March 24, 2014
Ignition Managing Partner Nick Sturiale sees plenty of room for a number of big players in the collaboration and storage sector where Hightail, a company he backed in the early days when it was known as YouSendIt, is operating.
He also believes Seattle’s startup ecosystem is maturing as a viable alternative to Silicon Valley, but will never pose any threat to the region he has operated in for more than a quarter century as a founder and funder.
Last April, the Puget Sound Business Journal reported Ignition Partners’ move to open a new Silicon Valley office as part of a shift in company operations.
Sturiale talked to me about these and other venture and startup topics in the Q&A that appears below.
His early success included 12 years as a software entrepreneur culminating as founding CEO of Timbre Technologies, a manufacturing-analytics software company, which was acquired by Tokyo Electron for $138 million in 2001.
On the venture side, Sturiale spent three years at Jafco Ventures as a general partner, investing in companies such as Reputation.com, Bill.com and Delphix, and eight years at Sevin Rosen Funds, where he led the first investment in XenSource, which was acquired by Citrix Systems for $500 million. He also helped to run The Carlyle Group’s Silicon Valley office for a while.
But for the past year, he has run Seattle-based Ignition’s office in Palo Alto, Calif., which he helped to launch.
I see you were involved in Hightail back when it was YouSendIt, right?
Correct. I was a series A investor in Hightail, back when it was one of the first freemium plays.
One of the areas that obviously has been getting a lot of attention is the competition in the storage and collaboration area. Box and Dropbox have been the focus of attention, but Hightail was a very early strong player in that space. How do you see all that playing out?
I think the market is bigger and more fragmented than the media has portrayed. People want to conflate Box, Dropbox, Hightail and a bunch of other companies into a sort of single pot. There is overlap, for sure, but there are a number of niches that are large within file collaboration that co-exist right alongside of each other. So I think it’s a fallacy for people to say there are just one or two players or there is just one generic market. There isn’t. There are a number of submarkets underneath that. That said, for sure it’s Box and Dropbox that dominate the coverage because they have raised something like a billion dollars total between them.
One of the things that sometimes gets overlooked is the big player involvement there. Google just lowered the price on Drive and that’s going to have some impact, as well.
It is, and Apple has got iCloud. It’s going to be a competitive business for a while. There are going to be niches that emerge because it’s not just the utility service. I think just doing storage, just doing file sending, just doing personal sync is just table stakes. I think the game is going to move to developing turnkey application services that solve the problem of a particular job or a particular situation. I think the companies that end up doing that will do very well. But it means providing much more customized solutions. There will be a generic set of utilities in something like file collaboration. But that’s a commodity business. There are going to be ways of adding value on top of file collaboration that get much stickier and make it more compelling and more profitable. So I think there is a lot of game left to be played in the space but it is very competitive, for sure.
The team is split between Seattle and Palo Alto, right?
Ignition was doing more and more investment in the (San Francisco) Bay Area, anyway, and I think there was interest on the limited partners’ part to solidify what was already taking place.
What’s the difference between the startup and investment scene in Seattle and the startup and investment scene in Silicon Valley?
The major difference is there is just more investment opportunity down here than there is in Seattle. The quantity and quality is higher down here than it is in Seattle. With that said, I think in the Seattle area, the entrepreneurship maturity is continuing to progress. I think we are starting to see better and better investment opportunities in Seattle than, say, five years ago or 10 years ago. I think you are getting people that have done a couple of startups and worked at Amazon or Google or Microsoft. When they come back into a startup, their literacy is quite high, whereas maybe 10 years ago that wasn’t the case.
What you are looking for is not just the founders. You are looking for the middle management, and you are looking for the university that can provide the feeder system of computer programmers. I think Seattle is getting close to having enough mass there, so we will do investments in Seattle for sure. It’s just there are just significantly more opportunities down here with people, this is still Mecca for startups.
We have certainly seen some companies leave the area up there and come down here with some success. Then there is the outlier that goes in the other direction, like Tableau.
Right. Tableau was started at Stanford, but ended up relocating to Seattle. I think that the competition for labor in the Bay Area is getting so intense and driving labor rates up quickly that I think you are going to start to find more interest outside the Bay Area for startups. I think more venture community and development offices will be distributed outside the Bay Area.
There has certain been a lot of talk about that. Are you actually seeing that materialize?
We are certainly encouraging our CEOs to think about setting up development teams in either Seattle or Canada or in the Midwest, certainly also on the sales and marketing front as well. It’s becoming really difficult to scale in the Bay Area with the labor rates that are now being commanded. Because at the end of the day we are all competing for the A talent which is getting something like five job offers.
One way companies like Yahoo are dealing with that is by buying startups for their talent. Has that affected you guys at all?
It has. We have had a robust set of exits in the last 18 months. Some of them have been pretty early. In fact, we would have liked to not have them be acquired. But it was a good outcome for the entrepreneur and we don’t want to get in the way when you know there is a good outcome.
