• Industry Ventures on Its New Fund, Cheap Stakes, and the State of the Market

    Hans SwildensHans Swildens is taking a break at his offices in San Francisco. “This is the first Monday in a long time that I haven’t been fundraising,” he says.

    It’s easy to understand why he’s exhausted. Swildens’s 15-year-old investment firm, Industry Ventures, has raised one fund after another in recent years, closing on a $425 million secondary fund 10 months ago and its newest vehicle — a $170 million venture capital fund of funds – late last week. At least in today’s market, the fundraising has come easier. In fact, the newest fund’s predecessor was $70 million, and the predecessor to that fund was $30 million.

    In conversation with StrictlyVC, Swildens talks about those funds, as well as what he’s seeing more broadly at Industry Ventures, which has assembled stakes in roughly 140 venture firms over the years (including True Ventures and Foundry Group) and developed one of the most intricate views into the startup ecosystem in the process.

    Your newest fund will make direct investments in sub-$250 million venture funds. But you’ll also use it to acquire secondary stakes in small venture funds and to co-invest directly with your fund managers. How much of the fund do you think you’ll allocate to each?

    We don’t have a hard rule, but in [our previous fund], it was about 40 percent in primary commitments, 40 percent in LP commitments, and 20 percent in co-investments.

    It’s such a go-go market. When it comes to snapping up those secondary stakes, where are you finding LPs who want to sell their venture fund shares?

    There are always investors who have to sell, though typically, it’s not the endowments or pension funds – it’s everyone else. We just bought two different corporations’ fund interests in two different venture funds. A lot of [sellers] today are individuals and family offices. Sometimes, [micro VC managers will] raise quickly between funds because they’re small and we’ll take half the [individual investors’] old commitment so they [have liquidity] to invest in the manager’s new fund, too. Compared with five years ago, there aren’t as many sellers, though.

    Are you chasing after funds? Are they coming to you?

    Eighty to ninety percent of what we do is proactive.

    How do you decide what to pursue?

    We have a relational database and we model the funds; we have a group of associates and partners here – almost 20 now. And we’re an LP in about 20 percent of the managers in the U.S. We have 140 venture firm stakes. And we get reporting on all of them every quarter, so we’re constantly looking at [that information].

    What’s performing and what’s not performing, in your view?

    Some say there are too many people doing seed and Series A deals – that things have grown crowded. But valuations haven’t moved that much in the last three to five years; they’re still in somewhat normal ranges. Late-stage valuations have become more inflated, of course. There are 45 $1-billion-plus companies [in terms of valuation] compared with four [in 2009]. So it’s a little trickier to buy into that market. If you’re buying into those deals, you have to have more conviction around what you’re buying. Our thesis is that it’s better to be in smaller funds that are shopping earlier.

    What about your secondary funds, like your 10-month-old, $425 million fund – are you buying into more mature companies and funds with that capital?

    We are, but our investment pace is about 25 percent slower than last year owing to us being more conservative about valuations. We’d started to bump into mutual funds and hedge funds that have come into the market with later-stage tender offers and secondary offers, and we decided not to compete head-to-head with them but maybe go a bit earlier in the cycle, writing smaller checks.

    Your secondaries business involves buying employee shares. What’s that like these days?

    The market has gotten much more complicated as it has evolved, with funds now exclusively doing loan deals for stock, companies that are doing tender offers, companies telling their CFOs to “work with these four parties” and if you aren’t on the list, you can’t get any information. That’s the bad. The good is that we’ve been in the market for more than a decade and everyone knows us, so we’ve been slotted into a lot of these [employee sale] processes.

    What do you make of some newer funds that lend money to shareholders and employees rather than acquire their shares outright? Would you ever get into the business of loaning employees money against their shares?

    We’d consider it, but our preference is to buy the stock. We’ve been doing this long enough to know that in good markets, loan structures work for both parties, but in bad markets, that’s not true, and three or four years from now, we don’t want regrets on either side.

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  • Don’t Panic: On VCs and Bubble Trouble

    panic buttonSeveral of the country’s most prominent venture capitalists have sent the startup world into a hysteria in recent weeks. Bill Gurley of Benchmark kicked off the panic when in an interview with the Wall Street Journal, he lamented that companies have taken their burn rates to levels not seen since 1999 and noted that “more humans in Silicon Valley are working for money-losing companies than [they] have been in 15 years. . .”

    Fred Wilson of Union Square Ventures weighed in the following day, writing at his popular blog: “The thing I like so much about Bill’s point of view is that he does not focus on valuations as a measure of risk. He focuses on burn rates instead. That’s very smart and from my experience, very accurate.”

