VCs involved…cased closed. Right?
Some Good Points…
The article (rightly) points out that the current issue is at least true for a subset of companies that, perhaps, focus on the consumer market. We also have seen many B2B companies bootstrap themselves with services revenue or low cost product downloads and get to a level of revenue and profitability with very little capital consumption before we invested in them.
My view on this issue is that it all depends on the goal for the company. If your goal is to build something useful (a feature that belongs in another company’s hands, for example) and make a reasonable amount of money from a sale (or create a lifestyle business), then clearly partnering with a VC is not for you (it is also not for the VC). But if your goal is to build a meaningful long-term enterprise, I would surround myself with as many smart, helpful, networked people as I can (good VCs fit in this category), and you will most likely need and/or want outside capital.
Expanding a Company- Uses of Capital
If you want to build a meaningful long-term enterprise, there are several uses of capital, even for profitable companies (yes, there are extreme outliers, but the following simple math is generally true):
1. As your revenues grow, your receivables grow, creating the need for working capital (cash turns into receivables). This point is generally true, but not true in certain consumer businesses that take credit cards and receive customer payments prior to paying suppliers (the negative working capital companies such as Amazon.com). If you run a financial model on your business including the balance sheet, you will get a good idea of the relationship.
2. As you grow your Sales and Marketing, the expenses are generally paid before the revenue/gross profit is received. Most great companies have the opportunity to grow (with a positive Net Present Value using a high discount rate) their companies faster than they can self-fund (that is, using the free cash flow of the business to fund this expense) sales and marketing. Again, the credit-card payment model is less sensitive to this point (due to days receivable outstanding being 3-5 days), but it still exists. On the other end of the spectrum, the B2B Software as a Service (A.K.A. On-Demand or ASP) “subscription” model (Salesforce.com is my best example), uses a lot of capital as the sales and marketing ramps up, as the timing for cash flowing out is much earlier than the timing for cash flowing in (btw, this is an extremely attractive business and economic model as Salesforce has been demonstrating in the public markets…my point is that it used capital to grow).
3. Experiments and “mistakes” use capital. Generally, as companies build-out, there are two major areas of expansion, one on the product development side and one on the product distribution side. I think of these build-outs as “grand experiments,” as you can do all of the up-front analysis that you can, but it is all theory until you put it into practice and see the results. Long-term sustainable businesses need to continue evolving their products’ feature/functions, build new products, and build out their channels of distribution. All of this takes capital, as the uses come before the benefits…even more capital if you make a few “mistakes” (and everyone does).
4. Missed Quarters (sometimes) Use Capital. Most emerging growth companies miss their quarters at some point. You want to make sure that you have “rainy day” money on the balance sheet to be used in circumstances like this.
5. Acquisitions use Capital. Several companies that I have been involved in have made small “tuck in” acquisitions, mostly to expand their product footprint. Generally, these types of acquisition candidates want at least a portion of their consideration in cash.
6. Large Enterprises want to see Capital on the balance sheet. If you are selling to a large enterprise customer, they generally are spending a large chunk of change on your product and many times will be integrating your product with some of their systems. They do their analysis and want to make sure that you are going to be there to serve them several years from now. Once of the items that they ask about is your company’s capitalization (note: my sense is that this issue peaked about 18 months ago and is now on the decline. I do still here about the issue periodically, however).
7. Finally, Founder Liquidity uses Capital. Many founders of great companies find themselves in the situation where a significant portion of their net worth is tied up in the business. Some VCs (including my firm) will make investments in a company to partially/fully liquidated certain shareholders (the key is that all key employees have enough of a financial stake in the company post the transaction that they remain highly incented). These types of transactions are useful to founders, as it allows them to take more risk (that make business sense) without worrying about their nest eggs.
I believe I have captured the major uses of capital as companies grow. I did not get into things like the company being subscale, but this implies that a company is unprofitable, which clearly requires capital.
I am actually a strong believer that VC is more about the help than the money, but given the question of capital need was raised, I thought I would direct my comments in that direction.
Is the need for venture capital changing? My answer for companies that want to build meaningful businesses over time, regardless of sector, is “no”…