SM: Even so, 2002 was not a great time to start a new fund. BJ: No, it was a horrible time to do that!
SM: Tell me more about that experience. BJ: I knew a few VCs who had tried to raise a new fund in 2002, and most of them gave up. They concluded the market was so bad there was no way they could succeed in raising a fund. The investors and venture funds were not interested after losing lots of money over the last few years. My partners and I thought very carefully before we decided to go fund raising.
SM: Can you give me some background on your partners? How did you find them and why did they share this crazy idea that in 2002, in the middle of nuclear winter, you ought to go out and look for funding?
BJ: When I decided to explore raising a new fund, I obviously started talking to some of my contacts in the Valley. One of the first people I talked to was Jason Green who was a partner at US Venture Partners. I had a lot of respect for Jason; we had worked in the marketplace in cooperation and in competition with each other during the previous five years. I knew we had similar ideas regarding identification of new venture opportunities.
We had both done a lot of investment in the services area. Specifically, we both looked at technology companies that were building service businesses versus product businesses. When Jason and I spoke, I was surprised to learn he was having similar ideas and had also come to the conclusion that a large venture fund was not well positioned for the future. We both agreed that services based investing was so different from product investing, that traditional venture firms had a hard time grasping the value. We had shared common frustrations of bringing a service deal to an established partnership.
Jason and I both had relationships throughout the Valley with individual partners who appreciated the model but had partnerships who were not fully supportive. Jason and I thought perhaps we would be good partners to work on this new venture firm together. Jason had also started conversations with an entrepreneur named Gordon Ritter who had led some important service companies as an entrepreneur and was also thinking about investing in this category.
We coalesced together as a partnership and we talked about whether or not we would work well together as a team. We spent about 6 months working together to test and see if we would be a good team, and concluded we would be a good team.
SM: Let’s delve into your investment thesis.
BJ: Most of the technology industry has been based on companies inventing some technology and selling it to their customers. The customers buy technology and get value out of it by implementing it and automating a business process. In the late 90’s there was a flurry of acquisition of technology by major companies as they were trying to use technology for competitive advantage.
What a lot of companies experienced was difficulty extracting the value they believed they would get. It is very hard to actually use technology after it was purchased. Billions of dollars were spent integrating the technology to the specific uses of the customers, which also took a long time to do. By the time the technology was implemented, often the requirements had changed or the technology was obsolete. There was a lot of frustration among customers at this approach to buying technology.