Norwest Venture Partners: Will 2019 bring a downturn or more IPOs?

Norwest Venture Partners was busy in 2018. The venture firm had $7 billion under management and invested $650 million this year. It made 70 new and follow-on investments, with 14 noteworthy liquidity events (acquisitions or initial public offerings).

Norwest’s portfolio now boasts 140 active companies, and its big deals included the Spotify IPO, LinkedIn’s acquisition of Glint, and Workday’s $1.55 billion acquisition of Adaptive Insights. Norwest also closed a new $1.5 billion fund. The fund conducted a survey of CEOs and discovered that a lot of them have a fear of failure, feel unqualified, and worry about hiring the wrong people.

I spoke with Matt Howard, partner at Norwest, about the year in venture capital, and I wasn’t surprised to learn he is concerned about the economy. The events of the past 45 days, including the stock market decline and government shutdown, aren’t the kind of thing that investors want to see as they prepare for 2019.

Here’s an edited transcript of our interview.

VentureBeat: You’ve got some Norwest by the numbers to talk about. Have you had a good year?

Matt Howard: Yeah, we had a great year. The economy has been strong. A lot of things are correlated to the stock market when it comes to liquidity, whether it’s IPOs or M&As. We’ve been very busy, with roughly 14 liquidity events, 70 new and follow investments. We’ve added to the team: three partners, or technically four if you think of Scott Beechuk, who’s been on for 18 months, close to two years. The firm’s been around for 58 years, so it’s nice to see how we continue to grow and evolve.

VentureBeat: You have [invested a lot]. How does that compare to some more recent years for you?

Howard: If you have a chance to look at the website, we invested $650 million in 2018 with some new investments that just came in. We’ve been pretty steady for the last couple of years. It’s a little higher this year. The highlights were Spotify, LinkedIn, and then Adaptive Insights being acquired by Workday, just to name a few.

VentureBeat: Did the year seem different to you in some ways? Have we seen any big changes happen?

Howard: The last month has been pretty interesting. If you’d asked me that about 45 days ago, I’d say the market was like clockwork, but as you know, there’s been a lot of turbulence in the financial markets lately. That’s been the main difference of the year, quite frankly, how we’re ending the year with a period of uncertainty and turbulence. Interest rates and yield curve inversion, things like that, have caused some turbulence. But the year has been exciting.

VentureBeat: There’s more worry around the bigger economic picture, for the world or the nation. Does that make you think differently about investments or startups? Does it have a bearing on what you do day to day?

Howard: If you look through the areas that are creating introspection, I look at the yield curve inversion, which is pretty rare. The yield curve is a powerful thing. And I’m looking at what’s happened with China. As far as trade and tariffs and the political aspects around China, those are the things that I would highlight that have the most teeth in them, so to speak.

Now, to answer your question as far as how we think about it, the beauty of our — it comes from experience. We’ve been around for 58 years. We’re established. We’ve been through many recessions. We have a lot of institutional knowledge about how these things go. Being stage-agnostic, geographically — we do investments in India and Israel. If you remember, we do early stage venture capital and late stage venture capital. We have a growth equity practice. We’re in health care.

The beauty of that is we have the flexibility to invest across all asset classes. For example, if you make an early stage investment today, it takes a couple of years to build the product, build the solution. Chances are you’ll be in a much different economic period, if you look historically at how long recessions usually last.

For us it’s business as usual. But what you’ll end up seeing is valuations will probably come down for some companies. There’s always a slight inequality. You sometimes see a concentration, whether it’s WeWorks or Uber and Lyft. There are some companies that can raise capital, be high concentration. This can hugely impact some potential companies. But for some other companies, I think you’ll see valuations come down, because at the end of the day, a lot of things are correlated to the stock market. Psychology, liquidity, M&A, and IPOs.

Great companies have no problems raising — there are some companies in the top 10, top 20 percent as far as performance. Those companies raise capital in any economic climate. Great companies can go public in any market climate. There are companies that are galactic and they can just get it done.

VentureBeat: If you take that impression from the last 45 days and convert it into a prediction for 2019, what would you predict?

Howard: It feels like, from an economic standpoint, we’re entering a period of uncertainty. There’s economic uncertainty, political uncertainty. Wall Street doesn’t like that. There will be a trickle-down effect for many companies on how to operate in that environment.

