In this two part interview, I sat down with Greg Gretsch of Sigma Partners to get his inside perspective on venture capital today. In part one we cover Sigma’s key principles for success, why Sigma isn’t a household name but has returns like one, and what markets and trends are driving entrepreneurship in today’s economy.
Kleiner Perkins and Sequoia Capital may be the flashy VCs presiding on Sand Hill Road, but across town in Menlo Park, Sigma Partners is posting equal, if not better, returns for their investors. Throughout the last 25 years, Sigma Partners has funded over 100 early stage companies and is currently investing their eighth fund of about $500 million, bringing their total capital under management to over $2 billion. Unlike some firms that hire venture capitalists based upon their business school degrees and finance backgrounds, Sigma recruits partners with experience in the trenches starting and running entrepreneurial companies. This first-hand experience allows Sigma to give early-stage companies both tactical and strategic guidance and access to their powerful business network.
Greg Gretsch, who joined the firm in 2000, fits the Sigma Partner profile. He has no MBA, but used his time out of school starting three companies. Greg’s successful investments as both an Angel and Venture investor include TalkingBlocks (HP), SlimDevices (Logitech), Postini (Google) and EqualLogic which was sold to Dell in 2008 for $1.4B, making it the largest all cash acquisition of a venture-backed technology company in history. These and Greg’s other investments earned him a slot on the AlwaysOn Venture Capital 100, making him one of the top VCs on the planet. Greg also maintains a very thoughtful and useful blog called Dispatches from the Darkside. Two of his most recent posts include Go Earn your Silicon Valley MBA and Don’t Let a Venture Capitalist Deflower Your Startup.
I think Greg Gretsch is one of the more thoughtful and successful VCs of his generation. We sat down with Greg Gretsch recently, and this is the first part of a two-interview series that will be published here.
Andrew Bellay: What are Sigma’s principles for success?
Greg: One of the core founding principles for Sigma is that we want to find companies that can build significant value on a minimum amount of aggregate capital. We believe that the entrepreneurs who are building great companies are the captains of industry. The perennial debate is: Do you invest in great people or great markets? I think it’s a little bit like the current debate between lean startups or fast startups – It’s a bit of a red herring. Yes, you want a great market. Yes, you want great people. Which do you pick first? Our argument would be: clearly you pick the great people first. If you look at what they’re doing and you think it’s a crappy market then check your assumptions on the people. We’d much rather have an A team working on what we think is a B idea than a B team working on an A idea. The A team can make something out of B idea and maybe make it an A idea.
Andrew Bellay: Sigma is one of the top five performing firms in the world but isn’t the household name that Kleiner Perkins, Sequoia, and Accel are. Why?
Greg: For us, the stars have always been the entrepreneurs. I don’t think our street-cred matches up with the credibility we have with LPs and the results that we’ve delivered. You don’t see us out there beating our drums much and that hurts us sometimes. In the end, the entrepreneurs appreciate our approach. Also – we haven’t historically been involved with consumer internet and so we’re not a part of the buzz machine.
Andrew Bellay: If not consumer internet, what markets does Sigma invest in? What are the trends you’re interested in today?
Greg: We do a lot of SaaS businesses, business to business sort of things. I think the most exciting thing that’s happened over the last ten year is that a bunch of different costs have come down a lot. Companies are using open source software, using the cloud for computing and storage, delivering their products as a service, eliminating belly-to-belly sales, and entering markets in innovative places as a result. SaaS businesses today have a direct line to customers all the time. I think that makes them more responsive to their customers, and ultimately creates a stronger bond and more value on both sides.
Assembling and managing a virtual workforce has also become another emerging trend that companies like oDesk are enabling and riding on top of. I think it’s huge. It feeds into the capital efficiency of startups. But it’s more than just ‘Oh someone in the Philippines costs a lot less than someone in Menlo Park.’ Well yeah, but you also have access to the global workforce – the best people around the world who also happen to be in places that are a lot cheaper than San Francisco.
Andrew Bellay: In these economic times, how important are tactical decisions like a building your company with a virtual team?
Greg: I think it’s critical. Companies that start from the beginning like that and build in advantages to their cost structure allow themselves to be significantly more competitive as they scale out. Think about how much more they can do in customer service, product development, QA, and everything that makes their product better for their customers. They can do more of it because the cost of doing it is cheaper than what any of their competitors can do it for. It makes them incredibly competitive and gives them a much stronger financial story.
Check out Part II here.
[Originally published By Andrew Bellay on aonetwork.com]
