• Tyler Winklevoss on the Positive Impact of “The Social Network”

    Tyler+Winklevoss+iD3xax1Fdzpm (1)By Semil Shah

    Cameron and Tyler Winklevoss, the twins who remain best known for their legal fight with Facebook CEO Mark Zuckerberg — and the ensuing depiction of that battle in “The Social Network” — have moved on from those days. Still, speaking for both men, Tyler Winklevoss recently agreed to share some thoughts about life in the public spotlight and how it has impacted the brothers.

    Many people in tech and startups know your name but may have an impression of you based on movies and press stories. What’s one thing you wish people knew about you that you feel is misunderstood?

    I think most people in tech and startups today actually know us through the investments we’ve made, the projects we’re working on, or their own first-hand experience in meeting or working with us. Over the past two years we’ve met with hundreds of entrepreneurs, attended many demo days, and keynoted at TechCrunch Disrupt, the Bitcoin 2013 Conference, and Money20/20, to name a few. We’ve co-invested with many top valley investors, built what we believe to be a strong portfolio, and have worked very hard to bring value beyond capital to entrepreneurs we’ve partnered with. Chances are, if you are a part of the tech ecosystem in either Silicon Valley, Los Angeles or New York, you know us or know someone who really does knows us, and this informs your impression of us, not a Hollywood movie.

    That being said, “The Social Network” was a fantastic film and it was a lot of fun to watch its success. It was certainly an interesting time back then, but we never got too caught up in it. We couldn’t. Our focus was on training for the Olympics. Today, we’ve traded athletics for Bitcoin and angel investing. The fact that we were portrayed in a film that won some Oscars and almost won for Best Picture is a cool piece of history, but it’s not really relevant to our daily lives. I feel the same way about graduating from Harvard and Oxford and competing in the Olympic Games. I’m proud of these accomplishments, but I don’t spend a lot of time thinking about them. They’re in the past and just not directly related to what I’m trying to accomplish these days.

    As for what the crowd understands or misunderstands, your guess is as good as mine. At the end of the day, impressions drawn from a movie or a movie portrayal, either right or wrong, live in a parallel universe of pop-culture. This is not a universe that I live in so I don’t spend much time analyzing it.

    What was your largest takeaway from the whole experience?

    My largest takeaway is just how powerful films can be. When we graduated from Harvard in 2004, computer science was the least popular major. When we went back to Harvard to speak to students in 2012, computer science was the tied for the most popular major on campus and it seemed like every student was involved in some sort of startup or had plans to be down the road. “The Social Network” has driven a lot of this cultural interest and shift towards technology and entrepreneurship and has had a profoundly positive impact on young people around the world. I’m very happy for this.

    As you grow as investors, do you see yourselves moving into traditional VC, or being more entrepreneurial and taking investing in a new direction?

    Right now, we’re really enjoying the freedom and agility that comes with running our own book, and this freedom has turned out to be a great asset so far. If we were operating a traditional VC fund, there’s a good chance we never would have been able to buy Bitcoin back in 2012, because Bitcoin is not a C-corp, and VC funds are, by and large, restricted to investing in corporations. I can only imagine what the conversations might have been like trying to explain what Bitcoin was to our LPs, let alone defend a direct investment in the asset itself. Being a fiduciary to outside parties also makes it a lot more complicated to put on the entrepreneur hat, which we have done with the Bitcoin ETF and the WinkDex bitcoin price index.

    Bitcoin aside, we’ve been able to place bets in a wide-range of sectors that I think has been crucial to our overall learning. While focus is important, there’s a lot of promising deals in our portfolio that wouldn’t be living side-by-side if we had a stricter mandate.

    Have you totally ruled out a traditional venture fund?

    We haven’t, but we’ve never really been traditional guys in that sense, and traditions don’t necessarily last forever. I do believe that venture crowdfunding will replace a significant portion of the venture capital stack in the future. This just has to be the case. Right now we see the majority of syndicate activity at the seed level, but it’s conceivable that later rounds could be filled out by syndicates down the road. By increasing liquidity, access and flexibility on both sides of the ledger, the crowdfunding model has the potential to greatly improve the power of the venture capital marketplace.

    We’re more interested in exploring this new path before walking down the existing one.

    Semil Shah is a guest contributor to StrictlyVC. Shah is currently working as a venture advisor to two funds, Bullpen Capital (which focuses on post-seed rounds) and GGV Capital (a cross-border U.S.-Asia fund).

    Connie

    ,
    , , , ,

  • Todd Chaffee of IVP: Uber “Wins This,” Could Be “Googlesque”

    TC SF 3Todd Chaffee has spent the last fourteen years as a managing director at Institutional Venture Partners, a Sand Hill firm that has evolved into a powerful late-stage investor over that period. (It celebrated its 101th IPO last month when the small business lender OnDeck went public.)

    Given the market zigs and zags that he has witnessed, we asked Chaffee — famous for his investments in Twitter and HomeAway – to share what he’s seeing in the late-stage market right now. We chatted yesterday in a conversation that has been edited for length.

    Just how bad are late-stage valuations right now?

    They’re high. They’re extraordinarily high. At the same time, the companies we’re seeing are more interesting, with more attractive business models and stronger and faster revenue growth than we’ve seen before. So it’s a little like, prices are high, but these are amazing companies. It’s a bit of a high-wire act.

    Have you been passing on deals you like?

