• The Tech IPO Whisper Wars Heat Up

    chatterOn Friday, the Wall Street Journal reported that GoDaddy, which provides domain-name registration and Web hosting services to millions of customers, is “preparing for an initial public offering” and that in “coming weeks [GoDaddy] plans to interview banks” to underwrite its offering. The source was “people familiar with the matter.”

    For better or worse, such whisperings have now become the new normal, and we can expect to see much more of the same as a result of the JOBS Act and the changes it has brought to tech IPOs. (The JOBS Act permits companies to submit confidential draft registrations to the SEC and go public within 30 days of their acceptance.)

    Before the JOBS Act, filing an S-1 was much more public. Competitors knew a company was planning to go public, and any revisions by the SEC caused costly delays that could cause a company to miss its “window” to go public.

    GoDaddy was just one company that suffered through this process. In 2006, it tried to go public but later pulled its offering. Former CEO Bob Parsons, who was replaced as CEO in 2012, said at the time that he yanked the offering because he found the quiet period that came along with it “suffocating” as it prevented him for doing radio, TV, or his-then weekly Internet radio show. (The company was also losing money, according to its S-1.)

    Today, the JOBS Act gives companies much more flexibility in timing their offering, and leaking their supposed IPO plans has become a big part of the process.

    For now, the situation seems to be a win-win for everyone involved. Companies can test the public waters while simultaneously chumming for strategic acquirers, while reporters can feast on “scoops” that are hard to disprove.

    If there’s any downside, it’s that not going public after all can be, well, awkward, says Jay Ritter, a professor at the University of Florida who studies the I.P.O. market. “One of the reasons companies like confidential filings is that if they start the process, then pull back because the market isn’t as receptive to their business model as they thought, it can be embarrassing for a company, just as it might be embarrassing for someone who broadcasts that they’ve applied for a new job and gets turned down. People like to wait until the good outcome is about to occur before they announce things.”

    Conceivably, employee morale could take a hit, too, if staffers become convinced that an IPO is nearer than they thought based on press reports.

    But John Fitzgibbon, founder of the research firm IPO Scoop, says the advantages far outweigh any potential downside.

    “Before the Jobs Act,” says Fitzgibbon, “companies had to hang it out there and hope to God the market didn’t fall apart. But [the nearly two-year-old law] created market timing.”

    Now, says Fitzgibbon, “You prime the pump, get the guns lined up and, like Bunker Hill, you don’t fire until you see the whites of their eyes.”

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  • DCM Reboots with a New Fund and Three Fewer GPs, Including Dixon Doll

    jason-krikorian-large-280In case you haven’t noticed, the global, early-stage venture firm DCM has been killing it in recent years. Since 2009, 15 of its portfolio companies have exited, many through highly successful IPOs. For example, DCM owned 20 percent of the China-based online retailer VIPshop when it went public in 2012 with a market cap of $600 million. Today, the company is valued at $8.7 billion.

    Eighteen-year-old DCM, which invests in the U.S, China, and Japan, doesn’t appear to be resting on its laurels. This morning, the firm is announcing its seventh, $330 million, venture fund. It’s also disclosing that longtime general partner Carl Amdahl and general partner and cofounder Dixon Doll will no longer be investing in new companies on behalf of the firm, a plan that has been in the works for several years, says general partner Jason Krikorian. (A third general partner, Gen Isayama, who opened DCM’s office in Tokyo in 2009, left last year to launch a new fund, which StrictlyVC wrote about in January.)

    On Tuesday, I chatted with Krikorian about the latest developments at the firm. Here’s part of that conversation, edited lightly for length.

    DCM clearly could have raised a bigger fund. Why didn’t it?

    For a few reasons. First, it has to do with where we think the sweet spot is, meaning the amount of money that [early-stage] investors should manage, and we think it’s between $50 million and $60 million per GP. [Editors note: DCM now has six active GPs.]

    This new fund also marks a bit of a transition for Dixon and Carl and it’s important for LP relations to have a long-planned out transition period; it’s part of the reason I was brought in [in 2010]. Also, it’s very tempting for funds to get bigger, but we think small teams operate better.

    DCM invests in three geographies. Which of them attracts the most of the firm’s capital?

    In the past, it’s really been balanced, with half in the U.S. and half in Asia, which is still dominated by China. Our returns in Japan have been good but there are far fewer startups to see; Japan still has a big company culture, so the best and brightest still go that route.

    You raised your sixth fund in 2010, but you assembled a couple of other side vehicles around the same time, right?

