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| Home - Venture Profile - Jul 03 Issue |
Venture Profile: Mark Sherman, Battery Ventures
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Angel Mehta: We've already seen a number of firms shrink their funds a couple of times...
Mark Sherman: Sure...we're starting the correction phase. Less money is being raised every year...by 2004 or 2005, many of the funds are going to be deployed and the quality firms will be able to come back and raise more – but it'll be less than they raised in the past. We'll see a Darwinian triage emerge...the funds that are in the top half in terms of returns will be able to raise money, the funds that are on the bottom half are going to be gone.
Angel Mehta: What do you think the core competency of a venture guy is? Creating new ideas for businesses and then executing on those ideas....or is it more of a risk management role? In other words, forget creating concepts or new ideas....just be able to evaluate which of the five deals in front of you are going to fly and which ones aren't.
Mark Sherman: Both are true. One is a more active early stage thesis...the other one is a little bit more of a passive, later stage thesis. But I think good venture guys actually do both, regardless of stage. There's a lot of ego in this industry...it gratifies the EGO to say that YOU are going to come up with the next big business idea and then go out and find minions to make it happen. It puts the venture investor out to be the star, with the employees of the organization as the supporting cast. It's fine to get very excited about markets...but I never confuse who the star is and who the supporting cast is. The entrepreneurs are the stars – period. We are the supporting cast...a venture partner is a good wartime consigliore...We can bring the wealth of experience from other boards that we sit on...other companies that we've seen . But the entrepreneurs make the decisions.
Angel Mehta: Let's talk a little bit about Battery itself. The structure of Battery is a little bit different than some of the boutiques – you've got a big supporting cast, with analysts and associates, etc. What have you found the advantages to be with that kind of model, and why is it that that you evolved that way?
Mark Sherman: Part of earning good returns for our limited partners is to go out and study the different available markets very well, pick markets that we think have a lot of momentum to them, and then study the companies in those markets. We have a larger disproportionate number of younger people who help us go out and understand these markets. So before we make an investment, we will have talked too many if not all of the competitors in the segment to try and understand the strategies that each of the players are using.
The other thing is, there are two categories of deals you can pick from. One is mainstream – the companies we'll talk to that everyone on Sand Hill or Route 128 get to see. But there are also opportunities off the beaten path...For example, spin-offs of big companies, sole-proprietorships, and turnaround situations. There are entrepreneurs who probably never even heard of Sand Hill Road and yet have developed some interesting technology and are looking for people that can help them leverage that. If you stick with the traditional channel, you'll never see those. So by having a large cadre of younger folks who have quotas on outbound calls to try and find unusual deals....it gives you an advantage in finding those deals that would otherwise be evasive.
Angel Mehta: Are you more likely to back an entrepreneur that you know but maybe has less domain expertise and management ability, or an entrepreneur you have no relationship with but has very strong domain expertise and business training?
Mark Sherman: I would say we would never back an entrepreneur that we didn't get to know. Regardless of whether we knew them before, we'll find people through our network that can help us understand the entrepreneur's background and expertise. You and I were just talking about the softer issues....drive and motivation....does the entrepreneur have the right DNA for the specific situation? In the end, the only way you really get to that is by meeting the people, talking to their references, talking to people who they didn't give as references. We'll always talk to an entrepreneur's references, but what counts more are the people we talk to that the entrepreneur DIDN'T submit.
Angel Mehta: The decision of whether to keep the entrepreneur in place or move him into a less central role is always a big one. Would you walk away from an entrepreneur who clearly didn't have the stuff to lead the company, but say, the technology was great?
Mark Sherman: No – but we would always have that conversation with the entrepreneur before we invest. You have to communicate with people and tell them what your intensions are because what kills you here is surprises. We can't invest and then on day 2 say, 'Hey we think you should leave the company so we can bring in a new CEO'... the entrepreneur would have every right to be angry. I will tell you that the way I think about team issues is to look for an anchor tenant. Somebody in one of the top 5 functional areas that is going to be around forever. Because what I found in recruiting is if you have an anchor tenant, you can build a team around that person. If you have a Neiman Marcus in the mall, you can go out and recruit the Body Shop and Victoria Secret...all the other boutique vendors that you need to get into the mall. But without an anchor tenant on the team, it's very difficult to get other people on board. The people on the team need to be able to look across the table and see at least one person that makes them think, 'Wow, that guy is really smart and is going to make this into something."
