By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search
Angel Mehta: I know you spent a number of years in the operating world before joining Lightspeed Ventures, so it took me by surprise when you left the venture world to go back into an operating role. Tell me what motivated that? Most people who go into venture never go back….
Skip Glass: The operating role is more fun. You get to see results a lot faster, you get to be in front of the customers, you get to deliver product, and you get to build a team. Venture is certainly a fun job but it's more advising, putting the right people in place in the jobs, connecting the dots to the right prospective customers. It is a little easier on the lifestyle because you don't have to hop on a plane every third month of the quarter and spend a month away from home. But venture requires a different set of skills; you have to be able to know when to pull back and let the entrepreneurs run the show.
Angel Mehta: And yet you've come back into venture capital again? Why?
Skip Glass: Personal reasons, mainly. My daughters are 12 and 13 and they still like to hang out with us, but that won't be for long. It's tough to devote the appropriate amount of time to family when you're an operating executive. But the reality is that I'm just having fun doing what I'm doing right now. Will I stay in venture forever? Maybe. Will I go back on the operational side? Maybe. I still don't quite know what I want to do when I grow up, and I'm kind of hopeful that I'll never find that out. Ever. It's more exciting that way.
Angel Mehta: Is your current role more about doing deals, or working with portfolio companies?
Skip Glass: Doing deals primarily and helping Canaan's portfolio companies secondarily. At Lightspeed, it was the opposite. The role of Venture Partner can really vary by firm. It can actually even vary within the firm depending upon whether or not your expressed desire is to become a Partner or not, how many hours a week you want to work, what your strengths are, what your track record is once you're within the firm, and actually your operational track record even before you joined the firm.
Angel Mehta: What are the three biggest areas you find entrepreneurs need help in after they get financed?
Skip Glass: One is recruiting the right people, and not just at the management level but even at the individual contributor level. There isn't a company that I've been involved with where you can't point out 10 to 12 people that really were the difference makers that made the company.
The second area is getting customers. It's very, very hard to procure new customers with good names and if you can connect your portfolio companies to great prospects, that's very, very helpful.
The third area would probably be process. They need to ensure that the processes are in place so they can measure the results of any given function. What's effective marketing versus ineffective marketing? When are they headed for trouble on the support side? What are the early indicators that they're going to have to put more people into support? How do they make sure that they have enough of a competitive view that they know that they're continuing to have a differentiable product and a differentiable strategy? How do they make sure, particularly in today's environment from a finance standpoint, they have an approach that takes Sarbanes-Oxley into consideration when running their business? Many of the bigger companies that are acquiring now, are asking you a lot of detailed questions about your processes, and so you need to make sure that from a finance standpoint you haven't been running too loose, because that could kill a merger and/or an IPO. So those are all process issues, which need to be monitored when you're growing, as well as to give you early indicators of when to slow the growth, and maybe indicators of when you should consider downsizing.
Angel Mehta: Do those things become less of an issue for you as a Venture Partner once a professional Management Team has been brought in?
Skip Glass: No. I think you need to keep an eye on it because often time professional management may have come from big companies and may overdo the process side. They also may have come from a company that was successful in the dot com era and didn't have to do as effective a job on the process side, and therefore didn't get that kind of discipline in place. You don't always want senior professional management across the board in a company because sometimes some of the better ideas and the freshness come from having young blood in the mix.
Angel Mehta: That's interesting…are there specific positions where you prefer 'young blood' as opposed to experience? Are there specific roles where you would absolutely insist on a professional manager?
Skip Glass: Well, I would absolutely insist upon a professional manager in the Chief Financial Officer and Chief Executive Officer roles. I might want a COO who's a little younger and has stayed a little more current on the technology. On the sales side I would like a mix. I think if you have too many guys who have made too much money that's bad, and if you have too many young guys that don't know how to call high, and how to get someone to write a big check, that's also bad. You need a mix.
Angel Mehta: What areas of opportunity are you focusing your attention on?
Skip Glass: Well, obviously there isn't much left on the applications side. However, there are business model changes, things with software as a service, things like grid computing and outsourcing, that are driving new opportunities. I did one open source deal with a set of technology where they've built some layers between open source and then a layer on top of open source that gets after network monitoring and network management. It is a company called Ground Work. The team saw that 80% of the underlying hard work you can pick up out of the open source community and then add a lot of value on top of that, some of which you can put back into the open source community and some of which you can keep proprietary. It's interesting, because they've built a competing product for one-tenth the cost of a Tivoli, Openview or Unicenter.
