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 a stake worth $12 billion after its IPO in September.
Sutter Hill amassed its fortune in the cloud software vendor in a unique way. The typical method of early-stage investing is to bet on a bunch of company founders, then get out of the way and let them work their magic. A few winners pay for all the companies that don’t work out.
But Speiser has shunned 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 came up with the concept for Snowflake alongside its founders in 2012. Sutter Hill gave the start-up space to work in its office, helped it create the original product, and continued to invest in subsequent rounds as revenue swelled. For years, Snowflake was Speiser’s main gig — he even served as its CEO at the beginning, and recruited top talent along the way.
Now that Snowflake is an $81 billion publicly traded company with thousands of employees, a well-seasoned CEO in Frank Slootman, and a leadership position in cloud databases, Speiser has shifted his attention to another project Sutter Hill incubated. It’s a security company called Lacework — and it’s built on top of Snowflake.
“There hasn’t been a $100 billion company in security, and we think that’s about to change,” Speiser said.
Skin in the game
At Sutter Hill, a company like Lacework doesn’t just show up, give a presentation and get showered with money until it becomes a stock-market darling.
Instead, the firm often helps hatch the idea, and sees it through to the end.
Lacework’s original CEO was Sutter Hill Managing Director Stefan Dyckerhoff, who joined the firm in 2012 from enterprise network hardware maker Juniper Networks. The technical co-founder was Vikram Kapoor, who became an entrepreneur-in-residence at Sutter Hill in 2014. (He previously worked at Oracle alongside Snowflake founders Thierry Cruanes and Benoit Dageville.) Sam Pullara, another Sutter Hill managing director who had contributed early work to Snowflake’s software development, got pulled in, too.
Speiser hasn’t been involved with Lacework for long, but he’s already been helpful. “Shortly after the Snowflake IPO, Mike took a call to interview a 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 offer their thoughts on how to improve it. “We’ve now built five companies on Snowflake. Lacework was the first,” Speiser said.
In turn, Snowflake was an early customer of Lacework, and several of Sutter Hill’s other 25 portfolio companies use Lacework. Grail, a cancer screening company that Illumina agreed to acquire, is a customer. So is Wavefront, a monitoring start-up that Pullara co-founded before selling it to VMware in 2017. Data center hardware maker Pure Storage uses Lacework, too.
Sutter Hill also helps with recruiting, and can sometimes act like the research and development wing of a company.
“The second product at Pure Storage was incubated at Sutter Hill and spun in at no cost to Pure Storage right before they went public,” Speiser said.
Different financial structure
The firm’s all-or-nothing style is risky. Sutter Hill doesn’t have the massively diversified portfolio that larger venture firms rely on to balance the losing bets.
But the firm has an uncommon financial structure that provides it this kind of freedom.
Many of Sutter Hill’s peers in venture capital go to limited partners and raise hundreds of millions of dollars or more, and then bring in returns over a set period of time. Big wins help persuade limited partners to put in money for the next fund.
Sutter Hill works differently. For decades it has maintained an evergreen fund. Limited partners have made investments, and Speiser and his fellow investors contribute money, too, with no set end date. Instead, a limited partner can invest money for a cycle that lasts a few years, and the limited partner’s money remains invested during the next cycle unless it opts out. Sutter Hill decides when to distribute money or company shares to the limited partner. The firm can also invest money into new or existing portfolio companies.
Sutter Hill regularly leads early rounds of funding for its start-ups, because it’s not making a whole lot of other bets.
“It’s quite rare for a venture firm to be all-in and lead multiple rounds of funding,” said Vik Singh, a former Yahoo architect who spent time working on his start-up Infer at Sutter Hill as an entrepreneur in residence in 2009 and 2010.
In the later stages of a company’s life, Sutter Hill is willing to put up serious money right next to deep-pocketed investors. Some prominent firms, such as Sequoia, have growth funds to do that, but Sutter Hill invests from its evergreen fund.
For instance, in the case of Pure Storage, which Speiser worked on in 2009, Sutter Hill bought more shares than Greylock Partners, Index Ventures and Redpoint Ventures in 2013 and 2014 funding rounds, before Pure’s 2015 debut on the New York Stock Exchange.
Similarly, when Snowflake raised money in 2020 before its IPO, Sutter Hill was a big buyer.
Sutter Hill wasn’t always a place where start-ups are built. The firm was founded in 1962 and for decades was mainly known as one of the earliest ones to open in Silicon Valley. It did gain some distinction after backing Nvidia: When the graphics card maker went public in 1999, Sutter Hill owned about 10% of the stock. It also backed storage hardware and software maker Data Domain, which Slootman took public in 2007 and EMC bought for $2 billion two years later.
The firm embraced the approach of incubating tiny start-ups after Speiser arrived in 2008. (Sutter Hill had backed Bix, a consumer start-up Speiser co-founded; Yahoo bought it in 2006.)
Not long after moving in to the office, which is down the street from HP headquarters in Palo Alto, Calif., Speiser began assembling Pure Storage with John Colgrove, who had worked at Veritas, and John Hayes, who was fresh out of Yahoo.
“What really happened is I saw flash in 2008, and I had the idea to build a storage company and a database company,” Speiser said. Pure became a vendor of hardware that worked very fast thanks to the fast flash drives inside of its boxes, rather than cheaper and more traditional disk drives. The database company came later, when Cruanes, Dageville and Speiser constructed Snowflake on flash storage, too.
For years insiders have been aware of Sutter Hill’s hands-on style. When Snowflake went public last year, drawing investments from Berkshire Hathaway and Salesforce and reaching a $70 billion market cap on its first day of trading, the method was validated as more than a quirky differentiator.
Some people would like to replicate Sutter Hill’s model. Investors at venture firm Wing have discussed nurturing start-ups very early on, partner Jake Flomenberg said. Greg Sands, who left his investing role at Sutter Hill after 13 years in 2011 and founded his own firm called Costanoa Ventures, said Costanoa recently finished a variant of Speiser’s incubation process for one start-up, with the founder also holding the CEO title. Sands said he would give Speiser credit for steering the firm toward finding outstanding people and helping them form promising businesses.
But Speiser said that it’s the firm that deserves credit, not just him.
“I’ve found that just by intense focus on things, I can do really well if I stay in my swim lane, I work really hard, and I surround myself with a ton of people in other areas,” Speiser said.