• Opendoor Raises $20M for Its Audacious Home-Buying Business

    Eric WuOpendoor, a year-old, San Francisco-based company, is on a mission to make residential real estate liquid by making it simple to buy and sell it online.

    Investors are buying what it’s selling. This morning, the company is announcing $20 million in fresh funding led by GGV Capital, a round that brings the company’s total outside funding to $30 million.

    Consumers are also buying Opendoor’s pitch. The 20-person company is now buying one house per day – sight unseen — in its test market of Phoenix. Home owners need merely give it their address and some basic details, and using public market information about historical home sales and Opendoor’s own proprietary data about market conditions, the company arrives at an offer price that’s just one to three points below what the seller might fetch on the open market roughly three months into the future. (That’s the average time, it says, required to sell a home in the U.S.)

    The big question now is whether the whole operation is sustainable. Certainly, the risk and reward associated with what it’s trying to pull off is enormous.

    Consider: After Opendoor acquires each home, it must ensure the home is up to code in order to resell it. The repairs alone can likely get complicated, as any homeowner can attest. But each home is also given numerous cosmetic upgrades that will give it so-called curb appeal. Think everything from new kitchen cabinets to light landscaping.

    Opendoor can (and surely intends) to sell its homes at a premium, based on those upgrades. But it’s a lot of work, the kind that involves contractors and lawn maintenance workers, in addition to Opendoor’s growing team of developers. More, hanging on to that inventory in the meantime is a huge risk. Though the company’s equity certainly helps, as does a partnership with a bank that gives it debt to use, the housing market is highly sensitive to interest rates and other macroeconomic factors. In Phoenix, for example, where Opendoor has been testing out its service for the last several months, up to a quarter of the homes that are listed for sale are eventually taken back off the market.

    CEO Eric Wu — a serial entrepreneur who cofounded Opendoor last year with investor-operator Keith Rabois — acknowledges the challenges, but he seems convinced that none are insurmountable. Partly, that owes to the progress Opendoor has made as a software company, whose platform can now (Wu says) seamlessly address everything from property assessments to quickly presenting offers to potential customers to handling the payment of the house to overseeing the infrastructure involved with holding and reselling it.

    Wu also knows that there’s tremendous pain associated with home buying today, and where there is pain, there is opportunity.

    In fact, Wu is already envisioning the day that Opendoor both buys homes, then resells others it owns to those same customers, creating one of those virtuous cycles that the digerati like to talk about.

    “Longer term,” says Wu, “we’d love to have a path where we transact 5 to 35 percent of all homes. Once that occurs, this business really starts to evolve into us solving pain points for homeowners, from [allowing them to easily sell their homes] to helping them [purchase] another with high-quality renovations. We definitely think we can touch both buyers and sellers.”

    The company could even get into the financing business eventually, Wu suggests. There’s “lot of headache and stress in securing mortgages today,” he notes. Opendoor has enough work ahead of it right now, but it’s “something we’ll look at down the road,” he says.

    Connie

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  • A Team Player Strikes Out on His Own

    Like many venture capitalists, Ashmeet Sidana watched his firm, Foundation Capital, grow smaller during his nearly nine-year tenure, narrowing from a $750 million fund closed in 2008 to a $282 million fund closed in 2013.

    In some ways, its downsizing was inevitable. As the costs of starting both consumer-facing and enterprise startups has shrunk, the industry has largely become split among very small funds that can nurture these efficiently run startups, and very large funds that can help get the survivors either sold or taken public.

    It left Sidana, who parted ways with Foundation in 2013, thinking about a big opportunity that he could chase with fewer dollars. Specifically, he began obsessing about the huge gulf between the best data centers — built by the likes of Amazon and Google, where one system administrator can manage 10,000 servers — and traditional enterprise data centers, where one administrator still sometimes manages just 25 to 50 servers.

    Because those traditional enterprise data centers will never go away entirely, owing to privacy and security and latency concerns, and “because you have this radical efficiency on the other side,” entirely new companies will be created between the two, insists Sidana.

    It’s that belief that has driven a number of Sidana’s angel investments over the last half year, including in startups Signal Fuse and Menlo Security (both of which remain in stealth mode).

    Sidana’s thesis, along with his track record – his past board seats include FreeWheel, acquired by Comcast for $350 million and Altor Networks, acquired by Juniper for $95 million – has also attracted the attention of institutional investors.

    Indeed, this morning, Sidana is officially taking the wraps off his new firm, Engineering Capital, as well as its debut, $32 million fund. The firm’s LPs include Foundation Capital founder Kathyrn Gould, investor-academic Steve Blank, and the fund of funds firm Cendana Capital. (We made brief mention of the fund in yesterday’s newsletter.)

    Sidana hasn’t made any investments from his newly assembled pool of capital, but he says that Engineering Capital plans to build a concentrated portfolio of between 12 to 15 companies across such sectors as storage, networking, management, and security. “Any company leveraging this trend in IT” is fair game, he says.

    Sidana will also be the first, anchor investor in them all if he has his way. “I’ll lead the round, price it, and take a board seat, which is different from a lot of other enterprise funds that are making small investments,” he says, calling his a“ rifle shot versus a shotgun approach.”

