Ex-Walden partner Eskenazi on realistic exits

He's beat the house twice but now has lower expectations

Few investors can boast that within one year’s time they had two portfolio companies get acquired for over $300 million each. Steve Eskenazi is one of these rare investors. He claims he hit the jackpot, but I’m certain there’s more than luck involved. His more than twenty years of deal-making experience in venture capital, investment banking, and technology must have collectively formed his exceptional ability at seeing a promising buy, maneuvering for growth, and recognizing when to sell.

From 1997 until 2008, Steve was a Managing Director/Managing General Partner with Walden Venture Capital, where he helped build Walden’s digital media and technology practice. His success includes  four investments that recently experienced huge exits and raising two funds totaling more than $300 million. Prior to Walden VC, Steve was a Managing Director for seven years at Alex. Brown & Sons. He currently serves on the Board of Directors of GoAmerica, Iconoculture and Real Girls Media. For an extended bio, visit Steve’s website.

I asked Steve to share with us some of his “wealth” of wisdom.

Weeks: Describe some of the changes you’re witnessing in the venture capital industry.

Eskenazi: The venture market’s exit amounts and the entrepreneurs’ needs have both changed. The issue is that something like 90 or 95% of the exits that are occurring in the VC market are happening below the $100 million level. The traditional model was to put in around $25 million over a series of rounds and hoping/expecting the company to sell for $250 to 500 million. But now with the public markets challenged and exits and IPO's so few, companies are learning to be capital efficient. The startups that need a huge investment round to get to profitability, in order to sell down the road, are more seriously challenged.

Weeks: Where do you think the money will be made given this current reality?

Eskenazi: Whereas ten years ago it would take $10 million to get a product out the door, now you can do it on a shoestring. New technologies and service components have lowered the cost of starting a business. It has never been lower than today. The public markets are saying that the large exits are few, so as a result there are lots of acquisitions in the $75 to 100 million range. Smart investors will put in less, like $5 million, help a company achieve breakeven much more quickly, and focus on a more realistic exit, such as $75 million. This is a model that I believe works much better today.

Weeks: Last year two of your portfolio companies had large liquidity events: Yahoo! acquired BlueLithium for $300 million and Verizon acquired Cybertrust for $450 million. What were some of the key factors in getting these deals done?

Eskenazi: The Yahoo! deal was very tough to get done, as our deal sponsor changed mid-stream and Yahoo! also did a major reorganization during the process; so in a way,  I felt like I had gone to Vegas and beat the odds in getting that deal done.  In terms of what made BlueLithium attractive, the company was profitable and had a great management team. We also had a superb banker working for us who used to be at Microsoft, so he understood what the buyers wanted. And Verizon knew Cybertrust’s security business was important because companies are always in need of keeping their network and systems secure. These managed services were viewed by Verizon as a painkiller.

Weeks: You’ve recently departed Walden Venture Capital in order to become an independent angel investor. Why?

Eskenazi: Well, first and foremost, I left to spend more time with my family, as I have 3 kids 3 years old and younger!  Next, I saw from the market that there is a sweet spot between $50 and 75 million exits, so I’ve started to look at companies that are capital efficient and have a culture that is frugal enough to wait to spend heavily before revenue is real. I’ve been in the venture business for 11 years, and it’s been great. But I’d now like to invest in companies that “do well by doing good,”similar to the mission of social investing. If a company is capital efficient and also does good in the world, then I’m interested. My goal is to invest, sit on the board, and have my network – both investors and operating executives – help out. I guess I’ve become the accidental angel of some sort. I can get together with a few other like-minded angels for a round of several million. While some angels only look at early stage companies, I’m stage-agnostic.

Weeks: Tell me about your first independent investment.

Eskenazi: In early 2007, I personally co-led a $2 million private round in Hands-On Video Relay Services, a Sacramento-based company that provides communication services to the deaf and hard-of-hearing market. I joined the Board, helped the company execute on a growth strategy, and had modest expectations about selling anytime soon. But within 6 months we were approached by a sophisticated private equity group and entered into a three-way merger with GoAmerica and a division of Verizon, which represented a phenomenal roughly 10x for us and the company. This proves an important point: investors need to make sure that the sweet spot of the market is an exit that is lucrative for everyone.

Weeks: Thanks, Steve