II. MÉTODO
2.6. Aspectos éticos
than the United States. And it was a reeling against the blows of Sarbanes-Oxley that perpetrated that. It is impossible to separate the effects of that from the infl uence of China and the distraction that America has toward Iraq and the Middle East. So you have all these forces that are, in a sense, coalescing to give us more challenges than we’ve ever had before as a venture industry.
It was also the year that private equity established themselves as the big guys in our sphere of infl uence, vis-à-vis the venture indus-try. If you look at our business, which is a US$20 billion to US$30 billion annual fund raising activity—US$25 billion last year—and you compare that against the private equity numbers, it couples with my fi rst point. Because the shriveling of the capital markets in the United States leads to an enhancement of the private equity market.
Then you adjust that against the one and a half trillion dollars that are locked in hedge funds, and you really see that the globe is awash in capital, looking for some kind of sustainable returns. But it is having trouble sorting it out. As a consequence, people who seem to be repu-table and have had some experience managing large pools of capital, seem to be the recipients of most of that liquidity. Thus, I think that leads us to the set-up for the next 12 months.
Ernst & Young: What is your outlook for the next 12 to 18 months?
Dick Kramlich: I think that overall the outlook is good. There have been some modifi cations in some of the regulatory stances and inter-pretations of Sarbanes-Oxley Section 404. It looks like they’re going to be moderated; that’s number one. Number two is that the com-panies founded around 2000 and subsequently are getting enough size so that they can deal with the restrictions that we now have to contend with in a mature way. The end result is a little better outlook for the domestic IPO market. And at the same time, we’re learning a lot about the international markets that give us capital market alter-natives such as AIM, Euronext, Hong Kong, Shanghai, or Tokyo as well as NASDAQ and the New York Stock Exchange.
Thus, the maturing of the companies founded in the last half a dozen years leads us to think that this will be a little better season for liquidity. We’ve gone through an almost unprecedented period of lack of liquidity for a lot of venture investments in the last sev-eral years and I believe that the outlook is better for this year. The effect that has on the M&A marketplace is signifi cant, because without a serious alternative for liquidity, you’re going down this
pathway of being acquired. For a variety of reasons a lot of people in the venture business need to show enough activity in their port-folios. Without a serious alternative, that usually doesn’t mean a very great outcome for the risk and time invested.
Ernst & Young: As you mentioned, the capital markets in the U.S.
have been challenging for VC-backed IPOs. What’s the short-term and long-term impact in both of your portfolio companies, as well as any change in your investment strategy?
Dick Kramlich: There’s been a change in our investment strategy.
We formally initiated that with NEA-12. The change is what we call venture growth equity. When we raised NEA-12 with US$2.5 billion, we said that about a billion of that will be for traditional A round and B round start-up venture capital sponsored deals. About US$1.5 billion will be for companies that either organically grow within our portfolio to a large enough size to create the need for larger amounts of capital or they’re going to be inorganic, that is they’re going to be external to our ecosystem, and we’ll fi nd them one way or another and be able to apply larger amounts of capital.
Thus, the US$1.5 billion will be invested in amounts of US$20 mil-lion to US$120 milmil-lion for a deal, approximately. These are going to be companies that generally are not making money but have good market traction. They’re going to be companies that need venture capital-type characteristics in regards to markets, products, incre-ments to management, fi nancing, etc.
We’ve done about 40 of these late-stage projects in the past fi ve years and monetized almost one-half of them. But we formalized it in NEA-12. So we changed our investment strategy to focus on both venture deals and venture growth deals.
Ernst & Young: What’s the impact on your portfolio companies in terms of the lack of IPOs?
Dick Kramlich: It has added about two years to the development pro-cess. It has increased the capital needs for the companies and reduced near-term returns. That’s why you’ve had a fl ood of companies investigating AIM and Euronext and China and so on.
Perspective from Silicon Valley:
Interview with
Dick Kramlich
General Partner, New Enterprise Associates It was the year that the capital markets went elsewhere than the United States. And it was a reeling against the blows of Sarbanes-Oxley that perpetrated that. It is impossible to separate the effects of that from the influence of China and the distraction that America has toward Iraq and the Middle East. So you have all these forces that are, in a sense, coalescing to give us more challenges than we’ve ever had before as a venture industry.
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28 GL O B A L VE N T U R E CA P I TA L IN S I G H T S RE P O RT 2007
Ernst & Young: Do you see any role for private equity in the venture-backed company space?
Dick Kramlich: Yes, actually our venture growth model is a little closer to that. However, most of them still look at profi table opera-tions that they can recapitalize somehow. We’re not into that model. There’s a bright line between what we’re doing and what they’re doing. But there are grounds for companies where we could collaborate with them. We don’t see too many practitioners in the venture growth area.
