"In our business we are measured by our slugging percentage, not by our batting

Earlier this year, one of Krishna ‘Kittu’ Kolluri’s long-time portfolio companies, The Climate Corporation, was acquired by Monsanto for nearly $1 billion. But Kolluri’s initial meeting with this weather prediction service company (initially called Weatherbill) in 2006 almost didn’t happen — the founder was running late, owing to a rainstorm! Seeing the ‘cut with a knife’ irony of it, Kolluri rescheduled the meeting and the rest, as they say, is history. An avid sports fan, he is also passionate about music, and has his own recording studio at home. But his colleagues are certain he often mistakes the NEA office for his recording studio because you can catch him singing old Hindi songs on his way to meetings. Read on as the good-humoured Amitabh Bachchan of NEA talks about identifying winners amid tectonic shifts in the technology sector, his big-bang exits and making bets based on imperfect data.

Investor interest seems to be shifting from consumer to enterprise technology as massive amounts of data generated by consumers is now creating opportunities for enterprise companies. How do you view the development?

There are a few things that look especially interesting, such as virtualisation, cloud computing, software as a service (SaasS), open source, and even mobility. All of these are like macro trends and happening around the same time. These are tectonic shifts and any one of them would be huge. 

Just think about it: as recently as 2005, we didn’t even have an iPhone, and today, can you even imagine your life without a smartphone? Many of these things have made it very easy to start a company, and more capital efficient than before. This has made entrepreneurs out of students and has increased innovation on the consumer side. 

Two decades back, it was the enterprise segment that was actually fuelling innovation, because a lot of IT buying, purchasing, was being done within an enterprise. That’s changed completely. Now, clearly, consumers are pushing the envelope from a technology point of view.

To give you an example, take something such as Gmail. When it came in, it completely reinvented mail — they said, “Why do you need folders? You should be able to search for whatever you want with the tools we provide”, and they reinvented the notion of mail. Most of us are somewhat disorganised, so it worked and the consumer segment took off. Now what is happening is, Gmail or Google apps, as an infrastructure, is becoming more and more pervasive within the enterprise space, particularly, mid-market. Why spend so much on infrastructure when you can do everything with just Google apps? That’s a classic example of how consumer IT has pushed the envelope from an innovation point of view. What this has demonstrated is that what has worked for consumers can be applicable for enterprises too. Or, take social networking as an example. Enterprise never really thought about social networking as a tool, but today, you have companies such as Yammer and Jive that are providing tools for enterprise that are in the social networking realm. 

When so many things are happening together, how do you identify companies and segments to bet upon?

As an enterprise we are looking for outsized and open-ended companies. Let me explain. We are investing out of a pretty large $2.5 billion fund. So, if I invest $3 million or $5 million in a company and fetch 10X return, it would be considered a homerun in some other venture firms. Here, my partners may not even give me a pat on the shoulder, and instead ask, “What have you done for me, of late?” So, our definition of success is different. The only way we can win is by being part of companies that are truly ground breaking. Of the top 10 issues since Facebook’s initial public offering, four were from our portfolio: Workday and Tableau, followed by cvent and Tesaro on the healthcare side. So, we have had a good run, both in technology as well as healthcare. 

What I look for are technologies, ideas and teams that can make truly disruptive change happen, whether it’s in networking, storage, security or currency exchanges. It’s got to capture my imagination. It’s like a marriage — you need to get excited, and you need emotional attachment with your companies, otherwise there is no way you can survive in venture capital. 

Would you say operational experience is a must to be a successful venture capitalist?

In our business if you have operational experience, it does give you an edge. But you have to remember that you are not running the company. You are there as a glorified consultant and so what they are borrowing from you is your experience. I can tell you, “This has worked for me in the past, and this hasn’t.” It would be somewhat of a self-serving comment because there are very successful venture capitalists who have been prior operators, such as John Doerr and Vinod Khosla. John was a very successful sales guy at Intel, and Vinod was one of the co-founders of Sun Microsystems. But Michael Moritz, one of the legends in the industry, didn’t have any operating experience; he was a journalist. At the end of the day, venture capitalists are stock pickers. If you can pick your companies well, it wins half the battle, and picking companies well is a combination of idea, people and market. Once you get this right, it becomes easier to build out a successful company. I don’t think there is any one recipe for success. 

How do you make large bet in early stages?

Most often, you are making bets on imperfect data. There is a vision that the entrepreneur paints and sometimes you add to that vision, or it could change — and you don’t know what you don’t know. But as you start building a company, you do get more data and you can see if your initial thesis has been validated. If it is validated, you go forward and, if not, you have to redirect. For example, one of my companies in the security space started in the firewall configuration side, which I knew was not going to be a big business. But the team was one that had worked with me previously, and I was confident that we could work together and take the company in a different direction. And the team achieved it, by changing focus to incident risk management space where we are really getting good traction. 

