Having successfully climbed the ranks at supply chain software leader BAAN (where she would eventually serve as President of the Americas), Amal Johnson found a new challenge in the world of early stage venture investing after joining Lightspeed Venture Partners in 1999. All of a sudden, the rules of the game changed: for the first time, winning meant slowing down. Angel Mehta, Managing Director at Sterling-Hoffman, talks with Amal Johnson about the transition from 'Leader' to 'Coach.'
Angel Mehta: Tell me about your transition from operating executive to venture partner. How did you come to be involved with the Lightspeed team?
Amal Johnson: When I was running BAAN Americas, I was recruited to be an outside Board director for a software company called, "Kiva". The two investors were Greylock and Weiss, Peck & Greer (which later became Lightspeed) - so I got to work with both David Strom from Greylock and with Gill Cogan and Peter Nieh from Weiss, Peck and Greer. When I decided to leave BAAN it was a natural transition to talk to one of these two firms about potentially joining.
Angel Mehta: Are the psychic rewards greater in venture investing than in running just one particular company?
Amal Johnson: No, just different. Very different risks and rewards, if you will, and the satisfaction you get from running an operation…building the team…accomplishing the milestones - it's very very different than the rewards you get out of selecting the right investments. The rhythm of the business in the operating world is very different than the rhythm of the business in the investing world and getting used to it….well, let's just say there is DEFINITELY a transition period.
Angel Mehta: I remember reading Ruthann Quindlen's book and she talked about the pressure of being a venture partner….everyone knows that being CEO is pretty intense. So which one was higher pressure for you? Running BAAN or being a venture investor?
Amal Johnson: The pressure is intense in both places - but again, it's a very different pressure…meaning that when you're an executive, it's all about the daily event that you deal with right? It's about the large deal you're trying to win… the very high profile sales executive you're trying to recruit…it's a partnership you're trying to secure. You're competing day in and day out in a very intense game.
Angel Mehta: So in the venture business…
Amal Johnson: In the VENTURE business you have more room to maneuver because things don't happen that fast…events don't unfold with that level of intensity.
Angel Mehta: But doesn't that mean that it's a higher pressure role in the operating environment because you have so much less time and things happen so quickly?
Amal Johnson: In a certain way, yes.
Angel Mehta: That said, would you have moved into the venture world had you known that the bubble was going to burst a year later? I mean, you joined in '99…I'm not sure I would have…[Laughing]
Amal Johnson: I joined the venture business in March of '99. But it had nothing to do with the bubble…I joined for a couple of reasons. First, I thought it would be an interesting next move to join the other side of the equation. Nurturing young companies as a coach, rather than as the leader…..I thought that was a very interesting CAREER move regardless of the financial aspect of things. The financial rewards are excellent at an operating company that is doing well…
Angel Mehta: So it isn't like you were moving from no financial rewards to a money tree….
Amal Johnson: Right. The bubble made both environments lucrative. But the other reason I made the move…just on a personal note…I was traveling incredibly at BAAN … working at a Dutch company with acquisitions all over…we acquired a company in Quebec, we acquired a company in Atlanta, we had an office in Menlo Park, we had an office in Reston; I was traveling all over the place. And after a while… It wears down on you.
Angel Mehta: You spoke about a transition period when you came into Lightspeed…
Amal Johnson: Yes…
Angel Mehta: Most executives go through a transition period when they move from one company to another…it's tougher when you move from one career to another…So the challenges of people that are 'new' to the venture business have always been interesting to me. What were those critical things you had to figure out about being a venture investor?
Amal Johnson: Well really it's not just lessons learned…it's more the style…as I said, the rhythm of the business is very different. In the operating world you learn to make 10 decisions, 20 decisions, 30 decisions per day. The nature of the business is to not be the bottleneck. And you make decisions knowing just that. Knowing that you do not have nearly enough data to make those decisions, you have to make them anyway. You have to move - you can't just be standing still until the market clarifies itself. A bad decision in the operating world is better then no decision. Correct?
Angel Mehta: Sure…
Amal Johnson: But in the venture business, 'no decision' is ten times better then a bad decision. Because you know if you end up making a bad decision you're stuck with it. You can't say, "I just changed my mind… I don't want to make this investment" - it's too late. Your money is in, your name is on the deal, and you have to make it work - or else. Time is your friend in the venture business. The more time you have, the more data you have, the more understanding of the environment, the more companies you look at…the better and smarter you get about that particular space.
Angel Mehta: So the fact that there is $90 billion or something in uncommitted capital right now…yet deals aren't getting done… do you think that that has something to do with the fact that 'no decision is better then the wrong decision'?
