Squinting Through Bubbles and Busts: Norwest’s Way To Navigate
Silicon Valley watchers are always on alert for two things: the next breakout tech investment no one should miss out on, and signs that a tech bubble is about to burst, bringing losses everyone wants to avoid.
The current jitters about a tech bubble have some foundation. They include doubts about the valuations of private startups—self-proclaimed unicorns allegedly worth $1 billion or more—and shock over recent share price slides for Twitter and LinkedIn—former startup stars that went public. The IPO market was weak in the second half of 2015, when venture firm fundraising also sagged significantly. And, as always, there are worries about the state of the global economy.
How do venture firms chart their course through such choppy seas? Here’s one story, from Norwest Venture Partners managing partner Matthew Howard.
Norwest, founded in 1961, has weathered the dotcom bust of 2000; the economic slowdown after the 9/11 terrorist attacks of 2001; and the Great Recession following the collapse of a housing boom in 2007 and its impact on major financial institutions in 2008. Some of the companies Norwest backed during such tough times ended up among the 22 exits the VC firm chalked up in the 18 months before raising its latest fund of $1.2 billion early this year, Howard (pictured above) says.
“The real credit goes to the entrepreneurs,” Howard says. “They squinted their eyes and envisioned how the world was going to be.”
Norwest, however, takes credit for spotting company founders with accurate foresight. Howard says Norwest invested early in San Francisco-based credit marketplace Lending Club, which got started before “peer-to-peer lending’’ was a common term; in cybersecurity company FireEye, a forerunner in defenses against advanced persistent threats; and in data discovery and sharing company 1010data, launched before “big data” was a buzzword.
Milpitas, CA-based FireEye (NASDAQ: FEYE) went public in 2013, followed by Lending Club (NASDAQ: LC) in 2014. In August, New York-based 1010data was acquired by a unit of media conglomerate Advance Publications for $500 million.
In the period between 2006 and 2015, Norwest was ranked among the top 10 U.S. venture firms in terms of fundraising by Thomson Reuters and the National Venture Capital Association. The firm’s new $1.2 fund is its third in a row at that amount.
Norwest didn’t target $1.2 billion as a magic number when raising its funds, Howard says. But he says the amount seems about right to fit the firm’s diversified investment aims. While the firm likes to back early stage startups ahead of the curve, it also makes late stage and growth equity investments in companies as they ride trends that are “near and apparent,” Howard says.
Norwest not only tries to keep investors coming back, but also aims for repeat deals with company founders. Howard says founders often return to the firm for financing when they launch another new startup. In part, he says, that’s because the firm provides advice from its experienced partners, as well as assistance with executive recruiting, marketing, legal issues, tax policy, research, and introductions. Norwest doesn’t charge for these portfolio services.
In addition to betting on companies both early and late in their development, Norwest bets across a range of sectors, including cybersecurity, healthcare, consumer apps, educational technology, IT infrastructure, and financial services. It invests in India and Israel as well as the United States. The Palo Alto, CA-based firm has offices in San Francisco and New York, along with subsidiaries in Mumbai and Bengaluru, India, and in Herzelia, Israel. With its global reach, Howard says, Norwest can help a healthcare company in India navigate the FDA approval process, and also help a U.S. company extend its operations in India.
Norwest’s investment philosophy could be described as “skating to where the puck is going to be,” as Howard puts it, paraphrasing The Great One, as so many tech investors and entrepreneurs are wont to do. He also names another tactic.
“You’re always trying to seek out the inefficiency,” Howard says.
Norwest is backing health IT companies such as Health Catalyst and Omada Health because Obamacare and changes in health care reimbursement are moving medicine from a fee-for-service model to fee-for-outcome payouts, he says. For example, hospitals may receive no additional fees if they have to correct complications from surgery. “It’s going to force a lot of efficiencies into the market,” Howard says.
In its search for inefficiencies, Norwest doesn’t confine itself to information technology and the life sciences. The firm invested in two long-established consumer sectors “where you’d think there’s no inefficiencies left,” Howard says.
Norwest backed San Francisco-based Madison Reed, an online seller of its own home hair coloring products. The company says its dyes contain fewer harsh chemicals than traditional hair colors. Norwest also invested in a New York company, Casper, which makes mattresses out of latex and memory foam and sells them online with free returns. In addition to touting the mattresses as very comfortable, Casper changed the distribution model for mattresses, Howard says, making them cheaper to ship by folding and compressing them into a box.
“The mattress sort of explodes in your bedroom,” he says.
Norwest is sometimes a contrarian investor, bucking current trends. Howard cites the firm’s bet on Israel’s Solar Edge Technologies at a time when Wall Street was highly skeptical of solar power.
To guide its investment choices, Norwest builds market maps. But the firm also trusts in creative thinking, vision, and gut instincts.
“How we squint our eyes is something we really pride ourselves on,” Howard says.