Venture Profile: Tim Haley, Redpoint Ventures
By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search
Angel Mehta: Several venture capital firms added 'Recruiting Partners' to compensate for the severe talent shortage during the bubble years, but very few people that came up through Executive Search ever became actual Investing Partners. So I'm interested to know how you made the transition to General Partner?
Tim Haley: It is a good question. You are correct. Very few executive search professionals have successfully transitioned into the VC business. In fact I can only name two others. David Beirne who joined Benchmark and Kathryn Gould who joined Merrill Pickard and later started Foundation Capital.
I always used the executive search business as a vehicle that allowed me to invest in technology companies at a very early stage. For me it was all about creating leverage. The smart VCs and entrepreneurs understood that there was a direct correlation between the quality of a team and the likelihood of big success. I simply used my ability to attract and evaluate great talent in exchange for getting some of my own money to work. It was a great deal for both sides. I worked that model for 17 years before joining IVP as a General Partner in 1998. It was really like managing a small fund. I still had to pick the winners and I still had to attract the very best executives. The transition was fairly easy. The biggest difference was that I now had a bunch of partners and needed to get them to agree with my investment decisions.
Angel Mehta: The open question I always put to different venture partners is about the best training ground for success in venture capital: operations, or finance? I've never talked to anyone about executive-search as a training ground…so how has the recruiting background prepared you for the investment role, or influenced your approach to venture investing?
Tim Haley: Firstly, I do not believe that there is a "best" training ground for this business. Some of the best investors have marketing/sales backgrounds and some are experienced operating guys. It's kind of all over the map. Certainly a good grasp of markets, technology and finance are all very important. But what may be more important is having great deal instincts combined with an ability to consistently identify and attract the best people. I firmly believe that great people make great companies. Period. I know some companies have succeeded in spite of having mediocre teams. That's just not a bet that I care to make. Mediocre people correlate with mediocre returns. At least that has been my experience. I actually think the search business is a great platform on which to develop the pattern recognition skills required for picking good deals and good people. If you have evaluated hundreds of deals and thousands of people you eventually develop a pretty good grading system. But the real test is in applying those skills to early stage technology investments. If you have a good track record doing it from the search platform I think it's a good predictor of how you will perform in the VC business. It's also pretty easy to measure. It's all about making great returns.
There is of course one other critical asset that directly translates from search to the VC business. That is a broad network of entrepreneurs. That network has an immediate impact on your transition into the VC business. When you think about it the VC business is all about having a great network…. right?
Angel Mehta: Sure…
Tim Haley: When I joined IVP I remember taking a look at the firms deal history. I wanted to get a sense for where most of the deals originated. What I found out was very interesting. It turned out that virtually every deal came from within the firms network, either from a lawyer, an entrepreneur, a CEO or a professor etc. I guess that's not a big surprise. But at the time it re-enforced the value of a great network. It is still very much true today. A deal that comes blindly over the transom…
Angel Mehta: It's thrown out?
Tim Haley: No, we don't just throw it out. We may look at the plan, we may study the market and we may even meet the team. We always look at interesting stuff. But the odds of that deal resulting in an investment is very low unless we can get some really good "in network" reference points on it.
Angel Mehta: So let's talk about the differences between managing an executive-search practice vs. an investment portfolio - what were some of the biggest challenges for you in making the transition?
Tim Haley: Executive search is a primarily a transaction business. A typical CEO search takes 4-6 months and then you move to another project. You still need to understand the business issues and assess the deal quickly. The front end of the project is very much like the deal evaluation and investment phase in the VC business. The big difference is that you are at the beginning of a 4-6 year relationship. It's really a long-term business. I think that is what makes VC business so much more interesting than the search business. You participate in the entire lifecycle of the company.
There has been no dearth of new experiences. I had to learn how to finance a company, manage an M&A, effectively contribute as a board member, and effectively contribute as a partner. The list goes on and on. And most of these were experiences unique to the VC business. That said, it is what these businesses have in common that is most critical. These are essentially relationship businesses. It's all about establishing credibility.
Angel Mehta: Have you now gotten to a point essentially where you're comfortable with those other domains, including finance?
Tim Haley: Yes.