    We’re very selective. We see several thousand deals a year, evaluate several hundred, and last year we made 14 investments. It’s a funny time because prices are so high, but these companies are so cool. When you have great management, a big market, and numbers [moving] up and to the right, you have to pay a high price.

    IVP hasn’t backed one of the most highly valued private companies in the U.S.: Uber. Why?

    Uber is in our “anti portfolio.” It’s a phenomenal company, with probably more potential than any other private company that’s out there right now. It could be Googlesque.

    Why not jump into one of its many, ongoing rounds then? Is it too richly priced at this point?

    We don’t have current numbers, but I know it’s beating its numbers all the time. . . That said, its valuation is way, way ahead of the fundamentals in every round. We usually don’t have to stretch too far; we don’t have to pay crazy prices to access top companies.

    Would you make another bet on this trend of people driving less?

    I think Uber wins this and will be the dominant player with the largest market share by a long shot. You can be the number two or three player, but it’s tough. Generally, we’ve found that if you back the market leader, it will drive the greater returns.

    What about the so-called connected home? It’s all anyone can talk about this week because of CES.

    We invested in Dropcam [acquired last summer by Nest Labs] and we were looking at Nest before Google acquired it [a year ago]. Those were the best two companies in that space as far as we could tell.

    I do think there’s opportunity there, but I also think [the connected home is] part of the hype cycle and that we haven’t reached the “trough of disillusionment” yet. We’re still in the “this is going to be amazing” phase.

    You came to IVP long ago from American Express and Visa. What do you make of today’s payment technologies?

    Payments are a funny thing. They migrate very slowly. We’ve been using paper and coins for thousands of years. Also, the thing about payments systems that people forget is that it isn’t a technology problem; it’s a system of guarantees. That’s what makes a payment system work – not whether the wireless NFC [reader] or the magnetic strip on the credit card will work.

    How do you feel about Bitcoin?

    I don’t know what to make of Bitcoin. I’ve looked at it. I saw the wave of payment systems back in the [dot com] era: CyberCash and DigiCash and all those players and passed on them, which was the right thing to do. Bitcoin seems to have more momentum. I’m just not sure. The payment system works pretty well right now.

    What interests you more?

    I’m very interested in security companies right now. There are huge issues underway. There are fires in the building – right now – in enterprise.

    We think the media world is fascinating, with big incumbent players just kind of losing it while companies like Vice and Buzzfeed and Business Insider – one of our portfolio companies – are showing up and saying, “We know how to work mobile and social.”

    We also think — to [riff] on Marc Andreessen’s [2011 observation] that software is eating the world — that mobile is eating software. Mobile is eating the web.

    IVP has backed Snapchat and Dropbox, which are riding that trend. What about startups that are turning smartphones into remote controls for the physical world. Are you interested in delivery service startups, for example?

    Not many have broken out and gotten to our stage yet in terms of scale. Also, when you have a physical aspect [to your business], you have to watch the margins. They get tough. If you’re going to deliver things, the operational intensity is high. Just because you can do something doesn’t mean you should do it.

    Did you look at the grocery delivery company Instacart, which just raised $220 million at a $2 billion valuation?

    We did. I know Instacart has a great team and great model and attracted some marquee investors at a staggering valuation. The jury is still out.

    Instacart’s newest round was led by Kleiner Perkins, but many deals now involve public market investors who’ve moved into private market investing. How are you getting on with them?

    It’s good when they pay a higher price than we do. It’s troubling when they become undisciplined. Most are pretty good. We’re not seeing too many drunken sailors yet. I’ve been doing this for 20 years, though, and you always get one or two [firms] that you’re like, What are those guys doing?

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

    Connie

    ,

  • Investing the Winklevoss Way

    Nautica Men's - Front Row - Fall 2013 Mercedes-Benz Fashion WeekBy Semil Shah

    Cameron and Tyler Winklevoss, the 6-foot-five-inch, Olympic-rowing twins who remain best known for their legal battles with Facebook CEO Mark Zuckerberg, could have taken the money they were eventually awarded in the case (a reported $65 million shared with partner Divya Narendra) and hit the beach. They decided to become full-time investors instead. In fact, since 2013, they’ve been assembling startup stakes across numerous industries. The brothers, who live both in L.A. and New York, have grown especially bullish on Bitcoin, creating among the single largest portfolios of the digital currency. To better understand why they’re so convinced that Bitcoin is here to stay — despite a rough 2014 — we asked Tyler to explain their thinking.

    You are both well-known for a variety of things now. Briefly catch us up on all of your activities. What are you both focused on for 2015?

    Sure. Over the last two years, Cameron and I have been focused on building Winklevoss Capital. Prior to this, we were elite athletes for close to 15 years. After retiring in 2012, we decided we wanted to get back into the startup game and investing seemed like a natural entry point. For the past two-plus years we been spending a lot of time building a strong network of fellow investors and promising entrepreneurs. We’ve been fine-tuning our filters to what we like and don’t like, and developing our overall investment thesis. Most importantly, we’ve been investing a lot. Ourportfolio now comprises more than 40 companies and is growing by the day.

    Our main focus for the coming year will be in Bitcoin and growing our overall angel portfolio. In the Bitcoin world, we will continue or joint role as both investors and entrepreneurs. We believe there will be some great opportunities in the infrastructure company layer, as well as some promising application layer startups. We will be working on the Bitcoin ETF and improving the WinkDex, the Bitcoin price index we launched in February, which will be used to price the Bitcoin ETF.