Also, for companies that are really in good shape, that are look-ing to go public, I don’t think that a private equity investment for a later stage company at a mezzanine price is a high priority for them. Most of these companies are only four or fi ve years old, and they don’t have a strong cash fl ow and that’s what you need to recapitalize most of them.
We do not see private equity funds very often in the venture growth deals because we’re interested in organically growing com-panies that are going to be consumers of capital, rather than the other way around, throwing off capital that they can recapitalize.
Ernst & Young: What are the challenges and opportunities you see today with China and India? How have those two markets evolved?
Dick Kramlich: China started out in the early ’90s with a very strong agenda. India saw quickly what was going on in China and decided that they better play in this game or else be left at the station. Thus, India is coming on rapidly in their areas of strength—services, soft-ware and infrastructure. Our own strategy has been to have direct offi ces in both countries, as well as having allies in affi liated funds in both countries.
In India we established NEA-Indus. In China we helped to estab-lish Northern Light, which we did with four mainlanders who were returnees, each of whom had made a substantial amount of capital.
They put in a signifi cant amount of personal capital. Greylock put in capital, we put in capital. We raised an additional US$60 million from our limited partners who wanted to participate in China; all told; the fund total is US$120 million. We offi ce together in Beijing, Shanghai and Menlo Park. So what the four fellows who are the gen-eral partners of that fund are bringing to the party is great knowledge
and experience in the entrepreneurial process and the managerial talent that they have demonstrated over the last 10 years.
In India, there’s a much larger ecosystem that has to do with public markets. There are thousands of public companies in India, most of them small, mom-and-pop operations. They’ve also been gradually relaxing the bureaucracy that had formerly hobbled the Indian marketplace.
The growth in China is just awesome—10% or so a year. We’re going to continue to see hybrid companies that are Chinese/Silicon Valley companies that are going to emerge in as public companies in telecommunications and in consumer electronics. There’s going to continue to be a lot of excitement around the opportunities in China.
These take a long time and can be very frustrating as you go through the development process, which is augmented by the fact that you have to penetrate cultural differences and understand the nuances and the interests of the government in keeping a steady hand on exactly what’s going on in this sector.
In India the likelihood is that there’ll be a quicker uptake and a little less bureaucracy as they drift much more to the American system. Overall both India and China are pretty exciting, and as long as you’re balanced in how you deploy your own assets, and don’t have too much in any one place, both countries are too large to ignore.
These are some of the most important markets for the next 50 years.
Europe and Israel are not too far behind. Both kept their hand in the game all the way through and we’re seeing some interesting things that are coming from these areas. Each of these is a unique situation, and it’s not quite as dramatic as what is happening in India and China, but they’re very important.
Ernst & Young: How do you describe NEA, and what’s your message to entrepreneurs?
Dick Kramlich: We look at ourselves as capital partners for entrepre-neurs and we have a responsibility to our limited partners to deliver consistent high-level rates of return. We regard our mission as provid-ing start-up venture capital for companies that are goprovid-ing to change the way people do things or think about things. It’s a very innovative pro-cess. We focus on medical life sciences and information technology.
We’re well-equipped to deal with change and the capital requirements for every exciting deal that comes down the pike.
Also, the byproduct of having a US$2.5 billion fund is that people might think that it means you have to put X number of dollars to work the deal. That isn’t the way we look at it at all. We don’t try to over-fund companies. We’re looking at the effi ciency of capital, but also the lack of restraint when it comes to running out of capital. We believe we can take a good project all the way, and we think tha’’s a tremendous advantage to the entrepreneur because we can get bench-marks along the way to prove that we’re dealing with market values.
But the entrepreneur knows that they’re not going to have to worry about running out of money if they ally with us.
IN V E S T O R PE R S P E C T I V E IN T E RV I E W
China started out in the early ’90s with a very strong agenda.
India saw quickly what was going on in China and decided that they better play in this game or else be left at the station. Thus, India is coming on rapidly in their areas of strength—services, software and infrastructure.
So how does a US$2.5 billion fund affect our process? We don’t think it affects it much at all really. We have approximately the same number of companies exiting the portfolios as entering—about 25 per year. Our workload stays fairly steady. We’re looking at doing one to one and a half deals per investing partner per year. I do one project a year and I’m not confused about what I’m doing. I may take on a dif-fi cult project or the most out-of-the-box project or something that no one else would do, but I consider that all part of the learning process.
We love to work with other people in our business who share the same goals that we do, and we like to work in a crisp and profes-sional way and have fun doing it. What we try to fi gure out, and this is central to the whole thing, is what is in the best interests of the company. We focus on the best interest of this particular ecosystem.
