The WSJ had another article
about venture capital, this time focusing just on Oak Investment Partners, the place I work during
the day (and at night and on weekends…). The whole article, “The
$100M Revenue Club: Oak Investment Stocks Up,” is well worth reading. Here
are a couple of highlights:
“Companies with annual revenue exceeding $100
million rarely used to show up within venture capital firms’ portfolios.”
…
“But few if any firms have as many of them in their
portfolios as Oak Investment Partners,
which has 22 private companies that generated more than $100 million in revenue
in 2009, according to information gathered and confirmed by Dow Jones
VentureWire.”
…
“Thad Gray,
who is a managing director with fund-of-funds Abbott Capital Management and
sits on Oak’s Valuation Committee, has become a strong believer in the venture
growth equity investing model … Gray said Oak has found success thanks, in
part, to having partners who are recognized as sector experts in complex areas
including health care information technology, financial technology, digital
media and energy technology.”
I have already posted about a
couple of the companies in the list of 22, including Kayak.com, iCrossing and
Demand Media.
In the quote above, Thad
talked about Oak’s “venture growth equity” investing model. This is a
relatively new model of venture investing, and Oak is demonstrating what it is
and how to do it. It combines important aspects of traditional venture capital
with some aspects of private equity. Since it’s relatively new, it’s worth
explaining.
The popular image of venture
capital is early stage investing. You might think that the internet would favor
early stage companies, because it is so relatively easy and inexpensive to get
a web site and make it not only viewable, but findable (as I discussed
previously) to anyone in the world. The bar is low, so the start-up
entrepreneur with his genius idea can get it going with a little seed money
from a savvy early-stage investor and watch it rocket to success. It’s all
about having the break-through idea; you need hardly any capital to make it a
reality. Right?
Let’s take that idea and
apply it to baseball. Suppose we find a couple of guys who have a terrific new
approach to pitching and catching. They’ve got it working in the “lab.” Now
they’re ready to go for it, and they look for a savvy VC who recognizes their
potential. If they get funded, the money will come from a traditional
early-stage VC. A VGE investor like Oak will pass; the opportunity is too early
stage. We don’t invest in individual players, regardless how good they are; we
only invest in teams that have found a way as teams to compete
and win in their league.
The way we see it, when the
VC invests in the pitcher-and-catcher novelty act, they’re going out and
competing in a playing field (called the internet) against full teams. Like it
or not, those two will be “taking the field” against teams that field nine players
and have a deep bench. The pitcher-catcher combo may be unbelievable, but they
are sure going to have to be, given that they have no one playing first base,
no one in right field, etc. Then of course when it’s their turn up at bat, their
batting order consists of two players – perhaps not so good…
Demand Media, for example, is
a full baseball team – they are literally “covering all the bases.” And they
have a deep bench and value-adding back office. It’s hard to figure out how a
couple of individual players, regardless
of how talented and hard working those individual players might be, could
possibly compete against a whole baseball team, particularly when so many of
Demand Media’s players are all-stars.
Let’s just take a quick romp
through the Demand Media “player roster” to illustrate all the different roles there
are in a fully-staffed team:
- A design team to
make their web sites look good. - A sales team to
craft the kinds of advertising deals that fit their content. - Separate teams
for each individual property (golflink.com, ehow, Livestrong, Cracked, etc.) - Strong
non-consumer technology-centric efforts (Pluck.com, enom). - A creative,
numbers-driven and results-focused research effort. - Strong technology
driving a leading-edge business model (Demand Studios). - Major value-adding
data center operation. - A group that can analyze
huge traffic (many tens of millions of uniques a month) and optimize. - Unique technology
derived from the huge volumes that increases effectiveness (this is
purposefully vague). - A sharp finance
operation to help keep cost focus. - Strong,
charismatic business leadership.
bunch of has-beens, you can imagine being just a couple of stand-outs and
competing against them. But on the internet, you end up competing against teams
of the best. The scale is so large, like it or not, it takes a team to compete
and win. That’s why the Venture Growth Equity approach makes sense, even on the
internet (actually, once you understand the issues, it’s particularly on the internet).
Like with any venture, there
are also intangibles, the kind of thing you feel when you’re on site with the
people, as I was last week with Demand in Santa Monica, along with my buddy
Ranjan Chak. I seem to feel good every time I visit, whether we’re celebrating
the good things that have happened or we’re grappling with challenging issues. Or
both. The attitudes, levels of engagement, and sophistication of approach are
just outstanding. Above all, they are a nerd-fueled enterprise (a subject I’ll
go into sometime soon), which by itself puts them at a different level than most
companies.