    Roughly a week later, Marc Andreessen decided to explain on Twitter why he agrees with both Wilson and Gurley. Using even more vivid language than his peers, Andreessen wrote that “when the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rate co’s will VAPORIZE.”

    The truth is that none of the VCs needed to broadcast their thoughts so pointedly. Gurley has been saying for years that there’s a problem with later-stage investing. It’s largely because his firm believes so strongly that there’s an inverse correlation between how much money an outfit accepts and the returns it produces that Benchmark continues to raise funds in the neighborhood of $425 million instead of raising more capital, which it could easily do.

    It isn’t the first time that Andreessen has voiced concern over burn rates, either. Back in July, he warned entrepreneurs against “[p]ouring huge money into overly glorious new headquarters” and of “[a]ssuming more cash is always available at higher and higher valuations, forever. This one will actually kill your company outright.”

    So why clang the alarm bell more forcefully now? Well, burn rates really are rising at later-stage companies, as Pitchbook data underscores. But it’s also worth remembering that while VCs might be friendly and respect one another, when it comes to business, they do what it takes to burnish their own brands. Surely Wilson, Gurley, and Andreessen are genuinely astonished by some wild spending on the part of startups, but they’re also competing with each other – in this case, about who first noticed that startup spending is out of control and who is the most disgusted by it.

    The warnings are also – and perhaps primarily — a defensive move. A flood of late-stage money has poured into the venture industry. While that’s been good for VCs in some cases – Tiger Global and T.Rowe Price are among other newer entrants to mark up investors’ earlier deals – that capital isn’t as welcome as it might have been a year ago, given that it just keeps coming. (As Fortune reported last week, Tiger Global is raising another $1.5 billion fund, just five months after raising its last $1.5 billion fund. It’s hard for anyone to compete with that kind of money, even Andreessen Horowitz, which has raised roughly $4 billion since launching five years ago.)

    Gurley and Andreessen have grown increasingly transparent about their disdain for some newer funding sources, in fact. In April, in one of Andreessen’s famous series of tweets, he warned founders to be “highly skeptical” of growth-stage investors outside Silicon Valley, saying they offer founders “breathtaking high-valuation term sheet[s],” then convince the teams to “go exclusive and shut off other talks,” which limits founders’ options going forward.

    On Saturday, presented on Twitter with a year-old chart that suggests rising burn rates don’t necessarily point to a bubble, Gurley tweeted: “[C]hart also doesn’t include 2014 (major uptick) and new sources late stage $$ (which is the majority of funding).” He then added, “I never said there was a valuation bubble — I just said burn rates and ‘risks’ are quite high.”

    You can’t blame Andreessen, Gurley or Wilson for commenting on the market. These are frothy times, and if trouble is just up ahead, it’s better to be on record for acknowledging some of the risky behavior they’re seeing.

    If in the meantime their warnings prompt more companies to eschew these “new sources of late stage money” zeroing in on them, well, that’s probably okay, too.

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  • Amplify.LA Turns the Accelerator Model Inside Out (Completely)

    Paul BricaultSince Y Combinator first swung open its doors nine years ago, hundreds of accelerator programs have sprung into existence, almost all modeled in similar fashion — holding classes at certain times of the year, accepting a pre-determined number of startup teams, and staging “demo days.”

    Paul Bricault, a founder the two-and-a-half-year-old accelerator Amplify.LA in Venice, Ca., thinks that’s a little, well, silly. In fact, Bricault and Amplify’s cofounder, Richard Wolpert, have basically ripped up that playbook and created a new one that in almost every way operates differently. Whether it works is another question that only time will answer.

    We chatted with Bricault, who is also a venture partner with Greycroft Partners, yesterday.

    You wear two hats. So does Richard, who’s a venture partner at Accel Partners. How do you divide your time?

    Amplify takes the bulk of my time. On an average week, it’s probably 70/30. But there are no normal weeks. [Laughs.]

    You’ve raised two small funds so far, a $4.5 million fund and an $8.1 million fund closed last November. Will you be in the market again soon?

    We’re not even a third of the way through fund two yet. My guess is that we’ll start fundraising early next year.

    How many companies have you funded?

    We’ve done 36 altogether and 31 have gone on to raise capital. Twenty-seven have raised seed rounds; four have raised Series A rounds, the smallest of which was $6 million. It’s a higher percentage than your average [accelerator] by a significant margin.

    You take pride in doing things — a lot of things — differently. Amplify.LA doesn’t do classes; you have a rolling start program instead. You don’t have set economics. You invest in follow-on rounds. Why take such a different approach, given the success of Y Combinator?

