• Semil Shah: A Part-Time VC No Longer

    semil.shahAbout a year ago, I sat down with Semil Shah, a plugged-in networker who, back then, was working nearly full time at a podcasting company called Swell and spending his spare time participating in some of the hottest seed-stage financings in Silicon Valley.

    Today, Shah is no longer at Swell, which was acquired by Apple last July. Instead, the part-time VC, as I’d dubbed him, is moving closer to the life he has long wanted as a full-time investor, with a new fund and roles as a venture advisor at two very different venture firms, GGV Capital and Bullpen Capital. We chatted on Friday about how he’s pulling it off. Our conversation has been edited for length.

    Last December, you were investing a $1 million fund. You’d backed 16 companies and you were beginning to think about a $5 million fund. Now I hear that you’re almost there with a second fund.

    Yes, I wound up investing that $1 million vehicle pretty evenly across 35 companies. The idea was to get my feet wet and learn all the little things about investing, like what referrals are like and how you decide to invest and how you interact with a company when you want to fund it and how you interact with a company when you don’t. I learned a lot. Raising a million dollars was not easy. Just trying to put $25,000 into companies wasn’t easy. You have to explain a lot [about the value you bring] and you need other people who are investing to support you. The amount of work and reputation required, even to make a small investment, was surprising.

    What would you say is the standout of that first fund, and have you had an exits?

    The standout is probably [the same-day grocery delivery company] Instacart, which has grown quickly and attracted a lot of attention, though there are a number that are on a great trajectory: DoorDash, Hired, Coin, HashiCorp.

    I’ve had a couple of exits in fund one, but the money wasn’t significant enough to distribute, so I’m still holding it. I could technically recycle it versus distribute it, but I’m not sure I’ll have the opportunity to do that. In fund two, my hope is to follow on in one or two companies, but that’s always up to the entrepreneur, not investors.

    Are you getting enough ownership in these startups to make this model work?

    If you go in early enough, you can have decent size ownership without doing a follow-on. I’m looking at companies before they get to Y Combinator. Part of the reason I enjoy writing so much and being active on Twitter is that I can explain what I’m thinking in real time and people reach out. I’ve had people contact me who don’t know me and introduce me to startups; they’ll just say, I know you like this stuff, and I thought you’d like this company.

    You also seem masterful at networking.

    Honestly, everything I’ve done has been born out of pain more than opportunity. I’d hoped to invest for a long time but I don’t have the typical background required and there are very few jobs. A couple of my friends [in the industry] kind of pulled me aside a couple of years ago and slapped me and said, You have to stop asking people for a job and figure out how to do it yourself.

    Have you been making investments from your newest fund?

    I’ve invested in 20 companies so far, including Chain, a block chain company that ended up being funded by Khosla Ventures, and [office cleaning startup] Managed by Q.

    Where do you want to be five years from now?

    Right now I’m operating on instinct and making decisions in three, four, five days. I put a lot of thought into each investment, but there isn’t much data to go off. As I invest more, I’d like it to be on a path of more concentrated investments.

    I also know I don’t want to be investing by myself. In general, it can be lonely, but you can also get stuck in your own way of thinking. I definitely want to be investing in the early stage somewhere, though.

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  • Tim Draper on Life Outside DFJ

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

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

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

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

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

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

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

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

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

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

    You seem to be investing more actively than ever.

    I think I am at my normal pace.

    Would you ever raise institutional funding again?

    Yes.

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

    Maybe 20 percent and rising.

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

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

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

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

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

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

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

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

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

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

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    Connie

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  • Sam Pullara on Being An Entrepreneur At a VC Firm

    pullaraSam Pullara has worn an awful lot of hats in his career. A staff engineer at WebLogic in the mid- to late- ’90s, Pullara went on to log time at BEA Systems [which acquired WebLogic, then sold to Oracle], Borland Software, and Yahoo, where over roughly three years, Pullara worked his way up to Chief Technologist. (He left a year later in 2010, as soon as his shares were vested.)

    Pullara has also cofounded two companies and served as an entrepreneur-in-residence at both Accel Partners and Benchmark. In fact, it probably came as little surprise to those who know him when in 2012, Pullara, working as a senior infrastructure engineer for Twitter at the time, was invited to join Sutter Hill Ventures as a managing director. Last week, Pullara talked a bit with us about his latest adventure and how long he thinks he’ll stick around this time.