    In the non-Bitcoin world, we will continue to place bets on strong entrepreneurs. We’ve found a lot of great teams attacking compelling problems in the logistics, human operations, smart home, consumer packaged goods and security spaces. We’ll keep our ears to the ground in those spheres but also be on the lookout for other secular trends that start to emerge.

    You’re both active on AngelList. How do you plan to use your own fund and AngelList to your advantage? Are you thinking of angles beyond just crowd-based syndication?

    AngelList has been instrumental to our overall investing. We’ve found great investments on the platform and the platform has made it really easy to diligence companies. Being able to message a founder directly or see a company’s existing investors and reach out to them makes the research process much more efficient. When the opportunity to invest directly in AngelList presented itself, the decision was a quick and easy “yes.”

    We recently launched the Winklevoss Capital Syndicate on AngelList and have already begun syndicating our first deal. We think the crowdfunding venture model has a lot of merit and we have been devoting significant time and effort towards getting behind it. When possible, our plan is to syndicate the deals that are appropriate and give accredited investors access to these deals. Our current portfolio demonstrates the types of deals we do, and investors who back our syndicate ahead of time will get priority. It’s important to note that backing does not obligate an investors to invest in any of our deals.

    I still think there is ample room to improve crowd-based syndication before focusing on other alternatives. Currently, closing takes days waiting on every wire and ACH transfer to hit. Incorporating Bitcoin into the AngelList platform for instance, would allow settlement to happen immediately. In addition, there is a lot of territory to be explored with regard to smart contracts in this context. Investors could invest contingent on certain fundraising targets being met, and the real-time balance of a syndicate would be completely transparent if it lived on the blockchain. Investors worried about momentum could instead invest immediately, knowing that if certain goals weren’t met, their money would be sent back. This particular example could help mitigate a chicken-and-egg funding dilemma and tip some startups into getting funded that otherwise wouldn’t.

    But the possibilities don’t end there. Any conceivable investment term could be baked into a syndicate smart contract and be triggered when certain milestones were met. Pro-rata pre-emptive rights, super pro-rata pre-emptive rights, sliding scale discount rates, information rights, etc., could be hard-wired, all the way to the election of a board member by vote of the syndicate investors. It is going to be fascinating to see this play out.

    You’re both big Bitcoin believers, but 2014 was a tougher year. As early-stage investors and with only a few larger firms investing (or conflicted out), how do you help your seeded companies thrive during a time where the area isn’t as hot as it was in 2013?

    2014 had its own set of challenges for Bitcoin, but as the saying goes, what doesn’t kill you makes you stronger. I think Bitcoin will finish the year more robust than ever. I say this taking into account a lot of metrics beyond just a surface measure of price. Price is just one indicator of strength, and there is evidence to show that the price highs at of the end of last year were more noise than signal (as a result of Mt. Gox trading bot manipulation), and should not be used as a benchmark. A more complete measure of strength should include the number of 10xers and tier-one venture capitalists who have moved into the space. It should also include growth in the number of Bitcoin startups, the amount of accelerators, incubators and hackathons that are Bitcoin-focused, and the sheer lines of Bitcoin-related code that have been written. All of these numbers have grown dramatically this year.

    Bitcoin may have lost some of its novelty buzz, but today it lives in meaningful business and technology headlines more than ever. Let’s not forget that less than a year ago the majority of media stories were busy lampooning Bitcoin as a ponzi scheme and/or a safe haven for money laundering that was on the brink of being outlawed. Now, serious Bitcoin news and developments are reported by the minute in the most respected and well-read publications and blogs around the world. If some of the frenzy has ceded to a calmer, more earnest narrative, then I think that is a positive development.

    The growth curve of venture capital Bitcoin investments over the last few years has been steep and up and to the right. Provided that there isn’t a major economic downturn, I believe the venture capital money flowing into the space will be plenty to fuel continued growth. Some have brought up a potential funding gap with respect to core development. I think that is a more relevant concern, but again, there are a lot of projects and non-profits tackling this.

    This year, both federal and state lawmakers have time and again decided not to outlaw Bitcoin but rather embrace it as an extremely transformative and monumental technology. This sets the stage for some great possibilities for this year and beyond.

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

    Connie

    ,
    , ,

  • Top Investor Michael Dearing on the Startup Ecosystem Now

    michael dearingBy Semil Shah

    Nearly five years ago, reporter Kara Swisher labeled Michael Dearing the “hottest angel investor you’ve never heard of.”

    Things haven’t changed much. Dearing, a former senior VP at eBay who joined Stanford’s faculty in 2006 as a consulting associate professor (he also teaches off campus), has quietly backed a long string of highly successful companies. Think AdMob, the mobile advertising start-up acquired by Google for $750 million in late 2009. Or Aardvark, the social search engine, also acquired by Google, for $50 million 2010. Dearing had another big win just this month when Acompli, a 1.5-year-old maker of a mobile email application, sold to Microsoft for $200 million in cash. It had raised just $7.3 million from investors, including Dearing’s investment vehicle, Harrison Metal.

    Despite keeping a low profile, Dearing nicely agreed to chat with us recently about a few things, including who he thinks is the best early-stage tech investor in the business today. From that interview:

    There’s been increasing chatter in the Valley about diversity in startups and investing, as well as the moral actions of companies. What strikes you most about the ecosystem in 2015? What’s healthy and what’s unhealthy in your opinion?

