• Tim Draper on Life Outside DFJ

    tim-draperA year ago, Fortune reported that billionaire investor Tim Draper would no longer be actively investing on behalf of DFJ, the firm he cofounded in 1985. As the news rippled throughout VC circles, Draper wrote StrictlyVC to clarify that he was “not leaving DFJ. Ever. I am just skipping a fund to do some work building Draper University and experimenting with new models for venture capital. He added: “I will of course be an investor in any new fund we create.”

    Draper, already known for his boundless energy, has seemingly been in overdrive since. In addition to his involvement with his 1.5-year-old Draper University — once characterized as an “unconventional boarding school for aspiring tech moguls” — Draper has become a highly active seed-stage investor. He’s betting heavily on bitcoin, too. In fact, in July, he purchased the 30,000 bitcoin seized when the feds took down the online drug bazaar Silk Road in October 2013. That’s saying nothing of his efforts this year to get an initiative on the California ballot to carve the state into six “startup” states. (It failed to qualify.)

    How does he find the time? StrictlyVC asked Draper if he could answer a few questions about the past year; we emailed this past weekend in an exchange that has been edited lightly for length.

    Last year, you said you decided to “skip a fund” at DFJ. How are you feeling one year later?

    Everything I do helps all my funds, whether they be DFJ or Draper Associates [Draper’s seed fund].

    Draper University; Boost.vc [son Adam’s investment fund], Hero City [Draper University’s coworking space]; and my long history in the VC world have all become an amazing source of deal flow.

    What’s been the best part about this past year? What’s been the most challenging?

    The best part is that I am able to innovate in the finance world. There are some things that can be done better for the entrepreneurs, and some that can be done better for the LPs. There are also some real technological innovations that are happening that I have been able to identify and apply to venture capital [including around bitcoin].

    Also, [Draper University] has provided me a new vehicle for investment, new contacts I never would have made without it, and innovations I never would have seen without it.

    The most challenging [thing for me] has been the sheer volume of opportunities I now have for investment.

    You seem to be investing more actively than ever.

    I think I am at my normal pace.

    Would you ever raise institutional funding again?

    Yes.

    What percentage of your bets this past year have been bitcoin-related?

    Maybe 20 percent and rising.

    When you successfully bid on those 30,000 bitcoin, you told Dealbook that you wanted to provide liquidity to markets that have been hamstrung by weak currencies. First, have you ever disclosed how much you paid? More importantly, how are you executing on that plan?

    We have done it. [Editor’s note: Here, Draper points me to his portfolio company Mirror, formerly Vaurum, an exchange platform for bitcoin investors.] And the price I paid for the bitcoin was higher than the current price, but my belief is that the price of bitcoin will exceed $10,000 within three years because the infrastructure is being built that will lay the groundwork for universal adoption. We will be using bitcoin for transactions and all we will know is that the transaction was made faster, smoother and cheaper than it would have been with just fiat currency.

    Will you invest as actively in bitcoin in 2015 or have you covered a lot of your bases at this point?

    This is just the tip of the iceberg. I expect bitcoin and the blockchain to be as prevalent in banking, commerce and finance as the Internet is in information, communications and software.

    A lot of very smart people are divided about bitcoin. Like you, Marc Andreessen is a famous bull. In contrast, Peter Thiel recently said that he’s skeptical, that it’s “not obvious how easy it is to get a seamless payment system attached to [bitcoin].”

    It is happening. I look forward to giving Peter a tour of Draper University and Hero City. Marc has already been there.

    Andreessen and Thiel have also become very public figures. Meanwhile, you did a lot of press around your Six Californias initiative, but as an investor, you seem to have pulled back.

    We just finished up another amazing session at Draper University. We are challenging the count at Six Californias. Draper Associates has been making some brilliant investments that I expect to have even greater outcomes than those I have made in the past. We have news cycles, too.:)

    Your three children are now making their own startup bets. What’s the best piece of advice you’ve given them about being investors in Silicon Valley?

    Yes, Jesse, the Valley Girl, is one of the top supporters of women in entrepreneurship, and she has made some exciting investments. My son Adam is running Boost.vc, and my son Billy works with me making investments for Draper Associates. They all look at the world as something that can be improved through entrepreneurship. [The] best piece of advice [I’ve given them]: “Fail and fail again until you succeed.”

