Milestone Group Quarterly: April 2004
Articles
Investment Viewpoint:
Warren Weiss, General Partner, Foundation Capital
Milestone: There are some cautious signs of optimism in the tech sector. Do you think we’ve seen bottom?
Weiss: From a venture capitalist perspective we only have two customers, one is the limited partners, those are the people who give us the money, and the other is portfolio company’s customers, and I think it is pretty clear that their budgets are still pretty flat in spite of our beginning to hear lots of noise about increases in capital spending. Our portfolio companies are getting new opportunities to make new deals, but I think the customer’s overall capital expense budget is pretty flat. There are only so many times you can upgrade SAP, right? You have to do something that is innovating where your business is going. So I think it will be a better year for start-ups.
Milestone: CIO’s are often still reluctant to purchase from start-ups. What are the best strategies for startups to get traction with CIOs?
Weiss: That is the $64,000 question. I still think CIOs control most of the tech purchases in spite of most young businesses trying to go around CIOs, they wind up back in the CIO’s lap. So they usually have some form of centralized budget, or strategy approval. For startups to sell, I think it has to be compelling, it has to go in quick. I think the proof points aren’t whether or not the vendor’s ROI is compelling, but whether or not the customer’s ROI is compelling – or ROE – ‘cause nobody believes them. I mean the industry has unfortunately, both the venture industry and the software industry, has really burned customers, so I think they are going to take it slow, they are going to do live pilots, they are going to get early wins, and they are going to do things that mask their strategic initiatives in the business. Large companies aren’t going to be able to innovate at the speed at which businesses change.
Milestone: There is a lot of talk again of hosted apps, some like to call them ‘software as a service’. What do you see as the 2-3 year trends in software licensing?
Weiss: I think it’s a bright future. Salesforce.com will put some wind behind the sails of the service provider model, you know, whether it’s a business service or a service bureau. And if you read the history of the software industry, it’s been around about forty years in different incarnations. We’ve got a heavy focus on investing in software as a service, we see that the systems are mission critical for the customer but they are not strategic that they be run in-house. So we can do it cheaper, faster, you know it’s just a total cost of ownership, the focus is much better. We have four or five initiatives that we funded this year, right in that sweet spot, so we see the market going that way.
Milestone: Warren, you’re a four time software CEO. What 2-3 key pieces of advice would you give to an entrepreneur starting a company today?
Weiss: Bootstrap your company, the industry was built by entrepreneurs and people that didn’t take venture money. I think it’s a little bit of an indictment of the venture industry how few long-term, sustainable software companies have actually been built by venture firms. That’s primarily because software is guaranteed to be wrong, by the nature of it, you build it and they don’t come, and it takes multiple iterations for a software product to hit the sweet spot to get real focus for the customer. So I would say hire incredibly bright people, keep your burn rate extremely low, and recognize all customers are really not the same. You need to work with customers who will really exercise your product and give you real feedback and really drive it and make sure that it scales in an enterprise, and I think that the more you can do that the better position you are in to get institutional money.
Milestone: Where do you think we are in the investing cycle?
Weiss: Personally I think it is a great time to be in venture, of course I would say that because I do venture, but I’ve watched these movements on cycles, I’ve been around and documented that this is not a new thing. Are we really going to stop innovating? I mean 25 years ago we didn’t have cell phones, PCs, faxes, you know whatever extends the level of automation, so 25 years from now think of all the things that might change in our world, with nanotechnology and biometrics and genomics, you know, it’s a great time to be an early stage investor. Yeah, there’s not a big IPO market available, so therefore if you can hit the market right, just building companies for value is what we focus on. And I think that in five to seven years we are going to build some incredibly valuable companies.
Milestone: As an asset class, when do you think early stage venture investors will show a positive return? 2010 or beyond?
