Eric Benhamou, the former CEO at 3Com and Palm who shifted to venture investing in recent years, is midway through raising between $75 million and $100 million for his third fund. Palo Alto-based Benhamou Global Ventures added an office in Israel with its second fund and is shifting some of its attention to China with Fund Three. But the focus won’t be on investing in Asian startups. It will be on helping BGV’s U.S. and Israeli companies expand there.
In the following TechFlash Q&A, Benhamou talks about the new fund, an investment round he led this week in San Mateo-based “customer success” software startup Totango where he is its new chairman and about other topics. The interview has been edited for length and clarity.
What’s new about your latest fund?
Fund Two, which was in 2014, and Fund Three are almost identical, except for the fact that the new one will be slightly bigger. But they have the same investment focus and the same strategy.
In Fund Three, we have augmented the team a little bit. We’ve added added an investing partner. We’ve also added a China advisory partner because Fund Three has a much greater China exposure than Fund Two.
But other than that, the two funds are basically identical. The investment thesis behind the two funds is that we’re undergoing a deep multi-year digitization of all industries. As industries adopt cloud technologies and related technologies, many, many new companies are getting formed. Old companies are weakening and the space for emerging new startups is increasing.
We want to have capital put to work to capitalize on these opportunities. The team and the fund specializes on enterprise IT technologies, anything related to cloud and the application level or the infrastructure level. Anything to do with cyber security is of interest to us and so is the industrial Internet of Things.
The team comes from this background. All of us have built and operated successful businesses over, in my case close to 40 years. We have built startups. Some failed, many succeeded.
We want to make sure that as we invest in our companies, we can be active investors and be strong resources for our CEOs. That’s basically the hallmark of the firm. We are come from the world of operating businesses in the field in which we invest.
How many investments per year do you normally make and what size check are you cutting?
We expect to make about five or six investments per year, which is about 1 percent to 1.5 percent of all the deals that we see. Over a period of three years, which is our investment period, we will build a portfolio of 15 to 18 companies. So that’s the pace at which we invest and this is also the cadence at which we form new funds. So Fund Two and Fund Three are almost three years apart, and that is basically the natural cadence of the investment team.
As far as the check size per company, it will be approximately $4 to $5 million over two or three rounds.
I understand that you’re halfway through your fundraising on Fund Three?
We’re actually past halfway, which we got to on July 8 to be precise. We expect to fundraise until we get to between $75 to $100 million. We should be able to get to that point by the end of the year or early into next year.
Has the fundraising been any different this time around?
Yes. There have been several significant differences. First, it has gone faster. Fund Two was really the first time that we raised outside capital. Fund One was entirely my capital. That was my first experience courting limited partners and raising outside capital for a fund. Obviously, I had raised lots of capital for public companies that I ran before, but never for a venture fund. It was a new process for me. With Fund Three, things have gone much faster.
The other difference is that we made a deliberate plan to raise some capital from China and Asia. The reason is that there’s a fair amount of capital available there and also many of our companies that get to a certain stage want to expand in Asia. We want to build an ecosystem of relationships that can help them do that.
We have several companies from Fund Two today which have a strong business model in the U.S. They’ve got great momentum in revenue and they are ready to establish a beachhead in China. We want to be able to help them do that.
So we have brought in several really strong investors from China who understand venture capital, who understand the sectors in which we invest and who in fact will do more than just invest capital. They will most likely engage in commercial relationships with these companies and that will also lead us to some of the partners that we should work with there.
In Fund Two you made some investments in Israel. Are the relationships with Asia only aimed at helping your companies from Israel and the U.S. there? Or are you also looking to invest over there?
We don’t expect to invest in early stage companies there. However, we will invest in the subsidiaries of our portfolio companies that get formed there. Several of our companies are establishing a beachhead and forming a subsidiary — in some cases a joint venture — in China. So we may actually invest directly there as well.
Israel plays a different role for us. It is a great region to incubate and start businesses. But, frankly, we would not invest in those businesses if they planned to stay in Israel or even stay in Europe. They only become relevant to our investment thesis if they come here. They can keep their R&D in Israel. In fact, we like it that way. But we want to their key positions to be here.
Totango is a great example of that. The R&D is entirely in Israel and it will continue to grow there. But Guy Nirpaz, the CEO and co-founder Omer Gotlieb are both here as are the head of sales and the head of marketing. This is the typical setup of cross-border Israeli-U.S. companies that we like. We’re comfortable with that. We have a lot of roots in Israel, myself in particular, but we also have a partner who has an office in Herzliya.