    You’ve been a full-time VC for two years. Is the job what you expected?

    It’s amazing. It is what I expected, which was a lot. It’s the last job I’ll have, which is surprising for me given my background, but the last two years have gone by super fast. Every day is interesting.

    In addition to traditional things, like recruit for companies, Sutter Hill does what it calls origination. Can you explain to readers what that means?

    The best example of what we do is Pure Storage, which my [Sutter Hill] partner Mike Speiser helped start when he was leaving Yahoo to come here. He worked with [founder and CTO] John Colgrove for eight months, trying to figure out the best company to start in flash storage. John started it and Mike joined as interim CEO as John built out the team. Then Aneel Bhusri of Greylock [Partners] did the Series B and the rest of that is going amazing. [Editor’s note: Pure Storage is now among the most richly funded companies in Silicon Valley, having raised $470 million since its 2009 founding.]

    How is that model different from firms that help incubate companies?

    Rarely do you see someone from [accelerator programs like] Y Combinator or Techstars join the [companies they help]. In fact, after Pure Storage, Mike went on to do another company that just came out of stealth, Snowflake Computing [a cloud data warehousing company that has so far raised $26 million, from Sutter Hill, Redpoint Ventures, and Wing Ventures]. Bob Muglia, who used to run Windows at Microsoft, is the CEO.

    I’m on my third company. I’m the interim CEO of one of them. I was very active helping run product and engineering for one of them. And the third, I’ve worked with closely for product-market fit. I’m there [at the last] right now as we speak.

    How big are these companies and do they leave you time to invest in companies where you don’t play an operating role?

    You work 40 percent of the time on the companies you’re helping originate. One [of mine] has 12 employees, one has six, and the last has two, including me. I do have other investments. My first deal at Sutter Hill was in [an enterprise app studio called] Tomfoolery that sold to Yahoo in January. And I’m on the board of two other companies: Boxer in Austin [it makes a mobile e-mail application to access various e-mail accounts] and FoundationDB [which makes a scalable NoSQL database]. I was pretty skeptical about [the latter’s] strong claims, but when they came in, I realized I’d met the team when I was still at Twitter. I was like, Oh, wait, it probably does work.

    In your own words, FoundationDB is a tool for building very high scale, fault tolerant, self-healing systems. Why is that such a big opportunity?

    In my career, I’d seen tech shift from enterprise companies over to Web companies, and part of what I want to do is bring that back to ops infrastructure companies that offer some core of infrastructure as a service. It’s very different from lower-level applications that you see from Salesforce or Workday.

    Why are you more interested in the “bottom of the stack,” so to speak?

    I’m somewhat burned from offering tools to developers. My first company aimed to provide continuous deployment to developers, but it’s a tough business. I think these companies are super interesting and they enable a ton, but you have to be pretty clever to make them sustainable. Oftentimes, the biggest advantage you get from a developer-focused product is this ineffable quality of increased productivity, and people don’t pay for that yet. In fact, when someone comes up [to us] with an interesting developer tool, I try to tease out of them what’s the most awesome thing that someone could build with that tool — then I tell them to do that. [Laughs.]

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  • The Industry Gets a New, $50 Million Micro-VC Fund of Funds

    Seed-Planting-SeedToday, Venture Investment Associates, a 21-year-old fund of funds group that commits capital to venture capital, growth capital, and private equity groups, is announcing that it has closed on an oversubscribed $50 million seed fund of funds that counts some pretty tony institutions as LPs. Managing director Chris Douvos — who joined the firm in 2011, having worked previously for TIFF (The Investment Fund for Foundations) and Princeton University’s endowment — won’t let StrictlyVC name those investors. But we talked recently about numerous other facets of the new fund, and who it’s liable to back. Our chat has been edited for length.

    This is your second formal micro-VC fund of funds, and half of it is already committed. Is that right?

    Yes, we’ve been investing in [micro-VC] since 2004; we were part of First Round Capital’s friends-and-family round. But we closed on an oversubscribed $25 million fund of funds in 2012, 80 percent of which went to four managers: True Ventures, First Round Capital, Data Collective and [O’Reilly AlphaTech Ventures]. And half of this oversubscribed $50 million fund is deployed among First Round, True, and Data Collective. We’re also likely to do OATV again when it comes back in the market.

    That’s concentrated.

    I believe investing is about conviction. I would give [First Round founder] Josh Kopelman the last dollar in my kids’ college funds.