    On the “healthy” list: continued inbound immigration — international and domestic — of exceptional people; circulation of talent from company to company; and bio-diversity of products being created. The “unhealthy” list for Silicon Valley is the same as for Earth. Sometimes people treat each other terribly. Sometimes fear and status anxiety creates a zero-sum thinking. But it’s a self-cleaning oven. What I mean is that the stuff on our “healthy” list eventually, inevitably overcomes the stuff on our “unhealthy” list. [It happens] slower than I’d like, but I’m an optimist, I guess. This is the world capital of our Industrial Revolution, so of course good will win!

    As a long-time seed investor, what have been the biggest changes you’ve seen in how companies get off the ground?

    Today, there’s an ample supply of money, ideas and talent. I think we’re short on great general management. Gears grind when people struggle to make a business work. Get everyone working on the right stuff. Make sure we set goals and hit them. All the stuff Andy Grove talks about in High Output Management. But it’s an old issue. The scarcest input in our system right now has been in short supply for 200-plus years of industrial capitalism — exceptional general management. That means stuff is harder than it needs to be, things take longer, the runway gets eaten up faster than it should. If we fix that, we can massively amplify the power of our talent, good ideas, and money. That’s why great general managers are so important. That’s where I am steering Harrison Metal.

    What’s your view on hot, high-growth companies staying private longer?

    I think it’s a good thing when founders have options. Obviously there’s risk on pricing. Will the companies grow into the valuations? I hope so. Where you get into trouble is in the high-flying private deals where the leadership takes out a ton of money in secondary sales. Especially if those companies face a shortage of great general management. Stuff goes sideways really quick when the business is run poorly and the leadership is prematurely rich.

    You’ve been in Palo Alto for years, but the center of gravity for many consumer and some B2B startups is now in San Francisco. How has Palo Alto changed for you, and have you ever thought about moving to the city?

    I love Palo Alto. We have Stanford, the sun, things like that. I spent eight years teaching at Stanford and my home is here. I don’t think of it as an “or” — PA versus SF. They are each part of the whole, and I spend a lot of time in both places. PA has changed a ton, though. When I started Harrison Metal, I used to be able to walk around PA and see a good chunk of the portfolio. But today it’s not that way. Maybe it will be again someday. Until then I, for one, affirm loyalty to my Palantir overlords.

    You’re not one to appear often publicly or promote yourself, so I’m curious: Who is one early-stage investor who founders should get to know, and what have you learned by working and co-investing with this person?

    The very best early-stage investor in the business is Steve Anderson [ofBaseline Ventures]. His track record is exceptional, obviously — and he’s well known for it — but I mean “best” in the broadest sense. Tells the truth. Focuses on making the pie big first. Crazy supportive of his founders in good and bad times. He’s honest and hard-working. He’s the very first person I would go see if I were raising money. There are some truly exceptional people in the early-stage business, but he’s at the top of my list.

    Semil Shah is a guest holiday contributor to StrictlyVC. Shah is currently working as a venture advisor to two funds, Bullpen Capital (which focuses on post-seed rounds) and GGV Capital (a cross-border U.S.-Asia fund). You can follow him on Twitter at @semil.

    Connie

    ,

  • Saar Gur of CRV on Marketing, New Platforms, and Breaking Into VC

    GurSaarPhoto1-225x150By Semil Shah

    Saar Gur joined CRV in 2007, though Gur was well-known in startup circles long before diving into venture capital, partly because of his early involvement in companies like Carebadges, which made a flash fundraising widget and was acquired by Facebook Causes, and the Internet video advertising network BrightRoll, which was acquired last month by Yahoo. We recently caught up with Gur — who focuses on consumer Internet investments for CRV — to learn a bit about how the firm sees the world as it heads into 2015.

    Some long-established venture firms still appear to be struggling with how to market themselves. Is marketing something you and your partners wrestle with? I should note that this Q&A was my idea and not yours.

    Marketing is very important in our business, and we could always do a better job on this front, but there are lots of ways to market. At CRV, our first priority is serving our entrepreneurs and promoting our companies, not ourselves. 
We know if we do a world-class job of supporting our entrepreneurs and helping our companies, they’ll help refer us to other great entrepreneurs.

    CRV was one of first venture firms to focus on seed investing. Is that still the case today, or has firm’s strategy changed?

    Over 90 percent of our investments are seed and Series A. We invest at this stage as we really enjoy being partners with our entrepreneurs throughout their company’s journey, starting as early as possible — often at the idea stage. There was a time when our seed program included investing small amounts of $50,000 to $100,000, but we no longer do that. Today most of our seed investments are in the range of $500,000 to $3 million, and we treat them as significant investments. We often take board seats of these early companies and work hard to help turn them into meaningful companies. Many of my recent consumer investments started with a seed investment, including Viki (sold to Rakuten last year), Doordash, and Patreon.

    One of the companies you helped start — BrightRoll — just had an exit. Tell us a bit about the story, as well as the tough lesson you learned from it.

    I will start by saying that there are 10x entrepreneurs, and [BrightRoll founder] Tod Sacerdoti is one of them. BrightRoll was a story of day-in and day-out execution for many years. There were no great network effects or unfair advantages afforded to the company. They just had to execute every single day for a long time. There were many lessons that I gained from the experience but primarily it reinforced my belief that great entrepreneurs, more than anything else, are the key ingredient in the startup success equation.