Amal Johnson: No. I believe there is a different reason for it now. I think the market, the software market and the different sectors of the software market are over funded and there are very few white spaces where you can say, "Here is an opportunity, here is a point of paying, here is a need in the market" and there is nobody satisfying the need. I mean, there are VERY few of those that remain. Every space that you're looking at…there is already either a big player or 20 small players both competing for the few dollars that the enterprises are spending to acquire that technology. So that's the reason, I think, money is on the sidelines.
Angel Mehta: In other words, there's just a lack of compelling deals?
Amal Johnson: Lack of compelling spaces.
Angel Mehta: And then by definition… a lack of compelling deals in those spaces.
Amal Johnson: Fewer compelling deals, yes.
Angel Mehta: An entrepreneur told me recently that he accepted financing from a venture firm purely because it had a few marquis partners that were 'celebrities' in the industry, but what he later realized is that the partner that actually did the deal was incredibly difficult to work with and the other partners at the firm just stood on the sidelines not getting involved. How relevant is the 'team' aspect in the venture business?
Amal Johnson: You know, you asked me about surprises earlier, and the thing that surprised me the most is how much this is a solo business. Much of the work you do and many of the challenges you face, you have to figure out yourself. If you want to really be original in your thinking…all the analysis - you have to do it. It's just there are so many DIMENSIONS to this business. Let me compare and contrast a little bit - it may be helpful. In the operating environment, it's about teamwork so the challenge you have as an executive is assembling the right team, right?
So you go get your VP of Engineering, VP of Sales, VP of Marketing and you build the team… the success and the power of the company is that team and how well that team works together.
In the venture business, you don't have that same effect. Or at least, not to the same degree as you would in an operating environment…everybody obviously will help, everybody will give you their opinion but at the end of the day…it's you.
Angel Mehta: So from a CEO or entrepreneur's perspective, when deciding which venture firm to partner with…should the entrepreneur almost demand that the venture partner who is going to be sitting on the Board has an airtight understanding of the market?
Amal Johnson: Yes. Remember at the end of the day, it's that venture partner that has the responsibility to be the sounding board and to direct how the company and how the CEO maneuvers. If you don't understand the space, I don't know how you can do that.
Angel Mehta: So here's a hypothetical question…If you are an entrepreneur and you have the decision between accepting money from, let's say, a Tier 1 venture firm with a partner who does not have the domain expertise about your market segment….or a Tier 2 or Tier 3 venture firm where the partner is very very strong in your domain: which would you chose?
Amal Johnson: No question - somebody with domain expertise.
Angel Mehta: In that case, I'm curious to know how much the 'social status' of the other committed investors matters to you when evaluating a deal?
Amal Johnson: I wouldn't use that criteria (social status). What I would use is, aside from strength of the deal itself, what's the make-up of the Board and what would the dynamics of the Board be?
Angel Mehta: What do you mean by 'dynamic'? I mean, give me an example of a good dynamic versus a bad one and how you tell the difference.
Amal Johnson: For example, you just mentioned the point about people who know the market, who have domain expertise, etc. right? So I would talk to the Board members and say, "Well, What do you like about the company? Where do you think the company has to go? What are your thoughts on how you expand? How would you complement the management team?" Just get their insight into how they think of the company. If they have a whole different set of expectations for the company that I think are unrealistic or does not map to what I believe (based on my due diligence)…well if we're going to be on two different pages fundamentally that's not going to be a very good beginning.
Angel Mehta: If you were an entrepreneur, would you start a company right now?
Amal Johnson: Yes! This is a fabulous time to start a company!
Angel Mehta: It's kind of funny that so many would-be entrepreneurs don't seem to feel that way…why do you think so?
Amal Johnson: For a couple of reasons. It's much better to start a company in a slow market then it is in a hyped market. For one thing, you have the time to build a solid foundation for your company so you can go and look at the best talent in the market. We did a CTO search for MAE (one of my recent investments) and had MULTIPLE great candidates. In 1999, we probably couldn't get ONE because of the hype of the market. So we had our pick of some great people.
Second, the cost structure now is much less then it was 4 years ago - whether its real estate, salaries, or even equipment. So you have the time to be able to do the good job of pouring the foundation. Now, if you're a company that's 2 years or 3 years old…this may not be a good time because now what you're ready for is momentum…you've already laid the foundation during an expensive period. And you're trying to get out of debt…trying to get out of your real estate contracts, etc. But for companies that are just getting started, it's a great time.
Amal Johnson is a General Partner at Lightspeed Venture Partners. Prior to joining Weiss, Peck and Greer, she served as President of BAAN Americas and President of ASK Manufacturing Systems. She can be reached via email at: ajohnson@lightspeedvp.com
Angel Mehta is Managing Director at Sterling-Hoffman Management Consultants, a retained executive search firm focused on CEO, VP Sales, and VP Marketing searches exclusively for enterprise software companies. He can be reached via email: amehta@sterlinghoffman.net