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Venture Profile: John Abraham, Kodiak Venture Partners
By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search
It’s unusual to find a venture investor convincing software companies to go for funding rounds. The companies John Abraham, a General Partner of Kodiak Venture Partners, funded didn’t need money, as they were pretty near break even when he found them. It took quite a while for John to sell his way into the deal– the gorilla way. Angel Mehta, Managing Director of Sterling-Hoffman, talks to John Abraham about the ‘friends and family’ network, the trust he places in a CEO of the company he invests in and on why there is no platform change in the horizon for the software industry.
Angel Mehta: I know you were able to have a successful exit pretty early and basically retired at 33… what motivated you to go back and work at Compuware in 1988?
John Abraham: When you’re a young guy, you get tired of just hanging out. Would you retire at 33?
Angel Mehta: Oliver Curme at Battery helped discover your first company, so it makes sense that you ended up at Battery Ventures, but how did you end up transitioning to Kodiak?
John Abraham: I joined Battery Ventures as a partner in 2000 when they raised their billion dollar funds, which was a natural thing for me to do because I knew all the guys there; love them, they’re great. Actually, I co-invested with Battery in an extremely successful company called Witness Systems, before I joined up with them. I was always doing venture work on the side with them. But when they raised all these huge funds and recognized this themselves, the behavior of the organization changed. They had a lot more money to put out and couldn’t keep the focus on early-stage companies the way they did in the past. I loved Battery, but they just couldn’t do small deals – they had to put much bigger chunks of money out there. The Kodiak transition happened because there was an investment I wanted to make that I couldn’t do at Battery – it was too small. I found a phenomenal company, Application Security Inc., and I brought it to a friend who, in turn, brought it to Kodiak and they said, “What the hell, why aren’t you investing in this?” I said, “I can’t, but I want to treat the company well because we spent six months trying to build it into an investment, only to learn that it’s not going to move the needle and I had to forget about it.”
One thing led to another…and as the godfather said, Kodiak made me ‘an offer I couldn’t refuse’.
Angel Mehta: Tell me how the cultures at Battery and Kodiak differ?
John Abraham: They’re highly different. There are many things about Battery that I miss and there are many things about Kodiak that I love; so, this is a real grey area. Battery has a cadre of EXTREMELY bright associates or junior partners who basically search the earth for anything that moves and then they analyze it. At Battery, you can get very spoiled as a partner because you basically throw darts at the wall, and say, “I think I’ll work on this.”
So, deals at Battery percolate. They come from the grassroots up to the partners, but by the time the partners see them, they’re clinical and actually a lot of the dirt is scrubbed out of it, if you know what I mean.
Angel Mehta: Please elaborate. What do you mean by ‘clinical’?
John Abraham: These younger associates, senior associates and in some cases, partners are extremely smart, but part of their career hinges on getting transactions accomplished. So they anticipate what will fly and what won’t and they tend to clean the things that won’t fly out of the deal before the partner sees them. That’s good and bad because in our business, it’s not like buying a house with a leaky roof where you know it’s going to cost you a couple of grand to fix it. In our business, companies with leaky roofs may not be fixable.
At Battery, there’s a strong culture of collaboration – I miss it. At Kodiak, we have no associates. We don’t have the deal flow origination that Battery has. We get our deal flow via the friends and family network, so I don’t see a hundred business plans to make one investment anymore. I might see 15 that are pretty high quality.
Angel Mehta: Give me a few examples of how that ‘friends and family’ network works, because entrepreneurs are always asking me how to ‘get in’ with a venture firm.
John Abraham: OK. Take Channel Advisor, for instance. An extremely successful company that, in essence, goes to merchants, corporations, manufacturers or anyone who needs an alternate channel; and with software and some services, allows them to sell their goods through places like eBay or Amazon auctions or whatever, it’s all automated. This is a very hot company. Right now, they’re doing over a billion dollars in gross market value – ‘GMV’ – as eBay would call it.
How did I find them? I only stumbled on them because a friend of mine identified it. I went down, checked it out and almost went crazy. They didn’t need money, as they were pretty near break even when I found them, and their founders were very wealthy having sold a prior business to Overture. It took me the better part of six months to sell my way into the deal, as they were not looking for capital. They had already gotten a little ahead of themselves; they were already down to Series C and what not. Even though they didn’t have that much capital in the company, I restructured everything. I said, “I don’t need to be the gorilla, that’s pressing down with all of my preferences on the rest of the shareholders, let’s re-jigger everything and create a Series A.” Very unusual for a venture investor – usually, VCs want to be lifers. So I suppose that the lesson for an entrepreneur is that if you have a really good company, you can pick who you want to deal with. Very few companies are in that category, but an entrepreneur should try to recognize when he/she has the ball.
Angel Mehta: How critical is it that an entrepreneur have a polished management team in place?
