Make Exits, Not Unicorns: Voyager Charts the Early Stage VC Course

Elemental Technologies and Blue Box Group were acquired by Amazon and IBM, respectively, in two of the Northwest’s most prominent technology deals of 2015. Both received initial venture capital investments from Voyager Capital.

With these successful exits behind them and the firm’s 20-year anniversary ahead next year, Voyager partners Bill McAleer and Erik Benson sat down with Xconomy to discuss how the investments exemplify Voyager’s approach, refined over nearly two decades, to the early-stage venture model in the age of the unicorn.

Voyager is based in Seattle, the headquarters of Amazon and Microsoft, two major cloud-computing players, and home to major engineering centers of other top-tier cloud competitors such as Google, Facebook, and IBM. The area is rightly known as the capital of cloud computing.

And Voyager’s recent exits illustrate the advances Pacific Northwest technology startups have made as the cloud industry has grown and matured.

“It used to be that we were producing incremental technology up here in the Northwest, and now we’re producing technology that has world-class exits,” Benson says.

Benson declined to be quoted on his investing philosophy when I interviewed him in 2013. He didn’t feel he had the track record yet to dish out advice, despite an investment in aQuantive, the ad tech startup acquired by Microsoft in 2007, and a handful of other exits. That’s changed with the recent successes. “I think it’s time to talk about what we do and how we do it, and hopefully attract others to syndicate with us,” Benson says.



McAleer co-founded Voyager Capital in 1997 with Enrique Godreau and Tony Audino, neither of whom remain with the firm. Benson joined a year later.

Voyager has about $420 million under management. It is investing from its fourth fund, raised in 2013, and averages about one new investment each quarter, the partners say. Voyager invests in companies selling technologies and services in the areas of cloud computing, software applications for specific industries, and big data and analytics applications. It tends to invest in companies at their first venture capital round. It focuses about 75 percent of its investments in the Pacific Northwest. In addition to its Seattle headquarters, Voyager has partners in Portland, OR, and Silicon Valley (Menlo Park, CA).



In an era when entrepreneurs have lots of places to turn for capital—including to individuals, regardless of whether they’re accredited investors, thanks to new equity crowdfunding rules—traditional venture capitalists are under increasing pressure to bring something more than money to the table.

At Voyager, the focus is on the entrepreneur. That’s something a lot of VCs say, though. Voyager puts it into practice by working closely with company founders on their initial go-to-market strategy and team development, the partners say. The firm also makes timely introductions to corporate partners to help startups scale up, or, eventually, find a potential acquirer.

Blue Box and Elemental

Voyager led the first venture round in both Elemental and Blue Box, investing about $2.5 million into each.

Jesse Proudman started Blue Box in his dorm room and had grown it to annual revenues in the range of $8 million when Voyager began tracking the company, McAleer says. Voyager advised Proudman to differentiate his strategy, which he did, positioning Blue Box as an early provider of private cloud services. Voyager invested in the company in 2012, nine years after it was founded.

In 2014, Proudman moved to the role of chief technology officer; Matthew Schiltz was brought on as CEO. (More on what Voyager looks for in a founder or founding team below.) Schiltz “provided some of the acceleration, and allowed Jesse to spend a lot of his time on the strategic stuff, which included the IBM conversation,” McAleer says, adding, “IBM needed access to a private cloud solution, and that was what led to the acquisition.”

The IBM acquisition, announced last June, was just voted Deal of the Year in GeekWire’s annual tech awards. (McAleer, Proudman, and his wife Rebecca are pictured above after receiving the award.) Terms remain undisclosed, but Benson says it was “a nice successful exit there.”

Voyager’s initial investment in Elemental Technologies, in May 2008, followed years of watching the growing IPTV and video streaming markets. Other startups focused on these markets were raising capital around that time, but Benson says Voyager was attracted to Elemental’s focus on software-defined video processing, as opposed to using custom hardware.

The iPhone had come out a year before the investment. “We saw a burgeoning use case in live streaming to mobile devices,” Benson says. The arrival of the iPad accelerated that trend. Elemental’s revenue growth rate was “very similar” to the iPad growth rate, he says.

“When we initially invested in Elemental, the market size was, let’s just say $100 million,” Benson says. “When we exited, it was several billion. In that course of time, live-streaming video to mobile devices just took off and became a huge market. I can’t take credit for all of that. We got a little lucky. Apple and Steve Jobs was helpful.”

Voyager was also attracted by the founding team: Sam Blackman, Jesse Rosenzweig, and Brian Lewis, who had all recently left Pixelworks. A Voyager investor on the Pixelworks board of directors informed the firm. “We were there at the right place at the right time,” Benson says.