If we can do that and do it realistically and honestly, make decisions around that, it will get us to more or less the right answers.
Ernst & Young: Are there any best practices on how to manage such global operations?
Dick Kramlich: We think so. A lot of people ask me, “How can you grow a really sustaining and quality large venture capital fi rm?”
Usually people would answer by saying it’s the people. People are the bottom line, there’s no doubt about that. But I think process is a big part of it. And having a check-and-balance process in place with real accountability and goal alignment is fundamental to this. We spend a lot of time refi ning the process. We refi ne it all the time. We have plenty of critics within the shop who will fi nd more reasons to refi ne it even further. I’m pretty happy with the way it is, but we’re making changes as we speak.
We try to keep the decision-making process straightforward, not complicated, but with responsibilities and authorities that are united.
We run it through these two practice groups, and then the general partners make the decision. We’ve been doing versions of this same thing for 29 years. All we’ve done, I think, is get better at it. Thus, the process is at the heart of it. That, complemented by the ability to grow people and add people that are going to be part of a dynamic team going forward, is our approach.
Ernst & Young: What ingredients do VC-backed CEOs need to have today in order to lead their companies to be the next market leaders?
Dick Kramlich: Because the probability is that today’s CEOs will have to lead their companies longer as private companies for a longer time than was the case fi ve years ago; it takes more energy, it takes more comprehensiveness in terms of knowledge of the business than in earlier years. It takes a different level of leadership, because you’re going to have to lead the company through challenges for a longer period from investment to exit.
Overall, it is much more diffi cult to fi nd the right CEO these days. It requires the focus on what’s good for the company because there are going to be founders who want to see it one way, and what’s good for the company might be another way. It also requires more frankness and candor, as well as a greater sense of mission on everybody’s part. This is a very diffi cult part of the equation, how to amplify management during periods of change without any reward being an intermediate benefi t. That’s a tough deal. That’s why the business is not growing much.
Ernst & Young: Where do you think the next class of great entrepre-neurs will come from?
Dick Kramlich: I think it’s possible that a lot of entrepreneurs will develop in China and India.
Ernst & Young: What are the emerging trends you see in IT, in terms of convergence or new—the ability of broadband and its application, wireless?
Dick Kramlich: One of the most interesting developments is the leap-frogging of all the infrastructure of the U.S. in new markets, so that they aren’t burdened with legacy products. Their consumer electron-ics business is kind of open-ended and that includes wireless. We also see the emergence of mobile computing—cell phone, PDA, etc.—as well as location-based devices and services. The bottom line is that wireless is a huge deal. On the other hand, it raises a lot of questions about security, containment, record keeping, storage, etc. But, broadband is fi nally coming in the United States and the demand is just incredible. We’re really not limited by ideas at this point. Another major development is open source. It’s interesting to notice how important gaming is on hand-held devices.
On the medical side, we see a lot happening in terms of attack-ing certain parts of the health care system, makattack-ing it more effi cient, particularly having to do with senior assistance. Not the high end, but the low end. There will continue to be a lot going on in bio-pharma and biomedical. Finally, alternative energy and water is a big part of what we’re doing.
… today’s CEOs will have to lead their companies longer as private companies for a longer time than was the case five years ago;
it takes more energy, it takes more comprehensiveness in terms of knowledge of the business than in earlier years. It takes a different level of leadership, because you’re going to have to lead the company through challenges for a longer period from investment to exit.
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F
ew fi rms are as identifi ed with Silicon Valley as Sequoia Capital. Since Don Valentine founded the fi rm in 1972, Sequoia Capital has fi nanced many of the start-up-to-blockbuster companies that have come to be synonymous with Silicon Valley—from Apple Computer to YouTube.Yet 35 years and some 600 investments later, Sequoia Capital today fi elds teams in Israel, China and India in addition to its offi ces in Menlo Park, California. A new emphasis on fast-growing later stage com-panies complements the early stage invest-ing that the fi rm is most known for. This transformation of the fi rm began less than 10 years ago and is accelerating.
The globalization of innovation and entrepreneurship is the driving force behind the changes at Sequoia Capital, says Michael Moritz, one of the fi rm’s general partners. “The near monopoly that the U.S. has enjoyed in the development of fresh and new technology companies is ending. That isn’t to say for a moment that the U.S. or Silicon Valley is going to be
The globalization of innovation and entrepreneurship is the driving force behind the changes at Sequoia Capital, says Michael Moritz, one of the fi rm’s general partners. “The near monopoly that the U.S. has enjoyed in the development of fresh and new technology companies is ending. That isn’t to say for a moment that the U.S. or Silicon Valley is going to be