Doug Pepper joined the venture capital business straight out of business school -- and just as the dot-com bubble was bursting. Not what they call auspicious timing.

But by focusing on consumer Internet, mobile and (more recently) Software-as-a-Service deals, the Stanford grad has earned a seat at hot companies like Marketo, which notched a soaring IPO last spring, and Lombardi, acquired by IBM for an estimated $180 million.

Pepper, who plies his trade at Sand Hill Road's InterWest Partners, has found that investing in serial entrepreneurs can boost a VC's batting average. In this week's Elevator Pitch, he talks about that strategy and what else he's seeing in the tech world.

Doug Pepper of InterWest Partners
Doug Pepper of InterWest Partners

Q: How'd you get into this racket?

A: I joined InterWest when I was 26 years old. It was September of 2000, just as the Internet bubble was bursting, but also when many venture firms had just raised billion-dollar funds. I'd started my career at Goldman Sachs, taking technology companies public, and then worked briefly at Amazon.com, but I fell in love with the startup scene at the Stanford Graduate School of Business. Ultimately, I decided that joining a venture capital firm was the best way to satisfy my interest in startups.

Q: What do you like about VC?


Advertisement

A: I love working with smart, passionate and ambitious entrepreneurs. I enjoy watching them take dreams and turn them into real companies that significantly impact markets, employees and customers. The teams do the work, but I'm able to help as a venture capitalist.

Take Marketo, for example. We first learned of the company in 2006 when it consisted of three founders, a PowerPoint presentation and an ambitious idea to create a new category of marketing software. We were fortunate enough to bet on them when no one else would. Software-as-a-Service, or SaaS, wasn't hot yet, and few VCs at the time recognized the possibilities around marketing software. InterWest funded Marketo on our own for two years.

Today, the company is public, serves thousands of customers and employs hundreds of people around the world. Being involved in that type of success, with all the ups and downs and great relationships, is the real joy of being in VC.

Q: What kinds of pitches are you looking for now?

A: I focus primarily on early-stage SaaS and mobile companies. In particular, I look for technologies that help an enterprise improve its relationship with its customers and ultimately increase revenue.

As an industry, we've spent the last 20 years optimizing the funnel for generating new customers. Today, as the world moves toward freemium and subscription business models, we believe that there will be many opportunities to optimize relationships with existing customers to increase recurring revenue.

Q: What's the biggest mistake entrepreneurs make?

A: We have a saying, "Nail it before you scale it." This means, before hitting the gas on sales and marketing, make sure you have true product-market fit. Of course, you also need to know the unit economics of your sales and marketing effort.

I've seen companies raise too much money too soon, simply because they can, before answering the important questions. They hire lots of salespeople but don't realize they don't have product-market fit until there is significant churn. Then, they're forced to cut sales and marketing while they fix the product or the go-to-market strategy. It's much better to grow thoughtfully and deliberately.

Q: What's the next big thing going to be?

A: For me, the next big thing in enterprise software is something that my friends at (venture firm) Homebrew refer to as the "Bottom Up Economy." Until now, most enterprise software has been adopted first by a senior executive, who makes the decision to buy it and then forces the entire company to use it.

Today, there's a trend toward adoption by individuals first: One person finds software that is easy to use, has no barriers to adoption (often mobile-first), and offers instant value. Then, if the software works, it spreads virally throughout the enterprise. The process is similar to the way individuals adopt consumer applications.

Q: You joined venture capital as the bubble was bursting in 2000 -- what was it like to learn the business during that time?

A: It was the perfect time to join the venture business. The people who joined VC in 1997-98 learned the wrong lessons, because for several years, everything worked. Many of those people are no longer in the venture business. In contrast, I learned the reality: That VC is very challenging, requiring deep industry understanding, sector focus and fundamental due diligence.

In my junior role, I wasn't forced to make a lot of investments in my first few years. Plus, companies weren't raising money "overnight" back then; it took months. So the environment allowed me the time to get a clear understanding about what makes a successful company. I had time to learn without making mistakes. Ultimately, by 2003, not only was I ready to invest, but it was a better environment and a great time to make investments.

Q: You have a couple companies in your portfolio that were launched by CEOs you'd previously backed. Do you like to work with repeat entrepreneurs?

A: Backing previously successful teams is one of the key tenets of my strategy. I especially appreciate entrepreneurs who know their domain cold and, from a personal perspective, are great to work with.

Contact Peter Delevett at 408-271-3638. Follow him at Twitter.com/mercwiretap.