VentureBeat: Do you think venture capital will be affected as a segment by economic changes in any particular way?

Howard: There will be probably more interest in being on the early side of investing. You have a lower burn rate. You have an idea that’s potentially newer. There will be adjustments, clearly. You’ll see valuations potentially come down on the late stage. Liquidity, when there’s an IPO or M&A, will probably be highly correlated with the public market comps.

Now, there will always be companies that will trade and go public on the high end of the spectrum. There will be companies that will trade at the levels of public market comps. At the end of the day, things do trade for multiples of revenue or multiples of ARR or multiples of EBITDA. A lot of times that’s correlated to the public markets. But there are always companies like Adaptive Insights, which we sold. That company went for a premium to public market comps at the time, mainly because that company was starting to show operating leverage, and there was an S1 registration. You could see all the financial performance.

There will be some firms that we’ll look at, and it might be their first recession, if we do go into a recession. I’m not predicting a recession. But there might be firms that are new to that environment.

VentureBeat: It might be wise to consider it a possibility, to take that into your planning.

Howard: In early stage investing you’re somewhat recession-proof. If you’re investing in a company that’s fairly new, you’re many months if not a couple of years away from going to market. One or two years from now, the economic climate will be much different. It’s hard to predict. You’re usually built in on a value proposition for tomorrow, not today. I think you’ll see a lot more focus on early stage investing, or companies that have EBITDA, that have operating performance. They’re not burning cash at all.

VentureBeat: Some people were expecting venture capital to change in some way, or to be disrupted by things like cryptocurrency and ICOs. It sounds like that didn’t really come to pass this year.

Howard: There were extremely high expectations for blockchain and crypto as a whole. It’s been the wild west, both from a technology standpoint — the technology, when it comes to enterprise and consumer applications, has had some performance issues. A lot of people are working on making blockchain faster, with even more security and privacy. You see companies like CipherTrace and Chain Analysis trying to work on compliance. As far as ICOs go, we’re starting to see more regulation.

Next year will be a very interesting year as these new tools come to fruition, new applications are worked on. I’d put it in the same bucket as autonomous cars and AI. We’ve had a period of early adopters, early deployments, and next year we’ll hopefully see the year of maturity with these technologies.

VentureBeat: As far as the notion that people would raise money through ICOs and not need venture capital at all, is that something you’d be concerned about?

Howard: No. There’s a whole ecosystem around raising capital. Investment bankers don’t always get enough credit, but part of the IPO process is the education, the distribution of what the investment bankers bring to the table. If you think of the whole S1 (IPO registration) process, we have an amazing ballet in the United States. We have the best capital markets in the world, when you think about it. We have the auditors, the big firms like PWC and Deloitte. You have amazing law firms. You have the SEC, the Federal Reserve, investment banks, venture capital. All of these entities come along in this ballet to make sure you have compliance, you have integrity, you have disclosure and reporting. In particular, you have distribution. You have to find people who want to invest in these IPOs.

When you look at an ICO, you don’t have an ecosystem. There’s been some bad examples of compliance and ethics, which have been well-publicized. The government is stepping in. We saw it. We were monitoring it. We spent a lot of time getting smart about it. We saw the risks involved and decided to wait on the sidelines on that a bit. Now the government is definitely getting involved.

My prediction is, as you see this mature, with more compliance, it will probably start looking a lot more like Dutch auctions, which we used at Rackspace. Google was part of that. You might see a direct listing, which Spotify used. If you think of some of the benefits of an ICO, there are other tools this will join that are available in the arsenal.

VentureBeat: When you look at some of the investments you guys made, what are some driving reasons behind them?

Howard: I’ll talk about three macro things that I can speak to personally, as an investor. Looking back earlier in our careers, people, I think, had more time. If you look at the IT professional today, how many dishes they’re spinning today, these people are multitasking. They’re extremely overworked. As a result, they’re looking at more and more AI tools and machine learning tools to help them filter out what’s essential and what’s not.

You think about ATM machines and self-serve gasoline, two trends you and I experienced as consumers. We’re seeing more of those come to fruition in the IT world, from self-serve autonomous IT — we have a company called Mist, which tries to help bring more automation to Wi-Fi and those types of deployments. That’s one trend we’re seeing, looking at tools that will help the IT professional become more leverageable and use AI to do more basic tasks.

