• Jeff Clavier on Dilution, Marketing, and Series A Stunts

    survivorLast week, for a conference in San Francisco, I was asked to interview Jeff Clavier, the straight-shooting founder of the early-stage investment firm SoftTech VC. We were tasked with addressing the so-called Series A crunch and its ripple effects. As part of that chat — edited here for length — Clavier volunteered some interesting tidbits, including how to prepare startups for their next round of funding, and the most ruthless firm on Sand Hill Road.

    You aim for a certain ownership percentage with each deal. Do things usually go as planned? I hear of uncomfortable situations cropping up between Series A and earlier investors.

    When you invest at the seed round, you have the legal right to maintain ownership provided that you clear the hurdle of being a major investor, and we always ask to be a major investor and have pro rata rights. However it’s true that there are some Series A firms on Sand Hill – I won’t mention any names but one that comes to mind starts with an S – that always try to cut you out of your pro rata ownership because they always want to take as big a chunk as possible of Series A rounds. They typically want something in the 30 percent range.

    If you want to take 30 percent and let insiders take their pro rata, that’s going to be a pretty dilutive round for the founders, so there are some games that they play. The way to counter the game is to organize a bit of a process where you can have multiple firms submitting term sheets, then figure out which is most interesting and the fairest to the founders as well as the insiders.

    Are you seeing more Series A firms try to elbow seed-stage investors out of the picture entirely?

    Yes, the “piggy” round. . . We have seen entrepreneurs take these rounds in lieu of a seed round – mostly people who’ve been around the block once or twice — and if there’s enough conviction from the VC to help entrepreneurs with the earliest stages of their companies’ life, it’s great for the entrepreneurs.

    Is that true from an equity standpoint, too? I wonder whether it’s good that — with so many seed and post-seed rounds today — entrepreneurs have given investors 20 percent of their startups before they even reach a Series A financing.

    It’s actually more than that. The seed round dilution is typically 20 to 25 percent dilution, plus [there’s the issue of] the option pool, meaning reserves for future hires. When you tack on your Series A – and some firms try to get 25 to 30 percent ownership for themselves, then you have the add-on of the insiders pro rata, which can be five to seven percent – those two rounds can be pretty dilutive.

    What we’ve seen with companies that are doing really well and are sort of “hot” is the percentage target of the Series A investor will go from 25 to 30 percent to 20 to sometimes 15 percent, because when you’re in a competitive situation, paying up is not the only way. Being easy to deal with and friendly from a term sheet perspective is also a way to win those competitive situations.

    So really only the hottest entrepreneurs are not getting screwed.

    I wouldn’t say screwed. If you can [run your company without outside investors and it’s a hit], you’re home free. [If you can’t], it’s really the support and help that you’re going to get alongside the cash that makes a fundamental difference in the seed-to-Series-A journey. You pay in dilution for what you get in terms of capital and support.

    Given that it’s your biggest challenge, how do you help your seed-funded companies nab Series A funding?

    Part of it is understanding the market dynamic. You know that some firms like to meet startups very early on and create relationships over a year, for example, like our friends at Emergence Capital. They love to meet companies way ahead of any fundraising, so roughly a year before we know we’ll have to fundraise, we’ll either introduce our companies to them or they’ll ping us, because they’re pretty good at that. Then, a year later, we’ll [reach out to say], “They’re thinking of doing a round, we’d love to get your feedback,” wink, wink.

    Connie

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  • VC Keval Desai Talks Real Time Spending in a Want-Driven Age

    Keval DesaiVenture capitalist Keval Desai, a product management director at Google turned VC, has a differentiated take on investing. His two theses are based around want versus need and real-time investing, the former being a focus on companies that help fulfill consumers’ desire, the latter being companies that solve problems for consumers in real time. (Suffice it to say that far from seeing a bubble, Desai is bullish on the consumer Internet. Among his investments is the luxury consignment site RealReal, which just raised a fresh $20 million.)

    We met at Rose’s Café in San Francisco on Friday to talk about it over eggs. Our conversation has been edited for length.

    You worked on Google’s video ads efforts and a TV initiative that was eventually folded into YouTube. Do you think the company is still interested in TV?