    Of all the new platforms being built upon — drones, virtual reality, bitcoin, crowdfunding, robotics/autonomous driving — where would you place a bet as to what will hit the mainstream market first?

    We think many of these areas will continue to grow, but I spend a lot of my time trying to think about the catalysts that will create non-linear accelerated adoption of these technologies. In terms of specifics, I guess it depends how you define “mainstream.” Of the technologies you mentioned, millions of consumers have participated in crowdfunding campaigns, and this is the one that’s probably closest to touching hundreds of millions of users before the others. At the same time, robotics/autonomous driving has already reached massive scale. Granted I am not talking about fully-autonomous self-driving cars. Often technology gets implemented in incremental steps and it seems to me that “smart” cruise control and reverse back-up alerts are pretty mainstream in newer vehicles at this point.

    On this topic of “mainstream,” I think we see a similar analogy in hot VC words like drones, bitcoin, and artificial intelligence. Often the implementation of a technology occurs in a non-obvious way. For example, many folks say “AI” is not yet mainstream, but it turns out that one of the most widely adopted implementations of AI is the auto-focus technology that’s incorporated in every smartphone camera and that has enabled the common person to take much better photos than ever before. All of these areas are very exciting and we’re actively looking to invest in them.

    I’m sure you and CRV are asked often about how folks can crack into venture. What advice would you give new college graduates and others who are interested in venture capital?

    It’s hard to enter the venture business as a young person. It feels to me that many firms will recruit based on:

    1) Network – e.g., you went to Stanford and seem connected to many potential founders, or you worked at a company like Facebook that will produce new company founders. This is why we often recommend that young people go and work in companies that will produce great people networks if they want to do venture.

    2) Unique domain expertise. You may be the leading drone expert at 18 years old, or be an expert in bitcoin at 16. Either way, if you have a unique domain experience and network in an area of venture interest, it can help.

    3) Analytics. If you have a demonstrable track record showing innate curiosity in tech startups and/or an ability to get up to speed on a market and form a unique point of view, that might make you more attractive.

    Semil Shah is a guest holiday contributor to StrictlyVC. Shah is currently working as a venture advisor to two funds, Bullpen Capital (which focuses on post-seed rounds) and GGV Capital (a cross-border U.S.-Asia fund). You can follow him on Twitter at @semil.

    Connie

    , ,

  • Ready to Go Public? Really? You’re Sure?

    20140630_ipo-calendar-2014By Lise Buyer and Leslie Pfrang

    It’s been a pretty terrific time in the IPO market this past year. According to Renaissance Capital, through December 15, there have been 271 IPOs in the U.S. in 2014, compared with 221 IPOs a year ago at this time, a volume increase of 23 percent. Thanks to Alibaba’s thunderlizard of a deal, the dollars raised by IPOs this year, $84.2 billion, exceeds last year’s total of $ 54.6 billion by 54 percent. Not bad.

    Ah, but look deeper and you will see that actually, roses weren’t coming up everywhere. While 271 IPOs have been completed so far this year, conservative estimates suggest that more than 350 companies filed S-1s, a difference of nearly 30 percent. For every 3 deals that filed and went public this year, at least one did the training, filed an S-1 and didn’t make it to the starting line. Of course, we need to back out those companies that filed late in the year, targeting a 2015 transaction. If we aggressively estimate that 20 fit that pattern, we still have more than 50 that didn’t get the job done as planned. When you consider the time and expense required for an initial filing, that is a big number.

    What’s the difference and what price “optionality”?

    Bankers and others can be convincing when suggesting companies take advantage of the relatively new option to file confidentially: “Get on file now, then choose your timing later, but you’ll be ready.” Factually correct? Yes. Good for your business, your P&L, your employees or your IPO? Not so fast. Preparing for an IPO too soon is neither a cost free nor risk free option.

    The ongoing and elevated expense, distraction, loss of momentum and sometimes embarrassment (Box anyone?) that accompany a premature “go” decision can easily outweigh any timing flexibility benefits.

    OK, but IPOs do take a long time. How do we know when to start?

    At January board meetings, following the “year in review” appraisals, many private company boards will have the “Is this the year to go?” conversation. (By “go,” we mean schedule a bake-off and hire bankers.) In advance of those meetings, we offer five questions every board should ponder before dropping the green flag:

    1) Can your sales and financial teams accurately forecast results for the next few quarters? Did you nail your forecasts last quarter? If answering either of these is anything other than a rock solid “yes”, then take your time. Public investors show no mercy to companies that miss an early quarter. Worse still, the brickbats courtesy of angry investors will be but mere annoyances relative to the grenades your employees, customers and partners may lob through your door if you miss an early public quarter.

    2) Do you have the right team in place? No really, are you sure you have the right team in place, not just for the IPO but also for the long term? Step back and take a cold, clear look. The team that helped you get this far may be gifted, battle-tested and composed of friends. That doesn’t mean it’s the team for a fast-growing public company. Public investors want to know that the C-suite in place for the IPO can scale the organization. Newly public companies juggle enough knives when adjusting to the market’s spotlight. There’s little bandwidth for concurrently integrating new senior leaders.