    Yes, we had raised [DCM VI] when I first joined, and we created two other funds simultaneously. One was an RMB (yuan) fund that primarily focused on later-stage China investments that we’d invested in [and wanted to back again]. We used that, for example, to invest more in both VIPshop and 58.com. It was a fund that we invested at basically $15 million a pop.

    The other fund was an Android fund that was backed by Asian-based corporates in China, Japan and Korea that viewed Android as a significant global opportunity. Some of the key LPs of that fund are [the Chinese investment holding company] Tencent, KDDI [which is one of Japan’s largest mobile phone operators], and NHN [which owns one of the largest search engines in South Korea].

    That fund has also been really great and given us a lot of flexibility to do deals where we put in a few million dollars at a valuation in the high, double-figure millions, including [South Korean messaging company] Kakao, which now has something like 95 percent penetration of the [regional] population. [Editor’s note: The WSJ recently reported that the company is talking with bankers about an IPO that would value it at $2 billion.]

    Will we see you raise similar side funds this time around?

    There’s interest [from LPs] as you might imagine, but we don’t have any definite plans to do [either]. We kind of view this new fund as a consolidation of those efforts.

    You had a personal win this week with the wearable device maker Basis, the first deal you led for DCM. How has the wearables and hardware space changed in the three-plus years since you made that investment?

    There’s a perception that this is a great time for hardware companies, and I think it’s true. There’s a more cooperative supply chain, [booming] capital markets, and a more favorable marketing environment with social media and blogs, so word gets out about great products.

    But I still think VCs are primarily funding the aggressive growth of the guys who’ve really broken out, so Fitbit, Jawbone, Nest. I still think there’s a lack of comfort around funding early-stage hardware companies pre-launch…because [a device] isn’t a Web service that can be tweaked. For instance, we backed Whistle [a health monitor for dogs] and 20,000 units just moved onto the shelves at [pet retail giant] Petsmart, and they have to work.

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  • Study: Entrepreneurs Are Actually Pretty Rational After All

    free-moneyIt takes a lot to be an entrepreneur. Founders often work longer hours and for less money than people with “paid jobs.” And entrepreneurs who start companies that take off stand a very good chance of being elbowed aside at some point. According to HBS professor Noam Wasserman, who conducted a decade of extensive research into roughly 3,600 startups, 52 percent of founders are gone by the time a company raises its third round of venture funding.

    Still, the common myth that entrepreneurs are an irrationally optimistic lot isn’t entirely accurate, suggests new research from Daniel Ekeblom, a PhD student (and ex M&A analyst) at Lund University in Sweden; and renowned finance professor Ola Bengtsson (who, sadly, passed away in January).

    Indeed, using a dataset of 180,814 individuals’ responses culled by the Swedish government between 1986 to 2009 — answers to questions like, “Do you think your country will be better off financially a year from now?” — the pair discovered that optimism is actually correlated with favorable beliefs about nationwide conditions. More, when entrepreneurs have more favorable beliefs about nationwide conditions, those beliefs are relatively good predictors of the future.

    In a recent call, I asked Ekeblom what motivated the research. He said simply that it’s an aspect of entrepreneurship that’s almost always overlooked: what people know about the immediate environment in which they’re working. “We thought: Can we use our data to sort that out? Can we avoid that problem, eliminate it somehow?”

    Ekeblom went on to call the endeavor “real science,” given that he and Bengtsson were comparing expectations to outcomes on a subject that was beyond any respondent’s domain of influence.

    Either way, armed with his conclusions, I was curious to know how he viewed the current founder boom. He told me: “When I look at like Silicon Valley — and we have small clusters of startups here in Sweden as well — people are trying to make some interesting stuff, but many aren’t generating cash flow like you’d expect based on these billion-dollar valuations. There’s something that’s not really catching up.”

    You could blame a glut of optimistic entrepreneurs for continuing to start viral but unprofitable companies, but Ekeblom sees a reason for it. “Maybe they’re rational, and it’s the [investors and acquiring companies] who aren’t. I’m not at all sure people are looking at or responding to pricing signals in a rational way. Meanwhile the entrepreneur is saying, ‘Free money. Let’s go.’”

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  • VC Manu Kumar on Lone Wolves

    Manu KumarWhen I first met Manu Kumar of K9 Ventures, nearly five years ago, he was a successful entrepreneur who was trying to break into micro VC and he was going it alone. As he said then, “I didn’t want to jump into partnering with someone just because it fulfills an LP criteria.”

    He still doesn’t want to take the plunge. Though Kumar went from investing a $6.25 million fund that he closed in 2009, to a $40 million fund closed in the summer of 2012, he hasn’t brought anyone aboard and that doesn’t look to change any time soon.