    I’d say yes. There are 5 billion homes in the world with a TV, compared with 2 billion with a PC and 1.3 billion with a smartphone, so if you want to reach a global audience, TV makes sense.

    Silicon Valley has tried to reinvent TV over the last 20 years and we’ve failed, for the most part. I think Larry [Page]’s takeaway is that [past efforts] were too slow. He has an obsession — rightly so, I think — with speed. If you make something superfast, you have more success. Google was the fastest search engine; Chrome is fastest browser. So I think Google does have an interest, but it probably wants to reinvent TV in a way that’s fast and open makes it easy to discover content quickly.

    How did your work at Google inform what interests you today as an investor?

    I think the web is becoming more like TV, a discovery-driven entertainment medium. If you think about it, over the first 20 years, the Internet was more about fulfilling basic needs; it was more like a utility. You got your modem and broadband and browser and then identity, via Facebook. Once those basic needs were satisfied, we began focusing on things we want but don’t need: YouTube, Pinterest, Airbnb. Do I need to watch videos online? No. Do I need to go on vacation? No. The need economy was winner-take-all; how many broadband and email and browser providers do you need? But how many places do you go see a movie, eat a nice meal, stay in a hotel, travel for vacation, buy shoes? The want economy is not winner-take-all and it’s 100 times bigger.

    What does that say about the valuations of Uber and Pinterest, big companies with growing numbers of competitors?

    Generally, I think people and markets are smart. These people who are paying “lofty” valuations are sophisticated investors who’ve been investing for decades in many cases.

    Also, the number of hours of the day that people have access to services is exponentially bigger than anything in the desktop era, so the mobile economy is huge. When Netscape and eBay and Amazon came out, it was very hard to reach $1 billion in revenue; now, there are 1.3 billion smartphone users in the world and Uber, which is in something like 50-plus cities, is probably already reaching half that addressable business. That translates into $2 per person per year. Then you put a 10x multiple on that? Sure. That’s not even a high multiple. Real time markets are changing everything.

    Because people can order things whenever and wherever.

    Think of the impact of that on service providers in our economy: Restaurants, taxi drivers, other businesses. Because end users can make decisions 24/7, every service now needs to be operating 24/7. I’m not an investor in HotelTonight, but I like them. They aren’t booking six months in advance. Instead, I show up to an airport and book a bed [at the last minute]. If I’m guaranteed a spot at a hotel that I like without paying an arm and a leg, I’m going to do it. It’s like [Google] AdWords. When I load a page, a relevant ad shows up. I think the whole world is moving in that direction.

    Service providers have always hoarded inventory because consumers couldn’t make decisions in real time and there wasn’t enough data about matching the right buyers with the right sellers in real time. Both of those issues are being fixed.

    Before we part, what’s one thing people might not know about you?

    I’m on eight boards, and six of them are led by women.

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    Connie

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  • VC Ed Sim on Seed-Stage, East Coast, Enterprise Investing

    Ed SimBack in December 2012, Fred Wilson of Union Square Ventures told entrepreneurs who crowded into the New York law offices of Cooley that they more should focus on enterprise technologies – and not simple analytics masquerading as such.

    A lot has changed since then, says Ed Sim, cofounder of the seed-stage fund Boldstart Ventures in New York, who suggests that when it comes to even pure enterprise tech – beyond enterprise applications – New York is catching up to the Bay Area. We talked last week about what he’s seeing and how his firm is funding what it’s finding. Our conversation has been edited for length.

    You raised a $1.5 million proof-of-concept fund in 2011, then another $17 million last year. So things must have gone well with that first fund.

    We sold companies to Salesforce (GoInstant), LinkedIn (Rapportive), Google (Divide), Akamai (Blaze.io), and Telenav (ThinkNear), so that beta test is proving fruitful.

    What size checks are you writing today?

    Between $250,000 and $350,000, with half [the fund] reserved for follow-on rounds. Our upper bound is $1.5 million. We shoot for an ownership stake of anywhere from 3 to 8 percent, depending on how early we get in.

    How do you differentiate Boldstart from other firms?

    It’s a leveraged model. We put together an advisory board of 12 folks — people we’ve funded over the years, many of whom have had successful exits – and they’re very helpful from a deal flow and diligence perspective.

