By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search
Angel Mehta: There is a school of thought that says the best venture capitalists are the ones that have the least amount of empathy because they have no trouble making ruthless decisions. What do you think - true or false? How does your operating background influence your approach in this regard?
Bruce Golden: First, I think that over the last several years it's been vital to have real empathy with entrepreneurs and CEO's who are building early stage companies. These are probably the most difficult jobs in the world right now, particularly given three years of negative Cap-ex spending, where no one wants to return your phone calls. For the most part, the market hasn't wanted to buy new technology or evaluate new vendors. This makes it difficult to wake up in the morning and convince yourself, let alone the rest of your team, that you can make sales happen, build positive momentum, get customers excited, etc. This is when having an operating background gives you both credibility with the entrepreneurs and the CEO's, as well as empathy for how difficult the job is.
I spent 15 years as an operating executive before transitioning into the venture community, and I really understand how difficult it is to navigate your way out of complex situations. Issues like scaling teams up and down, refocusing organizational priorities, reducing or changing your product delivery capabilities and, therefore, possibly having to decommit on promises that you made to customers because you just don't have the resources to deliver what you thought you would six months ago - all of these represent significant challenges. These are miserable situations to find yourself in. As an investor, I find it's invaluable to reflect back on some of my own experiences as it provides important context. I also think it gives me some sensitivity towards developing skills in others to help them through those situations. I don't believe you have to be ruthless to make good decisions. You do need to be able to assess situations quickly and execute decisively, but this shouldn't be confused with ruthlessness.
Angel Mehta: So you don't think that having empathy hurts a venture investor at all?
Bruce Golden: Not really. The danger is that former operating executives often project themselves into the situations that they're investing in or evaluating. I think that after you've been an investor for a few years, there's much more clarity about your role and the fact that you are primarily evaluating the strengths of this particular team to build the business. In fact, I think people with an operational background are able to bring objectivity to the situation. But once you've made an investment, a key part of your job is to help that executive team, and in particular the CEO, make the right decisions in a timely, effective way and move on. The teams that execute are the heroes in the story, not the VCs.
Angel Mehta: How did you make the move into the venture world? Tell me about the transition to Accel.
Bruce Golden: Accel was an investor in Illustra Information Technologies, a very promising database start-up that I had joined after leaving Sun Microsystems. I had the very good fortune of working with Jim Swartz, one of the founding partners of the firm, who was on the board and an early investor in Illustra. Through Jim, I met many of the other partners at Accel. After Informix acquired Illustra, I managed the data warehouse and business intelligence part of the business for Informix. It was a very troubled merger because some of the executives at Informix misrepresented the financial health of the company to both the market and to the team at Illustra. When I shared with some of the folks at Accel that I wasn't happy at Informix, Jim Breyer invited me to join the firm as an entrepreneur in residence. I joined the firm initially as an EIR thinking that I was going to start another company, but within six months I discovered that I was interested in being an investor.
Angel Mehta: How did you decide to make the move to Europe? Why did the London office become a priority for Accel?
Bruce Golden: We had been having internal discussions about broadening our investment horizon to Europe and Israel for some time. Around the same time period, one of Jim Breyer's classmates from Harvard Business School, Kevin Comolli, approached Jim to get his thoughts about creating and launching a new venture fund in Europe. We invited Kevin to team up with us to define the opportunity and develop a business plan to launch a new fund for Europe and Israel. After several months of work and really evaluating the market we all concluded this would be a great idea - and Accel Europe was born.
Angel Mehta: Is there a view that the deal flow in Europe and Israel is somehow more attractive than the US? What is it that made Accel believe that there were attractive deals in Europe that were not getting picked up on the radar?
Bruce Golden: First, I don't think it's right to say MORE attractive. We only have one investment bar at Accel. Period. It doesn't matter if a deal is getting done in Palo Alto, London, or Tel Aviv. There are simply great projects here that we wouldn't see if we didn't have a team on the ground. Innovation happens all over the world - not just in the US. There were classic, game-changing opportunities in Europe and given that our bread and butter continues to be early stage venture, it just made sense. In order to address these opportunities and provide appropriate support and service to the entrepreneurs, you have to be physically close to them. You also have to invest in really understanding how investments get done in these local countries and in building up relationships with local venture firms here.
Angel Mehta: Could you elaborate on that?