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    Connie

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  • Unrest at Nest

    tony fadellSitting on stage last week at a San Francisco conference, Greg Duffy, the 28-year-old co-founder and CEO of Dropcam, which makes Internet-connected video cameras, fielded questions from an audience of startup founders. It should have been a time to celebrate. After all, last June, Duffy sold Dropcam to Nest Labs for $555 million. As the panel discussion came to a close, however, Duffy sounded an ominous note. Referring to a longtime colleague who was sharing the stage with him, he told the invite-only crowd that Liz Hamren is “the best VP of marketing in the business.” He then added, laughing, “She’s also my former VP of marketing. You can read from that what you want into my current situation.”

    Duffy insists that everything is “great” at Nest, but a cursory look at employee reviews at the jobs site Glassdoor tells a different story. Despite the fact that longtime Apple executive and Nest co-founder and CEO Tony Fadell has received rock star treatment from many journalists (Fast Company dubbed him the “$3.2 Billion Man” for the amount Google paid for Nest this past January; others have wondered if he is the next Steve Jobs), he has received only a 46 percent approval rating across 26 reviews. By contrast, Duffy, who was Dropcam’s CEO until the merger, shows a 100 percent approval rating across six reviews.

    Some of these Glassdoor reviews claim that Nest is “killing everything that was special about working at Dropcam” and that “everything we built is being carelessly dismantled after [the] acquisition.” One review states, “Everything revolves around the CEO. It’s a dangerous mix of cult of personality and Stockholm syndrome. Comments like ‘He’s the next Steve Jobs’ are not uncommon, while people proudly say things like ‘I’m used to Tony screaming at me.’ Everyone dreads meetings with Tony because he will flip if he doesn’t like what he sees. Somehow that’s perceived as good leadership.”

    Sources who spoke to StrictlyVC and asked to remain anonymous say Fadell has fashioned a hierarchical structure reminiscent of TV’s “Game of Thrones.”

    According to one employee, “Almost every decision, no matter how small,” goes through either Fadell or Matt Rogers, who cofounded Nest with Fadell and was previously a senior manager at Apple. (Through a spokesperson, Fadell and Rogers declined to answer questions for this story.)

    “It’s always, ‘Tony and Matt want us to do this. We have to hit this deadline because Tony and Matt want us to.’ You definitely see people taking the path of least resistance because they don’t want to upset Tony.”

    Another employee calls it a “huge meeting culture, to the point where anyone at the director level or up spends their entire day in meetings, many of them duplicative meetings about the same subject, over and over to the point where a lot of people have complained.”

    Coming from Dropcam, which boasted a much more egalitarian culture, a clash seems all but inevitable.

    Yet these employees also suggest that the differences between Dropcam and Nest are not just stylistic. One Nest employee says that Nest, which employs between 700 and 800 people, will see roughly double the revenue of Dropcam this year but that Dropcam, which employs 100 people, is growing its revenue eight times as fast, thanks largely to its subscription business.

    Many employees were reportedly disappointed to sell to Google because “we were firing on all cylinders, with a sensor product about to be released and an outdoor camera about to come out in 2015 and great sales. It just felt like we’d been chopped off at the knees.”

    Says one insider, now at Nest, “There had been rumors earlier in the summer that Google was going to acquire Dropcam, so we had an inkling that something was happening. But when the founders finally called the staff together to announce that we’d been acquired by Nest, there was dead silence in the room. You could have heard a pin drop.”

    No wonder Dropcam investor and former board member Mark Siegel sounds less than elated when asked about the company’s sale to Nest. “I think there was a great independent company to be built, and I wasn’t shy about telling that to these guys,” he says of Duffy and his cofounder, Aamir Virani.

    Siegel, a longtime managing director at Menlo Ventures, says Dropcam was on a “terrific ramp” when it was acquired. Its Wi-Fi cameras were finally being sold via both Amazon and Apple, and the company was in early negotiations with Best Buy. Morever, “We were about to launch in a bunch more retail locations,” he says.

    “There was plenty that had to be built,” he notes. “But it’s very rare that you get the kind of consumer love for a product that you see with Dropcam. Even when we had some bumps in the road – like problems with the contract manufacturer early on—it didn’t affect consumer ratings, because the product was so good.”

    “There were some concerns about what it meant to be an independent, small company going up against a Google/Nest,” observes Siegel. “That’s true of any [situation like this]. The real question is, ‘Was [competing directly with Dropcam] Nest’s priority?’ Now, maybe from the inside looking out, you can ask Greg if that was an overblown fear.”