    Yes, we’re an accelerator in name but we do things differently. We have a rolling start program because we interviewed entrepreneurs from a dozen accelerator programs in the U.S and Israel and Canada and realized that classes benefit the accelerators but not entrepreneurs, who may have a different time frame than the accelerators. I don’t believe a class-based structure engenders cooperation, either; the founders feel like they’re in a Darwinian funnel leading up to their demo day. You see more collaboration between the SaaS company that has just raised a seed round and is working beside a younger company that needs help on its pricing model. Not last, classes create an artificial structure at most accelerators that have maybe 10 or 12 slots. We’ll go for a couple of months without admitting anyone, then admit four startups in a month.

    As for the economics?

    Not all companies are created equally. Some have traction and patents when they reach out; some have a brilliant idea and a PowerPoint. So it doesn’t make sense from an entrepreneur or investor standpoint to [present standard terms]. I will say that in general, we take between 5 and 10 percent and put in anywhere from $50,000 to $200,000, which is more than you typically see at accelerators.

    And we do follow-on financing, but not in every company. We’re so small that it’s not a huge negative signal [if we don’t participate in a company’s next round]. It’s not always because we like a company better but because of the economics of how we set up each deal. If we take four percent in one company and it’s raising a seed round, there’s a higher chance of our wanting to put more money in, versus the company where we already own more.

    Why have you dispensed with demo days?

    For similar reasons. As an investor, I’ve always disliked them; they force you to listen to pitches that aren’t necessarily in your areas of interest and pushes entrepreneurs into a truncated pitch structure, which causes all of the pitches to begin to sound the same. The whole thing is very impersonal. We do a showcase here instead, where investors who attend can preselect the companies they want to meet with and, rather than sit through pitch, they meet one on on with those teams to get a better sense of them, without 100 investors listening over their shoulder.

    Seed funding doesn’t seem to be an issue in L.A. as was once the case.

    There are a lot of seed funds here now: Crosscut Ventures, Double M Capital, Lowercase Capital, TenOneTen Ventures, Karlin Ventures, Wavemaker Partners, Baroda Ventures, A-Grade [Investments], QueensBridge [Venture Partners], TYLT Lab. There are probably 20 seed funds now, which is small by Silicon Valley measures but huge for L.A.

    What about early-stage VC?

    If there’s anything I worry about, it would be the lack of Series A and Series B and C capital in LA. There are two or three funds — Anthem [Venture Partners], Greycroft and Upfront [Ventures] — and other than that, there aren’t a lot of firms in a position to lead Series A rounds, so we have to attract external capital. Amplify.LA’s Series A rounds have been lead by Azure [Capital in San Francisco], Bessemer [Venture Partners, with offices in New York, Silicon Valley and Boston in the U.S.] and [Boston-based] Polaris Partners. Getting people to come down to L.A. or across the country is critical to the growth of ecosystem right now.

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  • Venture Debt Giant WTI on Good Times, and Dangers Ahead

    maurice-werdegarThe 34-year-old venture debt firm Western Technology Investment (WTI) has seen some cycles, and its CEO, Maurice Werdegar, thinks investor Bill Gurley had a point when he talked publicly last week about the excessive risk that startups are taking on.

    He doesn’t think Gurley scared anyone straight, though. “I think the [dot com bubble of the late ‘90s] is a distant memory to many participants in the ecosystem, so we’re not seeing anyone panic or ring the alarm bell,” says Werdegar. “We’re seeing burn rates increase across the board, and that’s emblematic of companies that think they’re supposed to accelerate into their opportunity without thinking about whether they can raise the next round.”

    It can mean brisk business for venture debt companies like WTI, which is currently joining about 100 financing deals a year, but it’s also dangerous, notes Werdegar. We talked about the environment, and WTI’s role in it, yesterday morning. Our chat has been edited for length.

    For readers who don’t completely understand venture debt, can you explain why a startup would turn to you?

    There are a number of cases, including to finance equipment, like when it comes to bitcoin mining. When a startup is behind on its plan, venture debt can also give it time to achieve the milestones it needs to obtain. Or it can be used to provide more runway to a company that may be hiring and spending ahead of its original plans because it sees a product-market fit and doesn’t necessarily want to be forced into raising another [VC] round prematurely.

    Another case is to get to profitability. Sometime companies close enough to achieving breakeven raise debt rather than raise capital again, which can change acquisition discussions. Some startups also turn to venture debt to take out a competitor. Maybe they didn’t contemplate an acquisition when they raised their last round; venture debt [enables them to acquire that competitor anyway].

    What types of deals are you doing and what’s your minimum threshold?