    What kind of ownership percentage do you target?

    When we’re a major institutional backer of a new entity, we like at least 10 percent of the fund. In the case of OATV, back in 2006, we did 15 percent of the fund. At Data Collective, we [bought] 10 percent of fund in 2012. We have a group of [institutional] investors who are super sophisticated and we’re sort of bird-dogging ideas for them.

    What new idea are you spying? What other types of funds are you looking to back right now?

    We’re looking to find another group or two where we can really make an impact and put them in business. Having invested in the space for more than a decade now, it’s easy to tell who the tourists are and who the long-term players are. I focus on groups that somehow punch above their weight, that offer a platform dynamic where their companies will materially benefit from interaction with the VC but where the VC doesn’t end up being a bottleneck.

    I’m not looking for sharpshooters that are the next really smart ex-entrepreneur, because I’ve seen that model rise and fall several times. There are a plethora of these people raising funds; I think we’ll have a Cambrian explosion and the species will kind of die off during the next financial crash. It’ll be like a meteor hitting.

    Are you seeing many newer firms emerge with platform approaches? I take it you’re looking for another True or First Round – firms that do a lot to facilitate interactions between the founders of their portfolio companies.

    Firms that demonstrate platform dynamics are really special, but they’re few and far between. There’s no one on my radar screen right now.

    Do you care where a firm is based? Would you fund a firm that’s not in the U.S.?

    This is an information business, and when you’re investing far afield, you start outrunning your supply lines of information. You’re investing in people and you need to understand their motivations and their fears and their contexts, and it’s hard to know those when they’re thousands of miles away.

    Do you favor VCs who spin out on their own to entrepreneurs?

    I think operating experience is overrated and that people undervalue the investing experience of people who’ve written checks of institutional size. When I’m looking at an entrepreneur, I’m asking myself: How do they think about investing as a fiduciary, because it’s a very different skill set and thought process.

    There’s a bias in the Valley that [investing experience] is a secondary consideration and that finding a cool technology or exciting team will make everything work out. But we’re starting to see with late-stage deals that are heavily structured and sapping the returns of earlier investors that [those ties] aren’t sufficient to the end goal of making money for investors.

    What do you make of AngelList? Do you think more entrepreneurs should or will begin using it to form their own micro VC outfits?

    I think AngelList Syndicates and [the accredited investor platform] FundersClub could really reshuffle the landscape. We don’t know yet how those stories play out. We made a small investment in AngelList’s Maiden Lane [a fund that backs investors on AngelList] partially to have a front row seat as things unfold.

    But part of me wonders about a lot of people who are raising these small funds. Traditional fund structure is deeply flawed. The average fund lasts twice as long as the average American marriage. It often outlasts their LP’s tenure at an institution. They’ve got to be thinking: Why not raise money via AngelList instead?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Is that frustrating?

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

    Wait. You still go home and write software?

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

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

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

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

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

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  • Secondaries Are Back

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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  • Boris Wertz Raises a New, Much Bigger Fund

    Boris WertzVersion One Ventures, the Vancouver-based fund of entrepreneur-turned-investor Boris Wertz, is taking the wraps off a $35 million early-stage fund today. That’s nearly twice the size of Wertz’s $20 million debut fund, closed in early 2012. Northleaf Venture Catalyst Fund and BDC Capital are the new fund’s anchor investors.

    As you might imagine, the extra capital will allow Wertz to write bigger checks. In a call yesterday, he said he now plans to make initial investments of between $500,000 and $750,000, up from $250,000 to $300,000, a shift that should allow him to lead more deals. The bigger pool should also enable Wertz to pour more follow-on funding into Version One’s existing portfolio, which right now includes the online cosmetics company Julep; the business intelligence platform Mattermark; and Kinnek, an online platform that brings together small businesses with suppliers.

    All told, said Wertz, he plans to invest his second fund in 20 to 25 companies. I asked him what else he’s planning for, particularly amid what feel like big shifts in the market.

    Congratulations on the your new fund. That’s quite a jump up in size.

    Thank you. We set out to raise $30 million and probably could have raised $40 million but didn’t want to make it larger. I’m still the single investing partner, and we think a good benchmark is $30 million to $35 million per partner, which is what you see at comparable funds like Floodgate.

    You say the collective value of Version One’s portfolio is now $600 million. Recognizing it’s early days, have any companies exited yet?