    Asked how he settled on his new brand, Sidana — who once ran product management for one of VMWare’s flagship products, and who plans to run his firm single-handedly for now — says Engineering Capital aims to represent “venture capital for engineers.”

    He adds with a laugh, “My joke is to ‘engineer’ the capital for them.”

    Pictured: Sidana, speaking at the Wharton School in San Francisco in 2012

    Connie

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  • The Kingmaker in the Background: Kathryn Gould

    GouldMost venture capitalists don’t curse like sailors. Most can’t boast a 90 percent internal rate of return over the course of their investing careers, either. Kathryn Gould — the inimitable founder of Foundation Capital, who today spends much of her time today on her vineyard in the foothills of California’s Sierra mountain range — is known for both.

    In select circles, Gould, who got her start in VC in the late ’80s at the now-defunct firm Merrill, Pickard, Anderson & Eyre, is also known for mentoring up-and-coming investors.

    We talked recently about her views on the industry – and which VCs she’s betting on right now.

    You used to make angel investments, including a $50,000 investment in Demandforce that returned $2 million when the company was acquired by Intuit in 2012. Why stop?

    I made three angel investments, and I wouldn’t say I won’t do more, but I’m a perfectionist and for me, making angel investments [requires as much time and effort] as running a firm. My lifetime IRR is 90 percent and I’m not going to mess with my numbers just to screw around.

    [Early-stage investor] Mike Maples and I put our personal money into Demandforce before we started Floodgate, but chance favors a prepared mind, and while I could still [make angel bets], I don’t want to.

    When you say that “we” started Floodgate, what do you mean?

    Mike [who logged time at Silicon Graphics and Trilogy Software, then cofounded a company, Motive, that went public in 2004] briefly floated through Foundation Capital [in the early 2000s] so I knew him, and we used to strategize about what was happening in venture business.

    He’d started to dabble with his own money, including investing in Twitter, which wasn’t an obvious winner. I’d retired [from Foundation in 2006], but I said, “If I were to do [another fund], I’d raise a small amount of money” [because of the changing economics of startups]. And we said, “Sh_t, let’s put together a business plan and do this thing.” So we mapped out how we’d do it, I helped him with his slides, and I introduced him to my three best investors at Weathergage, Horsley Bridge Partners, and the University of Chicago, and there he was.

    Are you an LP in Floodgate?

    Yes, though I help these guys, then invest in their firms, but I don’t get any special treatment.

    Who else have you helped get started?

    We [at Foundation] were investors in [entrepreneur-investor] Mar Hershenson’s companies. We invested in her [analog circuit company Barcelona Design], and when she developed this consumer penchant and hooked up with [angel investor] Pejman Nozad to launch their venture fund, I said, “Let me help you; I know classy institutional investors that will invest.” Even though I loved what they were doing, their written business plan was a goddamned mess. It was very random. And your slides have to be credible to go raise money from decent investors. I still see [Nozad and Hershenson] all the time to talk about things that are happening and give them ideas, and I’m an investor [in their fund].

    Most recently, I worked with Ashmeet Sidana, who was a GP at Foundation Capital for [nine years] and [left in September 2013] and started doing his own angel investing. We’d get together at a coffee shop in Portola Valley and I’d ask him what he was doing, and I was like, “This stuff is f_cking great, you should be doing this in a bigger way.” So we wrote his business plan, created his slides, I introduced him to several of his investors – he also has several Indian investors – and he just closed his first solo fund with $33 million. I think his firm, Engineering Capital, will be very successful.

    People will read this and start reaching out to you for introductions.

    I don’t want people calling me. I’m not going to help you raise your super sucky fund. I’ve known Mar for 20 years, Maples for 15. I’ve known Ashmeet for 15 years.

    I feel like I’m in the best of the best [of these small funds]. I think all the good ones are getting started or have started.

    —–

    You also coach some of Foundation Capital’s younger investors.

    There’s been solid turnover of people there and [there are] are bunch of guys who weren’t there [when I was] and who missed all my good stuff, so I’m giving some advice where I can.

    What do you tell them?

    That it’s not the calls you take. It’s the calls you make. Everyone is calling you with dumb startup ideas, and you can stay hugely busy sorting through that crap. My advice instead is to figure out who are the 10 to 20 smartest people you know and call them. One of them is always starting a company.

    You also hear VCs talk about how one company in their portfolio will be a huge winner, two or three will be also-rans, and the rest will be write-offs. Well, that’s bullsh_t. I didn’t go into a deal unless I thought it was going to be a winner. All 10 had to win, that was my attitude. A lot of VCs run and hide, but I worked hard, I was a good fixer, and I earned my money.

    I’m loath to ask, but you’re a very successful female VC. What do you make of the attention paid to the industry’s gender imbalance?

    I think all the press about it has done women a disservice. People want to bring in a woman partner now, and I’m like, “You want to bring in a good partner.” If someone isn’t listening to you [as a woman], it’s because your argument in weak. If you think instead that they aren’t listening because you’re a woman, if you allow yourself that false luxury [of thinking you’re being discriminated against], you won’t grow.

    You’ve never encountered a problem that you attribute to being a woman?