    To some of the employees we talked to, Nest’s priority seems to be separating itself from Google, not rolling out new products. At a conference in Dublin, Fadell was asked about the cultural differences between Apple and Google. Painting a picture that sounds like Nest today, he said that from its earliest days, Apple had a “much more hierarchical structure, and the communications structure was very understood,” while at Google, “everyone could just talk to everyone and learn about everything, and there was much more transparency.”

    “I’m not saying one is better than the other,” Fadell continued, “but it’s very different. The very first day, when the [Nest] deal was announced, I got all these various individuals from inside Google saying, ‘Oh, congratulations,’ and ‘I want to work with you,’ and ‘Is there something we can help you with?’ And at Apple, it was very structured. It wasn’t like you were going to send a message to Steve [Jobs] for any reason and say congratulations and flood his email box.”

    Asked about Dropcam’s merger with Nest after his stage presentation last week, Duffy was quick to describe Dropcam’s integration with Nest as “very positive. Aamir and I spend a lot of time with Tony and Matt” and “there’s a lot of mutual respect.”

    Unfortunately, Duffy politely declined to answer any further questions. “Google policy,” he explained.

    Then he made his way toward a clutch of founders who hoped they might catch a few more minutes of his time.

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    Connie

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  • A Startup Tackles Express B2B Delivery (and Tens of Rivals)

    DropoffSean Spector is a brave soul. Spector is the CEO and cofounder of year-old, Austin-based Dropoff, a same-day delivery service that’s targeting small and mid-size businesses that don’t necessarily want their sensitive documents being delivered by a harried bike messenger who has other places to be. Customers pay a bit more than they might to a traditional courier company but they get a high-touch service in return, from screened “agents” to a slick mobile app that providers customers real-time tracking and the ability to rate their messenger, among other things.

    The company, which is launching today with $1.85 million from Austin Ventures, Silverton Partners, Mucker Capital and others, says it’s targeting an underserved niche in the $8.7 billion same-day delivery market. While it’s making food deliveries, for example, it isn’t dropping off sandwiches to office workers but rather hauling over the catering to the 200-person office party. While it’s delivering flowers, its messengers aren’t bringing them to consumers’ doorsteps but to wedding venues.

    Still, Dropoff — which has made “thousands” of same-day business-to-business deliveries since it began testing its service in spring — has a good many competitors, including 39 that are listed on AngelList alone. I talked yesterday with Spector — who previously cofounded the online game rental service Gamefly — about how Dropoff breaks through the noise. Our chat has been edited for length.

    How many employees do you have? Are your messengers full-time employees? How are they paid? And who owns their modes of transport?

    We have 16 full-time employees, across marketing, finance, technology and sales. Our couriers are independent contractors who get a percentage of each delivery. Most of them work a full day, eight hours, seven days a week and they can earn $20 or more per hour. They own their own bikes, cars, and vans, which we use depending on the speed required of the delivery and its size; they also [pay for their] own insurance, though we [provide them with additional] insurance. All are thoroughly screened and vetted and arrive in uniform.

    You’ve chosen a tough business to enter. Everyone is jumping into same-day delivery.

    It may seem that way, but once you look behind the curtain, it’s very different, what we’re doing. If you think about sensitive documents, expensive medications, floral arrangements for a big wedding, different types of mission-critical things that need to be delivered and tracked, it’s a whole different process.

    How do you come up with your rates?

    We did a ton of research to understand how the current industry works, then modified it based on what makes the most sense for our model. But loosely, it depends on how quickly you need something, the distance we’re traveling, and the weight of what we’re delivering.

    I want catering trays, I’m five miles away and I want them in two hours.

    It will cost you under $20.

    You raised $1.85 million in April, though you’re just announcing it today, and you have plans to expand nationally from Austin. Are you actively seeking an A round yet?

    It’s fair to say we’ll be in the market in 2015.

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  • A Duo Reunites Over a New, Online Lending Opportunity

    ApplePieDuring the go-go ‘90s, an innovative company called OffRoad Capital emerged on the scene, pairing accredited investors with startups seeking funding via its online platform. A kind of AngelList 1.0, even OffRoad itself was backed by $17 million from roughly 150 accredited investors.

    Alas, its timing was lousy. Just as OffRoad began gaining real momentum, the tech market nosedived, and in 2001, the company was quietly acquired for an undisclosed amount.