    Ninety percent are tech deals right now. Another 10 percent are life sciences. We’ve done deals right out of Y Combinator on the low end; many of the deals we’re doing are with seed syndicates. We’ve also done deals north of $30 million, with several greater than $10 million in size this year, including Jet.com [the new e-commerce company by Quidsi cofounder Marc Lore].

    The seed stuff is interesting. You were actually involved with Facebook, as reported in David Kirkpatrick’s book, The Facebook Effect.

    We were the first venture debt for both Google and Facebook. We supplied debt along with Google’s Series A. With Facebook, we supplied two consecutive venture debt rounds of $300,000; they were buying servers because the cloud didn’t exist yet. We were also a seed equity investor in Facebook, writing a $25,000 check alongside Peter Thiel’s $500,000 check and the $37,000 checks of [entrepreneurs] Reid Hoffman and Mark Pincus, and we did a $3 million venture debt deal when Accel [led Facebook’s] $12 million Series A round [to cover the cost of computers and other hard assets]. The debt, in addition to the equity the company raised early on, helped position it for that next round. They don’t all go that way, though. [Laughs.]

    What kinds of convenants do you ask for?

    We have none . . . so we’re taking true risk. Our industry is known for taking money back when it gets nervous. Our firm actually loses money. It’s easy to lend money to a famous company, but much harder to work through unforeseen difficulties to keep a company alive and we’ll work through that adversity.

    What kind of return are you looking for when you get involved with a company?

    We have to deliver reasonably consistent, positive returns, but I’d rather not quote a number. There are often competitors that offer money less expensively, but it will come with covenants. Ours is more expensive but more usable. It’s a bit of you-get-what-you-pay-for in this industry.

    There are obvious upsides to venture debt, including that it reduces dilution to the founder. What are the biggest downsides?

    If it’s overused or abused, it can kill you. In any application of debt, there’s an amount that’s too much and it can get in the way. Say you’re a Y Combinator company and you raise $10 million in debt; the next round of investors won’t be interested in coming in with that kind of debt load. No one wants to finance a company that’s overburdened with debt.

    If debt can be called back, it can cause unforeseen calamity, too. If your bank account has been swept, legally, that’s scary for companies.

    You haven’t seen any reaction outside of the media to Bill Gurley’s proclamations last week. Does that worry you?

    We ourselves feel as if things can’t get a whole lot better than the current environment. A lot depends on Facebook and Google. If they trade down 20 percent, you can be sure the venture market will take a pause. It’s imperative that they keep feeding the pump from the M&A side.

    Any thoughts on valuations?

    Most valuations that you’re seeing are by no means the value of company if it were to try to sell itself today. It’s the Black-Scholes model – [pricing options] based on what a company might become worth, which could be very different than what it’s worth [currently]. That, I think, is dangerous.

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  • Jon Sakoda: Never Mind What Angels Say, VCs Have Your Back

    Sakoda-e1394772959555-480x500Partner Jon Sakoda of New Enterprise Associates, who co-heads the firm’s seed-stage practice, doesn’t know yet if it makes sense for NEA – which manages billions of dollars — to be dabbling with nascent startups.

    Over lunch recently at San Francisco’s MarketBar brasserie, Sakoda spoke candidly of the firm’s concerns about “diluting the NEA brand and the experience that an entrepreneur has with an NEA partner. We didn’t want to emulate other models where you get a second-tier experience because you’re a seed-funded company versus a prime-time NEA company.” NEA’s limited partners also “question whether it’s a good use of our time,” said Sakoda between bites of his BLT. “If I’ve invested $2.5 million in other companies and $250,000 in these other companies, is it really worth my time to invest in what can be some very challenging times for these companies?”

    Unsurprisingly, perhaps, NEA thinks the answer is yes. Out of 75 seed investments the firm has made since delving into the world of seed investing in 2011 — with 50 now far enough long to have either attracted follow-on funding, been acquired, or floundered – 25 have gone on to raise Series A funding, 10 of them from NEA. “It’s a little better than we’d thought” NEA would see on an overall basis, said Sakoda, adding that: “Of course, in five years, we’ll have to look and ask how much time we invested in these companies and whether we have enough meaningful returns. Because the Series A is not the end goal from our LPs’ perspective.”

    Here’s more from our conversation with Sakoda, edited for length:

    There still seems to be some confusion over whether it’s better to have a syndicate of investors, all of whom bring something to the table, or one or two investors who are more invested in a seed-stage company.

    You could argue both sides, but our experience would suggest that it’s better to have a syndicate of investors and it’s also largely better to have an institutional VC because the startup’s likelihood of raising a Series A round is higher. Our own research shows entrepreneurs are 50 percent more likely to get funding from another firm if they take money from us.

    So you don’t put much stock in signaling risk.