    I have. Once. I was at Merrill, Pickard, Anderson & Eyre. Bruce [Dunlevie] and Andy [Rachleff] and I all started the same year, and when those guys went off [to cofound the venture firm Benchmark with several others in 1995], I had to decide what I was going to do. I was on a roll. The 90 percent IRR thing was well on its way, I had IPOs and acquisitions and good things happening, so I talked with firms. I was picky, but there were six or seven firms I would have joined. They were all d_cking around, though, and I could see it would take a year for me to get a job with these guys. Meanwhile, I know if I’d been a guy with my numbers, I would have been snapped up in a week.

    I didn’t wait the year to see what would happen. Instead, after a couple of months, I thought, I’ll start a fund, and I had the money raised in three months. As it turns out, half or maybe more of the CIOs at [a lot of these institutional investors] are women. I’m really glad, too. I loved doing it my way.

    To this day, very few women have broken into the all-male firms. But I think the problem will go away, not through those firms hiring women, but because other firms like [the woman-led firm] Cowboy Ventures will grow up around them. I do think that for the most part, the industry is a meritocracy.

    Photo courtesy of Forbes.

    Connie

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  • Naval Ravikant on AngelList’s 2015 Game Plan

    IMG_9776Last week, at StrictlyVC’s inaugural event, investor and founder Naval Ravikant joked about the trials and tribulations of entrepreneurship. He also gave those gathered a comprehensive look at the near-term future of AngelList, his fast-moving, 22-person, San Francisco-based company that’s perhaps become best-known for its pop-up venture funds called Syndicates that allow angel investors to syndicate investments themselves. Indeed, according to Ravikant, more than 243 companies raised $104 million through the platform last year, making AngelList the “largest seed fund in the world.” And AngelList is hoping to double or triple those numbers this year.

    More from our chat that evening, edited for length, here.

    You say of the $104 million that your 15-month-old Syndicates program funneled toward startups last year, $7 million, or just less than 7 percent, was from institutions. Are you happy with that number?

    No. [Laughs.] Obviously, institutional investors come later to the game. They need more certainty, more diligence. It takes more time.

    A few venture firms now actively use Syndicates, including Foundry Group, which did something like 40 deals last year on your platform. Have you also talked with big mutual funds that now make big bets on later-stage startups and that might diversify even more by getting into earlier-stage investing?

    They have no idea what this is. I’ve tried to explain it to them and it’s too bleeding edge for them. Sometimes we’re too far out ahead of the curve.

    Where are these angels coming from – the Bay Area primarily?

    A lot of them are [from the] Bay Area. A lot are entrepreneurs, angels, or maybe individual VC partners who are backing each other. We also have hedge fund managers, oil traders, people in the finance industry who have made some money but aren’t in Silicon Valley. There are definitely the dentists and radiologists, who the finance industry seems to hate – I don’t know why. And they do try and come on and we either reject them or we put them into [a new series of index funds] that are managed by us so they can invest in 100 startups at a time [and hedge their bets].

    You have Syndicates. You have these index funds and other products. What do people use the most at AngelList?

    Actually, [they mostly use] the recruiting site, which we started on a lark in early 2012 when we noticed that people were raiding failed companies on AngelList for employees. That’s by far the highest activity thing on the site, because everyone is looking to hire. We have around 7,000 companies recruiting on AngelList, of whom more than 3,000 log-in every single week and go through . . . 120,000 candidate profiles that are active.

    Are you ever going to make money off those listings?

    That’s the obvious source of cash. But it works because it’s free for the startups. If we do monetize that — and we’re running some experiments — it will be at the high end for people who have more money than time.

    Last year, angel investor Gil Penchina raised $2.8 million via Syndicates to invest in Beepi, a used car marketplace, alongside DST Global. Was that the biggest syndicate to date by far?

    We’ve had a couple of others that were over a million bucks. It’s relatively constrained because you’re gathering checks from individuals, so when you collect $2.8 million, that’s 90 different checks and wire transfers and so on, and we’re limited because we form a special purpose vehicle to invest in each company, and that SPV is limited to 99 unit holders by law. So I would not extrapolate and say, okay, $2.8 million today; tomorrow, it will be $10 million, then $20 million. It’s fun to think it could go to that range, but I don’t think so, not yet.

    Penchina recently told the WSJ that he has poured his entire life savings into AngelList. Does that concern you? What if things go south for him?

    That might have been an exaggeration. [Laughs.] But sure, it’s never good when someone loses their shirt, that’s true of any startup.

    Has anyone come after you over a deal that didn’t go as expected?

    No. In the entire history of AngelList, we’ve never had a single related case of fraud or a lawsuit threat. We follow the rules, we have a no-action letter from the SEC, we have disclaimers, we’re trying to deal only with sophisticated people. This is America, and anyone can sue you and someone eventually will. But so far so good.

    How do you keep people from getting in over their heads?

    We look at what angel investments they’ve done before, and if they don’t have a history of doing them, then we’ll run them through a questionnaire that asks them: What percentage of your net worth are you putting in, what kind of return do you expect, how liquid do you think these investments are, how big a basket of these do you think you need to assemble? And based on their responses, we’ll either reject them, we’ll cap the amount they can invest, or we’ll move them into one of the index funds and say, “You can put a small amount in here.” Or we’ll say, “Go offline, go to your local angel association and lose some money there, then come back to us.” The test we’re looking for is: have you lost money before.

