Growing up, Martin Gagen had a particular fondness for Batman because the Caped Crusader achieved extraordinary feats without possessing supernatural powers. But can Gagen, an executive director for 3i Group PLC, mimic his superhero mentor and help make 3i a model for what he claims all major venture capital firms need to become?
Gagen, 45, has been with the United Kingdom-based firm for 19 years. He took responsibility for its U.S. operations in 1999. When he arrived in Silicon Valley, other VCs told him there wasn’t room for another VC. Moreover, the locals told him that a U.K. firm would never make it in the States.
3i has only gained momentum since then. It invested $95.83 million in 21 U.S.-based companies last year, for approximately 13.64% of 3i Group’s total capital disbursement in 2001. That figure compares favorably to the $58.24 million 3i invested in 17 U.S.-based companies in 2000, for just 3.86% of its investment total. Not only does 3i plan to up its capital commitments in 2002 while other VCs keep pulling back, but the firm is also leading a growing shift toward later-stage investing.
Of course, 3i is no fledgling VC firm. Founded in 1945, it has invested $20 billion worldwide, through its network of 36 offices in 16 countries on three continents. It is the largest VC in Europe, and it wants to duplicate that success in the United States. Gagen has been hiring top professionals at a furious pace, focussing on all sectors of investing.
Plenty of foreign firms have come to the United States with visions of grandeur only to be sent packing with their tails between their legs. Gagen says 3i is different than those that came before. In fact, he says that U.S.-based firms that don’t pursue 3i’s global model will ultimately fall by the wayside.
It’s an argument that runs counter to what has made VCs successful. Since it became an industry, venture capital has been conducted locally. There used to be a rule that you shouldn’t invest in any company that you couldn’t drive to. VCs still adhere to that unwritten law for the most part.
Gagen claims that the local focus of VCs is a sign of the industry’s immaturity. “The venture capital industry is stepping out of the cave and into the sunlight,” he says. “For years it has been a cottage industry. I don’t think this is a business for gifted amateurs. You need much better intelligence, and by that I mean information intelligence.”
Over the next five years, Gagen predicts, there will be a polarization of the VC industry. The top tier will be made up of truly global players. Small players will find niches to survive, but the middle-tier firms will suffer without a specialty, finding themselves on the bottom tier.
A key benefit of having a global network comes during due diligence, Gagen says. What looks like a unique deal in one location turns out to be no different than five other deals being looked at in other parts of the world, he explains. “And only one will succeed,” he notes. “To see the current meltdown unfold in the U.S. in 2000 and being able to share the lessons of that with the U.K. in such a way as to not repeat those same mistakes is very valuable.”
Cutting through the bravado, however, it is important to note that the U.K. venture market hardly came out of the Internet bubble-burst unscathed. And while it is true that 3i Group did avoid most fiscal black holes like Boo.com, it was nonetheless forced to let go of 185 people, or 17% of its staff, when it closed seven of its smaller European offices in December. The layoffs were part of a larger restructuring, which resulted in Gagen taking charge of 3i’s efforts in Asia Pacific in addition to the United States.
Gagen is building his U.S. team with an international flavor. A half-dozen nationalities are represented in 3i’s Menlo Park, Calif., office. About half the team has run other businesses. Gagen says 3i’s approach to managing portfolio companies is similar to that of raising a child. In the early stages, you have to nurture the company until it reaches the level where it can independently operate with little or no help from VCs. “The job of a VC is to anticipate the challenges the portfolio companies will face, to help them make fewer mistakes,” he says. “We take a very low-ego approach. No one knows how to run a business better than the entrepreneur. Some VCs don’t see that.”
In building out the infrastructure for 3i’s global network, Gagen says the key was for each location to operate as a small independent VC firm, but with the global resources of 3i behind it. “We want our people to spend 95 percent of their time with the outside world, not be worried about the internal organization,” he says.
He also wants his people to be willing to spend money. Unlike other large VCs who have cut back on their spending, Gagen anticipates increased disbursements.
CEO, 3i USA
Executive Director, 3i Group PLC
Investment focus: General
Biggest hits: Coordinated 3i’s International technology business and established US operations
Board seats: (As CEO of 3i USA he doesn’t take board seats on portfolio companies.)
Years as a VC: 18
Did you know? He qualified as a chartered accountant with Arthur Andersen, with whom he worked for five years.