Milestone Group Quarterly: January 2006
Articles
Investment Viewpoint:
Pete Solvik, General Partner, Sigma Partners
As former CIO of Cisco, you implemented a fair amount of technology. How did that experience shape how you invest?
We worked at Cisco with quite a few very early stage venture backed firms, so it gave me the opportunity (as a customer) to see how a lot of them fared. I saw what they did well and what they didn’t do well and, eventually, whether working with them turned out to be a good decision for us. Some of these companies went public, some were acquired. How they fared depended on the value they delivered and the strengths and weakness of the organization. The experience of working with a large number of venture backed companies over a fairly long period of time (I did the same at Apple for 10 years before Cisco) gave me a set of experiences, signals and pattern recognition on what would be required to be a successful company selling to large enterprises in the IT market. When we are looking at companies that are selling into the large IT market, which is a primary investing area for me and for Sigma Partners, I use that pattern recognition to evaluate those companies. I also use it to guide them on understanding the enterprise market and their market approach.
What motivated your move from an operating environment into venture?
Apple and Cisco were small when I joined and grew to be quite large. When a company grows to that size, a greater percentage of your day is spent on lower value-add activities. I was looking to reinvent myself and make a big career change after a successful run at two legends. I enjoy working in small groups of entrepreneurial, smart people on fast moving projects. I like to dabble in a number of different projects at one time, rather than dedicating all my time to a single project. I learned a lot as an external board member at several venture funded startups from 1995 until 2002. In venture, a higher percentage of your time is spent working with very smart and driven people primarily on strategic issues, as opposed to being an operating executive in a large company where you have a lot of routine responsibilities to tend to. It is more of a “thinking job” and that was exactly what I wanted to do next.
If you are a CIO right now in a large enterprise, do you think technology is becoming any easier to implement?
When an IT organization bought technology in the 1980’s or 1990’s, particularly software, a large amount of the risk fell on the buyer rather than the seller. The buyer put the money up front, even if the project failed. Now, if you look at software as a service, subscription-based or hosted software, the buyer is finding more of an environment of shared risk. Companies are putting less money up front; so I think there are some positives in terms of fewer mega projects with huge price tags on the front end but the positives are equally offset by rising expectations in the customer and client community. I think that budgets are still under great pressure and people are expecting IT organizations to deliver more value. Companies expect fewer mega projects that go on for long periods of time before they deliver.
Let’s say you were CIO again of a Fortune 500 company, what would you do differently that you couldn’t do when you were CIO at Cisco?
At Cisco we tried to get things done very quickly. Our longest projects took a year, whether it was a company-wide ERP implementation, network re-architecture or putting in new IP telephony. We tried to use technology to create an advantage for the company, which hasn’t changed. You still need to get things done in a very fast time to value and you want to use technology to create strategic value. I think the most significant change is that today you need to create an environment where you don’t have to own everything, meaning it doesn’t have to be in your data center. You can integrate a lot of disparate applications and you can take advantage of hosted solutions or software as a service. I think it is possible to create an integration and security architecture where you can quickly pick up technology assets and integrate them into your infrastructure and applications environment, to deliver applications and solutions very quickly. The other thing that is happening over time is that people are buying very small slices of functionality. The advantage is to create an infrastructure that could utilize that rather than be standardized on some huge single vendor controlled architecture like SAP or Oracle.
What is the future of the software industry as you see it? Will it become commoditized as many believe and where do you see value migrating to?
That’s a tough question. A lot of people talk about software as a service, or hosted solutions and ASP-like solutions and there have been a couple of very good outcomes there. There have been companies that were venture funded four to six years ago that still don’t have outcomes and it is unclear as to whether they are going to be successful. After a couple more years, it may be the case that selling big expensive installed application software packages (where risk and cost of implementation falls entirely on the buyer) is over. Massive consolidation will continue. The big players are going to continue to consolidate and continue to buy small players. There are not as many software IPO’s as there were, especially on the application side. I think the business will continue to evolve but the trends we’ve seen over the last couple of years will continue; nothing is going to stop this momentum.
