• A VC for Hard-Core Developers

    Steve HerrodStrictlyVC recently visited General Catalyst Partners in Palo Alto, Ca., as readers who’ve caught our interviews with Niko Bonatsos and Neil Sequeira know. Today, we conclude our General Catalystorm™ with Steve Herrod, a managing director who joined the firm last year after spending a dozen years with VMWare, the software giant that specializes in virtualization.

    Herrod was VMWare’s chief technology officer for his last five years with the company; he also has a PhD in computer engineering from Stanford. Thankfully, he can also speak plainly when seated opposite an English major. Here’s a bit of our chat, edited for length:

    You invest solely in companies that sell products to enterprises. What’s your primary focus right now?

    Mobile-first infrastructure. Everyone talks about apps in the consumer world, but enterprises still don’t think about every one of their customers accessing their information through a mobile device. Knowing that all enterprises will move to mobile in a very aggressive way, [I think a lot about] what are the second and third order changes that have to happen.

    What’s among the biggest of those changes?

    How companies actually write applications. Every company has a Web application; it’s what you use when you ask for help or your HR report. But when creating new mobile applications, companies and vendors quickly realize that they have to do something different with all the data and systems behind it — that more formal APIs [or side doors for developers into their machinery] are essential. To create a formal way that a mobile app and a Web app can access customer data is a pretty big transition, so I’m focusing on tools that help people create and use these APIs for the first time.

    What’s a portfolio company that illustrates your point?

    Runscope is helping companies formalize how they create and test and make these APIs safe for the rest of the world.

    I think all the core assets of companies are going to be things they can monetize or [otherwise make more accessible to external parties], so it’s a bet that formal APIs are the future for all companies.

    Who are Runscope’s customers?

    It just signed a great deal with Adobe as Adobe becomes a cloud company that provides a lot of access to things [on a subscription basis]. [The wearable device company] Fitbit uses Runscope. Target is another example [of a customer]. All are trying to formalize access to use of their data safely and securely. In the traditional world, you own an application and are responsible for it working. When you move to an API world, you have all these external people who are accessing your stuff, and if you do something that breaks it, you’ve now broken a bunch of other people’s stuff. So it’s almost more important that you use new tools on these APIs to prevent the external world from falling apart.

    You were with VMWare for many years. Has it been easier or more difficult than you’d imagined to transition into VC?

    My first few months [as a VC] was a tour to meet other VCs and ask [their advice], and everyone was very collaborative and helpful. [But] I definitely wanted to take a different angle to venture than I’d seen in my own work on the M&A side at VMWare. I come from a very technical background . . .I don’t think too many [other VCs] come from that background . . so [I] end up bringing hopefully something unique to the table . . . In the enterprise world, it’s amazing how many people make investments without actually trying out products.

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  • TubeMogul Investor Knows When to Get Out of the Way

    TubeMogul IPOWhen in 2004, college friends of Michael Berolzheimer asked him to invest in their prepared foods company, the former investment banker wrote them a $200,000 check. When that company was acquired for $122 million in 2007, Berolzheimer plowed his roughly $2 million in proceeds into seed-stage investments. By 2011, he’d decided to formalize his process, raising a $7 million fund from friends and family and naming his San Francisco-based firm Bee Ventures.

    Today, Berolzheimer has invested in 32 startups, including the video advertising software company TubeMogul, which goes public today. In fact, Berolzheimer was the company’s first investor. He says he was sold on the team after meeting them in 2007 at UC Berkeley’s Haas School of Business, where he was getting his MBA.

    Whether TubeMogul is another home run for Berolzheimer remains to be seen. While he believes the eight-year-old startup “has a long way to go in terms of its growth cycle,” institutional investors seem to think otherwise. At least, yesterday morning, TubeMogul revealed that it was dropping its price range from $11 to $13 per share to between $7 and $8 per share. And Scott Sweet, the founder of IPO Boutique, says that “even with that haircut, I’m not sure we have an ‘up’ deal.”

