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Venture Profile: Fred Sturgis, Managing Director, H.I.G. Ventures
By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search
After co-founding Hambrecht & Quist's technology investment banking group and leading the firm's East Coast software practice, Fred Sturgis moved even closer to the action when he joined H.I.G. Ventures. Angel Mehta, Managing Director of Sterling-Hoffman, sat down with Fred Sturgis to get the latest on software venture capital.
Angel Mehta: Let's talk about H.I.G. Ventures… how is the firm structured and what are the spaces you're investing in?
Fred Sturgis: The firm today has about $3.25 billion under management and we have four private and public equity funds. Our current venture capital fund is $300 million, and is our second fund (the first was $250 million). Our leveraged buyout team just announced a $750 million fourth fund. In addition, we have a large debt fund (Bayside Opportunity Fund) and a public equity fund (Brightpoint Capital). On the venture side, we invest in early and growth stage companies in information technology and healthcare. The firm was founded in 1992 and has offices in Atlanta, Boston, Miami, and San Francisco.
Angel Mehta: What percentage of your investments is in the Southeast region vs. outside in more prominent high tech hubs?
Fred Sturgis: Approximately 50% of our investments is in this region and the rest is national. I personally have four investments in Silicon Valley, for instance. We, as a firm, have companies all over the country but an important element of our strategy is trying to develop the Southeast market - there are a lot of untapped ideas here… the ecosystem to support entrepreneurs isn't quite the same as it is in Silicon Valley, obviously.
Angel Mehta: You mentioned that you had 4 companies in the Valley and I'm curious as to the cultural differences between the venture capital/tech community in Atlanta vs. the West Coast. What differences do you find between the people you work with?
Fred Sturgis: That's a real good question and probably one that'll pique your interest, given your focus. The short answer is that the people are different in terms of risk tolerance. The products, the ideas, the quality of technology are all very competitive in the Southeast. For instance, Georgia Tech produces a lot of great ideas and great engineering students, just as Stanford does for the Sand Hill crowd. But the issue is attracting and retaining the right management teams, and more specifically management teams that want to "swing for the fences". You know the Valley well, Angel, and there's clearly a risk-taking mentality embedded into the DNA. Swinging for the fences is critical to the success of the early stage venture capital model, and we need more people that want to do so in this region! So the eco-system of management talent is an issue that needs to be further developed.
Angel Mehta: Are software companies in that region as advanced in terms of their practices and/or growth techniques? For example, do they leverage offshore development the same way as companies in the Valley?
Fred Sturgis: I was actually on a panel last week talking about this very topic with an outsourcing group here in Atlanta. I think it is almost a foregone conclusion that development is going to be outsourced, and the Southeast is no exception to that basic rule of economics! It's table stakes at this point as a development-stage software company and, as you know, many companies have been doing it for 4-5 years already… or longer. We've seen the quality and consistency of software improve to the point where now the biggest challenge is keeping the offshore people on your team as they develop their skills and become more marketable. But software companies nowadays really have no choice - it is so critical, especially at the macro level when you think about it as it relates to the venture capital model. You have to control the amount of capital that's invested into the business to make money at a modest exit outcome, and there's no better way to capture cost savings than via an effective off-shoring strategy.
Angel Mehta: What are your intelligence sources telling you about whether software is going to continue to be a viable and interesting space for venture capital?
Fred Sturgis: We believe that it will continue to be viable, though I would expect it to moderate significantly in terms of its share of venture capital investment dollars. The economics of developing software are changing rapidly - as are the economics associated with exit prices and multiples! The utility of software is going up while the cost of developing and distributing it is going down - so it's reasonable to hypothesize that the value of software to end-users is going to continue to increase. We just need to figure out how to make nice returns around it as investors.
Angel Mehta: Are entrepreneurs from the Southeast who come in to pitch you less sophisticated than those from the valley? Tell me generally what would turn you off about an entrepreneur who came in to present.