John Abraham: It can boost their chances. I did a deal called ASPEED a while ago, which was brought to me by a friend. We invested in it because another friend of mine, Joe McCurdy, had just gotten out of Veritas and was going to lead it. I invested money because Joe invested his blood, sweat and tears. Without him involved, I probably would not have done the deal. None of us in the venture community are experts anymore, even though we think we are. The most important part of the word ‘background’ is ‘BACK’, you can’t project it. I’m a computer scientist by training, but I haven’t done it in years… but when I get someone like Joe, who knows what’s going on, and he tells me that he sees a great company, I’m more likely to trust his opinion.
Angel Mehta: What is the single most important quality, in your mind, that a CEO needs to possess?
John Abraham: The ability to actually stop your mind for a bit and listen to what someone else is saying.
I’m specifically speaking about entrepreneurial CEOs, but I think it’s useful in any case. It takes a certain amount of ignorance and a certain amount of tenacity to go ahead and start one of these companies. Ignorance in that you don’t really understand how few of these things actually succeed. You have this idea and you have other people who think it’s a good idea or whatever… it’s better now because once upon a time it was guys, who just getting out of MBA school, said, “I can go start a company.” They were getting rewarded for it, but that doesn’t happen too much anymore. They start the company and a lot of times what happens is they think they know everything because they’ve actually learned everything all by themselves. So by the time you get to them, they’ve stopped listening. They’ve gone through all these perils by themselves and don’t believe that someone else might know something they don’t. It can get especially bad if the entrepreneur has already been successful.
Angel Mehta: What do you demand of yourself in terms of depth of understanding before you do a deal? Do you insist on having an airtight understanding of the space and the technology, or are you really just sort of casting blind that space on the credibility of the entrepreneur?
John Abraham: Somewhere in between. I think at the extreme, as an investor, you’re just kidding yourself if you think you know it all. It takes a pretty self-introspective person to realize and admit that you’re never going to know all the ins and outs of a particular business. So I admit that upfront. I’m never going to understand as much about ASPEED or Application Security or Channel Advisor and I don’t want to. I’m not looking to work hard. I’m looking to work smart, which means leveraging your abilities through other people. As I aged, I got wiser, because now if the executives of the company aren’t really good at what they do, then I’m not very interested in it because then that means I’m going to have to work hard. I can’t run these companies and that’s another mistake that some venture firms make when they say, “I could run it if I had to.” They absolutely can’t because they have other deals to do and you can’t run a company on the side.
So where is the nice middle ground? The nice middle ground is what I call ‘trust’. You have to know enough, so that your trust is worthwhile and I know that sounds a little obtuse. If I know enough about the people and the space that I can trust the statements they’re making, even if those statements are wrong, I’m okay because they’re wrong in good faith and it means those guys will accept it and modify the business because that’s what it’s all about; nobody knows everything. So, from an entrepreneur’s perspective, you have to be a pretty confident person, not cocky, to say, “I’m going to set forth, but only if I’m going to watch my navigation instruments very carefully. If I see trouble, I’m going to navigate around it. I’m going to admit that I was wrong.” As long as you correct it, you have burnt a little extra fuel – that’s all. I strongly believe I need to know first of all, it has to be a wonderful market. I’ve seen too many talented guys who tried to change history. The one thing you can bring to entrepreneurs is a sense of the market because you’re always out there canvassing. It didn’t take a rocket scientist to figure out the alternate channel market for companies, like IBM, is key because they’re getting their brains beaten out to convince Circuit City to sell their stock. It took a lot of intuition and insights to invest in ASPEED because they had to realize that ‘grid’ is just a word. If apps can’t run on a grid, it doesn’t matter. So the CEOs of my companies, I totally trust.
Angel Mehta: What is your sense about the software industry as a whole? Will this ever be a growth industry again?
John Abraham: It depends and actually that’s the key question. Once upon a time in our industry, if you could get a company to have revenue and profit, it would be worth more than what you paid, but that’s no longer true. For example, you and I could sit down and we could go through NASDAQ listings and we would find not dozens, but hundreds of companies that have revenue and profit that are trading below their cash value. Which fundamentally means that they’ll pay you to own their stock
I don’t think the software business is anywhere the same nor do I think it will ever be the same, unless we get another platform change. In the last 10 years, certainly within the last 20, we’ve had multiple platform changes. First, we had the PC, then distributed computing, next the Internet and then we had Linux. Every time there’s a platform change or some motivator for a platform change, the software industry goes berserk.
Angel Mehta: The discontinuous innovation….
John Abraham: Right. And we haven’t had it because, you know, I think that people bought so much stuff in the name of ‘supply chain’ and in the name of ‘Year 2000’, and all the rest of the crap, that there’s no platform change on the horizon.
John Abraham is a General Partner of Kodiak Venture Partners
. He brings more than 30 years of experience in technology investing, executive management and product development to Kodiak. Most recently, John served as Venture Partner focusing on investments in software and e-business sectors at Battery Ventures, where he was an early investor in Applimation, Inc., OpenCOLA, OpenNetwork Technologies and Optiant, Inc. For interview feedback, contact John 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
Kodiak Venture Partners
- Collects: First-edition literature, oriental rugs, anything related to Roberto Clemente
- Hobbies: Big-game fisherman, motorcyclist, car enthusiast
- Little known fact: Been known to bowl a 200
- Likes spending time: At his Montana ranch