    Sweet doesn’t think the company should be going public right now at all, given that the public market performance of ad tech companies has been poor of late. “If this IPO breaks,” Sweet says, “it’ll further tarnish a niche that needs good news. It would be a lose-lose.”

    Berolzheimer acknowledges that today — and the coming months — may prove an uphill battle for TubeMogul. “There’s a chance that it gets misunderstood by investors,” he says.

    He’s also quick to note that Bee Partners holds stakes in numerous other promising startups. Tradesy, a consignment site, is among them. Bee Partners wrote the company its first check in 2012; in May, it raised a $13 million Series A round led by Kleiner Perkins Caufield & Byers.

    Bee Partners was also the first investor in the aerial robotics platform Skycatch, which raised a $13.2 million Series A round in May that was led by Avalon Ventures and included Google Ventures, ff Ventures, and renowned investor Ram Shriram.

    Indiegogo, the global crowdfunding platform, is another of its investments. Bee participated in both the company’s seed and Series A fundings.

    I ask Berolzheimer to characterize his firm’s style. “We find opportunities to support the company in any way we can, and if we can’t, we get the heck out of the way.”

    He adds, “We’ve had some small wins and a few losses but we’re generally happy with how the portfolio is maturing.” It’s a “starter fund,” he says. “Just like founders, you have to start somewhere.”

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  • VC: Opportunity for New E-Commerce Brands is “Endless”

    New BrandIn recent years, a seemingly unending procession of direct-to-consumer companies that make and sell everything from men’s pants to eyeglasses to snack foods has sprung up and nabbed venture capital. Think Bonobos,Warby Parker, and HelloFresh, among many others.

    In fact, based on venture cycles, one might be inclined to think that it’s time for investors to move on to the next thing. But Neil Sequeira, a managing director at General Catalyst Partners, heartily disagrees. Sequeira, who sits on the boards of NatureBox (healthy snacks) and the Honest Company (environmentally friendly products), cites startups’ ability to reach customers more quickly, easily, and cheaply as just a few reasons why he thinks the trend of new brands selling directly to shoppers is “endless.”

    Sequeira told us more last week at General Catalyst’s new Palo Alto office, a traditional pale yellow home that features whiteboard walls and polished concrete floors (a “home away from home” for founders, says the firm).

    You’re very bullish on so-called alternative commerce. What does that mean exactly?

    Historically, e-commerce has been defined by the Amazons of the world, where they take a product and resell it via the Web to a consumer. But the reality is that commerce – through online, mobile, and multichannel – is changing. It’s no longer about selling a product and taking a thin margin. It’s about creating your own products and brands and selling them on a subscription basis via [multiple] channels, so you’re mobile, you’re online, [and] you’re opening stores.

    Wasn’t the idea to not open stores to keep costs down? And is there a danger that consumers can only absorb so many new brands?

    These are multichannel businesses. The stores of Warby Parker [which General Catalyst has backed] do incredibly well. The company started online and created a brand. Now, its stores probably perform better than any optical store in the world.

    [As for your second question], I think historical big box retailers are in a heap of trouble. Their infrastructure and distribution systems can’t keep up with what consumers want. They have to make deals with manufacturers, their products go through a distribution facility, then to a store. If the products don’t sell, they have to be sent back. They have to do big-brand advertising and marketing. That’s why you’re seeing a lot of these places struggle. Consumers want their specific needs addressed, versus [the old model of] Proctor & Gamble and Kimberly-Clark and those companies doing things on a macro basis. There’s a lot that incumbents can’t do because of their legacy infrastructure.

    How big do you think the opportunity is?

    I think the trend is endless. It’s a trillion dollar industry. Of course, it means you have to do things differently – acquire customers differently, market differently, build brand differently – but that’s what great companies will do.

    How do you, as an investor, sort through what’s great in a market that’s attracting so many startups?

    It has to start with a mission — that can’t be manufactured. NatureBox’s CEO was an obese young man who started eating healthier and who wanted to create something to help kids like him. When [actress] Jessica [Alba] started Honest Company, she had already campaigned on Washington for three years to try to change what goes into kids’ clothing and food. Nobody listened . . .so she started a company. I think consumers hear authenticity.

