Voyager Capital Founders Discuss Investment Strategy, Connected Computing, and the Future of Venture Firms
Bill McAleer and Enrique Godreau remind me of an old couple. They’ve been through the ups and downs together. They’ve raised three children (OK, venture funds) in the past 10 years. They even sometimes finish each other’s sentences. And together they’ve built Voyager Capital into one of the most forward-looking venture firms in town.
First, some vital stats. Voyager Capital, based in downtown Seattle, has some $370 million under management. It raised its funds in 1998, 2000, and 2007. It does primarily early-stage deals across three main tech sectors: software and services, wireless, and digital media (including e-commerce, advertising, and marketing). It has a satellite office in Menlo Park, CA, and just opened a branch in Portland, OR, last month. Earlier this month, Voyager led an $8 million Series B investment in Los Gatos, CA-based Nusym, which makes software for verifying electronic designs.
I had a chance to sit down with McAleer and Godreau last week to talk about Voyager’s strategy and how it fits in with important trends in the tech industry. They discussed some of their portfolio companies, but they also expounded on the broader theme of “connected computing” (sometimes called ubiquitous computing) and how the Seattle area is uniquely positioned as a tech-business center. They also touched on the effects of the current financial crisis on investment strategy, and how they view the broader future of venture capital.
When McAleer and Godreau co-founded Voyager Capital in Seattle back in 1997, the tech world was a different place. Microsoft still ruled in software. The Web was just taking off, and Google didn’t exist yet. Amazon.com was just two years old. McAleer had come from Seattle-based Aldus (inventor of PageMaker) with a background in multimedia, and had his own firm for three years working with early-stage companies. Godreau had come from Gartner Group and Adobe by way of Xerox PARC; he was an early backer of Seattle-based aQuantive, which had a big IPO in 2000 and was bought by Microsoft for $6 billion last year. “We thought this region would take off as a tech region,” says McAleer.
But there were a number of challenges. “When we first started, it was how to get really senior talent into the city,” says McAleer. “That’s changed a lot. But back in 1997, there were still only a couple of opportunities they could go off to if their startup failed. The cost to build is somewhat less here [than Silicon Valley], so there’s a cost advantage. The other challenge is to attract really top-notch sales and marketing talent. It’s still thin in terms of really qualified marketing people. On the plus side, with the connected computing trend, consumers are leading rather than businesses.”
I’m a technical guy by training, so I wanted to hear more about this trend, and where the Seattle area fits in. McAleer explains connected computing as the “next stage of computing”—the next step in its evolution from mainframes, desktops, and PCs to the Web, Web 2.0, and smart mobile devices. As I see it, the proliferation of smartphones, social networking, and increased connectivity is changing the way people live, and is leading to all kinds of new applications for consumers and businesses. “We’re going through another sea shift in technology,” McAleer says.
He continues, “The unique thing about Seattle is with the software, wireless, and digital media base… eventually we’ll be connecting at all times. Seattle is really well-positioned for the blend of all three… Most other tech areas don’t have the richness in anchor tenants and available talent. When we started investing, you’d see teams from one company. Now you see teams that are from a mix of companies. And around all that has grown up a capital infrastructure, supported by a strong university.”
“This geography happens to have a lot of skills,” says Godreau. “With Linux in Portland, Nintendo and Xbox designed here, network and wireless companies here, and prominent retailers like Nordstrom, Costco, Starbucks. What happens when you combine those elements? You get the computing of the future. That distinguishes us from the Valley, the Beltway, New York…It’s no longer about the silicon, it’s about the people on the other side of the silicon.”
A case in point is a Seattle company we’ve covered at Xconomy this month—Ontela, which is backed by Voyager. Ontela makes software that automatically sends pictures from your camera phone to your e-mail inbox or hard drive. Its product is driven by the needs of mainstream users, not corporations, which is part of the trend the Voyager founders are talking about. “Consumers have been leading the space,” says McAleer.
The reason for this, as Godreau explains, is that technology is still difficult to use. Although more and more people have access to fancy devices and software, doing basic things like storing and transferring data is surprisingly hard. Godreau calls it the “Revenge of the Nerds” phenomenon, whereby certain technologies used to be created by geeks for geeks—but now they’ve gone mainstream. He cites a study in the past two weeks that shows people in the U.S. now text more than they talk on their cell phones. The broader technical challenge to address is “exchanging information using visual data,” says Godreau.