    Also, [firm cofounder] Eliot [Durbin] and I kind of figure out one or two things the entrepreneur needs to get a Series A done, whether it’s to refine the products, or introduce the founder to a few customers. Then we’ll co-invest with a few other micro VCs to share the load in what we do. It’s been working thus far. Our portfolio companies have gone on to raise more than $250 million in follow-on financing.

    Which firms do you tend to work with?

    We’re probably one of few teams in New York with a big focus on enterprise at the micro VC level. Other investors elsewhere, including in Boston, do more. So for example, we’ve co-invested with Atlas Venture in two companies.

    Why aren’t more seed-stage investors focused on the enterprise in New York? Are there fewer angels and micro-VCs in New York with enterprise investing experience?

    Enterprise is where the money is and plenty is happening in New York, including a number of Israeli technology [companies relocating here] because of customer traction.

    There’s a lot of talent around, too. One of our portfolio companies, Divide, was started by a team that was building software products at Morgan Stanley. [Divide, whose software helps corporations manage their employees’ personal smartphones, was acquired last month by Google for undisclosed financial terms.] Security Scorecard, which is still operating in stealth mode, was founded by guys who were heading up the security division of Gilt Groupe. A third [portfolio company], Yhat, was founded by people who spun out of the analytics and data warehousing group of OnDeck Capital.

    For us, this whole angel scene is tied to the vagaries of the stock market. When it’s doing well, more are out [writing checks]. Now, people are in wait-and-see mode because no one is sure which way the market is going, so that’s more opportunity for us.

    Connie

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  • Cybersecurity Investor David Cowan on Hackers, Valuations, and What’s Hot

    David CowanWhen the news emerged last week that Defense.net, a cloud service that defends data centers and applications from cyber attacks, was selling to publicly traded F5 Networks, some were surprised it was being swept up so soon. Its founder, Barrett Lyon, had started two other cyber security companies; it had been incubated at Bessemer Venture Partners just last year. Could it be that the market – spending for which is expected to hit $77 billion this year – is peaking right now?

    Longtime cybersecurity investor David Cowan, a general partner at Bessemer’s Palo Alto, Ca., insists that’s far from the case. Rather, in a call yesterday, he said that Defense.net’s business is “an expensive one to build. There’s a reason there aren’t a lot of companies out there that provide this kind of business. I would have been happy to keep going, but I can understand why the team found it attractive to take a strategic multiple when it was offered.”

    Here’s some more from that conversation yesterday, edited for length:

    A lot of businesses complain that it costs more to safeguard their systems than deal with a breach. What are you seeing?

    I wouldn’t say that companies would rather spend to remedy the breach rather than prevent it, but [there’s now an] awareness that breaches are inevitable, so part of any cyber plan has to be preparations for dealing with a breach. There are startups out there today that all they do is sell breach-response services to help companies prepare for that inevitability, though those aren’t particularly interesting to me because [they] don’t use a lot of technology to do it.

    As we connect more things to the Internet, more things become vulnerable to attack, including heart monitors and other medical devices. Is that an area that interests Bessemer? Do you have a vertical approach?

    We generally don’t have a vertical approach, but having said that, I do think the medical device vertical is pretty interesting. There’s a vast sea of medical devices out there and hospitals that are running on old Windows machines, many of which are no longer even supported by Microsoft. And those connected machines are likely swamps for malware. And nobody has any visibility into them. Companies that are going after I that . . . it’s an interesting vertical.

    What’s one thing you’re seeing in cybersecurity right now that wasn’t possible until recently?

    I invested in this company, Internet Identity, because they enable companies to do what no one has done before, which is to collaborate on cyber defense.

    There’s a lot of collusion by attackers in the form of exchanges, [including] people buying and selling [personally identifiable information]. As a result, it’s easy for someone to ramp up quickly as a cyberattacker. But until 18 months ago, no one ever talked openly about security infrastructure outside of their company or government agency. It was viewed as terribly private and intimate.

