Sand Hill Road’s Consiglieres: August Capital

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Sand Hill Road’s Consiglieres: August Capital

In his best-selling book “Give and Take,” Adam Grant argues that the fourth ingredient to success — aside from hard work, luck and talent — is the ability to connect with people.

After 10 years of research, he chose Sand Hill Road’s David Hornik as a prime example to prove his case that good guys can finish on top. If venture is a long game, then long-term relationships are paramount. In fact, August Capital’s story begins with a long-term relationship between a young VC, Dave Marquardt, and a friend-of-a-friend named “Billy Gates.”

The Making of a Firm

It was 1980, and 30-year-old David Marquardt was a young, hotshot VC at Technology Venture Investors looking for his next deal. He heard through the grapevine that another young hotshot, “Billy Gates,” was having success with a startup called Microsoft, so he called one of Gates’ employees and former classmate at Stanford Business School, Steve Ballmer, to get a meeting.

At the time, Marquardt was a rarity in the VC world filled with ex-bankers; he was a design engineer and deeply technical. This resonated with Gates and Ballmer, and Marquardt spent the next year going up to Redmond almost every weekend to spend time with Gates and his team.

Sometimes they would go to University of Washington football games, and other times they would brainstorm. But in that year, Marquardt sealed the deal, and became one of the investors in Microsoft’s Series A in 1981. At the time, Marquardt and TVI invested $1 million for 5 percent of the company. Thirty-three years later, he still sits on the board of Microsoft.

augustcap-marquardtRelationship building and company building has been Marquardt’s ethos as a VC; and he carried that view of venture capital to August Capital, the firm he co-founded with fellow TVI colleague John Johnston.

Relationships Before Returns

“The venture business is an intensely personal relationship business. And it’s not an industry that scales well,” explains Marquardt. He says he would never consider adding a value added service. “Companies should do that themselves,” he adds. Bill Gates wouldn’t let me bring in outside PR people and marketing talent — that’s what founders do, Marquardt maintains. “My view is that the CEO is ultimately responsible and accountable for everything, and they are the ones that make the decisions. The VCs are there to support and be steady”

Marquardt says that he’s seeing a lot of VCs who are closet operators who have been on boards and start pointing fingers at founders when things go wrong. “That’s not our style. Our style is more like telling the CEO, ‘Have you thought about this approach or this hire?’ We don’t believe we are there to make the decisions.”

While August may not have the marquis WhatsApp deal in its portfolio, or did not back Instagram early, the firm has had a number of early wins, such as Seagate, as well as quiet successes like Zulily and Splunk, which have helped its returns over the past few decades. And it’s clear that August isn’t all that concerned with getting some of the hype; the firm continues to be focused on its entrepreneurs and providing the kind of support Marquardt provided for Gates.

augustcap-johnstonBy the time Marquardt and Johnston teamed up to found the firm in 1995, they had already backed Microsoft and did the Series B in Sun Microsystems. (Marquardt went to business school with the company’s co-founder Vinod Khosla). Their fellow TVI alum Bob Kagel went on to found Benchmark.

The company closed its first fund, of around $100 million, and brought on Andy Rappaport. Andrew Anker joined the firm in 1998. The mid-nineties were an inflection point in the VC world, explains Marquardt, as many firms were starting to split based on ideological differences. Some VCs wanted to do more packaged consumer goods, but some ‘renegade VCs’ were betting on technology and networked computers.

The venture business is an intensively personal relationship business. And it’s not an industry that scales well.
— David Marquardt

One of the firm’s earliest investments was in Cobalt Networks, the developer of low-cost Linux-based servers. The company ended up going public and then being sold to Sun Microsystems for $2 billion. Cobalt drove the firm’s first fund, and made it easy for the second fund to be raised.