Angel Mehta: Okay. Let's talk a little bit then how you evaluate deals and entrepreneurs. We know the standard criteria that investors look for: market size, technology, people - but what are some of your personal preferences in terms of how you evaluate an entrepreneur or a business plan. If you could point to two or three things that an entrepreneur has to be ready to answer when he's in front of you…
Tim Haley: Of course different investors have different points of view on this. My bias has always been to assess the people first. If they make the grade then I will go to the next step. When I get a business plan the first things I do is I go to the team section - I really want to judge the talent. I need to know upfront if the team is top notch. Otherwise I will lose interest immediately.
Angel Mehta: Let's talk about the team and how they get evaluated. I think that a lot of entrepreneurs who need to evaluate a CEO that they're trying to bring in look at the pedigree and find that despite a terrific paper background, things don't work out. How do you gauge whether a CEO is right for one of your portfolio companies? What are some of the nuggets that say someone who is inexperienced in the area of hiring CEO's should know about?
Tim Haley: I tend to be biased toward people that have been successful. I worry a lot less about seniority… whether someone, for instance, has been a CEO before. I am more interested in whether they have what I call 'the genetics' of start-up CEO.
Angel Mehta: I hear that all the time, people talking about the right 'DNA'… but what does that mean?
Tim Haley: Are they a risk-taker. Have they consistently demonstrated an ability to take risk and win (at least most of the time). Whether a person has been in a big company or not is irrelevant. I want to know what they have actually done… whether they've taken a safe and easy path, or whether they have put themselves in the fast moving water and accomplished something important. They need to stand out above the crowd. You must be able to see them in the CEO job. It's also very important not to rationalize away weaknesses because you want to hire them or invest in the company. An appetite for risk and the ability to deal with ambiguity is much more interesting to me versus previous general management or CEO experience, whether they've been in a large or small company. There's a mentality, there's a certain kind of intelligence that I think is required for success as a CEO of a small company. I sometimes think that people either have it or they don't. I see it as both a challenge and opportunity to make that judgment and make it right. That's how you can win big.
Angel Mehta: Can you give me an example of what you mean by that?
Tim Haley: Sure. I had a consulting job with a young entrepreneur in 1992 named Reed Hastings. At that time Reed was in his 20s, he had virtually no management experience and had never founded a company. At first pass he seemed to be yet another talented software guy who had developed a great little SW tool and had an itch to build a company. If you had read his resume there would have been nothing to indicate his appetite for risk, leadership skill, ability hire amazing people and vision. He had the DNA. It would not take long and you could just see it.
Angel Mehta: They merged with Atria and then Rational Software, right?
Tim Haley: Yes. The company he founded was Pure Software. He built it, brought it public, merged it with Atria and eventually merged with Rational. It was quite a ride.
Angel Mehta: Hey, didn't he do Netflix?
Tim Haley: Yes, in fact Netflix was my very first investment as a VC.
Angel Mehta: Quite a gap in terms of domain, isn't it? From CASE software to online DVD rentals?
Tim Haley: Absolutely. And here's the point to the story. Reed not only battled and won the standards war with DiVix. He also pioneered DVD revenue sharing with the major studios and created an entirely new channel for content distribution. He has really changed the way many customers acquire, manage and pay for video content. He not only had the vision he had the conviction to change an industry at a time when both DVD and online commerce were just emerging. We are talking about 1997. It's a great example of the right CEO DNA.
Angel Mehta: Is this a billion dollar market opportunity…
Tim Haley: Yes this is a good example of what to look for in CEO. Reed's one of these guys that constantly looks forward and almost wills things into existence. He does not admit impediments. If he needs to make a strategy correction based on data, he can do it. He'll point the company in a direction, based on a hypothesis and he'll move it. If that hypothesis turns out to be wrong, he will make a strategy correction very very quickly. He can navigate a company without spending huge amounts of dollars and a lot of time trying to prove that the wrong strategy is the right one. I think the art to really good CEOship is that ability to navigate a company, make strategy corrections and build a team around the business model that you've put together - but then correct the model on the fly. Reed is a great example of someone who would not fit any conventional model but yet he's got these qualities: super intelligence, risk-taker, can view strategies, can recruit phenomenal people to work for him and build a great team
Angel Mehta: What do you know now that you wish you knew then, not including investment tips?
Tim Haley: I have to say that I never do that. I really don't like looking back. It's much more productive to look forward.
Tim Haley is a founding partner of Redpoint Ventures. Prior to founding Redpoint, Tim was a general partner with IVP, a firm he began working with in 1987 and joined in 1998. Tim focuses on investments in enterprise software and software infrastructure. Tim can be contacted at firstname.lastname@example.org for article feedback.
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: email@example.com