    Kumar – who writes initial checks of between $250,000 and $750,000 to very nascent startups with which he works closely — explained why over tea in San Francisco.

    Jeff Clavier [of SoftTech VC] recently said he’d never be a solo GP again. Apparently, you feel differently.

    Well, it’s true that K9 is one of the few solo GP funds without any associates. I don’t have a formal advisory network, either, though I do have people in my network who, when I’m looking at a deal, I’ll say, “Take a look at this and tell me what you think.”

    What’s the hardest part about operating the way you do?

    People say to me, “Your partner meetings must be really short.” But it’s more like they never end, because you’re constantly thinking about the companies and what they’re doing and what issues they have. I think the hardest part is just finding that balance between how engaged you want to get.

    Also, there’s no fallback. If I decide that I’m going to go to Tahoe for three days, there’s no one else who’s going to take my spot. If the companies need something, I still need to be accessible and available.

    So why not team up with someone?

    I answered my LPs this way: The risk of me adding a partner and that blowing up is much higher than the risk of me getting hit by a bus. I need to have a high degree of conviction before I invest in a company; the level of conviction I’d have to have in a partner would have to be an order of magnitude higher than that.

    Knowing what you know about being a solo operator, does it make you more or less inclined to fund single-founder startups?

    I’m not opposed to and am comfortable with single founders; I’ve seen lots of companies do well with them. It definitely requires more work, though. Probably the single-most important thing there is helping them to ride that emotional rollercoaster. If you’re on your own, you have no one to talk to.

    You’re investing a $40 million fund right now. Does that amount allow you to do seed, A deals, and Series B deals? I know the idea was to invest in roughly 30 companies.

    I typically pass on Series B and C, and some would have been great investments, but I can’t do that with the amount of capital I’m managing. [Among K9’s investments are the cloud communications company Twilio, the ride-sharing service Lyft, and the camera company Lytro, which have gone on to raise $104 million, $83 million, and $90 million, respectively.]

    Are you able to get your pro rata share of Series A deals? It seems like that’s becoming harder to do with seed investors’ strongest companies.

    It’s happened to me a couple of times where I haven’t gotten as much pro rata as I wanted in a deal. I’ve addressed that now by making it very clear to the founders, right at the time when I invest in them, that if I’m going to back them at the seed, they have to go to bat for me when it’s time [to raise more money]. They have to stand up to the next round investor, because the founders are the only ones who have the leverage in that situation.

    I don’t suppose the bigger VCs are willing to negotiate?

    In one case, I almost called up a firm and said, “Hey, you’ve invested in two of my companies. If you don’t give me my pro rata, you won’t get to get to see a third one.”

    What happened?

    In that case, I actually did get my pro rata [before resorting to that].

    Look, I don’t have any leverage now, but if you want good karma in the future, you better give me my pro rata. [Laughs.]

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  • Jeff Clavier on “When to Push and When to Pull”

    Jeff Clavier.2This week, StrictlyVC sat down with investor Jeff Clavier of SoftTech VC to talk shop. Yesterday, we featured part of that chat, with Clavier discussing the less glamorous aspects of his work, from expensive mistakes to entrepreneurs who don’t exactly hang on their investors’ every word.

    In this second installment, Clavier shares his insights into what’s happening in seed-stage investing, where SoftTech has been playing since its 2004 founding.

    You aim to own five to 10 percent of each startup that you back. Why is that the right range? Why not invest in fewer companies for slightly more ownership?

    It works because if you try to own 20 percent of a startup, there’s no room for syndication, and we believe fundamentally that the core proposition of the seed stage world is to own enough that any outcome is meaningful, without using any sharp elbows.

    But you have to partner with other investors who are adding value. There’s always a lot of work to do in seed deals, and it often goes on for a year to a year-and-a-half (before the company raises more funding or starts to wind down). And it screams at you, what investors haven’t done because a startup is one of 100 other startups they’ve backed.

    Are you finding that Series A investors are being any more or less accommodating of seed investors in today’s market?

    If there’s one term sheet, then you have to face reality [and take their terms]. If it’s a multiple term sheet situation, then you have a negotiation. If you come in with a convertible note, then you’re stuffed, because there’s no pro rata right, and the VCs will basically tell you to go f off. At least, some of the best and most aggressive will.

    What’s been your experience specifically?

