Venture Spotlight: Terry Garnett, Venrock Associates
By Angel Mehta, Managing Director, Sterling-Hoffman Management Consultants
Angel Mehta: I'm interested these days in early life experiences…about the forces that shaped the kind of investor you've become. Can we talk a little about your early career?
Terry Garnett: Sure. I was actually born in London and my parents emigrated to the U.S. when I was about a year old and so, I've lived in California almost all my life. As a result, I've been around silicon valley long enough to remember when there were still a lot of orchards and things were very undeveloped. Through a series of serendipitous events, I ended up at Tandem Computers in the late 70's which was one of the two hottest companies around - along with Apple.
At that point, Tandem was about a $50 million dollar company and grew to about $500 million in a 3-4-year period - so it was a real rocket ship growth period. It was the heyday of Jimmy Treybig…beer busts on Friday afternoon…just some very innovative management techniques, for that time anyway.
Angel Mehta: Presumably some of that grew out of HP, right?
Terry Garnett: For sure. I remember Treybig had actually put together a flowchart of how businesses operated and he PERSONALLY created a training course that every one of the senior managers had to learn, and then each manager had to train their employees on. This was even at a point when they had THOUSANDS of employees in the company. It was literally Business 101 compressed into a 2 or 3 day course. Every engineer, every assembly line worker, every sales person had to do it. It was probably one of the most impressive management training sessions I had ever seen.
Angel Mehta: Particularly impressive because of the beer busts, right? [Laughter]
Terry Garnett: [Laughing] The business training fit with the beer bust which was about getting groups from different functions to meet and spend time together. So there was actually a conscious strategy about trying to make the sales person and the guy in manufacturing to get to know each other. They might never meet otherwise, but at a party, people from separate departments would be standing next to each other in the beer line.
So there were some very interesting ideas that he put together that shaped a lot of the way I viewed management theory. Remember this was my first job out of college, so I figured this is how all companies run. Which was obviously not the case; Trey was five standard deviations out.
Angel Mehta: So how did your first entrepreneurial endeavor come about?
Terry Garnett: Well I moved around inside Tandem, and got very interested in one of the first personal computers that was ever in the company. Someone in the manufacturing group brought in an Apple 2 to actually do the master schedule on, which evolved into an Apple 3 and that was my first exposure to personal computing. I had taken computer classes in college, where we had computer punch cards?
Angel Mehta: So the Apple must have been a shock….
Terry Garnett: It was amazing that you could actually have a computer on a desk , put in rows and columns and all that (with Visicalc at the time). So I got very intrigued with the whole PC phenomenon and I actually left Tandem to start a small software company called, "Lightyear" . The offering was a modeling system for business decisions. We sold IT as a standard off the shelf $500 dollar PC application through Businessland and Computerland and all these different stores. So we got up to about 25 employees and went out to raise venture capital….
Angel Mehta: How old were you?
Terry Garnett: I was about 25 at the time. That's actually how I met Venrock in 1982. Venrock was one of 30 venture groups I went to over a 12 month period. Venrock did not invest but I got to know one of the partners in New York, David Hathaway, very well. Anyway, we eventually raised $1.5m. It was a positive experience because on the entrepreneurial side, I got exposure to lot of the struggles and problems that every entrepreneur faces. It gives you a little more empathy as the years go by, just in terms of meeting people who come in to try and raise money - because it's always hard no matter what people say.
Angel Mehta: Were you prepared for what the entrepreneurial experience would be like when you started Lightyear…
Terry Garnett: Nope. Totally naïve. There are two schools of thought on the issue…. I think to be a great entrepreneur, in some sense, have to defy gravity. I think if you knew completely going in what you were going to be up against and how formidable the challenge is, it would be a very tough thing to tackle. So, in some ways, being young and naïve and NOT knowing what you're getting into is a big part of the package. I think that that works in your favor.
The other school of thought is that because it is so hard, the experience of having done it before is precious. Especially on the side of the table as an investor, you're really looking for people who have been through it already. They can short circuit the path to get there. They know what the mistakes are, and hopefully have learned the hard way in terms of what works and what doesn't.
Angel Mehta: So would you have backed yourself back then?
Terry Garnett: Probably not. No. You know, Angel, there's a lot of stories of people that have come out of the garage and made it big - but those are the exceptions. I think if it's a completely new market, where there is a completely green field and you can tolerate a lot of mistakes - then you do see people come out of left field, do something completely new, and make it.
Angel Mehta: Right….
Terry Garnett: But if it's a space that's somewhat mature…or if you could sort of see how someone's going to create the company, what it's going to turn into…geez, in this kind of environment with so much capital out there - it's the people who have the experience that are going to win in the end.
Angel Mehta: Let's fast forward a few years. How did you end up at Oracle?
Terry Garnett: I was at Ashton Tate…In 1991, Oracle was blowing up and a good friend of mine who was at Oracle set me up to meet Larry Ellison. Larry offered me a job to come work for him as VP of Marketing. Pretty much the day I went to Oracle was the day my wife (who I met after business school) left Oracle and went to Sybase - she wound up running about half the development there and I eventually became Senior Vice President running marketing & business development at Oracle so that was pretty interesting.