    Since then, there’s been a really a big shift in people’s understanding that the private and the public sector all need to work together to share cyberintelligence, so that if an attacker is identified in one place, all doors [will be] closed [to that person] in buildings everywhere. That requires a lot of technology . . .and that’s what Internet Identity has developed and built. It now supports 30 federal agencies and at least three of the world’s six most valuable technology companies, and everyone who joins the exchange gets the benefit of all that intelligence in real time on their own network. It’s kind of like the social network of cyber; you share and you get back [a lot], and once someone joins the exchange, he or she naturally wants to invites lots of friends into the exchange as well.

    You say Defense.net’s sale wasn’t related to valuations. What’s happening out there, though?

    There’s been a huge increase in the value and multiples for companies selling cloud services to enterprises [in recent years]. With a huge pullback this year in the public market, I think it’s fair to expect that the private markets will have to respond accordingly . . .generally, when the [public] market goes up, it’s a matter of weeks before the private market does the same. When it goes down, it’s a matter of months [before private markets follow suit].

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  • VC Jim Scheinman Has Business Ideas for Days; Here’s His Latest

    Jim Scheinman.photoMicro VC Jim Scheinman of Maven Ventures is usually noodling on a new business idea, he tells me over coffee at The Battery, a private social club in San Francisco where various tanned VCs are seated opposite pale entrepreneurs in spacious black leather booths.

    One of these ideas was “a payment platform for the social web” that Scheinman dreamed up in 2007, but because he doesn’t code, he “found two guys who were basically going to build it with me.” Scheinman says he became the company’s acting COO and first seed investor. That startup, Jambool, was acquired by Google in 2010 for a reported $70 million. (It had raised $6 million.)

    Tango, a messaging company with more than 200 million users and roughly $367 million in venture backing, was also “in part, kind of my idea,” says Scheinman, an early investor in the company who says that, among other things, he came up with Tango’s name, its viral marketing strategy, and some of its early employees.

    Scheinman’s newest notion is turning his current “sub $10 million fund” into a new $50 million to $100 million second fund in the next year or so with his same LPs plus an institutional investor or two. The question is whether Silicon Valley is ready for this particular idea.

    A native New Yorker, Scheinman traces his investment background back the baseball cards he sold with his brother in high school. Within a few years, the two were running a multimillion-dollar business that employed 50 people, but Scheinman wanted more out of life, so not long after graduating from college at Duke University, he headed to UC Davis for a law degree, and afterward, to one startup and then another.

    It was at his second startup — San Francisco-based Friendster, one of the earliest social networks — that he met married programmers Michael and Xochi Birch. As Scheinman tells it, he was looking for acquisition targets for Friendster, but he was so impressed with the Birches that he instead convinced them to make him their third employee — first at their startup BirthdayAlarm and then at Bebo.com, a social network that AOL acquired for $850 million in cash in 2008.

    The sale made both Birches wealthy. (Indeed, they own and operate The Battery.) It also gave Scheinman the freedom to become an angel investor as well as raise a small fund once his angel investments began to pan out. “I’m happy to make people money and get a dinner or a thank you, but I thought, ‘Why not pool some of that money and take 20 percent?’”

    Scheinman has plainly taken his role as a VC seriously. He currently backs about six companies each year, writing checks to nascent startups ranging between $100,000 and $150,000 and very occasionally investing in a Series A or B round, such as with the investing platform AngelList and Banjo, a real-time content discovery company.

    Scheinman has also created a low-flying incubator that works with up to six startups that each receive a $250,000 convertible note, six to nine months of office space, ongoing help from Scheinman, and access to 20 mentors, including startup CEO coach Dave Kashen and Andy Johns, who has been a user growth manager at Quora, Twitter, Facebook and now Wealthfront. (Scheinman says the idea is to create or identify nascent consumer startups and help them scale massively. The mentors and Scheinman’s LPs receive a collective 3 percent in each startup; Scheinman gets another 3 percent.)

    Scheinman claims his formula is working. On the VC side, he says he was able to take “70x” his original investment off the table earlier this year when Alibaba led a $280 million round in Tango. (He claims he still maintains most of his ownership in the company, too.)

    Meanwhile, a company he incubated, Epic, a year-old, all-you-can-read e-book service for kids, has raised $1.4 million from investors, including TomorrowVentures, Webb Investment Network and Menlo Ventures.