    We’ve done well recently. In the last four months, we’ve [seen 10 of our portfolio companies close] Series A rounds and five [of them close] Series B rounds. A top-tier firm did three of our Series A [deals] and we could only get pro rata in one. But I don’t think that’s a new development; it’s happened all along. Everything is a negotiation. [Larger funds have to weigh] how big a spot they want to leave you in the cap table versus their own ownership requirements. But it’s not like we won’t deal with those guys again. If you have a reputation, people don’t want to f__k with you. You just have to know when to push and when to pull.

    These days, seed investors often own 20 percent of a startup by the time it meets with more traditional VCs. Is that becoming a problem?

    It’s true that when companies come to traditional VCs, the cap table has a chunk of 20 percent [up] from 5 percent. But it is what it is. The companies that come to them have been de-risked. Seed is the new A, and A is the new B. We’ve seen this [directly]. We’ve [participated in] traditional Series A [rounds], between $4.5 million and $6 million; we’ve also done Series A [rounds that are] between $8 million and $10 million. We’ve had a $15 million Series A round.

    How big a check will you write to maintain your stake in a startup?

    Well, we’re always trying to… generate 10x on a seed, Series A or Series B investment … One of the biggest checks we’ve written was $1.6 million in Vungle [a mobile ad startup that makes 15-second in-app videos]. Vungle just announced a $17 million Series B at a pretty hefty valuation [led by ThomVest Ventures], and we participated in full.

    Do you feel like things are working in the industry, structurally?

    There is so much institutional money that the funds being raised have to be put to work somewhere, so a lot of entrepreneurs are being funded who shouldn’t be. But it’s always hard to know who [should receive follow-on funding]. Somebody’s piece of junk is someone else’s Pinterest.

    Is there bifurcation happening in seed investing? We’re hearing more about early seed and seed prime and seed extension deals…

    No. You have incubators, which is a sh_t show now, there are so many of them. You also have early-stage funds like [K9 Ventures, whose founder, Manu Kumar] is almost like a quasi-founder.

    We really value the fact that Manu is working with entrepreneurs at that ideation phase. But we don’t typically do it. For example, when we invested in Coin [a card-shaped connected device that contains users’ credit, debit, gift, loyalty and membership card information], we saw a big, bulky piece of plastic. But at least we saw plastic. When Manu got involved, there was nothing but a vision.

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  • The Deal on Being a Micro VC, with Jeff Clavier

    Jeff ClavierJeff Clavier once worked for the venture investment arm of Reuters. But he decided he might do better on his own by sprinkling tiny amounts of money across what appeared to be a new crop of capital-efficient Internet companies. It was 2004. Sitting with Clavier at Founders Den, a popular clubhouse for San Francisco entrepreneurs, Clavier recalls that at Reuters, he’d made “some, but not a lot of money,” making the $250,000 that he and his wife set aside to stake his fund, SoftTech VC, “a nontrivial risk.”

    Fast forward, and that gamble appears to have paid off. Clavier turned his first $1 million fund into a second $15 million fund in 2007, then a $55 million third fund in early 2012. Clavier isn’t speaking about fundraising, but judging from the firm’s most recent SEC filing, an $85 million fourth fund is around the corner, too.

    “It was a crazy thing to do, but it worked,” shrugs Clavier, an unrepentant Frenchman. To date, roughly 20 percent of SoftTech’s 144 portfolio companies have been acquired, including the financial service Mint (Intuit), the online shopping services Kaboodle (Hearst), the content company Bleacher Report (Time Warner), and the game maker Tapulous (Disney).

    Given how many people seemingly want to be known as “micro VCs” these days, this reporter asked Clavier to elaborate on what the job really entails. (Tomorrow, I’ll feature more on Clavier’s portfolio and his thoughts about the current market.)

    What’s the biggest misconception about what you do?

    I think people have to understand that it’s harder that it looks, and that while people might give you [a small bit of capital first fund], you really need to be successful to be allowed to raise a next fund.

    Everyone thinks: I was a successful angel; I can be good at managing a micro fund. But the answer is no. Being an angel means having a good nose, being at the right place at the right time, and putting in small amounts of money after you’ve made quite a bit of money yourself, so that you’re not really risking anything. But managing other people’s money is a massive responsibility. Too often I get calls [from budding micro VCs] like, ‘Dude, I have this report to issue,’ or ‘Should I audit my fund?’ And those are panicked calls.

    Have we reached a tipping point? Are there too many seed-stage funds?

    There are so many. And I’m more than welcoming to the industry, but you wonder what people are thinking when they want to start yet another micro VC fund. The market doesn’t need it. [As it stands], there will be a contraction at some point.

    What are some mistakes from which you’ve learned?