The other one is, in the ecommerce world today, we’ve gone from getting shipments in five or six business days down to Amazon Prime in two days or one day or the same day. We’ve invested in a robotics company called 6 River Systems. To create this instant gratification for the consumer, now you need much more warehouse automation, both for delivery of products for orders and also handling returns. That’s another area where I see more of a macro trend.

The last one is security. We’ve gone from the high-schooler wanting to break in and change their grades to state-sponsored cyber warfare. The stakes are getting bigger and bigger. One prediction I think we’ll see in 2019 — if you look at public companies, you see audit committees, governance committees, and safety committees. You’ll see more and more people deploy a security committee at a public company to put much more attention to this.

VentureBeat: It doesn’t seem to have been solved yet.

Howard: No. It’s become more state-sponsored, too, which is very interesting. Whether it’s political or ransomware or ecommerce, every day you wake up and some new industry is reporting something different.

VentureBeat: As far as things that may be past their peak, past their hype cycle, where you’ve decided you want to stay out of a sector or category, does anything come to mind in 2018?

Howard: I’m not sure I can think of areas that are no-fly zones. We’re pretty disciplined about staying clear of things that could have a negative impact. We don’t do anything gambling-related, but we never have. I don’t think anything changed in 2018 as far as things where we’ve stayed away completely.

Blockchain has interesting applications. For example, there are companies in the Valley trying to use blockchain to change the way authentication happens, or change the way mortgage processing is done. Those are great applications. Our team was on the hunt and we looked at hundreds of blockchain companies, looking for a special aspect of the technology that opened up new markets. We didn’t find anything that really floated our boat.

As far as cryptocurrency goes, we just felt like it’s not an area — we looked at a lot of companies. We felt that there were enough solid cryptocurrencies already in the market that it was well-covered. We didn’t see a good opportunity to go into a currency. But the beauty of our firm being stage-agnostic — from an early stage investment standpoint, we didn’t find anything on the currency side that was exciting. But with a large fund, we have the potential to invest in mid stage and late stage. We’re tracking a number of companies, but we haven’t pulled the trigger. We just didn’t see anything that was exciting enough for us yet.

VentureBeat: I talked to IBM recently. As of just a few months ago, they had 1,500 people working on blockchain. That’s impressive.

Howard: The question will be, is it a technology, or is it a company? We always ask ourselves, when somebody comes up with a technology, is it a technology looking for a solution, or is it a solution you can build a company around? That’s where we’re looking right now.

If you look at companies like CipherTrace or Chain Analysis, we’re not involved in any of those companies, but they seem to have real business models and real customers. There are people in the ecosystem starting to show it on the enterprise side.

VentureBeat: You did the CEO journey survey as well. Did you have any favorite takeaways from that?

Howard: The piece that’s most important about the study, which will probably morph a bit — it really is the focus on the CEO experience and the psychology of what it’s like to be an executive in today’s market, the stresses that are there. It’s a lonely job. As a firm, we wanted to double down on what areas we can support the executives we fund. The study in itself is something that can give us data about their issues.

Some of the things that come up are a need for coaching, a need for peer groups. They need to be talking to people at their own level across industries, where it’s not competitive. We’ve created a whole program and system for them to be able to meet each other and build that network on a personal level. We’re finding that’s really helping them. Our executives have made friends and hang out together. Things like that are intangible, but really important. The basis of that survey was how to support them not just on a business level but on a personal level.

VentureBeat: I thought it was interesting that some of these CEOs wish that they knew more about operations or finance or sales, that they were better at public speaking or planning.

Howard: For a first-time CEO, maybe they don’t want to let anybody know, but they might not love public speaking, and then we ask them to do something up on stage. We don’t want to stress people out. Maybe it seems like something they should already know how to do, but if you’re still in your 20s — so, what can we do ease some of these things that might seem natural to somebody who’s been doing for a while, but are new to a younger person? Whatever we can do to help them, wherever they are on that journey. That’s why we call it a CEO journey survey. It’s a pathway, and not everyone has the same skill set.

VentureBeat: What do you find you spend a lot of time doing with CEOs?