    You also have to find creative acquisition channels. Banner ads and Google clicks aren’t going to work. If [my colleague] tells me to buy something, that’s how you sell it. Beyond social, I think mobile is the next real killer. Having that [purchasing power] in [a consumer’s] pocket and figuring out what they really want will be [increasingly powerful].

    How so, outside of a retailers’ ability to send a customer information or a discount based on their location?

    There are just so many more applications and data on mobile, and those will continue to proliferate, whereas online [retailers are limited to] a certain amount of traditional marketing channels. Then there’s ease and convenience; you don’t have to sit in front of a computer; you can just “one click” from your mobile. So there’s traditional, there’s social, there’s mobile, there’s on-demand. Meanwhile, the incumbents have to go to buy pre-roll on TV. They aren’t going to be able to change fast enough.

    Are there any businesses or segments you might avoid at this point because they seem saturated?

    Is there a lot of room for another Warby Parker? I don’t think so. But consumer products that are serving niches? Probably. Maybe you don’t want to compete with Google on last-mile delivery. When you have folks who have unending resources and they’re going after a market hard, it can be a challenge. But I don’t worry about the retailers. I don’t think there are that many areas that are shut off.

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  • A London VC on Startups, LPs, and Google’s Move to the Hood

    London_5With the official news last week that Google Ventures is opening a London office, we decided to call American-born Rob Kniaz of Hoxton Ventures, a London-based firm that closed its first $40 million fund late last year. In the view of Kniaz — who began his career in London as a market development manager with Intel before becoming a product manager at Google, then a VC with Fidelity Ventures Capital — Google’s move to London could be just the shot of adrenaline that the city’s staid venture scene needs. Our chat has been edited for length.

    I had read that raising a fund was harder than you’d expected.

    It took us almost three years. There’s far less appetite for funds here, so it probably took two or three times as long [as it would have in the U.S.]. But we got it closed last year, with 90 percent of it coming from individuals and 10 percent from institutions. People don’t understand the opportunity here because [some of the biggest successes] don’t seem European. People often think that Skype and Spotify are U.S. companies; they say, “I’d rather have tech exposure in California.”

    What are some of the biggest challenges right now for European startups?

    A lot of ideas here are comparable to ideas in the U.S. but have a harder time becoming globally competitive because they don’t have the same firepower. Because there are fewer VCs here, a company will raise $1 million, while a similar company in the U.S. raises $5 million.

    There’s also a big gap in mid to senior management talent. When I went to work for Google in 2004, probably 20 percent of the managers were ex-Amazon, with another 10 percent from Microsoft [etc]. It was almost like an academy, with people bringing best practices from legacy companies. Here, that generational knowledge isn’t passed down the same way, so the biggest challenge for us is either developing that talent, or finding people who’ve learned at the Facebooks or Googles of the world and are coming here.

    Does it seem like more people are moving to Europe from the U.S.?

    It does. At some point, people want to come home. Especially with the cost of living in San Francisco and the housing [shortage], the city is looking less tenable to a lot of people. There’s a lot of value in California, but if you already have that network in place, it makes a lot of sense to come here, especially with the pace picking up. Ten years ago, if you were a Frenchman, you went to the Valley and you didn’t come back. Now, it’s feasible to do your company here.

    You invest across Europe. Is it possible to draw broad distinctions between startups in Helsinki, Sweden and Berlin, for example?

    Finland is disproportionately excellent. The Swedes are thinking internationally from day one; there’s also tons of computer science talent familiar with the programming language Erlang, which is very good for massively parallel communications and was developed at Ericsson, outside Stockholm. And Berlin is super cool, like Brooklyn. Its livability is really high. There’s a big consumer and design focus. But it’s still in that hype cycle. People are talking about it, but it hasn’t had any tremendous successes yet except for the [e-commerce company] Zalando.

    Are you seeing more sophisticated angel investors in Europe?

