Venturing into the Unknown

Speaker’s Corner From The Practice January/February 2019
A conversation with Dan Nova

Dan Nova, a partner Highland Capital Partners, an early-stage venture capital fund, recently sat down with David B. Wilkins, faculty director of the Center on the Legal Profession, for a conversation on the future of work.

David Wilkins: What brought you to the world of venture capital? Can you describe the work you do as a venture capitalist?

Dan Nova: I’ve been a venture capitalist now for 27 years. I was born and raised in Cambridge, Mass., went to Boston College, where I was a computer science major, and worked in industry for a number of years. Then I went back to school at Harvard Business School, graduated in 1991 with a focus on finance and entrepreneurship, and that led me to venture capital. I was really fortunate back in 1991 to land a job at Summit Partners, which is a late-stage venture capital firm based in Boston and Palo Alto. I spent a few years there really developing the basics—mostly the finance and due-diligence skills of a venture capitalist.

Innovation starts with vision about what a market might look like in the future and having the ability to deliver a product or service to someone who finds value in it today.

Dan Nova, partner Highland Capital Partners

Then around 1994, the internet came bubbling along and I left with a portfolio-company CEO to start an early-stage venture capital firm focused on the internet. By most measures, we were the first venture firm in the United States to solely focus on internet opportunities. Today, it sounds very common to focus on the internet but back then it was new. My first early-stage investment was around creating the world’s first free ad-supported search engine company called Lycos. In five or six years, we grew the company from zero employees to nearly 2,000 employees and almost a billion in revenue. That was my first real exposure to taking something that I thought had value at a very early stage and, with a small amount of capital—around $2 million, creating success. Again, these are the days before Google and before Yahoo had a search engine, so this was new stuff.

From there, I really caught the bug around early-stage venture capital. When people think about venture capital, there are different shades of what that could be. My focus has been mostly on early-stage startup opportunities, so it’s often taking an idea or two or three people with an idea and providing them with early, preproduct, prerevenue capital. And that’s been the history of Highland Capital Partners. Highland has been around for 30 years focused mostly on series-A capital. We’ve raised 10 funds. The fund sizes have ranged, but in terms of our average check size, we’re writing checks in the $6-10 million range on first investment. The range can then go as high as $30 or $40 million. So, we’re playing in that early part of the venture spectrum, focused on industries that we think are disruptive and innovative.

We’re not trying to be all things to all people. By many measures, we’re considered to be a small venture fund—venture funds under $500 million are considered to be on the smaller side. So we play in spaces where we think we have unique competitive advantages. And we play in markets where we think we can be disruptive. Some of these markets have long tails, so we’ve been involved in things like cyber security and disruptive commerce for quite some time. Newer areas of focus include future of work, future of education, autonomous technologies, whether it be on the manufacturing floor or autonomous transportation technology; things like that.

Most of the time incumbents are not going to be overwhelmingly receptive to disruptive ideas. That’s why they’re incumbents.

I feel like I’ve got the best job in the world, where we get paid to be curious and we get paid to be students of technology and markets and innovation. And we’re very fortunate to be sitting on a wonderful perch at Highland where—through our networks, reputation, and our history—we’re able to really meet with some of the best entrepreneurs in the world who are doing really great things.

Wilkins: I want to pick up on your point about seeing innovation develop and supporting the things that you think will be most innovative. It probably won’t surprise you that law is not a place where people have thought a lot about innovation. I always tease that law is the only business in the world where you can’t say anything new unless you prove definitively somebody already said it before—that’s called precedent. But now, lots of people are throwing around the word innovation. And one thing we’ve been asking everybody in this issue is, “What does innovation actually mean to you?” As a venture capitalist, when people are pitching to you, how do you assess whether and in what ways their ideas are innovative? How do you think about the feasibility and desirability of the innovations they’re trying to create?