Where is the Sigma portfolio headed, what is your investment thesis and what do you see on the horizon?
We are opportunistic investors. We look for great entrepreneurs and evaluate the opportunities they find to see if we agree with them. We look for entrepreneurs that understand the market and identify great opportunities; rather than saying, “This is an interesting area, let’s look for the best companies there.” Our portfolio is becoming more diverse. Five years ago a higher percentage of our investments used to be in enterprise software. We are investing more in mobile, security, consumer, Web 2.0 although we do continue to invest in enterprise software companies both in the application, services and infrastructure areas. I would say that our bets are more diverse, while keeping our focus on technology based companies. We are not doing a massive amount in Cleantech and we are not doing a lot in Nano. We have never invested in biotech, medical devices or drug discovery and we have no intention of going in there.
How can a startup find a space large enough to attract venture capital but not large enough to attract strong competition early from big incumbents already in the space?
There are a number of areas where big incumbents are not the only innovators. Security is clearly one of those; storage is another where there is a lot of activity and where the big incumbents do not have a monopoly on wisdom. On the application side, I would have to say that it has to be in a vertical that is not dominated by a big incumbent. For example, if you look at financial services or health care, Oracle and SAP don’t have massive footprints there. If you look at manufacturing or consumer packaged goods, SAP and Oracle do have massive footprints. So to look at those as your initial markets is probably a mistake.
What two to three key pieces of advice could you give an entrepreneur starting a company today?
Ideally, get some early customers that want to be development partners and work with you through some of the early ups and downs so you can get your product built in a capital efficient manner.
Get as far along with the product and initial customers as you can before you seek venture so that you already have some good proof points.
The quality of team is as important now as it ever has been. Surround yourself with a team that has been through a lot of ups and downs because as venture people make investments. You expect an early stage venture backed startup to hit some U-turns or hit some 90-degree turns in the road. Venture investors prefer to invest in people who have been through that before and that are smart enough and have the fortitude to get through those very tough times.
Are you long or short on Cisco today and why?
I spend my time looking at small venture stage companies and not doing analysis on large cap growth or value stocks like Microsoft, Cisco, Intel, HP or Apple. All of my tech exposure is really at the venture stage of companies so I am probably not the right person to ask.
If you were an LP and had $10 million to invest in a competitor’s fund, who would it be and why?
If I only had $10 million to put it into venture, I would try to spread it over a number of firms. I would likely put a third of it in long term proven firms that are pretty conservative and went through the bubble and post bubble successfully I’d place a third of it in firms that have had more ups and downs, have been around for a while and had a good team in place and maybe a third of it in emerging firms that had strong teams. I would try to break it up, but with $10 million you could probably not get slices in enough firms to diversify your risk. If I had $100 million to put into venture private equity, I would probably put $10 million each into ten different firms, knowing that the firms you would want to invest in are too hard to get slots in.
Peter Solvik, Managing Partner, Sigma Partners
Prior to joining Sigma, Peter had a very successful 10-year career at Cisco Systems. His contributions as Senior Vice President & CIO, and founder of the Internet Business Solutions Group helped make Cisco one of the most successful companies of our time. During Peter’s time at Cisco the company experienced explosive success, growing from $200 million to well over $20 billion in annual sales run rate and earned a reputation as a leader and innovator in the use of IT to create strategic advantage. Prior to Cisco, Peter spent 11 years at Apple Computer. He held a number of senior IT management roles supporting the rapid growth and global expansion of the firm and oversaw the Apple Online Services Group.
Peter was named to the CIO 100 4 times by CIO Magazine; selected as one of "The 25 Most Powerful Executives in Networking" by Network World; and featured in four Harvard Business School case studies on the successful use of information technology in the enterprise. He has often been quoted in articles on IT and eBusiness in Fortune, the Wall Street Journal, Business Week, the Economist, the New York Times, Information Week, CIO Magazine and many other publications and books. Peter has been a keynote speaker at over 50 industry conferences on information technology and eBusiness.
Peter has a B.S. in Business Administration, University of Illinois, Urbana-Champaign. |