    No, angel investments I made prior to [creating Version One] have [been acquired] like Flurry [sold to Yahoo], but one rocket ship in our portfolio – [a consumer marketplace] that has raised an A and B round – hasn’t even announced [its funding publicly].

    More companies are waiting on their funding announcements. Why do you think that is?

    We have two companies in our portfolio that have raised [capital] and never announced. The entrepreneurs feel that they’re on to something and want to get solid traction and a head start before telling anybody else. It makes sense, especially if you have a product where you aren’t going to acquire users on StrictlyVC or TechCrunch and don’t need [the press] for branding purposes.

    You live in Vancouver but invest all around North America, including Silicon Valley. What are you seeing in terms of seed-stage valuations right now?

    Two-thirds to three-quarters of our deals are outside the Valley – in Seattle, Toronto, and New York. And those ecosystems have never gotten that crazy. But there’s definitely a little insecurity in the market, which is good, given that seed-stage valuations have continued to creep up over the last three or four years. I think we’re seeing a healthy correction of expectations on the part of both investors and entrepreneurs. Things can’t always go in one direction.

    When we last talked, in May, you were spending more time looking into digital healthcare, government “2.0” and bitcoin. Have you made any related bets yet?

    We have one digital healthcare investment, [Figure 1, a crowdsourced medical image library for health care professionals that VersionOne invested in last December], but the challenge in [backing another] is that it has blown up crazily in terms of valuations. Look at the on-demand doctor space. There are at least eight players, all of which were well-funded at crazy valuations. [The sector] ran away pretty quickly.

    As for bitcoin, we believe in the long-term potential, but we’re still forming an investing thesis around when is the right moment to invest.

    It must be challenging. I’m amazed by how many seriously smart people are divided over bitcoin.

    I’m in the middle. The technical platform is beautiful, and a decentralized system to record ownership makes a lot of sense for a lot of use cases. I think the real problem is that right now, there isn’t a killer use case. Payments in North America aren’t broken. I can use credit and debit cards or cash or PayPal. So people need to start focusing more on international payments and remittances, where bitcoin does make sense. The challenge is how to get into the markets that could use it the most – Brazil, Vietnam, Nigeria – and make it easy to spread. And there’s no clear path [to doing that], though we do believe some entrepreneurs will eventually figure it out.

    A prominent institutional LP recently said that right now could be an especially bad time to start investing a new fund based on traditional market cycles. Is that a concern of yours?

    Yes, there are cycles, but nobody can really predict them. You can only make your best investments given the environment and stay disciplined around valuations and your investment thesis and not get carried away by hype. The reality is that some vintages of funds will do better than others based on waves of new innovations or when valuations were really low. But it’s hard to predict beforehand and say 2014 or 2015 will be a terrible year for venture funds. Who knows? Timing and luck are involved in all of it, but if you focus on fundamentals and support your companies for the long term, you can hopefully smooth out your returns over time.

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

    Connie

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  • VC Erik Rannala on the “More Cautious” L.A Startup Scene

    erikrannalaL.A. has been receiving a lot of attention from investors lately, as local venture capitalist Mark Suster enthusiastically observed in a detailed overview of the market yesterday. Indeed, as Suster noted, SVAngel’s David Lee and early Twitter investor Chris Sacca are among a small but growing number of investors who’ve relocated to L.A. to capture its upside.

    Erik Rannala certainly gets it. Rannala was a product manager at eBay who went on to spend nearly three years running the seed-stage firm Harrison Metal with his former eBay colleague Michael Dearing. The gig, in Palo Alto, was great. But when another former eBay colleague, Will Hsu, proposed working together in L.A., where Rannala’s wife grew up, he leapt at the opportunity, forming the L.A-based accelerator MuckerLab with Hsu in 2011. (The two have since raised a $20 million seed fund called Mucker Capital.)

    As far as Rannala is concerned, there’s a lot of love about the L.A. scene. For one thing, entrepreneurs are “more cautious with their burn because capital isn’t nearly as plentiful in L.A. as in the Bay Area, or even New York.” He likens their mindset to someone “growing up during the depression . . . even when you eventually have infinitely more capital, it’s harder to shake the frugality that was learned the hard way in leaner times.”

    Many entrepreneurs in the Bay Area “haven’t experienced that,” he notes.

