Palo Alto, CA, January 24, 2017 – Merus Capital has raised $85 million for the Silicon Valley venture firm’s third fund. Net returns of both their first and second funds are in the top 5% of funds in their respective vintages, based on Cambridge Associates’ most recent published benchmarks (as of 3Q16). According to CA’s report, to be a top 5% fund means returns of at least a 3.9x and 1.7x for the 2008 and 2013 vintages, respectively, as compared to industry median of 1.4x and 1.1x for those same years.
A closer look at Merus reveals what it takes to thrive in the ever-changing world of venture capital.
Within the world of software, Merus focuses specifically on enterprise applications that have the potential to change the basis of competition. “We’re 100% focused on partnering with entrepreneurs building real software to solve real problems,” says partner Peter Hsing, “where there’s an opportunity to reshape entire industries.”
The Merus Capital founders — Sean Dempsey, Peter Hsing and Salman Ullah — hail from executive roles at Google and Microsoft. In the decade they spent at these companies assessing the technology landscape, the trio honed a playbook for the evaluation of software investments. This led to both the creation of new lines of business such as Xbox, Microsoft Cloud and Google Docs, as well as the acquisition of emerging stars including YouTube and Android. The Merus team understands how to pick winners across the software ecosystem, and believes that success boils down to three ingredients: experience, judgment, and independence of thought.
Like the old advice to English Lit students to “write what you know,” the three Merus founders don’t stray from their experience. They understand software businesses, and that’s all they fund. Plenty of enticing ideas come to them from other sectors; all get rejected.
Judgment is the ability to reach sensible conclusions, which, for Merus Capital, means going beyond the three-minute pitch over coffee. Principals exercise deep diligence that extends to customer calls, technical reviews, and all but living with a product. They need to understand intimately how the solution works and where each dollar flows. Without such deep knowledge, sound judgment is impossible.
Above all else, the team emphasizes independence of thought. They consciously resist our hard-wired impulses to heed peer pressure. “If you do what everyone else is doing,” says Merus partner Salman Ullah, “don’t expect great returns.”
Real Software Solving Real Problems
Take the example of Merus portfolio company Symphony, the enterprise messaging platform powering Wall Street that has raised more than $170 million. The company has attracted Google and more than a dozen of the world’s leading financial institutions including Goldman Sachs, BlackRock, and JP Morgan as investors.
Symphony solves an inherent challenge for extremely demanding enterprise customers operating in a continent-spanning regulatory environment. The solution requires an innovative security architecture as well as a unique open source component. Taken together, Symphony represents an entirely new business model.
Through the lows of the 2008 recession as well as the frothy highs of the more recent “unicorn” years, the Merus team and its strategy have remained refreshingly unchanged. “Our third fund simply continues our existing strategy,” says partner Sean Dempsey. “It’s the approach we’ve had for close to a decade now: investing in enterprise application startups solving economically important problems. Our focus remains the same not because it’s sexy, but because it works.”
Merus Capital is a Silicon Valley-based early stage venture capital firm founded in 2008 by former Google and Microsoft executives. The firm invests in businesses building enterprise-class software to solve fundamental business problems – real software solving real problems. Select portfolio companies include AdRoll, AllClear ID, Outward, Symphony, Womply, and Xcalar.
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