“Would you hire someone to be a CEO who’d never been a CEO before?” asks a member of the well-heeled audience attending this standing-room-only venture capital seminar.
The question is directed at Pete Higgins of Second Avenue Partners who is arguably the most qualified to answer among this panel of experts. As a former Microsoft executive who has run units like MS Office, MSN, MSNBC, Expedia, Carpoint, Slate, Internet Gaming Zone, PC games such as Flight Simulator and hardware products such as the Microsoft Mouse, well, he gets asked this all the time.
“My response has always been, ‘Most great CEO’s are in their first CEO job. If you look at the great ones, Michael Dell hadn’t run a big company when he got started, the same with Bill Gates, and Jack Welch at GE, ‘ ” explains Higgins.
But what about the COO, CFO or CIO positions? And what happens if the CEO has a tough time getting over a start-up’s early speed bumps as the company’s activities begin to accelerate? Just in case the going gets tough, it’s nice to have to a few battle-tested veterans on your team to get things going. It’s a unique breed of venture capitalist who knows where the landmines are buried. That’s what sets Higgins and his partners, Nick Hanauer, Mike Slade and Keith Grinstein of Second Avenue Partners apart.
Few venture capitalists have the level of management expertise that these four bring together. When Second Avenue Partners was founded, Hanauer had just finished taking Avenue A public and had hired a CEO. Grinstein had moved to Vice Chairman of Nextel International and hired a CEO. Slade had sold Starwave. And Higgins had left a stellar career at Microsoft.
We asked Pete Higgins for a virtual snapshot of the firm and what he feels differentiates Second Avenue from other VCs.–LS
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Seattle24x7: Can you give us a few examples of the different companies in your portfolio and what you like about each of them?
Higgins: Sure. With Hablador, we see a huge opportunity for a new generation of tools for Web site creation, particularly intranet site creation and management, to be done an order of magnitude easier and cheaper. The cost of first generation websites was indefensible.
In the case of TeraBeam, we are bullish about broadband communica tions. TeraBeam’s fixed wireless technology offers the potential for ultra high speed connectivity.
Digimine is all about providing the data and tools to maximize the effective-ness of websites. Led by a top-flight management team, Digimine has best of breed tools that are offered as a cost-effective service. Anyone who’s serious about their website should leverage the service—the market opportunity is enormous.
Then there’s Bocada. Storage is one of the fastest growing components of IT budgets. Bocada dramatically improves the efficiency and integrity of a key part of storage, data backup. As more and more of business becomes digital, the importance of backup integrity grows exponentially as does the need for tools to manage it.”
Seattle24x7: What Internet sectors are you finding the most value in now?
Higgins: We’ve done two fixed wireless communications equipment companies (Malibu and Terabeam) and remain bullish on these kinds of infrastructure investments. We’ve seen less in the way of B2C that we like, but see a lot of potential in tools that allow business to leverage the intranet (e.g. Digimine, Hablador, TeamOn), software (Bocada), or business services (e.g. Essention, HouseValues).
Seattle24x7: Obviously you don’t believe the “wireless Internet” is a joke (undoable), as some have suggested?
Higgins: It’s not a joke. It may not be as popular in all dimensions as some people have suggested, or not all things that are technologically feasible will be popular with consumers, but widespread access to the internet using a wireless device will be a reality.
Seattle24x7: What was the impetus in the formation of Second Avenue Partners?
Higgins: “We wanted to get involved in young companies, not as pure investors, but as mentors. We believe that the value isn’t created doing the deal. It’s figuring out how to delight customers with great products and provide great service, hire great people, and all the things that come with running a company.
Seattle24x7: How do you interact with your companies?
Higgins: You’ll find us meeting on a weekly basis with the CEO. We’ll sit down and go through the issues of the day and then actually get to work on them, whether it’s hiring, or figuring out pricing strategy or reviewing the product or marketing plan, or fussing over the financials and how fast we can burn cash. We’re far more frequently involved and in greater depth thanmost of the VC’s I know.
Seattle24x7: Are there specific issues or challenges you deal with that are confounding startups?
Higgins: We think we can help with most of the critical decisions. What’s important in any given company varies somewhat, but the common traits among all of them are hiring the right people, making those first customer or strategic contacts, making the right product and marketing decisions. In general, determining how are you going to spend the money.