    Every city has a good group of angels. It’s very different from angels in the Valley, though, who are former engineers, product directors, [and other former operators]. Here, they’ve mostly made their money in finance or banking and they’re tech fans; they don’t have that industry background.

    It all sounds a little like New York five years ago.

    It feels a lot like New York five years ago. There’s a lot of interesting stuff bubbling up, but it takes a while for people and money and ideas to come together.

    London has a few big firms: Index Ventures, Balderton Capital, Accel Partners. How do you feel about Google Ventures now coming to town?

    I’m tremendously excited about it. That London is the first place outside of California that Google is establishing an office – ahead of New York and many other places they could set up – it’s a pretty strong signal.

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  • A Small New Fund with a Game-Changing Idea

    kent_goldman2Unlike venture capitalists, who get to place dozens of bets in search of a winner, founders typically have one shot at winning the startup game.

    Kent Goldman, a former partner with First Round Capital, thinks he has struck on a way to improve those odds. Today, Goldman takes the wraps off a new, San Francisco-based, $30 million seed fund called Upside Partnership that will give every founding team in its portfolio a piece of its carry, making them effectively Upside’s partners.

    That’s right. Goldman will take what he characterizes as a standard management fee. But he’ll be sharing an amount of carry that he expects will reach “significantly into the double digits,” albeit “less than half” of Upside’s overall upside.

    If a venture capitalist somewhere just spit out his coffee, it’s understandable. Like it or not, Goldman may have just changed the game for everyone. What founder wouldn’t want a piece of a venture portfolio at no additional cost? And what better motivation for founders to help one another?

    VCs like to talk with entrepreneurs about what’s fair. Goldman’s model — where founders will receive carry on a sliding scale, based on Upside’s initial check size — doesn’t get much fairer.

    Other details about the fund: Unlike the many specialized seed funds springing into existence these days, Goldman says he went in the opposite direction, with plans to focus very generally on “purpose-built founders who can explain why this is the right time in their life to pursue their passion.”

    Certainly, if Goldman is predisposed toward certain sectors, you wouldn’t know if from his portfolio at First Round, where his varied investments included the hotel booking application company HotelTonight; the real time analytics platform MemSQL; and Airware, a platform that helps other companies develop commercial drones.

    Goldman says he plans to write relatively small checks, too, staying in the “$300,000 range” when possible. For one thing, he thinks there’s a dearth of VCs who are willing or able to meaningfully help startups without more money riding on those companies. He also suggests that getting into the best deals might be easier if he’s not asking founders or other investors to “make room for me.”

    As for fundraising, Goldman, who is the fund’s sole general partner for now, says it took roughly four months, with most of the capital coming from institutional investors. In fact, Goldman says that less than $2 million came from individuals, including First Round founder Josh Kopelman, with whom Goldman remains close.

    It begs the question of why Goldman left a plum job with First Round in the first place.

    “Venture tends to not be a terribly entrepreneurial industry,” Goldman says. But he had his big idea, and he couldn’t let it go.

    “I view this like any founder who leaves a great company to try something on their own,” he says. Particularly when that company’s mission involves meeting with entrepreneurs every day, it’s “hard not to catch the bug yourself.”

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  • Mitch Kapor on Dropcam and Data Collection

    MitchKaporLotus Software founder Mitch Kapor is well-known for his philanthropy, including through the Kapor Center for Social Impact, which funds startups as one prong of a strategy to strengthen underrepresented communities.

    But Kapor has also made many bets on companies based purely on their technology and teams. Among them is the home surveillance startup Dropcam, acquired last month by Google’s Nest Labs for $555 million. In fact, Kapor was its first investor.

    Late last week, we talked about how that deal came together, and how Kapor feels about the outcome.

    How did you find Dropcam five or so years ago?

    I came across it through a third founder who left very early, Anson Tsai, who went on to found Cardpool, a market for buying and selling gift cards. Cardpool was acquired by [the payments network] Blackhawk early and very successfully. I’d met Anson socially through [entrepreneur and popular blogger] Andrew Chen.

