Azure Capital: A New Twist on the VC Game?

Peter Burrows

As we were closing a piece for the magazine this week on , the news broke that the obstruction of justice charges against Frank Quattrone had been overturned. Normally, that would have the makings of the perfect lede to the story, as the four founders of Azure had all made their names while working for Quattrone during the roaring 1990s, first at Deutsche Bank and then at Credit Suisse First Boston.

Turns out there wasn't much great lede fodder in it after all. I spoke with two of Azure's partners, longtime PC analyst Mike Kwatinetz and communications banker Paul Ferris, about Quattrone the day the news broke. Other than Kwatinetz sending a congratulatory email, their responses were pretty uneventful--pretty much what I expected.

Because they'd left a year before Quattrone issued the now-famous e-mail that temporarily got him convicted, Kwatinetz said he felt no real personal vindication. "It had nothing to do with us." But they were glad for their former boss, and hopeful that the reversal might remove a stain from what they helped him build during those rarified Boom days. Said Kwatinetz: "I felt he was a scapegoat for lots of practices that were going on at the time. And it would be a shame if [his conviction] was the only thing people remembered about CSFB, becuase we built something out of nothing, that had a hand in a lot of capital formation."

I'll leave judgements on Quattrone to the courts (or to our legal reporters). But I'm glad the Quattrone story didn't overwhelm the story of Azure itself, which I found to be an interesting one. As we say in the magazine article, they stand out for their focus on doing primary research, and also for bringing a public markets perspective that goes beyond how to get a start-up to a liquidity event.

CEOs of Azure portfolio companies pointed to a number of ways Azure stands out from the Sand Hill Road crowd. For starters, having investment bankers Ferris or former software specialist Cameron Lester on their boards meant they had a deep, in-house understanding of the public markets, of the M&A opportunities, and of the debt-raising alternatives that could be employed to build a company of lasting value--not just one that gets to a big IPO day. One source said having this expertise even meant their start-up could focus on hiring a CFO with the auditing expertise necessary to handle Sarbanes-Oxley era complexities, rather than a higher-profile CFO with expertise in the care and feeding of Wall Street.

Entrepreneurs also say Azure's analytically-oriented partners stood out for their willingness to back unconventional business models. "A lot of VCs were interested in investing in us not because of what we did, but because of who we were. We were a Stanford start-up--and Stanford start-ups have an order-of-magnitude greater likelihood of success than other start-ups," recalls VWware CEO Diane Greene, who continues to run the software-maker after selling it to EMC in 2003 for $635 million. Rather than build a business around the company's virtualization software, "[other VCs] were all trying to figure out how to fit us in with what was hot during the Bubble. Cameron and Mike never did that for a second.” That's the reason Azure was the only US-based VC that got a piece of Azure, says Greene, who had been working on a potential IPO with Lester before EMC came calling.

CEOs also talked about Azure's network of connections. While all VCs have plenty of powerful friends and limited partners, many of these networks are dominated by entrepreneurs they've worked with in the past, with a smattering of famous former CEOs and technologists. But given their years of working with the largest public tech companies, Azure's founders have long rolodexes filled with names of top and mid-level executives at tech firms, and even at their biggest customers. Kwatinetz, for example, ran CSFB's well-attended investor conference in the late 1990s, and was an influential stock-picker with close connections at Apple, Dell and Microsoft (his claim to fame was being first to yell back-up-the-truck on Dell in the early 1990s, when Michael Dell was hardly out of his 20s.)

I doubt Azure's formula is going to lead them to invest in many headline-grabbing overnight successes. But they do seem to be on a roll. Consider SourceCode. Lester learned of the tiny South African firm while doing due diligence on a different firm that was making software to simplify the deployment of Microsoft's .Net web services technology. When a Microsoft exec told him that SourceCode's software was superior, Lester began pestering SourceCode CEO Adriaan van Wyk.

Like VMware's Green, van Wyk didn't want any VC backers. But he did need help in other areas. When he asked if Lester could get him an audience with the CEO of Citrix, another start-up that had succeeded by making Microsoft-compliant software, Lester set up a two-day visit with Citrix chief Mark Templeton within 24 hours. And Azure helped the company get relocated to offices across the street from Microsoft in Redmond. "Every VC has cash, and they all promise connections from people who've done it before," says van Wyk. "But we know what we're doing in terms of running our business. Azure has played an important role in helping us with the things we don't know."

No doubt, Azure's approach is no threat to the kings of Silicon Valley venture capital. In fact, it's more likely a partner to VC firms that want to bring its particular set of skills to the table--once they've done the spade work to spot the next Apple or Google. Indeed, the essential gift of spotting the Next Big Thing doesn't come from doing research or knowing the inner workings of Wall Street. “The markets we address aren’t researchable," says Michael Rolnick, a partner with Comventures (Full disclosure: he's also the husband of my friend and former bureau chief, Linda Himelstein). "If the market has been identified, we’re too late.”

Still, it seems to me Azure may be carving out a new and useful niche within the Silicon Valley capital formation ecosystem.

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