Last week I had the opportunity to speak with Pete Sonsini, General Partner at New Enterprise Associates (NEA). NEA is based in Silicon Valley along Sand Hill Road and has more than $3B in assets under management in their latest fund. For more than 30 years the firm has invested in over 350 companies and has had 208 companies IPO – quite an achievement by anyone’s standards.
I reached out to Pete for three reasons: 1). I wanted to establish a relationship with someone in the Valley that can serve as a sounding board for some of the deals I come across; 2). I wanted to get a better understanding of how people in his position assess companies and entrepreneurs; 3). and lastly, I wanted to hear from his perspective what he felt were the most important characteristics that he looks for in a company before investing.
On a couple of occasions I have visited California, but I have never been to Silicon Valley. Nevertheless, almost everyone I know that either lives there or has been there has told me that VCs in the valley are very open about giving advice and helping out. I asked Pete about a tech startup seeking to use technology to modernize the process that attorneys use for helping companies obtain visas for their employees. While he thought the company had upside potential, he thought it may be too early for professional investors (especially at his level). I wasn’t terribly surprised to hear him say that. In fact, it was pleasing to hear him say this because I was thinking the same thing.
We also talked a little bit about where he is investing and what sort of deals he’s looking for. He said his firm is always on the lookout for good companies all across the country, but nearly 75% of their investments are in California. When I asked him why, he said it was simple: “talent.” According to the National Science Foundation (NSF), The three most populous states—California, Texas, and New York—together accounted for more than one-fourth of all science & engineering employment in the United States. Let’s think about this for a moment – there are 50 states in the United States and just three (3) states make up 25% of all the science and engineering jobs. That’s staggering. Several major metropolitan areas in those states, for example, areas around Santa Clara, Los Angeles, and San Diego, all in California, and areas around New York City and Houston, together accounted for approximately 1 in 10 S&E workers nationwide. With that being said, there’s a lot of validity to justify Pete’s comment. It also implies that the rest of the nation should pay attention to what is happening in these states, especially as it relates to business, education, and innovation.
We proceeded to talk about what he’s looking for in the entrepreneurs and the companies he’s investing in. In short, his firm is looking for entrepreneurs with industry experience that have expertise in a particular vertical and are working on ideas that can potentially produce a multi-billion dollar outcome. In my opinion, this is probably one of the most significant differences between venture capital and any other type of investing that’s out there.
Venture capitalists think BIG, and I believe they think this way because they are investing in companies that have the potential to change the world. It goes without saying that VCs need to invest profitably in order to provide a return to their LPs. But in order to achieve multi-billion dollar results, I don’t think it’s simply about trying to make a good return on investment. I think it’s also important to be able to see and envision opportunity in places where no one else is able to see it.
This week I finished Steve Case’s book, The Third Wave. When Steve wrote about the merger of AOL with Time Warner, he said he was very surprised by the reactions he would get from the team at Time Warner when he spoke about the future of the internet and what they could do to take full advantage of it. Where he saw opportunity, they saw a threat to their current line of business. Steve Case is a visionary and it was his vision of what “could be” that helped him grow AOL to be one of the most profitable companies in the world at the time. I think it would be foolish to say that all VCs are only looking to invest in people like Steve Case. But I do think it is safe to say that when you’re investing to achieve multi-billion dollar outcomes, every investment has to be spectacular.
I hope that at some point I can refer a company or two to Pete, but most of the companies I see at the angel stage aren’t nearly ready for venture capital. In addition, most people like Pete are looking at probably 6 or 7 new companies every day so deal flow isn’t really a problem. Probably the key takeaway from my conversation with Pete would be the following: If you’re an investor or an entrepreneur and you’re curious about how VCs think and what you can do to get on their radar, don’t assume you know what they want – just pick up the phone and ask. They are lot friendlier than you might think.