Somesh Dash, who has been investing in later stage technology startups for 11 years at Institutional Venture Partners, believes that mutual funds are here to stay as investors in venture-backed companies.
And he is OK with that, telling me in a recent conversation that companies like Fidelity and T. Rowe Price can be important allies for enterprise business startups to have on their side.
Dash also believes that the mutual fund markdowns of the valuations of some high-profile venture-backed companies has been misunderstood.
Among the investments that Dash has been actively involved with in the past are Akamai, Dropbox, LivingSocial, Netflix, Pure Storage, Tanium, Zynga and, quite recently, Qubole.
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The following Q&A from our conversation has been edited for length and clarity.
Has the increase in activity by new late stage funders, including mutual funds, and their markdowns of some unicorns affected what you guys do?
We don’t actually see the mutual funds too often in the growth rounds we get involved in because we look at companies when they are just starting to ramp up their sales forces. That's usually a round or two before the mutual funds ever take a look at companies. We do we see them more, though, on the pre-IPO rounds.
I think one of the things that's worth noting is how these investors value a company. A lot of that has to do with their own internal accounting. I mean, private companies are private for a reason. If we all mark to market every single day, it would be impossible to value these companies.
Each mutual fund gets branded together, but each one has a different set of investors, a different structure and a different target return. There are a lot of allocations and reallocations that happen. Those reallocations happen sometimes because they need to rebalance the portfolio.
What’s interesting is the problem with the way the data is filtering to the public. The headline hits and everyone says, “Oh, my god, they are writing down this company. That means this company must not be doing well.”
What people don’t notice is that sometimes another mutual fund will come in on the same round and buy the same security and actually not write it down. So that's the first interesting quandary. Why is one mutual fund writing it down and the other one doesn’t? The second is sometimes the same mutual fund will write it back up the next quarter, and then write something else down.
So, these are basically methodologies that are, I would say, 99 percent internal accounting. They are trying to manage their risk exposure. They are not necessarily indictments of teams.
Another thing is that these are are all illiquid securities. What really matters at the end of the day for all of us who invest in private companies is terminal value. If you look at any startup, there are good days and there are bad days. If you look at the hourly flow of data, it looks kind of like a Richter scale. It’s going up and down really fast. But if you stretch that out over the course of a five- to seven-year time horizon — which is the way we look at things — overall you find companies in the aggregate scale up and to the right. They end up having terminal values that are pretty incredible. You can sometimes end up with a 3X to 5X return in 5 to 7 years, which is great.
Do you think the influx of the mutual funds, hedge funds and other late-stage investors is a long-term phenomenon? Many are getting in because late-stage companies are remaining private longer. These investors are afraid of missing out on the big growth they used to get by investing in an IPO.
I think any time you have a bull market, you see new people come in and different asset classes come in. They get excited during bull markets and they get very fearful during bear markets. I think you have to give the venture capital industry a lot of credit because for the last 40 years, they have been through some really ugly years. But there’s also been some really great years.
I think from a scale standpoint, companies will continue to invest in growth. Regardless of what’s happened in the stock market, the need for new enterprise technologies continues to accelerate. The pace of innovation and disruption continues to be robust. The global budgets allocated to IT continue to increase each year. If you take a longer view, there are going to be ebbs and flows. But things will continue to be trend over 20 years that will be up and to the right.
Many of the mutual fund investors will return to the markets when things look a little bit better. I also think a lot of the companies that go public will actually end up having share prices that are above their IPO price and far above their last round price. Once they see that sort of data that validates the idea of getting involved before an IPO I think they will come back.
One thing people don’t realize, to give the funds a little bit of credit, is they actually are big customers for many of these enterprise technology companies. If you think about the assets under management for the large mutual funds, one of them would can dwarf about 50 venture funds put together. So from a scale standpoint they actually have resources that can make them very valuable customers. They have research resources that can really be helpful as the company looks to expand internationally. So there is a value and a brand that comes with having those guys as investors.