    Scheinman says the Epic concept was his, adding that he’s always happy to share his ideas, particularly if they can turn into high-growth businesses. “The way I work is I talk with everyone about an idea, because you never know who it will resonate with or who is doing something similar.”

    (When I reach out to a couple of entrepreneurs who Scheinman has worked with in the past, one doesn’t respond to a Memorial Day email; another characterizes Scheinman as very helpful in the early days of his company and says Scheinman has a great consumer touch but differs with his portrayal of some of his specific contributions.)

    I ask Scheinman how he would scale his operation to fit the demands of a bigger fund. In addition to bringing aboard a second GP and two associates, he says he’d lead more deals, rather than hand so many off to his network. “Most of the companies [Maven] has incubated have gone on to raise $1 million to $1.5 million. Maybe I do that check or do $1 million and bring in one other syndicate.”

    Scheinman adds that he’s “not running these businesses. But I know the problems they’re going to face and I can help them avoid some of them.”

    “My value proposition is simple,” he continues. “If you want to build a hyper-growth consumer business and you think I can be helpful to you, you should let me in.”

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  • VC Brian Hirsch: New York is Just Fine, Thank You

    brian-hirschBrian Hirsch founded the New York-based venture arm of Greenhill & Co., then, in 2011, Tribeca Venture Partners, which is managing a $65 million debut fund. Hirsch knows the New York tech scene, in other words, and he’s a little exasperated by recent reports that it isn’t all it’s cracked up to be. Yesterday, we chatted by phone about what he’s seeing in the trenches.

    We’ve been discussing differences between what’s happening in New York and the Bay Area. One burgeoning trend out here, apparently, are rounds where one investor tries writing a check for an entire seed round, instead of pulling in a handful of co-investors. Have you seen this happening in New York?

    I’m not seeing it . . .but I’ve heard of things like that happening, mostly [involving] larger funds that want more control. I do wonder if there have been more learnings by those involved in party rounds about the increased competition at the table when it’s time to do [the startup’s] follow-on funding. [These new efforts] could also be tied to ownership. Smart investors are starting to understand that you can have a lot of great companies in your portfolio, but if you own one percent of [each], it may not move the needle. It’s still too early to know if these seed-only funds really [produce returns]; the challenge of the model is that you wind up owning more of your worst companies and less of your good ones.

    You’ve backed 15 companies at the Series A level with your new fund. Have Series A rounds begun to balloon to Series B size, as in the Bay Area?

    No. There’s just a lot more capital there and funds tend to be larger and much more competitive than here. If you’re looking to raise a Series A round here, there are just five to 10 funds that you’re going to go to that consistently lead or co-lead Series A rounds.

    For good deals [locally], there’s always some competition, but we’ve put out 18 term sheets since [founding Tribeca] and we have 17 of those companies in, or about to be in, our portfolio. The one [outlier] was a situation where another fund was 70 percent higher in valuation, and even in that case, the investor invited us into the round, and we chose not to do it. We haven’t been blown out of a deal.

    This is purely anecdotal, but I hear less about West Coast VCs canvassing New York. What’s your experience been like this year? Are you seeing the same level of enthusiasm from those investors?

    They’re here. Accel and NEA opened offices and they do occasional investments here. But the power center is Silicon Valley, and when 95 percent of your time is spent in one market and 5 percent in another, it’s hard to make an impact. You really have to be living in a community to be networked. Most – if not all – of the out-of-state funds haven’t hired someone who has been active in the market here for 15 to 20 years because there aren’t that many, and those who do have that background have opened our own firms. [None of us] wants to be part of a West Coast firm that decides New York is great today but might change its mind in five years.

    Tech investor Chris Dixon, who long lived in New York and now lives primarily in California, has reportedly said of New York that it’s about applying, not inventing, new technologies at this stage in its evolution as a tech hub. Do you agree?

    I think if you drink enough of the water, this Silicon Valley stance somehow becomes ingrained. I do agree that some really hard-core tech — storage networking technologies and semiconductors — might [remain West Coast industries], but with software – and that’s where 90 percent of the value will be in venture capital over the next 50 years — there’s no advantage between that market and this market, which is why every year, the gap between New York and Silicon Valley shrinks further.