    3) Is your business model stable and ready for public scrutiny? Admittedly, there are companies (like Twitter) where even 12 months post-IPO the model remain an enigma. We grant that if your business has north of 200 million active users, investors may cut you some slack. However, for most, a more stable model correlates to a larger crowd of investors rallying around your IPO’s order book. Are you hoping to migrate to a subscription model? Do you see significant price changes or regulatory updates on the near-term horizon? Launch that new model or absorb the changes before you step on the IPO court. In the eyes of investors, a foot-fault of your own making — or because someone else moved the lines in a way you could have predicted — will cripple your stock’s performance.

    4) Are you ready for an intense audit? The reason most companies on the IPO trail get thrown off course is because their audits aren’t ready on schedule. Audits won’t be rushed. The drill-down scrutiny on every last decimal point is much more intense when your auditors know you’re preparing for an IPO. The size of your audit team and number of questions will often triple during this process.

    5) Is your company really strong enough to support the valuation you expect? For this point, we will excuse readers at health-science companies, but for those selling products and services, size matters. Management teams tend to be optimistic. Bankers, reflecting experience, tend to be conservative. Your finance team may produce a model projecting revenues over the next two years of $X and $Y. By the time bankers have helped you “refine” them, your forecasts (for the sell side analysts) will likely be closer $.7X and $.8Y. Expect similar treatment (in the opposite direction) for your expense projections. It is those banker-adjusted numbers from which your initial valuation range will be determined. Do the exercise in-house to be sure the projected valuation, based off a hacked-up model, will be acceptable before hiring banks and kicking off a process. The more directly you face the conservative forecast reality, the better prepared you will be for the go/no go decision.

    Lise Buyer and Leslie Pfrang are partners at Class V Group, a consultancy for firms looking to go public

    Connie

    ,
    , , ,

  • VC Patrick Gallagher on Where CrunchFund is Shopping Now

    192000v2-max-450x450By Semil Shah

    When college friends Patrick Gallagher and Michael Arrington came together in 2011 to start CrunchFund, Arrington — who’d founded the media property TechCrunch in 2005 — brought contacts, startup smarts, and a talent for drumming up attention to the table. Gallagher brought his own sizable network and institutional investing know-how, having been a partner with VantagePoint Ventures and, before that, an investor at Morgan Stanley Venture Partners.

    The mix appears to work. The pair have funded hundreds of companies to date, including Uber and Airbnb. They’re also investing a second fund that closed earlier this year, having reportedly closed on about $30 million, or roughly the amount of their debut fund.

    This week, I asked Gallagher about that second fund via email. We also talked about Arrington, who made Seattle his primary residence back in 2010, a year before he sold TechCrunch to AOL. Our conversation follows:

    When most people think of “CrunchFund,” they think of Mike Arrington. How often is Mike in the Valley these days, and how have you observed him change as he transitioned from a writer and blogger to a full-time investor?

    These days, Mike spends at least half his time in the Valley, where around 70 percent of our investments are.

    When we started CrunchFund, one of the things that really resonated with Mike was the ability to meet with and interact with entrepreneurs at the earliest stages of a company’s life. Those were the types of companies he initially wrote about when he started TechCrunch and what he enjoys the most. Mike has always had a good sense for consumer start-ups but when you’re writing about a company, the opportunity cost is primarily your time to write the article. When you make an investment, the opportunity cost is much higher in terms of dollars and time. The biggest change I’ve seen in Mike since he became a full-time investor is his investment evaluation process. He now spends significantly more time trying out products and getting to know the company founders before he’s ready to sponsor an investment.

    CrunchFund’s smaller bet in Uber’s [$37 million, December 2011] Series B round is now of epic status. Walk us through how that deal came together. Was the partnership divided about making such an investment as a seed firm?

    CrunchFund is primarily a seed and early stage fund, but we allocate up to 20 percent of our fund for later-stage investments in companies we think can still generate venture level returns, and these have included Uber, Airbnb, Square, Skybox Imaging, Bluefly, Redfin, and a few others.

    Mike had written about Uber when it had first launched and had been friends with the company’s CEO, Travis [Kalanick], since 2006. We were both loyal users of the service, and when we found out that the company was raising its Series B, we asked if we could invest a small amount, and they graciously gave us an allocation.

    Tell readers more about what you focus on as an investor, including the B2B side and infrastructure side. I think founders want to know more about CrunchFund’s appetite for startups.

    I started my career in the venture business in 1997 at Morgan Stanley Venture Partners. We were the venture arm of this massive financial services firm that spent over $1 billion on IT, so I’ve spent most of my career investing in enterprise-facing companies and I spend the majority of my time focused on them at CrunchFund. About 40 percent of our investments are enterprise-facing companies, including Digital Ocean, Mesosphere, Branding Brand, Abacus Labs, Feed.fm, Rocketrip, Layer and many others. I see a ton of innovation in the enterprise, from the infrastructure inside the datacenter to the software people are using to manage their businesses day to day.

    I’m also a big believer in companies that sell to [small and mid-size businesses]. I was on the board of Constant Contact through its IPO and have seen firsthand that you can build a large business selling to this segment.

    For enterprise infrastructure deals, which don’t feature as many “party” rounds as do consumer deals, how does a smaller fund like CrunchFund make a dent when all the big firms want to max their ownership?

    CrunchFund typically invests $100,000 to $250,000 as an initial investment, and we normally don’t lead deals, so it’s pretty easy for us to fit into most rounds. We’re additive to any investor syndicate, and we focus on providing specific help with media and PR positioning and
    and introductions for larger follow-on rounds of financing through our network. We also open up our networks for things like business development, recruiting, and customer introductions. For us, because our fund size is still relatively small, investments in this range are meaningful.

