A little more than a year after raising its fifth fund and tightening its investing focus to enterprise and business-to-business startups, Ignition Partners sees the past as precedent for its bets on a broad reinvention happening in business computing.
The venture capital firm, based in Bellevue, WA, and with a new office in Palo Alto, CA, has made five investments out of the $150 million fund it raised in late 2013, backing companies including Tipbit, BlueData, and Tellwise. The firm is targeting about 12 to 15 investments total, and is right on the pace anticipated by the managing partners leading the fund, Frank Artale, John Connors, and Nick Sturiale.
Artale, a technology veteran who did a stint at Microsoft in the 1990s, says that Ignition’s investment thesis with this fund is that “business computing is in a renaissance. There’s a number of factors that we saw that occurred in the mid- to late-1990s that are eerily familiar to what’s happening right now.” He adds, “We like to use history as a guidepost.”
Artale sat down with Xconomy at Ignition’s downtown Bellevue offices earlier this month to explain some of those similarities, and share opinions on what makes a world-class venture fund, why 2014 is not like 1999, Cloudera’s recent “magical moment,” and what’s holding back Seattle startups.
Business computing renaissance. Technological shifts occurring now mirror those a generation ago and are opening major opportunities for startup companies selling to business customers, Artale says.
These include the end user experience, which is going from the desktop to mobile, a shift Artale compares to the transition from character-oriented user interfaces to graphical user interfaces.
Database structures are changing to Hadoop “big data” technologies and NoSQL, which reminds Artale of the shift from mainframes to distributed systems that was occurring 20 years ago.
Enterprise resource planning and other line-of-business software tools that came up in the 1990s are being replaced by software-as-a-service apps that can be tried and deployed by companies in hours—with little long-term commitment—rather than days or weeks.
Local area networking took hold in the 1990s, replacing point-to-point networks and other older systems. “And now the networks yet again are being blown apart,” he says. “We have networks in this room with no wires. My phone’s connected to a network called the 4G network. It really has nothing to do with an enterprise network, but I can access all my enterprise data from it.”
Entrepreneurs are harnessing these and other trends, which are upending virtually every aspect of business computing.
“Now we’re seeing more and more applications that will go and leverage all of that new infrastructure. And we’re seeing great deal flow,” Artale says.
Business focus. Artale says the current Ignition partners have no regrets since leaving behind the consumer and telecommunications sectors, where the firm was formerly active in previous funds. And, he notes, Ignition today is not set up for those kinds of investments, by design.
“Access is important in order to make those investments, and to just be quite honest, we don’t have that,” Artale says. “Some investors are good at making investments in consumer-oriented things, and some are good at making investments in B2B or enterprise things. We’re more of the B2B, enterprise.”
Exits from Ignition Partners IV and what makes a world-class fund. In the last year and a half or so, Ignition has had about two dozen exits from its existing portfolio. Artale says this is a natural progression, not an intentional effort to wind down the earlier funds. Some highlights: Cisco’s $415 million acquisition of Whiptail, which Artale describes as one of the largest returns to Ignition Ventures IV; ServiceMesh, acquired by Computer Sciences Corporation; Parse, acquired for a reported $85 million by Facebook; Zenprise, bought by Citrix Systems in 2012 for a reported $355 million; and the initial public offering of Splunk, also in 2012.
“I think at the end of the day, Ignition Ventures IV, where most of these exits are happening, will be a world-class venture fund and have world-class venture returns, not because of the exits that have happened already, but because of the ones that are still in the fund,” Artale says. Specifically, Cloudera, which just landed a huge investment from Intel and, perhaps more importantly, a partnership with the chip giant (see below); Bromium, an enterprise security company; and Xamarin, which makes tools for developing mobile apps.
To be considered a great venture fund, a single investment would need to return the entire $400 million raised in 2007 for Ignition’s fourth fund. “And Ignition Ventures IV has not had that sort of exit yet,” Artale says. “We believe there may be a company or two sitting in the fund—Cloudera as an example—that could provide that marquee that you need to have the fund considered, from a subjective perspective, to be a world-class fund.”
Bubble reading. Artale says we’re not reliving 1999. Companies going public today have significant revenues, good financial histories and controls, and real businesses. “In 1999, you had companies that were going public—and I was around back then—that really, I would just say, had no business going public,” Artale says. “It was just this euphoria that was brought on by a lot of analysts.”
That’s not to say that there’s no euphoria in the public markets now, some of which has been put in check by a correction earlier this month.
There is still considerable “inventory” of companies that might have gone public sooner, but the IPO window was closed during the Great Recession. Now, as these companies make their public debut, investors have been buying at the IPO, and then moving on to the next new issue. “So these so-called momentum stocks will suffer to some degree from rotation,” Artale says. “Then things kind of equalize over time, and also, when some of the euphoria around price-to-sales multiples actually comes back down to let’s just say plain old euphoria as opposed to super euphoria.”
Artale believes that unlike in the late 1990s, most of the companies that have gone public of late will