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  • Rebecca Lynn on the Power of Second Movers

    Rebecca LynnIn venture capital, there’s a lot of talk about “first-mover advantage.” Too much, says Rebecca Lynn, a general partner at Canvas Venture Fund (which spun out of Morgenthaler Ventures last year).

    “If you look at my portfolio, I’m usually not [backing] the first company with an idea,” Lynn observes. “I let that company break its pick and [zero in on] the second mover, the one that figures out the model when the market is ready for it.”

    Even though Lynn is a chemical engineer with both an MBA and JD from UC Berkeley, she doesn’t fit the conventional VC mold. For starters, neither of her parents went to school. Raised in a farming town in Missouri, Lynn learned computer programming beginning in third grade as part of her small school’s program for gifted students.

    Though Lynn has led just seven deals, she has assembled an impressive portfolio, including what could be a career-making bet on the online lending marketplace LendingClub. Her key criteria is whether she could imagine herself working at the company.

    Lynn’s approach clearly resonates with entrepreneurs. In fact, over dinner in 2009 to discuss the LendingClub’s Series B round, founder Renaud Laplanche told Lynn’s colleague, Gary Little, that he would accept Morgenthaler’s term sheet only if Little gave Lynn — then a principal — Morgenthaler’s board seat. “To Gary’s credit,” she says, “he didn’t do what a lot of VCs might have, which is spend the next half hour convincing Renaud why it should be him. He just said, ‘Of course she’ll be on your board.’”

    Here’s a bit more from our conversation yesterday afternoon:

    You’ve had a lot of careers, a product, you half-kiddingly say, of having ADD. You’ve been a nuclear engineer, worked in new product development all over the world for Proctor & Gamble, and been a marketing VP for NextCard, one of the first online credit card issuers. What haven’t you done that you wanted?

    I always wanted to start a [tech] company. I ran the business plan competition at [the Haas School of Business at Berkeley] with the idea of meeting people at the school and starting something, but I ended up meeting the guys at Morgenthaler at one of those events. Even [after joining the firm], I thought, I can meet people to add to my team or get them to fund me or pick whatever company [seeking funding] is most interesting and join them. . . After that dinner with Renaud, I thought, “Now I’m in venture.”

    How would you describe your pacing right now, given that Canvas closed a $175 million fund last fall?

    I’m funding a couple of companies a year. Because the angel environment has been so hot in recent years and you can now invest in so many Series A or B deals, the bar is pretty high, which is hard because there are so many interesting companies coming up, it’s difficult not to do more.

    You’ve been a VC for five or six years. Have you established that elusive “pattern recognition” that VCs say they develop over time?

    When we were spinning out Canvas, they put us through this test that determined that I’m half intuitive and half analytical, and I’d say the same is true of venture. You can get through the analysis: Is this a big market, is this company going to disintermediate an offline business, is this a CEO with a chip on his or her shoulder? These are all things you look for. But the biggest piece is the intuitive piece, which is hard to verbalize but I do think gives women a leg up in venture. With every one of my investments, I’ve had a thesis, I’ve mapped out the space, and said, “This is the company I want to bet on.”

    You bring up gender. You think it’s an advantage, being a woman in this field?

    I do. I think women overall are pretty good investors and that this intuitive piece is an interesting string to pull on. Some industry stats have said that women make up 11 percent of venture firms, but that’s bullsh_t. If you subtract out Cisco and Intel and focus on the people at firms who are leading at least a deal a year, that number drops to 3 percent, the same percentage of female-led startups that raise venture funding. It’s pretty interesting how closely the two mirror each other.

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  • VC Josh Felser: Small Steps are Better Than None

    bio-joshfelser (1)This week, a new study found that tropical cyclones worldwide are moving out of the tropics and more toward populations of people, especially in the Northern Hemisphere. It’s the kind of news about which we should be more aware, and concerned. But in the land of social media, it commanded about as much attention as a new software update from Blackberry — which is to say it went largely unnoticed.

    Josh Felser isn’t okay with that. Which explains why the successful entrepreneur turned venture capitalist is trying to change the conversation through #climate, a new nonprofit that has enticed a small but growing number of people to download its app.