Elemental Technologies co-founders Sam Blackman (left), Jesse Rosenzweig (center), and Brian Lewis (right)

Elemental Technologies co-founders Sam Blackman (left), Jesse Rosenzweig (center), and Brian Lewis (right)

Finding Founders

For Voyager, the ideal founding team includes a leader (or leaders) capable of scaling a company from nothing to at least the Series C funding round, or until the company is generating $5 million to $10 million a year in revenue, Benson says. It’s still difficult to find individuals with the broad set of skills and self-awareness to do that. Once Voyager does find them, it pays careful attention to how the founders develop their own teams, providing mentors and academic experts focused specifically on leadership and team-building.

“It doesn’t always work,” Benson acknowledges. “I’m not saying we have a perfect track record at it, but it is something that is different… There are certain firms that have different specialties, some that bring money to the table and some that bring financial acumen or legal acumen. We bring leadership acumen to the table.”

Switching leaders too early in a company’s development creates extra risk for investors, and the company itself, Benson says.

“There’s a lot of drama sometimes involved in founder transitions,” Benson says. “That energy that is spent on that transition could be spent on providing great customer value, providing great customer service.”

Blackman, Elemental’s CEO, “really could have taken that company public, and that was the plan,” he says.

But the IPO window, particularly for tech companies, has been shut tight. And as a VC, why would you want your portfolio company to go public anyway?

“When an entrepreneur and an investor goes through an IPO, you have to wait to get cash, liquidity,” Benson says. “And it can sometimes take years.”

Companies that say they are preparing for an IPO today are probably trying to attract acquirers, he says.

“Nobody talks about setting up for an IPO, prior to actually doing an IPO, that’s any good at it,” Benson says. “They’re trying to get somebody to buy them before they have to go through an IPO—because they really don’t want to go through an IPO, but they have to. A lot of the billion-dollar companies, there aren’t billion-dollar buyers, so they’re going to be stuck at billion-dollar valuations, waiting for an IPO market to return in order to get out of those companies.” (More on the problems facing unicorns in a minute.)

When Voyager first invested in Elemental, Amazon Web Services, the online giant’s cloud computing business, was not on the list of potential acquirers, Benson says. But the firm maintains lots of connections to the executives in charge of AWS. Benson says Voyager introduced Elemental to the head of business development at AWS in 2009. Elemental worked with AWS, among other technology providers, on integrating its video processing software with the Amazon cloud.

That led to the acquisition by AWS last year for $296 million, according to an Amazon SEC filing.

Benson is proud of how far Elemental went on a relatively modest sum of venture capital: it raised $44.1 million in total. And it’s a template for the early stage venture investing business.

“If you want to generate 10x returns, like an Elemental, you have to do everything you can to make sure that the companies don’t raise hundreds of millions of dollars of venture capital,” Benson says. “If you’re going to sell a business for $300 million, you cannot raise $300 million in venture capital and make 10x returns. The math does not work.”

The way to hold down the burn rate, and thus the need to raise outsize amounts of venture capital, is to minimize pivots. That means making the right decisions on people, technology, go-to-market strategy, and partnerships, Benson says.

‘Venture Origami’

And what of the unicorns? Xconomy interviewed McAleer and Benson just after venture capitalist Bill Gurley published a widely read distillation of the “dangerous” dynamics in the market for financing unicorns—private tech companies with billion-dollar valuations.

“I call those venture origami,” Benson says. “They’re folding paper to get to billion-dollar valuations.”

He continues: “In the venture industry, we all prefer to invest in companies at $10 million valuations, $50 million valuations, and sell at billion-dollar valuations. Those aren’t called unicorns, though, as it turns out. You’re only a ‘unicorn’ if you raise money at a billion-dollar valuation on paper, not in actuality [through an] exit.”

But the field of over-valued unicorns presents little problem for committed early stage investors, McAleer says.

“We’re investing at a pretty early stage, and we’re doing it at reasonable valuations and want our companies to be pretty capital efficient,” McAleer says. “This whole unicorn thing—there’s a couple of them here in Seattle, certainly—but it’s more of a Valley phenomenon.”

A market full of hedge funds, mutual funds, and private equity investors—none of which are “really venture investors,” and many of which arrived in the run-up to the 2000-01 tech bubble bursting—might even present an opportunity, albeit one that falls outside of Voyager’s normal investing philosophy.

“We can get a reasonably good exit if somebody is buying stock in these companies in a very late round,” McAleer says. “So there’s an opportunity for early stage investors to take a little money off the table as part of that.”

What’s Next

Voyager has made four new investments over the last nine months: Shiftboard, a Seattle company making scheduling software; SheerID, a Eugene, OR-based company that helps businesses verify customer eligibility for special offers; TurboPatent, a Seattle startup making software for patent processing; and Kaggle, an online community and competition platform for data scientists, based in San Francisco.

The partners say the firm has no plans to change course or shift strategy, though they are turning more attention to Vancouver, Canada.

“We’ve started to make investments up there over the last year,” Benson says, noting a relative dearth of venture investors in Vancouver. “That market could be another Portland, and could produce a great new investment per year for us, and for others.”

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