Tuesday, April 20, 2010
Clearstone's Sumant Mandal On Exits, Opportunities
Story by Benjamin F. Kuo
Over the last few months, Santa Monica-based Clearstone Ventures (www.clearstone.com) has had a number of high profile exits in its portfolio. We sat down with Sumant Mandal, Managing Director at Clearstone, and who has been closely involved with a number of those exits, to get some more color on what has driven those exits, and about his outlook on the venture market.
Has there been any rhyme or reason behind the surge of exits you've been seeing?
Sumant Mandal: I think there have been a lot of strategics today who feel the markets are changing for the better, and want to make decisions around new product, and now is the time to do it. If you about it, their customers have begun opening up their purses, which have been kind of tied up in the last 18-24 months, they haven't been investing in new technology or products, and equities are getting more expensive. They have cash--lots of these strategics are sitting on top of cash--and now is the time to buy companies, because customers are willing to pay for new products, and they can buy these companies "more efficiently" or economically than they will in 12 months from now. That's the belief system. Markets are getting better, these companies are going to be worth more twelve months from now, and let's try to take these out now. Now, to a certain degree, that makes us--as investors--not want to sell, if you have that same belief system. But, if you've been in a company for five or six years, the company is working, and you have a belief where that market for that company is headed, and what the best outcome is for them, based on how much money you have invested, then it's worth considering. That's sort of the decision making process going into these.
For us, as Series A investors, because we own so much of the company, these are meaningful exits. It's not meaningful for the venture industry as a whole, because if you're investing in Series B, C, or D round investments, these are not meaningful.
Is there any pattern to the kinds of companies actually getting to an exit?
Sumant Mandal: Companies with a very specific, technology advantage, with products that are focused on markets that people have a belief in, and are growth markets. If you are trying to be all things to all people, and build the biggest vision you have, it's probably not a good time to seek an exit. You should build your company. If you have a product, that attaches itself into the portfolio of a large company, and you have shown success there, and it creates massive efficiency for the acquiring company, that's what people are interested by.
So very much strategic, product-extension kinds of buys?
Sumant Mandal: Look, Ankeena, announced a couple of weeks ago, I can't say what their revenues were, but if you try to try to calculate the revenue multiple for what we sold it for--there is no correlation. It's not a revenue multiple sale. We've had four exits in the last six months, one is an IPO, Meru, which is a company we've been invested in for seven years. We were the Series A in there. The other three have been acquisitions, all of which are in the three digit sorts of millions, hundreds of millions, that sort of range. But, each had a different characteristic. The only commonality between the three was, there was an interest from strategics, more than one in some instances, who wanted the product for their portfolio.
When you made the investments in these companies, did you say--we expect we might be in these companies as long as seven years or whatever it's been?
Sumant Mandal: No, though I think it's only been delayed by about a year, not more than that. These companies have performed in their business plans, created tens of millions in revenue, and they've done well, close to break even or at break even, but it's just taken a little longer to see the liquidity in the market.
Given you've made some good picks in terms of getting to exit, was there anything looking back which you saw that made them good acquisition candidates?
Sumant Mandal: When we make investments, we generally don't invest in acquisition candidates. We invest in companies that we have a belief around a market, and ability for a stand-alone company, that they can create enough value to get to the public markets. In a lot of cases, what happens is that market change, they develop differently than we thought they would, sometimes there consolidation, sometimes there is commoditization, and in some cases you have a product which becomes one part of a broader solution set, and you have to become partners with a larger company. All those things lead to the decision on whether to sell or invest more.
What was the defining difference between the ones you decided to sell, versus the one you decided to IPO?
Sumant Mandal: I think the IPO ones are the companies where the markets are just massive. Bread and butter markets, where everyone has to have them. Then you know you can have a standalone company. Meru is in wireless LAN systems, and everyone has to have them--it's no longer a nice to have, it's a must-have. In the case of Kazeon, brilliant enterprise search technology, people weren't just willing to buy the search technology. They wanted an entire enterprise management system. That technology was just one part of it. You had to sell that, with storage, and an archival system, so they were partners with EMC. EMC said--Kazeon is the most profitable part of the sale, so I want to own it. They paid us good money, and the team made good money, and became part of the firm, so eventually the team is what drives the company, and as an investor you have to look at the team and figure out what is the best outcome for the team and the company.
As a firm, are you very active in the exit stages?
Sumant Mandal: Very active. I was the M&A committee for all of them, I was the banker. We never used a banker. I think what happens, is because we're such large holders in a company, you defacto become part of that process. It's part of the job. I don't think you'd find any Series A investor who would say something different. We started these companies, at least the three companies I was involved in. We were part of those companies before they were companies. So we helped create them, with the founders. The founders ran them, with the founder's ideas, but we supported them and took them to customers.
It seems you're somewhat unique in doing that, versus just looking at deals coming in the door, can you talk about how you do that?
Sumant Mandal: First of all, you know our heritage is as an incubator. Clearstone itself was an incubated entity, out of Idealab, it was Idealab Capital. A lot of our early successes were companies out of Idealab. The difference is now, the process of incubation for us, is giving smart people we have a relationship with, a cover to come develop their ideas, where we might have a common belief in the market. That means, if we have a common belief on the market--right now, I have a belief that right now around video in the wireless world--it's not unique, but I think the opportunity for a new company, that creates value in that market, exists today. If there's another guy I know, a very smart guy who is a technologist, and has the same idea, that's where I think an incubated project can come together. We don't know what the product is, we don't know what the market is, you don't know what kind of team you need, but we have a common belief in the market, come sit with us, let us work together to define what the company should look like.
So it sounds like you're much more likely to incubate a firm that fund someone coming in off the street?
Sumant Mandal: I would say personally that's what I've done the most, though I have other partners who have done differently. So, Jim looks at companies differently than I do. But we work together collaboratively. In the case of Ankeena, all of us got engaged in figuring out the product. When they wanted to meet customers to get feedback, the entire firm opened up their Rolodexes, and made calls. There were 35 customers they met before they even put the first flag to say what they were building. That's invaluable. That's how you take a company from inception, to north of three digits, hundreds of millions of dollars in eighteen months.
Finally, there's been some debate over where the venture industry is going. What's your opinion on where venture is going?
Sumant Mandal: I think venture is going back to what venture was really meant to be, that was in helping people take a company from idea to reality. A lot of time what people do now is they mix up the idea of venture with late stage investing. If you have a billion dollars under management, you can't be a venture fund. You can do some venture investing, but eventually you have to be investing $50 million dollar checks. That's not venture. I think it's going to morph into that, and you'll see smaller funds specialized in venture, larger funds doing later stage deals, and if people make money for their investors, the class will continue to exist. People are not just start building new companies without capital, there's always going to be a need for venture capital. It's just that went through a massive growth cycle because of the cycle, and now it's going to normalize. So if you're in the top 25 percent of the funds, you have the opportunity to create what you want.