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There has been a big debate over the last few years over whether the Series A crunch is real or not. What everyone can agree on, though, is that there are definitely more seed and early stage funds now than ever before, and more people willing to give money to young companies looking to make it big.
In this edition of "Meet the VC," we interview Erik Benson of Voyager Capital, a Pacific Northwest-based firm with offices in Seattle, Portland, and Menlo Park.
Erik focuses on market-changing technologies and disruptive business models, concentrating his efforts on working with seed- and early-stage companies based in the Pacific Northwest.
Erik currently represents Voyager on the board of directors of Act-On Software, Anova Data, Chirpify, Lighter Capital, Lytics, Rio SEO, SheerID, Shiftboard and SkyWard. Erik was previously responsible for Voyager's investments in aQuantive (acquired by Microsoft), Blue Box (acquired by IBM), Capital Stream (acquired by HCL Technologies), Covario (acquired by Dentsu Aegis), Elemental Technologies (acquired by Amazon Web Services), Geoloqi (acquired by ESRI) and Kryptiq (acquired by Surescripts).
Prior to Voyager, Erik was a seed investor for Seattle-based WRF Capital after holding leadership roles at Mimix Inc., a pioneer in the area of motion capture and animation software. Erik started his career in New York for a predecessor bank to JPMorgan Chase, advising and financing private equity clients.
Outside of work, Erik enjoys playing squash and flying drones. He has an MBA with honors from Harvard Business School and a BA in economics from Pacific Lutheran University.
VatorNews: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
Erik Benson: I was born on a 2,000-acre crop farm and raised in a very rural environment in northwest Washington state, near the Canadian border. I’m a big Norwegian kid that grew up in farming and went to college for undergrad where all Norwegian farmers go to school, which is Pacific Lutheran University, on a cello scholarship. I’m a lifelong musician, a classical cellist.
After college, I worked in Germany for a large industrial conglomerate called Metallgesellschaft, which has since been acquired. My first job was making joint ventures and investments in industrial-chemical companies in Europe. Then I moved to what was then called Chemical Bank, now called JPMorgan Chase, in New York, doing private equity, bonds, and syndicated loan and origination for four years before I applied to one and only one business school. I wanted to get into the best and got into Harvard Business School. I was actually the first person from my college, which is about 125 years old, to go to Harvard Business School. I fell in love with technology there, and ended up building an intranet site for a billion-dollar-plus scientific instruments company that wanted to put a portion of their business online and allow their customers to order parts and “disposables.” That was the summer of 1996, around the same time Netscape was going public.
I graduated from Harvard in 1997. A lot of classmates, instead of going into investment banking and consulting, wanted to move west. I moved to Seattle with a group of people who mostly went into startups or pre-IPO companies. Three or four of my classmates went to Amazon one month prior to their IPO. One of them is still there running a “small” division of Amazon called AWS.
I really wanted to join a startup and didn’t want to work at Microsoft or a large tech company. My first job at a startup was as the startup’s CEO. I literally had no experience being CEO but they thought I knew something about management because I went to Harvard Business School. I was attached to a bunch of engineers that were already angel funded in the 3D gaming/graphics software space. The company was called Mimix. The positive side about becoming CEO is you get the title right out of business school without having to be founder. Two, I got 10 percent of the company. Unfortunately, as I later learned, 10 percent of common stock in a low-exit environment doesn’t produce a lot of wealth (versus preferred stock). They couldn’t really pay me so I made $25,000 a year for my first job out of business school in 1997.
I did that for a year, sold the company. One of my board members, as it turned out, was a former retired venture capitalist who was one of the two founding fathers of venture capital in the Pacific Northwest, named Woody Howse. He said, “based on working with you for a year, I think you’d make a great venture capitalist.” He was the only one I knew so I asked him to introduce me to some VCs. And that’s how I started in venture capital.
VN: What is your investment philosophy?
EB: Voyager was started in Seattle as a Pacific Northwest-focused angel firm. Initially, I was an associate and learned the business by going to board meetings with older partners and doing a lot of due diligence for a lot of deals as the only non-partner team member at our firm for the first 5-6 years.
One of the things I saw is that transitioning a founder or founding team in the pre-Series C too early often led to a 1X or less return for us as an investor. Outside of Silicon Valley (and maybe Boston), it’s much harder to recruit CEOs to take over from founders. Now, we typically look for founding teams that can scale that have self-awareness, the smarts, the ability to recruit A-players, and all the things you need to build a company from a seed round up through a Series C round (or third venture round) before we need to do a transition of CEOs. In the first seven years of my experience, we did a lot of transitions. Many early transitions did not work out.
