• Late-Stage Investor: “Funding Acceleration” Doesn’t Add Up

    accelerateIn a recent piece in TechCrunch, writer and investor Danny Crichton highlighted an emerging trend: that of investors treating A and B rounds more like mezzanine rounds when it comes to funding promising startups. Called the tendency “funding acceleration,” Crichton used Slack — an enterprise collaboration software startup that just raised $120 million at a $1.12 billion valuation — as a prime example. (Slack publicly rolled out its product just eight months ago.)

    Yesterday, we talked with one of the industry’s most successful late-stage investors about whether or not the shift makes sense. The investor spoke candidly; he also asked not to be identified by name. (Apologies.) Our conversation has been edited for length.

    Many VCs now subscribe to this “winner’s circle” theory that there are 15 or so companies formed each year that produce all the returns. Do you believe that?

    I still remember seeing a report by Mary Meeker – then an equity research analyst – during the depths of the post-bubble recession that said only a few companies over the previous few years had really succeeded despite how many were funded. It wasn’t 15, though.

    Well, that’s the number that Andreessen Horowitz often cites, which is tied to some earlier research of investor and entrepreneur Andy Rachleff.

    Right. Andreessen Horowitz became the first to loudly declare that they wanted to be in the 15 good companies created each year, saying if you got into those companies, it would make up for all the others. But you’ll notice they quit that a couple of years ago; they’ve retracted from that and are now more focused on early-stage companies.

    Marc Andreesssen told me about a year ago they had largely jumped out of late-stage investing, saying the firm was going to let the “hot money” do its thing.

    And that was smart. If you look at the number of $3 billion-plus exits we’ve seen since the start of 2012 – and I say $3 billion because that constitutes a venture return if you’re investing at a $1 billion valuation – there have been 19 companies to go public or get acquired. Meanwhile, something like 60 private companies have been assigned $1 billion-plus valuations over the same period. If the flow at one end isn’t equal to the other end, you know something is wrong. Either the markets will be more receptive in future years, or there will be some disappointing outcomes.

    Sounds like you’re anticipating the latter.

    There were seven tech IPOs in the third quarter. The markets aren’t wide open, yet there’s a tremendous amount of investing going on at high valuations.

    Did you look at Slack?

    We did. Slack is a really interesting collaboration platform. But as quickly as it’s become available — and people are adopting it very quickly — therein lies part of the longer-term risk. There have been dozens of collaboration tools to pop up because they’re easy to develop, and it’s easy to see what has worked in the past and improve on it. I think we’ll see a tremendous amount of innovation in the space. But people will use whatever is best at the moment. It isn’t like a viral network like Facebook or Linkedin, where everyone is using it and you can’t drag the network over to the next new product.

    What do you make of the general idea that it makes sense to pay up early for a young company that looks to be taking off?

    You see companies that have a great start, but that doesn’t predict ultimate high-valued outcomes. We don’t think it makes sense to [make a big bet] until you have an awful lot of things that are proven and visible: rapid growth, great margins, a sustained track record of performance, a tangibly large market. For every [online retailer] Zulily, there are several Fabs – companies that raised a lot of money and never quite delivered.

    It’s troubling, what you’re seeing. It makes it very difficult for investors – and much less so for entrerepreneurs. We’re really out of balance right now, but this is a cyclical business. We’ll reach a point [as an industry] where several companies that are considered destined for success fail, then we’ll revert back to more proven ways.

    Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

    Connie

  • StrictlyVC: November 3, 2014

    Hi, everyone, no column this morning, but stay tuned for good things to come this week. (Web visitors, here’s an easier-to-read version of this morning’s email.)

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    Top News in the A.M.

    Midterm elections are tomorrow. Do not forget to vote.

    The Apple Watch is now slated for a spring 2015 launch, according to a leaked video transcript. CEO Tim Cook had previously said it would be “available early next year.”

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    A Note from Our Sponsor

    Techweek Los Angeles is coming up November 20-21 in Techweek’s purpose-built tent on Santa Monica Pier. Come hear JustFab founderAdam Goldenberg, Techstars Managing Director Cody Simms, and FundersClub cofounder Alex Mittal speak among dozens of other entrepreneurs and investors, then watch as more than 50 startups battle in front of the conference’s top judges and you. Registration information is here.

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    New Fundings

    Ebaoyang, a 10-month-old, Beijing-based, online-to-offline car maintenance service provider, has raised $5 million in Series A financing led by Source Code Capital, an early-stage fund founded by former Sequoia China VP Charlie Cao. (He closed his firm’s debut fund with $100 million last month.) China Money Network has some details here.