Weiss: I like the funds that are being raised now and the kind of the 2001 and beyond, I think if you look at those cycles they are anywhere from three and a half to four years to invest. And to fully mature, somewhere like seven to ten, by the time you have harvested everything. So I think in that time range that you are speaking to it’s gotta be good. No one can predict what the market’s going to be and I think that venture people have to work at building companies for the value, not for what the market’s going to look like in a takeout strategy. None of us forget that, and so the challenge there is to make sure that the capital you put to work is used wisely. If you are a firm that has to focus on large multiples of returns, like the funds that we traditionally had, you can’t afford to put too much money in a company, and we’ve proven that putting ten million into a company that only needs a million, and trying to get it market early, won’t work. Unmask the dot com crashes and that’s what people were trying to do.
Milestone: Where's the Foundation portfolio headed? Where are the opportunities as you see them?
Weiss: Foundation as a firm inherited some of its legacy from Merrill, Pickard, Anderson & Eyre, which was founded about 24 years ago – and in 1995 Jim Anderson, one of the same partners that started Merrill, Pickard, formed Foundation Capital. Our firm was really built on a couple of premises. One is that we really don’t chase markets, we are not the kind of firm that has to own something in every piece of the chess board, our strategy has always been to really meet the brightest people out in the world, you know, out of universities, or who are proven entrepreneurs, but we get about 80% of our deals from people we have done business with before, or out of university environments where we have relationships. Two, to really focus at a very early stage on deep intellectual properties. Things that are compelling, that are in a large market. The market’s either large or it’s not, you know, otherwise it’s a salmon, you’re going to go upstream and you’re going to die. So we view it as, if it is a very large market opportunity, there is deep, compelling, intellectual property, and you have a great management team, you’ve got a heck of a chance for success. At Foundation we like to partner with other blue chip, top tier venture firms because it creates a much more powerful network and a great financing strategy long-term for the firm.
Milestone: What do you think VCs need to do to (a) be more effective with LPs and (b) to be more effective with entrepreneurs?
Weiss: That’s what we do for a living, right? LPs require tremendous communication, a lot of them are in many different funds and it’s very hard for them to understand where they are at in the portfolio. I think Foundation has done an extraordinary job of communicating a level of detail in what’s happening in the portfolio companies while staying away from topical issues like the need for public disclosure. The reason it’s private is because it’s private and there are a lot of unknowns when you are investing in young companies. There’s a lot of companies that you can’t predict whether they are going to hit the knee to the growth curve and do well on the market. And I think for portfolio companies it’s just mystifying to me how you can be in the venture business if you haven’t run a company before. If you’re a CEO, why would you take the advice of somebody that hasn’t. You know it’s just both the good and the bad. I mean, I’ve made a lot of mistakes in my career, and I’ve had a lot of success in my career, and I think an entrepreneur values that. Another thing I would say is that we can’t run the company, that’s a very drive by shooting where you show up once a month and say “sell more”! It needs to be a situation where you have mutual respect for each other. That the CEO and the management team run the company and you’re really side by side with them, and when that works it works incredibly well. When it doesn’t, it’s very divisive, and it can rip apart a company.
Milestone: If you were an LP and had $10M to invest in a competitors fund, who would it be and why?
Weiss: Sequoia. I think they probably work differently than we work, but you have to hand it to them, I mean just look at the returns, look how they’ve gotten through the down times. The liquidity events that those partners had put together. And I have a lot of respect for Kleiner Perkins. They are incredibly bright people that change the world. Those are the two that we look at.
Warren Weiss is a General Partner at Foundation Capital (www.foundationcap.com). Warren joined Foundation Capital with over 25 years experience in the software industry, including President & CEO of four public and private software companies. Most recently, he served as President & CEO for Asera, a real-time software solutions provider. Warren served as President & CEO at Prism Solutions during the company's transition from data warehousing tools provider to business intelligence application deliverer. He was also President of SQRIBE Technologies (now Brio Technologies) and President & CEO of SMI (Strategic Mapping Inc.) and has held other senior executive positions at Next Software, Continuum and Dun & Bradstreet Software. Warren currently serves on the boards of Adexs, manageStar, MarkMonitor, Talaris, and Silver Spring Networks. |