    How much of someone’s net worth would you advise investing in nascent startups? Up to 10 percent?

    No, I would say anything more than 5 percent is probably silly. Obviously, I’m personally far more leveraged than that – I’m “all in” on startups — but that’s because I’m living in Silicon Valley and I’ve bought into the dream.

    —–

    You talk a lot about the advantage of moving investing online.

    People like to think that it doesn’t create that much value, but we forget that when you move online, there are all kinds of things you cannot do offline. An example: By the end of this year, you’ll be able to go into Syndicates and say, “This person sourced the deal for me so I’m going to give this person carry. This is passive capital, so they’ll pay full freight. The pro rata will get gobbled up by following entities.” You can even start doing differential pricing. You can establish that the first $250,000 into a deal gets a 20 percent discount and the next $250,000 gets a 15 percent discount. It breaks that logjam of: Why should I be the first one to write a check into the company.

    Online would also seem to play into this notion of continuous fundraising or rolling closes. Do you think that’s a sustainable trend?

    We’re going to see a lot more of it. Companies are getting much better at raising money whenever it’s available and they’ll raise it in dribs and drabs until they get to the scale or product-market fit where a VC will come in and write a $10 million check. I think it’s a natural trend and I do think it’s easier online than offline. We already enable it to an extent in that Syndicated deals can stay open for months and keep collecting capital if you want it to . . . My guess is that by the end of next year, it’ll be a common thing.

    In the past, entrepreneurs had gotten a lot of advice from the venture side, which was kind of talking their own book, which was, “Get your ducks in a row and raise money once and get a good board member.” It’s all good advice, but it’s a little self-serving, whereas accelerators give almost the opposite advice, which is: “Go get the money right now, get it from anyone who will write you a check within reason, and keep taking money as long as you can and just don’t run out of cash.”

    I’ve also seen you mention getting into secondaries. How serious were you?

    Yes, they’re becoming very popular now because household names like Uber and Airbnb and Dropbox are staying private longer and people are running around trading in the companies’ stock on the side. But it’s very tricky because [secondaries are] regulated in a very different way. Insider trading laws apply to secondaries; the companies often don’t want there to be secondary trades, so they have a right of first refusal. A lot of the secondary trades that are going on are in violation of the companies’ bylaws. A lot of them have counterparty risk, where you don’t actually run it through the company; you just get an IOU from someone who could skip town.

    A lot of this going on right now. It’s possible that the amount of secondary trading going on in Silicon Valley under the covers is going to match the amount of primary financing soon. And if you look at the public markets like the Nasdaq or the NYSE, it’s almost all secondary. The IPOs are a tiny piece of the trades, and then it’s all secondary trading going back and forth. So it’s something that we’re looking at, but it’s very difficult, and because we’re so large and so watched, we have to do it by the book. We’re looking into it, but it’s a hard problem.

    [Update: The original version of this story was titled: “In Silicon Valley, Secondary Deals Quietly Reaching ‘Primary’ Funding Levels.” Ravikant asked that we change it, given that our choice in wording was more predictive and certain than his original comments or intent. Our apologies to Ravikant and to readers.]

    Connie

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  • Strava’s CEO on Community, Competition, and Love-Hate Industry Relationships

    gallery-mark-gainey (1)People love Strava, the 95-person, San Francisco-based company whose training app for cyclists and runners has garnered an almost fanatical following. The company keeps its number of “members” close to the vest, but among the passionate acts of its users was one recent job hopeful who employed the company’s mobile app to spell out “Hire Me” over the course of an 8.1-mile run that ended at Strava’s offices. Another user plotted out a bike ride in the shape of a turkey. In the U.K., where the company’s app has taken off (70 percent of Strava users are outside the U.S.), the press has even asked of its obsessed users: “Is Strava Destroying Your Marriage?”

    Last week, at a StrictlyVC event in San Francisco, Strava’s charismatic cofounder, Mark Gainey, talked at length about his business with Sigma West managing director Greg Gretsch, who wrote Strava one of its first checks. During the conversation, Gainey opened up about what he views as the biggest weak spot of the sporting goods goliath Under Armour, his “love-hate” relationship with the navigation equipment company Garmin, and the one thing that keeps him up at night. Some of that chat follows here, edited for length.

    When Strava started [in 2009], it had 5,000 users. How has it evolved into a global brand?

    It’s been a fascinating ride. [Cofounder] Michael Horvath and I . . .wanted to motivate and entertain the world’s athletes. At first, we were a web company that supported Garmin devices for cyclists. We basically tried to surprise and delight cyclists using the data they’d just uploaded. [Editor’s note: users had access to all of Strava up to five rides; afterward, they were asked to pay $6 a month, or $60 per year for the use of all of its features.]

    In 2011, in trying to figure out a cheaper way for people to participate in Strava, we launched a mobile app that put us on a completely different path. The good news was that wow did that create growth, domestically, internationally – everywhere. The bad news was that we had to completely reconstruct our team and rethink the way we were building ourselves out.

    What types of athletes are using Strava?