Seattle24x7: You’re obviously looking for high caliber people, but does your approach also mean that you can take on a founder who is more entrepreneurial or more technical, knowing that you can provide the management expertise?
Higgins: I think so. It’s a complicated question. You’d like to work with someone who is bringing as much as possible, but I think we’re very comfortable with people who have deep domain expertise or specialization. We can help them fill out some of the management disciplines where they haven’t had that experience.
Seattle24x7: What makes for a better CEO, a strong vertical specialization or being a generalist, and which are you more interested in?
Higgins: Someone could be highly successful coming from a generalist direction or coming from the deep, passionate domain expertise, but they will fail if they don’t acquire enough of the other. The passion and deep understanding of a subject matter is probably the harder thing to find. It comes down to really understanding the customer and the solution that you’re providing to them.
Seattle24x7: Why have a majority of Internet “incubators” failed?
Higgins: The way the term “incubator” is used is fairly imprecise. Typically it has meant setting up a “production line” for a company, having a building and a bunch of people like accountants and designers and some technologists on staff. I don’t think that works for a number of reasons. Mostly because that isn’t the hard part. Being able to quickly get an accountant and a copier, or get your health plan set up is nice, but it’s not the hard part.
Now “incubating” as a verb is a very successful model. Getting in and providing advice, counsel, and sweat as needed. That is, broadly speaking, what we’re doing. You take great people with great ideas, you fill out some of their expertise and perspective, and add some gray matter and equity to the process — get them off on the right track.
Seattle24x7: Do you look for synergies between your portfolio companies?
Higgins: In a perfect world, what you learned from one company could be helpful to others. Some portfolio companies are like that, they have the Keiretsu effect of built-in partners and built-in sources of knowledge. They can trade a lot of best practices.
Seattle24x7: Can you give us an example in your portfolio?
Higgins: A simple example would be DigiMine, a data mining company. They are using Hablador’s [another Second Ave. Partners’ company] enterprise Web content management system to some of their Web site work. That’s a case where we simply suggested that the founders of the companies get together for lunch.
From a Keiretsu point of view, size matters a lot. Kleiner Perkins and Softbank have people whose sole job it is to work the connections between funds. They’ll have CTO meetings or marketing meetings or retreats among all their E-commerce companies and share data and trade ideas. That’s chapter one of the venture capital playbook these days.
Seattle24x7: What are some of the more valuable lessons you learned at Microsoft that you’ve brought to your VC role today?
Higgins: It surprises people, but the meetings and the business issues are very similar. Granted, Microsoft is a bigger company, and some of the decisions may have had more zeros attached to them, but the basic issues are quite similar. How do you evaluate a market and competition? How do you think about customers? Do you have the right product plan? Are you marketing effectively? On the other hand, I didn’t go to too many meetings at Microsoft talking about cash flow. Microsoft was well past that stage.
Seattle24x7: You managed Microsoft Interactive media including Expedia, CarPoint, Encarta, MSN and others. Was your approach and the culture to look at each of these in an entrepreneurial sense as separate businesses and grow them as their own egg so to speak?
Higgins: That’s exactly what we did. We had separate P&L’s for each businesses. When I was running Office, we’d look at all the different pieces as components, and say, is this a good idea?”
Seattle24x7: You could almost consider Microsoft as the supreme venture company in terms of the number of diverse business they have developed under one (rather large) roof?
Higgins: Microsoft has had to twist around a bit…let’s say travel. It’svery software intensive but the support issues of a lost ticket are a lot different than not being able to do mail merge. That’s a very different deal.
Larry Sivitz is the Managing Editor of Seattle24x7.
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Second Avenue Partners
1000 Second Avenue, Suite 1200
Seattle, WA 98104
Tel: 206.332.1200
Fax: 206.332.1201
Founded: February, 2000
Amount Invested: This amount is confidential (Second Avenue has not raised a fund). “It’s fair to say that the most common deal is $1M, with some smaller.”
Partners: Peter Higgins, Mike Slade, Keith Grinstein, Nick Hanauer
Portfolio Companies: Hablador HouseValues.com, TeraBeam, Digimine PublishOne (Sold to Intertrust), Malibu Networks, Essention, TeamOn, Bocada
For more info or to submit a resume, contact: [email protected]
To submit a business plan, contact: [email protected]
