Loyal readers know that Elevator Pitch features a different venture capitalist every week. But our latest guest is an ex-VC -- although he still invests in venture-backed companies.
Manuel Henriquez spent years doing corporate venture investing (as president of Comdisco Ventures) and traditional Sand Hill Road VC (at VantagePoint Capital Partners) before striking off to do a different kind of tech investing. "Venture debt" isn't a sexy term, but it's one that can give entrepreneurs an additional way to raise money without having to give up ownership in their companies.
We asked Henriquez, the CEO and co-founder of Palo Alto's Hercules Technology Growth Capital, why venture debt is an increasingly popular tool.
Q How'd you get into this racket?
A I've been involved with emerging companies since 1983, when I started my first company while still in college. Ten years ago, I started Hercules with two co-founders and a simple charter: To help entrepreneurs gain access to growth capital that is complementary to, but less expensive than, traditional venture equity.
This opens up possibilities for emerging companies that generally would not qualify for traditional loans because of a lack of revenues or cash on hand, and it helps founders avoid the dilution that would result from having to raise additional VC money before they are ready. This additional layer of capital essentially extends the "runway" of the VC dollars that have already been invested.
After 10 years, we've done almost $4 billion worth of transactions in more than 250 companies. Even though Hercules has become a billion-dollar, publicly traded company, I try to run it with the same entrepreneurial culture we had when we started.
Q What kinds of deals are you looking for now?
A At Hercules, we focus on four main areas: Technology, cleantech, life science and an emerging sector called special situations. Currently, we are heavily weighted to life science companies, although our portfolio continuously shifts between sectors and stages of development depending on market conditions.
At the end of the day, what we are looking for, regardless of sector, are companies that have great people, are well-backed and possess what we think is a sustainable business model and an innovative approach to the market they are serving.
Q What's the biggest mistake entrepreneurs make?
A Entrepreneurs by nature are strong-willed people and, to be fair, I put myself into this category. While having a vision is critical to success, there is a tendency for some entrepreneurs to believe that there is only one way to do things, and that's a big mistake.
Q What's the next big thing going to be?
A We think there are tremendous opportunities in the energy technology area, or what used to be called "cleantech." Many people only think of solar or wind when envisioning companies in this sector, but we take a much broader view. Attitudes about the environment, geopolitical energy dependency and changing demographics make this a very interesting place to be, and I think we are only in the second inning of a very long game.
For example, while fracking is viewed negatively by many, it is probably here to stay, and there are companies out there looking for ways to make it more environmentally friendly.
Q Why'd you make the switch from venture capital to venture debt?
A I spent almost two decades making equity investments into companies with firms such as BancBoston Ventures, CrossLink Capital (aka Omega Ventures) and VantagePoint. During this time, I saw a shift in the fundraising channels traditionally tapped by the venture capital community, and I thought that the public markets could be an interesting alternative.
I also wanted to create an entity that gave the average investor access to an asset class that very few people can enter. Remember, not everyone has the liquidity necessary to invest in a VC fund. By investing in Hercules, we give investors exposure to a portfolio of more than 110 companies to which we have warrants or equity investments for additional potential upside. It's a broadly diversified portfolio of pre-IPO companies at different stages of development that represent a range of industries and geographies and are backed by a wide variety of leading venture capital firms.
Q What's your take on the bubble question: Are the valuations we're seeing for companies like Twitter and Snapchat sustainable?
A I have seen a lot of cycles in my career -- from the original banking bubble of the late 1980s, to the dot-com crash to the most recent credit crisis -- and I do not believe that we are currently in that sort of bubble, at least not yet.
However, I do believe, and see evidence, that certain sectors are exhibiting "bubblelike" characteristics. That's OK if limited to a few companies within a sector. Just because there have been a few recent IPOs with high valuations does not in and of itself mean that we are seeing a repeat of 1998 and 1999. The volume of IPO companies realizing liquidity today pales in comparison with that period.
Having said that, there is always a tendency for valuations to become frothy as the IPO market opens and optimism takes hold. I cannot speak for other investors, but the key for us has always been to maintain our investment discipline and continue to perform the due diligence necessary on a company-by-company basis. If we continue to do this, we expect our portfolio to perform quite well, regardless of whether or not we enter a bubble.
Contact Peter Delevett at 408-271-3638. Follow him at Twitter.com/mercwiretap.