What do you look for in a CFO for a portfolio company?
We certainly will put in a VP of finance within the first year of investing; someone who can keep the books. But you want someone with good business insight, and who can run the back of the house [smoothly]. So we often put in a part-time CFO. Some of them are willing to juggle several portfolio companies, and they in a sense become a [venture capitalist]. They become very aligned with our business, because they have equity stakes and their time is valuable, so they don’t want to spend a year working on a company that’s not going anywhere.
Our best CFOs have tight relationships with service providers, like landlords and accountants, and can get things done quickly. If we need new lab space, they know exactly how to get to the landlord; if we need a discount on accounting services, they know exactly who to call at PwC. Most of all they’re great business partners, and they can think about things like pricing and selling strategies, how to position a product.
How can the lack of liquidity be fixed?
The Spitzer reforms [separating research and investment banking] have made it almost impossible to take a small company public, and that’s a structural dynamic that doesn’t get fixed easily. When you separate banking from research, it doesn’t make [economic] sense for banks [to underwrite those IPOs].
The good news is, the top 15 tech companies have more than $300 billion in cash earning basically nothing, so the large public companies that need growth will likely acquire it. The problem is, the venture industry grew so quickly that we funded way too many “me-too” companies, so when IBM wants to buy a company, there’s no shortage of look-alikes. Leverage is still very much with the larger companies.
Is a sale, rather than an IPO, a satisfactory outcome for you?
If you have a hugely differentiated product, you can make a reasonable amount of money in an M&A transaction. In fact, I would far rather sell a company for the certainty of cash these days than go public, because [with the latter] you’re in at least a six-month and maybe a one-to-two-year lock-up period. And given the reforms on Wall Street, those smaller companies tend to be ignored by analysts and trade at a discount. So you may be locked up into something that looks like a falling knife.
We do need the IPO market to come back to drive M&A valuations, though, because today you can’t say, “If you don’t want to buy us, we’ll go public.” That’s a very hollow threat. But I would far rather take cash today, even if it’s slightly less cash, than navigate a small-cap public company.