    To be honest, the biggest mistakes we’ve made are the companies we’ve passed on: LinkedIn, Twilio, Airbnb, Square Pinterest. All of those were in our hands, and we said no.

    Wow.

    You make mistakes. It’s your job to see everything, and hopefully make enough right decisions enough times that you make money for your investors.

    The challenge for very early stage investors is that when we see things, they’re pretty ugly. They don’t work yet. Sometimes, we just fall in love with the entrepreneur and we nail it. But take Airbnb. I heard of it when it was AirBed & Breakfast and they were selling a service that helped you get an air bed at someone’s place when you went to [an out-of-town] conference. Hmm [said mockingly], let me think. [Laughs.] And it was a total screw-up.

    Any other missteps that might be instructive?

    One of the mistakes I made, I think, was that I stayed on my own for too long. I don’t think I was clear on the real opportunity to build a firm around this strategy until around late 2008, 2009. Then I brought on my awesome partner Charles [Hudson] in 2010. [Clavier soon after added principal Stephanie Palmeri.]

    I wouldn’t do the solo GP thing again. But my own evolution has been defined by the fact that I started 10 years ago, when the only mentor I had at the time, because he’d gotten going slightly earlier, was Josh Kopelman of First Round [Capital].

    What else should those who want to follow your path consider doing?

    First, I’d say open a new bank account, define a budget, say $250,000, and give yourself 25 shots of $10,000 to invest over two or three years. Take your time, but forget about that money because the most likely outcome is that you lose everything, and if it comes back, it will take a long time; most exits take seven to nine years.

    Beyond that, try and figure out whether you’ll be good at being a coach: supporting, helping, kicking, yelling a bit if needed, being tough, but not driving, because entrepreneurs don’t work for you and often don’t listen to you.

    You also have to be really good at context switching, depending on the size of your portfolio, switching every half hour to an hour from one company to another to another, always on the lookout for portfolio value add [like new hires]. You have to be happy to work 10 to 12 hour days, then do email and still go to bed feeling like you’ve accomplished nothing because it’s so varied that having a sense of achievement and success is nearly impossible.

    You’ve noted that mistakes are inevitable. But are there any “tells” when it comes to good or bad founders? Any unifying threads?

    No, you can never predict. Sometimes we look back at teams we backed and we say, what the f__k were we thinking? It was just so obvious those guys would fail, but of course, when we invested, we didn’t feel that.

    It is really good to know what you’re good at and what you’re not good at. We made a couple of investments in next-generation e-commerce companies that literally got obliterated and we lost close to $1 million, twice, and that sucks. We actually stay away from that category now, the subscription thing, we’re done with it. It isn’t that there aren’t good types of companies; we’re just not good at sniffing those.

    Anything else people should expect to experience?

    For anyone getting going in this industry, they have to be clear that bad news comes first. So you invest in a company, and if it’s a really crappy deal, within six months to a year, you’ll have to tell your investors you lost their money. And unless there’s something exceptional happening in the portfolio where you have a very early win, you will have bad news after bad news after bad news until you get some good news. You have to have the guts to say, “This is why we failed and this is where we screwed up.”

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  • The Startup Whisperer, Paul Graham, on Getting Back to Basics

    Paul-GrahamY Combinator cofounder Paul Graham spoke at the Launch conference in San Francisco yesterday afternoon in a “fireside chat” with the event’s founder, Jason Calacanis.

    While it wasn’t exactly a hard-hitting interview – these things are rarely intended to be – Calacanis managed to surface a lot during their conversation. Graham spoke at length about about Y Combinator’s earliest days, for example; addressed a couple of the controversies he has found himself embroiled in over recent months; and explained the rationale behind his decision to relinquish day-to-day control over Y Combinator. (He’s basically exhausted and wants his “brain back.”) Calacanis also asked Graham plenty about what indicates to him that a startup might succeed or fail. Here’s some of what Graham — whose platform has helped launch Airbnb, Dropbox, and Stripe, among more than 600 other companies — had to say:

    On one of the quickest ways to get crossed off the list during an application interview with Y Combinator:

    “The founders have to get along. If the founders hate each other, you’re in big trouble,” and it happens “very, very often,” said Graham. “You don’t know how good friends you are with somebody until you try to start a startup with them. That’s why it works so badly when you have some startup that’s started by some dude in business school who has this idea for some startup, and then he goes and finds some, like, 20-year-old meek, undergraduate computer science major to realize his vision, and that’s the founding team … If you go into a Y Combinator interview, and one of you looks in terror to the other one before answering questions, that’s one of our secret tells. Or if you roll your eyes while your cofounder is speaking, which has actually happened, or if you stand up your cofounder – like you don’t show up for the interview… these have all happened.”