Fred Sturgis: I wouldn't say that Southeast entrepreneurs are less sophisticated at all; they just don't have as much experience pitching to VCs as their brethren on the West Coast. That being said, I hate to have somebody come in and tell me how the deal is priced or should be priced and what the justification is for pricing it a certain way. That's one that always causes concern.
Another classic mistake is trying to tell us that the competitive landscape is barren and that nobody else is doing the same thing. It's silly because we're going to intuitively assume that if it's an interesting opportunity, there's going to be a degree of competition, if not now, possibly very soon. We want people to embrace that, and talk about why their company will win versus saying, "Hey, nobody else is doing this." You're laughing, Angel, but it happens more than you think! And our reaction is the same as yours - you end up losing credibility.
Angel Mehta: What about after the financing is done… what does every entrepreneur need to know about working with the Board?
Fred Sturgis: There is an art to management of the Board, and the thing we want our entrepreneurs and executives to realize is that we want to be a partner - a trusted confidante. We would rather hear bad news than no news at all… we don't want information presented in a way that attempts to "package it" or make it more palatable. The best relationships that I have with executives are the ones where they are very comfortable talking about the good, the bad, and the ugly at a moment's notice.
Angel Mehta: What about mistakes in terms of managing the company at the early stages?
Fred Sturgis: From a tactical standpoint, the biggest issue is the inability to redirect the business plan in a very agile, nimble way. Sometimes entrepreneurs chart a course, build a plan, and get financing around that plan - and inevitably they get attached to that plan and try to let it run its course, even when it's clear that things need to change. The best executives and entrepreneurs have this instinct about when to change direction. Resistance to change simply does not work in a startup.
Angel Mehta: How do you know when to change strategies or when to stay the course? Grove talked about a core issue that would tell him that there is a massive tidal shift coming or that it's just time to change strategies when you start to see a number of those. Do you have an approach for deciding when to change strategy or when to just stick with what you're doing?
Fred Sturgis: That's a good question but unfortunately I haven't been able to reduce it to a formula. However, I don't think it's easily reduced to a formula, because it's very specific to the combination of markets, products, and people that you're funding, backing, and trying to drive. Even investors can get lulled into the notion of saying that things will turn around if we just wait one more quarter… and the irony is, sometimes that's true.
Angel Mehta: Would it not cause you to question the competency of the entrepreneur if he came to you and said, "Hey guys, this isn't working, we need to change strategies." I mean, how does an entrepreneur come to you and say that the plan they sold you doesn't make sense anymore? Ultimately they're saying, "I sold you a lemon." Is there any good way to do that?
Fred Sturgis: I guess the best advice I would have is create the trust and partnering relationship early on and be transparent about what's happening in the company… be real-time about it. If it's not working, we need to do something different… we ought to be reaching that conclusion together. There is never a good time to blindside your investors.
Fred Sturgis is Managing Director of H.I.G. Ventures. He focuses primarily on enterprise software and IT services investments. Prior to joining H.I.G., Fred was Vice President in the technology investment banking group of Hambrecht & Quist, and was a founding team member of H&Q's Atlanta office. At H&Q, he was responsible for the firm's East Coast software practice, advising clients on a variety of M&A and capital-raising transactions, and sponsoring several principal investments through H&Q's $500 million venture capital fund with expertise in the telecommunications and software industries. Fred combines strong technical and management background with a solid record as an investment professional to guide and oversee the investment strategy for the fund. For interview feedback, contact Fred at email@example.com
Angel Mehta is Managing Director of Sterling-Hoffman, a retained executive search firm focused on VP Sales, VP Marketing, and CEO searches for enterprise software companies and lead investor in http://www.softwaresalesjobs.com, the # 1 site for software sales jobs. Angel can be reached for feedback at firstname.lastname@example.org
VC: Fred Sturgis|
Firm: H.I.G. Ventures
- Favorite band: R.E.M.
- Hobbies: Family, golf, basketball, college football fan
- Passionate about: My three children
- Favorite movie: Wedding Crashers
- Favorite color: Purple
- Least liked food: Brussel sprouts
- Most admired person: Dick Hoyt