If I went to all of them, I’d get even more obese than what I got during the Oktoberfest. I am speaking about the high-caliber events in Bangalore that are happening on a huge scale these days: great speakers, smart audience to network with – followed by a lavish buffet on Indian food one can hardly resist.
But tonight I went. Terry Garnett was on, at a session of TiE. Terry who? Maybe this gentleman is not too famous by his name, but he has an amazing track-record and has found a very exciting niche in the investment industry. In his 25-year career in technology he used to head the global marketing for Oracle (“I worked for Larry”) and then started out in the venture business working as a partner for the Rockefeller family. After 6 years, he started out his own firm with a partner, Garnett & Helfrich Capital which could clearly be identified as a “Blue Ocean Strategy”. His firm does not go into head-on competition like the 1000 US-based VC-firms in the early stage, neither is he at the other end of the scale in the in the corporate buy-out business. In the latter value creation derives to a huge extent from pure financial engineering. He in fact defined a new industry with being a VBC (=Venture Buy Out). His first fund comprised US-$ 350 mn, and his firm is in the process of raising a second one at US-$ 850 mn.
In comparison to a classic investor, there are several layers of complexity which have to be mastered and institutionalized, but can in turn create an amazing performance. A VBC does not create a dealflow of companies which are for sale anyway. Rather, supported by the trustful network of contacts he has established, Mr. Garnett is looking for divisions in companies which have a great product but in his analysis are badly underperforming. An ideal candidate would be: good brand name, loss making, de-motivated management and revenue upside in his assessment 3 to 4 x. He convinces the management to spin it off in a separate entity whereby still keeping 20 to 25 % as a stake. Following the due diligence and take-over, the real-work begins: Restructuring and literally “carving the division” out from its incumbent infrastructure. “Carving out”, an expression Mr. Garnett tonight certainly used a dozen times. Two companies in the portfolio are presently for instance Ingres and WYSE which – like accidently – have been sponsors of this evening (see picture top right corner).
VBC requires very active investment. One of the biggest challenges is finding the best possible man-agement to stage the company anew (“it’s all about people”). The major attraction is a fat salary plus 1.5 % of a company which is generating, say, US-$ 40 mn in revenue. He mentioned that he was able to poach a senior manager from Oracle away. (I am not sure if “Larry” found that so cool …) He altogether reserves up to 20 % of the equity to attract, retain and motivate top-talent in order to turn the company around. Finally, he has the classic job of portfolio management to bring the company at some point to a liquid event and give the money – hopefully with a nice return – back to his limited partners.
During the Q&A-session I asked Mr. Garnett how this diverse complexity in his own organization can be scaled. He replied that it was indeed one of the biggest challenges. Opposed to classic VCs where each partner works on one deal alone, often the whole board of four partner gets pooled to work just on one deal/project over several months. Then there is hired staff in infrastructural roles, like one full-time-employee only taking care of facility management to find office space around the world. And finally, there a many, many consultants which work on a project-to-project basis. Huh, that’s complex indeed, and to some extent reminds me from my experience of some parallel challenges on the level of a company-incubator.
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