Milestone Group Quarterly: January 2008
Articles
Investment Viewpoint:
Sonja Hoel Perkins, Partner at Menlo Ventures
Milestone: Tell us about Menlo Ventures.
Sonja Hoel Perkins: We’re in our 32nd year, and one of the oldest venture funds in the Silicon Valley. We manage over $4 billion dollars in 10 funds. Our most recent fund is Menlo Ventures X, which is a $1.2 billion fund and Menlo Ventures IX, before that was a $1.5 billion fund. We invest in number-one companies in rapidly growing markets, particularly information technology businesses. We invest in pretty much any stage from early to late. Again, the main goal is to invest in companies that we think will be number one in their marketplace.
Milestone: Thirty-two years, how did you survive that long in a place like the Valley?
Sonja Hoel Perkins: With time, it gets easier. The key is to invest in the very best companies, and the very best people. You earn a track record where your portfolio companies have been successful, and then you have a lot of people that you’ve backed in the past that like you. So, I think that is helpful and we have entrepreneurs that we’ve backed several times, and that is always nice.
We treat entrepreneurs very fairly. We tell them what is expected of them, to meet their numbers, to gain happy customers, and to hire well. They build a great company and we provide board assistance on a strategic level. We also help with hiring but we are not going to micromanage the company or do the CEO’s job.
I believe that people like our style. I always tell perspective entrepreneurs it’s easy to get a great reference from a company that’s done well. But the companies that haven’t done so well, those really are the best references. We try to treat everybody fairly, even if we find that the product doesn’t work, or the company isn’t going to take off as expected.
Milestone: What do you mean by investing in a number-one company?
Sonja Hoel Perkins: Simply, we look for market leader potential. For example, we invested in a company called Acme Packet several years ago. The company has a product called Session Border Controller, which basically enables disparate IP networks to talk to each other for high quality voice-over IP. Though several companies ramped up at the same time, we saw that Acme Packet was best positioned to be the market leader because it had the best product and best management team. The company went public in late 2006, and it is number one in its space.
Milestone: How do you evaluate an investment? Is there a specific process that shows that number-one potential?
Sonja Hoel Perkins: We have a process called SEMS, which stands for Systematic Emerging Market Selection. We conduct research in specific areas, which could be as broad, for instance, as network security, or as narrow as a vulnerability assessment. We try to contact all the companies and learn about every company in the market, and then invest in the very best one.
Security technology is an interesting case. In the past, and even today, I have spent a lot of time looking at security companies. These days, I think it’s hard to get a security company funded, primarily because security is a much more mature market than it was say five years ago. It doesn’t mean that there’s no business in security, it just means that you have to look at it differently.
Some of the Internet related investments that I am involved with actually use security technologies to do something different. I am on the board of a company called NebuAd, which has a box that fits at an ISP and looks at data traffic going in and out of an ISP using deep packet inspection. Instead of looking for security threats, the company is looking at where people have gone on the Internet to better serve them ads. This is all done on anonymous basis in order to protect a user’s privacy. So this application uses deep packet inspection, which has many security applications for a new advertising model.
Milestone: Can you talk about the maturity in the security a bit more? Have we become too complacent about it?
Sonja Hoel Perkins: In starting a new security company, you will have to have a pretty high bar. Security is never going to go away; but I believe it will morph into other products. A company, network or computer is never 100% secure, but do you need to buy a big product just to solve a basic problem? Having said that, I do think there are some areas that need attention.
I am involved with a company called Q1 Labs, which has taken a very innovative approach to security. For Q1, the network is the security. Before the idea was you have to secure the network by putting something in front of it, around it, and in it. Q1 is saying: ‘No, the network is not only secure, it IS the security.’
One other company that I am involved with, Solidcore, started as a security company with a product that basically scrambles API codes. Instead of having a door with a lock on a house; it basically takes the door off of the house so you just can’t get in. API codes were written so that many people could write code to a standard API, and, of course, those codes were known by a hacker too. Solidcore scrambles an API code so that you don’t have a standard applications programming interface to a server and preventing new code from being written.
Solidcore was funded as a security company (as customers love being able to lock down their servers) but they really loved being able to track changes that were made. The server had to be certified and de-certified every time new code was written. The company morphed into a change management company, and still sells security products to OEMs. Solidcore secures NCR’s ATMs around the world. It’s very interesting how security technology has morphed into other applications.
Milestone: Looking ahead, what do you see as the dominant computing platform? Will the handheld device be the platform to design for, or will we continue on with the vast array of mobile, desktops, etc.?