    We started with cycling and really focused on them; cyclists are data geeks who are used to [logging their data]. But now, almost half the activity coming in is from the running community, You can upload up to 28 different activities into Strava, though. We see everything from yoga to skiing to kite surfing. We want people to capture their athletic life on Strava.

    What’s the business model and how has it evolved?

    You can use Strava for free as long as you like, or you can upgrade to $6 a month or $60 a year. It’s a very straightforward model that has worked very well for us over the past five years. By going direct to athlete, we’ve been able to maintain that one-to-one relationship and really create long-term customer value.

    A year-and-a-half ago, we also began developing a second direct-to-athlete revenue model, with integrated commerce. We’re not trying to be the Amazon for athletes or create a shop where you can buy stuff but [rather] integrating opportunities into the Strava experience. You can sign up for a monthly “Gran Fondo” — we basically challenge for you to ride roughly 100 miles on a given Saturday — and if you finish, you get an email from us and you “unlock” the ability to buy a limited-edition jersey. We routinely get more than 100,000 people who sign up for these challenges, and it turns out that rewards for athletes is really powerful. We’re simply trying to keep them motivated.

    We also launched something six months ago called Strava Metro, which is an opportunity for us to begin working with urban planners and local governments, taking ride and run data in any given population and giving them an anonymized version of it so they can plan bike paths and pedestrian walkways. That’s something we’ve begun to license out and we think it’s another interesting part of our business going forward.

    What are the metrics that matter most for Strava?

    A long time ago, we placed a bet not to worry so much about the top of the funnel and user acquisition but [focus instead] on engagement. We were sort of fortunate in that athletes tend to network with each other anyway, so we let that kind of be the organic growth, and we focused attention on keeping people engaged.

    Where things have shifted over the last one-and-a-half years is that engagement [now means] something very specific; we call them SUMs, Strava uploading members who [port] their activity into Strava. It’s a powerful metric. We know that once we get them uploading a few times, they’re lifers. If you saw our cohorts, our members, our athletes –they don’t go away. They hibernate when it’s a polar vortex outside, but they’ll come right back.

    Under Amour has been busily acquiring companies. It bought MyFitnessPal and Endomondo last week for $475 million and $85 million, respectively. Over a year ago, it acquired MapMyFitness [for $150 million]. Can you comment on what’s going on, and how you see the market evolving?

    We’re pretty excited about our future. We did a Series D [last fall] led by Sequoia. We didn’t need the capital; we’ve been pretty efficient with our capital. But we were sending a clear signal to the market that we intend to go and grow a global brand. We think there’s a great opportunity to build a sports brand using digital as the platform, so we’ve watched with interest as there has been some consolidation. Under Armour has been especially aggressive over the last year and a half. What we’re finding is that they’re just very different businesses.

    When you listen to Under Armour CEO Kevin Plank, he’s very clear. His business is selling apparel and shoes, and he needs channels to do so. And he has figured out that he can get 100 million email addresses when he pulls together these sites.

    At Strava, though, we have a strict definition of community. Community is about getting our customers to interact with one another. That’s when community happens, [that’s] when you have network effect. I’m not judging. Under Armour has a loyal customer base, Nike has a loyal customer base, Apple has a loyal customer base. I’m not saying that community is the way to go, but in our case, we’re a community-based business. We’re akin to a LinkedIn or a Facebook, and our business is very much predicated on the way the network interacts. And when you look at things like MyFitnessPal and Endomondo, the challenge they’ve had is there’s tremendous churn with them because there isn’t network effect. So it’ll be interesting to watch how it plays out.

    Will we see Strava make any acquisitions?

    Part of the reason to do the raise [last fall] and put ourselves in a position of strength [for that possibility]. It sure feels like it’s a market that’s ripe for consolidation, and we’d rather be on the aggressor’s side.

    What would you be acquiring for?

    We’re always looking at other services that would benefit our athletic community. Areas around nutrition are interesting, around training. The event marketplace is fascinating for Strava. The challenge is the noise of opportunity. There are so many things we could do for our athletes and frankly we’re a team of about 95 people, so we’re trying to be careful about what we do and don’t do.

    Which companies are always on your radar?

    Under Armour has always been on my radar [particularly after they acquired MapMyFitness last year]. Nike is always on my radar; we talk to them all the time and think there are opportunities for interesting partnerships, but they have Nike Plus, so I monitor that one closely. Another would be Garmin, [a company] that everyone thinks that we’re in bed with and that we’ve had this close relationship with since day one because we sell all their devices and support all their users. But the truth is it has been a love-hate relationship for the better part of five years. We think there are amazing things to do together, so we’re hoping it’s more the cooperation part but . . .

    What I actually lose sleep over is the startup I haven’t seen yet. I understand those big businesses and what they’re trying to do. I worry that there’s someone else who has figured out how to something really cool with mobile and apps and that we don’t have time to do. The guys who make me nervous are the companies that [venture capitalists] are probably funding right now.

    Connie

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  • Keith Rabois on the Tricky Business of Multi-Stage Investing

    IMG_9740Last week, at a StrictlyVC event in San Francisco, investor-writer Semil Shah interviewed Keith Rabois of the Sand Hill Road firm Khosla Ventures. There, he asked Rabois how Khosla manages its multi-stage approach, and whether Rabois anticipates that more firms will raise different-stage funds to capitalize on today’s go-go market.

