Posted by Tom Foremski - May 4, 2006
I recently met with Terry Garnett of Garnett & Helfrich Capital--the venture buyout firm behind behind Ingres and Wyse Technology. These are two very interesting companies that had caught my eye and I didn't realize the same investment team was behind both ventures.
I have been writing a lot abut Ingres because it is a small open source software company that has been assembling a dream team of top executives more suited to running multi-billion dollar business groups. So you can bet that Ingres won't be sitting on its hands. (Please see SVW: The ambitions of Ingres: A small company with the executive team of a giant )
And Wyse Technology is another interesting company, essentially reinventing the whole thin computer concept and renaming it Thin Computing. It takes a systems approach to driving down the cost of installing and operating large numbers of PC systems which can be replaced with Thin Computing systems and the users don't even know it. (Please see SVW: Wyse says in talks with Google and Yahoo on thin computing)
Garnett & Helfrich Capital has a modest buyout fund by the standards of Silver Lake Partners and others that have raised multi-billion dollar funds. But, it's not the amount of money you have, its the operational abilities, and long experience in the industry to be able to read the evolving trends--that Mr Garnett and his partner David Helfrich bring to the table.
Their current fund of $350m has done some very interesting deals and there are more to come plus plans to raise yet another fund around the end of the year.
I popped in on Mr Garnett last week, in the "VC Gulag" a raggle taggle sprawl of small office buildings on Sandhill Road (they are moving to larger quarters in Hillsdale). We covered a lot of ground, here is part of our conversation:
Mr Garnett said he used to be a venture capitalist at Venrock but he also has a long career in the software industry at many different companies. Here is his bio:
From 1990 to 1994, he worked with Oracle Corporation reporting to Larry Ellison, as Senior Vice President, Worldwide Marketing and Business Development and other positions. He has helped establish and build CrossWorlds, Lightyear, he has worked at McKinsey & Company; and held management positions with Tandem Computers. From 1995 to 2003, he was at Venrock where he led early stage financing and served on the boards of: New Era of Networks acquired by Sybase, Niku, CrossWorlds Software acquired by IBM, Neoforma, Netobjects; he was an early stage personal investor in Siebel Systems and Checkpoint Software.
It's clear that he understands the enterprise software market and his partner David Helfrich has led what he calls, a "parallel career." The two met at a horse riding school for their kids, and they spent two years "at the rail" getting to know each other before they decided to pool their skills and created Garnett & Helfrich Capital in March 2004, with an initial fund of over $250m, soon expanded to $350m.
"I sometimes explain what we do as 'there is a little bit of chocolate in my peanut butter' by which I mean it is a little bit of venture capital investing combined with venture buyout."
The investment firm was founded on the belief that there were decent sized business groups within larger tech companies that were good businesses but were not getting the attention or the funds from their parent organisations.
The firm analyzed hundreds of IPOs and acquisitions over the past few years and started to identify business groups of at least $50m in revenues, that could survive a buyout, and the temporary disruption that such events create for a business.
Ingres was one of those businesses, a database software group spun out of Computer Associates, a business with great revenues, large numbers of customers and a solid reputation within enterprise software markets.
"It was important that Ingres had a long history, it wasn't a new startup with an uncertain product and an uncertain future. Enterprises want to buy from companies that are stable and will be around for a long time" Mr Garnett said.
But spinning out from CA was not easy because of the huge management shakeup that was going on in the wake of a scandal that is currently in the courts (Please see: Former CA chief Kumar pleads guilty to fraud.)
The deal was further complicated in that Mr Garnett had to recreate three offices from scratch, set up the telephone systems, the billing systems etc. He had to create the entire infrastructure for a 100 plus employee company from nothing, and hire the executive team, and act as the CEO.
He says he would love to give up the CEO position and get back to his regular work but that, "Finding a CEO is more difficult because of the A-list caliber of the current executive team, they are going to demand an A-list CEO." Mr Garnett said he loves to recruit and his philosophy is to recruit 10 A-list executives because they will bring in another 40 top people.
Buyouts are very popular these days, and Silver Lake is one of the top firms in this area. But Mr Garnett points out that its much easier for Silver Lake to write a check to take, for example, Serena Software private--there is no infrastructure building that had to be done, as in the case of Ingres. That's why Silver Lake might find it difficult to compete against Mr Garnett's team, if it wants to target this middle sector of the buyout market.
Mr Garnett hopes to do about five or six deals with the first fund, and he sees lots of opportunities to buy out healthy business groups from within tech giants such as Siemens for example. "In a lot of cases the seller is not getting any credit from Wall Street for owning those business groups," he said. So the deals can be very compelling for these large tech businesses. Usually, the seller will retain about a 20 per cent stake in the new company, which helps with customer continuity.
A good example is the blade server switch business bought out from Nortel. Here is a list of deals.
Mr Garnett's many years in the enterprise software business have given him an understanding and an appreciation for brands, and the realization that brand building is long and difficult. Therefore if he can acquire products such as Ingres and Wyse, that have long established brands, that brings with it a significant amount of credibility among customers that is very valuable.
I think this is an important understanding of how markets and customers buy products. During Internet 1.0 and the dotcom boom, there was a lot brand building attempted, but throwing money, billboards, and cute sock puppets at the challenge of establishing lasting brands didn't work. Brands are built slowly, over time, they are trust-built relationships just like human relationships.
What's the exit strategy? The same as for other ventures: IPO or sell to larger players. But building a $50m to $100m dollar revenue businesses to the next stage, is a lot less riskier than trying to build a startup and take it beyond several millions dollars in revenue. It's smart investing and there are still plenty of deals to be done. It'll be interesting to see which other players emerge in this field.
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