Nova:  There are a lot of definitions around innovation, but to me it really starts with vision about what a market for a product or service might look like in the future and then having the ability to deliver that product or service to someone who actually finds value in it today. The nice thing about innovation is that most of the time incumbent players or markets are resistant to change or don’t have that same vision. So often, when we see an opportunity and we start to conduct due diligence, especially around disruptive ideas, I find very little value in talking to the incumbents. Most of the time the incumbents are not going to be overwhelmingly receptive to the proposed change. That’s why they’re incumbents.

What we look for are industries where there’s some irrational or illogical thought process relative to the time and technology that’s available today. We invested in this company called Catalant, which is looking to disrupt the consulting industry, and you could look at consulting as a sister industry to the legal profession. What we found when we did the early due diligence—when we talked to the Bains and the McKinseys and the BCGs of the world—was that they were very, very dismissive. And there had been no business-model innovation within consulting in the last 80-plus years. But when we thought about work and the future of work and how the millennial generation was crashing into Moore’s Law and the technological revolution, especially around mobile and bandwidth, we found that there was a real opportunity to democratize white collar work in the same way that Uber has democratized the driving world.

What we find now is that millennials are looking for work and not just a job. There’s a difference and a distinction between the two.

The next move was to find people who shared this passion and vision and provide them with a reasonable amount of capital to explore that vision, build products, and test them in the market. What we found with Catalant was that there was an overwhelmingly positive reaction—not only by small and medium-sized businesses who were looking to access elite talent but that there was a need within the Fortune 1000 who were really looking for an agile workforce solution. And, from this context, when you look at the future of work and think about how agile workforce solutions might apply to either the legal profession or the consulting world, there’s a real opportunity there.

An analogy would be Rent the Runway, another one of my companies, which allows you to have a core closet of clothing that you may own—and that core closet, we would suggest, should be a smaller closet than what you have today—but also the ability to pull down clothing on an as-needed basis. We think work forces are going to evolve the same way, where organizations are going to have a smaller core of employees but think about talent in the “cloud,” so that when there’s a particular need for talent—whether it be consulting talent, legal talent, or scientific talent—there is basically talent available on-demand in the “cloud.”

There is now a separation of work in time and place. Going back 20 or 30 years ago, it was common for someone to work at one place for many years. My dad, for instance, worked at Raytheon for more than 30 years in their missile systems division. That’s now an old concept. What we find now is that millennials, in particular, are looking for work and not just a job. There’s a difference and a distinction between the two. Moreover, they want fulfilling work; work that will expand their horizons and take advantage of their education and experience. And that work is not necessarily tied to one employer or one location.

Wilkins: You’re right to say the law, just like consulting, seems ripe for disruption and innovation. And yet what we’re seeing on the ground is that most of these legal startups—and there have been a bunch of them that have tried to get off the ground in the last few years—are failing. As somebody who’s seen this process over and over again, what is it that makes startups successful when so many of them that fail? Because we know most of them do fail, which holds true across all kinds of industries. That’s just a part of the startup phenomenon. But I imagine that you have gotten very good at trying to understand which ones are more likely to succeed than others.

Innovation can be an enabler. What are the technologies that will allow a law firm to do a better job and deliver a better product more quickly at a lower price?

Nova:  Statistically, more companies are going to fail than succeed—by a large factor. There are usually two reasons why companies succeed and why companies fail, and they’re kind of the same two reasons. First, it comes down to the team and, in particular, the founding people. Second, it comes down to timing. Often when we lose money at Highland, we are backing good people, and we see the future, but we’re just too early. There are a number of case studies I could give you where we invested in technologies and great teams and the market was not ready to adapt based on our offering. Therefore, the timing of investment relative to the opportunity is really important. But in addition to timing, it really comes down to great leadership.

Sometimes a particular innovation will spawn dozens and dozens of companies, some of which succeed and many of which fail. Other times, however, an innovation may prompt new ways of doing business without any new companies. I remember selling, back in 1983, a word processor to lawyer, who said, “Why would I ever need a word processor when I have a typewriter?” You could look at innovation in that frame and ask, “Was word processing an innovative development for the legal profession?” It was. But that doesn’t necessarily mean that lawyers or law firms were put out of business. Sometimes innovation allows you to do your job better. So, when we think about innovation, we’re not always thinking about disrupting the status quo. Innovation can be an enabler. From that perspective, what are the technologies that will allow a law firm to do a better job and deliver a better product more quickly at a lower price?