The bubble, says Marquardt, started in late 1996. “People out of Stanford Business School who had a PowerPoint presentation were raising $10 million at a $500 million valuation, and then going public six months later,” he says. But because the firm had placed more of its early bets on the enterprise, August Capital didn’t engage in some of the craziness like some VCs (Marquardt notes that the firm didn’t come out unscathed; its mistakes just weren’t that consequential to overall performance).

augustcap-hornikIn fact, one of the firm’s most successful deals took place in 2000 — storage technology company Seagate. After raising a third fund in 1999, the firm, which generally didn’t do buyouts, joined an investment consortium that included Silver Lake and others to take the company private in 2000 for $20 billion (August put around $135 million into this).

At the time Seagate sold some of the company to Veritas, and then the rest of the company remained private. “When we did the deal at Seagate, everyone thought we were crazy. It took courage to put that much money into hardware when everyone was fleeing,” he adds. Seagate ended up going public again in 2002.

The firm started to think to the future and brought on some fresh new talent, including lawyer-turned-VC David Hornik. Hornik was the counsel in the board meetings on the firm’s portfolio company Evite, and Marquardt says he was bringing more value into the board meetings than most of the VCs in the room. In 2003, the firm also brought on Vivek Mehra, the former VP of Engineering at Cobalt Networks, and then seasoned VC Howard Hartenbaum, who led one of the earliest investments in Skype, joined in 2008.

When thinking through bringing on new talent, Marquardt maintains that the more diversity of opinions, the better. “You want a group that is going to challenge each other but also shares the same values,” he says. “The challenge is to create a balance of personalities.”

After the Seagate success, the firm started to get much more deal flow, especially in late-stage investing. So August raised a special opportunity fund to do some of these late-stage deals on an individual basis. For the fourth fund, August raised $350 million for early-stage investing, and $250 million for the special opportunity fund. The firm has continued to make investments in later-stage growth rounds out of these funds, but the majority of the firm’s focus is on the Series A and Series B.

augustcap-carlborgTo manage this fund, the firm decided to bring on Eric Carlborg. On Carlborg’s first day on the job, he came to the partner meeting with a potential deal — Zulily. The then-fledgling e-commerce company for moms was raising a Series B, and August ended up leading the round shortly thereafter. Zulily of course went public a few years later, and is now a $5 billion company.

Most recently, August added former private equity whiz Tripp Jones who has helped work on investments in AvantCredit, Paperless Post, and Rocketmiles.

The Lobby

August’s partners are relationship builders, explains Hornik, and around ten years ago the firm thought about how it could actually broaden that to entrepreneurs and leaders in the industry outside the August Capital family.

Thus, The Lobby, a curated, off-the-record, invite-only event for founders, CEOs, VCs and thought leaders in the tech and media industries, was born.

There’s really no VC firm or even company that has been able to organize something as special as The Lobby — most of the other VC events are day-only conferences. It’s worth noting August also co-hosts a annual cocktail party with TechCrunch for the broader tech community each Summer.

But there’s something that Hornik and his team have been able to master when it comes to actually building lasting relationships out of The Lobby. It’s similar to Allen and Co’.s Sun Valley conference, with less emphasis on business and more focus on fun and bonding.

augustcap-mehra“We saw this as an opportunity to provide value to entrepreneurs in general,” Hornik explained. “It’s an opportunity for them to speak about business, give context about their decisions, but it’s also about creating a broader community and sharing knowledge. I don’t think it is possible to create a company without the help of a broader range of entrepreneurs, founders, CEOs and investors. The Lobby is a place to meet those people.”

The event itself is traditionally set in a tropical location, and actually is less about tech and more about sharing ideas and experiences. There are some bonding exercises but the primary format around conversations at The Lobby are called User Generated Conversations (a play on user-generated content), in which people participate in small groups. An example of a tactical user-generated discussion is how to create a call center, explains Hornik. But user-generated discussions can also swing to some of the personal challenges a leader in the tech industry might face (i.e. work-life balance).