We still force people to learn how to use complicated things like TiVo, Windows, and Internet Explorer, Godreau continues. He runs down a list of Voyager’s portfolio companies that are addressing the needs of mainstream consumers. Tropos Networks provides wi-fi outside of buildings. “You walk the streets of Mountain View, you’re connected. You don’t need to carry a laptop anymore, you know you can get to your bits,” he says. Or an application like Melodeo for managing digital media. “I forgot to update my music list, but I can use my cell phone,” he says. Or a software service like 1020, based in San Francisco, which delivers location-based ads to your cell phone. “You don’t need my name or my personal information, just where I am.”
McAleer also refers to the “democratization of content,” whereby the Internet has enabled more and more people to add material online. “Content creates new applications: how to sort it, how to monetize it,” he says. “There are new business models and new needs that consumers have. How to access, consume, and filter increasingly rich content. The emergence of the Internet has raised a whole bunch of interesting opportunities. Business applications can now be delivered over the network.”
Which is where Godreau chimes in with a bit of his personal pain. “Storage management is a huge challenge,” he says. “And content management: how to send bits. I have 5 terabytes of storage at my house…My bits are there, they’re secure, protected, I control them, I can access them—but I have to think about them. Now I have to get up early, and back them up. The bits rule. And our bits are only going to grow.”
That seems like a reasonable place to ask them about Voyager’s investment strategy, and what they look for in new ideas and companies. “When we look for investment opportunities, we are looking for companies to make these processes smoother and easier,” says McAleer. “And how to monetize it.”
One important issue is geography, which Voyager is addressing with its three West Coast offices. Voyager does about 60 percent of its deals in the Pacific Northwest, 35 percent in California, and 5 percent elsewhere. “Increasingly, we see the West Coast as networked. Entrepreneurs are becoming increasingly more mobile and dispersed, so our presence in those cities allows us to exchange resources, see trends, bring people between communities. It also helps us see a prospective deal in terms of how it fits into the West Coast view instead of just Seattle-based,” McAleer says. “Portland is interesting market, it’s developing pretty well. We see every deal down there…It’s not quite the same as Seattle in terms of volume. It’s a bit like Seattle was a few years ago.”
“We differentiate by providing resources and connections up and down the coast,” McAleer continues. “If you’re up here, we can connect you to customers and capital in the Valley. We use our geographic spread to build companies. We also differentiate on expertise…We help our companies a lot with their go-to-market strategy—what their target market should be, who their customer is, how to position their product. We’re pretty good at making customer introductions. We have a pretty broad Rolodex.”
In terms of the deal stage they’re targeting, McAleer says, “We’re actually looking for earlier-stage deals. But the angels seem to fill that in. Where it gets to be a challenge is that many of the large firms in the Valley have to put in a minimum of $2-4 million. Here, we can put in half a million to $2 million. A bigger number we’d do if we’re going to market.”
Given the recent upheaval in the financial markets, I asked how that affects Voyager’s strategy. “Business models are different,” says Godreau. “We’re very focused on capital efficiency. The exits, there are no IPOs and limited M&A deals. That has a trickle effect up the pipeline. So if that’s the endgame, [the challenge is] how to invest. Partnerships become important.”
“We’re looking at a longer-term horizon for investments,” says McAleer. “Most companies we’re investing in aren’t carrying any debt, so there’s less impact. A lot of successful companies came out of down times because they had good ideas and/or were very persistent, taking advantage of tough business conditions. With the lack of IPOs, venture investors rely more heavily on M&A. As we build companies, they have to be very valuable. We encourage companies to work partnerships aggressively, because often those partnerships are the ones to make the acquisition…You have to have a capital-efficient plan underneath that, so the returns you get are based on more modest exit expectations.”
And what about the broader future of venture capital? Are there too many VCs in the game now, I asked. “VC firms have to be differentiated in terms of what they offer to the entrepreneur, and what you’re offering to your investor,” says McAleer. “Over time, you’re going to see shrinkage in the number of firms…It’s like the 2000-2001 megafunds—that’s not a scalable model for venture. Inherently, venture is about working a number of opportunities and being close to entrepreneurs. It’s more an art than a science, picking interesting companies at interesting times. VCs have to be actively involved with companies—their fund size can’t be too large.”
Godreau echoes the sentiment, and adds a few nuggets of his own. “You have to have an informed point of view. You have to invest locally, and grow globally. You have to be an expert in specific threads to meet investors’ expectations,” he says. “There will be a winnowing of funds. There will be less of a mid-tier. Some firms will be very successful, and there’ll be ones that pick up the rest. The ones that will be successful will have a point of view, be willing to listen and learn from entrepreneurs and the market, and constantly adjust.” The good news, he adds, is that “entrepreneurship is alive and well.”