    On a founder type that Graham may have misjudged earlier on his career:

    “The one thing is people who are very smart, but that’s it. People who are very smart but ineffectual. We used to have more faith in brains. It turns out you can be surprisingly stupid if you’re sufficiently determined. And anyone can tell this empirically. There are some parts of America where there are a lot of rich people and they’re not very smart – parts of Manhattan and Florida and L.A. You don’t have to be supersmart if you’re fearsomely effective.”

    Calacanis asked him the most important thing for startups to focus on:

    “There’s a meta answer to that,” said Graham. “The most important thing for startups to do is to focus, because there are so many things you could be doing, but one of them is the most important, so you should be doing that and not any of the others. So you should not be grabbing coffee with investors. When you want to raise money, you shift into fundraising mode and you go and raise money. You do not promiscuously meet with investors in the middle of the day when you should be working simply because they send you an email saying, ‘Hey, let’s grab coffee.’ There are a 1,000 things you could be doing, and only one of them is the most important … and you work on that.”

    On the essence of growing a startup:

    “You have to start with a small, intense fire. Suppose you’re the Apple I. I think they made something like 500 of those things. So all they had to do was find 500 people to buy these things and they launched Apple. Apple! So you’ve got to find a small number of people – it’s necessarily going to be a small number of people…who want what you’re making a lot… You don’t have to do any better than Apple and Facebook. You’ve got to know who those first users are and how you’re going to get them, and then you just sit down and have a party with those first few users and you just focus entirely on them and you make them super, super happy.”

    Calacanis also managed to back into a question about how Graham righted the ship when, in 2012, it began to seem that Y Combinator was accepting too many startups into the program for its own good. (Its summer 2012 class welcomed 80 teams.) Considering that Y Combinator intends to grow much bigger, and may even spread to other cities eventually, according to Graham, his answer seems noteworthy:

    “We thought, ‘Why does this batch suck so bad? Why do we hate our life?’ There were startups, like halfway through the batch, I still didn’t know what they were doing. And we were asking what went wrong and it was so obvious…It was N squared, specifically,” said Graham. “It would be no problem having that many partners dealing with that many startups, so long as they were sharded,” he added, referring to a programming word that means a horizontal partition. “So we redesigned YC to be sharded and it has been ever since and it works just fine. Like, 68 [teams], no problem … We have three siloes, each one overseen by a group of partners. So basically, it’s like three little Y Combinators. And we know little Y Combinator works.”

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  • Scribd CEO Trip Adler on Books, Froth, and the Company’s Next Round

    Trip AdlerScribd has had a circuitous arc. Started in San Francisco in 2007, Scribd’s original concept was to allow anyone to take any kind of written content and slap it on the Web. (Fifty million documents have been uploaded since.) By 2009, it was also running an electronic book market, allowing authors and publishers to upload their works, then set their own price for them and keep most of the revenue. In 2011, Scribd also launching a news reading app called Float. (It later folded Float back into the company.)

    But the company thinks it has struck on its most promising transformation yet, as a digital lending library that charges $8.99 per month for unlimited access to roughly 100,000 titles from publishing partners like HarperCollins that can be read on pretty much any kind device.

    The company is about a year into the shift, though it only announced it in October of last year. Earlier this week, I talked with cofounder and CEO Trip Adler to see how it’s going – and whether Scribd might raise more funding to move past competitors (including, potentially, Amazon) that also want to become the Netflix of books.

    What can you tell us about how your new business is going? Are you releasing subscriber numbers?

    We aren’t, but they look good. Since launching a little over a year ago, the [number of subscribers has] been growing 50 to 100 percent each month. I haven’t seen anything grow quite this fast [at Scribd].

    Your business is increasingly reliant on subscriptions, whereas your document sharing business is largely ad supported. How much of that $8.99 is going in your pockets versus publishers whose books you’re renting?

    We pay publishers based on reading activity, so if a customer reads a book, we pay the publisher for the book.

    That seems like an expensive proposition. How much do the books cost you?

    Some of the romance books might cost a few dollars; some of the best-sellers can cost up to $15. We have some power readers who will read many books in one month, but the typical user reads a book a month, and we’re optimizing around the average user, who costs us less [than the $8.99 monthly subscription fee]. The model has been profitable since we launched it.

    You’re gathering a lot of data about how people consume books, including what prompts them to skip ahead, and whether people are more likely to finish biographies than business titles. Will you start charging publishers for these analytics?