    Now the band is back together. A year ago, in fact, OffRoad founder Stephen Pelletier and former OffRoad executive VP Denise Thomas rejoined forces to create ApplePie Capital, a San Francisco-based online loan business focused on franchise financing. Now the pair, who say they’re chasing a roughly $42 billion market, are announcing $3.77 million in funding from Freestyle Capital, Signia Venture Partners, QED Investors, and Camp One Ventures. Yesterday, I caught up with Thomas, who has taken on the role of CEO, to learn more.

    Why the franchise industry?

    We saw an opportunity partly because there’s a lot of data that shows the franchise segment of the small business market is a heck of a lot less risky than small businesses at large.

    Where is the money coming from that you plan to loan out?

    We have [access] to capital aside from the capital we’ve raised to operate our business — money from institutional and individual investors that will allow us to fully fund the loans that come on the platform. We aren’t disclosing those specific sources; that’s precious information to us. But all sorts of interesting people are involved.

    Not many people realize this but on P2P lending platforms, just 25 percent of the capital comes from individuals at this point. The rest comes from institutions. They saw the performance data and realized they could base decisions on their own models to ensure they’d hit their target returns. Our model is attractive to many of those same investors, particularly double-bottom line investors with mandates to create jobs. One in 20 working Americans is employed in the franchise industry.

    What interest rates will you charge, and how much will you see versus these institutional investors whose money you’re using?

    Our interest rates will range rom 8 to 12 percent and could get even lower over time [as our risk falls]. We don’t make money on the spread; that goes to the investors, minus a 1 percent processing fee, and there’s no real margin there. We make money off the origination fee, which is 5 percent if the money comes entirely from our network and 3 percent if [our customers] raise money from their own network, which we also help facilitate, taking on the liability and handling processing, state registrations, loan servicing, and so forth.

    Why is what you’re offering better than SBA loans, which offer more competitive interest rates?

    I’ve interviewed more than 50 brands, and SBA loans have become very painful. First, they’re offering 20 percent fewer of them before the financial crash of 2008. It’s also very difficult for anyone to get a loan of less than $1 million. And though today’s rates are 5 to 6 percent, you’re not locked into those rates; they could change, unlike our rates. Not last, it can take up to four six months. We’re offering speed and flexibility. By the way, we’re compatible with SBA loans. Maybe someone can’t qualify for one today, but after they’ve owned two or three or four units, they might.

    Is there a penalty for paying off your loans early?

    No.

    I remember OffRoad creating an index of startups that investors could back. Is there a plan to package these loans together to minimize risk for ApplePie’s investors?

    Absolutely. We don’t have a fund today, but we’re already diversified across five industries, and for now, there will be two ways for investors to participate. They can either choose the brand they want to invest in, or they can talk with us about a vehicle that, let’s say, commits $10,000 across 10 deals. We can ensure that happens.

    Connie

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  • Kleiner’s Mike Abbott on (Probably) Not Starting Another Company

    mike abbottThree years ago, Mike Abbott joined Kleiner Perkins Caufield & Byers in the plum role of general partner. Yet one senses the longtime operator and entrepreneur — whose many past roles include as Twitter’s VP of Engineering; as SVP at Palm; and as cofounder of the data virtualization startup Composite Software, acquired by Cisco last year for $180 million in cash — isn’t completely finished getting his hands dirty as an engineer. We caught up the other day, chatting about everything from Kleiner’s well-documented management changes to Abbott’s closet coding. Our conversation has been edited for length.

    When you joined Kleiner, it seemed to be undergoing a generational shift, with you and Megan Quinn reportedly charged with building the firm’s digital practice. Now, many younger partners the firm had brought on are gone, including Quinn, who has become a strategic advisor. What’s going on?

    Megan decided for personal reasons that she and her significant other were moving to the U.K. We wanted her to be part of the KP family, so that’s totally distinct from [the decision the firm made a year ago to downsize] . . . But we’re very much making sure that KP’s platform is getting built for the future and clearly we’ll be adding a couple of new folks as we find the right people for us.

    You joined the firm less than two years before it shook up its management team. How has that impacted your work and your outlook on KP?

    I don’t think I knew the firm would [be involved in] different legal issues or what not. I’m not going to lie and say I was aware of everything. But I was aware there was a conviction to make changes and I applaud [longtime general partners] Ted [Schlein] and John [Doerr] for doing [what they felt was best for the firm]. We have a long history of handling generational transitions and a great history to leverage; it doesn’t change the fact that we have a lot of work to do.

    John Doerr is joining the board of Slack, Kleiner’s latest high-profile deal. What are your new investments? What interests you?