August Capital The-Lobby-Conference

I’ve attended the event as a partner to my husband, but haven’t actually been an attendee. In term’s of who is there, and what’s talked about, that’s all off the record and Hornik prefers for the dialogue to be open and honest without fear of leaks to the general public.

Similar to the Allen & Co. conference, it’s common for partnerships, fundings and deals to be initiated or even made at The Lobby.  The list of attendees is kept private, but you can see some familiar faces on the conference’s homepage. The guest list is carefully curated, and it’s a mix of entrepreneurs; execs from Twitter, Tumblr, StumbleUpon, Uber, Dropbox, Facebook, Google, Yahoo, eBay, Amazon, etc.; as well as execs from CBS, MTV, Turner, Lifetime, Fox, Universal Music, and HBO.

augustcap-hartenbaumOf course, there is long-term benefit for August — all of the firm’s partners attend, and can interface with some of the tech world’s up and coming entrepreneurs, CEOs and potential founders. But that’s not the firm’s primary goal for sponsoring the event, which isn’t a money-maker, Hornik adds. At best, The Lobby breaks even, and at times, August covers the loss.

This year, the firm decided to expand The Lobby to a second conference focused entirely on enterprise entrepreneurs and investors. The original Lobby had started to be dominated by consumer-focused discussions, and it made sense to assemble founders, investors and CEOs of the most interesting startups and companies in the enterprise world (think the CEOs of companies like Cloudera, Fastly, Odesk, Nimble, Okta, Pure, Tegile, GitHub, Zuora, Salesforce, Splunk, Workday, NetSuite, Oracle, SAP, VMware, HP, etc.).

Hornik says that the conference does help with deal flow. “But our thinking is unlike many VCs. We’re relationship-driven and many in our industry are transaction driven. August is driven by relationships, and that is not about extracting every last penny of value. We don’t want more of the pie. We want the pie to get bigger,” says Hornik. Case in point — many VCs from competing firms are invited to and attend The Lobby.

“What’s different about the conference is that we don’t think of it as a utility,” says Hornik.

Firm Development

One element that is central to how August works is its flat structure–the firm has only seven active partners. Benchmark is one of the only other firms in the Valley that holds a similar structure where each partner has equal equity as well as an equal voice on investment decisions. But how does that change the dynamic?

As Howard Hartenbaum explains, every investor around the table is incentivized to help the other companies in their portfolios, even if it’s not one of the companies they source or are involved in at a board level. For example, he sourced the firm’s investment in Integral Ad Science, but Carlbourg joined the board because it was the right fit.

Mehra adds that the investment team is purposefully kept small with each VC coming from a diverse background. This prevents group think, he says. “We rarely look at deals with the same eyes, which helps us make better decisions.” And each partner is doing the diligence on their deals, he says. Often times at other VC firms, the first deals get judged by junior associates. “I do diligence calls myself, and so does the entire partnership.”

“Our partnership is different from an operational hierarchy. We’re a small group but we have very little turnover,” says Hartenbaum.

Only a handful of partners have left the VC firm, and when they do, it’s because they have wanted to pursue operational interests. “We want to be a place where we work well together,” he adds. And there are some practices in the VC world that August doesn’t stand for. Often if a company isn’t doing well, a general partner will be switched out for someone more junior, Hartenbaum says. Not the case at August — the firm stands by its companies through the good and bad.

Much of that is attributed to the firm’s long-term view of its companies and company building. August has seen some of its best returns come from companies they’ve been backing and working with for nearly 10 years.

August funded Splunk in 2004. The company didn’t go public until 2012. eBates, a company August funded in 2000, is a nine-figure-dollar business that is making millions of dollars, and Hornik has been going to board meetings for 14 years. And eBates is rumored to be eyeing a public offering this year.