But on the other side, I think what these write-downs have shown entrepreneurs is that if it bothers you to have your name out there in the headlines of the Wall Street Journal because someone is doing portfolio reallocations — irrespective of what you are doing in your business — then you should think twice about taking capital from them.
If it doesn’t bother you and you are happy to withstand the potential headlines and you see value in their money, then I think there is going to be that capital available for you over the long term.
I know you recently invested in Qubole and are quite interested in the Big Data space that they are in. Tell me about that investment and how it fits into what you and IVP are interested in.
We look for companies that are growing at breakneck speed, have already launched products in market and have a few sales reps. We also like to see that they have developed the product pretty fully in terms of feature functionality and have investors that have preceded us that we know and have working relationships with.
Qubole actually hit that on the mark and we’ve been co-investors with both Lightspeed Venture Partners and Charles River Ventures on lots of other enterprise companies. We knew both Devdutt Yellukar of CRV and Arif Janmohamed of Lightspeed, who were on their board. They said, hey, you remember these two guys from Facebook — Ashish Thusoo and Joydeep Sen Sarma? They left Facebook and they are doing an interesting new thing that we’re backing.
I knew of those guys but didn’t know them well. I heard about some of the work they had done at Facebook on the infrastructure team. So I’d been tracking them.
The other way we connected with them was that we’d spent a lot of time in the last few years understanding the Amazon Web Services ecosystem. We were at AWS Reinvent where one of our associates, Alex Lim, met with 10 to 20 interesting growth companies there. He came back from those meetings and said this is the one that is really interesting. They weren’t fundraising quite yet, but he said we should meet them and learn about the company.
So we went over there right after the conference ended and Ashish was kind enough of let us in and tell us a bit about what the company had done. We got so interested that we went back with an even more expanded team and met the rest of their team. A few weeks later we said, “We know that your plan is to try and raise a little bit later, but we would love to find a way to preempt that process. We ended up securing the commitment from the company that let us be investors and we led the round with a significant participation from all the existing investors.
Big Data is something that gets talked about a lot but it seems to mean different things sometimes. What does it mean to you in this situation?
I think these words help sometimes to narrow down the ambiguity of certain new markets, helping you say, hey, this is in this bucket or that bucket. But it’s kind of like the term Software-as-a-Service. It doesn’t really tell you what the company does. It just creates a bucket that you can use to categorize the business model.
The whole notion of using horizontal computing with scaled processing to uncover data and uncover insights is a model that really got kicked off a few years ago. But the idea of analytics and business intelligence is nothing new.
The big difference now is that it’s no longer just the development group that uses the product and has the budget. Now business analysts, data scientists, solutions engineers, all of them want access to tools like Qubole versus just the engineering org wanting them.
That's where Big Data gets interesting. It’s no longer just in the confines of the engineering org. It’s extended its tentacles outside of that into a lot of different disciplines that work with engineering. That’s really important because that will lead to increased budgets and more C-level visibility.
With Qubole, what really got our attention is that if you want to run production analytics and you really have intense heavy workloads, you are likely to be storing that data on one of the public clouds — Amazon Web Services, Google or Azure.
Qubole basically integrates with all of those and it’s a plug and play solution. You don’t have to rip anything out. You can run all your analytics and if you run Hive, if you Spark, if you run Presto — even in certain instances some of the new languages coming out — you can run all that on Qubole. It doesn’t matter what public clouds you are running. It doesn’t even matter what proxy language you are running. It’s the Switzerland of platforms, encompassing all those. The hard work they did is in doing all the plumbing to enable seamless integrations of all those different languages.
They have a really nice front-end, too. If you are a business analyst and you aren’t trained on how to use Hive, Spark or Presto Qubole lets you run queries and get the answers and insights you want. It combines a visualization layer with an analytics layer and looks a lot like high-end business intelligence tools. That's what they cornered and that's what got our attention.
Are there any other companies you are involved with in Big Data that are doing interesting things?
One of our investments that's pretty interesting is Ayasdi. They take the most complex data sets and apply machine learning to those.They take the datasets and visualize them and run computational analytics on them. Suddenly you can figure out what the data says. You can use a shape-driven model to basically find insights that would be hard to recognize in a linear math model.