Howard: I love that aspect of the job. For 19 years I’ve loved the interface with CEOs and young talent. I feel that part of my job is to be a trusted adviser to a CEO. I really enjoy that aspect. A lot of times I’m helping — when your car tire is spinning at 30 miles an hour, a lot of times you can’t tell you need a front-end alignment. But at around 70 miles an hour, you know you need it.

I try to spend a lot of time helping a CEO stay ahead of the curve. If you think about most CEOs today, they’re like superheroes. They’re trying to help everyone. They’re trying to coach all these young executives, sometimes inexperienced executives, sometimes first-time executives. They’re trying to close major sales relationships or developer relationships. A lot of times they neglect themselves.

Over the last few years, I try to make sure that the CEO is finding time for themselves, and not neglecting themselves. I want them to stay fit. I want them to make sure they have a vacation. To tie it all together, what tools do they want to develop themselves, so when they get up to $100 million in revenue they’re not wobbling? The whole company is counting on that.

That’s an area where I spend a lot of time with CEOs. It’s not just about today, but it’s a lot about tomorrow. We have a lot of focus on the near term strategy, but I’m really trying to help them develop the skills they feel the company is going to need down the road. It could be public speaking. It could be best practices in human resources. It could be recruiting.

VentureBeat: What else are you looking forward to in 2019?

Howard: 2019 is going to be interesting. There are high expectations about autonomous driving. A lot of people are talking about fielding stuff. We’re going to be seeing AI more and more. We’re in the first or second inning of AI. The whole supply chain as we know it, from consumer and digital brands like Casper and Ritual — what we call digital brands now are going direct to the consumer. You’ll see a lot more of that come online.

This is going to be the year for blockchain. It’s time to see what the technology can do. On security, we now have to operate in a zero trust environment. When you deploy technology, you have to have zero trust. You have to operate today assuming you are going to be compromised. It’s a matter of time. You can’t avoid it.

On the health care side, we’ll start seeing from virtual assistants, and a lot of AI — image interpretation, image analysis. There are some predictions that there will be a shortfall of primary care physicians. Some coverage in the trade magazines suggests that there will be a huge shortage of primary care physicians, so how can we use AI and automation to make that up? We’re invested in a company called Talkspace that’s trying to bring a more direct-to-consumer health care offering.

If the economy does slow down, these types of solutions will be the solutions you’ll need to be sustainable in an economy that’s under stress. Those are trends we’re investing in, and that should thrive in 2019, in what potentially could be a year of uncertainty.

I do believe that in 2019, the China issue will get resolved. The U.S. and China will work things out. They have to. We need each other. I don’t know what percentage of the goods at Wal-Mart are made in China, but — is it 50 percent? 75 percent? I do believe that things will get worked out between the two countries. That will be good for 2019. It might bring a bit more stability to the stock market. We’ll see what happens with interest rates. Those are two big things, economically. We’ve had a very long bull run.

Technology has become a more and more important part of the U.S. economy. Technology usually thrives in economic downturns as well as in big markets, because it brings more productivity. It’s essential. Even the U.S. government now, if you look at what’s going on in policy, is trying to bring much more support around protecting IP.

I think a light bulb has gone off in Washington D.C., the realization that technology is an extremely important part of the economy. There are probably four or five industries the U.S. dominates. We dominate financial markets. The best companies in the world go public here. Media and entertainment, gaming and Hollywood, we have the best. You have the defense complex, Lockheed and Raytheon and Boeing. And then technology. The U.S. dominates technology, and I think the U.S. government is now looking at this as something that has to be protected.

Historically — this is the beauty of Norwest, because we’ve gone through so many years of turbulence and economic downturns in 58 years of the firm. Technology thrives in down markets and it thrives in good markets. It thrives in a good market for a company like 6 Rivers, when companies can’t find warehouse pickers. The average warehouse picker walks six or seven miles a day. Those jobs are going unfilled. Construction jobs are going unfilled. Farm jobs are going unfilled. Technology has to fill the gap. In a downturn it becomes just as important.

I really am bullish. The only thing that’s going to be different in technology, I think, is valuations. But technology is becoming more and more an integral part of the U.S. economy, hence what the government is trying to do as far as protecting intellectual property.