    I joke that signaling risk was created so that angels could do no wrong. What’s the logic behind [thinking that if a] a high-quality institutional VC invests in your seed round, that somehow sends a negative signal? Some people think if that same VC doesn’t lead your Series A, then all hell breaks loose. And it’s true that when things aren’t going well, the investors in your syndicate aren’t likely to lead your Series A – but neither is anyone else.

    When the going gets tough, we’re the first people to go into our pocketbooks and bridge companies and give them a second seed and give them a chance to survive. We’re the most supportive when things are going sideways because if you think about it, we’re investing in these long-term relationships.

    I think it’s frequently the angel investors who aren’t doing this full time and don’t view this as a career investment in the individual who are the least likely to support these companies when times get tough. How can they? They don’t have the resources, they don’t have the time, they maybe have 50 investments.

    They’d probably argue that you don’t have unlimited bandwidth, either.

    Actually, we let any partner sponsor a seed investment and I’m one of two people [the other is NEA principal Rick Yang] who approves each investment. If I was sponsoring 75 investments, I’d be no different than angel investors. But I have 12 or 13 partners who are making five to seven seed investments over the course of a few years — maybe doing one or two a year — so they can spend as much time with the [seed-stage] entrepreneur as if they’d invested $5 million or $10 million. We want every partner to own the relationship with the entrepreneur. And we’re constantly paying attention to that. Are we doing too many deals? Are providing that same quality of service?

    There’s a lot of competition for the best seed deals. Are you having to find new ways to reach entrepreneurs?

    No, but we have had to be a lot more outspoken and public about what we do for our companies. People used to come to us, but in an environment where you have firms that are being much more outbound-oriented about promoting their services, we’ve had to rely on more active referencing for our network, including connecting entrepreneurs from our enterprise companies with CIOs and throwing events for our companies that need help with their marketing. In many ways, we’ve had to institutionalize things we were doing ad hoc because the industry grew more promotional about these services, and we’ve had to respond to that.

    In some ways, being one of the largest and quietest players means we have a further distance to travel.

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  • In Palo Alto, a Micro Community in the Making

    demo dayOn Tuesday, in leafy Palo Alto, Ca., tucked away in a nondescript office enlivened by bright, computer-themed art, the 1.5-year-old early-stage firm Pejman Mar Ventures welcomed journalists and investors to watch half a dozen startups explain what it is that they’re doing. Four of the teams were comprised of Stanford students who had tinkered on their nascent ideas at Pejman Mar’s offices this past summer. The other two startups that presented are fully up and running and about to hit the fundraising trail.

    In terms of quantity, it wasn’t much of a showcase. Two of the four Stanford-led teams are returning to school, its founders determined to finish their computer science PhDs. Pejman Mar’s timing could have been better, too, given everything else that was going on in the Bay Area on Tuesday, including Apple’s highly anticipated launch event and TechCrunch’s signature fall conference in San Francisco.

    Still, plenty of VCs and reporters showed up — including from SoftTech VC, Floodgate, CRV, and Forbes — and for two reasons, seemingly.

    First, Pejman Nozad and Mar Hershenson, the firm’s likable cofounders, are highly focused on creating a community around their young firm. Making room for ambitious Stanford students to hole up during the summer months is one way of going about it.

    The pair also hold weekly events at their space that feature VCs and renowned founders. Past guests include John Doerr of Kleiner Perkins, Yahoo cofounder Jerry Yang, and Zynga founder Mark Pincus — though an even more popular attraction, says Nozad, is a life coach who comes twice a month to help founders with their personal problems. (“When you say you’re going to have a VC here, maybe 10 or 20 people come,” he says. “As soon as we announced the life coach, we had a wait list.”)

    Of course, squishier stuff aside, investors are paying close attention to Pejman Mar because of its track record to date.

    On his own, Nozad, who famously sold rugs to tech millionaires before becoming a full-time investor, has backed more than 100 companies over the last 14 years, many of which have gone on to big exits, including the early smartphone company Danger, which sold to Microsoft in 2008 for $500 million. (It’s also through Danger that Nozad met Hershenson, a three-time entrepreneur whose husband cofounded Danger.)

    photo 2Since launching their fund a year and a half ago, the pair have backed another 21 companies, half of which have raised follow-on rounds – including some doozies. DoorDash, for example, a 1.5-year-old, Palo Alto-based restaurant food delivery startup, closed on a $17.3 million Series A round in May led by Sequoia. The company has raised $19.7 million altogether. Guardant Health, a Redwood City, Ca.-based startup that has developed a blood test for cancer, has also gone on to raise significant funding, most recently raising a $30 million Series B round in April led by Khosla Ventures. Guardant has raised at least $40 million altogether.