Bruce Golden: In short, you have to know the cultural issues in each geography. Frequent touch points and face-to-face meetings with the entrepreneurs, partners, and other investors are key to getting things done. One of the most important factors in the success of Silicon Valley is that it is a very collegial environment. There is an infrastructure of syndicate partners on any given deal, all of which are very predictable and can be relied upon to fulfill their roles at different stages of building out a company. That kind of inter-dependency is just as important in Europe as it is in Silicon Valley. In order to really be part of it you have to put a stake in the ground - you have to be here and have a permanent commitment.
Over the last several years, there were a number of U.S. firms who declared that they were coming to Europe and then before they even showed up they actually pulled out.
Angel Mehta: Why is that?
Bruce Golden: Several reasons. There were a wave of investment firms that came over and said, 'we'll take a U.S. fund and make it global but not have a separate pool of capital'. Most of those efforts failed because there wasn't any real commitment to the geography. As you can imagine, people discovered that it's actually really difficult to figure out what a deal in Germany or Israel or France or the Netherlands or Scandinavia looks like. Occasionally flying in from Boston or California doesn't cut it if you really want to meet the team and become knowledgeable about the marketplace. As the market became more and more complicated and people became more and more focused on the U.S. projects, a lot of people just retrenched and said, "What are we doing in Europe? We can't really compete".
Angel Mehta: What about the later-stage or buyout firms?
Bruce Golden: During the boom period, many of these firms felt there was easy money to be made in early stage venture. They just didn't understand the asset class nor have the patience or discipline of building companies over five to seven years. You have to be comfortable dealing with those critical issues: What should the management team look like? What are the milestones? How do you build out strategic alliances? What is the sales / distribution model? How much capital should go in at each stage?
When it became clear that exits had dried up and that venture was a very different type of process, the later stage firms retreated back to their traditional areas of focus.
Similarly, the vast majority of corporate equity groups withdrew from this market because their returns were dismal and they didn't have the patience nor the willingness to deal with messy capital structure situations and complex follow-on rounds.
Angel Mehta: With so many US-based venture capital firms having failed in Europe, what has differentiated Accel? In other words, we talked about why funds have failed in Europe…so why do some succeed?
Bruce Golden: This has been a very complicated environment over the last several years but for those of us who really made a firm commitment to both the asset class and the geography, it's a very, very attractive time because there aren't many people that do early stage venture. There's a large community of entrepreneurs with very strong technical backgrounds that are committed to being here in the geography. There's a growing community of management that have been within very successful U.S. companies like Oracle, BEA, SUN, IBM…or even successful indigenous European companies. Once you find promising technologies, obviously you have to surround them with the right management and resources…it's still scarce but it's increasingly available. The ecosystem for early stage venture is also growing - whether it's tax structures, search executives, bankers or attorneys. The number of people very familiar with Silicon Valley style investments is growing, which in turn accelerates the ability to build these companies.
Angel Mehta: Can you point to key differences between venture investing, evaluating deals, and evaluating entrepreneurs in Europe as opposed to the Valley? Are there any high level trends that you can identify?
Bruce Golden: First, I would say there are more similarities than differences. At the end of the day you're still asking the same questions:
- Is this a great team or individual?
- Is the technology unique or compelling?
- Is there some degree of deep invention around the intellectual property that's the basis for competitive advantage?
- Is there a market that you're attacking that's tangible and growing - where you have confidence that there's significant economic value that this technology can extract?
- Is there a known winning business model available to this company?
These are things that are identical whether you're in Silicon Valley or in Europe. The differences tend to be more cultural and geographic. If you're going to invest in Israel or Germany or France or the U.K. there are going to be different levels of sophistication. For example, in some cases if you're not dealing with an entrepreneur that's been through a venture-backed company before, there's an education process about simple concepts, like how the financing works, the meaning of certain term sheet issues, etc.
In Silicon Valley, many entrepreneurs just walk in cold knowing 90% of the issues and you can really focus on some of the unique terms that might be appropriate to a particular deal. In Europe there may be more education on how the first and subsequent financings might work. Occasionally, there are unique issues in certain countries around tax and employment law that are not necessarily pluses or minuses, but they're different and you just need to be familiar with them. There may be practices around your syndicate partners that are slightly different.
Another aspect of Silicon Valley is that many of the major firms have pretty consistent practices in the way they approach the overall business, such as how they think about option pools, founder stock and corporate investors. There's more diversity, not necessarily for the better, on these issues in Europe.
Additionally, there are market sectors in Europe that represent relatively distinctive investment opportunities. The wireless sector here in Europe, for example, is a significant part of the technology landscape since you've got many dominant companies such as Nokia, Ericsson, and Siemens… as well as some of the largest carriers in the world like Vodafone… which create some very interesting opportunities.
