Of Aspirin, Bubbles, and Clouds: A Chat with OpenView Venture’s Scott Maxwell
“We’re not social media investors,” says Scott Maxwell. And I like him already.
Maxwell is the founder of OpenView Venture Partners. The Boston-based VC firm is different from a lot of its peers in that it doesn’t typically invest in early-stage startups or late-stage growth companies. Instead it specializes in something in between, what it calls “expansion stage” deals: OpenView’s sweet spot is investing $5-15 million in tech companies that are making $2-20 million in annual sales and are wanting to get to $100 million in revenue, he says.
As Maxwell suggests, OpenView’s sector focus is less on social technologies, and more on the less flashy but highly lucrative fields of business software, cloud computing, and software as a service. The firm does look at consumer technologies, he says, but so far it has invested only in business-to-business companies. “You can invest in aspirin, vitamins, or endorphins,” Maxwell says. “A lot of [social media] is investing in endorphins. We’re much better at aspirin.”
OpenView has been around since 2006 and focuses on companies that are building their customer base in North America. The firm grew out of Maxwell’s experience at Insight Venture Partners, which he joined in 2000. Long before that, he was an MIT PhD in mechanical engineering and an MIT Sloan School MBA. He spent the ‘80s doing technology development at a couple of California startups, and the ‘90s working in financial services.
As he explains with his VC hat on, the expansion stage is the “best risk-return investment. It’s a really good point to invest. The expertise you need is unique compared to early stage or later growth stage.” The great majority of companies OpenView invests in are already “successful, chugging along, and growing nicely,” he says. (It’s still a bit early to talk about the payoff though—more on that below.)
Back in the summer, I talked with Maxwell (see photo, left) in depth about OpenView’s approach to investing in and supporting mid-stage tech companies—a stage that seems sorely lacking in capital, given the glut of seed- and early-stage investments being made out there. We also talked about broader trends in cloud computing, mobile software, and the Boston-area technology ecosystem. I wanted to relay some highlights here that have stayed with me.
But first, let’s address the b-word. When we spoke, in early August, there was a lot of talk about a new tech bubble, especially around early-stage companies. Maxwell was prescient in his response to my query. “I haven’t take a bubble bath in a long time,” he said. “There are lots of [kinds of] formations of bubbles. Sometimes they get bigger and slowly dissipate, or they get really big and pop. I think bubbles pop when everyone is all-in. When all the money is in, it has to come out.”
Maxwell contrasted the market dynamics with the original dot-com bubble. “By the time we got to ’99-2000, everyone who was going to be all-in was all-in,” he said. “My sense is we’re not there yet. We’re in an inflated state, but for me it feels tempered.”
With that in mind, Maxwell said, OpenView’s “philosophy is to keep building the companies and don’t worry about exits so much.” What the firm does worry about is the growth of its companies. “We try to get them on a high-growth trajectory,” he said. “Almost everything we do will be [mergers and acquisitions as exits]. We aim to get them to $100 million.”
Maxwell says it’ll be at least another year or two before most of the firm’s investments become ripe for acquisitions. So far, only one of its companies, San Francisco-based Loyalty Lab, has been acquired—by Tibco Software in December 2010, for $23 million.
A quick rundown on a few of OpenView’s current investments:
—Intronis, based in Boston (previously in New Jersey), does online data backup and recovery. The firm used to sell its service mostly to consumers, but as Mozy and Carbonite came to dominate that industry, Intronis shifted to IT service providers as its main customers. OpenView invested $5 million in the company in 2007.
—Skytap, based in Seattle, specializes in cloud computing software that helps organizations manage “virtual” machines for software development, testing, and other tasks. OpenView led a $10 million Series C round for Skytap at the beginning of 2011.
—Zmags, based in Boston (it started in Denmark), is a digital publishing, marketing, and e-commerce startup. The company hired Michael Schreck as its new CEO back in May. OpenView invested $4.2 million in the company in 2008.
One thing these companies have in common is cloud-based software. As Maxwell sees it, a sea change happened about a year ago in how businesses think about cloud computing. “There’s a real difference from a lot of hype to a lot of reality,” he said. “The software stack has evolved far enough that it makes huge economic sense for companies to outsource their servers. It’s not just the servers, it’s the software, and the people that manage them. It’s gotten so sophisticated that it’s hard for mid-market companies to have staffs [to manage servers and software].” By his math, companies can save “around 50 percent of overall cost” using cloud service providers such as Amazon Web Services.
One theme I’ve been thinking about lately is how and why a company like Amazon sprang up to take the lead in cloud computing, instead of a Boston-area firm, say—seeing as Boston has traditionally been strong in infrastructure and networking technologies.
“It comes down to individual entrepreneurs,” Maxwell said. “Boston is really set up well for [business-to-business] technology, in my view. Boston missed a couple of wind shifts, while some of the stuff like networking was tapering off. It feels to me that Boston is a little behind New York, and a lot behind California. But it feels like it’s getting better, in general. Boston could be a great cloud hub if some entrepreneurs locate here.”
Maxwell added, “I think there are some opportunities with cloud—and mobile devices—that may create a whole new generation of innovation.”