    Here’s how the process works, loosely: The months-old organization researches and produces information on hundreds of climate-oriented nonprofits. It then produces shareable “actions” based on users’ interests. If I were predominately focused on the Amazon rainforest, for example, I might be pointed to the Rainforest Trust organization, along with a tweetable link about saving the cotton-top tamarin. My Facebook friends or Twitter followers could then click on that link to learn more about why these small primates are endangered and, hopefully, donate to Rainforest Trust.

    It’s a tall order, of course — getting people to use the app, as well as ensuring the prompts are so compelling that social media users, despite their short attention spans, take the time to click on them.

    Felser argues that he had to start somewhere. “You can’t look at this as a viral media app,” he told me during a chat last week. “Getting people to focus or take action on a negative [like global warming] is hard. But we know that in the last three weeks, we’ve driven 35,000 unique visitors to various nonprofits’ sites. That’s hard to do and I feel really good about it.” (Asked if his team can track how many donations have resulted from those visits, he says the technology exists, but that getting nonprofits to change their code is “a bit of a challenge.”)

    So far, certain sports and entertainment figures have had the most impact on social media, including the band Guns N’ Roses, which has been asking fans to help save the Amazon, and the NBA, which has been promoting green initiatives and sustainability.

    Felser would like to see many more of his colleagues in tech take an interest, though. Tweets of congratulation on his efforts have been nice, he suggests, but as far as he’s concerned, the Silicon Valley startup community needs to get more visibly involved in amplifying the work of climate organizations.

    “We’ve created climate change and we have to fix it or it will destroy us,” says Felser, alluding to drought in the Middle East and Africa and rising sea levels that are putting people at risk in coastal regions like eastern India and and the Mekong Delta in Vietnam. “It makes poverty worse, it makes malaria worse, it makes everything worse.”

    Felser says not everyone has to get behind climate change, though he thinks they should. Eventually, his organization will broaden its mandate to include many other causes.

    Either way, he persuasively argues that the tech industry is missing an easy opportunity to be helpful. “I’m not sure that people in tech understand the impact they can have, with their knowledge, expertise, and reach. All are underutilized resources. They’re so passionate about entrepreneurship and tech that many forget the substantial impact they could have on the world if only they’d apply [themselves] to a cause.”

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  • Hunter Walk on Thinking Longer Term

    Hunter Walk.photoIt seems like yesterday that Hunter Walk and Satya Patel officially closed their first $35 million venture fund, but it was actually early last summer. And in the life of a seed-stage firm like Homebrew — where Walk and Patel have two-thirds of their capital reserved for follow-on investments — that’s an eternity.

    No wonder Walk – who previously worked for nine years at Google – and Patel – who logged a decade at Google, Battery Ventures, and Twitter – are already thinking about what a second fund might look like. Walk and I talked about it last week over a burger at a San Francisco eatery. Our conversation has been edited for length.

    You say you focus on the “bottom-up economy,” services and tools that make it possible for small players to compete with big companies, including, more recently, looking at bitcoin as a bottom-up currency; 3D printing as bottom-up manufacturing; and drones as bottom-up satellites. How else does Homebrew distinguish itself?

    We didn’t create Homebrew to create more noise in a crowded marketplace. We felt there was still a pretty small number of seed-stage funds that will be around for a long time, that have been started by former operators, and that want to take front-of-the-round positions.

    Why makes you better positioned than some?

    First, having a partner who has done venture before [is a big advantage]. There’s also a set of best practices and certain frameworks and models that we’ve thought about in advance — such as [around] what cash flow and portfolio management look like — that sometimes folks who’ve only come from an operating background or angel investor background don’t really understand.

    You’ve told me you could have raised more money last year. Will you go bigger the next time and will we see a third partner?

    That’s something we’ve discussed only lightly and I don’t think we’d do it in the near future. In some ways, we started Homebrew because we didn’t want to join existing funds . . . And so it’s this ironic situation where, if we were to try to find a third or fourth partner down the road, would we suddenly be the incumbent? How would we attract an entrepreneurial VC versus someone who just sees us as an existing fund? So we have to think about all that.