    Rabois — who speaks at a rapid-fire clip that keeps listeners on their toes — made several interesting observations, most notably that investing across stages is a very tricky business that, done properly, involves different teams, different skills, different compensation, and different bets.

    Perhaps unsurprisingly, he thinks Khosla Ventures has the model down.

    Noting that the firm has a seed fund (“a very large seed fund, [at] $300 million plus,” he said), as well as a “main” fund that has historically been roughly $1 billion in size, he went on to explain that Khosla’s seed fund “isn’t necessarily designed to do the same things the main fund is designed to do. The seed fund is designed to take risky experiments and provide capital to entrepreneurs who want to prove things and validate that something is technically feasible . . .” Meanwhile, he said, the main fund is “not a growth fund,” but rather a “standard venture fund” that invests in standard Series A and B deals.

    It’s an important distinction, he implied. It minimizes the potential for the conflicts of interest that can arise with the new breed of growth funds to be raised in recent years by Union Square Ventures, Foundry Group, Spark Capital, and Greycroft Partners, among others.

    Said Rabois: “What I detect from other funds is everyone is trying to raise a growth fund. Everybody who is a good Series A or Series B investor is like, ‘Wow, we have great asymmetric information about how well these companies are doing. Wouldn’t it be great if we could invest more money and take advantage of that information and of that relationship with the entrepreneur?’”

    It’s an understandable impulse, he said. Investors have long resorted to special purposes vehicles, which are time consuming and can be “painful” for the entrepreneur left managing his or her increasingly complicated cap table. But Rabois also warned of conflicts of interest, pointing to the storied firm Sequoia Capital to illustrate his point.

    Sequoia “fundamentally [does] Series A and Series B [rounds], and they do Series A better than anybody else and have for a very long time,” Rabois said. But Sequoia’s growth-stage fund, which typically invests between $10 million and $100 million in companies, has “now cherry-picked a couple of those [early-stage] investments,” including, most famously, the messaging app WhatsApp.

    That investment proved highly lucrative for Sequoia and its limited partners. In fact, WhatsApp’s exit last year was the largest ever for a still-private venture-backed company. (Sequoia invested $8 million in the company in 2011, then elbowed aside other investors to sink another $50 million into the company in 2013.)

    Still, “if you do that too often,” Rabois continued, “no one wants to fund your companies because they see your selection bias. It’s the same signaling problem [that can plague earlier-stage companies] just applied [to maturing companies]. It’s very challenging to run a true growth fund and a Series A fund and fund some [of your startups] but not all, or fund X percent but not Y percent, without people reading into it.”

    Obviously, said Rabois, “If Sequoia thinks a company is amazing, they’ll proactively offer from their growth fund to double down on it,” he continued. But “if they don’t, maybe I should be reading into that when I get an introduction from them to a Series B [deal]. Maybe I should be cynical about what’s going on at this company [laughs]. Why are you sending it to me? Why aren’t you funding it yourself?”

    Before moving on to another topic, Shah asked Rabois if it were any less dangerous for larger funds to “move down the stack” and invest in younger companies than they’ve traditionally funded. The hedge fund Tiger Global Management, for example, has recently led a number of Series A deals, including, most recently, in the India-based news aggregation startup News In Shorts.

    Rabois’s take: “I’m not sure it’s going to turn out that well. Early stage is just a very different skill set. Later stage is more science and early stage is more . . . I don’t think you can use metrics to assess most seed and Series A investments. The [metrics] just don’t exist, and you’re kidding yourself if you think that they do in any statistically valid way. You might be able to tease out something from some cohort, but [that’s it].”

    Connie

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  • Keith Rabois to Startups: Go Public Already

    Keith RaboisLast week, at a StrictlyVC event San Francisco, investor-writer Semil Shah interviewed Keith Rabois of Khosla Ventures in a wide-ranging chat. Among the issues raised was why companies are staying private longer, and whether founders, investors and the institutions that finance venture capitalists should be concerned.

    Rabois – a former lawyer who’d earlier served as COO of Square, and was an executive at PayPal, LinkedIn, and Slide — didn’t equivocate. He said he thinks companies that delay their public offerings are making a mistake, and he traces the trend to “his PayPal friends” and specifically to PayPal cofounder Peter Thiel.

    Said Rabois: “My views are a little bit more like [fellow VC] Bill Gurley’s than Marc Andreessen’s or Peter Thiel’s, [which is] that companies should go public earlier rather than later [for] a variety of reasons. One is that you actually get a lot of cash, and that cash gives you leverage to do things. Secondly, you have a currency, and you have a price on your currency and you can acquire things, which is very difficult to do as a private company.”

    Continued Rabois, “Some of the reasons that people don’t want to go public are just excuses. The founder doesn’t want to have scrutiny, doesn’t want transparency.” Other oft-cited reasons that management teams give for pushing off an IPO include concerns over employee retention and flagging morale, said Rabois, who called all of them “bad reasons” not to go public.

    As for the common complaint that employees begin obsessively watching their company’s ticker after a public offering, for example, Rabois noted that companies’ shares “go up and down” and that staffers can “get a little miffed and annoyed” by those gyrations. But he added that management can also respond proactively to those swings, saying that they’re ultimately among a long list of “soft things” that affect employee satisfaction.