Angel Mehta: And at the end of four years with Larry?
Terry Garnett: I left as everyone does with a lot of broken glass and I realized that at that time - this was 1995 - that Oracle had spawned a lot of great entrepreneurs and managers, especially the application space and in the enterprise software space. A lot of that alumni club from Oracle had gone out into the Valley and either started companies or were in senior roles in other great companies. So when I left, it was with the idea that I wanted to invest my own money.
Angel Mehta: Did you head to Venrock right away?
Terry Garnett: Actually, even before I came to Venrock, one of the first deals that came across my plate was Tom Siebel. Tom was just getting the company off the ground, raised a million dollars first round from about ten people he knew in silicon valley….I was one of them. A couple of months later, Dave Hathaway at Venrock called me and asked me if I had ever thought about going in on the venture capital side.
At the time, Tony Sun was the only person here at Venrock in California. Everyone else was in New York. So for the next 4½ years, I invested in probably about a dozen companies. The second one I worked on with Ray Rothrock was Checkpoint, which turned into a great success here at Venrock. Then right after that I wound up meeting Rick Adams who used to be the CIO of Goldman Sachs. Rick started a company in Denver called, "New Era of Networks" (NEON). So I had some great experiences at Venrock…at one point, I had Crossworlds, NEON, and NIKU go public within a 3 month window.
Angel Mehta: This was right before the bubble burst in early 2000?
Terry Garnett: Yes. Lucky for me, because I decided right before that it would be good to take some time off [Laughing]…not that I foresaw that things were going to go down hill, but I wanted to be with my family and did a lot of traveling. In the middle of 2001 after Venrock had raised this new large fund, they called and asked me if I'd consider coming back as a General Partner. That's what I did about a year and a half ago…It's been an interesting odyssey.
Angel Mehta: What was your impression of Tom Siebel in the early years? What was it that convinced you to invest?
Terry Garnett: You know when Tom was at Oracle, he had a vision for building a new application for tracking sales leads and customers and all the rest. He actually built something very similar to Siebel CRM when he was at Oracle internally. So I think what he was trying to create at Siebel was really just taking it to the next level. Tom, by the way, is an example of someone who knew EXACTLY what he wanted to do.
I mean, he's sort of the other side of the coin as far as being an entrepreneur. He had a clear vision from Day 1 about what he wanted to do, how he was going to do it, who the partners were going to be…look at how he built the board! Charles Schwab joined the Board very earlier on. He also got Jim Gaither from Cooley Godward….
Angel Mehta: In other words, Siebel was a 'professionally' managed startup from day one…
Terry Garnett: Right…and it's interesting. I think what happens in the venture world is, you could look back a year or two after the fact and see which companies were really put together like Siebel - on a professional level, where the entrepreneur was really good, the backers were first class...the odds of those deals succeeding are much higher than the average start-up.
Angel Mehta: I know you did a stint at McKinsey and I want to ask you about the consulting experience because I was having a pretty heated discussion with a friend of mine from AT Kearney recently. I remember an anonymous article in Fortune, years ago, by an ex-consultant who moved into an operating role. He was basically saying that he would never in a million years hire anyone from his old consulting firm to help him run the new company. What is your take on the value of a consulting background - let's say, in terms of preparing an entrepreneur or operating executive for how to do things right?
Terry Garnett: I'll change the question a little bit. I think that the larger consulting firms, Mckinsey, Bain, BCG…they're typically structured to service the Fortune 500 where you have very large complicated organizational structures….I think the biggest value of the consultants in a lot of cases is they challenge the existing view of the world. Sometimes in a big company, management gets down a track where they don't really have an objective perspective of what's going on outside in the marketplace.
Another key with consulting firms is that they've seen larger companies go through so many problems that if you're going through that same phase, they can probably help. For example, a lot of technology companies get to a billion in sales and they outrun their supply lines. The things that worked at a hundred million don't work at a billion and so a consulting firm like McKinsey that's worked with a billion, $5 billion, $10 billion can sort of help put a strategy together and say, "This is what you should look like at a billion dollars in revenue."
Angel Mehta: How to scale?
Terry Garnett: Right. So that's a viewpoint that I think is quite valuable. I think you know the success is in the implementation, though…Coming up with a strategy is easier than actually doing it.
Angel Mehta: But do you think its good training for a would-be entrepreneur to work at a consulting firm?
Terry Garnett: It can be for some people, but I think part of what makes a good entrepreneur and what we look for is people that have really had a lot of challenges - without a safety net. I think there's a value to being in a situation where you've run out of money. Can you handle running out of money? Can you go to the next level? Some people go through very predictable careers and find it hard to deal with ambiguous situations - which is what a startup is all about. There are no real answers that are readily apparent - but lots of choices.
Angel Mehta: So what you're identifying here is the value of having struggled?
