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ExecutiveBiz: Tell us about your decision to found Valhalla Partners.
Art Marks:
Hooks Johnston, Gene Riechers and I had known each other for years and often talked about the venture business and how it might be done a bit differently and a bit better. In 2002, we started talking about what kind of a firm we might create on our own. In 2003, we had our first closing on Valhalla Partners. The name Valhalla comes from the Viking heaven (where the best warriors go). We had "lived" before as operating executives and as venture partners at other firms, but now we were proceeding in a new and better way. Our new and better way was to be really great partners to the entrepreneurs by making relatively few investments and working hard to make them successful. We have a very high ratio of partners to investments and partners to dollars.
ExecutiveBiz: You've made a name for yourself in the Internet space. Is that still your focus?
Art Marks:
That is kind of you to say. It is hard today to find a start-up company that does not have a significant internet component. Nevertheless, we have built a portfolio based on several technology sectors where we have expertise and interest. Our portfolio targets include investments in internet infrastructure, in companies that exploit the internet to deliver their products or services more efficiently and effectively than entrenched competitors, storage related companies (including IPSAN), software (delivered both as perpetual license and on-demand), wireless-related investments, security-related and supply chain based investments. In addition we have a preference for investing on the East Coast where we can more readily make our team available to management.
ExecutiveBiz: Specifically, how will IPv6 impact our market?
Art Marks:
The explanation of the kinds of changes that will come from IPv6 is easy to understand, but the transition from IPv4 has been and will be difficult. The major benefits of IPv6 come from expanding the addressing capability (to 128 vs. 64 bits), "plug and play", privacy and security. In general, the objective of IPv6 is to make the internet more accessible, easier to use and more extensible than IPv4.
An example of how IPv6 extends the market is in the home. In that scenario, every device in your home could have its own IP address (TV, cell phone, telephone, PC, printer, video game, alarm clock, security camera, door bell and light switch) and with that addressing schema all kinds of new services could be developed.
We believe IPv6 will be deployed in certain areas and coexist with IPv4. Slowly IPv6 will evolve to take over more and more of the net (who knows what slowly means on the internet, what I mean is that it will not be in one day like the year 2000 switch-over).
In general, it is a very important change that should lead to many good investment opportunities, and, unfortunately, many bad ones as well.
ExecutiveBiz: What is your opinion on US Global competitiveness and where it is heading?
Art Marks:
I will take this one with the off shoring question as well. There are cross-currents of politics and fear here, but I regard the emergence of vibrant economies outside the US as very strong net positives. The US economy's growth coupled with the significant amount of outsourcing, off-shoring and global business activity tends to support that conclusion.
If you were running a company and were told you could buy steel or computers much more cheaply outside the U.S. you would be derelict if you did not exploit that opportunity. Because we are talking about certain kinds of labor available at lower prices, the potential loss of those jobs, creates an emotional/ political response out of proportion with the actions. A Globally competitive business is very complex and must never be defined by one issue. The enterprise must remain competitive. If that requires purchasing components (including certain kinds of labor offshore), a failure to do so is likely to lead to a failure of the company or a decline in performance ending additional jobs or even all employment.
This is not just a requirement of larger companies, 80% of our Valhalla One investments have some significant element of their work being done outside of the U.S. At last look, those localities included: India, Pakistan, China, Canada, Mexico, Brazil, Romania and a number of European countries. Businesses are more global in nature and customers can be found everywhere. We have not invested in companies to arbitrage temporary labor rate differences, but in companies where they know they must develop a globally competitive company.
As the economy in other countries becomes more vibrant, global GNP increases and markets for US goods and services (which were once too expensive) expand significantly. Instead of 300 million US consumers one can address another 700 million in Europe and a couple of billion in India and China. In addition, markets may evolve in other places faster and differently than the US. Take cellular phone services. Finland has much higher penetraton and Japan has a unique cell phone culture both of which have driven carriers to experiment with services and hand set features considerably in advance of the US. Replicating these services in the US has been critical to carriers maintaining viability as pricing has dropped.
