How this VC got a 770% return

Dolphin's Richard Brekka dissects the building and selling of Gomez, one of 09's best deals for LPs.

Dolphin Equity Partners recorded one of the largest single returns for LPs in 2009 and the largest sale of a private SaaS company with the sale of longtime investment Gomez to Compuware this year.

The $295 million acquisition pulled in $93 million for Dolphin investors, a 7.7x return. Dolphin was Gomez’s largest shareholder and first invested in the company in 2000.

In an age of quick-flips, it’s edifying to see a VC stick with a company for a decade, run it when needed, and ultimately pull off a big exit. I spoke with Dolphin Managing Partner Richard Brekka last week about how his team guided Gomez, and where he plans on taking the business technology world next.

MB: Gomez just brought in over 7x to investors with its recent sale. You were involved for a long time both as an investor and the company president. How did you and the team pull that off?

RB: We focused on building a sustainable long-term business. You know, Gomez did a fundraising in November 2000, where they raised $28.5 million and it was targeted at rating financial websites, and that model failed when the bubble burst. It was a fast-growing sector at the time, but the ad dollars stopped and so did the Gomez model. Gomez, shortly after raising its capital, planned to go public, but it didn’t work out.

We had a small stake in the company and the existing investors all decided to walk away. I sat down with the management team and looked at what elements of the business they had that could be sustainable, and the main part of that was Internet performance monitoring. At the time it was considered a nice-to-have. You could look at your data center and see that the website was operating. However, as the Internet evolved, websites created and delivered on a data center were rendered on your computer, which meant that from a data-center point of view, you couldn’t tell whether or not a customer experience was actually occurring around the world.

So we built a business on being able to show to the website operator that their web pages were actually rendering at the customer level, and we took the approach that we were going to build this for long-term value. It took us a total of nine years to ramp up the company and along the way, our approach was to be the best product on the market and continually improve the product and platform so that we were always on the front end of market development.

As we built the company overtime and built the management team, we were continually adding new products. In fact last year, we added eight new products. That’s really what created the value for Gomez. We could do the Internet performance monitoring from the outside and the network management companies like Compuware, CA and BMC, IBM and HP would do the network management tools on the inside. What we created last year was a product that would connect the outside to the inside. For instance, if Yahoo and Reuters doesn’t render the financial service information, we could tell you that, but Yahoo still couldn’t necessarily know where that emanated from. With the new software, we can identify it down to the server inside a Reuter’s data center somewhere and say, “that was the culprit.” So we actually connected the two worlds of network management and Web performance monitoring. That is a one-of-a-kind product in the world today--it doesn’t exist anywhere else.

That focus on the long-term and continually improving the product is really what drove the value. In our marketing of the product, as we were talking to the network management companies about it, that focus attracted not only interest in partnering but ultimately in buying the company, and that led to the exit.

Our approach with the company had always been: we’re building a long-term value here, we’re going to go public, we’ll continually to grow the company over the long term, and the company will realize its value and the investors will get their liquidity post-IPO. We had no intention of selling it in and M&A deal. It just happened that the price that was put on it was basically a forward-looking price on the company that was too attractive to pass up.



MB: You took a company whose core product was basically defunct, but stayed with them changed direction. Does this mean that the team is more important to you than the product? I think you’re hitting on an important point. What convinced us to stand behind the company was that we believed over the longer term, the web-performance monitoring and the application monitoring would become a critical factor. In the early days, Best Buy as a customer might do 1% of their revenue over the Web, but today it’s doing 20%. We believed that trend would continue.

RB: In order to make the vision come true, it’s management; it’s all about the people. We had a good team of people to start with. As the company got bigger, we continually evolved the management team to put the right team players in place that could scale it to the next level. In 2005, we made a change in management. We knew that we needed to go out and get a really strong CEO to run it. In the interim, I actually ran the company myself for part of 2005 and I recruited Jamie Ellertson to come in and be CEO. I give him a lot of credit for creating a lot of the value that we have today.


MB: Do you anticipate taking that active a roll in future investments?

RB: I have a great deal of respect for CEOs, having done it for a short period of time myself. I’d much rather have them do it than me. It is a lot of work to be a CEO of a startup of a startup and really building all the elements of a business. We believe in getting very active with a company and really helping them with changes of direction and all the elements of the business from product development to sales and marketing… which is a really key factor today. You have to get your message out about who you are and why you’re here and what value you add to a customer, and then the actual implementation to make sure that what you’re selling is getting executed and the value is getting realized by the customer.


MB: As you look forward, what kinds of business models would you like to see come across your desk?

RB: A big element of our focus is the software-as-a-service delivery model. That’s how we built Gomez, so that’s a key factor for us. We really like technology-enabled services in a recurring revenue model.

From there, it’s developing or finding an unmet need in the market. For example, I have a company out here that I met with this morning that does social media search. We have a phenomenon going on where the dialogue of customers in the market is online, and companies need to know what their prospective customers think about their products and not only their desires for products, but their intentions as to what they’re going to do—what they’re going to buy, if they’re going to leave you… and all of that is going on in social media today. It really caused an explosion of a dialogue and companies are ill equipped to listen in an automated way. So we’ve created a search engine for social media. Over the last two years, I’ve put together the management team to go build that company.

The other phenomenon is that the consumption of the Internet is going from a computer-based to a mobile-based world. That’s an area we’re interested in; we think there’s a lot of opportunity as information moves onto mobile devices.


MB: We’ve seen Google and Microsoft do deals with real-time social media companies like Twitter and Facebook recently, in order to get more real-time search results. Would you ever counsel a company to look for what a potential acquirer like Google or Microsoft might need a few years, and try to build toward them?

RB: In the case of Overtone, Yahoo and Microsoft are both customers. What we do is we look for what the market needs. We don’t try to anticipate what a Google, Yahoo or Microsoft would want to buy. Our belief is that if you find a market need and you build a strong sustainable business, the exit will come.


MB: Word on the street is people are expecting 50 or so IPOs and a big uptick in M&A in 2010. Do you expect a fair amount of your portfolio this year to graduate?

RB: We don’t have any current plans to do an IPO in 2010. I think the M&A market is picking up. The main thing you can do with a portfolio company beyond building it right and building it for long-term is making sure the market’s aware of who you are and what you have. We don’t try to force the sale of a company. Companies are bought not sold, but you always want to make sure there’s an awareness in the market of what you have. Gomez was a good example of that because we were working on trying to create partnerships with the network management companies to distribute our product. That grew awareness among the network management companies and led to multiple bids and the ultimate sale of the company.


MB: You’re helping build companies that will shape both business and media in the next few decades. How do you expect to impact society with the investments you’re making right now?

RB: I think ultimately, the goal is to make information readily available in the market, and a lot of the underlying precepts of the companies in the portfolio are to make that delivery easy. We have a company that does royalty management and mobile advertising technology. The goal is that a consumer can get what they when they want and where the want it. There’s the application that’s going to make people’s lives better and more efficient.

We have a mobile security company that protects the data on mobile devices, and we protect everything from the military to Obama’s laptop. That’s another element of this: as all this information becomes readily available, how do you protect it? We’ve heard stories of someone losing a laptop with all kinds of personal information on it about consumers. That information, now that it’s being distributed widely, also needs to be protected widely, and I think those are important factors for us as we look at what we’re building and what contribution to society we make.