Beyond VC: the case for crossover investing

The insight and risk-taking of venture capitalists has nurtured some of the most exciting, high-growth companies of the last 20 years. VCs have a knack for spotting talent, gauging opportunity, and providing an environment in which great ideas can be incubated. Venture capitalists often lead tomorrow’s corporate stars to the brink of public offerings and household familiarity.

But that’s where most VC firms shake hands and walk away, taking networks of talented and insightful investors with them. Institutional investors and hedge fund managers enter the picture, and VC experts go looking for the next opportunity.

For the past 10 years, Crosslink Capital has devoted itself to bridging the divide between private, early stage financing and long-term growth capital by breaking down the wall of church and state separating the two investment communities.

Most high technology companies are formed around an idea, and as that idea comes into focus they add employees, customers and capital, and grow continuously. The stages of venture capital investment help enable that growth, but why can’t the same investors continue to participate after a company enters the public sphere? When you have the right business idea, a company’s stage shouldn’t matter. Venture capital investing can aid public investing and vice versa.

Emphasis on building good businesses

Although popularized in the media, the IPO is only one day in the life of a company, and it doesn’t always make sense for investors to move on immediately. Continuing to help the company grow in the industries that the firm understands well can benefit both the company and its investors.

Working with, and investing in, small- and mid-cap public companies and early to late-stage private companies gives an investor greater insight into what is happening in a particular industry. That way, the firm can back the company in the best position to succeed—regardless of whether it is pre- or post-IPO. And in our experience, the top one or two companies in a category typically take the vast majority of the profits, with the rest of the pack fighting for the small percentage that is left over.

The crossover investing model has the advantage of addressing an entire market segment and leveraging strong networks and a deep understanding of a given technology.”

Michael Stark, Crosslink Capital

Investing in a company doesn’t make you a company builder. The “crossover” investing model has the advantage of addressing an entire market segment and leveraging strong networks and a deep understanding of a given technology. A company’s stage and short-term performance are not always the best indicators of whether it will be the category winner in the end. By embracing private and public markets, crossover investing affords more choice, better risk-reward opportunities, and a broader view from which to make decisions.

It’s not hard to understand if you simply put yourself in the shoes of the people starting companies. Bill Gates, Larry Ellison, Andy Grove… They didn’t stop working with their companies the day after they went public. A deep understanding of the company’s background and relationships that was developed with partners and customers pre-IPO continues to serve the company’s best interest after it goes public.

Entrepreneurs seek more than capital when they talk to prospective investors. They are looking for a partner who will help to catalyze the business and drive its success. They want someone with knowledge of their industry that complements what they already know. That conversation and relationship are best served by setting aside investment stages and getting to the heart of what will make a particular company successful.

It starts with people

Crosslink was built from the ground up, based on this idea of investing in the best companies in a category. We believe that crossover investing is the best way to achieve this goal. Most people in our firm have a background that includes both public and private investment and/or operating experience. Those backgrounds are further integrated by organizing along industry lines more than along stages of investing. At any point, for example, our semiconductor experts are as ready to talk constructively about venture capital opportunities as they are about public stocks. We have industry meetings each week to encourage the sharing of information between the investment professionals that invest in public and private securities. Many of Crosslink’s investors do both types of investing as part of their job.

Most people who have moved between investment communities, or who have attempted to create hybrid investment funds, have done so by starting in the public domain and then moving toward venture capital. By starting our firm based on the idea of crossover investing, we have a more balanced view of both the private and public sides of the market. It starts with the people recruited into our organization, people with broad investment backgrounds and industry depth. Crosslink has only one office, and every week the entire investment staff meets face-to-face for information sharing. Additional meetings that are industry-based, or organized around technology subsectors, consist of people from both public and private backgrounds.

In baseball and football, players are highly specialized, spending an entire career performing a specific role over and over. But in sports like soccer, basketball and hockey, players can change roles quite dramatically from moment to moment, moving quickly from offense to defense. They must be prepared to go to any part of the field or court. Successful crossover investing firms tend to look like the latter.

The types of investors that this somewhat complex model attracts are mavericks and pioneers who are not afraid to take risks and try something outside of the norm.”

Michael Stark, Crosslink Capital

Three strategies, one philosophy

Crosslink invests using three distinct strategies: long/short public equity investing, venture capital investing and crossover investing. The first two are traditional strategies that are recognizable to a broad population of investors, but the third is quite unique. We realize that not everyone is drawn to our paradigm. The reason we separate investment insights and efforts into these three different buckets is to accommodate traditional thinking in the investment community. Most investors set up and allocate their investments along the lines of public vs. private. Selecting a strategy that does both may not fit their decision-making protocols. There are many investors out there, however, who believe in the benefits of crossover investing and find a way to make it fit into their portfolio. These mavericks tend to be corporate pension funds, endowments and foundations, family trusts, and wealthy individuals.

Crossover investing is most successful when a senior-level investor, who is an expert in a given field, partners closely with an entrepreneur and takes an active role in growing the company. Leading the round, taking a board seat and staying involved on a daily basis are all important ways to ensure a greater probability of success for both the company and the investor. While this approach is considered typical for private companies, it works well with certain public companies, too. Companies that are lightly traded with little to no analyst coverage are prime examples. These teams might have a great product, but need help with marketing or identifying a new vertical. Or the company’s technology is promising, but the team isn’t the right one to lead the company. In these situations, a crossover investor can apply the same “company building” techniques that work well with private companies and reach a favorable outcome.

A different kind of investor

The difference in strategy between private and hedge fund investors keeps many firms out of the crossover space. The venture capital industry grew up around funds that are 10 years in length and must have a long-term focus. On the other hand, hedge funds and the public markets are about instant liquidity. From a practical point of view, it’s difficult to develop a business model that combines both. Nevertheless, our firm has done exactly that for well over a decade.

The types of investors that this somewhat complex model attracts are mavericks and pioneers who are not afraid to take risks and try something outside of the norm. While there are positioning and organizational challenges that must be addressed to make this business work well, that is true for anything outside of the normal mold. The result of making this strategy work well, however, is strong returns for a firm’s limited partners and a succession of successful private and public companies.