By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search
This article is the second of a two part series with Geoff Moore. To review part one, click here.
Angel Mehta: Tell me how you ended up becoming a Venture Partner at Mohr-Davidow.
Geoff Moore: In the 90's "Crossing the Chasm" struck a cord with the venture community because arguably every venture investment was a chasm-crossing activity. The first venture firm I got involved with was IVP, Institutional Venture Partners. They actually gave me an office for a year…it was almost as if I was an executive in residence.
Angel Mehta: This was in exchange for your coaching their CEO's on how to 'cross the chasm'?
Geoff Moore: Yes. I worked one day a month with one of their portfolio companies… quite frankly I couldn't have been more thrilled. I had 3000 Sand Hill Road on my business card…it was great! [Everybody laughing]
Then after a while they pushed me out of the nest, and Mayfield Fund asked if we would run their people through some training on the basic concepts. So we had a series of CEO seminars around "Crossing the Chasm" for them….and then the Atlas Ventures on the east coast wanted to have their CEO's go through this thing too. What really happened is that people liked the fact that they now had a vocabulary for confronting basic issues in high tech strategy…Investors were saying, "This lets us talk to our CEO's about problems in kind of a short-hand code that we all get."
Finally, I ended up connecting with Jon Feiber and Nancy Schoendorf who are the Managing Partners at Mohr-Davidow. They ran a series of portfolio companies through a similar exercise and kind of took me aside later and said, "Look, we have this idea about a 'venture partner' and we'd like you to consider playing that role with us." So we experimented with it over about a six-month period…And all of us liked the results and so here we are today.
Angel Mehta: The portfolio could almost serve as your own private research lab to test various theories…
Geoff Moore: Absolutely. I now have a captive set of start-ups to work with and study…and particularly now given that TCG Advisors is working with larger companies, I get my entrepreneurial fix from Mohr-Davidow's portfolio, which is great. The other benefit for me was the chance to participate in the equity of a venture firm…because you can't build equity in a consulting firm - not with what we do. I suppose if you try to lock up the intellectual property and pounce on anyone that violated your copyright, fine, but we always had the opposite point of view at the Chasm Group. We felt that anyone could use our IP if they wanted to, and we'd benefit because we were the experts. But we couldn't figure out a way to create equity…so joining Mohr-Davidow was phenomenal for that reason as well.
Angel Mehta: And what about evaluating new investment opportunities? Do you get involved in trying to evaluate each deal, and whether or not any given startup actually stands a chance of 'crossing the chasm', so to speak?
Geoff Moore: It's a very exciting part of the role, certainly, when you have people come in and pitch companies to you and you then get to figure out, 'Should we invest in this company or not and why or why not?' I got to tell you, that's been the biggest source of learning for me. Remember, I'm a venture partner; I'm not a general partner. I would be a terrible general partner because every time I'd see a pitch, I would think, 'Wow, this is a great one - I hope we invest in it!' (Everyone laughs). We ONLY Invest in 10 companies a year, give or take, but every single deal I see, I think, 'This is a good one…'
Angel Mehta: Geoff, if I ever start a company and need financing, I'm pitching to you first! [Everyone Laughing]
Geoff Moore: If I were in control of the bankroll, you'd be funded before you left the table. So needless to say, money should never be my responsibility. But seriously, what has been fascinating is learning the logic of why investors say yes or no to a business plan. And then to add to that, going through the bubble experience of how to deal with the market when you're thinking, 'this is crazy'. How do you deal with that and maintain integrity? Then when the market went the other way and forces were working against you, how do you maintain integrity and deal with that? Going forward in this decade, everyone realizes that you have to reset your matrix because you're pretty sure the data from the last five years is corrupt. So what is the roadmap for how we invest? How do you do that? There's an emotional depth and intellectual depth required here that is just extraordinary. It's not a thing that I'm particularly talented at, so I just love being on the inside watching it work.
Angel Mehta: So let's go back to learning about why the General Partners at Mohr-Davidow would say yes or no…most importantly, what are some of the common themes around why they say no?
Geoff Moore: Well first I think you have to understand Mohr-Davidow is an early stage investor… different venture funds will have different motives. If you're an early stage investor, the promise you've made to your limited partners is to be the first institutional money into most of the companies we back. The point being, it's a home run game…
Angel Mehta: Not about singles…
Geoff Moore: Right. So now you can apply that to whether you fund something or not and it ends up being about four buckets:
1. Market
2. Technology
3. Team
4. Finance
The 'market' one is 'is this is a home run play?' In other words, if these people hit the ball, does it go out of the park or is it a single play? So, for example, you can start some very interesting businesses that will build up to a $30 or $50 million dollar business but they're never going to be a $500 million dollar business.
Angel Mehta: Not that $30m to $50m is a failure….
Geoff Moore: Sure, that's a terrific business to start - but it's not an appropriate business for an early stage venture firm to back. So the first issue is the market and 'is the market already saturated?' Then there are all the issues around strategy. Are there going to be barriers to entry? Can you create a defensible position or are the big guys coming? There's lots of stuff around markets and that's probably the place where I'm able to contribute the most.
The second issue is technology: around the uniqueness of the proprietary-ness of the offer and that's where you can do a lot of due diligence. This is where associates can be extremely helpful because they can really dig in…especially in life sciences where you're going, 'Well I don't know what this means but it sounds good to me…'….So you have to network with the university community to understand opportunity and to vet opportunities you see from other sources. So its technology due diligence and market diligence and it is usually one of those two categories where entrepreneurs excel. If they are a science-oriented guy, they might be really strong in technology but if it's more of a business process or enterprise software entrepreneur, he's usually strong on the market side.
