A bank can have several versions of the same customer. A retailer can have mountains of sales data and still struggle to understand what is happening on its shelves. A programmer can download free software and then discover that making it dependable costs money. These are modest-sounding problems with expensive consequences. They also offer a useful introduction to Red Rock Ventures.
- Red Rock financed young information technology companies, with a focus on enterprise software and infrastructure.
- Its portfolio included Siperian, OpenLogic, Retail Solutions and Boingo Wireless.
- One fund’s receivership shows why a useful product and a sound financing structure require separate judgments.
The Palo Alto firm, founded in 1997, occupied the part of venture capital where the customer often sat in an IT department. Its history is now a retrospective: company databases list the firm as closed or inactive, and its adviser record includes an April 2020 final report. But the businesses it backed make its investment territory unusually easy to picture.
A buyer with a problem beats a crowd with an opinion
Consider Siperian. Its software helped organizations reconcile information about customers, products and other business entities scattered across different systems. The industry called this master data management. The everyday version is simpler: before a company can make a sensible decision, its computers need to agree about what they are discussing.
By January 2010, Siperian had more than 60 customers worldwide, including Pfizer and Bank of America. Informatica acquired it for approximately $130 million in cash. That combination of an identifiable operational headache, paying enterprise customers and an eventual strategic buyer captures the appeal of this corner of investing. The work could be obscure while the need was quite concrete.
OpenLogic addressed another gap between something being available and being usable inside a business. Open-source software could be obtained freely; assembling, managing and supporting it remained work. Red Rock participated in OpenLogic’s $4 million financing in March 2005 alongside Appian Ventures and Village Ventures. The announced uses included development, sales, marketing and new Colorado offices. Capital bought the practical ingredients of expansion.
Retail Solutions worked with operational data for consumer packaged goods companies. Its $15.2 million financing in September 2010 included Red Rock, Investor Growth Capital, Bessemer, Venrock and SAP Ventures. Here, too, the attraction was a business problem with a recognizable buyer. These companies supplied tools for people responsible for keeping other companies functioning.
Boingo extends the pattern beyond software. Its business connected people through wireless networks, including airport Wi-Fi. When it reached Nasdaq in May 2011, its prospectus identified holdings through Red Rock’s SBIC III and Cayman Investors III entities. Venture capital could turn up at the departure gate, quietly doing the plumbing.
The second check matters
Red Rock’s offer to founders combined investment with guidance. Bob Todd and Kip Myers were identified as co-founders and managing general partners. Todd’s background included running technology businesses; Myers had worked in engineering. Those careers help explain the firm’s operating vocabulary, although a biography alone cannot establish how helpful an investor was in any particular boardroom.
The financing model was ownership. Red Rock’s funds took positions in young companies, seeking eventual gains when those positions could be sold. For founders, the trade involved equity and investor rights. For fund investors, the proposition depended on the eventual proceeds from a portfolio of uncertain outcomes. A funding announcement recorded money entering a company, not money earned by its backers.
“We historically have reserved large amounts of capital for follow-on investments”
Bob Todd, historical fund statement
Todd’s stated preference for follow-on reserves is the practical detail worth stealing. A first check starts a relationship. Later checks can support the company while it builds a product and a sales organization. Founders assessing an investor should ask how much capital remains available and what conditions govern another investment. A famous portfolio name cannot answer either question.
An acquisition price measures a transaction. A fund return also depends on ownership, investment cost and the rest of the portfolio.
The clock inside the capital
The complication sits inside a particular legal vehicle: Red Rock Ventures - SBIC III, L.P. Through the Small Business Administration’s investment-company program, that fund used government-backed financing. That introduced obligations alongside the uncertainty of startup investing.
The SBA’s November 2015 complaint alleged approximately $28.55 million in outstanding leverage. It described a capital-impairment problem identified in 2009 and a transfer to liquidation status in February 2010 after the fund failed to cure it. This was a dated financial warning, years before the receivership filing.
Outstanding SBA leverage.
This figure concerns one fund.
A consent order filed in January 2016 appointed the SBA as receiver to administer and liquidate SBIC III’s assets. Its scope matters: the order concerned that partnership. Treating every Red Rock portfolio company as if it had entered receivership would erase the distinction between an investor and its investments.
Nor does Siperian’s acquisition price settle the fund’s economics. To calculate an investor’s outcome, one needs its stake, the terms of its securities, its investment cost and distributions. To calculate a fund’s outcome, one needs the other investments as well. A successful company can be part of a much more complicated financial picture.
Read the fund behind the name
The useful lesson is a pair of questions. Does the business solve a problem that customers will pay to remove? And does its capital arrangement give it the room to do so? Red Rock’s portfolio makes the first question tangible. SBIC III’s history gives the second teeth.
This approach has limits. A clear customer headache cannot guarantee adoption, and reserves cannot guarantee a profitable exit. Founders can copy the discipline: name the buyer, identify the budget and examine the money behind the term sheet. Red Rock’s history makes those questions feel less like paperwork.