Angel Mehta: Are there deeper talent pools in those sectors - wireless, for example? Does it make it more appealing to fund companies in that space?
Bruce Golden: Definitely. We see a lot of deals in these areas. Arguably there is a deeper talent pool and maybe more transparency around what some of the big issues are. There is knowledge surrounding how to compete at different levels of the technology stack - whether it's at the handset level, the network level, or the infrastructure level.
Angel Mehta: Do you personally find yourself serving as a coach to Accel's US-portfolio when they want to go after Europe?
Bruce Golden: We definitely try to help our US portfolio companies develop their operations in Europe. One of the things we do is facilitate introductions of existing U.S. portfolio companies to different major corporations here in Europe. We also help them recruit executives here in Europe.
Angel Mehta: I'm also curious about how management practices differ and specifically how much of an adjustment do you think it would be for a Silicon Valley CEO to go to Europe and run a company there? Would you be confident bringing a star Silicon Valley CEO to Europe if he had zero international experience? Do you think he could still get it done?
Bruce Golden: It's very difficult to just drop somebody in who has never lived abroad or managed overseas operations when you're dealing with complex multicultural situations every day.
I do think that in many cases, the star Silicon Valley executives have the DNA to be very successful. However, it just takes some time and experience to build up the cultural sensitivity and the pattern recognition expertise of dealing with people from all over the world. So I suppose what I'd say is that there does tend to be a bias in our companies to find executives with significant multicultural and multi-country experiences.
Angel Mehta: When the entrepreneur has no track-record to rely on - something that I imagine happens more frequently in Europe - how do you evaluate an entrepreneur? What empirical evidence is there as to whether the guy is going to work or not?
Bruce Golden: Again, it's very similar to Silicon Valley - you look for a history of success. Out of the fifteen initial investments in Accel Europe, thirteen of them were investments in repeat entrepreneurs, which we never would have expected. When we first launched the fund and were setting expectations with limited partners, we just didn't have any idea how many of the projects would be bets on first time entrepreneurs. We originally guessed that less than half and maybe even less than a third of the deals would be with repeat-entrepreneurs. And yet, 13 out of 15 were veteran entrepreneurs, and, in many cases, entrepreneurs that were successful in two or three prior companies. So to your point, we still look for a history of success and ideally we look for a history of success in building successful outcomes around early stage tech companies.
Angel Mehta: So what if the entrepreneur does not have a track record - let's talk about that type of prospect, sitting in your office, looking to get funded.
Bruce Golden: If the individual doesn't have a track record at company building, then the next best thing to look at is what else that individual has done. Does the entrepreneur have a history of excellence throughout his/her career? The truth is, a lot of great businesses have been built around first time CEO's or first time entrepreneurs. If they have passion and the courage to survive the next several years in this environment and if they possess exceptional domain expertise in the business that they've chosen… well then we'd give them a shot. You can imagine, just as in the executive search business, we try and invest in people that play to their strengths. It's potentially problematic to take a successful entrepreneur who has built a great business in one environment and then wants to do a startup in another area that he/she knows very little about. What we love is betting on people that keep pushing themselves in a space that they know better than anyone else because that's their unfair advantage.
Angel Mehta: Can you comment on whether the buying environment or selling environment for software companies is either easier or tougher in Europe then it is here in the U.S., and have conditions started to improve at all?
Bruce Golden: I would say that the IT environment in Europe is definitely as difficult and arguably worse than in most parts of the United States. Overall, my guess is that Europe will lag behind the U.S. and probably won't fully recover until the U.S. is driving new IT spending pretty consistently. People are more focused on consolidating their IT environment, leveraging the investments they've already made, and picking the vendors that they really want to work with rather than looking to cutting-edge technology vendors (unless there's just very compelling problems that can't be solved any other way). I would say that in the last couple of months we're seeing the market start to strengthen. It's far too early to declare that we're through this very difficult period in the economic cycle. I'm personally worried that public tech stocks have come back far too quickly. Nevertheless, we are seeing many promising new companies, with driven, passionate entrepreneurs, who seem to have the patience and endurance to build real businesses. We are personally encouraged as we think it's a great time to be starting new companies.
Bruce Golden has been focused on emerging markets and technologies since 1984. Bruce joined Accel in September of 1997 and specializes in Internet, e-commerce, and enterprise software investments. Feedback on the interview can be sent to: bgolden@accel.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