So we completely understand what Israeli companies have to go through when they establish their HQ in Silicon Valley. We understand the cultural issues and we understand the kind of people they need to recruit here to work well with their Israeli colleagues.
Tell me more about Totango. Why are you becoming chairman there?
We had been researching the customer success field for a while and we convinced ourselves earlier this year that the category had gained critical mass. That was recognized by all the major industry analyst firms and we felt that it had the wind at its back. The software-as-a-service model is being broadly adopted. Many companies are distributing themselves that way and therefore need help on customer success.
So we felt the market was right and the market would accommodate several competitors. This is not a winner-take-all market. When we stumbled across Totango, we found a company that had best-in-class technology in the space. Its data model helps a customer success person really figure out how their products is being used, which features are being used, who is using it, in which division, how often, who are power users, who are the neglected users, which features get most frequently involved and so on.
From a revenue perspective, Totango was acquiring customers very fast. We wanted to intercept them before they became too valuable for us. That happened in the spring of this year and we completed investments just a few weeks ago. I’m starting to work very closely with Guy and his team.
The reason I wanted to be Chairman is that the company is just getting to a stage where there’s no technology risk, there’s no market risk, there’s no product/market fit risk. It’s purely execution. The company has to recruit, acquire customers, lean into the enterprise part of the market, and establish governance rules to become a real full-fledged company. I have done this so many times before so I feel like I can be a good contributor and good partner to guide this.
You say you wanted to get to invest in Totango before it became too valuable. Round sizes and valuations in the early stages of startup investing shot up in 2014 and 2015. D id you have to adjust your strategy in that time? Has the climate changed this year?
Well, fewer deals have been cut this year but each deal has more capital. We’ve made tweaks in our model to deal with that. We invested more into Totango than we would have had to invest, maybe, in 2014. We also expect to grow the number of investments in Fund Three portfolio more slowly than the overall capital is growing. So we’re basically adjusting to the market trends that you described.
Within a year or two some of these companies will reach growth stage, technically outside the scope of both Fund Two and Fund Three. When that happens, I expect that we’ll have a growth capital vehicle, as well, to complement what we do for early stage.
So you’re planning to raise a growth fund, too?
That’s correct. It’s already in the works. But we want to put Fund Three to bed before we go full fledge into establishing the next one.
The financial structure of your fund is different from others, right? How and why?
The traditional model that the venture capital industry uses is the 2/20 model, they charge a 2 percent management fee and get a 20 percent carried interest fee. In our case, it’s 0/25. So we don’t draw any management fees from our investors and we take a greater carried interest percentage.
This has several effects which we think are beneficial. The first is to create a better alignment of interest between the general partners and the limited partners. With this model, the only way for general partners to create wealth is to create value in the companies they invest in, since nothing will come in the way of management fees. There also is no fee erosion to the limited partner capital base. Their entire capital is put to work in a portfolio.
If you do the math, if I get a 2 percent management fee each year for 10 years, that’s 20 percent. So somebody who invests a million bucks into a fund will only see part of that deployed. If they invest a million bucks with us, they’ll see a million bucks of their capital deployed in the portfolio.
This does put more pressure and more risk on the general partners. If we were at the beginning of our careers, perhaps we would really need the fees to survive. But we’re not.
Since you brought up the topic of carried interest fees, what are your thoughts about suggestions by the presidential candidates of doing away with tax incentives on carried interest? Both major candidates have suggested treating that is simple income and not capital gains.
I think it’s a highly political topic and it is fraught with misinformation. There has been some rancor and anger vis-à-vis hedge fund managers and even some large private equity fund managers who get this favorable treatment even though they aren’t necessarily long-term investors and value builders.
These asset classes are substantially bigger than the venture capitalist class and it’s very unfortunate that we get lumped in with them. We hold capital for long-period of time. In some cases, it’s 10 years and we believe that kind of investment requires capital gains treatment, both on the general partner side and on the limited partner side.
So, we hope that this doesn’t come to pass. The National Venture Capital Association represents us very aptly on this issue. But right now, there is so much misinformation about this that it’s really hard to rise above the fray and explain how venture capital is different from other forms of investment.
Cromwell Schubarth is TechFlash Editor at the Silicon Valley Business Journal.
Original article: http://www.bizjournals.com/sanjose/blog/techflash/2016/09/former-3com-palm-ceo-has-eyes-on-china-with-latest.html
- 16 Sep, 2016
- Posted by Anik Bose
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