How Mike Speiser and Sutter Hill are altering the foundations for VC

Venture capitalist Mike Speiser had a historic 2020. His firm Sutter Hill Ventures turned an initial investment of less than $ 200 million in Snowflake into $ 12 billion after its IPO in September.

Sutter Hill has uniquely amassed his fortune at the cloud software provider. The typical approach for early stage investing is to bet on a number of business founders, then get out of the way and let them do their magic. A few winners pay for any business that doesn’t work.

However, Speiser avoided the portfolio approach most VCs use. He told CNBC that his strategy is to spend 80% of his time and resources on a single project and the other 20% on the rest.

Speiser developed the concept for Snowflake together with its founders Sutter Hill gave the start-up room the opportunity to work in his office, helped develop the original product, and kept investing in subsequent rounds as revenues increased. Snowflake was Speiser’s main appearance for years – at the beginning he was even its CEO and recruited top talent.

Now that Snowflake is a $ 81 billion publicly traded company with thousands of employees, a veteran Frank Slootman CEO, and a leadership position in cloud databases, Speiser has turned his attention to another project that Sutter Hill started . It’s a security company called Lacework – and it’s based on Snowflake.

“There wasn’t a $ 100 billion security company, and we believe that will soon change,” Speiser said.

Skin in the game

At Sutter Hill, a company like Lacework doesn’t just show up, give a presentation, and be showered with money until it becomes a stock market treasure.

Instead, the company often helps develop the idea and stick it through to the end.

The original CEO of Lacework was Sutter Hill Managing Director Stefan Dyckerhoff, who joined the company in 2012 from company network hardware manufacturer Juniper Networks. The technical co-founder was Vikram Kapoor who became an entrepreneur in Sutter Hill in 2014. (He previously worked at Oracle with Snowflake founders Thierry Cruanes and Benoit Dageville.) Sam Pullara, another Sutter Hill executive who contributed to this, also took into account the early work on Snowflake’s software development.

Speiser didn’t spend long with lacework, but he was already helpful. “Shortly after Snowflake went public, Mike answered a call to interview an HR candidate,” said Dan Hubbard, who replaced Dyckerhoff as CEO in 2019.

Once a company is up and running, Sutter Hill’s other portfolio companies try the product and see how it can be improved. “We have now built five companies on Snowflake. Lacework was the first,” said Speiser.

In turn, Snowflake was an early lacework customer and several of Sutter Hill’s other 25 portfolio companies use lacework. Grail, a cancer screening company that Illumina has agreed to acquire, is a customer. So did Wavefront, a surveillance start-up that Pullara co-founded before being sold to VMware in 2017. Data center hardware manufacturer Pure Storage also uses lacework.

Sutter Hill also helps with recruitment and can at times act like a company’s research and development wing.

“The second product at Pure Storage was incubated in Sutter Hill and given to Pure Storage for free shortly before the IPO,” said Speiser.

Different financial structure

The company’s all-or-nothing style is risky. Sutter Hill doesn’t have the massively diversified portfolio that larger venture firms rely on to make up for losing bets.

But the company has an unusual financial structure that gives it that kind of freedom.

Many of Sutter Hill’s fellow venture capitalists go to limited partners and raise hundreds of millions of dollars or more to generate returns over a set period of time. Big profits help convince limited partners to put money into the next fund.

Sutter Hill works differently. It has had an evergreen fund for decades. Limited partners have invested, and Speiser and his fellow investors are also donating money with no set end date. Instead, a limited partner can invest money for a cycle that lasts for a few years, and the limited partner’s money stays invested through the next cycle unless it defaults. Sutter Hill decides when to distribute money or company shares to the limited partner. The company can also invest money in new or existing portfolio companies.

Sutter Hill regularly runs early funding rounds for its startups as it doesn’t make many other bets.

“It’s pretty rare for a venture company to be all-in and lead multiple rounds of funding,” said Vik Singh, a former Yahoo architect who worked as an entrepreneur in residence on his Sutter Hill startup Infer in 2009, 2010 .

In the later stages of a company’s life, Sutter Hill is ready to put some serious money right next to deep pocket investors. Some well-known companies like Sequoia have growth funds, but Sutter Hill invests from his evergreen fund.

For example, in the case of Pure Storage, which Speiser worked on in 2009, Sutter Hill bought more stocks than Greylock Partners, Index Ventures and Redpoint Ventures in the 2013 and 2014 funding rounds before Pure debuted on the New York Stock Exchange in 2015.

When Snowflake raised money before going public in 2020, Sutter Hill was a big buyer.

Speiser’s influence

Sutter Hill hasn’t always been a place where startups are built. The company was founded in 1962 and was known for decades as one of the earliest companies in Silicon Valley. After the support of Nvidia it became clear: When the graphics card manufacturer went public in 1999, Sutter Hill owned about 10% of the shares. It also backed storage hardware and software maker Data Domain, which Slootman floated in 2007 and which EMC bought two years later for $ 2 billion.

The company advocated the approach of incubating tiny startups after Speiser’s arrival in 2008. (Sutter Hill had sponsored Bix, a consumer start-up co-founded by Speiser; Yahoo bought it in 2006.)

Shortly after moving into the office, which is near HP headquarters in Palo Alto, California, Speiser began putting together Pure Storage with John Colgrove, who had worked at Veritas, and John Hayes, who was fresh from Yahoo came from.

“What really happened is that I saw Flash in 2008 and got the idea to start a storage company and a database company,” Speiser said. Pure became a supplier of hardware that, thanks to the fast flash drives in the boxes, worked very quickly and was not cheaper and more conventional. The database company came later when Cruanes, Dageville, and Speiser Snowflake also relied on flash memory.

For years, insiders have been aware of Sutter Hill’s practical style. When Snowflake went public last year, attracted investments from Berkshire Hathaway and Salesforce, and hit $ 70 billion in market cap on its first day of trading, the method was validated as more than a peculiar differentiator.

Some people want to recreate the Sutter Hill model. Investors in the venture company Wing spoke very early about promoting startups, said partner Jake Flomenberg. Greg Sands, who left his investment role at Sutter Hill after 13 years in 2011 and started his own company called Costanoa Ventures, said Costanoa recently completed a variant of Speiser’s incubation process for a start-up, with the founder also serving as CEO Title held. Sands said he would do Speiser the honor of aligning the company to find great people and help them start promising businesses.

But Speiser said it’s the company that deserves recognition, not just him.

“I’ve found that I can only do really well if I focus intensely on things, if I can stay on my swimming lane, work very hard and be around a lot of people in other areas,” said Speiser.

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