Of Venture Socialism and the Future of VCs—The Story of Jo Tango and Kepha Partners
This is a story of a different breed of venture capital firm—one so different it practices venture socialism. At least that’s how the founder of Waltham, MA-based Kepha Partners, Josaphat “Jo” Tango, describes it. (Before all you entrepreneurs beat a path to his door thinking he shares more of the wealth back with you, let’s just say it’s not quite what you think—read on.)
To me, though, it’s also a story of coming out from under a rock, or maybe of the rock itself coming out—”Kepha” meaning “rock” in Aramaic. Ever since Kepha closed a $50 million fund in spring 2007, I’ve been trying to get the press-shy Tango to talk about his unique firm. Finally, last week, after Tango announced the hiring of his first investment partner, former Atlas Venture IT partner Eric Hjerpe, he agreed. Our conversation marked what he says is the first detailed interview about the firm—its history, and its investment philosophy—he’s ever given.
Since this is a blog, here are some tags to set the scene: Immigrant, Driven, Yale, Harvard, Bain, Bezos (almost), Highland, Kepha, $50 million, $100 million, Investments, Entrepreneurial Advice, Hjerpe, Venture Socialism, Venture 2.0.
That’s the Tango-Kepha story, in rough chronological order. Tango was born in Indonesia (his family is ethnic Chinese) and moved to the States when he was three. He paints a picture of a classic American immigrant family. “We landed in America with a few suitcases, with $1,500, and I grew up in the Bronx [and] in Brooklyn, and my parents always said, ‘If you can ever be an entrepreneur, do it,’” he says.
Which is what he would ultimately do with Kepha. But first, there was Yale (summa cum laude in economics and poli-sci), and Harvard Business School (Baker Scholar). He worked five years at Bain. Then, in 1997, a West Coast venture capitalist Tango didn’t recognize—it turned out to be John Doerr of KPCB—recruited him to Seattle to work at a company called Amazon.com. Says Tango, “I was going to report to Jeff Bezos…kind of be chief of staff and help launch the non-book businesses.”
But Tango and his wife didn’t want to leave New England. Enter Highland, with an appealing offer: try being a VC, and if you don’t like it, become an entrepreneur-in-residence, or start a company. “They just left it very open,” Tango says.
He started at Highland as an associate in early 1998 and 18 months later became a partner. Over some nine years there, he focused mainly on early-stage venture, often engaging with entrepreneurs before a business plan was written. His investments included StreamBase Systems, Vertica Systems, and Virtual Iron; he was also involved in Ask Jeeves (NASDAQ: ASKJ), Digital Market, and NextCard (NASDAQ: NXCD).
Tango found he loved being a VC. “My hobby is my passion. I love starting companies,” he says. By 2007, at age 38, he felt the time was right to start his own fund. “In my family’s culture you haven’t accomplished much until you’ve started your own businesses. I just felt like I had to try,” he says. Plus, his brother-in-law, just 42, had recently died overnight of a brain aneurism. “That got me thinking about things,” Tango says. “It just made me realize that you can only start something new at certain points in your career. Life doesn’t last forever.”
He had no investment partner, so he hit the road alone looking for limited partners for a $50 million early-stage fund. “Everyone thought I was crazy. They’re like, ‘You want to raise a venture fund and you’re by yourself—are you nuts?’” His answer: “Yes, probably. But here is the market as I see it…”
In retrospect, Tango says he was lucky with timing—the economy was pretty good. “We were over-subscribed, about 3X, in ’07,” he says. Last fall, at the urging of a major investor and before the full effects of the downturn were felt, he doubled up to $100 million. All previous investors backed the doubling—and nearly all joined the new round, with almost everyone at their pro rata shares or above. “The timing could not have been better. I think we had dumb luck twice now in a row,” he says.
Kepha focuses on pre-seed, seed, and Series A companies—what its website calls “the foundation, or rock, of venture capital.” Which brings us to the name. “I wanted something that was memorable, short, and no one had had already,” Tango says. “I actually had to go to a dead language, Aramaic, to find something.”