    I’ve been spending a lot of time around computer vision. I think the advancements in deep learning that Google and Facebook are making are interesting. One of my most recent investments is Airware [a three-year-old company that’s developing a drone operating system]. It’s going to be really interesting to see what kinds of applications get built [because of it].

    I’ve spent my career focused on big data, but now we have efficient ways to query it and store it and [the next step] is extracting real intelligence out of it.

    How? What are some of the other related applications and services that interest you?

    I think it’s interesting to think through how, if you were to build a Salesforce or NetSuite today, you would build it. RelateIQ, which Salesforce acquired, was starting to do interesting analytics around the email accounts of sales teams to enable them to do better lead forecasting – like looking at the frequency that [a rep] talks with a customer, and the time between that outgoing email and the customer’s response.

    What we haven’t seen yet is more work around the quantified employee, meaning: How do you start building metrics that go beyond performance management? If I usually send X number of emails, and check in so many times on Github, and you build a fingerprint of me as an employee and that [fingerprint] suddenly changes, well, maybe it’s because of my personal life or maybe it’s because I don’t like who I’m working with and maybe now I’m at risk [of leaving the company]. I’m not suggesting monitoring employees for bad behavior, but when I was at Twitter, managing a couple hundred employees, boy, if there’d been a way for me to get different metrics that were implicitly derived and would have helped me be a more effective leader and manager . . .

    Before joining Kleiner, you were a fairly active angel investor. What’s your pacing like as a VC?

    I’ve done two Series A deals [for the firm] this year and one Series B. It’s not like, “You used your two; you’re done.” But if you look at the size of the fund and reserves, it kind of ends up that way.

    Is that frustrating?

    It’s not easy, even if I’m writing more software [on the side]. I really enjoy the mentoring and service aspect [of venture capital], but I won’t lie; as someone who has built products for 20 years, the feedback cycles are a lot longer than when you’re shipping software.

    Wait. You still go home and write software?

    I do. I’ve recently met with a number of companies doing deep learning and just wanted to see what state-of-the-art was for someone like me to try out.

    A couple of weeks ago, I also wrote a couple of [scripts] for custom keyboards, which you can use for i0S 8 [as it now allows third-party keyboards in the App store]. I don’t necessarily know if there’s a company or not, but different keyboards for different locations is fascinating to me.

    Are you talking about helping another team incubate a company or are you tempted to start another company?

    I certainly can and would [help incubate a company]. KP has a history of people starting companies out of its offices, which made me feel better [when I joined], thinking I could start one. But having started companies, I know what kind of investment that takes and I’m not sure I’ve been able to reconcile whether [I] can really do [a startup] and provide enough time and support to the companies on whose boards I sit.

    I wouldn’t say no way [will I ever start another company]. But I have a deep respect for what it requires.

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    Connie

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  • 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.

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    Connie

  • Secondaries Are Back

    raining_moneyIn recent years, the secondary market has gone from hot to not and back again. And it looks poised to pick up steam going forward, as an unsteady public market forces more startups to push out their IPOs.

    In the last two weeks alone, two investment firms that help cash out inside shares of privately held companies have closed new funds. The first, Founders Circle Capital, raised $195 million across two funds, beating its $125 million target. Another, Akkadian Ventures, just today closed on a $75 million fund; it was targeting $50 million.

    A third firm, the new brokerage Battery East, officially swung open its doors last month with the aim of getting employees shares into the hands of growth-hungry institutional investors.

    The outfits – all in San Francisco — each face the same challenge: Getting on the good side of startup CFOs, who typically have strict rules that limit share sales by employees. Toward that end, they’re actively working to differentiate themselves.

    Battery East, for example, boasts of its connections to both Wall Street and Silicon Valley. The firm was founded by Barrett Cohn, a former adviser at Maveron, and Michael Sobel, a former BlackRock executive. And they recently hired Howard Caro, the former general counsel of Founders Fund, and Duncan Niederauer, who recently retired as head of the NYSE.

    “We’re in close dialogue with large mutual funds, who [will] tell us there are three or four companies they have their eye on,” says Cohn. Battery East’s network also includes “folks who are looking for help, like the CFO who wants to run a tender offer, or the C-suite person who is moving on and needs help, or venture firms that are doing portfolio restructuring – especially guys who have companies that are way up and to the right.”

