Buyout firm not shying away from Cisco, Oracle with its investments

Don’t call Garnett & Helfrich Capital a venture capital firm. The two-year-old outfit labels itself a “venture buyout” company. Instead of investing its $350 million in brand new companies, it uses the funds it raises from limited partners such as Harvard’s and Stanford’s endowment management groups to buy out existing technology businesses or product lines and put operations people in place to try to fuel growth or turn the companies around. So far the Menlo Park, Calif., private equity firm has backed some pretty big names, buying out thin-client company Wyse, CA’s Ingres open source database business and Nortel’s blade switching group.

Managing Director David Helfrich, formerly a VC and executive at companies such as Ascend Communications and Newbridge Networks, spoke this week with Network World Executive News Editor Bob Brown, whose last Q&A was with Jay Tumas, who oversees Harvard University’s network operations.

How has your original game plan panned out?

It’s a little bit eerie how much we stuck to our plan. Venture buyout is a new concept and new asset class. To define that in advance and not have many, if any, changes is unusual.

Did you have an inkling of the assets that you would go after from the start?

The Wyse transaction we got exposed to while fundraising. But it was the PGP assets that Terry spun out of Network Associates while still on the venture side that was really the precursor to doing this whole thing. We modeled it on that and through subsequent conversations with CEOs, analysts and investment bankers we talked about that transaction. What we saw was a tremendous amount of unlocked value inside of these large technology companies in terms of product lines or businesses that were subscale, didn’t fit the strategic thrust of the company or in one way or another were underutilized but had an opportunity if we could pull them out and set them up as standalone businesses.

Have there been a lot of opportunities, or have the pickings been slim?

There are a lot of opportunities. They don’t just float around for everyone to see. To capitalize on them you have to have a broad network of relationships you can draw upon and have to understand the issue. The bad news is that I’m soon to be 50 years old; the good news is that I’ve been in the networking business since 1979, so I know where just about all the bodies are buried. Terry [Garnett, Helfrich’s fellow managing director]got into the business in ’79 as well on the software side. Mike Guthrie, who joined us from Texas Pacific Group, has spent his career on the semiconductor side of things, so we have all those spaces covered. What we’re really doing more than acquisitions is forming joint ventures to establish businesses on an aggressive growth path, partnering with the company shedding the asset.

I wouldn’t have thought the companies you’ve spun out so far have anything to do with each other, but do you see them fitting together in some logical way?

The area we’ve been most active in is the next generation data center, with four deals, three of them announced. Wyse in thin-client computing, Ingres in enterprise, open source databases and Nortel’s blade network technologies (now a separate company called Blade Network Technologies). Absolutely, they fit together. If you go inside the data center you’re selling to the same person, where the buildout is driven by applications. On the applications side probably the largest dollars spent go into databases. But coming at it from the hardware infrastructure standpoint, currently 9% of the servers are blades, from a market of 0% or 1% a few years ago, and it’s anticipated blades will have 20% share by the end of 2009. The server chassis going forward will have not only server blades but PC blades, where you have more of the computing function going to these blades in the data center and a thin client on the desktop. Wyse gives us an entrée there.

Why did Nortel give up on switch blades if it’s such a hot market?

They are not giving up. Computer Associates (which spun off Ingres) and Nortel firmly believe in the market opportunity, but they recognize they can’t be all things to all people… In most cases the keys to success are focus, resources and talent, and those are three things we can bring to the party that they can’t.

Many VCs seem to try to avoid bringing companies to market that they know will go head-to-head with leaders such as Cisco, Microsoft and Oracle. But your companies seem to be going right up against those big guys…

Not really. We’re not gluttons for punishment. Terry worked for Larry Ellison running marketing and business development at Oracle and fully appreciates what they’ve accomplished and stand for. I’ve competed with Cisco throughout my career and have the utmost respect for the company, and if I had my druthers I would stay away from them and not compete with them. But the fact is that both of those companies, to use two examples, cover so much of the market that if you’re going to do anything in the enterprise software or networking space you’re going to compete with them. It’s not a question if, but of when and how. We selectively have gone after opportunities where we believe we’re well positioned to compete and where the Ciscos or Oracles are at a disadvantage, and we’re looking to exploit that.

The venture approach to [competing with these kinds of companies] was through innovation. The idea has been to get technologists together who can figure out what comes next faster and deploy it faster and gain value in the market. We think that model is broken for a variety of reasons. The incumbents are much more adroit and quicker to respond to market opportunities. Customers are reticent to deploy new technologies from small start-ups. The enterprise and carrier customers are slower to support technologies, they’re not deploying new stuff every 3-6 months. The environment is such that you really have to take a different approach if you’re going to succeed. We always thought it odd given that the venture model has changed dramatically that the venture capital community that constantly browbeats their CEOs when they run into a wall and demands that they innovate and change, won’t do the same when it comes to their own housekeeping.

How’s the plan going to turn Wyse from a $175 million-a-year business when you bought it a year ago into a $1 billion a year business by 2010?

The plan is on track, at least the part we can control and the market is also cooperating. I see pretty rapid acceleration in the market happening in the next 4 to 8 quarters. The whole thin-client thing makes a lot of sense, and we’re not the first to recognize that. Sometimes the vision of the market does materialize, but it just materializes 5 or 10 years after people dream it up, like with VoIP. Thin computing was first promoted by Sun and Oracle, and those guys were right, but at the time we just didn’t have Web 2.0, software as a service and most importantly the broadband connectivity that we have today.

Switching over to Ingres, what’s your take on the direction open source is taking, especially with established companies such as Novell and Oracle buying so heavily into it?

The market is very receptive to open source. Oracle and the closed source community, in relational databases, has a big gap in what customers want and need. You have start-ups that are trying to fill that void and they are doing it from scratch and there is no way in a few years you can regenerate the knowledge base and technology and feature set required for an enterprise-class relational database. The benefit of the Ingres product and teaming up with Computer Associates is that we have 20-plus years worth of technology that’s been developed and is running many critical applications in many companies. We’re looking to reinvigorate it through investment and development. It won’t be right for everyone, but neither will the Oracle solution. There’s a basic feeling by people that they’re trapped and that you’ve got a vendor who dictates to the customer product terms, etc., and there is very little choice.