“More diligence in the VC world than in the years of the dotcom bubble”

Why did SAP decide to get into the venture capital business?

Nolan: Hasso Plattner, did it by accident. Years ago he made an investment in CrossWorld and it dawned on him, we’re in the venture business. Howard Lowell, who ran SAP Labs, took it over and created the program at its earliest stages. Hasso Plattner, an entrepreneur at heart, has a healthy respect for startups and in Silicon Valley there is such a density of startups and activity that he gravitates toward. SAP needed a hook into the activity for the benefit of the industry as a whole. It’s fair to say this is his vision – how important startup innovation is to the industry and to SAP having its own program for VC.

Can you give us a little history about SAP Ventures?

Nolan: In 1997 it was one person, in 1998 Howard Lowell became the 2nd person and then they continued to add people. There is no turnover really, except that Howard has retired. We stay very focused in software technology applications because we understand that market. We all come from operational backgrounds, sales, marketing, etc. and not finance. We’re not Wall Street people. There are some things we don’t do, we don’t set the terms, we are always a syndicate partner, investing with other partners, which offset the risk of not financing itself and also not competing with companies in the Valley that take the lead.

We also do not hide any investments from shareholders, but are limited to 20 percent ownership, which is very lawful and tactical. So we are limited in the amount of ownership we can take. Of the 58 deals we’ve done, we had some success and failures and some mediocre at best. The returns have been some wins, losses and draws but overall we have succeeded or it’s been successful as we’ve generated more profits than losses.
The 20 percent limitation is a GAAP accounting issue. We make all of our investments on SAP’s balance sheet, if we were take more than a 20 percent interest we would have to roll up losses and earnings from the investment to our own P&L statement. For example, if we own 25 percent of a company and they lose $10m for the year, SAP would be obligated to include (-$2.5m) on our own profit and loss statement for the year in the ‘non-cash gain/loss’ line.

Can you tell us a little bit about the companies you have invested in?

Nolan: We take a long term approach whereas others take quarter to quarter. We invest to be in it for a couple of years, so we’ll make up gains in another quarter. We have had some interesting deals, just closed an investment in T3CI, an early stage company in RFID applications and services, pre-product pre-revenue. A year ago it didn’t exist.

We also invested in an open source company, Sistina that is involved in clustering technology work; it was sold to Red Hat. And Indx sold performance management for oil and gas industry and a later stage company Apriso in Southern California manufactured executive enterprise software, all the applications sit below SAP’s layer, so it was a good fit. We were also investors in WebEx and Red Hat early on.

Obviously in the software business, SAP is in a very competitive environment. What is the situation in the VC world, do you have to compete with other like minded companies?

Nolan: No, in fact we have co-invested with competitors in a number of deals, its normal, because if we were taking lead positions, then we’d compete because we don’t do that, we’re a partner. The SAP brand carries so much in the enterprise, we did not fold up our tent when the market got bad. The venture business is personal; the personal relationships and the partners have with one another. Others know who we are individually, Jeff, Lisa etc. that’s an important aspect of this business.

Are you based in Silicon Valley and how do you make yourself heard about the noise from other venture capitalists?

Nolan: We’re based in the Valley, Boston, Colorado, people spread all over. We’ve been at it long enough that people know us. There’s not really as much noise as people.

I believe one of the things you did was start a blog, which garnered you some publicity. What is it called and what do you write about?

Nolan: The concept is pretty straight forward. It started about eighteen months ago as I kept hearing blog, blog and wanted to see about the opportunity from an investment point. My main motivation was to learn about the medium and to help boost SAP Venture’s profile.

I started writing this thing and it was funny. In the first month about 20 people read it, then it started gaining; now there are about 1,000 people a day that read it. I started out writing about the things I read; (integral part of a VC job is reading, talking and reading); taking in a lot of data and sorting it out. It also generated some deals out of the blog as well. My blog became my personal archive, it lets me search for something I wrote about six months ago or a company I was interested in or some interesting people. I changed the name from SAP Ventures to Jeff Nolan not long ago.

What is the state of the VC world, three years after the dotcom bust? Are start-ups finding funding difficult or is it the other way round and there is too much money chasing too few start-ups?

Nolan: There is always more money than the period before even through the downturn in the market. Core group of investors are still around today and raising money. I don’t think the market suffered as much turmoil as we were led to believe; some of the startups probably shouldn’t been funded. It’s probably a good thing overall.

Through the last 3 years, there has been an increasing number of startups with well tightly integrated management teams who have been successful in previous companies. They used their own money to affect their companies and got products and customers without VC funding over the last year. They’re now going out to raise their first round of funding and are eminently more mature than what we’ve seen in years past.
The market is probably better than it has been in the last ten years where too much money chased too few deals. From 1999-2000, there was so much money and the market was supply driven, today its demand driven capital. There is a lot more diligence than there was in the more hectic years; a lot more analysis and fact finding.

Is there any talk of “killer business idea” in sight that has the VC community excited?

Nolan: No we have moved on from that simple analysis that one application will change everything. There is enthusiasm about enterprise software, a lot of space that still will create successful companies and what’s happening in the home and wireless environment; digital media continues to be a hot topic because it is not boiled down to one company.

I am very enthusiastic about enterprise software. Sensor networks, search, collaboration tools, and analytics are just a couple of examples of areas that are seeing a lot of startup activity. Wireless is not a new category, but things like secure access are still viable investment areas. Wireless and mobility is taking on many facets as quad-band devices are hitting the market and public wireless infrastructures take the place of private networks. The market is also seeing the advent of the internet as an enterprise transaction/message bus, much of it is enabled over mobile devices as well. Digital media is not an area we focus on.

What about successes and failures? Are there any stand-out examples of VCs taking a big bet and winning and are there any of them taking a big bet and losing?

Nolan: Probably Google because it was the most public and talked about mystical VC story, making billions. Still there are lots of others that are also slugging it out.

There are stories about that venture capitalists are rushing into China. What do you think of this trend and do you think that SAP Ventures will ever have investments there?

Nolan: I can’t say never but we have to learn about activity in China and India and Latin America. It’s a global technology industry and it is in good health. VC is a quirky animal as it depends on things we can’t control, cultural and legal environments and the local people in the areas that you’re investing in.

China is a complex market it takes Chinese partners and participants. VC are investing through local proxies; not sending over Americans but using Chinese partners. While SAP Ventures invests as a syndicate, it’s not to say we outsource our due diligence. We do extensive research and expect to be involved in the companies. It’s different in China and India, and while we could find partners, we would need to see how many times we lose before we win. We have more than enough investments in Europe and the US on emerging technology that combines large market potential with high growth opportunity.