    Battery East is “definitely seeing an uptick in demand and we think it will grow as the market does what it’s been doing of late, combined with blue chips that aren’t blue chips anymore,” says Cohn. “I don’t have a number to put on [that increased demand], but in just the next six months, more than a billion dollars of institutional buy-side demand is coming online from mutual funds, hedge funds” and others.

    One major prong of Battery East’s strategy involves running auctions that “help companies advocate for employees better by running a real process around [the sale of their shares].”

    Two-year-old Founders Circle Capital, meanwhile, doesn’t involve third parties at all, instead buying the shares directly based on their 409A valuations from startups’ management teams. (So far, the firm has assembled stakes in Ebates, Dollar Shave Club, Good Technology, Kabam, Lumos Labs, and Ticketfly, among others.)

    “You’ve got great companies that are growing quickly and making the strategic decision to stay private longer,” says cofounder Chris Albinson, who previously co-founded Panorama Capital and was a general partner at JP Morgan Partners. Yet “they’re also dealing with this pressure valve of 400 employees working hard for a long period.”

    Albinson compares building a “world-class company” to a marathon, saying that Founders Circle is “like the water station at mile 21, giving people what they need for that final push.”

    Three-year-old Akkadian Ventures sees itself much the same way, says its founder Ben Black, who similarly touts Akkadian’s ability to buy directly from a startup, which helps ensure that the startup knows and trusts everyone on its cap table, even after its shares have traded hands.

    There are differences, however. Unlike Founders Circle, for example, Akkadian also offers “option exercise loans.” (Black describes these as fairly modest in size.) Akkadian also facilitates co-investments in some cases when its LPs want access to more of a particular portfolio company. One arrangement included a co-investment in the ad tech company Rocket Fuel, which enjoyed a highly successful IPO in 2013, though its shares are trading down dramatically today.

    “We’re not trying to time the market,” says Black. But he adds that in the last six months, Akkadian is seeing more companies that might have forbade insider sales beginning to rethink some of those rules.

    “Companies see that liquidity can be a powerful tool in the war for talent,” says Black. “You can’t [compete] when companies are providing secondary liquidity to their employees and your company is not.”

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  • Gil Penchina is Coming for You

    Gil+Penchina+TechCrunch+Disrupt+SF+2014+Day+L4UGljNri2BlGil Penchina is a former eBay and Wikia executive. He’s also a longtime angel investor who has enjoyed cash-on-cash returns of 6x over the last 15 years, he says.

    But the latest feather in Penchina’s cap is his place within AngelList’s universe of so-called Syndicates, which are essentially pop-up funds that allow angel investors to syndicate their investments in exchange for 15 percent of any upside. (AngelList collects another 5 percent. There are no management fees.)

    Since the program was rolled out by AngelList roughly a year ago, Penchina has attracted 1,300 accredited investors who’ve committed to collectively plug up to $4.6 million into each deal he wants to make. Those numbers make his the largest Syndicate on the platform. They also give him the firepower, theoretically, of a mid-size venture fund.

    Penchina, who has already invested “between $5 million and $10 million” in startups through his syndicate, says he’s just getting started. We caught up yesterday. Our chat has been edited for length.

    You don’t have an office. You have no institutional investors. And yet you have a stunning amount of capital at your disposal suddenly.

    Yes. We only started nine months ago, and [our commitments are up] to $4.6 million per deal, which is slightly frightening when you’re used to writing $25,000 checks [from your personal bank account]. We’ve now led two A rounds, for [the sales prospecting company] Datanyze and *Contactually [a relationship marketing platform], and we’re trying to do more [lead investing].

    We’ve also launched a SaaS syndicate, a bitcoin syndicate, an [Internet of Things] syndicate, and we’re launching a [financial technology] syndicate. And we’ve launched a late-stage syndicate for B and C rounds and we’re in the registration and comment period with regulatory authorities for a venture debt syndicate, which will be interesting once that’s up and running. Notionally, we want to [represent] every vertical, and every asset class – from bridge rounds to A and B and C rounds — so if investors want a more narrow thesis, they can invest in it. If they want a broader thesis, they can in invest in my main syndicate and get a more diversified pool of investments.

    Wow. How much have investors committed to these vertical syndicates?

    The SaaS syndicate has [commitments of] $1.8 million, the late-stage syndicate has $1.1 million, bitcoin has $700,000. All of these ideas are getting some traction. Ultimately, I’m trying to build Fidelity, with fund managers who specialize in certain sectors.

    Who are all these investors?