    I don’t think people realize there was a third founder.

    Yes, with Greg [Duffy] and Aamir [Virani], who’d worked together at [the email startup] Xobni, which was just shut down by Yahoo, ironically [roughly a year after it was acquired for undisclosed amount]. I think the chemistry wasn’t right, so Anson left to start his own company, but I liked Greg and Aamir and what they were doing and thought they were riding some good themes so invested.

    Were you privy to any of Dropcam’s conversations with Google? I always wonder which investors know what and when.

    Our relationship as seed investors is heavily concentrated from the time we first make an investment up through a Series A. In Dropcam’s case, the Series A came pretty early, because, to his credit, Sameer [Gandhi] of Accel saw something in the company [and led the company’s Series A round in 2011]. Once Dropcam had a board, our relationship changed. I was involved, but more on demand, when Greg or Aamir wanted coaching or advice or introductions. In fact, I found out about the sale by reading about it in my Twitter stream and getting congratulated, and that’s typical if you don’t have a board seat. Seed investors often find out about big events as they’re happening or sometimes just before.

    What kind of return did you see on your investment? More than 100x?

    Definitely more than 100x. It was a big return.

    As a big believer in the company, do you think selling to Google was the best outcome for Dropcam?

    The right outcome has to do with the founders who are in place and deciding the right thing to do. Sometimes, they think it’s the right time to sell because being part of something bigger helps in achieving strategic objectives and getting [a financial] outcome. There are tradeoffs, too, if you stay on your own. You enjoy your independence and you can maybe build something larger, but it comes with a lot of headaches.

    I’m surprised people aren’t more concerned by certain companies’ moves to dominate the connected home, given their growing reach into other aspects of our lives. Do you have any thoughts about why that is?

    I think ultimately there will be some kind of new social contract backed up by laws that will put some restrictions on what companies that collect a lot of data on people can do with that information, and that would include Google, Apple, and Facebook. I believe it will be a long and messy road to get there, but if we look at what’s going on today, we see the outlines of how it will happen. For a number of years, for example, Silicon Valley companies resisted releasing their employment data. Google gets credit for its willingness to put it out there, though. It was difficult, because its diversity numbers are terrible. But the time had come for the company to take a step forward and it has.

    When do you think we’ll see these protective regulations?

    Probably 5 or 10 years from now, and I think it will come from unhappiness among consumers and other forces that convince Google that its long-term interests are better served by agreeing to do something that previously it found difficult or impossible to do.

    People will have to get more upset about the whole subject of large amounts of personal information being collected. But change happens. Consider gender issues. There’s been one embarrassing scandal after another, with Tinder, Github, and others. I don’t think there’s more of that going on now than before, but people are more aware that it’s going on now, it’s covered more, and there’s more of a climate that this isn’t right. It’s an issue that’s no longer ignored.

    We’re not there yet on data collection, but I think we’ll get there. It will happen.

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  • For Razor’s Edge, Ties to Intelligence Community are Key

    intelTo do business with the government, you could do worse than partner with Razor’s Edge Ventures, a no-frills, Herndon, Va.-based venture firm that’s investing a $55 million fund and whose managing directors include several executives from the defense contractor Blackbird Technologies; a former director of technology assessment at the C.I.A.-backed venture firm In-Q-Tel; and a longtime Cooley attorney who used to focus on M&A.

    The firm has especially close ties to the classified community, says the former attorney, Mark Spoto, who happens to be the only managing director that Razor’s Edge lists by name at its site. (The others prefer operating below the radar owing to their “other business interests,” he says.)

    That kind of — yes — intel, is a big advantage, Spoto says. National security officials “don’t just let people knock on the door and show off their stuff. You have to have clearances and longer relationships and to show people that you’ve vetted the technologies. Otherwise, they’d be buried in business plans.”

    So far, Razor’s Edge has made seven investments, writing initial checks of between $2 million and $5 million. Its most recent bet is CounterTack, a three-year-old, Waltham, Ma.-based firm that makes threat detection and response software. The company held a final close on its Series B financing last month.