Angel Mehta: Most venture firms will speak with customers as part of the due diligence process before investing in a startup, but how much contact do you have with customers after the deal is done?
Skip Glass: I've learned that it's incredibly important to stay in touch with customers even after the deal is done. Customers will tell Venture guys something that they might not tell even the CEO. As an example, I know a company where one of their customers told me the other day, "They really need to spend more time out with us to pick up more of the domain expertise. They built the first generation and the second generation product which anticipated the needs, but as they've been growing fast their latest releases haven't had as much leading edge function in them, and if they were to spend more time out directly with us we think that they would be able to get a better view into that."
I don't know why they didn't tell the CEO that, or why they chose to tell me. But that's very interesting input because that says maybe you need to put together a user group, maybe you need to have someone spend a day, either out of your Product Management or your Engineering Group, out with the customers every quarter. You don't learn that unless you're very hands on as a board member.
Angel Mehta: Many of the Venture guys, and this seems to be almost common wisdom, say we'll only back deals that have billion dollar home run potential. Is that still realistic given the nature of the market? Are there billion dollar deals out there, and do you have the view that you only back deals that you think are going to be home runs. Do you have a view that each of the deals that the portfolio has done or the fund has done over the last few years could really be that big?
Skip Glass: Every deal looks like a winner when you do it, or you wouldn't do it, right? Look, they aren't predictable. Period. You have timing of macro economic issues which influence how a company does, you need a certain element of luck, you need an open IPO market because you aren't typically going to get acquired for billions of dollars. Anyone who says they can predict a billion dollar company, I think, is fooling themselves. For example China, who would have predicted that 20 years ago? What about Russia? Is Russia the next China? Don't know, but you know what, maybe you ought to have a little bit of an investment in both China and Russia because both countries look to be promising areas of opportunity, similar to where India was a decade ago.
Now, having said that, I think there's a whole lot of really smart people in venture and they can see much better than the average business person, the macro technology trends and the potential for very big markets. That is why people are willing to invest in venture firms. They are paying for the expertise and the track record of the people running the venture firm. And sometimes you do get that billion dollar company. But you should be investing expecting a good return based on a number of smaller successful firms and then be very appreciative when you do get that billion dollar outcome. But the billion dollar company will be the exception rather than the rule.
Angel Mehta: That brings to mind an interesting question; I saw an article recently where a group of venture guys organized a trip to China to look at the opportunities there. What is so big about China besides the opportunity for labor arbitrage? What do they have that India or Western Europe aren't providing?
Skip Glass: A billion people. There's a huge market. India is close in size. But with China, you have a government favorable to as fast a transition to a vibrant economy as can be done within an environment where you have several hundred million people in the south and east with a lot of money, by China's standards, and most everyone else in the west living a much lower standard of living. You have to manage the growth very carefully so you don't have a revolt, and I think the Chinese officials are actually doing a pretty good job of that. By the way, almost all the top Chinese officials are trained in major universities in either Europe or the U.S. The people heading the country are not the old generals, although those folks certainly have a very visible position, but I think the people really pulling the trigger are very smart people and that they have immense issues to deal with in that you can't immediately move to a capitalistic and democratic environment overnight. That's going to take a generation or two.
Angel Mehta: So would the immediate opportunity be more in the consumer market?
Skip Glass: If you're going to be in IT infrastructure, you're going to have to set up operations over in China and/or invest in China-based companies that are primarily selling into the Chinese marketplace. Now, having said that, I think B2C will be a big area of opportunity, but I also think over time they will begin to develop their own enterprise IT companies and it won't just be companies that have headquarters in the U.S. or Europe. I think the Chinese government wants to have, just as Japan did 50 years ago, a set of companies in their country that own a lot of the IP.
Skip Glass is a venture partner with Canaan Partners focusing on investments in the areas of software and services. Before joining Canaan Partners, Skip served as CEO and President of uRoam. Before that he served as a venture partner at Lightspeed Venture Partners. He has over 20 years of operating experience in technology companies, including four successful start-ups and the management of a $400 million business unit at IBM. Skip can be reached for feedback at: sglass@canaan.com.
Angel Mehta is Managing Director at Sterling-Hoffman, a retained executive search firm focused on VP Sales, VP Marketing, and CEO searches for enterprise software companies. He can be reached for feedback at: amehta@sterlinghoffman.net