Lesson number two seems obvious today, but wasn’t as obvious in the bubble of the late 1990s, which is buy low and sell high. We invested in seed, A, and B rounds but our pre-money valuations were sometimes $10-30 million. We were investing $1-10 million of capital. And we figured out what a business model or a go-to-market model should be in the experimentation phase early on in the company’s lifecycle before you put in a lot of capital. The adage we follow is “we nail it before we scale it.” Many of the investments we made at what I described as high early-stage valuations also didn’t work out as venture investments. We learned to keep our losses to below $2-3 million per company. We also learned to focus on the first institutional venture round, which is commonly called a seed round today. We’re almost exclusively focused on the first venture round at a single-digit pre-money valuation buying 15-20 percent ownership stakes for $1-2 million.
VN: What do you like to invest in? What are your categories of interest?
EB: We only invest in B2B tech. We focus on software, infrastructure and big data applications. We do not invest in consumer and never have. All the principles of Voyager come out of B2B experiences, whether it’s Microsoft, Adobe, etc.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
EB: In the 17 investments I’ve made post-becoming partner in 2004, I’ve only had two write-offs. I’ve had a series of companies acquired for $40-60 million exits, maybe 3-5X returns. I’ve had a number of 10X or better exits without needing to have unicorn valuations. Two of our companies that we invested in for Series A were acquired last year—one by IBM (Blue Box in Seattle) and another one by AWS (Elemental in Portland). TechCrunch reported the acquisition size between $300-500 million; it’s actually between those two numbers.
Above: A photo of the Elemental team around the time of the acquisition.
VN: Given that these days a Seed round is yesterday's Series A, meaning today a company raises a $3M Seed and no one blinks. But 10 years ago, $3M was a Series A. So what are the attributes of a seed round vs a Series A round?
EB: Almost all of our investments up until about 2010-2011 were essentially $3-6 million rounds and they were always called Series A. Around that time we saw the switch in the Pacific Northwest to calling those same rounds “seed rounds” or “seed two rounds” due to Silicon Valley starting to inflate the definition of a Series A to being a $8-10M round It’s just a change in vernacular. We’re still looking for the same things we were looking before, it’s just called something different.
The next round we syndicate or help lead (Series A) are generally companies that are growing 100 percent or better year-over-year, on a revenue run rate of $1-2 million, and have a path (but not necessarily there today) to market leadership or dominance in their particular segment of the marketplace.
VN: Given all the money moving into the private sector, I believe there's more money going into late-stage deals in 2015 than there was during the heyday, back in 2000, do you think we're in a bubble? And is it deflating now?
EB: I honestly don’t see a lot of unicorns completing IPOs or high-value exits in the foreseeable future. I call those companies “venture origami.” You’re basically folding paper and profits.
VN: If the bubble is deflating, how does that affect your investing?
EB: In the long-term, you want to see a thriving exit environment across all stages. But, in general, most exits traditionally in the B2B software/tech space occur in the sub-$200 million range—well before you get to unicorn status.
We have designed our investment methodology and our style of investing and approach to identifying founders, startups, and investment opportunities around the idea that most exits will happen in that range. Therefore, we look for opportunities at appropriate early valuations, help them grow without needing to raise a lot of capital, so we can return 10X to our LPs on a consistent basis without having to achieve billion-dollar exit valuations.
VN: What do you like best about being a VC?
EB: The most fun I have is identifying the raw talent in first-time founders and working with them to develop them and their leadership capabilities as first-time CEOs. Hiring the team around them, working with recruiters in executive searches, and building their boards—that is the best part about being a venture capitalist, being able to work with a number of leading entrepreneurs and growing them into CEOs of $50-100 million companies from scratch.
VN: What is the size of your current fund? And where is the firm currently in the investing cycle?
EB: We’ve had four funds two that are $50 million and two that are $100+ million. Our current fund is just over $50 million. We’ve made 10 investments, so we’re about 60 percent of the way through and three years into that fund.
VN: What is the investment range? How much do you put into each startup?
EB: Most of the time, we invest $1-3 million in the first venture round and then $5-7 million into a company over multiple rounds. Generally, we lead or co-lead the round. We almost always take a board seat, which is different from seed funds. Sometimes we’ll invest $500,000 in a company really early, but it’s pretty rare.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?
EB: We’re at least 50 percent of the round, but we’re almost never 100 percent. If a company was raising $4, we’re doing at least $2 million of that. We bring a syndicate partner to invest in the other $1-2 million. Sometimes it’s a traditional venture fund based here in the Northwest or in California, or in some cases it’s a large family office that has an investment team that’s a pseudo-venture capitalist.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
EB: It’s either seed or Series A, but most of the time it’s $5 million or less and they’re called seed rounds. It’s the first institutional venture round. There isn’t another VC or micro-VC, though there may have been angel investors prior to us.
VN: In a typical year how many startups do you invest in?
EB: For the last 18 years, it’s averaged to about 4-5 new investments per year across our firm.
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