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Tuesday, July 16, 2013

Failing Forward Still Hurts

Failing Forward Still Hurts

A cautionary tale of misses in the quest for success in my own venture-capital fund 

I was a venture capitalist for 13 years, investing early and often in technology companies in the Pacific Northwest. I had a few years of experience under my belt when three of my investment co-workers and I struck out on our own to form a fund called Greenstone Venture Partners. We sourced $40 million from big institutions. We raised the fund in 1999 and started investing in March 2000. We worked hard, had some small wins, but we had some bigger misses. Our timing was impeccably bad. This is a cautionary tale about how hard it is to be a VC and how heart-breakingly close you can come to raging success.
Greenstone made six investments in its first six months because we were in a big hurry to be a part of the dot-com and communications gold rush. One of those was a local company called eTunnels Inc., which allowed file sharing between computers. It was remarkably similar to Dropbox in form (though maybe not in function, as it was more peer-to-peer).
Ultimately, it didn’t succeed, but from the ashes of failure came success. CEO Dimitri Sirota left eTunnels and started Layer 7 Technologies Inc. with two other local fellows. In May this year, Layer 7 sold to CA Technologies Inc. for a rumoured $180 million. For us, it was a case of the right guy, wrong company.
We made another investment in a California startup along with some of the biggest names in venture capital: Battery Ventures, Norwest Venture Partners and Morgenthaler Ventures. The company, Inkra Networks Corp., was co-founded in Burnaby and Fremont, California, simultaneously.
Five years in, after gaining some customer success for its innovative piece of data-room hardware (and tallying more than $10 million in yearly sales), the company found that its market was the larger data centres of the day (Savvis Inc., AT&T Inc., Telus Corp.) and not the enterprise data centre. The lead Silicon Valley VC in the Inkra deal famously said at the time, “There is no market in the larger data centres; it is all about the enterprise,” after which he packed up his things and would not put any more money into the company.
Turns out that amazing, forward-thinking VC named to the top of the Forbes Midas List in 2004 was completely wrong. A little thing called “the cloud” emerged, making the enterprise data centre obsolete. Oops. And we had sold it for scrap to Nortel Networks Corp. Double oops.
But our biggest failure as a fund, it turns out, recently emerged as a story of an epic miss. In 2000, our fund invested in a Seattle startup called NetUpdate. It was a software-as-a-service application for mortgage brokers to use to originate and process loans. It was a hard slog getting people to use an Internet-based system back then and NetUpdate CEO Tom Gonser struggled for sales. In 2004, we asked Gonser to leave and brought in a CEO who was more experienced with mortgages. But a year before that, Gonser had talked us into buying an asset from a bankrupt Seattle company called DocuTouch, which he said would help the loan process online. As he departed the company he asked us, the investors, if he could buy back that asset for $10,000. We said yes.
In 2005, Gonser started his new company around that asset, which allowed for signatures to be taken online. In 2006, he got his first funding from Seattle VCs. By 2012, he had moved to San Francisco and closed a $55.7-million round with venture firm Kleiner Perkins Caufield & Byers (famous American venture capitalist and Internet guru Mary Meeker is on his company’s board), bringing the total funding to $112 million. It’s one of the hottest software companies in America and now known as DocuSign, the world’s leading electronic signature platform.
And we missed it. Big time.