    Little wonder that on Tuesday, VCs were paying close attention to the two startups that will soon be seeking funding: Solvvy, which is trying to reinvent mobile search and has so far raised $500,000 from Pejman Mar (it’s seeking out more seed funding this fall), and Fieldbook, whose software lets users track and organize their information in simple data tables. Fieldbook has also raised $500,000, including from Pejman Mar; AngelList cofounder Naval Ravikant; former Microsoft executive Steven Sinofsky; and Lotus founder Mitch Kapor. The company says it will seek out more funding in the middle of next year.

    It’s a little early to know whether the assembled investors connected with the startups this past week. With Pejman Mar’s growing reputation, though, it’s easy to imagine they’ll find interest somewhere along the line. “These companies are for real,” Nozad told me on Tuesday, looking like a proud parent as the crowd chatted with the presenting companies. “They’re great people.”

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  • With Kleiner’s Snapchat Deal, There Isn’t Much to See

    nothing to see hereA week ago, the WSJ reported that Kleiner Perkins Caufield & Byers is investing up to $20 million in Snapchat at a $10 billion valuation as part of a larger round that the messaging app is assembling. The piece noted that just months earlier, DST Global had also quietly committed capital — at a $7 billion valuation.

    The news generated a lot of chatter, with one piece in particular suggesting that Kleiner is part of a broader pump-and-dump scheme to keep valuations frothy until retail market investors are convinced to buy companies like Snapchat on the public market. (If Snapchat is eventually sold for top dollar to a publicly traded acquirer like Facebook and Google, that’s apparently just as pernicious as they, too, are partly owned by retail investors.)

    It’s not the first time tech investors have been accused of looking to sell their shares to a greater fool. When it comes to Kleiner’s investment, though, the argument misses the mark. Kleiner’s motivations look simpler to me.

    First and foremost, despite a recent string of exits for the firm, including Dropcam’s sale to Google, Kleiner is still seen as slightly out of touch compared with some of its Sand Hill Road peers. It nearly missed Facebook and Twitter. It bet heavily on Zynga. And it has parted ways with many of its younger partners, through attrition, downsizing, and a lawsuit, which probably doesn’t make it any cooler to young entrepreneurs (or younger LPs, for that matter). Some say that institutional investors are no longer swayed by the logos in a venture firm’s portfolio, but LPs don’t swoon over Kleiner like they once did. In this case, maybe Kleiner is hoping the logo makes an impression.

    Another motivating factor might be Kleiner’s desire to acquire information rights to Snapchat. What direction is Snapchat moving toward? What new technologies is it developing that will change the face of mobile apps? Who is it partnering with and which startups might it acquire? While it might seem like general information, it puts Kleiner in the know and could help its portfolio companies, at least tangentially.

    There’s also IRR to consider. Kleiner’s Snapchat investment might not generate a good cash-on-cash return for the firm, but it could turn into a high IRR deal if Snapchat sells soon, which seems as likely as any scenario given that it has virtually no revenue at this point. Even if an acquisition doesn’t do much for Kleiner’s overall fund, it’s always nice to have some flashy numbers to produce for potential investors.

    It may be convenient to use Snapchat as an example of a bubble in Silicon Valley. But pointing to Kleiner’s role in Snapchat’s soaring valuation is giving Kleiner a bit too much credit. The reality is more mundane, as far as I can tell. Kleiner wanted to be associated with a high-profile deal and it was willing to get in at any cost. And it succeeded.

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  • NEA Partner Dayna Grayson on Turning Designers Into Founders

    team-Dayna_Grayson_520_990New Enterprise Associates is growing more serious about young design talent. On Wednesday, the 36-year-old venture firm announced the third of an ongoing series of two-week-long design mentorship programs that aim to transform more designers into founders. Among the big names who’ve signed on to help with the initiative are Albert Lee, the founder of the New York-based product studio All Tomorrows; and Liz Danzico, founding chair of the MFA in Interaction Design program at New York’s School of Visual Arts.

    To better understand why NEA — which manages billions of dollars — is bothering with the whole enterprise, I spoke yesterday with Dayna Grayson, the Washington, D.C.-based NEA partner who is herself a former product designer and who helped launch the program last summer.

    NEA and Kleiner Perkins are among a growing number of venture firms that are trying to close the gap between design and technology. Why do startups need investors to play that role?

    There are different flavors of these programs. But the reality is that for any startup – consumer or enterprise – great, intuitive design has become table stakes. Ten years ago, you could have clunky design and enterprise salespeople would explain it and get the technology into the hands of users. Today, technologies have to suit users from day one, so we asked ourselves last year: What if we could mentor and push more designers to become founders to ensure that that [design] DNA is there from the beginning rather than a bolt-on later?