    Analytics isn’t part of our business model yet. So far, we’re just sharing it with publishers very openly, but it could be something down the road that we turn into a business model.

    How are you marketing this new service?

    Most of it has been organic; we have 80 million monthly active users, so we’re mostly marketing it to that audience, and growth hasn’t been a problem. We’re also starting to do more paid ads, and we’re talking to journalists like you.

    How big is Scribd at this point, and is it profitable?

    We have 55 employees, mostly in engineering and design. And we’ve been profitable for a while and growing revenue pretty steadily – 90 percent year over year since we started the company.

    You’ve raised $26 million so far, with your most recent, $13 million round closing in 2011. Are you back in the market or will you be soon?

    We might fundraise if it feels like we have a use for the cash, but it hasn’t been a priority for us. Right now, we’re just focused on making the product the best that we can.

    People are throwing a lot of money around right now.

    Things do seem frothy to me. The valuations that companies are getting are just crazy. For that reason, it could be a good time to fundraise. If you can build a company and get it profitable, funding comes naturally, though. It’s harder to build a profitable business than to raise money.

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    Connie

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  • Waiting for Seed Funds to Sprout Cash

    sproutsOver the weekend, venture capitalist Marc Andreessen tweeted, as part of a broader conversation, that there are “definitely too many new small angel funds. That seems clear.”

    The comment kicked off a spirited debate on Twitter about small funds and their perceived merit. But if anyone knows what’s happening in the broader world of seed funds, it’s Michael Kim of Cendana Capital, a four-year-old investment firm that has made its name by backing micro funds, including Freestyle Capital, Founder Collective, IA Ventures, K9 Ventures, PivotNorth Capital, Lerer Ventures, SoftTech VC, and Forerunner Ventures. Kim, whose firm is managing around $90 million and is raising a fresh $55 million, talked with StrictlyVC yesterday about what he’s seeing.

    You’ve backed lots of micro VC firms. What’s your criteria?

    We look for groups that lead or co-lead their deals. There are plenty that just chip a bit into a seed round. But for us, it’s really important that the funds we invest in focus on ownership and on being the largest investors [in a startup’s seed round], as well as having substantial reserves. We’re looking for a firm that does three to five deals a year, putting in a million dollars [into each deal] and owning 15 to 20 percent.

    Most of your funds are in the Bay Area. Is that by design?

    We do think about the ecosystem: it has to feature high-quality entrepreneurs, high-quality co-investors, and lots of opportunity for follow-on capital. So L.A., for example, doesn’t have a good seed ecosystem; it’s too reliant on the Sand Hill Road crowd to fund its companies.

    More funds has meant more specialization. Is that a good thing or do some micro VC fund managers run the risk of backing themselves into a corner?

    I think it’s very important to stake out what your value-add is. Forerunner Ventures specializes in digital commerce, so pretty much anyone who starts in that space wants to meet with [founder Kirsten Green]. IA Ventures is known for being a big data investor; Founder Collective is known for being [comprised of] ex-entrepreneurs who want to help other entrepreneurs. Assuming it will become a much more competitive world, any seed fund really needs to think about its market positioning.

    How many micro VC funds are you aware of?

    A lot. When I started Cendana, the clear pioneers were Steve Anderson [of Baseline Ventures], Michael Dearing of [Harrison Metal] and Mike Maples [of Floodgate]; but I’ve probably met with or interviewed more than 260 groups since then, mostly in the U.S., because we don’t invest outside of the U.S., but also from Russia, Turkey, Berlin, China.

    It seems like many more micro VC funds are being founded by venture capitalists.

    A subset of them are definitely younger VCs from more established firms, which is an indictment of a lot of big firms that haven’t done enough about succession issues.

    Tim Connors [of PivotNorth] was at Sequoia and [U.S Venture Partners]; Chris Rust was at USVP and is starting a fund; Mamoon Hamid [also formerly of USVP] quit to join [former Mayfield Fund and Facebook exec] Chamath Palihapitiya at The Social+Capital Partnership; Aileen Lee left Kleiner Perkins to start Cowboy Ventures; Matt Holleran left Emergence Capital to start a fund [called Cloud Apps Management, which focuses on cloud business applications management]; Ullas Naik left Globespan Capital Partners to start [Streamlined Ventures, a seed-stage investment firm focused on infrastructure software]; Kent Goldman has left First Round Capital to start his own thing.

    Do you think VCs who launch seed funds have an advantage over ex-operators who launch seed funds?

