Whether it is entrepreneurs or business academics, when the subject turns to venture capital, one name is almost always in the conversation in central Florida. That one individual, who is considered the expert by the experts, is Jason Rottenberg, managing director of Arsenal Venture Partners (AVP). Rottenberg served as a manager in Arthur Andersen’s Silicon Valley office and has spent the last dozen years founding, building and funding early-stage technology companies. Rottenberg has been involved in the beginning and the exits of several significant companies, as well as being the founder of Muse Ventures and IT Angel. I sat down with him at his office in Winter Park.
EW: How did you get into the venture capital arena?
JR: I worked with Arthur Andersen in D.C. and then was recruited out to Silicon Valley, where I worked with very early stage companies for a number of years. When I went back east to go to (Harvard) business school (MBA and Baker Scholar), I was involved with a couple of companies, right at their inception; one was spun out of MIT technologies. That is where I got interested in very early stage venture and helping start companies.
After grad school, I planned to go back to San Francisco or stay in the Boston area. I had done a project for a small seed fund here in Orlando and that is what drew me here, not to mention the fact that my family and I love living here. We invest all over the country – I am out in the Valley a couple of times a month, in Boston, DC or Texas, but this is home; this is where we think about our investment thesis and strategy.
EW: How is Arsenal funded?
JR: It is funded by typical venture capital fund investors, meaning large pensions, primarily state pensions and fund to fund vehicles, etc. What most people don’t realize is that venture is a really small asset class. This idea that venture guys are running around, putting capital wherever they see a good deal, well it is much more complex than that. First of all you have to raise capital and you have to put that capital to work in a particular way. Every pool of capital you raise is for a portfolio of companies, like a stock portfolio. Except you have to find the capital; you have to build that portfolio and it has timeframes around when you can do it.
EW: You alluded to the size of the class.
JR: When you think about asset classes, if you are an institutional investor, you allocate to U.S. equities and foreign equities, bonds and municipals, then alternative assets like commodities. Then, a very little piece of alternatives is venture capital.
EW: Do you see that piece of the pie growing?
JR: I’m not sure I know enough to answer that. I do know it is a very complicated asset class; the more you move to smaller private deals, the more complex it becomes because the variation of performance from the mean gets a lot bigger.
JR: For instance, the mean return for U.S. bond funds might be, say 3.2 percent, the top quartile goes to 3.4 percent and the top 10 percent might be 3.75 percent; we are talking a few tenths of a percent from the mean to the top. In venture, the return might be 8 or 9 percent, but the top performing funds might be 36 percent, which also means the bottom quartile could be zero. There is a huge variation, therefore most people don’t invest in it, nor should they.
EW: What differentiates Arsenal from others in their class in this region?
JR: If I understand the question, I don’t believe there are any other ones, in the same class, in Central Florida. There aren’t many venture funds in the entire state of Florida and we happen to be the one located here. There are several very good ones around the state and there are people from other states investing in deals here.
But understand, I don’t have $100 million sitting in a bank somewhere. Our partners commit to the fund, then when we are ready I do capital calls; they are committed and contractual capital calls, which are very structured. When you hear about venture firms in the Valley, that is what they do. For instance one state pension commits $3 million; our objective is to perform well on that fund and next time they may put $6 million in. All of our LP’s put a portion in venture and if we perform well, they increase their investment.
EW: Maybe this is a weak analogy, but your firm organizes the equivalent of a mutual fund for venture investments?
JR: Essentially, yes. Twenty investors, like the pension fund, put in $3 million, which we invest in a portfolio of companies. So instead of them risking $3 million in one company, they put one twentieth (1/20) of their $3 million in any one company.
EW: Do they have a choice about which ones they invest in?
JR: No, it is discretionary on our part. And unlike a mutual fund, you can’t sell it or get out at any time you decide.
EW: So each fund has a defined life span? What is the average?
JR: Yes, the average is ten years, plus a few extensions. Initially you are making the deals, then you allow them to grow; after that you are harvesting. Though you understand I am greatly simplifying a very complex proposition.
EW: What are the primary lessons you have learned along the way?
JR: I’ve learned a lot of them and few did I learn the easy way. I can’t tell you the most important, but here are a few off the top of my head. First, great technology doesn’t make a great company. We have tons of people that pitch us who are convinced and are convincing that they have the best XYZ. That doesn’t make it worth a venture investment, you have to monetize it. And frankly, most of the time, venture isn’t the best way.
Secondly, the quality of the team is the single most important factor when we make an investment. Not just the inventor or developer, but who will execute the business plan? The tough part of that is that it requires a lot of self-reflection. For instance, someone might show us a great opportunity, focused on a large and growing market, but still they need a team on board that can put it into production, can do a product roadmap in terms of what comes next, have someone who can sell it and then handle the logistics of delivery.
Just because you came up with the idea, doesn’t mean you can execute all these variables and most opportunities that are presented to us don’t have a great team. What we look for is a very self-aware team. They may have a great CTO and CFO, but not a CEO or a VP of sales. We will fund a deal, if they agree in advance that the pieces of the puzzle need to be filled and are coachable about who those players are.
EW: How do you determine whether or not to proceed? If they are ‘self-aware’ and you can put the right people on the bus?
JR: It is part science and part art. It comes from exposure to many deals, from being around very successful CEOs and unsuccessful CEOs. We change out management teams in our portfolio companies all the time. We are almost always correct in swapping them out; in fact we are almost always late. For us it is about seeing the opportunity and determining the risk; if there are huge deliverables in the first six months, we aren’t going to invest in a team that has never executed. You have to do it a lot to become good at it.
EW: How do you find the companies and vet them? Or better, how do companies get to you?
JR: Actually it is pretty easy for someone to get to us; our website is public and you can write an email to me or one of my colleagues. What is hard is not to get stuff to us; what’s hard is to get our attention. What gets our attention, 100 percent of the time, is a great deal, not a good deal, but a great deal. If it is from someone I know or a trusted entrepreneur and it’s a great deal, you’ll get our attention.
EW: How would you define a “great deal?”
JR: Excellent product, targeting a large growing market, with an experienced successful team to execute it, and that is looking for the right amount of capital.