    I think the incentives are to raise more money, [between] management fees, ego, and deal flow optionality – you get exposed to a lot of things you want to invest in. But we’re not doing this to [eventually] raise a $500 million multistage fund or become a 12-partner business that builds out shared services and competes with billion-dollar funds. We know firmly which side of the [investing] barbell we want to be on.

    Roughly one year into this endeavor, what’s been the biggest surprise?

    With venture — and I think it’s one of the reasons I write so much, working through my own learnings – the fund cycle is long. Satya just saw two exits from companies he invested in at Battery in 2007 and 2008. So you want to bring a sense of urgency every day, to lean in and help [your startups], but you also have to manage your own energy and keep the founders who are burning hard every day in the right frame of mind.

    How?

    By making their lives simpler [and doing what you can] to clear the road ahead. We also ensure boards are formed with an outside board member. Most seed investors don’t ask for a board seat and don’t care if there’s an outside board member. We care a lot, not because we want control but because we want first-time founders to build confidence and a management cadence and, when it comes time to raise a Series A, signal to other investors that theirs is a company that’s been operating with some maturity.

    You don’t need a bunch of people around the table. But having worked for strong founders [at Google and Twitter] and seen the benefit of founder-driven companies — not just in year one but in year 10 — we want folks who are building something that, in their head, will be around a while. And our job is to help prepare them for that, because it’s not easy.

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    Connie

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  • Ed Tech Startups are Hot: Now, How to Make Money

    ed-techThere’s no question that when it comes to ed tech, the market today is about as hot as it gets. According to CB Insights, roughly $600 million was invested in 103 related deals in the first quarter of this year. Compare that to all of 2013, when investors plugged $1.25 billion into ed tech startups, and you start to sense just how brisk the pace of investing has been.

    Some questions now are where to pour more dollars, as well as how investors will wring venture returns out of the startups they’ve already backed. Wright Steenrod, a partner at Chrysalis Ventures, has a few answers, based on his 10 years of experience in ed tech investing. We chatted by phone yesterday.

    Your firm has sold several ed tech companies, and you’re currently on the boards of three others. What do you think education will look like in 20 years?

    I think there will be a public K-12 system and that we’ll still have four-year colleges where people go to school and live in dorms. In North America, which has brand value in post secondary leadership, [education] will still be delivered through the institutions that it’s delivered through now. But international [education] is a completely different story. Because the developing world has fewer robust institutions, it’s much more of a green field opportunity.

    There are so many ways to fund education-related startups right now. What are you looking for specifically?

    We think there’s opportunity within K-12 and secondary education. When you look at the budget situation in this country, it’s hard to argue that schools will receive more money to spend; instead, they have to create greater value with lesser dollars, much like healthcare. So tech and services that help schools deliver better value at less cost is an area of interest.

    What kinds of tech and services?

    I think overall, standardized tests will see a lot of innovation. Even more interesting to me are cognitive science tests that tell you quite a bit about how somebody thinks or behaves. These types of tests have been sitting around in desk drawers because you didn’t have the Internet to distribute them, and you didn’t have an artificial intelligence engine to grade them, but [now that we do], I think you’ll see more.

    What’s overfunded?

    From an early-stage investor’s point of view, it’s diffcult to try and figure out which content and curriculum will succeed. It’s being sourced all over the globe. There are talented people everywhere who’ve developed online ways of helping 4- to 6-year-olds learn how to read, and created math programs for 7-years-olds. But is the literacy program developed in Australia — versus Singapore versus California — better? I think it’s very hard to determine from an investors’ perspective, yet a lot of money is going into [related startups].

    It’s hard to see how many of these companies exit. Who are the acquirers here for companies that don’t go public?

    There are a number of non-traditional buyers that are interested in education. Google’s deal with Renaissance Learning comes to mind. I think private equity firms or new strategics will be buyers, including because you can build stable cash-flow businesses around education. Traditional institutions like Pearson will be buyers as well, though with all the money coming into the space, they aren’t going to buy enough to allow many investors to find a successful exit.

    We should all be excited as citizens for what tech is doing for education. But I do think how you make money off those innovations remains the biggest challenge for investors.

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