Angel Mehta: So what about 'team' and 'finance'?
Geoff Moore: Team just has to do with chemistry…so the question the venture person asks is, "Is this company going to be able to scale two orders of magnitude on my watch?" When people present to me, at minimum I have to think, "Can they do the first wave?" If I don't think they can do the first wave, we're kind of done.
In a lot of situations you see people who say, "I think we can do the first wave but I don't know quite how I can do the second wave" and as an objective observer you may see they just don't have the right talents for whatever reason. The thing is, when you diligence teams you're often diligencing them for the next wave…
Angel Mehta: As opposed to the wave they're currently surfing?
Geoff Moore: Yes. One of the most confusing things if you're on the other side of the table is 'how can anybody be turning us down if they're so excited about what you have in front of you?' The answer is often you're not getting turned down for what's right in front of you; you're getting turned down three moves ahead - like playing chess.
Angel Mehta: Got it. So what about the last variable - the finance piece? It would seem that this is pretty basic…use comparables for valuation, figure out what they need to get past the first few milestones, and cut a cheque….is finance really a big component to a decision?
Geoff Moore: Well, I'll tell you where it matters - it's when you have a capital-intensive model. If you have a very capital-efficient model then you can kind of deprioritize financial risk. But if you have a very capital-intensive model…for example, if you're going to build a disk-drive company or a systems company or something that requires a fair amount of inventory….You have to be very thoughtful about how you're going to get those other rounds of funding. In part, that's what made the bubble into a bubble…there was this period where it was 'whoopee!'. All you do is pass GO and collect another gazillion dollars. Now, I think there's a greater appreciation for the need for capital efficiency.
Angel Mehta: Let's talk about tornados. You probably won't want to do this but I'm going to put you on the spot anyway. What segments would you point to for tornado watching?
Geoff Moore: The first thing that's interesting about tornados is that in this decade they will have a more muted effect then they did in the past decade. There must be a weather equivalent to this…. where you have a season of highly violent tornados and then you have a season not as disruptive. Every season there are tornados, every season there are hurricanes, but it's not every season that you have a Hurricane Andrew or whichever one it was that caused all the trouble. We're in a decade where I think the hyper-growth that comes from the tornado effect is still real….but because the technology sector is in the doghouse, it's not going to be as marvelously uplifting as it was in the last decade. That said, I think certainly the whole mobile computing wireless space is going to enable a bunch of new infrastructure around it, particularly in the enterprise, I believe. There's also a bunch of things happening in the consumer market that are tornados… venture investors have never been very good at winning in that market space, so I am heavily biased towards the enterprise side of the equation.
Angel Mehta: Me too.
Geoff Moore: The other area is life sciences…it's weird because it's a tornado, but it's confined really to one vertical - albeit, a very influential and economically rich vertical. Not just drug discovery, but all the health-related stuff around the genome. We now have the alphabet when it comes to this stuff, but we're trying to write Hamlet. Between A-to-Z and Hamlet, there are more than a few intermediate layers that we need to fill in. So we're pretty excited about that opportunity.
Angel Mehta: Let's talk about the consolidation of the large application players in the enterprise software space. Do you think that makes it harder or easier for the best of breed players to compete?
Geoff Moore: It's interesting. At one level you're going to commoditize the function by saying, "It's just another module in the existing ecosystem of established players", kind of the way Microsoft made a browser kind of Windows. You can see SAP or Oracle or PeopleSoft saying, "Whatever that great start-up is doing it's really just another set of modules in our world". So the fact that you have the functionality is only differentiating at the very beginning of an enterprise software category because then pretty soon it's on everybody's roadmap. So they say, "How the hell are you going forward?" So if you look at all these things and if you remember what SAP was offering for a supply chain module when it first came out, or what Oracle was doing for CRM when they first came at it, it was very, very thin compared to somebody who said, "You don't understand, this is what we do for a living". So best of breed for a while can compete effectively on product. But at some point I believe the new entrant has to align with a vertical market in order to really have a sustainable competitive advantage against the incumbent gorilla. If you go deep enough into a vertical you will hit bedrock that has huge value for the customer but for the gorilla it is not economically productive to drill down that deep. But if you're a chimp, if you're not a gorilla, you get two advantages from doing it. One, is you can protect yourself from the gorilla by building up barriers to entry.
Angel Mehta: Right.
Geoff Moore: That gives you more room to evolve. Second, you tap into a source of a much higher margin business, albeit it's in a relatively restricted area. The companies that tend to get in trouble are the ones that didn't drill deep enough. I would submit to you that JD Edwards never drilled deep enough to really control its own destiny. On the other hand, when you start seeing these acquisitions coming later in the market evolution, when you see people getting acquired for a PREMIUM, I think it's because they have a genuinely powerful installed base. And we see discount acquisitions I think it's because basically they really can't defend their install base over time and if they don't…it's just a question of when they sell it.
Geoff Moore is a Venture Partner at Mohr Davidow, a founder of the Chasm Group, and co-founder of TCG Advisors. He is also the author of bestselling books, 'Crossing the Chasm', 'Inside the Tornado', 'The Gorilla Game', and 'Living on the Fault Line'. Send feedback to Geoff at: gmoore@tcg-advisors.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
