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Enterprise startups too hot? SAP Ventures CEO says yes
- Cromwell Schubarth
- Senior Technology Reporter- Silicon Valley Business Journal
- Email | Twitter | Google+
Inflated startup valuations made
last year one of the most frustrating in his more than 15 years in venture
investing, SAP Ventures CEO Nino Marakovic told me on
Monday.
But the cause of his trouble wasn't the bubble of consumer seed fundings over
the last two years that so many have been talking about and is the subject of
the Business Journal's cover story this week.Sign up for the daily Startup Now newsletter by clicking here.
It's inflated valuations among later stage startups aimed at the business sector, he said in an exclusive Q&A he did with me for Startup Now that is excerpted below.
Marakovic joined SAP Ventures in
2006 after working as a partner at two other Palo Alto firms, Draper Fisher Jurvetson and IVF Ventures. He oversees
investments by SAP Ventures' $350 million fund and its $155 million Hana
Realtime fund.
He currently directly oversees
investments in Apriso, Marin Software, OpenX, Vendavo and Zend.
Here are excerpts of our conversation:What were the big exits recently for SAP Ventures?
There was Endeca, which was acquired by Oracle about two years ago, and then LinkedIn's IPO 18 months or so ago and Exact Target last year with a big IPO. Those were our three billion-dollar-plus exits of the past two years.
Any opportunities that you passed on that you wish you hadn’t in the past year?
I’ll tell you 2012 was one of the most frustrating years of my career. I feel like I’ve seen more interesting companies and fantastic entrepreneurs than I’ve ever seen before. But the valuations got so frothy that we passed on tons of companies that we really liked that we felt were inappropriately valued by the private markets. I am 100 percent sure I made lots of mistakes, in fact, more mistakes than I’ve ever made in my career in the last year.
Any in particular that come to mind?
I would obviously hesitate to call out any single one and point out that their valuation was inappropriate. But it was an interesting year with lots of passing on good companies.
There was a lot said about Series A crunch and a bubble of consumer companies in the last year. Is that what you are talking about?
No, I am talking more towards the later stage companies over the last 18 months, in the 10 million plus revenue size. I think the frothiness moved from the consumer space when Facebook dove after its and then Splunk had a good IPO and Exact Target had a great IPO. I think the focus turned more towards the enterprise side and we are now seeing valuations that are beyond what is typically the case on the enterprise side on A rounds. But again I do think that a lot of money has been poured into these A rounds and I think we will see valuation adjustments by the time they need to raise their B rounds.
So you think the that pendulum swing towards enterprise has resulted in some frothiness in that market now?
Yeah, I think it did for sure with enterprise companies towards the end of last year. But I think that, too, has crested. I would certainly say that in general the pendulum has swung from consumer to enterprise now and a lot of folks who don’t necessarily understand enterprise are trying to outbid everybody else on some of the known properties.
We invest in Series A with the Hana fund with companies built around SAP's Hana real-time Big Data ecosystem. But with the classic SAP Ventures we invest in the B, C and D rounds. So hopefully we will see increased deal flow and less competition for these later rounds as these A companies mature to B and C rounds over the next year or two. We are seeing a little bit of a flattening out in valuations and it wouldn’t surprise me to see them go down soon. The good companies, however, typically just stay at a high valuation and grow into that vs. having a down valuation round. But we certainly do feel like there’s a lot of companies looking for that B round and not all of them will get it.
What percentage of the investment by your two funds is in the Bay Area?
It’s probably a good 40 plus percent. When we think about the whole portfolio, our target or historical allocation is about two-thirds U.S. and a third in the rest of the world, leading with Europe and India second. Selectively we are in Brazil and we’ve looked at China as well. Of the U.S. based companies many of the of the ones we invested in last year happened to be in San Francisco but probably 40 to 45 percent are in the Bay Area.
Why the trend towards startups moving the city and away from the valley?
I think the city has done a decent job at providing tax relief for some larger companies and there are some companies like Twitter and others that have their headquarters there that are attracting a lot of young folks. I don’t think necessarily this is a big trend as the consumer craze cools. Some of the enterprise companies often have a little bit more mature management teams who have families and maybe prefer to stay down south. I think the shift to San Francisco is a temporary blip, not a bigger trend. Certainly not for a good majority of the companies we typically see. I think it’s more of an exceptional circumstance last year that we ended up investing in a bunch of companies in the city. But we’ll be monitoring the trend and it’s only a 35 minute drive. It’s not like it's very far away.
Tell me about some recent investments that you are excited about.
I like all of my children. But let me just tell you about the last few companies we’ve invested in.
We’ve invested in Marin Software. They basically help large keyword search ad spenders optimize their spend. They basically help people manage their keyword spending when they bid simultaneously on thousands if not hundreds of thousands and millions of keywords across their product lines on web pages. Think of it almost like a Bloomberg terminal for your marketing spend. They are a San Francisco based company.
Then there is Violin Memory in Mountain View which is a leading flash array storage vendor.
There is a company called Ticketfly out of San Francisco that is a crowd-based ticketing platform.
And there is a company called Docusign in San Francisco which is a service for delivery of secure online signatures.
Is there one feature these companies that have in common?
High growth. We’re particularly interested to invest in the next set of innovators and disruptors so one of the things we look for is just extraordinary growth.
Is there a consumer company that excites you?
There is a company called Justdial which is one of the leading Internet properties in India. One that was sort of half consumer and half enterprise is LinkedIn. We are particularly interested in a company like LinkedIn, which has kind blends the consumerization and the enterprise approach. We are also investors in Box and a company called Lithium and others who have a blend of consumer features that then monetize through enterprise.
I think of Box as more of an enterprise focused company.
It has become more of an enterprise solution but the way that Box virally spread was through basically small business and small group adoptions and, in fact, individuals adopting it for their own personal use and spreading it into the enterprise. I was a Box user for my personal files before it became a key way we drive our document management today at SAP Ventures. I started using it as a consumer.
Even though SAP Ventures is set up to be independent of SAP it sounds like you are still investing close to its business lines.
I would just say that our mandate is to help companies we invest in beyond what any other VC can do by helping them network within the SAP ecosystem of partners, customers and SAP itself. So obviously our value proposition is strong if they are interested in what SAP and SAP customers are interested in. Therefore you see strong kinds of themes that we invest in that are in SAP’s strategic direction. It's not because we actually follow SAP’s strategic mandate at all. We design our investment teams independently. But frankly if you go to any VC now these days it’s going to be cloud, mobile, social and Big Data. And those are some of the things that SAP in interested in too. So it’s a perfect overlap of interests.
Cromwell Schubarth is the Senior Technology Reporter at the Business Journal. His phone number is 408.299.1823.
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