    Razor’s Edge doesn’t focus on security startups alone, though. While a company “has to have some kind of innovative technology that has important national security applications,” says Spoto, “we’re looking for companies that have the ability to take their technologies out to other markets as well,” such as the oil and gas, financial services, and healthcare industries.

    The firm’s ties to the government also inform what it won’t invest in. For example, while Razor’s Edge is interested in autonomous vehicles, including drones, its partners think it’s too soon to make a bet. “The marketplace is being driven by an FAA regulatory scheme that’s still being developed,” says Spoto. “Investors who think the market will break free of that process in 2015 are being optimistic.” (Indeed, a new audit report notes that the FAA is “significantly behind schedule” in its attempt to meet Congress’ September 2015 deadline for integrating commercial drones into U.S. airspace.)

    Razor’s Edge doesn’t have any exits to show for its efforts just yet, but Spoto says its portfolio companies are healthy and growing. He points to two-year-old 908 Devices, a Boston-based company that manufactures battery-operated, hand-held chemical detection tools. “When we invested, it was pre-revenue. We helped them finish their product development and now the company is doing amazingly well.” (Razor’s Edge first backed the company in a Series A round in the fall of 2012. It went on to raise Series B funding last summer.)

    In fact, Spoto talks enthusiastically about all of the firm’s startups, as well as his transition from attorney to venture capitalist, a move he made after being approached by his current partners, who were previously his clients.

    “I had some sense of what it was going to be like before I came in,” he says. But he likes it even more than he imagined he would. “I learn new stuff every day, I see different ideas, I get to interact with people and solve problems. I wouldn’t go back to the practice of law if you paid me all the money in the world.”

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    Connie

  • Eric Hippeau on His Firm’s New Fund and Where It’s Shopping Now

    Eric HippeauLerer Hippeau Ventures announced yesterday that it has closed its fourth seed-stage fund with $62 million, up from the $50 million it raised for its third fund. According to Eric Hippeau, one of the firm’s four managing directors, the firm plans to hire more support staff, and the initial checks it writes to startups will likely increase from between $300,000 and $600,000 to between $400,000 and $800,000. Little is changing structurally, though.

    What is shifting a bit is what interests the four-year-old, New York-based firm, whose bets include Warby Parker, Buzzfeed, and LiveIntent, among many others. Hippeau, a longtime venture capitalist and the former CEO of Huffington Post, told me more yesterday. Our chat has been edited for length.

    You’ve been out fundraising numerous times in your career. What’s it like out there right now?

    By design, we fundraise every 16 to 18 months, so it can’t be a long fundraising cycle. So it’s about a three-month-plus period [that we need to gather commitments]. We’re very fortunate in that we have very supportive existing [investors] who tend to reinvest with us. We do attract new LPs every time we raise a fund, so there’s a due diligence process with new LPs.

    What was important to the new LPs?

    Every fund has to have a point of view and a differentiated position to succeed; that’s what new LPs are looking for. In our case, a number of things differentiate us. We’re seed-first investors . . and 70 percent our investments are in New York, with the rest tending to be in Silicon Valley.

    I do think venture is increasingly intriguing to LPs; I think there’s recognition that something important is going on that’s more than just building technology for technology’s sake – that technology is, in fact, disrupting a huge number of sectors and touching people’s lives in a much broader way today than ever before and . . .creating new wealth. So if you have a unique proposition, it’s a good time to be talking with LPs.

    You’ve said that just two partners have to agree to move forward on a deal, partly because it would be more time-consuming otherwise. Are you having to make quick decisions right now? How would you characterize the pace of deal-making?

    Deal flow is the strongest I’ve seen since we started in 2010, both in terms of quantity and quality. In New York, things tend to slow down in the summer, which is fine; it gives us a chance to catch up on other things. But we’ve been seeing super-high-quality companies coming through.

    As seed investors, how much “there” should be there when you’re looking at a startup?