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

    Connie

    ,
    , , ,

  • Weathergage: Peers Thought We Were “Half Crazy” to Back Micro VC

    judith elseaJudith Elsea, a cofounder of the Palo Alto, Ca.-based venture fund-of-funds Weathergage Capital, has been a proponent of micro-VC funds since long before the term came into fashion.

    We caught up last week to talk shop, during which time Elsea was fairly candid — except about whether eight-year-old Weathergage has sealed up a third, $200 million fund that the firm set out to raise 10 months ago. (Weathergage closed its first, $250 million vehicle, in 2007. It closed a second fund with $182 million in 2011.)

    Weathergage invests in growth equity funds and venture capital, including micro VCs. On a percentage basis, much do you allocate to the last?

    Micro VC is part of a larger practice. I couldn’t share how big a part, but we’re one of the pioneering investors in micro VC and we’ve increased our exposure over time. We saw that it was much easier and cheaper to start a company and that you could do a heck of a lot more at the product-market fit level with a lot less money. We saw the opportunity, but we didn’t know if we’d see investors set up much smaller size funds to capture entrepreneurs at that point in their companies’ development. But it happened that we did and we were fortunate to invest in some really talented investors.

    I remember when Mike Maples — who you’ve backed — was starting out in 2006 with $15 million from 10 individual investors.

    Many institutional investors and our peers in our general ecosystem thought we were half crazy for allocating some our capital to this area. But as time has gone on and returns have rolled in and been quite good and competitive, it’s attracted more investor interest and become a lot less of an oddity.

    Still, no one knows yet quite how they’ll do.

    The primarily characteristic of the performance so far is a large number of M&A and early exits. So you might say that’s an artifact of the current market. But that doesn’t mean they haven’t achieved exits fairly quickly and at fairly attractive multiples in aggregate.

    I don’t know how much time it takes to prove a model – probably longer than we’ve seen in micro VC. But for the best-in-class managers, they seem to have found a nice niche in the VC ecosystem. We certainly see their companies getting sponsored by the best venture funds with great regularity. We see them getting attractive exits. To the extent that the funds aren’t fully liquidated yet, you could say they’re unproven. But you could say the same of any VC firm in last five years.

    Some LPs prefer new managers who have operating experience. Others prefer investing experience. Does Weathergage favor one or the other?

    Some [of our top managers] have recent operating experience that resonates with entrepreneurs who matter. Some, because of the body of their investment work, resonate with the entrepreneurs who matter. So we don’t have a bias in that regard.

    Do you care how much of the fund GPs contribute from their own pockets?

    We’re looking for GPs to be committed in every way to the success of their endeavor. Sometimes that takes the form of capital commitment; in all cases, it’s the time and attention that they spend on their companies’ behalf. Especially in micro VC, where people have probably had some success in their previous lives but are raising very small funds, we don’t have a tendency to be dogmatic [about how much they kick in themselves].

    As more funds compete for the attention of LPs, they’ve become increasingly specialized. Is that an effective strategy? Do you invest thematically?

    We do, but we don’t express it by sectors. We have views on life sciences, for instance, so because we’ve been quite bullish on that area, we have sought out exposure to best-in-class life sciences managers. But we haven’t really gotten down to the level of saying, We need more Internet-focused managers. The investment opportunity is too dynamic.

    Connie

    ,
    , ,

  • Michael Kim of Cendana Capital On His New $50 Million Fund

    michael_kim_DV_20110104201014 (1)This morning, five-year-old Cendana Capital, which has made a name for itself by backing so-called micro funds, is taking the wraps off a new, $50 million fund of funds — roughly twice the size as its first $28.5 million pool.

    No doubt that’s good news to Cendana’s existing managers – including Freestyle Capital, IA Ventures, K9 Ventures, Lerer Hippeau Ventures, and SoftTech VC. It’ll also undoubtedly be seen as a boon to the many entrepreneurs and operators who are entering the market with hopes for their own seed-stage funds.

    Yesterday, StrictlyVC caught up with Cendana founder Michael Kim to talk about the new fund and his one big concern about today’s market. Our chat has been edited for length.

    Congratulations on the new fund.

    Thank you. We were targeting $30 million so this was way oversubscribed. We hit our hard cap.

    Your first fund must be performing well.

    Our net IRR was 24 percent as of June, and we expect performance to improve from there.

    Who have you backed with your newest fund?

    We’ve invested in five funds so far, four of which were [investments in managers we’ve previously backed], including PivotNorth Capital, SoftTech VC, Forerunner Ventures, and Lerer Hippeau Ventures. Our new investment is MHS Capital, founded by Mark Sugarman. He spent seven years investing his first, $34 million fund, and he wound up with sizable stakes in some great companies, including OPower, Indiegogo, and Thumbtack. We think we’ll eventually invest in roughly the same number of core positions as we took in our first fund, which is 10 or 11.

    Will other new managers have a shot at getting a check from you?

    Yes, though I do think it’s becoming harder for new entrants to compete. At this point, the incumbents really have the credibility to lead the best deals. And the ownership levels a fund can get are important, both because seed stakes get diluted and because the average venture exit is between $50 million and $100 million. If you own just a few percent of a company that exits at that range, it doesn’t really move the needle.

    When you set out to raise this fund a year or so ago, you’d also set out to raise a $25 million fund to make direct investments. Did that come together?