Starting Small, Taking It Slow
So far, Kepha has worked in depth on seven companies (or ideas for companies)— three it decided not to continue, three it took to a Series A round, and one that is still pending. The A round firms include: AutoVirt (automated data migration for Windows servers), Azuki Systems (software enabling video and other content delivery to mobile devices), and ByLedge (founded by relational database pioneer Michael Stonebraker, it is still in stealth mode, though Tango says it’s in the “search space”).
Tango believes in working very closely with companies as they get going, in starting small, and in not forcing an investment. Smart, experienced entrepreneurs don’t want to raise a lot money initially, he explains. “The end game is not to raise a big venture round, the end game is to build a big, sustainable business.” If VCs have written big checks early on, they and the entrepreneurs can become so entrenched in the business that they have a hard time accepting reality if it isn’t the right idea. “No one wants to walk away,” Tango says.
Case in point: Kepha’s first investment, Azuki. Co-founder and chairman Cheng Wu had started three other companies that together created billions in shareholder value—Arrowpoint, Arris, and Acopia. Wu and co-founder Raj Nair, the CTO, showed up with a couple slides and an idea. “I thought the idea was interesting,” Tango says. So the men moved into Kepha’s office, and joined Tango in putting up $5,000 to get things going and investigate further. A couple months later, Tango says, “we thought we had something.” So both he and Cheng wrote checks for a several-hundred-thousand-dollar seed round. That led to a $6 million Series A round led by Kepha and Sigma Partners that closed in September 2007. Azuki raised another $6.1 million from the same two firms and company management this May.
It was a similar story with Stonebraker. Tango had worked with the database expert at Highland. Stonebraker had a new idea, named Morpheus, that they developed at Kepha for nine months with minimal funding. At that point, says Tango, the men agreed that “it was interesting, but not compelling. So we said we’re going to stop working on it. Three months later, he [Stonebraker] had a new idea.”
That was ByLedge, which in July 2008 completed a Series A round (the amount is still undisclosed) with Kepha and Flybridge Capital Partners as co-funders.
Until Hjerpe joined last week, Tango was the only investor at Kepha Partners. He has actually been looking for an investment partner almost since Day One. “I’ve met with 70 people over three years,” Tango says. “We take our time in recruiting, because we’re looking for partners in the truest sense of the word. The fit has to be right.”
Which bring us to the venture socialism model. There are only four people at Kepha—Tango, Hjerpe, Ed Hamilton, the firm’s CFO, and Lyn Elfman, an executive assistant. Aside from Elfman, everyone is a partner. There are no managing partners, managing directors, VPs, junior partners, associates, etc. And while Tango won’t talk in detail about the firm’s economics, he says they are unusually egalitarian for a venture firm. “We’re venture capitalists, but we’re venture socialists.” he says. “I think it’s very fair to say that we share the wealth and the upside in our firm.”
I tried to learn more about what this model means—asking if all partners got the same salary, or what. Tango stuck to his guns about not revealing more, but he did say that “the Kepha vision is an equal partnership,” and that its “economics are as flat as possible.” It sounds like all partners get roughly the same compensation—but read into it what you will.
This flat partnership, though, ties into a last critical aspect of Kepha’s investment philosophy. Says Tango, “We firmly believe that, one, the entrepreneur is our customer. Two, we have to add value to our entrepreneurs and their companies. And thirdly, the best people to add value are people who have been in venture a long time.” He believes there is simply no replacing experience when it comes to helping an entrepreneur—from experience with different economic conditions and business models to a strong Rolodex. When he finds the right experienced partner, he is willing to share the wealth. “I firmly believe venture capital is best played as a team sport,” he says.
Tango isn’t saying venture socialism is the way of the future—but he does think that venture capitalism is undergoing a period of transformation and that small, focused firms like Kepha with somewhat untraditional models might be illustrative of one potential new path for the industry.
“I just get the feeling that VC 1.0 is over,” he says. “The industry is going through massive change, and we’re in this in-between period where the VC 2.0 period is going to start, but yet we don’t yet know what VC 2.0 is going to look like.”
Every industry goes through transformative periods, and venture capitalists of all people shouldn’t be surprised at this reality, he says. After all, they are funding startups that routinely go after the likes of IBM, Amazon, and Google with game-changing ideas. Says Tango, “It would be weird if all industries go through change, and the one industry that doesn’t change is the one industry that funds innovation.”