“It’s not just about making quick money,” Hartenbaum says. “It’s about building great solid, free-standing businesses.”

augustcap-rappaport“I have no time frame, and no target for what is the outcome of a business when I invest,” Hornik says. “I go into every business thinking they could be next Microsoft, Splunk or Zulily, and it takes anywhere from 7 to 13 years to build those kinds of businesses.”

Another differentiating factor for August is how they work with their CEOs and founders — think more consigliere than mob boss. As Marquardt mentioned above, the approach is helping founders when they need help. There is not a “helicopter VC” mentality amongst any of the partners. “I give them my opinions but I understand that I only think about them for a few hours a week because founders and CEOs are thinking about their challenges 80 to 100 hours per week. I never get upset with a founder if he or she doesn’t take my advice,” says Hartenbaum.

Mehra sees his and the firm’s value not being in recruiting, marketing and other functions. “We gravitate towards founders who want to own those functions. We want to help with the other stuff.”

Bill Clerico, founder of payments company WePay, agrees. “Some firms are trying to build agencies, but August Capital is not like that. They are really lean, and the partners are all on the same page,” he says. He emphasized that the firm really feels like a real partnership, with no politics among partners for deals. Clerico adds that while Hornik led the investment in WePay, Mehra and Hartenbaum have been instrumental in helping him, as well. “August is in it for the long haul.”

“The approach August takes around the long play is rare,” says Rohit Kshetrapal, founder and CEO of hybrid flash storage appliance developer Tegile Systems. “The partners are genuine and are committed to being there during the ups and downs.”

Our legacy is Microsoft, Splunk, Sun, and Zulily, but just because you didn’t turn out only billion-dollar-plus businesses doesn’t mean that you aren’t making a difference and adding value.
— David Hornik

For Alexei Agratchev, the founder and CEO of in-store analytics company RetailNext, August was one of the few VCs that took the time to try to understand his business at a deeper level. He adds that he could have received a higher valuation from other investors, but took a 10-15 percent cut in valuation to go with August. Why?

He says that first meeting he had pitching one of the partners was at a mall, where Agratchev could show the tangible value of the software he had developed. Most other VCs wouldn’t take the time, he explains. And once he was part of the August family, the entire partnership threw their support behind him. When he went on to raise another round of funding, he talked to each partner at least twice around his pitch strategy and more.

“We rarely lose a deal if entrepreneurs do references on us,” says Hartenbaum.

But what about August’s Limited Partners? It’s one thing to be beloved by founders, but what about the people that are counting on your returns? While August hasn’t pulled Instagram or WhatsApp into its portfolio, Hornik says that in the history of the fund, the firm has always “made people money” and outperformed the financial markets. “We just don’t talk about it,” he adds.

There were some funds, like the 2000 fund, that was one of the best-performing funds of its time and some that haven’t performed as well as others. But it’s clear in talking to the partnership that creating blockbuster returns isn’t the primary focus.

“Our legacy is Microsoft, Splunk, Sun, and Zulily, but just because you didn’t turn out only billion-dollar-plus businesses doesn’t mean that your aren’t making a difference and adding value,” explains Hornik. The firm is centered around the belief that it derives value from being helpful to companies, he says. “This isn’t about creating the best venture brand of all time.”

The Good Guys

augustcap-jonesIs the approach scalable? Probably not. But “the firm is not looking to scale,” says Mehra. Thirty-three years later, Marquardt still sits on the board of Microsoft, and the partners that have since joined all line up around one core principle: to be as helpful as possible to entrepreneurs.

Spend real time with the partners, and you’ll be introduced to an ethos of “giving” that feels borderline spiritual. And while it’s one thing for a firm to have “giving” as their tagline, it’s quite another for a firm to spend decades building and operating with consistency and discipline around that core belief.

While the industry has changed over the past few decades, their position has not. And the result is an outpouring of gratitude and loyalty from some of tech’s top entrepreneurs.

When I first started writing at TechCrunch, I was taught that relationships don’t just lead to returns in the venture business — relationships are the return. If you believe that, then chalk one up for the good guys.