    Joyent, a 10-year-old, San Francisco-based cloud infrastructure company, has raised $15 million in Series E funding from earlier investors El Dorado Ventures, Epic Ventures, Intel Capital, LGI Ventures, and Orascom TMT Investments, along with other unnamed investors. The company has now raised $131 million altogether, shows Crunchbase.

    Photofy, a 20-month-old, Raleigh, N.C.-based social content creation app whose users can add pre-designed content to their photos, has raised $1 million in funding, including from Capitol Broadcasting Corp., Highland Capital’s James Dondero, and Michael Olander of MDO Holdings. The company has now raised $1.75 million altogether, it says.

    Social Labs, a five-year-old, San Francisco-based company that helps marketers launch new social acquisition programs, including via in-house “growth hackers” who help optimize clients’ programs, has raised $13.4 million in new funding across two rounds in 2014, show SEC filings. The company had previously raised $7 million in Series B funding and an undisclosed amount of Series A funding, shows Crunchbase. Real Ventures, Battery Ventures, Quest Venture Partners, and Javelin Venture Partners are among the company’s backers.

    SomaLogic, a 15-year-old, Boulder, Co.-based protein biomarker discovery and clinical diagnostics company, has raised $16.5 million in new funding, shows an SEC filing that says two investors participated in the round. The company had previously raised at least $31 million, shows Crunchbase. The company has not disclosed its backers. In June, it received a $1 million grant from the Bill & Melinda Gates Foundation.

    Tout, a four-year-old, San Francisco-based company that invites users to create video updates and to publish them instantly to the web, mobile and social outlets, has raised $3.1 million in debt, shows an SEC filing. The company had previously raised $24.1 million from Horizons Ventures, SRI International, Jawbone founder Hosain Rahman and others.

    Weaved, a year-old, Palo Alto, Ca.-based Networking as a Service (NaaS) provider for the so-called Internet of Everything, has raised $2.3 million in seed funding led by CrunchFund, with Alpine Meridian Ventures, Big Basin Partners, Core Ventures Group, Double M Partners, Haystack Fund, Ironfire Angel Partners, Maxfield Capital Fund, Metamorphic Ventures and previous angel investors participating. The company has now raised $2.6 million altogether, shows Crunchbase.

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    New Funds

    Insight Venture Partners, the 19-year-old, New York-based investment firm, is looking to raise $4 billion for two technology-focused funds — $3 billion for a growth equity fund and $1 billion for a buyout pool — reports Bloomberg. Insight, which has previously made its investments out of a single fund, raised its last giant pool, of $2.6 billion, in 2012. In May, it raised an additional $510 million to invest alongside that fund in larger companies.

    Jerusalem Venture Partners, the 21-year-old, Jerusalem-based venture firm, has raised has raised $100 million of a targeted $120 million for its seventh, general purpose fund, shows an SEC filing. The firm disclosed in a separate SEC filing that it has raised $60 million for its “cyber investment initiative.” At the beginning of this year, JVP launched a cyber security incubator in partnership with Ben-Gurion University in Beer-Sheva, in the south of Israel. It’s called Cyber Labs.

    Maple Leaf Angels, a Toronto-based angel group, has launched a new fund called MLA48 LP that will focus on startups in southern Ontario. The fund commits to making decisions about prospective investments within 48 hours. More here.

    Mercury Fund, a nine-year-old, Houston-based seed and early stage fund that largely targets startups in the Midwest and Texas, has raised $97.4 million, according to an SEC filing that shows a $125 million target. The company had closed its previous fund with $70 million in 2010.

    Rock Health, a four-year-old, San Francisco-based incubator and seed fund that’s focused around digital health startups, has just raised its third fund. It isn’t disclosing the amount but its leading investors include Kaiser Permanente Ventures and Bessemer Venture Partners, with participation from Kleiner Perkins Caufield & Byers, Mayo Clinic,Montreux Equity Partners and Great Oaks Ventures. With the new fund, Rock Health portfolio companies will receive investments of $250,000, up from a previous $100,000, with the idea that it will fund fewer companies with more money. Rock Health has backed 55 companies to date, including Augmedix, which StrictlyVC featured here; Lift Labs, acquired by Google; and Wello, sold to Weight Watchers. MedCity News has more here.