We may go full circle becoming, again, hunters and gatherers, working when we want to work, where we want to work, and with whom we want to work.

Wilkins: When you look at potential new investments, in addition to timing, you mentioned the critical importance of the people and teams underpinning the idea. As part of this, how do you think about domain expertise—for instance, in the legal profession or in consulting or even in taxi driving—versus technology or engineering expertise? How do you think about that mix?

Nova: There is no one perfect mix. In fact, we are often successful with people who do not have industry experience. They are typically not handicapped by the rules of the trade as they’re defined today. For example, both with Rent the Runway and Catalant, these are people who had no prior experience within those specific subject areas. Depending on the opportunity, however, sometimes experience does matter. It really comes down to finding entrepreneurs and leaders who want to listen and want to learn, who have the vision, who are okay accepting advice, and who surround themselves with great people. When we look at the best companies that we’ve ever backed, these companies are not led by one person—they are usually led by a team of excellent people. So the best CEOs know how to find the best VPs of engineering and the best VPs of marketing and sales and finance. It’s about teambuilding. It’s very, very rare to find one CEO who does it all. It really doesn’t exist. And if it does exist, I would argue that that person is not going to scale. With this mindset, when we’re looking for innovative leaders to back, we ask ourselves a very simple question: “If we were in this business, would we work for this person—does she or he possess the skills and the energy and the personality to make me want to join that team?”

Wilkins: What’s your time horizon? Companies often fail because they run out of money, and you must have some ideas, especially when you’re getting in, around what you are looking for in terms of ROI.

I think talent will become more separated from the workplace and more independent.

Nova: Our funds horizon is 10 to 12 years with extension periods, so we’re long-term investors. We don’t have a specific forecast. When we make an investment, we’re not ever forecasting—or rather it’s never part of our investment thesis to say, “If all goes well, we’ll be out in three or four or five years.” Indeed, we just successfully sold a company for which I was on the board for 19 years. We also just got out of another company in the autonomous technology space that we’ve been invested in for 15 months. At the end of the day, our general investment thesis is around investing in a company and building the fundamentals and the foundation so that the company has long-term sustainability to a point where we think it can go public. So we build toward an IPO. That’s our general investment thesis—to build for the long-term. It never works when you make an investment and you think you’re going to flip it to a potential acquirer in a preordained period of time. That’s what we call “a bet on a bet.” We would rather do the right thing from the beginning, build the foundations so that we’re a long-term sustainable entity, and hopefully make it as a public company in the long run.

Wilkins: If you were to look out five or ten years from now, what do you see around what’s going to define the future of professional work?

Nova:  There will be the continued development of professional tools that make lawyers, consultants, engineers, chemists—pick your favorite white collar worker—more productive and more efficient. These tools are being developed in real time. They usually involve big datasets. Some of them involve artificial intelligence—though I like the word “augmented intelligence” much better. All of these are tools that will make a professional worker more productive and provide a better product or service to the end customer at a lower cost and in a more-time-efficient manner.

I’m also a big believer in agile workforce opportunities, both for the organizations and for the employees. I think talent will become more separated from the workplace and more independent. It’s kind of back to the future. If you look at the history of work, we went from being hunters and gatherers to an agricultural society to an industrial society to a society built around technology in the workplace. I think we may go full circle becoming, again, hunters and gatherers, working when we want to work, where we want to work, and with whom we want to work. In thinking about where work has come from and where it’s headed, technological tools are at the core, today and in the future.

Dan Nova is a partner Highland Capital Partners, an early-stage venture capital fund, where he focuses on disruptive commerce and the future of work.

David B. Wilkins is the Lester Kissel Professor of Law at Harvard Law School, vice dean for Global Initiatives on the Legal Profession, and faculty director of the Center on the Legal Profession.