Voyager Capital didn’t invest in the Internet’s sexiest sectors. And in retrospect, that turned out to be a good thing. Instead, this four-year-old VC firm has steadfastly focused on proprietary software for business transactions, an increasing number of which are being done online. In Voyager’s portfolio are Seattle companies such as CheckSpace, provider of online check-processing, and Captura Software, which sells financial-analysis tools to the Fortune 500.
Headed by former alums of Adobe/Aldus, Microsoft and Xerox, Voyager’s low-key but intense due diligence has met with success. Three of its initial 13 investments were bought, including Tegic (by AOL) and NetPodium (by Intervu/Akamai). Now, Voyager is looking to invest its second fund, $215 million big. To find out how and where, we talked to Erik Benson, a principal at Voyager who joined the firm in 1998. After graduating with honors from Harvard Business School, Erik co-founded the private equity group at Chemical Banking Corp. and was IT management advisor at PE Corp. (parent of the genomics company Celera). Erik’s a local boy, to boot, having grown up in Washington’s tulip country.–SJ
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Seattle24x7: Voyager Capital does not invest in Internet companies that sell to consumers, so-called B-2-C plays. In retrospect, that’s been a good decision. When and why was that decided?
Benson: Back in 1996, mainly because the firm’s founders came out of Adobe, Xerox and Microsoft and had backgrounds in business software. And they also realized that there weren’t any local VC funds focused on e-business or the enterprise. Back when B-to-C was the rage, we did look at HomeGrocer [now WebVan]. But we passed.
Seattle24x7: How much have you invested, and how much are you looking to invest now?
Benson: Fund I was $48.5 million, and it was invested in ’98 and ’99 in 13 companies. Fund II has $215 million, of which $144 million is not yet invested. We’ve put money into five new companies so far and are looking to invest in eight to 12 more.
Seattle24x7: It’s difficult–if not impossible–to take an unprofitable company public these days. Given the ice-cold IPO market, one of your investments–Captura Software–had to withdraw its IPO. How are your portfolio companies, all of them startups, funding operations?
Benson: All companies we support have proprietary technology, so there’s always the potential for a buyout by a larger corporation that needs that tech. Of the 13 companies we had in our first fund, three were acquired and only one did an IPO.
Of course, the M&A market has also slowed down, too. Each week we monitor the gap between how much we’ve invested in a company and how much will be required before the company turns a profit. Through our own funds, our syndicate and corporate partners, we’re filling those gaps. Captura Software has large corporate partners, who have also stepped in with funding.
Seattle24x7: What kind of follow-up money are you willing to commit to your initial investment?
Benson: In our Fund II, which has $215 million total to invest, we’re looking to invest between $10-$20 million over the life cycle of any one company [including the initial investment, which was recently running $3-$5 million]. This is assuming all goes according to plan and the company is meeting its milestones. Many venture-capital funds did not reserve enough for follow-on investing, because in 1999 and early 2000 VCs found that they could do just one round of financing and the next round would be an IPO. So they might have up to 50 portfolio companies that they had not adequately reserved for.
Seattle24x7: Guess that explains why VCs were pulling the plug on some of their investments. Are you using money in your Fund II to invest in the companies that Fund I committed to?
Benson: Very rarely. But if we see great management meeting milestones, we occassionally do what’s known as a “crossover” investment. One example would be SeeCommerce. We had a small investment in that company in our Fund I and we added to it through our Fund II.
Seattle24x7: AvenueA, which tracks and facilitates online advertising, was the only one of your portfolio companies to go public, so far. Are you still invested in AvenueA, whose shares have plummeted since the IPO?
Benson: We’re still a large investor in Avenue A; we haven’t sold any of our holdings. Although we’re not on AvenueA’s board, we maintain a close relationship with the company, in terms of assisting them to acquire new customers.
Seattle24x7: What’s your take on the wireless Internet, and how are you investing in that sector?