    “If you actually manage people, you know the things that are going to distract the people in your office [are things like] the food you serve,” Rabois told the gathered attendees. “I actually had a revolt [at a former company] because I took away bacon because it’s not good for you. All the engineers barfed [at the move] and I didn’t know why they were all annoyed at me until someone asked a question [about my decision] at a company meeting.”

    As for retention, Rabois shared a story about the online review site Yelp, on whose board of directors Rabois served for roughly eight years. (He stepped down in January 2014.)

    According to Rabois, Yelp co-founder and CEO Jeremy Stoppelman — who’d worked as an engineer at PayPal earlier in his career — “was very nervous about going public because he’d gotten all this advice from Peter [Thiel] and my PayPal friends,” who had themselves gone through a “searing experience” when PayPal staged its IPO in 2002.

    “[PayPal] was one of two companies in technology that went public that year – the other being Netflix – we [filed our S-1] the day after [the terrorist attacks of] 9/11, and people had a lot of emotional reactions to all the things we went through,” said Rabois. “The state of Louisiana suspended us the week before we went public [owing to customer service complaints. We had numerous other issues]. So Peter and other friends of mine started telling everyone that it’s terrible to go public,” and the “Facebook crowd kind of bought into that,” he said.

    So have a lot of other entrepreneurs, said Rabois, characterizing today’s accepted wisdom about the dangers of going public as a “derivative sort of consequence” of that “mess.”

    It’s a shame, suggested Rabois, who said that once Yelp did go public, in March 2012, it became “the best thing ever for the company. Morale improved, actually, the year before we went public. Retention post going public is significantly better than the two years before going public. I’d argue that innovation [at Yelp] is better. We’ve also been able to acquire a couple of strategic assets, one in Europe, one just last week . . . one maybe could have been done as a private company but the others surely couldn’t have been.”

    Said Rabois, “All the most innovative companies on the planet are public. Apple – nobody is more innovative than Apple — Amazon, Google. If you have the right founder, you can innovate. Every other answer is an excuse.”

    Connie

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  • At StartX Demo Day, a Wide Assortment of Startups

    Box-of-ChocolatesLittle about the accelerator program StartX is conventional. On the one hand, the 5.5-year-old, Palo Alto, Ca.-based outfit is a nonprofit that helps founders affiliated with Stanford University to build peer groups, as well as their confidence. Specifically, it provides companies with 10 weeks of free educational programming about everything from setting goals to launching products.

    But StartX is also becoming a power player, owing largely to a deal it struck in September 2013 with Stanford University and Stanford Health Care, which asked it to manage a for-profit vehicle on their behalf — uncapped capital that StartX now uses to invest in up to 10 percent of its founders’ rounds.

    You can actually see StartX’s growing influence. Not only does the 16-person outfit now operate out of 13,000 square feet of office space, but at a demo day yesterday, on the heels of one of StartX’s three yearly sessions, roughly 200 investors stood elbow-to-elbow in a nook of that space to hear 20 of its companies ask them for funding.

    Perhaps unsurprisingly, the companies were a tad unconventional, too.

    One presenting company, Summer Technologies, a sustainable agriculture startup, is hoping to transform the cattle industry by bringing analytics to grazing management. Currently, says CEO Christine Su, farmers aren’t making the most of their land. They allow their cows to graze too long in one place, when moving them around more frequently would keep the grass and soil healthier. Summer’s software, currently being piloted at 30 ranches across five states, pulls in rain, soil and other data that can help those farmers boost their productivity.

    Another company, Payjoy, aims to bring consumer finance to hundreds of millions of people in India and elsewhere by embedding technology in smartphones and TVs that allows them to pay for the products as they’re used, instead of in up-front cash. Striking the right relationships would seem to be a big hurdle for Payjoy, but founder Doug Ricket, a former Google engineer, has spent the last six years selling technologies into the developing world; presumably, he has a network to leverage.

    Vouch, a third startup, also has an unusual approach to what’s an increasingly crowded space. It intends to use the creditworthiness of a borrower’s personal network, as well as their own individual data, to tailor personal loans for its users. Think friends, uncles, cousins. It sounds a little out there, but online lending is obviously a huge and growing market, and the team includes former alums of PayPal and Prosper, among other companies.

    How far these companies will go is anyone’s guess. But the portfolio of StartX appears to hold promise. Since launching its fund with Stanford’s capital — it’s called the Stanford-StartX Fund — StartX has invested $31.4 million across 82 companies, 9.2 percent of which have already been acquired.

    At least one company, six-year-old, San Francisco-based Life360, looks like a breakout success story, too. Right now, two million families are signing up for its family communication app each month — traction that investors have noticed. (The company has raised $76 million to date.)

    Of course, the organization has also seen its flops. Though 88.5 percent of its companies are still up and running, StartX readily admits that another 11.4 percent have gone out of business.

    If press reports are to be believed, one of its highest-profile portfolio companies – the payment startup Clinkle – may be headed in the same direction.

    For a full list of the companies that presented yesterday/are looking for funding, click here.