    It doesn’t have to have a finished product but we do need to see a product. There are always exceptions. If it’s a repeat entrepreneur, and someone we know well, [or] if it’s [a] [business-to-business] enterprise startup, the product doesn’t have to be as far along.

    Looking out six to 12 months, what might you be investing in that you’re less focused on today?

    I think we’ll look more at fin tech, because New York has a lot of relevant experience and because, for the most part, to this day, [fin tech] is built on proprietary technology, and our sense is that it will use the same consumer tech we use every day in our pockets.

    You have a lot of media investments as a firm. Can you share some general thoughts about the future of the news business? Do you think, like Marc Andreessen, that it will grow 10x or more from where it is today?

    We invested in content way before people on the West Coast did and [remain] very bullish on it. We believe, for example, that there’s a ton of new platforms that need native content. So if you look at Instagram or Snapchat or WhatApp or social mobile, all of these platforms are opportunities for people to consume more content, and those opportunities allow for new brands.

    We also start content companies ourselves, [among them the animal-themed site] TheDoDo and NowThis News, which are short-form videos on Instagram.

    Is content the dominant theme of your portfolio?

    People think it is because of the Huffington Post and investments like Buzzfeed. It actually represents less than 20 percent of our portfolio.

    Connie

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  • Arvind Sodhani on the Giant that is Intel Capital

    arvindsodhaniintelcapital-304Last week, at a conference in San Francisco, I was asked to interview Intel Capital’s president Arvind Sodhani, who also holds the title of executive VP of Intel Corporation. The idea was to give the audience insight into how the nine-year-old corporate venture unit – which employs 85 investors around the world and invests between $300 million and $500 million each year – does what it does.

    Suffice it to say that it’s complicated. Here’s a cheat sheet, though, for investors and entrepreneurs looking for more, ahem, intel.

    Intel, like most corporate VCs, won’t invest in something that looks like it could be a financial home run but has no bearing on the company’s business. Every investment has to have the potential of delivering both a strategic and financial return. The good news: In one form or another, Intel’s business touches almost every sector out there, so it’s investing in everything from wearables to semiconductors to Hadoop, the bedrock software of so-called big data businesses — which Intel sees as a growth sector. Indeed, readers might recall that in late March, Intel forked over $740 million for an 18 percent stake in Cloudera, which produces the most popular version of the Hadoop software framework.

    Which raises another point: Intel Capital is stage agnostic. While it sometimes makes a swing-for-the-fences deal like Cloudera, it’s also willing to fund very nascent ideas, Sodhani told me last week, calling the organization’s “sweet spot between $5 million and $20 million – that’s where we’re doing the bulk of our investments.”

    As for where it’s making its bets geographically, Sodhani said that half of Intel Capital’s investments are here in the U.S., with the rest distributed globally, including in China, where the organization recently committed to invest up to $100 million in companies working on smart devices, as well as Israel, Russia, India, Brazil, Japan and elsewhere.

    Unsurprisingly, some places work out better than others. Intel Capital has backed companies in places like Vietnam and Chile, for example, but hasn’t been able to consistently find deal flow in either country. It also recently placed an investor in Nigeria to scout out opportunities in Africa, though Sodhani said it “takes a year-and-a-half to two years before someone new in a country can get going and see investments . . . When you arrive in a new country, it takes time to figure out the legal framework, what instruments are available . . . there are lots of different issues.”

    One of them is helping to develop a tech-friendly ecosystem, which Sodhani credits Intel Capital with doing in a variety of places like Vietnam, where startups are still a relatively new phenomenon. While there are plenty of founders, said Sodhani, wresting potential employees out of their solid jobs to work for those founders is still in an upward battle. “Entrepreneurs are willing to take the risk; the hard part is how do you get the rest of the people to come and join the company.”