Sonja Hoel Perkins: I think it will be a variety of things. One benefit that the traditional laptop and computer has is the screen size. There are some applications that are better suited for mobile and others that are not. Email, for example, is clearly a great application for mobile. We have a company called Credant in our portfolio that secures mobile devices, as people tend not to have as much security in those devices. Credant is doing incredibly well.
Milestone: Can you think of any technology that might exist, that’s been held back either because it has not been able to differentiate itself or show clear market potential? How would you go about helping a company work through that?
Sonja Hoel Perkins: I think Google today is the Microsoft of the past. In the past we tried not to invest in anything that competed against Microsoft, because we always knew Microsoft had the muscle to win. Google is becoming that today and we try to stay out of their way. I am always a bit surprised when I see a business plan from a company competing with several public companies that already do exactly what they do.
You must clearly differentiate your product; your technology can’t be just a little bit better. Years ago we saw a lot of security companies that had a “new, better” way of encryption. Encryption had already happened and there were a lot of players developing new encryption algorithms. To fund a startup focused on encryption was really difficult. We later founded Voltage, which does easy encryption for email. They are doing incredibly well because they focused on the application versus the technology only. They have proprietary technology for encrypting messages based on a user’s identity and the algorithms are similar to the public and private keys. It’s just easier to use than traditional PKI.
We don’t fund technology only. We fund solutions.
Milestone: What is Menlo’s investment view on Web 2.0, in social media?
Sonja Hoel Perkins: I am very excited about Web 2.0 and social media. It reminds me of early television, with someone sitting on a stool behind a desk reading a script. At the time television was similar to radio, but with the extra visual piece. Likewise, much of the early Internet was moving content from paper-based to Web-based platforms.
Looking at TV, how we went from the Ed Sullivan Show to MTV. MTV really took advantage of what television has to offer, the sound and the visual. Thanks to MySpace and Facebook people have seen that a lot more can be accomplished on the Internet. I think those two companies are very interesting, and those investors are going to make - and have made - a lot of money.
I’m involved with a company called Jobfox, which takes social networking to a business level (I call it social networking for adults). Jobfox was founded by Rob McGovern, who was also the founder of CareerBuilder, one of the first Internet companies to post jobs and resumes.
Rob sold CareerBuilder to the Tribune Company. Today with Jobfox, he and his team use many Internet features to make for a better job search. For example, if someone puts up their resume to apply for a computer programmer, the Jobfox application will determine what kind of programming languages they know and how many hours per week they use it. The application asks the prospective employers to do the same thing, which results in a really good match.
Jobfox offers the job seeker something similar to a MySpace page that represents you as an individual and presents you to a prospective employer. Job candidates can show samples of their work, a photo, papers they might have written, or any other material. When a prospective employer reads a resume from the Jobfox site, the candidate receives an SMS message indicating that the company has just viewed the resume. The employer can also know instantly if the job seeker is online.
Milestone: If you had $10 million as an LP to put into another fund, who would it be?
Sonja Hoel Perkins: You know, there are so many great funds out there; it would be hard to choose.
Milestone: Is there a company that you passed on and wished you had a do-over on?
Sonja Hoel Perkins: You know, not really. We all miss opportunities. I think there are many more that you are glad you turned down versus not turned down. We always look to the future, and Menlo is very fortunate that with our model of choosing large markets and companies with the potential to become a number-one, we’ve done pretty well over the years and that’s really helped us out.
Sonja joined Menlo Ventures in 1994. Prior to Menlo Ventures, she was in business development for Symantec Corporation and was an investment analyst for TA Associates. Sonja focuses primarily on software, communications and Internet investments. Her recent investments and board seats include: Acme Packet (APKT), Asempra, Big Tent, Green Note, Jobfox, nCircle, NebuAd, Q1 Labs and Solidcore. Her prior investments and board seats include: AssureNet Pathways, acquired by Symantec (SYMC); Eloquent (ELOQ); F5 Networks (FFIV); MailFrontier, acquired by SonicWALL (SNWL); Optical Solutions, acquired by Calix; PassMark Security, acquired by RSA Security (formerly RSAS and now a subsidiary of EMC Corporation); Priority Call, acquired by LHS Group; Recourse Technologies, acquired by Symantec (SYMC); and Vermeer Technologies, acquired by Microsoft (MFST). Sonja is a graduate of the University of Virginia (B.S. in Commerce) and the Harvard University Graduate School of Business Administration (M.B.A.). She serves as a director of the Western Association of Venture Capitalists (WAVC), the Foundation Board of the McIntire School of Commerce at the University of Virginia and the Thomas Jefferson Foundation.
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