Listen to your customers!

It's an adage that is as old as time. But in the business of venture capital - just what does it mean? What customers (Limited Partners) want is very straightforward - top tier returns. Beyond that, they want goal alignment with the partnerships in which they invest. So, if you are already providing both, what do you listen to?

It turns out that in VC, as in many business settings, it is not just the outcomes that customers care about, but the process by which those outcomes are delivered. It is an LP's understanding and appreciation of the GP's process that provides the comfort needed to survive the inevitable J-curves and long periods of illiquidity.

In the case of OVP, having been in the business for 22 years, and having successfully raised six funds, there are times we might think we've heard every question an LP could ask. We might assume over time we have developed solid answers to all those questions. We might believe we don't need to listen so closely any more. That would be wrong.

One of the best reasons to go out and visit prospective Limited Partners, even when you have a very solid core of existing investors, is new people have a delightful knack for not taking anything about you for granted. They also tend to drive conversations to places you have not been recently (or maybe ever), with insightful results. Here are some questions we've been asked lately - and how they helped us think about our firm.

• "Your numbers are strong, but there are clearly some cases in the past where you kept writing checks (supporting a deal) when you should have stopped. Have you changed anything to address this?"

• This actually was not a tough one - simply because we had analyzed the same data, come to the same conclusion, and changed our process in OVP VI to put two partners on every deal - one, as board member who lives with the optimistic pride of parenthood, and one as resident cynic to ask the tough questions come "next check" time. Still, it pointed out that while we were ahead of the customer's question - it would have been awkward to be behind. Sometimes it pays to "listen in advance."

• "Tell us about a deal in OVP VI where you had competing term sheets. What did you do to win?"

• This one caused us to pause. It would have been straightforward to answer in earlier funds. But we have worked hard to develop unique proprietary deal flow, and so now rarely find ourselves in the multiple term sheet arena. The answer to this question was found in an earlier one (about how we create deal flow) - but until confronted with the issue, we hadn't actually internalized how much our progress had changed our process.
• "We invested in a well-known regionally focused fund, with frankly marginal results. Why should we believe the Pacific Northwest, and OVP, will be any different?"
• At first, we thought this was an easy one. Having already demonstrated excellent returns, with our strategy and in our region, we have the proof points. But that begged the question "why?" Finally, after some fumbling around, two reasons came to us. First, there was a big distinction between the PNW and the other region. Washington and Oregon offer a much more diverse and rich set of technology infrastructure, and so a broader set of start-up opportunities. Second, the fund in the other region had grown to be quite large, probably outstripping its ability to mine the local soil. By staying at the size we have, we matched our scale to our opportunity set. That latter answer also provided a solid reminder to us why a hard cap on our fund size remains a good idea.

No matter what your business, customers can provide the necessary mirror to make you look hard at yourself and evaluate where you measure up, where you may have been doing the right things without even thinking about it, and where you may need to take corrective action. To keep their competitive edge, venture capital partnerships would be wise to continually take advantage of sophisticated potential LPs.

Listen to your customers!

Mobile video is a hot topic.

South Korean carriers already offer mobile video services, trials are underway in Japan, Europe and the US, and the Chinese Government has selected China Mobile to provide mobile TV for the 2008 Summer Olympics.

The evolutionary path will vary significantly between regions -- different standards, different ecosystems of players, and different timeframes. Other current barriers to widespread adoption of mobile video are:

• Video-enabled wireless handsets require many different types of integrated circuits: multimedia processors; video controllers; camera controllers; display controllers; video receivers; radio frequency ICs; power management; base band ICs; and memory ICs. Semiconductor firms have to design these multimedia capabilities into ICs within the constraints of: small form factor; battery life issues; short product life cycles; and ruthless pricing pressures.
• Technical challenges associated with aggregating and distributing video content over wireless networks and compatibility issues with a wide variety of handsets.
• Scarce licensed spectrum and network bandwidth constraints.
• The user experience and filming requirements are very different from broadcast TV. There has to be a wide range of new, compelling, short video clips that often will be viewed on smaller handsets.
• Content licensing & Digital Rights Management

Many firms are trying to address some of these problems. So what are the best opportunities for OVP to ride the mobile video wave over the next 3 years?

We will focus on enabling technologies. The wireless video handset segment is a great target market for our portfolio firm, Ambric. Ambric is developing a new type of programmable IC platform that accelerates time to market while also slashing system development costs. We also are looking at investment opportunities which enable content aggregators and carriers to distribute video and other content to a wide range of devices, offering an optimal user experience while not overburdening wireless networks.

Stay tuned!

Don’t listen to your customers too much!

Wait a minute? Doesn’t this contradict the “Charting The Course” article above? In a way, it does.

One area where we are often called upon to counsel our portfolio companies relates to how much they should modify their original product and market plans to satisfy a key early account.

This is a tough issue, because while we can say “focus-focus-focus” all we want, out of the other side of our mouths we are saying, “Get some customer traction if you want to see the Series B check!” In the end, it usually comes down to a matter of degree, and a matter of how skilled the new management team is in bending but not breaking.

For example, we have a portfolio company that very nearly broke themselves and us to capture that key anchor account. The customer – the clear industry leader in their space, originally said they would go with our firm, right during the time we were doing our due diligence. It was the triggering event that got us over the hump to invest. But then, interesting things began to happen.

The account found the company's “standard” product was not exactly what they wanted. They wanted some “changes.” By the time it was all done, there was a custom design for them, that took a year to deliver (against a six month plan) and another year to get all the bugs out. No one had assumed such a massive redesign, and so no one built in any “beta” phase for this fully committed customer. It was a two year delay to revenues and cash – and we as investors nearly threw in the towel en route.

The good news is that with all the trials here, the outcome was positive. Not only did the major account end up happy, but the new design was a real advance that will be incorporated into future products for general release. This was an industry leading account after all – and they knew their stuff!

Still, it is a cautionary tale – we have also seen the outcome go the other way. When it comes to landing that first big customer, start-ups have to tread a narrow path between responsiveness to customer requests and de-focusing.

The key is to manage the process, as well as the customer!

After a year in stealth mode (how appropriate for a network security software company), GraniteEdge Networks of Bellevue, WA has emerged from the shadows. The firm provides Network Based Anomaly Detection (NBAD) for enterprise computing networks. GraniteEdge identifies suspicious activities by performing deep packet inspection and enhancing this data with events from firewalls, intrusion detection systems, and routers to provide enterprise customers a global view of internal network activity - allowing them to quickly identify normal and anomalous behavior. This helps defeat elaborate or “blended” attacks, called “the most significant online threat to companies,” by IDC.

OVP provided the $1.25M seed round in GraniteEdge last year, and now has co-led the $6.5M Series A investment with Outlook Ventures of San Francisco, CA. Lucinda Stewart serves on the GraniteEdge board for OVP, backed up by Dr. Rick LeFaivre.