    We raised $17 million.

    Have you been getting asked, or have you been trying, to make more direct investments in the portfolio companies of your fund managers?

    We get involved in a subset of A deals, as well as subset of those companies that go on to Series B deals, where the tech risk is largely mitigated and the companies are generating tens of millions, if not hundreds of millions, of dollars.

    But are your portfolio managers calling you and saying, Hey, it’d be great for you to kick in a little capital so this other guy doesn’t get the position, or are you proactively seeking out these stakes?

    We proactively work with fund managers and entrepreneurs so we can react quickly if there’s an opportunity to invest. We’ve made three investments [from that $17 million fund] already, and in each case, the round was way oversubscribed but we got in because of our fund managers’ relationships with the founders and because the companies thought we could add value. We invested in Casper [an online retailer of mattresses], for example, and we helped them get on CNN a few days ago because my friend is a producer there, and they sold more than they ever have that day.

    Of course, there are cases where Sequoia will come in and do a Series A and not let anyone else in. It’s very competitive, but [we can keep up].

    A lot of people point to Sequoia as having the sharpest elbows. Who else tends not to want to share the Series A pie?

    All the top tier firms are very focused on ownership, and rightly so if they feel like a company has high potential. From what I can tell, Accel is similar, but it’s behavior that makes sense and that seed managers need to negotiate by having a close relationship with founders and [hanging on to their] pro rata rights [if they can].

    There’s concern that the market has been good for so long that a downturn, maybe soon, is inevitable.

    Even if the public markets correct by 20 percent, the most vulnerable sectors are the late-stage companies and investors. Hortonworks [which is going public and expected to command a public market value below what it was assigned during its last financing round] is a perfect example.

    Seed-stage funds are best-positioned for a downturn because if valuations come down, public tech companies will need to focus on growth, and they’re likely to use some of their tens of billions in cash to acquire it. And seed funds can exit companies at much more modest valuations and still get capital recovery.

    Everything could also freeze, including the bank accounts of would-be acquirers.

    If the seed funds can’t exit, that’s a big issue. Even though most of our funds have substantial reserves, they can’t carry a company forever. So a perfect storm would be a 20 percent market crash that causes Series A and B investors to pull back. You could end up with a lot of zombie companies. Still, even with a higher loss ratio, I think we’ll ultimately see seed funds do well. It just takes one or two winners.

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

    Connie

    ,
    ,

  • How Many Tech Companies Break Out Each Year? And Where?

    breakout cosIn recent years, it’s become the conventional wisdom that roughly 15 companies each year go on to produce all the returns in venture capital. Marc Andreessen was the first to make a very public case for the approach, citing the research of Andy Rachleff, who cofounded the venture firm Benchmark and who today teaches at Stanford and is the executive chairman of the investment firm Wealthfront.

    “Basically, between roughly the mid-‘80s and the mid-2000s—a good cross-section of time across a couple of different cycles—what [Rachleff] found is that there are about 15 companies a year that are founded in the tech industry that will eventually get to $100 million in annual revenue,” Andreessen told me when Andreessen Horowitz was closing its first fund in 2009. “His data show that they [account for] 97 percent of all public returns, which is a good proxy for all returns. So those are the companies that matter.”

    Rachleff’s reasoning explains much about how Andreessen Horowitz has operated from the start. Persuaded by the rise of Andreessen Horowitz, Rachleff’s research has also found its way into the thinking of every other top and second-tier venture firm (not to mention many hedge funds and mutual funds).

    Interestingly, it’s hard to prove whether or not Rachleff’s findings still apply to today’s market. He never published the research, which he’d prepared for a speech. And he lost all of the data when his computer’s hard disk crashed in 2006, he once told me. When earlier this month, I asked him if he thinks today’s winner’s circle has changed in size, given falling startup costs and more ubiquitous broadband penetration (among other factors), Rachleff politely offered that he didn’t have time to explore the topic.

    There is, of course, the oft-cited research of Aileen Lee of Cowboy Ventures, who looked at breakout companies last year and concluded that just four “unicorns” — or tech companies that go on to be valued at $1 billion or more — are founded each year. But Lee’s much newer dataset centered on U.S.-based tech companies that were launched in January 2003 and afterward. And comparing “unicorns” to tech companies that produce at least $100 million in revenue isn’t necessarily an apples-to-apples comparison.

    Unfortunately, Lee didn’t respond to a recent request to discuss whether her findings and those of Rachleff are complementary or at odds. More recent research suggests that Rachleff’s research holds up, though. In an 11-page paper written last year, economist Paul Kedrosky found “there are there are, on average, fifteen to twenty technology companies founded per year in the United States that one day get to $100 million in revenues.” He added that the “pace at which the United States produces $100-million companies has been surprisingly stable over time, despite changes in the nature of the U.S. economy.” (It’s highly remarkable, in our opinion.)

    Kedrosky added that the biggest “hidden changes” in the way U.S. tech giants are created is where they are founded, suggesting that if investors with big funds are going to chase after breakout companies, they’d be smart to cast a net far beyond Silicon Valley. Indeed, according to him, of the 15 to 20 tech companies to break out each year, just four, or 20 percent, are now founded in California, “usually.” In the 1990s, meanwhile, California’s share of $100-million technology companies was roughly 35 percent.

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

    Connie

    ,
    , , , , , ,

StrictlyVC on Twitter