Terry Garnett: Yes. If you've gone through all the gates and gone to all the right schools, and then you've worked at all the right firms…that's a much difference existence than going out and sort of having to make something literally from nothing. If you look at the great entrepreneurs in our century: Larry Ellison, Michael Dell, Bill Gates. These guys didn't even get through college. Which doesn't mean they don't have the smarts and all the rest…but they didn't have classic careers were you say, "I'm going to go through all these gates and finally when I get to a certain point I jump off and then I'll become an entrepreneur."
Angel Mehta: I like to ask people to reflect on the phrase, 'If I knew then what I know now.'….So if if you had a chance to go back in time and speak to your younger self, what are some of the things you'd want to pass on about how you think about business and how to apply. NOT INCLUDING stock tips like 'Buy MSFT young man'… [Laughter]
Terry Garnett: That's a great question. I think that after 20 years in Silicon Valley, I've been very lucky to meet some incredibly smart, gifted people and I think if there were any mistakes I made…it was letting relationships drift. In retrospect, I look back and say, "God, I should have stayed in contact with that person" or "I wish I had found a project to work on with that person …" The problem is, you wind up going at such a fast rate that you're moving on to new things all the time and it's very hard to stay in contact with all the people that you wanted to. Good people do good things many times over. So that's probably the biggest thing I would pass on to my younger self.
Angel Mehta: I wanted to talk about the market a little bit. How much do you demand of yourself in terms of depth of knowledge before you do a deal? Does Venrock, or just you personally, insist on having an airtight understanding of the space, the technology, that sort of thing?
Terry Garnett: No. It's probably scary how little we know on some deals. It's very much a gut feel. I think one other thing I've realized is how important it is to have another good partner from another good firm that I want to work with on a deal with me. It's reciprocal. In fact, some of the newer deals I'm seeing are ones where I've said to two or three people I really like in the venture industry, 'Hey, let's do something together…'…I did one with Dave Beirne at Benchmark Capital…I've done deals in the past with Promod Haque over at Norwest…I"ve been interested in doing one with Jim Breyer from Accel for a while. The idea is that if two of us both see the opportunity in the segment, and we've both been doing it a while, there's probably something there that has potential. But of course, going into new markets, you're just NOT going to know all the answers going in. There's a level of ambiguity that just comes with the territory. You just hope you've found people that are smart enough and motivated enough to go chase down whatever the opportunity happens to be.
Angel Mehta: Will the selling environment improve for ISV's this year?
Terry Garnett: Well you know if you think about the software space, Angel….there's something like 400 public software companies - even after all the consolidation and bankruptcies. If you think about the situation of the CIO at GM or Coca Cola…he has 400 direct sales forces from these PUBLIC software companies calling on him.
Angel Mehta: Trying to get on his calendar…and then you've got thousands of startups doing the same thing.
Terry Garnett: Exactly. So the congestion in each customer account is incredible. You've got to have something very unique that is really compelling….and I think the question for the venture industry is that, with thousands of venture capitalists, how many new companies can we really create around this? Of course, the good news is that if you think of the Internet sort of dated around '93 when Netscape was started…the Internet is less than 10 years old in the commercial sense. The PC is 25 years old and it's still a growing market, een though Microsoft owns a big part of that space. We're still at a stage where we're in the first or second generation of applications. There should be another wave over the next 10 years that we really don't know how to read yet.
Angel Mehta: More and more these days I find that past performance records don't do much to tell us if a CEO or VP Sales is going to succeed or not. Do you find any consistent indicators? How do you select who you're going to drop in to a portfolio company?
Terry Garnett: I've had a similar experience. I, at one point, had a CEO who was in his probably late 20's…he had only been in staff jobs at a pretty large company - hadn't really managed large teams. On the other side, I had a CIO of a very large bank who had managed 4,000 people and now is running start-ups. It's very hard to predict, and I've been surprised on both ends. I've been surprised by people who had phenomenally good resumes - you do the background checks and they seem like they walked on water…and they get into the portfolio company can't handle it. Then you have the flipside…people that you look at the resume and say, 'I will never back this person' - but somehow, they do phenomenally well. In fact, I've actually become more a fan of giving the entrepreneur more time to try and work it out.
Angel Mehta: That's something I haven't heard very often…
Terry Garnett: It depends on the situation but there's no substitute for the passion and the vision that the entrepreneur has. Whenever you move that out and you put in the professional manager, you lose something. A great example of that is Checkpoint, where there were three young engineers who started the company in Israel… didn't have a lot of management experience coming in and now that's a company that's very significant today is the exact team that had very little management experience. Checkpoint is an INCREDIBLY well run company. It's got incredible systems that they've built to run the business. So that's an example of a company where going in, you would have seriously questioned, "Could the original team scale through all those gates?". And the answer would have been, 'Probably not' - but somehow, they did.
Terry Garnett is a General Partner with Venrock Associates. He was a personal early stage investor in Siebel Systems and Checkpoint, and also led Venrock's investments in NIKU, NEON, and Crossworlds among others. To send feedback to Terry, email: firstname.lastname@example.org
Angel Mehta is Managing Director at Sterling-Hoffman, a retained executive search firm that specializes in VP Sales & VP Marketing searches for enterprise software companies. To send feedback to Angel, email: email@example.com