    We get a mix. When you democratize and reduce friction, everyone shows up. CEOs, dentists, young guys who are making their first investment. Six months ago, we had 200 investors. Today we have 1,300. If things continue [apace], we’ll have 10,000 investors in a year’s time.

    And who’s the “we” when you refer to your syndicates?

    There are two managers per syndicate. They aren’t full time but rather executives in each particular vertical. One is a chief revenue officer, another is a product executive, another is the CEO of a bitcoin company.

    We also have 30 volunteers, from associates at venture firms, to executives who think these syndicates are a great way to learn about other industries, to people who want to work in venture and think [helping us] is a great training ground.

    These managers and volunteers are essentially scouts? Do you promise them a percentage of your carry if they bring you something you eventually decide to fund?

    It isn’t that structured. We aren’t making management fees, though, so I [will] share the carry with [everyone who helps me]. We want everyone’s interests aligned, so that if there’s a mediocre deal, we don’t do it.

    By the way, we’re always looking for new recruits, if you can let your readers know.

    How would you describe your pacing, and what size checks are you writing right now?

    We did smaller deals at first, a couple hundred thousand dollars here and there to see how it works. Then we moved from $200,000 to $500,000 and now we’re writing checks of $1 million. Six months ago, we’d do a deal every two months and in October, we’ve already done three deals, two of which were $1 million, so the pace seems to be getting faster every month.

    The public market has been been volatile. Meanwhile, unlike a traditional fund’s investors, Syndicate investors can opt out of deals or opt out entirely. You must be seeing some kind of pullback.

    I’m not. The market was up last week; it was down the week before. You have to remember that AngelList is growing at a rapid rate itself, so every day, new people are joining the crowd, and a rising tide raises all boats. Even if my boat is a little leaky, I don’t notice it because I’m [moving up] and not down.

    You’ve said before that the beauty of AngelList for an investor like yourself is not having to deal with attorneys and LPs. AngelList sets up the funds; it handles customer accounting. But AngelList has a lot of out-of-pocket fees as a result, something like $12,000 per fund, cofounder Naval Ravikant told me last year. Do you worry that it’s not sustainable, given that AngelList is not yet producing revenue?

    No. Putting together an LLC is a bunch of legal docs. Costs are higher now because there are probably 75 different permutations of deal structures or term sheets, but at some point, they’ll have a template for every one of the damn things and it will be cheap. More and more of this will get automated – reporting, tax [considerations]. I’m really not sure why anyone would start a micro fund in 2014 when they could start a Syndicate for zero dollars instead and not spend a lot of time doing the annual accounting or figuring out the legal structure of this stuff.

    *The original version of this story misidentified Penchina’s investment as in Contractually, a different startup.

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    Connie

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  • Spikes Security Raises $11 Million to Stuff Your Browser Elsewhere

    browser_thumbBranden Spikes didn’t set out to become an entrepreneur. Straight out of high school, he jumped instead into work as a security consultant, eventually working at Elon Musk’s first company, Zip2, then at PayPal, then SpaceX, where, as the Musk’s fourth employee and CIO, Spikes was tasked with keeping the computers of “extremely brilliant Ph.D.’s with access to sensitive IP” from being hacked.

    Spikes also needed to ensure his boss had unfettered access to the Web while operating in a safe environment. (“You can imagine Elon Musk trying to get online and having problems. I’d have found myself fired if I messed that one up,” says Spikes with a laugh.)

    Spikes’s big idea — one he decided to spin into a standalone business in 2012 — is a technology that runs browser software on a separate server, catching nasty bits of malicious code that could otherwise make their way onto users’ laptops. The technology then streams a video of the browser to users’ computers so seamlessly that they don’t know the software is running elsewhere.

    The concept, called browser isolation, isn’t entirely new, and Spikes’s company, Spikes Security, isn’t the only one to offer it. In addition to going up against Authentic8, a Mountain View, Ca.-based startup backed by Foundry Group, two of Spikes’s biggest competitors are Citrix and Microsoft.

    The other companies’ execution leaves much to be desired, though, say Spikes, who calls browser isolation “pretty technically challenging and, if not done properly, really problematic and burdensome for the IT people deploying it and the actual people browsing the web.”

    A growing number of customers appears to agree with Spikes. Spikes Security already has more than two dozen large enterprises as clients, some of which are running the software through Spike Security’s data center, some of which are opting to run the software in their own data centers for privacy reasons. All are “helping us stretch the product and develop the technology at the right pace,” says Spikes.