    Connie

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  • In Venture Database Race, a Kerfuffle

    screenshot-2015-02-04-10-01-41Anand Sanwal, founder of the New York-based venture database company CB Insights, made an unpleasant discovery yesterday after his subscribers pointed him to a TechCrunch piece about Techlist, a new venture database business.

    Techlist made the news because the outfit — a subsidiary of the Singapore-based media company Tech In Asia — was just admitted to the winter class of the prestigious accelerator program Y Combinator. The problem spied by Sanwal and his customers: Techlist has borrowed heavily from CB Insights’s design and user interface. The company clearly “crossed over from inspiration into plagiarism,” says Sanwal.

    Whether Y Combinator agrees remains to be seen. But Sanwal – whose bootstrapped, 27-person company is competing against a growing number of new investor database companies — isn’t imagining things, seemingly. In recent months, 12 Techlist employees have seized on a 30-day trial period that CB Insights offers, including Tech In Asia’s CEO, Willis Wee, his head of product, and numerous product managers and developers.

    Indeed, on Twitter yesterday, Wee acknowledged using CB Insights “as a reference to launch fast,” writing to Sanwal specifically, “Credits to you and we will be improving as we go along.”

    Wee — whose company has previously raised venture funding from East Ventures and Simile Venture Partners — quickly added that Techlist is “very very different from any other venture database out there.”

    StrictlyVC chatted with Sanwal yesterday about what happens next.

    You just wrote a jokey post about “arriving” now that you have a “copycat.” Are you thinking of taking further action?

    We’ve talked to our lawyers and are awaiting their guidance. Since Willis admitted on [Hacker News] and via Twitter [that] they copied, a lot of the gray area has been removed. But ultimately, this is a distraction, so [I’m] not sure what we’ll do. Plus, I love our lawyers, but they ain’t cheap.

    Techlist plans to zero in on the Asian market. How big an area of focus is that for you?

    We cover financing and exit data globally, including Asia, as our institutional clients expect that we’re comprehensive. Also, Asia is our second fastest-growing market in terms of clients, so we’re putting a lot of effort on the area.

    Have you asked Y Combinator for comment?

    We haven’t. For the record, we don’t think this is YC’s fault. They have a lot of companies and cannot audit the UI/UX of their portfolio companies. I also don’t think [President] Sam [Altman] and the team condone this type of thing or think great companies are built by copying other companies. That said, I am curious to see what YC does.

    Just yesterday, the WSJ published a piece about the advantages that venture-backed companies have over those that choose to bootstrap, including investor connections. How big a concern is this company and its investor ties?

    It’s annoying, mainly because our team works hard, and I feel this is sort of crappy for them. But beyond that, we’re not concerned. Money buys you time, not the ability to execute. And we’ve seen lots of well-funded companies come into our space and all flame out.

    You seem to be maintaining a sense of humor about this.

    We’re a heads-down, low-drama group, so this made things interesting for us today. I realized that some drama from time to time is fun.

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

    Connie

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  • On the Bias Toward Writing About Bias

    WomenTechInvestorThe last two years have seen countless articles about why there aren’t more successful women in tech. First, a story is published about the dearth of female entrepreneurs or female investors (or both), then people either applaud the piece or enumerate why its wrong-headed (or both). Finally, someone else is legitimately wronged by some knucklehead, and the cycle begins anew.

    Much of the coverage has had a positive impact. By shining a light on age-old behaviors that were deemed acceptable for too long, more tech startups are instituting sensitivity training and diversity initiatives. Women who felt isolated in facing gender bias have learned that they’re far from alone.

    The many reports about women in tech have also put a finer point on some differences between male and female entrepreneurs that are now being actively addressed.

    For example, Mar Hershenson, a serial entrepreneur-turned venture capitalist, now advises some of the female entrepreneurs with whom she meets to “raise their voice – not be afraid to talk about the best-case scenario for their startups.” Talking up their work doesn’t always come as naturally to women, says Hershenson. But “venture firms look for big vision, nothing-is-going-to-stop-me type pitches,” and getting that memo beforehand is useful, she adds.

    Still, some think much of the coverage around women in tech is becoming counterproductive.

    Mada Seghete, cofounder of the deep-linking tech company Branch Metrics, says some of what she reads in the media rings true. For example, she observed more of a “risk-taking attitude, to some extent” by her male classmates at Stanford, where Seghete — who has two engineering degrees from Cornell — recently snagged her MBA.

    Yet Seghete also notes that a higher percentage of her female classmates have seen their businesses take off since graduating, partly because “a lot of guys played with the ideas and took their time” while their female peers dove into things that are “less risky,” says Seghete.

    Among those companies is The League, a dating startup cofounded by Seghete’s former classmate Amanda Bradford. It just closed on $2.1 million in funding last week.

    Seghete also seems to think the ongoing narrative of women as victims can have unintended consequences – namely, making women unnecessarily ill at ease.

    “Even as a software developer, I don’t consider that I’m different. And maybe it’s because I don’t anticipate bias that I’m confident in a way that people don’t look at me differently,” says Seghete. (Her own company — cofounded with classmates Alex Austin, Dmitri Gaskin, and Mike Molinet — has raised $3 million led by New Enterprise Associates.)

    “If I thought I’d be facing bias in a situation, then I might be more self-conscious,” she says. “It would be a self-fulfilling process.”

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

    Connie

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