I think the critical success factor is identifying the customer use case. And this is where entrepreneurs make a big mistake: they fall in love with the technology and the product that they have built. What they need to understand is that the customer doesn’t care a damn about how you built it; the product should take care of their problem. If you can identify a problem that they have, and offer a solution, you’ve got a sale right there. So, one of the questions that I ask an entrepreneur is, “What is the use case?” It does not matter if you know or do not know the answer to that, but if you don’t know you need to know that you don’t know. Because if you know that you don’t know, then you can at least embark on a discovery process. Having said that, a lot of times, your best laid plans don’t pan out and so, a company that you thought as very big, may not end up being that. In such a case, we try and find a smooth landing for it: find a home for the company in some other company or worst case, shut it down.

One of my companies, Climate Corporation, just got bought by Monsanto. We had invested $1 million in the company in 2006 when it was a weather derivative company. Its initial use case was to sell weather insurance to consumers who were travelling. We managed to sell to Priceline a little bit, but nobody actually bought much of it, it was going sideways, and then we pivoted into events, and we started insuring things such as the US Open. But there weren’t that many such tournaments being played, so you couldn’t build a big business out of it. Where the company really hit pay dirt was when it pivoted into the agriculture space with multi-peril crop insurance. But people would buy it and then cancel it the last moment. It became like gambling. But when we went into total weather insurance, and said, you need to buy insurance for the entire season, that’s when it worked. Who could have imagined that a technology company in the Valley would get bought by Monsanto?

But with imperfect data, how are you able to foresee opportunities turning big? 

At the outset, you have to have a vision that there is a possibility that these could be big companies, otherwise don’t even go there. You have to have a thesis around how something is going to be big. Like I said, it is probably a 1% chance, so when that actually happens, people would be lying to you saying, “Oh, I saw it.” 

When I first brought the Climate Corporation investment to the table, a lot of my partners said we will support you but they were kind of discouraging me from doing it because it was completely alien, and even along the way, no one shared my excitement. But it worked finally. That was an early stage investment. On the other hand, when we invested in Workday, which was a late-stage investment, it had a fantastic team. How could we go wrong? We had to literally beg our way in there.

Similarly, how do you make small investments and then scale up?

I love the book by Nassim Taleb called Fooled by Randomness. He says, “While success is purely random, sustained moderate success is not accidental.” In our business we are measured by our slugging percentage, not by our batting average, but where that baseball analogy breaks down is, when you strike out, you want the strike outs to be cheap. You don’t want to put $20-30 million into a company and then strike out. It’s better to strike out with less than $10 million. That sums up my investing philosophy: I like to make a large number of small investments, and then when something starts to work, double down on it and if it doesn’t work, find a home for it.

How your investment strategy changed in the past few years?

If you ask me, today, we are probably slightly underweight on renewable energy. We have invested a lot in the clean technology solar space, but solar technologies have got gutted because the Chinese flooded the market with cheap silicon, which hurt some of our companies. But when you have a problem, it becomes an opportunity, and we got into energy management and energy storage as opposed to energy generation. 

And I would say, probably a little overweight on the biopharma side. We have a terrific biopharma team that has a lot of experience in the rare orphan diseases, and that’s an area where I think we have done really well.

How do you ensure that you stay away from the herd and do not get bogged down by sceptics? 

One of my partners has a very interesting way of putting it.  He says, you know, there are four types of investments: obvious, non-obvious, failures, successes. With the obvious successes, you can make some money, but it’s going to drive up your valuations, so returns aren’t that great.  With the obvious failures, you become a laughing stock. The non-obvious failure, people will say, “I told you, I knew it wouldn’t work.”  Non-obvious success is what helps you streak ahead in the industry. And those are the ones that can actually create the outside strata. 

Take the example of Groupon. It started off as The Point, a site for collective activisim. When Peter Barris, who is the managing director, bought it in, a lot of people were like, “Ok, we are only doing it because you want to do it.” The company then pivoted, became Groupon, and the rest is history. So, I think historically, some of our best deals have been actually controversial deals. Even Climate Corporation was a controversial deal.

What are the challenges as a venture capitalist?

It is picking the right companies. I think you can’t underestimate the value of being in the right company, because there is a small number of companies that will have that outsized return and you just want to make sure you have a share of them.

What areas do you see as promising and areas where there is a bubble emerging?

Enterprise infrastructure is clearly a very promising area right now. There are some very large market cap companies that will get disrupted in the enterprise space and you could probably see the emergence of a new wave of very large companies. Only, if I knew which those companies are, I would be sitting in Las Vegas! β