    Investors like the vision of the 27-person, Los Gatos, Ca.-based company, too. In fact, the startup — which had originally raised $2 million from Javelin Venture Partners, Spikes himself, and other angel investors – is today announcing $11 million in new funding from Javelin, Benhamou Global Ventures, and Lakewood & Company.

    Spikes says the money will go a long way toward helping the company meet growing demand — which is but one of numerous challenges he’s learning to tackle as a first-time entrepreneur.

    In fact, Spikes says he now understands his former boss much better. “For many years, I was puzzled by Elon’s actions and decisions and disagreements, about why $5,000 for this or that purchase wasn’t wise, or why hiring this guy would have been a mistake or why firing this person was a good idea. Now, I find I understand them a lot more.”

    Connie

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  • Former Schwab CEO Dave Pottruck on His New Book, His Bets, and Bitcoin

    david pottruckThe first time I met David Pottruck, it was 1999 and he was co-CEO of the high-flying discount brokerage Charles Schwab, a title he’d share for five years with founder Charles Schwab before becoming the sole CEO of the company in January 2003.

    Eighteen months later, the company — which Pottruck had pushed into the Internet age and that struggled after the dot com crash — ousted him in a decision that still stings, though Pottruck will tell you the company made the right decision.

    A new book by Pottruck captures the experience. It also features interviews with a dozen others who’ve led organizations through periods of dramatic change, including Intel’s president Renée James; eBay CEO John Donahoe; JetBlue CEO David Barger; and San Francisco Giants CEO Larry Baer. I caught up with Pottruck last week to learn more about the book (which hits bookstores today), and where he’s focusing his energy now.

    You spend a lot of time in New York these days. Have you moved there?

    I’m still in San Francisco, but I have an apartment in New York and I’ve been spending more and more time there for personal and business reasons.

    Tell us about your business interests. After leaving Schwab, you formed an investment firm called Red Eagle Ventures. How would you describe its mission?

    After I left Schwab, I decided the smartest thing to do was work for myself and invest in early-stage companies and see if I could add value as a mentor, as a coach to CEOs.

    Financial services CEOs?

    For a long time, I stayed away from financial services. I wanted to do other things, learn about new industries. So I spent a couple of years working on a startup airline called Eos Airlines that ultimately didn’t make it. The idea was to fly [a high-end service] from New York to London, but while people loved it, the economics were challenging and when oil spiked to $150 per barrel for a few months [it killed the business].

    Are you still interested in disrupting the airline industry?

    No, I’d never invest in another airline. It’s a terrible industry. It’s like Warren Buffett says, if you want a small fortune, start with a large fortune and invest in an airline.

    Where are you investing then?

    I realized I should look for something that I knew about and would enjoy, and I became a founding investor in and chairman of Hightower, a fast-growing, very profitable, seven-year-old wealth management firm. It now has 30 different locations around the U.S., around 300 employees, and almost $100 million in revenue. I’m also the chairman and a large investor in CorpU, a leadership development business that launched a few years ago and whose revenue is getting into double digit millions now.

    So you like making concentrated bets. Are you ever tempted to pick up the pace of your investing?

    No, negotiating term sheets, trying to dig into whether or not a business is something to get involved with or not – I hate every aspect of it. I’m an operator. Strategic, tactical, and leadership issues are what fascinate me. That’s what I like to think and write about.

    Your new book focuses on breakthrough change. How interested are you in the many changes happening in financial services? What do you make of bitcoin specifically?

    If you look at it, it’s like gold, whose value is in the eye of the beholder. Gold has very little real tangible value. It’s a shiny metal. But it goes up and down because it’s considered a store of value. Bitcoins are like that that. They’re simply digits, and if the public believes them to be a store of value, then I think they are. But in my mind, it’s an extremely risky currency, if you even want to call it that.

    People like the whole idea of a currency that’s not backed by a government, but governments play a key role in stabilizing currencies and ensuring they have a stable value. It doesn’t always work out that way, but bitcoin doesn’t have anybody doing that. I mean, who is accountable? The answer is nobody. Nobody has raised their hand to say, I’m behind this. I think it’s nuts.

    You spent 20 years at Schwab. Are you still in touch with Charles Schwab?

    I had an amazing career because Charles Schwab the man gave me that opportunity. He supported me and promoted me and got behind me when I made idiotic, adolescent mistakes. I wish my last days had ended differently, but the company needed different leadership at the time, and Chuck and I continue to have a very nice relationship.

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    Connie

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