All in all, the growing global economy has created more opportunities for more people than any other time in history.
ExecutiveBiz: What were Valhalla's last two investments and why did you choose them?
Art Marks:
Our last two investments were EnterpriseDB and Register.com. EnterpriseDB product offering is based on the Postgres open source data base and which has many features which make it Oracle-compatible. They sell into Oracle's customer base. The company is located in New Jersey, the Chairman is Phillip Merrick from webmethos and the CEO is a former webmethods executive. We co-invested with Charles River Ventures. We invested here because the opportunity is so large, the offering compelling and we were familiar with the management team and co-investors.
Register.com is a leveraged buyout based in New York. They offer global domain name registration and related products for small to medium companies. In their last year as a public company they had over $100 million in revenue. Domain names are growing 32% per year and the products around them are growing faster. We co-invested with Vector Ventures which was founded by Alex Slusky, with whom I had worked at NEA. We are using our operating experience to help restructure the company, enhance their strategy and recruit key members of the team. We think the opportunity is very large and while there are other competitors none of them has a commanding position.
ExecutiveBiz: What are the hottest VC trends in the mid-Atlantic region?
Art Marks:
I expect that most of the hot deals in the region will come from historical sources. The mid-Atlantic has a history of creating companies built around the internet (UUNet, AOL, Digex), around security (AXENT, Cybertrust, SourceFire), around enterprise software (Merant, LEGENT, webmethods) and around telecommunications (Yurie, MCI, Nextel, Ciena, Salix, Corvis, Torrent). The technological capability and the management talents around these companies have deep roots in the area sometimes reaching into government labs or initiatives. The talent pool is unique. There are more advanced engineering degrees in the great Washington, DC area than Silicon Valley, for example.
In addition, we are beginning to see more media and consumer based projects coming from the community.
ExecutiveBiz: What is the climate for the VC community in 2006?
Art Marks:
There is more than one way to look at that question.
In terms of exiting investments, companies remain reluctant to go public and the costs of a public offering remain high. The reluctance and the costs stem from the compliance with new governance regulations and how significant they are relative to the size of the companies. A five million cost of "being public" may not be much for a company with $1 billion in revenue, but for a $50 million company it could absorb all of its profits. In addition, CEO's are a bit gun shy of all the lawyer-driven shareholder suits and their impact on the CEO's ability to manage their business. So I believe you will see more decisions like the Ferber brothers made last summer to sell Advertising.com to AOL rather than go public. While many recognize the costs are disproportionate for small companies, this is not the kind of cause that Congress is likely to be excited about. It is quite damaging, but probably will not change for years.
With regards to new investments by the industry, total dollars are up 10 to 20% vs. last year. A meaningful chunk of the increment is being invested either off-shore (in Indian or Chinese companies) or in non-traditional, large, late-stage equity investments. So, my view is we are flat to slightly up in new company formation. That is healthy, because in 2000 we were investing at triple our current levels and that led to disaster.
Finally, with regard to fund raising by Venture Capitalists it will probably be a relatively good time. The various public markets are forecasted to return 3 to 7% over the next seven years. This means that all forms of private equity, which has a historically better return, will remain attractive to endowments, pension funds and others. The danger is that it becomes over-funded and returns are pushed down.
ExecutiveBiz: What should an entrepreneur look for in choosing a venture capitalist?
Art Marks:
- They should know your business (understand what you do, have contacts and perspective)
- They should know their business (experience)
- They should have good personal chemistry with you and your team
- They should know how to give good advice (and convince you to listen) without trying to take over the company.
- They should have the time and the availability to help when it is needed. (This is not parachuting in for a board meeting once a quarter – or horrors, attending by phone; this is being available to meet for a drink or coffee when an issue needs to be discussed face-to-face)
- They should be fair and have a reputation for fairness.
For more information about
Valhalla Partners, visit
www.valhallapartners.com.
Interview with Art Marks conducted by JD Kathuria.
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