Angel Mehta: So let's talk about sort of where enterprise software is going. I was saying over to the Chasm Group guys the other day and you know we were talking about it doesn't matter whether ___ continues the way it has for the next years. I mean, profits are much more powerful but users have what they need in software by and large. Is that true? I mean, is there going to be...are we going to see the new areas of growth in enterprise software the way we have over the last 10 years?
Mark Sherman: I think there are three trends in software that are important. First, the software industry is maturing and so when an industry matures what tends to happen is much more refined market segmentation and product packaging, placement, and distribution to match the specific sub-segments. What I personally think is going to happen is a lot of the more commodity applications spaces are going to be RE-packaged in new models. You're going to increasingly see models like salesforce.com....for example, Microsoft rolling out a CRM business on top of it's GreatPlains business, etc. Classic ASP's are going to take a lot of functionality and finally price it in a range that lets smaller, lean businesses afford it. These are businesses that have never tried to consume that kind of technology before....
Angel Mehta: Because it's been out of their league from a pricing standpoint...
Mark Sherman: Right. So I think that's one of the important trends.
I think a second trend has to do with the data center and security architecture...so infrastructure software is going to have tons of opportunities. We've really moved from an environment the central device was a mainframe that cost a million bucks and the people that manage that mainframe costs tens of thousands of dollars – that was 20 years ago. But now, we have people that cost hundreds of thousands of dollars to run IT but we have devices that cost tens of thousands of dollars and there's thousands of them everywhere. It's a fundamental shift. The cost structure of the devices versus the cost structure of people has created architectural shifts in the way infrastructure software is going to manage all the devices that are out there. I think that you're going to see the emergence of more and more infrastructure software that can manage thousands and tens of thousands of devices as opposed to a small handful. You're going to have infrastructure software that thinks of technology delivery as a business as opposed to uptime of a specific device. So an example is you know what does it cost Merrill Lynch to deliver e-mail to its tens of thousands of employees? Are there ways that they can shrink the cost of that delivery?
Right now, most of the NetIQ exchange server management devices are focused on the exchange server being up or down...I'm not trying to pick on NetIQ but I think a lot of managers THINK that way....is it 'on or off'?.... But that's not the question. If Angel just joined Merrill Lynch, is it going to cost us $10 a month or $1000 a month to deliver email? If it's costing us $1,000 a month, we've got some problems and we better fix those problems ourselves or if we can't fix them...
Angel Mehta: Better outsource it to Critical Path for $20 a month, or whatever...
Mark Sherman: Exactly. So that's the second trend. The third trend has to do with pockets of vertical applications that haven't been touched. We haven't touched transportation, and many pockets of the insurance industry. Many commercial banking segments haven't really been touched. Those areas need to be revisited by vendors that are focused enough to address the deeper problems faced by those segments. So those are three trends in enterprise software I think we'll see over the next few years.
Angel Mehta: I like to ask people to think about the phrase 'if I knew then to what I know now'. What would you do differently?
Mark Sherman: (Pause) It's a very good question. (Longer Pause) Here's one: I wish I had learned to ask harder questions as a venture guy, earlier in the process. Part of the difference between being a venture investor versus being a banker is that as a banker, you're selling and trying to get to 'yes'. You're dealing with companies that are already down the path.... you're choosing between things that have a high probability of turning out reasonably successful. But as a venture investor, you're being sold – as opposed to selling. By and large most of the plans we look at will fail. As a banker, I'd wait to ask the really tough questions until I got to know the person a little better because you don't want the client to be threatened. But in venture investing, there's a lot of value to asking harder questions earlier. Not to be a jerk, but to figure out faster what the opportunities in the market are. Because ultimately, that helps us get to a better investment decision FASTER, which is good for us AND good for the entrepreneur you know? The second best answer after 'yes" is 'No', right?
Angel Mehta: As opposed to let me see how this turns out, or let me see this piece of data...
Mark Sherman: 'Let me see" is the stuff that kills you. We're investing our time, and the entrepreneurs are investing their time. We'd rather get to know the details by meeting 2, as opposed to meeting 20. Tough questions are the most valuables questions for both sides.
Mark Sherman is a General Partner with Battery Ventures. His investments include mFormation, Decisionpoint Applications, and Neoteris. To send feedback to Mark, email: sherman@battery.com
Angel Mehta is Managing Director at Sterling-Hoffman, a retained executive search firm that focuses on VP Sales & VP Marketing searches exclusively for enterprise software companies. To send feedback to Angel, email: amehta@sterlinghoffman.net
 
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