    Valuations are also “more reasonable,” Rannala says, insisting that “dollar for dollar, you’re getting more for your money down here than in the Bay Area at the top of the cycle.”

    Rannala thinks it’s a little easier for L.A. entrepreneurs to escape the groupthink of Silicon Valley, too. “We’re seeing a lot of entrepreneurs here who are looking at existing industries that are getting software enabled [and figuring out how to expedite their transition] rather than doing purely derivative things like social,” though there’s plenty of that, too.

    As an example, Rannala points to Santa Monica-based Surf Air, a members-only airline that offers unlimited flights for a $1,750 a month. The venture-funded company started flying last year with three used single-engine turboprops that seat seven passengers. It recently ordered 15 new Pilatus PC-12 NG aircraft. (*MuckerLab wrote the company’s first check. Surf Air has gone on to raise $18.8 million altogether.)

    Everything said, Rannala, who still travels regularly to the Bay Area, is trying to be pragmatic about L.A.’s boom times. Though he doesn’t think for a minute that “LA is a flash in the pan” – for a long list of familiar reasons, he argues that the tech ecosystems in both L.A. and New York “are not short-term phenomena” — he also notes that a “shortage of indigenous local capital up and down the stack,” could mean problems if the market turns.

    Bay Area investors are “inclined to invest outside the Bay Area right now, particularly when it comes to companies that are further along,” Rannala observes. “It’s [to be determined] how this evolves when we’re at the bottom of the cycle.”

    *An original version of this story reported that MuckerLabs was not an investor in Surf Air. Apologies for the mix-up.

    Connie

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  • Planning for the End of a Bubble

    Bursting-BubbleWith so much talk lately of bubbles and burn rates, venture capitalists seem to be hoping for the best but planning for the worst. None will tell you with certainty that we’re at the top of the market, but they say they’re trying to be as prudent as ever — just in case.

    Investor Stewart Alsop, for example, whose firm is in the process of raising a third, $100 million, fund, says the way his firm is planning for the end of today’s go-go cycle is by “not investing in momentum businesses right now.”

    It’s not an entirely new trend for Alsop-Louie Partners, which has always stuck to atypical and very early-stage investments, and that’s largely because Alsop remembers the last bubble so well. “I was at [New Enterprise Associates] and we’d raised a new fund in 2000 and invested in telecom companies through that fall,” he recalls. “The idea was that these were real companies, buying real stuff.”

    When it became apparent that the telecoms’ endless growth possibilities weren’t so endless (they eventually built up an oversupply of capacity), they tanked, and NEA — along with many other firms — had to write off almost all of their investments. The lesson for Alsop: “That venture capital isn’t based on what happens in the next 12 months.”

    Venky Ganesan of Menlo Ventures says his firm is also being cautious. For one thing, Menlo is taking a good long look these days at whether the unit economics of the startups it meets with make sense. The firm is also focused on business models that aren’t dependent on the availability of cheap capital, and it’s “orienting toward more seed and Series A rounds so we don’t have a timing issue,” says Ganesan.

    Ganesan says he doesn’t believe we’re in a bubble, citing some of Menlo’s portfolio companies like Uber, which are “growing revenue at a pace we haven’t seen in our history.” Even still, he says, by funding companies that will “go to market in 18 to 24 months,” Menlo is essentially buying itself time to better understand “whether this is a bubble or a long-term secular trend,” he says.

    It’s an approach to which Greg Gretsch of Sigma West can relate. Gretsch says he doesn’t know whether or not we’re “in a bubble and headed for a crash” and that “anyone who says they know is a fool.” But he sees plenty of companies whose “business model is the ever-decreasing cost of capital that’s freely available” and says Sigma has been steering far clear of them.

    Like Alsop, Gretsch suggests that his firm is mostly sticking to its knitting, meaning “focusing on companies that have a fundamental business with real customers who are buying.” He adds that while most of Sigma’s portfolio companies are spending their revenue on growth at the moment, “a large percentage [of them] could cut back to profitability if they had to. We don’t have any [portfolio companies] that will hit the wall hard” if the winds change.

    That’s not to say that Sigma West is insulated from what’s happening around it. Says Gretsch: “The challenge in this market is that everything is expensive and you have to make sure you’re not making investments to keep up with the Joneses. We hear a lot of, ‘Our competitor has this great space and employee perks and they look better to [outsiders].’ And it’s like, yeah, those things would be optimal from a cultural standpoint, but those competitors are spending a ton.”

