Leadership Insight > Dave Fachetti

VC Managing Director Talks About How Enterprise CIOs Influence Investment Portfolio Decisions

By Elizabeth M. Ferrarini

The dot.com days of investing hundreds of millions of dollars in startups with the expectation of raking in billions from IPOs colored the venture capital industry. However, today's venture capitalists don't have any plans to repeat the past mistakes. With investment dollars being at an all time premium, venture capitalists need to go beyond the normal due diligence to find those emerging companies that can, one to three years down the line, successfully fill the information technology needs of large enterprises.

Several years ago, Dave Fachetti, a managing director in Globespan Partners (formerly JAFCO Ventures), decided that his venture capital firm needed to look at technology investments through the eyes of global CIOs. Globespan typically invests anywhere from $250,000 up to $15 million in emerging IT sector companies, ranging from infrastructure to peripherals. Fachetti put together an advisory board of CIOs from some of the largest banks, insurance firms, and investment companies in New England. He says, "I had tremendous access to many entrepreneurs, but I really couldn't decipher which ones to select. At the end of the day, we invest in many things we don't consume, but CIOs do. I wanted to have a good context for a discussion about our investments."

The BTM Institute recently sat down with Fachetti to discuss what both the CIOs and Globespan derive from its CIO advisory board. Here's what he had to say:

Every entrepreneur comes to us with the same mindset, such as 'I've figured out the world's largest problem. It's going to be huge.' Many large enterprises don't consume these technologies to the degree that entrepreneurs envision. I'd prefer to hear CIOs from large enterprises say, 'Here are my largest problems. How can you solve them.'

Q. How did you go about starting the CIO advisory board?

Someone told me to contact John Fiore, who was retiring as CIO of State Street. During our initial discussion, we both agreed that VCs, in their efforts to reach CIOs, just wind up representing their portfolios. In other words, CIOs perceived us as vendor agents. I asked him what we needed to think about before we wrote a check to fund a company. We're always looking at where to deploy the $100 million we use to fund companies each year. To this end, we spend much of our time looking at technology with a very skeptical eye. CIOs view technology the same way. John and I both shared this viewpoint. Over the years, he had become frustrated with having access to a handful of large vendors. He also had a $500 million capital budget. He knew that smaller vendors offered some interested technology, but he couldn't filter through all of their noise.

So, I had the filtering system and John had the perspective that I valued. That's when we decided we had a strong mutual interest for a long-term relationship. Besides being cynical about technology, we both were looking for sources of true innovation.

Q. How do CIOs and your firm benefit from this advisory board?

The CIOs have controlled access to entrepreneurs through us. They get a different framework on how to think about technology. As VCs, we think about it differently than they do. They find that to be interesting and extremely valuable. We structure our meetings around the specifics of broad topics that interest our members. We vet those topics with our members. About 15 large enterprises participate in this program.

As a VC firm, we have a very purpose driven conversation about what we should be looking for in a specific area. Within each topic, we look at the people issues, the process issues, and the technology issues. Ultimately I want criteria covered when I'm looking at the investments I will make.

Q. What are some of the technology topics you've covered at these meetings and how do you approach these topics?

We've done sessions on topics such as information security, networking technology, innovation, and enterprise data management. We recently did a session on virtualization. We have a session coming up on a service level view of systems management. At the end of the day, we think that CIOs care about the service view of technology. However, it's easier for IT people to take a systems level view and historically reconcile these two views. Many IT people spend their time doing just that. Technologies such as virtualization or software as a service now make it harder for IT departments to reconcile the service view and the systems view of technology.

At the same time, we have this great dependency on the services. We think we're at a choke point. We're trying to figure out the technology that can solve this. We're looking at how important that problem is to prioritize and solve. For example, do service level agreements really matter? If so, when do they really matter? These things would come out as cost allocations. Through our relationships with CIOs, we want to develop a framework they can use when they think about acquiring certain technologies. CIOs often say there isn't one uber technology that solves this problem.

As I think about point solutions, for example, I have a certain priorization framework that I 'm looking at. Certain technologies might be a fit better than others. As I decide to acquire some of these point solutions, I need to think about those differences. The CIOs we work with consistently look to see if these solutions fit into a framework. As a firm, we have to decide if this is the right framework for looking at investment opportunities.