    Before we’d parted ways, I’d asked Sodhani to share how investment decisions are made within Intel Capital. He suggested that, despite the sprawling design of the organization, it isn’t unlike most venture firms. Every Tuesday, it holds a weekly partner meeting where all deals receive some air time and potential new investments are presented. Company experts are then brought in to discuss and evaluate new funding prospects, questions are asked and researched, and after at least a second look at a company, a committee of five people within Intel Capital decides whether or not to back it. (Sodhani says that Intel Capital can “move lightening fast when there’s a great deal if we’re made aware that it’s a competitive situation. We can put together a term sheet in less than 24 hours if we want.”)

    Like a lot of firms with deep pockets, Intel Capital is also willing to overlook price if the technology is deemed as a must-have. “Valuations are very [high], and I’d say that we’re probably getting to a point where we need to be careful of them,” Sodhani said. Still, he’d added, “some things we have to hold our noses and say, [Let’s move forward], because the technology is important to us.”

    Open source software is one of those things, he continued. “It’s becoming very expensive, but open source is producing lot of software that’s critical. The whole trend of IT migration to the cloud — that’s a $30 trillion idea.”

    Connie

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  • True Seed Investors

    Pejman MarIn recent years, the bar has been steadily rising for funding rounds of all sizes, including seed rounds. Indeed, last week, early-stage investor Jeff Clavier told us that “there are way more seed [stage] VCs investing at the same time – when there are proof points – than those who just go with their gut instincts.”

    Clavier readily admits that he’s among those looking for early products, not ideas, as was once the case. His firm, SoftTech VC, pores over the business ideas of between 500 and 750 companies each quarter and invests in just four or five of them. Given so many proposals, startups with traction inevitably stand out. “We need a way to filter them somehow,” he explained.

    Still, as round sizes and valuations shoot upwards, and VCs like Clavier focus on the numbers that can justify their increasingly large bets, a contrarian opportunity has arisen for investors who are willing to just go with their gut. One daredevil that falls in this category is venture capitalist Manu Kumar, a man renowned in Silicon Valley for helping massage messy concepts into fundable businesses. Others include Pejman Nozad and Mar Hershenson, founders of the eponymous early-stage firm Pejman Mar. As Hershenson, who I met with last week, told me, “We invest super early, when there are two or three people and no product. It’s what true seed meant a long time ago.”

    Hershenson and Nozad – a former rug dealer turned highly successful angel investor – are rushing into this void with open arms. With a debut fund of $40 million, the 10-month-old firm has already backed a dozen teams, half of which have gone on to raise additional funding from heavy-hitting venture firms, including from Sequoia Capital, Kleiner Perkins Caufield & Byers, Canaan Partners, and Khosla Ventures. (Guardant Health and DoorDash are among those to raise a follow-on round. Soon to be in the market – EagerPanda, a semantic search startup.)

    Nozad’s reputation for risk-taking has become a huge source of dealflow, a fact which Hershenson knows from first-hand experience. Fifteen years ago, her husband, Matt, co-founded Danger, an early smartphone company. When he was trying to get the company off the ground, he knocked on investors’ doors for nine solid months. “One day,” she recalls, “Matt came home and said, ‘Well, Pejman Nozad is giving us money.’ I said, ‘Who is Pejman?’ Matt said, ‘He sells rugs.’ It was like, ‘What?!’” Microsoft subsequently acquired Danger in 2008 for $500 million

    Hershenson – herself a three-time entrepreneur who remained friends with Nozad over the years – also drums up deal flow by spending her days at Stanford, where she received her PhD in electrical engineering.

    “I’m there all the time – when there are final project classes, if they need anyone to judge [a competition] or [give a] talk. We’re close with the students and with the organizations at the school.” There are “a lot of amazing people at Stanford,” she adds. “There’s plenty for everybody – let’s put it that way.”

    In fact, the firm is hosting six “companies” from Stanford this summer at its 5,000-square-foot office in downtown Palo Alto, Ca.

    “We don’t run it like an incubator: some of them are graduating but some will go back to school,” she explains. Still, Pejman Mar is giving each between $15,000 and $25,000 in convertible, uncapped notes.

    “We won’t count them as portfolio companies,” she tells me. They’re too nascent. Later on, though, who knows? “Maybe some of them will work out,” she says with a smile.

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    Connie

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