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    IPOs

    VeriSilicon Holdings, a Shanghai-based provider of intellectual property, design and semiconductor manufacturing services, has filed to list its American Depository Shares on Nasdaq. The company, which also has an office in Santa Clara, Ca., said it could raise up to $75 million.

    Virobay, an eight-year-old, Menlo Park, Ca.-based clinical stage pharmaceutical company, withdrew its plans for a $50 million IPO late last week. Renaissance Capital has more here.

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    Exits

    Publicis Groupe, the Paris-based advertising giant, is acquiring the publicly traded, Boston-based marketing and consulting company Sapient Corp. for $3.7 billion, the companies announced this morning. The amount represents a 44 percent premium to Sapient’s Oct. 31 close. Publicis, notes Bloomberg, is moving on from a planned $35 billion merger with Omnicom, which was scuttled in May after executives clashed over how to run the combined entity.

    SiTime Corporation, a nine-year-old, Sunnyvale, Calif.-based, analog semiconductor company that had raised roughly $100 million, has been acquired by MegaChips, a publicly traded chip maker in Japan, for $200 million. SiTime’s backers include Innovative Venture Fund, SMBC Venture Capital, Greylock Partners, JAFCO Ventures, Rusnano, andBosch Group. The WSJ has more here.

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    People

    The head of Google’s web spam team, Matt Cutts, who went on leave in July and said would return this month, announced Friday that he’s continuing his leave through 2015, and Search Engine Land speculates that he may not return at all. Cutts joined Google in 2000.

    Parents in cities from Los Angeles to New York are starting to use car-booking and ride-sharing apps like Uber to ferry their kids around. Byron Deeter, a partner at Bessemer Venture Partners, is among them, he says.

    Google “probably” needs a new mission statement, cofounder and CEO Larry Page tells the Financial Times in a wide-ranging interview that underscores Google’s ambitions to pioneer massive changes in the fields of biotech, robotics, and beyond.

    Steve Schnell, the former VP of operations at Lyft, has joined rival Uber to work on its international growth, according to TechCrunch and Bloomberg. In defecting to Uber, Schnell follows in the footsteps of former Lyft COO Travis VanderZanden, who joined Uber as its VP of international growth in October, two months after leaving Lyft.

    Former Google executive Megan Smith, now chief technology office of the United States, talks with the New York Times about why more techies should consider Washington, despite the old-school tech with which they have to work. “My son saw me with my BlackBerry, and he was like, ‘Hi, ’90s mom.’ Also, I had this big, thick laptop, and my other son, who was born in 2005, was like, ‘What is that?’ He’d never seen such a big one.”

    On Friday, a San Francisco Superior Court judge said he would allow civil claims to proceed against Nextdoor CEO Nirav Tolia for intentional infliction of emotional distress and willful misconduct in the operation of a motor vehicle, says The Recorder. Tolia is accused of swerving into another highway lane in August 2013 to pass a slower car, a maneuver that caused driver Patrice Motley to spin out of control and crash into a highway median, says her lawyer. Tolia was charged criminally for his role in the crash, and pleaded no contest to misdemeanor hit-and-run causing injury in June. The civil suit accuses Tolia of “despicable” conduct “done with a willful and knowing disregard of the rights or safety of other motorists.”

    At 2 p.m. PST on Thursday, Facebook CEO Mark Zuckerberg will host his first public “Community Q&A” on Facebook. You can ask your questions here. (For its part, TechCrunch hopes he’ll answer what’s happening with teen engagement, which the company has declined to address since last year.)

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    Job Listings

    Gree, the Japanese gaming giant, is looking for a director of corporate development in San Francisco.

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    Essential Reads

    A new startup has raised $100 million for a portable ultrasound.

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    Detours

    What NASA engineers can do to pumpkins in an hour.

    A look at Christopher Nolan, now considered among the most powerful directors in Hollywood, one whose “rejection of many modern trends—he doesn’t shoot with digital cameras, own a cellphone or have an email address—only adds to the mystique,” says the WSJ.

    Colleges are becoming enablers of helicopter parents, seemingly scheduling a growing number of events for parents (and grandparents, and siblings) to attend each year. “It’s the weirdest thing ever,” one parent of a Middlebury sophomore tells the New York Times. “Midnight roller skating! But we felt we had to go.”

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    Retail Therapy

    The Porsche Panamera Executive Exclusive Turbo S. Only 100 will be created. We hope at least one boasts the license plate “HDQRTRS.”

    Connie

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