This week, in a first for ePitch, we feature two VCs for the price of one. Neal Dempsey has been at venerable Bay Partners since 1989; his son Sean got into the venture game six years ago by founding Palo Alto’s Merus Capital.
Q: HOW’D YOU GET INTO THIS RACKET?
NEAL: I was the CEO of a company (Qubix Graphics Systems) many years ago, and Bay Partners was one of my investors. When the company made its exit, Bay Partners approached me about becoming a venture capitalist. Honestly, I didn’t really understand what VCs did, but I decided to give it a try.
I thought I’d start out as a big-time partner, but that’s not how it went. I came in at an entry level position in my mid-40s and had to work my way up to partner just like everyone else. I made a few good early investments and figured out I had a knack for it. In my first five years as a VC, we took three companies public: Red Brick Software, Shiva and Geoworks. All three were really successful offerings, and I was a board member and led the Bay investment. After that, I figured I might be kind of good at this business. Well, “kind of good” mixed with a big dose of luck.
SEAN: I started my tech career in investment banking working for Frank Quattrone in the ’90s. I then spent about 10 years investing in and acquiring companies for Google and Microsoft. So I’ve been immersed in technology, and software in particular, for many years.
And of course, I had watched my dad’s venture experience very closely. Ultimately, the time felt right to jump from the corporate ship and build a business of my own. My partners and I felt there was a market opportunity to build a different kind of venture firm… And on a personal level, each of us wanted to create something brand new.
Q: WHAT DO YOU LIKE ABOUT VC?
NEAL: Working with the entrepreneurs. I consider being a VC to be my true calling. It’s something I absolutely love doing. But it’s really about the entrepreneurs. They’re the ones coming up with the great ideas and making things happen. I’m just one of the people at the trough of their success.
I try to always be encouraging, even if I don’t like the idea or feel it’s not a good fit for Bay Partners. Maybe the founders need to tweak the product or get a stronger team behind them. We may turn down a deal for all kinds of reasons, but I always like meeting with entrepreneurs.
SEAN: Early stage venture is a very personal form of investing. I get the most enjoyment out of the extraordinarily close collaboration between my partners and our portfolio companies. To work closely with a founding team and help navigate the challenges that all startups face, and then to see success years later – that’s the most rewarding thing, and the greatest fun I’ve had in my career.
Q: WHAT KINDS OF PITCHES ARE YOU LOOKING FOR NOW?
NEAL: We’re focused on early stage SaaS solutions, but mostly, we’ve had a very busy couple of years with some fantastic exits with our current portfolio companies. Right now, we’re fortunate enough to have some great companies already on board doing big things, so we’re pretty selective about any new investments. Our focus is continuing to bring the current Bay X and Bay XI fund investments to liquidity and success.
SEAN: At Merus, we invest in “iEnterprise” companies. These are startups building hybrid platforms – enterprise-class software coupled with a consumer-grade UI. Through this hybrid approach, these businesses can scale from consumer all the way to the enterprise. Well-known examples include Gmail, Skype or even Salesforce to an extent. Enterprises use the same version of the product as consumers and small businesses. It just works across the board.
A new generation of companies is emerging that will scale to tens, or even hundreds, of thousands of customers. These iEnterprise platforms will penetrate every business on the planet and change the basis of competition across industries.
Q: WHAT’S THE BIGGEST MISTAKE ENTREPRENEURS MAKE?
NEAL: Not listening. They think they have the answers and they don’t listen to their customers, their management team, their employees or their board. If you don’t listen, you can’t adapt to the constant wave of market shifts, and then you’ll miss a valuable opportunity.
You can’t build a successful business if you don’t listen. You can’t recruit and retain great people if you don’t listen.
SEAN: To build a business, you need to be long-term patient and short-term impatient. By that I mean, you can’t lose your belief in the long term vision despite the inevitable challenges and setbacks that will arise. At the same time, every day should be treated as your last as a company. There needs to be a sense of urgency in building the business. I think the biggest mistake is not having a truly deep understanding of this.
Q: WHAT’S THE NEXT BIG THING GOING TO BE?
NEAL: I could guess, but VCs don’t really decide that. We work with the entrepreneurs who are building the next big thing. In the end, it’s the entrepreneurs that bring the creativity, intellectual curiosity and huge imagination that knows no bounds.
The next big thing is all about the people who break the rules and have blinders toward what supposedly can’t be done. It’s great to just be part of it and play some small role.
SEAN: Well, we built our firm around the iEnterprise theme, so we certainly believe it’s going to be an enormous opportunity over the next couple of decades.
Q: NEAL, BAY PARTNERS HAS GONE THROUGH A FAIR BIT OF TUMULT IN RECENT YEARS. HOW DO THINGS STAND NOW?
Sometimes, our portfolio companies go through hard times and have to pivot. In this case, it was Bay Partners who went through some hard times and had to make some changes. It happens to most companies at one time or another.
But I’m happy to say that we came through it, and most importantly, we still managed to get our portfolio companies into some very lucrative exits. Since that turnaround, we’ve had a total of four IPO’s and five major MA transactions, returning almost $ 1 billion dollars to our LPs. Just last year, we had three IPOs with Eloqua, Guidewire and Enphase. All of these companies were with us before the tough times and in the end, we still did what we were supposed to do despite the challenges: We got them to liquidity events that produced strong returns for everyone.
I’m glad the LPs decided to give us another shot to fix the internal issues, which we did in spades. The problems really had nothing to do with the quality of our investments. Fortunately, we listened … We made some important and positive changes and are in a very good place now.
Q: WHAT DID YOU THINK WHEN YOU SON TOLD YOU HE WANTED TO FOLLOW IN THE FAMILY FOOTSTEPS?
A: I thought he’d make a great VC. It’s an acknowledged family fact that he’s the smarter one. I think there’s no doubt he’ll have much better success than even I have.
Sean and his partners have a unique strategy that is already paying dividends. Merus is doing well, and I see them positioned perfectly in very early stage venture capital. They remind me a bit of my first experiences 20 years ago when it was all early stage.
Q: SEAN, WHAT’S THE MOST IMPORTANT LESSON YOUR DAD’S TAUGHT YOU ABOUT TECH INVESTING?
A: He has always stressed the fact that early stage investing is about people. An investor may have a perspective on a certain market or product, but ultimately success depends on investing in the right people. While I may have understood that intellectually before launching Merus (translation here), I think I now understand it emotionally. Sometimes you have to experience something to really understand what it means.
Q: SO WHY’D YOU DECIDE TO OPEN YOUR OWN SHOP WHEN YOU LEFT GOOGLE, RATHER THAN JOIN BAY OR ANY NUMBER OF OTHER VC FIRMS?
A: In my time at Google and Microsoft, I had an opportunity to get to know a number of venture investors and firms. What I noticed was that most VC firms operate less as a team and more as a group of individuals. Partners may work for the same firm, but they act independently. I felt like there was room to start a new kind of venture firm where all the partners were equal and collaborative.
At Merus, the three of us have adopted a Google style of working, where we sit almost literally elbow-to-elbow in the same room. That allows us to be in a mode of constantly sharing ideas, and to capitalize on each other’s experience, knowledge and network. We bring broader support to our portfolio companies than any of us could do as an individual.
We are firm believers that venture is a team sport and that this approach benefits all involved — our firm, our investors and our companies.
Photo credit: Gary Reyes, Mercury News