Benson: We don’t know much about consumer applications for wireless. From a business-application perspective, we’re watching very closely two wireless LAN standards: 80211B and Bluetooth. Initially, we’re looking for companies creating the “middleware” that enables wireless Local Area Networks (LANs), which are basically in-house corporate networks, such as the one Microsoft has. And we’re also looking at companies that enable the wireless Internet, connecting workers outside the corporate compound.
One of our most-recent investments is Oregon-based Qsent, [which allows companies to access more accurate directory-assistance info on their wireline and wireless devices and also allows cell-phone users to book taxis and limos]. Qsent’s management team, lead by Patrick Cox, came from Metro One, providers of the 411 service, and they have lots of industry experience and contacts.
Seattle24x7: Erik, a lot of the Internet stocks are down 80% to 90% from their 52-week highs. How does this compare with venture-capital valuations?
Benson: Private-company valuations have not dropped as much as the stock market, although they might get there. In the area we invest in, enterprise software, I’d say they’re down 60% to 75% from their highs, which is about where they were in early 1998, which we consider “normalized” levels.
Typically, private companies are not valued according to the current stock market, because it usually takes a startup three to five years to go public or be acquired. But when the market was soaring in 1999, entrepreneurs were insisting their companies be valued in line with similar publicly traded equities. Given the fall in stock prices, they’re no longer making such connections.
Seattle24x7: What’s different about how you’re investing Fund II vs. Fund I?
Benson: The initial investment is definitely smaller, at around $3 to $5 million. And there are performance goals, or milestones, that must be met. And valuations are also lower.
Seattle24x7: Do you believe the tech-stock implosion caused a drop-off in entrepreneurial activity locally?
Benson: There’s still a large supply of capital out there, looking to be invested. And it’s increasing being put into the top-tier companies. There are three levels of entrepreneurship: Tier A has highly experienced management, large market opportunity and great technology. These are the Qsents, and they’re still getting funded at reasonable valuations.
Tier B companies typically have been funded in the recent past and are now looking for a second round. They have some traction and decent technology, but the VCs are much pickier about investing in them. We haven’t seen a dropoff in Tier A or Tier B activity.
It’s the Tier C level that’s not being funded, which we think is good. These are the total startups–first company, first product in a market that may be saturated.
Seattle24x7: How competitive is it vying for local VCs for those top-tier companies?
Benson: Actually, Seattle isn’t as competitive as you might think. During the tech-stock heyday, quite a few firms elsewhere in the country started to get greedy. Whereas they would typically call in other VC firms to partner with them in making an investment, they started to go at it solo. So you saw VC firms investing $20 to $30 million in a company so they could own 20% to 30% of it outright. In the past, they might have had three or four other VCs sharing the risk and reward.
The good news is that solo VC investing didn’t materialize in Seattle. That’s probably because we don’t have huge local funds, although we do have a couple of national funds with local offices that are close to $1 billion. Seattle has more of a collaborative VC environment. I can’t think of a single company we’ve invested in without another VC joining us. I can’t think of one local VC that started taking rounds all by itself.
And collaboration happens between the groups based here and with firms in Silicon Valley and on the East Coast. We have a three-person office in Palo Alto, so we can take local companies to California VCs and even to the East Coast, where our investors include JP Morgan Chase.
Seattle24x7: You’re president and co-founder of the Seattle Association of Young Venture Capitalists. What’s that all about?
Benson: I created this group to foster better communication among local VC firms. We have 65 members now–from analysts all the way up to managing directors–and get together informally. Most people are 40 or below and there are quite a few women. The website is at: www.sayvc.com
Seattle24x7: Thanks, Erik.
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Voyager Capital
www.voyagercap.com
800 Fifth Ave., Suite 4100
Seattle, WA 98104
206-470-1180
Palo Alto, Calif. office: 650-855-9300
Year founded: 1997
Managing Directors: Bill McAleer (Aldus, Westin Hotels); Tony Audino (Microsoft); Enrique Godreau III (Gartner Group, Adobe, Xerox); Curtis Feeny (Stanford University’s venture and LBO portfolio).
Investments in past 12 months: CapitalStream, CheckSpace, ClaimsDesk, Contivo (Calif.), eCustomers (Texas), Planet 7, Qsent, SeeCommerce (Calif.)
