|Venture Spotlight: Bob Davoli, Sigma Partners
|By Angel Mehta, Managing Director, Sterling-Hoffman Management Consultants
Most venture partners are information junkies - so why does Bob Davoli avoid trade publications and analyst reports like the plague? One need only spend a few minutes in conversation with Bob Davoli to realize that he is unique. Having joined Boston-based Sigma Partners in '95, Davoli has all the energy and intensity you'd expect of an early stage venture investor and successful entrepreneur. But it's his political views that may surprise you. Angel Mehta, Managing Director at Sterling-Hoffman, talks to Bob Davoli about pitfalls for venture investors, finding great ideas, and social responsibility.
Angel Mehta: You joined the venture game in '95….
Bob Davoli: Pre-bubble wasn't it?
Angel Mehta: '95? Yeah sure I guess you can say that was pre-bubble. I mean, the browser was what…
Bob Davoli: Hrmm…We invested in Vermeer…right...so we invested in the first Web development play which was Front Page - that was in 1995, which we subsequently sold to Microsoft.
Angel Mehta: Tell me what motivated that move moving from the operating environment into the venture game.
Bob Davoli: I had already run two companies and you know, I liked the idea of investing because I didn't want to retire. I liked the venture business because you meet the brightest people and see the newest technology, but you have a more flexible lifestyle.
Angel Mehta: Did you, at the time, have any idea how big the bubble would get?
Bob Davoli: I didn't have a clue.
Angel Mehta: Then tell me about how the challenges of being you know being a venture investor changed from '99 or 2000 until now.
Bob Davoli: Nothing changed for us. I mean, we never did any pantyhose.com deals….no retail and no telecom whatsoever. We've done 24 deals in the last 24 months because we think there has never been a better time to invest. The valuations are reasonable and the ideas didn't go away. There's just a lot less noise.
Angel Mehta: Now that the volume of deals has slowed down, for whatever reason, do you think it's true that many venture partners don't know what to do with their time or how to add value? An entrepreneur told me that recently but it was the first time I'd ever heard anyone admit it to publicly.
Bob Davoli: Look, I do two things as a venture capitalist; I spend time with my current companies when they want me to; sometimes I spend no time because they're running fine so I don't get in their way. The worst thing a venture capitalist can do is call up a portfolio CEO or entrepreneur and say, "How's it going?" ….What do you mean, "how is it going?" This is not a social club, you know? If I'm an entrepreneur, I'm thinking, "If you've got something that you want to help me with or something you want me to do or if you've got a lead for me…great." But don't just call them up and say, "How's it going?" It's a waste of time.
I spend all my time either with my companies or maybe looking at 3 or 4 new deals a month - but it's incredibly filtered. People that used to work for me or people that I know….or other venture guys that I know and respect. I never read business plans, I never read a trade rag, I never read anything an analyst has written, I never go to a trade show, I never do any venture meetings, I never read VentureOne. I don't read anything related to business. I don't use a computer except to do e-mails. And after my assistant has gone through it, it's mostly just personal e-mail.
Angel Mehta: Are you serious? Aren't venture guys supposed to be information junkies?
Bob Davoli: I have a theory called the 'stupid stick'. The stupid stick is like this: You have at the top, the smartest guys - who are the entrepreneurs. They figure something out. The venture guy is the next smartest guy, who gets lucky and happens to hear the idea and say, "I'll take a risk". So the new company writes reports or whitepapers and sends the reports to Gartner or Forrester or some analyst. Gartner or Forrester copy the report, re-format it and make it look pretty and then say, "Oh this is a new market". Well shit, the entrepreneur already figured it out and the venture guy backed it! And then, the dumbest guys are the public market analysts who do nothing. I never read an analyst report - it would be the most dangerous thing in the world to do. They're so far removed from reality…they don't know when things are going to change - they're just running spreadsheets; they don't know anything about anything. Not that the vc's do either….But I never read business plans, and never read journals. My time is only spent working my current portfolio companies OR looking at 3 or 4 new deals a month that are highly filtered and mostly through the people that used to work for me.
Angel Mehta: Is that an M.O that you've evolved over time or was that always sort of your approach to the business?
Bob Davoli: Always been my approach. Most venture guys, they add no value…, they actually have negative value because they've never been operating guys, so they have questions that are really stupid. So my style has always been, while having run companies so I know what you need, I work for the entrepreneur. Venture guys think the CEO's work for them. It's the opposite for me; I work for the CEO's. If I don't do a good job they're going to give me a bad grade on my scorecard. I believe at all Board meetings…that after the entrepreneurs show you the numbers and goals, there should be a segment where the venture guys stand up and say, "Here's what I did last quarter. How did I do Mr. CEO?"
Angel Mehta: So the implication about high-value add venture guys is…
Bob Davoli: Think about it. We've all run companies at Sigma…we're operating guys that are technical. So what do we do? We evaluate technology and we help people run businesses. So why would you hire anybody to be a venture capitalist that either wasn't a successful entrepreneur or that didn't understand technology? I mean, it's like hiring a car mechanic that has never changed the oil. Would you hire someone to perform surgery on you that's never studied medicine? It's just an amazing business - I've never seen a more incompetently structured business in my entire life! There are venture firms on the west coast, I won't name the names, but they won't even hire you unless you have an MBA from Harvard, Stanford or MIT. How does having an MBA help you be a venture investor? I think it hurts you because then you're going to try and analyze markets and it's too late because you've already missed the guys with the ideas.
Angel Mehta: So the bottom line is that you think that venture guys who have been entrepreneurs are better at being venture investors?