    We think entrepreneurs have the most credibility with other entrepreneurs, because they’ve built their own companies.

    The one element I’m wary about is a lot of ex-entrepreneurs’ [experience]. A lot of them haven’t seen investing cycles, and one of the quickest ways to destroy a portfolio is through follow-on rounds – investing so that you suddenly have a $2 million hole instead of a $500,000 hole [from an initial investment]. So they have to have discipline about follow-ons, bridge financings and the like.

    How are all of these funds doing? Is it still too early to know?

    They look promising. A lot of the established players I mentioned [like Baseline Ventures and Floodgate] and older groups like First Round have promising portfolios. But in terms of returns – aside from [Baseline], which had a huge hit in Instagram – I suspect a lot of it is [high but unrealized IRRs]. Things have been marked up hugely on paper, especially if you’re in Uber or Pinterest. But LPs are very focused on cash returns, and while last year was a great year for venture firms like Greylock, Accel, and Benchmark, which returned substantial capital back to LPs, there aren’t a lot of seed funds that could say [the same].

    In the meantime, can things possibly remain as collegial as they have in past years between seed investors?

    A lot of new seed funds are relatively smart about focusing on ownership. At the same time, you can’t have four funds trying to get 10 percent [of a startup]. I do think we’ll see some sharper elbows.

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    Connie

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  • For eShares, a Race to Win Over Startups — and Their Cap Tables

    henry wardHenry Ward, the cofounder and CEO of 18-month-old eShares in Palo Alto, has a business that’s arguably great for startups. eShares digitizes paper stock certificates along with stock options, warrants, and derivatives to create a real-time picture of who owns what at a startup. The company insists that it also makes it dead simple to transfer ownership of these things.

    “Right now,” says Ward, “a company can hire Wilson Sonsini or [startup stock exchange] SecondMarket to create a liquidity program for employees to allow them, say, to sell up to 10 percent of their vested options to existing shareholders. But it can be a costly, three-month-long process that involves figuring out demand and supply. We offer the same thing with a click of a button,” he says, referring to eShares’ clean, simple interface.

    Now it’s just a race to convince law firms – gatekeepers for most startups and their paper certificates – of eShare’s merits.

    So far, three law firms – Perkins Coie, Gunderson Dettmer, and DLA Piper – have handed over access to 350 companies’ cap tables. But eShares aims to become the private market equivalent of the Depository Trust & Clearing Corporation, which provides clearing and settlement services to the public financial markets. And to get there, it needs to sign up the top 10 to 20 law firms — before someone else does.

    The competition is growing by the month. Among the companies that eShares needs to fence out are SecondMarket, Nasdaq Private Market (as it will be known), and upstarts like CapShare, DocDep, and TruEquity.

    Ward is clearly in it to win it, touting eShare’s advantages as a transfer agent capable of moving stock certificates directly from one person to another. (He likens broker-dealers like SecondMarket to Craigslist, which matches buyers and sellers but is incapable of handling transactions and isn’t exactly a marvel of modern technology from a design perspective.)

    Ward also insists that eShare’s pricing model makes more sense than that of competitors, some of which exclusively rely on a SaaS model. Though eShares charges companies $159 a month or roughly $1,900 a year to maintain an ongoing valuation report (an alternative to spending $5,000 for every 409a valuation), it also charges a $20 fee every time a company issues a new grant and another $20 every time someone exercises the sale of one of their holdings. The model means eShares isn’t constrained by the number of startups up and running. As long as companies are hiring and their employees and investors are moving shares around, eShares is making money. Presumably.

    Still, eShares will need to further distinguish itself from the pack, which it has numerous plans to do. In April, for example, eShares will begin buying “zombie investments” from investors whose shares have gone to zero and who would otherwise be stuck waiting until the startup is dissolved to write off their investment. It’s not a great business, notes Ward. But it could further endear eShares to investors – who can then recommend eShares to their other portfolio companies.

    The 12-person company — which has so far raised $1.8 million, including from Draper VC, Expansion VC, K9 Ventures, Subtraction Capital and IronPort cofounder Scott Banister — will also need to raise more capital later this year, says Ward.

    “We have a very sticky value proposition, and once companies are on the platform, they’re on for life. But it’s a slow growth model,” he explains. “Getting companies to use eShares as a master record isn’t an impulse purchase for them.”

    Ward doesn’t kid himself. He freely admits that if a “new entrant comes in and the market bifurcates, it’ll be much harder for us.”

    But that won’t happen if he can help it. “We’re in a land grab,” he says. “It’s a race to a monopoly.”

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    Connie

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