Q. What technology areas interest you the most right now?

I look at technology areas where there is momentum. I also look at areas that interest me. Virtualization is an interesting segment with about 100 startups in it. I'm also interested in data management because data is a critical asset to any organization. Many organizations do a poor job of managing their data, but many investors don't have a lot of interest in investing in data management because it’s a hard problem to solve. You can make a lot of money if you can solve it. However, it encompasses many different solutions.

I'm also interested in cloud computing, which seems to be getting a lot of momentum. Cloud computing provides you with a set of services that although you don't need to own, you do need to control. Things like software as a service and service oriented architecture will give you the control you need to deploy a cloud architecture. Software as a service has been tried before. However, the cloud architecture is now standardized, offering more modularity and flexibility. As a result, you'll be able to do more customization outside of the firewall. People aren't talking about it enough yet.

You're going to see a continuum of things that you'll be able to have within the firewall and things you'll be able to have outside of the firewall. A blurred line will exist between. Having this synchronization across the firewall could become a good area of investment.

Q. What criteria do you use to evaluate the future success of the companies in your portfolio?

Because we have many early stage companies in our portfolio, we can't necessarily look at revenues. In some cases, it might take several years for these companies to become profitable. We have to look at what things they're trying to provide and where they intend to provide them. To this end, we work with each company's management team to figure out what's the appropriate metric for assessing how well that company is performing. We look at things such as the product roadmap, product features, and early customer adoption. For example, I look to see if the customer represents a large segment of a specific market. It's a plus for the company if it attracts a partnership with a major player, such as a virtualization startup striking a deal with VMWare or Citrix. Overall, we look to see how can the company increase the value of the enterprise.

Q. Do you get smarter with each new investment?

We're active investors. We sit on the board of the companies we invest in. The benefit we have is that we do have 50 active portfolio companies. It's not that we get smarter with each new company. We've just seen the same movie played out a lot, and had the chance to learn from those patterns.

We operate a cash-on-cash business, but it takes a long time before the cash goes out and then comes back. How do we know if we are on the right path? How do we know when to seed and when it’s time to eat? Ours is a business of pattern recognition - which in the end, all businesses are that of pattern recognition. The question is what are the data points that create the patterns?

Q. What kind of exposure do CIOs get to the companies in your portfolio?

When I first started the CIO advisory board, CIOs would ask me about my firm's portfolio companies. I was very sensitive to that issue because I didn't want to be seen as a vendor agent. I wasn't going to help my portfolio companies sell. If you invest in the right companies, then they should be able sell themselves. The CIOs continued to ask me if they could learn more about the companies in our portfolio. Some of the CIOs said, 'Look we're having a conversation about an important area, and you've made a decision to invest in that area.' So now when we cover a specific technology segment, if we have made investments in that area, we'll do a technology briefing, where we demonstrate some of these companies' products. In a few cases, these CIOs have become customers of our portfolio companies.

Q. Are many CIOs talking about technology being part of their company's business strategy or moving in that direction?

I speak with many business-oriented CIOs. In fact, the majority of them are that way. All of the CIOs in enterprises I've had interactions with perceive technology as a critical component for driving effective business process. The big question these CIOs have is: Where do these business processes fall on the risk continuum? How aggressive should they be?

A couple of my CIOs gave a risk tolerance presentation to some of my firm's investors. Based on the discussion that ensued, I learned that each situation carries it own risk definition. CIOs perceive risk as anything that isn't desired. An organization might have the desire to adopt something, but on the other hand, executives face the risk of whether or not the adoption will be successful. The more you understand these things, the higher your likelihood of success.

If you acquire something that the organization greatly desires, than you have a higher level of job protection to pursue. You might think that going with open source would be a risky decision. However, several years ago people started aggressively moving to open source. They also started to move IT functions offshore. Yet, these things were still in their infancy and not well understood, but organizations wanted them nevertheless. CEOs championed the adoption of these things. You gain credibility by pursuing something that is desirable by the organization, even if it fails. This view is in contrast to the CIO who says, 'I know this isn't the popular path, but it's the best one.'

The popular path may be less risky to take than the unpopular one, but I’m not concerned with popularity – I’m looking at what’s most effective. That's why I spend my time with CIOs. I'm not interested in well understood. I'm interested in the highly desired.

Elizabeth M. Ferrarini is a writer from Boston, Massachusetts. Reach her at elizabethferrarini@yahoo.com.