Doug Pepper joined the venture capital business straight out of business school — in 2000, as the dot-com bubble was bursting. Not what they call auspicious timing.
But by focusing on consumer Internet, mobile and (more recently) Software-as-a-Service deals, the Stanford grad has earned a seat at hot companies like Marketo (whose IPO last spring raised $85 million) and Lombardi (acquired by IBM for an estimated $180 million) — as well as onetime high-flyers like Groupon competitor Bloomspot, which JP Morgan Chase bought for less than what its investors are believed to have put into it. Can’t win ’em all, as many a VC will tell you.
Still, Pepper, who plies his trade at Sand Hill Road’s InterWest Partners, has found that investing in serial entrepreneurs can boost that batting average. In this week’s Elevator Pitch, Pepper talks about that strategy and what else he’s seeing in the tech world.
Q: HOW’D YOU GET INTO THIS RACKET?
A: I joined InterWest when I was 26 years old. It was September of 2000, just as the Internet bubble was bursting, but also when many venture firms had just raised billion-dollar funds. I’d started my career at Goldman Sachs, taking technology companies public, and then worked briefly at Amazon.com, but fell in love with the startup scene at the Stanford Graduate School of Business.
While at Stanford, I wrote several business plans, and was even awarded third place in the Business Association of Stanford Entrepreneurial Students (BASES) startup competition. Ultimately, though, I decided that joining a venture capital firm was the best way to satisfy my interest in startups.
Q: WHAT DO YOU LIKE ABOUT VC?
A: I love working with smart, passionate and ambitious entrepreneurs. I enjoy watching them take dreams and turn them into real companies that significantly impact markets, employees and customers. The teams do the work, but I’m able to help as a venture capitalist, and I enjoy being a part of that process.
Take Marketo, for example. We first learned of the company in 2006 when it consisted of three founders, a PowerPoint presentation and an ambitious idea to create a new category of marketing software. We were fortunate enough to bet on them when no one else would. SaaS wasn’t hot yet, and few VCs at the time recognized the possibilities around marketing software. InterWest funded Marketo on our own for two years. Today, the company is public, serves thousands of customers and employs hundreds of people around the world.
Being involved in that type of success, with all the ups and downs and great relationships, is the real joy of being in VC. It’s fun and rewarding, both personally and professionally.
Q: WHAT KINDS OF PITCHES ARE YOU LOOKING FOR NOW?
A: I focus primarily on early-stage SaaS and mobile companies. In particular, I look for technologies that help an enterprise improve its relationship with its customers and ultimately increase revenue. On the SaaS side, we’ve partnered with companies like GetSatisfaction, Badgeville, C9, LocBox, Varolii, MarketTools, Aria Systems and several others. On the mobile side, we’ve invested in Flurry, Tapjoy, Doximity, Biba, Gainfitness and Triposo, to name just a few.
As an industry, we’ve spent the last 20 years optimizing the funnel for generating new customers. Today, as the world moves towards freemium and subscription business models, we believe that there will be many opportunities to optimize relationships with existing customers to increase recurring revenue. I believe a great opportunity over the next 10 years will be in providing the new roles of the Customer Success Manager and Chief Customer Officer with a system of record.
Q: WHAT’S THE BIGGEST MISTAKE ENTREPRENEURS MAKE?
A: Getting ahead of their skis. We have a saying, “Nail it before you scale it.” This means, before hitting the gas on sales and marketing, make sure you have true product-market fit. Of course, you also need to know the unit economics of your sales and marketing effort.
I’ve seen companies raise too much money too soon, simply because they can, before answering the important questions. They hire lots of salespeople, and don’t realize that they don’t have product-market fit until there is significant churn. Then, they’re forced to cut sales and marketing while they fix the product or the go-to-market strategy. But that’s not the way to go about it. It’s much better to grow thoughtfully and deliberately. Once you have the right SaaS metrics in place, you hit the gas!
Q: WHAT’S THE NEXT BIG THING GOING TO BE?
A: Since I focus on marketing software, I’ll talk about the major trend that I’m seeing in that space: Content marketing. Content is the fuel for all marketing, so there’s room for someone to build a full platform for creating, curating, publishing, and measuring the effectiveness of content. This will include workflow technologies, a content-creator marketplace, syndicated content, and deep analytics. This type of content marketing system will feed existing marketing channels, such as marketing automation, email marketing, and social marketing. The data that comes out of marketing channels — which campaigns are working and which are not — will then drive the decisions behind what new content needs to be created.
For me, the next big thing in enterprise software is something that my friends at Homebrew refer to as the “Bottom Up Economy.” Until now, most enterprise software has been adopted first by a senior executive, who makes the big decision to buy it and then forces the entire company to use it.
Today, there’s a trend toward adoption by individuals first: One person finds software that is easy to use, has no barriers to adoption (often mobile-first), and offers instant value. Then, if the software works, it spreads virally throughout the enterprise. The process is similar to the way individuals adopt consumer applications. Our portfolio company Optimizely has been adopted this way, and they are enjoying extraordinary growth and unit economics as a result.
Q: YOU JOINED VENTURE CAPITAL AS THE BUBBLE WAS BURSTING IN 2000 — WHAT WAS IT LIKE TO LEARN THE BUSINESS DURING THAT TIME?
A: It was the perfect time to join the venture business. The people who joined VC in 1997-98 learned the wrong lessons, because for several years, everything worked. Many of those people are no longer in the venture business. In contrast, I learned the reality: That VC is very challenging, requiring deep industry understanding, sector focus, and fundamental due diligence to validate assumptions.
In my junior role, I wasn’t forced to make a lot of investments in my first few years. Plus, companies weren’t raising money “overnight” back then; it took months. So the environment allowed me the time to do real due diligence on companies. I was able to do the fundamental work and get a clear understanding about what makes a successful company. In short, I had time to learn without making mistakes. Ultimately, by 2003, not only was I ready to invest, but it was a better environment and a great time to make investments.
Q: YOU HAVE A COUPLE COMPANIES IN YOUR CURRENT PORTFOLIO THAT WERE LAUNCHED BY CEOS YOU’D PREVIOUSLY BACKED. WHY DO YOU LIKE TO WORK WITH REPEAT ENTREPRENEURS?
Backing previously successful teams is one of the key tenets of my strategy. I especially appreciate entrepreneurs who know their domain cold and, from a personal perspective, are great to work with. Rod Favaron is a great example. I’ve invested in two of his companies: Lombardi, which he successfully sold to IBM, and Spredfast, which is currently growing very quickly in the social relationship management space.