Tell me about your focus at Ignition.
We are investing from a $150 million fund that was raised last March, and we are exclusively focused on early stage enterprise software startups.
You launched at right about the time when it seemed like everybody I was talking to was focusing on enterprise startups.
Yeah, it’s funny. If you wait long enough, bellbottom jeans become cool again. As investors, we have been in enterprise software since 2000. It’s just recently that the public market vigorously endorsed new platform-based enterprise software companies. So, of course, the venture community piles in, as we are wont to do when a theme or genre is doing well.
What were some of the companies that you backed before Ignition?
I was the first investor in Splunk, along with David Hornik of August Capital. I was also a seed investor in a company called ZenSource, which Citrix bought for $500 million.
What companies have you invested in since you have come over to Ignition?
Two companies, so far. One is BlueData, which is making a sort of purpose built Big Data private cloud system. Another is a company called StrongLoop, which is helping to commercialize Node.js, and Node.js is one of the most popular frameworks going on right now in mobile software and also in Internet of Things.
Has there been a change at all in what you look in enterprise startups?
I don’t think so. I think you are looking for disruption. Usually disruption comes in the form of new platforms. You look for platforms that look like they are gaining traction and then you are trying to decide which are the services that are the enablers on the top of those platforms. We are obviously looking at teams and the CEO and the evidence of execution velocity. Market is the dominant factor. If there is no market or if you are too soon to market or too late to market your investor will be challenged.
Where are StrongLoop and BlueData based?
StrongLoop is in San Mateo (Calif.) and BlueData is on Castro Street in Mountain View (Calif.).
Let’s take one of those as an example of what you are looking for. Describe what it is you found there.
StrongLoop. There is an open source framework called Node.js, which has become very popular in the last five years. Companies like Yahoo and LinkedIn are building much of their infrastructure on Node.js. Node.js, which means Node and Java Script, is a server side programming framework. One of the big challenges today in enterprise mobility is connecting iPad applications back to data repositories behind the firewall. So, an iPad app that connects to a software as a service platform like Salesforce, that’s very straightforward. But if you have an analytic application running on a mobile device and you want to connect that to say 25 or 50 data sources behind the firewall, that becomes much more challenging. There really isn’t a good solution today on the application server side for very high concurrency data access.
This is in large measure why Node.js has become so popular. There really wasn’t a commercial vendor that was dedicated to Node.js. Joyent owns the copyright and Joyent provides some support for Node.js. But that’s not their core business. So with StrongLoop several of the most important contributors to the open source community for Node were brought together into a single company. The idea is to help support the commercialization and maturity of Node.js, but also to build proprietary products that are based on Node that helps mobile enterprise become as useful as the desktop.
Had you worked with any of these guys before?
No. I knew the CEO previously, Issac Roth. I thought very highly of him. I also knew some of the guys at Shasta. I thought highly of them as well. I also had some success investing in open source with ZenSource. This is sort of a classic series A that are commercializing in ecosystem.
Are you guys exclusively Series A and Series B?
We are predominantly series A. We do a handful of Series B’s and then one off model investment, we haven’t done one yet.
It seems that we have been seeing much larger Series A rounds. Some big players are getting involved earlier than they used to. Has that had any impact on what you guys are doing?
Yes, it has, because valuation is imputed by the amount raised. So with the larger amounts being raised, valuations have gone up. Smaller funds like ours have to be more sensitive about valuation and ownership than the larger funds. So inevitably we will miss out or lose out on deals that have venture scrums around them.
But there is a fairly significant amount of statistical evidence that smaller funds perform better than larger funds in the venture industry.
So how do you compete? What’s the advantage that you guys have that perhaps startups are not going to get at a larger fund?
Well, that’s a topic we discuss every week. It’s an evolving thing. I would say, fundamentally, how we compete is to do a very small number of projects and we devote our time significantly to those companies. At the end of the day the only thing that really matters is the time a general partner spends on the company. So we limit the number of investments we make and we limit the number of boards we take on. You can deliver a better level of service to a company doing that than when you are on eight to 10 to 12 boards and are, in effect, cramming for the exam every time you show up for a board meeting. So our sales pitch is when we do an investment in you, you get the entire Ignition team and you get a high percentage of our time.
One question I ask everybody is about their “anti-portfolio.” Is there a company that you had passed on that you wish you hadn’t?
It’s usually a traumatic event and so I try to blot it out from my mind.
In my old firm we passed on Heroku, which ended up getting sold for a fancy number pretty quickly thereafter to Salesforce. We were definitely kicking ourselves for that one. It’s usually situations involving a giant financing for giant prices where we really weren’t even considering getting in on it. I mean there is a whole phenomenon of just buying a logo. That means investing at any price, at any round. That tends to be more about marketing for the firm and we have stayed away from that because at the end of the day what our limited partners care about is cash.
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