Bob Davoli: Oh my God…I mean, over the long run they just have to be.
Angel Mehta: I always wanted to ask you about something….you're sort of an anomaly in the venture business in my mind because…
Bob Davoli: An anomaly?
Angel Mehta: Well…word on the street is that you're sort of a diehard liberal…and that you're somewhat in opposition to some of the elements of our economic system, at least philosophically. Which is strange considering that venture guys came to be so representative of capitalism in the 90's.
Bob Davoli: I'm a complete diehard liberal. There's only one thing that Republicans care about that and that is lowering taxes. No matter what they did, if the Republican Party said tomorrow, "We're going to do everything we normally do except we want to raise taxes," everybody would leave. That's all these people care about. We pay fewer taxes then any other western nation in the world. We should be paying higher taxes so we can take care of the disenfranchised…The people who have no houses, no clothing, no food, no health insurance…If we took care of them, our violence rate would go way down like in the rest of Western Europe. But instead we pay the lowest taxes, and put people in destitute conditions. So yeah, we pay the lowest taxes but they're going to shoot us if the disparity between the haves and have-nots continues to widen!
Angel Mehta: Did you see 'Bowling for Columbine?' [laughing…]
Bob Davoli: No, but it sounds like something I'd like. You know there was something written that was incredible to me. It was in the New York Times. The theme was why do middle class people vote like the rich? And the main thesis was - and I could never understand it - But the reason they do it is they have aspirations to be rich. They did a poll from the 2000 election …they asked people if they were in the top 1% of wage earners in the country. Nineteen percent said, 'yes' and another 20% said 'no' - but the 20% that said no said they WILL be in the top 1% in the future! So 39% percent of people think they're in the Top 1% of wealth, or that they will be. They're voting based on their aspirations!
Angel Mehta: Do you think of yourself, then, as a contradiction? I mean, does it ever bother you that you've become such a central spoke in the wheel of free enterprise?
Bob Davoli: There's nothing wrong with free enterprise. All I'm saying is that we should be doing more. Bill Gates, as an example, is a guy that does good things…he gives billions of dollars away. But some venture guys; they don't give a nickel away. I mean, it's incredibly myopic that's all I can say.
Angel Mehta: Let's get back to your approach to venture investing…how do you find an interesting idea?
Bob Davoli: Put it this way: When a venture a guy says, "I'm going to go analyze the supply chain or storage markets", the problem is it's too late. Unless you're out in the real world and you're working in some market, the entrepreneur is going to see the problem first - no venture capitalist is going to see the problem until somebody tells him about it. That's why you've got to invest in people. To say, 'We're focused on supply chain' or 'we're focused on CRM'…that's ridiculous. I don't know anything about anything. I mean, I'm too far removed. I used to be a fair database designer but I know nothing about what's going on because I've been a venture capitalist for 7 years. Seriously.
I'll give you an example of a company that I recently invested in - I don't want to say the name. The guy used to work for me 15 years ago… he called me up. I said, "Well what do you do?" He told me and I said, "I don't know what you're talking about". He tells me they have three customers, but only $1.4 million in angel money, friends of the family. They got $2 million in revenue and were profitable. I called up three references they all said, "We have multimillion, multi-year contracts." All three customers tell me they save a hundred grand a month, so you know what? THAT'S IT - I'm done. I was like, 'Where do I sign?" I invested in the guy but I never heard of the space.
Angel Mehta: [Laughing]…Ok…so any thoughts on when to expect a recovery?
Bob Davoli: No clue. I have no idea how the market works. It does what it does; it's run by fear and greed. We know there are cycles of fear and cycles of greed. We just went through a greed cycle, it busted, and now we're in fear. All I know is that the numbers say when a market hit its high, say NASDAQ 5,000? If it doesn't hit that high again a year later then the time it takes to get to that high again, in this case 5,000, is anywhere between 2 and 22 years. If you want my opinion, I'd say we have another 10 years but what the hell do I know?!
Angel Mehta: Let's go back to the topic of investing in people because 'Get the best people' has become incredibly cliché…can you be more specific? Who is the best CEO you've ever seen?
Bob Davoli: I couldn't answer that Angel - that would be unfair because I've seen a lot of good ones. But I mean, I can tell you what their make-up is.
Angel Mehta: That's what I'm trying to get at absolutely.
Bob Davoli: First of all, they have a passion. They have unbelievable integrity, they create a culture that is maniacal. Of course, there has to be great technology in a large market; however, I believe that the passion and the culture is just as important - if not more important. Family comes second to the job. Everyone single CEO that's been great always puts the company first in terms of time…if their kid got run over by a truck I think they'd probably take some time off work and go to the hospital for a day but still, it's maniacal intensity-focused, passionate and culture creation and thinking on your feet. Non-political and just result-oriented. When the politics creeps in it's dead. None of the good guys ever let politics creep in.
Bob Davoli joined Sigma Partners as a Managing Director in 1995. Most recently he was President & CEO of Epoch Systems, which he sold in 1993 to EMC for $141 million. Previously, he was the Founder, President and CEO of SQL Solutions, a leading purveyor of services and tools for the relational database market, which he later sold to Sybase. Bob has a B.A. in History from Ricker College and studied computer science at Northeastern University for two years. To send feedback to Bob, email: email@example.com
Angel Mehta is a Managing Director at Sterling-Hoffman, a retained executive search firm focused exclusively on CEO, VP Sales, and VP Marketing searches for enterprise software companies. He can be reached via email at: firstname.lastname@example.org
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