    Gretsch says he tries to be sympathetic to his startups, but he’s not taking anything for granted right now. He points to a Chicago-based portfolio company that’s doubling its workforce every year and recently asked his opinion about whether it should move into a big new building whose landlord wanted a 10-year-lease, or into several smaller satellite offices that required shorter commitments but could come at a cultural cost.

    He nudged the company toward the satellite offices.

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

    Connie

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  • Made in Japan: Osuke Honda on the Evolving Startup Scene

    osuke-303Osuke Honda is having a good week. In 2010, the DCM partner bet on Kakao Talk, Korea’s biggest messaging app, and on Wednesday, Kakao acquired Korea’s second biggest Internet company, Daum Communications, which was already public. Now the combined company, Daum Kakao, is expected to list on the Korean stock exchange in a couple of weeks with a market cap of roughly $10 billion.

    It’s quite a feather in Honda’s cap, though he’s had a pretty prosperous career all along. We talked the other day about his work and, largely, the evolving startup scene in Japan, where Honda was born and lives today. Our chat has been edited for length.

    You were born in Japan, but you’ve always been a global citizen.

    I was born in Japan but came to the U.S. when I was eight months old because my dad was transferred here. We lived in Houston, then L.A. I went to Tokyo for my undergraduate degree [at Hitotsubashi University], then grad school [at Wharton] in Philadelphia.

    Why head to Japan for college?

    I always identified as Japanese, but I didn’t really know Japan. I’d spent a month and a half there in the summers, but that was it, and I wanted to know where my family is from. I’d also started doing martial arts when I was 11 and figured if I wanted to get better at Judo, I should go. I figured if I didn’t like it, I’d just come back, but I liked it.

    Your first job was at Mitsubishi. What was that like?

    Very Japanese – kind of like Samsung in Korea. It was the kind of company everyone wanted to get into. I spent seven years there and was lucky enough to be part of a new organization that in 1999 was [tasked] with figuring out the e-commerce thing in Japan, which Mitsubishi’s CEO recognized was going to be the Next Big Thing.

    You were eventually lured into venture capital, first at Apax Globis Partners, then, in 2007, at DCM.

    Yes, one deal I was involved in was Gree, the largest mobile gaming platform in Japan, which went public in 2008 and was valued at $5 billion at its market peak. There isn’t a big venture community in Japan and you get to know people, and [during that time, DCM’s] David Chao and I started talking about what we thought was a successful VC model moving forward, which is cross-border [investing]. And we eventually joined forces.

    What shifts have you seen in your time as a VC in Japan? Are founders still seen as, well, crazy?

    Relative to five years ago, things are changing very quickly for the good.
    In the past, raising money in Japan was a challenge. That was one reason people didn’t do startups. But especially because the IPO market has been very good, a lot of corporate VCs are being established. And as [more capital emerges], the mindset of entrepreneurs is changing, too.

    Is hiring still a challenge? I sometimes hear that more people are willing to start companies, but that it’s hard to extricate employees from their comparatively safe jobs to work for them.

    I think it depends on the sector. When it comes to consumer Internet, I see a lot of folks [joining startups] if there’s a hot entrepreneur involved, especially someone from Google or Rakuten or Yahoo or Gree. They’re very much able to attract smart, capable people.

    I noticed you’ve backed a number of people to come out of Google, including Daisuke Sasaki, the founder of the accounting software startup Freee, and Hiroshi Kuraoka, the cofounder of the online bookings company Coubic.

    Folks who come out of Google are interesting based on what I’ve seen. Because at Google, they work across offices, their teams tend to follow what’s happening in the U.S. and other regions around the globe and to think: What can we learn from them? That mindset is very important. Also, if you’re a product manager at Google, the way it’s metric driven is a great way to be trained.

    Are college graduates thinking about startups right out of school, as in the U.S.?

    No. If you go to a top university and ask students what they want to do, they’ll still say they want to work for Mitsubishi. But it’s changing, and growing a company is something that people respect more these days.

    Ten or 15 years ago, for example, no one could have imagined that SoftBank would own a carrier. But entrepreneurs like [SoftBank founder Masayoshi] Son are kind of encouraging people that, hey, I can do that, too. They’re looking at the CEOs of [the clothing company] Uniqlo and [e-commerce giant] Rakuten – these self-made billionaires – and getting inspired.

    Connie

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