    Kleiner’s program aims to get more and better designers into its portfolio companies, whereas NEA’s is designed to help designers start their own companies. Where are your applicants coming from, and how far along must they be to gain admittance into NEA’s program?

    Some are coming straight out of design schools. Some have held agency jobs but want to own and commercialize a product themselves.

    We now have two types of sessions on a rolling basis. For the [upcoming] “go-to-market” session, you have to have a product that’s ready to be taken live imminently. We’ve also [organized two-week] “vision” sessions, where we take applicants that have nothing.

    So you’re first helping people create a vision, then inviting them back to hone it.

    We’ll have some teams back, though we’ll also select new teams.

    Many accelerator programs go on for months. What convinced you that two weeks of intense mentoring is enough?

    We want [these designers] to take what they’ve learned and ruminate on it and decide if it’s right for them. These aren’t necessarily people who are founders above all else. You have to let their entrepreneurial ability sort itself out. Also, frankly, I think it’s more true to life. With entrepreneurship, you have these intense periods of advice and ideation followed by intense periods of executing and scaling.

    What sorts of companies are people coming up with?

    We had one team come up Shortwave, an app that allows customers to easily exchange files via Bluetooth with others who are within 100 feet. Another, Factory, is a mobile application that features a stream of fascinating facts in short form. It’s like an ingestible Wikipedia. A third project, Booya Fitness, features high intensity workouts [online] for people who don’t have an hour-and-a-half to exercise.

    Have you funded any of the teams to pass through the program? Also, how much of your time is focused on it?

    We’re in the process of funding one startup now. Because we encourage some to come with nothing — they’re pre-seed — we expect more to [evolve into] seed-stage and Series A [type opportunities] over time.

    I’m an investor first and I have five portfolio companies, so the [NEA Design Studio] is a project that probably accounts for 10 to 20 percent of what I do. But it’s an important project of mine.

    Connie

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  • Eric Liaw Means Business

    eric_liawEric Liaw of Institutional Venture Partners has been at the center of two of this week’s biggest deals, both of which happen to be in L.A. On behalf of IVP, Liaw led a $63 million investment in the jobs aggregation platform ZipRecruiter. Liaw is also on the board of The Honest Company, the maker of eco-friendly baby products, which just closed on $70 million in Series C funding.

    Given that Liaw is still a principal and not a partner, we thought his involvement in both deals was interesting, so we chatted with him yesterday about how things work at IVP and how interested the firm has become in Southern California specifically.

    You joined IVP from Technology Crossover Ventures in 2011 but you’re not yet a partner. Is it typical for a principal at the firm to lead deals?

    At our firm, it’s something we’ve been doing for a while. When [general partner] Jules Maltz was a principal, he was leading deals. For [current principal] Somesh [Dash], it’s the same. Our firm is fairly small so it’s something we decided to do and we think it’s working.

    Honest just raised a huge round of funding in preparation for an eventual IPO. When, exactly, did you get involved with the company?

    Lightspeed [Venture Partners] had funded the company in September 2011 and we came in for a little bit, then General Catalyst Partners led a Series A-1 in the company in March 2012 and we participated. [Honest raised $27 million across those fundings.] We then led the company’s [$25 million] Series B round in October 2012. Finding Honest was a team effort. [General partner] Dennis Phelps and I have been spending a lot of time in L.A.; we’d gotten to know Honest cofounder Brian Lee at LegalZoom [which Lee also cofounded and is another IVP investment]. It was a little unorthodox for us to invest in something that didn’t even have a site yet, but we knew early on that it was a good thing to get involved with and it’s grown by leaps and bounds since. Brian and [cofounder] Jessica [Alba] have said publicly that they passed the $100 million run rate back in January, and it’s safe to say that the business has only accelerated from there.

    Do you divide your time between San Francisco and L.A.? Is that how you came to know of ZipRecruiter?

    I went to high school in L.A. and my parents still live down there, but the firm is based up here. Half our deals are in the Valley; the rest are outside, including L.A., New York, Austin, Scandinavia … ZipRecruiter we met a couple of years ago but they hadn’t wanted to seek outside funding. When the opportunity came up in the earlier part of this year, they talked with a handful of firms. It was very competitive. But our success in building subscription businesses at the growth stage [won over the company].

    So it largely comes down to product experience?

    There has to be a lot of comfort around the table, too. One piece of advice I gave [ZipRecruiter CEO Ian Siegel] was that [founders] should be super comfortable with whoever they’re going to work with, because it’s a lot easier to get into a deal than get out of it when things go sideways. Also, in this case, the founders retain significant majority of company, so I had to be comfortable with [the team] and I certainly am.