The National Institutes of Health, for example, is using it to run really advanced analytics on clinical breast cancer trials. Airline manufacturers are running this to figure out depreciation schedules of engines. Ayasdi is helping solve really big problems for Fortune 100 companies by using Big Data.
It was actually founded by a professor who was the pioneer of topography at Stanford, Gunnar Carlson, and two of his students. It is a situation where the math and computer science kind of came together. The founder said, the computer science guys usually get all the credit and now the math guys actually look cool, too. So, that's another one in the Big Data space that we’ve backed.
Are there any other trends going on right now in venture or in tech that you think are very interesting that you are watching very closely, that you might something to say about?
I think that what I’ve invested in and what I am probably most excited about is security. When you look at the last 10 to 15 years of security, you would hard pressed to find a lot of exits over a $1 billion. The typical path for liquidity was an acquisition by Symantec or McAfee or Trend Micro and those are typically under $500 million. So I think there was a lot of carnage in the security space historically and which led to a lot of people maybe looking away from it.
But what’s amazing is you don’t have to go much beyond the headlines to know that security is not a back-of-the-IT-department issue anymore. It’s literally a board issue with committees being formed on public company boards to manage security. The CEOs of major corporations like Home Depot and Target and Sony have been either fired or publicly reprimanded for mismanaging security issues at their companies. So I think that’s one of the big trends that we’ve invested.
We’ve invested in companies like Tanium and Pindrop Security and Alien Vault and Anomoli, all in the security space. It’s kind of fascinating to me that security spending is no just longer concentrated in the CIOs and CTOs. The operations guys are figuring out when we’re looking at the nuts and bolts of running an enterprise application stack, how do we integrate with security tools so that we have visibility to threats as they are coming in. We need visibility to breaches as they are about to occur. We need visibility into our own organizations and where we’re most vulnerable. We’ve made several investments that touch on each of these.
Tanium, in particular, that is worth looking at a little bit. It basically has made the entire process of endpoint management so seamless that you can literally type in a search box, “How many of my mobile users are running an outdated version of box.net?” Within 15 seconds you see all the IP addresses of all the devices that are running that outdated version and then you can remediate that, on the spot. It’s been one of the fastest growing companies that we’ve ever invested in. It was founded by an amazing father-son team, David and Orion Hindawi,who founded BigFix before that, which was sold to IBM. So we have pretty high hopes for the prospects for that company.
Area there any companies that you didn't invest in when you had the chance to that rises to the top of your regrets list?
Luckily for us, I would say the majority of the companies that we admire we found a way to be investors in. Sometimes we wish we came in a round earlier. Sometimes we wish had put a little bit more capital in. But hindsight is always 20/20.
I think the obvious one that for me was a learning experience, was not investing in Facebook about 10 years ago. But I would say that the decision to not invest was rational because at the time that we got a chance to look into Facebook the product was still only for college students. They hadn’t even launched in high schools yet. They didn’t have a national sales team, and they basically had just a handful of sponsored buyers that were basically covering the cost of infrastructure.
It was unclear to us what they were building, in terms of their own proprietary IP stack, which only became visible years later. Perhaps most importantly we just didn’t realize how the scope of the company’s ambitions would continue to increase and their success would propel themselves to new heights. That's a company where I just marvel at how well they have executed and what they have done in the social web in a very short period of time.
I think the lesson — and people still don’t internalize this lesson enough — is that it's not always the most experienced CEO that brings the biggest hits. It is a very common phrase that people use and I hear it all the time: You want the experienced CEO. But if you look at the founders of the most iconic Internet companies and, historically, the most iconic enterprise companies like Microsoft and Oracle and Cisco, the vast majority of them had somebody at the top who was in their first time at the rodeo.
It’s very easy to dismiss a young, 22-year-old CEO. But then you see what he grows into and you see what impact he’s going to have on the world in the next 20 years. So Facebook is definitely one that I look back at. There’s just a lot to learn from the way they have executed that business.