    As a late-stage investor, how are you feeling about valuations?

    You can look at valuations as indicators of broader trends and excitement. People are definitely feeling more comfortable in investing in [late-stage venture] where the perception of risk has been diminished — accurately or inaccurately — because the market is perceived to be much larger.

    We look at valuations on a company-by-company and deal-by-deal basis. It’s like public stocks. The “market” is a basket of individual stocks. Some do well even when most do not.

    Connie

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  • Micky Malka Doubles Down: “I Don’t Believe in Diversification”

    malka_meyerIn a crowded market, venture capitalists tend to talk up particular investment angles to differentiate themselves from their peers. When Ribbit Capital founder Micky Malka talks financial services, though, it isn’t for marketing purposes. Malka has been living and breathing finance since co-founding his first company in 1993, a broker dealer that evolved into an online financial services portal and sold in 2000, just before the bubble burst, to the Spanish bank Banco Santander.

    LPs clearly like his credentials. Ribbit, in Palo Alto, closed its first fund with $100 million last year and officially closed on a second, $125 million fund last week. I chatted with Malka on Friday to learn more about what those investors — including Silicon Valley Bank, the Spain-based lender Banco Bilbao VIzcaya Argentaria, and individuals from the financial services world — find so compelling about what Malka is doing.

    You’re Venezuelan and spent most of your life in South America. When did you come to the U.S. and why?

    I came here seven years ago this month. I’d started all kinds of consumer financial services companies in Europe and Latin America and did very well for myself, but I felt like I was playing in the AAA leagues and that Silicon Valley was the majors.

    You came to be an entrepreneur, though, not an investor.

    Yes, I moved with my family to build another company, again around consumer financial services – around mobile payments. Bling Nation was right on the vision but so wrong on the strategy, wrong on the protocols. It took us a couple of years to figure it out, though. At that point, we went to our VCs and said, “It’s not working and we have two options. We can return your money and lose our own personal money that we’d put in. Or you can give us six months to figure it out.” To my surprise, the investors said, “We backed you guys, not the idea. Take six months to figure it out.” It was really big [of them]. We launched a company called Lemon, a financial app, and we sold it last year to a public company.

    Had you had it with startups at that point? Why form Ribbit?

    I’d listen to this guy say, “I’m doing this lending business in the U.K.,” and I’d say, “I’d love to be involved.” Then I’d learn of a new financial advisor in the U.S., and I’d think that was interesting. I realized there was an investment thesis going on that was broader than what people were thinking about. Also, I’ve started companies on four continents, and there aren’t many VCs who really know financial services in different jurisdictions. It’s a very particular DNA around which to start a firm.

    So much is happening on the financial services front right now. Where in the cycle are we?

    Financial services innovate when there’s a new channel and when users or clients are tired of existing brands. Well, people aren’t wearing their Goldman Sachs or Citibank hats anymore. Meanwhile, mobile has taken off dramatically, and banks and insurance companies don’t think in mobile terms. I’m not saying the brands we know will disappear, but who will be the Capital One or Charles Schwab of this generation? It’s early, and there are a lot of unique innovators in different subsets of the universe.

    Where are you investing your capital geographically?

    Our mandate is global. We look for opportunities in seven markets: The U.S. and Canada, Brazil, the U.K., Germany, South Africa, Turkey, and India, which are all markets where there are entrepreneurs and investment partners who I’ve known for 15 years.

    Where have you made some of your biggest bets to date?

    We’re the largest bitcoin VC in world. Let Marc [Andreessen] be Marc [in being so public about bitcoin]; we’ve been investing since 2012. Back then, there were no bitcoin entrepreneurs so we had to buy bitcoin directly. Later, we found our first entrepreneurs, including at [bitcoin exchange service] Coinbase [which Ribbit backed last year]. We’ve now made five investments in bitcoin [startups]: Two here in the U.S., one in Hong Kong, one in Brazil and one in Slovenia.

    You made 10 investments out of your first fund, and you’ve made six from your second fund, only one of which, Wealthfront, has been announced. Are you still focused narrowly on consumer-facing financial startups?

    Yes. We’ve done lending businesses, personal finance, wealth management, accounting and invoicing, and bitcoin, and now we’re going to add insurance, which we’ve spent the last year researching. We just see too many opportunities that we like.

    What size checks are you writing?

    We make very concentrated bets. Our checks are usually between $3 million to $4 million and $20 million. When we find what we like, we have a lot of conviction. I don’t believe in diversification.

    Image courtesy of the upcoming Money 20/20 conference.

    Connie

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